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EXHIBIT 13(a)
BANCINSURANCE CORPORATION AND SUBSIDIARIES
SELECTED FINANCIAL DATA
2003 2002 2001 2000 1999
------------ ------------ ------------ ------------ ------------
INCOME STATEMENT DATA
Net premiums earned........................ $ 47,369,056 $ 40,882,237 $ 38,308,738 $ 24,841,815 $ 25,215,631
Net investment income...................... 1,599,064 1,236,138 1,450,761 1,628,306 1,495,848
Net realized gain (loss) on investments.... 822,161 (1,220,477) 22,542 (320,742) 226,826
Codification and subscription fees......... 3,819,221 3,324,037 2,652,231 1,884,067 -
Management fees............................ 114,094 749,442 846,446 659,929 1,153,663
Other revenue.............................. 81,653 197,278 161,544 1,531,679 190,934
Total revenues............................. 53,805,249 45,168,655 43,442,262 30,380,996 31,261,907
Cumulative effect of change in accounting
principle................................ - (1,481,558) - - -
Net income................................. 3,909,817 889,613 3,075,190 3,918,357 3,889,195
BALANCE SHEET DATA AT YEAR END
Total cash and investments................. $ 76,929,462 $ 57,293,361 $ 51,758,885 $ 36,938,985 $ 34,659,801
Total assets............................... 115,869,736 72,703,204 64,670,677 45,900,984 42,448,113
Notes payable.............................. 53,276 2,166,355 5,696,839 5,142,000 5,145,000
Trust preferred debt issued to affiliates.. 15,465,000 8,248,000 - - -
Shareholders' equity....................... 33,365,028 28,901,838 31,391,909 28,535,359 25,193,289
Common shares outstanding.................. 4,920,050 5,000,291 5,770,185 5,769,235 6,023,049
PER COMMON SHARE DATA
Income before cumulative effect of
change in accounting principle.......... $ .77 $ .41 $ .53 $ .66 $ .63
Net income................................. .77 .16 .53 .66 .63
Year-end book value........................ 6.78 5.78 5.44 4.95 4.18
GAAP RATIOS
Loss ratio................................. 64.2% 65.1% 70.0% 59.8% 62.4%
Expense ratio.............................. 27.8% 27.2% 26.9% 29.4% 23.4%
Combined ratio............................. 92.0% 92.3% 96.9% 89.2% 85.8%
STATUTORY RATIOS
Loss ratio................................. 66.1% 67.9% 63.9% 60.2% 65.0%
Expense ratio.............................. 26.2% 25.9% 21.3% 23.0% 19.2%
Combined ratio............................. 92.3% 93.8% 85.2% 83.2% 84.2%
Net premiums written to statutory surplus.. 1.6X 1.4x 1.5x .9x 1.0x
Exhibit 13(a) - 1
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
OVERVIEW
Bancinsurance Corporation ("Bancinsurance") is a specialty property insurance
holding company incorporated in the State of Ohio in 1970. Bancinsurance
Corporation and its subsidiaries (collectively, the "Company") have three
reportable business segments: (1) property/casualty insurance, (2) municipal
code publishing and (3) insurance agency, which are described in more detail
below.
PRODUCTS AND SERVICES
Property/Casualty Insurance. Our wholly-owned subsidiary, Ohio Indemnity Company
("Ohio Indemnity"), is a specialty property insurance company. Our principal
sources of revenue are premiums paid by insureds for insurance policies written
by Ohio Indemnity. Ohio Indemnity, an Ohio corporation, is licensed in 47
states, the District of Columbia and for surplus lines in Texas. As such, Ohio
Indemnity is subject to the regulations of the Ohio Department of Insurance (the
"Department") and the regulations of each state in which it operates. The
majority of Ohio Indemnity's premiums are derived from two distinct lines of
business: (1) products designed for automobile lenders/dealers and (2)
unemployment compensation and bail bond products.
Our automobile lender/dealer line offers three types of products. First,
ultimate ULTIMATE LOSS INSURANCE(R) ("ULI"), a blanket vendor single interest
coverage, is the primary product we offer to financial institutions nationwide.
This product insures banks and financial institutions against damage to pledged
collateral in cases where the collateral is not otherwise insured. A ULI policy
is generally written to cover a lender's complete portfolio of collateralized
personal property loans, typically automobiles. Second, creditor placed
insurance ("CPI") is an alternative to our traditional blanket vendor single
interest product. While both products cover the risk of damage to uninsured
collateral in a lender's automobile loan portfolio, CPI covers the portfolio
through tracking individual borrowers' insurance coverage. The lender purchases
physical damage coverage for loan collateral after a borrower's insurance has
lapsed. Third, our guaranteed auto protection insurance ("GAP") pays the
difference or "gap" between the amount owed by the customer on a lease or loan
contract and the amount of primary insurance company coverage in the event a
vehicle is damaged beyond repair or stolen and never recovered. 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.
We offer three types of unemployment compensation products: (1) bonded service;
(2) excess of loss; and (3) mandated bonds. Our unemployment compensation
products are utilized by not-for-profit entities which elect not to pay the
unemployment compensation tax and instead reimburse the state unemployment
agencies for benefits paid by the agencies to the entities' former employees.
Certain national cost containment firms provide programs to ensure that
reimbursing employers discharge their unemployment compensation commitments.
Through its bonded service products, Ohio Indemnity bonds these national cost
containment firms for their program service responsibilities. Ohio Indemnity
also provides excess of loss coverage, under trust arrangements, to groups of
not-for-profit entities that want to declare reimbursing status for their
unemployment compensation obligations. We also underwrite state mandated surety
bonds. Certain states require that reimbursing employers post a bond as a
security for the performance of their reimbursing obligations. Ohio Indemnity
provides this mandated bond on behalf of employers enrolled in the bonded
service program. In addition to the unemployment compensation products, we
provide bail bond coverage through an assumed reinsurance agreement for 15%
participation, with other insurers assuming the remaining exposure. This
agreement insures a bail bond company against losses arising from the
nonperformance of bail requirements.
The Company sells its insurance products through a network of distribution
channels, including four managing general agents, approximately thirty
independent agents and direct sales.
Municipal Code Publishing. Our wholly-owned subsidiary, American Legal
Publishing Corporation ("ALPC"), codifies, publishes, supplements and
distributes ordinances for over 1,800 municipalities and counties nationwide in
addition to state governments. Ordinance codification is the process of
collecting, organizing and publishing legislation for state and local
governments.
Insurance Agency. In July 2002, we formed Ultimate Services Agency, LLC ("USA"),
a wholly-owned subsidiary. We formed USA to act as an agency for placing
property/casualty insurance policies offered and underwritten by Ohio Indemnity
and by other property/casualty insurance companies. In the fourth quarter of
2002, we dissolved our wholly-owned subsidiary, Paul Boardway and Associates,
Inc., which previously acted as a property/casualty insurance agency.
ECONOMIC FACTORS, OPPORTUNITIES, CHALLENGES AND RISKS
The Company's results of operations have historically varied from quarter to
quarter principally due to fluctuations in underwriting results and timing of
investment sales. The Company's primary source of revenue and cash is derived
from premiums collected and investment activity. The majority of our premium
revenues are dependent on the demand for our customers' automobile financing
programs. Increased automobile sales generally cause increased demand for
automobile financing and, in turn, our lender/dealer products. Our ULI and CPI
claims experience is impacted by the rate of loan defaults, bankruptcies and
automobile repossessions among our customers. As delinquency dollars rise, our
claims experience is expected to increase. In addition, the state of the used
car market has a direct impact to our GAP claims. As used car prices decline,
there is a larger gap between the balance of the loan or lease and the actual
cash value of the automobile, which results in higher severity of GAP claims.
Our unemployment compensation products are directly impacted by the nation's
unemployment levels. As unemployment levels rise, we would anticipate an
increase in the frequency of claims. In addition, the interest rate and market
rate environment can have an impact on the yields and valuation of our
investment portfolio.
Exhibit 13(a) - 2
The Company is focused on opportunities in specialty insurance to extend our
product offerings with appropriate levels of risk that will enhance the
Company's operating performance. Our strategy emphasizes long-term growth
through increased market penetration, product line extensions, and an ongoing
commitment to achieve sustainable levels of profitability.
REINSURANCE TRANSACTION
Ohio Indemnity entered into a reinsurance transaction (the "Reinsurance
Transaction") in the fourth quarter 2003 which ceded 100% of the business for
one of our existing lender/dealer customers. This resulted in $7,882,981 of
ceded net premiums earned, $52,928 of ceded commissions, $2,946,616 of ceded
losses and loss adjustment expenses, and $4,936,365 of ceded experience rating
adjustments for the year ended December 31, 2003. At December 31, 2003, a
deferred ceded commission of $853,615 was recorded for this Reinsurance
Transaction, which will be earned over the life of the reinsurance agreement not
to exceed five years.
Excluding the impact of the Reinsurance Transaction, net premiums earned grew
$14,369,800, losses and loss adjustment expenses increased $7,715,532 and
experience rating adjustments rose $3,941,539 in 2003 compared to 2002. See note
16 to the consolidated financial statements for a more detailed description of
the Company's reinsurance.
SUMMARY RESULTS
The following table sets forth period-to-period changes in selected financial
data:
Period-to-Period Increase (Decrease)
Years ended December 31,
---------------------------------------------------------------
2002-2003 2001-2002
---------------------------- ------------------------------
AMOUNT % CHANGE Amount % Change
----------- -------- ----------- ----------
Net premiums earned........................................ $ 6,486,819 15.9% $ 2,573,499 6.7%
Net realized gain (loss) on investments.................... 2,042,638 167.4% (1,243,019) (5,514.2)%
Total revenues............................................. 8,636,594 19.1% 1,726,393 4.0%
Losses and loss adjustment expenses........................ 4,786,916 16.8% 6,655,512 30.7%
Experience rating adjustments.............................. (994,826) (58.2)% (6,863,964) (133.1)%
Commissions and other insurance expenses................... 1,839,379 16.7% 2,035,258 22.6%
Income before federal income taxes and cumulative effect
of change in accounting principle........................ 2,211,981 66.8% (954,556) (22.4)%
Cumulative effect of change in accounting principle........ 1,481,858 100.0% (1,481,585) (100.0)%
Net income................................................. 3,020,204 339.5% (2,185,577) (71.1)%
Net income for 2003 was $3,909,817, or $0.77 per diluted share, compared to
$889,613, or $0.16 per diluted share, in 2002. The most significant factors
contributing to the increase was a $2,042,638 favorable comparison in net
realized gain (loss) on investments compared to 2002 and adoption of Statement
of Financial Accounting Standards No. 142 ("SFAS 142"), "Goodwill and Other
Intangible Assets" in the first quarter 2002, which resulted in a non-cash
after-tax impairment charge of $1,481,858, or $0.25 per diluted share. Results
for 2003 were also impacted by a decrease in management fees of $635,348 as a
result of rising unemployment compensation obligations related to the increased
level of unemployment. The impact of lower management fees in 2003 was mitigated
by growth in our CPI product which was introduced in fourth quarter 2002.
Net income for 2002 was $889,613, or $0.16 per diluted share, compared to
$3,075,190, or $0.53 per diluted share, in 2001. The most significant factors
contributing to the decrease was a $1,243,019 unfavorable comparison in net
realized gain (loss) on investments compared to 2001 and the after-tax
impairment charge of $1,481,858 from adoption of SFAS 142 in 2002.
The combined ratio, which is the sum of the loss ratio and the expense ratio, is
the traditional measure of underwriting experience for insurance companies. The
statutory combined ratio is the sum of the ratio of losses to premiums earned
plus the ratio of statutory underwriting expenses to premiums written after
reducing both premium amounts by dividends to policyholders. Statutory
accounting principles differ in certain respects from accounting principles
generally accepted in the United States ("GAAP"). Under statutory accounting
principles, policy acquisition costs and other underwriting expenses are
recognized immediately, not at the same time premiums are earned. To convert
underwriting expenses to a GAAP basis, policy acquisition expenses are deferred
and recognized over the period in which the related premiums are earned.
Therefore, the GAAP combined ratio is the sum of the ratio of losses to premiums
earned plus the ratio of underwriting expenses to premiums earned. The following
table reflects Ohio Indemnity's loss, expense and combined ratios on both a
statutory and a GAAP basis for the years ended December 31:
2003 2002 2001
---- ---- -----
GAAP:
Loss ratio...................................................... 64.2% 65.1% 70.0%
Expense ratio................................................... 27.8% 27.2% 26.9%
----- ----- -----
Combined ratio.................................................. 92.0% 92.3% 96.9%
===== ===== =====
Statutory:
Loss ratio...................................................... 66.1% 67.9% 63.9%
Expense ratio................................................... 26.2% 25.9% 21.3%
----- ----- -----
Combined ratio.................................................. 92.3% 93.8% 85.2%
===== ===== =====
Exhibit 13(a) - 3
RESULTS OF OPERATIONS
2003 COMPARED TO 2002
Net Premiums Earned. Net premiums earned increased 15.9% to $47,369,056 in 2003
from $40,882,237 in 2002. Net premiums earned for 2003 benefited from strong
growth in our CPI and GAP products and was also influenced by the Reinsurance
Transaction.
Net premiums earned for CPI rose significantly to $5,439,426 in 2003 from
$163,729 a year ago. CPI was introduced in the fourth quarter 2002 and
particularly benefited from new policies added during 2003. Net premiums earned
for GAP increased to $2,733,170 in 2003 compared with $939,014 the prior year.
This increase is due to purchases of GAP coverage by two large financial
institution customers in 2003 and increased volume with existing customers. Net
premiums earned for unemployment compensation and bail bond products
(collectively, "UC") grew 18.3% to $5,821,856 in 2003 from $4,920,040 in 2002
primarily due to rate increases with existing customers.
These increases were partially offset by a decrease in ULI net premiums earned
of 4.3% from $34,859,454 in 2002 to $33,374,604 in 2003. This decrease was
principally due to $7,882,981 of ceded net premiums earned associated with the
Reinsurance Transaction. Excluding the Reinsurance Transaction, 2003 ULI net
premiums earned increased $6,398,131 or 18.4% in 2003 compared to 2002
principally due to rate and volume increases with existing customers. Higher
levels of automobile lending by some of our large financial institution
customers, driven by aggressive financing offers, was the primary cause of the
increased volume.
Investment Income. At December 31, 2003, our $73,979,835 investment portfolio
was allocated as follows: fixed maturity securities (45.7%); equity securities
(13.8%); short-term investments (39.1%); and other invested assets (1.4%). We
seek to invest in investment-grade obligations of states and political
subdivisions because the majority of the interest income from such investments
is tax-exempt and such investments have generally resulted in more favorable net
yields. Net investment income increased 29.4% to $1,599,064 in 2003 from
$1,236,138 in 2002 due to a solid increase in invested assets, which was
partially offset by lower interest rates and yields on the investment portfolio.
During 2003, we recorded a net realized gain on investments of $822,161 compared
with a net realized loss on investments of $1,220,477 in 2002. This increase was
a combination of the timing of the sale of individual securities and
other-than-temporary impairments on investments. We generally decide whether to
sell securities based upon investment opportunities and tax consequences. We
regularly evaluate the quality of our investment portfolio. When we believe that
a specific security has suffered an other-than-temporary decline in value, the
difference between cost and estimated fair value is charged to income as a
realized loss on investments. There were $129,729 in impairment charges included
in net realized gain (loss) on investments in 2003 compared to $931,531 in 2002.
For more information concerning impairment charges, see "Other-Than-Temporary
Impairment of Investments" below.
Codification and Subscription Fees. ALPC's codification and subscription fees
increased 14.9% to $3,819,221 in 2003 compared to $3,324,037 in 2002 principally
due to new state, city and municipal customers added since fourth quarter 2002
and the provision of additional services, including specialized codification and
integrated product offerings.
Management Fees. We have an agreement with a cost containment service firm to
control the unemployment compensation costs of certain non-profit employers.
Pursuant to this agreement, we have issued a surety bond insuring the payment of
certain reimbursable unemployment compensation benefits on behalf of the
employers enrolled in this program. We hold certain monies allocated toward the
payment of these benefits. Together with the cost containment service firm, we
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 that
the residual is shared with the cost containment service firm. Our management
fees in 2003 decreased 84.8% to $114,094 from $749,442 in 2002 as a result of
rising unemployment compensation obligations related to the increased level of
unemployment. We expect management fees to vary from period to period depending
on unemployment levels and claims experience.
Losses and Loss Adjustment Expenses. Losses and loss adjustment expenses ("LAE")
represent claims associated with insured loss events and expenses associated
with adjusting and recording policy claims, respectively. Losses and LAE
increased 16.8% to $33,083,172 in 2003 from $28,314,256 in 2002 primarily due to
loss experience in our CPI, UC and GAP business.
Losses and LAE related to our CPI products increased $1,658,542 to $1,778,494 in
2003 from $119,952 in 2002 principally due to premium growth as the product was
introduced in the fourth quarter 2002. UC losses and LAE increased 118.0% to
$2,757,672 in 2003 from $1,264,831 in 2002 as a result of reserve strengthening
and increased benefit payments associated with rising unemployment compensation
obligations. GAP losses and LAE rose 70.0% to $2,610,495 from $1,535,892 in
2002. We attribute this increase primarily to our growth in GAP premiums
combined with increased severity of GAP claims. The lower residual value for
used automobiles contributed to the increased severity of claims by creating a
larger difference between the outstanding balance of a customer's loan or lease
and the amount of primary insurance coverage.
ULI losses and LAE increased 2.1% to $25,936,511 in 2003 from $25,393,581 in
2002. ULI losses and LAE were impacted by the $2,946,616 of ceded losses and LAE
associated with the Reinsurance Transaction. Excluding the impacts of the
Reinsurance Transaction, ULI losses and LAE increased 13.7% from 2002. We
attribute these increases primarily to our growth in premiums combined with
higher frequency of losses and LAE. With the continued slowdown in the U.S.
economy and high consumer debt, financial institutions are experiencing a rise
in delinquency dollars. As loan defaults, bankruptcies and automobile
repossessions increased, we experienced a higher frequency of losses and LAE.
For more information concerning losses and LAE, see "Losses and Loss Adjustment
Expense Reserves" below.
Exhibit 13(a) - 4
Experience Rating Adjustments. The experience rating adjustment is primarily
influenced by ULI policy experience-to-date and premium growth. Experience
rating adjustments decreased 58.2% to $(2,702,910) in 2003 from $(1,708,084) in
2002. The most significant factor contributing to the decrease was a $4,936,365
positive adjustment to experience rating adjustments which resulted from the
Reinsurance Transaction. Excluding the Reinsurance Transaction, experience
rating adjustments increased $3,941,539 in 2003 compared to 2002 primarily as a
result of and premium growth in our ULI product line. Management anticipates
that experience rating adjustments may fluctuate in future periods based upon
loss experience and premium growth.
Commissions and Other Insurance Expenses. Commission expense rose 9.1% to
$7,891,016 in 2003 from $7,230,636 in 2002 principally due to the growth in
premiums which was partially offset by ceding commissions associated with
several reinsurance transactions entered into in 2003. Other insurance operating
expenses increased 31.0% to $4,982,456 in 2003 from $3,803,457 in 2002 as a
result of an increase in premium taxes, salaries and benefits.
Codification and Subscription Expenses. Codification and subscription expenses
incurred by ALPC increased 13.1% to $3,269,714 in 2003 from $2,889,981 in 2002.
These increases were consistent with growth in codification and subscription
revenues and were primarily attributable to increases in salaries, outside
printing, supplies and consulting fees.
Interest expense. Interest expense grew to $541,248 in 2003 from $131,323 in
2002 as a result of two trust preferred debt offerings in December 2002 and
September 2003 that raised $8.2 million and $7.2 million, respectively. The
increase in interest expense from the trust preferred debt was partially offset
by lower borrowing levels on the Company's revolving credit line during 2003.
The proceeds from the trust preferred debt offerings provided additional
financial flexibility for the Company. See "Liquidity and Capital Resources" for
a more detailed description of the trust preferred debt.
Federal Income Taxes. The Company's effective income tax rate was 29.2% and
28.4% in 2003 and 2002, respectively. The increase in the effective tax rate was
primarily due to declining yields on tax exempt interest income.
GAAP Combined Ratio. The Company's specialty insurance products are underwritten
by Ohio Indemnity, whose results represent the Company's combined ratio. For
2003, the combined ratio improved slightly to 92.0% from 92.3% in 2002. The loss
ratio declined to 64.2% for 2003 from 65.1% in 2002, principally due to the
decrease in the experience rating adjustments which was partially offset by
reserve strengthening and higher loss experience due to persistent weaknesses in
the national economy. The expense ratio increased to 27.8% in 2003 from 27.2% in
2002, which primarily resulted from an increase in premium taxes, salaries and
benefits.
2002 COMPARED TO 2001
Net Premiums Earned. Net premiums earned increased 6.7% to $40,882,237 in 2002
from $38,308,738 in 2001. We attribute this increase in net premiums earned
primarily to an increase in our lender/dealer business.
Net premiums earned related to ULI products increased 4.4% to $34,859,454 in
2002 from $33,400,437 in 2001. We attribute this growth to an increase in
automobile lending, driven by aggressive financing offers by some of our large
financial institution customers. Net premiums earned related to our GAP products
increased 90.6% to $939,014 in 2002 from $492,754 in 2001 due primarily to an
agent transferring a book of business to us during the third quarter of 2001. As
a result, we recorded a full year of activity with respect to such book of
business in 2002 compared to a partial year in 2001. Net premiums earned related
to our UC products increased 11.4% to $4,920,040 in 2002 from $4,415,547 in 2001
principally due to the assumption of bail bond coverage. In addition, we
introduced CPI in the fourth quarter 2002 which produced net premiums earned of
$163,729 in 2002.
Investment Income. Net investment income decreased 14.8% to $1,236,138 in 2002
from $1,450,761 in 2001 principally due to declining yields on new investments.
Net realized loss on investments was $1,220,477 in 2002 compared with a net
realized gain of $22,542 in 2001. The decrease in net realized gain (loss) on
investments was principally due to impairment charges of $931,531 recorded
during 2002 (none in 2001)
Codification and Subscription Fees. ALPC's codification and subscription fees
increased 25.3% to $3,324,037 in 2002 compared to $2,652,231 in 2001 primarily
due to new codification contracts and to a lesser extent, our acquisition in
June 2001 of the net assets of Justinian Publishing Company, which contributed
$490,833 and $301,631 in revenue in 2002 and 2001, respectively. In addition,
growth in subscriptions and state league programs contributed to the increase.
Losses and Loss Adjustment Expenses. Losses and LAE increased 30.7% to
$28,314,256 in 2002 from $21,658,744 in 2001. Losses and LAE with respect to our
ULI products rose 21.8% to $25,393,581 in 2002 from $20,842,930 in 2001. With
the continued slowdown in the U.S. economy and high consumer debt, financial
institutions experienced a rise in delinquency dollars which resulted in higher
losses and LAE. Losses and LAE with respect to our GAP products increased
$1,241,816 to $1,535,892 in 2002 from $294,076 in 2001. We attribute this
increase to premium growth and deterioration in underwriting quality of one
customer over time. This customer's policy was cancelled at the end of 2002.
Losses and LAE with respect to our UC products increased 142.4% to $1,264,831 in
2002 from $521,738 in 2001. We attribute this increase primarily to increased
benefit charges associated with rising unemployment insurance obligations in
addition to reserve strengthening. Lastly, we introduced CPI in the fourth
quarter 2002 which incurred losses and LAE of $119,952 in 2002.
Experience Rating Adjustments. Experience rating adjustments decreased 133.1% to
$(1,708,084) in 2002 from $5,155,850 in 2001. We attribute this decrease
primarily to the addition of a significant policy in the second quarter of 2001
which resulted in an increase in experience rating adjustments during 2001.
Experience rating adjustments are calculated and adjusted from period to period
based on policy experience-to-date and premium growth. We anticipate that
experience rating adjustments may fluctuate in future periods based upon this
calculation.
Exhibit 13(a) - 5
Commissions and Other Insurance Expenses. Commissions and other insurance
operating expenses increased 22.6% to $11,034,093 in 2002 from $8,998,835 in
2001. Commissions and other insurance operating expense increases were
consistent with overall premium activity in 2002 compared to 2001.
Codification and Subscription Expenses. Codification and subscription expenses
incurred by ALPC increased 27.0% to $2,889,981 in 2002 from $2,276,360 in 2001,
which is attributable to the growth in codification and subscription revenues.
Interest expense. Interest expense increased 367.7% to $131,323 in 2002 from
$28,076 in 2001 as a result of interest expense recorded on $8.2 million of
trust preferred debt issued in December 2002 combined with higher borrowing
levels on the Company's revolving credit line during 2002.
Cumulative Effect of Change in Accounting Principle. Effective January 1, 2002,
we adopted 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 segment. Based on our
impairment testing, a net after-tax impairment charge of $1,481,858 was
recognized as a cumulative effect of the 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.
Federal Income Taxes. The Company's effective income tax rate was 28.4% and
27.9% in 2002 and 2001, respectively. The increase in the effective tax rate was
primarily due to declining yields on tax exempt interest income.
GAAP Combined Ratio. For 2002, the combined ratio improved to 92.3% from 96.9%
in 2001. The loss ratio declined to 65.1% for 2002 from 70.0% in 2001,
principally due to the decrease in experience rating adjustments which was
partially offset by reserve strengthening and higher loss experience due to
weaknesses in the national economy. The expense ratio increased to 27.2% in 2002
from 26.9% in 2001, which primarily resulted from an increase in commission
expense.
BUSINESS OUTLOOK
During 2004, we will continue to focus on opportunities emerging in specialized
insurance markets within the financial services industry. We are making progress
on profit improvement strategies by reviewing each policy's loss ratio and
managing the loss ratio by increasing premiums and/or amending or canceling
coverages. We are increasing our independent agency force and will continue to
penetrate larger financial institutions. We believe our specialized underwriting
expertise, strong financial ratings and solid customer relationships will enable
us to benefit in the marketplace. Further, an increase in customer appreciation
for risk management products and services should provide for additional
opportunities in the marketplace.
Beginning in 2004, our bonded service program, within our UC line, will be
discontinued and replaced with our new UCassure product. The introduction of
UCassure will provide the Company with greater control and flexibility in the
distribution and expense management of the product.
Although the economy showed signs of recovery in the second half of 2003,
financial institutions are continuing to experience a rise in delinquency
dollars due to continued corporate downsizing and high consumer debt. If loan
defaults, bankruptcies and automobile repossessions continue to increase, we
would anticipate an increase in the frequency of losses and LAE for our ULI and
CPI products. Increased incentives being offered on new cars by dealers and
manufacturers have depressed the value of the used car market, although there
were signs late in 2003 that used car prices are stabilizing. If used car prices
continue to decline, we would anticipate an increase in the severity of losses
and LAE for our GAP products. In addition, if unemployment levels remain high,
we would expect higher claims experience and lower management fees from our UC
products. Our outlook for 2004 remains cautious.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity and capital resources demonstrate the overall financial strength of
the Company and its ability to generate sufficient cash flows from its
operations and borrow funds at competitive rates to meet operating and growth
needs. As of December 31, 2003, the Company's capital structure consists of
trust preferred debt issued to affiliates and shareholders' equity and is
summarized in the following table:
2003 2002 2001
------------ ------------ ------------
Trust preferred debt issued to BIC Statutory Trust I............ $ 8,248,000 $ 8,248,000 $ -
Trust preferred debt issued to BIC Statutory Trust II........... 7,217,000 - -
------------ ------------ ------------
Total trust preferred debt issued to affiliates.......... 15,465,000 8,248,000 -
------------ ------------ ------------
Total shareholders' equity...................................... 33,365,028 28,901,838 31,391,909
------------ ------------ ------------
Total capitalization..................................... $ 48,830,028 $ 37,149,838 $ 31,391,909
============ ============ ============
Ratio of total debt obligations to total capitalization......... 31.7% 22.2% 0.0%
Exhibit 13(a) - 6
In December 2002, we organized BIC Statutory Trust I ("BIC Trust I"), a
Connecticut special purpose business trust, which issued $8,000,000 of floating
rate trust preferred capital securities in an exempt private placement
transaction. In September 2003, we organized BIC Statutory Trust II ("BIC Trust
II"), a Delaware special purpose business trust, which issued $7,000,000 of
floating rate trust preferred capital securities in an exempt private placement
transaction. BIC Trust I and BIC Trust II (collectively, the "Trusts") were
formed for the sole purpose of issuing and selling the floating rate trust
preferred capital securities and investing the proceeds from such securities in
junior subordinated debentures of the Company. In connection with the issuance
of the trust preferred capital securities, the Company issued junior
subordinated debentures of $8,248,000 and $7,217,000 to BIC Trust I and BIC
Trust II, respectively. The floating rate trust preferred capital securities and
the junior subordinated debentures have substantially the same terms and
conditions. The Company has fully and unconditionally guaranteed the obligations
of the Trusts with respect to the floating rate trust preferred capital
securities. The Trusts distribute the interest received from the Company on the
junior subordinated debentures to the holders of their floating rate trust
preferred capital securities to fulfill their dividend obligations with respect
to such trust preferred securities. BIC Trust I's floating rate trust preferred
capital securities, and the junior subordinated debentures issued in connection
therewith, pay dividends and interest, as applicable, on a quarterly basis at a
rate equal to three month LIBOR plus four hundred basis points (5.18% and 5.40%
at December 31, 2003 and 2002, respectively), are redeemable at par on or after
December 4, 2007 and mature on December 4, 2032. BIC Trust II's floating rate
trust preferred capital securities, and the junior subordinated debentures
issued in connection therewith, pay dividends and interest, as applicable, on a
quarterly basis at a rate equal to three month LIBOR plus four hundred and five
basis points (5.21% at December 31, 2003), are redeemable at par on or after
September 30, 2008 and mature on September 30, 2033. The proceeds from the
junior subordinated debentures were used for general corporate purposes and
provided additional financial flexibility to the Company. The terms of the
junior subordinated debentures contain various restrictive covenants. As of
December 31, 2003, the Company was in compliance with all such covenants.
We also have a $10,000,000 unsecured revolving line of credit with a maturity
date of June 30, 2007 with no outstanding balance at December 31, 2003
($2,100,000 at December 31, 2002). The revolving line of credit provides for
interest payable quarterly at an annual rate equal to the prime rate less 75
basis points. Under the terms of the revolving credit agreement, our
consolidated shareholders' equity must not fall below $20,000,000 and Ohio
Indemnity's ratio of net premiums written to policyholders surplus cannot exceed
three to one.
The short-term cash requirements of our property/casualty business primarily
consist of paying losses and LAE, reinsurance premiums and day-to-day operating
expenses. Historically, the Company has met those requirements through cash
receipts from operations, which consist primarily of insurance premiums
collected, reinsurance recoveries and investment income. Our investment
portfolio is a source of additional liquidity through the sale of readily
marketable fixed maturities, equity securities and short-term investments. After
satisfying our cash requirements, excess cash flows from these underwriting and
investment activities are used to build the investment portfolio and thereby
increase future investment income.
Because of the nature of the risks we insure, losses and LAE 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 loss and expense obligations through the
end of 2004. We maintain a level of cash and liquid short-term investments which
we believe will be adequate to meet our anticipated cash needs without being
required to liquidate intermediate-term and long-term investments through the
end of 2004. At December 31, 2003, cash and short-term investments amounted to
$31,854,307 or 41.4% of our total cash and invested assets.
ALPC derives its funds principally from codification and subscription fees which
are currently sufficient to meet its operating expenses. USA derives its funds
principally from commission fees which are currently sufficient to meet its
operating expenses.
Cash flows provided by operating activities totaled $13,755,991, $6,447,381 and
$14,242,945 for 2003, 2002 and 2001, respectively. The increase in 2003 (as
compared to 2002) was primarily the result of growth in net premiums collected
of $10,155,105 to $54,498,123 in 2003 compared to $44,343,018 in 2002, which was
partially offset by an increase in net paid losses and LAE. The decrease in cash
flows provided by operating activities in 2002 (as compared with 2001) was
principally due to an increase in net paid losses and LAE of 30.7%, which
outpaced the increase in premiums collected of 8.1%.
Ohio Indemnity is restricted by the insurance laws of the State of Ohio as to
amounts that can be transferred to Bancinsurance in the form of dividends
without the approval of the Department. During 2004, the maximum amount of
dividends that may be paid to Bancinsurance by Ohio Indemnity without prior
approval is limited to $3,629,310. Bancinsurance received cash dividends of $0,
$1,290,000 and $630,000 from Ohio Indemnity during 2003, 2002 and 2001,
respectively. We do not anticipate receiving any cash dividends in 2004.
Ohio Indemnity is subject to a Risk Based Capital test applicable to
property/casualty insurers. The Risk Based Capital test serves as a benchmark of
an insurance enterprise's solvency by state insurance regulators by establishing
statutory surplus targets which will require certain company level or regulatory
level actions. Ohio Indemnity's total adjusted capital is in excess of all
required action levels as of December 31, 2003.
Given the Company's historic cash flow and current financial results, management
believes that the cash flow from operating activities over the next year will
provide sufficient liquidity for the operations of the Company. Our line of
credit provides us with additional liquidity that could be used for short-term
cash requirements if cash from operations and investments is not sufficient. If
necessary, we believe our financial strength continues to provide us with the
flexibility and capacity to obtain funds externally through debt or equity
financings on both a short-term and long-term basis.
Exhibit 13(a) - 7
CONTRACTUAL OBLIGATIONS
The following table sets forth the Company's contractual obligations at December
31, 2003:
Payments Due By Period
-----------------------------------------------------------------------
Less than 1-3 3-5 More than
Total 1 year years years 5 years
------------ ----------- ---------- ----------- ------------
Contractual Obligations:
Trust preferred debt issued to affiliates(1) $ 15,465,000 $ - $ - $ - $ 15,465,000
Operating leases........................ 1,061,888 223,317 384,619 453,952 -
------------ ----------- ---------- ----------- ------------
Total................................. $ 16,526,888 $ 223,217 $ 384,619 $ 453,952 $ 15,465,000
============ =========== ========== =========== ============
(1) In accordance with the provisions of the debt agreements, the BIC Trust I
and BIC Trust II debt obligations are redeemable at par on December 4, 2007
and September 30, 2008, respectively. The table above assumes payout at
maturity date rather than redemption date.
DISCLOSURES 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 equity prices. 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 we manage
those exposures. The discussion is limited to financial instruments subject to
market risks and is not intended to be a complete discussion of all the risks
the Company is exposed to in the ordinary course of business.
The primary market risks to the Company are interest rate risk associated with
investments in fixed maturity securities and fixed-rate short-term investments
and equity price risk associated with investments in equity securities. 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. At December 31, 2003, the fixed maturity portfolio had an average
duration of 3.03 years (3.67 years at December 31, 2002). At December 31, 2003,
we did not own any material non-investment grade securities. We believe that a
high quality investment portfolio is more likely to generate a stable and
predictable investment returns. Aside from interest rate risk, we do not believe
a material risk, relative to earnings or liquidity, is inherent in holding
investment grade fixed maturity securities.
Equity price risk is the potential loss in market value resulting from an
adverse change in price. We mitigate this risk by diversifying our portfolio
across industries and concentrations in any one company are limited by
parameters established by senior management, as well as by statutory
requirements. We have no foreign exchange risk or direct commodity risk. Our
market risk sensitive instruments are entered into for purposes other than
trading. During 2003, there were no material changes in our primary market risk
exposures or in how these exposures were managed compared to 2002.
The carrying value of our investment portfolio at December 31, 2003 was
$73,979,835, 45.7% of which is invested in fixed maturity securities, 39.1% in
short-term investments, 13.8% in equity securities and 1.4% in other invested
assets. Approximately 19% of our fixed maturity investment portfolio is invested
in variable rate redeemable preferred stock with reset provisions at par and
interest rates that adjust to market on a periodic basis ranging from every
month to on an annual basis. Approximately 87% of our short-term investment
portfolio is invested in variable rate short-term investments with interest
rates that adjust to market every seven days. The Company does not maintain a
trading portfolio.
The following table summarizes the projected cash flows and estimated fair
values of those financial instruments held by us at December 31, 2003, which are
sensitive to changes in interest rates. We have excluded short-term investments
and variable rate redeemable preferred stock from the financial instruments
shown below because we have determined the interest rate risk related to those
instruments to be immaterial. The table also presents the average interest rate
for each period presented.
Projected Cash Flows
----------------------------------------------------------------------------------------------------
December 31, 2003
There- Estimated
2004 2005 2006 2007 2008 after Total Fair Value
---------- ---------- ---------- ---------- -------- ---------- ----------- -----------------
Assets
Fixed maturity securities:
Held to maturity........ $ 635,000 $ 145,000 $1,008,000 $ 480,000 $ - $2,505,000 $ 4,773,000 $ 5,066,125
Available for sale...... $2,742,358 $3,850,925 $4,785,135 $3,771,280 $540,292 $5,835,582 $21,525,572 $22,459,867
Weighted-average interest rate:
Fixed maturity securities 5.67% 6.35% 5.89% 5.83% 5.39% 5.78% 5.89%
INFLATION
We do not consider the impact of inflation to be material in the analysis of our
overall operations.
Exhibit 13(a) - 8
CRITICAL ACCOUNTING POLICIES
The preparation of the consolidated financial statements requires us to make
estimates, assumptions and judgments that affect the reported amounts of assets,
revenues, liabilities and expenses and related disclosures of contingent assets
and liabilities. We regularly evaluate these estimates, assumptions and
judgments. We base our estimates on historical experience and on various
assumptions that we believe to be reasonable under the circumstances. Actual
results may differ from these estimates under different assumptions or
conditions. The Company's significant accounting policies are more fully
described in note 1 to the Company's consolidated financial statements. Set
forth below are the critical accounting policies that we believe require
significant judgments, estimates and assumptions and are critical to an
understanding of our consolidated financial statements.
OTHER-THAN-TEMPORARY IMPAIRMENT OF INVESTMENTS
We continually monitor the difference between our cost and the estimated fair
value of our investments, which involves uncertainty as to whether declines in
value are temporary in nature. If we believe a decline in the value of a
particular available for sale investment is temporary, we record the decline as
an unrealized loss in our shareholders' equity. If we believe the decline in any
investment is "other-than-temporarily impaired," we write down the carrying
value of the investment and record a realized loss on investments. Our
assessment of a decline in value includes our current judgment as to the
financial position and future prospects of the entity that issued the investment
security. If that judgment changes in the future, we may ultimately record a
realized loss after having originally concluded that the decline in value was
temporary.
The following discussion summarizes our process of reviewing our investments for
possible impairment.
Fixed Maturities. On a monthly basis, we review our fixed maturity securities
for impairment. We consider the following factors when evaluating potential
impairment:
- the length of time and extent to which the estimated fair value has
been less than book value;
- the degree to which any appearance of impairment is attributable to an
overall change in market conditions (e.g., interest rates);
- the degree to which an issuer is current or in arrears in making
principal and interest/dividend payments on the securities in
question;
- the financial condition and future prospects of the issuer, including
any specific events that may influence the issuer's operations and its
ability to make future scheduled principal and interest payments on a
timely basis;
- the independent auditor's report on the issuer's most recent financial
statements;
- buy/hold/sell recommendations of investment advisors and analysts;
- relevant rating history, analysis and guidance provided by rating
agencies and analysts; and
- our ability and intent to hold the security for a period of time
sufficient to allow for recovery in the market value.
Equity Securities. On a monthly basis, we review our equity securities for
impairment. We consider the following factors when evaluating potential
impairment:
- the length of time and extent to which the estimated fair value has
been less than book value;
- whether the decline appears to be related to general market or
industry conditions or is issuer-specific;
- the financial condition and future prospects of the issuer, including
any specific events that may influence the issuer's operations;
- the recent income or loss of the issuer;
- the independent auditor's report on the issuer's most recent financial
statements;
- buy/hold/sell recommendations of investment advisors and analysts;
- rating agency announcements; and
- our ability and intent to hold the security for a period of time
sufficient to allow for recovery in the market value.
In addition to the monthly valuation procedures described above, we continually
monitor developments affecting our invested assets, paying particular attention
to events that might give rise to impairment write-downs. There were $129,729,
$931,531 and $0 in impairment charges included in net realized gain (loss) on
investments for the years ended December 31, 2003, 2002 and 2001, respectively.
Additional impairments within the portfolio during 2004 are possible if current
economic and financial conditions worsen. See note 2 to the Company's
consolidated financial statements for analysis and discussion with respect to
securities in an unrealized loss position at December 31, 2003.
LOSSES AND LOSS ADJUSTMENT EXPENSE RESERVES
Our projection of ultimate loss and LAE reserves are estimates of future events,
the outcomes of which are unknown to us at the time the projection is made.
Considerable uncertainty and variability are inherent in the estimation of loss
reserves. As a result, it is possible that actual experience may be materially
different than the estimates reported. As such, we cannot guarantee that future
experience will be as expected or recorded by us.
In establishing our reserves, we tested our data for reasonableness, such as
ensuring there are no case outstanding reserves on closed claims, and
consistency with data used in our previous estimates. We found no material
discrepancies or inconsistencies in our data.
Exhibit 13(a) - 9
Our estimates of ultimate loss are based on our historical loss development
experience. In using this historical information, we assume that past loss
development is predictive of future development. Our assumptions allow for
changes in claims and underwriting operations, as now known or anticipated,
which may impact the level of required reserves or the emergence of losses.
However, we do not anticipate any extraordinary changes in the legal, social or
economic environments that could affect the ultimate outcome of claims or the
emergence of claims from causes not currently recognized in our historical data.
Such extraordinary changes or claims emergence may impact the level of required
reserves in ways that are not presently quantifiable. Thus, while we believe our
reserve estimates are reasonable given the information currently available,
actual emergence of losses could deviate materially from our estimates and from
amounts recorded by us.
We conduct a reserve study using historical losses and LAE by product line or
coverage within product line. We compute a range of reasonable estimates as well
as select an estimate of indicated reserves. The indicated range includes
estimates of expected losses and LAE given the information currently available
to us.
As of December 31, 2003, our indicated reserve range for losses and LAE was
$11.7 million to $17.3 million. As our gross reserve of $14.4 million as of
December 31, 2003 falls within this range, we believe it is a reasonable
provision in the aggregate for our unpaid losses and LAE obligations as of
December 31, 2003.
At December 31, 2003, losses and LAE reserves, net of reinsurance recoverables,
totaled $9.5 million. Management's recorded best estimate, on a net basis, is
based on various assumptions, including but not limited to, historical
experience and historical loss patterns. Management's estimate was deemed
reasonable by our independent actuary. As a result of changes in estimates of
insured events in prior years, the provision for losses and LAE decreased by
$2.8 million. The majority of this change relates primarily to favorable
development attributable to aggregate limit ultimate loss coverage reserves.
losses incurred in 2002. The majority of our losses are short-tail in nature and
adjustments to reserve amounts occur rather quickly. There were no specific
events in 2003 that caused a change in our overall reserve assumptions.
Conditions that affected this change may not necessarily occur in the future.
Accordingly, it may not be appropriate to extrapolate this redundancy to future
periods.
We did not experience any significant change in the number of claims paid (other
than for growth in our business), average claim paid or average claim reserve
that would be inconsistent with the types of risks we insured in the respective
years. The increase in claims opened correlates to the increase in policies in
force for each policy.
Our reserves reflect anticipated salvage and subrogation included as a reduction
to loss and LAE reserves in the amount of $521,157. We record reserves on an
undiscounted basis. We do not provide coverage that could reasonably be expected
to produce asbestos and/or environmental liability claims activity or material
levels of exposure to claims-made extended reporting options.
We prepared our estimates of the gross and net loss and allocated LAE (expenses
that can be specifically assigned to a particular claim) liabilities using loss
development triangles for each of our principal insurance products as follows:
- ULI - non-aggregate limit
- ULI - aggregate limit (in which the policy runs at a maximum loss
ratio)
- CPI
- GAP
- UC
Our reserves for these independently estimated principal insurance products
comprise the majority of our total recorded loss and allocated LAE reserves as
of December 31, 2003 on a gross and net of reinsurance basis. We prepared
independent estimates for unallocated LAE reserves (expenses associated with
adjusting and recording policy claims, other than those included in allocated
LAE).
Annual accident year loss development triangles were used to estimate ultimate
loss and allocated LAE for the ULI non-aggregate limit , CPI, GAP and UC
policies. Our data for the ULI aggregate limit policies consisted of premium and
loss data and maximum loss ratio by insured bank. This data was used to
determine the required reserve under the maximum loss ratio.
Historical "age-to-age" loss development factors ("LDF") were calculated to
measure the relative development of an accident year from one maturity point to
the next. We then selected appropriate age-to-age LDFs based on these historical
factors. We used the selected factors to project the ultimate losses.
The validity of the results from using a loss development approach can be
affected by many conditions, such as our claim department processing changes, a
shift between single and multiple payments per claim, legal changes or
variations in our mix of business form year to year. Also, because the
percentage of losses paid for immature years is often low, development factors
are volatile. A small variation on the number of claims paid can have leveraging
effect that can lead to significant changes in estimated ultimate losses.
Therefore, ultimate values for immature accident years are often based on
alternative estimation techniques.
We prepared our estimate of unallocated LAE reserves using the relationship of
calendar year unallocated LAE payments to calendar year loss payments. Our
selected unallocated LAE factor of 3% was selected judgmentally based on a
review of historical unallocated LAE-to-loss payments from 1999 to 2003. The
incurred but not reported ("IBNR") reserve is then split into IBNR on known
claims and IBNR on claims yet to be reported (pure IBNR). This is based on our
assumption that all of the UC reserve is pure IBNR and the ULI, CPI and GAP
policies will have a one week lag in claim reporting. The unallocated LAE factor
is applied to 50% of pure IBNR reserves and 50% of the remaining reserves on the
premise that half of our unallocated LAE costs are incurred when the claim is
reported and the other half when the claim is closed.
Exhibit 13(a) - 10
CODIFICATION AND SUBSCRIPTION REVENUE AND EXPENSE RECOGNITION
Revenue from municipal code contracts is recognized on the
percentage-of-completion method: completion is measured based on the percentage
of direct labor costs incurred to date compared to estimated direct labor costs
for each contract. While we use available information to estimate total direct
labor costs on each contract, actual experience may vary from estimated amounts.
Under this method, the costs incurred and the related revenues are included in
the income statement as work progresses. Adjustments to contract cost estimates
are made in the periods in which the facts which require such revisions become
known. If a revised estimate indicates a loss, such loss is provided for in its
entirety. The amount by which revenues are earned in advance of contractual
collection dates is an unbilled receivable and the amount by which contractual
billings exceed earned revenues is deferred revenue which is carried as a
liability.
OFF-BALANCE SHEET TRANSACTIONS
We do not have any off-balance sheet arrangements that either have, or are
reasonably likely to have, a current or future effect on our financial
condition, changes in financial condition, revenues or expenses, results of
operations, liquidity, capital expenditures or capital resources that is
considered material.
FORWARD-LOOKING INFORMATION
Certain statements made in this report are forward-looking and are made pursuant
to the safe harbor provisions of the Private Securities Litigation Reform Act of
1995. These statements include certain discussions relating to future revenue,
underwriting income, premium volume, investment income and other investment
results, business strategies, profitability, liquidity, capital adequacy,
anticipated capital expenditures and business relationships, as well as any
other statements concerning fiscal year 2004 and beyond. The forward-looking
statements are not guarantees of future performance and involve risks and
uncertainties that may cause actual results to differ materially from those
statements. Factors that might cause actual results to differ from those
statements include, without limitation, changes in underwriting results affected
by adverse economic conditions, fluctuations in the investment markets, changes
in the retail marketplace, changes in the laws or regulations affecting the
operations of the Company, changes in the business tactics or strategies of the
Company, the financial condition of the Company's business partners, changes in
market forces, litigation and the other risk factors that have been identified
in the Company's filings with the SEC, any one of which might materially affect
the operations of the Company. Another factor is ownership of the Company. As of
the date of this report, members of the Sokol family, including the Chairman and
Chief Executive Officer and President, owned approximately 61.5% of the
Company's outstanding common shares. Therefore, members of the Sokol family have
significant voting power. Any forward-looking statements speak only as of the
date made. We undertake no obligation to update any forward-looking statements
to reflect events or circumstances arising after the date on which they are
made.
Exhibit 13(a) - 11
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Bancinsurance Corporation
We have audited the accompanying consolidated balance sheets of Bancinsurance
Corporation and subsidiaries as of December 31, 2003 and 2002, and the related
consolidated statements of income, shareholders' equity, and cash flows for each
of the three years in the period ended December 31, 2003. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Bancinsurance
Corporation at December 31, 2003 and 2002, and the consolidated results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2003, in conformity with accounting principles generally accepted
in the United States.
As discussed in Note 1 to the financial statements, in 2002 the Company changed
its method of accounting for goodwill.
/s/Ernst & Young LLP
Columbus, Ohio
January 30, 2004
Exhibit 13(a) - 12
BANCINSURANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31,
----------------------------------------------
2003 2002 2001
------------ ------------ ------------
REVENUES:
Net premiums earned ..................................................... $ 47,369,056 $ 40,882,237 $ 38,308,738
Net investment income ................................................... 1,599,064 1,236,138 1,450,761
Net realized gain (loss) on investments ................................. 822,161 (1,220,477) 22,542
Codification and subscription fees ...................................... 3,819,221 3,324,037 2,652,231
Management fees ......................................................... 114,094 749,442 846,446
Other income ............................................................ 81,653 197,278 161,544
------------ ------------ ------------
TOTAL REVENUES ...................................................... 53,805,249 45,168,655 43,442,262
------------ ------------ ------------
EXPENSES:
Losses and loss adjustment expenses ..................................... 33,083,172 28,314,256 21,658,744
Experience rating adjustments ........................................... (2,702,910) (1,708,084) 5,155,850
Commission expense ...................................................... 7,891,016 7,230,636 5,918,461
Other insurance operating expenses ...................................... 4,982,456 3,803,457 3,080,374
Codification and subscription expenses .................................. 3,269,714 2,889,981 2,276,360
General and administrative expenses ..................................... 1,216,571 1,195,085 1,057,840
Interest expense ........................................................ 541,248 131,323 28,076
------------ ------------ ------------
TOTAL EXPENSES ...................................................... 48,281,267 41,856,654 39,175,705
------------ ------------ ------------
Income before federal income taxes and cumulative effect of change in
accounting principle .............................................. 5,523,982 3,312,001 4,266,557
Federal income tax expense ............................................... 1,614,165 940,530 1,191,367
------------ ------------ ------------
Income before cumulative effect of change in accounting principle ... 3,909,817 2,371,471 3,075,190
Cumulative effect of change in accounting principle ...................... - (1,481,858) -
------------ ------------ ------------
NET INCOME .......................................................... $ 3,909,817 $ 889,613 $ 3,075,190
============ ============ ============
Basic net income per share:
Before cumulative effect of change in accounting principle ........... $ .79 $ .42 $ .53
Cumulative effect of change in accounting principle .................. - (.26) -
------------ ------------ ------------
BASIC NET INCOME PER SHARE ........................................... $ .79 $ .16 $ .53
============ ============ ============
Diluted net income per share:
Before cumulative effect of change in accounting principle ........... $ .77 $ .41 $ .53
Cumulative effect of change in accounting principle .................. - (.25) -
------------ ------------ ------------
DILUTED NET INCOME PER SHARE ......................................... $ .77 $ .16 $ .53
============ ============ ============
See accompanying notes to consolidated financial statements.
Exhibit 13(a) - 13
BANCINSURANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31,
----------------------------
2003 2002
------------ ------------
ASSETS
Investments:
Held to maturity:
Fixed maturities, at amortized cost (fair value $5,066,125 in 2003 and $4,691,903 in 2002).. $ 4,872,012 $ 4,487,749
Available for sale:
Fixed maturities, at fair value (amortized cost $28,622,634 in 2003 and $15,557,400 in 2002) 28,918,149 15,912,650
Equity securities, at fair value (cost $7,621,880 in 2003 and $5,716,906 in 2002)........... 10,235,858 6,869,513
Short-term investments, at cost which approximates fair value................................ 28,904,680 25,135,305
Other invested assets........................................................................ 1,049,136 582,137
------------ ------------
Total investments........................................................................ 73,979,835 52,987,354
------------ ------------
Cash.......................................................................................... 2,949,627 4,306,007
Premiums receivable........................................................................... 10,661,766 5,910,719
Accounts receivable, net...................................................................... 993,093 844,059
Reinsurance recoverables...................................................................... 4,926,446 283,417
Prepaid reinsurance premiums.................................................................. 12,244,588 1,228,632
Deferred policy acquisition costs............................................................. 4,962,150 2,653,826
Estimated earnings in excess of billings on uncompleted codification contracts................ 283,336 224,837
Loans to affiliates........................................................................... 770,466 685,856
Current federal income taxes.................................................................. - 295,235
Goodwill...................................................................................... 753,737 753,737
Intangible assets, net,....................................................................... 920,048 994,566
Accrued investment income..................................................................... 541,519 328,751
Other assets.................................................................................. 1,883,125 1,206,208
------------ ------------
TOTAL ASSETS ............................................................................ $115,869,736 $ 72,703,204
============ ============
See accompanying notes to consolidated financial statements.
Exhibit 13(a) - 14
BANCINSURANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS, CONTINUED
December 31,
-------------------------------
2003 2002
------------- -------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Reserve for unpaid losses and loss adjustment expenses ........................... $ 14,385,919 $ 7,559,503
Unearned premiums ................................................................ 25,124,137 10,304,769
Ceded reinsurance premiums payable ............................................... 1,721,963 50,820
Experience rating adjustments payable ............................................ 6,997,784 4,764,329
Retrospective premium adjustments payable ........................................ 5,370,273 3,951,898
Funds held under reinsurance treaties ............................................ 2,646,693 1,513,297
Contract funds on deposit ........................................................ 1,908,184 1,317,663
Taxes, licenses and fees payable ................................................. 1,315,443 297,418
Current federal income taxes ..................................................... 511,091 -
Deferred federal income taxes .................................................... 852,625 82,027
Deferred ceded commissions ....................................................... 1,224,938 -
Commissions payable .............................................................. 2,660,979 1,990,436
Billings in excess of estimated earnings on uncompleted codification contracts ... 143,888 93,894
Notes payable .................................................................... 53,276 2,166,355
Other liabilities ................................................................ 2,122,515 1,460,957
Trust preferred debt issued to affiliates ........................................ 15,465,000 8,248,000
------------- -------------
TOTAL LIABILITIES ........................................................... 82,504,708 43,801,366
------------- -------------
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 at December 31, 2003 and 2002, 4,920,050 shares outstanding at
December 31, 2003 and 5,000,291 shares outstanding at at December 31, 2002 ... 1,794,141 1,794,141
Additional paid-in capital ...................................................... 1,337,138 1,337,138
Accumulated other comprehensive income .......................................... 1,920,265 995,186
Retained earnings ............................................................... 34,339,332 30,429,515
------------- -------------
39,390,876 34,555,980
Less: Treasury shares, at cost (1,250,291 common shares in 2003 and
1,170,050 common shares in 2002) ............................................ (6,025,848) (5,654,142)
------------- -------------
TOTAL SHAREHOLDERS' EQUITY .................................................. 33,365,028 28,901,838
------------- -------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY .................................. $ 115,869,736 $ 72,703,204
============= =============
See accompanying notes to consolidated financial statements.
Exhibit 13(a) - 15
BANCINSURANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
ACCUMULATED
PREFERRED SHARES ADDITIONAL OTHER
------------------ COMMON PAID-IN COMPREHENSIVE
CLASS A CLASS B SHARES CAPITAL INCOME
--------- ------- ------------ ------------ -------------
Balance at December 31, 2000 ....... - - $ 1,794,141 $ 1,336,805 $ 748,602
--------- ------- ------------ ------------ ------------
Comprehensive income:
Net income ....................... - - - - -
Unrealized losses, net of tax and
reclassification adjustment ..... - - - - (223,554)
Total comprehensive income .......
Purchase of 1,050 treasury shares .. - - - - -
Capital contributed in asset
purchase ........................ - - - 437 -
--------- ------- ------------ ------------ ------------
Balance at December 31, 2001 ....... - - 1,794,141 1,337,242 525,048
--------- ------- ------------ ------------ ------------
Comprehensive income:
Net income ....................... - - - - -
Unrealized gains, net of tax and
reclassification adjustment ..... - - - - 470,138
Total comprehensive income .......
Purchase of 770,494 treasury shares - - - - -
600 shares issued in connection with
the exercise of stock options ..... - - - (104) -
--------- ------- ------------ ------------ ------------
Balance at December 31, 2002 ....... - - 1,794,141 1,337,138 995,186
--------- ------- ------------ ------------ ------------
Comprehensive income:
Net income ....................... - - - - -
Unrealized gains, net of tax and
reclassification adjustment ..... - - - - 925,079
Total comprehensive income .......
Purchase of 80,241 treasury shares . - - - - -
--------- ------- ------------ ------------ ------------
Balance at December 31, 2003 ....... - - $ 1,794,141 $ 1,337,138 $ 1,920,265
========= ======= ============ ============ ============
TOTAL
RETAINED TREASURY SHAREHOLDERS'
EARNINGS SHARES EQUITY
------------ ------------- -------------
Balance at December 31, 2000 ....... $ 26,464,712 $ (1,808,901) $ 28,535,359
------------ ------------ ------------
Comprehensive income:
Net income ....................... 3,075,190 - 3,075,190
Unrealized losses, net of tax and
reclassification adjustment ..... - - (223,554)
------------
Total comprehensive income ....... 2,851,636
------------
Purchase of 1,050 treasury shares .. - (4,542) (4,542)
Capital contributed in asset
purchase ........................ - 9,019 9,456
------------ ------------ ------------
Balance at December 31, 2001 ....... 29,539,902 (1,804,424) 31,391,909
------------ ------------ ------------
Comprehensive income:
Net income ....................... 889,613 - 889,613
Unrealized gains, net of tax and
reclassification adjustment ..... - - 470,138
------------
Total comprehensive income ....... 1,359,751
------------
Purchase of 770,494 treasury shares. - (3,852,611) (3,852,611)
600 shares issued in connection with
the exercise of stock options ..... - 2,893 2,789
------------ ------------ ------------
Balance at December 31, 2002 ....... 30,429,515 (5,654,142) 28,901,838
------------ ------------ ------------
Comprehensive income:
Net income ....................... 3,909,817 - 3,909,817
Unrealized gains, net of tax and
reclassification adjustment ..... - - 925,079
------------
Total comprehensive income ....... 4,834,896
------------
Purchase of 80,241 treasury shares . - (371,706) (371,706)
------------ ------------ ------------
Balance at December 31, 2003 ....... $ 34,339,332 $ (6,025,848) $ 33,365,028
============ ============ ============
See accompanying notes to consolidated financial statements.
Exhibit 13(a) - 16
BANCINSURANCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31,
----------------------------------------------
2003 2002 2001
------------ ------------ ------------
Cash flows from operating activities:
Net income .................................................................... $ 3,909,817 $ 889,613 $ 3,075,190
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 ..................................... (822,161) 1,220,477 (22,542)
Net realized (gain) loss on disposal of property and equipment .............. - 1,073 (14,800)
Depreciation and amortization ............................................... 457,915 311,459 306,061
Deferred federal income tax (benefit) expense ............................... 294,042 (269,166) (86,180)
Change in assets and liabilities:
Premiums receivable ...................................................... (4,751,047) (721,596) (2,597,506)
Accounts receivable, net ................................................. (149,034) (253,658) (149,086)
Reinsurance recoverables ................................................. (4,643,029) (161,372) (2,164)
Prepaid reinsurance premiums ............................................. (11,015,956) (327,150) (851,434)
Deferred policy acquisition costs ........................................ (2,308,324) (1,131,293) (879,746)
Other assets, net ........................................................ (737,559) (508,042) (147,402)
Reserve for unpaid losses and loss adjustment expenses ................... 6,826,416 2,686,905 1,913,983
Unearned premiums ........................................................ 14,819,368 4,274,496 3,289,855
Ceded reinsurance premiums payable ....................................... 1,671,143 50,820 -
Experience rating adjustments payable .................................... 2,233,455 (1,708,084) 5,155,850
Retrospective premium adjustments payable ................................ 1,418,375 235,029 2,861,302
Funds held under reinsurance treaties .................................... 1,133,396 511,777 1,001,520
Contract funds on deposit ................................................ 590,521 (620,261) (135,605)
Deferred ceded commissions ............................................... 1,224,938 - -
Other liabilities, net ................................................... 3,603,715 305,496 1,525,649
------------ ------------ ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES ................................ 13,755,991 6,447,381 14,242,945
------------ ------------ ------------
Cash flows from investing activities:
Proceeds from held to maturity fixed maturities due to redemption or maturity 1,405,000 1,250,400 1,341,000
Proceeds from available for sale fixed maturities sold, redeemed or matured . 21,430,449 5,933,115 7,383,150
Proceeds from available for sale equity securities sold ..................... 16,688,164 19,056,907 13,175,789
Cost of investments purchased:
Held to maturity fixed maturities ........................................ (1,811,114) (1,102,131) (299,955)
Available for sale fixed maturities ...................................... (34,634,639) (7,530,214) (8,064,552)
Available for sale equity securities ..................................... (17,834,184) (20,098,251) (15,288,282)
Net change in short-term investments and other invested assets .............. (4,236,374) (19,659,165) 543,300
Other ....................................................................... (647,967) (189,345) (500,499)
------------ ------------ ------------
NET CASH USED IN INVESTING ACTIVITIES .................................... (19,640,665) (22,338,684) (1,710,049)
------------ ------------ ------------
Cash flows from financing activities:
Proceeds from note payable to bank ........................................... 5,900,000 20,040,000 20,350,000
Repayments of note payable to bank ........................................... (8,000,000) (23,540,000) (19,892,000)
Proceeds from issuance of trust preferred debt to an affiliate ............... 7,000,000 8,000,000 -
Acquisition of treasury stock ................................................ (371,706) (3,852,611) (4,542)
Proceeds from stock options exercised ........................................ - 2,789 -
------------ ------------ ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES ................................ 4,528,294 650,178 453,458
------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH ............................................... (1,356,380) (15,241,125) 12,986,354
Cash at beginning of year ..................................................... 4,306,007 19,547,132 6,560,778
------------ ------------ ------------
Cash at end of year ........................................................... $ 2,949,627 $ 4,306,007 $ 19,547,132
============ ============ ============
Supplemental disclosures of cash flow information: Cash paid during the year
for:
Interest ..................................................................... $ 540,300 $ 100,098 $ 13,398
============ ============ ============
Income taxes ................................................................. $ 600,000 $ 1,988,102 $ 950,000
============ ============ ============
See accompanying notes to consolidated financial statements.
Exhibit 13(a) - 17
BANCINSURANCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - DECEMBER 31, 2003, 2002 AND 2001
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) ORGANIZATION
Bancinsurance Corporation ("Bancinsurance") is a specialty property
insurance holding company incorporated in the State of Ohio in 1970.
Bancinsurance Corporation and its subsidiaries (collectively, the
"Company") have three reportable business segments: (1)
property/casualty insurance, (2) municipal code publishing and (3)
insurance agency, which are described in more detail below.
Property/Casualty Insurance. Our wholly-owned subsidiary, Ohio
Indemnity Company ("Ohio Indemnity"), is a specialty property
insurance company. Ohio Indemnity, an Ohio corporation, is licensed in
47 states, the District of Columbia and for surplus lines in Texas. As
such, Ohio Indemnity is subject to the regulations of the Ohio
Department of Insurance (the "Department") and the regulations of each
state in which it operates. The majority of Ohio Indemnity's premiums
are derived from two distinct lines of business: (1) products designed
for automobile lenders/dealers and (2) unemployment compensation and
bail bond products.
Our automobile lender/dealer line offers three types of products.
First, ULTIMATE LOSS INSURANCE(R) ("ULI"), a blanket vendor single
interest coverage, is the primary product we offer to financial
institutions nationwide. This product insures banks and financial
institutions against damage to pledged collateral in cases where the
collateral is not otherwise insured. A ULI policy is generally written
to cover a lender's complete portfolio of collateralized personal
property loans, typically automobiles. Second, creditor placed
insurance ("CPI") is an alternative to our traditional blanket vendor
single interest product. While both products cover the risk of damage
to uninsured collateral in a lender's automobile loan portfolio, CPI
covers the portfolio through tracking individual borrower's insurance
coverage. The lender purchases physical damage coverage for loan
collateral after a borrowers' insurance has lapsed. Third, our
guaranteed auto protection insurance ("GAP") pays the difference or
"gap" between the amount owed by the customer on a lease or loan
contract and the amount of primary insurance company coverage in the
event a vehicle is damaged beyond repair or stolen and never
recovered. 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.
We offer three types of unemployment compensation products: (1) bonded
service; (2) excess of loss; and (3) mandated bonds. Our unemployment
compensation products are utilized by not-for-profit entities which
elect not to pay the unemployment compensation tax and instead
reimburse the state unemployment compensation for benefits paid by the
agencies to the entities' former employees. Certain national cost
containment firms provide programs to ensure that reimbursing
employers discharge their unemployment compensation commitments.
Through its bonded service products, Ohio Indemnity bonds these
national cost containment firms for their program service
responsibilities. Ohio Indemnity also provides excess of loss
coverage, under trust arrangements, to groups of not-for-profit
entities that want to declare reimbursing status for their
unemployment insurance obligations. We also underwrite state mandated
surety bonds. Certain states require that reimbursing employers post a
bond as a security for the performance of their reimbursing
obligations. Ohio Indemnity provides this mandated bond on behalf of
employers enrolled in the bonded service program. In addition to the
unemployment compensation products, we provide bail bond coverage
through an assumed reinsurance agreement for 15% participation, with
other insurers assuming the remaining exposure. This agreement insures
a bail bond company against losses arising from the nonperformance of
bail requirements.
The Company sells its insurance products through a network of
distribution channels, including four managing general agents,
approximately thirty independent agents and direct sales.
Municipal Code Publishing. Our wholly-owned subsidiary, American Legal
Publishing Corporation ("ALPC"), codifies, publishes, supplements and
distributes ordinances for over 1,800 municipalities and counties
nationwide in addition to state governments. Ordinance codification is
the process of collecting, organizing and publishing legislation for
state and local governments.
Insurance Agency. In July 2002, we formed Ultimate Services Agency,
LLC ("USA"), a wholly-owned subsidiary. We formed USA to act as an
agency for placing property/casualty insurance policies offered and
underwritten by Ohio Indemnity and other property/casualty insurance
companies. In the fourth quarter of 2002, we dissolved our
wholly-owned subsidiary, Paul Boardway and Associates, Inc., which
previously acted as a property/casualty insurance agency.
In December 2002, we organized BIC Statutory Trust I ("BIC Trust I"),
a Connecticut special purpose business trust. In September 2003, we
organized BIC Statutory Trust II ("BIC Trust II"), a Delaware special
prupose business trust. BIC Trust I and BIC Trust II were formed for
the sole purpose of issuing and selling the floating rate trust
preferred capital securities in exempt private placement transactions
and investing the proceeds from such securities in junior subordinated
debentures of the Company.
(b) BASIS OF FINANCIAL STATEMENT PRESENTATION
Our accompanying consolidated financial statements have been prepared
in accordance with accounting principles generally accepted in the
United States ("GAAP") which vary in certain respects from accounting
practices prescribed or permitted by the Department.
The preparation of financial statements in conformity with GAAP
requires us to make estimates and assumptions that affect the reported
amounts of assets and liabilities and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from these estimates.
Exhibit 13(a) - 18
(c) CONSOLIDATION POLICY
The accompanying financial statements include the Company's accounts
and our wholly-owned subsidiaries. All significant intercompany
transactions and balances have been eliminated in consolidation.
(d) INVESTMENTS
Investments in held to maturity fixed maturities where we have the
ability and intent to hold to maturity, are carried at amortized cost.
Investments in fixed maturities held as available for sale, which
include debt securities and redeemable preferred stock, are carried at
fair value. The unrealized holding gain or loss, net of applicable
deferred taxes and reclassification adjustment, is reflected in other
comprehensive income.
Available for sale equity securities, which include common stock and
non-redeemable preferred stock, are reported at fair value with
unrealized gains or losses, net of applicable deferred taxes and
reclassification adjustment, reflected in other comprehensive income.
Short-term investments are reported at cost which approximates fair
value. Other invested assets are reported at cost.
Realized gains and losses on disposal of investments are determined by
the specific identification method. The carrying value of an
investment is revised and the amount of revision is charged to net
realized losses on investments when management determines that a
decline in the value of an investment is other than temporary.
(e) ACCOUNTS RECEIVABLE
Accounts receivable is comprised of ALPC's municipal code contract
billings. We estimate our allowance for doubtful accounts and bad
debts based upon our assessment of the collectibility of receivables
and prior experience.
(f) GOODWILL
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 is performed in the fourth
quarter, or earlier if deemed necessary.
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 reporting segments. Following
such assignment, the fair value of each reporting segment was compared
to its carrying value. Fair values were determined by discounting
estimated future cash flows. Based on our initial 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.
We dissolved Paul Boardway and Associates, Inc. in the fourth quarter
of 2002. As a result, the remaining goodwill of $179,000 was recorded
as a pre-tax impairment charge to income in the third quarter 2002.
Our 2003 testing under SFAS 142 determined there was no further
impairment of goodwill.
(g) INTANGIBLE ASSET
Intangible assets represent databases acquired by ALPC. The databases
are comprised of municipal code data and related files. Provision for
amortization of the databases is based on estimated useful lives of
twenty years and is computed on the straight-line method.
As a result of assigning goodwill and intangibles to our reporting
segments, in connection with our SFAS 142 assessment in 2002, we
identified a noncompete agreement in the amount of $120,001 that was
included in goodwill and therefore subsequently reclassified to an
intangible asset. Provision for amortization is based on a definite
life of five years and is computed on the straight-line method.
(h) RECOGNITION OF REVENUE AND RELATED EXPENSES
Ohio Indemnity's insurance premiums and ceded commissions are earned
over the terms of the related insurance policies and reinsurance
contracts. For our lender/dealer insurance products, premiums are
earned in proportion to the risk assumed. For our unemployment
insurance protection products, premiums are earned pro rata over the
policy term. The portion of premiums written applicable to the
unexpired portion of insurance policies is recorded in the balance
sheet as unearned premiums.
Revenue from ALPC municipal code contracts is recognized on the
percentage-of-completion method. Completion is measured based on the
percentage of direct labor costs incurred to date compared to
estimated direct labor costs for each contract. While we use available
information to estimate total direct labor costs on each contract,
actual experience may vary from estimated amounts. Revenue from code
supplements is recognized on the completed-contract method because the
typical supplement is completed in a few months.
Commission fee revenues for USA (and Paul Boardway and Associates
prior to its dissolution) are recognized when earned based on
contractual rates and services provided.
(i) DEFERRED POLICY ACQUISITION COSTS
Acquisition expenses, mainly commissions and premium taxes, related to
unearned premiums are deferred and amortized over the period the
coverage is provided. Anticipated losses and other expenses related to
those premiums are considered in determining the recoverability of
deferred acquisition costs.
Exhibit 13(a) - 19
(j) RESERVE FOR UNPAID LOSSES AND LOSS ADJUSTMENT EXPENSES
Loss and loss adjustment expense reserves represent our best estimate
of the estimated ultimate net cost of all reported and unreported
losses incurred through December 31. We do not discount loss and loss
adjustment expense reserves. The reserves for unpaid losses and loss
adjustment expenses are estimated using individual case-basis
valuations and statistical analyses. Those estimates are subject to
the effects of trends in loss severity and frequency. Although
considerable variability is inherent in such estimates, we believe the
reserves for losses and loss adjustment expenses are adequate. The
estimates are regularly reviewed and adjusted as necessary as
experience develops or new information becomes known. Such adjustments
are included in current operations.
(k) REINSURANCE
In the ordinary course of business, we cede and assume reinsurance
with other insurers and reinsurers. Ceded reinsurance transactions are
associated with our lender/dealer business. The assumed business
represents a quota share participation in the gross liability of an
insurer covering bail bond business.
(l) EXPERIENCE RATING AND RETROSPECTIVE PREMIUM ADJUSTMENTS
Certain policies are eligible for premium adjustments based upon a
comparison of actual losses to expected losses. For certain policies,
return premiums are calculated and settled on an annual basis. These
balances are presented in the accompanying balance sheets as
retrospective premium adjustments payable. Certain other policies are
eligible for an experience rating adjustment that is calculated and
adjusted from period to period and settled upon cancellation of the
policy. These balances are presented in the accompanying balance
sheets as experience rating adjustments payable.
(m) CONTRACT FUNDS ON DEPOSIT
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. Together with the cost containment service
firm, we 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. Fees of $114,094, $749,442 and $846,446 were
recognized in 2003, 2002 and 2001, respectively, as a result of this
arrangement.
(n) DEPRECIATION AND AMORTIZATION
Real estate is stated at cost and depreciated using the straight-line
method over thirty-nine years. Property, equipment and computer
software are stated at cost and depreciated using the straight-line
method over the estimated useful life, ranging from three to five
years. Leasehold improvements are capitalized and amortized over the
remaining office lease term. Maintenance and repairs are charged
directly to expense as incurred.
(o) FEDERAL INCOME TAXES
We file a consolidated federal income tax return with our
subsidiaries. Accordingly, deferred tax liabilities and assets have
been recognized for the expected future tax consequences of events
that have been included in the financial statements or tax returns.
Deferred income taxes are recognized at prevailing income tax rates
for temporary differences between financial statement and income tax
bases of assets and liabilities for which income tax benefits will be
realized in future years.
(p) CASH AND CASH EQUIVALENTS
We classify investments as cash equivalents if their original maturity
is three months or less. Cash equivalents are stated at cost, which
approximates fair value
(q) STOCK OPTION ACCOUNTING
We use the "intrinsic value method" under Accounting Principles Board
Opinion No. 25 ("APB No. 25") and related interpretations in
accounting for stock options issued to employees, officers and
directors under our equity compensation plans. FASB Statement No. 123
("SFAS 123"), "Accounting for Stock-Based Compensation," as amended,
was issued by the FASB in 1995 and requires the "fair value method"
for recognition of cost on equity compensation plans similar to those
used by the Company. Adoption of SFAS 123 is optional; however, pro
forma disclosures as if we had adopted the cost recognition
requirements under SFAS 123 in 2003, 2002 and 2001 are presented
below.
As Reported Pro Forma
------------------------------------- ---------------------------------------
2003 2002 2001 2003 2002 2001
---------- ---------- ---------- ---------- ---------- -----------
Net income........................... $3,909,817 $ 889,613 $3,075,190 $3,892,127 $ 875,944 $ 3,068,601
---------- ---------- ---------- ---------- ---------- -----------
Basic net income per common share.... $ .79 $ .16 $ .53 $ .79 $ .16 $ .53
---------- ---------- ---------- ---------- ---------- -----------
Diluted net income per common share.. $ .77 $ .16 $ .53 $ .77 $ .16 $ .53
---------- ---------- ---------- ---------- ---------- -----------
The effects of applying SFAS 123 in this pro forma disclosure are not
indicative of future amounts. Additional awards in future years are
anticipated.
(r) RECLASSIFICATION
Certain prior year amounts have been reclassified in order to conform
to the 2003 presentation.
Exhibit 13(a) - 20
(2) INVESTMENTS
The amortized cost, gross unrealized gains and losses and estimated fair
value of investments in held to maturity and available for sale securities
were as follows:
DECEMBER 31, 2003
-----------------------------------------------------------------
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
------------ ----------- ----------- ------------
Held to maturity:
Fixed maturities:
US Treasury securities and obligations of
US Government corporations and agencies.. $ 437,268 $ 5,462 $ - $ 442,730
Obligations of states and political
subdivisions............................. 4,434,744 194,351 5,700 4,623,395
------------ ----------- ----------- ------------
Total held to maturity .............. 4,872,012 199,813 5,700 5,066,125
------------ ----------- ----------- ------------
Available for sale:
Fixed maturities:
US Treasury securities and obligations of
US Government corporations and agencies.. 1,500,000 4,167 16,719 1,487,448
Obligations of states and political
subdivisions............................. 18,660,506 300,654 51,095 18,910,065
Corporate securities...................... 628,966 4,050 1,432 631,584
Asset-backed securities................... 1,433,162 - 2,392 1,430,770
Redeemable preferred stock................ 6,400,000 58,282 - 6,458,282
------------ ----------- ----------- ------------
Subtotal ............................ 28,622,634 367,153 71,638 28,918,149
Equity securities............................ 7,621,880 2,643,545 29,567 10,235,858
------------ ----------- ----------- ------------
Total available for sale............. 36,244,514 3,010,698 101,205 39,154,007
------------ ----------- ----------- ------------
Total................................ $ 41,116,526 $ 3,210,511 $ 106,905 $ 44,220,132
============ =========== =========== ============
December 31, 2002
------------------------------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
------------ ----------- ----------- -------------
Held to maturity:
Fixed maturities:
US Treasury securities and obligations of
US Government corporations and agencies... $ 1,535,197 $ 32,428 $ - $ 1,567,625
Obligations of states and political
subdivisions.............................. 2,952,552 171,726 - 3,124,278
------------ ----------- ----------- -------------
Total held to maturity ............... 4,487,749 204,154 - 4,691,903
------------ ----------- ----------- -------------
Available for sale:
Fixed maturities:
Obligations of states and political
subdivisions.............................. 15,529,900 385,668 37,918 15,877,650
Corporate securities....................... 27,500 7,500 - 35,000
------------ ----------- ---------- -------------
Subtotal ............................. 15,557,400 393,168 37,918 15,912,650
Equity securities............................. 5,716,906 1,367,885 215,278 6,869,513
------------ ----------- ---------- -------------
Total available for sale.............. 21,274,306 1,761,053 253,196 22,782,163
------------ ----------- ---------- -------------
Total................................. $ 25,762,055 $ 1,965,207 $ 253,196 $ 27,474,066
============ =========== ========== =============
Exhibit 13(a) - 21
The amortized cost and estimated fair value of fixed maturity investments in
held to maturity and available for sale securities at December 31, 2003, by
contractual maturity, are shown below. Expected maturities will differ from
contractual maturities because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties.
DECEMBER 31, 2003
-------------------------------------------------------------------
HELD TO MATURITY AVAILABLE FOR SALE
AMORTIZED ESTIMATED AMORTIZED ESTIMATED
COST FAIR VALUE COST FAIR VALUE
------------- ------------- ------------ -------------
Due in one year or less................... $ 135,363 $ 140,105 $ 292,878 $ 295,446
Due after one year but less than five years 1,950,943 1,998,344 3,749,530 3,834,299
Due after five years but less than ten years 1,982,367 2,090,189 4,591,291 4,610,787
Due after ten years....................... 803,339 837,487 12,155,773 12,288,565
------------- ------------- ------------ -------------
Subtotal................................. 4,872,012 5,066,125 20,789,472 21,029,097
------------- ------------- ------------ -------------
Asset-backed securities................... - - 1,433,162 1,430,770
Redeemable preferred stock................ - - 6,400,000 6,458,282
------------- ------------- ------------ -------------
Total $ 4,872,012 $ 5,066,125 $ 28,622,634 $ 28,918,149
============= ============= ============ =============
Net investment income for the year ended December 31 is summarized below:
2003 2002 2001
----------- ----------- -----------
Fixed maturities........................................... $ 1,240,248 $ 995,619 $ 1,131,336
Equity securities.......................................... 255,672 251,787 196,707
Short-term investments..................................... 256,450 114,477 173,834
Other...................................................... 30,468 - 44,176
Expenses................................................... (183,774) (125,745) (95,292)
----------- ----------- -----------
Net investment income................................. $ 1,599,064 $ 1,236,138 $ 1,450,761
=========== =========== ===========
The proceeds from sales of available for sale securities were $38,118,613,
$24,990,022 and $20,558,939 for the years ended December 31, 2003, 2002 and
2001, respectively.
Pre-tax net realized gains (losses) on investments and changes in
unrealized gains (losses) on available for sale investments were as follows
for each of the years ended December 31:
2003 2002 2001
------------ ------------ ------------
Gross realized gains:
Fixed maturities........................................ $ 236,224 $ 35,508 $ 53,314
Equity securities....................................... 869,307 320,661 665,761
Other invested assets................................... 162,094 - -
------------ ------------ ------------
Total gains........................................... 1,267,625 356,169 719,075
------------ ------------ ------------
Gross realized losses:
Fixed maturities........................................ 132,574 79,158 47,392
Equity securities....................................... 183,161 565,957 649,141
Other-than-temporary impairments........................ 129,729 931,531 -
------------ ------------ ------------
Total losses.......................................... 445,464 1,576,646 696,533
------------ ------------ ------------
Net realized gains (losses)................................ $ 822,161 $ (1,220,477) $ 22,542
============ ============ ============
Changes in unrealized gains (losses) on available for sale
investments:
Fixed maturities........................................ $ (59,735) $ 293,519 (101,736)
Equity securities....................................... 1,461,371 418,809 (236,981)
------------ ------------ ------------
Net change in unrealized gains (losses)............... $ 1,401,636 $ 712,328 $ (338,717)
============ ============ ============
Exhibit 13(a) - 22
The following table summarizes, for all securities in an unrealized loss
position at December 31, 2003, the estimated fair value and pre-tax gross
unrealized loss by length of time those securities have been continuously in
an unrealized loss position.
GROSS
ESTIMATED UNREALIZED
FAIR VALUE LOSS
------------ -------------
Fixed maturities:
0-6 months.................................................................. $ 6,494,896 $ 41,652
7-12 months................................................................. 1,800,835 15,867
Greater than 12 months...................................................... 948,208 19,819
------------ -------------
Total fixed maturities................................................ 9,243,939 77,338
------------ -------------
Equities:
0-6 months.................................................................. 1,093,326 29,567
7-12 months................................................................. - -
Greater than 12 months...................................................... - -
------------ -------------
Total equities........................................................ 1,093,326 29,567
------------ -------------
Total................................................................. $ 10,337,265 $ 106,905
============ =============
As of December 31, 2003, the Company had unrealized losses on 31 fixed
maturity securities of $77,338, including 19, 8, and 4 securities that
maintained an unrealized loss position for 0-6 months, 7-12 months, and
greater than 12 months, respectively. All 31 fixed maturity securities each
had a fair value to cost ratio equal to or greater than 97% as of December
31, 2003.
As of December 31, 2003, the Company had unrealized losses on 9 equity
securities of $29,567, which all maintained an unrealized loss position for
0-6 months. All 9 equity securities each had a fair value to cost ratio
equal to or greater than 90% as of December 31, 2003.
The Company continually monitors developments affecting our invested
assets, paying particular attention to events that might give rise to
impairment write-downs, including but not limited to: (1) the length of
time and extent to which the estimated fair value has been less than book
value; (2) whether the decline appears to be related to general market or
industry conditions or is issuer-specific; and (3) our ability and intent
to hold the security for a period of time sufficient to allow for recovery
in the estimated fair value. There were $129,729, $931,531 and $0 in
impairment charges included in net realized gain (loss) on investments for
the years ended December 31, 2003, 2002 and 2001, respectively. As part of
the Company's normal assessment of other-than-temporary impairments of
investments, the securities listed were evaluated and no further
impairments were deemed necessary as of December 31, 2003.
At December 31, 2003, investments having a carrying value of $4,511,084
were on deposit with various state insurance departments to meet their
respective regulatory requirements.
(3) DEFERRED POLICY ACQUISITION COSTS
Changes in deferred policy acquisition costs for the year ended December 31
are summarized as follows:
2003 2002 2001
-------------- ------------- -----------
Deferred, January 1........................................... $ 2,653,826 $ 1,522,533 $ 642,787
Additions:
Commissions................................................ 5,380,025 1,904,229 1,682,847
Premium tax................................................ 400,315 135,711 122,837
-------------- ------------- -----------
Total additions....................................... 5,780,340 2,039,940 1,805,684
-------------- ------------- -----------
Amortization to expense ...................................... 3,472,016 908,647 925,938
-------------- ------------- -----------
Deferred, December 31......................................... $ 4,962,150 $ 2,653,826 $ 1,522,533
============== ============= ===========
(4) UNCOMPLETED CONTRACTS
Revenues earned on uncompleted codification contracts by ALPC were
$1,625,993 and $1,492,583 and billings to date on those contracts were
$1,486,545 and $1,361,640, at December 31, 2003 and 2002, respectively. The
excess of costs and estimated earnings over billings to date are presented
in the accompanying balance sheets.
Exhibit 13(a) - 23
(5) GOODWILL AND INTANGIBLE ASSETS
There were no changes in the carrying amount of goodwill during 2003. The
changes in the carrying amount of goodwill by reporting unit for the year
ended December 31, 2002 are as follows:
Property/Casualty Insurance Municipal
Insurance Agency Code Publishing Total
----------------- ---------------- ---------------- ------------
Balance at December 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 at December 31, 2002......... $ 753,737 $ - $ - $ 753,737
============= ================ ================ ============
Below is a reconciliation statement of income information to pro forma
amounts that reflect the elimination of amortization of goodwill, net of
tax, for the year ended December 31, 2001:
Per Share
---------------------------------------------
Amount Basic Diluted
---------------- ----- -------
Net income, as reported.................. $ 3,075,190 $ .53 $ .53
Amortization of goodwill................. 101,316 .02 .02
---------------- ----- -------
Pro forma net income..................... $ 3,176,506 $ .55 $ .55
================ ===== =======
Intangible assets as of December 31 were as follows:
DECEMBER 31, 2003 December 31, 2002
---------------------------------------- ---------------------------------------
ACCUMULATED Accumulated
COST AMORTIZATION NET Cost amortization Net
----------- ------------ ----------- ---------- ------------ ----------
Amortizing intangibles:
Databases............................ $ 1,008,773 $ (153,001) $ 855,772 $ 1,008,773 $ (102,562) $ 906,211
Noncompete agreement................. 120,394 (56,118) 64,276 120,394 (32,039) 88,355
----------- ----------- ----------- ----------- ---------- ----------
Total intangible assets $ 1,129,167 $ (209,119) $ 920,048 $ 1,129,167 $ (134,601) $ 994,566
=========== =========== =========== =========== ========== ==========
Amortization expense related to amortizable intangible assets was $74,518,
$80,240 and $35,995 during 2003, 2002 and 2001, respectively. The estimated
amortization expense of intangible assets for the next five fiscal years
ending December 31 is as follows:
2004 $ 74,518
2005 74,518
2006 66,518
2007 50,477
2008 50,439
----------
$ 316,470
==========
(6) NOTES PAYABLE
As of December 31, 2003, we had an unsecured $10,000,000 revolving line of
credit with a maturity date of June 30, 2007 with no outstanding balance
($2,100,000 at December 31, 2002). The revolving credit agreement provides
for interest payable quarterly, at an annual rate equal to 0.75% less than
the prime rate (3.25% per annum at December 31, 2003). The Company was in
compliance with all provisions of our debt covenants at December 31, 2003.
The bank that provides the credit line is also a policyholder of the
Company.
(7) LEASE EXPENSES
We routinely lease premises for use as administrative offices, vehicles and
office equipment under operating leases for varying periods. Management
expects that in the normal course of business, leases will be renewed or
replaced by other leases. Effective January 2001, we entered into a new
lease for our Columbus office space. Under its provisions, no cash payments
were due until April 1, 2002. Rent expense is recognized evenly over the
lease term ending December 31, 2008. Rental expenses under operating leases
were $271,656, $303,781 and $267,000 during 2003, 2002 and 2001,
respectively.
The future minimum lease payments required under these operating leases for
the next five fiscal years ending December 31 are as follows:
2004 $ 223,317
2005 175,850
2006 208,769
2007 224,009
2008 229,943
----------
$1,061,888
==========
Exhibit 13(a) - 24
(8) TRUST PREFERRED DEBT ISSUED TO AFFILIATES
In December 2002, we organized BIC Statutory Trust I ("BIC Trust I"), a
Connecticut special purpose business trust, which issued $8,000,000 of
floating rate trust preferred capital securities in an exempt private
placement transaction. In September 2003, we organized BIC Statutory Trust
II ("BIC Trust II"), a Delaware special purpose business trust, which
issued $7,000,000 of floating rate trust preferred capital securities in an
exempt private placement transaction. BIC Trust I and BIC Trust II were
formed for the sole purpose of issuing and selling the floating rate trust
preferred capital securities and investing the proceeds from such
securities in junior subordinated debentures of the Company. In connection
with the issuance of the trust preferred capital securities, the Company
issued junior subordinated debentures of $8,248,000 and $7,217,000 to BIC
Trust I and BIC Trust II, respectively. The floating rate trust preferred
capital securities and the junior subordinated debentures have
substantially the same terms and conditions. The Company has fully and
unconditionally guaranteed the obligations of BIC Trust I and BIC Trust II
with respect to the floating rate trust preferred capital securities. BIC
Trust I and BIC Trust II distribute the interest received from the Company
on the junior subordinated debentures to the holders of their floating rate
trust preferred capital securities to fulfill their dividend obligations
with respect to such trust preferred securities. BIC Trust I's floating
rate trust preferred capital securities, and the junior subordinated
debentures issued in connection therewith, pay dividends and interest, as
applicable, on a quarterly basis at a rate equal to three month LIBOR plus
four hundred basis points (5.18% at December 31, 2003), are redeemable at
par on or after December 4, 2007 and mature on December 4, 2032. BIC Trust
II's floating rate trust preferred capital securities, and the junior
subordinated debentures issued in connection therewith, pay dividends and
interest, as applicable, on a quarterly basis at a rate equal to three
month LIBOR plus four hundred and five basis points (5.21% at December 31,
2003), are redeemable at par on or after September 30, 2008 and mature on
September 30, 2033. Interest on the junior subordinated debentures is
charged to income as it accrues. Interest expense related to the junior
subordinated debentures for the period ended December 31, 2003 and 2002 was
$538,056 and $33,748, respectively. The Company was in compliance with all
provisions of our debt covenants at December 31, 2003.
In January 2003, the FASB issued Interpretation No. 46 ("FIN 46"),
"Consolidation of Variable Interest Entities," which requires the
consolidation of certain entities considered to be variable interest
entities ("VIEs"). An entity is considered to be a VIE when it has equity
investors who lack the characteristics of having a controlling financial
interest, or its capital is insufficient to permit it to finance its
activities without additional subordinated financial support. Consolidation
of a VIE by an investor is required when it is determined that the investor
will absorb a majority of the VIE's expected losses if they occur, receive
a majority of the VIEs expected residual returns if they occur, or both.
The Company adopted FIN 46 on July 1, 2003. Upon adoption, BIC Trust I was
deconsolidated effective July 1, 2003 with prior periods reclassified in
the consolidated financial statements. The deconsolidation did not have any
impact on net income. In accordance with FIN 46, BIC Trust II was not
consolidated upon formation in September 2003.
(9) FEDERAL INCOME TAXES
Deferred income taxes for 2003 and 2002 reflect the impact of "temporary
differences" between amounts of assets and liabilities for financial
reporting purposes and such amounts as measured on an income tax basis.
Temporary differences which give rise to the net deferred tax liability at
December 31 are as follows:
2003 2002
----------- -----------
Deferred tax assets:
Unpaid loss and loss adjustment expense reserves.................... $ 171,539 $ 121,063
Unearned premium reserves........................................... 1,211,482 622,859
Accrued bonus....................................................... - 99,079
Capital loss carryforward........................................... - 26,009
Other than temporary impairment of investments...................... 88,245 316,721
Deferred ceded commissions.......................................... 416,479 -
Other............................................................... 121,596 195,285
----------- -----------
Subtotal......................................................... 2,009,341 1,381,016
----------- -----------
Deferred tax liabilities:
Unrealized gains on available for sale securities................... (989,227) (512,671)
Discounting of anticipated salvage and subrogation.................. (9,609) (2,752)
Deferred policy acquisition costs................................... (1,687,131) (902,303)
Accrued dividends receivable........................................ (17,950) (4,182)
Other............................................................... (158,049) (41,135)
----------- -----------
Subtotal......................................................... (2,861,966) (1,463,043)
----------- -----------
Net deferred tax liability....................................... $ (852,625) $ (82,027)
=========== ===========
Net deferred tax assets and liabilities and federal income tax expense in
future years can be materially affected by changes in enacted tax rates or
by unexpected adverse events.
Exhibit 13(a) - 25
The provision for federal income taxes for the period ended December 31
consists of the following:
2003 2002 2001
------------ ------------ ------------
Current ................................................... $ 1,320,123 $ 1,175,825 $ 1,056,810
Deferred expense (benefit)................................. 294,042 (235,295) 134,557
------------ ------------ ------------
Federal income taxes.................................... $ 1,614,165 $ 940,530 $ 1,191,367
============ ============ ============
The difference between income taxes provided at our effective tax rate and
the 34% federal statutory rate for the period ended December 31 is as
follows:
2003 2002 2001
------------ ------------ -------------
Federal income tax at statutory rate....................... $ 1,878,154 $ 1,137,555 $ 1,450,629
Dividends received deduction and tax exempt interest....... (379,099) (326,397) (327,644)
Business meals and entertainment........................... 22,489 20,238 46,686
Other...................................................... 92,621 109,134 21,696
------------ ------------ -------------
Federal income taxes.................................. $ 1,614,165 $ 940,530 $ 1,191,367
============ ============ =============
(10) BENEFIT PLANS
The Ohio Indemnity Company Employee 401(k) and Profit Sharing Plan (the
"401(k) Plan") is available to full-time employees who meet the 401(k)
Plan's eligibility requirements. Under the 401(k) Plan, we match 50% of
the qualified employee's contribution up to 6% of salary. The total cost
of the matching contribution was $164,057, $133,353 and $92,340 for the
years ended December 31, 2003, 2002 and 2001, respectively.
(11) STOCK OPTION PLANS
We have stock options outstanding and exercisable at December 31, 2003
under three equity compensation plans, each of which has been approved by
our security holders. Our 1984 Stock Option Plan (the "1984 Stock Option
Plan") was open to all employees of the Company and its subsidiaries. All
options were granted to employees of our Company before May 17, 1994 and
had a term of not more than ten years. Under the 1984 Stock Option Plan,
options for 10,000 common shares were outstanding at December 31, 2003 and
expire in 2004 at an option price per share of $5.25. All of the options
outstanding were granted to an employee for compensatory purposes.
The 1994 Stock Option Plan (the "1994 Stock Option Plan") provides for the
grant of options to purchase up to an aggregate of 500,000 common shares,
with a 100,000 common share maximum for any one participant. Key
employees, officers and directors of, and consultants and advisors to,
Bancinsurance and its subsidiaries are eligible to participate in the 1994
Stock Option Plan. The 1994 Stock Option Plan is administered by the
Company's Compensation Committee which determines to whom and when options
will be granted along with the terms and conditions of the options. Under
the 1994 Stock Option Plan, options for 372,400 common shares were
outstanding at December 31, 2003 and expire at various dates from 2004 to
2013 and range in option price per share from $2.50 to $6.75. Of the
options for 372,400 common shares outstanding, 46,000 have been granted to
our non-employee directors and 326,400 have been granted to employees.
The 2002 Stock Incentive Plan (the "2002 Plan") provides for awards,
including grant of options, to purchase up to an aggregate of 600,000
common shares. Key employees, officers and directors of, and consultants
and advisors to, Bancinsurance and its subsidiaries are eligible to
participate in the 2002 Plan. The 2002 Plan is administered by the
Compensation Committee which determines to whom and when options,
restricted stock or stock appreciation rights will be granted as well as
the terms and conditions of the award. Under the 2002 Plan, options for
204,000 common shares were outstanding at December 31, 2003 and expire at
various dates from 2012 to 2013 and range in option price per share from
$4.50 to $5.21. All of the options outstanding were granted to employees
for compensatory purposes.
A summary of the status of our stock options as of December 31, 2003, 2002
and 2001 and changes during the year ended on those dates is presented
below:
2003 2002 2001
--------------------------- ---------------------------- --------------------------
WEIGHTED-AVERAGE Weighted-average Weighted-average
SHARES EXERCISE PRICE Shares exercise price Shares exercise price
-------- ---------------- ---------- ---------------- -------- ----------------
Outstanding at beginning of year......... 487,900 $ 4.73 355,500 $ 4.81 323,000 $ 4.76
Granted.................................. 159,000 5.56 164,000 4.66 49,000 4.62
Exercised................................ (18,000) 4.92 (600) 4.65 (14,000) 2.89
Expired.................................. (20,000) 6.00 - - - -
Canceled................................. (22,500) 4.95 (31,000) 5.33 (2,500) 4.75
--------- ---------- --------
Outstanding at end of year............... 586,400 4.90 487,900 4.73 355,500 4.81
========= ========== ========
Shares reserved for issuance............. 982,400 1,042,900 434,500
Options available for future grant....... 396,000 555,000 129,000
Weighted-average fair value of options
granted during the year................ $ 1.7068 $ 1.7135 $ 2.0434
Exhibit 13(a) - 26
The fair value of each option granted during 2003, 2002 and 2001 is
estimated on the date of grant using the Black-Scholes option-pricing model
with the following assumptions: (1) expected volatility of 27.44 % for
2003, 28.97% for 2002 and 35.15% for 2001; (2) risk-free interest rate of
3.09% for options granted March 14, 2003, 2.82% for options granted May 16,
2003, 2.74% for options granted June 2, 2003, 2.64% for options granted
June 3, 2003, 5.00% for options granted May 17, 2002, 4.71% for options
granted June 4, 2002, 3.86% for options granted July 26, 2002, 3.48% for
options granted October 28, 2002, 3.41% for options granted November 4,
2002, 5.24% for options granted May 17, 2001, 5.31% for options granted May
30, 2001 and 5.20% for options granted May 31, 2001; (3) expected life of
six years for all years; and (4) 0% dividend yield for all years.
The following table summarizes weighted-average information by range of
exercise prices for stock options outstanding and exercisable at December
31, 2003:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------------- -----------------------------
NUMBER WEIGHTED-AVERAGE WEIGHTED-AVERAGE NUMBER WEIGHTED-AVERAGE
OUTSTANDING REMAINING EXERCISE EXERCISABLE EXERCISE
RANGE OF EXERCISE PRICES AT 12/31/03 CONTRACTUAL LIFE PRICE AT 12/31/03 PRICE
- ------------------------------------- ----------- ---------------- ---------------- ----------- ----------------
$ 2.50 - 2.875....................... 19,500 1.92 $ 2.54 19,500 $ 2.54
3.375 - 3.875...................... 32,000 2.96 3.84 32,000 3.84
4.00 - 4.85........................ 268,400 6.77 4.58 143,360 4.64
5.25 - 5.625....................... 248,500 7.77 5.46 76,000 5.36
6.00 - 6.75........................ 18,000 3.18 6.22 8,000 6.50
---------- -------
2.50 - 6.75........................ 586,400 6.71 4.90 278,860 4.65
========== =======
(12) STATUTORY RESTRICTIONS
Generally, Ohio Indemnity is restricted by the insurance laws of the State
of Ohio as to amounts that can be transferred to the parent in the form of
dividends, loans, or advances without the approval of the Department. Under
these restrictions, during 2004, dividends, loans or advances in excess of
$3,629,310 will require the approval of the Department.
Ohio Indemnity is subject to a Risk Based Capital test applicable to
property and casualty insurers. The Risk Based Capital test serves as a
benchmark of an insurance enterprise's solvency by state insurance
regulators by establishing statutory surplus targets which will require
certain company level or regulatory level actions. Ohio Indemnity's total
adjusted capital is in excess of all required action levels.
(13) STATUTORY SURPLUS AND NET INCOME
Ohio Indemnity is statutorily required to file financial statements with
state regulatory authorities. The accounting principles used to prepare
such statutory financial statements follow prescribed or permitted
accounting principles as defined in the National Association of Insurance
Commissioners Accounting Practices and Procedures Manual, each of which may
differ from GAAP. Permitted statutory accounting practices encompass all
accounting practices not so prescribed, but allowed by the Department. Ohio
Indemnity has no permitted statutory accounting practices.
As of and for the period ended December 31, Ohio Indemnity's statutory
surplus and net income determined in accordance with accounting practices
prescribed by the Department differed from shareholder's equity and net
income determined in accordance with GAAP by the following:
Shareholder's Equity/Surplus Net Income
---------------------------------------- -----------------------------------
2003 2002 2001 2003 2002 2001
----------- ----------- ----------- ----------- ---------- ----------
Statutory.................................. $36,293,102 $32,353,218 $29,632,880 $ 2,427,321 $1,751,827 $2,567,615
Reconciling items:
Non-admitted assets....................... 33,682 91,723 2,818 - - -
Deferred policy acquisition costs......... 4,962,150 2,653,826 1,522,533 2,308,324 1,131,292 879,746
Deferred ceded commissions................ (371,323) - - (371,323) - -
Deferred taxes............................ (1,660,512) (1,023,087) (538,651) (37,523) 166,270 (134,557)
Unrealized gain on available for sale fixed
maturities and redeemable preferred stock 293,031 355,249 61,730 - - -
Provision for reinsurance................. 47,000 - 32,027 - - -
----------- ----------- ----------- ----------- ---------- ----------
GAAP........................................ $39,597,130 $34,430,929 $30,713,337 $ 4,326,799 $3,049,389 $3,312,804
=========== =========== =========== =========== ========== ==========
Exhibit 13(a) - 27
(14) OTHER COMPREHENSIVE INCOME
The related federal income tax effects of each component of other
comprehensive income (loss) are as follows:
YEAR ENDED DECEMBER 31, 2003
--------------------------------------------------------
BEFORE-TAX INCOME NET-OF-TAX
AMOUNT TAX EFFECT AMOUNT
------------- ------------- ------------
Net unrealized holding gains on securities:
Unrealized holding gains arising during 2003.................. $ 2,061,702 $ 700,979 $ 1,360,723
Less: reclassification adjustments for gains realized in
net income.................................................. 660,067 224,423 435,644
------------- ------------- ------------
Net unrealized holding gains.................................. 1,401,635 476,556 925,079
------------- ------------- ------------
Other comprehensive income...................................... $ 1,401,635 $ 476,556 $ 925,079
============= ============= ============
Year ended December 31, 2002
-----------------------------------------
Before-tax Income Net-of-tax
amount tax effect amount
-------------- ----------- -----------
Net unrealized holding gains on securities:
Unrealized holding losses arising during 2002............................ $ (321,214) $ (109,213) $ (212,001)
Less: reclassification adjustments for losses realized in net income..... (1,033,544) (351,405) (682,139)
------------- ---------- ----------
Net unrealized holding gains............................................. 712,330 242,192 470,138
------------- ----------- -----------
Other comprehensive income.................................................. $ 712,330 $ 242,192 $ 470,138
============= =========== ===========
Year ended December 31, 2001
-----------------------------------------
Before-tax Income Net-of-tax
amount tax effect amount
----------- ------------ ----------
Net unrealized holding losses on securities:
Unrealized holding losses arising during 2001............................ $ (316,176) $ (107,500) $ (208,676)
Less: reclassification adjustments for gains realized in net income...... 22,542 7,664 14,878
----------- ------------ ----------
Net unrealized holding losses............................................ (338,718) (115,164) (223,554)
----------- ----------- ----------
Other comprehensive income loss............................................. $ (338,718) $ (115,164) $ (223,554)
=========== =========== ==========
(15) RESERVE FOR UNPAID LOSSES AND LOSS ADJUSTMENT EXPENSES
Activity in the reserve for unpaid losses and loss adjustment expenses is
summarized as follows (dollars in thousands):
2003 2002 2001
------------ ------------- ------------
Balance at January 1................... $ 7,559 $ 4,873 $ 2,959
Less reinsurance recoverables........ 283 90 20
------------ ------------- ------------
Net Balance at January 1............... 7,276 4,783 2,939
------------ ------------- ------------
Incurred related to:
Current year......................... 35,888 29,121 21,759
Prior years.......................... (2,805) (807) (100)
------------ ------------- ------------
Total incurred......................... 33,083 28,314 21,659
------------ ------------- ------------
Paid related to:
Current year......................... 21,120 21,103 17,074
Prior years.......................... 9,779 4,718 2,741
------------ ------------- ------------
Total paid............................. 30,899 25,821 19,815
------------ ------------- ------------
Net Balance at December 31............. 9,460 7,276 4,783
Plus reinsurance recoverables........ 4,926 283 90
------------ ------------- ------------
Balance at December 31................. $ 14,386 $ 7,559 $ 4,873
============ ============= ============
As a result of changes in estimates of insured events in prior years, the
provision for unpaid losses and loss adjustment expenses decreased by
$2,805,000, $807,000 and $100,000 in 2003, 2002 and 2001, respectively, due
to favorable development, primarily attributable to aggregate limit
ultimate loss coverage reserves.
Exhibit 13(a) - 28
(16) REINSURANCE
In the ordinary course of business, we assume and cede reinsurance with
other insurers and reinsurers. Such arrangements serve to enhance our
capacity to write business, provide greater diversification and limit our
maximum loss arising from certain risks. Although reinsurance does not
discharge the original insurer from its primary liability to its
policyholders, it is the practice of insurers for accounting purposes to
treat reinsured risks as risks of the reinsurer. The primary insurer would
only reassume liability in those situations where the reinsurer is unable
to meet the obligations it assumed under the reinsurance agreements. The
ability to collect reinsurance is subject to the solvency of the
reinsurers.
We report balances pertaining to reinsurance transactions "gross" on the
balance sheet, meaning that reinsurance recoverables on unpaid losses,
ceded experience rating adjustments payable and ceded unearned premiums are
not deducted from insurance reserves but are recorded as assets.
The Company's ceded reinsurance transactions are attributable to our
lender/dealer business. The assumed business represents a quota share
participation in the gross liability of an insurer covering bail bond
business. During 2003, the Company entered into two new quota share
reinsurance agreements whereby 100% of our lender/dealer business was ceded
for two customers. Under the two separate agreements, the Company ceded
written premium of $18,459,771 and $8,826,954, respectively, during 2003.
At December 31, 2003, the Company recorded a reinsurance recoverable of
$1,475,632 and $3,067,461, respectively, and prepaid reinsurance premiums
of $5,127,910 and $5,638,647, respectively, for these two separate
agreements. For both agreements, the Company has obtained collateral in the
form of a letter of credit and a trust from the reinsurers to secure their
obligations. Under the provisions of the reinsurance agreements, the
collateral must be equal to or greater than 102% of the reinsured reserves
and the Company has immediate access to such collateral if necessary.
A reconciliation of direct to net premiums, on both a written and earned
basis, for the years ended December 31, 2003, 2002 and 2001 is as follows:
2003 2002 2001
-------------------------------- ----------------------------- -----------------------------
PREMIUMS PREMIUMS Premiums Premiums Premiums Premiums
WRITTEN EARNED written earned written earned
--------------- -------------- ------------ ------------ ------------ ------------
Direct................. $ 85,697,160 $ 69,417,859 $ 45,403,898 $ 40,978,953 $ 44,384,593 $ 38,390,171
Assumed................ 367,466 409,024 495,762 411,179 329,739 173,005
Ceded.................. (28,537,419) (22,457,827) (835,045) (507,895) (1,105,872) (254,438)
--------------- -------------- ------------ ------------ ------------ ------------
$ 57,527,207 $ 47,369,056 $ 45,064,615 $ 40,882,237 $ 43,608,460 $ 38,308,738
=============== ============== ============ ============ ============ ============
The amounts of recoveries pertaining to reinsurance that were deducted from
losses incurred during 2003, 2002 and 2001 were $9,917,371, $231,998 and
$164,794, respectively. The amount of recoveries pertaining to reinsurance
that was deducted from experience rating adjustments during 2003 was
$4,936,365 (none in 2002 and 2001). During 2003, 2002 and 2001, ceded
reinsurance decreased commission expense incurred by $7,380,273, $132,344
and $160,839, respectively.
(17) RELATED PARTIES
Loans to affiliates at December 31, 2001 included a $96,000 loan to an
officer of the Company. Such indebtedness was due and payable on February
1, 2002. Pursuant to the terms of a Resignation Agreement and Release
between the Company and such officer, we offset the loan payable against
$96,000 that was due and payable by the Company under such Resignation
Agreement and Release at the officer's termination on March 31, 2002.
In 1994, we entered into a Split-Dollar Insurance Agreement with a bank, as
trustee, for the benefit of an officer and his spouse. The bank has
acquired a second-to-die policy on the lives of the insureds, in the
aggregate face amount of $2,700,000. At December 31, 2003 and 2002, we had
loaned the trustee $717,496 and $645,777, respectively, under this
agreement for payment of insurance premiums, which is included in loans to
affiliates. Amounts loaned by the Company to the trustee are to be repaid,
in full, without interest from any of the following sources: (1) cash
surrender value of the underlying insurance policies; (2) death benefits;
and/or (3) the sale of 15,750 common shares of the Company contributed by
the officer to the trust. In February 2000, we entered into a Split-Dollar
Insurance Agreement for the benefit of another officer in the face amount
of $1,000,000. At December 31, 2003 and 2002, $30,000 was included in loans
to affiliates for payment of insurance premiums in accordance with this
agreement. All premiums paid by the Company in accordance with this
agreement are to be repaid, in full, without interest, upon the death,
retirement or termination of the officer.
During 2003 and 2001, we agreed to repurchase common shares of the Company
from two officers of Ohio Indemnity concurrent with the issuance of such
common shares through exercise of stock options. The $4,680 payment in 2003
and the $22,640 payment in 2001 to settle the option grants were recorded
as compensation expense.
We share the Company's executive offices with certain of our consolidated
subsidiaries. Rental, equipment and bookkeeping expenses are allocated
among them pursuant to management fee agreements.
Exhibit 13(a) - 29
(18) CONCENTRATIONS
The Company has the following concentrations of net premiums earned within
our property/casualty insurance business segment for the years ended
December 31:
PRODUCT - CUSTOMER TYPE 2003 2002 2001
- ---------------------------------------------------------------- ------------ ---------- -----------
Lender/Dealer-Managing General Agent............................ $ 10,889,155 $9,724,753 $ 7,219,390
Lender/Dealer-Managing General Agent............................ 6,512,701 5,521,061 5,121,341
Lender/Dealer-Managing General Agent............................ 5,439,426 163,729 -
Lender/Dealer-Policyholder...................................... 7,062,900 5,804,975 4,238,080
(19) COMMON SHARE REPURCHASE PROGRAM
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. The repurchase program expired on December 31, 2003. Through
December 31, 2003, we repurchased 699,465 common shares at an average price
per share of $5.00 under this program. Repurchases were funded by cash
flows from operations.
(20) FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments for which it is practicable to
estimate fair value:
Short-term investments: The carrying amounts are reasonable estimates of
fair value.
Fixed maturities and equity securities: Fair values are based upon quoted
market prices or dealer quotes for comparable securities.
Accounts receivable: The carrying amounts are reasonable estimates of fair
value.
Notes payable: Rates currently available to us for debt with similar terms
and remaining maturities are used to estimate fair value of existing debt.
As the interest rate adjusts regularly, the carrying amount is a reasonable
estimate of fair value.
Trust preferred debt issued to affiliates: Fair value is estimated using
discounted cash flow calculations based on interest rates currently being
offered for similar obligations with maturities consistent with the
obligation being valued. As the interest rate adjusts regularly, the
carrying amount is a reasonable estimate of fair value.
The carrying amount and estimated fair value of financial instruments
subject to disclosure requirements were as follows at December 31:
2003 2002
-------------------------------- ----------------------------
CARRYING ESTIMATED Carrying Estimated
AMOUNT FAIR VALUE amount fair value
------------- ------------- ------------ -------------
Assets:
Held to maturity fixed maturities......... $ 4,872,012 $ 5,066,125 $ 4,487,749 $ 4,691,903
Available for sale fixed maturities....... 28,918,149 28,918,149 15,912,650 15,912,650
Available for sale equity securities...... 10,235,858 10,235,858 6,869,513 6,869,513
Short-term investments.................... 28,904,680 28,904,680 25,135,305 25,135,305
Cash...................................... 2,949,627 2,949,627 4,306,007 4,306,007
Liabilities:
Notes payable............................. 53,276 53,276 2,166,355 2,166,355
Trust preferred debt issued to affiliates. 15,465,000 15,465,000 8,248,000 8,248,000
(21) QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
Our results of operations have varied, and in the future may vary, from
quarter to quarter principally because of fluctuations in underwriting
results. Consequently, quarterly results are not necessarily indicative of
full year results, nor are they comparable to the results of other
quarters. The following table sets forth certain unaudited quarterly
consolidated financial and operating data:
2003
----------------------------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
------------ ------------ ------------ ------------
Total revenues............................. $ 12,771,501 $ 16,732,220 $ 17,497,669 $ 6,803,859
Income before federal income taxes......... 1,437,535 1,622,924 927,856 1,535,667
Net income................................. 1,029,003 1,146,128 750,175 984,511
Earnings per common share:
Basic................................... .21 .23 .15 .20
Diluted................................. .20 .23 .15 .19
Exhibit 13(a) - 30
2002
----------------------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
------------ ------------ ------------ ------------
Total revenues............................. $ 10,407,965 $ 11,284,189 $ 12,613,057 $ 10,863,444
Income before federal income taxes and
cumulative effect of change in accounting
principle................................. 1,439,672 1,332,021 114,623 425,685
Income before cumulative effect of change in
accounting principle...................... 1,020,484 950,951 92,670 307,366
Net income (loss).......................... (461,374) 950,951 92,670 307,366
Earnings per common share:
Basic:
Income before cumulative effect of change
in accounting principle............. .18 .17 .02 .05
Net income (loss)..................... (.08) .17 .02 .05
Diluted:
Income before cumulative effect of change
in accounting principle............. .17 .17 .02 .05
Net income (loss)..................... (.08) .17 .02 .05
(22) LITIGATION
There are no actions, suits, claims, governmental investigations or
proceedings instituted, pending or, to our knowledge, threatened against
the Company, its subsidiaries or against any of their assets, interests or
rights that in any such case, if decided adversely, could reasonably be
expected to have, individually or in the aggregate, a material adverse
effect on the Company. Neither the Company nor any of its subsidiaries is a
party to any order, judgment or decree which has had or could reasonably be
expected to have a material adverse effect on the Company or such
subsidiary.
(23) SUPPLEMENTAL DISCLOSURE FOR EARNINGS PER SHARE
2003 2002 2001
----------------- ----------------- ---------------
Net income....................................... $ 3,909,817 $ 889,613 $ 3,075,190
----------------- ----------------- ---------------
Income available to common shareholders,
assuming dilution............................ $ 3,909,817 $ 889,613 $ 3,075,190
----------------- ----------------- ---------------
Weighted-average common shares outstanding....... 4,941,731 5,376,465 5,769,340
Dilutive effect of outstanding options....... 108,282 34,649 20,000
----------------- ----------------- ---------------
Diluted common shares............................ 5,050,013 5,411,114 5,789,340
================= ================= ===============
Basic net income per common share................ $ .79 $ .16 $ .53
Diluted net income per common share.............. $ .77 $ .16 $ .53
(24) SEGMENT INFORMATION
As described in Note 1, the Company has three reportable business segments:
(1) Property/Casualty Insurance; (2) Municipal Code Publishing; and (3)
Insurance Agency. 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.
DECEMBER 31, 2003
----------------------------------------------------------------------------
MUNICIPAL REPORTABLE
PROPERTY/CASUALTY CODE INSURANCE SEGMENT
INSURANCE PUBLISHING AGENCY TOTAL
----------------- ------------- ----------- -------------
Revenues from external customers $ 48,500,430 $ 3,819,221 $ 3,735 $ 52,323,386
Intersegment revenues......... 5,880 - 370,871 376,751
Interest revenue.............. 1,685,726 - 9 1,685,735
Interest expense.............. 549 2,032 - 2,581
Depreciation and amortization. 222,280 92,609 - 314,889
Segment profit................ 6,072,662 457,490 310,813 6,840,965
Income tax expense............ 1,745,863 187,881 106,564 2,040,308
Segment assets................ 105,342,377 2,551,413 547,206 108,440,996
Exhibit 13(a) - 31
December 31, 2002
---------------------------------------------------------------------------
Municipal Reportable
Property/Casualty Code Insurance Segment
Insurance Publishing Agency Total
----------------- ------------- ----------- -------------
Revenues from external customers $ 40,822,797 $ 3,324,037 $ 8,463 $ 44,155,297
Intersegment revenues......... 5,880 - 155,181 161,061
Interest revenue.............. 1,293,032 - 116 1,293,148
Interest expense.............. 15,477 11,420 1,327 28,224
Depreciation and amortization. 113,591 100,455 28,000 242,046
Segment profit (loss)......... 4,141,969 522,636 (1,623,255) 3,041,350
Income tax expense............ 1,094,048 243,066 18,049 1,355,163
Segment assets................ 66,692,915 2,153,838 299,257 69,146,010
December 31, 2001
------------------------------------------------------------------------------
Municipal Reportable
Property/Casualty Code Insurance Segment
Insurance Publishing Agency Total
----------------- ------------- ----------- -------------
Revenues from external customers $ 39,747,354 $ 2,652,231 $ 67,065 $ 42,466,650
Intersegment revenues......... 5,880 - 340,494 346,374
Interest revenue.............. 1,335,796 - 107 1,335,903
Interest expense.............. 9,266 3,162 - 12,428
Depreciation and amortization. 59,829 78,140 102,122 240,091
Segment profit................ 4,545,478 380,425 141,402 5,067,305
Income tax expense............ 1,229,850 143,617 87,923 1,461,390
Segment assets................ 58,283,510 1,878,414 2,610,501 62,772,425
The following is a reconciliation of the segment results to the
consolidated amounts reported in the consolidated financial statements:
2003 2002 2001
--------------- -------------- -------------
Revenue
Total revenues for reportable segments............................ $ 52,323,386 $ 44,155,297 $ 42,466,650
Other revenues.................................................... 218,772 2,702 23,147
Interest revenue.................................................. 1,739,082 1,317,751 1,380,079
Elimination of intersegment revenues............................. (475,991) (307,095) (427,614)
--------------- -------------- -------------
Total consolidated revenue....................................... $ 53,805,249 $ 45,168,655 $ 43,442,262
=============== ============== =============
Profit
Total profit for reportable segments.............................. $ 6,840,965 $ 3,041,350 $ 5,067,305
Other gain (loss)................................................. (840,992) 577,746 (373,134)
Elimination of intersegment profits............................... (475,991) (307,095) (427,614)
--------------- -------------- -------------
Income before income taxes and cumulative effect of change
in accounting principle....................................... $ 5,523,982 $ 3,312,001 $ 4,266,557
=============== ============== =============
Assets
Total assets for reportable segments.............................. $ 108,440,996 $ 69,146,010 $ 62,772,425
Parent company assets............................................. 8,122,851 11,950,233 3,967,509
Elimination of intersegment receivables........................... (694,111) (8,393,039) (2,069,257)
--------------- ------------- ------------
Consolidated assets.............................................. $ 115,869,736 $ 72,703,204 $ 64,670,677
=============== ============== =============
Exhibit 13(a) - 32
MARKET INFORMATION
The Company's common shares are traded on the Nasdaq National Market under the
symbol "BCIS." The following table sets forth, for the periods indicated, the
high and low closing sale prices for the Company's common shares. On February
27, 2004, the last reported sale price of the Company's common shares was $7.93.
FISCAL QUARTER ENDED LOW SALE HIGH SALE
- -------------------- -------- ---------
March 31, 2002 4.05 4.95
June 30, 2002 4.75 5.37
September 30, 2002 4.50 5.33
December 31, 2002 4.51 5.15
March 31, 2003 4.45 5.15
June 30, 2003 4.58 6.00
September 30, 2003 5.52 6.58
December 31, 2003 6.20 7.67
HOLDERS
The number of registered holders of record of the Company's common shares as of
February 27, 2004 was 760.
DIVIDENDS
No cash dividends were declared or paid on our outstanding common shares in the
two most recent fiscal years. We intend to retain earnings to finance the growth
of our business and the business of Ohio Indemnity and American Legal Publishing
and, therefore, do not anticipate paying any cash dividends to holders of our
common shares in the foreseeable future. Any determination to pay dividends in
the future will be at the discretion of our Board of Directors and will be
dependent upon our results of operations, financial condition, legal and
regulatory restrictions, and other factors deemed relevant at the time. For a
description of the restrictions on payment of dividends to us from Ohio
Indemnity, see note 12 to the consolidated financial statements.
ANNUAL MEETING
The annual meeting of shareholders will be held on June 2, 2004, at 10:30 a.m.
local time, at The Columbus Club, 181 East Broad Street, Columbus, Ohio.
Exhibit 13(a) - 33