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, 1997 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
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(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, 1997
- ------------------------------- ---------------------------------
Common stock, without par value 5,843,115
2
BANCINSURANCE CORPORATION
AND SUBSIDIARIES
INDEX
Page
----
PART I - FINANCIAL INFORMATION:
Item 1. Financial Statements
Consolidated Balance Sheets as of September 30,
1997 (unaudited) and December 31, 1996 3
Consolidated Statements of Income for the three months and
nine months ended September 30, 1997 and 1996 (unaudited) 5
Consolidated Statements of Cash Flows for the nine months
ended September 30, 1997 and 1996 (unaudited) 6
Notes to Consolidated Financial Statements (unaudited) 8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9
Item 3. Quantitative and Qualitative Disclosures About
Market Risk Not Applicable
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
2
3
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements
BANCINSURANCE CORPORATION
AND SUBSIDIARIES
Consolidated Balance Sheets
September 30, December 31,
Assets 1997 1996
- ------ ------------- ------------
(Unaudited)
Investments:
Held to maturity:
Fixed maturities, at amortized cost (fair value
$4,138,853 in 1997 and $4,086,856 in 1996) $ 4,042,276 $ 4,004,550
Available for sale:
Fixed maturities, at fair value (amortized cost
$13,241,120 in 1997 and $11,271,525 in 1996) 13,551,737 11,502,186
Equity securities, at fair value (cost $2,454,739
in 1997 and $2,602,891 in 1996) 3,050,483 3,031,014
Short-term investments, at cost which
approximates fair value 4,768,777 5,730,923
Securities purchased under agreements to resell 1,368,503 1,091,630
----------- -----------
Total investments 26,781,776 25,360,303
----------- -----------
Cash 1,729,383 681,286
Premiums receivable 938,915 494,322
Accounts receivable, net of allowance for
uncollectible amounts 242,532 -
Reinsurance receivable 15,750 15,150
Reinsurance recoverable on paid losses 1,033 25,143
Prepaid reinsurance premiums 33,764 -
Premium taxes receivable 15,712 -
Prepaid commissions 115,499 -
Loans to affiliates 606,182 434,463
Note receivable 75,000 -
Furniture, fixtures and leasehold improvements, net 105,678 86,435
Excess of investment over net assets of subsidiaries 1,004,102 753,738
Prepaid federal income taxes 100,559 29,633
Accrued investment income 362,080 308,646
Other assets 114,404 85,833
----------- -----------
Total assets $32,242,369 $28,274,952
----------- -----------
(Continued)
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4
BANCINSURANCE CORPORATION
AND SUBSIDIARIES
Consolidated Balance Sheets, Continued
September 30, December 31,
Liabilities and Shareholders' Equity 1997 1996
- ------------------------------------ ------------ ------------
(Unaudited)
Reserve for unpaid losses and loss adjustment
expenses $ 1,589,102 $ 1,359,775
Unearned premiums 1,294,144 745,787
Contract funds on deposit 3,164,042 2,950,108
Reinsurance premiums payable 40,133 503,806
Note payable to bank 6,540,000 5,600,000
Note payable 40,323 -
Taxes, licenses, and fees payable 143,844 93,566
Deferred federal income taxes 288,639 194,755
Commissions payable 405,004 342,258
Other 391,713 578,080
----------- -----------
Total liabilities 13,896,944 12,368,135
----------- -----------
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 1,495,387 1,433,329
Net unrealized gain on investments, net of tax 598,198 434,797
Retained earnings 16,036,787 14,040,484
----------- -----------
18,445,939 16,224,177
Less: Treasury stock, at cost (35,162 common
shares at September 30, 1997 and 111,020
at December 31, 1996) (100,514) (317,360)
----------- -----------
Total shareholders' equity 18,345,425 15,906,817
----------- -----------
Total liabilities and shareholders' equity $32,242,369 $28,274,952
----------- -----------
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,
1997 1996 1997 1996
----------- ----------- ----------- -----------
Income:
Premiums written $ 2,965,371 $ 1,553,460 $ 8,325,545 $ 6,874,161
(Increase) decrease in
unearned premiums 311,734 804,983 (548,357) 1,492,389
----------- ----------- ----------- -----------
Premiums earned 3,277,105 2,358,443 7,777,188 8,366,550
Premiums ceded (29,678) 16,764 (29,678) (471,940)
----------- ----------- ----------- -----------
Net premiums earned 3,247,427 2,375,207 7,747,510 7,894,610
Investment income (net of
expenses of $85,830 and
$ 49,917, respectively) 362,386 334,120 1,027,933 1,001,389
Net realized gain on
investments 115,926 52,133 198,798 180,708
Claims administration fees 146,698 132,978 495,680 398,432
Title and appraisal fees 561,200 - 1,057,682 -
Other income 25,541 (256) 328,574 215,005
----------- ----------- ----------- -----------
Total revenue 4,459,178 2,894,182 10,856,177 9,690,144
----------- ----------- ----------- -----------
Losses and operating expenses:
Losses and loss adjustment
expenses 1,900,712 1,083,054 4,014,656 4,529,614
Reinsurance recoveries - 50,893 - (456,881)
Commission expense 487,693 305,087 1,091,805 1,130,448
Other insurance operating
expenses 360,535 397,239 1,040,833 1,149,177
General and administrative
expenses 714,463 225,186 1,754,358 589,767
Interest expense 111,559 109,320 259,440 323,975
----------- ----------- ----------- -----------
Total expenses 3,574,962 2,170,779 8,161,092 7,266,100
----------- ----------- ----------- -----------
Income before federal
income taxes 884,216 723,403 2,695,085 2,424,044
----------- ----------- ----------- -----------
Federal income tax expense 226,051 176,956 698,782 618,772
----------- ----------- ----------- -----------
Net income $ 658,165 $ 546,447 $ 1,996,303 $ 1,805,272
----------- ----------- ----------- -----------
Net income per common share: $ .11 $ .09 $ .34 $ .31
----------- ----------- ----------- -----------
Weighted average number of
common shares and equivalents
outstanding 5,893,871 5,818,386 5,868,749 5,831,726
----------- ----------- ----------- -----------
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,
1997 1996
--------- ---------
Cash flows from operating activities:
Net income $1,996,303 $1,805,272
Adjustments to reconcile net income to net cash
provided by operating activities:
Net realized gain on investments (198,798) (180,708)
Net realized loss on disposal of equipment - 601
Depreciation 65,867 45,846
Amortization of bond premium (discount) 40,266 (613)
Deferred federal income tax expense 9,708 124,019
Increase in premiums receivable (444,593) (206,785)
Increase in accounts receivable (98,783) -
(Increase) decrease in reinsurance receivable (600) 488,751
Decrease in reinsurance recoverable on paid losses 24,110 510,355
(Increase) decrease in prepaid reinsurance premiums (33,764) 514,662
(Increase) decrease in premium taxes receivable (15,712) 124,912
Increase in prepaid commissions (115,499) (103,806)
Increase in loans to affiliates (171,719) (216,719)
Increase in note receivable (75,000) -
(Increase) decrease in prepaid federal income taxes (70,926) 74,753
Increase in accrued investment income (53,434) (51,040)
Increase in other assets (28,571) ( 7,597)
Increase (decrease) in reserve for unpaid losses
and loss adjustment expenses 229,327 (976,233)
Increase (decrease) in unearned premiums 548,357 (1,492,389)
Increase in contract funds on deposit 213,934 1,186,377
Increase (decrease) in reinsurance premiums
payable (463,673) 109,294
Decrease in note payable (6,500) -
Increase in taxes, licenses and fees payable 50,278 18,123
Increase (decrease) in commissions payable 62,746 (71,968)
Decrease in other liabilities (315,999) (29,567)
---------- ----------
Net cash provided by operating activities 1,147,325 1,665,540
---------- ----------
Cash flows from investing activities:
Proceeds from held to maturity: fixed maturities
due to redemption or maturity 1,156,000 408,779
Proceeds from available for sale: fixed maturities
sold, redeemed and matured 1,389,619 2,215,248
Proceeds from available for sale equity securities
sold 1,777,748 1,882,883
Cost of investments purchased:
Held to maturity: fixed maturities (1,344,403) (241,682)
Available for sale: fixed maturities (3,539,635) (3,881,664)
Equity securities (1,139,966) (962,453)
Decrease in amount due to stock brokers - (143,038)
Net (increase) decrease in short-term investments 962,146 (935,835)
Net increase securities purchased under
agreements to resell (276,873) (41,715)
Purchase of furniture, fixtures and leasehold
improvements (54,907) (5,235)
Cash acquired in purchase of subsidiary 27,918 -
---------- ----------
Net cash used in investing activities (1,042,353) (1,704,712)
---------- ----------
(Continued)
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7
BANCINSURANCE CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Cash Flows, Continued
(Unaudited)
Nine Months Ended
September 30,
1997 1996
---------- ----------
Cash flows from financing activities:
Proceeds from note payable to bank 7,525,000 2,990,000
Repayments of note payable to bank (6,585,000) (2,606,132)
Proceeds from stock options exercised 3,125 22,500
Acquisition of treasury stock - (183,785)
---------- ----------
Net cash provided by financing activities 943,125 222,583
---------- ----------
Net increase in cash 1,048,097 183,411
---------- ----------
Cash at December 31 681,286 482,405
---------- ----------
Cash at September 30, $1,729,383 $ 665,816
---------- ----------
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 259,440 $ 323,975
---------- ----------
Income taxes 760,000 420,000
---------- ----------
Supplemental schedule of noncash investing activities:
Common stock issued in purchase acquisition $ 275,781 -
---------- ----------
See accompanying notes to consolidated financial statements.
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8
BANCINSURANCE CORPORATION
AND SUBSIDIARIES
Notes To Consolidated Financial Statements (Unaudited)
1. The Consolidated Balance Sheets as of September 30, 1997, the Consolidated
Statements of Income for the three and nine months ended September 30, 1997 and
1996, 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 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, 1997
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,
1996. The results of operations for the period ended September 30, 1997 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 April 2, 1997, Title Research Corporation, ("Title Research"), a newly
formed, wholly-owned subsidiary of Bancinsurance Corporation, purchased
substantially all of the net assets of Title Research Agency, an Ohio
corporation, for 62,500 shares of Bancinsurance Corporation common stock, with
a value of $275,781. Title Research is engaged in title, appraisal and related
services which support documentation needs for first and second mortgage
lending requirements. The acquisition has been accounted for as a purchase and
resulted in $258,998 of goodwill. The consolidated statements of income for the
nine months ended September 30, 1997, included the operating results of the
acquired business from April 2, 1997.
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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 ("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. 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.
Claims administration fees generated by BCIS Services, Inc. ("BCIS
Services"), a wholly owned subsidiary of the Company, and title and appraisal
fees generated by Title Research are recorded and earned as services are
billed.
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,
-------------------------------
1996-97
-------
Premiums written $1,451,384
Net premiums earned (147,100)
Net investment income 44,634
Loss and loss adjustment expense,
net of reinsurance recoveries (58,077)
Operating expense 1,017,604
Interest expense (64,535)
Operating income 271,041
Net income $ 191,031
The combined ratio, which is the sum of the loss ratio and expense ratio,
is the traditional measure of underwriting experience for insurance companies.
The following table reflects the loss, expense and combined ratios of Ohio
Indemnity on both a statutory and GAAP basis for the nine months ended
September 30:
1997 1996
---- ----
Statutory:
Loss ratio 51.8% 51.6%
Expense ratio 25.2% 31.7%
---- ----
Combined ratio 77.0% 83.3%
---- ----
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1997 1996
---- ----
GAAP:
Loss ratio 51.8% 51.6%
Expense ratio 22.5% 30.0%
---- ----
Combined ratio 74.3% 81.6%
---- ----
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 held to maturity fixed income securities to maturity or
put date, and as a result carries its held to maturity 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
SEPTEMBER 30, 1997 AS COMPARED TO SEPTEMBER 30, 1996
Premiums Written; Net Premiums Earned. Premiums written for the nine months
increased from $6,874,161 at September 30, 1996 to $8,325,545 at September 30,
1997, and net premiums earned marginally decreased from $7,894,610 at September
30, 1996 to $7,747,510 at September 30, 1997. Premiums written increased from
$1,553,460 during the three months ended September 30, 1996 to $2,965,371
during the three months ended September 30, 1997, while net premiums earned
increased from $2,375,207 to $3,247,427 during the same period, respectively.
Increases in premiums written for the nine months ended September 30, 1996
versus 1997 were primarily associated with the addition of a significant new
policy and reductions in return premiums associated with the discontinuance of
the Automobile Physical Damage Insurance program. Premiums earned marginally
decreased for the nine months ended September 30, 1996 versus 1997 due to the
change in unearned premiums associated with the run-off of the Automobile
Physical Damage Insurance program in addition to reductions in unearned premium
associated with an Ultimate Loss Insurance canceled policy. Premiums written
and earned increased for the three months ended September 30, 1996 and 1997,
respectively, associated with a new Ultimate Loss Insurance policy and growth
in the Bonded Service program.
Premiums written for Ultimate Loss Insurance increased from $4,084,805 in
the first nine months of 1996 to $5,084,097 in the first nine months of 1997.
Net premiums earned from Ultimate Loss Insurance increased from $4,910,304 in
the first nine months of 1996 to $5,095,369 in the first nine months of 1997.
Premiums written for Ultimate Loss Insurance increased from $1,336,218 in the
third quarter of 1996 to $2,621,791 in the third quarter of 1997. Net premiums
earned for Ultimate Loss Insurance increased from $1,583,333 in the third
quarter of 1996 to $2,331,277 in the third quarter of 1997. Increases in
premiums written and net premiums earned were primarily attributable to premium
from a large lending institution added as a customer during the third quarter
of 1997 and a new agency program.
Premiums written for the Bonded Service program increased from $2,885,633
in the first nine months of 1996 to $3,175,635 in the first nine months of
1997, while net premiums earned from the Bonded Service program increased from
$2,343,010 in the first nine months of 1996 to $2,554,603 in the first nine
months of 1997 due to increases in employee enrollment among existing trust
members resulting in higher service fees. Premiums written for the Bonded
Service program increased from $244,926 in the third quarter of 1996 to
$320,118 in the third quarter of 1997 due to the timing of billing issuance,
while net premiums earned increased from $779,651 in the third quarter of 1996
to $884,078 in the third quarter of 1997.
Automobile Physical Damage Insurance accounted for $107,727 of premium
cancellations and $576,301 of net premiums earned for the first nine months in
1996 and $34,304 of premium cancellations and $(9,541) of net premiums earned
for the quarter ended September 30, 1996. There were no premiums written or net
premiums earned during the nine months ended September 30, 1997.
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11
Net Investment Income. Net investment income increased from $1,182,097 in
the first nine months of 1996 to $1,226,731 in the first nine months of 1997
and net investment income increased from $386,253 in the third quarter of 1996
to $478,312 in the third quarter of 1997 primarily resulting from a higher
invested asset position, higher investment yields, and higher net realized
gains.
Claims Administration. Claims administration income generated by BCIS
Services, a wholly-owned subsidiary of the Company, accounted for $398,432 and
$495,680 for the nine months ended September 30, 1996 and 1997, respectively,
and increased from $132,978 in the third quarter of 1996 to $146,698 in the
third quarter of 1997, an increase of 24.4% and 10.3%, respectively,
attributable to an increase in claims processing and servicing
responsibilities.
Title and Appraisal. Title and appraisal income accounted for $1,057,682 of
the revenues for the nine months and $561,200 for the three months ended
September 30, 1997, respectively, for the acquired Title Research business from
April 2, 1997.
Other Income. Other income increased from $215,005 in the nine months ended
September 30, 1996 to $328,574 in the nine months ended September 30, 1997 and
increased from $(256) to $25,541 in the third quarters, respectively. The
increase in other income was primarily due to earnings of $252,652 attributed
to recognition of favorable results from a closed year of operations of the
Bonded Service program. During the nine months ended September 30, 1996,
$187,605 of redundant reserves were earned. Additionally, the Company recorded
$63,657 as a reimbursement for expenses previously incurred from a line of
business sold. These expenses, totalling $72,980, are included in general and
administrative expenses for the nine months ended September 30, 1997.
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 $4,014,656, or 51.8% of net
premiums earned during the first nine months of 1997. Losses and loss
adjustment expenses totaled $1,133,947 or 47.7% of net premiums earned during
the third quarter of 1996 versus $1,900,712, or 58.5% of net premiums earned
during the third quarter of 1997. Losses and loss adjustment expenses, as a
percentage of net premiums earned, decreased for the nine months ended
September 30, 1996 versus 1997, 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 higher than anticipated salvage and subrogation received
from the discontinued Automobile Physical Damage Insurance program. Losses and
loss adjustment expenses increased for the three months ended September 30,
1996 versus 1997, primarily due to loss development related to a new policy and
deficiency development on prior year reserves.
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 1996 which totalled $494,107
compared with $53,332 of net recoveries during the first nine months of 1997
and totaled $17,687 of net recoveries during the third quarter of 1996 compared
with $17,494 during the same quarter of 1997. The decrease in the nine months
ended September 30, 1996 versus 1997 was due to the discontinuance of the
Automobile Physical Damage Insurance Program. The losses and loss adjustment
expenses for Ultimate Loss Insurance increased 10.6% from $2,962,945 in the
first nine months of 1996 to $3,276,767 in the first nine months of 1997 and
totaled $926,661 for the third quarter of 1996 compared with $1,667,505 during
the third quarter of 1997, due to an increase in loss development related to a
new policy during the three months ended September 30, 1997. Losses and loss
adjustment expenses for the Bonded Service program increased from $322,009 to
$461,658 for the nine months ended September 30, 1996 and 1997, and increased
from $114,235 for the third quarter of 1996 compared with $160,882 during the
third quarter of 1997 primarily due to deficiency development on prior year
reserves.
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Operating Expense. Operating expense consists of commission expense, other
insurance operating expense, and general and administrative expenses. Operating
expense increased 35.5% from $2,869,392 to $3,886,996 for the nine months ended
September 30, 1996 and 1997, respectively, and increased from $927,512 to
$1,122,691 for the three months ended September 30, 1996 and 1997,
respectively. The increase in operating expense was primarily due to operating
and administrative expenses incurred by the newly formed Title Research
Corporation. Commission expense marginally decreased 3.4% from $1,130,448 to
$1,091,805 in the nine months ended September 30, 1996 and 1997, respectively,
and increased from $305,087 to $487,693 for the three months ended September
30, 1996 and 1997 respectively, primarily due to the addition of the Ultimate
Loss Insurance agency program and commissions incurred related to timing
differences on billings on the Bonded Service Program during the three months
ended September 30, 1997. Other insurance operating expenses decreased 9.4%
from $1,149,177 to $1,040,833 in the nine months ended September 30, 1996 and
1997, respectively, and decreased from $397,239 to $360,535 in the three months
ended September 30, 1996 and 1997, respectively, primarily due to decreases in
legal expense. General and administrative expenses increased 197.5% from
$589,767 in the first nine months of 1996 to $1,754,358 in the first nine
months of 1997 and increased from $225,186 to $714,463 in the third quarter
respectively, primarily due to operating and administrative expenses of
$1,038,459 incurred by the Title Research from April 2, 1997. Additionally,
BCIS Services incurred operating expenses of $416,926 and $474,630 during the
nine months ended September 30, 1996 and 1997, respectively, and increased from
$134,488 during the third quarter of 1996 to $142,552 during the third quarter
of 1997.
Interest Expense. Interest expense decreased 19.9% from $323,975 in the
first nine months of 1996 to $259,440 in the first nine months of 1997. The
decrease was due to lower borrowing levels on the Company's revolving credit
line.
Federal Income Taxes. Federal income taxes increased from $618,772 in the
first nine months of 1996 to $698,782 in the first nine months of 1997 and
increased from $176,956 to $226,051 in the third quarter, respectively, due to
increases in taxable income primarily resulting from a higher nondeductible
unearned premiums.
Statutory Combined Ratios. The statutory combined ratio decreased from
83.3% at September 30, 1996 to 77.0% at September 30, 1997. This decline is
reflective of favorable underwriting experience in the company's core lines of
business; Ultimate Loss Insurance and Bonded Service. In the first nine months
ended September 30, 1997, underwriting results improved due to the reduction in
run-off of the discontinued automobile program compared with the nine months
ended September 30, 1996. In addition, higher than anticipated salvage and
subrogation, related to the Automobile Physical Damage Insurance business, was
recognized during the nine months ended September 30, 1997.
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 Ohio Indemnity 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 1997 from Ohio
Indemnity, absent regulatory consent, is $2,890,887.
Ohio Indemnity 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 operating activities equalled $1,147,325, and $1,665,540 for the
nine months ended September 30, 1997 and 1996, respectively. Net cash provided
by financing activities was $943,125 for the nine months ended September 30,
1997 and $222,583 for the nine months ended September 30, 1996. Net cash used
in investing activities of the Company was $1,042,353 and $1,704,712 for the
nine months ended September 30, 1997 and 1996, respectively.
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BCIS Services derives its funds principally from claims administration fees
which are sufficient to meet its operating obligations. Although it is
impossible to estimate accurately the future cash flow from the operations of
the newly acquired title business, management believes its effective capital
costs may increase. Management is actively exploring further avenues for
improving liquidity.
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
through the next twelve months. 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 through the next twelve
months.
The Company's investments at September 30, 1997 consisted primarily of
investment-grade fixed income securities. Cash and short-term investments at
September 30, 1997 amounted to $7,866,663, or 27.6% 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
held to maturity 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 $1,182,097 and $1,226,731 for the
nine months ended September 30, 1996 and 1997, respectively.
The Company's total shareholders' equity increased from $13,336,058 at
September 30, 1995 to $15,307,373 at September 30, 1996, to $18,345,425 at
September 30, 1997, representing a 37.6% increase over the three-year period.
The increase in total shareholders' equity is driven by profitable operating
earnings and strengthens the Company's capital position.
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. Such loses were $363,200 and $458,436 at September 30,
1997 and December 31, 1996, respectively.
Under applicable insurance statutes and regulations, Ohio Indemnity is
required to maintain prescribed amounts of capital and surplus as well as
statutory deposits with the appropriate insurance authorities. Ohio Indemnity
is in compliance with all applicable statutory capital and surplus
requirements. Ohio Indemnity's investments consist only of permitted
investments under Ohio insurance laws.
FACTORS TO CONSIDER FORWARD LOOKING
The Company expects to continue expanding its direct sale force, which
should allow the Company to increase its market penetration. These activities
will be directed toward selected market niches where management believes the
Company will be able to provide customers with additional services.
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.
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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 1997, the Company has experienced no
material adverse consequences with respect to its growth in premiums.
INSURANCE REGULATORY MATTERS
On June 20, 1997, the Ohio Department of Insurance issued its triennial
examination report on Ohio Indemnity as of December 31, 1996. 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 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, 1996, were
reasonable.
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, included in "Management's Discussion and Analysis
of Financial Condition and Results of Operations", 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.
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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.
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, 1997.
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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 5, 1997 By: Si Sokol
------------------------ -------------------------
Si Sokol
President and
Chairman of Board of Directors
(Principal Executive Officer)
Date: November 5, 1997 By: Sally Cress
------------------------ -------------------------
Sally Cress
Treasurer, Secretary
(Principal Financial and
Accounting Officer)
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