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 June 30, 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
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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 June 30, 1998
- ------------------------------- ------------------------------
Common stock, without par value 5,843,115
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BANCINSURANCE CORPORATION
AND SUBSIDIARIES
INDEX
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Page No.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of
June 30, 1998 (unaudited) and December 31, 1997 3
Consolidated Statements of Income for the three months and
six months ended June 30, 1998 and 1997 (unaudited) 5
Consolidated Statements of Comprehensive Income for the
three months and six months ended June 30, 1998 and
1997 (unaudited) 6
Consolidated Statements of Cash Flows for the
six months ended June 30, 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 15
Item 5. Other Information 15
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
June 30, December 31,
Assets 1998 1997
- ------ ----------- ------------
(Unaudited)
Investments:
Held to maturity:
Fixed maturities, at amortized cost (fair value
$4,637,991 in 1998 and $4,054,026 in 1997) $ 4,531,583 $ 3,940,194
Available for sale:
Fixed maturities, at fair value (amortized cost
$11,815,264 in 1998 and $12,635,652 in 1997) 12,115,315 12,962,626
Equity securities, at fair value (cost $2,927,080
in 1998 and $2,601,150 in 1997) 3,488,851 3,225,061
Short-term investments, at cost which
approximates fair value 5,947,419 5,753,669
Securities purchased under agreements to resell 1,331,580 1,048,075
----------- -----------
Total investments 27,414,748 26,929,625
----------- -----------
Cash 2,408,268 1,146,317
Accounts receivable, net of allowance for
uncollectible amounts 247,062 297,519
Reinsurance receivable 13,100 8,000
Prepaid reinsurance premiums 33,438 36,335
Premium taxes receivable 36,289 --
Prepaid commissions 280,088 --
Loans to affiliates 628,670 606,182
Note receivable 36,031 67,500
Furniture, fixtures and leasehold improvements, net 177,129 121,697
Excess of investment over net assets of
subsidiaries, net 972,404 976,610
Accrued investment income 283,323 298,234
Other assets 263,846 160,802
----------- -----------
Total assets $34,349,286 $31,404,432
=========== ===========
(Continued)
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4
BANCINSURANCE CORPORATION
AND SUBSIDIARIES
Consolidated Balance Sheets, Continued
June 30, December 31,
Liabilities and shareholders' Equity 1998 1997
- ------------------------------------ ----------- ------------
(Unaudited)
Reserve for unpaid losses and loss adjustment
expenses $ 2,060,952 $ 1,531,714
Unearned premiums 2,103,247 698,764
Contract funds on deposit 3,115,209 3,451,371
Reinsurance premiums payable 9,974 27,821
Note payable to bank 5,000,000 5,000,000
Note payable 30,573 37,073
Taxes, licenses, and fees payable 177,768 150,778
Deferred federal income taxes 255,264 296,049
Federal income taxes payable 155,310 741
Commissions payable 267,410 493,212
Other 514,090 637,108
----------- -----------
Total liabilities 13,689,797 12,324,631
----------- -----------
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 1,495,387
Accumulated other comprehensive income 568,802 627,583
Retained earnings 18,380,247 16,741,778
----------- -----------
20,760,003 19,180,315
Less: Treasury stock, at cost (35,162 common
shares at June 30, 1998 and December
31, 1997) (100,514) (100,514)
----------- -----------
Total shareholders' equity 20,659,489 19,079,801
----------- -----------
Total liabilities and shareholders' equity $34,349,286 $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 Six Months Ended
June 30, June 30,
1998 1997 1998 1997
---------- ---------- ----------- ----------
Income:
Premiums written $4,626,795 $1,634,550 $10,677,967 $5,360,174
(Increase) decrease in
unearned premiums 764,813 748,461 (1,404,483) (860,091)
---------- ---------- ----------- ----------
Premiums earned 5,391,608 2,383,011 9,273,484 4,500,083
Premiums ceded (26,123) -- (41,518) --
---------- ---------- ----------- ----------
Net premiums earned 5,365,485 2,383,011 9,231,966 4,500,083
Investment income (net of
expenses of $30,237 and
$53,923, respectively) 349,679 358,140 693,655 665,547
Net realized gain on
investments 48,061 52,179 50,993 82,872
Claims administration fees 145,696 169,251 291,764 348,982
Title and appraisal fees 491,878 496,482 969,705 496,482
Management fees 237,315 221,985 461,207 221,985
Other income 16,876 72,755 27,008 81,048
---------- ---------- ----------- ----------
Total revenue 6,654,990 3,753,803 11,726,298 6,396,999
---------- ---------- ----------- ----------
Losses and operating expenses:
Losses and loss adjustment
expenses 3,521,126 975,001 5,943,154 2,113,944
Commission expense 590,041 303,575 984,981 604,112
Other insurance operating
expenses 574,047 411,804 964,114 680,298
General and administrative
expenses 577,621 783,035 1,414,547 1,039,895
Interest expense 82,996 125,483 156,968 147,881
---------- ---------- ----------- ----------
Total expenses 5,345,831 2,598,898 9,463,764 4,586,130
---------- ---------- ----------- ----------
Income before federal
income taxes 1,309,159 1,154,905 2,262,534 1,810,869
---------- ---------- ----------- ----------
Federal income tax expense 378,191 311,319 624,065 472,731
---------- ---------- ----------- ----------
Net income $ 930,968 $ 843,586 $ 1,638,469 $1,338,138
========== ========== =========== ==========
Net income per common share $ .16 $ .14 $ .28 $ .23
========== ========== =========== ==========
Net income per common share,
assuming dilution $ .16 $ .14 $ .28 $ .23
========== ========== =========== ==========
See accompanying notes to consolidated financial statements.
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BANCINSURANCE CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
1998 1997 1998 1997
-------- ---------- ---------- ----------
Net income $930,968 $ 843,586 $1,638,469 $1,338,138
Other comprehensive income,
net of tax:
Unrealized holding gains
(losses) on securities
arising during period (79,045) 235,802 (58,781) 66,136
-------- ---------- ---------- ----------
Comprehensive income $851,923 $1,079,388 $1,579,688 $1,404,274
======== ========== ========== ==========
See accompanying notes to consolidated financial statements.
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BANCINSURANCE CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
Six Months Ended
June 30,
1998 1997
----------- -----------
Cash flows from operating activities:
Net income $ 1,638,469 $ 1,338,138
Adjustments to reconcile net income to net cash
provided by operating activities:
Net realized gain on investments (50,993) (82,872)
Depreciation 49,111 36,811
Amortization of bond premium 28,492 24,349
Deferred federal income tax expense (benefit) (10,504) 17,908
Increase in premiums receivable (835,568) (264,138)
Increase in prepaid commissions (280,088) (215,849)
Increase in other assets (34,841) (270,253)
Increase in reserve for unpaid losses and loss
adjustment expenses 529,238 98,241
Increase in unearned premiums 1,404,483 860,091
Decrease in contract funds on deposit (336,162) (297,052)
Increase in federal income taxes payable 154,569 40,190
Decrease in commissions payable (225,802) (26,349)
Decrease in other liabilities (120,375) (288,448)
----------- -----------
Net cash provided by operating activities 1,910,029 970,767
----------- -----------
Cash flows from investing activities:
Proceeds from held to maturity: fixed maturities
due to redemption or maturity 340,000 806,000
Proceeds from available for sale: fixed maturities
sold, redeemed and matured 770,000 618,870
Proceeds from available for sale: equity securities
sold 1,113,486 1,288,799
Cost of investments purchased:
Held to maturity: fixed maturities (411,469) (1,344,403)
Available for sale: fixed maturities -- (2,141,113)
Equity securities (1,886,447) (702,379)
Net (increase) decrease in short-term investments (193,750) 575,895
Net increase in securities purchased under
agreements to resell (283,505) (489,174)
Purchase of furniture, fixtures and leasehold
improvements (96,393) (7,244)
Cash acquired in purchase of subsidiary -- 27,918
----------- -----------
Net cash used in investing activities (648,078) (1,366,831)
----------- -----------
Cash flows from financing activities:
Proceeds from note payable to bank 3,950,000 5,935,000
Repayments of note payable to bank (3,950,000) (5,400,000)
----------- -----------
Net cash provided by financing activities -- 535,000
----------- -----------
Net increase in cash 1,261,951 138,936
----------- -----------
Cash at December 31 1,146,317 681,286
----------- -----------
Cash at June 30 $ 2,408,268 $ 820,222
=========== ===========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 156,968 $ 147,881
=========== ===========
Income taxes 480,000 385,000
=========== ===========
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 June 30, 1998, the Consolidated
Statements of Income for the six months ended June 30, 1998 and 1997, and the
Consolidated Statements of Comprehensive Income for the three and six months
ended June 30, 1998 and 1997, and the Consolidated Statements of Cash Flows for
the six 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
June 30, 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 June 30, 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 Six Months Ended
June 30, June 30,
1998 1997 1998 1997
---------- ---------- ---------- ----------
Net income $ 930,968 $ 843,586 $1,638,469 $1,338,138
---------- ---------- ---------- ----------
Income available to common
stockholders, assuming
dilution $ 930,968 $ 843,586 $1,638,469 $1,338,138
---------- ---------- ---------- ----------
Weighted average common
shares outstanding 5,843,115 5,838,115 5,843,115 5,803,159
Adjustments for dilutive
securities:
Dilutive effect of
outstanding options 101,429 57,507 101,429 57,507
---------- ---------- ---------- ----------
Diluted common shares 5,944,544 5,895,622 5,944,544 5,860,666
========== ========== ========== ==========
Net income per common share $ .16 $ .14 $ .28 $ .23
Net income per common share,
assuming dilution $ .16 $ .14 $ .28 $ .23
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BANCINSURANCE CORPORATION
AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of
---------------------------------------
Financial Condition and Results of Operations
---------------------------------------------
OVERVIEW
Bancinsurance Corporation 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
Six Months Ended June 30,
--------------------------------
1997-98
--------------------------------
Premiums written $5,317,793
Net premiums earned 4,731,883
Net investment income (3,771)
Claims administration fees 5,329,299
Title and appraisal fees 473,223
Loss and loss adjustment expense,
net of reinsurance recoveries 3,829,210
Operating expense 1,039,337
Interest expense 9,087
Operating income 451,665
Net income $ 300,331
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") on both a statutory and GAAP basis for the
six months ended June 30:
1998 1997
---- ----
Statutory:
Loss ratio 64.9% 47.0%
Expense ratio 21.5% 25.3%
---- ----
Combined ratio 86.4% 72.3%
==== ====
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1998 1997
---- ----
GAAP:
Loss ratio 64.9% 47.0%
Expense ratio 18.2% 19.7%
---- ----
Combined ratio 83.1% 66.7%
==== ====
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
JUNE 30, 1998 AS COMPARED TO JUNE 30, 1997
------------------------------------------
Premiums Written; Net Premiums Earned. Premiums written for the six months
increased from $5,360,174 at June 30, 1997 to $10,677,967 at June 30, 1998, and
net premiums earned increased from $4,500,083 at June 30, 1997 to $9,231,966 at
June 30, 1998. Premiums written increased from $1,634,550 during the three
months ended June 30, 1997 to $4,626,795 during the three months ended June 30,
1998, while net premiums earned increased from $2,383,011 to $5,365,485 during
the same period, respectively. Premiums increased due to a focus on historically
profitable core lines of business and complementary products and services. The
addition of two significant new policies in the Ultimate Loss Insurance Program,
a new agency program and growth in the Bonded Service program contributed to the
increases.
Premiums written for Ultimate Loss Insurance increased from $2,462,306 in
the first six months of 1997 to $7,033,780 in the first six months of 1998. Net
premiums earned from Ultimate Loss Insurance increased from $2,764,092 in the
first six months of 1997 to $7,149,722 in the first six months of 1998. Premiums
written for Ultimate Loss Insurance increased from $1,352,501 in the second
quarter of 1997 to $4,331,814 in the second quarter of 1998. Net premiums earned
for Ultimate Loss Insurance increased from $1,490,496 in the second quarter of
1997 to $4,357,195 in the second quarter of 1998. The increase in premiums
written and premiums earned during the first six months of 1998 reflected
increased premium volume primarily attributable to a significant new customer
added during the third quarter of 1997 and a second added during the second
quarter of 1998. In addition, a new creditor placed mortgage protection and
collateral protection program added during the fourth quarter of 1997 recorded
in the aggregate $64,379 and $178,520 of premiums written and earned,
respectively, in 1998.
Premiums written for the Bonded Service program increased from $2,855,517 in
the first six months of 1997 to $3,376,249 in the first six months of 1998,
while net premiums earned from the Bonded Service program increased from
$1,670,525 in the first six months of 1997 to $1,941,193 in the first six months
of 1998 due to increases in premium rates. 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. Premiums written for the Bonded Service program decreased
from $266,272 in the second quarter of 1997 to $232,082 in the second quarter of
1998 due to the timing of billing issuance, while net premiums earned increased
from $864,049 in the second quarter of 1997 to $937,182 in the second quarter of
1998.
Net Investment Income. Net investment income remained relatively constant
from $748,419 in the first six months of 1997 to $744,648 in the first six
months of 1998 and net investment income decreased from $410,319 in the second
quarter of 1997 to $397,740 in the second quarter of 1998. Net investment income
was relatively constant as additional income due to growth in invested assets
from positive cash flow and lengthened maturities on the bond portfolio were
offset by a shift from income producing preferred stocks to common stocks and
declining interest rates. Investment yield has been relatively low due to the
high allocation of short-term investments and emphasis on tax-exempt bonds in
the portfolio.
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Claims Administration Fees. Claims administration fees generated by BCIS
Services, Inc. ("BCIS Services"), a consolidated subsidiary, accounted for
$348,982 of the revenues for the first six months of 1997 and $291,764 in the
first six months of 1998 and decreased from $169,251 in the second quarter of
1997 to $145,696 in the second quarter of 1998. This decrease was primarily
attributable to a decrease in claims processing and servicing responsibilities.
Management Fees. Management fees were $461,207 for the six months ended June
30, 1998 and $237,315 for the three months ended June 30, 1998. Management fees
were $221,985 for the three months ended June 30, 1997. 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 in the Bonded Service program.
Other Income. Other income decreased from $81,048 in the first six months of
1997 to $27,008 in the first six months of 1998 and decreased from $72,755 to
$16,876 in the second quarters, respectively. The decrease was primarily the
result of recording $63,657 as a reimbursement for expenses previously incurred
from an insurance product line sold during the second quarter of 1997.
Losses and Loss Adjustment Expenses, Net of Reinsurance Recoveries. Losses
and loss adjustment expenses totaled $2,113,944, or 47.0% of net premiums earned
during the first six months of 1997 versus $5,943,154, or 64.4% of net premiums
earned during the first six months of 1998. Losses and loss adjustment expenses
totaled $3,521,126 or 65.6% of net premiums earned during the second quarter of
1998 versus $975,001, or 40.9% of net premiums earned during the second quarter
of 1997. Losses and loss adjustment expenses, as a percentage of net premiums
earned, increased for the comparable periods 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 from $1,609,262 during the six months ended June 30, 1997 to
$5,579,251 during the six months ended June 30, 1998 and totalled $694,690
during the second quarter of 1997 compared with $3,429,813 during the second
quarter of 1998. Loss and loss adjustment expenses for Ultimate Loss Insurance
business increased primarily due to a significant new customer added during the
third quarter of 1997 and a second added during the second quarter of 1998.
Losses and loss adjusting expenses for the Bonded Service program decreased from
$300,776 in 1997 to $102,842 in 1998 and decreased from $165,513 for the second
quarter of 1997 compared with $11,118 for the second quarter of 1998. These
decreases were due to redundancy development on prior year reserves combined
with timing differences on the release of prior accident 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 44.7% from
$2,324,305 for the first six months of 1997 to $3,363,642 in the first six
months of 1998 and increased from $1,498,414 for the second quarter of 1997
compared with $1,744,709 during the second quarter of 1998. Commission expense
increased 63.0% from $604,112 in the first six months of 1997 to $984,981 in the
first six months of 1998 and increased from $303,575 to $590,041 in the second
quarter, primarily due to commissions associated with a new collateral
protection insurance agency program and an increase in commissions incurred
associated with higher service fees in the Bonded Service Program. Other
insurance operating expenses increased 41.7% from $680,298 in the first six
months of 1997 to $964,114 in the first six months of 1998 and increased from
$411,804 to $577,047 during the three months ended June 30, respectively,
primarily due to increases in allocable salaries and related benefits, legal,
prepaid premium taxes, rent and advertising. General and administrative expenses
increased 36.0% from $1,039,895 in the first six months of 1997 to $1,414,547 in
the first six months of 1998, primarily due to recognition of two quarters of
operating and administrative expenses incurred by Title Research Corporation
versus only the second quarter of expense recognition during 1997. General and
administrative expenses decreased from $783,035 to $577,621 in the second
quarter of 1997 versus 1998, respectively, primarily due to expense recognition
totalling $72,980 from a product line sold during the second quarter of 1997, in
addition to reductions in consulting, bad debt expense and office supplies.
Additionally, BCIS Services incurred operating expenses of $331,911 in the first
six months of 1997 compared with $282,183 during the first six months of 1998
and decreased from $163,610 during the second quarter of 1997 to $142,690 during
the second
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quarter of 1998.
Interest Expense. Interest expense increased 6.1% from $147,891 in the first
six months of 1997 to $156,968 in the first six months 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, $472,731
in the first six months of 1997 and $624,065 in the first six months of 1998 and
$311,319 to $378,191 in the second quarter, respectively, resulted from more
permanent tax differences resulting in a higher effective tax rate.
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 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 $1,910,029 and $970,767 for the six
months ended June 30, 1998 and 1997, respectively. Net cash provided by
financing activities was $535,000 for the six months ended June 30, 1997. Net
cash used in investing activities of the Company was $648,078 and $1,366,831 for
the six months ended June 30, 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 June 30, 1998 consisted primarily of
investment-grade fixed income securities. Cash and short-term investments at
June 30, 1998 amounted to $9,687,267, or 32.5% 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 $744,648 and $748,419 for the six months ended June 30,
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.
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The Company's total shareholders' equity increased $3,072,619 to $20,659,489
at June 30, 1998 from $17,586,870 at June 30, 1997 representing a 17.5% 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 $241,850 and $477,600 at June 30, 1998 and
December 31, 1997, 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.
One of the Company's significant Ultimate Loss Insurance program customers
decided to close their auto finance division as part of an overall strategy to
focus on more profitable areas of lending, however, they will continue to
service the existing auto loan portfolio as the loans pay off. Management
expects the discontinuance of this operation will result in a gradual decline in
premium volume although policy coverage under existing loans will continue
in-force during the next two to four years.
IMPACT OF THE YEAR 2000 ISSUE
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.
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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 six months of 1998, the Company has experienced no
material adverse consequences with respect to its growth in premiums.
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, 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 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
The Company held its Annual Meeting of Shareholders on June 2, 1998 for the
purpose of electing six directors to serve one year terms expiring in 1999.
The number of votes cast for or against each candidate is as follows:
VOTES FOR VOTES WITHHELD
--------- --------------
Si Sokol 5,150,692 6,708
James R. Davis 5,152,192 5,208
Daniel D. Harkins 5,150,692 6,708
Milton O. Lustnauer 5,150,592 6,808
John S. Sokol 5,150,692 6,708
Saul Sokol 5,150,392 7,008
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Item 5. Other Information
-----------------
Any shareholder proposal submitted outside the processes of Rule 14a-8 under
the Securities Exchange Act of 1934 for presentation to the Company's 1999
Annual Meeting of Shareholders will be considered untimely for purposes of Rules
14a-4 and 14a-5 if notice thereof is received by the Company after March 9,
1999.
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 June 30, 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: August 3, 1998 By: Si Sokol
--------------------------------- -------------------------------
Si Sokol
President and
Chairman of Board of Directors
(Principal Executive Officer)
Date: August 3, 1998 By: Sally Cress
--------------------------------- -------------------------------
Sally Cress
Treasurer and Secretary
(Principal Financial and
Accounting Officer)
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