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, 2000 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
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(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, 2000
- ------------------------------- --------------------------------
Common stock, without par value 5,822,109
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BANCINSURANCE CORPORATION
AND SUBSIDIARIES
INDEX
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Page No.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of
June 30, 2000 (unaudited) and December 31, 1999...............................3
Consolidated Statements of Income for the three months and
six months ended June 30, 2000 and 1999 (unaudited)...........................5
Consolidated Statements of Comprehensive Income for the
three months and six months ended June 30, 2000 and
1999 (unaudited)..............................................................6
Consolidated Statements of Cash Flows for the
six months ended June 30, 2000 and 1999 (unaudited)...........................7
Notes to Consolidated Financial Statements (unaudited).............................8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations................................11
Item 3. Quantitative and Qualitative Disclosures About
Market Risk..................................................................17
PART II - OTHER INFORMATION AND SIGNATURES
Item 1. Legal Proceedings ....................................................Not Applicable
Item 2. Changes in Securities and Use of Records..............................Not Applicable
Item 3. Default Upon Senior Securities........................................Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders ........................18
Item 5. Other Information ....................................................Not Applicable
Item 6. Exhibits and Reports on Form 8-K............................................18
Signatures..........................................................................19
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3
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements
BANCINSURANCE CORPORATION
AND SUBSIDIARIES
Consolidated Balance Sheets
June 30, December 31,
Assets 2000 1999
- ------ ----------- -----------
(Unaudited) (Note 2)
Investments:
Held to maturity:
Fixed maturities, at amortized cost (fair value $5,264,217 in 2000 and
$4,897,428 in 1999) ................................................ $ 5,281,910 $ 4,902,028
Available for sale:
Fixed maturities, at fair value (amortized cost $16,218,579 in 2000
and $16,091,394 in 1999) ........................................... 15,934,985 15,649,618
Equity securities, at fair value (cost $4,844,852 in 2000 and
$4,409,620 in 1999) ................................................. 5,551,145 5,059,639
Short-term investments, at cost which approximates fair value .......... 3,692,911 4,254,006
Securities purchased under agreements to resell ........................ 1,339,912 2,393,198
----------- -----------
Total investments ................................... 31,800,863 32,258,489
----------- -----------
Cash ........................................................................ 7,217,809 2,401,312
Premiums receivable ......................................................... 2,820,522 2,213,278
Accounts receivable, net of allowance for doubtful accounts ................. 402,490 459,684
Reinsurance receivable ...................................................... 36,750 2,250
Reinsurance recoverable on paid losses ...................................... 2,012 --
Prepaid reinsurance premiums ................................................ 95,192 80,420
Deferred policy acquisition costs ........................................... 626,855 219,193
Estimated earnings in excess of billings on uncompleted
codification contracts ................................................. 157,119 --
Loans to affiliates ......................................................... 1,268,039 635,420
Land and building, net ...................................................... 36,471 38,288
Furniture, fixtures and leasehold improvements, net ......................... 145,838 255,369
Excess of investment over net assets of subsidiaries, net ................... 2,687,230 2,932,701
Intangible asset, net ....................................................... 433,436 --
Accrued investment income ................................................... 357,946 338,117
Deferred federal income taxes ............................................... 207,956 324,114
Other assets ................................................................ 464,470 289,478
----------- -----------
Total assets ........................................ $48,760,998 $42,448,113
=========== ===========
(Continued)
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4
BANCINSURANCE CORPORATION
AND SUBSIDIARIES
Consolidated Balance Sheets, Continued
June 30, December 31,
Liabilities and Shareholders' Equity 2000 1999
- ------------------------------------ ----------- ------------
(Unaudited) (Note 2)
Reserve for unpaid losses and loss adjustment expenses ...................... $ 5,553,477 $ 5,272,601
Unearned premiums ........................................................... 4,177,225 2,430,776
Contract funds on deposit ................................................... 1,906,698 2,272,177
Reinsurance premiums payable ................................................ 47,796 12,211
Note payable to bank ........................................................ 7,150,000 5,145,000
Acquisition liability ....................................................... 540,609 619,114
Taxes, licenses, and fees payable ........................................... 128,042 177,357
Return premiums payable ..................................................... 1,436,637 83,524
Federal income taxes payable ................................................ 166,220 90,068
Commissions payable ......................................................... 514,383 681,732
Billings in excess of estimated earnings on uncompleted
codification contracts ................................................. 55,593 --
Other ....................................................................... 727,183 470,264
----------- -----------
Total liabilities ............................................. 22,403,863 17,254,824
----------- -----------
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; 6,170,341 shares issued ...................................... 1,794,141 1,794,141
Additional paid-in capital ............................................. 1,374,001 1,442,773
Accumulated other comprehensive income ................................. 278,981 137,440
Retained earnings ...................................................... 24,513,285 22,546,355
----------- -----------
27,960,408 25,920,709
Less: Treasury stock, at cost (348,232 and 147,292
common shares, respectively) ....................................... (1,603,273) (727,420)
----------- -----------
Total shareholders' equity .................................... 26,357,135 25,193,289
----------- -----------
Total liabilities and shareholders' equity .................... $48,760,998 $42,448,113
=========== ===========
See accompanying notes to consolidated financial statements.
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5
BANCINSURANCE CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Income
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
2000 1999 2000 1999
---------- ---------- ----------- -----------
Income:
Premiums written ............................ $5,919,345 $5,794,094 $13,911,157 $14,329,206
Decrease (increase) in unearned premiums .... 547,938 809,391 (1,781,747) (1,991,380)
---------- ---------- ----------- -----------
Premiums earned ............................. 6,467,283 6,603,485 12,129,410 12,337,826
Premiums ceded .............................. (67,728) (28,618) (114,229) (58,781)
---------- ---------- ----------- -----------
Net premiums earned ................... 6,399,555 6,574,867 12,015,181 12,279,045
Investment income (net of expenses of $47,048
and $54,292 respectively) ................. 428,994 361,468 843,289 695,753
Net realized gain (loss) on investments ..... (89,284) 36,599 (116,593) 113,444
Codification and subscription fees .......... 599,702 -- 769,963 --
Claims administration fees .................. 121,831 123,591 322,904 261,223
Title and appraisal fees .................... -- 639,277 115,724 1,161,660
Management fees ............................. 71,885 318,334 446,556 579,198
Commission fees ............................. 41,854 -- 107,101 --
Other income ................................ 901,969 31,041 941,052 50,856
---------- ---------- ----------- -----------
Total revenue ......................... 8,476,506 8,085,177 15,445,177 15,141,179
---------- ---------- ----------- -----------
Losses and operating expenses:
Losses and loss adjustment expenses ......... 3,781,310 3,591,085 7,466,626 7,313,701
Reinsurance recoveries ...................... (28,926) -- (45,967) --
Commission expense .......................... 906,001 1,025,940 1,511,675 1,878,641
Other insurance operating expenses .......... 882,084 664,331 1,664,324 1,092,570
General and administrative expenses ......... 944,291 1,085,291 1,856,662 1,847,513
Interest expense ............................ 85,467 41,840 179,994 82,697
---------- ---------- ----------- -----------
Total expenses ........................ 6,570,227 6,408,487 12,633,314 12,215,122
---------- ---------- ----------- -----------
Income before federal income taxes .... 1,906,279 1,676,690 2,811,863 2,926,057
Federal income tax expense ..................... 593,217 493,692 844,932 862,284
---------- ---------- ----------- -----------
Net income ............................ $1,313,062 $1,182,998 $ 1,966,931 $ 2,063,773
========== ========== =========== ===========
Basic and diluted earnings per share ........... $ .22 $ .19 $ .33 $ .33
========== ========== =========== ===========
See accompanying notes to consolidated financial statements.
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6
BANCINSURANCE CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
2000 1999 2000 1999
---------- ---------- ---------- ----------
Net income ..................................... $1,313,062 $1,182,998 $1,966,931 $2,063,773
Other comprehensive income:
Unrealized holding gains (losses) arising
during period, net of income tax (benefit)
expense of $72,915 and $(119,972),
respectively ............................. 20,696 (89,519) 141,542 (232,886)
---------- ---------- ---------- ----------
Comprehensive income ........................... $1,333,758 $1,093,479 $2,108,473 $1,830,887
========== ========== ========== ==========
See accompanying notes to consolidated financial statements.
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7
BANCINSURANCE CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
Six Months Ended
June 30,
2000 1999
----------- -----------
Cash flows from operating activities:
Net income ......................................................................... $ 1,966,931 $ 2,063,773
Adjustments to reconcile net income to net cash provided by operating activities:
Net realized gain on disposal of subsidiary ..................................... (35,311) --
Net realized (gain) loss on investments ......................................... 116,593 (113,444)
Net realized loss on disposal of equipment ...................................... 798 437
Net realized loss on debt forgiveness ........................................... 30,000 --
Depreciation and amortization ................................................... 130,436 95,153
Deferred federal income tax (benefit) expense ................................... 43,545 (26,380)
Change in premiums receivable ................................................... (607,244) (996,240)
Change in accounts receivable ................................................... 847,721 (74,391)
Change in deferred policy acquisition costs ..................................... (407,662) (388,115)
Change in other assets .......................................................... (438,472) (561,041)
Change in reserve for unpaid losses and loss adjustment expenses ................ 280,876 730,099
Change in unearned premiums ..................................................... 1,746,449 1,991,380
Change in return premium payable ................................................ 1,353,113 721,273
Change in contract funds on deposit ............................................. (365,479) 167,808
Decrease in other liabilities ................................................... (440,068) (452,693)
----------- -----------
Net cash provided by operating activities .................................... 4,222,226 3,157,619
----------- -----------
Cash flows from investing activities:
Proceeds from held to maturity: fixed maturities due to redemption or maturity ..... 895,000 115,000
Proceeds from available for sale: fixed maturities sold, redeemed and matured ...... 1,044,788 2,259,646
Proceeds from available for sale: equity securities sold ........................... 2,939,973 1,943,885
Cost of investments purchased:
Held to maturity: fixed maturities ................................................. (885,085) (200,000)
Available for sale: fixed maturities ............................................... (1,598,023) (5,378,331)
Equity securities .................................................................. (3,478,973) (2,692,375)
Net decrease in short-term investments ............................................. 561,095 624,848
Net (increase) decrease in securities purchased under agreements to resell ......... 1,053,286 (250,778)
Other .............................................................................. (40,070) (165,778)
Cash used in purchase of subsidiary ................................................ (958,094) --
----------- -----------
Net cash used in investing activities ........................................ (466,103) (3,743,883)
----------- -----------
Cash flows from financing activities:
Proceeds from note payable to bank ................................................. 8,550,000 4,000,000
Repayments from note payable to bank ............................................... (6,545,000) (4,250,000)
Proceeds from stock options exercised .............................................. 37,563 --
Acquisition of treasury stock ...................................................... (982,189) --
Dividends paid ..................................................................... -- (464)
----------- -----------
Net cash provided by (used in) financing activities .......................... 1,060,374 (250,464)
----------- -----------
Net increase (decrease ) in cash ...................................................... 4,816,497 (836,728)
----------- -----------
Cash at December 31 ................................................................... 2,401,312 4,582,168
----------- -----------
Cash at June 30 ....................................................................... $ 7,217,809 $ 3,745,440
=========== ===========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest ........................................................................ $ 169,297 $ 82,697
=========== ===========
Income taxes .................................................................... $ 745,000 $ 1,000,000
=========== ===========
See accompanying notes to consolidated financial statements.
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BANCINSURANCE CORPORATION
AND SUBSIDIARIES
Notes To Consolidated Financial Statements (Unaudited)
1. The Consolidated Balance Sheet as of June 30, 2000, the Consolidated
Statements of Income for the three and six months ended June 30, 2000 and 1999,
and the Consolidated Statements of Comprehensive Income for the three and six
months ended June 30, 2000 and 1999, and the Consolidated Statements of Cash
Flows for the six months then ended have been prepared by Bancinsurance
Corporation ("Bancinsurance") without an audit. In the opinion of 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, 2000 and for all periods presented have been made.
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10
Regulation S-X.
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 our form 10-K for the year ended December 31, 1999. The
results of operations for the period ended June 30, 2000 are not necessarily
indicative of the results of operations for the full year.
In 1998, the National Association of Insurance Commissioners ("NAIC") adopted
the Codification of Statutory Accounting Principles guidance, which will replace
the current Accounting Practices and Procedures manual as the NAIC's primary
guidance on statutory accounting. The NAIC is now considering amendments to the
Codification guidance that would also be effective upon implementation. The
Codification provides guidance for areas where statutory accounting has been
silent and changes current statutory accounting in some areas. The Ohio
Insurance Department has adopted the Codification guidance, effective January 1,
2001. We have not estimated the potential effect of the Codification guidance
adopted by the Department.
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. In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement establishes accounting and
reporting standards for derivatives instruments and requires recognition of all
derivatives as assets or liabilities in the statement of financial position and
measurement of those instruments at fair value. The statement, as amended, is
effective for fiscal years beginning after June 15, 2000. Our balance sheet and
statements of earnings and cash flows were not materially impacted by the
adoption of this statement.
4. Supplemental Disclosure For Earnings Per Share
Three Months Ended Six Months Ended
June 30, June 30,
2000 1999 2000 1999
---------- ---------- ---------- ----------
Net income ............................... $1,313,062 $1,182,998 $1,966,931 $2,063,773
---------- ---------- ---------- ----------
Weighted average common shares outstanding 5,867,370 6,135,179 5,938,239 6,135,179
Adjustments for dilutive securities:
Dilutive effect of outstanding options 15,275 82,744 21,369 87,140
---------- ---------- ---------- ----------
Diluted common shares .................... 5,882,645 6,217,923 5,959,608 6,222,319
========== ========== ========== ==========
Basic and diluted earnings per share ..... $ .22 $ .19 $ .33 $ .33
8
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BANCINSURANCE CORPORATION
AND SUBSIDIARIES
Notes To Consolidated Financial Statements (Unaudited) (Continued)
On May 5, 1999, we declared a 5% common stock dividend to shareholders of record
on May 25, 1999. Accordingly, all common stock share data have been adjusted to
include the effect of the stock dividend.
5. We operate primarily in the property/casualty insurance industry. There are
intersegment management fees and commission fees. The allocations of certain
general expenses within segments are based on a number of assumptions, and the
reported operating results would change if different methods were applied.
Depreciation and capital expenditures are not considered material.
JUNE 30, 2000
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PROPERTY/ WORKERS MUNICIPAL
CASUALTY TITLE COMPENSATION INSURANCE CODE ALL CONSOLIDATED
INSURANCE AGENCY ADMINISTRATION AGENCY PUBLISHING OTHER TOTALS
---------------------------------------------------------------------------------------------
Revenues from external customers .. $13,801,925 $115,724 $322,904 $ 108,124 $ 769,963 $ 1,029 $15,119,669
Intersegment revenues ............. 2,940 -- -- 443,770 -- 24,620 471,330
Interest revenue .................. 770,108 -- -- 27 -- 26,703 796,838
Interest expense .................. 3,259 90 -- 40 -- 176,605 179,994
Depreciation and amortization ..... 33,407 419 1,764 53,774 14,501 26,571 130,436
Segment profit (loss) ............. 3,077,901 (37,138) 20,277 275,813 128,393 (182,053) 3,283,193
Income tax expense (benefit) ...... 892,438 -- 6,931 111,033 47,082 (212,552) 844,932
Segment assets .................... 41,820,737 -- 179,689 2,687,149 1,488,363 4,148,353 50,324,291
JUNE 30, 1999
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WORKERS
PROPERTY/CASUALTY TITLE COMPENSATION ALL CONSOLIDATED
INSURANCE AGENCY ADMINISTRATION OTHER TOTALS
------------------------------------------------------------------------------
Revenues from external customers.. $13,070,834 $1,161,460 $261,223 $ 609 $14,494,126
Intersegment revenues ............ 4,740 -- -- 5,220 9,960
Interest revenue ................. 645,538 -- -- 11,475 657,013
Interest expense ................. 2,300 1,402 29 78,966 82,697
Depreciation and amortization .... 33,685 30,657 2,356 28,455 95,153
Segment profit (loss) ............ 3,426,340 28,225 (38,793) (479,755) 2,936,017
Income tax expense (benefit) ..... 1,030,420 11,028 -- (179,164) 862,284
Segment assets ................... 37,475,794 924,405 189,983 3,483,838 42,074,020
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BANCINSURANCE CORPORATION
AND SUBSIDIARIES
Notes To Consolidated Financial Statements (Unaudited) (Continued)
-----------------------------
JUNE 30 JUNE 30
2000 1999
-----------------------------
REVENUES
- --------
Total revenues for reportable segments ..... $15,119,669 $14,494,126
Interest revenue ........................... 796,838 657,013
Elimination of intersegment revenues ....... (471,330) (9,960)
----------- -----------
Total consolidated revenues ................ $15,445,177 $15,141,179
=========== ===========
PROFIT
- ------
Total profit for reportable segments ....... $ 3,465,246 $ 3,415,772
Other loss ................................. (182,053) (479,755)
Elimination of intersegment profits ........ (471,330) (9,960)
----------- -----------
Income before income taxes ................. $ 2,811,863 $ 2,926,057
=========== ===========
ASSETS
- ------
Total assets for reportable segments ....... $46,175,938 $38,590,182
Other assets ............................... 4,148,353 3,483,838
Elimination of intersegment receivables .... (1,563,293) (1,533,413)
----------- -----------
Consolidated assets ........................ $48,760,998 $40,540,607
=========== ===========
5. On August 16, 1999, 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 500,000 of its common shares. The
program will expire on December 31, 2000. As of June 30, 2000, we have
repurchased 365,070 shares at an average price per share of $4.74 under
this program. Repurchases have been and will continue to be funded by
cash flows from operations.
6. On January 24, 2000, we sold 85.4% of our 100 shares of Custom Title
Services, Inc. for $350,000 in the form of a promissory note. The note
bears interest at the prime rate, payable quarterly commencing March 1,
2000, and is payable as to principal quarterly commencing March 1,
2002. We contributed the remaining 14.6 shares of Custom Title in
consideration of a 10% capital investment of $60,000 in the acquiring
company. The carrying amount of the investment is a reasonable estimate
of fair value. In connection with the sale transaction, we loaned
$91,000 to the acquiring company. The associated promissory note
provides for interest at the prime rate and is payable in full as to
interest and principal on February 1, 2001.
7. On July 19, 1999, we entered into an Agreement and Plan of Merger with
Westford Group, Inc., an Ohio corporation ("Westford"), whereby
Westford would be merged with and into Bancinsurance. On February 29,
2000, the shareholders of Westford approved the merger. We paid the
Westford shareholders cash in the amount of $.70 per share for each
share of Westford common stock, without par value. The total amount of
the merger consideration paid by us was $958,094. We paid the merger
consideration from existing cash reserves. Immediately following the
new merger, Westford was dissolved and Westford's wholly-owned
subsidiary, American Legal Publishing Corporation ("ALPC") became the
surviving entity as a wholly-owned subsidiary of Bancinsurance. ALPC
offers a wide range of publishing services including information
management, document imaging, and electronic publishing solutions for
state and local governments. They currently publish, supplement and
distribute codes of ordinances for over 1,000 municipalities. The
merger was accounted for as a purchase and, accordingly, our financial
statements reflect them from the date of acquisition. The excess of the
fair value of net assets acquired over the purchase price of
approximately $440,780 was allocated to a database acquired. Pro forma
data for the merger is not included as the effect is not material to
the Company's financial statements. The database is comprised of the
municipal code data and related files. Provision for amortization of
the database is based on an estimated useful life of twenty years
reflecting the long-lived nature of the municipal codes.
9. Included in other income is a $900,000 payment received in May 2000, in
connection with the settlement of a dispute with an unaffiliated party.
10
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BANCINSURANCE CORPORATION
AND SUBSIDIARIES
Notes To Consolidated Financial Statements (Unaudited) (Continued)
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
OVERVIEW
Bancinsurance Corporation is a specialty property insurance holding company. Our
principal sources of revenue are premiums paid by insureds for insurance
policies issued by our 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 us. Our principal costs are losses and loss
adjustment expenses. The principal factor in determining the level of our 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. We are 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 us 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. We
review case and IBNR reserves monthly and make appropriate adjustments.
During 1993, BCIS Services, Inc. was incorporated as our wholly-owned
subsidiary. BCIS Services provides workers' compensation professional
administration and cost control services to employers who self-insure this
obligation. BCIS Services derives its revenues principally from claims
administration fees. On August 25, 1999, we acquired Paul Boardway and
Associates, Inc. Paul Boardway and Associates is a property/casualty insurance
agency serving lending institutions and derives its revenues principally from
commission fees. On February 29, 2000, American Legal Publishing Corporation
became a wholly-owned subsidiary through a merger. American Legal Publishing's
primary business consists of the codification of municipal and county codes of
ordinances and the supplementing thereof.
SUMMARY RESULTS
The following table sets forth period to period changes in selected financial
data:
------------------------
Period to Period Increase
Six Months Ended June 30,
------------------------
1999-2000
------------------------
Amount % Change
------------------------
Premiums written ............................ $(418,049) (2.9)%
Net premiums earned ......................... (263,864) (2.1)%
Net investment income ....................... (82,501) (10.2)%
Total revenue ............................... 303,998 2.0%
Loss and loss adjustment expense,
net of reinsurance recoveries .............. 106,958 1.5%
Operating expense ........................... 213,937 4.4%
Interest expense ............................ 97,297 117.7%
Operating income ............................ (114,194) (3.9)%
Net income .................................. $ (96,842) (4.7)%
11
12
BANCINSURANCE CORPORATION
AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Continued)
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
Company ("Ohio Indemnity), a consolidated subsidiary, on both a statutory and
GAAP basis for the six months ended June 30:
2000 1999
-----------------------
Statutory:
Loss ratio ............................. 61.8% 59.6%
Expense ratio .......................... 26.6% 22.2%
---- ----
Combined ratio ......................... 88.4% 81.8%
==== ====
GAAP:
Loss ratio ............................. 61.8% 59.6%
Expense ratio .......................... 25.6% 19.8%
---- ----
Combined ratio ......................... 87.4 % 79.4%
==== ====
Investments of Ohio Indemnity's assets are restricted to the investments
permitted by Ohio's insurance laws. Our overall investment policy is determined
by our Board of Directors and is reviewed periodically. We principally invest in
investment-grade obligations of states, municipalities and political
subdivisions because the majority of the interest income from these investments
is tax-exempt and these investments have generally resulted in favorable net
yields. We have the ability and intent to hold our held to maturity fixed income
securities to maturity or the applicable put date, and as a result we carry our
held to maturity fixed income securities at amortized cost for GAAP purposes. As
our fixed income securities mature, there can be no assurance that we will be
able to reinvest in securities with comparable yields.
RESULTS OF OPERATIONS
JUNE 30, 2000 AS COMPARED TO JUNE 30, 1999
- ------------------------------------------
Premiums Written; Premiums Earned. Premiums written for the six months ended
June 30, 2000 decreased 2.9% from $14,329,206 at June 30, 1999 to $13,911,157,
while premiums earned decreased 2.1% from $12,279,045 at June 30, 1999 to
$12,015,181 at June 30, 2000. Premiums written increased 2.2% for the three
months ended June 30, 1999 versus June 30, 2000, respectively, while premiums
earned decreased 2.7% for the same second quarter comparables. Premiums written
for Ultimate Loss Insurance increased 3.3% from $10,003,606 in the first six
months of 1999 to $10,329,318 in the first six months of 2000. Premiums earned
from Ultimate Loss Insurance remained relatively constant from $9,983,611 in the
first six months of 1999 to $9,933,917 in the first six months of 2000. Premiums
written for Ultimate Loss Insurance increased 2.8% for the three months ended
June 30, 1999 versus 2000. Premiums earned for Ultimate Loss Insurance decreased
2.5% for the same second quarter comparables. Premiums written increased for
both the six month and second quarter comparables primarily due to acquisition
and lending activities of existing policyholders and financial institutions
added as customers. Premiums written for the Bonded Service program decreased
24.9% from $4,278,605 for the six months ended June 30, 1999 versus $3,214,432
in 2000, while premiums earned from the Bonded Service program decreased 24.5%
from $2,365,166 to $1,786,764 during the first half of 1999 and 2000,
respectively. Premiums written and earned for the Bonded Service program
decreased for the three and six months ended June 30, 1999 versus 2000. The
decreases in premiums written and premiums earned on the Bonded Service program
were primarily attributable to a reduction in premium associated with a decline
in risk exposure resulting from higher deductibles on two significant policies
and the loss of a trust.
Net Investment Income. Net investment income decreased 10.2% from $809,197 in
the first six months of 1999 to $726,696 in the first six months of 2000, and
decreased 14.7% from $398,067 to $339,710 in the three months ended June 30,
1999 and 2000, respectively. These decreases were due to realized investment
losses which were $116,593 and $89,284 in the first six months
12
13
BANCINSURANCE CORPORATION
AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Continued)
and second quarter of 2000, respectively, compared to realized investment gains
of $113,444 and $36,599 in the first six months and second quarter of 1999,
respectively.
Codification and Subscription Fees. Codification and subscription fees generated
by our American Legal Publishing subsidiary accounted for $769,963 and $599,702
of the revenues for the six months and three months ended June 30, 2000.
Claims Administration Fees. Claims administration fees generated by our BCIS
Services subsidiary accounted for $261,223 of the revenues for the first six
months of 1999 and $322,904 in the first six months of 2000. Claims
administration fees accounted for $123,591 and $121,831 of the revenues for the
three months ended June 30, 1999 and 2000, respectively. The six month increase
of $61,681 was attributable to claims processing and servicing responsibilities
provided to two clients acquired by BCIS Services during the second half of
1999. The second quarter claims administration fees remained relatively constant
due to a decline in claims administration services to a new client.
Title and Appraisal Fees. Title Services and appraisal fees generated by our
Custom Title Services subsidiary accounted for $1,161,660 and $115,724 of the
revenues during the first half of 1999 and 2000, respectively. On January 24,
2000, we sold Custom Title. See Note 7 to our Consolidated Financial Statements.
Management Fees. Management fees decreased from $579,198 during the six months
ended June 30, 1999 to $446,556 in the six months ended June 30, 2000.
Management fees decreased from $318,334 for the three months ended June 30, 1999
to $71,885 for the three months ended June 30, 2000. The decrease was
attributable to recognition of less favorable results from a closed year of
operations of the Bonded Service program. We expect management fees to vary from
year to year depending on claims experience in the Bonded Service program.
Commission Fees. Net commission fees generated by our Paul Boardway and
Associates subsidiary accounted for $107,101 and $41,854 of revenues during the
six and three months ended June 30, 2000. Paul Boardway and Associates was
acquired by us during the third quarter of 1999.
Other income. Other income increased by $890,196 to $941,052 for the six months
ended June 30, 2000, as compared to $50,856 for the six months ended June 30,
1999. Other income increased by $870,928 to $901,969 for the three months ended
June 30, 2000 from $41,041 for the three months ended June 30, 1999. This
increase is attributable to other income of $900,000 received by us in the
second quarter of 2000 in settlement of a dispute with an unaffiliated party.
Losses and Loss Adjustment Expenses, Net of Reinsurance Recoveries. Losses and
loss adjustment expenses totaled $7,313,701, or 59.6% of net premiums earned
during the first six months of 1999 versus $7,420,659, or 61.8% of net premiums
earned during the first six months of 2000. Losses and loss adjustment expenses
totaled $3,752,384 or 58.6% of net premiums earned during the second quarter of
2000 versus $3,591,085, or 54.6% of net premiums earned during the second
quarter of 1999. Loss and loss adjustment expenses for the Ultimate Loss
Insurance program remained relatively constant from $6,933,495 during the six
months ended June 30, 1999 to $6,906,158 during the six months ended June 30,
2000. Losses and loss adjustment expenses for the Ultimate Loss Insurance
program remained relatively constant from $3,526,619 during the three months
ended June 30, 1999 to $3,493,066 during the three months ended June 30, 2000.
Losses and loss adjustment expenses for the Bonded Service program decreased
69.6% from $102,639 in 1999 to $31,200 in 2000 primarily due to favorable loss
experience on reserves for prior accident years, and further complemented by a
decrease in the loss and loss adjustment expense ratio for losses and loss
adjustment expenses occurring in the current accident year.
Operating Expense. Operating expense consists of commission expense, other
insurance operating expense and general and administrative expenses. Operating
expense increased 4.4% from $4,818,724 for the six months ended June 30, 1999
compared with $5,032,661 during the six months ended June 30, 2000. Operating
expense decreased 1.6% from $2,775,562 to $2,732,376 during the three months
ended June 30, 1999 and 2000, respectively. Commission expense decreased 19.5%
from $1,878,641 for
13
14
BANCINSURANCE CORPORATION
AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Continued)
the six months ended June 30, 1999 to $1,511,675 for the six months ended June
30, 2000. Commission expense decreased 11.7% from $1,025,940 to $906,001 in the
second quarter, primarily due to the elimination of intersegment commission
expense of $443,771 and $235,937 for the first half and second quarter of 2000,
respectively, incurred in connection with our Paul Boardway and Associates
subsidiary. Prior to August 25, 1999, Paul Boardway and Associates was an
unaffiliated independent insurance agency. Subsequent to the acquisition, all
intercompany commission transactions and balances have been eliminated in
consolidation. Other insurance operating expenses increased 52.3% from
$1,092,570 in the first six months of 1999 to $1,664,324 in the first six months
of 2000 and increased 32.8% from $664,331 to $882,084 during the three months
ended June 30, 1999 and 2000, respectively, primarily due to increases in
allocable salaries and related benefits, computer consulting services, legal and
insurance department licenses and fees. General and administrative expenses
remained relatively constant from $1,847,513 in the first six months of 1999 to
$1,856,662 in the first six months of 2000. General and administrative expenses
decreased 13.0% from $1,085,291 to $944,291 in the second quarter of 1999 versus
2000, respectively, primarily due to decreases in salaries and related benefits,
shareholder expense, rent and insurance. BCIS Services incurred operating
expenses of $300,016 in the first six months of 1999 compared with $302,749
during the first six months of 2000 and decreased 11.6% from $147,506 during the
second quarter of 1999 to $130,452 during the second quarter of 2000. Custom
Title discontinued business operations under our ownership January 24, 2000.
Paul Boardway and Associates incurred operating expenses of $276,108 during the
six months ended June 30, 2000 and $124,113 in the second quarter of 2000.
American Legal Publishing incurred operating expenses of $641,816 and $501,198
for the six months and three months ended June, 2000, respectively.
Interest Expense. Interest expense increased from $82,697 in the first six
months of 1999 to $179,994 in the first six months of 2000 and increased from
$41,840 for the three months ended June 30, 1999 versus $85,467 for the three
months ended June 30, 2000 due to higher borrowing levels on our revolving
credit line and increases in the prime rate.
Federal Income Taxes. Federal income taxes decreased 2.0% from $862,284 in the
first six months of 1999 and $844,932 in the first six months of 2000 and
increased 20.2% from $493,692 to $593,217 in the second quarter, respectively.
The effective consolidated income tax rate was 29.5% for the quarter ended June
30, 1999 and 30.0% for the quarter ended June 30, 2000.
Statutory Combined Ratios. The change in the statutory combined ratio from 81.8%
at June 30, 1999 to 88.4% June 30, 2000 was an anticipated increase in the loss
ratio due to management's continuing emphasis on larger accounts in the Ultimate
Loss Insurance program.
DISCONTINUED PRODUCTS
On January 24, 2000, we entered into an agreement for the sale of Custom Title
Services, Inc. as part of an overall strategy to focus on historically
profitable core lines of business. Our management does not expect this
transaction to have a material adverse effect on our operating results.
LIQUIDITY AND CAPITAL RESOURCES
We are an insurance holding company whose principal asset is the stock of Ohio
Indemnity. We are, and will continue to be, dependent on dividends from Ohio
Indemnity to meet our liquidity requirements, including debt service
obligations. We have a $10 million credit facility to fund working capital
requirements. Based on statutory limitations, the maximum amount of dividends
that we would be able to receive in 2000 from Ohio Indemnity, absent regulatory
consent, is $3,644,602.
Ohio Indemnity derives its funds principally from net premiums written,
reinsurance recoveries, investment income and contributions of capital from us.
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 equaled $4,222,226 and $3,157,619 for the six months ended
June 30, 2000 and 1999, respectively. Net cash provided by (used in) financing
activities was $1,060,374 for the six months ended June 30, 2000 and $(250,464)
for the six months ended June 30, 1999. Net cash used in our investing
activities was $466,103 and $3,743,883 for the six months ended June 30, 2000
and 1999, respectively.
14
15
BANCINSURANCE CORPORATION
AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Continued)
BCIS Services derives its funds principally from claims administration fees,
American Legal Publishing from codification and subscription fees and Paul
Boardway and Associates from commission fees which are sufficient to meet their
respective operating obligations. Our Company has pursued selected growth
opportunities to build upon existing strengths and industry experience. As each
business segment is continually evaluated with goals of increased revenue and
profitability, management will reposition assets to those areas which contribute
to our overall financial objectives.
Our balance sheet liquidity remains favorable as evidenced by invested assets
that significantly exceed liabilities. The liquidity position has been enhanced
by positive underwriting and favorable loss experience.
We maintain a level of cash and liquid short-term investments which we believe
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 we insure, losses and loss adjustment
expenses emanating from our 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, we believe that we
can estimate our cash needs to meet our loss and expense payment obligations
through the next twelve months.
Our investments at June 30, 2000 consisted primarily of investment-grade fixed
income securities. Cash and short-term investments at June 30, 2000 amounted to
$12,250,632 or 31.4% of total cash and invested assets. The fair values of our
held to maturity fixed income securities are subject to market fluctuations but
are carried on the balance sheet at amortized cost because we have the ability
and intent to hold held to maturity fixed income securities to maturity or put
date. Available for sale fixed income securities are reported at fair value with
unrealized gains or losses, net of applicable deferred taxes, reflected in
accumulated other comprehensive income. We earned net investment income of
$726,696 and $809,197 for the six months ended June 30, 2000 and 1999,
respectively.
Interest rate risk is the risk that interest rates will change and cause a
decrease in the value of an insurer's investments. We mitigate this risk by
attempting to ladder 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, we would have to sell assets prior to maturity and recognize
a gain or loss.
Our Company has produced favorable equity growth over the past year, driven by
operating earnings which were tempered by our stock repurchase program.
Management believes we are sufficiently capitalized to support future business
growth.
All our material capital commitments and financial obligations are reflected in
our financial statements, except our 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 these programs for any
claims filed and for an estimate of incurred but not reported losses. These
reserves were $193,000 and $226,250 at June 30, 2000 and 1999, 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.
DISCLOSURE ABOUT MARKET RISK
The following discussion about our risk-management activities includes
"forward-looking statements" that involve risk and uncertainties. Actual results
could differ materially from those projected in the forward-looking statements.
Market risk is the risk of loss arising from adverse changes in market rates and
prices, such as interest rates, foreign currency exchange rates, and other
relevant market rate or price changes. Market risk is directly influenced by the
volatility and liquidity in the markets in which the related underlying assets
are traded. The following is a discussion of our primary market risk exposures
15
16
BANCINSURANCE CORPORATION
AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Continued)
and how those exposures are currently managed as of June 30, 2000. Our market
risk sensitive instruments are entered into for purposes other than trading.
The carrying value of our investment portfolio as of June 30, 2000 was
$31,800,863, 66.7% of which is invested in fixed maturity securities and 15.8%
of which is invested in short-term securities. The primary market risk to the
investment portfolio is interest rate risk associated with investments in fixed
maturity securities as well as fixed-rate short-term investments. Our exposure
to equity risk is not significant. We have no foreign exchange risk or direct
commodity risk.
For fixed maturity securities, the short-term liquidity needs and the potential
liquidity needs of the business are key factors in managing the portfolio. The
portfolio duration relative to the liabilities' duration is primarily managed
through cash market transactions. For additional information regarding our
objectives and strategies pertaining to the investment portfolio, see the
Liquidity and Capital Resources section of this Management's Discussion and
Analysis.
For our investment portfolio, there were no significant changes in our primary
market risk exposures or in how these exposures are managed compared to the year
ended December 31, 1999. We do not anticipate significant changes in our primary
market risk exposures or in how those exposures are managed in future reporting
periods based upon what is known or expected to be in effect in future reporting
periods.
The fair values of loans to affiliates and notes payable would not be materially
different as compared to their fair values at December 31, 1999 as interest
rates have remained relatively consistent.
FACTORS TO CONSIDER FORWARD LOOKING
Going forward, management will consider underwriting, acquisition and investment
opportunities which fit our strategy of penetrating niche markets. These
decisions will be in areas where management feels they have an understanding of
the underwriting and inherent risks. Management is intent on adding independent
agents to expand our market presence. We will further concentrate on penetrating
larger financial institutions for collateral protection insurance and expanding
financial institution programs to include mortgage collateral insurance.
Opportunities will be considered for underwriting additional non-profit
organizations as they continue to consolidate into national trusts and seek to
retain and transfer their unemployment claim exposure.
On January 24, 2000, we entered into an agreement for the sale of Custom Title
Services, Inc. as part of an overall strategy to focus on historically
profitable core lines of business. On February 29, 2000, we acquired Westford
Group, Inc. Management expects neither of these transactions will have a
material adverse effect on our operating results.
TRENDS
Management does not know of any trends, events or uncertainties that will have,
or that are reasonably likely to have, a material adverse effect on our
liquidity, capital resources or results of operations.
Our results of operations have varied from quarter to quarter principally
because of fluctuations in underwriting results. Our experience indicates that
more loans for automobile purchases are financed during summer months due to
seasonal consumer buying habits. Codification and subscription fees vary
principally because of fluctuations in production. Sales typically increase
during the second and third quarters as a result of sales to basic code
subscribers. We expect that such quarterly fluctuations may lessen as the
percentage of our new sales are made to clients with fiscal years other than
December 31, although there can be no assurance that this will occur.
FORWARD-LOOKING INFORMATION
Statements in this "Management's Discussion and Analysis of Financial Condition
and Results of Operations" that indicate our or management's intentions, hopes,
beliefs, expectations or predictions of the future are forward-looking
statements. It is important to note that our actual results could differ
materially from those projected in such forward-looking statements.
Forward-looking statements are not guarantees of performance. They involve
risks, uncertainties and assumptions. Our future results and shareholder values
may differ materially from those expressed in these forward-looking statements.
Many of the factors that will determine these results and values are beyond our
ability to control or predict. Shareholders are cautioned not to put undue
16
17
BANCINSURANCE CORPORATION
AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Continued)
reliance on forward-looking statements. In addition, we do 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, we claim 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 2000, we have 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 our liquidity, capital resources or results
of operations.
The NAIC has developed a risk-based capital measurement formula to be applied to
all property/casualty insurance companies. This formula calculates a minimum
required statutory net worth, based on the underwriting, investment, credit,
loss reserve and other business risks inherent in an individual company's
operations. Under the current formula, any insurance company which does not meet
threshold risk-based capital measurement standards could be forced to reduce the
scope of its operations and ultimately could become subject to statutory
receivership proceedings. Based on our analysis, it appears that our total
adjusted capital is in excess of all required action levels and that no
corrective action will be necessary. The Risk Based Capital provisions have been
enacted into the Ohio Revised Code.
RESERVES
The amount of incurred losses and loss adjustment expenses is dependent upon a
number of factors, including claims frequency and severity, and the nature and
types of losses incurred and the number of policies written. These factors may
fluctuate from year to year and do not necessarily bear any relationship to the
amount of premiums written or earned.
As claims are incurred, provisions are made for unpaid losses and loss
adjustment expenses by accumulating case reserve estimates for claims reported
prior to the close of the accounting period and by estimating IBNR claims based
upon past experience modified for current trends. Notwithstanding the
variability inherent in such estimates, management believes that the provisions
made for unpaid losses and loss adjustment expenses are adequate to meet our
claims obligations. 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 our results of operations. Our
independent consulting actuary has opined that loss and loss adjustment expense
reserve levels, as of December 31, 1999, were reasonable.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The information required by this item is included under the caption
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Disclosure About Market Risk".
17
18
BANCINSURANCE CORPORATION
AND SUBSIDIARIES
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
We held our Annual Meeting of Shareholders on May 30, 2000 for the purpose of
electing six directors to serve one year terms expiring in 2001.
The number of votes cast for or against each candidate is as follows:
VOTES FOR VOTES WITHHELD
--------- --------------
John S. Sokol 5,098,226 30,544
Si Sokol 5,116,850 11,920
James R. Davis 5,114,750 14,020
Daniel D. Harkins 5,116,850 11,920
Milton O. Lustnauer 5,054,330 74,440
Saul Sokol 5,054,330 74,440
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
--------
Item 27 Financial Data Schedule
(b) Reports on Form 8-K
-------------------
A Form 8-K was filed by us as of June 20, 2000. A Form 8-K/A was
filed by us as of June 29, 2000.
18
19
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, we have
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
BANCINSURANCE CORPORATION
-------------------------
(Company)
Date: August 11, 2000 By: Si Sokol
-------------------------------- ------------------------------------
Si Sokol
Chairman and Chief Executive Officer
(Principal Executive Officer)
Date: August 11, 2000 By: Sally Cress
-------------------------------- ------------------------------------
Sally Cress
Treasurer and Secretary
(Principal Financial and
Accounting Officer)
19