1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended September 30, 1995 Commission File Number 0-8738
------------------- -----------------------------
BANCINSURANCE CORPORATION
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Ohio 31-0790882
- - - ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
20 East Broad Street, Columbus, Ohio 43215
- - - ----------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number including area code (614) 228-2800
None
- - - ----------------------------------------------------------------------------
Former name, former address and former fiscal year, if changed since last
report.
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.
YES __X__ NO_______
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the last practicable date.
Class Outstanding at September 30, 1995
- - - ------------------------------- ----------------------------------
Common stock, without par value 5,866,949
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BANCINSURANCE CORPORATION
AND SUBSIDIARIES
INDEX
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Page No.
PART I - FINANCIAL INFORMATION:
Item 1. Financial Statements
Consolidated Balance Sheets as of September 30, 1995
(unaudited) and December 31, 1994 3
Consolidated Statements of Income for the three months and
nine months ended September 30, 1995 and 1994 (unaudited) 5
Consolidated Statements of Cash Flows for the nine months
ended September 30, 1995 and 1994 (unaudited) 7
Notes to Consolidated Financial Statements (unaudited) 9
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10
PART II - OTHER INFORMATION:
Item 1. Legal Proceedings 16
Item 2. Changes in Securities Not Applicable
Item 3. Default Upon Senior Securities Not Applicable
Item 4. Submission of Matters to a Vote
of Security Holders Not Applicable
Item 5. Other Information Not Applicable
Item 6. Exhibits and Reports on Form 8-K 17
Signatures 18
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PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements
BANCINSURANCE CORPORATION
AND SUBSIDIARIES
Consolidated Balance Sheets
September 30, December 31,
Assets 1995 1994
------ ------------- ------------
(Unaudited)
Investments:
Fixed maturities:
Held to maturity, at amortized cost (fair value
$6,303,096 in 1995 and $6,077,019 in 1994) $ 6,367,041 $ 6,468,606
Available for sale, at fair value (amortized
cost $9,519,171 in 1995 and $14,108,553 in
1994) 9,905,780 13,945,564
Equity securities, at fair value (cost $2,141,255
in 1995 and $2,367,513 in 1994) 2,251,097 2,303,740
Short-term investments, at amortized cost which
approximates fair value 5,571,000 4,263,541
Securities purchased under agreements to resell 1,564,466 1,655,042
----------- -----------
Total investments 25,659,384 28,636,493
----------- -----------
Cash (258,404) (428,633)
Premiums receivable 474,013 1,988,844
Reinsurance receivable 822,848 1,327,767
Reinsurance recoverable on paid losses 1,987,680 2,008,961
Deferred policy acquisition costs 207,174 397,029
Prepaid reinsurance premiums 1,704,213 6,970,613
Prepaid premium tax 130,671 -
Loans to affiliates 143,744 72,025
Furniture, fixtures and leasehold improvements, net 148,746 187,275
Excess of investment over net assets of subsidiaries 753,738 753,738
Deferred federal income taxes 219,508 710,322
Prepaid Federal income taxes 291,086 613,120
Accrued investment income 295,558 366,373
Other assets 139,020 170,377
----------- -----------
$32,718,979 $43,774,264
=========== ===========
(Continued)
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BANCINSURANCE CORPORATION
AND SUBSIDIARIES
Consolidated Balance Sheets, Continued
September 30, December 31,
Liabilities and Shareholders' Equity 1995 1994
------------------------------------ ------------- ------------
(Unaudited)
Reserve for unpaid losses and loss adjustment
expenses $ 2,769,551 $ 4,516,879
Unearned premiums 6,310,722 17,292,237
Contract funds on deposit 1,710,251 896,096
Return premiums payable 104,651 244,000
Reinsurance premiums payable 1,312,013 1,771,172
Note payable to bank 6,316,132 5,916,132
Taxes, licenses, and fees payable 134,183 250,562
Commissions payable 362,025 760,540
Other 363,393 288,222
----------- -----------
Total liabilities 19,382,921 31,935,840
----------- -----------
Commitment and contingent liabilities
Shareholders' equity:
Non-voting preferred stock:
Class A Serial Preference shares, without par value;
authorized 100,000 shares; no shares issued or
outstanding - -
Class B Serial Preference shares, without par value;
authorized 98,646 shares; no shares issued or
outstanding - -
Common stock, without par value; authorized
20,000,000 shares; 5,878,277 shares issued 315,567 315,567
Additional paid-in capital 1,466,753 1,586,221
Net unrealized gain (loss) on investments 327,657 (149,663)
Retained earnings 11,250,852 10,278,350
----------- -----------
13,360,829 12,030,475
Less: Treasury stock, at cost (11,328 common
shares at September 30, 1995 and
87,828 at December 31, 1994) (24,771) (192,051)
----------- -----------
Total shareholders' equity 13,336,058 11,838,424
----------- -----------
Total liabilities and shareholders' equity $32,718,979 $43,774,264
=========== ===========
See accompanying notes to consolidated financial statements.
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BANCINSURANCE CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Income
(Unaudited)
Three Months Ended Nine months Ended
September 30, September 30,
1995 1994 1995 1994
----------- ----------- ----------- -----------
Income:
Premiums written $ 1,039,342 $ 8,499,555 $12,883,582 $28,020,043
Decrease in unearned premiums 5,151,303 1,751,520 10,981,515 286,000
----------- ----------- ----------- -----------
Premiums earned 6,190,645 10,251,075 23,865,097 28,306,043
Premiums ceded (1,823,421) (3,232,000) (7,539,689) (9,078,843)
----------- ----------- ----------- -----------
Net premiums earned 4,367,224 7,019,075 16,325,408 19,227,200
Investment income (net of
expenses of $28,142 and
$121,563, respectively) 378,064 360,436 1,166,930 1,074,482
Net realized gain on
investments 686 2,673 44,442 104,252
Claims administration fees 132,408 131,572 400,776 385,973
Other income 59,013 12,256 113,552 35,025
----------- ----------- ----------- -----------
Total revenue 4,937,395 7,526,012 18,051,108 20,826,932
----------- ----------- ----------- -----------
Losses and operating expenses:
Losses and loss adjustment
expenses 5,361,125 7,107,333 18,609,125 19,469,589
Reinsurance recoveries (2,187,841) (2,878,436) (7,714,160) (8,118,103)
Commission expense 806,213 845,333 2,313,697 2,546,772
Other insurance operating
expenses 528,676 1,072,071 2,414,388 2,924,212
Amortization of deferred
policy acquisition costs 102,818 205,783 451,988 575,614
General and administrative
expenses 189,457 207,417 595,628 663,202
Interest expense 108,452 109,979 339,080 290,288
----------- ----------- ----------- -----------
Total expenses 4,908,900 6,669,480 17,009,746 18,351,574
----------- ----------- ----------- -----------
Income before federal
income taxes 28,495 856,532 1,041,362 2,475,358
----------- ----------- ----------- -----------
Federal income tax (benefit)
expense (86,319) 29,766 68,860 384,203
----------- ----------- ----------- -----------
Net income $ 114,814 $ 826,766 $ 972,502 $ 2,091,155
=========== =========== =========== ===========
(Continued)
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BANCINSURANCE CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Income, Continued
(Unaudited)
Three Months Ended Nine months Ended
September 30, September 30,
1995 1994 1995 1994
---------- ---------- ---------- ----------
Net income per common share $ .02 $ .14 $ .17 $ .35
========== ========== ========== ==========
Weighted average number of common
shares and equivalents
outstanding 5,904,398 6,073,281 5,866,748 6,066,002
---------- ---------- ---------- ----------
See accompanying notes to consolidated financial statements.
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BANCINSURANCE CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
Nine Months Ended
September 30,
1995 1994
----------- ----------
Cash flows from operating activities:
Net income $ 972,502 $2,091,155
Adjustments to reconcile net income to net cash
used in operating activities:
Net realized gain on investments (44,442) (101,830)
Depreciation 50,894 65,460
Amortization of bond (discount) premium (19,127) 111,123
Amortization of deferred policy acquisition costs 451,988 575,614
Deferred federal income tax expense 244,920 159,665
(Increase) decrease in premiums receivable 1,514,831 (2,835,626)
(Increase) decrease in reinsurance receivable 504,919 (505,462)
(Increase) decrease in reinsurance recoverable
on paid losses 21,281 (2,130,948)
Increase in deferred policy acquisition costs (262,133) (709,065)
(Increase) decrease in prepaid reinsurance
premiums 5,266,400 (741,042)
Increase in prepaid premium tax (130,671) -
Increase in loans to affiliates (71,719) -
(Increase) decrease in prepaid Federal income
taxes 322,034 (400,461)
Decrease in accrued investment income 70,815 57,552
(Increase) decrease in other assets 31,317 (114,250)
Increase (decrease) in reserve for unpaid losses
and loss adjustment expenses (1,747,328) 279,658
Decrease in unearned premiums (10,981,515) (286,000)
Increase in contract funds on deposit 814,155 98,926
Decrease in return premiums payable (139,349) (82,208)
Increase (decrease) in reinsurance premiums
payable (459,159) 2,771,475
Decrease in taxes, licenses and fees payable (116,379) (295,288)
Increase (decrease) in commissions payable (398,515) 900,921
Increase in other liabilities 75,171 42,135
----------- ----------
Net cash used in operating activities (4,029,110) (1,048,496)
----------- ----------
Cash flows from investing activities:
Proceeds from held to maturity: fixed maturities
due to redemption or maturity 579,274 58,598
Proceeds from available for sale: fixed maturities
sold, redeemed and matured 4,892,699 4,436,689
Proceeds from equity securities sold 597,537 638,622
Cost of investments purchased:
Held to maturity: fixed maturities (501,094) (2,103,636)
Available for sale: fixed maturities (289,825) (1,549,154)
Equity securities (297,817) (441,400)
Decrease in amount due to stock broker - (449,054)
Net increase in short-term investments (1,307,459) (1,540,313)
Net decrease in securities purchased under
agreements to resell 90,576 148,723
Purchase of furniture, fixtures and leasehold
improvements (12,365) (28,148)
----------- ----------
Net cash provided by (used in) investing
activities 3,751,526 (829,073)
----------- ----------
(Continued)
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BANCINSURANCE CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Cash Flows (continued)
(Unaudited)
Nine Months Ended
September 30,
1995 1994
---------- ----------
Cash flows from financing activities:
Proceeds from note payable to bank 4,200,000 550,000
Repayments of note payable to bank (3,800,000) (250,000)
Proceeds from stock options exercised 47,813 24,063
---------- ----------
Net cash provided by financing activities 447,813 324,063
---------- ----------
Net increase (decrease) in cash 170,229 (1,553,506)
---------- ----------
Cash at beginning of year (428,633) 1,641,299
---------- ----------
Cash at end of period $ (258,404) $ 87,793
========== ==========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 339,080 $ 290,288
Income taxes - 625,000
========== ==========
See accompanying notes to consolidated financial statements.
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BANCINSURANCE CORPORATION
AND SUBSIDIARIES
Notes To Consolidated Financial Statements (Unaudited)
1. The Consolidated Balance Sheet as of September 30, 1995, the Consolidated
Statements of Income for the three and nine months ended September 30, 1995
and 1994, and the Consolidated Statements of Cash Flows for the nine months
then ended have been prepared by Bancinsurance Corporation (the "Company")
without an audit. In the opinion of management, all adjustments (which
include only normal recurring adjustments) necessary to present fairly the
financial position, results of operations and cash flow at September 30, 1995
and for all periods presented, have been made.
2. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been omitted. It is suggested that these unaudited
Consolidated Financial Statements be read in conjunction with the financial
statements and notes thereto included in the Company's Form 10-K for the year
ended December 31, 1994. The results of operations for the period ended
September 30, 1995 are not necessarily indicative of the results of operations
for the full year.
3. On July 28, 1995, Ohio Indemnity entered into an agreement with the
California Department of Insurance (the "Department") settling their Statement
of Charges/Accusations filed against them on November 16, 1994. (See notes to
the Consolidated Financial Statements for the year ended December 31, 1994
included in the Company's Form 10-K).
Ohio Indemnity paid an administrative fee of $50,000 to the Department and
contributed $275,000 in a fund to resolve policyholder complaints. (See Part
II Item 1. Legal Proceedings).
(THIS SPACE INTENTIONALLY LEFT BLANK)
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BANCINSURANCE CORPORATION
AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
OVERVIEW
The Company's principal sources of revenue are premiums paid by insureds
for insurance policies issued by the Company. The premiums written become
premiums earned for financial statement purposes as the premium is earned
incrementally over the term of each insurance policy and after deducting the
amount of premium ceded to reinsurers pursuant to reinsurance treaties or
agreements. The Company's principal costs are losses and loss adjustment
expenses. The principal factor in determining the level of the Company's
profit is the difference between these premiums earned and losses and loss
adjustment expenses incurred.
Loss and loss adjustment expense reserves are estimates of what an insurer
expects to pay on behalf of claimants. The Company is required to maintain
reserves for payment of estimated losses and loss adjustment expenses for both
reported claims ("case reserves") and for incurred but not reported ("IBNR")
claims ("IBNR reserves"). The ultimate liability incurred by the Company may
be different from current reserve estimates.
Loss and loss adjustment expense reserves for IBNR claims are estimated
based on many variables including historical and statistical information,
inflation, legal developments, economic conditions, general trends in claim
severity and frequency and other factors that could affect the adequacy of
loss reserves. The Company reviews case and IBNR reserves monthly and makes
appropriate adjustments.
As of July 28, 1995, Ohio Indemnity Company, a wholly owned subsidiary of
the Company ("Ohio Indemnity"), entered into an agreement with the California
Department of Insurance to discontinue sales and renewals of private passenger
personal lines in automobile physical damage insurance in California. See
Part II Item 1. Legal Proceedings.
As of July 31, 1994, there were changes in the policies of two significant
lending institution customers in the Ultimate Loss Insurance program. The
first lending institution's policy was canceled and the second lending
institution's policy was restructured to eliminate continuation coverage.
SUMMARY RESULTS
The following table sets forth period to period changes in selected
financial data:
Period to Period Increase (Decrease)
------------------------------------
Nine Months Ended September 30,
------------------------------------
1994-95
------------
Premiums written $(15,136,461)
Net premiums earned (2,901,792)
Net investment income 32,638
Loss and loss adjustment expense, net of
reinsurance recoveries (456,521)
Operating expense (934,099)
Interest expense 48,792
Operating income (1,433,996)
Net income $ (1,118,653)
The combined ratio, which is the sum of the loss ratio and expense ratio,
determined in accordance with statutory accounting practices, is the
traditional measure of underwriting experience for insurance companies. The
following table reflects the loss, expense and combined ratios of Ohio
Indemnity on both a statutory and GAAP basis for each of the years ended
September 30:
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1995 1994
--------- ---------
Statutory:
Loss ratio 66.7% 59.0%
Expense ratio 45.8% 34.8%
--------- ---------
Combined ratio 112.5% 93.8%
========= =========
GAAP:
Loss ratio 66.7% 59.0%
Expense ratio 48.1% 32.8%
--------- ---------
Combined ratio 114.8% 91.8%
========= =========
Investments of Ohio Indemnity's assets are restricted to certain
investments permitted by Ohio insurance laws. The Company's overall
investment policy is determined by the Company's Board of Directors and is
reviewed periodically. The Company principally invests in investment-grade
obligations of states, municipalities and political subdivisions because the
majority of the interest income from such investments is tax-exempt and such
investments have generally resulted in favorable net yields. The Company
has the ability and intent to hold its fixed income securities to maturity or
put date, and as a result carries its fixed income securities at amortized
cost for GAAP purposes. As the Company's fixed income securities mature,
there can be no assurance that the Company will be able to reinvest in
securities with comparable yields.
RESULTS OF OPERATIONS
QUARTER ENDED SEPTEMBER 30, 1995 AS COMPARED TO QUARTER ENDED SEPTEMBER 30,
1994
Premiums Written; Net Premiums Earned. Premiums written decreased from
$28,020,043 at September 30, 1994 to $12,883,582 at September 30, 1995, while
net premiums earned decreased from $19,227,200 at September 30, 1994 to
$16,325,408 at September 30, 1995. Premiums written decreased from $8,499,555
during the three months ended September 30, 1994 to $1,039,342 during the
three months ended September 30, 1995, while net premiums earned decreased
from $7,019,075 to $4,367,224 during the same period, respectively. Premiums
decreased primarily due to the initial restructuring of the California
Automobile Physical Damage Program in May 1995 and later discontinuance of
sales and renewals on July 28, 1995. Management anticipates the discontinuance
of the Automobile Physical Damage Program will result in a positive impact on
underwriting results although there will be a material reduction in premiums
associated with its discontinuance. Nonetheless, there can be no assurance that
the discontinuance will not have a material adverse effect on the Company's
operating results. See "DISCONTINUED PRODUCTS".
Automobile Physical Damage Insurance accounted for $21,702,845 of premiums
written and $11,141,918 of net premiums earned for the nine months ended
September 30, 1994 compared with $5,663,356 of premiums written and $8,433,792
of net premiums earned for the nine months ended September 30, 1995. The
Automobile Physical Damage Insurance program represented 44.0% of the
Company's premiums written and 51.7% of the Company's premiums earned for the
nine months ended September 30, 1995 versus 77.5% and 58.0%, respectively, for
the nine months ended September 30, 1994. Automobile Physical Damage
accounted for $8,570,000 of premiums written and $3,997,195 of net premiums
earned for the quarter ended September 30, 1994 compared with $(554,347) of
premiums written and $1,912,264 of net premiums earned for the third quarter
of 1995. The Company began commercially marketing the product in California
in June 1992 and in Arizona in January 1993. In October 1994, the Company
discontinued sales of Automobile Physical Damage insurance in Arizona. On
April 30, 1995, the Company canceled its managing general agent contract for
the sales of Automobile Physical Damage Insurance in California. On May 1,
1995, the reinsurance agreement applicable to the Automobile Physical Damage
written through its managing general agent was canceled. Reinsurance will
remain in force for all policies written by its managing general agent. In
addition, on May 1, 1995 the Company assumed marketing and underwriting
responsibilities and engaged an independent claims agent to handle subsequent
settlements. As of September 30, 1995, there were $311,184 in premiums written
under the restructured program. On July 28, 1995, Ohio Indemnity Company
entered into an agreement with the California Department of Insurance to
discontinue sales and renewals of private passenger personal lines in
automobile physical damage insurance in California. See "DISCONTINUED
PRODUCTS". Premiums earned decreased less significantly than premiums written
as a result of reductions in unearned premium resulting from the run-off and
reductions in premiums written.
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Premiums written for Ultimate Loss Insurance increased from $3,936,857 in
the first nine months of 1994 to $4,298,153 in the first nine months of 1995.
Net premiums earned for Ultimate Loss Insurance decreased from $5,929,713 in
the first nine months of 1994 to $5,317,662 in the first nine months of 1995.
Premiums written for Ultimate Loss Insurance increased from $(350,231) in the
third quarter of 1994 to $1,301,112 in the third quarter of 1995. Net
premiums earned for Ultimate Loss Insurance decreased from $2,252,585 in the
third quarter of 1994 to $1,633,023 in the third quarter of 1995. The
increase in premiums written for the nine months ended September 30, 1995 was
the result of reductions in return premium and the decrease in net premiums
earned related to reductions in unearned premium associated with the canceled
policy and the elimination of continuation coverage on a second policy. See
"OVERVIEW" above.
Premiums written for the Bonded Service program increased from $2,336,733
in the first nine months of 1994 to $2,930,758 in the first nine months of
1995, while net premiums earned from the Bonded Service program increased from
$1,898,726 in the first nine months of 1994 to $2,443,689 in the first nine
months of 1995. Premiums written for the Bonded Service program decreased
from $309,667 in the third quarter of 1994 to $291,859 in the third quarter of
1995, while net premiums earned from the Bonded Service program increased from
$681,154 in the third quarter of 1994 to $780,528 in the third quarter of
1995. The increases in premiums written and net premiums earned on the Bonded
Service program were primarily attributable to growth of the program. The
decrease in premiums written in the third quarter of 1995 resulted from
expedient billing procedures which accelerated the recognition of premiums
written during the first half of 1995.
Net Investment Income. Net investment income increased from $1,178,734 in
the first nine months of 1994 to $1,211,372 in the first nine months of 1995
and increased from $363,109 in the third quarter of 1994 to $378,750 in the
third quarter of 1995 as a result of higher returns on invested assets. The
average yield on the investment portfolio increased from 5.6% at September 30,
1994 to 5.8% at September 30, 1995.
Other Income. Other income increased from $35,025 in the first nine months
of 1994 to $113,552 in the first nine months of 1995 and, increased from
$12,256 in the third quarter of 1994 to $59,013 in the third quarter of 1995.
Losses and Loss Adjustment Expenses, Net of Reinsurance Recoveries. Losses
and loss adjustment expenses totaled $10,894,965 or 66.7% of net premiums
earned during the first nine months of 1995 versus $11,351,486, or 59.0% of
net premiums earned during the first nine months of 1994. Loss and loss
adjustment expenses totaled $3,173,284, or 72.7% of net premiums earned during
the third quarter of 1995 versus $4,228,897, or 60.2% of net premiums earned
during the third quarter of 1994. Losses and loss adjustment expenses, as a
percentage of net premiums earned, increased for the same period because net
premiums earned increased at a lower percentage rate than the percentage rate
increase in losses and loss adjustment expenses. This result reflected higher
loss and loss adjustment experience, reductions in premium volume and marginal
increases in premium rates.
The absolute increase in losses and loss adjustment expenses was primarily
attributable to initial claims from the Automobile Physical Damage Insurance
business written in the first nine months of 1995 which totaled $7,833,860
compared with $8,133,661 during the first nine months of 1994 and totaled
$2,262,524 for the third quarter of 1995 compared with $2,908,435 during the
third quarter of 1994. The losses and loss adjustment expenses for Ultimate
Loss Insurance declined 7.2% from $2,850,027 in the first nine months of 1994
to $2,643,412 in the first nine months of 1995. Losses and loss adjustment
expenses decreased from $1,233,662 in the third quarter of 1994 to $773,086 in
the third quarter of 1995 due to decreases in loss and loss adjustment expense
payments connected with two significant lending institutions. Losses and loss
adjustment expenses for the Bonded Service Program increased from $26,937 in
the first nine months in 1994 to $86,631 in the first nine months in 1995
primarily due to the increase of IBNR reserves. See Discontinued Products.
Operating Expense. Operating expense consists of commission expense, other
insurance operating expense, amortization of deferred policy acquisition costs
and general and administrative expenses. Operating expense decreased 13.9%
from $6,709,800 in the first nine months of 1994 to $5,775,701 in the first
nine months of 1995 and decreased 30.2% from $2,330,604 in the third quarter
of 1994 to $1,627,164 in the third
12
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quarter of 1995. Non-deferred commission expense decreased 9.2% and policy
fees paid to its managing general agent in connection with administration of
Automobile Physical Damage Insurance decreased 54.6%. Policy fees decreased
from $1,803,140 in the first nine months of 1994 to $819,280 in the first nine
months of 1995 and decreased from $737,010 in the third quarter of 1994 to
$18,090 in the third quarter of 1995 due to discontinuance of the program.
Legal expenses increased from $169,731 in the first nine months of 1994 to
$414,318 in the first nine months of 1995 and decreased from $70,061 in the
third quarter of 1994 to $56,233 in the third quarter of 1995 as a result of
legal work related to a discontinued product and an Accusation. See Part II,
Item 1. Legal Proceedings. Operating expense also decreased as a result of
reductions in bond amortization expenses, consulting and audit expense.
Amortization of deferred policy acquisition costs decreased 21.5% from
$575,614 in the first nine months of 1994 to $451,988 in the first nine months
of 1995 and decreased from $205,783 in the third quarter of 1994 to $102,818
in the third quarter of 1995 due to discontinuance of the Automobile Physical
Damage Program. Additionally, BCIS Services, Inc., a wholly-owned subsidiary
of the Company ("BCIS Services"), incurred operating expenses of $428,872 in
the first nine months of 1995 compared with $521,090 in the first nine months
of 1994 and incurred operating expenses of $144,654 in the third quarter of
1995 compared with $176,803 in the third quarter of 1994.
Interest Expense. Interest expense increased 16.8% from $290,288 in the
first nine months of 1994 to $339,080 in the first nine months of 1995 and
decreased 1.4% from $109,979 in the third quarter of 1994 to $108,452 in the
third quarter of 1995. The increase in interest expense for the first nine
months of 1995 was due to increases in the prime rate. The decrease during
the third quarter of 1995, despite higher interest rates, was due to higher
repayment levels on the Company's revolving credit line.
Federal Income Taxes. Federal income taxes decreased from $384,203 in the
first nine months of 1994 to $68,860 in the first nine months of 1995 due to
lower pre-tax income primarily due to the recognition of higher losses and
loss adjustment expenses in the first nine months of 1995 and a higher
unearned premiums deduction.
Statutory Combined Ratios. The change in the statutory combined ratio from
93.8% at September 30, 1994 to 112.5% at September 30, 1995 was attributable
to a decrease in premiums written primarily associated with the discontinued
sales of automobile physical damage insurance together with higher loss and
loss adjustment expense experience. See Losses and Loss Adjustment Expenses,
Net of Reinsurance Recoveries.
DISCONTINUED PRODUCTS
In October 1994, the Company discontinued sales of Automobile Physical
Damage insurance in Arizona which accounted for 2.2% of premiums written and
1.9% of premiums earned in 1994. The Company's managing General Agent
withdrew from Arizona and discontinued sales. On April 30, 1995, the Company
canceled its managing general agent contract for the sales of Automobile
Physical Damage Insurance in California. On May 1, 1995, the reinsurance
agreement applicable to the Automobile Physical Damage written through its
managing general agent was canceled. Reinsurance will remain in force for all
policies written by its managing general agent. In addition, on May 1, 1995
the Company assumed marketing and underwriting responsibilities and engaged an
independent claims agent to handle subsequent settlements. On July 28, 1995,
Ohio Indemnity entered into an agreement with the California Department of
Insurance to discontinue sales and renewals of private passenger personal
lines in automobile physical damage insurance in California for a maximum
period of three years. The Automobile Physical Damage Insurance program
represented 44.0% of the Company's premiums written and 51.7% of the Company's
premiums earned for the nine months ending September 30, 1995 versus 77.5% and
58.0%, respectively, for the nine months ended September 30, 1994. See Part
II Item 1. Legal Proceedings.
LIQUIDITY AND CAPITAL RESOURCES
The Company is an insurance holding company whose principal asset is the
stock of Ohio Indemnity. The Company is, and will continue to be, dependent
on dividends from Ohio Indemnity to meet its liquidity requirements, including
debt service obligations. The Company has a $10 million credit facility to
fund working capital requirements.
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Based on statutory limitations, the maximum amount of dividends that the
Company would be able to receive in 1995 from Ohio Indemnity, absent
regulatory consent, is $2,915,632.
Ohio Indemnity derives its funds principally from premiums written,
reinsurance recoveries, investment income and contributions of capital from
the Company. The principal use of these funds is for payment of losses and
loss adjustment expenses, commissions, operating expenses and income taxes.
Net cash used in operating activities equalled $4,029,110 and $1,048,496 for
the nine months ended September 30, 1995 and 1994, respectively. Net cash
provided by financing activities was $447,813 and $324,063 for the nine months
ended September 30, 1995 and 1994, respectively. Net cash provided by (used
in) investing activities of the Company was $3,751,526 and $(829,073) for the
nine months ended September 30, 1994 and 1995, respectively.
BCIS Services derives its funds principally from claims administration fees
which are sufficient to meet its operating obligations.
The Company maintains a level of cash and liquid short-term investments
which it believes will be adequate to meet anticipated payment obligations
without being required to liquidate intermediate-term and long-term
investments. Due to the nature of the risks the Company insures, losses and
loss adjustment expenses emanating from its policies are characterized by
relatively short settlement periods and quick development of ultimate losses
compared to claims emanating from other types of insurance products.
Therefore, the Company believes that it can estimate its cash needs to meet
its loss and expense payment obligations.
The Company's investments at September 30, 1995 consisted primarily of
investment-grade fixed income securities. Cash and short-term investments at
September 30, 1995 amounted to $6,877,062, or 27.1% of total cash and invested
assets. The fair values of the Company's held to maturity fixed income
securities are subject to market fluctuations but are carried on the balance
sheet at amortized cost because the Company has the ability and intent to hold
fixed income securities to maturity or put date. Available for sale fixed
income securities are reported at fair value with unrealized gains or losses,
net of applicable deferred taxes, reflected in shareholders' equity. The
Company earned net investment income of $1,211,372 and $1,178,734 for the nine
months ended September 30, 1995 and 1994, respectively and $378,750 and
$363,109 for the quarter ended September 30, 1995 and 1994, respectively.
As of September 30, 1995, 77.6% of the Company's total assets consisted of
investment-grade fixed income securities, equity securities, short-term
investments, other corporate securities and cash. The Company's total
shareholders' equity increased from $9,464,629 at September 30, 1993 to
$12,075,323 at September 30, 1994 to $13,336,058 at September 30, 1995,
representing a 40.9% increase over the three-year period. The increase in
total shareholders' equity has strengthened the Company's capital position.
As of September 30, 1995, the Company had a $10.0 million revolving line of
credit with an outstanding balance of $6,316,132. The credit facility has a
maturity date of May 1, 1999 and bears interest at the bank's prime rate (8.75
per annum at September 30, 1995).
All material capital commitments and financial obligations of the Company
are reflected in the Company's financial statements, except the Company's risk
on surety bonds and state mandated performance bonds, written in connection
with the Bonded Service program. The financial statements include reserves
for losses on such programs for any claims filed and for an estimate of
incurred but not reported losses.
Under applicable insurance statutes and regulations, Ohio Indemnity is
required to maintain prescribed amounts of capital and surplus as well as
statutory deposits with the appropriate insurance authorities. Ohio Indemnity
is in compliance with all applicable statutory capital and surplus
requirements. Ohio Indemnity's investments consist only of permitted
investments under Ohio insurance laws.
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INFLATION
Although the cumulative effects of inflation on insurance operations cannot
be fully determined, increases in the retail price of automobiles have
generally resulted in increased amounts being financed which constitutes one
of the bases for determining premiums on Ultimate Loss Insurance and
Automobile Physical Damage Insurance. Despite relatively low inflation during
the first nine months of 1995, the Company believes that the effect of
inflation is insignificant to its insurance operations.
TRENDS
Management does not know of any trends, events or uncertainties that will
have, or that are reasonably likely to have, a material effect on the
Company's liquidity, capital resources or results of operations.
The Company's results of operations have varied from quarter to quarter
principally because of fluctuations in underwriting results. The Company's
experience indicates that more loans for automobile purchases are financed
during summer months due to seasonal consumer buying habits. The Company
expects that such quarterly fluctuations may lessen as a result of the
discontinuance of the California Automobile Physical Damage Insurance Program,
although there can be no assurance that this will occur.
INSURANCE REGULATORY MATTERS
On August 9, 1994, the Ohio Department of Insurance issued its triennial
examination report on Ohio Indemnity as of December 31, 1993. The examiners
reported that the financial statements set forth in the report reflected the
financial condition of Ohio Indemnity. Management is not aware of any
recommendations by regulatory authorities which would have, or are reasonably
likely to have, a material effect on the Company's liquidity, capital
resources or results of operations.
The National Assocaition of Insurance Commissioners ("NAIC") has developed
a risk-based capital measurement formula to be applied to all
property/casualty insurance companies. This formula calculates a minimum
required statutory net worth, based on the underwriting, investment, credit,
loss reserve and other business risks inherent in an individual company's
operations. Under the current formula, any insurance company which does not
meet threshold risk-based capital measurement standards could be forced to
reduce the scope of its operations and ultimately could become subject to
statutory receivership proceedings. Based on the Company's analysis, it
appears that the Company's total adjusted capital is in excess of all required
action levels and that no corrective action will be necessary. The Risk Based
Capital provisions have not yet been enacted into the Ohio Revised Code.
RESERVES
The amount of incurred losses and loss adjustment expenses is dependent
upon a number of factors, including claims frequency and severity, and the
nature and types of losses incurred and the number of policies written. These
factors may fluctuate from year to year, and do not necessarily bear any
relationship to the amount of premiums written or earned.
As claims are incurred, provisions are made for unpaid losses and loss
adjustment expenses by accumulating case reserve estimates for claims reported
prior to the close of the accounting period and by estimating IBNR claims
based upon past experience modified for current trends. Notwithstanding the
variability inherent in such estimates, management believes that the
provisions made for unpaid losses and loss adjustment expenses are adequate to
meet claims obligations of the Company. Such estimates are reviewed monthly
by management and annually by an independent consulting actuary and, as
adjustments thereto become necessary, such adjustments are reflected in the
Company's results of operations. The Company's independent consulting actuary
has opined that loss and loss adjustment expense reserve levels, as of
December 31, 1994, were reasonable.
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BANCINSURANCE CORPORATION
AND SUBSIDIARIES
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
-----------------
The Company is routinely a party to litigation incidental to its business,
as well as to other nonmaterial litigation. Management believes that no
individual item of litigation, or group of similar items of litigation,
including the matters referred to below, is likely to result in judgements
that will have a material adverse effect on the financial condition of the
Company.
On or about November 16, 1994, the California Department of Insurance (the
"Department") served an Order to Show Cause and Statement of
Charges/Accusation (the "Accusation") on Ohio Indemnity, alleging that Ohio
Indemnity had engaged in unfair methods of competition of unfair or deceptive
acts or practices in violation of California laws in connection with the
processing of automobile insurance claims filed by certain of Ohio Indemnity's
insureds. Multiple statutory violations were stated with respect to each
cited claim and insured, which, when combined with the maximum penalty
provided for each alleged violation under the California statutes, resulted in
a prayer by the Department of penalties aggregating $4,227,000 and either
suspension of Ohio Indemnity's certificate of authority for a period not
exceeding one year or a fine in the amount of $55,000 in lieu of suspension.
On July 28, 1995, Ohio Indemnity entered into a Stipulation and Waiver with
the Department and the Department issued a Stipulated Order resolving the
Accusation and any other regulatory investigations, actions or proceedings
which could be based on acts or omissions of Ohio Indemnity occurring before
the date of the Stipulation and Waiver. There was no finding by the
Department in the Stipulated Order that the allegations contained in the
Accusation were true and Ohio Indemnity neither admitted nor denied the
assertions in the Allegation. Under the terms of the Stipulated Order, Ohio
Indemnity will not write or renew private passenger personal lines in
automobile physical damage insurance in California, provided that Ohio
Indemnity may reenter the California private passenger personal automobile
insurance market after two years with the Department's approval. In addition,
Ohio Indemnity paid an administrative fee of $50,000 to the Department and
contributed $275,000 to a fund to be administered by the Department to resolve
policyholder complaints based on claims-handling practices described in the
Accusation or arising out of other acts or omissions of Ohio Indemnity which
may be alleged to have occurred prior to July 28, 1995. Finally, while Ohio
Indemnity neither admitted nor denied the assertions in the Allegation, it
agreed that it would not engage in certain claims-handling practices relating
to its California private passenger personal lines of insurance as described
in the Stipulation and Waiver.
On November 2, 1994 the James L. Miniter Agency, Inc. ("Agent") filed a
lawsuit against Ohio Indemnity alleging that Ohio Indemnity interfered with
Agent's broker relationship with a policyholder. The Agent's complaint also
alleged that Ohio Indemnity violated Massachusetts Unfair Trade Practices Act
which provides for the trebling of damages in some select circumstances. The
case is presently pending in the United States District Court for the District
of Massachusetts. On February 16, 1995 the Agent made a demand for $5 million
(its purported compensatory damages trebled), an amount Ohio Indemnity
believes to be unsupported by the facts or law involved in this matter. On
June 2, 1995 Ohio Indemnity filed a motion for summary judgement seeking to
have Agent's lawsuit dismissed. That motion is presently pending. Should
Ohio Indemnity's motion not be granted, Ohio Indemnity is confident that it
will nonetheless prevail in this action.
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Item 6. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits
--------
Item 27 Financial Data Schedule
(b) Reports on Form 8-K
-------------------
No reports on Form 8-K were filed by the Company during the quarter
ended September 30, 1995.
(THIS SPACE INTENTIONALLY LEFT BLANK)
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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
-------------------------
(Company)
Date: November 3, 1995 By: Si Sokol
------------------- -----------------------------------------
Si Sokol
Chairman of Board of Directors and President
(Principal Executive Officer)
Date: November 3, 1995 By: Sally Cress
------------------- -----------------------------------------
Sally Cress
Treasurer, Secretary,
Chief Financial Officer
and Chief Accounting
Officer
(Principal Accounting Officer)
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