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 Quarterly Period Ended March 31, 2001 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.)
250 East Broad Street, Columbus, Ohio 43215
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(Address of principal executive offices) (Zip Code)
(614) 228-2800
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(Registrant's telephone number including area code)
20 East Broad Street, Columbus, Ohio 43215
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(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 March 31, 2001
- ----------------------------------- -----------------------------
Common shares, without par value 5,768,185
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BANCINSURANCE CORPORATION
AND SUBSIDIARIES
INDEX
-----
Page No.
PART I - FINANCIAL INFORMATION:
Item 1. Financial Statements
Consolidated Balance Sheets as of
March 31, 2001 (unaudited) and December 31, 2000............................................ 3
Consolidated Statements of Income for the
three months ended March 31, 2001 and 2000 (unaudited)...................................... 5
Consolidated Statements of Comprehensive Income for the
three months ended March 31, 2001 and 2000 (unaudited)...................................... 6
Consolidated Statements of Cash Flows for the
three months ended March 31, 2001 and 2000 (unaudited)...................................... 7
Notes to Consolidated Financial Statements (unaudited).............................................. 9
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations............................................... 11
Item 3. Quantitative and Qualitative Disclosures About
Market Risk................................................................................. 16
PART II - OTHER INFORMATION AND SIGNATURES
Item 1. Legal Proceedings.................................................................. Not Applicable
Item 2. Changes in Securities and Use of Proceeds.......................................... Not Applicable
Item 3. Defaults 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
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3
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements
BANCINSURANCE CORPORATION
AND SUBSIDIARIES
Consolidated Balance Sheets
March 31, December 31,
Assets 2001 2000
- ------ ------------------ -----------
(Unaudited) (Note 2)
Investments:
Held to maturity:
Fixed maturities, at amortized cost (fair value
$4,779,957 in 2001 and $5,144,356 in 2000)................................. $ 4,649,346 $ 5,048,466
Available for sale:
Fixed maturities, at fair value (amortized cost
$15,405,765 in 2001 and $14,323,397 in 2000)............................... 15,318,353 14,486,863
Equity securities, at fair value (cost $5,571,130
in 2001 and $3,852,659 in 2000)............................................ 5,623,442 4,823,438
Short-term investments, at cost which
approximates fair value...................................................... 4,952,937 6,019,440
-------------- ---------------
Total investments..................................................... 30,544,078 30,378,207
-------------- ---------------
Cash ............................................................................... 6,791,642 6,560,778
Premiums receivable................................................................. 4,569,626 2,591,617
Accounts receivable, net of allowance for doubtful accounts......................... 389,417 441,315
Reinsurance receivable.............................................................. 53,988 20,250
Reinsurance recoverable on paid losses.............................................. 27,538 99,631
Prepaid reinsurance premiums........................................................ 178,019 50,048
Deferred policy acquisition costs................................................... 1,682,571 642,787
Estimated earnings in excess of billings on uncompleted codification contracts...... 142,014 159,295
Loans to affiliates................................................................. 536,039 533,039
Notes receivable.................................................................... 350,000 441,000
Land and building, net.............................................................. - 34,546
Furniture, fixtures and leasehold improvements, net................................. 130,471 134,691
Excess of investment over net assets of subsidiaries, net........................... 2,607,862 2,635,424
Intangible asset, net............................................................... 416,906 422,416
Accrued investment income........................................................... 364,046 336,803
Amount due from broker.............................................................. 138,145 100,000
Other assets........................................................................ 134,618 319,137
-------------- ---------------
Total assets................................................ $ 49,056,980 $ 45,900,984
============== ===============
(Continued)
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4
BANCINSURANCE CORPORATION
AND SUBSIDIARIES
Consolidated Balance Sheets, Continued
March 31, December 31,
Liabilities and Shareholders' Equity 2001 2000
- ------------------------------------ ------------- -------------
(Unaudited) (Note 2)
Reserve for unpaid losses and loss adjustment expenses.............................. $ 4,062,503 $ 2,958,615
Unearned premiums................................................................... 5,637,535 2,740,418
Reinsurance premiums payable........................................................ 24,138 -
Experience rating adjustments payable............................................... 1,454,470 1,316,563
Retrospective premium adjustments payable........................................... 458,605 855,567
Funds held under reinsurance treaties............................................... 137,025 -
Contract funds on deposit........................................................... 2,165,972 2,073,529
Note payable to bank................................................................ 4,300,000 5,142,000
Acquisition liability............................................................... 115,584 159,659
Taxes, licenses, and fees payable................................................... 183,420 216,923
Federal income taxes payable........................................................ 114,144 47,314
Deferred federal income taxes....................................................... 85,478 310,345
Commissions payable................................................................. 750,166 821,777
Billings in excess of estimated earnings on uncompleted codification contracts...... 65,878 64,195
Amount due broker................................................................... 150,000 -
Other............................................................................... 938,951 658,720
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Total liabilities..................................................... 20,643,869 17,365,625
------------- -------------
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 shares without par value; authorized 20,000,000 shares;
6,170,341 shares issued ................................................. 1,794,141 1,794,141
Additional paid-in capital..................................................... 1,336,805 1,336,805
Accumulated other comprehensive income (loss).................................. (23,167) 748,602
Retained earnings.............................................................. 27,118,774 26,464,712
------------- -------------
30,226,553 30,344,260
Less: Treasury stock, at cost (402,156 in 2001 and
401,106 in 2000 common shares)............................................. (1,813,442) (1,808,901)
------------- -------------
Total shareholders' equity............................................ 28,413,111 28,535,359
------------- -------------
Total liabilities and shareholders' equity............................ $ 49,056,980 $ 45,900,984
============= =============
See accompanying notes to consolidated financial statements.
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5
BANCINSURANCE CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Income
(Unaudited)
Three Months Ended
March 31,
2001 2000
------------ ------------
Income:
Premiums written................................................................. $ 10,002,032 $ 7,991,812
Increase in unearned premiums.................................................... (2,897,117) (2,329,685)
------------ ------------
Premiums earned.................................................................. 7,104,915 5,662,127
Premiums ceded................................................................... (90,221) (46,501)
------------ ------------
Net premiums earned....................................................... 7,014,694 5,615,626
Investment income (net of expenses of $10,521 and
$7,031, respectively).......................................................... 431,881 414,295
Net realized gain (loss) on investments.......................................... 422,567 (27,309)
Gain on sale of property......................................................... 15,848 -
Codification and subscription fees............................................... 593,874 170,261
Claims administration fees....................................................... - 201,073
Title and appraisal fees......................................................... - 115,724
Management fees.................................................................. 114,578 374,671
Commission fees.................................................................. 63,460 65,247
Other income..................................................................... 27,212 39,083
------------ ------------
Total revenue............................................................. 8,684,114 6,968,671
------------ ------------
Losses and operating expenses:
Losses and loss adjustment expenses.............................................. 5,199,793 3,673,292
Reinsurance recoveries........................................................... (61,276) (17,041)
Experience rating adjustments.................................................... 137,907 12,024
Commission expense............................................................... 1,003,068 605,674
Other insurance operating expenses............................................... 844,751 782,240
General and administrative expenses.............................................. 659,480 912,371
Interest expense................................................................. 6,787 94,527
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Total expenses............................................................ 7,790,510 6,063,087
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Income before federal income taxes........................................ 893,604 905,584
Federal income tax expense............................................................ 239,541 251,715
------------ ------------
Net income................................................................ $ 654,063 $ 653,869
============ ============
Basic and diluted earnings per share.................................................. $ .11 $ .11
============ ============
See accompanying notes to consolidated financial statements.
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6
BANCINSURANCE CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income (Loss)
(Unaudited)
Three Months Ended
March 31,
2001 2000
------------- -------------
Net income............................................................................ $ 654,063 $ 653,869
Other comprehensive income:
Unrealized holding gains (losses) arising during period, net of
income tax expense (benefit) of $(397,578) and $62,254, respectively......... (771,769) 120,846
------------- -------------
Comprehensive income (loss)........................................................... $ (117,706) $ 774,715
============ =============
See accompanying notes to consolidated financial statements.
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7
BANCINSURANCE CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
Three Months Ended
March 31,
2001 2000
----------- -----------
Cash flows from operating activities:
Net income ...................................................................... $ 654,063 $ 653,869
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 ..................................... (422,567) 27,309
Net realized gain on disposal of property ................................... (15,848) -
Depreciation and amortization ............................................... 50,471 62,545
Deferred federal income tax expense ......................................... 172,711 50,960
Change in premiums receivable ............................................... (1,978,009) (614,422)
Change in accounts and reinsurance receivable, net .......................... (37,718) 532,389
Change in deferred policy acquisition costs ................................. (1,039,784) (524,145)
Change in notes receivable .................................................. 91,000 -
Change in accrued investment income ......................................... (27,243) -
Change in other assets ...................................................... 213,339 (238,540)
Change in reserve for unpaid losses and loss adjustment expenses ............ 1,103,888 (26,819)
Change in unearned premiums ................................................. 2,897,117 2,294,387
Change in reinsurance premiums payable ...................................... 24,138 -
Change in experience rating adjustments payable ............................. 137,907 -
Change in retrospective premium adjustments payable ......................... (396,962) 544,173
Change in contract funds on deposit ......................................... 92,443 (355,549)
Change in other liabilities ................................................. 486,580 (503,013)
----------- -----------
Net cash provided by operating activities ................................ 2,005,526 1,867,833
----------- -----------
Cash flows from investing activities:
Proceeds from held to maturity: fixed maturities due to redemption or maturity . 400,000 275,000
Proceeds from available for sale: fixed maturities sold, redeemed and matured ... 1,462,950 214,000
Proceeds from available for sale: equity securities sold ........................ 3,304,879 1,219,392
Cost of investments purchased:
Held to maturity: fixed maturities ........................................ - (496,484)
Available for sale: fixed maturities ........................................ (2,520,802) (636,206)
equity securities ....................................... (4,626,249) (2,103,759)
Net change in short-term investments ............................................ 1,066,503 (469,584)
Purchase of furniture, automobiles and leasehold improvements ................... (15,402) (8,733)
Cash used in purchase of subsidiary ............................................. - (958,094)
----------- -----------
Net cash used in investing activities .................................... (928,121) (2,964,468)
----------- -----------
Cash flows from financing activities:
Proceeds from note payable to bank .............................................. 4,300,000 3,900,000
Repayments from note payable to bank ............................................ (5,142,000) (2,145,000)
Proceeds from stock options exercised ........................................... - 31,313
Acquisition of treasury stock ................................................... (4,541) (691,184)
----------- -----------
Net cash provided by (used in) financing activities ...................... (846,541) 1,095,129
----------- -----------
See accompanying notes to consolidated financial statements.
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BANCINSURANCE CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Continued)
(Unaudited)
Three Months Ended
March 31,
2001 2000
----------- -----------
Net increase (decrease) in cash .................. 230,864 (1,506)
----------- -----------
Cash at December 31 .............................. 6,560,778 2,401,312
----------- -----------
Cash at March 31 ................................. $ 6,791,642 $ 2,399,806
=========== ===========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest .................................... $ 9,407 $ 89,728
=========== ===========
Income taxes ................................ $ - $ 150,000
=========== ===========
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 March 31, 2001, the Consolidated
Statements of Income for the three months ended March 31, 2001 and 2000,
the Consolidated Statements of Comprehensive Income for the three months
ended March 31, 2001 and 2000, and the Consolidated Statements of Cash
Flows for the three months then ended have been prepared by us 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 flows at March 31, 2001 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 of 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 the Company's Form 10-K for the
year ended December 31, 2000. The results of operations for the period
ended March 31, 2001 are not necessarily indicative of the results of
operations for the full year.
The National Association of Insurance Commissioners ("NAIC") adopted the
Codification of Statutory Accounting Principles guidance, which replaced
the Accounting Practices and Procedures manual as the NAIC's primary
guidance on statutory accounting. Codification provides guidance for areas
where statutory accounting has been silent and changes current statutory
accounting in some areas. Effective January 1, 2001, the Ohio Insurance
Department adopted Codification. The Company has determined that the
adoption of Codification did not have a material effect on statutory-basis
capital and surplus.
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States, requires management to
make estimates and assumptions that affect the reported amounts of assets
and liabilities, the 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. Certain prior year amounts have been reclassified in order to conform to
the 2001 presentation.
4. 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 derivative 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. As
we do not hold or own any derivative securities, SFAS 133 does not impact
our financial statements.
5. Supplemental Disclosure For Earnings Per Share
Three Months Ended
March 31,
2001 2000
------------- ------------
Net income...................................................................... $ 654,063 $ 653,869
------------- ------------
Weighted average common shares outstanding...................................... 5,768,535 6,009,108
Adjustments for dilutive securities:
Dilutive effect of outstanding options...................................... 20,764 35,907
------------- ------------
Diluted common shares........................................................... 5,789,299 6,045,015
============= ============
Basic and diluted earnings per share............................................ $ .11 $ .11
============= ============
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BANCINSURANCE CORPORATION
AND SUBSIDIARIES
Notes To Consolidated Financial Statements (Unaudited) (Continued)
6. We operate primarily in the property/casualty insurance industry. There are
intersegment management 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.
MARCH 31, 2001
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Municipal
Property/Casualty Insurance Code All Consolidated
Insurance Agency Publishing Other Totals
---------------------------------------------------------------------------------------------
Revenues from external customers $ 7,731,717 $ 63,460 $ 593,874 $ 4,414 $ 8,393,465
Intersegment revenues........... 1,470 68,687 - 20,310 90,467
Interest revenue................ 370,964 40 - 10,112 381,116
Interest expense................ 16 - - 6,771 6,787
Depreciation and amortization... 68 25,593 13,400 11,410 50,471
Segment profit (loss)........... 802,552 77,770 109,148 (5,399) 984,071
Income tax expense (benefit).... 190,311 40,368 39,445 (30,583) 239,541
Segment assets.................. 43,929,544 2,533,169 1,590,686 2,528,308 50,581,707
MARCH 31, 2000
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Workers Municipal
Property/Casualty Title Compensation Insurance Code All Consolidated
Insurance Agency Administration Agency Publishing Other Totals
---------------------------------------------------------------------------------------------
Revenues from external customers $ 6,231,497 $ 115,724 $ 201,073 $ 65,758 $ 170,261 $524 $6,784,837
Intersegment revenues........... 1,470 - - 207,834 - 2,310 211,614
Interest revenue................ 383,395 - - 9 - 12,044 395,448
Interest expense................ 1,607 90 - - - 92,830 94,527
Depreciation and amortization... 17,815 419 882 26,888 3,418 13,123 62,545
Segment profit (loss)........... 1,129,358 (37,138) 28,861 121,605 29,780 (155,268) 1,117,198
Income tax expense (benefit).... 305,543 - 9,818 49,973 10,803 (124,422) 251,715
Segment assets.................. 39,888,282 - 143,990 2,525,743 1,496,738 3,611,575 47,666,328
-----------------------------------
March 31, March 31,
2001 2000
-----------------------------------
Revenues
Total revenues for reportable segments..................................... $ 8,393,465 $ 6,784,837
Interest revenue........................................................... 381,116 395,448
Elimination of intersegment revenues....................................... (90,467) (211,614)
------------- -------------
Total consolidated revenues................................................ $ 8,684,114 $ 6,968,671
============= =============
Profit
Total profit for reportable segments....................................... $ 989,470 $ 1,272,466
Other loss ................................................................ (5,399) (155,268)
Elimination of intersegment profits........................................ (90,467) (211,614)
------------- -------------
Income before income taxes................................................. $ 893,604 $ 905,584
============= =============
Assets
Total assets for reportable segments....................................... $ 48,053,399 $ 44,054,753
Other assets............................................................... 2,528,308 3,611,575
Elimination of intersegment receivables.................................... (1,524,727) (867,241)
------------- -------------
Consolidated assets........................................................ $ 49,056,980 $ 46,799,087
============= =============
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BANCINSURANCE CORPORATION
AND SUBSIDIARIES
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 we issue. Our principal costs are losses and loss
adjustment expenses. The principal factor in determining the level of our profit
is the difference between (i) the sum of these premiums earned and investment
income and (ii) the sum of 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 claims. The ultimate liability incurred by
us may be different from current reserve estimates.
Losses and loss adjustment expense reserves for incurred but not reported 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 incurred but not reported reserves monthly
and make appropriate adjustments.
American Legal Publishing Corporation, acquired through a February 29, 2000
merger, offers a wide range of publishing services for state and local
governments. Paul Boardway and Associates, Inc., acquired in August 1999, is a
property/casualty insurance agency serving lending institutions.
SUMMARY RESULTS
The following table sets forth period to period changes in selected financial
data:
-----------------------------------------------------
Period to Period Increase
Three Months Ended March 31,
-----------------------------------------------------
2000-2001
-----------------------------------------------------
Amount % Change
-----------------------------------------------------
Premiums written.............................................. $ 2,010,220 25.2%
Net premiums earned........................................... 1,399,068 24.9%
Net investment income......................................... 467,462 120.8%
Total revenue................................................. 1,715,443 24.6%
Loss and loss adjustment expenses, net of reinsurance
recoveries 1,482,266 40.5%
Operating expenses............................................ 332,897 14.4%
Interest expense.............................................. (87,740) (92.8)%
Operating income.............................................. (11,980) (1.3)%
Net income.................................................... 194 .03%
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, a consolidated subsidiary, on both a statutory and GAAP basis for the
three months ended March 31:
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BANCINSURANCE CORPORATION
AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of
---------------------------------------
Financial Condition and Results of Operations (Continued)
---------------------------------------------
2001 2000
Statutory:
Loss ratio..................................... 68.9% 65.3%
Expense ratio.................................. 31.5% 20.5%
------ ----
Combined ratio................................. 100.4% 85.8%
====== ====
GAAP:
Loss ratio..................................... 73.3% 65.1%
Expense ratio.................................. 21.0% 18.7%
------ ----
Combined ratio................................. 94.3% 83.8%
====== ====
Investment 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
MARCH 31, 2001 AS COMPARED TO MARCH 31, 2000
Premiums Written; Premiums Earned. Premiums written increased 25.2% from
$7,991,812 at March 31, 2000 to $10,002,032, at March 31, 2001, and premiums
earned increased 24.9% from $5,615,626 at March 31, 2000 to $7,014,694 at March
31, 2001. Premiums written for the Lender/Dealer Insurance program increased
35.5% from $4,685,538 during the first quarter of 2000 to $6,349,405 during the
first quarter of 2001. Premiums earned for the Lender/Dealer Insurance program
increased 27.6% from $4,587,723 during the first quarter of 2000 to $5,853,386
during the first quarter of 2001. We direct market to large banks and market
through independent agents to regional and community financial institutions.
Premium growth during the first quarter of 2001 was primarily generated through
agency relationships. Premiums written for the Unemployment Insurance Protection
program increased 10.4% from $3,307,744 during the first quarter of 2000 to
$3,650,444 in 2001, and premiums earned from the Unemployment Insurance
Protection program increased 13.2% from $1,023,308 during the first quarter of
2000 to $1,158,014 during the first quarter of 2001. The increases in premiums
written and premiums earned on the Unemployment Insurance Protection program
were primarily attributable to increases in employment enrollment among existing
trust members.
Net Investment Income. We continued to evaluate assets in the equity portion of
our portfolio during the first quarter of 2001 in light of the weaker outlook
for U.S. corporate profits and a slowdown in the national economy. This resulted
in a sale of securities that contributed to realized gains of $422,567 for the
quarter compared with realized net losses of $27,309 the prior year. Our
$30,544,078 investment portfolio is primarily concentrated in investment-grade
fixed income securities.
Codification and Subscription Fees. Codification and subscription fees generated
by American Legal Publishing, our consolidated subsidiary acquired on February
29, 2000, accounted for $170,261 of the revenues for the first quarter of 2000
compared to $593,874 of the revenues for the first quarter of 2001.
Claims Administration Fees. Claims administration fees generated by our BCIS
Services subsidiary accounted for $201,073 of the revenues during the first
quarter of 2000. On October 6, 2000, we sold BCIS Services.
Title and Appraisal Fees. Title services and appraisal fees generated by our
Custom Title Services subsidiary accounted for $115,724 of the revenues during
the first quarter of 2000. On January 24, 2000, we sold Custom Title Services.
Management Fees. Management fees decreased from $374,671 during the first
quarter of 2000 to $114,578 during the first quarter of 2001. 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.
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Commission Fees. Net commission fees generated by our Paul Boardway and
Associates subsidiary, accounted for $65,247 of revenues during the first
quarter of 2000 compared with $63,460 during the first quarter of 2001.
Losses and Loss Adjustment Expenses, Net of Reinsurance Recoveries. Losses and
loss adjustment expenses totaled $3,656,251, or 65.1% of net premiums earned
during the first quarter of 2000, versus $5,138,517, or 73.3% of net premiums
earned during the first quarter of 2001. Loss and loss adjustment expenses for
the Lender/Dealer Insurance program increased 38.9% from $3,544,782 during the
first quarter of 2000 to $4,922,680 during the first quarter of 2001 primarily
due to higher reserves on pending claims. Losses and loss adjustment expenses
for the Unemployment Insurance Protection program increased 24.4% from $70,829
during the first quarter of 2000 to $88,111 during the first quarter 2001
primarily due to less favorable loss development on prior years reserves.
Operating Expenses. Operating expenses consist of experience rating adjustments,
commission expenses, other insurance operating expenses, cost of sales and
general and administrative expenses. Operating expenses increased 14.4% from
$2,312,309 during the first quarter of 2000 to $2,645,207 during the first
quarter of 2001. Experience rating adjustments increased $12,024 for the quarter
ended March 31, 2001 to $137,907. Commission expenses increased 65.6% from
$605,674 during the first quarter of 2000 to $1,003,068 during the first quarter
of 2001 due primarily to higher direct and contingent commissions associated
with the increase in premiums written in the Lender/Dealer Insurance program.
Other insurance operating expenses increased 8.0% from $782,240 during the first
quarter of 2000 to $844,751 during the first quarter of 2001, primarily due to
increases in allocable salaries and related benefits, audit and rent. General
and administrative expenses decreased 27.7% from $912,371 during the first
quarter of 2000 to $659,480 during the first quarter of 2001 primarily due to
decreases in temporary services, outside computer services, title business
expenses, licenses/fees and depreciation/amortization. Paul Boardway and
Associates incurred operating expenses of $151,995 during the first quarter of
2000 as compared with $70,264 during the first quarter of 2001. American Legal
Publishing incurred operating expenses of $140,618 during the first quarter of
2000 as compared with $483,502 during the first quarter of 2001.
Interest Expense. Interest expense decreased from $94,527 during the first
quarter of 2000 to $6,787 during the first quarter of 2001 due to lower
borrowing levels on our revolving credit line and decreases in the prime rate .
Federal Income Taxes. Federal income taxes decreased 4.8% from $251,715 during
the first quarter of 2000 to $239,541 during the first quarter of 2001. The
effective consolidated income tax rate was 27.8% for the quarter ended March 31,
2000 and 26.8% for the quarter ended March 31, 2001.
GAAP Combined Ratio. Ohio Indemnity increased reserves during the first quarter
of 2001 in response to higher reported claims related to Lender/Dealer Insurance
products. The combined ratio for Ohio Indemnity for the three months ended March
31, 2001 was 94.3% versus 83.8% for the same period last year. Most of this
increase occurred in the loss portion of the ratio, which rose to 73.3% for the
first quarter of 2001 from 65.1% the prior year. Historically, the loss ratio
increases during periods of slower economic activity. The expense ratio
increased to 21.0% for the first quarter 2001 from 18.7% a year ago, which is
primarily attributable to the increase in other insurance operating expenses.
These included higher commissions, additional staffing, and expanded marketing
and product development initiatives.
DISCONTINUED PRODUCTS
On January 24, 2000, we sold Custom Title Services, Inc. and on October 6, 2000,
we sold BCIS Services , Inc. as part of an overall strategy to focus on
historically profitable core lines of business. Our management does not expect
these transactions will 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 2001 from Ohio Indemnity, absent regulatory
consent, is $3,693,686. 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 equalled $1,867,833 and $2,004,561 for the
quarters ended March 31, 2000 and 2001, respectively. Net cash provided by
financing activities was $1,095,129 for the quarter ended March 31, 2000 and
$(846,541) for the quarter ended March 31, 2001. Net cash used in our investing
activities was $2,964,468 and $927,156 for the quarters ended March 31, 2000 and
2001, respectively.
American Legal Publishing derives its funds principally from codification and
subscription fees which are currently sufficient to meet its operating
obligations. Paul Boardway and Associates derives its funds principally from
commission fees which are currently sufficient to meet its operating
obligations. We have 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
attempt to reposition assets to those areas which contribute to our overall
financial objectives.
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Our balance sheet liquidity remains favorable as evidenced by invested assets
that significantly exceed liabilities. The liquidity position has been enhanced
by increased premiums, positive underwriting, favorable loss experience and
investment income.
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 March 31, 2001 consisted primarily of investment-grade fixed
income securities. Cash and short-term investments at March 31, 2001 amounted to
$11,744,579, or 31.5% 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 intend 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
$386,986 and $854,448 for the three months ended March 31, 2000 and 2001,
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 our assets with the expected
payouts of our 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.
Shareholder's equity was $28,413,111 at March 31, 2001, or 0.4% lower than at
December 31, 2000. Declines in the U.S. equity markets during first quarter 2001
resulted in unrealized losses of $23,167 in securities available for sale at
March 31, 2001. Management continues to actively monitor the entire investment
portfolio as well as factors that may influence future performance. Book value
per diluted share was $4.91 at March 31, 2001.
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 Unemployment Insurance
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.
Such reserves were $112,375 and $368,000 at March 31, 2001 and December 31,
2000, 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, commodity
prices 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 and how those exposures are currently managed as of March
31, 2001. Our market risk sensitive instruments are entered into for purposes
other than trading.
The carrying value of our investment portfolio as of March 31, 2001 was
$30,544,078, 65.4% of which is invested in fixed maturity securities, 18.4% in
equity securities and 16.2% in short-term investments. 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. 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, during the quarter ended March 31, 2001, 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, 2000. 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.
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FACTORS TO CONSIDER FORWARD-LOOKING
Going forward, management will consider underwriting, acquisition and investment
opportunities which fit our strategy of penetrating niche markets within the
financial services industry. 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 its market presence.
We will further concentrate on penetrating larger financial institutions for
collateral protection insurance, expanding financial institution programs and
auto dealer service contract programs. We will consider opportunities for
underwriting additional non-profit organizations as they continue to consolidate
into national trusts and seek to retain and transfer their unemployment claim
exposure.
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 our liquidity,
capital resources or results of operations.
The market for most of our policies is dependent on sales and financing trends
in the automobile industry. The current environment is being influenced by
captive finance companies of automobile manufacturers offering low interest rate
loans and leases to reduce inventory. As a result, automobile loans made by
banks and finance companies may be reduced, which would lower the amount of
insurance premiums we collect from our customers. We will continue to pursue new
customer relationships consistent with our profitability objectives.
FORWARD-LOOKING INFORMATION
Statements in this "Management's Discussion and Analysis of Financial Condition
and Results of Operations" that indicate our 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.
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
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. Some of the factors that could cause actual
results to differ from our forward-looking statements include the following: (i)
the demand for Ultimate Loss and Unemployment Insurance will vary with factors
beyond our control such as changes in interest rates, level of automobile
financing activity, cost of automobiles, consumer confidence, unemployment
levels, inflation and general economic activity; (ii) the risk that losses from
claims are greater than anticipated such that reserves for possible claims are
inadequate; (iii) the risk that unanticipated adverse changes in securities
markets could result in material losses in our investments; and (iv) the
dependence on key management personnel with skills critical to our long-term
success.
INFLATION
We do not believe that inflation has, or will have in the foreseeable future, a
material impact upon our operating results.
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 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, 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 incurred but not
reported 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 claim 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, 2000, were reasonable.
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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".
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits
None.
(b) Reports on Form 8-K
-------------------
No reports on Form 8-K were filed by the Company during the
quarter ended March 31, 2001.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, we have
duly caused this report to be signed on our behalf by the undersigned thereunto
duly authorized.
BANCINSURANCE CORPORATION
-------------------------
(Company)
Date: May 10, 2001 By: Si Sokol
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Si Sokol
Chairman
(Principal Executive Officer)
Date: May 10, 2001 By: Sally Cress
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Sally Cress
Treasurer and Secretary
(Principal Financial and Accounting Officer)
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