-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, BsRSpr+hpk3jQCfhffUVUWNw5Yo+HXEnR2G4fRzbpzBfQa4NhTHao2w7QTiY34FI ImtJct+qiTcBWT7Axvt98Q== 0000950152-97-001990.txt : 19970321 0000950152-97-001990.hdr.sgml : 19970321 ACCESSION NUMBER: 0000950152-97-001990 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970320 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: BANCINSURANCE CORP CENTRAL INDEX KEY: 0000276400 STANDARD INDUSTRIAL CLASSIFICATION: FIRE, MARINE & CASUALTY INSURANCE [6331] IRS NUMBER: 310790882 STATE OF INCORPORATION: OH FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 000-08738 FILM NUMBER: 97559552 BUSINESS ADDRESS: STREET 1: 20 E BROAD ST STREET 2: 4TH FLOOR CITY: COLUMBUS STATE: OH ZIP: 43215 BUSINESS PHONE: 6142282800 MAIL ADDRESS: STREET 1: 20 E. BROAD STREET STREET 2: 4TH FLOOR CITY: COLUMBUS STATE: OH ZIP: 43215 10-K405 1 BANCINSURANCE CORPORATION FORM 10-K 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended 0-8738 - ---------------------------------------- ------------------------------------- December 31, 1996 Commission File Number BANCINSURANCE CORPORATION - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Ohio 31-0790882 - ---------------------------------------- ------------------------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 20 East Broad Street, Columbus, Ohio 43215 - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number including area code (614) 228-2800 ------------------------ Securities registered pursuant to Section 12(b) of the Act: Name of Each Exchange on Title of Each Class Which Registered NONE NONE - ---------------------------------------- ------------------------------------- Securities registered pursuant to Section 12(g) of the Act: COMMON SHARES, WITHOUT PAR VALUE - -------------------------------------------------------------------------------- (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 twelve 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 the 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. [ X ] Based upon the closing price reported on the Nasdaq National Market on February 14, 1997, the aggregate market value of the Common Stock of Registrant held by non-affiliates on that date was $8,048,850. As of February 14, 1997, the Registrant had 5,767,257 Common Shares, without par value, outstanding. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrant's Annual Report to Stockholders for the fiscal year ended December 31, 1996 are incorporated by reference in Part II. Portions of the Registrant's Proxy Statement for the 1997 Annual Meeting of Stockholders are incorporated by reference in Part III. 2 BANCINSURANCE CORPORATION AND SUBSIDIARIES 1996 FORM 10-K TABLE OF CONTENTS Page PART I Item 1. Business................................................... 3 Item 2. Properties................................................. 7 Item 3. Legal Proceedings.......................................... 7 Item 4. Submission of Matters to a Vote of Security Holders........ 7 PART II Item 5. Market for the Company's Common Stock and Related Security Holder Matters................................ 7 Item 6. Selected Consolidated Financial Data....................... 8 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.................... 8 Item 8. Consolidated Financial Statements and Supplementary Data... 8 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.................... 8 PART III Item 10. Directors and Executive Officers of the Company............ 8 Item 11. Executive Compensation..................................... 8 Item 12. Security Ownership of Certain Beneficial Owners and Management............................................. 8 Item 13. Certain Relationships and Related Transactions............. 8 Part IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K............................................... 9 3 Part I Item 1. Business -------- GENERAL The Company is an Ohio insurance holding company engaged primarily in the underwriting of specialized and niche insurance products and related services through its wholly-owned insurance subsidiary, Ohio Indemnity Company ("Ohio Indemnity"). Ohio Indemnity is licensed to transact business in 44 states and the District of Columbia and on a surplus lines basis in Texas. During 1993, BCIS Services, Inc. ("BCIS Services") was incorporated in Ohio as a wholly-owned subsidiary of the Company. BCIS Services is a non-risk bearing provider of workers' compensation administration and cost control services to employers who self-insure workers' compensation coverage. PRODUCTS Most of the Company's net premiums written and premiums earned are derived from two distinct lines of specialized and niche insurance products and related services: Ultimate Loss Insurance. Ultimate Loss Insurance, a form of physical damage blanket single interest insurance, is sold to lending institutions, such as banks, savings and loan associations, credit unions, automobile dealers and finance companies. Ultimate Loss Insurance insures such institutions against damage to pledged collateral in cases where the collateral is not otherwise insured. The standard policy covers physical damage to the collateral, not to exceed the lesser of the collateral's fair market value or the outstanding loan balance. This blanket single interest policy is generally written to cover the lending institution's complete portfolio of collateralized personal property loans, which consist primarily of automobile loans. The Company offers supplemental coverages, at additional premium cost, for losses due to unintentional errors in lien filings and conversion, confiscation and skip risks. Conversion risk coverage protects the lender from unauthorized and wrongful taking of the lender's collateral. Skip risk coverage protects the lender when a delinquent debtor disappears with the loan collateral. Since its inception in 1956, the Company has gradually expanded coverage of the program from traditional lenders such as banks, savings and loans and credit unions to nontraditional lenders, such as finance companies. During 1996, the Company provided Ultimate Loss Insurance coverage to approximately 300 lending institutions. The premiums charged for Ultimate Loss Insurance reflect claims experience, loan volumes and general market conditions. Bonded Service Program. Bonded Service is a program in which the Company participates by bonding specific unemployment insurance servicing commitments by a cost containment service firm. The unemployment compensation laws of each state generally permit not-for-profit organizations, school districts and political subdivisions to opt out of the state sponsored unemployment compensation insurance system and, instead, elect to reimburse the state for unemployment compensation claims paid by the state on their behalf. Although the reimbursing employer can usually realize certain cost advantages through this reimbursement method, it also assumes the risk of unexpected, unbudgeted unemployment claims. The Bonded Service program provides the risk mechanism to limit the impact of such unexpected claims costs. The cost containment service firm operates under a service contract with the reimbursing employer by which the cost containment service firm assures that the employer will satisfy his obligations to the state as a reimburser. From the Bonded Service fees charged by the cost containment service firm, an aggregate loss fund account is maintained from which losses in excess of expected charges are paid up to the bond limit. The Company controls the Bonded Service participation process. The Company has participated in the Bonded Service program since 1989. In 1992, the Company agreed to write a similar type bond covering groups of smaller not-for-profit entities which could realize the cost benefits of being reimbursers but could not do so on a stand-alone basis. As of December 31, 1996, the Company services seven (7) such groups. 3 4 The cost containment service firm's charge to the participating employer is based primarily upon historical claims experience, general economic conditions and other factors specific to the employer. The bond premium paid to the Company is calculated as a percentage of that charge. Subscribers to the Bonded Service program enroll for a term ranging from one to two years and the Company's surety bond extends for the duration of the term. The Bonded Service program fees applicable to any renewal term are adjusted based upon the subscriber's historical claims experience, the subscriber's announced business plans with respect to significant planned changes in employment, stability of the subscriber's source of funding and general economic conditions. Since 1989, annual renewals have averaged 95%. Some states require that reimbursing employers post a bond as security for the performance of their reimbursing obligations. On limited occasions, the Company has provided this mandated bond on behalf of employers enrolled in the Bonded Service program for which it assesses a separate premium charge. The Company's obligations under such bonds may not, in every case, cease upon termination of an employer's participation in the Bonded Service program. The financial statements include reserves for losses on such programs for benefits paid. Such reserves were $458,436 and $345,000 at December 31, 1996 and 1995, respectively. Automobile Physical Damage Insurance. Automobile Physical Damage Insurance is designed for the nonstandard automobile insurance market, consisting mostly of inexperienced drivers, drivers with poor driving records or claims experience, or drivers who otherwise do not qualify for the standard market. The Company offered Automobile Physical Damage Insurance from June 1992 to August 1995 to California residents and from January 1993 to October 1994 to Arizona residents. The Company does not currently offer Automobile Physical Damage Insurance in any jurisdiction. BCIS Services, Inc. BCIS Services is a third party administrator (TPA) specializing in managing workers' compensation obligations assumed by employers who self-insure this coverage. The contract defines specific servicing responsibilities for which the client pays agreed upon fees during the duration of such contract which normally covers one to three years. BCIS Services was formed in February 1993 and began marketing its programs in July 1993. BCIS Services does not engage in the business of underwriting or insuring risks of loss. BCIS Services assists the client in controlling factors that impact containment of workplace disability costs from risk control to proactive claims management. BCIS Services is postured to provide independent claims administration involving other casualty insurance exposures on a multi-state basis. Independent resources are engaged to provide specialized control functions as circumstances dictate. During 1996, the Company provided cost control services to four employers in California which generated revenues of $550,615. BCIS Services operated in California only during 1996, 1995 and 1994. There can be no assurance that this operation will be commercially successful or profitable. COMPETITION With respect to Ultimate Loss Insurance, the Company competes with "forced-placement" insurance and other providers of physical damage blanket single interest insurance. Forced-placement coverage is an alternative to physical damage blanket single interest insurance in that the provider arranges with a lending institution to insure, without the borrower's consent, uninsured or underinsured collateral pledged by the borrower to the lender. The Company believes its Ultimate Loss Insurance is a superior product to forced-placement insurance. Under forced-placement insurance, an individual policy is written for the lending institution's customer without the customer's consent and the premiums are paid directly by the customer through an increase in the customer's outstanding loan balance. The propriety of forced-placement coverage has recently been challenged in a number of class action suits against providers of forced-placement insurance. Competition for the Bonded Service program is provided indirectly by insurers who have designed coverages for reimbursing employers with loss limitation features similar in concept to the Bonded Service program. The Company believes that the Bonded Service program has cost savings and other features which enable the program to compete 4 5 effectively against providers of loss limitation coverages. The cost containment service firm, on whom the Company relies for growth in bond fees, competes with other cost containment service firm's for cost containment service contracts with not-for-profit organizations, some of which may require loss limitation coverages. Concerning BCIS Services, competition includes any brokers, agents, insurance companies or consultants which provide administrative services to their clients. The major competitors are TPA's, most of which operate on a regional basis. There are approximately 51 TPA's in California that specialize in serving employers who self-insure workers' compensation. There can be no assurance that the Company will not face additional competition in its markets from new or existing competitors. REINSURANCE The Company maintains a quota share reinsurance agreement, by which Ohio Indemnity cedes a portion of its insurance to a reinsurer. This arrangement limits the net claim liability potential arising from specific policies. This reinsurance agreement does not relieve the Company from its obligations to policyholders. Consequently, failure of the reinsurer to honor its obligations could result in losses to the Company. The Company currently recovers 50% of the paid losses and loss adjustment expense applicable to Automobile Physical Damage insurance policies. As of December 31, ceded reinsurance reduced commission expense incurred by $62,147, $121,972 and $3,137,726 in 1996, 1995 and 1994, respectively. REGULATION Insurance Company Regulation Ohio Indemnity, as an Ohio property/casualty insurance company, is subject to the primary regulatory supervision of the Ohio Department of Insurance. In addition, Ohio Indemnity is subject to regulation in each jurisdiction in which it is licensed to write insurance. In general, such regulation is designed to protect the interests of insurance policyholders rather than the Company or the Company's shareholders. Such regulation relates to, among other matters: licensing of insurers and their agents; authorized lines of business; capital and surplus requirements and general standards of solvency; financial reports; reserve requirements; underwriting limitations; investment criteria; transactions with affiliates; dividend limitations; changes in control and a variety of other financial and nonfinancial matters. The principal source of cash available to the Company is dividends from Ohio Indemnity. The Company is subject to the Ohio Insurance Holding Company System Regulatory Act, as amended, which requires that a 10-day notice of the proposed payment of any dividends or other distributions by Ohio Indemnity be given to the Ohio Superintendent of Insurance. If such dividends or distributions, together with any other dividends or distributions made within the preceding twelve months, exceed the greater of: (i) 10% of Ohio Indemnity's statutory surplus as of the immediately preceding December 31st, or (ii) the net income of Ohio Indemnity for the immediately preceding calendar year, a 30-day notice of such proposed dividend or distribution is required to be given to the Superintendent and the Superintendent may disapprove such dividend or distribution within the 10-day period following receipt of such notice. Most states have insurance laws requiring that rate schedules and other information be filed with the state's regulatory authority, either directly or through a rating organization with which the insurer is affiliated. The regulatory authority may disapprove a rate filing if it finds that the rates are inadequate, excessive or unfairly discriminatory. Rates vary by class of business, hazard assumed and size of risk, and are not necessarily uniform for all insurers. Many states have recently adopted laws which limit the ability of insurance companies to effect rate increases. To date, such limitations have had a limited impact on the Company, and the Company has no knowledge of any such limitations that may affect its future results of operations, although there can be no assurance that such limitations will not adversely affect the Company's results of operations in the future. 5 6 All insurance companies must file annual statements in states where they are authorized to do business and are subject to regular and special examinations by the regulatory agencies of those states. On August 9, 1994, the Ohio Department of Insurance issued its triennial examination report on Ohio Indemnity for the three-year period ended December 31, 1993. The examiners reported that the financial statements set forth in the report reflected the financial condition of Ohio Indemnity. Management is not aware of any recommendations by regulatory authorities which, if implemented, would have, or are reasonably likely to have, a material effect on the Company's liquidity, capital resources or results of operations. The next triennial review of the Company will be conducted by the Ohio Superintendent of Insurance in 1997 for the three-year period ending December 31, 1996. Numerous states routinely require deposits of assets by insurance companies to protect policyholders. As of December 31, 1996, securities with a market value of approximately $3,531,856 had been deposited by the Company with eleven state insurance departments. Such deposits must consist of securities which comply with standards established by the particular state's insurance department. The deposits, typically required by a state's insurance department on admission to do insurance business in such state, may be increased periodically as mandated by applicable statutory or regulatory requirements. Insurance Holding Company System Regulation The Company is subject to certain provisions of the Ohio Insurance Holding Company System Regulatory Act, as amended, which governs any direct or indirect change in control of the Company and certain affiliated-party transactions involving the Company or its assets. No person may acquire, directly or indirectly, 10% or more of the outstanding voting securities of Ohio Indemnity, unless the Ohio Superintendent of Insurance has approved such acquisition. The determination of whether to approve any such acquisition is based on a variety of factors, including an evaluation of the acquirer's financial condition, the competence of its management and whether competition in Ohio would be reduced. In addition, certain material transactions involving the Company and Ohio Indemnity must be disclosed to the Ohio Superintendent of Insurance not less than 30 days prior to the effective date of the transaction. Such transaction can be disapproved by the Superintendent within such 30-day period if it does not meet certain standards. Transactions requiring such approval include, but are not limited to: sales, purchases or exchanges of assets; loans and extensions of credit; and investments not in compliance with statutory guidelines. Ohio Indemnity is also required to file periodic and updated statements reflecting the current status of its holding company system, the existence of any related-party transactions and certain financial information relating to any person who directly or indirectly controls (presumed to exist with 10% voting control) Ohio Indemnity. The Company believes that it is in compliance with the Ohio Insurance Holding Company System Regulatory Act and the regulations promulgated thereunder. The National Association of Insurance Commissioners All states have adopted the financial reporting form of NAIC, which is typically referred to as the NAIC "annual statement," and most states, including Ohio, generally defer to NAIC with respect to statutory accounting practices and procedures. In this regard, NAIC has a substantial degree of practical influence and is able to accomplish certain quasi-legislative initiatives through amendments to the NAIC annual statement and applicable statutory accounting practices and procedures. For example, in recent years, NAIC has required all insurance companies to have an annual statutory financial audit and actuarial certification as to loss reserves by including such requirements in the annual statement instructions. During 1993, the NAIC adopted a Risk Based Capital (RBC) test applicable to property and casualty insurers as of December 31, 1994. The RBC calculation serves as a benchmark of insurance enterprises' solvency by state insurance regulators by establishing statutory surplus targets which will require certain Company level or regulatory level actions. Based on the Company's analysis, it appears that the Company's total adjusted capital is in excess of all required action levels and that no corrective action will be necessary. These RBC provisions have not been enacted into the Ohio Revised Code. 6 7 PENDING LEGISLATION The insurance industry is under continuous review by both state and federal legislatures. From time to time various regulatory and legislative changes have been proposed in the insurance industry which could have an effect on insurers and reinsurers. Among the proposals that have in the past been, or are at present being, considered are the possible introduction of federal regulation in addition to, or in lieu of, the current system of state regulation of insurers, and other possible restrictions on insurance transactions with unlicensed insurers. The Company is unable to predict whether any of these proposals will be adopted, the form in which any such proposals would be adopted or the impact, if any, such adoption would have on the Company. EMPLOYEES As of February 14, 1997, the Company employed 23 full-time employees. The Company is not a party to any collective bargaining agreement and is not aware of any efforts to unionize its employees. SERVICE MARKS The Company has developed common law rights in its service mark, ULTIMATE LOSS INSURANCE, which is registered in the State of Ohio. The Company has federally registered its trademark, BI BANCINSURANCE CORPORATION(R) (stylized letters). Item 2. Properties ---------- The Company leases all of its office space, which as of February 14, 1997, totalled approximately 9,900 square feet. The home office in Columbus, Ohio aggregates approximately 7,000 square feet. The lease provides for a monthly gross rental of $7,817. The leased space is shared with Westford Group, Inc., an affiliate of the Company through a common officer and principal shareholder. Rental expense is allocated in accordance with space utilization. BCIS Services' office in Los Angeles, California occupies approximately 2,900 square feet. The lease provides for a monthly gross rental of $3,324. Item 3. Legal Proceedings ----------------- The Company is routinely a party to litigation incidental to its business, as well as to other nonmaterial litigation. Management believes that no individual item of litigation, or group of similar items of litigation, including the matters referred to below, is likely to result in judgments that will have a material adverse effect on the financial condition or results of operations of the Company. On November 2, 1994, the James L. Miniter Agency, Inc. (the "Agent") filed a lawsuit against Ohio Indemnity in the Suffolk County Superior Court, Massachusetts, alleging essentially that Ohio Indemnity had breached its contractual obligations to the Agent policyholder. On December 2, 1994, Ohio Indemnity removed the case to the United States District Court for the District of Massachusetts. On June 7, 1996, a summary judgement was granted in favor of Ohio Indemnity, however, an appeal of the judgement has been filed by the Agent. Item 4. Submission of Matters to a Vote of Security Holders --------------------------------------------------- Not applicable. PART II Item 5. Market for the Company's Common Stock and Related Security Holders ------------------------------------------------------------------- Matters ------- The information required by this item is included under the caption "Market Information", "Holders", "Dividends", and "Market Makers" in the Company's 1996 Annual Report (the "Annual Report") and is incorporated herein by reference. 7 8 Item 6. Selected Financial Data ----------------------- The information required by this item is included under the caption "Selected Financial Data" in the Company's Annual Report and is incorporated herein by reference. Item 7. Management's Discussion and Analysis of Financial Condition and --------------------------------------------------------------- Results of Operations --------------------- The information required by this item is included under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Company's Annual Report and is incorporated herein by reference. Item 8. Consolidated Financial Statements and Supplementary Data -------------------------------------------------------- The Company's consolidated balance sheets as of December 31, 1996 and 1995, and the consolidated statements of income, shareholders' equity and cash flows for each of the three years ended December 31, 1996, 1995 and 1994 and the notes to the financial statements, together with the independent auditors' report thereon appear in the Company's Annual Report and are incorporated herein by reference. The Company's Financial Statement Schedules and Independent Auditors' Report on Financial Statement Schedules are included in response to Item 14 hereof. Item 9. Changes in and Disagreements with Accountants on Accounting and --------------------------------------------------------------- Financial Disclosure -------------------- None. PART III Item 10. Directors and Executive Officers of the Company ----------------------------------------------- The information required by this item is included under the captions "Election of Directors," "Executive Officers of the Corporation" and "Section 16(a) Beneficial Ownership Reporting Compliance" in the Company's Proxy Statement (the "Proxy Statement") relating to the Company's 1997 Annual Meeting of Stockholders to be held on June 3, 1997, and is incorporated herein by reference. Item 11. Executive Compensation ---------------------- The information required by this item is included under the captions "Compensation of Directors" and "Executive Compensation" in the Proxy Statement and is incorporated herein by reference. Item 12. Security Ownership of Certain Beneficial Owners and Management -------------------------------------------------------------- The information required by this item is included under the caption "Ownership of Voting Stock" in the Proxy Statement and is incorporated herein by reference. Item 13. Certain Relationships and Related Transactions ---------------------------------------------- The information required by this item is included under the caption "Certain Relationships and Related Transactions" in the Proxy Statement and is incorporated herein by reference. 8 9 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K --------------------------------------------------------------- (a) The following documents are filed as part of this report: -------------------------------------------------------- (1) The following financial statements appearing in the Company's Annual Report are incorporated herein by reference: Consolidated Balance Sheets as of December 31, 1996 and 1995. Consolidated Statements of Income for the three years ended December 31, 1996. Consolidated Statements of Shareholders' Equity for the three years ended December 31, 1996. Consolidated Statements of Cash Flows for the three years ended December 31, 1996. Notes to the Consolidated Financial Statements. Independent Auditors' Report. (2) Financial Statement Schedules ----------------------------- Included in Part IV of this Report: Schedule I -- Summary of investments - other than investments in related parties Schedule II -- Condensed financial information of Bancinsurance Corporation (Parent Company Only) Independent Auditors' Report on Financial Statement Schedules Other schedules are omitted because of the absence of conditions under which they are required or because the required information is given in the consolidated financial statements or notes thereto. (3) Exhibits -------- 3(a) Amended Articles of Incorporation (reference is made to Exhibit 3(a) of Form 10-K for the fiscal year ended December 31, 1984 (file number 0-8738), which is incorporated herein by reference). 3(b) Amended Code of Regulations (reference is made to Exhibit 3(b) of Form 10-K for the fiscal year ended December 31, 1984 (file number 0-8738), which is incorporated herein by reference). 10(a) Amended Tax Allocation Agreement (reference is made to Exhibit 10(d) of Form 10-K for the fiscal year ended December 31, 1983 (file number 0-8738), which is incorporated herein by reference). 10(b) Private Passenger Automobile Physical Damage Quota Share Reinsurance Agreement between Ohio Indemnity Company and North American Reinsurance Corporation (reference is made to Exhibit 10(d) of Form 10-K/A for the fiscal year ended December 31, 1992 (file number 0-8738), which is incorporated herein by reference). 10(c) Amended and Restated Unemployment Compensation Administration Agreement Between Ohio Indemnity Company and The Gibbens Co., Inc. (The Company has requested that portions of this Exhibit be given confidential treatment.) (reference is made to Exhibit 10(e) of Form 10-K/A for the fiscal year ended December 31, 1992 (file number 0-8738), which is incorporated herein by reference). 9 10 The following are management contracts and compensatory plans and arrangements in which directors or executive officers participate: 10(d) Employee Profit Sharing Plan (reference is made to Exhibit 10(a) of Form 10-K for the fiscal year ended December 31, 1986 (file number 0-8738), which is incorporated herein by reference). 10(e) 1984 Stock Option Plan (reference is made to Exhibit 10(d) of Form 10-K for the fiscal year ended December 31, 1984 (file number 0-8738), which is incorporated herein by reference). 10(f) 1994 Stock Option Plan - (reference is made to Exhibit 10(f) of Form 10-Q for the fiscal quarter ended June 30, 1994 (file number 0-8738), which is incorporated herein by reference). 13.1 Annual Report to Shareholders for the year ended December 31, 1996. 21 Subsidiaries of the Company as of December 31, 1996. 23 Consents of independent accountants to incorporation of their opinions by reference in Registration Statement on Form S-8. 27 Financial Data Schedule. (b) Reports on Form 8-K ------------------- No reports on Form 8-K were filed by the Company during the quarter ended December 31, 1996. (c) Exhibits -------- The exhibits to this report begin on page 18. (d) Financial Statement Schedules ----------------------------- The financial statement schedules and the independent auditors' report thereon are included on the following pages. (THIS SPACE INTENTIONALLY LEFT BLANK) 10 11 Board of Directors and Shareholders Bancinsurance Corporation: In connection with our audits of the consolidated financial statements of Bancinsurance Corporation and Subsidiaries as of December 31, 1996 and 1995, and for each of the three years in the period ended December 31, 1996, which financial statements are included in the Company's Annual Report, we have also audited the financial statment schedules listed in Item 14. herein. In our opinion, these financial statement schedules, when considered in relation to the basic financial statements taken as a whole, present fairly, in all material respects, the information required to be included therein. /s/ Coopers & Lybrand L.L.P. Columbus, Ohio February 28, 1997 11 12 BANCINSURANCE CORPORATION AND SUBSIDIARY Schedule I - SUMMARY OF INVESTMENTS - OTHER THAN INVESTMENT IN RELATED PARTIES
December 31, 1996 - ----------------------------------------------------------------------------------------------- Column A Column B Column C Column D -------- -------- -------- -------- Type of Investment Cost (1) Fair Amount at which Value shown in the balance sheet - ----------------------------------------------------------------------------------------------- Held to maturity: Fixed maturities: Governments $ 1,039,505 $ 1,043,750 $ 1,039,505 States, Territories and Possessions 309,943 306,000 309,943 Political Subdivisions of States, Territories and Possessions 551,822 582,943 551,822 Special Revenue 1,453,280 1,504,163 1,453,280 Other debt securities 50,000 50,000 50,000 Redeemable preferred stocks: Public Utilities 600,000 600,000 600,000 ----------- ----------- ----------- Total Held to maturity 4,004,550 4,086,856 4,004,550 ----------- ----------- ----------- Available for sale: Fixed maturities: Governments 858,006 864,650 864,650 States, Territories and Possessions 2,812,533 2,830,896 2,830,896 Political Subdivisions of States, Territories and Possessions 3,123,343 3,210,222 3,210,222 Special Revenue 4,238,072 4,355,232 4,355,232 Industrial and Miscellaneous 239,571 241,186 241,186 Equity securities: Nonredeemable preferred stocks: Public Utilities 200,000 193,000 193,000 Banks, Trust and Insurance Companies 592,313 903,000 903,000 Industrial and Miscellaneous 974,300 961,500 961,500 Common stocks: Banks, Trust and Insurance Companies 298,570 364,754 364,754 Industrial and Miscellaneous 537,708 608,760 608,760 ----------- ----------- ----------- Total Available for sale 13,874,416 14,533,200 14,533,200 ----------- ----------- ----------- Short-term investments 5,730,923 5,730,923 5,730,923 Securities purchased under agreements to resell 1,091,630 1,091,630 1,091,630 ----------- ----------- ----------- Total investments $24,701,519 $25,442,609 $25,360,303 =========== =========== =========== (1) Original cost of equity securities, adjusted for any permanent write downs, and, as to fixed maturities, original cost reduced by repayments, write downs and adjusted for amortization of premiums or accrual of discounts.
12 13 BANCINSURANCE CORPORATION AND SUBSIDIARIES CONDENSED BALANCE SHEETS December 31, 1996 and 1995 Schedule II - CONDENSED FINANCIAL INFORMATION OF BANCINSURANCE CORPORATION (PARENT COMPANY ONLY)
Assets 1996 1995 ------ ----------- ---------- Cash $ 9,117 $ 14,182 Investment in subsidiaries 20,491,962 18,398,880 Other 1,143,067 1,115,705 ----------- ----------- $21,644,146 $19,528,767 =========== =========== Liabilities and Shareholders' Equity ------------------------------------ Note payable to bank $ 5,600,000 $ 5,616,132 Other 137,329 202,225 Shareholders' equity 15,906,817 13,710,410 ----------- ----------- $21,644,146 $19,528,767 =========== ===========
13 14 BANCINSURANCE CORPORATION AND SUBSIDIARIES Schedule II - CONDENSED FINANCIAL INFORMATION OF BANCINSURANCE CORPORATION (PARENT COMPANY ONLY) CONDENSED STATEMENTS OF INCOME Years Ended December 31, 1996, 1995, and 1994
1996 1995 1994 ---------- ---------- ------- Dividends from Subsidiaries $ 650,000 $ 600,000 $ 600,000 Other income 24,777 52,236 36,365 General and administrative expenses (613,491) (605,132) (761,765) ----------- ----------- ----------- Net income (loss) before income tax benefit and equity in earnings of subsidiaries 61,286 47,104 (125,400) Income tax benefit (205,213) (198,655) (295,236) ----------- ----------- ----------- Net income before equity in earnings of subsidiaries 266,499 245,759 169,836 Equity in undistributed earnings of subsidiaries 2,074,549 1,175,327 2,147,159 ----------- ----------- ----------- Net income $ 2,341,048 $ 1,421,086 $ 2,316,995 =========== =========== ===========
14 15 BANCINSURANCE CORPORATION AND SUBSIDIARIES Schedule II - CONDENSED FINANCIAL INFORMATION OF BANCINSURANCE CORPORATION (PARENT COMPANY ONLY) CONDENSED STATEMENTS OF CASH FLOWS Years Ended December 31, 1996, 1995, and 1994
1996 1995 1994 ---------- ---------- ------- Cash flows from operating activities: Net income $ 2,341,048 $ 1,421,086 $ 2,316,995 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Equity in undistributed net earnings of subsidiaries (2,074,549) (1,175,327) (2,147,159) Deferred federal income tax (benefit) expense (108,747) 108,747 - (Increase) decrease in notes receivable (145,000) 28,602 (1,622) Increase in loans to affiliates (71,719) (71,719) (72,025) Increase in accounts receivable from subsidiaries - (29,585) (143,500) (Increase) decrease in prepaid federal income taxes 291,855 291,632 (502,575) Decrease in other assets 6,249 21,486 38,982 Increase (decrease) in accounts payable to subsidiaries 34,129 (259,168) 46,339 Increase (decrease) in other liabilities (99,024) 78,587 9,012 ----------- ----------- ----------- Net cash provided by (used in) in operating activities 174,242 414,341 (455,553) ----------- ----------- ----------- Cash flows from investing activities: Investment in subsidiaries - - - ----------- ----------- ----------- Net cash provided by (used in) investing activities - - - ----------- ----------- ----------- Cash flows from financing activities: Proceeds from notes payable to bank 1,790,000 5,100,000 850,000 Repayments of notes payable to bank (1,806,132) (5,400,000) (250,000) Proceeds from stock options exercised 22,500 47,812 24,063 Acquisition of treasury stock (185,675) (162,838) (165,000) ----------- ----------- ----------- Net cash provided by (used in) financing activities (179,307) (415,026) 459,063 ----------- ----------- ----------- Net increase (decrease) in cash (5,065) (685) 3,510 ----------- ----------- ----------- Cash at beginning of year 14,182 14,867 11,357 ----------- ----------- ----------- Cash at end of year $ 9,117 $ 14,182 $ 14,867 =========== =========== =========== Supplemental disclosures of cash flow information: Cash paid during the year for: Interest $ 425,523 $ 453,855 $ 405,071 Income taxes 530,000 20,000 625,000 =========== =========== ===========
15 16 Signatures ---------- Pursuant to the requirements of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Bancinsurance Corporation (Company) 3/17/97 By Si Sokol ---------- ------------------------------ DATE Si Sokol Chairman of Board of Directors, President (principal executive officer) Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons, which include the Chief Executive Officer, the Chief Financial Officer and a majority of the Board of Directors, on behalf of the Registrant and in the capacities and on the dates indicated: 3/17/97 Si Sokol 3/17/97 Sally Cress - ---------- ----------------------- ---------- --------------------- DATE Si Sokol DATE Sally Cress Chairman of Board of Treasurer, Secretary Directors, President and Chief Financial Officer Chief Executive Officer and Chief Accounting Officer 3/17/97 Daniel D. Harkins 3/17/97 Milton O. Lustnauer - ---------- ----------------------- ---------- --------------------- DATE Daniel D. Harkins DATE Milton O. Lustnauer Director Director 3/17/97 Saul Sokol 3/17/97 James R. Davis - ---------- ----------------------- ---------- --------------------- DATE Saul Sokol DATE James R. Davis Director Director 3/17/97 John S. Sokol - ---------- ----------------------- DATE John S. Sokol Director
16 17 INDEX OF EXHIBITS The following is the Index of Exhibits required by Item 601 of Regulation S-K.
Exhibit No. Description Page No. - ----------- ----------- -------- 3(a) Amended Articles of Incorporation (reference is made to Exhibit 3(a) of Form 10-K for the fiscal year ended December 31, 1984 (file number 0-8738), which is incorporated herein by reference). 3(b) Amended Code of Regulations (reference is made to Exhibit 3(b) of Form 10-K for the fiscal year ended December 31, 1984 (file number 0-8738), which is incorporated herein by reference). 10(a) Amended Tax Allocation Agreement (reference is made to Exhibit 10(d) of Form 10-K for the fiscal year ended December 31, 1983 (file number 0-8738), which is incorporated herein by reference). 10(b) Private Passenger Automobile Physical Damage Quota Share Reinsurance Agreement between Ohio Indemnity Company and North American Reinsurance Corporation (reference is made to Exhibit 10(d) of Form 10-K/A for the fiscal year ended December 31, 1992 (file number 0-8738), which is incorporated herein by reference). 10(c) Amended and Restated Unemployment Compensation Administration Agreement between Ohio Indemnity Company and The Gibbens Co., Inc. (The Company has requested that portions of this Exhibit be given confidential treatment.) (references is made to Exhibit 10(e) of Form 10-K/A for the fiscal year ended December 31, 1992 (file number 0-8738), which is incorporated herein by reference). The following are management contracts and compensatory plans and arrangements in which directors or executive officers participate: 10(d) Employee Profit Sharing Plan (reference is made to Exhibit 10(a) of Form 10-K for the fiscal year ended December 31, 1986 (file number 0-8738), which is incorporated herein by reference). 10(e) 1984 Stock Option Plan (reference is made to exhibit 10(d) of From 10-K for the fiscal year ended December 31, 1984 (file number 0-8738), which is incorporated herein by reference). 10(f) 1994 Stock Option Plan - (reference is made to Exhibit 10(f) of Form 10-Q for the fiscal quarter ended June 30, 1994 (file number 0-8738), which is incorporated herei n by reference). 13.1 Annual Report to Shareholders for the year ended December 31, 18 1996. 21 Subsidiaries of the Company as of December 31, 1996. 52 23 Consent of independent accountants to incorporation of their 53 opinion by reference in Registration Statement on Form S-8. 27 Financial Data Schedule. 54
17 EX-13.1 2 EXHIBIT 13.1 1 Exhibit 13.1 BANCINSURANCE CORPORATION 1996 Annual Report 2 - -------------------------------------------------------------------------------- BANCINSURANCE CORPORATION 1996 ANNUAL REPORT Bancinsurance Corporation (NASDAQ:BCIS) is a specialty property insurance holding company engaged, through its property/casualty insurance subsidiary, Ohio Indemnity Company, in underwriting niche insurance. Among its products are "Ultimate Loss Insurance," which protects banks and other lenders against risk arising from theft or damage to certain loan collateral where the borrower has failed to secure and maintain adequate insurance coverage. The Company also provides a surety bond program for national administrative firms that perform certain services for non-profit entities and operates a third party administrator specializing in certain workers' compensation programs.
FINANCIAL HIGHLIGHTS (In thousands, except for per share data) ---------------------------------------------------------------------- YEAR ENDED DECEMBER 31, 1996 1995 1994 1993 1992 1991 ---------------------------------------------------------------------- INCOME STATEMENT DATA --------------------- Net Premiums Earned $10,138 $19,783 $25,536 $19,788 $10,657 $ 6,853 Net Investment Income 1,564 1,413 1,561 1,253 782 619 Other Income 1,003 614 580 626 459 34 ------- ------- ------- ------- ------- ------- Total Revenue 12,705 21,810 27,667 21,667 11,898 7,506 ------- ------- ------- ------- ------- ------- Losses and Loss Adjustment Expenses, Net of Reinsurance Recoveries 5,404 12,760 15,565 10,919 5,064 3,444 Income Before Federal Income Taxes and Cumulative Effect Accounting Change 3,121 1,598 2,652 2,827 2,896 1,275 ------- ------- ------- ------- ------- ------- Net Income $ 2,341 $ 1,421 $ 2,317 $ 2,295 $ 2,138 $ 942 ======= ======= ======= ======= ======= ======= Net Income Per Common Share $ .40 $ .24 $ .39 $ .38 $ .36 $ .16 ======= ======= ======= ======= ======= ======= Weighted Average Common Shares and Equivalents Outstanding 5,831 5,892 5,921 6,090 5,960 5,843 BALANCE SHEET DATA ------------------ Total Assets $28,275 $27,750 $43,774 $43,612 $28,015 $15,535 Shareholders' Equity 15,907 13,710 11,838 9,910 7,581 5,240
SHAREHOLDEERS EQUITY' NET INCOME (Thousnads) (Thousands) 1991 $5,240 1991 $942 1992 $7,581 1992 $2,138 1993 $9,910 1993 $2,295 1994 $11,838 1994 $2,317 1995 $13,710 1995 $1,421 1996 $15,907 1996 $2,341
1 - -------------------------------------------------------------------------------- 3 - ------------------------------------------------------------------------------- TO OUR SHAREHOLDERS Record profitability was achieved for 1996 due to key decisions which were made the prior year combined with a consistent focus on the Company's niche market opportunities. Net income rose 65 percent to $2,341,048 for the twelve months ended December 31, 1996, compared with $1,421,086 a year ago. Net income per share increased nearly 67 percent to $0.40 versus $0.24 in 1995. These results benefited from significant improvement in operating performance, a stronger investment portfolio, and a disciplined approach to growth. Strategies were pursued throughout 1996 to further strengthen our core products and services. The substantial decline in premiums earned versus 1995 understates the progress which was achieved this past year. Discontinuance of the Automobile Physical Damage (APD) Program in 1995 negatively impacted premiums earned for most of 1996, but it also enabled us to refocus the Company on profitable business. Revenues totaled $12,704,874 in 1996 versus $21,810,344 the prior year, a decrease of 42 percent. We are now positioned to benefit from solid improvement in long-term performance within our business. The combined ratio, which includes the loss and loss adjustment expense ratio plus the operating expense ratio, declined sharply in 1996 to 83.8 percent, compared with 116.7 percent a year ago. Our underwriting profit for 1996 compares very favorably with the experience of property and casualty insurers. It was principally due to lower claims as a percentage of premiums earned due to the discontinued APD Program, achievement of higher than anticipated salvage and subrogation results, and much lower operating expenses, compared with the prior year. Total investments were $25,360,303 at December 31, 1996. Fixed income securities represented 61 percent of the year-end portfolio, while equity securities declined to 12 percent. The investment strategy throughout this past year was primarily tax driven in order to utilize prior year tax benefits and to shelter realized gains. We began the new year with a portfolio which continues to be invested conservatively and we remain committed to prudent fiscal management. A.M. Best, an independent rating organization for the insurance industry, assigned Ohio Indemnity Company, a subsidiary of Bancinsurance engaged in specialized property and casualty insurance, the rating of "A-" Excellent. The accomplishments of the past year have enabled management to accelerate efforts to aggressively build upon our established strengths and seek additional niche products to enhance the overall business. Our long-term strategies continue to be focused on consistent improvement in profitability. Shareholders' equity at December 31, 1996 was $15.9 million, an increase of 16 percent over the same date in 1995. We thank all of our shareholders, Board of Directors, officer and employees for their continued faith in and commitment to Bancinsurance Corporation. Sincerely, /s/ Si Sokol ----------- Si Sokol President and Chief Executive Officer 2 - ------------------------------------------------------------------------------- 4 - -------------------------------------------------------------------------------- BUSINESS STRATEGY The Company's business strategy is to maximize underwriting profits through niche products and services within the insurance industry. During the past several years, Bancinsurance has expanded into businesses which are complementary to its core business and long-term objectives. The Company concentrates on underwriting specialized lines of business where it can utilize its underwriting and claims management expertise to generate underwriting profits superior to property/casualty industry results. PRODUCTS Bancinsurance Corporation currently has three distinct lines of niche insurance products and related services: Ultimate Loss Insurance, Bonded Service Program and BCIS Services. ULTIMATE LOSS INSURANCE PROGRAM - ------------------------------- Ultimate Loss Insurance, a form of physical damage blanket single interest insurance, is sold to lending institutions, such as banks, savings and loan associations, credit unions, automobile dealers and finance companies. Ultimate Loss Insurance insures such institutions against damage to pledged collateral in cases where the collateral is not otherwise insured. The standard policy covers physical damage to the collateral, not to exceed the lesser of the collateral's fair market value or the outstanding loan balance. This blanket single interest policy is generally written to cover the lending institution's complete portfolio of collateralized personal property loans which consist primarily of automobile loans. BONDED SERVICE PROGRAM - ---------------------- Bonded Service is a program in which the Company participates by bonding specific unemployment insurance servicing commitments by a cost containment service firm. Unemployment Compensation laws of each state generally permit non-profit organizations to opt out of the state sponsored unemployment compensation insurance system and, instead, elect to reimburse the state for unemployment compensation claims paid by the state on their behalf. The Company believes that the Bonded Service Program provides a cost effective alternative for qualified reimbursing employers. BCIS SERVICES, INC. - ------------------- BCIS Services is a third party administrator specializing in managing workers' compensation obligations assumed by employers who self-insure this coverage. The contract defines specific servicing responsibilities for which the client pays agreed upon fees during the duration of such contract. Services include any that assist the client in controlling factors that impact containment of workplace disability costs from risk control to proactive claims management. BCIS Services can provide independent claims administration involving other casualty insurance exposures on a multi-state basis. Marketing of the program began in July 1993. BCIS Services does not engage in underwriting or insuring risks of loss. SUMMARY During the past several years, Bancinsurance Corporation has pursued select growth opportunities to build upon existing strengths and industry experience. These actions by management have resulted in increases in revenue and profitability, while also creating a stronger, more diversified base of business. From time to time, we plan to seek additional ways to complement the Company's existing product and services offerings. 3 - ------------------------------------------------------------------------------- 5 - ------------------------------------------------------------------------------- REPORT OF INDEPENDENT ACCOUNTANTS The Board of Directors and Shareholders Bancinsurance Corporation: We have audited the consolidated balance sheets of Bancinsurance Corporation and subsidiaries as of December 31, 1996 and 1995, and the related consolidated statements of income, shareholders' equity, cash flows, and the financial statement schedules for each of the years in the three-year period ended December 31, 1996. These consolidated financial statements and financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedules based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards 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. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Bancinsurance Corporation and subsidiaries as of December 31, 1996 and 1995, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1996, in conformity with generally accepted accounting principles. /s/ Coopers & Lybrand L.L.P. Columbus, Ohio February 28, 1997 4 - -------------------------------------------------------------------------------- 6 - ------------------------------------------------------------------------------- BANCINSURANCE CORPORATION CONSOLIDATED BALANCE SHEETS
DECEMBER 31, - -------------------------------------------------------------------------------------------------------------------------------- 1996 1995 - -------------------------------------------------------------------------------------------------------------------------------- ASSETS Investments (note 2): Held to maturity: Fixed maturities, at amortized cost (fair value $4,086,856 in 1996 and $4,390,089 in 1995)..... $ 4,004,550 $ 4,258,129 Available for sale: Fixed maturities, at fair value (amortized cost $11,271,525 in 1996 and $9,222,686 in 1995).... 11,502,186 9,563,314 Equity securities, at fair value (cost $2,602,891 in 1996 and $3,175,130 in 1995).............. 3,031,014 3,465,204 Short-term investments, at cost which approximates fair value................................... 5,730,923 4,942,924 Securities purchased under agreements to resell................................................. 1,091,630 1,158,571 ------------ ------------- TOTAL INVESTMENTS........................................................................... 25,360,303 23,388,142 ------------ ------------ Cash............................................................................................. 681,286 482,405 Premiums receivable.............................................................................. 494,322 400,397 Reinsurance receivable (note 12)................................................................. 15,150 528,726 Reinsurance recoverable on paid losses (note 12)................................................. 25,143 525,102 Prepaid reinsurance premiums (note 12)........................................................... - 514,662 Premium taxes receivable......................................................................... - 138,632 Loans to affiliates (note 13).................................................................... 434,463 217,744 Furniture, fixtures and leasehold improvements, net.............................................. 86,435 129,490 Excess of investment over net assets of subsidiaries............................................. 753,738 753,738 Deferred federal income taxes.................................................................... - 55,623 Prepaid federal income taxes..................................................................... 29,633 321,488 Accrued investment income........................................................................ 308,646 231,276 Other assets .................................................................................... 85,833 62,809 -------------- ------------- TOTAL ASSETS................................................................................ $ 28,274,952 $27,750,234 ============ =========== - -------------------------------------------------------------------------------------------------------------------------------
5 7 - ------------------------------------------------------------------------------- BANCINSURANCE CORPORATION CONSOLIDATED BALANCE SHEETS
DECEMBER 31, - ----------------------------------------------------------------------------------------------------------------------------- 1996 1995 - ---------------------------------------------------------------------------------------------------------------------------- LIABILITIES AND SHAREHOLDERS' EQUITY Reserve for unpaid losses and loss adjustment expenses (note 12)................................$ 1,359,775 $ 2,241,881 Unearned premiums (note 12)..................................................................... 745,787 2,997,334 Contract funds on deposit....................................................................... 2,950,108 1,809,012 Reinsurance premiums payable (note 12).......................................................... 503,806 392,716 Note payable to bank (note 4)................................................................... 5,600,000 5,616,132 Taxes, licenses, and fees payable............................................................... 93,566 54,552 Deferred federal income taxes................................................................... 194,755 - Commissions payable............................................................................. 342,258 341,112 Amount due to stock broker...................................................................... - 143,038 Other........................................................................................... 578,080 444,047 ----------- ------------- TOTAL LIABILITIES.......................................................................... 12,368,135 14,039,824 ----------- ------------ Commitments and contingent liabilities (notes 5, 12 and 17) Shareholders' equity (notes 8, 9 and 10): Non-voting preferred stock: Class A Serial Preference shares without par value; authorized 100,000 shares; no shares issued or outstanding............................................................. - - Class B Serial Preference shares without par value; authorized 98,646 shares; no shares issued or outstanding ............................................................ - - Common stock without par value; authorized 20,000,000 shares; 5,878,277 shares issued ......... 315,567 315,567 Additional paid-in capital..................................................................... 1,433,329 1,466,753 Net unrealized gain on investments, net of tax (note 2)........................................ 434,797 416,263 Retained earnings.............................................................................. 14,040,484 11,699,436 ----------- ------------ 16,224,177 13,898,019 Less: Treasury stock, at cost (111,020 common shares in 1996 and 71,728 common shares in 1995).............................................................................. (317,360) (187,609) ----------- ------------- TOTAL SHAREHOLDERS' EQUITY................................................................. 15,906,817 13,710,410 ----------- ------------ TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY.................................................$28,274,952 $27,750,234 =========== =========== See accompanying notes to consolidated financial statements.
6 - ------------------------------------------------------------------------------- 8
- -------------------------------------------------------------------------------- BANCINSURANCE CORPORATION CONSOLIDATED STATEMENTS OF INCOME YEARS ENDED DECEMBER 31, - -------------------------------------------------------------------------------------------------------------------------- 1996 1995 1994 - -------------------------------------------------------------------------------------------------------------------------- INCOME: Premiums written......................................................... $ 8,358,499 $14,038,845 $35,629,799 Decrease in unearned premiums............................................ 2,251,545 14,294,905 2,051,123 ------------- ----------- ------------ Premiums earned ..................................................... 10,610,044 28,333,750 37,680,922 Premiums ceded........................................................... (471,940) (8,550,443) (12,145,098) -------------- ------------ ------------ Net premiums earned.................................................. 10,138,104 19,783,307 25,535,824 Investment income (net of expenses of $78,003, $78,761 and $167,190, respectively)............................................... 1,318,137 1,387,602 1,447,683 Net realized gain on investments......................................... 246,038 25,891 112,942 Claims administration fees............................................... 550,615 533,354 521,171 Other income............................................................. 451,980 80,190 58,938 -------------- ------------- ------------- TOTAL REVENUE........................................................ 12,704,874 21,810,344 27,676,558 ------------- ----------- ----------- LOSSES AND OPERATING EXPENSES: Losses and loss adjustment expenses...................................... 5,864,170 21,206,483 26,297,669 Reinsurance recoveries................................................... (459,686) (8,446,389) (10,733,161) Commission expense....................................................... 1,441,430 2,885,353 3,158,574 Other insurance operating expenses....................................... 1,551,578 2,996,319 4,100,758 Amortization of deferred policy acquisition costs........................ - 397,029 768,059 General and administrative expenses...................................... 734,660 719,268 1,024,565 Interest expense ........................................................ 451,425 454,497 407,696 -------------- ------------ ------------ TOTAL EXPENSES...................................................... 9,583,577 20,212,560 25,024,160 -------------- ----------- ----------- INCOME BEFORE FEDERAL INCOME TAXES.................................. 3,121,297 1,597,784 2,652,398 Federal income tax expense (note 6)...................................... 780,249 176,698 335,403 -------------- ------------ ------------ NET INCOME.......................................................... $ 2,341,048 $ 1,421,086 $ 2,316,995 ============= =========== =========== Net income per common share.............................................. $ .40 $ .24 $ .39 ============ =========== ========== Weighted average number of common shares and equivalents outstanding..... 5,831,048 5,892,002 5,921,419 ------------ ----------- ---------- See accompanying notes to consolidated financial statements.
7 - -------------------------------------------------------------------------------- 9 - ------------------------------------------------------------------------------- BANCINSURANCE CORPORATION CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY - -------------------------------------------------------------------------------
PREFERRED STOCK ADDITIONAL UNREALIZED TOTAL -------------------- COMMON PAID-IN GAIN (LOSS) ON RETAINED TREASURY SHAREHOLDERS' CLASS A CLASS B STOCK CAPITAL INVESTMENTS EARNINGS STOCK EQUITY - ------------------------------------------------------------------------------------------------------------------------------------ Balance December 31, 1993 - - $ 315,567 $1,599,582 $ 97,713 $ 7,961,355 $ (64,475) $ 9,909,742 Net income..................... - - - - - 2,316,995 - 2,316,995 Cumulative effect of change in accounting for investments, net of income taxes of $345,660 (notes 1(d) and 2)........................ - - - - 670,986 - - 670,986 Change in unrealized loss on investments, net of income tax benefit of $473,712...................... - - - - (918,362) - - (918,362) Purchase of 60,000 treasury shares .............. - - - - - - (165,000) (165,000) 38,500 shares issued in connection with the exercise of stock options (note 8).............. - - - (13,361) - - 37,424 24,063 ---------- ---------- --------- ---------- --------- ----------- --------- ----------- Balance December 31, 1994 - - 315,567 1,586,221 (149,663) 10,278,350 (192,051) 11,838,424 Net income..................... - - - - - 1,421,086 - 1,421,086 Change in unrealized gain on investments, net of income taxes of $291,538...................... - - - - 565,926 - - 565,926 Purchase of 60,400 treasury shares (note 17) ............ - - - - - - (162,838) (162,838) 76,500 shares issued in connection with the exercise of stock options (note 8)...................... - - - (119,468) - - 167,280 47,812 ---------- ---------- --------- ---------- --------- ----------- --------- ----------- Balance December 31, 1995 - - 315,567 1,466,753 416,263 11,699,436 (187,609) 13,710,410 NET INCOME.................... - - - - - 2,341,048 - 2,341,048 CHANGE IN UNREALIZED GAIN ON INVESTMENTS, NET OF INCOME TAXES OF $9,548........................ - - - - 18,534 - - 18,534 PURCHASE OF 59,292 TREASURY SHARES (NOTE 17) - - - - - - (185,675) (185,675) 20,000 SHARES ISSUED IN CONNECTION WITH THE EXERCISE OF STOCK OPTIONS (NOTE 8).............. - - - (33,424) - - 55,924 22,500 ---------- ---------- --------- ---------- --------- ----------- --------- ----------- BALANCE DECEMBER 31, 1996 - - $ 315,567 $1,433,329 $ 434,797 $14,040,484 $(317,360) $15,906,817 ========== ========== ========= ========== ========= =========== ========= =========== See accompanying notes to consolidated financial statements.
8 - -------------------------------------------------------------------------------- 10 - ------------------------------------------------------------------------------- BANCINSURANCE CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, - ------------------------------------------------------------------------------------------------------------------------ 1996 1995 1994 - ------------------------------------------------------------------------------------------------------------------------ Cash flows from operating activities: Net income............................................................... $ 2,341,048 $ 1,421,086 $2,316,995 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Net realized gain on investments........................................ (245,436) (25,891) (112,942) Depreciation............................................................ 64,605 69,339 88,988 Amortization of bond premium (discount)................................. (19,491) 29,149 137,279 Amortization of deferred policy acquisition costs....................... - 538,017 768,059 Deferred federal income tax expense..................................... 240,830 363,161 212,978 (Increase) decrease in premiums receivable.............................. (93,925) 1,588,447 (1,161,276) (Increase) decrease in reinsurance receivable........................... 513,576 799,041 (97,825) (Increase) decrease in reinsurance recoverable on paid losses........... 499,959 1,483,859 (375,066) Increase in deferred policy acquisition costs........................... - (140,988) (784,039) (Increase) decrease in prepaid reinsurance premiums..................... 514,662 6,455,951 (278,747) (Increase) decrease in premium taxes receivable......................... 138,632 (138,632) - Increase in loans to affiliates......................................... (216,719) (71,719) (72,025) (Increase) decrease in prepaid federal income taxes..................... 291,855 291,632 (502,575) (Increase) decrease in accrued investment income........................ (77,370) 135,097 64,361 (Increase) decrease in other assets..................................... (23,024) 33,528 (243) Decrease in reserve for unpaid losses and loss adjustment expenses...... (882,106) (2,274,998) (360,475) Decrease in unearned premiums........................................... (2,251,547) (14,294,903) (2,051,123) Increase in contract funds on deposit................................... 1,141,096 912,916 105,737 Increase (decrease) in reinsurance premiums payable..................... 111,090 (1,378,456) (117,263) Increase (decrease) in taxes, licenses and fees payable................. 39,014 (196,010) (239,088) Increase (decrease) in commissions payable.............................. 1,146 (419,428) 708,569 Increase (decrease) in other liabilities................................ 134,033 (88,175) 36,030 ------------ ------------ ------------ NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES.................. $ 2,221,928 $(4,907,977) $(1,713,691) ----------- ----------- -----------
9 - -------------------------------------------------------------------------------- 11 - -------------------------------------------------------------------------------- BANCINSURANCE CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, - ------------------------------------------------------------------------------------------------------------------------------- 1996 1995 1994 - ------------------------------------------------------------------------------------------------------------------------------- Cash flows from investing activities: Proceeds from held to maturity: fixed maturities due to redemption or maturity..$ 508,779 $ 1,068,590 $ 58,598 Proceeds from available for sale: fixed maturities sold, redeemed and matured... 3,168,317 5,653,365 5,062,788 Proceeds from available for sale: equity securities sold........................ 1,865,588 781,249 692,371 Cost of investments purchased: Held to maturity: fixed maturities............................................. (241,682) (602,344) (2,094,074) Available for sale: fixed maturities........................................... (5,152,466) (188,575) (1,719,497) Equity securities.............................................................. (1,106,028) (426,816) (504,713) Increase (decrease) in amount due to stock broker............................... (143,038) 143,038 (449,054) Net increase in short-term investments.......................................... (787,999) (679,383) (1,363,262) Net (increase) decrease in securities purchased under agreements to resell...... 66,941 496,471 (461,932) Purchase of furniture, fixtures and leasehold improvements...................... (22,152) (11,554) (36,529) ------------ ------------ ---------- NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES......................... (1,843,740) 6,234,041 (815,304) ------------ ----------- ---------- Cash flows from financing activities: Proceeds from note payable to bank.............................................. 1,790,000 5,100,000 850,000 Repayments of note payable to bank.............................................. (1,806,132) (5,400,000) (250,000) Proceeds from stock options exercised........................................... 22,500 47,812 24,063 Acquisition of treasury stock................................................... (185,675) (162,838) (165,000) ------------ ----------- ---------- NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES......................... (179,307) (415,026) 459,063 ------------ ----------- ---------- Net increase (decrease) in cash.................................................. 198,881 911,038 (2,069,932) Cash at beginning of year........................................................ 482,405 (428,633) 1,641,299 ------------ ----------- ---------- CASH AT END OF YEAR..............................................................$ 681,286 $ 482,405 $ (428,633) ============ =========== ========== Supplemental disclosures of cash flow information: Cash paid during the year for: Interest .......................................................................$ 430,662 $ 454,568 $ 407,307 ============ =========== ========== Income taxes....................................................................$ 530,000 $ 20,000 $ 625,000 ============ =========== ========== Transfer of securities from held to maturity to available for sale at amortized cost (fair value $3,102,454)....................................................$ - $ 3,110,174 $ - ============ =========== ========= See accompanying notes to consolidated financial statements.
10 - -------------------------------------------------------------------------------- 12 - ------------------------------------------------------------------------------- BANCINSURANCE CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (A) ORGANIZATION Bancinsurance Corporation (the Company) was incorporated in the state of Ohio in 1970. The Company is primarily engaged, through its wholly-owned subsidiary, Ohio Indemnity, in the underwriting of specialized property and casualty insurance. Ohio Indemnity is licensed in forty-four states and the District of Columbia and licensed for surplus lines in Texas. As such, Ohio Indemnity is subject to the regulations of the Department of Insurance of the State of Ohio (the Department) and the regulations of each state in which it operates. During 1993, BCIS Services, Inc. was incorporated as a wholly-owned subsidiary of the Company. BCIS Services provides workers' compensation professional administration and cost control services to employers who self-insure this obligation. No single customer of the Company accounts for a predominant share of consolidated revenue, except for one customer in the Ultimate Loss Insurance program and one customer in the Surety program. See Note 14. (B) BASIS OF FINANCIAL STATEMENT PRESENTATION The accompanying consolidated financial statements have been prepared in accordance with generally accepted accounting principles (GAAP) (which vary in certain respects from reporting practices prescribed or permitted by the 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. Statutory accounting practices differ from GAAP in that: (1) assets must be included in the statutory statements at "admitted asset value" and "nonadmitted assets" must be excluded through a charge against surplus; (2) policy acquisition costs are charged against income as incurred rather than being deferred and amortized over the terms of the related policies; (3) ceded reinsurance balances payable are reflected as a reduction of premiums in the course of collection rather than as a liability; (4) adjustments reflecting the revaluation of stocks are carried to the equity account as unrealized investment gains or losses, without providing for Federal income taxes; and (5) the fixed maturities are carried at amortized cost instead of market value with no unrealized gain or loss reflected in surplus. The effects of these differences on shareholder's equity and net income are shown in Note 10. The Company received written approval from the Department to record Unearned Premium reserves in the amount of $620,264 at December 31, 1996 for the premium applicable to the unexpired portion of certain ultimate loss insurance policies, whereby coverage was extended to include runoff and to record Contract Funds On Deposit for the portion of funds allocated toward the payment of benefits collected pursuant to a bond insuring the payment of certain reimbursable unemployment compensation benefits on behalf of enrolled employers. 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 the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. (C) CONSOLIDATION POLICY The accompanying financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany transactions and balances have been eliminated in consolidation. (D) INVESTMENTS Effective January 1, 1994, the Company adopted SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities" and has reported the cumulative effect of this accounting change, represented by the unrealized gain for available for sale securities of $1,016,646, net of the related deferred income taxes of $345,660 as an increase in shareholders' equity. Investments in fixed maturities held as available for sale are carried at fair value. The net unrealized holding gain or loss, net of applicable deferred taxes, is shown as a separate component of shareholders' equity, and is not included in the determination of net earnings. Prior to the adoption of SFAS No. 115, fixed maturities were reported at cost adjusted for the amortization of premium or discount and other than temporary market value declines. Investments in held to maturity fixed maturities, which include bonds and preferred stocks with mandatory redemption features, where the Company has the ability and intent to hold to maturity or put date, are carried at amortized cost. As permitted by the Financial Accounting Standards Board's Special Report entitled "A Guide to Implementation of Statement 115 an Accounting for Certain Investments in Debt and Equity Securities", the Company reassessed the appropriateness of its classifications of all securities held. As a result, the Company transferred additional securities from its held to maturity portfolio to available for sale in 1995. Available for sale equity securities, which include common stocks and preferred stocks without mandatory redemption features, are reported at fair value with unrealized gains or losses, net of applicable deferred taxes, reflected in shareholders' equity. Short-term investments are reflected at cost which approximates fair value. 11 - ------------------------------------------------------------------------------- 13 - ------------------------------------------------------------------------------- Realized gains and losses on disposal of investments are determined by the specific identification method and are included in investment income. The carrying value of investments is revised and the amount of revision is charged to net realized losses on investments when management determines that a decline in the value of an investment is other than temporary. (E) EXCESS OF INVESTMENT OVER NET ASSETS OF SUBSIDIARY As allowed by generally accepted accounting principles, the excess of investment over net assets of Ohio Indemnity acquired is not being amortized as the acquisition took place on April 22, 1970, and there is no permanent diminution in value of such excess. (F) RECOGNITION OF PREMIUM REVENUES AND RELATED EXPENSES Insurance premiums are recorded as revenue over the period of risk assumed. For the Company's "Ultimate Loss Insurance" products, a form of physical damage blanket single interest insurance sold to lending institutions, premiums are earned in relation to the level of exposure assumed. For the surety and auto physical damage products (sales were discontinued in 1995), premiums are earned pro rata. The portion of premiums written applicable to the unexpired portion of insurance contracts is recorded in the balance sheet as unearned premiums. (G) POLICY ACQUISITION COSTS During 1992 to 1995, the Company wrote a line of business on which it capitalized and amortized certain policy acquisition costs incurred at policy issuance. Such costs were deferred and amortized over the term of the policy to the extent that these deferred costs could be recovered from future profits, including anticipated investment income related to the line of business. Certain other lines of business have acquisition costs that have not been deferred due to the uncertainty surrounding ultimate profit margins. (H) RESERVE FOR UNPAID LOSSES AND LOSS ADJUSTMENT EXPENSES Reserve for unpaid losses and loss adjustment expenses includes case basis estimates of reported losses and estimates of losses incurred but not reported based upon past experience. The reserve also includes an estimate of the loss adjustment expenses to be incurred in the settlement of items provided for in the reserve for unpaid losses. These reserves are reported net of amounts recoverable from salvage and subrogation. Management believes the reserve for unpaid losses and loss adjustment expenses is adequate. Amounts recoverable from the reinsurer are estimated in a manner consistent with the reserve for unpaid losses and loss adjustment expenses and are recorded as a reinsurance receivable. (I) REINSURANCE The Company's reinsurance transactions are attributable to premiums written in its automobile physical damage business, which was discontinued in 1995. The Company records its reinsurance transactions in accordance with the provisions of SFAS No. 113, "Accounting and Reporting for Reinsurance of Short-Duration and Long- Duration Contracts." (J) CONTRACT FUNDS ON DEPOSIT The Company has an agreement with a cost containment service firm involving a program designed to control the unemployment compensation costs of certain non-profit employers. Pursuant to this agreement, a bond has been issued insuring the payment of certain reimbursable unemployment compensation benefits on behalf of the employers enrolled in this program. Certain monies allocated toward the payment of these benefits are held by the Company. The Company and the cost containment service firm share any redundancy resulting from the development of the claims to be paid from the contract funds held on deposit. The Company recognized $411,176 in payments received in excess of losses incurred which are included in other income in 1996. No such amounts were recognized in 1995 or 1994. (K) RETURN PREMIUMS PAYABLE Return premiums payable are computed based upon a comparison of reported losses to expected losses with certain insured companies. If actual losses reported are less than expected losses, a return of premium is due to the insured. (L) DEPRECIATION AND AMORTIZATION Furniture and fixtures are stated at cost and depreciated using the straight-line method over a five year useful life. Leasehold improvements are amortized over the remaining office lease term. Maintenance, repairs and minor renewals are charged directly to expense as incurred. When furniture and fixtures are sold or otherwise disposed of, the related cost and accumulated depreciation are removed from the accounts and the resulting gains or losses are included in the accompanying statements of income. (M) EARNINGS PER SHARE Earnings per share have been computed by dividing net income by the weighted average number of common shares outstanding during the year, including outstanding stock options, which are included as common stock equivalents. 12 - ------------------------------------------------------------------------------- 14 - ------------------------------------------------------------------------------- (N) FEDERAL INCOME TAXES Bancinsurance Corporation files a consolidated federal income tax return with its subsidiaries. Accordingly, deferred tax liabilities and assets have been recognized for the expected future tax consequences of events that have been included in the financial statements or tax returns. Deferred income taxes are recognized at prevailing income tax rates for temporary differences between financial statement and income tax bases of assets and liabilities for which income tax benefits will be realized in future years. (O) DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate that fair value: Cash, short-term investments and securities purchased under agreements to resell: For these short-term investments, the carrying amounts are reasonable estimates of fair value. Fixed maturities and equity securities: Fair values are based upon quoted market prices or dealer quotes for comparable securities. Note payable to bank: Rates currently available to the Company for debt with similar terms and remaining maturities are used to estimate fair value of existing debt. The carrying amount is a reasonable estimate of fair value. (2) INVESTMENTS The amortized cost and estimated fair values of investments in held to maturity and available for sale securities were as follows:
DECEMBER 31, 1996 ----------------------------------------------------------------------- GROSS GROSS AMORTIZED UNREALIZED UNREALIZED FAIR COST GAINS LOSSES VALUE ----------------------------------------------------------------------- Held to maturity: Fixed maturities: US Treasury securities and obligations of US government corporations and agencies............. $ 1,039,505 $ 4,856 $ 611 $ 1,043,750 Obligations of states and political subdivisions................ 2,315,045 84,994 6,933 2,393,106 Other debt securities.................. 50,000 50,000 Redeemable preferred stock............... 600,000 - - 600,000 -------------- ------------- ----------- ------------ 4,004,550 89,850 7,544 4,086,856 -------------- ----------- --------- ------------ Available for sale: Fixed maturities: US Treasury securities and obligations of US government corporations and agencies............. 858,006 7,011 367 864,650 Obligations of states and political subdivisions................ 10,173,948 239,968 17,566 10,396,350 Corporate securities................... 239,571 1,615 - 241,186 Equity securities........................ 2,602,891 507,620 79,497 3,031,014 -------------- ------------ -------------- ------------- 13,874,416 756,214 97,430 14,533,200 -------------- ------------ -------------- ------------- Totals............................ $ 17,878,966 $ 846,064 $ 104,974 $ 18,620,056 ============== ============ ============== =============
13 - -------------------------------------------------------------------------------- 15 - --------------------------------------------------------------------------------
DECEMBER 31, 1995 ----------------------------------------------------------------------- GROSS GROSS AMORTIZED UNREALIZED UNREALIZED FAIR COST GAINS LOSSES VALUE ----------------------------------------------------------------------- Held to maturity: Fixed maturities: US Treasury securities and obligations of US government corporations and agencies............. $ 797,938 $ 12,062 $ - $ 810,000 Obligations of states and political subdivisions................ 2,510,191 120,333 435 2,630,089 Other debt securities.................. 50,000 - - 50,000 Redeemable preferred stock............... 900,000 - - 900,000 ----------- ----------- ------------- ------------ 4,258,129 132,395 435 4,390,089 ----------- ----------- ------------- ------------ Available for sale: Fixed maturities: Obligations of states and political subdivisions................ 8,958,651 300,277 13,551 9,245,377 Corporate securities................... 264,035 53,902 - 317,937 Equity securities........................ 3,175,130 334,149 44,075 3,465,204 ------------ ------------ -------------- ------------ 12,397,816 688,328 57,626 13,028,518 ------------ ------------ -------------- ------------ Totals............................ $16,655,945 $ 820,723 $ 58,061 $ 17,418,607 =========== ============ ============== ============
The amortized cost and estimated fair value of investments in held to maturity and available for sale securities at December 31, 1996 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.
----------------------------------------------------------------------- HELD TO MATURITY AVAILABLE FOR SALE AMORTIZED FAIR AMORTIZED FAIR COST VALUE COST VALUE ----------------------------------------------------------------------- Due in one year or less................... $ 650,247 $ 652,577 $ 889,239 $ 893,402 Due after one year through five years..... 1,866,547 1,912,567 3,868,403 3,946,479 Due after five years through ten years.... 538,640 572,812 4,043,632 4,137,460 Due after ten years....................... 299,116 298,900 2,470,251 2,524,847 -------------- -------------- ------------ ------------- 3,354,550 3,436,856 11,271,525 11,502,188 Redeemable preferred stock................ 600,000 600,000 - - Equity securities......................... - - 2,602,891 3,031,012 Other debt securities..................... 50,000 50,000 - - --------------- -------------- ------------ ------------- $ 4,004,550 $ 4,086,856 $ 13,874,416 $ 14,533,200 =============== ============== ============ =============
Gross investment income, including net realized gains and losses, is summarized below:
----------------------------------------------------- 1996 1995 1994 ----------------------------------------------------- Held to maturity: Fixed maturities $ 281,850 $ 253,804 $ (72,327) Available for sale: Fixed maturities 664,909 642,621 1,339,751 Equity securities 366,357 260,363 215,108 Short-term investments 319,228 327,423 229,696 Other 9,834 8,043 15,587 ------------- ----------- ----------- Gross investment income $ 1,642,178 $ 1,492,254 $ 1,727,815 ============= =========== ===========
14 - -------------------------------------------------------------------------------- 16 - -------------------------------------------------------------------------------- All fixed maturity investments were income producing for the years ended December 31, 1996, 1995 and 1994. Pre-tax net realized gains (losses) on investments were as follows for each of the years ended December 31:
----------------------------------------------------- 1996 1995 1994 ----------------------------------------------------- Gross realized gains: Held to maturity: fixed maturities......................... $ 3,779 $ 4,250 $ 248 Available for sale: fixed maturities....................... 86,529 56,881 96,317 Equity securities........................ 187,870 77,088 25,502 ------------ ------------ ----------- Total gains............................................. 278,178 138,219 122,067 ============ ============ =========== Gross realized losses: Held to maturity: fixed maturities......................... 5 38,926 - Available for sale: fixed maturities....................... 31,585 58,363 4,370 Equity securities........................ 550 15,039 4,755 ------------ ------------ ----------- Total losses............................................ 32,140 112,328 9,125 ============ ============ =========== Net realized gains ..................................... $ 246,038 $ 25,891 $ 112,942 ============ ============ ===========
From time to time, the Company purchases securities under agreements to resell the same securities (repurchase agreements). The amounts advanced under these agreements represent short-term loans. The fair value of the securities underlying the agreements approximates the carrying value. At December 31, 1996, investments having a par value of $3,425,000 were on deposit with various state insurance departments to meet their respective regulatory requirements. (3) DEFERRED POLICY ACQUISITION COSTS Changes in deferred policy acquisition costs at December 31 are summarized as follows:
----------------------------------------------------- 1996 1995 1994 ----------------------------------------------------- Deferred, January 1........................................... $ - $ 397,029 $ 381,049 Additions: Commissions................................................ - (121,972) 3,133,836 Premium tax................................................ - 126,889 715,195 Salaries................................................... - 14,099 68,844 Ceding commissions......................................... - 121,972 (3,133,836) -------------- ------------ ------------- - 538,017 1,165,088 Amortization to expense ...................................... - 538,017 768,059 -------------- ------------ ------------- Deferred, December 31......................................... $ - $ - $ 397,029 ============== ============ =============
(4) NOTE PAYABLE TO BANK As of December 31, 1996, the Company had a $10,000,000 revolving line of credit with a maturity date of May 1, 2000 and an outstanding balance of $5,600,000. The revolving credit agreement provides for interest payable quarterly, at the bank's prime rate (8.25% per annum at December 31, 1996). Under the terms of the revolving line of credit agreement, the Company has provided the lending bank a collateral assignment of a $100,000 face value life insurance policy on the life of the President. The policy cash value at December 31, 1996, was $23,855. 15 - -------------------------------------------------------------------------------- 17 - -------------------------------------------------------------------------------- (5) LEASES AND SHARED EXPENSES Ohio Indemnity leases its office facility and an automobile. The office facilities are shared with other affiliated entities and rental and bookkeeping expenses are allocated among them. This operating lease expires in 2000. In February 1997, the Company entered into an operating lease agreement for an office facility. The lease expires in 2000. Consolidated rental expenses under operating leases were $141,738, $128,271 and $124,873 in each of the years 1996, 1995 and 1994, respectively. The future minimum lease payments required under these operating leases, as of December 31, 1996 follows: ----------------------------------------------------- YEAR OPERATING ENDING LEASES ----------------------------------------------------- 1997 $ 108,224 1998 109,354 1999 104,080 2000 81,667 ----------- 2000 $ 403,325 ========== (6) FEDERAL INCOME TAXES Deferred income taxes for 1996 and 1995 reflect the impact of "temporary differences" between amounts of assets and liabilities for financial reporting purposes and such amounts as measured on an income tax basis. Temporary differences which give rise to the net deferred tax asset at December 31 are as follows:
------------------------------------ 1996 1995 ------------------------------------ Deferred tax assets: Unpaid loss and loss adjustment expense reserves.................... $ 13,066 $ 26,985 Unearned premium reserves........................................... 67,305 185,413 Alternative minimum tax credit carryforward......................... - 91,726 Subtotal......................................................... 80,371 304,124 Deferred tax liabilities: Unrealized gains on available for sale fixed maturities equity securities (223,986) (214,438) Discounting of anticipated salvage and subrogation.................. (4,919) (4,919) Accrued dividends receivable........................................ (3,120) (3,043) Other ............................................................ (43,101) (26,101) ------------ ----------- Net deferred tax asset (liability)............................... $ (194,755) $ 55,623 =========== ===========
Net deferred tax assets and federal income tax expense in future years can be significantly affected by changes in enacted tax rates or by unexpected adverse events that would impact management's conclusions as to the ultimate realizability of deferred tax assets. The provision for federal income taxes at December 31, consists of the following:
----------------------------------------------------- 1996 1995 1994 ----------------------------------------------------- Current ................................................... $ 631,144 $ (278,189) $ 122,425 Deferred .................................................. 149,105 454,887 212,978 ------------- ----------- ----------- Federal income tax expense.............................. $ 780,249 $ 176,698 $ 335,403 ============= =========== ===========
16 - -------------------------------------------------------------------------------- 18 - -------------------------------------------------------------------------------- The difference between income taxes provided at the Company's effective tax rate and the 34% federal statutory rate at December 31, is as follows:
----------------------------------------------------- 1996 1995 1994 ----------------------------------------------------- Federal income tax at statutory rate....................... $ 1,061,241 $ 543,247 $ 901,815 Dividends received and tax exempt interest deductions...... (284,618) (359,821) (450,523) Adjustment for utilization of capital loss carryforwards... - - (88,402) Other...................................................... 3,626 (6,728) (27,487) ----------- ----------- ---------- Federal income tax expense.............................. $ 780,249 $ 176,698 $ 335,403 =========== =========== ==========
(7) BENEFIT PLANS During 1995 and 1994, the Company had a profit sharing plan for all employees with six months of service. Contributions were determined annually by the Board of Directors. The contribution to the plan was $44,745, in 1994. There was no contribution to the plan in 1995. On January 1, 1996, the Company implemented the Ohio Indemnity Company Employee 401(k) and Profit Sharing Plan (the "401(k)" Plan"). The 401(k) Plan is available to full-time employees who meet the 401(k) Plan's eligibility requirements. Under the 401(k) Plan, the Company matches 50% of the qualified employee's contribution up to 6%. The total cost of the matching contribution was $24,930 for the year ended December 31, 1996. Concurrent with this implementation, the Company merged the Profit Sharing Plan into the Company's 401(k) Plan. (8) STOCK OPTION PLANS The Company applies APB Opinion No. 25 and related Interpretations in accounting for its plans. FASB Statement No. 123 "Accounting for Stock-Based Compensation" ("SFAS 123") was issued by the FASB in 1995 and, if fully adopted, would change the methods for recognition of cost on plans similar to those used by the Company. Adoption of SFAS 123 is optional; however, pro forma disclosures as if the Company adopted the cost recognition requirements under SFAS 123 in 1996 and 1995 are presented below. The Company has two stock option plans. The 1984 Plan was open to all employees of the company and its subsidiaries. All options were granted before May 17, 1994 for a term of not more than ten years. The options for 135,000 shares outstanding at December 31, 1996 expire at various dates from 1997 through 2004 and range in option price per share from $.625 to $6.00. The 1994 Stock Option Plan provides for the grant of options to purchase up to an aggregate of 500,000 shares, 100,000 shares for any one individual, of the common stock of the Company. Certain key employees, officers, and directors of, and consultants and advisors to, the Company and its subsidiaries are eligible to participate in the Plan. The Plan is administered by the Stock Option Committee which will determine to whom and when options will be granted along with the terms and conditions of the options. The options for 50,500 shares outstanding at December 31, 1996 expire at dates from 2004 to 2006 and range in option price per share from $2.50 to $6.75. A summary of the status of the Company's stock options as of December 31, 1996 and 1995 and changes during the year ended on those dates is presented below:
1996 1995 -------------------------------------------------------------------- WGTD. AVG. WGTD. AVG. SHARES EXER. PRICE SHARES EXER. PRICE -------------------------------------------------------------------- Outstanding at beginning of year.............. 199,500 $3.28 237,500 $2.54 Granted....................................... 6,000 3.38 38,500 2.55 Exercised..................................... (20,000) 1.125 (76,500) .625 Expired....................................... - - - - Canceled...................................... - - - - ---------- ---------- Outstanding at end of year.................... 185,500 $3.52 199,500 $3.28 ========== ====== ========== ===== Options exercisable at year-end............... 159,500 167,000 ========== ========== Shares reserved for issuance.................. 635,000 655,000 ========== ========== Options available for future grant............ 449,500 455,500 ========== ========== Weighted average fair value of options granted during the year.................... $ 2.0535 $ 1.5969 ========== ==========
17 - -------------------------------------------------------------------------------- 19 - ------------------------------------------------------------------------------- The fair value of each option granted during 1996 and 1995 is estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions: (1) expected volatility of 56.82%, (2) risk-free interest rate of 5.99% for options granted June 15, 1995, 5.58% for options granted December 21, 1995 and 6.67% for options granted June 5, 1996, and (3) expected life of 6 years. The following table summarizes information about stock options outstanding at December 31, 1996:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE -------------------------------------------------------------------- NUMBER WGTD. AVG. WGTD. AVG. NUMBER WGTD. AVG. OUTSTANDING REMAINING EXERCISE EXERCISABLE EXERCISE RANGE OF EXERCISE PRICES AT 12/31/96 CONTR.LIFE PRICE AT 12/31/96 PRICE -------------------------------------------------------------------- $ .625........................................ 25,000 2.87 $ .625 25,000 $ .625 1.125........................................ 15,000 4.67 1.125 15,000 1.125 1.9375- 2.50................................. 57,500 6.04 2.255 31,500 2.054 2.875 - 3.375................................ 12,000 8.94 3.125 12,000 3.125 5.25 - 6.75................................. 76,000 7.04 5.96 76,000 5.96 ------- -------- .625 - 6.75................................. 185,500 6.10 3.519 159,500 3.685 ======= ========
Had compensation cost for the Company's 1996 and 1995 grants for stock-based compensation plans been determined consistent with SFAS 123, the Company's net income and net income per common share for 1996 and 1995 would approximate the pro forma amounts below:
-------------------------------------------------------------------- AS REPORTED PRO FORMA 1996 1995 1996 1995 -------------------------------------------------------------------- Net income....................................... $2,341,048 $1,421,086 $2,333,507 $1,420,230 --------- --------- --------- --------- Net income per common share...................... $ .40 $ .24 $ .40 $ .24 ---------- --------- --------- ---------
The effects of applying SFAS 123 in this pro forma disclosure are not indicative of future amounts. SFAS 123 does not apply to awards prior to 1995. Additional awards in future years are anticipated. (9) DIVIDEND RESTRICTIONS Under Ohio law, insurance companies may only pay dividends to shareholders from shareholders' equity determined in accordance with statutory accounting practices. Further, Ohio law limits dividends to shareholders, without prior approval of the Department, to the greater of the prior year's statutory net income or 10% of statutory shareholders' equity. As of December 31, 1996, dividends from Ohio Indemnity in 1997 are limited to $2,890,887 without prior approval of the Department. (10) STATUTORY SHAREHOLDERS' EQUITY AND NET INCOME As of December 31, 1996, Ohio Indemnity's statutory surplus and net income determined in accordance with accounting practices prescribed or permitted by the Department differed from shareholders' equity and net income determined in accordance with GAAP by the following:
SHAREHOLDERS' NET EQUITY/SURPLUS INCOME ------------- ------------ Statutory.................................................................. $ 20,146,338 $ 2,890,887 Reconciling items: Non-admitted assets....................................................... 4,116 - Deferred taxes............................................................ (189,319) (149,103) Unrealized gain on available for sale fixed maturities.................... 230,661 - ------------- ------------ GAAP.................................................................... $ 20,191,796 $ 2,741,784 ============= ============
As of December 31, 1995, Ohio Indemnity's statutory surplus differed from GAAP shareholders' equity by an amount of $6,979 in nonadmitted assets, $169,806 for deferred taxes and $340,627 in unrealized gain on available for sale fixed maturities. Statutory net income for the year ended December 31, 1995 differed from GAAP net income by ($397,029) for deferred acquisition costs and ($449,452) in deferred taxes. 18 - -------------------------------------------------------------------------------- 20 - -------------------------------------------------------------------------------- (11) RESERVE FOR UNPAID LOSSES AND LOSS ADJUSTMENT EXPENSES Activity in the reserve for unpaid losses and loss adjustment expenses is summarized as follows:
------------------------------------------------ 1996 1995 1994 ------------------------------------------------ Balance at January 1............................................ $ 2,242,000 $ 4,517,000 $ 4,877,000 Less reinsurance recoverables.................................. 529,000 1,328,000 1,230,000 -------------- ------------ ------------ Net Balance at January 1........................................ 1,713,000 3,189,000 3,647,000 -------------- ------------ ------------ Incurred related to: Current year................................................... 5,761,000 12,513,000 15,036,000 Prior years.................................................... (357,000) 247,000 529,000 --------------- ------------ ------------ Total incurred.................................................. 5,404,000 12,760,000 15,565,000 -------------- ------------ ------------ Paid related to: Current year................................................... 4,424,000 10,659,000 12,188,000 Prior years.................................................... 1,348,000 3,577,000 3,835,000 -------------- ------------ ------------ Total paid...................................................... 5,772,000 14,236,000 16,023,000 -------------- ------------ ------------ Net Balance at December 31...................................... 1,345,000 1,713,000 3,189,000 Plus reinsurance recoverables.................................. 15,000 529,000 1,328,000 --------------- ------------ ------------ Balance at December 31.......................................... $ 1,360,000 $ 2,242,000 $ 4,517,000 ============= ============ ============
As a result of changes in estimates of insured events in prior years, the provision for unpaid losses and loss adjustment expenses decreased by $357,000 in 1996 primarily because of higher than anticipated salvage and subrogation received from the discontinued Automobile Insurance business, and increased by $247,000 in 1995 because of higher than anticipated losses and related legal expenses in connection with a discontinued product. The provision for unpaid losses and loss adjustment expenses increased by $529,000 in 1994 because of higher than anticipated losses from the Automobile Insurance business. (12) REINSURANCE The Company maintains a quota share reinsurance agreement, by which Ohio Indemnity cedes a portion of its insurance to a reinsurer. This arrangement limits the net claim liability potential arising from specific policies. This reinsurance agreement does not relieve the Company from its obligations to policyholders. Consequently, failure of the reinsurer to honor its obligations could result in losses to the Company. The Company currently recovers 50% of the paid losses and loss adjustment expense applicable to Automobile Physical Damage insurance policies. As of December 31, ceded reinsurance reduced commission expense incurred by $62,147, $121,972 and $3,137,726 in 1996, 1995 and 1994, respectively. (13) RELATED PARTIES Included in loans to affiliates at December 31, 1996, 1995 and 1994 is a $19,000 loan to an officer of Ohio Indemnity, due December 8, 1996. Interest only is payable in quarterly installments at the rate of two points above prime. On December 2, 1996, the loan was renewed and the maturity was extended to December 8, 1997. The carrying amount of the loan is a reasonable estimate of fair value. On July 22, 1996, the Company entered into a commercial financing agreement with an Administrator for the marketing and servicing of certain not-for-profit entities in the Bonded Service Program. Under terms of the agreement, the Company provides a line of credit, up to a maximum of $200,000, effective to April 30, 1997 (the "Renewal Date"). Interest is payable in quarterly installments at the rate of one point above prime. The outstanding principal balance is payable in full to the Company on or before April 30 of each annual term. In addition, the Administrator must maintain a principal balance of zero for a minimum of 15 consecutive calendar days during each annual term. At December 31, 1996, the Company had loaned the Administrator $200,000 under this agreement. During 1994, the Company entered into a Split-Dollar Insurance Agreement with a bank, as trustee, for the benefit of an officer/shareholder and his spouse. The bank has acquired a second-to-die policy on the lives of the insureds, in the aggregate face amount of $2,700,000. At December 31, 1996, the Company had loaned the trustee $215,463 under this agreement for payment of insurance premiums. Amounts loaned by the Company to the trustee are to be repaid, in full, without interest from any of the following sources; cash surrender value of the underlying insurance contracts, death benefits and/or the sale of 15,000 shares of the Company's common stock contributed by the officer/shareholder to the Trust. (14) CONCENTRATIONS A single customer in the Ultimate Loss Insurance program represented $1,553,282, $2,343,398 and $2,425,234 of the Company's net premiums earned in 1996, 1995 and 1994, respectively. 19 - -------------------------------------------------------------------------------- 21 - ------------------------------------------------------------------------------- A single customer in the Surety program represented $995,241, $1,074,126 and $1,059,839 of the Company's net premiums earned in 1996, 1995 and 1994, respectively. (15) QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) The Company's results of operations have varied, and in the future may vary from quarter to quarter principally because of fluctuations in underwriting results. Consequently, quarterly results are not necessarily indicative of full year results, nor are they comparable to the results of other quarters. The following table sets forth certain unaudited quarterly consolidated financial and operating data:
1996 ----------------------------------------------------------------------- FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER QUARTER ----------------------------------------------------------------------- Net premiums earned........................ $2,895,349 $2,624,054 $2,375,207 $2,243,494 Net investment and other income............ 592,478 684,081 518,975 771,236 Total revenues............................. 3,487,827 3,308,135 2,894,182 3,014,730 Losses and operating expenses.............. 2,774,479 2,320,842 2,170,779 2,317,477 Net income ................................ 541,422 717,403 546,447 535,776 Net income per share....................... .09 .13 .09 .09 1995 ----------------------------------------------------------------------- FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER QUARTER ----------------------------------------------------------------------- Net premiums earned........................ $6,281,912 $5,676,272 $4,367,224 $3,457,899 Net investment and other income............ 558,522 597,007 470,171 401,337 Total revenues............................. 6,840,434 6,273,279 4,837,395 3,859,236 Losses and operating expenses.............. 6,405,219 5,695,627 4,908,900 3,202,814 Net income ................................ 386,966 470,722 114,814 448,584 Net income per share....................... .07 .08 .02 .07
(16) REGULATORY STANDARD During 1993, the National Association of Insurance Commissioners adopted a Risk Based Capital (RBC) test applicable to property and casualty insurers as of December 31, 1994. The RBC calculation serves as a benchmark of insurance enterprises' solvency by state insurance regulators by establishing statutory surplus targets which will require certain Company level or regulatory level actions. Based on the Company's analysis, it appears that the Company's total adjusted capital is in excess of all required action levels and that no corrective action will be necessary. The RBC provisions have been enacted into the Ohio Revised Code. (17) COMMON SHARE REPURCHASE PROGRAM On November 13, 1995, the Board of Directors adopted a common share repurchase program. The program allows the Company to repurchase, up to a total of 100,000 of its common shares. As of September 5, 1996, the Company repurchased 100,000 shares. In addition, on September 5, and November 4, 1996, the Board of Directors approved an additional 19,112 and 100,000 common shares for repurchase, respectively. The program will expire on December 31, 1997. As of December 31, 1996, the Company repurchased 119,692 shares at an average price per share of $2.91 under this program. Repurchases have been and will continue to be funded by cash flows from operations. (18) LITIGATION The Company is routinely a party to litigation incidental to its business, as well as to other nonmaterial litigation. Management believes that no individual item of litigation, or group of similar items of litigation, including the matters referred to below, is likely to result in judgments that will have a material adverse effect on the financial condition or results of operations of the Company. On November 2, 1994, the James L. Miniter Agency, Inc. (the "Agent") filed a lawsuit against Ohio Indemnity in the Suffolk County Superior Court, Massachusetts, alleging essentially that Ohio Indemnity had breached its contractual obligations to the Agent policyholder. On December 2, 1994, Ohio Indemnity removed the case to the United States District Court for the District of Massachusetts. On June 7, 1996, a summary judgement was granted in favor of Ohio Indemnity, however, an appeal of the judgement has been filed by the Agent. 20 - -------------------------------------------------------------------------------- 22 - -------------------------------------------------------------------------------- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW The Company's principal sources of revenue are premiums paid by insureds for insurance policies issued by the Company. The premiums written become premiums earned for financial statement purposes as the premium is earned incrementally over the term of each insurance policy and after deducting the amount of premium ceded to reinsurers pursuant to reinsurance treaties or agreements. The Company's principal costs are losses and loss adjustment expenses. The principal factor in determining the level of the Company's profit is the difference between these premiums earned and losses and loss adjustment expenses incurred. Loss and loss adjustment expense reserves are estimates of what an insurer expects to pay on behalf of claimants. The Company is required to maintain reserves for payment of estimated losses and loss adjustment expenses for both reported claims and IBNR claims. The ultimate liability incurred by the Company may be different from current reserve estimates. Loss and loss adjustment expense reserves for IBNR claims are estimated based on many variables including historical and statistical information, inflation, legal developments, economic conditions, general trends in claim severity and frequency and other factors that could affect the adequacy of loss reserves. The Company reviews case and IBNR reserves monthly and makes appropriate adjustments.
SUMMARY RESULTS The following table sets forth period to period changes in selected financial data: -------------------------------------------------------------------------------- PERIOD TO PERIOD INCREASE (DECREASE) YEARS ENDED DECEMBER 31, -------------------------------------------------------------------------------- 1995-96 1994-95 1993-94 ---------------------- -------------------- -------------------- AMOUNT %CHANGE AMOUNT %CHANGE AMOUNT %CHANGE ------ ------- ------ ------- ------ ------- Premiums written................... $ (5,680,346) (40.5%) $(21,590,954) (60.6%) $(1,254,297) (3.4%) Net premiums earned................ (9,645,203) (48.8%) (5,752,517) (22.5%) 5,747,966 29.0% Net investment income.............. 150,682 10.7% (147,132) (9.4%) 307,703 24.6% Loss and loss adjustment expense, net of reinsurance recoveries..... (7,355,610) (57.6%) (2,804,414) (18.0%) 4,645,859 42.5% Operating expense.................. (3,270,301) (46.7%) (2,053,987) (22.7%) 1,756,145 24.1% Interest expense................... (3,072) (.7%) 46,801 11.5% 197,295 93.8% Operating income................... 1,523,513 95.4% (1,054,614) (39.8%) (174,216) (6.2%) Net income......................... $ 919,962 64.7% $ (895,909) (38.7%) $ 22,173 1.0%
The combined ratio, which is the sum of the loss ratio and expense ratio, determined in accordance with statutory accounting practices, is the traditional measure of underwriting experience for insurance companies. The following table reflects the loss, expense and combined ratios of the Subsidiary on both a statutory and GAAP basis for each of the years ended December 31:
1996 1995 1994 --------------------------------------- Statutory: Loss ratio......................................................... 53.3% 64.5% 61.9% Expense ratio...................................................... 30.4% 48.8% 33.8% ------- ----- ---- Combined ratio..................................................... 83.7% 113.3% 95.7% ======= ===== ==== GAAP: Loss ratio......................................................... 53.3% 64.5% 61.0% Expense ratio...................................................... 30.5% 52.2% 34.4% ------- ----- ---- Combined ratio..................................................... 83.8% 116.7% 95.4% ======= ===== ====
Investments of the Subsidiary's assets are restricted to certain investments permitted by Ohio insurance laws. The Company's overall investment policy is determined by the Company's Board of Directors and is reviewed periodically. The Company principally invests in investment-grade obligations of states, municipalities and political subdivisions because the majority of the interest income from such investments is tax-exempt and such investments have generally resulted in favorable net yields. The Company has the ability and intent to hold its held to maturity fixed income securities to maturity or put date, and as a result carries its held to maturity fixed income securities at amortized cost for GAAP purposes. As the Company's fixed income securities mature, there can be no assurance that the Company will be able to reinvest in securities with comparable yields. 21 - ------------------------------------------------------------------------------- 23 - ------------------------------------------------------------------------------- RESULTS OF OPERATIONS YEAR ENDED DECEMBER 31, 1996 AS COMPARED TO YEAR ENDED DECEMBER 31, 1995 Premiums Written; Premiums Earned. Premiums written decreased 40.5% from $14,038,845 in 1995 to $8,358,499 in 1996, while premiums earned decreased 48.8% from $19,783,307 in 1995 to $10,138,104 in 1996. Premiums decreased primarily due to the discontinuance of the California Automobile Physical Damage Program. Automobile insurance premiums were predominantly earned through June 1996 as the policies expired. The discontinuance of the Automobile Physical Damage Program resulted in a positive impact on underwriting results although there has been a material reduction in premiums associated with its discontinuance. Nonetheless, there can be no assurance that the discontinuance will not have a material adverse effect on the Company's operating results. See "DISCONTINUED PRODUCTS." Automobile Physical Damage Insurance accounted for $(110,821) of premiums written and $573,207 of premiums earned in 1996, compared with $5,272,700 and $9,507,516 in 1995, a decrease of 102.1% and 94.0% respectively. The Company began commercially marketing the product in California in June 1992 and in Arizona in January 1993. In October 1994, the Company discontinued sales of Automobile Physical Damage insurance in Arizona. On April 30, 1995, the Company canceled its managing general agent contract for the sales of Automobile Physical Damage Insurance in California. On May 1, 1995, the reinsurance agreement applicable to the Automobile Physical Damage written through its managing general agent was canceled. Reinsurance will remain in force for all policies written by its managing general agent. In addition, on May 1, 1995, the Company assumed marketing and underwriting responsibilities and engaged an independent claims agent to handle subsequent settlements. On July 28, 1995, Ohio Indemnity Company entered into an agreement with the California Department of Insurance to discontinue sales and renewals of private passenger personal lines in automobile physical damage insurance in California. Premiums earned decreased less significantly than premiums written as a result of reductions in unearned premium resulting from the run-off and reductions in premiums written. Premiums written for Ultimate Loss Insurance decrease 5.1% from $5,479,857 in 1995 to $5,198,724 in 1996. Premiums earned for Ultimate Loss Insurance decreased 8.6% from $6,817,904 in 1995 to $6,233,308 in 1996. The decrease in premiums written and premiums earned during 1996 reflected decreased premium volume. The decrease in premiums earned reflects, in addition, the reduction in unearned premium associated with a canceled policy. Premiums written for the Bonded Service program remained relatively constant from $3,285,708 in 1995 to $3,231,642 in 1996, while premiums earned from the Bonded Service program decreased 2.0% from $3,293,325 in 1995 to $3,228,725 in 1996. The decreases in net premiums written and premiums earned on the Bonded Service program were primarily attributable to marginal decreases in premium rates. Net Investment Income. Net investment income increased 10.7% from $1,413,493 in 1995 to $1,564,175 in 1996 primarily as a result of net realized gains on equity securities. During 1996, the Company's investment strategy was primarily tax driven in order to utilize potentially expiring capital loss carryforwards and to shelter current year realized gains that were primarily market driven. The average yield on the investment portfolio was 5.8% in 1995 and 5.6% in 1996. Claims Administration. Claims administration income generated by BCIS Services accounted for $533,354 of the revenues for 1995 and $550,615 in 1996. The wholly-owned subsidiary commenced business operations in California during the third quarter of 1993. Other Income. Other income increased 463.6% from $80,190 in 1995 to $451,980 in 1996. The increase in other income was primarily due to earnings in 1996 of $411,176 attributed to recognition of favorable results from a closed year of operations of the Bonded Service program. The Company expects other income to vary from year to year depending on claims experience of the Bonded Service program. See Note (1)(j) of the Notes to Consolidated Financial Statements. Losses and Loss Adjustment Expenses, Net of Reinsurance Recoveries. Losses and loss adjustment expenses totaled $12,760,094, or 64.5% of premiums earned in 1995 versus $5,404,484, or 53.3% of premiums earned in 1996. Losses and loss adjustment expenses, as a percentage of premiums earned, decreased for the same period because net premiums earned decreased at a lower percentage rate than the percentage rate decrease in losses and loss adjustment expenses. This result reflected lower loss and loss adjustment expense experience and higher than anticipated salvage and subrogation received from the discontinued Automobile Insurance program. The decrease in losses and loss adjustment expenses was primarily attributable to claims from the Automobile Physical Damage Insurance business which in 1995 totaled $8,614,845 compared with $502,208 in 1996. This decrease of 94.2%, was due to the discontinuance of the Automobile Physical Damage program in 1995. The losses and loss adjustment expenses for Ultimate Loss Insurance increased 17.0% from $3,485,742 in 1995 to $4,079,921 in 1996 due to increases in loss expenses. Losses and loss adjustment expenses for the Bonded Service program increased from $176,684 in 1995 to $438,355 in 1996 due to increases in reserves. 22 - ------------------------------------------------------------------------------- 24 - ------------------------------------------------------------------------------- Operating Expense. Operating expense consists of commission expense, other insurance operating expense, amortization of deferred policy acquisition costs and general and administrative expenses. Operating expense decreased 46.7% from $6,997,969 in 1995 to $3,727,668 in 1996. The decrease in operating expense was primarily attributable to a 50.0% decrease in 1996 in non-deferred commission expense and a 100% decrease in policy fees paid to the general agent in connection with administration of Automobile Physical Damage Insurance. Legal expenses decreased from $590,083 in 1995 to $202,199 in 1996. Operating expense also decreased as a result of reductions in bond amortization expense, consulting and supplies. Amortization of deferred policy acquisition costs decreased 100% from $538,017 in 1995 due to discontinuance of the Automobile Physical Damage Program. Insurance Department licenses and fees expense decreased 35.5% from $131,639 in 1995 to $84,957 in 1996 primarily due to securing additional states authority to accommodate the expansion of the Surety program during 1995. Additionally, BCIS Services incurred operating expenses of $567,343 in 1996 compared with $565,910 of operating expenses during 1995. Interest Expense. Interest expense remained relatively constant from $454,497 in 1995 to $451,425 in 1996. Federal Income Taxes. The difference between Federal income taxes, $176,698 in 1995 and $780,249 in 1996, resulted from an increase in the effective tax rate primarily due to lower tax exempt interest in 1996 and increases in taxable income. See Note 6 to the Notes to Consolidated Financial Statements. Statutory Combined Ratios. The change in the statutory combined ratio from 113.3% in 1995 to 83.7% in 1996 was primarily attributable to a decrease in loss and loss adjustment expense experience together with higher than anticipated salvage and subrogation associated with the discontinued automobile physical damage insurance program. See "Losses and Loss Adjustment Expenses, Net of Reinsurance Recoveries." YEAR ENDED DECEMBER 31, 1995 AS COMPARED TO YEAR ENDED DECEMBER 31, 1994 Premiums Written; Premiums Earned. Premiums written decreased 60.6% from $35,629,799 in 1994 to $14,038,845 in 1995, while premiums earned decreased 22.5% from $25,535,824 in 1994 to $19,783,307 in 1995. Premiums decreased primarily due to the initial restructuring of the California Automobile Physical Damage Program in May 1995 and later discontinuance of sales and renewals on July 28, 1995. It is anticipated that premium will predominantly be earned through June 1996 as the policies expire. Management anticipates the discontinuance of the Automobile Physical Damage Program will result in a positive impact on underwriting results although there has been and will continue to be a material reduction in premiums associated with its discontinuance. Nonetheless, there can be no assurance that the discontinuance will not have a material adverse effect on the Company's operating results. Automobile Physical Damage Insurance accounted for $5,272,700 of premiums written and $9,507,516 of premiums earned in 1995, compared with $27,537,712 and $14,835,119 in 1994, a decrease of 80.9% and 35.9% respectively. The Company began commercially marketing the product in California in June 1992 and in Arizona in January 1993. In October 1994, the Company discontinued sales of Automobile Physical Damage insurance in Arizona. On April 30, 1995, the Company canceled its managing general agent contract for the sales of Automobile Physical Damage Insurance in California. On May 1, 1995, the reinsurance agreement applicable to the Automobile Physical Damage written through its managing general agent was canceled. Reinsurance will remain in force for all policies written by its managing general agent. In addition, on May 1, 1995, the Company assumed marketing and underwriting responsibilities and engaged an independent claims agent to handle subsequent settlements. As of December 31, 1995, there were $278,122 in premiums written under the restructured program. On July 28, 1995, Ohio Indemnity Company entered into an agreement with the California Department of Insurance to discontinue sales and renewals of private passenger personal lines in automobile physical damage insurance in California. Premiums earned decreased less significantly than premiums written as a result of reductions in unearned premium resulting from the run-off and reductions in premiums written. Premiums written for Ultimate Loss Insurance remained relatively constant from $5,378,178 in 1994 to $5,479,857 in 1995. Premiums earned for Ultimate Loss Insurance decreased 11.7% from $7,717,291 in 1994 to $6,817,904 in 1995. The increase in premiums written during 1995 was the result of reductions in return premium and the decrease in net premiums earned related to reductions in unearned premium associated with the canceled policy and the elimination of continuation coverage on a second policy. See Note 14 to the Notes to Consolidated Financial Statements. Premiums written for the Bonded Service program increased 22.8% from $2,675,532 in 1994 to $3,285,708 in 1995, while premiums earned from the Bonded Service program increased 23.6% from $2,664,525 in 1994 to $3,293,325 in 1995. The increases in net premiums written and premiums earned on the Bonded Service program were primarily attributable to the addition in 1995 of one multi-employer group created by the cost containment service firm to service small not-for-profit organizations. As of December 31, 1995, the Company services five such groups. Net Investment Income. Net investment income decreased 9.4% from $1,560,625 in 1994 to $1,413,493 in 1995 primarily as a result of a smaller investment portfolio attributable to the Company's premium reduction relating to the discontinued Automobile Physical Damage program, offset in part by a higher return on investments in 1995 due to the prevailing interest rate environment. During 1995, the Company's investment strategy was primarily tax driven in order to utilize potentially expiring capital loss carryforwards and to shelter current year realized gains that were primarily market driven. In addition, unallocated investment expenses decreased, primarily attributable to a reduction in bond amortization of 80.4% from $142,365 in 1994 to $27,857 in 1995. 23 - ------------------------------------------------------------------------------- 25 - ------------------------------------------------------------------------------- The average yield on the investment portfolio was 5.6% in 1994 and 5.8% in 1995. Claims Administration. Claims administration income generated by BCIS Services accounted for $521,171 of the increase in revenues for 1994 and $533,354 in 1995. The wholly-owned subsidiary commenced business operations in California during the third quarter of 1993. Other Income. Other income increased 36.1% from $58,938 in 1994 to $80,190 in 1995. The increase in other income was primarily due to earnings in 1995 of $24,400 attributed to fee income earned and $24,522 in recoveries. A portion of the fees charged to participants in the Bonded Service program by the cost containment service firm are used to establish an aggregate loss fund to cover potential losses. If losses reserved do not ultimately develop, a portion of the reserve fund is earned by the Company. Reserve years 1994, 1993 and 1992, though not fully developed at December 31, 1995 are expected to yield redundant reserves due to lower than anticipated losses. The Company expects other income to vary from year to year depending on claims experience of the Bonded Service program. Losses and Loss Adjustment Expenses, Net of Reinsurance Recoveries. Losses and loss adjustment expenses totaled $15,564,508, or 61.0% of premiums earned in 1994 versus $12,760,094, or 64.5% of premiums earned in 1995. Losses and loss adjustment expenses, as a percentage of premiums earned, increased for the same period because net premiums earned increased at a lower percentage rate than the percentage rate increase in losses and loss adjustment expenses. This result reflected higher loss and loss adjustment expense experience, reductions in premium volume and marginal increases in premium rates. The absolute decrease in losses and loss adjustment expenses was primarily attributable to initial claims from the Automobile Physical Damage Insurance business in 1994 which totaled $11,111,284 compared with $8,614,845 in 1995. This decrease of 22.5%, was primarily due to the discontinuance of the Automobile Physical Damage program in 1995. The losses and loss adjustment expenses for Ultimate Loss Insurance decreased 14.6% from $4,083,264 in 1994 to $3,485,742 in 1995 due to decreases in loss and loss adjustment expenses connected with two significant lending institutions. See Note 14 to the Notes to Consolidated Financial Statements. Losses and loss adjustment expenses for the Bonded Service program decreased from $316,701 in 1994 to $176,684 in 1995 due to a decrease in reserves. Operating Expense. Operating expense consists of commission expense, other insurance operating expense, amortization of deferred policy acquisition costs and general and administrative expenses. Operating expense decreased 22.7% from $9,051,956 in 1994 to $6,997,969 in 1995. The decrease in operating expense was primarily attributable to a 8.7% decrease in 1995 in non-deferred commission expense and a 67.0% decrease in policy fees paid to the general agent in connection with administration of Automobile Physical Damage Insurance. Policy fees decreased from $2,483,795 in 1994 to $819,325 in 1995 due to discontinuance of the program. Legal expenses increased from $320,800 in 1994 to $590,083 in 1995 as a result of legal work related to a Contract Dispute. See Note 19 to the Notes to Consolidated Financial Statements. Operating expense also decreased as a result of reductions in bond amortization expense, consulting and audit expenses. Amortization of deferred policy acquisition costs decreased 30.0% from $768,059 in 1994 to $538,017 in 1995 due to discontinuance of the Automobile Physical Damage Program. Insurance Department licenses and fees expense decreased 45.5% from $241,550 in 1994 to $131,639 in 1995 primarily due to securing additional states authority to accommodate the expansion of the Surety program during 1994. Additionally, BCIS Services incurred operating expenses of $565,910 in 1995 compared with $667,646 of operating expenses during 1994. Interest Expense. Interest expense increased 11.5% from $407,696 in 1994 to $454,497 in 1995. This increase was due to higher borrowing levels on the Company's revolving credit line and increases in the prime rate. Federal Income Taxes. The difference between Federal income taxes, $335,403 in 1994 and $176,698 in 1995, provided at the Company's effective tax rate, 12.6% in 1994 and 11.1% in 1995, and the 34% Federal statutory rate was primarily due to lower pre-tax income primarily due to a higher unearned premiums deduction and the recognition of higher losses and loss adjustment expenses in 1995. See Note 6 to the Notes to Consolidated Financial Statements. Statutory Combined Ratios. The change in the statutory combined ratio from 95.7% in 1994 to 113.3% in 1995 was attributable to a decrease in premiums written primarily associated with the discontinued sales of automobile physical damage insurance together with higher loss and loss adjustment expense experience. See "Losses and Loss Adjustment Expenses, Net of Reinsurance Recoveries." YEAR ENDED DECEMBER 31, 1994 AS COMPARED TO YEAR ENDED DECEMBER 31, 1993 Premiums Written; Premiums Earned. Premiums written decreased 3.4% from $36,884,096 in 1993 to $35,629,799 in 1994, while premiums earned increased 29.0% from $19,787,858 in 1993 to $25,535,824 in 1994. Automobile Physical Damage Insurance accounted for $27,537,712 of premiums written and $14,835,119 of premiums earned in 1994, compared with $26,249,514 and $10,925,091 in 1993, an increase of 4.9% and 35.8% respectively. The Company began commercially marketing Automobile Physical Damage Insurance in California in June 1992 and in Arizona from January 1993 to October 1994. 24 - -------------------------------------------------------------------------------- 26 - ------------------------------------------------------------------------------- Premiums written for Ultimate Loss Insurance decreased 39.0% from $8,809,547 in 1993 to $5,378 178 in 1994. Premiums earned for Ultimate Loss Insurance increased 5.9% from $7,289,015 in 1993 to $7,717,291 in 1994. Premiums written decreased primarily from the cancellation of a significant policy and the recognition of a return premium attributable to the elimination of continuation coverage on a second significant policy. Premiums earned increased as a result of reductions in unearned premium resulting from the canceled policy and the elimination of continuation coverage on the second policy. See Note 15 to the Notes to Consolidated Financial Statements. A discontinued product accounted for (0.3%) of premiums written and 0.1% of premiums earned for 1993. Premiums written for the Bonded Service program increased 100.2% from $1,336,473 in 1993 to $2,675,532 in 1994, while premiums earned from the Bonded Service program increased 100.4% from $1,329,361 in 1993 to $2,664,525 in 1994. The increases in net premiums written and premiums earned on the Bonded Service program were primarily attributable to the addition in 1994 of two multi-employer groups created by the TPA to service small not-for-profit organizations. As of December 31, 1994, the Company services four such groups. Net Investment Income. Net investment income increased 24.6% from $1,252,922 in 1993 to $1,560,625 in 1994 primarily as a result of higher interest earned on short-term investments and dividends earned on equity securities resulting from growth in invested assets during 1993. In addition, unallocated investment expenses decreased, primarily attributable to a reduction in bond amortization of 37.1% from $226,359 in 1993 to $142,365 in 1994. The average yield on the investment portfolio was 6.1% in 1993 and 5.6% in 1994. Claims Administration. Claims administration income generated by BCIS Services accounted for $154,523 of the increase in revenues for 1993 and $521,171 in 1994. The wholly-owned subsidiary commenced business operations in California during the third quarter of 1993. Other Income. Other income decreased 87.5% from $471,562 in 1993 to $58,938 in 1994. The decrease in other income was primarily due to earnings in 1993 of $396,612 attributed to the release of redundant reserves from the aggregate loss fund established in connection with the Bonded Service program. A portion of the fees charged to participants in the Bonded Service program by the TPA is used to establish an aggregate loss fund to cover potential losses. If losses reserved do not ultimately develop, a portion of the reserve fund is earned by the Company. Reserve year 1993, though not fully developed at December 31, 1994 is not expected to yield redundant reserves due to higher than anticipated losses. The Company expects other income to vary from year to year depending on claims experience of the Bonded Service program. Losses and Loss Adjustment Expenses, Net of Reinsurance Recoveries. Losses and loss adjustment expenses totaled $10,918,649, or 55.2% of premiums earned in 1993 versus $15,564,508, or 61.0% of premiums earned in 1994. Losses and loss adjustment expenses, as a percentage of premiums earned, increased for the same period because premiums earned increased at a lower percentage rate than the percentage rate increase in losses and loss adjustment expenses. This result reflected higher loss and loss adjustment expense experience, smaller increases in premium volume and marginal increases in premium rates. The absolute increase in losses and loss adjustment expenses was primarily attributable to initial claims from the Automobile Physical Damage Insurance business written in 1994 which totaled $11,111,284 compared with $7,179,975 in 1993. This increase of 54.8%, was due to higher loss and loss adjustment expense experience in 1994, in part due to the 1994 California earthquake. The losses and loss adjustment expenses for Ultimate Loss Insurance rose 5.1% from $3,884,133 in 1993 to $4,083,264 in 1994 due to higher than anticipated loss and loss adjustment expenses related to a discontinued product and increases in loss and loss adjustment expense payments connected with two significant lending institutions. See Note 15 to the Notes to Consolidated Financial Statements. Losses and loss adjustment expenses for the Bonded Service program increased from $(204,363) in 1993 to $316,701 in 1994 due to an increase in reserves. Operating Expense. Operating expense consists of commission expense, other insurance operating expense, amortization of deferred policy acquisition costs and general and administrative expenses. Operating expense increased 24.1% from $7,295,811 in 1993 to $9,051,956 in 1994. The increase in operating expense was primarily attributable to a 61.4% increase in 1994 in non-deferred commission expense and a 8.7% increase in policy fees paid to the general agent in connection with administration of Automobile Physical Damage Insurance. Policy fees increased from $2,285,575 in 1993 to $2,483,795 in 1994 due to expansion of the program. Legal expenses decreased from $666,084 in 1993 to $320,800 in 1994 as a result of a reduction in legal work related to a discontinued product. See Note 19 to the Notes to Consolidated Financial Statements. Operating expense also increased as a result of recognition of amortized deferred policy acquisition costs that increased from $535,233 in 1993 to $768,059 in 1994 due to the expansion of the Surety and the Automobile Physical Damage programs. Insurance Department licenses and fees expense increased 63.5% from $147,719 in 1993 to $241,550 in 1994 in part due to securing additional states authority to accommodate the expansion of the Surety program. Additionally, BCIS Services incurred operating expenses of $667,646 in 1994 compared with $455,761 in start-up costs during 1993. Interest Expense. Interest expense increased 93.8% from $210,401 in 1993 to $407,696 in 1994. This increase, despite lower interest rates, was due to higher borrowing levels on the Company's revolving credit line and increases in the prime rate. Federal Income Taxes. The difference between Federal income taxes, $580,379 in 1993 and $335,403 in 1994, provided at the Company's effective tax rate, 20.5% in 1993 and 12.6% in 1994, and the 34% Federal statutory rate was primarily due to a 25 - ------------------------------------------------------------------------------- 27 - ------------------------------------------------------------------------------- significant portion of pre-tax income representing dividends received and tax-exempt interest deductions, and in 1994 the adjustment resulting from a restructuring of the policy coverage and the policy cancellation with two significant customers in the Ultimate Loss Insurance program. See Note 6 to the Notes to Consolidated Financial Statements. Statutory Combined Ratios. The change in the statutory combined ratio from 80.6% in 1993 to 95.7% in 1994 was attributable to higher general and administrative expenses and higher loss and loss adjustment expense experience, together with marginal increases in premium rates. DISCONTINUED PRODUCTS In October 1994, the Company discontinued sales of Automobile Physical Damage insurance in Arizona which accounted for 2.2% of premiums written and 1.9% of premiums earned in 1994. The Company's managing General Agent withdrew from Arizona and discontinued sales. On April 30, 1995, the Company canceled its managing general agent contract for the sales of Automobile Physical Damage Insurance in California. On May 1, 1995, the reinsurance agreement applicable to the Automobile Physical Damage written through its managing general agent was canceled. Reinsurance will remain in force for all policies written by its managing general agent. In addition, on May 1, 1995 the Company assumed marketing and underwriting responsibilities and engaged an independent claims agent to handle subsequent settlements. On July 28, 1995, Ohio Indemnity entered into an agreement with the California Department of Insurance to discontinue sales and renewals of private passenger personal lines in automobile physical damage insurance in California for a maximum period of three years. Premiums were predominantly earned through June 1996 as the policies expired. The Automobile Physical Damage Insurance program represented (1.3)% of the Company's premiums written and 5.7% of the Company's premiums earned for 1996 versus 37.6% and 48.1%, and 77.3% and 58.1%, respectively, for 1995 and 1994. See "RESULTS OF OPERATIONS." LIQUIDITY AND CAPITAL RESOURCES The Company is an insurance holding company whose principal asset is the stock of Ohio Indemnity. The Company is, and will continue to be, dependent on dividends from the Subsidiary to meet its liquidity requirements, including debt service obligations. The Company has a $10 million credit facility to fund working capital requirements. Based on statutory limitations, the maximum amount of dividends that the Company would be able to receive in 1997 from Ohio Indemnity, absent regulatory consent, is $2,890,887. See Note 9 to the Notes to Consolidated Financial Statements. Ohio Indemnity derives its funds principally from net premiums written, reinsurance recoveries, investment income and contributions of capital from the Company. The principal use of these funds is for payment of losses and loss adjustment expenses, commissions, operating expenses and income taxes. Net cash provided by (used in) operating activities equalled $(1,713,691), $(4,907,977) and $2,221,928 for the years ended December 31, 1994, 1995, and 1996, respectively. Net cash provided by (used in) financing activities was $459,063, $(415,026), and $(179,307) for the years ended December 31, 1994, 1995, and 1996, respectively. Net cash provided by (used in) investing activities of the Company was $(815,304), $6,234,041 and $(1,843,740) for the years ended December 31, 1994, 1995, and 1996, respectively. BCIS Services derives its funds principally from claims administration fees which are sufficient to meet its operating obligations. The Company maintains a level of cash and liquid short-term investments which it believes will be adequate to meet anticipated payment obligations without being required to liquidate intermediate-term and long-term investments through the end of 1997. Due to the nature of the risks the Company insures, losses and loss adjustment expenses emanating from its policies are characterized by relatively short settlement periods and quick development of ultimate losses compared to claims emanating from other types of insurance products. Therefore, the Company believes that it can estimate its cash needs to meet its loss and expense payment obligations through the end of 1997. The Company's investments at December 31, 1996 consisted primarily of investment-grade fixed income securities. Cash and short-term investments at December 31, 1996 amounted to $7,503,839, or 28.8% of total cash and invested assets. The fair values of the Company's held to maturity fixed income securities are subject to market fluctuations but are carried on the balance sheet at amortized cost because the Company has the ability and intent to hold held to maturity fixed income securities to maturity or put date. Available for sale fixed income securities are reported at fair value with unrealized gains or losses, net of applicable deferred taxes, reflected in shareholders' equity. The Company earned net investment income of $1,560,625, $1,413,493 and $1,564,175 for the years ended December 31, 1994, 1995 and 1996, respectively. The Company's total shareholders' equity increased from $11,838,424 in 1994 to $13,710,410 in 1995 to $15,906,817 in 1996 representing a 34.4% increase over the three-year period. The increase in total shareholders' equity has strengthened the Company's capital position. All material capital commitments and financial obligations of the Company are reflected in the Company's financial statements, except the Company's risk on surety bonds and state mandated performance bonds, written in connection with the Bonded Service program. The financial statements include reserves for losses on such programs for any claims filed and for an estimate of incurred but not reported losses. Such reserves were $458,436 and $345,000 at December 31, 1996 and 1995, respectively. 26 - ------------------------------------------------------------------------------- 28 - -------------------------------------------------------------------------------- Under applicable insurance statutes and regulations, the Subsidiary is required to maintain prescribed amounts of capital and surplus as well as statutory deposits with the appropriate insurance authorities. The Subsidiary is in compliance with all applicable statutory capital and surplus requirements. The Subsidiary's investments consist only of permitted investments under Ohio insurance laws. NAIC guidelines recommend that a property/casualty insurer's ratio of annual statutory net premiums written to statutory surplus be no greater than 3 to 1. At December 31, 1996, the ratio of combined annual statutory net premiums written by the Subsidiary to its combined statutory surplus was approximately .42 to 1. FACTORS TO CONSIDER FORWARD LOOKING Management has undertaken several initiatives in 1996 which should favorably impact performance in 1997, although there can be no assurance that this will occur. The discontinuance of the Automobile Physical Damage Program in California should allow the Company to improve its profit potential. The discontinuance of the Automobile Physical Damage Program in California has resulted in a positive impact on underwriting results although there has been a material reduction in premiums associated with its discontinuance. Additionally, the restructured business should allow for better concentration on established products and opportunities intended to improve the Company's performance over the long-term. Nonetheless, there can be no assurance that the discontinuance will not have a material adverse effect on the Company's results of operations. The Company expects to continue expanding its direct sale force, which should allow the Company to increase its market penetration. These activities will be directed toward selected market niches where management believes the Company will be able to provide customers with additional services. TRENDS Management does not know of any trends, events or uncertainties that will have, or that are reasonably likely to have, a material effect on the Company's liquidity, capital resources or results of operations. The Company's results of operations have varied from quarter to quarter principally because of fluctuations in underwriting results. The Company's experience indicates that more loans for automobile purchases are financed during summer months due to seasonal consumer buying habits. The Company expects that such quarterly fluctuations may lessen as a result of the discontinuance of the California Automobile Physical Damage Program, although there can be no assurance that this will occur. See Note 15 to the Notes to Consolidated Financial Statements. SAFEHARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 Except for the historical information contained herein, the matters discussed in this Annual Report includes forward-looking statements that involve risks and uncertainties, including, but not limited to, quarterly fluctuations in results, the management of growth, and other risks detailed from time to time in the Company's Form 10-K for the year ended December 31, 1996 and other Securities and Exchange Commission filings. Actual results may differ materially from management expectations. INFLATION Although the cumulative effects of inflation on premium growth cannot be fully determined, increases in the retail price of automobiles have generally resulted in increased amounts being financed which constitutes one of the bases for determining premiums on Ultimate Loss Insurance. Despite relatively low inflation during 1996, the Company has experienced no material adverse consequences with respect to its growth in premiums. INSURANCE REGULATORY MATTERS On August 9, 1994, the Ohio Department of Insurance issued its triennial examination report on Ohio Indemnity as of December 31, 1993. The examiners reported that the financial statements set forth in the report reflected the financial condition of Ohio Indemnity. Management is not aware of any recommendations by regulatory authorities which would have, or are reasonably likely to have, a material effect on the Company's liquidity, capital resources or results of operations. The NAIC has developed a risk-based capital measurement formula to be applied to all property/casualty insurance companies. This formula calculates a minimum required statutory net worth, based on the underwriting, investment, credit, loss reserve and other business risks inherent in an individual company's operations. Under the current formula, any insurance company which does not meet threshold risk-based capital measurement standards could be forced to reduce the scope of its operations and ultimately could become subject to statutory receivership proceedings. Based on the Company's analysis, it appears that the Company's total adjusted capital is in excess of all required action levels and that no corrective action will be necessary. The Risk Based Capital provisions have been enacted into the Ohio Revised Code. 27 - ------------------------------------------------------------------------------- 29 - -------------------------------------------------------------------------------- RESERVES The amount of incurred losses and loss adjustment expenses is dependent upon a number of factors, including claims frequency and severity, and the nature and types of losses incurred and the number of policies written. These factors may fluctuate from year to year and do not necessarily bear any relationship to the amount of premiums written or earned. As claims are incurred, provisions are made for unpaid losses and loss adjustment expenses by accumulating case reserve estimates for claims reported prior to the close of the accounting period and by estimating IBNR claims based upon past experience modified for current trends. Notwithstanding the variability inherent in such estimates, management believes that the provisions made for unpaid losses and loss adjustment expenses are adequate to meet claims obligations of the Company. Such estimates are reviewed monthly by management and annually by an independent consulting actuary and, as adjustments thereto become necessary, such adjustments are reflected in the Company's results of operations. The Company's independent consulting actuary has opined that loss and loss adjustment expense reserve levels, as of December 31, 1996, were reasonable. 28 - ------------------------------------------------------------------------------- 30
- ----------------------------------------------------------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------------- BANCINSURANCE CORPORATION SELECTED FINANCIAL DATA - ----------------------------------------------------------------------------------------------------------------------------------- 1996 1995 1994 1993 1992 1991 1990 - ----------------------------------------------------------------------------------------------------------------------------------- Premiums earned $10,138,104 $19,783,307 $25,535,824 $19,787,858 $10,657,111 $6,852,544 $4,596,382 Investment and other income 2,566,770 2,027,037 2,140,734 1,879,007 1,241,158 653,300 343,776 Total revenues 12,704,874 21,810,344 27,676,558 21,666,865 11,898,269 7,505,844 4,940,158 Losses and loss adjustment expenses, net of reinsurance recoveries 5,404,484 12,760,094 15,564,508 10,918,649 5,063,855 3,444,370 2,582,505 Operating expenses 4,179,093 7,452,466 9,459,652 7,506,212 3,938,717 2,786,956 1,739,441 Operating income 3,121,297 1,597,784 2,652,398 2,826,614 2,895,697 1,274,518 618,212 Income taxes 780,249 176,698 335,403 580,379 758,167 332,108 178,466 Net income 2,341,048 1,421,086 2,316,995 2,294,822 2,137,530 942,410 439,746 Net income per outstanding share of common stock $.40 $.24 $.39 $.38 $.36 $.16 $.08 Average number of shares of common stock outstanding(1) 5,831,048 5,892,002 5,921,419 6,089,720 5,959,705 5,843,382 5,781,947 SELECTED BALANCE SHEET DATA - ------------------------------------------------------------------------------------------------------------------------------------ 1996 1995 1994 1993 1992 1991 1990 - ------------------------------------------------------------------------------------------------------------------------------------ Total assets $28,274,952 $27,750,234 $43,774,264 $43,612,249 $28,014,631 $15,534,604 $11,581,617 Note payable to bank $ 5,600,000 $ 5,616,132 $ 5,916,132 $ 5,316,132 $ 3,500,000 $ 3,350,000 $ 3,600,000 Net shareholders' equity $15,906,817 $13,710,410 $11,838,424 $ 9,909,742 $ 7,581,232 $ 5,239,984 $ 4,247,832 (1) Earnings per share have been computed by dividing net income by the weighted average number of common shares outstanding during the year, including convertible preferred stock and stock options, which are included as common stock equivalents. In 1990 the stock options (see Note 8 to the Notes to Consolidated Financial Statements) were excluded from the computation due to their anti-dilative effect.
29 - ------------------------------------------------------------------------------- 31 - ------------------------------------------------------------------------------- - ----------------------------------------------------------------------------------------------------------------------------------- 1989 1988 1987 1986 1985 1984 1983 1982 - ----------------------------------------------------------------------------------------------------------------------------------- $3,326,437 $3,327,362 $2,717,607 $2,413,136 $1,760,841 $1,479,406 $1,241,397 $1,123,176 379,287 275,331 264,709 192,960 147,136 160,803 114,710 131,845 3,705,724 3,602,693 2,982,316 2,606,096 1,907,977 1,640,209 1,356,107 1,255,021 2,119,556 1,957,693 1,418,484 1,280,981 844,401 634,439 625,547 676,851 1,074,691 774,083 643,867 544,173 480,737 429,414 328,056 549,896 511,477 870,917 919,965 780,942 582,839 576,356 402,504 274,002 72,596 240,220 258,315 276,392 155,288 182,021 116,239 - 438,881 630,697 628,226 504,550 273,420 320,578 298,861 123,827 $.08 $.11 $.11 $.08 $.04 $.05 $.06 $ .02 5,784,347 5,863,733 5,844,144 6,573,406 6,905,644 6,285,843 5,277,564 6,984,217 - ------------------------------------------------------------------------------------------------------------------------------------ 1989 1988 1987 1986 1985 1984 1983 1982 - ----------------------------------------------------------------------------------------------------------------------------------- $7,492,524 $5,755,781 $4,021,011 $3,456,108 $2,680,210 $2,696,888 $ 2,233,922 $1,845,290 $1,600,000 $1,650,000 $ 368,000 $ 388,000 $ 408,200 $ 433,292 $ 458,292 $ 458,292 $3,685,010 $3,342,282 $2,777,141 $2,255,976 $1,930,873 $1,640,687 $ 1,320,109 $ 991,303
30 - ------------------------------------------------------------------------------- 32 - ------------------------------------------------------------------------------- MARKET INFORMATION AND DIVIDENDS Bancinsurance Corporation's common stock trades on the Nasdaq National Market tier of The Nasdaq Stock Market under the symbol "BCIS." The following table sets forth, for the periods indicated, the high and low sale prices for the Company in the over-the-counter market as reported by the National Quotation Bureau, Inc. The prices shown represent quotation between dealers, without adjustment for retail markups, markdowns or commissions, and may not represent actual transactions. On February 14, 1997, the last reported sale price of the Company's common stock was $4 1/4. Low Sale High Sale -------- --------- September 30, 1995 2 3/4 3 1/4 December 31, 1995 2 3/8 2 3/4 March 31, 1996 3 3 1/2 June 30, 1996 3 1/4 3 1/2 September 30, 1996 3 3 1/4 December 31, 1996 3 3/4 4 1/8 HOLDERS The number of holders of record of the Company's common stock as of February 14, 1997 was 1,012. DIVIDENDS No cash dividends were declared or paid on the Company's outstanding common stock in the two most recent fiscal years. The Company intends to retain earnings to finance the growth of its business and the business of Ohio Indemnity and BCIS Services and, therefore, does not anticipate paying any cash dividends to holders of its common stock. Any determination to pay dividends in the future will be at the discretion of the Company's Board of Directors and will be dependent upon the Company's results of operations, financial condition, legal and regulatory restrictions, and other factors deemed relevant at the time. Reference is made to Note 9 to the Notes to Consolidated Financial Statements for a description of the restrictions on payment of dividends to the Company from the Subsidiary. MARKET MAKERS As of January 31, 1997, the following broker-dealer firms were making a market in Bancinsurance Corporation common stock: THE CHICAGO CORPORATION MCDONALD & COMPANY SECURITIES, INC. ERNST & COMPANY MORGAN, KEEGAN & COMPANY EVEREN SECURITIES INC. NASH WEISS/DIV. OF SHATKIN INV. HERZOG, HEINE, GEDULD, INC. SHERWOOD SECURITIES CORP. MAYER & SCHWEITZER INC. WIEN SECURITIES CORP. ANNUAL MEETING The annual meeting of shareholders will be held on June 3, 1997, at 9:30 A.M. at the offices of Porter, Wright, Morris & Arthur, 29th Floor, 41 South High Street, Columbus, Ohio. 31 - -------------------------------------------------------------------------------- 33 - -------------------------------------------------------------------------------- BOARD OF DIRECTORS Milton O. Lustnauer Private Investor Saul Sokol Owner Sokol Insurance Agency James R. Davis Vice President John S. Sokol Executive Vice President Daniel D. Harkins Private Investor Si Sokol Chairman Bancinsurance Corporation - ------------------------------------------------------------------------------- OFFICERS Si Sokol Chairman, President and Chief Executive Officer John S. Sokol Executive Vice President James R. Davis Vice President Sally J. Cress Secretary and Treasurer 32 - ------------------------------------------------------------------------------- 34 - ------------------------------------------------------------------------------- CORPORATE OFFICE Bancinsurance Corporation 20 East Broad Street Columbus, Ohio 43215 SUBSIDIARIES: Ohio Indemnity Company 20 East Broad Street Columbus, Ohio 43215 BCIS Services, Inc. 15301 Ventura Blvd. Sherman Oaks, California 91403 - ------------------------------------------------------------------------------- INDEPENDENT ACCOUNTANTS Coopers & Lybrand L.L.P. Columbus, Ohio - ------------------------------------------------------------------------------- LEGAL COUNSEL Porter, Wright, Morris, & Arthur Columbus, Ohio - ------------------------------------------------------------------------------- TRANSFER AGENT AND REGISTRAR Communications regarding changes of address, transfer of shares, and lost certificates should be directed to the Company's stock transfer agent and registrar: The Huntington National Bank Stock Transfer Department, HC 1026 Columbus, Ohio 43287 - ------------------------------------------------------------------------------- S.E.C. FORM 10-K A copy of the Bancinsurance Form 10-K as filed with the Securities and Exchange Commission is available to shareholders without charge upon written request to the Corporate Secretary. - ------------------------------------------------------------------------------- COMMON STOCK Listed: Nasdaq National Market Quoted: BCIS 33 - ------------------------------------------------------------------------------- EX-21 3 EXHIBIT 21 1 - -------------------------------------------------------------------------------- EXHIBIT 21 - SUBSIDIARIES OF THE COMPANY --------------------------- BANCINSURANCE CORPORATION ------------------------- 100% 100% OHIO INDEMNITY COMPANY BCIS SERVICES, INC. AN INSURANCE COMPANY - ------------------------------------------------------------------------------- EX-23 4 EXHIBIT 23 1 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the incorporation by reference in the registration statement of Bancinsurance Corporation's 1984 Stock Option Plan and the 1994 Stock Option Plan on Form S-8 of our report dated February 23, 1996, on our audits of the consolidated financial statements and financial statement schedules of Bancinsurance Corporation as of December 31, 1996 and 1995 and for the years ended December 31, 1996, 1995 and 1994, which report is included in this Annual Report on Form 10-K. Coopers & Lybrand L.L.P. Columbus, Ohio February 28, 1997 EX-27 5 EXHIBIT 27
7 YEAR DEC-31-1996 DEC-31-1996 11,502,186 4,004,550 4,086,856 3,031,014 0 0 25,360,303 681,286 25,143 0 28,274,952 1,359,775 745,787 0 0 5,600,000 315,567 0 0 15,591,250 28,274,952 10,138,104 1,318,137 246,038 1,002,595 5,404,484 3,727,668 451,425 3,121,297 780,249 2,341,048 0 0 0 2,341,048 .40 0 1,713,000 5,761,000 (357,000) 4,424,000 1,348,000 1,345,000 0
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