UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2002
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 0-8738
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BANCINSURANCE CORPORATION
- --------------------------------------------------------------------------------
(Exact Name of Registrant as Specified in Its Charter)
Ohio 31-0790882
- ------------------------------------------------------------------------------------------------------------
(State or Other Jurisdiction of Incorporation or Organization) (I.R.S. Employer Identification No.)
250 East Broad Street, Columbus, Ohio 43215
- ------------------------------------------------------------------------------------------------------------
(Address of Principal Executive Offices) (Zip Code)
(614) 228-2800
- ------------------------------------------------------------------------------------------------------------
(Registrant's Telephone Number Including Area Code)
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 12 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 [ ]
The number of outstanding Common Shares of the registrant as of April 24, 2002
was 5,770,185.
BANCINSURANCE CORPORATION
AND SUBSIDIARIES
INDEX
Page No.
--------
PART I - FINANCIAL INFORMATION:
Item 1. Financial Statements
Consolidated Balance Sheets as of
March 31, 2002 (unaudited) and December 31, 2001.......................... 3
Consolidated Statements of Income (Loss) for the
three months ended March 31, 2002 and 2001 (unaudited).................... 5
Consolidated Statements of Comprehensive Loss for the
three months ended March 31, 2002 and 2001 (unaudited).................... 6
Consolidated Statements of Cash Flows for the
three months ended March 31, 2002 and 2001 (unaudited).................... 7
Notes to Consolidated Financial Statements (unaudited)............................ 9
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations............................. 12
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. 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................................................ 17
Signatures.............................................................................. 18
Exhibit Index........................................................................... 19
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BANCINSURANCE CORPORATION
AND SUBSIDIARIES
Consolidated Balance Sheets
March 31, December 31,
Assets 2002 2001
- ------ ------------------ ---------------
(Unaudited) (Note 2)
Investments:
Held to maturity:
Fixed maturities, at amortized cost (fair value
$4,682,866 in 2002 and $4,869,247 in 2001)................................. $ 4,591,671 $ 4,746,889
Available for sale:
Fixed maturities, at fair value (amortized cost
$14,868,372 in 2002 and $14,211,422 in 2001)............................... 14,815,028 14,273,152
Equity securities, at fair value (cost $5,717,651
in 2002 and $5,981,774 in 2001)............................................ 6,753,359 6,715,572
Short-term investments, at cost which
approximates fair value...................................................... 5,800,674 5,476,140
-------------- ---------------
Total investments..................................................... 31,960,732 31,211,753
-------------- ---------------
Cash ............................................................................... 16,163,119 19,547,132
Premiums receivable................................................................. 5,167,565 5,189,123
Accounts receivable, net of allowance for doubtful accounts......................... 595,063 590,401
Reinsurance receivable.............................................................. 124,919 90,018
Reinsurance recoverable on paid losses.............................................. 5,661 32,027
Prepaid reinsurance premiums........................................................ 972,253 901,482
Deferred policy acquisition costs................................................... 2,286,041 1,522,533
Estimated earnings in excess of billings on uncompleted codification contracts...... 151,705 151,507
Loans to affiliates................................................................. 702,108 699,208
Notes receivable.................................................................... 382,500 400,000
Furniture, fixtures and leasehold improvements, net................................. 146,935 150,024
Excess of investment over net assets of subsidiaries, net........................... 932,737 2,534,596
Intangible asset, net............................................................... 959,421 864,912
Accrued investment income........................................................... 351,346 338,300
Other assets........................................................................ 500,186 447,661
-------------- ---------------
Total assets.......................................................... $ 61,402,291 $ 64,670,677
============== ===============
(Continued)
3
BANCINSURANCE CORPORATION
AND SUBSIDIARIES
Consolidated Balance Sheets, Continued
March 31, December 31,
Liabilities and Shareholders' Equity 2002 2001
- ------------------------------------ ----------------- -------------
(Unaudited) (Note 2)
Reserve for unpaid losses and loss adjustment expenses.............................. $ 3,830,026 $ 4,872,598
Unearned premiums................................................................... 8,992,012 6,030,273
Reinsurance premiums payable........................................................ 14,849 -
Experience rating adjustments payable............................................... 6,108,179 6,472,413
Retrospective premium adjustments payable........................................... 376,979 3,716,869
Funds held under reinsurance treaties............................................... 1,097,172 1,001,520
Contract funds on deposit........................................................... 1,544,057 1,937,924
Note payable........................................................................ 5,088,419 5,696,839
Taxes, licenses, and fees payable................................................... 222,908 552,873
Federal income taxes payable........................................................ 742,605 374,861
Deferred federal income taxes....................................................... 222,280 109,001
Commissions payable................................................................. 1,125,539 1,350,924
Billings in excess of estimated earnings on uncompleted codification contracts...... 118,669 107,452
Due to broker ...................................................................... 32,249 -
Other............................................................................... 832,502 1,055,221
------------- -------------
Total liabilities..................................................... 30,348,445 33,278,768
------------- -------------
Shareholders' equity:
Non-voting preferred shares:
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..................................................... 1,337,242 1,337,242
Accumulated other comprehensive income......................................... 648,360 525,048
Retained earnings.............................................................. 29,078,527 29,539,902
------------- -------------
32,858,270 33,196,333
Less: Treasury shares, at cost (400,156 common shares)........................ (1,804,424) (1,804,424)
------------- ------------
Total shareholders' equity............................................ 31,053,846 31,391,909
------------- -------------
Total liabilities and shareholders' equity............................ $ 61,402,291 $ 64,670,677
============= =============
See accompanying notes to consolidated financial statements.
4
BANCINSURANCE CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Income (Loss)
(Unaudited)
Three Months Ended
March 31,
2002 2001
------------ -------------
Income:
Premiums written................................................................. $ 12,030,360 $ 10,002,032
Increase in unearned premiums.................................................... (2,961,741) (2,897,117)
------------ -------------
Premiums earned.................................................................. 9,068,619 7,104,915
Premiums ceded................................................................... (81,159) (90,221)
------------ -------------
Net premiums earned....................................................... 8,987,460 7,014,694
Investment income................................................................ 314,898 431,881
Net realized gain (loss) on investments.......................................... (93,719) 422,567
Gain on sale of property......................................................... - 15,848
Codification and subscription fees............................................... 748,361 593,874
Management fees.................................................................. 321,513 114,578
Commission fees.................................................................. 1,406 63,460
Other income..................................................................... 144,389 27,212
------------ -------------
Total revenue............................................................. 10,424,308 8,684,114
------------ -------------
Losses and operating expenses:
Losses and loss adjustment expenses.............................................. 6,420,906 5,199,793
Reinsurance recoveries........................................................... (39,966) (61,276)
Experience rating adjustments.................................................... (364,234) 137,907
Commission expense............................................................... 1,458,060 1,003,068
Other insurance operating expenses............................................... 854,125 844,751
General and administrative expenses.............................................. 651,112 659,480
Interest expense................................................................. 4,633 6,787
------------ -------------
Total expenses............................................................ 8,984,636 7,790,510
------------ -------------
Income before federal income taxes and
cumulative effect of change in accounting principle..................... 1,439,672 893,604
Federal income tax expense............................................................ 419,188 239,541
------------ -------------
Income before cumulative effect of change
in accounting principle................................................. 1,020,484 654,063
Cumulative effect of change in accounting
principle........................................................................ (1,481,858) -
------------ -------------
Net income (loss)......................................................... $ (461,374) $ 654,063
============ =============
Basic net income (loss) per share:
Before cumulative effect of change in accounting principle....................... $ .18 $ .11
Cumulative effect of change in accounting principle.............................. (.26) -
------------ -------------
Basic net income (loss) per share............................................ $ (.08) $ .11
============ =============
Dilutive net income (loss) per share:
Before cumulative effect of change in accounting principle....................... $ .17 $ .11
Cumulative effect of change in accounting principle ............................. (.25) -
------------ -------------
Diluted net income (loss) per share.......................................... $ (.08) $ .11
============ =============
See accompanying notes to consolidated financial statements.
5
BANCINSURANCE CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Comprehensive Loss
(Unaudited)
Three Months Ended
March 31,
2002 2001
------------ -------------
Net income (loss)..................................................................... $ (461,374) $ 654,063
Other comprehensive income:
Unrealized holding gains (losses) on securities
arising during period, net of income
tax expense (benefit) of $63,524 and $(397,578), respectively.................... 123,312 (771,769)
------------ -------------
Comprehensive loss.................................................................... $ (338,062) $ (117,706)
============ =============
See accompanying notes to consolidated financial statements.
6
BANCINSURANCE CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
Three Months Ended
March 31,
2002 2001
------------ ------------
Cash flows from operating activities:
Net income (loss)................................................................ $ (461,374) $ 654,063
Adjustments to reconcile net income to net cash provided by operating activities:
Net realized (gain) loss on investments...................................... 93,719 (422,567)
Net realized gain on disposal of property and equipment...................... - (15,848)
Net realized loss on goodwill impairment..................................... 1,481,858 -
Depreciation and amortization................................................ 92,161 50,471
Deferred federal income tax expense.......................................... 49,755 172,711
Change in operating assets and liabilities:
Premiums receivable....................................................... 21,558 (1,978,009)
Accounts and reinsurance receivable, net.................................. (39,563) (37,718)
Deferred policy acquisition costs......................................... (763,508) (1,039,784)
Other assets.............................................................. (95,574) 277,096
Reserve for unpaid losses and loss adjustment expenses.................... (1,042,572) 1,103,888
Unearned premiums......................................................... 2,961,739 2,897,117
Funds held under reinsurance treaties..................................... 95,652 -
Experience rating adjustments payable..................................... (364,234) 137,907
Retrospective premium adjustments payable................................. (3,339,890) (396,962)
Contract funds on deposit................................................. (393,867) 92,443
Other liabilities......................................................... (350,430) 510,718
------------ ------------
Net cash provided by (used in) operating activities..................... (2,054,570) 2,005,526
------------ ------------
Cash flows from investing activities:
Proceeds from held to maturity: fixed maturities due to redemption or maturity... 152,000 400,000
Proceeds from available for sale: fixed maturities sold, redeemed and matured.... 664,250 1,462,950
Proceeds from equity securities sold............................................. 5,299,277 3,304,879
Cost of investments purchased:
Available for sale fixed maturities.......................................... (1,366,970) (2,520,802)
Equity securities............................................................ (5,124,335) (4,626,249)
Net change in short-term investments............................................. (324,534) 1,066,503
Purchase of furniture, equipment and leasehold improvements...................... (19,131) (15,402)
------------ ------------
Net cash used in investing activities................................... (719,443) (928,121)
------------ ------------
Cash flows from financing activities:
Proceeds from note payable to bank............................................... 4,990,000 4,300,000
Repayments from note payable to bank............................................. (5,600,000) (5,142,000)
Acquisition of treasury shares................................................... - (4,541)
------------ ------------
Net cash used in financing activities................................... (610,000) (846,541)
------------ ------------
See accompanying notes to consolidated financial statements.
7
BANCINSURANCE CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Continued)
(Unaudited)
Three Months Ended
March 31,
2002 2001
------------ ------------
Net increase (decrease) in cash............................... (3,384,013) 230,864
------------ ------------
Cash at December 31........................................... 19,547,132 6,560,778
------------ ------------
Cash at March 31.............................................. $ 16,163,119 $ 6,791,642
============ ============
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest.................................................
$ 12,631 $ 9,407
============ ============
Income taxes............................................. $ 110,000 $ -
============ ============
See accompanying notes to consolidated financial statements.
8
BANCINSURANCE CORPORATION
AND SUBSIDIARIES
Notes To Consolidated Financial Statements (Unaudited)
1. The Consolidated Balance Sheet as of March 31, 2002, the Consolidated
Statements of Income (Loss) for the three months ended March 31, 2002 and
2001, the Consolidated Statements of Comprehensive Loss for the three
months ended March 31, 2002 and 2001, and the Consolidated Statements of
Cash Flows for the three months ended March 31, 2002 and 2001, have been
prepared by us without an audit. In the opinion of management, all
adjustments necessary to present fairly the financial position, results of
operations and cash flows at March 31, 2002 and for all periods presented
have been made.
The accompanying unaudited consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the
United States for interim financial information and with the instructions
to the Quarterly Report on 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 accounting principles generally
accepted in the United States 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 Annual Report on
Form 10-K for the year ended December 31, 2001. The results of operations
for the period ended March 31, 2002 are not necessarily indicative of the
results of operations for the full year.
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. In June 2001, the FASB issued SFAS 141, "Business Combinations," which
eliminates the pooling-of-interest method of accounting for business
combinations and requires the use of the purchase method. In addition, SFAS
141 requires the reassessment of intangible assets to determine if they are
appropriately classified either separately or within goodwill. SFAS 141 is
effective for business combinations initiated after June 30, 2001. The
Company adopted SFAS 141 on July 1, 2001, with no material impact on the
financial statements.
Effective January 1, 2002, the Company adopted Statement of Financial
Accounting Standards No. 142, Goodwill and Other Intangible Assets ("SFAS
142"). Under SFAS 142, the Company will no longer amortize goodwill and
intangibles which have indefinite lives. SFAS 142 also requires that the
Company assess goodwill and intangibles with indefinite lives for
impairment at least annually, based on the fair value of the related
reporting unit. The Company has not yet determined which quarter its annual
impairment assessment will be performed on an on-going basis.
As an initial step in the SFAS 142 implementation process, the Company
assigned its goodwill and intangibles to three of its reporting units. As a
result of this allocation, the Company identified a noncompete agreement in
the amount of $120,001 that was separately classified as an intangible with
a definite life. Then, the fair value of each reporting unit was compared
to its carrying value. Fair values were determined by discounting estimated
future cash flows.
Based on the Company's impairment testing, goodwill was reduced by
$1,601,859 and a net after-tax impairment charge of $1,481,858 ($0.25 per
diluted share) was recognized as a cumulative effect of change in
accounting principle in the first quarter of 2002. The impairment charge,
associated with the August 1999 acquisition of Paul Boardway and
Associates, Inc., primarily resulted from evaluating impairment based on
discounted cash flows, as required by SFAS 142.
The changes in the carrying amount of goodwill by segment for the quarter
ended March 31, 2002 are as follows:
Property/Casualty Insurance
Insurance Agency Total
----------------- ----------- -----------
Balance,
Dec. 31, 2001 $ 753,737 $ 1,780,859 $ 2,534,596
Impairment
write-offs - (1,481,858) (1,481,858)
Noncompete
agreement recognition - (120,001) (120,001)
------------ ------------ ------------
Balance,
March 31, 2002 $ 753,737 $ 179,000 $ 932,737
============ =========== ===========
9
BANCINSURANCE CORPORATION
AND SUBSIDIARIES
Intangible assets as of March 31, 2002 and December 31, 2001 were as follows:
As of March 31, 2002 As of December 31, 2001
--------------------------------------- -------------------------------------
Accumulated Accumulated
Cost Amortization Net Cost Amortization Net
----------- ------------ ---------- ---------- ------------ ---------
Amortization Intangibles:
Databases $ 919,272 $ (65,852) $ 853,420 $ 919,273 $ (54,361) $ 864,912
Noncompete agreement 120,001 (14,000) 106,001 - - -
----------- ----------- ---------- ----------- ---------- ----------
Total intangible assets $ 1,039,273 $ (79,852) $ 959,421 $ 919,273 $ (54,361) $ 864,912
=========== =========== ========== =========== ========== ===========
Amortization expense related to amortizable intangible assets was $25,491 for
the first quarter of 2002 and $5,510 for the first quarter of 2001. The
estimated amortization expense of intangible assets for the years ending
December 31 is as follows:
2002 $ 77,964
2003 69,964
2004 69,964
2005 69,964
2006 61,964
2007 45,964
A reconciliation of the previously reported 2001 statement of income information
to pro forma amounts that reflect the elimination of amortization of goodwill is
presented below:
Three Months Ended
March 31, 2001
-------------------------------------
Per Share
------------------
Amount Basic Diluted
------ ----- -------
Net income, as reported $ 654,063 $ .11 $.11
Amortization of goodwill 25,110 .01 .01
--------- ----- -------
Pro forma net income $ 679,173 $ .12 $.12
========= ===== =======
4. Supplemental Disclosure For Earnings (Loss) Per Share
Three Months Ended
March 31,
2002 2001
------------- ------------
Net income (loss).................................. $ (461,374) $ 654,063
------------- ------------
Weighted average common shares outstanding......... 5,770,185 5,768,535
Adjustments for dilutive securities:
Dilutive effect of outstanding options......... 72,925 20,764
------------- ------------
Diluted common shares.............................. 5,843,110 5,789,299
============= ============
Basic and diluted earnings (loss) per share........ $ (.08) $ .11
============ ============
10
BANCINSURANCE CORPORATION
AND SUBSIDIARIES
5. The Company operates 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, 2002
---------------------------------------------------------------------------------------------
Municipal
Property/Casualty Code Insurance All Consolidated
Insurance Publishing Agency Other Totals
---------------------------------------------------------------------------------------------
Revenues from external customers $ 9,340,567 $ 848,361 $ 16,708 $ 2,955 $ 10,208,591
Intersegment revenues........... 1,470 - 84,306 27,810 113,586
Interest revenue................ 321,331 - 43 7,929 329,303
Interest expense................ 1,870 1,581 - 1,182 4,633
Depreciation and amortization... 44,449 24,193 14,000 9,519 92,161
Segment profit.................. 1,163,435 272,710 26,508 90,605 1,553,258
Income tax expense (benefit).... 320,043 97,024 9,013 (6,892) 419,188
Segment assets.................. 56,249,344 1,962,188 1,137,400 4,139,672 63,488,604
March 31, 2001
---------------------------------------------------------------------------------------------
Municipal
Property/Casualty Code Insurance All Consolidated
Insurance Publishing Agency Other Totals
---------------------------------------------------------------------------------------------
Revenues from external customers $ 7,731,717 $ 593,874 $ 63,460 $ 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 13,400 25,593 11,410 50,471
Segment profit (loss)........... 802,552 109,148 77,770 (5,399) 984,071
Income tax expense (benefit).... 190,311 39,445 40,368 (30,583) 239,541
Segment assets.................. 43,929,544 1,590,686 2,533,169 2,528,308 50,581,707
----------------------------------------------------
March 31, March 31,
2002 2001
----------------------------------------------------
REVENUE
Total revenues for reportable segments..................................... $ 10,208,591 $ 8,393,465
Interest revenue........................................................... 329,303 381,116
Elimination of intersegment revenues....................................... (113,586) (90,467)
------------- -------------
Total consolidated revenues................................................ $ 10,424,308 $ 8,684,114
============= =============
PROFIT/(LOSS)
Total profit (loss) for reportable segments................................ $ 1,462,653 $ 989,470
Other profit (loss)........................................................ 90,605 (5,399)
Elimination of intersegment profits........................................ (113,586) (90,467)
------------- -------------
Income (loss) before income taxes and cumulative
effect of change in accounting principle................................. $ 1,439,672 $ 893,604
============= =============
ASSETS
Total assets for reportable segments....................................... $ 59,348,932 $ 48,053,399
Other assets............................................................... 4,139,672 2,528,308
Elimination of intersegment receivables.................................... (2,086,313) (1,524,727)
------------- -------------
Consolidated assets........................................................ $ 61,402,291 $ 49,056,980
============= =============
11
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. 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 the premiums earned and investment income and (ii) the
sum of the 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.
Our wholly-owned subsidiary, American Legal Publishing Corporation, offers a
wide range of publishing services for state and local governments. Our
wholly-owned subsidiary, Paul Boardway and Associates, Inc., 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 (Decrease)
Three Months Ended March 31,
-------------------------------------------
2001-2002
-------------------------------------------
Amount % Change
-------------------------------------------
Premiums written.............................................. $ 2,028,328 20.3%
Net premiums earned........................................... 1,972,766 28.1%
Net investment income......................................... (633,269) (74.1)%
Total revenue................................................. 1,740,194 20.0%
Loss and loss adjustment expenses, net of reinsurance
recoveries 1,242,423 24.2%
Operating expenses............................................ (46,143) (1.7)%
Interest expense.............................................. (2,154) (31.7)%
Operating income.............................................. 546,068 61.1%
Cumulative effect of change in accounting principle........... 1,481,858 100.0%
Net income (loss)............................................. (1,115,437) (170.5)%
The combined ratio, which is the sum of the loss ratio and expense ratio, is the
traditional measure of underwriting experience for insurance companies. The
following table reflects the loss, expense and combined ratios of Ohio Indemnity
on both a statutory and GAAP basis for the three months ended March 31:
12
BANCINSURANCE CORPORATION
AND SUBSIDIARIES
2002 2001
---------------------
Statutory:
Loss ratio...................................... 68.2% 68.9%
Expense ratio................................... 36.7% 31.5%
------ ------
Combined ratio.................................. 104.9% 100.4%
====== ======
GAAP:
Loss ratio...................................... 71.0% 73.3%
Expense ratio................................... 23.5% 21.0%
------ ------
Combined ratio.................................. 94.5% 94.3%
====== ======
Investment of Ohio Indemnity's assets is restricted to the investments permitted
by the Ohio 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 such investments
is tax-exempt and such investments have generally resulted in favorable net
yields. We have the ability and intent to hold held to maturity fixed income
securities to maturity or to the put date, and, as a result, we carry 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, 2002 AS COMPARED TO MARCH 31, 2001
Premiums. Premiums written in the first quarter of fiscal year 2002 increased
20.3% to $12,030,360 from $10,002,032 in the first quarter of fiscal year 2001.
Net premiums earned in the first quarter of fiscal year 2002 increased 28.1% to
$8,987,460 from $7,014,694 in the first quarter of fiscal year 2001. Premiums
written for our Lender/Dealer business increased by $2,339,898 to $3,094,418
from $3,650,444 during the first quarter of 2002 over the comparable period in
fiscal year 2001. This increase was primarily due to Lender/Dealer policies
added during the 2001 fiscal year combined with higher volume from existing
customers. Premiums written for our Guaranteed Auto Protection ("GAP") business
increased to $423,624 in the first quarter of fiscal year 2002 from $101,440 in
the first quarter of fiscal year 2001 primarily as the result of an agent
transferring a book of GAP business to us during the third quarter of fiscal
2001. Premiums written for our Unemployment Insurance Protection business
decreased by $556,026 during the first quarter of fiscal year 2002 over 2001,
respectively due to timing differences on billing issuance related to Mandated
Surety Bonds.
Investment Income. Investment income (before taxes and excluding net realized
capital gains/losses) decreased 27.1% to $314,898 in the first quarter of fiscal
year 2002 from $431,881 in the first quarter of fiscal year 2001. Even though
the size of our portfolio has increased, investment income declined due to lower
investment yields that resulted from the decline in interest rates during the
past year. During the first quarter of fiscal year 2002, we realized capital
losses on investments of $93,719 compared with realized gains of $422,567 in the
first quarter of fiscal year 2001. The Company's investment strategy is based on
current market conditions and tax considerations which we regularly monitor.
Codification and Subscription Fees. Codification and subscription fees generated
by American Legal Publishing accounted for $748,361 of our revenues in the first
quarter of fiscal year 2002 and $593,874 in the first quarter of fiscal year
2001. The increase in fees in the first quarter of fiscal year 2002 was
primarily the result of our acquisition in June 2001 of Justinian Publishing
Company, which contributed $182,864 in additional codification fees.
Management Fees. Management fees increased $206,935 to $321,513 during the first
quarter of fiscal year 2002 from $114,578 during the first quarter of fiscal
year 2001. The increase was the result of a 25.1% decline in calendar year
benefit charges which were partially offset by a 3.6% reduction in fees from our
Bonded Service business (increasing the residual reserve distribution). We
expect fees to vary from year to year depending on unemployment levels and
claims experience in our Bonded Service business.
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BANCINSURANCE CORPORATION
AND SUBSIDIARIES
Other income. Other income increased to $144,389 in the first quarter of fiscal
year 2002 from $27,212 2001 in 2001. The increase was primarily the result of
releasing a $100,000 reserve related to the dismissal of a dispute with an
unaffiliated party.
Losses and Loss Adjustment Expenses. Losses and loss adjustment expenses
increased 24.2% in the first quarter of 2002 to $6,380,940 from $5,138,517 in
the first quarter of fiscal year 2001. The loss ratio declined 2.3 percentage
points to 71.0% from the same period last year. The increase in the losses and
loss adjustment expense ratio during the first quarter of fiscal year 2002 was
primarily the result of higher dollar losses expected due to the growth of our
Lender/Dealer business during fiscal year 2001, combined with continuation of
increased claims attributable to weak economic conditions that persisted
nationally during the first quarter of fiscal year 2002. Our GAP business
incurred losses and loss adjustment expenses of $175,653 in the first quarter of
fiscal year 2002 and $26,521 in the first quarter of fiscal year 2001. Losses
and loss adjustment expenses for our Unemployment Insurance business decreased
$85,142, which was primarily caused by lower claims experience.
Operating Expenses. Operating expenses consist of experience rating adjustments,
commission expenses, other insurance operating expenses, amortization of
deferred policy acquisition costs and general and administrative expenses.
Experience rating adjustments decreased to $(364,234) in the first quarter of
fiscal year 2002 from $137,907 in the first quarter of fiscal year 2001.
Experience rating adjustments are calculated and adjusted from period to period
based on policy experience to date and premium growth. Management anticipates
that the experience rating adjustment may fluctuate in future years based on
this calculation. Commission expense increased 45.4% during the first quarter of
fiscal year 2002 from $1,003,068 in the first quarter of fiscal year 2001 to
$1,458,060 in 2002. The increase in the first quarter of fiscal year 2002 was
consistent with the overall premium activity in 2002. Other insurance operating
expenses and general and administrative expenses remained relatively constant.
Cumulative Effect of Change in Accounting Principle. Effective January 1, 2002,
the Company adopted Statement of Financial Accounting Standards No. 142,
Goodwill and Other Intangible Assets ("SFAS 142"). Under SFAS 142, the Company
will no longer amortize goodwill and intangibles which have indefinite lives.
SFAS 142 also requires that the Company assess goodwill and intangibles with
indefinite lives for impairment at least annually, based on the fair value of
the related reporting unit. The Company has not yet determined which quarter its
annual impairment assessment will be performed on an on-going basis.
As an initial step in the SFAS 142 implementation process, the Company assigned
its goodwill and intangibles to three of its reporting units. As a result of
this allocation, the Company identified a noncompete agreement in the amount of
$120,001 that was separately classified as an intangible with a definite life.
Then, the fair value of each reporting unit was compared to its carrying value.
Fair values were determined by discounting estimated future cash flows.
Based on the Company's impairment testing, goodwill and intangible assets were
reduced by $1,481,958 and a net after-tax impairment charge of $1,481,858 ($0.25
per diluted share) was recognized as a cumulative effect of change in accounting
principle in the first quarter of 2002. The impairment charge, associated with
the August 1999 acquisition of Paul Boardway and Associates, Inc., primarily
resulted from evaluating impairment based on discounted cash flows, as required
by SFAS 142.
Amortization expense related to amortizable intangible assets was $25,491 for
the first quarter of 2002 and $5,510 for the first quarter of 2001.
Federal Income Taxes. In the first quarter of fiscal year 2002, we had income
before taxes of $1,439,672 (and recorded a provision of $419,188 for federal
income taxes) as compared to income before taxes of $893,604 (and a recorded
provision for federal income taxes of $239,541) in the first quarter of fiscal
year 2001. The effective consolidated income tax rate was 29.1% and 26.9% in the
first quarter of fiscal year 2002 and 2001, respectively.
GAAP Combined Ratio. Our combined ratio remained relatively constant at 94.5% of
net premiums earned for the first quarter of fiscal year 2002 compared to 94.3%
for the first quarter of calendar year 2001.
LIQUIDITY AND CAPITAL RESOURCES
We are an insurance holding company whose principal asset is the capital 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 2002 from Ohio Indemnity, absent regulatory
consent, is $2,963,288. 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
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BANCINSURANCE CORPORATION
AND SUBSIDIARIES
provided by (used in) operating activities equaled $(2,054,570) and $2,005,526
for the quarters ended March 31, 2002 and 2001, respectively. Net cash used in
financing activities was $610,000 541 for the quarter ended March 31, 2002 and
$846, 2001 for the quarter ended March 31, 2001. Net cash used in our investing
activities was $719,443 and $928,121 for the quarters ended March 31, 2002 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. When expanding our business through acquisitions, 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 reposition assets to those areas
which contribute to our overall financial objectives.
We maintain a level of cash and liquid short-term investments which we believe
will be adequate to meet our anticipated payment obligations without being
required to liquidate intermediate-term and long-term investments through the
next 12 months. Because of 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 12 months.
Our investments at March 31, 2002 consisted primarily of investment-grade fixed
income securities. Cash and short-term investments at March 31, 2002 amounted to
$21,963,793 or 45.6% 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 our 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
$221,179 and $854,448 for the three months ended March 31, 2002 and 2001,
respectively. The 74.1% decrease was primarily due to realized losses on certain
securities in the investment portfolio, and, to a lesser extent, lower
investment yields that resulted from declines in interest rates during the past
year.
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 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.
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 our Bonded Service program. Our
financial statements include reserves for losses on this business for any claims
filed and for an estimate of incurred but not reported losses. Such reserves
were $208,423 and $425,500 at March 31, 2002, and December 31, 2001,
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 risks 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
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, 2002. Our market risk sensitive instruments are entered into for purposes
other than trading.
The carrying value of our investment portfolio as of March 31, 2002 was
$31,960,732, 60.7% of which is invested in fixed income securities, 21.1% in
equity securities and 18.2% in short-term investments. The primary market risk
to the investment portfolio is interest rate risk associated with investments in
fixed income securities as well as fixed-rate short-term investments. We have no
foreign exchange risk or direct commodity risk.
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BANCINSURANCE CORPORATION
AND SUBSIDIARIES
For fixed income 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
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources."
For our investment portfolio, during the quarter ended March 31, 2002, there
were no material changes in our primary market risk exposures or in how these
exposures were managed compared to the year ended December 31, 2001. We do not
anticipate material 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 during future reporting periods.
FACTORS TO CONSIDER FORWARD-LOOKING
Going forward, management will consider underwriting, acquisition and investment
opportunities which fit our strategy of penetrating specialized insurance
markets within the financial services industry. These opportunities will be in
areas where management believes we have an understanding of the underwriting and
inherent risks. Management intends to add independent agents to expand our
market presence. We will also further concentrate on penetrating larger
financial institutions for collateral protection insurance and expanding
financial institution programs and auto dealer service contract programs. In
addition, we will also 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
In our first quarter of fiscal year 2002, we experienced a material increase in
loss and loss adjustment expenses. We attribute this increase to growth in
Lender/Dealer premiums combined with the condition of the national economy.
Specifically, we believe that rising unemployment levels and increased loan
defaults and automobile repossessions caused such increase. To the extent that
unemployment levels continue to rise, loan defaults and automobile repossessions
continue to increase in frequency and the national economy continues to weaken,
we anticipate that this trend will continue during the second quarter of fiscal
year 2002.
We also anticipate that our premiums earned in the second quarter of fiscal year
2002 will be affected by the condition of the national economy. Specifically,
the tragedies of September 11, 2001 motivated captive finance companies of
automobile manufacturers to offer 0% financing programs. As a result, banks and
finance companies, our primary customers, are experiencing lower demand for
automobile loans. Although we are uncertain of the long-term impact of this
trend, we anticipate that it will cause a decrease in premiums earned by our
Lender/Dealer Insurance programs during our second quarter of fiscal year 2002.
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 have no obligation, and
we do not intend, 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 our actual
results to differ from our forward-looking statements include the following: (i)
the demand for Ultimate Loss and Bonded Service insurance varies with factors
beyond our control such as changes in interest rates, level of automobile
financing activity, cost of automobiles, consumer confidence, unemployment
levels, 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.
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BANCINSURANCE CORPORATION
AND SUBSIDIARIES
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, our total adjusted capital is
in excess of all required action levels and 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, 2001, 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".
PART II - OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
See Index to Exhibits at page 18 for a list of exhibits included
herewith.
(b) REPORTS ON FORM 8-K
No reports on Form 8-K were filed by the Company during the
quarter ended March 31, 2002.
17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
BANCINSURANCE CORPORATION
-------------------------
(Registrant)
Date: May 8, 2002 By: Si Sokol
-------------------- ---------------------------
Si Sokol
Chairman
(Principal Executive Officer)
Date: May 8, 2002 By: Sally Cress
-------------------- ---------------------------
Sally Cress
Treasurer and Secretary
(Principal Financial and Accounting Officer)
18
Bancinsurance Corporation
Quarterly Report on Form 10-Q
For the Fiscal Quarter Ended March 31, 2002
Index to Exhibits
Exhibit No. Description Location
- ----------- ----------- --------
10(g) Employment Agreement dated May 17, 2000 Filed Herewith
by and between Ohio Indemnity Company
and Daniel J. Stephan
19