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, 1996 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, 1996
- ------------------------------- -----------------------------------
Common stock, without par value 5,767,857
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BANCINSURANCE CORPORATION
AND SUBSIDIARIES
INDEX
-----
Page
PART I - FINANCIAL INFORMATION:
Item 1. Financial Statements
Consolidated Balance Sheets as of September 30,
1996 (unaudited) and December 31, 1995 3
Consolidated Statements of Income for the three months and
nine months ended September 30, 1996 and 1995 (unaudited) 5
Consolidated Statements of Cash Flows for the nine months
ended September 30, 1996 and 1995 (unaudited) 6
Notes to Consolidated Financial Statements (unaudited) 8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9
PART II - OTHER INFORMATION AND SIGNATURES
Item 1. Legal Proceedings 15
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 15
Signatures 16
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PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements
BANCINSURANCE CORPORATION
AND SUBSIDIARIES
Consolidated Balance Sheets
September 30, December 31,
Assets 1996 1995
------ ------------- ------------
(Unaudited)
Investments:
Held to maturity:
Fixed maturities, at amortized cost (fair value
$3,684,346 in 1996 and $4,390,089 in 1995) $ 3,593,678 $ 4,258,129
Available for sale:
Fixed maturities, at fair value (amortized cost
$10,742,418 in 1996 and $9,222,686 in 1995) 10,953,014 9,563,314
Equity securities, at fair value (cost $3,080,060
in 1996 and $3,175,130 in 1995) 3,428,919 3,465,204
Short-term investments, at cost which
approximates fair value 5,878,759 4,942,924
Securities purchased under agreements to resell 1,200,286 1,158,571
----------- -----------
Total investments 25,054,656 23,388,142
----------- -----------
Cash 665,816 482,405
Premiums receivable 607,182 400,397
Reinsurance receivable 39,975 528,726
Reinsurance recoverable on paid losses 14,747 525,102
Prepaid reinsurance premiums - 514,662
Premium taxes receivable 13,720 138,632
Prepaid commissions 103,806 -
Loans to affiliates 215,463 143,744
Loans receivable 219,000 74,000
Furniture, fixtures and leasehold improvements, net 88,276 129,490
Excess of investment over net assets of subsidiaries 753,738 753,738
Deferred federal income taxes - 55,623
Prepaid federal income taxes 246,735 321,488
Accrued investment income 282,316 231,276
Other assets 70,406 62,809
----------- -----------
Total assets $28,375,836 $27,750,234
=========== ===========
(Continued)
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BANCINSURANCE CORPORATION
AND SUBSIDIARIES
Consolidated Balance Sheets, Continued
September 30, December 31,
Liabilities and Shareholders' Equity 1996 1995
------------------------------------ ------------ ------------
(Unaudited)
Reserve for unpaid losses and loss adjustment
expenses $ 1,265,648 $ 2,241,881
Unearned premiums 1,504,945 2,997,334
Contract funds on deposit 2,995,389 1,809,012
Return premiums payable 10,494 19,488
Reinsurance premiums payable 502,010 392,716
Note payable to bank 6,000,000 5,616,132
Taxes, licenses, and fees payable 72,675 54,552
Commissions payable 269,144 341,112
Deferred federal income taxes 44,172 --
Amount due to stock broker -- 143,038
Other 403,986 424,559
------------ ------------
Total liabilities 13,068,463 14,039,824
------------ ------------
Commitments 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 1,433,329 1,466,753
Net unrealized gain on investments 369,240 416,263
Retained earnings 13,504,707 11,699,436
------------ ------------
15,622,843 13,898,019
Less: Treasury stock, at cost (110,420 common
shares at September 30, 1996 and 71,728
at December 31, 1995) (315,470) (187,609)
------------ ------------
Total shareholders' equity 15,307,373 13,710,410
------------ ------------
Total liabilities and shareholders' equity $ 28,375,836 $ 27,750,234
============ ============
See accompanying notes to consolidated financial statements.
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5
BANCINSURANCE CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Income
(Unaudited)
Three Months Ended Nine months Ended
September 30, September 30,
1996 1995 1996 1995
----------- ----------- ----------- --------
Income:
Premiums written $ 1,553,460 $ 1,039,342 $ 6,874,161 $12,883,582
Decrease in unearned premiums 804,983 5,151,303 1,492,389 10,981,515
----------- ----------- ----------- -----------
Premiums earned 2,358,443 6,190,645 8,366,550 23,865,097
Premiums ceded 16,764 (1,823,421) ( 471,940) (7,539,689)
----------- ----------- ----------- -----------
Net premiums earned 2,375,207 4,367,224 7,894,610 16,325,408
Investment income (net of
expenses of $49,917 and
$ 28,142, respectively) 334,120 378,064 1,001,389 1,166,930
Net realized gain on
investments 52,133 686 180,708 44,442
Claims administration fees 132,978 132,408 398,432 400,776
Other income ( 256) 59,013 215,005 113,552
----------- ----------- ----------- -----------
Total revenue 2,894,182 4,937,395 9,690,144 18,051,108
----------- ----------- ----------- -----------
Losses and operating expenses:
Losses and loss adjustment
expenses 1,083,054 5,361,125 4,529,614 18,609,125
Reinsurance recoveries 50,893 (2,187,841) ( 456,881) (7,714,160)
Commission expense 305,087 806,213 1,130,448 2,313,697
Other insurance operating
expenses 397,239 528,676 1,149,177 2,414,388
Amortization of deferred
policy acquisition costs - 102,818 - 451,988
General and administrative
expenses 225,186 189,457 589,767 595,628
Interest expense 109,320 108,452 323,975 339,080
----------- ----------- ----------- -----------
Total expenses 2,170,779 4,908,900 7,266,100 17,009,746
----------- ----------- ----------- -----------
Income before federal
income taxes 723,403 28,495 2,424,044 1,041,362
----------- ----------- ----------- -----------
Federal income tax (benefit)
expense 176,956 (86,319) 618,772 68,860
----------- ----------- ----------- -----------
Net income $ 546,447 $ 114,814 $ 1,805,272 $ 972,502
=========== =========== =========== ===========
Net income per common share: $ .09 $ .02 $ .31 $ .17
=========== =========== =========== ===========
Weighted average number of
common shares and equivalents
outstanding 5,818,386 5,904,398 5,831,726 5,866,748
----------- ----------- ----------- -----------
See accompanying notes to consolidated financial statements.
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6
BANCINSURANCE CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
Nine Months Ended
September 30,
1996 1995
---------- ---------
Cash flows from operating activities:
Net income $1,805,272 $ 972,502
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Net realized gain on investments (180,708) (44,442)
Net realized loss on disposal of equipment 601 -
Depreciation 45,846 50,894
Amortization of bond discount (613) (19,127)
Amortization of deferred policy acquisition costs - 451,988
Deferred federal income tax expense 124,019 244,920
(Increase) decrease in premiums receivable (206,785) 1,514,831
Decrease in reinsurance receivable 488,751 504,919
Decrease in reinsurance recoverable on paid losses 510,355 21,281
Increase in deferred policy acquisition costs - (262,133)
Decrease in prepaid reinsurance premiums 514,662 5,266,400
(Increase) decrease in premium taxes receivable 124,912 (130,671)
Increase in prepaid receivable (103,806) -
Increase in loans to affiliates (71,719) (71,719)
(Increase) decrease in loans receivable (145,000) 95,632
Decrease in prepaid federal income taxes 74,753 322,034
(Increase) decrease in accrued investment income (51,040) 70,815
Increase in other assets (7,597) (64,315)
Decrease in reserve for unpaid losses
and loss adjustment expenses (976,233) (1,747,328)
Decrease in unearned premiums (1,492,389) (10,981,515)
Increase in contract funds on deposit 1,186,377 814,155
Decrease in return premiums payable (8,994) (139,349)
Increase (decrease) in reinsurance premiums
payable 109,294 (459,159)
Increase (decrease) in taxes, licenses and fees
payable 18,123 (116,379)
Decrease in commissions payable ( 71,968) (398,515)
Increase (decrease) in other liabilities (20,573) 75,171
---------- ----------
Net cash provided by (used in) operating
activities 1,665,540 (4,029,110)
---------- ----------
Cash flows from investing activities:
Proceeds from held to maturity: fixed maturities
due to redemption or maturity 408,779 579,274
Proceeds from available for sale: fixed maturities
sold, redeemed and matured 2,215,248 4,892,699
Proceeds from available for sale equity securities
sold 1,882,883 597,537
Cost of investments purchased:
Held to maturity: fixed maturities (241,682) (501,094)
Available for sale: fixed maturities (3,881,664) (289,825)
Equity securities (962,453) (297,817)
Decrease in amount due to stock brokers (143,038) -
Net increase in short-term investments (935,835) (1,307,459)
Net (increase) decrease in securities purchased under
agreements to resell (41,715) 90,576
Purchase of furniture, fixtures and leasehold
improvements (5,235) (12,365)
---------- ----------
Net cash provided by (used in)
investing activities (1,704,712) 3,751,526
---------- ----------
(Continued)
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BANCINSURANCE CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Cash Flows, Continued
(Unaudited)
Nine Months Ended
September 30,
1996 1995
---------- ---------
Cash flows from financing activities:
Proceeds from note payable to bank 2,990,000 4,200,000
Repayments of note payable to bank (2,606,132) (3,800,000)
Proceeds from stock options exercised 22,500 47,813
Acquisition of treasury stock (183,785) -
---------- ----------
Net cash provided by financing activities 222,583 447,813
---------- ----------
Net increase in cash 183,411 170,229
---------- ----------
Cash at December 31 482,405 (428,633)
---------- ----------
Cash at September 30, $ 665,816 $ (258,404)
========== ===========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 323,975 $ 339,080
========== ==========
Income taxes 420,000 -
========== ==========
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 Sheets as of September 30, 1996, the Consolidated
Statements of Income for the three and nine months ended September 30, 1996 and
1995, 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 the Company's 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, 1996
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,
1995. The results of operations for the period ended September 30, 1996 are not
necessarily indicative of the results of operations for the full year.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
3. On November 13, 1995, the Board of Directors adopted a common share
repurchase program. The program allows the company to repurchase up to a total
of 100,000 of its common shares. As of September 5, 1996, the Company
repurchased 100,000 shares. In addition, on September 5, 1996, the Board of
Directors approved an additional 19,112 common shares for repurchase. The
average price was $2.91 for 119,112 shares repurchased under this program.
Repurchases have been funded by cash flows from operations.
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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 is an insurance holding company whose principal asset is the
stock of Ohio Indemnity Company ("Subsidiary" or "Ohio Indemnity"). The
Company's principal sources of revenue are premiums paid by insureds for
insurance policies issued by Ohio Indemnity. 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. Ohio Indemnity's principal costs are losses and loss adjustment
expenses. The principal factor in determining the level of the Ohio Indemnity'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. Ohio Indemnity 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. These reserves are reported net of amounts recoverable from salvage and
subrogation. The ultimate liability incurred by Ohio Indemnity 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. Ohio Indemnity reviews case and IBNR reserves monthly and makes
appropriate adjustments.
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,
-------------------------------
1995-96
-------
Premiums written $(6,009,421)
Net premiums earned (8,430,798)
Net investment income (29,275)
Loss and loss adjustment expense,
net of reinsurance recoveries (6,822,232)
Operating expense (2,907,309)
Interest expense (15,105)
Operating income 1,382,682
Net income $ 832,770
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 the Subsidiary on both a
statutory and GAAP basis for the nine months ended September 30:
1996 1995
--------- ---------
Statutory:
Loss ratio 51.6% 66.7%
Expense ratio 31.7% 45.8%
--------- ---------
Combined ratio 83.3% 112.5%
========= =========
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1996 1995
--------- ---------
GAAP:
Loss ratio 51.6% 66.7%
Expense ratio 30.0% 48.1%
--------- ---------
Combined ratio 81.6% 114.8%
========= =========
Investments of the Subsidiary'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. Carrying values for
available for sale fixed maturities are at fair value, carrying value for held
to maturity fixed maturities, including bonds and preferred stocks with
mandatory redemption features, are at amortized cost and carrying values for
available for sale equity securities, including common stocks and preferred
stocks without mandatory redemption features are at fair value. 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
SEPTEMBER 30, 1996 AS COMPARED TO SEPTEMBER 30, 1995
Premiums Written; Net Premiums Earned. Premiums written for the nine months
decreased from $12,883,421 at September 30, 1995 to $6,874,161 at September 30,
1996, and net premiums earned decreased from $16,325,408 at September 30, 1995
to $7,894,610 at September 30, 1996. Premiums written increased from $1,039,342
during the three months ended September 30, 1995 to $1,553,460 during the three
months ended September 30, 1996, while net premiums earned decreased from
$4,367,224 to $2,375,207 during the same period, respectively. Premiums written
decreased primarily due to the initial restructuring of the California
Automobile Physical Damage Program in May 1995 and the later discontinuance of
sales and renewals on July 28, 1995. Net premiums were earned through June 1996
as the policies had expired. Management anticipates the discontinuance of the
Automobile Physical Damage Program will result in a positive impact on
underwriting results although there has been and will continue to 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.
Automobile Physical Damage Insurance accounted for $5,663,356 of premiums
written and $8,433,792 of net premiums earned for the first nine months in 1995
compared with $(107,727), due to cancellations, of premiums written and $576,301
of net premiums earned for the first nine months of 1996, a decrease of 100.1%
and 93.2%, respectively. Automobile Physical Damage accounted for $(554,347) of
premiums written and $1,912,264 of net premiums earned for the quarter ended
September 30, 1995 compared with $(34,304) of premiums written and $(9,541) of
net premiums earned for the quarter ended September 30, 1996. 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. 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 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. Premiums earned decreased less significantly than
premiums written as a result of reductions in unearned premiums resulting from
the run-off and reductions in premiums written.
Premiums written for Ultimate Loss Insurance decreased from $4,298,153 in
the first nine months of 1995 to $4,084,805 in the first nine months of 1996.
Net premiums earned from Ultimate Loss Insurance decreased from $5,317,662 in
the first nine months
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of 1995 to $4,910,304 in the first nine months of 1996. Premiums written for
Ultimate Loss Insurance increased from $1,301,112 in the third quarter of 1995
to $1,336,218 in the third quarter of 1996. Net premiums earned for Ultimate
Loss Insurance decreased from $1,633,023 in the third quarter of 1995 to
$1,583,333 in the third quarter of 1996. Premiums written decreased primarily
from the cancellation of a policy. Net premiums earned decreased as a result of
reductions in unearned premiums associated with the elimination of continuation
coverage on a second policy.
Premiums written for the Bonded Service program decreased from $2,930,758 in
the first nine months of 1995 to $2,885,633 in the first nine months of 1996,
while net premiums earned from the Bonded Service program decreased from
$2,443,689 in the first nine months of 1995 to $2,343,010 in the first nine
months of 1996. Premiums written for the Bonded Service program decreased from
$291,859 in the third quarter of 1995 to $244,926 in the third quarter of 1996,
while net premiums earned decreased from $780,528 in the third quarter of 1995
to $779,651 in the third quarter of 1996.
Net Investment Income. Net investment income decreased 2.4% from $1,211,372
in the first nine months of 1995 to $1,182,097 in the first nine months of 1996
reflecting reduced cash flows due to the lower premium volume which caused a
reduction in the invested asset base. Net investment income increased from
$378,750 in the third quarter of 1995 to $386,253 in the third quarter of 1996
resulting from realized gains that were primarily market driven.
Claims Administration. Claims administration income generated by BCIS
Services, Inc. ("BCIS Services"), a wholly-owned subsidiary of the Company,
accounted for $400,776 of the revenues for the first nine months of 1995 and
$398,432 in the first nine months of 1996 and marginally increased from $132,408
in the third quarter of 1995 to $132,978 in the third quarter of 1996. BCIS
Services commenced business operations in California during 1993.
Other Income. Other income increased from $113,552 in the first nine months
of 1995 to $215,005 in the first nine months of 1996. This increase was
attributed to the release of redundant reserves from the aggregate loss fund
established for reserve years 1992, 1993 and partial year 1994 in connection
with the Bonded Service program.
Losses and Loss Adjustment Expenses, Net of Reinsurance Recoveries. Losses
and loss adjustment expenses totaled $4,072,733, or 51.6% of net premiums earned
during the first nine months of 1996 versus $10,894,965, or 66.7% of net
premiums earned during the first nine months of 1995. Losses and loss adjustment
expenses totaled $1,133,947 or 47.7% of net premiums earned during the third
quarter of 1996 versus $3,173,284, or 72.7% of net premiums earned during the
third quarter of 1995. Losses and loss adjustment expenses, as a percentage of
net premiums earned, decreased for the same period because net premiums earned
decreased at a lower percentage rate than the percentage rate decrease in losses
and loss adjustment expenses. This result reflected lower losses and loss
adjustment expense experience and a decline in overall premium volume.
The absolute decrease 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 $494,107 during the first nine months of 1996 and totaled
$2,262,524 for the third quarter of 1995 compared with $(17,687) during the
third quarter of 1996. This decrease of 93.7%, for the nine months, was due to
the discontinuance of the Automobile Physical Damage Program. The losses and
loss adjustment expenses for Ultimate Loss Insurance increased 12.1% to
$2,962,945 in the first nine months of 1996 from $2,643,412 in the first nine
months of 1995 and totaled $926,661 for the third quarter of 1996 compared with
$773,086 during the third quarter of 1995, due to increases in losses and loss
adjustment expense experience. Losses and loss adjustment expenses for the
Bonded Service program increased from $86,631 in 1995 to $322,009 in 1996 and
increased from $64,333 for the third quarter of 1995 compared with $114,235
during the third quarter of 1996 primarily due to an increase in IBNR.
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 50.3% from
$5,776,701 for the first nine months of 1995 to $2,869,392 in the first nine
months of 1996 and decreased from $1,627,164 for the third quarter of 1995
compared with $927,512 during
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the third quarter of 1996. The decrease in operating expense was primarily
attributable to a 51.1% decrease in non-deferred commission expense and a
decrease of $819,280 in policy fees paid to the general agent in connection with
administration of Automobile Physical Damage Insurance. Legal expenses decreased
from $414,318 during the first nine months of 1995 to $120,514 during the first
nine months of 1996 primarily resulting from settlement of a contract dispute.
Legal expenses increased from $56,233 during the third quarter of 1995 to
$75,955 during the third quarter of 1996. Amortization of deferred policy
acquisition costs decreased $451,988 due to discontinuance of the Automobile
Physical Damage Program. Operating expense also decreased as a result of
reductions in licenses/fees, travel and consulting expenses. Additionally, BCIS
Services incurred operating expenses of $428,872 in the first nine months of
1995 compared with $416,926 of operating expenses during the first nine months
of 1996 and decreased from $144,654 during the third quarter of 1995 to $134,488
during the third quarter of 1996.
Interest Expense. Interest expense decreased 4.5% from $339,080 in the first
nine months of 1995 to $323,975 in the first nine months of 1996. The decrease
was due to lower borrowing levels on the Company's revolving credit line and
decreases in the prime rate.
Federal Income Taxes. Federal income taxes increased from $68,860 in the
first nine months of 1995 to $618,772 in the first nine months of 1996 and
increased from $(86,319) to $176,956 in the third quarter, respectively,
primarily due to a significant increase in pre-tax income due to lower unearned
premium deduction and the recognition of lower losses and loss adjustment
expenses in 1996.
Statutory Combined Ratios. The change in the statutory combined ratio from
83.3% at September 30, 1995 to 112.5% at September 30, 1996 was attributable to
decreases of general and administrative expenses and lower loss and loss
adjustment expense experience, primarily associated with the discontinuance of
the Automobile Physical Damage program. Losses and loss adjustment expenses
decreased at a higher percentage rate than the percentage decline in premium
volume.
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 the Subsidiary to meet its liquidity requirements, including debt
service obligations. The Company has a $10 million credit facility to fund
working capital requirements. Based on statutory limitations, the maximum amount
of dividends that the Company would be able to receive in 1996 from the
Subsidiary, absent regulatory consent, is $2,660,432.
The Subsidiary derives its funds principally from net 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
provided by (used in) operating activities equalled $1,665,540, and $(4,029,110)
for the nine months ended September 30, 1996 and 1995, respectively. Net cash
provided by financing activities was $222,583 for the nine months ended
September 30, 1996 and $447,813 for the nine months ended September 30, 1995.
Net cash provided by (used in) investing activities of the Company was
$(1,704,712) and $3,751,526 for the nine months ended September 30, 1996 and
1995, respectively.
The Company maintains a level of cash and liquid short-term investments
which it believes will be adequate to meet its anticipated payment obligations
through September 30, 1997 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.
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The Company's investments at September 30, 1996 consisted primarily of
investment-grade fixed income securities. Cash and short-term investments at
September 30, 1996 amounted to $7,744,861, or 30.1% 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
these securities to their 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 $1,182,097 for the nine months ended
September 30, 1995 and 1996, respectively.
As of September 30, 1996, 99.8% 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 $12,075,323 at September 30, 1994 to
$13,336,058 at September 30, 1995, to $15,307,373 at September 30, 1996,
representing a 26.8% increase over the three-year period. The increase in total
shareholders' equity has strengthened the Company's capital position.
As of September 30, 1996, the Company had a $10.0 million revolving line of
credit with an outstanding balance of $6,000,000. The credit facility has a
maturity date of May 1, 2000 and bears interest at the bank's prime rate (8.25%
per annum at September 30, 1996).
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 Company's obligations under such performance
bonds may not, in every case, cease upon termination of an employer's
participation in 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.
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 Program, although there can be no
assurance that this will occur.
SAFEHARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
Except for the historical information contained herein, the matters
discussed in this Form 10-Q includes forward-looking statements that involve
risks and uncertainties, including, but not limited to, quarterly fluctuations
in results, the management of growth, and other risks detailed from time to time
in the Company's Securities and Exchange Commission filings. Actual results may
differ materially from management expectations.
INFLATION
Although the cumulative effects of inflation on premium growth 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. Despite relatively low
inflation during the first nine months of 1996, the Company has experienced no
material adverse consequences with respect to its growth in premiums.
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INSURANCE REGULATORY MATTERS
The NAIC has developed a risk-based capital measurement formula to be
applied to all property/casualty insurance companies. This formula calculates a
minimum required statutory net worth, based on the underwriting, investment,
credit, loss reserve and other business risks inherent in an individual
company's operations. Under the current formula, any insurance company which
does not meet threshold risk-based capital measurement standards could be forced
to reduce the scope of its operations and ultimately could become subject to
statutory receivership proceedings. Based on 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 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, severity, the nature and types
of losses incurred, and the number of policies written. These factors may
fluctuate from year to year and do not necessarily bear any relationship to the
amount of premiums written or earned.
As claims are incurred, provisions are made for unpaid losses and loss
adjustment expenses by accumulating case reserve estimates for claims reported
prior to the close of the accounting period and by estimating 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, 1995, were
reasonable.
RECENT ACCOUNTING AND LEGISLATIVE CHANGES
In October 1995, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for
Stock-Based Compensation," which defines a fair value based method of accounting
for employee stock options and similar equity instruments. However, SFAS No. 123
also allows an entity to continue to account for these plans according to
Accounting Principals Board Opinion No. 25 (APB 25), provided pro forma
disclosures of net income and earnings per share are made as if the fair value
based method of accounting defined by SFAS No. 123 had been applied. The Company
expects to continue to measure compensation cost related to employee stock
purchase options using APB 25 and will provide pro forma disclosures as
required. This statement is effective for the year ended December 31, 1996.
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BANCINSURANCE CORPORATION
AND SUBSIDIARIES
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
-----------------
On November 2, 1994, the James L. Miniter Agency, Inc. (the "Agent") filed a
lawsuit against Ohio Indemnity in the Suffolk County Superior Court,
Massachusetts, alleging essentially that Ohio Indemnity had breached its
contractual obligations to the Agent policyholder. On December 2, 1994, Ohio
Indemnity removed the case to the United States District Court for the District
of Massachusetts. On June 7, 1996, a summary judgement was granted in favor of
Ohio Indemnity, however, an appeal of the judgement has been filed by the Agent.
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, 1996.
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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 4, 1996 By: Si Sokol
--------------------------------- ---------------------------
Si Sokol
President and
Chairman of Board of Directors
(Principal Executive Officer)
Date: November 4, 1996 By: Sally Cress
--------------------------------- ---------------------------
Sally Cress
Treasurer, Secretary
(Principal Financial and
Accounting Officer)
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