UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2004
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 0-8738
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BANCINSURANCE CORPORATION
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(Exact name of registrant as specified in its charter)
Ohio 31-0790882
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(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
250 East Broad Street, Columbus, Ohio 43215
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(Address of principal executive offices) (Zip Code)
(614) 220-5200
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES [X] NO [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
YES [ ] NO [X]
The number of outstanding Common Shares, without par value, of the registrant
as of July 30, 2004 was 4,967,700.
BANCINSURANCE CORPORATION
AND SUBSIDIARIES
INDEX
Page No.
--------
PART I - FINANCIAL INFORMATION:
Item 1. Financial Statements
Consolidated Statements of Income for the
three months and six months ended June 30, 2004 and 2003 (unaudited)........................ 3
Consolidated Balance Sheets as of
June 30, 2004 (unaudited) and December 31, 2003............................................. 4
Consolidated Statements of Cash Flows for the
six months ended June 30, 2004 and 2003 (unaudited)......................................... 6
Notes to Consolidated Financial Statements (unaudited).............................................. 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations............................................... 12
Item 3. Quantitative and Qualitative Disclosures About
Market Risk................................................................................. 23
Item 4. Controls and Procedures........................................................................... 23
PART II - OTHER INFORMATION AND SIGNATURES
Item 1. Legal Proceedings.................................................................. Not Applicable
Item 2. Changes in Securities and Use of Proceeds......................................................... 24
Item 3. Defaults Upon Senior Securities.................................................... Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders............................................... 24
Item 5. Other Information.................................................................. Not Applicable
Item 6. Exhibits and Reports on Form 8-K.................................................................. 25
Signatures................................................................................................ 26
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BANCINSURANCE CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Income
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
2004 2003 2004 2003
------------ ------------ ------------ ------------
Revenues:
Net premiums earned $ 12,975,816 $ 15,095,790 $ 24,483,383 $ 26,256,766
Net investment income 489,013 413,178 899,848 766,947
Net realized gains on investments 622,430 233,025 966,302 467,060
Codification and subscription fees 978,880 876,960 1,972,341 1,756,676
Management fees (4,183) 71,307 28,814 199,423
Other income (26,875) 41,960 27,001 56,849
------------ ------------ ------------ ------------
Total revenues 15,035,081 16,732,220 28,377,689 29,503,721
------------ ------------ ------------ ------------
Expenses:
Losses and loss adjustment expenses 9,234,300 9,794,907 15,549,926 15,933,817
Experience rating adjustments (728,622) 582,210 (192,702) 2,156,341
Commission expense 2,185,800 1,934,038 4,298,329 3,325,288
Other insurance operating expenses 1,774,641 1,439,212 3,110,424 2,655,375
Codification and subscription expenses 909,092 895,759 1,899,929 1,625,983
General and administrative expenses 359,908 353,811 581,780 527,267
Interest expense 204,879 109,359 431,482 219,191
------------ ------------ ------------ ------------
Total expenses 13,939,998 15,109,296 25,679,168 26,443,262
------------ ------------ ------------ ------------
Income before federal income taxes 1,095,083 1,622,924 2,698,521 3,060,459
------------ ------------ ------------ ------------
Federal income tax expense 248,932 476,796 693,777 885,328
------------ ------------ ------------ ------------
Net income $ 846,151 $ 1,146,128 $ 2,004,744 $ 2,175,131
============ ============ ============ ============
Net income per share:
Basic $ .17 $ .23 $ .41 $ .44
============ ============ ============ ============
Diluted $ .17 $ .23 $ .39 $ .43
============ ============ ============ ============
See accompanying notes to consolidated financial statements.
3
BANCINSURANCE CORPORATION
AND SUBSIDIARIES
Consolidated Balance Sheets
June 30, December 31,
2004 2003
------------ ------------
(Unaudited) (Note 1)
Assets
Investments:
Held to maturity:
Fixed maturities, at amortized cost (fair value
$5,140,728 in 2004 and $5,066,125 in 2003) $ 5,072,562 $ 4,872,012
Available for sale:
Fixed maturities, at fair value (amortized cost
$42,485,800 in 2004 and $28,622,634 in 2003) 42,414,694 28,918,149
Equity securities, at fair value (cost $7,165,425
in 2004 and $7,621,880 in 2003) 8,451,455 10,235,858
Short-term investments, at cost which approximates fair value 17,944,165 28,904,680
Other invested assets 715,000 1,049,136
------------ ------------
Total investments 74,597,876 73,979,835
------------ ------------
Cash 3,069,116 2,949,627
Premiums receivable 8,191,434 10,661,766
Accounts receivable, net 783,979 993,093
Reinsurance recoverables 2,333,736 4,926,446
Prepaid reinsurance premiums 9,393,918 12,244,588
Deferred policy acquisition costs 5,391,801 4,962,150
Estimated earnings in excess of billings on uncompleted codification contracts 143,213 283,336
Loans to affiliates 839,089 770,466
Goodwill 753,737 753,737
Intangible assets, net 882,789 920,048
Accrued investment income 684,817 541,519
Current federal income taxes 5,950 --
Other assets 1,986,997 1,883,125
------------ ------------
Total assets $109,058,452 $115,869,736
============ ============
4
BANCINSURANCE CORPORATION
AND SUBSIDIARIES
Consolidated Balance Sheets, Continued
June 30, December 31,
2004 2003
------------- -------------
(Unaudited) (Note 1)
Liabilities and Shareholders' Equity
Reserve for unpaid losses and loss adjustment expenses $ 12,381,856 $ 14,385,919
Unearned premiums 23,853,960 25,124,137
Ceded reinsurance premiums payable 371,066 1,721,963
Experience rating adjustments payable 8,351,316 6,997,784
Retrospective premium adjustments payable 3,766,854 5,370,273
Funds held under reinsurance treaties 1,546,223 2,646,693
Contract funds on deposit 2,363,506 1,908,184
Taxes, licenses and fees payable 24,793 1,315,443
Current federal income taxes -- 511,091
Deferred federal income taxes 132,290 852,625
Deferred ceded commissions 886,005 1,224,938
Commissions payable 2,403,717 2,660,979
Billings in excess of estimated earnings on uncompleted codification contracts 98,728 143,888
Notes payable 639,237 53,276
Other liabilities 2,293,820 2,122,515
Trust preferred debt issued to affiliates 15,465,000 15,465,000
------------- -------------
Total liabilities 74,578,371 82,504,708
------------- -------------
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 June 30, 2004 and December 31, 2003,
4,967,700 shares outstanding at June 30, 2004 and 4,920,050 shares
outstanding at December 31, 2003 1,794,141 1,794,141
Additional paid-in capital 1,336,190 1,337,138
Accumulated other comprehensive income 801,850 1,920,265
Retained earnings 36,344,075 34,339,332
------------- -------------
40,276,256 39,390,876
Less: Treasury shares, at cost (1,202,641 common shares at June 30, 2004
and 1,250,291 common shares at December 31, 2003) (5,796,175) (6,025,848)
------------- -------------
Total shareholders' equity 34,480,081 33,365,028
------------- -------------
Total liabilities and shareholders' equity $ 109,058,452 $ 115,869,736
============= =============
See accompanying notes to consolidated financial statements.
5
BANCINSURANCE CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
Six Months Ended
June 30,
2004 2003
------------ ------------
Cash flows from operating activities:
Net income $ 2,004,744 $ 2,175,131
Adjustments to reconcile net income to net cash provided by operating activities:
Net realized gains on investments (966,302) (467,060)
Amortization 175,946 186,686
Deferred federal income tax (benefit) expense (144,182) 392,259
Change in assets and liabilities:
Premiums receivable 2,470,332 (2,994,966)
Accounts receivable, net 209,114 282,220
Reinsurance recoverables 2,592,710 (1,012,614)
Prepaid reinsurance premiums 2,850,670 (4,943,017)
Deferred policy acquisition costs (429,651) (2,181,391)
Other assets, net (181,620) 166,214
Reserve for unpaid losses and loss adjustment expenses (2,004,063) 1,883,958
Unearned premiums (1,270,177) 11,038,028
Ceded reinsurance premiums payable (1,350,897) --
Experience rating adjustments payable 1,353,532 2,156,341
Retrospective premium adjustments payable (1,603,419) (1,396,725)
Funds held under reinsurance treaties (1,100,470) 1,124,360
Contract funds on deposit 455,322 710,471
Deferred ceded commissions (338,933) --
Other liabilities, net (1,946,897) 569,406
------------ ------------
Net cash provided by operating activities 775,759 7,689,301
------------ ------------
Cash flows from investing activities:
Proceeds from held to maturity fixed maturities due to redemption or maturity 40,000 1,100,000
Proceeds from available for sale fixed maturities sold, redeemed or matured 10,277,606 4,751,480
Proceeds from available for sale equity securities sold 7,506,527 10,164,502
Cost of investments purchased:
Held to maturity fixed maturities (250,410) (1,185,607)
Available for sale fixed maturities (24,812,287) (9,894,749)
Equity securities (5,206,945) (16,828,768)
Net change in short-term investments and other invested assets 10,960,515 2,080,991
Other -- (79,570)
------------ ------------
Net cash used in investing activities (1,484,994) (9,891,721)
------------ ------------
Cash flows from financing activities:
Proceeds from note payable to bank 3,000,000 5,900,000
Repayments of note payable to bank (2,400,000) (5,100,000)
Acquisition of treasury shares -- (371,515)
Proceeds from stock options excercised 228,724 --
------------ ------------
Net cash provided by financing activities 828,724 428,485
------------ ------------
Net increase (decrease) in cash 119,489 (1,773,935)
Cash at December 31 2,949,627 4,306,007
------------ ------------
Cash at June 30 $ 3,069,116 $ 2,532,072
============ ============
Supplemental disclosure of cash flow information
Cash paid during the year for:
Interest $ 429,500 $ 225,148
============ ============
Income taxes $ 1,355,000 $ --
============ ============
See accompanying notes to consolidated financial statements.
6
BANCINSURANCE CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements (Unaudited)
1. BASIS OF PRESENTATION
We prepared the consolidated balance sheet as of June 30, 2004, the
consolidated statements of income for the three and six months ended June
30, 2004 and 2003 and the consolidated statements of cash flows for the six
months ended June 30, 2004 and 2003, without an audit. In the opinion of
management, all adjustments necessary to fairly present the financial
position, results of operations and cash flows of Bancinsurance Corporation
("Bancinsurance") and subsidiaries (collectively, the "Company") as of June
30, 2004 and for all periods presented have been made.
We prepared the accompanying unaudited consolidated financial statements in
accordance with accounting principles generally accepted in the United
States for interim financial information and with the instructions to the
Quarterly Report on Form 10-Q and Article 10 of Regulation S-X.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with accounting principles generally
accepted in the United States have been omitted. We recommend that you read
these unaudited consolidated financial statements together with the
financial statements and notes thereto included in our Annual Report on
Form 10-K for the fiscal year ended December 31, 2003. The results of
operations for the period ended June 30, 2004 are not necessarily
indicative of the results of operations for the full 2004 year.
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to
make estimates and assumptions that affect the reported amounts of assets
and liabilities, the disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates.
Certain prior year amounts have been reclassified to conform to the 2004
presentation.
2. 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
(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 (5.34% and 5.28% at June 30,
2004 and 2003, 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 (5.64% at June 30, 2004), 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 three months
ended June 30, 2004 and 2003 was $202,338 and $110,963, respectively, and
$405,032 and $222,264 for the six months ended June 30, 2004 and 2003,
respectively. The Company was in compliance with all provisions of our debt
covenants at June 30, 2004.
In January 2003, the Financial Accounting Standards Board ("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
7
BANCINSURANCE CORPORATION
AND SUBSIDIARIES
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.
3. STOCK OPTION PLANS
We have three equity incentive plans which allow for granting options to
certain employees and directors of the Company. We account for compensation
expense related to such transactions using the "intrinsic value" based
method under the provisions of the Accounting Principles Board ("APB")
Opinion No. 25, "Accounting for Stock Issued to Employees," and its related
interpretations.
As we account for stock options using the "intrinsic value" method, no
compensation cost has been recognized in net income for the equity
incentive plans. Had we accounted for all stock-based employee compensation
under the "fair value" method (SFAS No. 123), our net income and earnings
per share would have been reduced as follows:
Three Months Ended Six Months Ended
June 30, June 30,
2004 2003 2004 2003
----------- ----------- ----------- -----------
Net income, as reported $ 846,151 $ 1,146,128 $ 2,004,744 $ 2,175,131
Deduct: Total stock-based employee compensation expense
determined under "fair value" based method for all awards,
net of related tax effects (1,994) (17,092) (1,994) (17,794)
----------- ----------- ----------- -----------
Pro forma net income $ 844,157 $ 1,129,036 $ 2,002,750 $ 2,157,337
=========== =========== =========== ===========
Basic and diluted earnings per share would not be impacted if the "fair
value" based method had been applied to all awards. Compensation expense in
the pro forma disclosure is not indicative of future amounts as options
vest over several years and additional grants are generally made each year.
4. OTHER COMPREHENSIVE INCOME
The related federal income tax effects of each component of other
comprehensive income (loss) are as follows:
Three Months Ended June 30, 2004
--------------------------------------------
Before-tax Income Net-of-tax
amount tax effect amount
--------------------------------------------
Net unrealized holding gains (losses) on securities:
Unrealized holding losses arising during 2004 $ (484,923) $ (164,874) $ (320,049)
Less: reclassification adjustments for gains realized in net income 956,566 325,232 631,334
----------- ----------- -----------
Net unrealized holding losses (1,441,489) (490,106) (951,383)
----------- ----------- -----------
Other comprehensive loss $(1,441,489) $ (490,106) $ (951,383)
=========== =========== ===========
Three Months Ended June 30, 2003
--------------------------------------------
Before-tax Income Net-of-tax
amount tax effect amount
--------------------------------------------
Net unrealized holding gains (losses) on securities:
Unrealized holding gains arising during 2003 $ 1,351,286 $ 459,437 $ 891,849
Less: reclassification adjustments for gains realized in net income 233,025 79,228 153,797
----------- ----------- -----------
Net unrealized holding gains 1,118,261 380,209 738,052
----------- ----------- -----------
Other comprehensive income $ 1,118,261 $ 380,209 $ 738,052
=========== =========== ===========
8
BANCINSURANCE CORPORATION
AND SUBSIDIARIES
Six Months Ended June 30, 2004
--------------------------------------------
Before-tax Income Net-of-tax
amount tax effect amount
--------------------------------------------
Net unrealized holding gains (losses) on securities:
Unrealized holding losses arising during 2004 $ (394,132) $ (134,005) $ (260,127)
----------- ----------- -----------
Less: reclassification adjustments for gains realized in net income 1,300,438 442,149 858,289
----------- ----------- -----------
Net unrealized holding losses (1,694,570) (576,154) (1,118,416)
----------- ----------- -----------
Other comprehensive loss $(1,694,570) $ (576,154) $(1,118,416)
=========== =========== ===========
Six Months Ended June 30, 2003
--------------------------------------------
Before-tax Income Net-of-tax
amount tax effect amount
--------------------------------------------
Net unrealized holding gains (losses) on securities:
Unrealized holding gains arising during 2003 $ 1,135,677 $ 386,130 $ 749,547
Less: reclassification adjustments for gains realized in net income 467,060 158,800 308,260
----------- ----------- -----------
Net unrealized holding gains 668,617 227,330 441,287
----------- ----------- -----------
Other comprehensive income $ 668,617 $ 227,330 $ 441,287
=========== =========== ===========
5. REINSURANCE
Several of our insurance producers have formed sister reinsurance
companies, commonly referred to as a producer-owned reinsurance company
("PORC"). The primary reason for an insurance producer to form a
reinsurance company is to realize the underwriting profits and investment
income from the insurance premiums generated by that producer. In return,
the Company receives a ceding commission, which is based on a percentage
of the premiums ceded. Such arrangements align business partners with the
Company's interests while preserving valued customer relationships.
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 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. Effective January 1, 2003, the Company entered
into a producer-owned reinsurance arrangement with a new lender/dealer
producer whereby 100% of that producer's premiums (along with the
associated risk) was ceded to its PORC. This reinsurance arrangement was
cancelled effective December 31, 2003. Effective October 1, 2003, the
Company entered into a producer-owned reinsurance arrangement with an
existing lender/dealer customer whereby 100% of that customer's premiums
(along with the associated risk) was ceded to its PORC. For this
reinsurance arrangement, the Company has obtained collateral in the form
of a trust from the reinsurer to secure its obligations. Under the
provisions of the reinsurance agreement, 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.
Beginning in the second quarter 2004, the Company cedes and assumes waste
surety bond business at a 50% quota share participation.
During 2001, the Company began assuming bail bond coverage sold by a bail
bond agency through several fronting insurance carriers. The liability of
the fronting carriers was then transferred to a group of reinsurers,
including the Company. The Company reinsured up to 15% of the business.
The bail bond program was discontinued in the second quarter 2004 and no
new bail bonds are being written.
During the second quarter 2004, the Company paid bail bond losses of
$950,182. As of June 30, 2004, the Company's loss reserves, net of
anticipated recoveries, were $537,128 related to the bail bond program. In
addition, the Company received approximately $1.4 million in bail bond
claims that are not reserved for as of June 30, 2004 as these losses
relate to program years in dispute. The Company has retained legal counsel
and is reviewing its rights under the various contracts for these
9
BANCINSURANCE CORPORATION
AND SUBSIDIARIES
disputed years. As of June 30, 2004, the Company recorded a $225,000
reserve for legal costs to review and defend its rights under the
contracts. As of June 30, 2004, the Company recorded a return premium
reserve of $226,200 associated with these disputed program years. At the
present time, we are uncertain as to our ultimate exposure for future loss
development on the run off of the bail bond program.
A reconciliation of direct to net premiums, on both a written and earned
basis, for the three months and six months ended June 30, 2004 and 2003 is
as follows:
Three Months Ended Six Months Ended
----------------------------------------------------- ------------------------------------------------------
June 30, June 30, June 30, June 30,
2004 2003 2004 2003
-------------------------- ------------------------- ------------------------- --------------------------
Premiums Premiums Premiums Premiums
Written Earned Written Earned Written Earned Written Earned
----------- ------------ ----------- ----------- ----------- ----------- ------------ -----------
Direct $14,925,671 $14,712,461 $23,704,246 $19,062,502 $25,646,994 $29,658,682 $ 41,364,441 $31,657,712
Assumed 1,243,734 59,478 113,925 106,561 1,284,420 146,328 140,158 205,585
Ceded (643,659) (1,796,123) (4,810,400) (4,073,273) (924,722) (5,321,627) (10,549,548) (5,606,531)
----------- ------------ ----------- ----------- ----------- ----------- ------------ -----------
Total $15,525,746 $12,975,816 $19,007,771 $15,095,790 $26,006,692 $24,483,383 $ 30,955,051 $26,256,766
=========== ============ =========== =========== =========== =========== ============ ===========
The amounts of recoveries pertaining to reinsurance that were deducted
from losses and loss adjustment expenses incurred during the three months
ended June 30, 2004 and 2003, were $392,898 and $1,153,142, respectively,
and $1,323,896 and $2,349,144 during the six months ended June 30, 2004
and 2003, respectively. The amount of recoveries pertaining to reinsurance
that was deducted from experience rating adjustments during the three and
six months ended June 30, 2004 were $381,824 and $1,546,234, respectively
(none in 2003). During the three months ended June 30, 2004 and 2003,
ceded reinsurance decreased commission expense incurred by $52,050 and
$1,671,893, respectively, and $445,893 and $3,688,205 during the six
months ended June 30, 2004 and 2003, respectively.
6. 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 previously
approved. The repurchase program expired on December 31, 2003. Through June
30, 2003, we repurchased 699,434 common shares at an average price per
share of $5.00 under this program. Repurchases were funded by cash flows
from operations. There were no repurchases for the three and six months
ended June 30, 2004.
7. SUPPLEMENTAL DISCLOSURE FOR EARNINGS PER SHARE
Three Months Ended Six Months Ended
June 30, June 30,
---------------------------- ----------------------------
2004 2003 2004 2003
---------- ---------- ---------- ----------
Net income $ 846,151 $1,146,128 $2,004,744 $2,175,131
---------- ---------- ---------- ----------
Income available to common shareholders,
assuming dilution 846,151 1,146,128 2,004,774 2,175,131
---------- ---------- ---------- ----------
Weighted average common shares
outstanding 4,942,151 4,931,486 4,931,101 4,963,765
Adjustments for dilutive securities:
Dilutive effect of outstanding
options 218,718 60,638 216,283 50,248
---------- ---------- ---------- ----------
Diluted common shares 5,160,869 4,992,124 5,147,384 5,014,013
========== ========== ========== ==========
Earnings per common share:
Basic $ .17 $ .23 $ .41 $ .44
Diluted $ .17 $ .23 $ .39 $ .43
10
BANCINSURANCE CORPORATION
AND SUBSIDIARIES
8. SEGMENT INFORMATION
We have three reportable business segments: (1) Property/Casualty
Insurance; (2) Municipal Code Publishing; and (3) Insurance Agency. The
following provides financial information regarding our reportable business
segments. 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 assumptions were applied. Depreciation and capital expenditures
are not considered material.
Three Months Ended
June 30, 2004
---------------------------------------------------------------------------------
Municipal Reportable
Property/Casualty Code Insurance Segment
Insurance Publishing Agency Total
---------------------------------------------------------------------------------
Revenues from external customers $ 13,597,164 $ 978,880 $ 3,305 $ 14,579,349
Intersegment revenues 1,470 -- 145,429 146,899
Interest revenue 534,290 -- 75 534,365
Interest expense 382 481 -- 863
Depreciation and amortization 79,630 110,165 -- 189,795
Segment profit 1,657,602 69,308 204,497 1,931,407
Income tax expense 443,322 25,914 69,457 538,693
Segment assets 98,953,872 2,443,430 671,411 102,068,713
Three Months Ended
June 30, 2003
---------------------------------------------------------------------------------
Municipal Reportable
Property/Casualty Code Insurance Segment
Insurance Publishing Agency Total
---------------------------------------------------------------------------------
Revenues from external customers $ 15,466,275 $ 876,960 $ 936 $ 16,344,171
Intersegment revenues 1,470 -- 46,877 48,347
Interest revenue 455,562 -- 3 455,565
Interest expense 90 507 -- 597
Depreciation and amortization 40,302 21,451 -- 61,753
Segment profit (loss) 2,064,372 (19,307) 15,008 2,060,073
Income tax expense (benefit) 593,231 (2,752) 4,997 595,476
Segment assets 86,957,683 2,183,508 445,003 89,586,194
Six Months Ended
June 30, 2004
---------------------------------------------------------------------------------
Municipal Reportable
Property/Casualty Code Insurance Segment
Insurance Publishing Agency Total
---------------------------------------------------------------------------------
Revenues from external customers $ 25,537,377 $ 1,972,341 $ 3,785 $ 27,513,503
Intersegment revenues 2,940 -- 215,974 218,914
Interest revenue 958,813 -- 108 958,921
Interest expense 464 961 -- 1,425
Depreciation and amortization 135,048 144,274 -- 279,322
Segment profit 3,531,364 71,451 298,050 3,900,865
Income tax expense 977,644 28,746 100,929 1,107,319
Segment assets 98,953,872 2,443,430 671,411 102,068,713
11
BANCINSURANCE CORPORATION
AND SUBSIDIARIES
Six Months Ended
June 30, 2003
---------------------------------------------------------------------------------
Municipal Reportable
Property/Casualty Code Insurance Segment
Insurance Publishing Agency Total
---------------------------------------------------------------------------------
Revenues from external customers $ 27,162,615 $ 1,756,676 $ 1,645 $ 28,920,936
Intersegment revenues 2,940 -- 184,832 187,772
Interest revenue 808,676 -- 6 808,682
Interest expense 354 1,041 -- 1,395
Depreciation and amortization 69,859 46,200 -- 116,059
Segment profit 3,509,866 129,652 119,864 3,759,382
Income tax expense 998,952 52,953 40,554 1,092,459
Segment assets 86,957,683 2,183,508 445,003 89,586,194
The following is a reconciliation of the segment results to the
consolidated amounts reported in the consolidated financial statements.
Three Months Ended Six Months Ended
June 30, June 30,
2004 2003 2004 2003
------------- ------------- ------------- -------------
Revenues
Total revenues for reportable segments $ 15,260,613 $ 16,848,083 $ 28,691,338 $ 29,917,390
Parent company gain (loss) (53,823) 71,594 (45,115) 53,716
Elimination of intersegment revenues (171,709) (187,457) (268,534) (467,385)
------------- ------------- ------------- -------------
Total consolidated revenues $ 15,035,081 $ 16,732,220 $ 28,377,689 $ 29,503,721
============= ============= ============= =============
Profit
Total profit for reportable segments $ 1,931,407 $ 2,060,073 $ 3,900,865 $ 3,759,382
Parent company profit (loss) (664,615) (249,692) (933,810) (231,538)
Elimination of intersegment profits (171,709) (187,457) (268,534) (467,385)
------------- ------------- ------------- -------------
Income before federal income taxes $ 1,095,083 $ 1,622,924 $ 2,698,521 $ 3,060,459
============= ============= ============= =============
Assets
Total assets for reportable segments $ 102,068,713 $ 89,586,194
Parent company assets 7,525,083 11,756,019
Elimination of intersegment receivables (535,344) (9,136,679)
------------- -------------
Total consolidated assets $ 109,058,452 $ 92,205,534
============= =============
ITEM 2. 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, each of 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 for insurance policies written by Ohio
Indemnity. Ohio Indemnity, an Ohio corporation, is licensed in 48 states and the
District of Columbia. 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 three distinct lines of business: (1) products designed for
automobile lenders/dealers; (2) unemployment compensation products; and (3)
other specialty products.
12
BANCINSURANCE CORPORATION
AND SUBSIDIARIES
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 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 loan or lease
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 and provides coverage on either an
individual or portfolio basis.
We offer three types of unemployment compensation products: (1) UCassure; (2)
excess of loss; and (3) mandated bonds. Our unemployment compensation products
are utilized by not-for-profit entities that 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
UCassure and bonded service products, Ohio Indemnity insures these national cost
containment firms for their program service responsibilities. Ohio Indemnity's
bonded service program was discontinued at the end of 2003 and replaced by the
UCassure product, which provides Ohio Indemnity greater control in the
distribution and expense management of the product. 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.
Other specialty products consist primarily of our waste surety bond program and
our bail bond reinsurance program. In the second quarter 2004, the Company
entered into a 50% quota share reinsurance arrangement with a waste surety bond
underwriter. The majority of these surety bonds satisfy the closure/post-closure
financial responsibility imposed on hazardous and solid waste treatment, storage
and disposal facilities pursuant to Subtitles C and D of the Federal Resource
Conservation and Recovery Act ("RCRA"). Closure/post-closure bonds cover future
costs to close and monitor a regulated site such as a landfill. The insurer
obtains collateral from the insured throughout the life of the landfill so that
upon closure, the estimated cost of closure/post-closure is fully
collateralized. The collateralization of this program reduces the risk of loss.
In addition to the waste surety bond program, during 2001, the Company began
assuming bail bond coverage sold by a bail bond agency through several fronting
insurance carriers. This coverage insures a bail bond company against losses
arising from the nonperformance of bail requirements. Under the program, the
liability of the fronting carriers is transferred to a group of reinsurers,
including the Company. The Company reinsured up to 15% of the business. The bail
bond program was discontinued in the second quarter 2004 and no new bail bonds
are being written.
The Company sells its insurance products through a network of distribution
channels, including three 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. Ultimate Services Agency, LLC ("USA"), a wholly-owned
subsidiary, acts as an agency for placing property/casualty insurance policies
offered and underwritten by Ohio Indemnity and by other property/casualty
insurance companies.
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 on our GAP claims. As used car prices decline,
there is a larger gap between the balance of the loan/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.
13
BANCINSURANCE CORPORATION
AND SUBSIDIARIES
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 providing our
customers and agents with superior service and innovative technology.
REINSURANCE TRANSACTIONS
During 2003 Ohio Indemnity selectively began to respond to growth opportunities
through producer-owned reinsurance. This involves an insurance producer forming
a sister reinsurance company, commonly referred to as a producer-owned
reinsurance company ("PORC"). The primary reason for an insurance producer to
form a reinsurance company is to realize the underwriting profits and investment
income from the insurance premiums generated by that producer. In return, the
Company receives a ceding commission, which is based on a percentage of the
premiums ceded.
In consultation with one of our large lender/dealer customers during 2003, we
provided them a variety of risk management solutions. This resulted in our
customer making a decision to move their coverage to another one of our
lender/dealer products that better fit their changing needs. In conjunction with
this change in products, Ohio Indemnity reinsured 100% of this customer's
premiums (along with the associated risk) to its PORC beginning in fourth
quarter 2003 (the "Reinsurance Transaction").
Effective January 1, 2003, we entered into a 100% producer-owned reinsurance
arrangement for a new lender/dealer producer. This arrangement was cancelled at
the end of 2003.
During the second quarter 2004, the Company entered into a 50% quota share
reinsurance arrangement whereby the Company cedes and assumes waste surety bond
coverage with an experienced waste surety bond underwriter.
During the second quarter 2004, our bail bond reinsurance program was
discontinued and no new bail bonds are being written.
See note 5 to the consolidated financial statements for additional information
regarding the Company's reinsurance.
SUMMARY RESULTS
The following table sets forth period-to-period changes in selected financial
data:
Period-to-Period Increase (Decrease)
Three and Six Months Ended June 30,
2003-2004
------------------------------------------------------
Three Months Ended Six Months Ended
------------------------------------------------------
Amount % Change Amount % Change
------------------------------------------------------
Net premiums earned $ (2,119,974) (14.0)% $ (1,773,383) (6.8)%
Net realized gains on investments 389,405 167.1 % 499,242 106.9 %
Total revenues (1,697,139) (10.1)% (1,126,032) (3.8)%
Losses and loss adjustment expenses (560,607) (5.7)% (383,891) (2.4)%
Experience rating adjustments (1,310,832) (225.1)% (2,349,043) (108.9)%
Commissions and other insurance expenses 587,191 17.4 % 1,428,090 23.9 %
Income before federal income taxes (527,841) (32.5)% (361,938) (11.8)%
Net income (299,977) (26.2)% (170,387) (7.8)%
Net income was $846,151, or $0.17 per diluted share, for the second quarter 2004
compared to $1,146,128, or $0.23 per diluted share, for the same period last
year. Net income was $2,004,744, or $0.39 per diluted share, for the first six
months of 2004 compared to $2,175,131, or $0.43 per diluted share, a year ago.
The results for the three and six months ended June 30, 2004 included favorable
loss development for the Company's ULI product and higher net realized gains on
investments. These positive factors were offset by losses in the CPI product and
the bail bond reinsurance program.
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 expenses and ceding commissions are recognized
immediately, not at the same time premiums are earned. To convert underwriting
expenses to a GAAP basis, policy acquisition expenses and ceding commissions are
deferred and
14
BANCINSURANCE CORPORATION
AND SUBSIDIARIES
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 three and six months ended June 30:
Three Months Ended Six Months Ended
-------------------- --------------------
2004 2003 2004 2003
-------------------- --------------------
GAAP:
Loss ratio 65.6% 68.7% 62.7% 68.9%
Expense ratio 30.5% 22.3% 30.3% 22.8%
---- ---- ---- ----
Combined ratio 96.1% 91.1% 93.0% 91.7%
==== ==== ==== ====
Statutory:
Loss ratio 68.2% 67.5% 63.7% 66.1%
Expense ratio 26.6% 22.3% 31.0% 26.9%
---- ---- ---- ----
Combined ratio 94.8% 89.8% 94.7% 93.0%
==== ==== ==== ====
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2004 COMPARED TO JUNE 30, 2003
Net Premiums Earned. Total net premiums earned declined 14.0% to $12,975,816 for
the three months ended June 30, 2004. The largest portion of this decrease was
attributable to CPI premiums, which were $568,379 for the second quarter 2004
versus $2,209,749 for the same period last year. This was due to the
cancellation of a poor performing book of business in the second quarter 2004.
ULI net premiums earned declined 9.4% to $9,673,636 for the second quarter 2004
from $10,672,484 a year ago. This decrease was due to a fourth quarter 2003
producer-owned reinsurance transaction whereby the Company ceded 100% of the
premiums (along with the associated risk) for an existing lender/dealer
customer. Excluding the impact of the reinsurance transaction, ULI net premiums
earned for the second quarter 2004 increased $425,787 compared to the same
period last year. Net premiums earned for guaranteed auto protection ("GAP")
increased to $1,309,486 for the second quarter 2004 from $665,587 a year ago.
This growth was due to the purchase of GAP coverage by two large financial
institution customers in the second half of 2003, combined with rate increases,
volume increases with existing customers and new customers added in 2004.
Net premiums earned for unemployment compensation ("UC") products declined 5.3%
to $1,349,612 in the second quarter 2004 primarily due to the cancellation of an
excess of loss policy at year-end 2003.
Other specialty products ("OSP") declined 39.5% to $74,703 for the second
quarter 2004 from $123,559 for the same period last year due to lower premiums
in our discontinued bail bond program that partially offset an increase in our
waste surety bond program ("WSB"), which was introduced in the second quarter
2004.
Investment Income. 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 18.4% to $489,013 for the
second quarter 2004. This improvement was due to solid growth in invested assets
during the past twelve months combined with a higher portfolio yield. Higher
yields resulted from the Company's $15.0 million reallocation of short-term
investments to fixed maturities during the second quarter 2004, which provided a
better matching of the Company's invested assets to its product liability
duration while maximizing investment return.
We recorded net realized gains on investments of $622,430 in the second quarter
2004 compared with $233,025 in the second quarter 2003. This increase was a
combination of the timing of sales 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 the cost and estimated fair value is charged to income as a
realized loss on investment. There were $364,096 and $49,328 in impairment
charges included in net realized gains on investments for the three months ended
June 30, 2004 and 2003, respectively. Included in impairment charges for the
three months ended June 30, 2004 is a write down of $334,136 related to a
private equity investment due to its financial uncertainty. For more information
concerning impairment charges, see "Other-Than-Temporary Impairment of
Investments" below.
15
BANCINSURANCE CORPORATION
AND SUBSIDIARIES
Codification and Subscription Fees. ALPC's codification and subscription fees
increased 11.6% to $978,880 in the second quarter 2004 compared to $876,960 in
the second quarter 2003 principally due to a new state customer added in 2003.
Management Fees. Through our UCassure and bonded service products, we insure the
payment of certain reimbursable unemployment compensation benefits to be paid
from monies allocated toward the payment of these benefits. We have an agreement
with a cost containment service firm to control the unemployment compensation
costs of certain non-profit employers. 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 the second quarter 2004 decreased $75,490 from $71,307 in
the second quarter 2003 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 declined 5.7% to $9,234,300 for the second quarter 2004 from
$9,794,907 the prior year. ULI losses and LAE declined 24.1% to $6,227,736 for
the second quarter 2004 primarily due to favorable loss development and the
Reinsurance Transaction. CPI losses and LAE increased $105,813 to $947,537 in
the second quarter 2004 principally due to losses on a poor performing book of
business that was cancelled in the second quarter 2004. GAP losses and LAE
increased 53.0% to $636,112 for the second quarter 2004 consistent with the
growth in this business. UC losses and LAE declined $237,750 from a year ago
primarily due to the cancellation of an excess of loss policy at year-end 2003.
OSP losses and LAE increased $1,329,224 from a year ago due to our bail bond
reinsurance program. During 2001, the Company began assuming bail bond coverage
sold by a bail bond agency through several fronting insurance carriers. The
liability of the fronting carriers was then transferred to a group of
reinsurers, including the Company. The Company reinsured up to 15% of the
business. The bail bond program was discontinued in the second quarter 2004 and
no new bail bonds are being written.
During the second quarter 2004, the Company paid bail bond losses of $950,182.
As of June 30, 2004, the Company's loss reserves, net of anticipated recoveries,
were $537,128 related to the bail bond program. In addition, the Company
received approximately $1.4 million in bail bond claims that are not reserved
for as of June 30, 2004 as these losses relate to program years in dispute. The
Company has retained legal counsel and is reviewing its rights under the various
contracts for these disputed years. As of June 30, 2004, the Company recorded a
$225,000 reserve for legal costs to review and defend its rights under the
contracts. As of June 30, 2004, the Company recorded a return premium reserve of
$226,200 associated with these disputed program years. At the present time, we
are uncertain as to our ultimate exposure for future loss development on the run
off of the bail bond program.
For more information concerning losses and LAE, see "Losses and Loss Adjustment
Expense Reserves" below.
Experience Rating Adjustments. The experience rating adjustment is primarily
influenced by ULI policy experience-to-date and premium growth. Experience
rating adjustments decreased $1,310,832 in the second quarter 2004 compared to a
year ago as a result of ceded experience rating adjustments associated with the
Reinsurance Transaction. Management anticipates that experience rating
adjustments may fluctuate in future periods based upon loss experience and
premium growth.
Commissions and Other Insurance Operating Expenses. Commission expense increased
13.0% to $2,185,800 for the second quarter 2004 primarily due to higher
commission rates associated with the CPI product line combined with a reduction
in ceding commissions. Ceding commissions declined in the second quarter 2004
versus a year ago due to the cancellation of a 100% producer-owned reinsurance
arrangement at the end of 2003. Other insurance operating expenses rose 23.3% to
$1,774,641 for the second quarter 2004 compared to last year principally due to
higher salaries and administrative fees associated with the Company's UCassure
product.
Codification and Subscription Expenses. Codification and subscription expenses
incurred by ALPC remained relatively flat at $909,092 in the second quarter 2004
compared to $895,759 in the second quarter 2003.
Interest Expense. Interest expense increased $95,520 to $204,879 for the second
quarter 2004 compared to a year ago as a result of the Company's $7.2 million
trust preferred debt offering in September 2003. The proceeds from this
financing provided additional financial flexibility for the Company. See
"Liquidity and Capital Resources" for a more detailed description of the trust
preferred debt.
16
BANCINSURANCE CORPORATION
AND SUBSIDIARIES
Federal Income Taxes. Federal income taxes decreased $227,864 to $248,932 for
the second quarter 2004 compared to $476,796 a year ago as a result of the
decline in pretax income and an increase in tax exempt investment income.
GAAP Combined Ratio. The Company's specialty insurance products are underwritten
by Ohio Indemnity, whose results represent the Company's combined ratio. For the
second quarter 2004, the combined ratio increased 5.0 percentage points to 96.1%
from 91.1% the prior year. The loss ratio improved to 65.6% for the second
quarter 2004 from 68.7% a year ago principally due to the decrease in experience
rating adjustments associated with the Reinsurance Transaction. The expense
ratio increased to 30.5% for the second quarter 2004 from 22.3% a year ago,
primarily due to a higher amount of CPI commissions and lower ceding
commissions.
RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 2004 COMPARED TO JUNE 30, 2003
Net Premiums Earned. Net premiums earned declined 6.8% to $24,483,383 for the
six months ended June 30, 2004 as a result of decreases in ULI and CPI which
were partially offset by an increase in GAP business. ULI net premiums earned
declined 10.8% to $17,229,794 for the first six months of 2004 from $19,326,717
a year ago due to a fourth quarter 2003 producer-owned reinsurance transaction.
Excluding the impact of the reinsurance transaction, ULI net premiums earned for
the first six months of 2004 increased $594,112 compared to the same period last
year due to rate increases, volume increases with existing customers and new
customers added in 2004.
CPI net premiums earned declined 26.0% to $2,148,042 for the six months ended
June 30, 2004 compared to the prior year due to the cancellation of a poor
performing book of business in the second quarter 2004.
Net premiums earned for GAP increased 114.2% to $2,374,846 for the first six
months of 2004 from $1,108,712 a year ago. This growth was due to the purchase
of GAP coverage by two large financial institution customers in the second half
of 2003, rate increases, volume increases with existing customers and new
customers added in 2004.
Investment Income. Net investment income increased 17.3% to $899,848 for the
first six months of 2004. This improvement was due to solid growth in invested
assets during the past twelve months combined with a higher portfolio yield.
We recorded net realized gains on investments of $966,302 for the first six
months of 2004 compared with $467,060 the same period a year ago. This increase
was a combination of the timing of sales of individual securities and
other-than-temporary impairments on investments. There were $450,792 and $49,328
in impairment charges included in net realized gains on investments for the six
months ended June 30, 2004 and 2003, respectively. Included in impairment
charges for the six months ended June 30, 2004 is a write down of $334,136
related to a private equity investment due to its financial uncertainty. 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 12.3% to $1,972,341 for the first six months of 2004 compared to
$1,756,676 a year ago principally due to a new state customer added in 2003 and
printing services provided to an existing customer.
Management Fees. Our management fees for the first six months of 2004 decreased
85.6% to $28,814 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 LAE declined 2.4% to $15,549,926
for the first six months of 2004 from $15,933,817 a year ago principally due to
lower lender/dealer losses and LAE which were partially offset by an increase in
OSP. Lender/dealer losses and LAE declined due to favorable loss development
within our ULI product line and as a result of the Reinsurance Transaction. OSP
losses and LAE increased $1,313,160 from a year ago principally due to
deterioration in the bail bond reinsurance program.
Experience Rating Adjustments. Experience rating adjustments declined $2,349,043
for the first six months of 2004 compared to a year ago as a result of ceded
experience rating adjustments associated with the Reinsurance Transaction.
Management anticipates that experience rating adjustments may fluctuate in
future periods based upon loss experience and premium growth.
17
BANCINSURANCE CORPORATION
AND SUBSIDIARIES
Commissions and Other Insurance Operating Expenses. Commission expense increased
29.3% to $4,298,329 for the first six months of 2004 primarily due to higher
commission rates associated with the CPI product line combined with a reduction
in ceding commissions. Ceding commissions declined due to the cancellation of a
100% producer-owned reinsurance arrangement at the end of 2003. Other insurance
operating expenses rose 17.1% to $3,110,424 for the first six months of 2004
compared to last year principally due to higher salaries and administrative fees
associated with the Company's UCassure product.
Codification and Subscription Expenses. Codification and subscription expenses
incurred by ALPC increased 16.8% to $1,899,929 for the first six months of 2004
principally due to higher salaries and consulting expenses.
Interest Expense. Interest expense increased $212,291 to $431,482 for the first
six months of 2004 compared to a year ago as a result of the Company's $7.2
million trust preferred debt offering in September 2003. 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 25.7% and
28.9% for the six months ended June 30, 2004 and 2003, respectively. The
decrease in the effective tax rate was primarily due to an increase in tax
exempt investment income.
GAAP Combined Ratio. For the six months ended June 30, 2004, the combined ratio
increased 1.3 percentage points to 93.0% from 91.7% the prior year. The loss
ratio improved to 62.7% for the first six months of 2004 from 68.9% a year ago
principally due to the decrease in experience rating adjustments associated with
the Reinsurance Transaction. The expense ratio increased to 30.3% for the first
six months of 2004 from 22.8% a year ago, primarily due to a higher amount of
CPI commissions and lower ceding commissions.
BUSINESS OUTLOOK
During 2004, we will continue to focus on opportunities emerging in specialized
insurance markets. We believe our specialized underwriting expertise, strong
financial ratings and solid customer relationships will enable us to take
advantage of these opportunities. Further, an increase in customer appreciation
for risk management products and services could provide for additional
opportunities in the marketplace.
Our new waste surety bond program that began in second quarter 2004 is an
example of a specialized insurance opportunity taken advantage of by the
Company. Our treasury listing and large state surety bond licensing provided an
opportunity for the Company to enter into a new business transaction with a
waste surety bond underwriter.
The national economy still appears to be in a state of struggle. If loan
defaults, bankruptcies and automobile repossessions 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
are signs 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. If unemployment levels remain high, we would expect higher
claims experience and lower management fees from our UC products. Furthermore,
the future development of the bail bond reinsurance program could have a
material impact on our results of operations and financial condition. At the
present time, we are uncertain as to our ultimate exposure for future loss
development on the run off of the bail bond program. Our outlook for the
remainder of 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 June 30, 2004 and December 31, 2003, the Company's capital
structure consists of trust preferred debt issued to affiliates, borrowings from
our revolving line of credit and shareholders' equity and is summarized in the
following table:
June 30, December 31,
2004 2003
------------ ------------
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 7,217,000
Bank note payable 600,000 -
------------ ------------
Total debt obligations 16,065,000 15,465,000
------------ ------------
Total shareholders' equity 34,480,081 33,365,028
------------ ------------
Total capitalization $ 50,545,081 $ 48.830.028
============ ============
Ratio of total debt obligations to total capitalization 31.8% 31.7%
18
BANCINSURANCE CORPORATION
AND SUBSIDIARIES
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 (5.34% and 5.28%
at June 30, 2004 and 2003, 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 (5.64% at June 30, 2004), 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 for the Company. The terms of the
junior subordinated debentures contain various restrictive covenants. As of June
30, 2004, 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 a $600,000 outstanding balance at June 30, 2004 (none
at December 31, 2003). 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
consists 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 property/casualty 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 June 30, 2004, cash and short-term
investments amounted to $21,013,281 or 27.1% 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 $775,759 and $7,689,301 for
the six months ended June 30, 2004 and 2003, respectively. The decrease was
primarily the result of an increase in paid claims, retrospective premium
adjustments, prepaid taxes and salaries and a decrease in ceded commissions paid
in the first six months of 2004 compared to a year ago. The decrease in ceded
commissions paid was primarily due to the cancellation of a producer-owned
reinsurance arrangement at the end of 2003.
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 Ohio Department of Insurance (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. We do not
anticipate receiving any cash dividends from Ohio Indemnity in 2004.
19
BANCINSURANCE CORPORATION
AND SUBSIDIARIES
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 June 30, 2004.
Given the Company's historic cash flow and current financial results, management
believes that the cash flows from operating activities 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.
DISCLOSURES ABOUT MARKET RISK
During the six months ended June 30, 2004, there were no material changes in our
primary market risk exposures or in how these exposures were managed compared to
the year ended December 31, 2003. We do not anticipate material changes in our
primary market risk exposures or in how these exposures are managed in future
reporting periods based upon what is known or expected to be in effect during
future reporting periods. For a description of our primary market risk
exposures, see our Annual Report on Form 10-K for the fiscal year ended December
31, 2003.
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, assumptions and judgments under
different assumptions or conditions. Set forth below are the critical accounting
policies that we believe require significant estimates, assumptions and
judgments and are critical to an understanding of our consolidated financial
statements.
OTHER-THAN-TEMPORARY IMPAIRMENT OF INVESTMENTS
We continually monitor the difference between the 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. 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:
o the length of time and extent to which the estimated fair value has
been less than book value;
o the degree to which any appearance of impairment is attributable to an
overall change in market conditions (e.g., interest rates);
o the degree to which an issuer is current or in arrears in making
principal and interest/dividend payments on the securities in
question;
o 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;
o the independent auditor's report on the issuer's most recent financial
statements;
o buy/hold/sell recommendations of investment advisors and analysts;
o relevant rating history, analysis and guidance provided by rating
agencies and analysts; and
o our ability and intent to hold the security for a period of time
sufficient to allow for recovery in the estimated fair value.
20
BANCINSURANCE CORPORATION
AND SUBSIDIARIES
Equity Securities. On a monthly basis, we review our equity securities for
impairment. We consider the following factors when evaluating potential
impairment:
o the length of time and extent to which the estimated fair value has
been less than book value;
o whether the decline appears to be related to general market or
industry conditions or is issuer-specific;
o the financial condition and future prospects of the issuer, including
any specific events that may influence the issuer's operations;
o the recent income or loss of the issuer;
o the independent auditor's report on the issuer's most recent financial
statements;
o buy/hold/sell recommendations of investment advisors and analysts;
o relevant rating history, analysis and guidance provided by rating
agencies and analysts; and
o our ability and intent to hold the security for a period of time
sufficient to allow for recovery in the estimated fair 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 $450,792
and $49,328 in impairment charges included in net realized gains on investments
for the six months ended June 30, 2004 and 2003, respectively. Included in
impairment charges for the six months ended June 30, 2004 is a write down of
$334,136 related to a private equity investment due to its financial
uncertainty. Additional impairments within the portfolio during 2004 are
possible if current economic and financial conditions worsen.
The following table summarizes, for all securities in an unrealized loss
position at June 30, 2004, the estimated fair value and pre-tax gross unrealized
losses by length of time those securities have been continuously in an
unrealized loss position.
Gross
Estimated unrealized
fair value losses
----------- -----------
Fixed maturities:
6 months or less $23,766,074 $ 334,163
7-12 months 2,457,866 54,735
Greater than 12 months 646,332 12,497
----------- -----------
Total fixed maturities 26,870,272 401,395
----------- -----------
Equities:
6 months or less 1,879,729 152,928
7-12 months 448,820 47,070
----------- -----------
Total equities 2,328,549 199,998
----------- -----------
Total $29,198,821 $ 601,393
=========== ===========
As of June 30, 2004, the Company had unrealized losses on 86 fixed maturity
securities totaling $ 401,395, including 76, 6, and 4 fixed maturity securities
that maintained an unrealized loss position for 6 months or less, 7-12 months,
and greater than 12 months, respectively. Out of the 86 fixed maturity
securities, 85 securities had a fair value to cost ratio equal to or greater
than 96%, and one security had a fair value to cost ratio equal to 87% as of
June 30, 2004.
As of June 30, 2004, the Company had unrealized losses on 22 equity securities
totaling $199,998, including 19 and 3 equity securities that maintained an
unrealized loss position for 6 months or less, and 7-12 months, respectively.
Out of the 22 equity securities, 14 securities had a fair value to cost ratio
equal to or greater than 90%, 6 securities had a fair value to cost ratio
between 80% and 89%, and 2 securities had a fair value to cost ratio between 69%
and 73% as of June 30, 2004.
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
and LAE 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.
21
BANCINSURANCE CORPORATION
AND SUBSIDIARIES
Our estimates of ultimate losses 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 June 30, 2004, our indicated reserve range for losses and LAE was $9.7
million to $14.6 million. As our gross reserve of $12.4 million as of June 30,
2004 falls within this range, we believe it is a reasonable provision in the
aggregate for our unpaid losses and LAE obligations as of June 30, 2004.
As of June 30, 2004, losses and LAE reserves, net of reinsurance recoverables,
totaled $10.4 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.
Other than for our bail bond reinsurance program, 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 prior years. The increase in
claims opened correlates to the increase in policies in force.
Our reserves reflect anticipated salvage and subrogation included as a reduction
to loss and LAE reserves in the amount of $2.0 million. 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:
o ULI - non-aggregate limit
o ULI - aggregate limit (in which the policy runs at a target loss
ratio)
o CPI
o GAP
o UC
Our reserves for these independently estimated principal insurance products
comprise the majority of our total recorded loss and allocated LAE reserves as
of June 30, 2004 on both 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 target loss ratio by insured bank. This data was used to determine
the required reserve under the target 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 claims department processing changes, a
shift between single and multiple payments per claim, legal changes or
variations in our mix of business from 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 a
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.
22
BANCINSURANCE CORPORATION
AND SUBSIDIARIES
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 2000 through 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% to 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.
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 that require such adjustments 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, without limitation, 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 Securities and Exchange Commission, including
the Company's Annual Report on Form 10-K for the fiscal year ended December 31,
2003, any one of which factors might materially affect the operations of the
Company. 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
The information required by this item is included under the caption
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Disclosures About Market Risk."
ITEM 4. CONTROLS AND PROCEDURES
With the participation of our management, including our principal executive
officer and principal financial officer, we have evaluated the effectiveness of
our disclosure controls and procedures (as defined in Rules 13a-15 and 15d-15 of
the Securities Exchange Act of 1934 (the "Exchange Act")) as of the end of the
period covered by this report. Based upon that evaluation, our principal
executive officer and principal financial officer have concluded that such
disclosure controls and procedures are effective as of the end of the period
covered by this report.
In addition, there were no changes during the period covered by this report in
our internal control over financial reporting (as defined in Rules 13a-15 and
15d-15 of the Exchange Act) that have materially affected, or are reasonably
likely to materially affect, our internal control over financial reporting.
23
BANCINSURANCE CORPORATION
AND SUBSIDIARIES
PART II - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
The following table provides information with respect to any purchase made by or
on behalf of the Company or any "affiliated purchaser" of common shares of the
Company during the second quarter 2004:
Issuer Purchases of Equity Securities
- ----------------------------------------------------------------------------------------------------------------------------------
(a) (b) (c) (d)
Period Total number Average price Total number of Maximum number (or
of shares (or units) paid per share shares (or units) approximate dollar value)
purchased (or unit) purchased as part of shares (or units) that may
of publicly announced yet be purchased under the
plans or programs plans or programs
- ----------------------------------------------------------------------------------------------------------------------------------
Month #1 (April 1, 2004
through April 30, 2004) - - - -
Month #2 (May 1, 2004
through May 31, 2004) - - - -
Month #3 (June 1, 2004
through June 30, 2004) 3,350(1) (1) - -
Total - - - -
- ----------------------------------------------------------------------------------------------------------------------------------
(1) In accordance with the terms of our 2002 Stock Incentive Plan, the Company
acquired these common shares in connection with the exercise of stock
options by two of its Directors and the payment by such Director of the
aggregate exercise price ($27,000) by delivery of common shares already
owned by such Directors.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On June 2, 2004, Bancinsurance held its 2004 Annual Meeting of Shareholders. The
shareholders voted on the election of seven directors to serve one year terms,
and a proposal to ratify the appointment of Ernst & Young LLP as the independent
accountants and auditors for the fiscal year 2004. The results of the voting
were as follows:
1. Election of Directors:
Votes For Votes Withheld
--------- --------------
Kenton R. Bowen 4,577,364 22,500
Daniel D. Harkins 4,577,364 22,500
William S. Sheley 4,577,364 22,500
John S. Sokol 4,543,013 56,851
Saul Sokol 4,540,913 58,951
Si Sokol 4,541,333 58,531
Matthew D. Walter 4,586,194 13,670
All seven directors were reelected.
2. To ratify the appointment of Ernst & Young LLP as the independent
accountants and auditors for fiscal year 2004:
Votes For 4,577,134
Votes Against 10,950
Abstentions 11,780
The proposal was approved.
24
BANCINSURANCE CORPORATION
AND SUBSIDIARIES
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
31.1* Certification of Principal Executive Officer Pursuant to Rule
13a-14 under the Securities Exchange Act of 1934, as Adopted
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2* Certification of Principal Financial Officer Pursuant to Rule
13a-14 under the Securities Exchange Act of 1934, as Adopted
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1* Certification of Principal Executive Officer and Principal
Financial Officer Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
(b) Reports on Form 8-K
The Company furnished a Form 8-K, dated April 30, 2004, on
April 30, 2004 to report the issuance of a press release by
the Company announcing results of operations for the first
quarter ended March 31, 2004.
- ----------------
* Filed with this Quarterly Report on Form 10-Q.
25
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BANCINSURANCE CORPORATION
-------------------------
(Registrant)
Date: August 13, 2004 By: /s/ Si Sokol
---------------------- -------------------------------------
Si Sokol
Chairman and Chief Executive Officer
(Principal Executive Officer)
Date: August 13, 2004 By: /s/ Matthew C. Nolan
---------------------- --------------------------------------
Matthew C. Nolan
Principal Financial Officer
26