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 March 31, 1998 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 March 31, 1998
- ------------------------------- -----------------------------
Common stock, without par value 5,843,115
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BANCINSURANCE CORPORATION
AND SUBSIDIARIES
INDEX
-----
Page No.
PART I - FINANCIAL INFORMATION:
Item 1. Financial Statements
Consolidated Balance Sheets as of
March 31, 1998 (unaudited) and December 31, 1997 3
Consolidated Statements of Income for the
three months ended March 31, 1998 and 1997 (unaudited) 5
Consolidated Statements of Comprehensive Income for the
three months ended March 31, 1998 and 1997 (unaudited) 6
Consolidated Statements of Cash Flows for the
three months ended March 31, 1998 and 1997 (unaudited) 7
Notes to Consolidated Financial Statements (unaudited) 9
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10
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 and Use of Proceeds 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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3
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements
--------------------
BANCINSURANCE CORPORATION
AND SUBSIDIARIES
Consolidated Balance Sheets
March 31, December 31,
Assets 1998 1997
- ------ ----------- ------------
(Unaudited)
Investments:
Held to maturity:
Fixed maturities, at amortized cost (fair value
$4,443,975 in 1998 and $4,054,026 in 1997) $ 4,337,883 $ 3,940,194
Available for sale:
Fixed maturities, at fair value (amortized cost
$12,311,085 in 1998 and $12,635,652 in 1997) 12,631,236 12,962,626
Equity securities, at fair value (cost $2,358,389
in 1998 and $2,601,150 in 1997) 3,019,824 3,225,061
Short-term investments, at cost which
approximates fair value 5,211,414 5,753,669
Securities purchased under agreements to resell 1,430,067 1,048,075
----------- -----------
Total investments 26,630,424 26,929,625
----------- -----------
Cash 3,055,571 1,146,317
Premiums receivable 1,032,792 755,611
Accounts receivable, net of allowance for
doubtful accounts 245,231 297,519
Reinsurance receivable 6,588 8,000
Prepaid reinsurance premiums 28,169 36,335
Premium taxes receivable 53,972 --
Prepaid commissions 418,336 --
Loans to affiliates 357,874 606,182
Note receivable 55,000 67,500
Furniture, fixtures and leasehold improvements, net 172,416 121,697
Excess of investment over net assets of
subsidiaries, net 976,380 976,610
Prepaid federal income taxes 26,156 --
Accrued investment income 316,815 298,234
Other assets 287,830 160,802
----------- -----------
Total assets $33,663,554 $31,404,432
=========== ===========
(Continued)
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4
BANCINSURANCE CORPORATION
AND SUBSIDIARIES
Consolidated Balance Sheets, Continued
March 31, December 31,
Liabilities and Shareholders' Equity 1998 1997
- ------------------------------------ ----------- -----------
(Unaudited)
Reserve for unpaid losses and loss adjustment
expenses $ 1,297,663 $ 1,531,714
Unearned premiums 2,868,060 698,764
Contract funds on deposit 3,340,669 3,451,371
Reinsurance premiums payable 2,763 27,821
Note payable to bank 4,950,000 5,000,000
Note payable 33,823 37,073
Taxes, licenses, and fees payable 158,566 150,778
Deferred federal income taxes 319,260 296,049
Federal income taxes payable -- 741
Commissions payable 271,807 493,212
Other 613,377 637,108
----------- -----------
Total liabilities 13,855,988 12,324,631
----------- -----------
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 1,495,387 1,495,387
Accumulated other comprehensive income 647,847 627,583
Retained earnings 17,449,279 16,741,778
----------- -----------
19,908,080 19,180,315
Less: Treasury stock, at cost (35,162 common
shares at March 31, 1998 and December
31, 1997) (100,514) (100,514)
----------- -----------
Total shareholders' equity 19,807,566 19,079,801
----------- -----------
Total liabilities and shareholders' equity $33,663,554 $31,404,432
=========== ===========
See accompanying notes to consolidated financial statements.
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5
BANCINSURANCE CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Income
(Unaudited)
Three Months Ended
March 31,
1998 1997
----------- -----------
Income:
Premiums written $ 6,051,172 $ 3,725,624
Increase in unearned premiums (2,169,296) (1,608,552)
----------- -----------
Premiums earned 3,881,876 2,117,072
Premiums ceded (15,395) --
----------- -----------
Net premiums earned 3,866,481 2,117,072
Investment income (net of expenses of $14,687 and
$14,897, respectively) 343,976 307,407
Net realized gain on investments 2,932 30,693
Claims administration fees 146,068 179,731
Title and appraisal fees 477,827 --
Management fees 223,892 --
Other income 10,132 8,293
----------- -----------
Total revenue 5,071,308 2,643,196
----------- -----------
Losses and operating expenses:
Losses and loss adjustment expenses 2,422,028 1,138,943
Commission expense 394,940 300,537
Other insurance operating expenses 390,067 268,494
General and administrative expenses 836,926 256,860
Interest expense 73,972 22,398
----------- -----------
Total expenses 4,117,933 1,987,232
----------- -----------
Income before federal income taxes 953,375 655,964
Federal income tax expense 245,874 161,412
----------- -----------
Net income $ 707,501 $ 494,552
=========== ===========
Net income per common share $ .12 $ .09
=========== ===========
Net income per common share, assuming dilution $ .12 $ .09
=========== ===========
See accompanying notes to consolidated financial statements.
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6
BANCINSURANCE CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
(Unaudited)
Three Months Ended
March 31,
1998 1997
-------- ---------
Net income $707,501 $ 494,552
Other comprehensive income, net of tax:
Unrealized holding gains (losses) on
securities arising during period 20,264 (169,666)
-------- ---------
Comprehensive income $727,765 $ 324,886
======== =========
See accompanying notes to consolidated financial statements.
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7
BANCINSURANCE CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
Three Months Ended
March 31,
1998 1997
---------- -----------
Cash flows from operating activities:
Net income $ 707,501 $ 494,552
Adjustments to reconcile net income to net cash
provided by operating activities:
Net realized gain on investments (2,932) (30,693)
Depreciation 21,737 9,025
Amortization of bond premium 16,426 7,792
Deferred federal income tax expense 12,772 17,563
Increase in premiums receivable (277,181) (222,024)
Decrease in accounts receivable, net 48,345 --
Decrease in reinsurance receivable 1,412 9,712
Decrease in reinsurance recoverable
on paid losses -- 25,143
Decrease in prepaid reinsurance premiums 8,166 --
Increase in premium taxes receivable (53,972) (45,072)
Increase in prepaid commissions (418,336) (323,505)
Decrease in loans to affiliates 248,308 100,000
Decrease in note receivable 12,500 --
Increase in prepaid federal income taxes (26,156) (21,151)
Increase in accrued investment income (18,581) (32,989)
Increase in other assets (127,028) (4,516)
Increase (decrease) in reserve for unpaid losses
and loss adjustment expenses (234,051) 54,133
Increase in unearned premiums 2,169,296 1,608,552
Increase (decrease) in contract funds on deposit (110,702) 192,918
Decrease in reinsurance premiums payable (25,058) --
Decrease in note payable (3,250) --
Increase in taxes, licenses and fees payable 7,788 6,002
Decrease in federal income taxes payable (741) --
Decrease in commissions payable (221,405) (82,685)
Decrease in other liabilities (23,731) (335,020)
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Net cash provided by operating activities 1,711,127 1,427,737
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Cash flows from investing activities:
Proceeds from held to maturity: fixed maturities
due to redemption or maturity 25,000 306,000
Proceeds from available for sale: fixed maturities
sold, redeemed and matured 285,000 399,871
Proceeds from available for sale: equity securities
sold 537,539 852,024
Cost of investments purchased:
Held to maturity: fixed maturities -- (842,762)
Available for sale: fixed maturities -- (1,889,863)
Equity securities (691,392) (243,990)
Net (increase) decrease in short-term investments 542,255 (179,750)
Net increase in securities purchased under agreements
to resell (381,992) (92,335)
Purchase of furniture, fixtures and leasehold
improvements (68,283) (14,328)
---------- -----------
Net cash provided by (used in) investing
activities 248,127 (1,705,133)
---------- -----------
(Continued)
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8
BANCINSURANCE CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Cash Flows, Continued
(Unaudited)
Three Months Ended
March 31,
1998 1997
----------- -----------
Cash flows from financing activities:
Proceeds from note payable to bank $ 1,950,000 $ 5,100,000
Repayments from note payable to bank (2,000,000) (4,900,000)
Proceeds from stock option exercised -- 29,063
Acquisition of treasury stock -- (29,065)
----------- -----------
Net cash provided by (used in)
financing activities (50,000) 199,998
----------- -----------
Net increase (decrease) in cash 1,909,254 (77,398)
----------- -----------
Cash at December 31 1,146,317 681,286
----------- -----------
Cash at March 31 $ 3,055,571 $ 603,888
=========== ===========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 73,972 $ 29,386
Income taxes $ 260,000 $ 165,000
=========== ===========
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 March 31, 1998, the Consolidated
Statements of Income for the three months ended March 31, 1998 and 1997, the
Consolidated Statements of Comprehensive Income for the three months ended March
31, 1998 and 1997, and the Consolidated Statements of Cash Flows for the three
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 March 31, 1998
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,
1997. The results of operations for the period ended March 31, 1998 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. Prior period financial statements have been restated to reflect the adoption
of Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting on
Comprehensive Income". SFAS No. 130 establishes standards for reporting and
display of comprehensive income and its components. In June 1997, the Financial
Accounting Standards Board issued SFAS 131, "Disclosures About Segments of an
Enterprise and Related Information". This statement requires certain disclosures
about products and services, geographic areas and major customers. The segment
and other information disclosures are required for the year ended December 31,
1998. These standards, expand or modify disclosures and, accordingly, have no
impact on the Company's consolidated results of operations, financial position
or cash flows.
4. Supplemental Disclosure For Earnings Per Share
Three Months Ended
March 31,
1998 1997
---------- ----------
Net income $ 707,501 $ 494,552
---------- ----------
Income available to common stockholders,
assuming dilution $ 707,501 $ 494,552
---------- ----------
Weighted average common shares outstanding 5,843,115 5,767,814
Adjustments for dilutive securities:
Dilutive effect of outstanding options 88,249 58,627
---------- ----------
Diluted common shares 5,931,364 5,826,441
========== ==========
Net income per common share $ .12 $ .09
Net income per common share, assuming dilution $ .12 $ .09
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BANCINSURANCE CORPORATION
AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of Financial Condition and Results
-----------------------------------------------------------------------
of Operations
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OVERVIEW
Bancinsurance Corporation (NASDAQ:BCIS) is a specialty property insurance
holding company. The Company's principal sources of revenue are premiums paid by
insureds for insurance policies issued by the Company. Premium volume
principally is earned as written due to the nature of the monthly policies
issued by the Company. 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 and incurred but not reported ("IBNR") claims. 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.
SUMMARY RESULTS
The following table sets forth period to period changes in selected
financial data:
----------------------------
Period to Period Increase
Three Months Ended March 31,
----------------------------
1997-98
----------------------------
Premiums written $2,325,548
Net premiums earned 1,749,409
Net investment income 8,808
Total revenue 2,428,112
Loss and loss adjustment expense,
net of reinsurance recoveries 1,283,085
Operating expense 796,042
Interest expense 51,574
Operating income 297,411
Net income $ 212,949
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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
Company ("Ohio Indemnity), a consolidated subsidiary, on both a statutory and
GAAP basis for the three months ended March 31:
1998 1997
------------------
Statutory:
Loss ratio 63.1% 53.8%
Expense ratio 17.5% 17.2%
---- ----
Combined ratio 80.6% 71.0%
==== ====
GAAP:
Loss ratio 63.1% 53.8%
Expense ratio 13.4% 15.3%
---- ----
Combined ratio 76.5% 69.1%
==== ====
Investments of Ohio Indemnity's assets are restricted to certain
investments permitted by the 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
MARCH 31, 1998 AS COMPARED TO MARCH 31, 1997
Premiums Written; Net Premiums Earned. Premiums written increased 62.4%
from $3,725,624 at March 31, 1997 to $6,051,172 at March 31, 1998 and premiums
earned increased 82.6% from $2,117,072 at March 31, 1997 to $3,866,481 at March
31, 1998. Premiums increased due to a focus on historically profitable core
lines of business and complementary products and services. The addition of a
significant new policy in the Ultimate Loss Insurance Program, a new agency
program and growth in the Bonded Service Program primarily contributed to the
increases.
Premiums written for Ultimate Loss Insurance increased from $1,109,805 in
the first quarter of 1997 to $2,690,933 in 1998. Premiums earned for Ultimate
Loss Insurance increased from $1,273,596 in the first quarter of 1997 to
$2,698,821 in 1998. The increase in premiums written and premiums earned during
the first quarter of 1998 reflected increased premium volume primarily
attributable to a significant new customer added during the third quarter of
1997. In addition, a new creditor placed mortgage protection and collateral
protection program added during the fourth quarter of 1997 recorded in the
aggregate $18,262 and $93,706 of premiums written and premiums earned,
respectively, in 1998.
Premiums written for the Bonded Service program increased 28.4% from
$2,589,245 in the first quarter of 1997 to $3,323,617 in 1998, while premiums
earned from the Bonded Service program increased 30.1% from $806,476 to
$1,048,874 during the first quarter of 1997 and 1998, respectively. The
increases in net premiums written and premiums earned on the Bonded Service
program were primarily attributable to increases in employee enrollment among
existing trust members resulting in higher service fees.
Net Investment Income. Net investment income remained relatively constant
from $338,100 in the first quarter of 1997 and $346,908 in the first quarter of
1998. Investment income increased from $307,407 in the first quarter of 1997 to
$343,976 in 1998 primarily resulting from lengthened maturities on the bond
portfolio. Net realized gains on investments decreased from $30,693 in the first
quarter of 1997 to $2,932 in 1998 resulting from the Company's 1998 investment
strategy to shelter current year realized gains that were primarily market
driven.
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Claims Administration. Claims administration fees generated by BCIS
Services Inc. ("BCIS Services"), a consolidated subsidiary, accounted for
$179,731 of the revenues during the first quarter of 1997 and $146,068 in 1998.
The decrease of 18.7% was primarily attributable to a decrease in claims
processing and servicing responsibilities.
Title and Appraisal Fees. Title and appraisal fees generated by Title
Research, a consolidated subsidiary, accounted for $480,214 of the revenues for
the first quarter of 1998. Title Research commenced business operation in Ohio
during the second quarter of 1997.
Management Fees. Management fees were $223,892 during the first quarter of
1998. No such amount was recognized during the first quarter of 1997. The
increase was attributed to recognition of favorable results from a closed year
of operations of the Bonded Service program. The Company expects management fees
to vary from year to year depending on claims experience of the Bonded Service
program.
Losses and Loss Adjustment Expenses, Net of Reinsurance Recoveries. Losses
and loss adjustment expenses totaled $1,138,943, or 53.8% of net premiums earned
during the first quarter of 1997 versus $2,422,028, or 62.6% of net premiums
earned during the first quarter of 1998. 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.
The absolute increase in losses and loss adjustment expenses was
attributable to initial claims from the Ultimate Loss Insurance business which
increased to $2,149,438 in the first quarter of 1998 from $914,572 in the first
quarter of 1997 primarily due to a significant new policy added during the third
quarter of 1997. Losses and loss adjustment expenses for the Bonded Service
program decreased from $135,263 in 1997 to $103,745 in 1998 primarily due to
redundancy development on prior year reserves.
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 increased 96.4% from
$825,891 in the first quarter of 1997 to $1,621,933 in the first quarter of
1998. Commission expense increased 31.4% from $300,537 in the first quarter of
1997 to $394,940 in the first quarter of 1998, primarily due to the addition of
a new collateral protection insurance agency program and commission incurred
related to the Bonded Service Program. Other insurance operating expenses
increased 45.3% from $268,494 in the first quarter of 1997 to $390,067 in the
first quarter of 1998, primarily due to increases in allocable salaries and
related benefits, legal, consulting and appraisal and prepaid premium taxes.
General and administrative expenses increased from $256,860 in the first quarter
of 1997 to $836,926 in the first quarter of 1998 primarily due to operating and
administrative expenses incurred by Title Research. Additionally, salaries and
related costs, consulting and depreciation increased during 1998. BCIS Services
incurred operating expenses of $168,301 in the first quarter of 1997 compared
with $139,461 in the first quarter of 1998 and Title Research incurred operating
expenses of $483,115 during the first quarter of 1998.
Interest Expense. Interest expense increased from $22,398 in the first
quarter of 1997 to $73,972 in the first quarter of 1998. The increase was due to
higher borrowing levels on the Company's revolving credit line.
Federal Income Taxes. The difference between federal income taxes, $161,412
in 1997 and $245,874 in 1998, resulted from an increase in the effective tax
rate primarily due to an increase in taxable income.
Statutory Combined Ratios. The change in the statutory combined ratio from
71.0% at March 31, 1997 to 80.6% at March 31, 1998 was attributable to higher
incurred losses, which were anticipated as a result of the planned increase in
larger accounts in the Ultimate Loss Insurance program.
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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. Based on statutory limitations, the maximum amount
of dividends that the Company would be able to receive in 1998 from Ohio
Indemnity, absent regulatory consent, is $3,042,840.
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 $1,711,127 and $1,427,737 for the
quarter ended March 31, 1998 and 1997, respectively. Net cash provided by (used
in) financing activities was $(50,000) for the quarter ended March 31, 1998 and
$199,998 for the quarter ended March 31, 1997. Net cash provided by (used in)
investing activities of the Company was $248,127 and $(1,705,133) for the
quarter ended March 31, 1998 and 1997, respectively.
BCIS Services derives its funds principally from claims administration fees
and Title Research derives its funds principally from title and appraisal fees
which are sufficient to meet their respective operating obligations. Although it
is impossible to estimate accurately the future cash flows from the operations
of Title Research's business, management believes the Company's effective
capital costs may increase. Management is actively exploring further avenues for
preserving capital and 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 March 31, 1998 consisted primarily of
investment-grade fixed income securities. Cash and short-term investments at
March 31, 1998 amounted to $9,697,052, or 32.7% 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 $346,908 and $338,100 for the three
months ended March 31, 1998 and 1997, respectively.
Interest rate risk is the risk that interest rates will change and cause a
decrease in the value of an insurer's investments. The Company mitigates this
risk by attempting to match the maturity schedule of its assets with the
expected payouts of its liabilities. To the extent that liabilities come due
more quickly than assets mature, an insurer would have to sell assets prior to
maturity and recognized a gain or loss.
The Company's total shareholders' equity increased $3,757,865 to
$19,807,566 at March 31, 1998 from $16,231,701 at March 31, 1997 representing a
23.2% increase over the one-year period. Driven by profitable operating
earnings, the increase in total shareholders' equity has strengthened 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 reserves were $331,425 and $331,500 at March 31, 1998 and
1997, respectively.
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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 sales 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.
IMPACT OF THE YEAR 2000 ISSUE
The Company continues to evaluate the implications of the Year 2000
computer systems issue which relates to the potential inability of computer
programs to correctly recognize the Year 2000 date change. Systems that are not
Year 2000 compliant may be unable to read dates correctly after the year 1999
which may cause system failures resulting in the disruption of operations. The
Company is implementing changes which are required to its existing computer
systems, and reviewing the impact of this issue on products which it sells, and
potential impacts on the Company of third party compliance with the Year 2000
issue. At this time, the Company does not believe that compliance with the Year
2000 will have a material adverse effect on its results of operations or
financial position.
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. Title and appraisal
fees are closely related to the level of real estate activity and the average
price of real estate sales. The availability of funds to finance purchases
directly affects real estate sales. Other factors include consumer confidence,
economic conditions, supply and demand, mortgage interest rates and family
income levels. Historically, the first quarter has had the least real estate
activity, while the remaining quarters have been more active. Fluctuations in
mortgage interest rates can cause shifts in real estate activity outside the
normal seasonal pattern.
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's 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 quarter of 1998, the Company has experienced no
material adverse consequences with respect to its growth in premiums.
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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 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, 1997, were
reasonable.
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, is
likely to result in judgments that will have a material adverse effect on the
financial condition or results of operations 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 March 31, 1998.
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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: May 1, 1998 By: Si Sokol
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Si Sokol
President and
Chairman of Board of Directors
(Principal Executive Officer)
Date: May 1, 1997 By: Sally Cress
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Sally Cress
Treasurer and Secretary
(Principal Financial and
Accounting Officer)
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