-----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, CepXBoHETxPgoKmL836/sYh9FH8UBvEW3MC51meG7wuu333l/35PAKKpMdZWqPrX d1sHeGkXwwHualq93Y5xmg== 0000950152-98-008595.txt : 19981109 0000950152-98-008595.hdr.sgml : 19981109 ACCESSION NUMBER: 0000950152-98-008595 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981106 FILER: COMPANY DATA: COMPANY CONFORMED NAME: BANCINSURANCE CORP CENTRAL INDEX KEY: 0000276400 STANDARD INDUSTRIAL CLASSIFICATION: FIRE, MARINE & CASUALTY INSURANCE [6331] IRS NUMBER: 310790882 STATE OF INCORPORATION: OH FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-08738 FILM NUMBER: 98739452 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 BANINSURANCE CORPORATION FORM 10-Q 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 FORM 10-Q QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For Quarter Ended September 30, 1998 Commission File Number 0-8738 ------------------ ----------------------------- BANCINSURANCE CORPORATION - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Ohio 31-0790882 - ------------------------------- ---------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 20 East Broad Street, Columbus, Ohio 43215 - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number including area code (614) 228-2800 ---------------- None - -------------------------------------------------------------------------------- Former name, former address and former fiscal year, if changed since last report. Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. YES X NO ----- ----- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the last practicable date. Class Outstanding at September 30, 1998 - ------------------------------- ----------------------------------- Common stock, without par value 5,843,115 2 BANCINSURANCE CORPORATION AND SUBSIDIARIES INDEX -----
Page PART I - FINANCIAL INFORMATION: Item 1. Financial Statements Consolidated Balance Sheets as of September 30, 1998 (unaudited) and December 31, 1997 3 Consolidated Statements of Income for the three months and nine months ended September 30, 1998 and 1997 (unaudited) 5 Consolidated Statements of Comprehensive Income for the three 6 months and nine months ended September 30, 1998 and 1997 (unaudited) Consolidated Statements of Cash Flows for the nine months ended September 30, 1998 and 1997 (unaudited) 7 Notes to Consolidated Financial Statements (unaudited) 8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9 Item 3. Quantitative and Qualitative Disclosures About Market Risk Not Applicable PART II - OTHER INFORMATION AND SIGNATURES Item 1. Legal Proceedings 15 Item 2. Changes in Securities Not Applicable Item 3. Default Upon Senior Securities Not Applicable Item 4. Submission of Matters to a Vote of Security Holders Not Applicable Item 5. Other Information Not Applicable Item 6. Exhibits and Reports on Form 8-K 16 Signatures 17
2 3 PART I - FINANCIAL INFORMATION ITEM 1. Financial Statements -------------------- BANCINSURANCE CORPORATION AND SUBSIDIARIES Consolidated Balance Sheets
September 30, December 31, Assets 1998 1997 - ------ -------------- -------------- (Unaudited) Investments: Held to maturity: Fixed maturities, at amortized cost (fair value $4,684,913 in 1998 and $4,054,026 in 1997) $ 4,528,095 $ 3,940,194 Available for sale: Fixed maturities, at fair value (amortized cost $11,770,565 in 1998 and $12,635,652 in 1997) 12,182,309 12,962,626 Equity securities, at fair value (cost $2,889,700 in 1998 and $2,601,150 in 1997) 3,220,575 3,225,061 Short-term investments, at cost which approximates fair value 6,379,748 5,753,669 Securities purchased under agreements to resell 648,171 1,048,075 -------------- -------------- Total investments 26,958,898 26,929,625 -------------- -------------- Cash 3,470,383 1,146,317 Premiums receivable 1,078,438 755,611 Accounts receivable, net of allowance for uncollectible amounts 267,297 297,519 Reinsurance receivable 5,250 8,000 Reinsurance recoverable on paid losses 11,074 - Prepaid reinsurance premiums 24,686 36,335 Premium taxes receivable 18,468 - Prepaid commissions 145,518 - Loans to affiliates 677,901 606,182 Note receivable 21,031 67,500 Furniture, fixtures and leasehold improvements, net 162,542 121,697 Excess of investment over net assets of subsidiaries, net 968,428 976,610 Accrued investment income 294,764 298,234 Prepaid federal income taxes 6,015 - Other assets 238,686 160,802 -------------- -------------- Total assets $ 34,349,379 $ 31,404,432 ============== ============== (Continued)
3 4 BANCINSURANCE CORPORATION AND SUBSIDIARIES Consolidated Balance Sheets, Continued
September 30, December 31, Liabilities and Shareholders' Equity 1998 1997 - ------------------------------------ ------------ ------------ (Unaudited) Reserve for unpaid losses and loss adjustment expenses $ 1,965,570 $ 1,531,714 Unearned premiums 1,427,904 698,764 Contract funds on deposit 2,884,021 3,451,371 Reinsurance premiums payable 6,602 27,821 Note payable to bank 5,000,000 5,000,000 Note payable 30,665 37,073 Taxes, licenses, and fees payable 174,157 150,778 Deferred federal income taxes 211,144 296,049 Federal income taxes payable - 741 Commissions payable 309,416 493,212 Other 974,921 637,108 ------------ ------------ Total liabilities 12,984,400 12,324,631 ------------ ------------ Commitments and contingent liabilities Shareholders' equity: Non-voting preferred stock: Class A Serial Preference shares without par value; authorized 100,000 shares; no shares issued or outstanding - - Class B Serial Preference shares without par value; authorized 98,646 shares; no shares issued or outstanding - - Common stock without par value; authorized 20,000,000 shares; 5,878,277 shares issued 315,567 315,567 Additional paid-in capital 1,495,387 1,495,387 Accumulated other comprehensive income 490,128 627,583 Retained earnings 19,164,411 16,741,778 ------------ ------------ 21,465,493 19,180,315 Less: Treasury stock, at cost (35,162 common shares at September 30, 1998 and December 31, 1997) (100,514) (100,514) ------------ ------------ Total shareholders' equity 21,364,979 19,079,801 ------------ ------------ Total liabilities and shareholders' equity $ 34,349,379 $ 31,404,432 ============ ============
See accompanying notes to consolidated financial statements. 4 5 BANCINSURANCE CORPORATION AND SUBSIDIARIES Consolidated Statements of Income (Unaudited)
Three Months Ended Nine months Ended September 30, September 30, 1998 1997 1998 1997 ------------ ------------ ------------ ------------ Income: Premiums written $ 4,025,837 $ 2,965,371 $ 14,703,804 $ 8,325,545 (Increase) decrease in unearned premiums 675,344 311,734 (729,139) (548,357) ------------ ------------ ------------ ------------ Premiums earned 4,701,181 3,277,105 13,974,665 7,777,188 Premiums ceded (15,964) (29,678) (57,482) (29,678) ------------ ------------ ------------ ------------ Net premiums earned 4,685,217 3,247,427 13,917,183 7,747,510 Investment income (net of expenses of $45,378 and $85,830, respectively) 346,801 362,386 1,040,456 1,027,933 Net realized gain (loss) on investments (1,025) 115,926 49,968 198,798 Claims administration fees 152,046 146,698 443,810 495,680 Title and appraisal fees 488,991 561,200 1,458,696 1,057,682 Management fees 668,978 30,667 1,130,185 252,652 Other income 3,888 - 30,896 75,922 ------------ ------------ ------------ ------------ Total revenue 6,344,896 4,464,304 18,071,194 10,856,177 ------------ ------------ ------------ ------------ Losses and operating expenses: Losses and loss adjustment expenses 2,825,170 1,900,712 8,768,324 4,014,656 Commission expense 657,526 487,693 1,642,507 1,091,805 Other insurance operating expenses 458,445 360,535 1,422,559 1,040,833 General and administrative expenses 1,244,681 719,589 2,659,228 1,754,358 Interest expense 64,827 111,559 221,795 259,440 ------------ ------------ ------------ ------------ Total expenses 5,250,649 3,580,088 14,714,413 8,161,092 ------------ ------------ ------------ ------------ Income before federal income taxes 1,094,247 884,216 3,356,781 2,695,085 ------------ ------------ ------------ ------------ Federal income tax expense 310,083 226,051 934,148 698,782 ------------ ------------ ------------ ------------ Net income $ 784,164 $ 658,165 $ 2,422,633 $ 1,996,303 ============ ============ ============ ============ Net income per common share $ .13 $ .11 $ .41 $ .34 ============ ============ ============ ============ Net income per common share, assuming dilution $ .13 $ .11 $ .41 $ .34 ============ ============ ============ ============
See accompanying notes to consolidated financial statements. 5 6 BANCINSURANCE CORPORATION AND SUBSIDIARIES Consolidated Statements of Comprehensive Income (Unaudited)
Three Months Ended Nine Months Ended September 30, September 30, 1998 1997 1998 1997 ------------ ------------ ------------ ------------ Net income $ 784,164 $ 658,165 $ 2,422,633 $ 1,996,303 Other comprehensive income, net of tax: Unrealized holding gains (losses) on securities arising during period (78,674) 97,265 (137,455) 163,401 ------------ ------------ ------------ ------------ Comprehensive income $ 705,490 $ 755,430 $ 2,285,178 $ 2,159,704 ============ ============ ============ ============
6 7
BANCINSURANCE CORPORATION AND SUBSIDIARIES Consolidated Statements of Cash Flows (Unaudited) Nine Months Ended September 30, 1998 1997 ------------ ------------ Cash flows from operating activities: Net income $ 2,422,633 $ 1,996,303 Adjustments to reconcile net income to net cash provided by operating activities: Net realized gain on investments (49,968) (198,798) Depreciation 69,231 65,867 Amortization of bond premium 42,256 40,266 Increase in premiums receivable (322,827) (444,593) Increase in prepaid commissions (145,518) (115,499) Increase in other assets (56,891) (514,691) Increase in reserve for unpaid losses and loss adjustment expenses 433,856 229,327 Increase in unearned premiums 729,140 548,357 Increase (decrease) in contract funds on deposit (567,350) 213,934 Decrease in reinsurance premiums payable (21,219) (463,673) Increase (decrease) in commissions payable (183,796) 62,746 Increase (decrease) in other liabilities 354,043 (272,221) ------------ ------------ Net cash provided by operating activities 2,703,590 1,147,325 ------------ ------------ Cash flows used in investing activities: Proceeds from held to maturity: fixed maturities due to redemption or maturity 340,000 1,156,000 Proceeds from available for sale: fixed maturities sold, redeemed and matured 1,012,000 1,389,619 Proceeds from available for sale equity securities sold 2,198,975 1,777,748 Cost of investments purchased: Held to maturity: fixed maturities (411,469) (1,344,403) Available for sale: fixed maturities (207,946) (3,539,635) Equity securities (2,935,211) (1,139,966) Net (increase) decrease in short-term investments (626,079) 962,146 Net (increase) decrease securities purchased under agreements to resell 399,904 (276,873) Purchase of furniture, fixtures and leasehold improvements (149,923) (54,907) Proceeds from disposal of equipment 225 - Cash acquired in purchase of subsidiary - 27,918 ------------ ------------ Net cash used in investing activities (379,524) (1,042,353) ------------ ------------ Cash flows from financing activities: Proceeds from note payable to bank 5,950,000 7,525,000 Repayments of note payable to bank (5,950,000) (6,585,000) Proceeds from stock options exercised - 3,125 ------------ ------------ Net cash provided by financing activities - 943,125 ------------ ------------ Net increase in cash 2,324,066 1,048,097 ------------ ------------ Cash at December 31 1,146,317 681,286 ------------ ------------ Cash at September 30, $ 3,470,383 $ 1,729,383 ============ ============ Supplemental disclosures of cash flow information: Cash paid during the year for: Interest $ 221,795 $ 259,440 ============ ============ Income taxes 955,000 760,000 ============ ============ Supplemental schedule of noncash investing activities: Common stock issued in purchase acquisition - $ 275,781 ============ ============
See accompanying notes to consolidated financial statements 7 8 BANCINSURANCE CORPORATION AND SUBSIDIARIES Notes To Consolidated Financial Statements (Unaudited) 1. The Consolidated Balance Sheets as of September 30, 1998, the Consolidated Statements of Income for the three and nine months ended September 30, 1998 and 1997, the Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 1998 and 1997, and the Consolidated Statements of Cash Flows for the nine months then ended have been prepared by Bancinsurance Corporation (the "Company") without an audit. In the opinion of Company's management, all adjustments (which include only normal recurring adjustments) necessary to present fairly the financial position, results of operations, and cash flow at September 30, 1998 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, 1997. The results of operations for the period ended September 30, 1998 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. Prior period financial statements have been restated to reflect the adoption of Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting on Comprehensive Income". SFAS No. 130 establishes standards for reporting and display of comprehensive income and its components. In June 1997, the Financial Accounting Standards Board issued SFAS 131, "Disclosures About Segments of an Enterprise and Related Information". This statement requires certain disclosures about products and services, geographic areas and major customers. The segment and other information disclosures are required for the year ended December 31, 1998. These standards, expand or modify disclosures and, accordingly, have no impact on the Company's consolidated results of operations, financial position or cash flows. 4. Supplemental Disclosure For Earnings Per Share
Three Months Ended Nine Months Ended September 30, September 30, 1998 1997 1998 1997 ------------ ------------ ------------ ------------ Net income $ 784,164 $ 658,165 $ 2,422,633 $ 1,996,303 ------------ ------------ ------------ ------------ Income available to common stockholders, assuming dilution $ 784,164 $ 658,165 $ 2,422,633 $ 1,996,303 ------------ ------------ ------------ ------------ Weighted average common shares outstanding 5,843,115 5,839,365 5,843,115 5,815,928 Adjustments for dilutive securities: Dilutive effect of outstanding options 99,955 53,187 96,604 52,821 ------------ ------------ ------------ ------------ Diluted common shares 5,943,070 5,892,552 5,939,719 5,868,749 ============ ============ ============ ============ Net income per common share $ .13 $ .11 $ .41 $ .34 Net income per common share, assuming dilution $ .13 $ .11 $ .41 $ .34
8 9 BANCINSURANCE CORPORATION AND SUBSIDIARIES Item 2. Management's Discussion and Analysis of --------------------------------------- Financial Condition and Results of Operations --------------------------------------------- The following discussion should be read in conjunction with the consolidated financial statements of the Company and the notes thereto and the other financial information included elsewhere in this Quarterly Report on Form 10-Q, as well as the factors set forth under the caption "Forward-Looking Information" below. OVERVIEW Bancinsurance Corporation is a specialty property insurance holding company. The Company's principal sources of revenue are premiums paid by insureds for insurance policies issued by the Company's wholly-owned subsidiary, Ohio Indemnity Company ("Ohio Indemnity"). 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) Nine Months Ended September 30, -------------------------------------------- 1997-98 -------------------------------------------- Premiums written $ 6,378,259 Net premiums earned 6,169,673 Net investment income (137,307) Claims administration fees (51,870) Title and appraisal fees 401,014 Loss and loss adjustment expense, net of reinsurance recoveries 4,753,668 Operating expense 1,837,298 Interest expense (37,645) Operating income 661,696 Net income 426,330
The combined ratio, which is the sum of the loss ratio and expense ratio, is the traditional measure of underwriting experience for insurance companies. The following table reflects the loss, expense and combined ratios of Ohio Indemnity on both a statutory and GAAP basis for the nine months ended September 30:
1998 1997 ------------ ------------ Statutory: Loss ratio 63.0% 51.8% Expense ratio 22.5% 25.2% ------------ ------------ Combined ratio 85.5% 77.0% ============ ============
9 10
1998 1997 ------------ ------------ GAAP: Loss ratio 63.0% 51.8% Expense ratio 20.9% 22.5% ------------ ------------ Combined ratio 83.9% 74.3% ============ ============
Investments of Ohio Indemnity's assets are restricted to certain investments permitted by Ohio insurance laws. The Company's overall investment policy is determined by the Company's Board of Directors and is reviewed periodically. The Company principally invests in investment-grade obligations of states, municipalities and political subdivisions because the majority of the interest income from such investments is tax-exempt and such investments have generally resulted in favorable net yields. The Company has the ability and intent to hold its held to maturity fixed income securities to maturity or put date, and as a result carries its held to maturity fixed income securities at amortized cost for GAAP purposes. As the Company's fixed income securities mature, there can be no assurance that the Company will be able to reinvest in securities with comparable yields. RESULTS OF OPERATIONS SEPTEMBER 30, 1998 AS COMPARED TO SEPTEMBER 30, 1997 Premiums Written; Net Premiums Earned. Premiums written for the nine months increased from $8,325,545 at September 30, 1997 to $14,703,804 at September 30, 1998, and net premiums earned increased from $7,747,510 at September 30, 1997 to $13,917,183 at September 30, 1998. Premiums written increased from $2,965,371 during the three months ended September 30, 1997 to $4,025,837 during the three months ended September 30, 1998, while net premiums earned increased from $3,247,427 to $4,685,217 during the same period, respectively. Premiums increased due to strong performance in the Company's expanding core product lines of business. The addition of two significant new policies in the Ultimate Loss Insurance Program, a new agency program and growth in the Bonded Service program contributed to the increases. Premiums written for Ultimate Loss Insurance increased from $5,084,097 in the first nine months of 1997 to $10,507,500 in the first nine months of 1998. Net premiums earned from Ultimate Loss Insurance increased from $5,095,369 in the first nine months of 1997 to $10,521,409 in the first nine months of 1998. Premiums written for Ultimate Loss Insurance increased from $2,621,791 in the third quarter of 1997 to $3,473,720 in the third quarter of 1998. Net premiums earned for Ultimate Loss Insurance increased from $2,331,277 in the third quarter of 1997 to $3,371,687 in the third quarter of 1998. The increase in premiums written and premiums earned during the first nine months of 1998 reflected increased premium volume primarily attributable to a significant new customer added during the third quarter of 1997 and a second added during the second quarter of 1998. In addition, a new creditor-placed mortgage protection and collateral protection program added during the fourth quarter of 1997 recorded in the aggregate $258,579 and $295,009 of premiums written and earned, respectively, in 1998. Premiums written for the Bonded Service program increased from $3,175,635 in the first nine months of 1997 to $3,617,730 in the first nine months of 1998, while net premiums earned from the Bonded Service program increased from $2,554,603 in the first nine months of 1997 to $2,890,348 in the first nine months of 1998 due to increases in premium rates. 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. Premiums written for the Bonded Service program decreased from $320,118 in the third quarter of 1997 to $241,481 in the third quarter of 1998 due to the timing of billing issuance, while net premiums earned increased from $884,078 in the third quarter of 1997 to $949,155 in the third quarter of 1998. Net Investment Income. Net investment income decreased from $1,226,731 in the first nine months of 1997 to $1,090,424 in the first nine months of 1998 and net investment income decreased from $478,312 in the third quarter of 1997 to $345,776 in the third quarter of 1998. Investment income was relatively constant as additional income due to growth in invested assets from positive cash flow was offset by declining interest rates and a shift from income producing preferred stocks to common stocks. Investment 10 11 yield has been relatively low due to the high allocation of short-term investments and emphasis on tax-exempt bonds in the portfolio. Realized gains on investments sold, redeemed or matured decreased 74.9% from the nine months ended September 30, 1997 to the nine months ended September 30, 1998 and decreased from a $115,926 realized gain during the three months ended September 30, 1997 to a realized loss of $1,025 during the three months ended September 30, 1998, principally due to recent stock market declines. Claims Administration. Claims administration fees generated by BCIS Services, Inc. ("BCIS Services"), a consolidated subsidiary, accounted for $495,680 of the revenues of the first nine months of 1997 and $443,810 in the first nine months in 1998, and increased from $146,698 in the third quarter of 1997 to $152,046 in the third quarter of 1998. The decrease in the nine month comparables was primarily attributable to a decrease in claims processing and servicing responsibilities. The increase during the third quarter was attributable to additional services performed for a customer during the third quarter ended September 30, 1998. Title and Appraisal Fees. Title and appraisal fees generated by Title Research Corporation ("Title Research"), a consolidated subsidiary, accounted for $1,057,682 and $1,458,696 of the revenues for the nine months ended September 30, 1997 versus 1998 and $561,200 and $488,991 of the revenues during the three months ended September 30, 1997 versus 1998, respectively. Title Research commenced business operations in Ohio during the second quarter of 1997. Management Fees. Management fees were $1,130,185 for the nine months ended September 30, 1998 and $668,978 for the three months ended September 30, 1998. Management fees were $252,652 for the nine months ended September 30, 1997 and $30,667 during the third quarter of 1997. The increase was attributed to recognition of favorable results from a closed period of operations of the Surety programs. The Company expects management fees to vary from period to period depending on claims experience in the Surety programs. Other Income. Other income decreased from $75,922 in the first nine months of 1997 to $30,896 in the first nine months of 1998 and was $3,888 in the three months ended September 30, 1998. The decrease was primarily the result of recording $63,657 as a reimbursement for expenses previously incurred from an insurance product line sold during the second quarter of 1997. Losses and Loss Adjustment Expenses, Net of Reinsurance Recoveries. Losses and loss adjustment expenses totaled $4,014,656, or 51.8% of net premiums earned during the first nine months of 1997 versus $8,768,324, or 63.0% of net premiums earned during the first nine months of 1998. Losses and loss adjustment expenses totaled $1,900,712 or 58.5% of net premiums earned during the third quarter of 1997 versus $2,825,170, or 60.3% of net premiums earned during the third quarter of 1998. Losses and loss adjustment expenses, as a percentage of net premiums earned, increased for the comparable periods because net premiums earned increased at a lower percentage rate than the percentage rate increase in losses and loss adjustment expenses. This anticipated increase is primarily the result of losses associated with two significant new policies in the Ultimate Loss Insurance program. The absolute increase in losses and loss adjustment expenses was attributable to initial claims primarily associated with two significant new policies in the Ultimate Loss Insurance business which increased from $3,276,767 during the nine months ended September 30, 1997 to $8,071,128 during the nine months ended September 30, 1998 and totalled $1,667,505 during the third quarter of 1997 compared with $2,491,877 the third quarter of 1998. Loss and loss adjustment expenses for Ultimate Loss Insurance business increased primarily due to a significant new customer added during the third quarter of 1997 and a second added during the second quarter of 1998. Losses and loss adjustment expenses for the Bonded Service program decreased from $461,658 in 1997 to $217,978 in 1998 and decreased from $160,882 for the third quarter of 1997 compared with $115,136 during the third quarter of 1998. These decreases were due to redundancy development on prior year reserves combined with timing differences on the release of prior accident year reserves. 11 12 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 47.3% from $3,886,996 for the first nine months of 1997 to $5,724,294 for the first nine months of 1998 and increased 50.6% from $1,567,817 for the third quarter of 1997 compared with $2,360,652 during the third quarter of 1998. Commission expense increased 50.5% from $1,091,085 in the first nine months of 1997 to $1,642,507 in the first nine months of 1998 and increased 34.8% from $487,693 to $657,526 in the third quarter, primarily due to higher direct commissions in the Ultimate Loss Insurance Program and both higher direct and contingent commissions in the Bonded Service Program. Other insurance operating expenses increased 36.7% from $1,040,833 in the first nine months of 1997 to $1,422,559 in the first nine months of 1998 and increased 27.2% from $360,535 to $458,445 during the three months ended September 30, 1997 and 1998, respectively, primarily due to increases in allocable salaries and related benefits, legal, premium taxes, rent and outside computer services. General and administrative expenses increased 51.6% from $1,754,358 in the first nine months of 1997 to $2,659,228 in the first nine months of 1998, primarily due to recognition of three quarters of operating and administrative expenses incurred by Title Research Corporation (a purchase business combination in 1997) versus only two quarters of expense recognition during 1997. General and administrative expenses increased 73.0% from $719,589 to $1,244,681 in the third quarter of 1997 versus 1998, respectively, primarily due to increases in legal and consulting. Title Research incurred operating expenses of $1,035,606 in the six months ended September 30, 1997 compared with $1,560,014 during the nine months ended September 30, 1998 and increased from $505,137 during the third quarter of 1997 to $542,681 during the third quarter of 1998. BCIS Services incurred operating expenses of $474,630 in the first nine months of 1997 compared with $425,851 during the nine months of 1998 and remained relatively constant from $142,552 during the third quarter of 1997 to $143,668 during the third quarter of 1998. Interest Expense. Interest expense decreased due to lower borrowing levels on the Company's revolving credit line. Federal Income Taxes. The difference between federal income taxes, $698,782 in the first nine months of 1997 to $934,148 in the first nine months of 1998 and $226,051 to $310,083 in the third quarter, respectively, resulted from higher pre-tax income and lower permanent tax differences resulting in a higher effective tax rate. 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 1998 from Ohio Indemnity, absent regulatory consent, is $3,042,840. 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. 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 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 12 13 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. 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, the Company would have to sell assets prior to maturity and recognize a gain or loss. The Company's total shareholders' equity increased $3,019,554 to $21,364,979 at September 30, 1998 from $18,345,425 at September 30, 1997 representing a 16.5% increase over the one-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 loses were $355,275 and $477,600 at September 30, 1998 and December 31, 1997, 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. One of the Company's significant Ultimate Loss Insurance program customers decided to close their auto finance division as part of an overall strategy to focus on more profitable areas of lending, however, they will continue to service the existing auto loan portfolio as the loans pay off. Management expects the discontinuance of this operation will result in a gradual decline in premium volume although policy coverage under existing loans will continue in-force during the next two to four years. IMPACT OF THE YEAR 2000 ISSUE State of Readiness. The Year 2000 issue relates to the way computer systems and programs define calendar dates; they could fail or make miscalculations due to interpreting a date including "00" to mean 1900, not 2000. During fiscal 1997, the Company completed the installation and testing of its internal financial systems and believes that such systems are Year 2000 compliant. The Company utilizes the latest version of Year 2000 compliant Platinum SQL software for its internal financial system. The Company began work on the Year 2000 Compliance issue for all remaining internal software in fiscal 1997. The scope of the project includes: ensuring the compliance of all applications, operating systems and hardware on network, PC platforms; and addressing the compliance of key business partners. The most significant category of key business partners are financial institutions. Their critical functions include safeguarding and management of investment portfolios and processing of the Company's operating bank accounts. Other partner categories include insurance agencies, communication services, utilities; materials and supplies. Based on the importance of each relationship, the Company is defining a strategy to determine compliance. 13 14 The target for completion of all phases is the second quarter of 1999. The Company has completed the assessment and strategy phases for applications, operating systems and hardware. Currently, approximately 45% of all policyholder network systems are compliant. The Company has not had an independent review of its Year 2000 risks or estimates. However, experts have been engaged to assist in developing estimates and to complete remediation work on separate portions of the project. Costs to Address the Company's Year 2000 Issue. Since the inception of the project, the Company has incurred external costs of approximately $51,000. Current estimates project a total expense for the project of $150,000. Current year costs are expected to be $75,000, which are expensed as incurred. There has not been a material adverse impact on the Company's operations or financial condition as a result of projects being deferred due to resource constraints caused by the year 2000 project. The Company's Contingency Plans. With respect to contingency plans for critical policyholder systems, the Company recognizes that there is no viable alternative if these systems are non-compliant. Thus, the Company targeted completion of critical policyholder systems by second quarter end of 1999, allowing for unanticipated delays. The Company will continue to reassess the need for formal contingency plans, based on progress of Year 2000 efforts by the Company and third parties. Risks of the Company's Year 2000 Issue. Although the Company expects its critical systems to be compliant by second quarter 1999 end, there is no guarantee that these results will be achieved. Specific factors that give rise to this uncertainty include a possible loss of technical resources to perform the work, failure to identify all susceptible systems, non-compliance by third parties whose systems and operations impact the Company, and other similar uncertainties. A reasonable possible worst case scenario might include one or more of the Company's significant policyholder systems being non-compliant. Such an event could result in a material disruption to the Company's operations. Specifically, the Company could experience an interruption to its ability to collect and process premiums, process claims payments, safeguard and manage its invested assets and operating cash accounts, accurately maintain policyholder information and perform adequate custom service. Should the worst case scenario occur, it could, depending on its duration, have a material impact on the Company's results of operations and financial position. 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. FORWARD-LOOKING INFORMATION Statements in the following discussion that indicate the Company's or management's intentions, hopes, beliefs, expectations or predictions of the future are forward- looking statements. It is important to note that the Company's actual results could differ materially from those projected in such forward-looking statements. Additional information concerning factors that could cause actual results to differ materially from those suggested in the forward-looking statements is contained under the caption "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Company's Annual Report on Form 10-K for the year ended December 31, 1997 filed with the Securities and Exchange Commission, as the same may be amended from time to time. 14 15 Forward-looking statements are not guarantees of performance. They involve risks, uncertainties and assumptions. The future results and shareholder values of the Company may differ materially from those expressed in these forward-looking statements. Many of the factors that will determine these results and values are beyond the Company's ability to control or predict. Shareholders are cautioned not to put undue reliance on forward-looking statements. In addition, the Company does not have an intention or obligation to update forward-looking statements after the date hereof, even if new information, future events, or other circumstances have made them incorrect or misleading. For those statements, the Company claims the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. 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 1998, the Company has experienced no material adverse consequences with respect to its growth in premiums. 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, 1997, were reasonable. PART II - OTHER INFORMATION Item 1. Legal Proceedings ----------------- On June 11, 1998, the Company filed an action in Franklin County Common Pleas Court against Brian Delphia d/b/a Delphia Carr and Delphia Consulting, Inc., a computer consulting firm, asserting claims for breach of contract relating to a software development project. The computer consultant brought a counter-claim seeking payment of $166,500 for outstanding billings. Mr. Delphia filed a second counter-claim seeking $1,000,000 from the Company for malicious prosecution. The Company believes both counter-claims are without merit and believes it has strong defenses to the claims. 15 16 Item 6. Exhibits and Reports on Form 8-K -------------------------------- (a) Exhibits -------- Item 27 Financial Data Schedule (b) Reports on Form 8-K ------------------- No reports on Form 8-K were filed by the Company during the quarter ended September 30, 1998. 16 17 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. BANCINSURANCE CORPORATION ------------------------- (Company) Date: November 6, 1998 By: /s/ Si Sokol --------------------------------- --------------------------------- Si Sokol President and Chairman of Board of Directors (Principal Executive Officer) Date: November 6, 1998 By: /s/ Sally Cress --------------------------------- --------------------------------- Sally Cress Treasurer and Secretary (Principal Financial and Accounting Officer) 17 EX-27 2 EXHIBIT 27
7 9-MOS DEC-31-1998 JAN-01-1998 SEP-30-1998 12,182,309 4,528,095 4,684,913 3,220,575 0 0 26,958,898 3,470,383 0 0 34,349,379 1,965,570 1,427,904 0 0 5,000,000 0 0 315,567 21,049,412 34,349,379 13,917,183 1,040,456 49,968 3,063,587 8,768,324 5,724,294 221,795 3,356,781 934,148 2,422,633 0 0 0 2,422,633 .41 .41 1,524,000 8,805,000 (37,000) 6,901,000 1,431,000 1,960,000 0
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