-----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, LevYM4LjLHIuXfzqMgNKp9oa9o9YAhO7YujuSi1GWWFOP8yENIitM2bRdKokPY5I cWrJ/ohSEagzD8XUpmURTg== 0000950152-97-005656.txt : 19970808 0000950152-97-005656.hdr.sgml : 19970808 ACCESSION NUMBER: 0000950152-97-005656 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970630 FILED AS OF DATE: 19970807 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: 97652955 BUSINESS ADDRESS: STREET 1: 20 E BROAD ST STREET 2: 4TH FLOOR CITY: COLUMBUS STATE: OH ZIP: 43215 BUSINESS PHONE: 6142282800 MAIL ADDRESS: STREET 1: 20 E. BROAD STREET STREET 2: 4TH FLOOR CITY: COLUMBUS STATE: OH ZIP: 43215 10-Q 1 BANCINSURANCE CORPORATION/QUARTERLY RPT./FORM 10-Q 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 FORM 10-Q QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For Quarter Ended June 30, 1997 Commission File Number 0-8738 ----------------- ------------------------------- BANCINSURANCE CORPORATION - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Ohio 31-0790882 - ------------------------------- ------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 20 East Broad Street, Columbus, Ohio 43215 - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number including area code (614) 228-2800 ---------------- None - -------------------------------------------------------------------------------- Former name, former address and former fiscal year, if changed since last report. Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. YES __X__ NO _____ Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the last practicable date. Class Outstanding at June 30, 1997 - ------------------------------- ---------------------------- Common stock, without par value 5,838,115 2 BANCINSURANCE CORPORATION AND SUBSIDIARIES INDEX
Page No. PART I - FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Balance Sheets as of June 30, 1997 (unaudited) and December 31, 1996 3 Consolidated Statements of Income for the three months and six months ended June 30, 1997 and 1996 (unaudited) 5 Consolidated Statements of Cash Flows for the six months ended June 30, 1997 and 1996 (unaudited) 6 Notes to Consolidated Financial Statements (unaudited) 8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9 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 1997 1996 - ------ ----------- ------------ (Unaudited) Investments: Held to maturity: Fixed maturities, at amortized cost (fair value $4,309,796 in 1997 and $4,086,856 in 1996) $ 4,237,913 $ 4,004,550 Available for sale: Fixed maturities, at fair value (amortized cost $12,778,595 in 1997 and $11,271,525 in 1996) 12,984,341 11,502,186 Equity securities, at fair value (cost $2,395,206 in 1997 and $2,602,891 in 1996) 2,948,451 3,031,014 Short-term investments, at cost which approximates fair value 5,155,028 5,730,923 Securities purchased under agreements to resell 1,580,804 1,091,630 ----------- ----------- Total investments 26,906,537 25,360,303 ----------- ----------- Cash 820,222 681,286 Premiums receivable 758,460 494,322 Accounts receivable, net of allowance for uncollectible amounts 293,115 - Reinsurance receivable 5,613 15,150 Reinsurance recoverable on paid losses 4,517 25,143 Premium taxes receivable 29,993 - Prepaid commissions 215,849 - Loans to affiliates 556,182 434,463 Note receivable 75,000 - Furniture, fixtures and leasehold improvements, net 81,417 86,435 Excess of investment over net assets of subsidiaries 938,499 753,738 Prepaid federal income taxes - 29,633 Accrued investment income 313,096 308,646 Other assets 106,611 85,833 ----------- ----------- Total assets $31,105,111 $28,274,952 =========== ===========
(Continued) 3 4 BANCINSURANCE CORPORATION AND SUBSIDIARIES Consolidated Balance Sheets, Continued
June 30, December 31, Liabilities and shareholders' Equity 1997 1996 - ------------------------------------ ----------- ------------ (Unaudited) Reserve for unpaid losses and loss adjustment expenses $ 1,458,016 $ 1,359,775 Unearned premiums 1,605,878 745,787 Contract funds on deposit 2,653,056 2,950,108 Reinsurance premiums payable 503,806 503,806 Note payable to bank 6,135,000 5,600,000 Note payable 43,573 - Federal income taxes payable 40,190 - Deferred federal income taxes 246,733 194,755 Taxes, licenses, and fees payable 117,048 93,566 Commissions payable 315,909 342,258 Other 399,032 578,080 ----------- ----------- Total liabilities 13,518,241 12,368,135 ----------- ----------- Commitments and contingent liabilities Shareholders' equity: Non-voting preferred stock: Class A Serial Preference shares without par value; authorized 100,000 shares; no shares issued or outstanding - - Class B Serial Preference shares without par value; authorized 98,646 shares; no shares issued or outstanding - - Common stock without par value; authorized 20,000,000 shares; 5,878,277 shares issued 315,567 315,567 Additional paid-in capital 1,506,555 1,433,329 Net unrealized gain on investments 500,933 434,797 Retained earnings 15,378,622 14,040,484 ----------- ----------- 17,701,677 16,224,177 Less: Treasury stock, at cost (40,162 common shares at June 30, 1997 and 111,020 at December 31, 1996) (114,807) (317,360) ----------- ----------- Total shareholders' equity 17,586,870 15,906,817 ----------- ----------- Total liabilities and shareholders' equity $31,105,111 $28,274,952 =========== ===========
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, 1997 1996 1997 1996 ---------- ----------- ----------- ----------- Income: Premiums written $ 1,634,550 $ 1,716,950 $ 5,360,174 $ 5,320,701 (Increase) decrease in unearned premiums 748,461 944,838 (860,091) 687,406 ---------- ----------- ----------- ----------- Premiums earned 2,383,011 2,661,788 4,500,083 6,008,107 Premiums ceded - (37,734) - (488,704) ---------- ----------- ---------- ----------- Net premiums earned 2,383,011 2,624,054 4,500,083 5,519,403 Investment income (net of expenses of $53,923 and $31,084, respectively) 358,140 327,842 665,547 667,269 Net realized gain on investments 52,179 125,386 82,872 128,575 Claims administration fees 169,251 132,571 348,982 265,454 Title and appraisal fees 496,482 - 496,482 - Other income 294,740 98,282 303,033 215,261 ---------- ----------- ---------- ----------- Total revenue 3,753,803 3,308,135 6,396,999 6,795,962 ---------- ----------- ---------- ----------- Losses and operating expenses: Losses and loss adjustment expenses 975,001 1,469,671 2,113,944 3,446,560 Reinsurance recoveries - (87,756) - (507,774) Commission expense 303,575 306,691 604,112 825,361 Other insurance operating expenses 411,804 349,597 680,298 751,938 General and administrative expenses 783,035 176,621 1,039,895 364,581 Interest expense 125,483 106,018 147,881 214,655 ---------- ----------- ---------- ----------- Total expenses 2,598,898 2,320,842 4,586,130 5,095,321 ---------- ----------- ---------- ----------- Income before federal income taxes 1,154,905 987,293 1,810,869 1,700,641 ---------- ----------- ---------- ----------- Federal income tax expense 311,319 269,890 472,731 441,816 ---------- ----------- ---------- ----------- Net income $ 843,586 $ 717,403 $1,338,138 $ 1,258,825 ========== =========== ========== =========== Net income per common share: $ .14 $ .13 $ .23 $ .22 ========== =========== ========== =========== Weighted average number of common shares and equivalents outstanding 5,895,622 5,842,363 5,860,665 5,852,354 ========== =========== ========== ===========
See accompanying notes to consolidated financial statements. 5 6 BANCINSURANCE CORPORATION AND SUBSIDIARIES Consolidated Statements of Cash Flows (Unaudited)
Six Months Ended June 30, 1997 1996 ---------- ---------- Cash flows from operating activities: Net income $1,338,138 $1,258,825 Adjustments to reconcile net income to net cash provided by operating activities: Net realized gain on investments (82,872) (128,575) Net realized loss on disposal of equipment - 601 Depreciation and amortization 36,811 30,510 Amortization of bond premium (discount) 24,349 (2,227) Deferred federal income tax expense 17,908 105,677 Increase in premiums receivable (264,138) (375,284) Increase in accounts receivable (78,109) - Decrease in reinsurance receivable 9,537 423,285 Decrease in reinsurance recoverable on paid losses 20,626 259,206 Decrease in prepaid reinsurance premiums - 514,662 (Increase) decrease in premium taxes receivable (29,993) 135,701 Increase in prepaid commissions (215,849) (235,150) Increase in loans to affiliates (121,719) (71,719) Increase in note receivable (75,000) - Decrease in prepaid federal income taxes 29,633 161,139 Increase in accrued investment income (4,450) (16,336) (Increase) decrease in other assets (20,778) 45,266 Increase (decrease) in reserve for unpaid losses and loss adjustment expenses 98,241 (865,362) Increase (decrease) in unearned premiums 860,091 (687,407) Increase (decrease) in contract funds on deposit (297,052) 111,304 Decrease in return premiums payable - (6,929) Increase in reinsurance premiums payable - 108,044 Decrease in note payable (3,250) - Increase in federal income taxes payable 40,190 - Increase (decrease) in taxes, licenses and fees payable 23,482 (21,509) Decrease in commissions payable (26,349) (147,965) Decrease in other liabilities (308,680) (86,973) ---------- ---------- Net cash provided by operating activities 970,767 508,784 ---------- ---------- Cash flows from investing activities: Proceeds from held to maturity: fixed maturities due to redemption or maturity 806,000 408,779 Proceeds from available for sale: fixed maturities sold, redeemed and matured 618,870 1,553,402 Proceeds from available for sale: equity securities sold 1,288,799 1,072,900 Cost of investments purchased: Held to maturity: fixed maturities (1,344,403) (241,682) Available for sale: fixed maturities (2,141,113) (1,898,816) Equity securities (702,379) (651,245) Decrease in amount due to stock brokers - (143,038) Net (increase) decrease in short-term investments 575,895 (372,166) Net increase in securities purchased under agreements to resell (489,174) (988) Purchase of furniture, fixtures and leasehold improvements (7,244) (4,209) Cash acquired in purchase of subsidiary 27,918 - ---------- ---------- Net cash used in investing activities (1,366,831) (277,063) ---------- ----------
(Continued) 6 7 BANCINSURANCE CORPORATION AND SUBSIDIARIES Consolidated Statements of Cash Flows, Continued (Unaudited)
Six Months Ended June 30, 1997 1996 ---------- ---------- Cash flows from financing activities: Proceeds from note payable to bank 5,935,000 1,700,000 Repayments of note payable to bank (5,400,000) (1,316,132) Acquisition of treasury stock - (101,811) ---------- ---------- Net cash provided by financing activities 535,000 282,057 ---------- ---------- Net increase in cash 138,936 513,778 ---------- ---------- Cash at December 31 681,286 482,405 ---------- ---------- Cash at June 30, $ 820,222 $ 996,183 ========== ========== Spplemental disclosures of cash flow information: Cash paid during the year for: Interest $ 147,881 $ 214,556 ========== ========== Income taxes 385,000 175,000 ========== ========== Supplemental schedule of noncash investing activities: Common stock issued in purchase acquisition $ 275,781 $ - ========== ==========
See accompanying notes to consolidated financial statements. 7 8 BANCINSURANCE CORPORATION AND SUBSIDIARIES Notes To Consolidated Financial Statements (Unaudited) 1. The Consolidated Balance Sheet as of June 30, 1997, the Consolidated Statements of Income for the three and six months ended June 30, 1997 and 1996, 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 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, 1997 and for all periods presented have been made. 2. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been omitted. It is suggested that these unaudited Consolidated Financial Statements be read in conjunction with the financial statements and notes thereto included in the Company's Form 10-K for the year ended December 31, 1996. The results of operations for the period ended June 30, 1997 are not necessarily indicative of the results of operations for the full year. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 3. On April 2, 1997, Title Research Corporation, ("Title Research"), a newly formed, wholly-owned subsidiary of Bancinsurance Corporation, purchased substantially all of the net assets of Title Research Agency, an Ohio corporation, for 62,500 shares of Bancinsurance Corporation common stock, with a value of $275,781. Title Research is engaged in title, appraisal and related services which support documentation needs for first and second mortgage lending requirements. The acquisition has been accounted for as a purchase and resulted in $187,741 of goodwill. The consolidated statements of income for the six months ended June 30, 1997, included the operating results of the acquired business from April 2, 1997. 8 9 BANCINSURANCE CORPORATION AND SUBSIDIARIES Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OVERVIEW The Company is an insurance holding company whose principal asset is the stock of Ohio Indemnity Company ("Ohio Indemnity"). The Company's principal sources of revenue are premiums paid by insureds for insurance policies issued by Ohio Indemnity. The premiums written become premiums earned for financial statement purposes as the premium is earned incrementally over the term of each insurance policy and after deducting the amount of premium ceded to reinsurers pursuant to reinsurance treaties or agreements. Ohio Indemnity's principal costs are losses and loss adjustment expenses. The principal factor in determining the level of the Ohio Indemnity's profit is the difference between these premiums earned and losses and loss adjustment expenses incurred. Loss and loss adjustment expense reserves are estimates of what an insurer expects to pay on behalf of claimants. Ohio Indemnity is required to maintain reserves for payment of estimated losses and loss adjustment expenses for both reported claims ("case reserves") and for incurred but not reported ("IBNR") claims. The ultimate liability incurred by Ohio Indemnity may be different from current reserve estimates. Loss and loss adjustment expense reserves for IBNR claims are estimated based on many variables including historical and statistical information, inflation, legal developments, economic conditions, general trends in claim severity and frequency and other factors that could affect the adequacy of loss reserves. Ohio Indemnity reviews case and IBNR reserves monthly and makes appropriate adjustments. Claims administration fees generated by BCIS Services, Inc. ("BCIS Services"), a wholly owned subsidiary of the Company, and title and appraisal fees generated by Title Research are recorded and earned as services are billed. SUMMARY RESULTS The following table sets forth period to period changes in selected financial data:
Period to Period Increase (Decrease) Six Months Ended June 30, 1997-96 ------- Premiums written $ 39,473 Net premiums earned (1,019,320) Net investment income (47,425) Claims administration fees 83,528 Title and appraisal fees 496,482 Loss and loss adjustment expense, net of reinsurance recoveries (824,842) Operating expense 382,425 Interest expense (66,774) Operating income 110,228 Net income $ 79,313
The combined ratio, which is the sum of the loss ratio and expense ratio, is the traditional measure of underwriting experience for insurance companies. The following table reflects the loss, expense and combined ratios of Ohio Indemnity on both a statutory and GAAP basis for the six months ended June 30:
1997 1996 ---- ---- Statutory: Loss ratio 47.0% 53.2% Expense ratio 25.3% 29.9% ---- ---- Combined ratio 72.3% 83.1% ==== ====
9 10
1997 1996 ---- ---- GAAP: Loss ratio 47.0% 53.2% Expense ratio 19.7% 25.6% ---- ---- Combined ratio 66.7% 78.8% ==== ====
Investments of Ohio Indemnity's assets are restricted to certain investments permitted by Ohio insurance laws. The Company's overall investment policy is determined by the Company's Board of Directors and is reviewed periodically. The Company principally invests in investment-grade obligations of states, municipalities and political subdivisions because the majority of the interest income from such investments is tax-exempt and such investments have generally resulted in favorable net yields. The Company has the ability and intent to hold its held to maturity fixed income securities to maturity or put date, and as a result carries its held to maturity fixed income securities at amortized cost for GAAP purposes. As the Company's fixed income securities mature, there can be no assurance that the Company will be able to reinvest in securities with comparable yields. Results of Operations June 30, 1997 as Compared to June 30, 1996 Premiums Written; Net Premiums Earned. Premiums written for the six months increased from $5,320,701 at June 30, 1996 to $5,360,174 at June 30, 1997, and net premiums earned decreased from $5,519,403 at June 30, 1996 to $4,500,083 at June 30, 1997. Premiums written decreased from $1,716,950 during the three months ended June 30, 1996 to $1,634,550 during the three months ended June 30, 1997, while net premiums earned decreased from $2,624,054 to $2,383,011 during the same period, respectively. Increases in premiums written for the six months ended June 30, 1997 compared to June 30, 1996 were primarily associated with the Bonded Service program along with reductions in return premiums associated with the discontinuance of the Automobile Physical Damage Insurance program. Premiums earned decreased due to the change in unearned premiums associated with the run-off of the Automobile Physical Damage Insurance program in addition to reductions in unearned premium associated with an Ultimate Loss Insurance canceled policy. Premiums written for Ultimate Loss Insurance decreased from $2,748,587 in the first six months of 1996 to $2,462,306 in the first six months of 1997. Net premiums earned from Ultimate Loss Insurance decreased from $3,326,971 in the first six months of 1996 to $2,764,092 in the first six months of 1997. Premiums written for Ultimate Loss Insurance decreased from $1,383,410 in the second quarter of 1996 to $1,352,501 in the second quarter of 1997. Net premiums earned for Ultimate Loss Insurance decreased from $1,660,742 in the second quarter of 1996 to $1,490,496 in the second quarter of 1997. Premiums written and net premiums earned decreased as a result of reductions in the number of loans made by existing policy holders. Additionally, net premiums earned decreased as a result of reductions in unearned premium associated with a canceled policy. Premiums written for the Bonded Service program increased from $2,640,707 in the first six months of 1996 to $2,855,517 in the first six months of 1997, while net premiums earned from the Bonded Service program increased from $1,563,359 in the first six months of 1996 to $1,670,525 in the first six months of 1997 due to increases in premium rates. Premiums written for the Bonded Service program decreased from $350,128 in the second quarter of 1996 to $266,272 in the second quarter of 1997 due to the timing of billing issuance, while net premiums earned marginally increased from $857,112 in the second quarter of 1996 to $864,049 in the second quarter of 1997. Automobile Physical Damage Insurance accounted for $73,423 of premium cancellations and $585,842 of net premiums earned for the first six months in 1996 and $20,077 of premium cancellations and $83,499 of net premiums earned for the quarter ended June 30, 1996. There were no premiums written or net premiums earned during the six months ended June 30, 1997. On July 28, 1995, Ohio Indemnity entered into an agreement with the California Department of Insurance to discontinue sales and renewals of primate passenger personal lines in automobile physical damage insurance in California. 10 11 Net Investment Income. Net investment income decreased from $795,844 in the first six months of 1996 to $748,419 in the first six months of 1997 and net investment income decreased from $453,228 in the second quarter of 1996 to $410,319 in the second quarter of 1997 as a result of allocating bond premium amortization. Claims Administration. Claims administration income generated by BCIS Services, a wholly-owned subsidiary of the Company, accounted for $265,454 of the revenues for the first six months of 1996 and $348,982 in the first six months of 1997 and increased from $132,571 in the second quarter of 1996 to $169,251 in the second quarter of 1997, an increase of 31.5% and 27.7%, respectively, attributable to an increase in claims processing and servicing responsibilities. Title and Appraisal. Title and appraisal income accounted for $496,482 of the revenues for the three and six months ended June 30, 1997 for the acquired Title Research business from April 2, 1997. Other Income. Other income increased from $215,261 in the first six months of 1996 to $303,033 in the first six months of 1997 and increased from $98,282 to $294,740 in the second quarters, respectively. The increase in other income was primarily due to earnings in the second quarter of 1997 of $221,985 attributed to recognition of favorable results from a closed year of operations of the Bonded Service program. During the second quarter of 1996, $98,000 of redundant reserves were earned. Additionally, the Company recorded $63,657 as a reimbursement for expenses previously incurred from a line of business sold. These expenses, totalling $72,980, are included in general and administrative expenses for the six months ended June 30, 1997. 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 $2,113,944, or 47.0% of net premiums earned during the first six months of 1997. Losses and loss adjustment expenses totaled $975,001 or 40.9% of net premiums earned during the second quarter of 1997 versus $1,381,915, or 52.7% of net premiums earned during the second quarter of 1996. 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 higher than anticipated salvage and subrogation received from the discontinued Automobile Physical Damage Insurance program. 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 1996 which totalled $511,794 compared with $35,838 of net recoveries during the first six months of 1997 and totaled $21,489 of net recoveries during the second quarter of 1997 compared with $120,478 during the second quarter of 1996. These decreases were due to the discontinuance of the Automobile Physical Damage Insurance Program. The losses and loss adjustment expenses for Ultimate Loss Insurance decreased 21.0% to $1,609,262 in the first six months of 1997 from $2,036,284 in the first six months of 1996 and totaled $694,690 for the second quarter of 1997 compared with $1,093,857 during the second quarter of 1996, due to decreases in losses and loss adjustment expense payments. Losses and loss adjustment expenses for the Bonded Service program increased from $207,774 in 1996 to $300,776 in 1997 and increased from $104,319 for the second quarter of 1996 compared with $165,513 during the second quarter of 1997 primarily due to deficiency development on prior year reserves. Operating Expense. Operating expense consists of commission expense, other insurance operating expense, and general and administrative expenses. Operating expense increased 19.7% from $1,941,880 for the first six months of 1996 to $2,324,305 in the first six months of 1997 and increased from $832,909 for the second quarter of 1996 compared with $1,498,414 during the second quarter of 1997. The increase in operating expense was primarily due to operating and administrative expenses incurred by the newly formed Title Research Corporation. Commission expense decreased 26.8% from $825,361 in the first six months of 1996 to $604,112 in the first six months of 1997 and marginally decreased from $306,691 to $303,575 in the second quarter. Other insurance operating expenses decreased 9.5% from $751,938 in the first six months of 1996 to $680,298 in the first six months of 1997 primarily due to decreases in legal 11 12 expense. General and administrative expenses increased 185.2% from $364,581 in the first six months of 1996 to $1,039,895 in the first six months of 1997 and increased 343.3% from $176,621 to $783,035 in the second quarter respectively, primarily due to operating and administrative expenses of $531,308 incurred by the Title Research during the second quarter of 1997. Additionally, BCIS Services incurred operating expenses of $282,438 in the first six months of 1996 compared with $331,911 during the first six months of 1997 and increased from $134,596 during the second quarter of 1996 to $163,610 during the second quarter of 1997. Interest Expense. Interest expense decreased 31.1% from $214,655 in the first six months of 1996 to $147,891 in the first six months of 1997. 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 $441,816 in the first six months of 1996 to $472,731 in the first six months of 1997 and increased from $269,890 to $311,319 in the second quarter, respectively, due to increases in taxable income primarily resulting from higher nondeductible unearned premiums. Statutory Combined Ratios. The statutory combined ratio decreased from 83.1% at June 30, 1996 to 72.3% at June 30, 1997. This decline is reflective of favorable underwriting experience in the company's core lines of business; Ultimate Loss Insurance and Bonded Service. In the first six months ended June 30, 1997, underwriting results improved due to the reduction in run-off of the discontinued automobile program compared with the six months ended June 30, 1996. In addition, higher than anticipated salvage and subrogation, related to the Automobile Physical Damage Insurance business, was recognized during the six months ended June 30, 1997. LIQUIDITY AND CAPITAL RESOURCES The Company is an insurance holding company whose principal asset is the stock of Ohio Indemnity. The Company is, and will continue to be, dependent on dividends from the Ohio Indemnity to meet its liquidity requirements, including debt service obligations. The Company has a $10 million credit facility to fund working capital requirements. Based on statutory limitations, the maximum amount of dividends that the Company would be able to receive in 1997 from Ohio Indemnity, absent regulatory consent, is $2,890,887. Ohio Indemnity derives its funds principally from net premiums written, reinsurance recoveries, investment income and contributions of capital from the Company. The principal use of these funds is for payment of losses and loss adjustment expenses, commissions, operating expenses and income taxes. Net cash provided by operating activities equalled $970,767 and $508,784 for the six months ended June 30, 1997 and 1996, respectively. Net cash provided by financing activities was $535,000 for the six months ended June 30, 1997 and $282,057 for the six months ended June 30, 1996. Net cash used in investing activities of the Company was $1,366,831 and $277,063 for the six months ended June 30, 1997 and 1996, respectively. BCIS Services derives its funds principally from claims administration fees which are sufficient to meet its operating obligations. Although it is impossible to estimate accurately the future cash flow from the operations of the newly acquired title business, management believes its effective capital costs may increase. Management is actively exploring further avenues for improving liquidity. The Company maintains a level of cash and liquid short-term investments which it believes will be adequate to meet anticipated payment obligations without being required to liquidate intermediate-term and long-term investments through the next twelve months. Due to the nature of the risks the Company insures, losses and loss adjustment expenses emanating from its policies are characterized by relatively short settlement periods and quick development of ultimate losses compared to claims emanating from other types of insurance products. Therefore, the Company believes that it can estimate its cash needs to meet its loss and expense payment obligations through the next twelve months. 12 13 The Company's investments at June 30, 1997 consisted primarily of investment-grade fixed income securities. Cash and short-term investments at June 30, 1997 amounted to $7,556,054, or 27.3% 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 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 $795,844 and $748,419 for the six months ended June 30, 1996 and 1997, respectively. The Company's total shareholders' equity increased from $13,115,024 at June 30, 1995 to $14,760,681 at June 30, 1996, to $17,586 870 at June 30, 1997, representing a 34.1% increase over the three-year period. The increase in total shareholders' equity is driven by profitable operating earnings and strengthens the Company's capital position. All material capital commitments and financial obligations of the Company are reflected in the Company's financial statements, except the Company's risk on surety bonds and state mandated performance bonds, written in connection with the Bonded Service program. The financial statements include reserves for losses on such programs for any claims filed and for an estimate of incurred but not reported losses. Such loses were 488,000 and $458,436 at June 30, 1997 and December 31, 1996, respectively. Under applicable insurance statutes and regulations, Ohio Indemnity is required to maintain prescribed amounts of capital and surplus as well as statutory deposits with the appropriate insurance authorities. Ohio Indemnity is in compliance with all applicable statutory capital and surplus requirements. Ohio Indemnity's investments consist only of permitted investments under Ohio insurance laws. FACTORS TO CONSIDER FORWARD LOOKING The Company expects to continue expanding its direct sale force, which should allow the Company to increase its market penetration. These activities will be directed toward selected market niches where management believes the Company will be able to provide customers with additional services. TRENDS Management does not know of any trends, events or uncertainties that will have, or that are reasonably likely to have, a material effect on the Company's liquidity, capital resources or results of operations. The Company's results of operations have varied from quarter to quarter principally because of fluctuations in underwriting results. The Company's experience indicates that more loans for automobile purchases are financed during summer months due to seasonal consumer buying habits. 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 1997, the Company has experienced no material adverse consequences with respect to its growth in premiums. INSURANCE REGULATORY MATTERS On June 20, 1997, the Ohio Department of insurance issued its triennial examination report on Ohio Indemnity as of December 31, 1996. The examiners reported that the financial statements set forth in the report reflected the financial condition of Ohio Indemnity. Management is not aware of any recommendations by regulatory authorities which would have, or are reasonably likely to have, a material effect on the Company's liquidity, capital resources or results of operations. 13 14 The NAIC has developed a risk-based capital measurement formula to be applied to all property/casualty insurance companies. This formula calculates a minimum required statutory net worth, based on the underwriting, investment, credit, loss reserve and other business risks inherent in an individual company's operations. Under the current formula, any insurance company which does not meet threshold risk-based capital measurement standards could be forced to reduce the scope of its operations and ultimately could become subject to statutory receivership proceedings. Based on the Company's analysis, it appears that the Company's total adjusted capital is in excess of all required action levels and that no corrective action will be necessary. The Risk Based Capital provisions have been enacted into the Ohio Revised Code. RESERVES The amount of incurred losses and loss adjustment expenses is dependent upon a number of factors, including claims frequency, severity, the nature and types of losses incurred, and the number of policies written. These factors may fluctuate from year to year and do not necessarily bear any relationship to the amount of premiums written or earned. As claims are incurred, provisions are made for unpaid losses and loss adjustment expenses by accumulating case reserve estimates for claims reported prior to the close of the accounting period and by estimating IBNR claims based upon past experience modified for current trends. Notwithstanding the variability inherent in such estimates, management believes that the provisions made for unpaid losses and loss adjustment expenses are adequate to meet claims obligations of the Company. Such estimates are reviewed monthly by management and annually by an independent consulting actuary and, as adjustments thereto become necessary, such adjustments are reflected in the Company's results of operations. The Company's independent consulting actuary has opined that loss and loss adjustment expense reserve levels, as of December 31, 1996, were reasonable. SAFEHARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995 Except for the historical information contained herein, the matters discussed in this Form 10-Q, included in "Management's Discussion and Analysis of Financial Condition and Results of Operations", includes forward-looking statements that involve risks and uncertainties, including, but not limited to, quarterly fluctuations in results, the management of growth, and other risks detailed from time to time in the Company's Securities and Exchange Commission filings. Actual results may differ materially from management expectations. 14 15 BANCINSURANCE CORPORATION AND SUBSIDIARIES PART II - OTHER INFORMATION Item 1. Legal Proceedings The Company is routinely a party to litigation incidental to its business, as well as to other nonmaterial litigation. Management believes that no individual item of litigation, or group of similar items of litigation, including the matters referred to below, is likely to result in judgements that will have a material adverse effect on the financial condition of the Company. 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. An appeal of the judgement was filed by the Agent, however, on May 12, 1997, the summary judgement was affirmed. Item 4. Submission of Matters to a Vote of Security Holders The Company held its Annual Meeting of Shareholders on June 3, 1997 for the purpose of electing six directors to serve one year terms expiring in 1998. The number of votes cast for or against each candidate is as follows:
VOTES FOR VOTES WITHHELD --------- -------------- Si Sokol 5,159,224 5,500 James R. Davis 5,157,124 7,600 Daniel D. Harkins 5,159,424 5,300 Milton O. Lustnauer 5,159,124 5,600 John S. Sokol 5,158,424 6,300 Saul Sokol 5,157,124 7,600
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, 1997. 15 16 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. BANCINSURANCE CORPORATION ------------------------- (Company) Date: August 6, 1997 By: /s/ Si Sokol ----------------------------- -------------------------- Si Sokol President and Chairman of Board of Directors (Principal Executive Officer) Date: August 6, 1997 By: /s/ Sally Cress ----------------------------- -------------------------- Sally Cress Treasurer, Secretary (Principal Financial and Accounting Officer) 16 EX-27 2 EXHIBIT 27
7 6-MOS DEC-31-1997 JAN-01-1997 JUN-30-1997 12,984,341 4,237,913 4,309,796 2,948,451 0 0 26,906,537 820,222 0 0 31,105,111 1,458,016 1,605,878 0 0 6,135,000 0 0 315,567 17,271,303 31,105,111 4,500,083 665,547 82,872 1,148,497 2,113,944 2,324,305 147,881 1,810,869 472,731 1,338,138 0 0 0 1,338,138 .23 .23 1,345,000 673,000 1,441,000 1,047,000 960,000 1,452,000 0
-----END PRIVACY-ENHANCED MESSAGE-----