-----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, F5VzyEQHPYu9rrzKGlrciRds6+dCPyR3V2ACVwTZoQM3ZMGwLq1mw/4mmgEu6XtW aOVJIkGGfS/x8RrEWugqmQ== 0000950152-97-007773.txt : 19971114 0000950152-97-007773.hdr.sgml : 19971114 ACCESSION NUMBER: 0000950152-97-007773 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970930 FILED AS OF DATE: 19971112 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-Q SEC ACT: SEC FILE NUMBER: 000-08738 FILM NUMBER: 97712448 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-Q 1 BANCINSURANCE CORPORATION FORM 10-Q 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 FORM 10-Q QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For Quarter Ended September 30, 1997 Commission File Number 0-8738 ------------------ ----------------------------- 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 -------------- None - ------------------------------------------------------------------------------ Former name, former address and former fiscal year, if changed since last report. 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 the number of shares outstanding of each of the issuer's classes of common stock, as of the last practicable date. Class Outstanding at September 30, 1997 - ------------------------------- --------------------------------- Common stock, without par value 5,843,115 2 BANCINSURANCE CORPORATION AND SUBSIDIARIES INDEX
Page ---- PART I - FINANCIAL INFORMATION: Item 1. Financial Statements Consolidated Balance Sheets as of September 30, 1997 (unaudited) and December 31, 1996 3 Consolidated Statements of Income for the three months and nine months ended September 30, 1997 and 1996 (unaudited) 5 Consolidated Statements of Cash Flows for the nine months ended September 30, 1997 and 1996 (unaudited) 6 Notes to Consolidated Financial Statements (unaudited) 8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9 Item 3. Quantitative and Qualitative Disclosures About Market Risk Not Applicable PART II - OTHER INFORMATION AND SIGNATURES Item 1. Legal Proceedings 15 Item 2. Changes in Securities Not Applicable Item 3. Default Upon Senior Securities Not Applicable Item 4. Submission of Matters to a Vote of Security Holders Not Applicable Item 5. Other Information Not Applicable Item 6. Exhibits and Reports on Form 8-K 15 Signatures 16
2 3 PART I - FINANCIAL INFORMATION ITEM 1. Financial Statements BANCINSURANCE CORPORATION AND SUBSIDIARIES Consolidated Balance Sheets
September 30, December 31, Assets 1997 1996 - ------ ------------- ------------ (Unaudited) Investments: Held to maturity: Fixed maturities, at amortized cost (fair value $4,138,853 in 1997 and $4,086,856 in 1996) $ 4,042,276 $ 4,004,550 Available for sale: Fixed maturities, at fair value (amortized cost $13,241,120 in 1997 and $11,271,525 in 1996) 13,551,737 11,502,186 Equity securities, at fair value (cost $2,454,739 in 1997 and $2,602,891 in 1996) 3,050,483 3,031,014 Short-term investments, at cost which approximates fair value 4,768,777 5,730,923 Securities purchased under agreements to resell 1,368,503 1,091,630 ----------- ----------- Total investments 26,781,776 25,360,303 ----------- ----------- Cash 1,729,383 681,286 Premiums receivable 938,915 494,322 Accounts receivable, net of allowance for uncollectible amounts 242,532 - Reinsurance receivable 15,750 15,150 Reinsurance recoverable on paid losses 1,033 25,143 Prepaid reinsurance premiums 33,764 - Premium taxes receivable 15,712 - Prepaid commissions 115,499 - Loans to affiliates 606,182 434,463 Note receivable 75,000 - Furniture, fixtures and leasehold improvements, net 105,678 86,435 Excess of investment over net assets of subsidiaries 1,004,102 753,738 Prepaid federal income taxes 100,559 29,633 Accrued investment income 362,080 308,646 Other assets 114,404 85,833 ----------- ----------- Total assets $32,242,369 $28,274,952 ----------- -----------
(Continued) 3 4 BANCINSURANCE CORPORATION AND SUBSIDIARIES Consolidated Balance Sheets, Continued
September 30, December 31, Liabilities and Shareholders' Equity 1997 1996 - ------------------------------------ ------------ ------------ (Unaudited) Reserve for unpaid losses and loss adjustment expenses $ 1,589,102 $ 1,359,775 Unearned premiums 1,294,144 745,787 Contract funds on deposit 3,164,042 2,950,108 Reinsurance premiums payable 40,133 503,806 Note payable to bank 6,540,000 5,600,000 Note payable 40,323 - Taxes, licenses, and fees payable 143,844 93,566 Deferred federal income taxes 288,639 194,755 Commissions payable 405,004 342,258 Other 391,713 578,080 ----------- ----------- Total liabilities 13,896,944 12,368,135 ----------- ----------- Commitments and contingent liabilities Shareholders' equity: 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 1,495,387 1,433,329 Net unrealized gain on investments, net of tax 598,198 434,797 Retained earnings 16,036,787 14,040,484 ----------- ----------- 18,445,939 16,224,177 Less: Treasury stock, at cost (35,162 common shares at September 30, 1997 and 111,020 at December 31, 1996) (100,514) (317,360) ----------- ----------- Total shareholders' equity 18,345,425 15,906,817 ----------- ----------- Total liabilities and shareholders' equity $32,242,369 $28,274,952 ----------- -----------
See accompanying notes to consolidated financial statements. 4 5 BANCINSURANCE CORPORATION AND SUBSIDIARIES Consolidated Statements of Income (Unaudited)
Three Months Ended Nine months Ended September 30, September 30, 1997 1996 1997 1996 ----------- ----------- ----------- ----------- Income: Premiums written $ 2,965,371 $ 1,553,460 $ 8,325,545 $ 6,874,161 (Increase) decrease in unearned premiums 311,734 804,983 (548,357) 1,492,389 ----------- ----------- ----------- ----------- Premiums earned 3,277,105 2,358,443 7,777,188 8,366,550 Premiums ceded (29,678) 16,764 (29,678) (471,940) ----------- ----------- ----------- ----------- Net premiums earned 3,247,427 2,375,207 7,747,510 7,894,610 Investment income (net of expenses of $85,830 and $ 49,917, respectively) 362,386 334,120 1,027,933 1,001,389 Net realized gain on investments 115,926 52,133 198,798 180,708 Claims administration fees 146,698 132,978 495,680 398,432 Title and appraisal fees 561,200 - 1,057,682 - Other income 25,541 (256) 328,574 215,005 ----------- ----------- ----------- ----------- Total revenue 4,459,178 2,894,182 10,856,177 9,690,144 ----------- ----------- ----------- ----------- Losses and operating expenses: Losses and loss adjustment expenses 1,900,712 1,083,054 4,014,656 4,529,614 Reinsurance recoveries - 50,893 - (456,881) Commission expense 487,693 305,087 1,091,805 1,130,448 Other insurance operating expenses 360,535 397,239 1,040,833 1,149,177 General and administrative expenses 714,463 225,186 1,754,358 589,767 Interest expense 111,559 109,320 259,440 323,975 ----------- ----------- ----------- ----------- Total expenses 3,574,962 2,170,779 8,161,092 7,266,100 ----------- ----------- ----------- ----------- Income before federal income taxes 884,216 723,403 2,695,085 2,424,044 ----------- ----------- ----------- ----------- Federal income tax expense 226,051 176,956 698,782 618,772 ----------- ----------- ----------- ----------- Net income $ 658,165 $ 546,447 $ 1,996,303 $ 1,805,272 ----------- ----------- ----------- ----------- Net income per common share: $ .11 $ .09 $ .34 $ .31 ----------- ----------- ----------- ----------- Weighted average number of common shares and equivalents outstanding 5,893,871 5,818,386 5,868,749 5,831,726 ----------- ----------- ----------- -----------
See accompanying notes to consolidated financial statements. 5 6 BANCINSURANCE CORPORATION AND SUBSIDIARIES Consolidated Statements of Cash Flows (Unaudited)
Nine Months Ended September 30, 1997 1996 --------- --------- Cash flows from operating activities: Net income $1,996,303 $1,805,272 Adjustments to reconcile net income to net cash provided by operating activities: Net realized gain on investments (198,798) (180,708) Net realized loss on disposal of equipment - 601 Depreciation 65,867 45,846 Amortization of bond premium (discount) 40,266 (613) Deferred federal income tax expense 9,708 124,019 Increase in premiums receivable (444,593) (206,785) Increase in accounts receivable (98,783) - (Increase) decrease in reinsurance receivable (600) 488,751 Decrease in reinsurance recoverable on paid losses 24,110 510,355 (Increase) decrease in prepaid reinsurance premiums (33,764) 514,662 (Increase) decrease in premium taxes receivable (15,712) 124,912 Increase in prepaid commissions (115,499) (103,806) Increase in loans to affiliates (171,719) (216,719) Increase in note receivable (75,000) - (Increase) decrease in prepaid federal income taxes (70,926) 74,753 Increase in accrued investment income (53,434) (51,040) Increase in other assets (28,571) ( 7,597) Increase (decrease) in reserve for unpaid losses and loss adjustment expenses 229,327 (976,233) Increase (decrease) in unearned premiums 548,357 (1,492,389) Increase in contract funds on deposit 213,934 1,186,377 Increase (decrease) in reinsurance premiums payable (463,673) 109,294 Decrease in note payable (6,500) - Increase in taxes, licenses and fees payable 50,278 18,123 Increase (decrease) in commissions payable 62,746 (71,968) Decrease in other liabilities (315,999) (29,567) ---------- ---------- Net cash provided by operating activities 1,147,325 1,665,540 ---------- ---------- Cash flows from investing activities: Proceeds from held to maturity: fixed maturities due to redemption or maturity 1,156,000 408,779 Proceeds from available for sale: fixed maturities sold, redeemed and matured 1,389,619 2,215,248 Proceeds from available for sale equity securities sold 1,777,748 1,882,883 Cost of investments purchased: Held to maturity: fixed maturities (1,344,403) (241,682) Available for sale: fixed maturities (3,539,635) (3,881,664) Equity securities (1,139,966) (962,453) Decrease in amount due to stock brokers - (143,038) Net (increase) decrease in short-term investments 962,146 (935,835) Net increase securities purchased under agreements to resell (276,873) (41,715) Purchase of furniture, fixtures and leasehold improvements (54,907) (5,235) Cash acquired in purchase of subsidiary 27,918 - ---------- ---------- Net cash used in investing activities (1,042,353) (1,704,712) ---------- ----------
(Continued) 6 7 BANCINSURANCE CORPORATION AND SUBSIDIARIES Consolidated Statements of Cash Flows, Continued (Unaudited)
Nine Months Ended September 30, 1997 1996 ---------- ---------- Cash flows from financing activities: Proceeds from note payable to bank 7,525,000 2,990,000 Repayments of note payable to bank (6,585,000) (2,606,132) Proceeds from stock options exercised 3,125 22,500 Acquisition of treasury stock - (183,785) ---------- ---------- Net cash provided by financing activities 943,125 222,583 ---------- ---------- Net increase in cash 1,048,097 183,411 ---------- ---------- Cash at December 31 681,286 482,405 ---------- ---------- Cash at September 30, $1,729,383 $ 665,816 ---------- ---------- Supplemental disclosures of cash flow information: Cash paid during the year for: Interest $ 259,440 $ 323,975 ---------- ---------- Income taxes 760,000 420,000 ---------- ---------- Supplemental schedule of noncash investing activities: Common stock issued in purchase acquisition $ 275,781 - ---------- ----------
See accompanying notes to consolidated financial statements. 7 8 BANCINSURANCE CORPORATION AND SUBSIDIARIES Notes To Consolidated Financial Statements (Unaudited) 1. The Consolidated Balance Sheets as of September 30, 1997, the Consolidated Statements of Income for the three and nine months ended September 30, 1997 and 1996, and the Consolidated Statements of Cash Flows for the nine months then ended have been prepared by Bancinsurance Corporation (the "Company") without an audit. In the opinion of Company's management, all adjustments (which include only normal recurring adjustments) necessary to present fairly the financial position, results of operations, and cash flow at September 30, 1997 and for all periods presented have been made. 2. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been omitted. It is suggested that these unaudited Consolidated Financial Statements be read in conjunction with the financial statements and notes thereto included in the Company's Form 10-K for the year ended December 31, 1996. The results of operations for the period ended September 30, 1997 are not necessarily indicative of the results of operations for the full year. 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. 3. On April 2, 1997, Title Research Corporation, ("Title Research"), a newly formed, wholly-owned subsidiary of Bancinsurance Corporation, purchased substantially all of the net assets of Title Research Agency, an Ohio corporation, for 62,500 shares of Bancinsurance Corporation common stock, with a value of $275,781. Title Research is engaged in title, appraisal and related services which support documentation needs for first and second mortgage lending requirements. The acquisition has been accounted for as a purchase and resulted in $258,998 of goodwill. The consolidated statements of income for the nine months ended September 30, 1997, included the operating results of the acquired business from April 2, 1997. 8 9 BANCINSURANCE CORPORATION AND SUBSIDIARIES Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations OVERVIEW The Company is an insurance holding company whose principal asset is the stock of Ohio Indemnity Company ("Ohio Indemnity"). The Company's principal sources of revenue are premiums paid by insureds for insurance policies issued by Ohio Indemnity. 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. Ohio Indemnity's principal costs are losses and loss adjustment expenses. The principal factor in determining the level of the Ohio Indemnity'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. Ohio Indemnity is required to maintain reserves for payment of estimated losses and loss adjustment expenses for both reported claims ("case reserves") and for incurred but not reported ("IBNR") claims. The ultimate liability incurred by Ohio Indemnity 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. Ohio Indemnity reviews case and IBNR reserves monthly and makes appropriate adjustments. Claims administration fees generated by BCIS Services, Inc. ("BCIS Services"), a wholly owned subsidiary of the Company, and title and appraisal fees generated by Title Research are recorded and earned as services are billed. SUMMARY RESULTS The following table sets forth period to period changes in selected financial data:
Period to Period Increase (Decrease) ------------------------------------ Nine Months Ended September 30, ------------------------------- 1996-97 ------- Premiums written $1,451,384 Net premiums earned (147,100) Net investment income 44,634 Loss and loss adjustment expense, net of reinsurance recoveries (58,077) Operating expense 1,017,604 Interest expense (64,535) Operating income 271,041 Net income $ 191,031
The combined ratio, which is the sum of the loss ratio and expense ratio, is the traditional measure of underwriting experience for insurance companies. The following table reflects the loss, expense and combined ratios of Ohio Indemnity on both a statutory and GAAP basis for the nine months ended September 30:
1997 1996 ---- ---- Statutory: Loss ratio 51.8% 51.6% Expense ratio 25.2% 31.7% ---- ---- Combined ratio 77.0% 83.3% ---- ----
9 10
1997 1996 ---- ---- GAAP: Loss ratio 51.8% 51.6% Expense ratio 22.5% 30.0% ---- ---- Combined ratio 74.3% 81.6% ---- ----
Investments of Ohio Indemnity'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. RESULTS OF OPERATIONS SEPTEMBER 30, 1997 AS COMPARED TO SEPTEMBER 30, 1996 Premiums Written; Net Premiums Earned. Premiums written for the nine months increased from $6,874,161 at September 30, 1996 to $8,325,545 at September 30, 1997, and net premiums earned marginally decreased from $7,894,610 at September 30, 1996 to $7,747,510 at September 30, 1997. Premiums written increased from $1,553,460 during the three months ended September 30, 1996 to $2,965,371 during the three months ended September 30, 1997, while net premiums earned increased from $2,375,207 to $3,247,427 during the same period, respectively. Increases in premiums written for the nine months ended September 30, 1996 versus 1997 were primarily associated with the addition of a significant new policy and reductions in return premiums associated with the discontinuance of the Automobile Physical Damage Insurance program. Premiums earned marginally decreased for the nine months ended September 30, 1996 versus 1997 due to the change in unearned premiums associated with the run-off of the Automobile Physical Damage Insurance program in addition to reductions in unearned premium associated with an Ultimate Loss Insurance canceled policy. Premiums written and earned increased for the three months ended September 30, 1996 and 1997, respectively, associated with a new Ultimate Loss Insurance policy and growth in the Bonded Service program. Premiums written for Ultimate Loss Insurance increased from $4,084,805 in the first nine months of 1996 to $5,084,097 in the first nine months of 1997. Net premiums earned from Ultimate Loss Insurance increased from $4,910,304 in the first nine months of 1996 to $5,095,369 in the first nine months of 1997. Premiums written for Ultimate Loss Insurance increased from $1,336,218 in the third quarter of 1996 to $2,621,791 in the third quarter of 1997. Net premiums earned for Ultimate Loss Insurance increased from $1,583,333 in the third quarter of 1996 to $2,331,277 in the third quarter of 1997. Increases in premiums written and net premiums earned were primarily attributable to premium from a large lending institution added as a customer during the third quarter of 1997 and a new agency program. Premiums written for the Bonded Service program increased from $2,885,633 in the first nine months of 1996 to $3,175,635 in the first nine months of 1997, while net premiums earned from the Bonded Service program increased from $2,343,010 in the first nine months of 1996 to $2,554,603 in the first nine months of 1997 due to increases in employee enrollment among existing trust members resulting in higher service fees. Premiums written for the Bonded Service program increased from $244,926 in the third quarter of 1996 to $320,118 in the third quarter of 1997 due to the timing of billing issuance, while net premiums earned increased from $779,651 in the third quarter of 1996 to $884,078 in the third quarter of 1997. Automobile Physical Damage Insurance accounted for $107,727 of premium cancellations and $576,301 of net premiums earned for the first nine months in 1996 and $34,304 of premium cancellations and $(9,541) of net premiums earned for the quarter ended September 30, 1996. There were no premiums written or net premiums earned during the nine months ended September 30, 1997. 10 11 Net Investment Income. Net investment income increased from $1,182,097 in the first nine months of 1996 to $1,226,731 in the first nine months of 1997 and net investment income increased from $386,253 in the third quarter of 1996 to $478,312 in the third quarter of 1997 primarily resulting from a higher invested asset position, higher investment yields, and higher net realized gains. Claims Administration. Claims administration income generated by BCIS Services, a wholly-owned subsidiary of the Company, accounted for $398,432 and $495,680 for the nine months ended September 30, 1996 and 1997, respectively, and increased from $132,978 in the third quarter of 1996 to $146,698 in the third quarter of 1997, an increase of 24.4% and 10.3%, respectively, attributable to an increase in claims processing and servicing responsibilities. Title and Appraisal. Title and appraisal income accounted for $1,057,682 of the revenues for the nine months and $561,200 for the three months ended September 30, 1997, respectively, for the acquired Title Research business from April 2, 1997. Other Income. Other income increased from $215,005 in the nine months ended September 30, 1996 to $328,574 in the nine months ended September 30, 1997 and increased from $(256) to $25,541 in the third quarters, respectively. The increase in other income was primarily due to earnings of $252,652 attributed to recognition of favorable results from a closed year of operations of the Bonded Service program. During the nine months ended September 30, 1996, $187,605 of redundant reserves were earned. Additionally, the Company recorded $63,657 as a reimbursement for expenses previously incurred from a line of business sold. These expenses, totalling $72,980, are included in general and administrative expenses for the nine months ended September 30, 1997. Losses and Loss Adjustment Expenses, Net of Reinsurance Recoveries. Losses and loss adjustment expenses totaled $4,072,733, or 51.6% of net premiums earned during the first nine months of 1996 versus $4,014,656, or 51.8% of net premiums earned during the first nine months of 1997. Losses and loss adjustment expenses totaled $1,133,947 or 47.7% of net premiums earned during the third quarter of 1996 versus $1,900,712, or 58.5% of net premiums earned during the third quarter of 1997. Losses and loss adjustment expenses, as a percentage of net premiums earned, decreased for the nine months ended September 30, 1996 versus 1997, 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 losses and loss adjustment expense experience and higher than anticipated salvage and subrogation received from the discontinued Automobile Physical Damage Insurance program. Losses and loss adjustment expenses increased for the three months ended September 30, 1996 versus 1997, primarily due to loss development related to a new policy and deficiency development on prior year reserves. The absolute decrease in losses and loss adjustment expenses was primarily attributable to initial claims from the Automobile Physical Damage Insurance business written in the first nine months of 1996 which totalled $494,107 compared with $53,332 of net recoveries during the first nine months of 1997 and totaled $17,687 of net recoveries during the third quarter of 1996 compared with $17,494 during the same quarter of 1997. The decrease in the nine months ended September 30, 1996 versus 1997 was due to the discontinuance of the Automobile Physical Damage Insurance Program. The losses and loss adjustment expenses for Ultimate Loss Insurance increased 10.6% from $2,962,945 in the first nine months of 1996 to $3,276,767 in the first nine months of 1997 and totaled $926,661 for the third quarter of 1996 compared with $1,667,505 during the third quarter of 1997, due to an increase in loss development related to a new policy during the three months ended September 30, 1997. Losses and loss adjustment expenses for the Bonded Service program increased from $322,009 to $461,658 for the nine months ended September 30, 1996 and 1997, and increased from $114,235 for the third quarter of 1996 compared with $160,882 during the third quarter of 1997 primarily due to deficiency development on prior year reserves. 11 12 Operating Expense. Operating expense consists of commission expense, other insurance operating expense, and general and administrative expenses. Operating expense increased 35.5% from $2,869,392 to $3,886,996 for the nine months ended September 30, 1996 and 1997, respectively, and increased from $927,512 to $1,122,691 for the three months ended September 30, 1996 and 1997, respectively. The increase in operating expense was primarily due to operating and administrative expenses incurred by the newly formed Title Research Corporation. Commission expense marginally decreased 3.4% from $1,130,448 to $1,091,805 in the nine months ended September 30, 1996 and 1997, respectively, and increased from $305,087 to $487,693 for the three months ended September 30, 1996 and 1997 respectively, primarily due to the addition of the Ultimate Loss Insurance agency program and commissions incurred related to timing differences on billings on the Bonded Service Program during the three months ended September 30, 1997. Other insurance operating expenses decreased 9.4% from $1,149,177 to $1,040,833 in the nine months ended September 30, 1996 and 1997, respectively, and decreased from $397,239 to $360,535 in the three months ended September 30, 1996 and 1997, respectively, primarily due to decreases in legal expense. General and administrative expenses increased 197.5% from $589,767 in the first nine months of 1996 to $1,754,358 in the first nine months of 1997 and increased from $225,186 to $714,463 in the third quarter respectively, primarily due to operating and administrative expenses of $1,038,459 incurred by the Title Research from April 2, 1997. Additionally, BCIS Services incurred operating expenses of $416,926 and $474,630 during the nine months ended September 30, 1996 and 1997, respectively, and increased from $134,488 during the third quarter of 1996 to $142,552 during the third quarter of 1997. Interest Expense. Interest expense decreased 19.9% from $323,975 in the first nine months of 1996 to $259,440 in the first nine months of 1997. The decrease was due to lower borrowing levels on the Company's revolving credit line. Federal Income Taxes. Federal income taxes increased from $618,772 in the first nine months of 1996 to $698,782 in the first nine months of 1997 and increased from $176,956 to $226,051 in the third quarter, respectively, due to increases in taxable income primarily resulting from a higher nondeductible unearned premiums. Statutory Combined Ratios. The statutory combined ratio decreased from 83.3% at September 30, 1996 to 77.0% at September 30, 1997. This decline is reflective of favorable underwriting experience in the company's core lines of business; Ultimate Loss Insurance and Bonded Service. In the first nine months ended September 30, 1997, underwriting results improved due to the reduction in run-off of the discontinued automobile program compared with the nine months ended September 30, 1996. In addition, higher than anticipated salvage and subrogation, related to the Automobile Physical Damage Insurance business, was recognized during the nine months ended September 30, 1997. 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 Ohio Indemnity 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. 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 operating activities equalled $1,147,325, and $1,665,540 for the nine months ended September 30, 1997 and 1996, respectively. Net cash provided by financing activities was $943,125 for the nine months ended September 30, 1997 and $222,583 for the nine months ended September 30, 1996. Net cash used in investing activities of the Company was $1,042,353 and $1,704,712 for the nine months ended September 30, 1997 and 1996, respectively. 12 13 BCIS Services derives its funds principally from claims administration fees which are sufficient to meet its operating obligations. Although it is impossible to estimate accurately the future cash flow from the operations of the newly acquired title business, management believes its effective capital costs may increase. Management is actively exploring further avenues for improving liquidity. 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 next twelve months. 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 next twelve months. The Company's investments at September 30, 1997 consisted primarily of investment-grade fixed income securities. Cash and short-term investments at September 30, 1997 amounted to $7,866,663, or 27.6% 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 $1,182,097 and $1,226,731 for the nine months ended September 30, 1996 and 1997, respectively. The Company's total shareholders' equity increased from $13,336,058 at September 30, 1995 to $15,307,373 at September 30, 1996, to $18,345,425 at September 30, 1997, representing a 37.6% increase over the three-year period. The increase in total shareholders' equity is driven by profitable operating earnings and strengthens 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 loses were $363,200 and $458,436 at September 30, 1997 and December 31, 1996, respectively. Under applicable insurance statutes and regulations, Ohio Indemnity is required to maintain prescribed amounts of capital and surplus as well as statutory deposits with the appropriate insurance authorities. Ohio Indemnity is in compliance with all applicable statutory capital and surplus requirements. Ohio Indemnity's investments consist only of permitted investments under Ohio insurance laws. FACTORS TO CONSIDER FORWARD LOOKING 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. 13 14 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 the first nine months of 1997, the Company has experienced no material adverse consequences with respect to its growth in premiums. INSURANCE REGULATORY MATTERS On June 20, 1997, the Ohio Department of Insurance issued its triennial examination report on Ohio Indemnity as of December 31, 1996. 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. RESERVES The amount of incurred losses and loss adjustment expenses is dependent upon a number of factors, including claims frequency, severity, 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. SAFEHARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 Except for the historical information contained herein, the matters discussed in this Form 10-Q, included in "Management's Discussion and Analysis of Financial Condition and Results of Operations", 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 Securities and Exchange Commission filings. Actual results may differ materially from management expectations. 14 15 BANCINSURANCE CORPORATION AND SUBSIDIARIES PART II - OTHER INFORMATION Item 1. 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 judgements that will have a material adverse effect on the financial condition of the Company. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits Item 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 September 30, 1997. 15 16 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. BANCINSURANCE CORPORATION (Company) Date: November 5, 1997 By: Si Sokol ------------------------ ------------------------- Si Sokol President and Chairman of Board of Directors (Principal Executive Officer) Date: November 5, 1997 By: Sally Cress ------------------------ ------------------------- Sally Cress Treasurer, Secretary (Principal Financial and Accounting Officer) 16 EX-27 2 EXHIBIT 27
7 9-MOS DEC-31-1997 JAN-01-1997 SEP-30-1997 13,551,737 4,042,276 4,138,853 3,050,483 0 0 26,781,776 1,729,383 1,033 0 32,242,369 1,589,102 1,294,144 0 0 6,540,000 0 0 315,567 18,029,858 32,242,369 7,747,510 1,027,933 198,798 1,881,936 4,014,656 3,886,996 259,440 2,695,085 698,782 1,996,303 0 0 0 1,996,303 .34 .34 1,360,000 4,388,000 (373,000) 2,436,000 1,350,000 1,589,000 0
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