UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 FORM 10-Q [ ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2002 or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to ------------------- ----------------------- 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 Identification No.) incorporation or organization) 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, without par value, of the registrant as of October 31, 2002 was 5,071,561. BANCINSURANCE CORPORATION AND SUBSIDIARIES INDEX Page No. -------- PART I - FINANCIAL INFORMATION: Item 1. Financial Statements Consolidated Balance Sheets as of September 30, 2002 (unaudited) and December 31, 2001........................................ 3 Consolidated Statements of Income for the three months and nine months ended September 30, 2002 and 2001 (unaudited)........................................ 5 Consolidated Statements of Comprehensive Income for the three months and nine months ended September 30, 2002 and 2001 (unaudited)........................ 6 Consolidated Statements of Cash Flows for the nine months ended September 30, 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................................................................................. 18 Item 4. Controls and Procedures........................................................................... 19 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.................................................................. 19 Signatures................................................................................................ 20 Certifications............................................................................................ 21 2 PART I - FINANCIAL INFORMATION ITEM 1. Financial Statements -------------------- BANCINSURANCE CORPORATION AND SUBSIDIARIES Consolidated Balance Sheets September 30, December 31, 2002 2001 (Unaudited) (Note 2) ----------- ----------- Assets - ------ Investments: Held to maturity: Fixed maturities, at amortized cost (fair value $4,837,060 in 2002 and $4,869,247 in 2001) ............................. $ 4,592,303 $ 4,746,889 Available for sale: Fixed maturities, at fair value (amortized cost $14,618,491 in 2002 and $14,211,422 in 2001) ........................... 15,055,576 14,273,152 Equity securities, at fair value (cost $6,773,514 in 2002 and $5,981,774 in 2001) ........................................ 6,993,870 6,715,572 Short-term investments, at cost which approximates fair value .................................................. 16,421,455 5,476,140 ----------- ----------- Total investments ................................................. 43,063,204 31,211,753 ----------- ----------- Cash ............................................................................ 3,897,524 19,547,132 Premiums receivable ............................................................. 5,639,812 5,189,123 Accounts receivable, net of allowance for doubtful accounts ..................... 538,041 590,401 Reinsurance receivable .......................................................... 248,908 90,018 Reinsurance recoverable on paid losses .......................................... - 32,027 Prepaid reinsurance premiums .................................................... 1,169,868 901,482 Deferred policy acquisition costs ............................................... 2,559,937 1,522,533 Estimated earnings in excess of billings on uncompleted codification contracts .. 221,040 151,507 Loans to affiliates ............................................................. 684,857 699,208 Notes receivable ................................................................ 297,500 400,000 Furniture, fixtures and leasehold improvements, net ............................. 198,106 150,024 Excess of investment over net assets of subsidiaries, net ....................... 753,737 2,534,596 Intangible asset, net ........................................................... 1,013,195 864,912 Accrued investment income ....................................................... 363,872 338,300 Receivable for securities ....................................................... 217,882 - Prepaid federal income taxes .................................................... 41,358 - Other assets .................................................................... 499,922 447,661 ----------- ----------- Total assets ...................................................... $61,408,763 $64,670,677 =========== =========== (Continued) 3 BANCINSURANCE CORPORATION AND SUBSIDIARIES Consolidated Balance Sheets September 30, December 31, 2002 2001 ------------ ------------ (Unaudited) (Note 2) Liabilities and Shareholders' Equity - ------------------------------------ Reserve for unpaid losses and loss adjustment expenses ....................... $ 6,515,493 $ 4,872,598 Unearned premiums ............................................................ 9,875,805 6,030,273 Experience rating adjustments payable ........................................ 5,673,725 6,472,413 Retrospective premium adjustments payable .................................... 2,508,716 3,716,869 Funds held under reinsurance treaties ........................................ 1,393,943 1,001,520 Contract funds on deposit .................................................... 780,893 1,937,924 Note payable ................................................................. 3,065,874 5,696,839 Taxes, licenses, and fees payable ............................................ 344,478 552,873 Federal income taxes payable ................................................. - 374,861 Deferred federal income taxes ................................................ 120,691 109,001 Commissions payable .......................................................... 1,559,501 1,350,924 Billings in excess of estimated earnings on uncompleted codification contracts 115,300 107,452 Other ........................................................................ 1,067,581 1,055,221 ------------ ------------ Total liabilities .............................................. 33,022,000 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 .................................. 433,911 525,048 Retained earnings ....................................................... 30,122,149 29,539,902 ------------ ------------ 33,687,443 33,196,333 Less: Treasury Shares, at cost (1,099,380 common shares in 2002 and 400,156 common shares in 2001) ................................. (5,300,680) (1,804,424) ------------ ------------ Total shareholders' equity ..................................... 28,386,763 31,391,909 ------------ ------------ Total liabilities and shareholders' equity ..................... $ 61,408,763 $ 64,670,677 ============ ============ See accompanying notes to consolidated financial statements. 4 BANCINSURANCE CORPORATION AND SUBSIDIARIES Consolidated Statements of Income (Unaudited) Three Months Ended Nine Months Ended September 30, September 30, 2002 2001 2002 2001 ------------ ------------ ------------ ------------ Income: Premiums written ................................. $ 11,835,535 $ 10,589,460 $ 34,879,794 $ 31,239,186 Increase in unearned premiums .................... (266,076) (433,653) (3,845,534) (3,349,286) ------------ ------------ ------------ ------------ Premiums earned .................................. 11,569,459 10,155,807 31,034,260 27,889,900 Premiums ceded ................................... 29,336 (57,569) (350,779) (158,705) ------------ ------------ ------------ ------------ Net premiums earned ........................ 11,598,795 10,098,238 30,683,481 27,731,195 Investment income ................................ 298,908 319,328 1,038,759 1,127,950 Net realized gain (loss) on investments .......... (248,844) 6,035 (398,529) 406,003 Gain on sale of property ......................... - - - 15,848 Codification and subscription fees ............... 745,017 708,168 2,259,726 1,892,872 Management fees .................................. 178,826 234,889 638,692 671,306 Commission fees .................................. 989 (259) 7,716 66,933 Other income ..................................... 2,736 52,132 164,144 100,770 ------------ ------------ ------------ ------------ Total revenue .............................. 12,576,427 11,418,531 34,393,989 32,012,877 ------------ ------------ ------------ ------------ Losses and operating expenses: Losses and loss adjustment expenses .............. 8,966,372 5,889,648 21,084,260 15,724,994 Reinsurance recoveries ........................... 13,201 (62,882) (161,295) (136,259) Experience rating adjustments .................... (1,013,276) 1,203,767 (798,689) 4,033,054 Commission expense ............................... 2,086,527 1,865,760 5,370,829 4,585,214 Other insurance operating expenses ............... 1,155,307 858,765 2,999,933 2,664,410 General and administrative expenses .............. 1,043,369 644,714 2,762,468 2,032,125 Goodwill impairment .............................. 179,000 - 179,000 - Interest expense ................................. 31,304 10,479 71,167 25,512 ------------ ------------ ------------ ------------ Total expenses .......................... 12,461,804 10,410,251 31,507,673 28,929,050 ------------ ------------ ------------ ------------ Income before federal income taxes and cumulative effect of change in accounting principle ............................... 114,623 1,008,280 2,886,316 3,083,827 Federal income tax expense ....................... 21,953 278,884 822,211 854,110 ------------ ------------ ------------ ------------ Income before cumulative effect of change in accounting principle ................. 92,670 729,396 2,064,105 2,229,717 Cumulative effect of change in accounting principle ..................................... - - (1,481,858) - ------------ ------------ ------------ ------------ Net income ................................. $ 92,670 $ 729,396 $ 582,247 $ 2,229,717 ------------ ------------ ------------ ------------ Basic net income per share: Before cumulative effect of change in accounting principle ........................ $ .02 $ .13 $ .37 $ .39 Cumulative effect of change in accounting principle ................................... - - (.26) - ------------ ------------ ------------ ------------ Basic net income per share .................... $ .02 $ .13 $ .11 $ .39 ============ ============ ============ ============ Dilutive net income per share: Before cumulative effect of change in accounting principle ........................ $ .02 $ .13 $ .36 $ .39 Cumulative effect of change in accounting principle ................................... - - (.25) - ------------ ------------ ------------ ------------ Diluted net income per share .................. $ .02 $ .13 $ .11 $ .39 ============ ============ ============ ============ See accompanying notes to consolidated financial statements. 5 BANCINSURANCE CORPORATION AND SUBSIDIARIES Consolidated Statements of Comprehensive Income (Loss) (Unaudited) Three Months Ended Nine Months Ended September 30, September 30, 2002 2001 2002 2001 ----------- ----------- ----------- ----------- Net income ................................. $ 92,670 $ 729,396 $ 582,247 $ 2,229,717 Other comprehensive income: Unrealized holding losses on securities arising during period, net of tax ..... (109,924) (55,010) (91,137) (569,277) ----------- ----------- ----------- ----------- Comprehensive income (loss) ................ $ (17,254) $ 674,386 $ 491,110 $ 1,660,440 =========== =========== =========== =========== See accompanying notes to consolidated financial statements. 6 BANCINSURANCE CORPORATION AND SUBSIDIARIES Consolidated Statements of Cash Flows (Unaudited) Nine Months Ended September 30, 2002 2001 ------------ ------------ Cash flows from operating activities: Net income ...................................................................... $ 582,247 $ 2,229,717 Adjustments to reconcile net income to net cash provided by operating activities: Net realized loss on goodwill impairment ..................................... 1,660,858 - Net realized (gain) loss on investments ...................................... 398,529 (406,003) Net realized (gain) loss on disposal of property and equipment ............... 1,073 (13,605) Depreciation and amortization ................................................ 232,476 198,892 Deferred federal income tax (benefit) expense ................................ 58,639 (89,397) Change in operating assets and liabilities: Premiums receivable ....................................................... (450,689) (1,834,188) Accounts and reinsurance receivable, net .................................. (342,889) (704,568) Deferred policy acquisition costs ......................................... (1,037,404) (962,345) Other assets .............................................................. (289,755) (85,167) Reserve for unpaid losses and loss adjustment expenses .................... 1,642,895 1,685,761 Unearned premiums ......................................................... 3,845,532 3,349,286 Funds held under reinsurance treaties ..................................... 392,423 658,652 Experience rating adjustments payable ..................................... (798,688) 4,033,054 Retrospective premium adjustments payable ................................. (1,208,153) 1,949,924 Contract funds on deposit ................................................. (1,157,031) 4,883 Other liabilities ......................................................... (450,830) 1,311,168 ------------ ------------ Net cash provided by operating activities ............................... 3,079,233 11,326,064 ------------ ------------ Cash flows from investing activities: Proceeds from held to maturity: fixed maturities due to redemption or maturity .. 1,245,400 620,000 Proceeds from available for sale: fixed maturities sold, redeemed or matured .... 4,554,438 4,500,016 Proceeds from available for sale: equity securities sold ........................ 14,599,850 10,120,816 Cost of investments purchased: Held to maturity: fixed maturities ........................................... (1,102,131) - Available for sale: fixed maturities ......................................... (5,300,325) (5,414,702) Equity securities ............................................................ (15,525,770) (12,071,767) Net change in short-term investments ............................................ (10,945,315) 1,758,082 Purchase of furniture, equipment and leasehold improvements ..................... (133,731) (99,448) Cash used in acquisition of assets .............................................. (25,000) (403,503) Other ........................................................................... - 160 ------------ ------------ Net cash used in investing activities ................................... (12,632,584) (990,346) ------------ ------------ Cash flows from financing activities: Proceeds from note payable to bank .............................................. 12,590,000 14,750,000 Repayments of note payable to bank .............................................. (15,190,000) (14,892,000) Acquisition of treasury shares .................................................. (3,496,257) (4,541) ------------ ------------ Net cash used in financing activities .................................. (6,096,257) (146,541) ------------ ------------ See accompanying notes to consolidated financial statements. 7 BANCINSURANCE CORPORATION AND SUBSIDIARIES Consolidated Statements of Cash Flows (Unaudited) Nine Months Ended September 30, 2002 2001 ------------ ------------ Net increase (decrease) in cash ......................... (15,649,608) 10,189,177 ------------ ------------ Cash at December 31 ..................................... 19,547,132 6,560,778 ------------ ------------ Cash at September 30 .................................... $ 3,897,524 $ 16,749,955 ============ ============ Supplemental disclosures of cash flow information: Cash paid during the period for: Interest ........................................... $ 67,704 $ 11,210 ============ ============ Income taxes ....................................... $ 1,288,102 $ 600,000 ============ ============ Supplemental disclosure of non-cash investing activities: Common shares issued in purchase acquisition ....... - $ 9,456 ============ ============ See accompanying notes to consolidated financial statements. 8 BANCINSURANCE CORPORATION AND SUBSIDIARIES Notes To Consolidated Financial Statements (Unaudited) 1. We prepared the Consolidated Balance Sheet as of September 30, 2002, the Consolidated Statements of Income for the three and nine months ended September 30, 2002 and 2001, the Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2002 and 2001, and the Consolidated Statements of Cash Flows for the nine months ended September 30, 2002 and 2001, without an audit. In the opinion of management, we made all adjustments necessary to fairly present the financial position, results of operations and cash flows at September 30, 2002 and for all periods presented. We prepared the accompanying unaudited Consolidated Financial Statements 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. We recommend that you read these unaudited Consolidated Financial Statements together with the financial statements and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2001. The results of operations for the period ended September 30, 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 Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 141, Business Combinations ("SFAS 141"), 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. We adopted SFAS 141 on July 1, 2001, with no material impact on the financial statements. Effective January 1, 2002, we adopted Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets ("SFAS 142"). Under SFAS 142, we no longer amortize goodwill and intangibles which have indefinite lives. SFAS 142 requires that we assess goodwill and intangibles with indefinite lives for impairment at least annually, based on the fair value of the related reporting unit. Our annual impairment assessment will be performed in the fourth quarter on an on-going basis. As an initial step in the SFAS 142 implementation process, we assigned goodwill and intangibles to our property casualty insurance, insurance agency and municipal code publishing business segments. As a result of this assignment, we identified a noncompete agreement in the amount of $120,001 that was separately classified as an intangible with a definite life. Following such assignment, 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 our impairment testing, a net after-tax impairment charge of $1,481,858 was recognized as a cumulative effect of change in accounting principle in the first quarter of 2002. The impairment charge was associated with the August 1999 acquisition of Paul Boardway and Associates, Inc. Management has decided to dissolve Paul Boardway and Associates, Inc. in the fourth quarter of 2002. As a result of this pending dissolution, the remaining goodwill of $179,000 has been recorded as a pre-tax impairment charge to income in the third quarter of 2002. The changes in the carrying amount of goodwill by business segment for the quarter ended September 30, 2002 are as follows: Property/Casualty Insurance Municipal Insurance Agency Code Publishing Total ----------------- ----------- --------------- ----------- Balance, Dec. 31, 2001 ....... $ 753,737 $ 1,780,859 - $ 2,534,596 Impairment write-offs .......... - (1,660,858) - (1,660,858) Noncompete agreement recognition - (120,001) - (120,001) ----------- ----------- --------- ----------- Balance, September 30, 2002 .. $ 753,737 $ - $ - $ 753,737 =========== =========== ========= =========== 9 BANCINSURANCE CORPORATION AND SUBSIDIARIES Intangible assets as of September 30, 2002 and December 31, 2001 were as follows: As of September 30, 2002 As of December 31, 2001 --------------------------------------- --------------------------------------- Accumulated Accumulated Cost Amortization Net Cost Amortization Net ---------- ------------ ---------- ---------- ------------ ---------- Amortization Intangibles: Databases $1,009,166 $ (89,972) $ 919,194 $ 919,273 $ (54,361) $ 864,912 Noncompete agreement 120,001 (26,000) 94,001 - - - ---------- ---------- ---------- ---------- ---------- ---------- Total intangible assets . $1,129,167 $ (115,972) $1,013,195 $ 919,273 $ (54,361) $ 864,912 ========== ========== ========== ========== ========== ========== Amortization expense related to amortizable intangible assets was $61,611 and $18,629 for the nine and three months ended September 30, 2002, respectively, and $24,504 and $11,491 for the nine and three months ended September 30, 2001, respectively. The estimated amortization expense of intangible assets for the next six fiscal 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 Nine Months Ended September 30, 2001 September 30, 2001 ---------------------------------- ---------------------------------- Per Share Per Share ------------------ ------------------ Amount Basic Diluted Amount Basic Diluted ------ ----- ------- ------ ----- ------- Net income, as reported $ 729,396 $.13 $.13 $2,229,717 $.39 $.39 Amortization of goodwill 25,320 - - 75,995 .01 .01 ---------- ---- ---- ---------- ---- ---- Pro forma net income $ 754,716 $.13 $.13 $2,305,712 $.40 $.40 ========== ==== ==== ========== ==== ==== 4. Supplemental Disclosure For Earnings Per Share Three Months Ended Nine Months Ended September 30, September 30, 2002 2001 2002 2001 ---------- ---------- ---------- ---------- Net income ................................... $ 92,670 $ 729,396 $ 582,247 $2,229,717 ---------- ---------- ---------- ---------- Weighted average common shares outstanding ... 5,145,006 5,770,185 5,479,499 5,769,055 Adjustments for dilutive securities: Dilutive effect of outstanding options .... 229,269 25,155 178,705 17,418 ---------- ---------- ---------- ---------- Diluted common shares ........................ 5,374,275 5,795,340 5,658,204 5,786,473 ========== ========== ========== ========== Basic and diluted earnings per share ......... $ .02 $ .13 $ .11 $ .39 ========== ========== ========== ========== 5. On April 25, 2002, the Board of Directors adopted a common share repurchase program. On May 23, 2002, the Board of Directors increased the aggregate number of common shares available for repurchase under the repurchase program to 700,000 common shares from 600,000 common shares originally approved on April 25, 2002. The repurchase program will expire on December 31, 2003. Through September 30, 2002, we purchased 699,224 shares at an average price per share of $5.00 under this repurchase program. 10 BANCINSURANCE CORPORATION AND SUBSIDIARIES 6. We operate primarily in the property/casualty insurance industry. There are intersegment management and commission fees. Depreciation and capital expenditures are not considered material. September 30, 2002 ---------------------------------------------------------------------------------------------- Municipal Property/Casualty Insurance Code All Consolidated Insurance Agency Publishing Other Totals ---------------------------------------------------------------------------------------------- Revenues from external customers $31,402,947 $ 7,716 $ 2,259,726 $ 2,008 $33,672,397 Intersegment revenues .......... 4,410 151,431 - 83,430 239,271 Interest revenue ............... 942,467 102 - 18,294 960,863 Interest expense ............... 15,359 - 3,642 52,166 71,167 Depreciation and amortization .. 85,788 26,000 74,392 46,296 232,476 Segment profit (loss) .......... 3,392,171 (120,563) 368,016 (514,037) 3,125,587 Income tax expense (benefit) ... 910,045 20,265 138,600 (246,699) 822,211 Segment assets ................. 61,344,048 1,029,896 3,004,891 2,033,690 67,412,525 September 30, 2001 ---------------------------------------------------------------------------------------------- Municipal Property/Casualty Insurance Code All Consolidated Insurance Agency Publishing Other Totals ---------------------------------------------------------------------------------------------- Revenues from external customers $29,302,948 $ 66,933 $ 1,892,872 $ 25,548 $31,288,301 Intersegment revenues .......... 4,410 255,931 - 60,930 321,271 Interest revenue ............... 1,018,257 94 - 27,496 1,045,847 Interest expense ............... 10,363 - 1,581 13,568 25,512 Depreciation and amortization .. 25,488 76,802 54,452 42,150 198,892 Segment profit (loss) .......... 3,273,444 143,147 248,685 (260,178) 3,405,098 Income tax expense (benefit) ... 765,236 77,038 94,380 (82,544) 854,110 Segment assets ................. 53,829,934 2,606,035 1,887,436 3,401,685 61,725,090 September 30, September 30, 2002 2001 ------------ ------------ REVENUE Total revenue for reportable segments .... $ 33,672,397 $ 31,288,301 Interest revenue ......................... 960,863 1,045,847 Elimination of intersegment revenue ...... (239,271) (321,271) ------------ ------------ Total consolidated revenue ............... $ 34,393,989 $ 32,012,877 ============ ============ PROFIT Total profit for reportable segments ..... $ 3,639,624 $ 3,665,276 Other loss ............................... (514,037) (260,178) Elimination of intersegment profit ....... (239,271) (321,271) Income before income taxes and cumulative ------------ ------------ effect of change in accounting principle $ 2,886,316 $ 3,083,827 ============ ============ ASSETS Total assets for reportable segments ..... $ 65,378,835 $ 58,323,405 Other assets ............................. 2,033,690 3,401,685 Elimination of intersegment receivables .. (6,003,762) (1,532,495) ------------ ------------ Consolidated assets ...................... $ 61,408,763 $ 60,192,595 ============ ============ 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 ("Ohio Indemnity"). Ohio Indemnity's core line of business is a vendor's single interest product sold to lending institutions. This lender product insures banks and financial institutions against damage to pledged collateral in cases where the collateral is not otherwise insured. The policy is generally written to cover a lender's complete portfolio of collateralized personal property loans, typically automobiles. The second insurance product is guaranteed auto protection ("GAP"). GAP coverage pays the difference between the amount owed by the customer on a lease or loan contract in the event a vehicle is damaged beyond repair, or stolen and never recovered, and the primary insurance company settlement. The GAP product is sold to automobile dealers, lenders and lessors, who then sell coverage directly to the borrower at the time of purchasing or leasing an automobile. The third line is a surety product utilized by not-for-profit entities which reject paying the unemployment compensation tax and instead reimburse the state unemployment agencies for benefits paid by the agency to former employees. Certain national cost containment firms provide programs to assure that reimbursing employers discharge their unemployment compensation commitments. Ohio Indemnity bonds these firms for their program responsibilities. Ohio Indemnity also provides this coverage to groups of not-for-profits under trust arrangements. In addition, state mandated surety bonds, which are required by certain state Departments of Labor are underwritten, and Ohio Indemnity assumes bail bond coverage. 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. Our ultimate liability may be different from our current reserve estimates. We estimate losses and loss adjustment expenses for incurred but not reported claims 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 recorded estimates of outstanding unpaid liabilities associated with specific reported claims and estimated reserves required to pay ultimate net losses on unreported claims monthly and make appropriate adjustments. Our wholly-owned subsidiary, American Legal Publishing Corporation, publishes and distributes ordinances for over 1,300 municipalities. Our wholly-owned subsidiary, Paul Boardway and Associates, Inc., is a property/casualty insurance agency serving lending institutions. Management has decided to dissolve Paul Boardway and Associates, Inc. in the fourth quarter of 2002. SUMMARY RESULTS The following table sets forth period to period changes in selected financial data: 12 BANCINSURANCE CORPORATION AND SUBSIDIARIES Period to Period Increase (Decrease) Nine Months Ended September 30, ----------------------------------------------------- 2001-2002 ----------------------------------------------------- Amount % Change ----------------------------------------------------- Premiums written.............................................. $ 3,640,608 11.7% Net premiums earned........................................... 2,952,286 10.6% Net investment income......................................... (893,723) (58.3)% Total revenue................................................. 2,381,112 7.4% Losses and loss adjustment expenses, net of reinsurance recoveries 5,334,230 34.2% Operating expenses............................................ (2,980,262) (22.4)% Interest expense.............................................. 45,655 179.0% Operating income.............................................. (165,612) (7.4)% Cumulative effect of change in accounting principle........... 1,481,585 100.0% Net income.................................................... (1,647,470) (73.9)% 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 Ohio Indemnity's loss, expense and combined ratios on both a GAAP and statutory basis for the nine months ended September 30: 2002 2001 --------------------------------- GAAP: Loss ratio.................................................................. 68.2% 60.5% Expense ratio............................................................... 23.2% 33.5% ---- ---- Combined ratio.............................................................. 91.4% 94.0% ==== ==== Statutory: Loss ratio.................................................................. 66.5% 63.8% Expense ratio............................................................... 28.7% 26.0% ---- ---- Combined ratio.............................................................. 95.2% 89.8% ==== ==== RESULTS OF OPERATIONS SEPTEMBER 30, 2002 AS COMPARED TO SEPTEMBER 30, 2001 - ---------------------------------------------------- Premiums. Premiums written increased 11.8% in the third quarter of 2002 to $11,835,535 from $10,589,460 in the same quarter of 2001. On a year-to-date basis, premiums written increased 11.7% to $34,879,794 from $31,239,186 in the same nine-month period of 2001. Net premiums earned for the third quarter of 2002 increased 14.9% to $11,598,795 from $10,098,238 for the same quarter of 2001. Year-to-date premiums earned increased 10.6% to $30,683,481 from $27,731,195 in the same nine month period of 2001. The growth in premiums written and net premiums earned was primarily attributable to both policies added during 2001 and volume increases with existing customers. Premiums written related to our lender insurance products increased 15.7% in the third quarter of 2002 to $10,749,970 from $9,292,973 in the third quarter of 2001. On a year-to-date basis, premiums written for our lender insurance products increased 10.9% to $28,527,833 from $25,725,198 in the same nine month period of 2001. The growth in premiums written was primarily attributable to both policies added during 2001 and volume increases with existing customers. This volume increase was the result of geographic expansion and financing incentives offered by some of our customers, which increased their share of the automobile lending market. Net premiums earned related to our lender insurance products increased 16.3% for the third quarter of 2002 to $10,128,176 from $8,707,046 for the same quarter of 2001. Year-to-date net premiums earned increased 9.8% to $26,464,243 from $24,095,786 in the same nine month period of 2001. 13 BANCINSURANCE CORPORATION AND SUBSIDIARIES Premiums written related to our guaranteed auto protection products ("GAP") decreased 20.8% in the third quarter of 2002 to $722,878 from $912,310 in the same quarter of 2001. On a year-to-date basis, GAP premiums written increased 43.8% to $1,854,157 from $1,289,039 in the same nine month period of 2001. This growth in year-to-date GAP premiums was due primarily to an agent transferring a book of business to us during the third quarter of 2001. Net premiums earned related to our GAP insurance products for the third quarter of 2002 decreased 7.4% to $254,853 from $275,178 for the same quarter of 2001. Year-to-date net premiums earned increased 76.2% to $602,909 from $342,260 in the same nine month period of 2001. This growth in year-to-date GAP net premiums earned was due primarily to an agent transferring a book of business to us during the third quarter of 2001. Premiums written related to our surety products decreased 5.6% to $362,687 in the third quarter of 2002 from $386,176 in the same quarter of 2001. This decrease was primarily attributable to timing differences on issuance of billings for mandated surety bonds. On a year-to-date basis, surety premiums written in 2002 increased 6.5% to $4,497,804 from $4,224,949 in the same nine month period of 2001. This increase was primarily attributable to the assumption of bail bond coverage during the third quarter of 2001. Net premiums earned related to our surety products for the third quarter of 2002 increased 8.9% to $1,215,766 from $1,116,014 for the same quarter of 2001. Year-to-date net premiums earned increased 9.8% to $3,616,329 from $3,293,150 in the same nine month period of 2001. Net Investment Income. Our $43,063,204 investment portfolio is allocated among investment-grade fixed income securities, equity securities and short-term investments, with investment grade fixed income securities constituting the largest allocation. With respect to the equity portion of our portfolio, we regularly evaluate factors that may impact the national economy as well as the outlook for corporate profits. Net investment income decreased 58.3% from $1,533,953 in the first nine months of 2001 to $640,230 in the first nine months of 2002, and decreased 84.6% from $325,363 in the three months ended September 30, 2001 to $50,064 in the three months ended September 30, 2002. The nine month and three month decreases were primarily due to realized investment losses of $398,529 and $248,844, respectively, in 2002 compared to realized investment gains of $406,003 and $6,035, respectively, in 2001. Our investment strategy is based on current market conditions and tax considerations which we regularly monitor. 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 seek to 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. Codification and Subscription Fees. Codification and subscription fees generated by American Legal Publishing increased 5.2% in the third quarter of 2002 to $745,017 from $708,168 in the same quarter of 2001. On a year-to-date basis, American Legal Publishing's codification and subscription fees increased 19.4% to $2,259,726 from $1,892,872 in the same nine month period of 2001. The increase in fees was primarily the result of our acquisition in June 2001 of the net assets of Justinian Publishing Company, which contributed $112,075 in additional codification fees in the third quarter of 2002 and $438,800 in additional codification fees in the first nine months of 2002, as compared with $162,855 for both the third quarter and the first nine months of 2001. Management Fees. We have an agreement with a cost containment service firm involving a program designed to control the unemployment compensation costs of certain non-profit employers. Pursuant to this agreement, a surety bond has been issued insuring the payment of certain reimbursable unemployment compensation benefits on behalf of the employers enrolled in this program. Certain monies allocated toward the payment of these benefits are held by us. We and the cost containment service firm share any residual resulting from the development of benefits to be paid from the contract funds held on deposit. We record management fees in the period the residual is shared with the cost containment service firm. Our management fees in the third quarter of 2002 decreased 23.9% to $178,826 from $234,889 in the same quarter of 2001. Year-to-date management fees decreased 4.9% to $638,692 from $671,306 in the same nine month period of 2002. We expect management fees to vary from period to period depending on unemployment levels and claims experience in bonded service. Other Income. Other income decreased 94.8% in the third quarter of 2002 to $2,736 from $52,132 in the same quarter of 2001. This decrease was primarily attributable to lower claims service fees. On a year-to-date basis, other income increased 62.9% to $164,144 from $100,770 in the same nine month period of 2001. The increase in the year-to-date period was primarily the result of releasing a $100,000 reserve related to the dismissal of a dispute with an unaffiliated party. 14 BANCINSURANCE CORPORATION AND SUBSIDIARIES Losses and Loss Adjustment Expenses. Losses and loss adjustment expenses (net of reinsurance recoveries) in the third quarter of 2002 increased 20.5% to $7,020,573 from $5,826,766 in the third quarter of 2001. Losses incurred with respect to our lender insurance products in the third quarter of 2002 increased 17.2% to $6,566,313 from $5,602,220 in the same quarter of 2001. On a year-to-date basis, losses incurred with respect to our lender insurance products increased 16.9% to $17,608,495 from $ 15,069,235 for the same nine month period in 2001. These increases were consistent with our growth in premiums for our lender insurance products during the same period. In addition, with weakened economic conditions, we have experienced higher loan defaults and repossessions. Losses incurred with respect to our GAP insurance products in the third quarter of 2002 increased 401.1% to $196,844 from $39,281 in the same quarter of 2001. On a year-to-date basis, losses incurred increased 369.2% to $706,660 from $150,614 in the same nine month period of 2001. These increases were consistent with premium growth and were primarily attributable to an agent transferring a book of business to us during the fourth quarter of 2001. Losses incurred with respect to our surety products in the third quarter of 2002 increased 38.9% to $257,416 from $185,265 in the same quarter of 2001. On a year-to-date basis, losses incurred increased 75.9% to $648,811 from $368,886 in the same nine month period of 2001. These increases were primarily attributable to a significant claim incurred in association with our bail bond coverage and rising unemployment levels, which caused increased benefit charges associated with our unemployment insurance protection product. Operating Expenses. Our operating expenses consist of experience rating adjustments, commission expenses, other insurance operating expenses and general and administrative expenses. Experience rating adjustments decreased 184.2% in the third quarter of 2002 to $(1,013,276) from $1,203,767 in the same quarter of 2001. On a year-to-date basis, experience rating adjustments decreased 119.8% to $(798,689) from $4,033,054 in the same nine month period of 2001. These decreases were primarily attributable to a significant policy added in 2001. Experience rating adjustments are calculated and adjusted from period to period based on policy experience to date and premium growth. Management anticipates that experience rating adjustments may fluctuate in future quarters based upon this calculation. Commissions, other insurance operating and general and administrative expenses in the third quarter increased 27.2% to $4,285,203 from $3,369,239 in the third quarter of 2001. On a year-to-date basis, commissions, operating and general and administrative expenses increased 19.9% to $11,133,230 from $9,281,749 in the same nine month period of 2001. Commission and other insurance operating expense increases were consistent with overall premium activity in 2002. Increases in general and administrative expenses were primarily the result of increases in salaries and related benefits and consulting. American Legal Publishing incurred operating and administrative expenses of $679,151 and $1,888,068 in the third quarter and first nine months of 2002, respectively, compared with $592,304 and $1,642,606 in the third quarter and first nine months of 2001, respectively. These increases were consistent with overall sales activity in 2002 and were primarily attributable to both salary and printing expense increases. 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 no longer amortizes goodwill and intangibles which have indefinite lives. SFAS 142 also requires the Company to assess goodwill and intangibles with indefinite lives for impairment at least annually, based on the fair value of the related reporting unit. Our annual impairment assessment will be performed in the fourth quarter on an on-going basis. As an initial step in the SFAS 142 implementation process, the Company allocated its goodwill and intangibles to its three business segments. 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 business segment was compared to its carrying value. Fair values were determined by discounting estimated future cash flows. Based on the Company's impairment testing, a net after-tax impairment charge of $1,481,858 was recognized as a cumulative effect of change in accounting principle in the first quarter of 2002. The impairment charge was associated with our August 1999 acquisition of Paul Boardway and Associates, Inc. Management has decided to dissolve Paul Boardway and Associates, Inc. in the fourth quarter of 2002. The decision to dissolve the subsidiary was primarily the result of our action taken during 2000 to preserve the business acquired from Paul Boardway and Associates in 1999 and to provide a claim servicing location closer to its customers. During the first half of 2000, the majority of policies were transferred to another general agency who represents Ohio Indemnity. As a result of this pending dissolution, the remaining goodwill of $179,000 has been recorded as a pre-tax impairment charge to income in the third quarter of 2002. Amortization expense related to definite-lived intangible assets was $18,629 and $61,611 in the third quarter and first nine months of 2002 compared with $11,491 and $24,504 in the third quarter and first nine months of 2001, respectively. The increase in amortization expense in 2002 compared with 2001 is primarily associated with a database acquired by American Legal Publishing in June 2001. 15 BANCINSURANCE CORPORATION AND SUBSIDIARIES Federal Income Taxes. Federal income tax expense decreased in the third quarter of 2002 to $21,953 from $278,884 in the same quarter of 2001. On a year-to-date basis, federal income tax expense decreased 3.7% to $822,211 from $854,110 in the same nine month period of 2001. This decrease reflects lower pre-tax income. The effective federal income tax rate was 19.2% and 27.6% for the third quarter of 2002 and 2001, respectively, and 28.5% and 27.7% for the first nine months of 2002 and 2001, respectively. GAAP Combined Ratio. Our combined ratio for the third quarter and the first nine months of 2002 was 95.8% and 91.4%, respectively, and 92.4% and 91.7% for the third quarter and the first nine months of 2001, respectively. The decrease in the first nine months was primarily attributable to higher expense ratios in 2001 as a result of a change in experience rating adjustments related to the addition of a significant policy in the second quarter of 2001. The increase in the third quarter was primarily attributable to a higher losses and loss adjustment expenses incurred. 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 our debt service obligations. 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. Ohio Indemnity principally uses these funds for payment of losses and loss adjustment expenses, commissions, operating expenses and income taxes. Net cash provided by operating activities equaled $3,079,233 and $11,326,064 for the nine months ended September 30, 2002 and 2001, respectively. Net cash used in our investing activities was $12,632,584 and $990,346 for the nine months ended September 30, 2002 and 2001, respectively. Net cash used in financing activities equaled $6,096,257 and $146,541 for the nine months ended September 30, 2002 and 2001, respectively. We have a $13,000,000 revolving line of credit with a maturity date of June 30, 2006. The revolving credit provides for interest payable quarterly, at an annual rate equal to 0.75% less than the prime rate. The bank that provides the credit line is also a policyholder of Ohio Indemnity. American Legal Publishing derives its funds principally from codification and subscription fees which are currently sufficient to meet its operating expenses. 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 expenses, 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 the insurance policies that we issue 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 losses and expenses through the next 12 months. Our investment portfolio is allocated among investment-grade fixed income securities, equity securities and short-term investments, with investment grade fixed income securities constituting the largest allocation. Cash and short-term investments at September 30, 2002 amounted to $20,318,979 or 43.3% of our 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 values with unrealized gains or losses, net of applicable deferred taxes, reflected in accumulated other comprehensive income. We earned net investment income of $640,230 and $1,533,953 for the nine months ended September 30, 2002 and 2001, respectively. The 58.3% decrease was primarily due to realized losses on investments sold, 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 of our investments 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. 16 BANCINSURANCE CORPORATION AND SUBSIDIARIES 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 unemployment insurance protection products. Our financial statements include reserves for losses on these products for any claims filed and for an estimate of incurred but not reported losses. Such reserves were $422,564 and $425,500 at September 30, 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 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 September 30, 2002. Our market risk sensitive instruments are entered into for purposes other than trading. The carrying value of our investment portfolio as of September 30, 2002 was $43,063,204, 45.6% of which is invested in fixed income securities, 16.2% in equity securities and 38.1% in short-term investments. The primary market risk to our 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. For fixed income securities, our short-term liquidity needs and the potential liquidity needs of our business are key factors in managing our 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 our 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 September 30, 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 are consistent with 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 our lender insurance products and expanding our financial institution and auto dealer service contract products. In addition, we will also consider opportunities for underwriting additional surety policies for non-profit organizations as they continue to consolidate into national trusts and seek to retain and transfer their unemployment claim exposure. TRENDS The Company's results of operations have varied from quarter to quarter principally because of fluctuations in underwriting results. The majority of our revenues are dependent on the demand for our customers automobile financing programs. An increase in automobile lending, driven by aggressive financing offers by some of our customers, helped increase premiums during the summer of 2002. We anticipate that as financing incentives are phased-out, consumer spending on automobiles will decline and, therefore, automobile lending will also decrease in the fourth quarter of 2002. The U.S. economy's recovery from recession may take longer than originally expected. With the still-struggling economy, continued corporate downsizing and high consumer debt, financial institutions are seeing a rise in delinquency dollars. As loan defaults and automobile repossessions continue to increase in frequency, we anticipate an increase in losses and loss adjustment experience in the fourth quarter of 2002. 17 BANCINSURANCE CORPORATION AND SUBSIDIARIES 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 our actual results are beyond our ability to control or predict. We caution you 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. The risks and uncertainties that may affect the operations, performance, development and results of our business, include the following: changes in property and casualty reserves; premium and investment growth; product pricing environment; availability of credit; performance of financial markets; fluctuations in interest rates; availability and pricing of reinsurance; acts of war and terrorist activities; rating agency actions; competition; adverse state and federal legislation and regulation, including limitations on premium levels, and increases in prescribed amounts of capital and surplus; Bancinsurance's reliance as a holding company on dividends from Ohio Indemnity and applicable regulatory restrictions on the ability of Ohio Indemnity to pay dividends; litigation and administrative proceedings; ability to achieve targeted expense savings; ability to achieve premium targets and profitability goals; and general economic conditions. INFLATION We do not consider the impact of inflation to be material in the analysis of our overall operations. INSURANCE REGULATORY MATTERS The National Association of Insurance Commissioners 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 the applicable risk-based capital measurement threshold could be forced to reduce the scope of its operations and ultimately could become subject to statutory receivership proceedings. Based on our analysis, our statutory net worth is in excess of the applicable threshold and no corrective action is necessary. The risk-based capital provisions have been enacted into the Ohio Revised Code. RESERVES The amount of our 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 reported claim 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". 18 BANCINSURANCE CORPORATION AND SUBSIDIARIES Item 4. Controls and Procedures ----------------------- Under the supervision and, with the participation of our management, including our principal executive officer and principal financial officer, we have evaluated our disclosure controls and procedures (as defined in Rules 13a-14 and 15d-14 of the Securities Exchange Act of 1934) as of a date within 90 days prior to the filing of this report. Based upon that evaluation, our principal executive officer and principal financial officer have concluded that such disclosure controls and procedures are effective. There have not been any significant changes in our internal controls or in other factors that could significantly affect these controls subsequent to the date of our evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. PART II - OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K -------------------------------- (a) Exhibits -------- 99.1* Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 99.2* Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. * Filed with this Report. (b) Reports on Form 8-K ------------------- No reports on Form 8-K were filed by the Company during the quarter ended September 30, 2002. 19 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. BANCINSURANCE CORPORATION ------------------------- Date: November 12, 2002 By: /s/ Si Sokol ----------------------- --------------------------------------- Si Sokol Chairman and Chief Executive Officer (Principal Executive Officer) Date: November 12, 2002 By: /s/ Sally J. Cress ----------------------- -------------------------------------------- Sally J. Cress Treasurer and Secretary (Principal Financial and Accounting Officer) 20 CERTIFICATIONS I, Si Sokol, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Bancinsurance Corporation; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules l3a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 12, 2002 /s/ Si Sokol ----------------- -------------------------------------- Si Sokol Chairman and Chief Executive Officer (Principal Executive Officer) 21 I, Sally Cress, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Bancinsurance Corporation; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules l3a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officer and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: November 12, 2002 /s/ Sally J. Cress ----------------- ---------------------------------------------- Sally J. Cress Treasurer and Secretary (Principal Financial and Accounting Officer) 22