-----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, I7SS0PTpyIFUbbI9+7I+XcS6yIqdnUfJcM+bG1c0BFf6wmOf6ZlL9EcTtbJVo3B5 VGYpJjugHv+aVsS1TCmXng== 0000950152-96-003729.txt : 19960806 0000950152-96-003729.hdr.sgml : 19960806 ACCESSION NUMBER: 0000950152-96-003729 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19960630 FILED AS OF DATE: 19960805 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: BANCINSURANCE CORP CENTRAL INDEX KEY: 0000276400 STANDARD INDUSTRIAL CLASSIFICATION: FIRE, MARINE & CASUALTY INSURANCE [6331] IRS NUMBER: 310790882 STATE OF INCORPORATION: OH FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-08738 FILM NUMBER: 96603797 BUSINESS ADDRESS: STREET 1: 20 E BROAD ST STREET 2: 4TH FLOOR CITY: COLUMBUS STATE: OH ZIP: 43215 BUSINESS PHONE: 6142282800 MAIL ADDRESS: STREET 1: 20 E. BROAD STREET STREET 2: 4TH FLOOR CITY: COLUMBUS STATE: OH ZIP: 43215 10-Q 1 BANCINSURANCE 10-Q 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 FORM 10-Q QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For Quarter Ended June 30, 1996 Commission File Number 0-8738 BANCINSURANCE CORPORATION (Exact name of registrant as specified in its charter) Ohio 31-0790882 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 20 East Broad Street, Columbus, Ohio 43215 (Address of principal executive offices) (Zip Code) Registrant's telephone number including area code (614) 228-2800 None (Former name, former address and former fiscal year, if changed since last report.) Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. YES X NO ----- ----- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the last practicable date. Class Outstanding at June 30, 1996 Common stock, without par value 5,774,049 2 BANCINSURANCE CORPORATION AND SUBSIDIARIES INDEX Page No. PART I - FINANCIAL INFORMATION: Item 1. Financial Statements Consolidated Balance Sheets as of June 30, 1996 (unaudited) and December 31, 1995 3 Consolidated Statements of Income for the three months and six months ended June 30, 1996 and 1995 (unaudited) 5 Consolidated Statements of Cash Flows for the six months ended June 30, 1996 and 1995 (unaudited) 6 Notes to Consolidated Financial Statements (unaudited) 8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9 PART II - OTHER INFORMATION AND SIGNATURES Item 1. Legal Proceedings 15 Item 2. Changes in Securities Not Applicable Item 3. Default Upon Senior Securities Not Applicable Item 4. Submission of Matters to a Vote of Security Holders 15 Item 5. Other Information Not Applicable Item 6. Exhibits and Reports on Form 8-K 15 Signatures 16 2 3 PART I - FINANCIAL INFORMATION ITEM 1. Financial Statements BANCINSURANCE CORPORATION AND SUBSIDIARIES Consolidated Balance Sheets
June 30, December 31, Assets 1996 1995 ------ ----------- ------------ (Unaudited) Investments: Held to maturity: Fixed maturities, at amortized cost (fair value $3,684,866 in 1996 and $4,390,089 in 1995) $ 3,590,424 $ 4,258,129 Available for sale: Fixed maturities, at fair value (amortized cost $9,729,817 in 1996 and $9,222,686 in 1995) 9,890,304 9,563,314 Equity securities, at fair value (cost $3,223,170 in 1996 and $3,175,130 in 1995) 3,531,654 3,465,204 Short-term investments, at cost which approximates fair value 5,315,090 4,942,924 Securities purchased under agreements to resell 1,159,559 1,158,571 ----------- ----------- Total investments 23,487,031 23,388,142 ----------- ----------- Cash 996,183 482,405 Premiums receivable 775,681 400,397 Reinsurance receivable 105,441 528,726 Reinsurance recoverable on paid losses 265,896 525,102 Deferred policy acquisition costs 235,150 -- Prepaid reinsurance premiums -- 514,662 Premium taxes receivable 2,931 138,632 Loans to affiliates 215,463 143,744 Furniture, fixtures and leasehold improvements, net 102,586 129,490 Excess of investment over net assets of subsidiaries 753,738 753,738 Deferred federal income taxes 4,934 55,623 Prepaid federal income taxes 160,349 321,488 Accrued investment income 247,612 231,276 Other assets 91,543 136,809 ----------- ----------- Total assets $27,444,538 $27,750,234 =========== =========== (Continued)
3 4 BANCINSURANCE CORPORATION AND SUBSIDIARIES Consolidated Balance Sheets, Continued
June 30, December 31, Liabilities and Shareholders' Equity 1996 1995 ------------------------------------ ----------- ------------ (Unaudited) Reserve for unpaid losses and loss adjustment expenses $ 1,376,519 $ 2,241,881 Unearned premiums 2,309,927 2,997,334 Contract funds on deposit 1,920,316 1,809,012 Return premiums payable 12,559 19,488 Reinsurance premiums payable 500,760 392,716 Note payable to bank 6,000,000 5,616,132 Taxes, licenses, and fees payable 33,043 54,552 Commissions payable 193,147 341,112 Amount due to stock broker -- 143,038 Other 337,586 424,559 ----------- ----------- Total liabilities 12,683,857 14,039,824 ----------- ----------- Commitments and contingent liabilities Shareholders' equity: Non-voting preferred stock: Class A Serial Preference shares without par value; authorized 100,000 shares; no shares issued or outstanding -- -- Class B Serial Preference shares without par value; authorized 98,646 shares; no shares issued or outstanding -- -- Common stock without par value; authorized 20,000,000 shares; 5,878,277 shares issued 315,567 315,567 Additional paid-in capital 1,466,753 1,466,753 Net unrealized gain on investments 309,521 416,263 Retained earnings 12,958,260 11,699,436 ----------- ----------- 15,050,101 13,898,019 Less: Treasury stock, at cost (104,228 common shares at June 30, 1996 and 71,728 at December 31, 1995) (289,420) (187,609) ----------- ----------- Total shareholders' equity 14,760,681 13,710,410 ----------- ----------- Total liabilities and shareholders' equity $27,444,538 $27,750,234 =========== ===========
See accompanying notes to consolidated financial statements. 4 5 BANCINSURANCE CORPORATION AND SUBSIDIARIES Consolidated Statements of Income (Unaudited)
Three Months Ended Six Months Ended June 30, June 30, 1996 1995 1996 1995 ---------- ----------- ----------- ----------- Income: Premiums written $ 1,716,950 $ 2,663,422 $ 5,320,701 $11,844,240 Decrease in unearned premiums 944,838 5,696,670 687,406 5,830,212 ---------- ----------- ----------- ----------- Premiums earned 2,661,788 8,360,092 6,008,107 17,674,452 Premiums ceded (37,734) (2,683,820) (488,704) (5,716,268) ---------- ----------- ---------- ----------- Net premiums earned 2,624,054 5,676,272 5,519,403 11,958,184 Investment income (net of expenses of $31,084 and $28,905, respectively) 327,842 408,443 667,269 788,866 Net realized gain on investments 125,386 29,128 128,575 43,756 Claims administration fees 132,571 132,914 265,454 268,368 Other income 98,282 26,522 215,261 54,539 ---------- ----------- ---------- ----------- Total revenue 3,308,135 6,273,279 6,795,962 13,113,713 ---------- ----------- ---------- ----------- Losses and operating expenses: Losses and loss adjustment expenses 1,469,671 5,794,001 3,446,560 13,248,000 Reinsurance recoveries (87,756) (2,267,347) (507,774) (5,526,319) Commission expense 306,691 502,640 825,361 1,507,484 Other insurance operating expenses 349,597 1,232,594 751,938 1,885,712 Amortization of deferred policy acquisition costs -- 157,241 -- 349,170 General and administrative expenses 176,621 201,842 364,581 406,171 Interest expense 106,018 74,656 214,655 230,628 ---------- ----------- ---------- ----------- Total expenses 2,320,842 5,695,627 5,095,321 12,100,846 ---------- ----------- ---------- ----------- Income before federal income taxes 987,293 577,652 1,700,641 1,012,867 ---------- ----------- ---------- ----------- Federal income tax expense 269,890 106,930 441,816 155,179 ---------- ----------- ---------- ----------- Net income $ 717,403 $ 470,722 $1,258,825 $ 857,688 ========== =========== ========== =========== Net income per common share: $ .13 $ .08 $ .22 $ .15 ========== =========== ========== =========== Weighted average number of common shares and equivalents outstanding 5,842,363 5,867,106 5,852,354 5,847,610 ---------- ----------- ---------- -----------
See accompanying notes to consolidated financial statements. 5 6 BANCINSURANCE CORPORATION AND SUBSIDIARIES Consolidated Statements of Cash Flows (Unaudited)
Six Months Ended June 30, 1996 1995 ---------- --------- Cash flows from operating activities: Net income $1,258,825 $ 857,688 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Net realized gain on investments (128,575) (43,756) Net realized loss on disposal of equipment 601 -- Depreciation 30,510 33,861 Amortization of bond discount (2,227) (4,247) Amortization of deferred policy acquisition costs -- 349,170 Deferred federal income tax expense 105,677 259,387 (Increase) decrease in premiums receivable (375,284) 1,355,437 Decrease in reinsurance receivable 423,285 705,081 Decrease in reinsurance recoverable on paid losses 259,206 77,974 Increase in deferred policy acquisition costs (235,150) (397,596) Decrease in prepaid reinsurance premiums 514,662 3,010,046 (Increase) decrease in premium taxes receivable 135,701 (168,139) Increase in loans to affiliates (71,719) (71,719) Decrease in prepaid federal income taxes 161,139 393,887 (Increase) decrease in accrued investment income (16,336) 96,777 Decrease in other assets 45,266 26,897 Decrease in reserve for unpaid losses and loss adjustment expenses (865,362) (2,059,300) Decrease in unearned premiums (687,407) (5,830,212) Increase in contract funds on deposit 111,304 452,802 Increase (decrease) in return premiums payable (6,929) 33,558 Increase (decrease) in reinsurance premiums payable 108,044 (616,835) Decrease in taxes, licenses and fees payable (21,509) (127,957) Decrease in commissions payable (147,965) (528,853) Increase (decrease) in other liabilities (86,973) 110,366 ---------- ---------- Net cash provided by (used in) operating activities 508,784 (2,085,683) ---------- ---------- Cash flows from investing activities: Proceeds from held to maturity: fixed maturities due to redemption or maturity 408,779 575,124 Proceeds from available for sale: fixed maturities sold, redeemed and matured 1,553,402 4,317,598 Proceeds from available for sale: equity securities sold 1,072,900 597,537 Cost of investments purchased: Held to maturity: fixed maturities (241,682) -- Available for sale: fixed maturities (1,898,816) (289,825) Equity securities (651,245) (297,817) Decrease in amount due to stock brokers (143,038) -- Net increase in short-term investments (372,166) (1,992,250) Net increase in securities purchased under agreements to resell (988) 403,052 Purchase of furniture, fixtures and leasehold improvements (4,209) (7,102) ---------- ---------- Net cash provided by (used in) investing activities (277,063) 3,306,317 ----------- ---------- (Continued)
6 7 BANCINSURANCE CORPORATION AND SUBSIDIARIES Consolidated Statements of Cash Flows, Continued (Unaudited)
Six Months Ended June 30, 1996 1995 ---------- --------- S> Cash flows from financing activities: Proceeds from note payable to bank 1,700,000 2,600,000 Repayments of note payable to bank (1,316,132) (2,500,000) Proceeds from stock options exercised -- 47,813 Acquisition of treasury stock (101,811) -- ---------- ---------- Net cash provided by financing activities 282,057 147,813 ---------- ---------- Net increase in cash 513,778 1,368,447 ---------- ---------- Cash at December 31 482,405 (428,633) ---------- ---------- Cash at June 30, $ 996,183 $ 939,814 ========== ========== Supplemental disclosures of cash flow information: Cash paid during the year for: Interest $ 214,556 $ 230,628 ========== ========== Income taxes 175,000 -- ========== ==========
See accompanying notes to consolidated financial statements. 7 8 BANCINSURANCE CORPORATION AND SUBSIDIARIES Notes To Consolidated Financial Statements (Unaudited) 1. The Consolidated Balance Sheet as of June 30, 1996, the Consolidated Statements of Income for the three and six months ended June 30, 1996 and 1995, and the Consolidated Statements of Cash Flows for the six months then ended have been prepared by Bancinsurance Corporation (the "Company") without an audit. In the opinion of the Company's management, all adjustments (which include only normal recurring adjustments) necessary to present fairly the financial position, results of operations, and cash flow at June 30, 1996 and for all periods presented have been made. 2. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been omitted. It is suggested that these unaudited Consolidated Financial Statements be read in conjunction with the financial statements and notes thereto included in the Company's Form 10-K for the year ended December 31, 1995. The results of operations for the period ended June 30, 1996 are not necessarily indicative of the results of operations for the full year. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 3. On November 13, 1995 the Board of Directors adopted a common share repurchase program. The program allows the company to repurchase, from time to time, up to a total of 100,000 of its common shares. The program will expire on December 31, 1997. As of June 30, 1996, the Company repurchased 92,900 shares at an average price per share of $2.85 under this program. Repurchases have been and will continue to be funded by cash flows from operations. 8 9 BANCINSURANCE CORPORATION AND SUBSIDIARIES Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations OVERVIEW The Company is an insurance holding company whose principal asset is the stock of Ohio Indemnity Company ("Subsidiary" or "Ohio Indemnity"). The Company's principal sources of revenue are premiums paid by insureds for insurance policies issued by Ohio Indemnity. The premiums written become premiums earned for financial statement purposes as the premium is earned incrementally over the term of each insurance policy and after deducting the amount of premium ceded to reinsurers pursuant to reinsurance treaties or agreements. Ohio Indemnity's principal costs are losses and loss adjustment expenses. The principal factor in determining the level of the Ohio Indemnity's profit is the difference between these premiums earned and losses and loss adjustment expenses incurred. Loss and loss adjustment expense reserves are estimates of what an insurer expects to pay on behalf of claimants. Ohio Indemnity is required to maintain reserves for payment of estimated losses and loss adjustment expenses for both reported claims ("case reserves") and for incurred but not reported ("IBNR") claims. The ultimate liability incurred by Ohio Indemnity may be different from current reserve estimates. Loss and loss adjustment expense reserves for IBNR claims are estimated based on many variables including historical and statistical information, inflation, legal developments, economic conditions, general trends in claim severity and frequency and other factors that could affect the adequacy of loss reserves. Ohio Indemnity reviews case and IBNR reserves monthly and makes appropriate adjustments. SUMMARY RESULTS The following table sets forth period to period changes in selected financial data:
Period to Period Increase (Decrease) ------------------------------------ Quarter Ended June 30, ---------------------- 1995-96 ------- Premiums written $(6,523,539) Net premiums earned (6,438,781) Net investment income (36,778) Loss and loss adjustment expense, net of reinsurance recoveries (4,782,895) Operating expense (2,206,657) Interest expense (15,973) Operating income 687,774 Net income $ 401,137
The combined ratio, which is the sum of the loss ratio and expense ratio, determined in accordance with statutory accounting practices, is the traditional measure of underwriting experience for insurance companies. The following table reflects the loss, expense and combined ratios of the Subsidiary on both a statutory and GAAP basis for each quarter ended June 30:
1996 1995 --------- --------- Statutory: Loss ratio 53.2% 64.6% Expense ratio 29.9% 41.2% --------- --------- Combined ratio 83.1% 105.8% ========= =========
9 10
1996 1995 --------- --------- GAAP: Loss ratio 53.2% 64.6% Expense ratio 25.6% 40.7% --------- --------- Combined ratio 78.8% 105.3% ========= =========
Investments of the Subsidiary's assets are restricted to certain investments permitted by Ohio insurance laws. The Company's overall investment policy is determined by the Company's Board of Directors and is reviewed periodically. The Company principally invests in investment-grade obligations of states, municipalities and political subdivisions because the majority of the interest income from such investments is tax-exempt and such investments have generally resulted in favorable net yields. The Company has the ability and intent to hold its fixed income securities to maturity or put date, and as a result carries its fixed income securities at amortized cost for GAAP purposes. As the Company's fixed income securities mature, there can be no assurance that the Company will be able to reinvest in securities with comparable yields. RESULTS OF OPERATIONS QUARTER ENDED JUNE 30, 1996 AS COMPARED TO QUARTER ENDED JUNE 30, 1995 Premiums Written; Net Premiums Earned. Premiums written for the six months decreased from $11,844,240 at June 30, 1995 to $5,320,701 at June 30, 1996, and net premiums earned decreased from $11,958,184 at June 30, 1995 to $5,519,403 at June 30, 1996. Premiums written decreased from $2,663,422 during the three months ended June 30, 1995 to $1,716,950 during the three months ended June 30, 1996, while net premiums earned decreased from $5,676,272 to $2,624,054 during the same period, respectively. Premiums written decreased primarily due to the initial restructuring of the California Automobile Physical Damage Program in May 1995 and the later discontinuance of sales and renewals on July 28, 1995. Net premiums were earned through June 1996 as the policies had expired. Management anticipates the discontinuance of the Automobile Physical Damage Program will result in a positive impact on underwriting results although there has been and will continue to be a material reduction in premiums associated with its discontinuance. Nonetheless, there can be no assurance that the discontinuance will not have a material adverse effect on the Company's operating results. Automobile Physical Damage Insurance accounted for $6,217,703 of premiums written and $6,521,528 of net premiums earned for the first six months in 1995 compared with $(73,423), due to cancellations, of premiums written and $585,842 of net premiums earned for the first six months of 1996, a decrease of 101.2% and 91.0% respectfully. Automobile Physical Damage accounted for $774,663 of premiums written and $2,895,015 of net premiums earned for the quarter ended June 30, 1995 compared with $(20,077) of premiums written and $83,499 of net premiums earned for the quarter ended June 30, 1996. 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. 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 premiums resulting from the run-off and reductions in premiums written. Premiums written for Ultimate Loss Insurance decreased from $2,997,041 in the first six months of 1995 to $2,748,587 in the first six months of 1996. Net premiums earned from Ultimate Loss Insurance decreased from $3,684,639 in the first six months of 1995 to $3,326,971 in the first six months of 1996. Premiums written for Ultimate Loss Insurance decreased from $1,586,150 in the second quarter of 1995 to $1,383,410 in the 10 11 second quarter of 1996. Net premiums earned for Ultimate Loss Insurance decreased from $1,927,698 in the second quarter of 1995 to $1,660,742 in the second quarter of 1996. Premiums written decreased primarily from the cancellation of a policy. Net premiums earned decreased as a result of reductions in unearned premiums associated with the elimination of continuation coverage on a second policy. Premiums written for the Bonded Service program increased from $2,638,899 in the first six months of 1995 to $2,640,707 in the first six months of 1996, while net premiums earned from the Bonded Service program decreased from $1,663,161 in the first six months of 1995 to $1,563,359 in the first six months of 1996. Premiums written for the Bonded Service program increased from $305,630 in the second quarter of 1995 to $350,128 in the second quarter of 1996, while net premiums earned increased from $822,520 in the second quarter of 1995 to $857,112 in the second quarter of 1996. Net Investment Income. Net investment income decreased 16.4% from $832,622 in the first six months of 1995 to $795,844 in the first six months of 1996 reflecting reduced cash flows due to the lower premium volume which caused a reduction in the invested asset base. Net investment income increased from $437,571 in the second quarter of 1995 to $453,228 in the second quarter of 1996 resulting from realized gains that were primarily market driven. Claims Administration. Claims administration income generated by BCIS Services, Inc. ("BCIS Services"), a wholly-owned subsidiary of the Company, accounted for $268,368 of the revenues for the first six months of 1995 and $265,454 in the first six months of 1996 and marginally decreased from $132,914 in the second quarter of 1995 to $132,571 in the second quarter of 1996. BCIS Services commenced business operations in California during 1993. Other Income. Other income increased from $54,539 in the first six months of 1995 to $215,261 in the first six months of 1996 and increased from $26,522 to $98,282 in the second quarters, respectively. This increase was attributed to the release of redundant reserves from the aggregate loss fund established for reserve years 1992, 1993 and partial year 1994 in connection with the Bonded Service program. Losses and Loss Adjustment Expenses, Net of Reinsurance Recoveries. Losses and loss adjustment expenses totaled $2,938,786, or 53.2% of net premiums earned during the first six months of 1996 versus $7,721,681, or 64.6% of net premiums earned during the first six months of 1995. Losses and loss adjustment expenses totaled $1,381,915 or 52.7% of net premiums earned during the second quarter of 1996 versus $3,526,654, or 62.1% of net premiums earned during the second quarter of 1995. Losses and loss adjustment expenses, as a percentage of net 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 losses and loss adjustment expense experience and a decline in overall premium volume. The absolute decrease in losses and loss adjustment expenses was primarily attributable to initial claims from the Automobile Physical Damage Insurance business written in the first six months of 1995 which totalled $5,571,336 compared with $511,794 during the first six months of 1996 and totaled $120,478 for the second quarter of 1996 compared with $2,254,430 during the second quarter of 1995. This decrease of 90.8% was due to the discontinuance of the Automobile Physical Damage Program. The losses and loss adjustment expenses for Ultimate Loss Insurance increased 8.9% to $2,036,284 in the first six months of 1996 from $1,870,326 in the first six months of 1995 and totaled $1,093,857 for the second quarter of 1996 compared with $992,683 during the second quarter of 1995, due to increases in losses and loss adjustment expense experience. Losses and loss adjustment expenses for the Bonded Service program increased from $22,298 in 1995 to $207,774 in 1996 and increased from $90,003 for the second quarter of 1995 compared with $104,319 during the second quarter of 1996 primarily due to an increase in IBNR. 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 53.2% from $4,148,537 for the first six months of 1995 to $1,941,880 in the first six months of 1996 and decreased from $2,094,317 for the second quarter of 1995 compared with $832,909 during 11 12 the second quarter of 1996. The decrease in operating expense was primarily attributable to a 45.2% decrease in non-deferred commission expense and a decrease of $801,190 in policy fees paid to the general agent in connection with administration of Automobile Physical Damage Insurance. Legal expenses decreased from $358,085 during the first six months of 1995 to $44,559 during the first six months of 1996 and decreased from $295,898 during the second quarter of 1995 to $17,176 during the second quarter of 1996, primarily resulting from settlement of a contract dispute. Amortization of deferred policy acquisition costs decreased $349,170 due to discontinuance of the Automobile Physical Damage Program. Operating expense also decreased as a result of reductions in licenses/fees and consulting expenses. Additionally, BCIS Services incurred operating expenses of $284,218 in the first six months of 1995 compared with $282,438 of operating expenses during the first six months of 1996 and decreased from $136,743 during the second quarter of 1995 to $134,596 during the second quarter of 1996. Interest Expense. Interest expense decreased 6.9% from $230,628 in the first six months of 1995 to $214,655 in the first six months of 1996. The decrease was due to lower borrowing levels on the Company's revolving credit line and decreases in the prime rate. Federal Income Taxes. Federal income taxes increased from $155,179 in the first six months of 1995 to $441,816 in the first six months of 1996 and increased from $106,930 to $269,890 in the second quarter, respectively, primarily due to a significant increase in pre-tax income due to lower unearned premium deduction and the recognition of lower losses and loss adjustment expenses in 1996. Statutory Combined Ratios. The change in the statutory combined ratio from 105.8% at June 30, 1995 to 83.1% at June 30, 1996 was attributable to decreases of general and administrative expenses and lower loss and loss adjustment expense experience, primarily associated with the discontinuance of the Automobile Physical Damage program. Losses and loss adjustment expenses decreased at a higher percentage rate than the percentage decline in premium volume. LIQUIDITY AND CAPITAL RESOURCES The Company is an insurance holding company whose principal asset is the stock of Ohio Indemnity. The Company is, and will continue to be, dependent on dividends from the Subsidiary to meet its liquidity requirements, including debt service obligations. The Company has a $10 million credit facility to fund working capital requirements. Based on statutory limitations, the maximum amount of dividends that the Company would be able to receive in 1996 from the Subsidiary, absent regulatory consent, is $2,660,432. The Subsidiary 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 $508,784, and ($2,085,683) for the six months ended June 30, 1996 and 1995, respectively. Net cash provided by financing activities was $282,057 for the six months ended June 30, 1996 and $147,813 for the six months ended June 30, 1995. Net cash provided by (used in) investing activities of the Company was $(277,063) and $3,306,317 for the six months ended June 30, 1996 and 1995, respectively. BCIS Services derives its funds principally from claims administration fees which are sufficient to meet its operating obligations. The Company maintains a level of cash and liquid short-term investments which it believes will be adequate to meet its anticipated payment obligations through June 30, 1997 without being required to liquidate intermediate-term and long-term investments. 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. 12 13 The Company's investments at June 30, 1996 consisted primarily of investment-grade fixed income securities. Cash and short-term investments at June 30, 1996 amounted to $7,470,832, or 30.5% 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 these securities to their 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 $832,622 and $795,844 for the six months ended June 30, 1995 and 1996, respectively. As of June 30, 1996, 99.5% of the Company's total assets consisted of investment-grade fixed income securities, equity securities, short-term investments, other corporate securities, and cash. The Company's total shareholders' equity increased from $11,342,276 at June 30, 1994 to $13,115,024 at June 30, 1995, to $14,760,681 at June 30, 1996, representing a 30.1% increase over the three-year period. The increase in total shareholders' equity has strengthened the Company's capital position. As of June 30, 1996, the Company had a $10.0 million revolving line of credit with an outstanding balance of $6,000,000. The credit facility has a maturity date of May 1, 2000 and bears interest at the bank's prime rate (8.25% per annum at June 30, 1996). 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. Under applicable insurance statutes and regulations, the Subsidiary is required to maintain prescribed amounts of capital and surplus as well as statutory deposits with the appropriate insurance authorities. The Subsidiary is in compliance with all applicable statutory capital and surplus requirements. The Subsidiary's investments consist only of permitted investments under Ohio insurance laws. INFLATION Although the cumulative effects of inflation on premium growth cannot be fully determined, increases in the retail price of automobiles have generally resulted in increased amounts being financed which constitutes one of the bases for determining premiums on Ultimate Loss Insurance. Despite relatively low inflation during the first six months of 1996, the Company has experienced no material adverse consequences with respect to its growth in premiums. SAFEHARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 Except for the historical information contained herein, the matters discussed in this Form 10-Q includes forward-looking statements that involve risks and uncertainties, including, but not limited to, quarterly fluctuations in results, the management of growth, and other risks detailed from time to time in the Company's Securities and Exchange Commission filings. Actual results may differ materially from management expectations. TRENDS Management does not know of any trends, events or uncertainties that will have, or that are reasonably likely to have, a material effect on the Company's liquidity, capital resources or results of operations. The Company's results of operations have varied from quarter to quarter principally because of fluctuations in underwriting results. The Company's experience indicates that more loans for automobile purchases are financed during summer months due to seasonal consumer buying habits. The Company expects that such quarterly fluctuations may lessen as a result of the discontinuance of the California Automobile Physical Damage Program, although there can be no assurance that this will occur. 13 14 INSURANCE REGULATORY MATTERS The NAIC has developed a risk-based capital measurement formula to be applied to all property/casualty insurance companies. This formula calculates a minimum required statutory net worth, based on the underwriting, investment, credit, loss reserve and other business risks inherent in an individual company's operations. Under the current formula, any insurance company which does not meet threshold risk-based capital measurement standards could be forced to reduce the scope of its operations and ultimately could become subject to statutory receivership proceedings. Based on the Company's analysis, it appears that the Company's total adjusted capital is in excess of all required action levels and that no corrective action will be necessary. The Risk Based Capital provisions have been enacted into the Ohio Revised Code. RESERVES The amount of incurred losses and loss adjustment expenses is dependent upon a number of factors, including claims frequency, severity, the nature and types of losses incurred, and the number of policies written. These factors may fluctuate from year to year and do not necessarily bear any relationship to the amount of premiums written or earned. As claims are incurred, provisions are made for unpaid losses and loss adjustment expenses by accumulating case reserve estimates for claims reported prior to the close of the accounting period and by estimating IBNR claims based upon past experience modified for current trends. Notwithstanding the variability inherent in such estimates, management believes that the provisions made for unpaid losses and loss adjustment expenses are adequate to meet claims obligations of the Company. Such estimates are reviewed monthly by management and annually by an independent consulting actuary and, as adjustments thereto become necessary, such adjustments are reflected in the Company's results of operations. The Company's independent consulting actuary has opined that loss and loss adjustment expense reserve levels, as of December 31, 1995, were reasonable. RECENT ACCOUNTING AND LEGISLATIVE CHANGES In October 1995, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation," which defines a fair value based method of accounting for employee stock options and similar equity instruments. However, SFAS No. 123 also allows an entity to continue to account for these plans according to Accounting Principals Board Opinion No. 25 (APB 25), provided pro forma disclosures of net income and earnings per share are made as if the fair value based method of accounting defined by SFAS No. 123 had been applied. The Company expects to continue to measure compensation cost related to employee stock purchase options using APB 25 and will provide pro forma disclosures as required. This statement is effective for the year ended December 31, 1996. 14 15 BANCINSURANCE CORPORATION AND SUBSIDIARIES PART II - OTHER INFORMATION Item 1. Legal Proceedings On November 2, 1994, the James L Miniter Agency, Inc. (the "Agent") filed a lawsuit against Ohio Indemnity in the Suffolk County Superior Court, Massachusetts, alleging essentially that Ohio Indemnity had breached its contractual obligations to the Agent policyholder. On December 2, 1994, Ohio Indemnity removed the case to the United States District Court for the District of Massachusetts. On June 7, 1996, a summary judgement was granted in favor of Ohio Indemnity, however, an appeal of the judgement has been filed by the Agent. Item 4. Submission of Matters to a Vote of Security Holders The Company held its Annual Meeting of Shareholders on June 4, 1996 for the purpose of electing six directors to serve one year terms expiring in 1997. The number of votes cast for or against each candidate is as follows:
VOTES FOR VOTES WITHHELD --------- -------------- Si Sokol 4,519,933 24,378 James R. Davis 4,519,733 24,578 Daniel D. Harkins 4,521,733 22,578 Milton O. Lustnauer 4,519,733 24,578 John S. Sokol 4,521,933 22,378 Saul Sokol 4,519,733 24,578
Item 6. Exhibits and Reports on Form 8-K (a) Exhibits Item 27 Financial Data Schedule (b) Reports on Form 8-K No reports on Form 8-K were filed by the Company during the quarter ended June 30, 1996. 15 16 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. BANCINSURANCE CORPORATION (Company) Date: August 2, 1996 By: Si Sokol ------------------------------- Si Sokol President and Chairman of Board of Directors (Principal Executive Officer) Date: August 2, 1996 By: Sally Cress ------------------------------- Sally Cress Treasurer, Secretary (Principal Financial and Accounting Officer) 16 EX-27 2 EXHIBIT 27
7 6-MOS DEC-31-1996 JAN-01-1996 JUN-30-1996 9,890,304 3,590,424 3,684,866 3,531,654 0 0 23,487,031 996,183 265,896 235,150 27,444,538 1,376,519 2,309,927 0 0 6,000,000 0 0 315,567 14,445,114 27,444,538 5,519,403 667,269 128,575 408,715 2,938,786 1,941,880 214,655 1,700,641 441,816 1,258,825 0 0 0 1,258,825 .22 0 1,713,155 2,198,000 740,786 1,958,000 1,422,863 1,271,078 0
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