-----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, O+ABmZdguC0cHBbnnDO6j2bflaXR63nnklod5Bj91lAFPzKLx2moMIdBI8Adr2cF dtRhnsjY019+vkGYS6RLpQ== 0000950152-98-002141.txt : 19980323 0000950152-98-002141.hdr.sgml : 19980323 ACCESSION NUMBER: 0000950152-98-002141 CONFORMED SUBMISSION TYPE: 10-K405/A PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980319 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/A SEC ACT: SEC FILE NUMBER: 000-08738 FILM NUMBER: 98569099 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/A 1 BANCINSURANCE CORPORATION/AMENDMT.#1/10-K405/A 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 Amendment No. 1 to 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, 1997 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 ] On February 12, 1998, the aggregate fair value of the voting stock held by those other than executive officers and directors of the registrant was $10,714,863. As of February 12, 1998, the Registrant had 5,843,115 Common Shares, without par value, outstanding. DOCUMENTS INCORPORATED BY REFERENCE Portions of the registrant's Annual Report to Shareholders for the fiscal year ended December 31, 1997 are incorporated by reference in Part II. Portions of the registrant's Proxy Statement for the 1998 Annual Meeting of Shareholders are incorporated by reference in Part III. 2 BANCINSURANCE CORPORATION AND SUBSIDIARIES 1997 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............................................................. 8 Item 6. Selected Consolidated Financial Data.................................................... 8 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations................................................. 8 Item 7A. Quantitative and Qualitative Disclosures About Market Risk................................................................................ 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.......................................................................... 9 Item 13. Certain Relationships and Related Transactions.......................................... 9 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 45 states and the District of Columbia and on a surplus lines basis in Texas. BCIS Services, Inc. ("BCIS Services") is 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. During 1997, Title Research Corporation ("Title Research") was incorporated in Ohio as a wholly-owned subsidiary of the Company. Title Research specializes in title, appraisal and related services which support documentation needs for first and second mortgage lending requirements. The reference to "the Company" in the following discussion relates to the Company and its subsidiaries. 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 collateral protection 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 collateral protection 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 to include lenders such as banks, savings and loans, credit unions and finance companies. During 1997, 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. The Company is test marketing creditor placed collateral and mortgage protection policies in two states. Collateral and mortgage protection insurance covers primarily automobile and residential mortgages pledged as security for loans for which the borrower has not produced evidence of coverage as required by the lender. Bonded Service Program. Unemployment compensation is a federally mandated social insurance program. Private employers finance the payment of unemployment benefits to their former employees by paying a tax on covered wages. Certain not-for-profit and governmental entities can elect not to pay the tax but, instead, reimburse the state for benefits paid to their former employees. This reimbursing method is usually the least costly option but poses the risk of having to pay unexpected, unbudgeted benefit costs. The Bonded Service program alleviates that risk of unexpected loss. The Company has participated since 1989 by bonding specific unemployment compensation servicing commitments of a cost containment service firm including reimbursement of unemployment benefits. 3 4 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 a reimburser but could not do so on a stand-alone basis. As of December 31, 1997, the Company services seven (7) such groups. 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. 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. The Company's obligations under such bonds may not, in every case, cease upon termination of an employer's participation in the program. The financial statements include reserves for losses on such programs for benefits paid. Such reserves were $477,600 and $458,436 at December 31, 1997 and 1996, respectively. 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. The Company provided cost control services to four employers in California which generated revenues of $658,884, $533,354 and $550,615 during 1997, 1996 and 1995, respectively. BCIS Services operated in California only during 1997, 1996 and 1995. There can be no assurance that this operation will be commercially successful or profitable. Title Research Corporation. In April 1997, Title Research, a newly formed, wholly-owned subsidiary of the Company, purchased substantially all of the net assets of Title Research Agency, an Ohio corporation. Title Research assists the consumer mortgage lending industry with various services including title, lien search, property appraisal, closings and placement of title insurance. Title Research is engaged in preparation all technical documentation necessary for home equity lending. Title Research does not engage in the business of underwriting or insuring title coverage, but represents two title insurance companies. During 1997, the Company generated title and appraisal fees of $1,593,556. Title Research operated primarily in Ohio during 1997. There can be no assurance that this operation will be commercially successful or profitable. COMPETITION The insurance business is highly competitive. There are approximately 3,200 property and casualty insurance companies in the United States, although most of them are not significant competitors for the specialty lines which the Company underwrites. Some competing companies offer more diversified insurance coverage and have greater financial resources than the Company. Competition may include lower premiums, specialized products, more complete and complex product lines, greater pricing flexibility, superior service, different marketing techniques, or better agent compensation. Management believes that one of its competitive advantages is specializing in limited insurance lines. This specialization allows the Company to refine its underwriting and claims techniques, which in turn, provide agents and insureds with superior service. 4 5 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 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. Concerning Title Research, competition includes title companies, brokers, agents, insurance companies or contractors who provide mortgage services to their clients. The major competitors are title lien search companies, most of which operate on a regional basis. There are approximately 1,100 title lien search companies in Ohio that specialize in first and second mortgage lending requirements. The title lien industry is highly competitive. Key elements which affect competition are: price, expertise, service, financial strength and size of the company. 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 mortgage protection and automobile physical damage 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 75% and 50% of the paid losses and loss adjustment expense applicable to Mortgage Protection and Automobile Physical Damage insurance policies, respectively. As of December 31, ceded reinsurance reduced commission expense incurred by $23,032 in 1997 and increased commission expense incurred by $62,147 and $121,972 in 1996 and 1995, 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 5 6 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. 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 June 20, 1997, the Ohio Department of Insurance issued its triennial examination report on Ohio Indemnity for the three-year period ended 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, 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 2000 for the three-year period ending December 31, 1999. Numerous states routinely require deposits of assets by insurance companies to protect policyholders. As of December 31, 1997, securities with a fair value of approximately $3,999,026 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 Bancinsurance Corporation 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 it and certain affiliated-party transactions involving it 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 Bancinsurance Corporation 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. Bancinsurance Corporation 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 6 7 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. The NAIC adopted a Risk Based Capital ("RBC") test applicable to property and casualty insurers. 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 been enacted into the Ohio Revised Code. 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 12, 1998, the Company employed 46 full-time employees and 5 part-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 13, 1998, totalled approximately 17,000 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. Title Research leases office space at a property located in Hilliard, Ohio which serves as its corporate headquarters. The office occupies approximately 3,500 square feet. Title Research's branches lease office space in three locations throughout Ohio occupying approximately 3,600 square feet. These four leases provide for a monthly gross rental of $6,322. 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 is likely to result in judgments that will have a material adverse effect on the financial condition or results of operations of the Company. Item 4. Submission of Matters to a Vote of Security Holders No matters were submitted to a vote of security holders during the fourth quarter of the fiscal year ended December 31, 1997. 7 8 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 1997 Annual Report (the "Annual Report") and is incorporated herein by reference. 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 7A. Quantitative and Qualitative Disclosures About Market Risk None. Item 8. Consolidated Financial Statements and Supplementary Data The Company's consolidated balance sheets as of December 31, 1997 and 1996, and the consolidated statements of income, shareholders' equity and cash flows for each of the three years ended December 31, 1997, 1996 and 1995 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 1998 Annual Meeting of Stockholders to be held on June 2, 1998, 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. 8 9 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. 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, 1997 and 1996. Consolidated Statements of Income for the three years ended December 31, 1997. Consolidated Statements of Shareholders' Equity for the three years ended December 31, 1997. Consolidated Statements of Cash Flows for the three years ended December 31, 1997. 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). 9 10 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). 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, 1997. 21 Subsidiaries of the Company as of December 31, 1997. 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, 1997. (c) Exhibits The exhibits to this report begin on page 17. (d) Financial Statement Schedules The financial statement schedules and the independent auditors' report thereon are included on the following pages. 10 11 Board of Directors and Shareholders Bancinsurance Corporation: Our report on the consolidated financial statements of Bancinsurance Corporation and Subsidiaries has been incorporated by reference in this Form 10-K from page 22 of the 1997 Annual Report to Shareholders of Bancinsurance Corporation. In connection with our audits of such financial statements, we have also audited the related financial statement schedules listed in the index on page 9 of this Form 10-K. In our opinion, the financial statement schedules referred to above, 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 27, 1998 11 12 BANCINSURANCE CORPORATION AND SUBSIDIARY Schedule I - SUMMARY OF INVESTMENTS - OTHER THAN INVESTMENT IN RELATED PARTIES
December 31, 1997 - ------------------------------------------------------------------------------------------------ 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 $ 1,160,644 $ 1,187,800 $ 1,160,644 States, territories and possessions 1,020,723 1,035,250 1,020,723 Political subdivisions of states, territories and possessions 506,763 536,000 506,763 Special revenue 1,102,064 1,144,976 1,102,064 Other debt securities 50,000 50,000 50,000 Redeemable preferred stocks: Public utilities 100,000 100,000 100,000 ----------- ----------- ----------- Total held to maturity 3,940,194 4,054,026 3,940,194 ----------- ----------- ----------- Available for sale: Fixed maturities: Governments 853,376 857,540 857,540 States, territories and possessions 3,098,386 3,143,426 3,143,426 Political subdivisions of states, territories and possessions 4,961,653 5,103,767 5,103,767 Special revenue 3,672,237 3,806,862 3,806,862 Industrial and miscellaneous 50,000 51,031 51,031 Equity securities: Nonredeemable preferred stocks: Public utilities 500,000 483,548 483,548 Banks, trust and insurance companies 417,312 620,846 620,846 Industrial and miscellaneous 567,050 560,876 560,876 Common stocks: Banks, trust and insurance companies 474,390 854,978 854,978 Industrial and miscellaneous 642,398 704,813 704,813 ----------- ----------- ----------- Total available for sale 15,236,802 16,187,687 16,187,687 ----------- ----------- ----------- Short-term investments Securities purchased under agreements 5,753,669 5,753,669 5,753,669 to resell 1,048,075 1,048,075 1,048,075 ----------- ----------- ----------- Total investments $25,978,740 $27,043,457 $26,929,625 =========== =========== ===========
(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 Schedule II - CONDENSED FINANCIAL INFORMATION OF BANCINSURANCE CORPORATION (PARENT COMPANY ONLY) CONDENSED BALANCE SHEETS December 31, 1997 and 1996
Assets 1997 1996 ------ ----------- ----------- Cash $ 10,673 $ 9,117 Investment in subsidiaries 22,640,505 20,491,962 Other 1,564,445 1,143,067 ----------- ----------- $24,215,623 $21,644,146 =========== =========== Liabilities and Shareholders' Equity ------------------------------------ Note payable to bank $ 5,000,000 $ 5,600,000 Other 135,822 137,329 Shareholders' equity 19,079,801 15,906,817 ----------- ----------- $24,215,623 $21,644,146 =========== ===========
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, 1997, 1996, and 1995
1997 1996 1995 ----------- ----------- ----------- Dividends from subsidiaries $ 1,375,000 $ 650,000 $ 600,000 Other income 36,477 24,777 52,236 General and administrative expenses (503,534) (613,491) (605,132) ----------- ----------- ----------- Net income before tax benefit and equity in earnings of subsidiaries 907,943 61,286 47,104 Income tax benefit (181,297) (205,213) (198,655) ----------- ----------- ----------- Net income before equity in earnings of subsidiaries 1,089,240 266,499 245,759 Equity in undistributed earnings of subsidiaries 1,612,054 2,074,549 1,175,327 ----------- ----------- ----------- Net income $ 2,701,294 $ 2,341,048 $ 1,421,086 =========== =========== ===========
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, 1997, 1996, and 1995
1997 1996 1995 ----------- ----------- ----------- Cash flows from operating activities: Net income $ 2,701,294 $ 2,341,048 $ 1,421,086 Adjustments to reconcile net income to net cash provided by operating activities: Equity in undistributed net earnings of subsidiaries (1,679,976) (2,074,549) (1,175,327) Deferred federal income tax (benefit) expense -- (108,747) 108,747 (Increase) decrease in notes receivable (167,500) (145,000) 28,602 Increase in loans to affiliates (71,719) (71,719) (71,719) Increase in accounts receivable from subsidiaries (148,455) -- (29,585) Increase in prepaid federal income taxes 29,633 291,855 291,632 (Increase) decrease in other assets (63,337) 6,249 21,486 Increase (decrease) in accounts payable to subsidiaries 25,616 34,129 (259,168) Increase (decrease) in other liabilities (27,123) (99,024) 78,587 ----------- ----------- ----------- Net cash provided by in operating activities 598,433 174,242 414,341 ----------- ----------- ----------- Cash flows from financing activities: Proceeds from notes payable to bank 7,525,000 1,790,000 5,100,000 Repayments of notes payable to bank (8,125,000) (1,806,132) (5,400,000) Proceeds from stock options exercised 3,123 22,500 47,812 Acquisition of treasury stock -- (185,675) (162,838) ----------- ----------- ----------- Net cash used in financing activities (596,877) (179,307) (415,026) ----------- ----------- ----------- Net increase (decrease) in cash 1,556 (5,065) (685) ----------- ----------- ----------- Cash at beginning of year 9,117 14,182 14,867 ----------- ----------- ----------- Cash at end of year $ 10,673 $ 9,117 $ 14,182 =========== =========== =========== Supplemental disclosures of cash flow information: Cash paid during the year for: Interest $ 389,632 $ 425,523 $ 453,855 Income taxes 935,000 530,000 20,000 =========== =========== ===========
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) 3/15/98 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:
3/15/98 Si Sokol 3/15/98 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 3/15/98 Daniel D. Harkins 3/15/98 Milton O. Lustnauer - --------- -------------------------- --------- -------------------------- DATE Daniel D. Harkins DATE Milton O. Lustnauer Director Director 3/15/98 Saul Sokol 3/15/98 James R. Davis - --------- -------------------------- --------- -------------------------- DATE Saul Sokol DATE James R. Davis Director Director 3/15/98 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 - ----------- ----------- 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 herein by reference). 13.1 Annual Report to Shareholders for the year ended December 31, 1997. 21 Subsidiaries of the Company as of December 31, 1997. 23 Consent of independent accountants to incorporation of their opinion by reference in Registration Statement on Form S-8. 27 Financial Data Schedule.
17 EX-13.1 2 EXHIBIT 13.1 1 Exhibit 13.1 BANCINSURANCE CORPORATION 1997 Annual Report 2 BANCINSURANCE CORPORATION 1997 ANNUAL REPORT Bancinsurance Corporation (the "Company") (NASDAQ:BCIS) is a specialty property insurance holding company primarily 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. Title Research Corporation, acquired in April 1997, specializes in title, appraisal and related services which support documentation needs for first and second mortgage lending requirements. FINANCIAL HIGHLIGHTS (In thousands, except for per share data)
------------------------------------------------------------------- YEAR ENDED DECEMBER 31, 1997 1996 1995 1994 1993 1992 ------------------------------------------------------------------- INCOME STATEMENT DATA Net Premiums Earned $11,169 $10,138 $19,783 $25,536 $19,788 $10,657 Net Investment Income 1,528 1,564 1,413 1,561 1,253 782 Other Income 3,133 1,003 614 580 626 459 ------- ------- ------- ------- ------- ------- Total Revenue 15,830 12,705 21,810 27,677 21,667 11,898 ------- ------- ------- ------- ------- ------- Losses and Loss Adjustment Expenses, Net of Reinsurance Recoveries 6,071 5,404 12,760 15,565 10,919 5,064 Income Before Federal Income Taxes and Cumulative Effect Accounting Change 3,669 3,121 1,598 2,652 2,827 2,896 ------- ------- ------- ------- ------- ------- Net Income $ 2,701 $ 2,341 $ 1,421 $ 2,317 $ 2,295 $ 2,138 ======= ======= ======= ======= ======= ======= Net Income Per Common Share, Diluted $ .46 $ .40 $ .24 $ .40 $ .40 $ .37 ======= ======= ======= ======= ======= ======= BALANCE SHEET DATA Total Assets $31,404 $28,275 $27,750 $43,774 $43,612 $28,015 Shareholders' Equity 19,080 15,907 13,710 11,838 9,910 7,581
[GRAPH] SHAREHOLDERS' EQUITY 1992 1993 1994 1995 1996 1997 $7,581 $9,710 $11,838 $13,710 $15,907 $19,080 [GRAPH] NET INCOME 1992 1993 1994 1995 1996 1997 $2,138 $2,295 $2,317 $1,421 $2,341 $2,701 3 TO OUR SHAREHOLDERS For Bancinsurance Corporation, 1997 was a year of strategic transition, capped by solid revenue growth and increased profitability. What Bancinsurance Corporation developed over the past 12 months-through a sharp focus on our historically profitable core market, our first acquisition, and an expansion of our product line and customer base-is a Company that is ideally positioned for continued growth. Growth in premiums written and earned. Growth in complementary products and services. Growth in the number and size of financial institutions served. Growth in net income and shareholder satisfaction. The Company posted year-end revenues of $15,830,401, a dramatic 25% rise over 1996. Premiums written increased 34% to $11,179,561 while premiums earned rose 10% to $11,169,243 in 1997...growth that will continue as Bancinsurance Corporation extends its reach nationally. Net income for the year ended December 31, 1997 rose to $2,701,294 from $2,341,048, a 15% increase. Earnings per share grew to $.46 from $.40 last year. Our combined ratio, including the loss and loss adjustment expense ratio plus the operating expense ratio, dropped from 83.9% in 1996 to 76.5% this year, indicating an underwriting profit more favorable than the property-casualty industry average. The April 1997 purchase of Columbus, Ohio-based Title Research Agency-our first acquisition-marks a significant turning point for Bancinsurance Corporation. The wholly owned subsidiary, renamed Title Research Corporation, demonstrates our capacity to recognize and act upon strategically advantageous opportunities. Specializing in second mortgage title and lien searches, Title Research will be marketed to consumer lending departments of Ohio-based financial institutions currently served by our core Ultimate Loss Insurance product, a form of physical damage, blanket single interest insurance. We devoted the second half of 1997 to creating a web-based system to enhance Title Research's efficiencies and turn-around times. As we enter the new year, we will cultivate the market for this service, while keeping an eye open for other acquisitions that may become available as the insurance industry continued to consolidate. 2 4 An expanding customer base also contributed to 1997 growth. We signed up a large national Ultimate Loss Insurance account that had a significant positive impact on the Company's third and fourth quarter results. Based on that success, we plan to market our core product to the super-regional and national financial institutions in 1998, in addition to the smaller community bank market we have traditionally served. Among other 1997 firsts, Bancinsurance Corporation signed new agents to represent our Ultimate Loss product, enhancing our position in the marketplace and creating new opportunities to grow our core business. We also began test marketing collateral and mortgage protection policies in two states in association with a new agent. These products, alternative to Ultimate Loss Insurance, hold tremendous promise. If successful, they will be introduced elsewhere in the country later in 1998. Adding to the year's accomplishments, the management service fee income generated by our Bonded Service Program-bonding specific unemployment insurance serving commitments- was much higher than anticipated, significantly more than previous years. BCIS Services, Inc.-our third-party administrator specializing in managing the workers' compensation obligations of self-insured employers-also posted increased revenues in 1997, thanks largely to an increase in servicing responsibilities. Finally A.M. Best, an independent rating organization assigned an "A-" Excellent rating to Ohio Indemnity Company our consolidated subsidiary, engaged in underwriting specialized property and casualty insurance. We are enthused by the Company's performance over the past 12 months and are committed to the timely and profitable growth of Bancinsurance Corporation in 1998 and beyond. We are grateful to our shareholders, directors, officers and employees for their continued support. Sincerely, Si Sokol President and Chief Executive Officer 3 5 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 The Company currently has four distinct lines of niche insurance products and related services: Ultimate Loss Insurance, Bonded Service Program, BCIS Services and Title Research. ULTIMATE LOSS INSURANCE PROGRAM Ultimate Loss Insurance, a form of physical damage blanket single interest collateral protection 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 collateral protection 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 compensation servicing commitments of a cost containment service firm including reimbursement of unemployment benefits. Unemployment Compensation laws of each state permit certain non-profit and governmental entities to opt out of the state sponsored unemployment compensation program and, instead, reimburse the state for benefits paid to their former employees. 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. BCIS Services does not engage in underwriting or insuring risks of loss. TITLE RESEARCH CORPORATION In April 1997, 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. Title Research assists the consumer mortgage lending industry with various services including title, lien search, property appraisal, closings and placement of title insurance. Title Research is engaged in preparation of all technical documentation necessary for home equity lending. Title Research does not engage in the business of underwriting or insuring title coverage, but represents two title insurance companies. SUMMARY During the past several years, the Company 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 products and services. 4 6 BANCINSURANCE CORPORATION CONSOLIDATED BALANCE SHEETS
DECEMBER 31, - --------------------------------------------------------------------------------------------------------------------- 1997 1996 - --------------------------------------------------------------------------------------------------------------------- ASSETS Investments (note 2): Held to maturity: Fixed maturities, at amortized cost (fair value $4,054,026 in 1997 and $4,086,856 in 1996) ............................................................ $ 3,940,194 $ 4,004,550 Available for sale: Fixed maturities, at fair value (amortized cost $12,635,652 in 1997 and $11,271,525 in 1996) ........................................................... 12,962,626 11,502,186 Equity securities, at fair value (cost $2,601,150 in 1997 and $2,602,891 in 1996) ................................................................ 3,225,061 3,031,014 Short-term investments, at cost which approximates fair value ......................... 5,753,669 5,730,923 Securities purchased under agreements to resell ....................................... 1,048,075 1,091,630 ----------- ----------- TOTAL INVESTMENTS ................................................................. 26,929,625 25,360,303 ----------- ----------- Cash ................................................................................... 1,146,317 681,286 Premiums receivable .................................................................... 755,611 494,322 Accounts receivable, net of allowance for doubtful accounts ............................ 297,519 -- Reinsurance receivable (note 14) ....................................................... 8,000 15,150 Reinsurance recoverable on paid losses (note 14) ....................................... -- 25,143 Prepaid reinsurance premiums (note 14) ................................................. 36,335 -- Loans to affiliates (note 15) .......................................................... 606,182 434,463 Note receivable (note 4) ............................................................... 67,500 -- Furniture, fixtures and leasehold improvements, net .................................... 121,697 86,435 Excess of investment over net assets of subsidiaries, net .............................. 976,610 753,738 Prepaid federal income taxes ........................................................... -- 29,633 Accrued investment income .............................................................. 298,234 308,646 Other assets ........................................................................... 160,802 85,833 ----------- ----------- TOTAL ASSETS ...................................................................... $31,404,432 $28,274,952 =========== ===========
5 7 BANCINSURANCE CORPORATION CONSOLIDATED BALANCE SHEETS
DECEMBER 31, - ---------------------------------------------------------------------------------------------------------- 1997 1996 - ---------------------------------------------------------------------------------------------------------- LIABILITIES AND SHAREHOLDERS' EQUITY Reserve for unpaid losses and loss adjustment expenses (note 14) ...... $ 1,531,714 $ 1,359,775 Unearned premiums (note 14) ........................................... 698,764 745,787 Contract funds on deposit ............................................. 3,451,371 2,950,108 Reinsurance premiums payable (note 14) ................................ 27,821 503,806 Note payable to bank (note 5) ......................................... 5,000,000 5,600,000 Note payable (note 6) ................................................. 37,073 -- Taxes, licenses, and fees payable ..................................... 150,778 93,566 Deferred federal income taxes ......................................... 296,049 194,755 Federal income taxes payable .......................................... 741 -- Commissions payable ................................................... 493,212 342,258 Other ................................................................. 637,108 578,080 ------------ ------------ TOTAL LIABILITIES ................................................ 12,324,631 12,368,135 ------------ ------------ Commitments and contingent liabilities (notes 7, 14 and 19) Shareholders' equity (notes 10, 11 and 12): 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 (note 2) .............. 627,583 434,797 Retained earnings .................................................... 16,741,778 14,040,484 ------------ ------------ 19,180,315 16,224,177 Less: Treasury stock, at cost (35,162 common shares in 1997 and 111,020 common shares in 1996) ......................... (100,514) (317,360) ------------ ------------ TOTAL SHAREHOLDERS' EQUITY ....................................... 19,079,801 15,906,817 ------------ ------------ TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ....................... $ 31,404,432 $ 28,274,952 ============ ============
See accompanying notes to consolidated financial statements. 6 8 BANCINSURANCE CORPORATION CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, - --------------------------------------------------------------------------------------------------------------------- 1997 1996 1995 - --------------------------------------------------------------------------------------------------------------------- INCOME: Premiums written....................................................... $11,179,561 $ 8,358,499 $14,038,845 Decrease in unearned premiums.......................................... 47,023 2,251,545 14,294,905 ----------- ----------- ----------- Premiums earned ................................................... 11,226,584 10,610,044 28,333,750 Premiums ceded......................................................... (57,341) (471,940) (8,550,443) ----------- ----------- ----------- Net premiums earned................................................ 11,169,243 10,138,104 19,783,307 Investment income (net of expenses of $68,621, $78,003 and $78,761, respectively).............................................. 1,344,815 1,318,137 1,387,602 Net realized gain on investments....................................... 182,734 246,038 25,891 Claims administration fees............................................. 658,884 550,615 533,354 Title and appraisal fees............................................... 1,593,556 -- -- Management fees........................................................ 809,345 411,176 -- Other income........................................................... 71,824 40,804 80,190 ----------- ----------- ----------- TOTAL REVENUE...................................................... 15,830,401 12,704,874 21,810,344 ----------- ----------- ----------- LOSSES AND OPERATING EXPENSES: Losses and loss adjustment expenses.................................... 6,070,954 5,864,170 21,206,483 Reinsurance recoveries................................................. - (459,686) (8,446,389) Commission expense..................................................... 1,565,826 1,441,430 2,885,353 Other insurance operating expenses..................................... 1,692,041 1,551,578 2,996,319 Amortization of deferred policy acquisition costs...................... -- -- 397,029 General and administrative expenses.................................... 2,469,935 734,660 719,268 Interest expense ...................................................... 362,997 451,425 454,497 ----------- ----------- ----------- TOTAL EXPENSES.................................................... 12,161,753 9,583,577 20,212,560 ----------- ----------- ----------- INCOME BEFORE FEDERAL INCOME TAXES................................ 3,668,648 3,121,297 1,597,784 Federal income tax expense (note 8).................................... 967,354 780,249 176,698 ----------- ----------- ----------- NET INCOME........................................................ $ 2,701,294 $ 2,341,048 $ 1,421,086 =========== =========== =========== Net income per common share (note 21).................................. $ .46 $ .41 $ .24 =========== =========== =========== Net income per common share, assuming dilution (note 21)............... $ .46 $ .40 $ .24 =========== =========== ===========
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, 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 19) ........ -- -- -- -- -- -- (162,838) (162,838) 76,500 shares issued in connection with the exercise of stock options (note 10) ............... -- -- -- (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 19) -- -- -- -- -- -- (185,675) (185,675) 20,000 shares issued in connection with the exercise of stock options (note 10) ....... -- -- -- (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 NET INCOME ............... -- -- -- -- -- 2,701,294 -- 2,701,294 CHANGE IN UNREALIZED GAIN ON INVESTMENTS, NET OF INCOME TAXES OF $99,314 ................. -- -- -- -- 192,786 -- -- 192,786 ISSUE OF 62,500 TREASURY SHARES IN PURCHASE ACQUISITION (NOTE 1(F)) . -- -- -- 97,120 -- -- 178,661 275,781 20,000 SHARES ISSUED IN CONNECTION WITH THE EXERCISE OF STOCK OPTIONS (NOTE 10) ....... -- -- -- (35,062) -- -- 38,185 3,123 ---- ---- -------- ----------- --------- ----------- --------- ------------ BALANCE DECEMBER 31, 1997 .. -- -- $315,567 $ 1,495,387 $ 627,583 $16,741,778 $(100,514) $ 19,079,801 ==== ==== ======== =========== ========= =========== ========= ============
See accompanying notes to consolidated financial statements. 8 10 BANCINSURANCE CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, - ----------------------------------------------------------------------------------------------------------------------------- 1997 1996 1995 - ----------------------------------------------------------------------------------------------------------------------------- Cash flows from operating activities: Net income ................................................................... $ 2,701,294 $ 2,341,048 $ 1,421,086 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Net realized gain on investments ............................................ (182,734) (245,436) (25,891) Depreciation ................................................................ 113,202 64,605 69,339 Amortization of bond premium (discount) ..................................... 47,530 (19,491) 29,149 Amortization of deferred policy acquisition costs ........................... -- -- 538,017 Deferred federal income tax expense ......................................... 1,980 240,830 363,161 (Increase) decrease in premiums receivable .................................. (261,289) (93,925) 1,588,447 Increase in accounts receivable, net ........................................ (129,374) -- -- Decrease in reinsurance receivable .......................................... 7,150 513,576 799,041 Decrease in reinsurance recoverable on paid losses .......................... 25,143 499,959 1,483,859 Increase in deferred policy acquisition costs ............................... -- -- (140,988) (Increase) decrease in prepaid reinsurance premiums ......................... (36,335) 514,662 6,455,951 (Increase) decrease in premium taxes receivable ............................. -- 138,632 (138,632) Increase in loans to affiliates ............................................. (171,719) (216,719) (71,719) Increase in note receivable ................................................. (67,500) -- -- Decrease in prepaid federal income taxes .................................... 29,633 291,855 291,632 (Increase) decrease in accrued investment income ............................ 10,412 (77,370) 135,097 (Increase) decrease in other assets ......................................... (74,969) (23,024) 33,528 Increase (decrease) in reserve for unpaid losses and loss adjustment expenses ....................................................... 171,939 (882,106) (2,274,998) Decrease in unearned premiums ............................................... (47,023) (2,251,547) (14,294,903) Increase in contract funds on deposit ....................................... 501,263 1,141,096 912,916 Increase (decrease) in reinsurance premiums payable ......................... (475,985) 111,090 (1,378,456) Decrease in note payable .................................................... (9,750) -- -- Increase (decrease) in taxes, licenses and fees payable ..................... 57,212 39,014 (196,010) Increase in federal income taxes payable .................................... 741 -- -- Increase (decrease) in commissions payable .................................. 150,954 1,146 (419,428) Increase (decrease) in other liabilities .................................... (70,604) 134,033 (88,175) ----------- ----------- ------------ NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES ...................... $ 2,291,171 $ 2,221,928 $ (4,907,977) ----------- ----------- ------------
9 11 BANCINSURANCE CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED DECEMBER 31, - ------------------------------------------------------------------------------------------------------------------ 1997 1996 1995 - ------------------------------------------------------------------------------------------------------------------ Cash flows from investing activities: Proceeds from held to maturity: fixed maturities due to redemption or maturity ...................................... $ 1,259,000 $ 508,779 $ 1,068,590 Proceeds from available for sale: fixed maturities sold, redeemed and matured ........................................ 2,515,944 3,168,317 5,653,365 Proceeds from available for sale: equity securities sold ...... 2,235,078 1,865,588 781,249 Cost of investments purchased: Held to maturity: fixed maturities ........................... (1,500,543) (241,682) (602,344) Available for sale: fixed maturities ......................... (3,908,653) (5,152,466) (188,575) Equity securities ............................................ (1,763,653) (1,106,028) (426,816) Increase (decrease) in amount due to stock broker ............. -- (143,038) 143,038 Net increase in short-term investments ........................ (22,746) (787,999) (679,383) Net decrease in securities purchased under agreements to resell 43,555 66,941 496,471 Purchase of furniture, fixtures and leasehold improvements .... (115,163) (22,152) (11,554) Cash acquired in purchase of subsidiary ....................... 27,918 -- -- ----------- ----------- ----------- NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES ....... (1,229,263) (1,843,740) 6,234,041 ----------- ----------- ----------- Cash flows from financing activities: Proceeds from note payable to bank ............................ 7,525,000 1,790,000 5,100,000 Repayments of note payable to bank ............................ (8,125,000) (1,806,132) (5,400,000) Proceeds from stock options exercised ......................... 3,123 22,500 47,812 Acquisition of treasury stock ................................. -- (185,675) (162,838) ----------- ----------- ----------- NET CASH USED IN FINANCING ACTIVITIES ..................... (596,877) (179,307) (415,026) ----------- ----------- ----------- Net increase in cash ........................................... 465,031 198,881 911,038 Cash at beginning of year ...................................... 681,286 482,405 (428,633) ----------- ----------- ----------- CASH AT END OF YEAR ............................................ $ 1,146,317 $ 681,286 $ 482,405 =========== =========== =========== Supplemental disclosures of cash flow information: Cash paid during the year for: Interest ...................................................... $ 389,632 $ 430,662 $ 454,568 =========== =========== =========== Income taxes .................................................. $ 935,000 $ 530,000 $ 20,000 =========== =========== =========== Supplemental schedule of noncash investing activities: Common stock issued in purchase acquisition ................... $ 275,781 -- -- =========== =========== =========== 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. Insurance written is principally in two lines of business, ultimate loss insurance and a bonded service program. Ohio Indemnity is licensed in forty-five 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. During 1997, Title Research Corporation ("Title Research") was incorporated in Ohio as a wholly-owned subsidiary of the Company. Title Research is a title lien search and mortgage service company. No single customer of the Company accounts for a predominant share of consolidated revenue, except for two customers in the Ultimate Loss Insurance program and one customer in the Surety program. See Note 16. (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 12. The Company received written approval from the Department to record management fee income for the redundancy resulting from the development of the claims paid from the contract funds held on deposit 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 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. 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) ACCOUNTS RECEIVABLE Accounts receivable at December 31, 1997 are comprised of title and appraisal billings. Provisions are made periodically to reflect estimated doubtful accounts. (F) 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. On April 2, 1997, 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. The acquisition was accounted for using the purchase method. Under the purchase method, the results of operations of the acquired Company are included prospectively from the date of acquisition, and the acquisition is allocated to the acquirees' tangible assets and liabilities based upon their fair values at the date of acquisition, with any residual being goodwill. The company amortizes goodwill on a straight-line basis over its estimated economic life of fifteen years. At December 31, 1997, the net book value of goodwill associated with the acquisition was $222,872. (G) RECOGNITION OF 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 collateral protection insurance sold to lending institutions, premiums are earned in relation to the level of exposure assumed. For the surety product, 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. Claims administration fees reported for BCIS Services and title and appraisal fees reported for Title Research are recorded as revenue in the period in which the work was performed and/or services provided. (H) 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. (I) 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. (J) REINSURANCE The Company's reinsurance transactions are attributable to premiums written in its automobile physical damage business, which was discontinued in 1995 and for its mortgage protection product. 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." (K) 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 records these management fees when the loss year has been closed. Fees of $809,345 and $411,176 were recognized in 1997 and 1996, respectively, as a result of this arrangement. No such amount was recognized in 1995. 12 14 (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 Effective December 31, 1997, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings Per Share." The statement specified the computation, presentation and disclosure requirements for earnings per share for entities with publicly held common stock, and required restatement of all prior period earnings per share data presented. The impact of the statement on the Company's earnings per share was not material. Net income per common share is presented in two prescribed methods. Net income per common share is calculated by dividing net income available to common stockholders by the weighted-average number of common shares outstanding. Net income per common share-assuming dilution is calculated by dividing net income available to common stockholders by the weighted-average number of common shares outstanding adjusted for any dilative potential common shares for the period. (N) FEDERAL INCOME TAXES The Company 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, 1997 --------------------------------------------------------- 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 .. $ 1,160,644 $ 27,156 $ -- $ 1,187,800 Obligations of states and political subdivisions ..... 2,629,550 88,755 2,079 2,716,226 Other debt securities ....... 50,000 -- -- 50,000 Redeemable preferred stock .... 100,000 -- -- 100,000 ----------- ---------- ---------- ----------- 3,940,194 115,911 2,079 4,054,026 ----------- ---------- ---------- ----------- Available for sale: Fixed maturities: US Treasury securities and obligations of US government corporations and agencies .. 853,376 4,164 -- 857,540 Obligations of states and political subdivisions ..... 11,732,276 332,815 11,036 12,054,055 Corporate securities ........ 50,000 1,031 -- 51,031 Equity securities ............. 2,601,150 728,547 104,636 3,225,061 ----------- ---------- ---------- ----------- 15,236,802 1,066,557 115,672 16,187,687 ----------- ---------- ---------- ----------- Totals ................. $19,176,996 $1,182,468 $ 117,751 $20,241,713 =========== ========== ========== ===========
13 15
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 =========== ======== ========== ===========
The amortized cost and estimated fair value of investments in held to maturity and available for sale securities at December 31, 1997 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 ..................... $ 199,322 $ 200,000 $ 1,843,455 $ 1,852,185 Due after one year through five years ....... 2,535,801 2,628,076 6,261,709 6,474,874 Due after five years through ten years ...... 856,365 877,050 4,024,567 4,129,567 Due after ten years ......................... 198,706 198,900 505,921 506,000 ---------- ----------- ----------- ----------- 3,790,194 3,904,026 12,635,652 12,962,626 Redeemable preferred stock .................. 100,000 100,000 -- -- Equity securities ........................... -- -- 2,601,150 3,225,061 Other debt securities ....................... 50,000 50,000 -- -- ---------- ----------- ----------- ----------- $3,940,194 $ 4,054,026 $15,236,802 $16,187,687 ========== =========== =========== ===========
Gross investment income, including net realized gains and losses, is summarized below:
----------------------------------------------- 1997 1996 1995 ----------------------------------------------- Held to maturity: Fixed maturities ....................................... $ 246,173 $ 281,850 $ 253,804 Available for sale: Fixed maturities ....................................... 696,644 664,909 642,621 Equity securities ...................................... 336,173 366,357 260,363 Short-term investments .................................. 296,266 319,228 327,423 Other ................................................... 20,914 9,834 8,043 ---------- ---------- ---------- Gross investment income ............................ $1,596,170 $1,642,178 $1,492,254 ========== ========== ==========
14 16 All fixed maturity investments were income producing for the years ended December 31, 1997, 1996 and 1995. Pre-tax net realized gains (losses) on investments were as follows for each of the years ended December 31:
----------------------------------------- 1997 1996 1995 ----------------------------------------- Gross realized gains: Held to maturity: fixed maturities ......................... $ 8,191 $ 3,779 $ 4,250 Available for sale: fixed maturities ........................................ 6,753 86,529 56,881 equity securities ....................................... 230,869 187,870 77,088 -------- -------- -------- Total gains ............................................. 245,813 278,178 138,219 ======== ======== ======== Gross realized losses: Held to maturity: fixed maturities ......................... 392 5 38,926 Available for sale: fixed maturities ........................................ 1,503 31,585 58,363 equity securities ....................................... 61,184 550 15,039 -------- -------- -------- Total losses ............................................ 63,079 32,140 112,328 ======== ======== ======== Net realized gains ...................................... $182,734 $246,038 $ 25,891 ======== ======== ========
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, 1997, investments having a par value of $3,825,000 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:
-------------------------------------------- 1997 1996 1995 -------------------------------------------- Deferred, January 1 ...................................... $ -- $ -- $ 397,029 Additions: Commissions ........................................... -- -- (121,972) Premium tax ........................................... -- -- 126,889 Salaries .............................................. -- -- 14,099 Ceding commissions .................................... -- -- 121,972 ----------- -------- --------- -- -- 538,017 Amortization to expense .................................. -- -- 538,017 ----------- -------- --------- Deferred, December 31 .................................... $ -- $ -- $ -- =========== ======== =========
(4) NOTE RECEIVABLE The promissory note provides for principal and interest payable monthly at the rate of 7-1/2% per annum with a maturity date Of December 1, 1998. (5) NOTE PAYABLE TO BANK As of December 31, 1997, the Company had a $10,000,000 revolving line of credit with a maturity date of May 1, 2001 and an outstanding balance of $5,000,000. The revolving credit agreement provides for interest payable quarterly, at the bank's prime rate less one quarter percent (8.25% per annum at December 31, 1997). 15 17 (6) NOTE PAYABLE In connection with the acquisition of Title Research, the Company agreed to assume a note payable to the previous owner of a Title Research branch office. The cognovit note agreement provides for principal and interest payable monthly at the rate of 6.5% per annum with a maturity date of April 1, 2001. Annual payments are $13,000 and the outstanding balance was $37,073 at December 31, 1997. (7) LEASES AND SHARED EXPENSES The Company routinely leases premises for use as administrative offices, vehicles and office equipment under operating leases for varying periods. Management expects that in the normal course of business, leases will be renewed or replaced by other leases. Consolidated rental expenses under operating leases were $202,100, $141,738 and $128,271 in each of the years 1997, 1996 and 1995, respectively. The future minimum lease payments required under these operating leases, as of December 31, 1997 follows: --------------------------------------- YEAR OPERATING ENDING LEASES --------------------------------------- 1998 $217,570 1999 146,758 2000 91,789 2001 1,005 --------- $457,122 ========= (8) FEDERAL INCOME TAXES Deferred income taxes for 1997 and 1996 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 liability at December 31 are as follows:
--------------------------- 1997 1996 --------------------------- Deferred tax assets: Unpaid loss and loss adjustment expense reserves ............................ $ 13,660 $ 13,066 Unearned premium reserves ................................................... 61,637 67,305 --------- --------- Subtotal ................................................................. 75,297 80,371 Deferred tax liabilities: Unrealized gains on available for sale fixed maturities and equity securities ............................................................... (323,300) (223,986) Discounting of anticipated salvage and subrogation .......................... (4,919) (4,919) Accrued dividends receivable ................................................ (2,389) (3,120) Other ....................................................................... (40,738) (43,101) --------- --------- Net deferred tax liability ............................................... $(296,049) $(194,755) ========= =========
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:
------------------------------------- 1997 1996 1995 ------------------------------------- Current .................................................. $965,374 $631,144 $(278,189) Deferred ................................................. 1,980 149,105 454,887 -------- -------- --------- Federal income tax expense ............................ $967,354 $780,249 $ 176,698 ======== ======== =========
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:
------------------------------------------- 1997 1996 1995 ------------------------------------------- Federal income tax at statutory rate ............................... $1,247,340 $1,061,241 $ 543,247 Dividends received and tax exempt interest deductions .............. (290,738) (284,618) (359,821) Other .............................................................. 10,752 3,626 (6,728) ---------- ---------- --------- Federal income tax expense ...................................... $ 967,354 $ 780,249 $ 176,698 ========== ========== =========
(9) BENEFIT PLANS During 1995, the Company had a profit sharing plan for all employees with six months of service. Contributions were determined annually by the Board of Directors. 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% of salary. The total cost of the matching contribution was $68,288 and $24,930 for the year ended December 31, 1997 and 1996, respectively. (10) STOCK OPTION PLANS The Company applies APB Opinion No. 25 and related Interpretations in accounting for options issued to employees, officers and directors under its plans. FASB Statement No. 123 "Accounting for Stock-Based Compensation" ("SFAS 123") was issued by the FASB in 1995 and changes 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 1997, 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 95,000 shares outstanding at December 31, 1997 expire at various dates from 2000 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 121,500 shares outstanding at December 31, 1997 expire at dates from 2004 to 2007 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, 1997, 1996 and 1995 and changes during the year ended on those dates is presented below:
1997 1996 1995 ------------------------------------------------------------------------ WGTD. AVG. WGTD. AVG. WGTD. AVG. SHARES EXER. PRICE SHARES EXER. PRICE SHARES EXER. PRICE ------------------------------------------------------------------------ Outstanding at beginning of year............ 185,500 $3.52 199,500 $3.28 237,500 $2.54 Granted..................................... 71,000 4.04 6,000 3.38 38,500 2.55 Exercised................................... (20,000) 1.61 (20,000) 1.125 (76,500) .625 Expired..................................... - - - - - - Canceled.................................... (20,000) $6.00 - - - - ------- ----- ------- ----- -------- ----- Outstanding at end of year.................. 216,500 $3.64 185,500 $3.52 199,500 $3.28 ======= ===== ======= ===== ======== ===== Options exercisable at year-end............. 132,000 159,500 167,000 ======= ======= ======= Shares reserved for issuance................ 595,000 635,000 655,000 ======= ======= ======= Options available for future grant.......... 378,500 449,500 455,500 ======= ======= ======= Weighted average fair value of options granted during the year................... $2.2211 $2.0535 $1.5969 ======= ======= =======
17 19 The fair value of each option granted during 1997, 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 47.84% for 1997 and 56.82% for 1996 and 1995, (2) risk-free interest rate of 6.25% for options granted January 2, 1997, 6.83% for options granted April 1, 1997, 6.51% for options granted June 4, 1997, 5.99% for options granted June 15, 1995, 5.58% for options granted December 21, 1995 and 6.67% for options granted June 15, 1996 and (3) expected life of 6 years for all years. The following table summarizes information about stock options outstanding at December 31, 1997:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE ----------------------------------------------------------------- NUMBER WGTD. AVG. WGTD. AVG. NUMBER WGTD. AVG. OUTSTANDING REMAINING EXERCISE EXERCISABLE EXERCISE RANGE OF EXERCISE PRICES AT 12/31/97 CONTR.LIFE PRICE AT 12/31/97 PRICE ------------------------------------------------------------------ $ .625 - 1.10................................. 20,000 2.42 $ .625 20,000 $ .625 1.10 - 1.93.................................. 15,000 3.67 1.125 15,000 1.125 1.9375 - 2.50............................... 42,500 7.09 2.368 23,000 2.256 2.875 - 4.31................................ 83,000 8.95 3.908 31,000 3.680 5.25 - 6.75.................................. 56,000 6.07 5.946 56,000 5.946 ------- ------- .625 - 6.75................................. 216,500 6.87 3.637 145,000 3.644 ======= =======
Had compensation cost for the Company's 1997, 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 would approximate the pro forma amounts below:
------------------------------------------------------------------------------ AS REPORTED PRO FORMA 1997 1996 1995 1997 1996 1995 ------------------------------------------------------------------------------ Net income......................... $2,701,294 $2,341,048 $1,421,086 $2,686,209 $2,333,507 $1,420,230 ---------- ---------- ---------- ---------- ---------- ---------- Net income per common share........ $ .46 $ .41 $ .24 $ .46 $ .40 $ .24 ---------- ---------- ---------- ---------- ---------- ----------
The effects of applying SFAS 123 in this pro forma disclosure are not indicative of future amounts. Additional awards in future years are anticipated. (11) 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, 1997, dividends from Ohio Indemnity in 1998 are limited to $3,042,840 without prior approval of the Department. (12) STATUTORY SHAREHOLDERS' EQUITY AND NET INCOME As of December 31, 1997, 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 ............................................................ $ 22,011,391 $ 3,042,840 Reconciling items: Non-admitted assets ................................................. 2,689 -- Deferred taxes ...................................................... (293,942) (5,310) Unrealized gain on available for sale fixed maturities .............. 326,973 -- ------------ ----------- GAAP .............................................................. $ 22,047,111 $ 3,037,530 ============ ===========
As of December 31, 1996, Ohio Indemnity's statutory surplus differed from GAAP shareholders' equity by an amount of $4,116 in nonadmitted assets, ($189,319) for deferred taxes and $230,661 in unrealized gain on available for sale fixed maturities. Statutory net income for the year ended December 31, 1996 differed from GAAP net income by ($149,103) in deferred taxes. 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 (13) RESERVE FOR UNPAID LOSSES AND LOSS ADJUSTMENT EXPENSES Activity in the reserve for unpaid losses and loss adjustment expenses is summarized as follows: [Dollars in thousands]
--------------------------------- 1997 1996 1995 --------------------------------- Balance at January 1 ......... $ 1,360 $ 2,242 $ 4,517 Less reinsurance recoverables 15 529 1,328 ------- ------- ------- Net Balance at January 1 ..... 1,345 1,713 3,189 ------- ------- ------- Incurred related to: Current year ................ 6,074 5,761 12,513 Prior years ................. (3) (357) 247 ------- ------- ------- Total incurred ............... 6,071 5,404 12,760 ------- ------- ------- Paid related to: Current year ................ 4,479 4,424 10,659 Prior years ................. 1,413 1,348 3,577 ------- ------- ------- Total paid ................... 5,892 5,772 14,236 ------- ------- ------- Net Balance at December 31 ... 1,524 1,345 1,713 Plus reinsurance recoverables 8 15 529 ------- ------- ------- Balance at December 31 ....... $ 1,532 $ 1,360 $ 2,242 ======= ======= =======
As a result of changes in estimates of insured events in prior years, the provision for unpaid losses and loss adjustment expenses decreased by $3,000 in 1997 and $357,000 in 1996 primarily due to higher than anticipated salvage and subrogation received from the discontinued Automobile Insurance business. The provision for unpaid losses and loss adjustment expenses increased by $247,000 in 1995 because of higher than anticipated losses and related legal expenses in connection with a discontinued product. (14) REINSURANCE The Company maintains a quota share reinsurance agreement for certain insurance products, 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 75% and 50% of the paid losses and loss adjustment expense applicable to Mortgage Protection and Automobile Physical Damage insurance policies, respectively. As of December 31, ceded reinsurance reduced commission expense incurred by $23,032 in 1997 and increased commission expense incurred by $62,147 and $121,972 in 1996 and 1995, respectively. (15) RELATED PARTIES Included in loans to affiliates at December 31, 1997 and 1996 is a $19,000 loan to an officer of Ohio Indemnity, originally due December 8, 1997. Interest only is payable in quarterly installments at the rate of two points above prime. On December 8, 1997, the loan was renewed and the maturity was extended to December 8, 1998. 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 amended terms of the agreement, the Company provides a line of credit, up to a maximum of $300,000, effective to April 30, 1998 (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, 1997, the Company had loaned the Administrator $300,000 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, 1997, the Company had loaned the trustee $287,182 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. The executive offices of the Company are shared with consolidated subsidiaries and other affiliated entities. Rental, equipment and bookkeeping expense are allocated among them pursuant to management fee agreements. 19 21 (16) CONCENTRATIONS A single customer in the Ultimate Loss Insurance program represented $1,398,541, $1,553,282, and $2,343,398 of the Company's net premiums earned in 1997, 1996 and 1995, respectively. A new customer in the Ultimate Loss Insurance program represented $1,866,672 of the Company's net premiums earned in 1997. A single customer in the Surety program represented $907,942, $995,241 and $1,074,126 of the Company's net premiums earned in 1997, 1996 and 1995, respectively. (17) 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:
1997 ------------------------------------------------------- FIRST SECOND THIRD FOURTH QUARTER QUARTER QUARTER QUARTER ------------------------------------------------------- Net premiums earned ........... $2,117,072 $2,383,011 $3,247,427 $3,421,733 Net investment and other income 526,124 1,370,792 1,211,751 1,552,491 Total revenues ................ 2,643,196 3,753,803 4,459,178 4,974,224 Losses and operating expenses . 1,987,232 2,598,898 3,574,962 4,000,661 Net income .................... 494,552 843,586 658,165 704,991 Net income per common share ... .09 .14 .11 .12 Net income per common share, assuming dilution ........... .09 .14 .11 .12
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 common share ... .09 .13 .10 .09 Net income per common share, assuming dilution ........... .09 .13 .09 .09
(18) REGULATORY STANDARD Ohio Indemnity is subject to a Risk Based Capital ("RBC") test applicable to property and casualty insurers. 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. (19) 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 expired on December 31, 1997. 20 22 (20) 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, is likely to result in judgments that will have a material adverse effect on the financial condition or results of operations of the Company. (21) SUPPLEMENTAL DISCLOSURE FOR EARNINGS PER SHARE
------------------------------------- 1997 1996 1995 ------------------------------------- Net income......................................................... $2,701,294 $2,341,048 $1,421,086 ---------- ---------- ---------- Income available to common stockholders, assuming dilution............................................... $2,701,294 $2,341,048 $1,421,086 ---------- ---------- ---------- Weighted average common shares outstanding......................... 5,822,781 5,780,351 5,837,983 Adjustments for dilutive securities: Dilutive effect of outstanding options.......................... 55,342 50,697 54,019 ---------- ----------- ---------- Diluted common shares.............................................. 5,878,123 5,831,048 5,892,002 ========== ========== ========== Net income per common share........................................ $ .46 $ .41 $ .24 Net income per common share, assuming dilution..................... $ .46 $ .40 $ .24
(22) ADOPTION OF NEW ACCOUNTING STANDARDS In December 1996, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 127, "Deferral of the Effective Date of Certain Provisions of FASB Statement No. 125." SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities" (issued in June 1996) establishes new criteria for determining whether a transfer of financial assets should be accounted for as a sale or as a pledge of collateral in a secured borrowing, as well as establishes new accounting requirements for pledged collateral. SFAS No. 127 deferred the implementation of SFAS No. 125 as it relates to repurchase agreements, dollar-rolls, securities lending and similar transactions. The Company will adopt SFAS No. 125 in 1998, as required by SFAS 127; however the implementation of SFAS No. 125 is not expected to have a material impact on the Company's statement of position or results of operations. In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income." Under SFAS No. 130, enterprises that provide a full set of financial statements that report financial position, results of operations and cash flows should also include a Statement of Comprehensive Income for fiscal years beginning after December 15, 1997, with earlier adoption permitted. The Company intends to adopt SFAS No. 130 in 1998. In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." Under SFAS No. 131, public business enterprises are required to provide disclosures about operating segments using the "management approach" for fiscal years beginning after December 15, 1997, with earlier adoption permitted. The Company intends to adopt SFAS No. 131 in 1998. The Company has not yet determined what its operating segments will be under SFAS No. 131. 21 23 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, 1997 and 1996, and the related consolidated statements of income, shareholders' equity and cash flows, for each of the years in the three-year period ended December 31, 1997. These consolidated financial statements 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, 1997 and 1996, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1997, in conformity with generally accepted accounting principles. /s/ Coopers & Lybrand L.L.P. Columbus, Ohio February 27, 1998 22 24 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. Premium volume principally is earned as written due to the nature of the monthly policies issued by the Company. 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 incurred but not reported ("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, ------------------------------------------------------ 1996-97 1995-96 ------------------------- -------------------------- AMOUNT %CHANGE AMOUNT %CHANGE ----------- ------- ----------- ------- Premiums written ................ $ 2,821,062 33.8% $(5,680,346) (40.5%) Net premiums earned ............. 1,031,139 10.2% (9,645,203) (48.8%) Net investment income ........... (36,626) (2.3%) 150,682 10.7% Total revenue ................... 3,125,527 24.6% (9,105,470) (41.7%) Loss and loss adjustment expense, net of reinsurance recoveries .. 666,470 12.3% (7,355,610) (57.6%) Operating expense ............... 2,000,134 53.7% (3,270,301) (46.7%) Interest expense ................ (88,428) (19.6%) (3,072) (.7%) Operating income ................ 547,351 17.5% 1,523,513 (95.4%) Net income ...................... $ 360,246 15.4% $ 919,962 (64.7%)
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 each of the years ended December 31:
1997 1996 1995 Statutory: Loss ratio .............................. 54.4% 53.3% 64.5% Expense ratio ........................... 21.9% 30.4% 48.8% ---- ---- ---- Combined ratio .......................... 76.3% 83.7% 113.3% ==== ==== ===== GAAP: Loss ratio .............................. 54.4% 53.3% 64.5% Expense ratio ........................... 22.1% 30.5% 52.2% ---- ---- ---- Combined ratio .......................... 76.5% 83.8% 116.7% ==== ==== =====
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. 23 25 RESULTS OF OPERATIONS YEAR ENDED DECEMBER 31, 1997 AS COMPARED TO YEAR ENDED DECEMBER 31, 1996 Premiums Written; Premiums Earned. Premiums written increased 33.8% from $8,358,499 in 1996 to $11,179,561 in 1997, while premiums earned increased 10.2% from $10,138,104 in 1996 to $11,169,243 in 1997. Premiums increased due to a focus on historically profitable core lines of business and complementary products and services. The addition of a significant new policy in the Ultimate Loss Insurance Program, a new agency program, growth in the Bonded Service Program and reductions in return premiums recorded in 1996 associated with the discontinuance of the Automobile Physical Damage Insurance Program, which had no premiums written or earned during 1997, primarily contributed to the increases. Premiums written for Ultimate Loss Insurance increased 47.3% from $7,620,000 in 1996 to $7,656,552 in 1997. Premiums earned for Ultimate Loss Insurance increased 22.2% from $6,233,308 in 1996 to $7,620,000 in 1997. The increase in premiums written and premiums earned during 1997 reflected increased premium volume primarily attributable to a significant new customer added during the third quarter of 1997. See Note 16 to the Notes to Consolidated Financial Statements. In addition, a new creditor placed mortgage protection and collateral protection program during 1997 recorded $624,691 and $266,578 of premiums written and earned, respectively, in 1997. Premiums written for the Bonded Service program increased 5.9% from $3,231,642 in 1996 to $3,422,032 in 1997, while premiums earned from the Bonded Service program increased 5.9% from $3,228,725 in 1996 to $3,420,793 in 1997. The increases in net premiums written and premiums earned on the Bonded Service program were primarily attributable to increases in employee enrollment among existing trust members resulting in higher service fees. Net Investment Income. Net investment income remained relatively constant from $1,564,175 in 1996 to $1,527,549 in 1997. Investment income increased from $1,318,137 in 1996 to $1,344,815 in 1997 primarily resulting from a higher invested asset position and lengthened maturities on the bond portfolio. Net realized gains on investments decreased from $246,038 in 1996 to $182,734 in 1997 resulting from the Company's 1997 investment strategy to shelter current year realized gains that were primarily market driven. The average yield on the investment portfolio was 5.6% in 1996 and 5.3% in 1997. Claims Administration. Claims administration fees generated by BCIS Services, a consolidated subsidiary, accounted for $550,615 of the revenues for 1996 and $658,884 in 1997. The increase of 19.7% was primarily attributable to an increase in claims processing and servicing responsibilities. Title and Appraisal Fees. Title and appraisal fees generated by Title Research, a consolidated subsidiary, accounted for $1,593,556 of the revenues for 1997. Title Research commenced business operations in Ohio during the second quarter of 1997. Management Fees. Management fees increased from $411,176 in 1996 to $809,345 in 1997. The increase was attributed to recognition of favorable results from a closed year of operations of the Bonded Service program. See Note (1)(K) of the Notes to Consolidated Financial Statements. Other Income. Other income increased from $40,804 in 1996 to $71,824 in 1997 primarily as a result of recording $63,657 as a reimbursement for expenses previously incurred from an insurance product line sold. Expenses totalling $72,980 for this business are recorded on the income statement as general and administrative expenses in 1997. Losses and Loss Adjustment Expenses, Net of Reinsurance Recoveries. Losses and loss adjustment expenses totaled $5,404,484, or 53.3% of premiums earned in 1996 versus $6,070,954, or 54.4% of premiums earned in 1997. 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 was primarily due to loss development related to a new policy and deficiency development on prior year reserves. The absolute increase in losses and loss adjustment expenses was primarily attributable to a significant new policy in the Ultimate Loss Insurance Program which incurred loss and loss adjustment expenses of $1,649,340. See Note 16 to the Notes to the Consolidated Financial Statements. Total loss and loss adjustment expenses for the Ultimate Loss Insurance Program increased 25.2% from $4,079,921 in 1996 to $5,106,930 in 1997. Loss and loss adjustment expenses for the Bonded Service Program increased 31.5% from $438,355 in 1996 to $576,502 in 1997 due to adverse development on prior year reserves. Loss and loss adjustment expenses from the Automobile Physical Damage Insurance Program decreased from $502,208 in 1996 to $158,136 of net recoveries in 1997 due to higher than anticipated salvage and subrogation and adequate reserves to handle the runoff associated with the discontinued program. 24 26 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 53.7% from $3,727,668 in 1996 to $5,727,802 in 1997. Commission expense increased 8.6% from $1,441,430 in 1996 to $1,565,826 in 1997, primarily due to the addition of a new collateral protection insurance agency program and commission incurred related to the Bonded Service Program. Other insurance operating expenses increased 9.1% from $1,551,578 in 1996 to $1,692,041 in 1997, primarily due to increases in allocable salaries and related benefits, advertising, amortization of bond premiums, consulting and appraisal and prepaid premium taxes. General and administrative expenses increased from $734,660 in 1996 to $2,469,935 in 1997 primarily due to operating and administrative expenses incurred by Title Research from April 2, 1997. Additionally, salaries and related costs, consulting and depreciation increased during 1997. BCIS Services incurred operating expenses of $567,343 in 1996 compared with $619,032 in 1997 and Title Research incurred operating expenses of $1,599,516 during 1997. Interest Expense. Interest expense decreased from $451,425 in 1996 to $362,997 in 1997 due to lower borrowing levels on the Company's revolving credit line. Federal Income Taxes. The difference between Federal income taxes, $780,249 in 1996 and $967,354 in 1997, resulted from an increase in the effective tax rate primarily due to an increase in taxable income. See Note 8 to the Notes to Consolidated Financial Statements. Statutory Combined Ratios. The change in the statutory combined ratio from 83.7% in 1996 to 76.3% in 1997 was primarily attributable to a decrease in loss and loss adjustment expense experience primarily associated with the discontinuance of the Automobile Physical Damage Program, which generally carried higher loss ratings than the company's core lines. 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. 25 27 Claims Administration. Claims administration income generated by BCIS Services accounted for $533,354 of the revenues for 1995 and $550,615 in 1996. BCIS Services commenced business operations in California during the third quarter of 1993. Management Fees. Management fees was $411,176 in 1996. No such amount was recognized in 1995. Management fees was 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)(k) 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. 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 8 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." DISCONTINUED PRODUCTS The Company recorded $63,657 as a reimbursement for expenses previously incurred from a product line sold May 31, 1997. The business was engaged (during five months of 1997) in administering and marketing of service contracts on consumer goods. Expenses incurred, totalling $72,980, are included in general and administrative expenses in 1997. See "RESULTS OF OPERATIONS." 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)% and 5.7% of the Company's premiums written and 37.6% and 48.1% of the Company's premiums earned, respectively, for 1996 and 1995. There were no premiums written or earned during 1997. 26 28 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 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 1998 from Ohio Indemnity, absent regulatory consent, is $3,042,840. See Note 11 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 $(4,907,977), $2,221,928 and $2,291,171 for the years ended December 31, 1995, 1996, and 1997, respectively. Net cash used in financing activities was $415,026, $179,307 and $596,877 for the years ended December 31, 1995, 1996, and 1997, respectively. Net cash provided by (used in) investing activities of the Company was $6,234,041, $(1,843,740) and $(1,229,263) for the years ended December 31, 1995, 1996 and 1997, respectively. BCIS Services derives its funds principally from claims administration fees and Title Research derives its funds principally from title and appraisal fees which are sufficient to meet their respective operating obligations. Although it is impossible to estimate accurately the future cash flows from the operations of Title Research's business, management believes the Company's effective capital costs may increase. Management is actively exploring further avenues for preserving capital and 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 end of 1998. 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 1998. The Company's investments at December 31, 1997 consisted primarily of investment-grade fixed income securities. Cash and short-term investments at December 31, 1997 amounted to $7,948,061, or 28.3% 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 $1,413,493, $1,564,175 and $1,527,549 for the years ended December 31, 1995, 1996 and 1997, respectively. Interest rate risk is the risk that interest rates will change and cause a decrease in the value of an insurer's investments. The Company mitigates this risk by attempting to match the maturity schedule of its assets with the expected payouts of its liabilities. To the extent that liabilities come due more quickly than assets mature, an insurer would have to sell assets prior to maturity and recognized a gain or loss. The Company's total shareholders' equity increased $13,710,410 in 1995 to $15,906,817 in 1996 to $19,079,801 in 1997 representing a 39.2% increase over the three-year period. Driven by profitable operating earnings, 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 $477,600 and $458,436 at December 31, 1997 and 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. 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, 1997, the ratio of combined annual statutory net premiums written by the Subsidiary to its combined statutory surplus was approximately .5 to 1. The relative capital position is reflective of the Company's low underwriting leverage and conservative investment risk profile. 27 29 FACTORS TO CONSIDER FORWARD LOOKING Management has undertaken several initiatives in 1997 which should favorably impact performance in 1998, 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 Company's current and future marketing plan is to provide fast and efficient service in the delivery of coverage and service through a home office, branch offices and issuing agents. Marketing activities will be directed toward selected market niches where management believes the Company will be able to provide customers with additional services. IMPACT OF THE YEAR 2000 ISSUE The Year 2000 Issue is the result of computer programs being written using two digits rather than four to define the applicable year. Any of the Company's computer programs that have date-sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in a system failure or miscalculations causing disruptions of operations, including, among other things, a temporary liability to process transactions or engage in normal business activities. The Company will utilize external resources to reprogram, or replace, and test the software for Year 2000 modifications. The Company plans to complete the Year 2000 project no later than December 31, 1998. The total cost of the Year 2000 project is estimated at $49,500 and will be funded through operating cash flows. Of the total project cost, approximately $24,880 is attributable to the purchase and development of new software which will be capitalized. The remaining $24,620, which will be expensed as incurred is not expected to have a material affect on the results of operations. To date, the Company has incurred and expensed approximately $19,620 related to the assessment of, and preliminary efforts in connection with, its Year 2000 project and the development of a remediation plan. The costs of the project and the date on which the Company plans to complete the Year 2000 modifications are based on management's best estimates, which were derived utilizing assumptions of future events including the continued availability of certain resources and other factors. However, there can be no guarantee that these estimates will be achieved and actual results could differ from those plans. 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. Title and appraisal fees are closely related to the level of real estate activity and the average price of real estate sales. The availability of funds to finance purchases directly affects real estate sales. Other factors include consumer confidence, economic conditions, supply and demand, mortgage interest rates and family income levels. Historically, the first quarter has had the least real estate activity, while the remaining quarters have been more active. Fluctuations in mortgage interest rates can cause shifts in real estate activity outside the normal seasonal pattern. See Note 17 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, 1997 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 1997, the Company has experienced no material adverse consequences with respect to its growth in premiums. 28 30 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 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, 1997, were reasonable. 29 31 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 12, 1998, the last reported sale price of the Company's common stock was $5-1/8.
Low Sale High Sale -------- --------- September 30, 1996 3 3-1/4 December 31, 1996 3-3/4 4-1/8 March 31, 1997 4-1/4 5-1/8 June 30, 1997 4 4-1/4 September 30, 1997 4-1/8 4-3/8 December 31, 1997 4-1/2 5
HOLDERS The number of holders of record of the Company's common stock as of February 12, 1998 was 966. 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 11 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, 1998, the following broker-dealer firms were making a market in Bancinsurance Corporation common stock: HERZOG, HEINE, GEDULD, INC. MORGAN, KEEGAN & COMPANY MAYER & SCHWEITZER INC. NASH WEISS/DIV. OF SHATKIN INV. MCDONALD & COMPANY SECURITIES, INC. SOUTHLAND SECURITIES CORP. ANNUAL MEETING The annual meeting of shareholders will be held on June 2, 1998, at 9:30 A.M. at the offices of Porter, Wright, Morris & Arthur, 29th Floor, 41 South High Street, Columbus, Ohio. 30 32 BANCINSURANCE CORPORATION SELECTED FINANCIAL DATA
------------------------------------------------------------------------------------------- 1997 1996 1995 1994 1993 1992 1991 ------------------------------------------------------------------------------------------- Premiums earned ........... $11,226,584 10,138,104 $19,783,307 $25,535,824 $19,787,858 $10,657,111 $6,852,544 Investment and other income 4,661,158 2,566,770 2,027,037 2,140,734 1,879,007 1,241,158 653,300 Total revenues ............ 15,830,401 12,704,874 21,810,344 27,676,558 21,666,865 11,898,269 7,505,844 Losses and loss adjustment expenses, net of reinsurance recoveries .. 6,070,954 5,404,484 12,760,094 15,564,508 10,918,649 5,063,855 3,444,370 Operating expenses ........ 6,090,799 4,179,093 7,452,466 9,459,652 7,506,212 3,938,717 2,786,956 Operating income .......... 3,668,648 3,121,297 1,597,784 2,652,398 2,826,614 2,895,697 1,274,518 Income taxes .............. 967,354 780,249 176,698 335,403 580,379 758,167 332,108 Net income ................ 2,701,294 2,341,048 1,421,086 2,316,995 2,294,822 2,137,530 942,410 Net income per common share, diluted(1) .... $ .46 $ .40 $ .24 $ .40 $ .40 $ .37 $ .16
SELECTED BALANCE SHEET DATA
----------------------------------------------------------------------------------------------- 1997 1996 1995 1994 1993 1992 1991 ----------------------------------------------------------------------------------------------- Total assets $31,404,432 $28,274,952 $27,750,234 $43,774,264 $43,612,249 $28,014,631 $15,534,604 Note payable to bank $ 5,000,000 $ 5,600,000 $ 5,616,132 $ 5,916,132 $ 5,316,132 $ 3,500,000 $ 3,350,000 Net shareholders' equity $19,079,801 $15,906,817 $13,710,410 $11,838,424 $ 9,909,742 $ 7,581,232 $ 5,239,984
(1) Earnings per share assuming dilution is computed by dividing net income available to common shareholders by the weighted-average number of common shares outstanding adjusted for any dilative potential common shares for the period. 31 33
- -------------------------------------------------------------------------------------------------------------------- 1990 1989 1988 1987 1986 1985 1984 1983 - -------------------------------------------------------------------------------------------------------------------- $ 4,596,382 $3,326,437 $3,327,362 $2,717,607 $2,413,136 $1,760,841 $1,479,406 $1,241,397 343,776 379,287 275,331 264,709 192,960 147,136 160,803 114,710 4,940,158 3,705,724 3,602,693 2,982,316 2,606,096 1,907,977 1,640,209 1,356,107 2,582,505 2,119,556 1,957,693 1,418,484 1,280,981 844,401 634,439 625,547 1,739,441 1,074,691 774,083 643,867 544,173 480,737 429,414 328,056 618,212 511,477 870,917 919,965 780,942 582,839 576,356 402,504 178,466 72,596 240,220 258,315 276,392 155,288 182,021 116,239 439,746 438,881 630,697 628,226 504,550 273,420 320,578 298,861 $ .08 $ .08 $ .11 $ .11 $ .08 $ .04 $ .05 $ .06 - -------------------------------------------------------------------------------------------------------------------- 1990 1989 1988 1987 1986 1985 1984 1983 - -------------------------------------------------------------------------------------------------------------------- $11,581,617 $7,492,524 $5,755,781 $4,021,011 $3,456,108 $2,680,210 $2,696,888 $2,233,922 $ 3,600,000 $1,600,000 $1,650,000 $ 368,000 $ 388,000 $ 408,200 $ 433,292 $ 458,292 $ 4,247,832 $3,685,010 $3,342,282 $2,777,141 $2,255,976 $1,930,873 $1,640,687 $1,320,109
32 34 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 33 35 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 Title Research Corporation 3966 G Brown Park Drive Hilliard, Ohio 43026 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: Fifth Third Bank Corporate Trust Services 38 Fountain Square Plaza Mail Drop #1090F5-4129 Cincinnati, Ohio 45263 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 34 EX-21 3 EXHIBIT 21 1 EXHIBIT 21 - SUBSIDIARIES OF THE COMPANY BANCINSURANCE CORPORATION
100% 100% 100% Ohio Indemnity Company BCIS Services, Inc. Title Research Corporation (An Insurance Company) (A Cost Containment Provider) (A Title Lien Search 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 27, 1998, on our audits of the consolidated financial statements of Bancinsurance Corporation as of December 31, 1997 and 1996 and for the years ended December 31 1997, 1996 and 1995 which report is incorporated by reference in this Annual Report on Form 10-K and our report on the financial statement schedules of Bancinsurance Corporation as of December 31, 1997 and 1996 and for the years ended December 31, 1997, 1996 and 1995, included in this Annual Report on Form 10-K. Columbus, Ohio February 27, 1998 EX-27.1 5 EXHIBIT 27.1
7 12-MOS DEC-31-1997 JAN-01-1997 DEC-31-1997 12,962,626 3,940,194 4,054,026 3,225,061 0 0 26,929,625 1,146,317 0 0 31,404,432 1,531,714 698,764 0 0 5,000,000 0 0 315,567 18,764,234 31,404,432 11,169,243 1,344,815 182,734 3,133,609 6,070,954 5,727,802 362,997 3,668,648 967,354 2,701,294 0 0 0 2,701,294 .46 .46 1,345,000 6,074,000 (3,000) 4,479,000 1,413,000 1,524,000 0
EX-27.2 6 EXHIBIT 27.2
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 0 0 315,567 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 .41 .40 1,713,000 5,761,000 (357,000) 4,424,000 1,348,000 1,345,000 0
EX-27.3 7 EXHIBIT 27.3
7 12-MOS DEC-31-1995 JAN-01-1995 DEC-31-1995 9,563,314 4,258,129 4,390,089 3,465,204 0 0 23,388,142 482,405 525,102 0 27,750,234 2,241,881 2,997,334 0 0 5,616,132 0 0 315,567 13,394,843 27,750,234 19,783,307 1,387,602 25,891 613,544 12,760,094 6,997,969 454,497 1,597,784 176,698 1,421,086 0 0 0 1,421,086 .24 .24 3,189,112 12,513,000 247,094 10,659,000 3,577,051 1,713,155 0
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