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, 1999 Commission File Number 0-8738
------------------ -----------------------------
BANCINSURANCE CORPORATION
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Ohio 31-0790882
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
20 East Broad Street, Columbus, Ohio 43215
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number including area code (614) 228-2800
--------------
None
- --------------------------------------------------------------------------------
Former name, former address and former fiscal year, if changed since last
report.
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the last practicable date.
Class Outstanding at March 31, 1999
- ------------------------------- -----------------------------
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
March 31, 1999 (unaudited) and December 31, 1998 3
Consolidated Statements of Income for the
three months ended March 31, 1999 and 1998 (unaudited) 5
Consolidated Statements of Comprehensive Income for the
three months ended March 31, 1999 and 1998 (unaudited) 6
Consolidated Statements of Cash Flows for the
three months ended March 31, 1999 and 1998 (unaudited) 7
Notes to Consolidated Financial Statements (unaudited) 9
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 12
Item 3. Quantitative and Qualitative Disclosures About
Market Risk 17
PART II - OTHER INFORMATION AND SIGNATURES
Item 1. Legal Proceedings 18
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 18
Signatures 19
2
3
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements
--------------------
BANCINSURANCE CORPORATION
AND SUBSIDIARIES
Consolidated Balance Sheets
March 31, December 31,
Assets 1999 1998
- ------ ------------ ------------
(Unaudited)
Investments:
Held to maturity:
Fixed maturities, at amortized cost (fair value
$4,814,539 in 1999 and $4,841,414 in 1998) $ 4,698,706 $ 4,702,163
Available for sale:
Fixed maturities, at fair value (amortized cost
$11,693,225 in 1999 and $10,763,962 in 1998) 12,028,618 11,170,469
Equity securities, at fair value (cost $3,254,155
in 1999 and $3,434,573 in 1998) 3,698,275 4,024,800
Short-term investments, at cost which
approximates fair value 6,190,700 5,824,464
Securities purchased under agreements to resell 1,630,680 1,260,857
------------ ------------
Total investments 28,246,979 26,982,753
------------ ------------
Cash 5,230,227 4,582,168
Premiums receivable 2,517,620 1,783,719
Accounts receivable, net of allowance for
doubtful accounts 326,527 286,242
Reinsurance receivable 2,750 2,750
Prepaid reinsurance premiums 33,823 28,400
Deferred policy acquisition costs 629,748 152,678
Loans to affiliates 578,621 578,621
Note receivable - 6,031
Furniture, fixtures and leasehold improvements, net 259,530 171,764
Excess of investment over net assets of subsidiaries, net 960,477 964,453
Accrued investment income 293,530 269,690
Due from brokers 157,982 -
Other assets 371,258 139,398
------------ ------------
Total assets $ 39,609,072 $35,948,667
============ ============
3
4
BANCINSURANCE CORPORATION
AND SUBSIDIARIES
Consolidated Balance Sheets, Continued
March 31, December 31,
Liabilities and Shareholders' Equity 1999 1998
------------ ------------
(Unaudited)
Reserve for unpaid losses and loss adjustment
expenses $ 3,380,000 $ 3,177,845
Unearned premiums 3,519,566 718,795
Return premium payable 415,768 33,671
Contract funds on deposit 3,250,137 2,917,868
Reinsurance premiums payable 6,937 5,430
Note payable to bank 4,000,000 4,250,000
Note payable 25,267 28,076
Taxes, licenses, and fees payable 203,502 373,679
Deferred federal income taxes 232,716 290,846
Federal income taxes payable 147,058 44,191
Commissions payable 432,722 438,175
Other 753,509 1,165,609
------------ ------------
Total liabilities 16,367,182 13,444,185
------------ ------------
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 514,477 657,844
Retained earnings 21,016,973 20,136,198
------------ ------------
23,342,404 22,604,996
Less: Treasury stock, at cost (35,162 common
shares at March 31, 1999 and December
31, 1998) (100,514) (100,514)
------------ ------------
Total shareholders' equity 23,241,890 22,504,482
------------ ------------
Total liabilities and shareholders' equity $ 39,609,072 $ 35,948,667
============ ============
See accompanying notes to consolidated financial statements.
4
5
BANCINSURANCE CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Income
(Unaudited)
Three Months Ended
March 31,
1999 1998
---------- ---------
Income:
Premiums written $8,535,112 $6,051,172
Increase in unearned premiums (2,800,771) (2,169,296)
---------- ---------
Premiums earned 5,734,341 3,881,876
Premiums ceded (30,163) (15,395)
---------- ----------
Net premiums earned 5,704,178 3,866,481
Investment income (net of expenses of $9,620 and
$14,687, respectively) 334,285 343,976
Net realized gain on investments 76,845 2,932
Claims administration fees 137,632 146,068
Title and appraisal fees 522,383 477,827
Management fees 260,864 223,892
Other income 19,815 10,132
---------- ----------
Total revenue 7,056,002 5,071,308
---------- ----------
Losses and operating expenses:
Losses and loss adjustment expenses 3,722,616 2,422,028
Commission expense 852,701 394,940
Other insurance operating expenses 428,239 390,067
General and administrative expenses 762,222 836,926
Interest expense 40,857 73,972
---------- ----------
Total expenses 5,806,635 4,117,933
---------- ----------
Income before federal income taxes 1,249,367 953,375
Federal income tax expense 368,592 245,874
---------- ----------
Net income $ 880,775 $ 707,501
========== ==========
Net income per common share $ .15 $ .12
========== ==========
Net income per common share, assuming dilution $ .15 $ .12
========== ==========
See accompanying notes to consolidated financial statements.
5
6
BANCINSURANCE CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
(Unaudited)
Three Months Ended
March 31,
1999 1998
---------- ----------
Net income $ 880,775 $ 707,501
Other comprehensive income:
Unrealized holding gains (losses) arising during
period, net of income tax expense (benefit) of
$(73,856) and $10,439, respectively (143,367) 20,264
----------- -----------
Comprehensive income $ 737,408 $ 727,765
========== ===========
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,
1999 1998
---------- ----------
Cash flows from operating activities:
Net income $ 880,775 $ 707,501
Adjustments to reconcile net income to net cash
provided by operating activities:
Net realized gain on investments (76,845) (2,932)
Net realized loss on disposal of equipment 437 -
Depreciation and amortization 44,143 38,163
Deferred federal income tax expense 15,725 12,772
Increase in premiums receivable (733,901) (277,181)
(Increase) decrease in accounts receivable, net (40,285) 48,345
Decrease in reinsurance receivable - 1,412
(Increase) decrease in prepaid reinsurance premiums (5,423) 8,166
Increase in deferred policy acquisition costs, net (477,070) (472,308)
Decrease in loans to affiliates - 248,308
Decrease in note receivable 6,031 12,500
Increase in prepaid federal income taxes - (26,156)
Increase in accrued investment income (23,840) (18,581)
Increase in due from brokers (157,982) -
Increase in other assets (231,860) (127,028)
Increase (decrease) in reserve for unpaid losses
and loss adjustment expenses 202,155 (234,051)
Increase in unearned premiums 2,800,771 2,169,296
Increase in return premium payable 382,097 19,136
Increase (decrease) in contract funds on deposit 332,269 (110,702)
Increase (decrease) in reinsurance premiums payable 1,507 (25,058)
Decrease in note payable (2,809) (3,250)
Increase (decrease) in taxes, licenses and fees payable (170,177) 7,788
Increase (decrease) in federal income taxes payable 102,867 (741)
Decrease in commissions payable (5,453) (221,405)
Decrease in other liabilities (412,100) (42,867)
---------- ----------
Net cash provided by operating activities 2,431,032 1,711,127
---------- ----------
Cash flows from investing activities:
Proceeds from held to maturity: fixed maturities
due to redemption or maturity - 25,000
Proceeds from available for sale: fixed maturities
sold, redeemed and matured 1,195,121 285,000
Proceeds from available for sale: equity securities
sold 1,164,321 537,539
Cost of investments purchased:
Available for sale: fixed maturities (2,114,034) -
Equity securities (928,697) (691,392)
Net (increase) decrease in short-term investments (366,236) 542,255
Net increase in securities purchased under agreements
to resell (369,823) (381,992)
Purchase of furniture, fixtures and leasehold
improvements (113,725) (68,283)
Proceeds from disposal of equipment 100 -
---------- ----------
Net cash provided by (used in) investing
activities (1,532,973) 248,127
---------- ----------
(Continued)
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8
BANCINSURANCE CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Cash Flows, Continued
(Unaudited)
Three Months Ended
March 31,
1999 1998
---------- ----------
Cash flows from financing activities:
Proceeds from note payable to bank $2,000,000 $1,950,000
Repayments from note payable to bank (2,250,000) (2,000,000)
---------- ----------
Net cash used in financing activities (250,000) (50,000)
---------- ----------
Net increase in cash 648,059 1,909,254
---------- ----------
Cash at December 31 4,582,168 1,146,317
---------- ----------
Cash at March 31 $5,230,227 $3,055,571
========== ==========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 40,857 $ 73,972
Income taxes $ 250,000 $ 260,000
========== ==========
See accompanying notes to consolidated financial statements.
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9
BANCINSURANCE CORPORATION
AND SUBSIDIARIES
Notes To Consolidated Financial Statements (Unaudited)
1. The Consolidated Balance Sheet as of March 31, 1999, the Consolidated
Statements of Income for the three months ended March 31, 1999 and 1998,
the Consolidated Statements of Comprehensive Income for the three months
ended March 31, 1999 and 1998, 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
flows at March 31, 1999 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, 1998. The results of operations for the period
ended March 31, 1999 are not necessarily indicative of the results of
operations for the full year.
In 1998, the National Association of Insurance Commissioners ("NAIC")
adopted the Codification of Statutory Accounting Principles guidance, which
will replace the current Accounting Practices and Procedures manual as the
NAIC's primary guidance on statutory accounting. The NAIC is now
considering amendments to the Codification guidance that would also be
effective upon implementation. The Codification provides guidance for areas
where statutory accounting has been silent and changes current statutory
accounting in some areas. The Ohio Insurance Department has adopted the
Codification guidance, effective January 1, 2001. The Company has not
estimated the potential effect of the Codification guidance if adopted by
the Department.
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. In 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities." This
statement, which is effective for periods beginning after June 15, 1999,
establishes accounting and reporting standards which require derivatives to
be measured at fair value and recognized as assets or liabilities in the
balance sheet. The Company's balance sheet and statements of earnings and
cash flows will not be materially impacted by this statement, upon
adoption.
4. Supplemental Disclosure For Earnings Per Share
Three Months Ended
March 31,
1999 1998
---------- ---------
Net income $ 880,775 $ 707,501
---------- ----------
Income available to common stockholders,
assuming dilution $ 880,775 $ 707,501
---------- ----------
Weighted average common shares outstanding 5,843,115 5,843,115
Adjustments for dilutive securities:
Dilutive effect of outstanding options 90,858 88,249
---------- ----------
Diluted common shares 5,933,973 5,931,364
========== ==========
Net income per common share $ .15 $ .12
Net income per common share, assuming dilution $ .15 $ .12
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BANCINSURANCE CORPORATION
AND SUBSIDIARIES
Notes To Consolidated Financial Statements (Unaudited) (Continued)
5. During 1997, SFAS No. 131, "Disclosures about Segments of an Enterprise and
Related Information" was issued. This SFAS was adopted by the Company as of
January 1, 1998. SFAS No. 131 requires disclosure of revenues and other
information based on the way management organizes the segments of the
business for making operating decisions and assessing performance.
The Company operates primarily in the property/casualty insurance industry.
There are intersegment management fees but not intersegment sales. The
allocations of certain general expenses within segments are based on a
number of assumptions, and the reported operating results would change if
different methods were applied. Depreciation and capital expenditures are
not considered material.
MARCH 31, 1999
------------------------------------------------------------------------------
WORKERS
PROPERTY/CASUALTY TITLE COMPENSATION ALL CONSOLIDATED
INSURANCE AGENCY ADMINISTRATION OTHER TOTALS
------------------------------------------------------------------------------
Revenues from external customers... $ 6,087,080 $ 522,527 $ 137,632 $ - $ 6,747,239
Intersegment revenues.............. 2,370 - - 2,610 4,980
Interest revenue................... 307,627 - - 6,116 313,743
Interest expense................... 780 718 20 39,339 40,857
Depreciation and amortization...... 14,744 15,345 1,178 12,876 44,143
Segment profit (loss).............. 1,365,511 (24,883) (14,878) (71,403) 1,254,347
Income tax expense (benefit)....... 407,120 - - (38,528) 368,592
Segment assets..................... $ 36,820,587 $ 799,466 $ 187,274 $3,140,025 $40,947,352
MARCH 31, 1998
------------------------------------------------------------------------------
WORKERS
PROPERTY/CASUALTY TITLE COMPENSATION ALL CONSOLIDATED
INSURANCE AGENCY ADMINISTRATION OTHER TOTALS
------------------------------------------------------------------------------
Revenues from external customers... $ 4,112,793 $ 480,214 $ 146,068 $ - $ 4,739,075
Intersegment revenues.............. 2,370 - - 2,610 4,980
Interest revenue................... 331,384 - - 5,829 337,213
Interest expense................... - - 70 73,902 73,972
Depreciation and amortization...... 16,426 7,935 830 12,972 38,163
Segment profit (loss).............. 1,225,562 (2,901) 6,606 (270,912) 958,355
Income tax expense (benefit)....... 338,197 - 2,300 (94,623) 245,874
Segment assets..................... $ 31,481,713 $ 538,319 $ 186,864 $2,310,056 $34,516,952
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BANCINSURANCE CORPORATION
AND SUBSIDIARIES
Notes To Consolidated Financial Statements (Unaudited) (Continued)
------------------------------------
MARCH 31 MARCH 31
1999 1998
------------------------------------
REVENUES
--------
Total revenues for reportable segments..................................... $ 6,747,239 $ 4,739,075
Interest revenue........................................................... 313,743 337,213
Elimination of intersegment revenues....................................... (4,980) (4,980)
----------- -----------
Total consolidated revenues................................................ $ 7,056,002 $ 5,071,308
=========== ===========
PROFIT
------
Total profit for reportable segments....................................... $ 1,325,750 $ 1,229,267
Other loss ................................................................ (71,403) (270,912)
Elimination of intersegment profits........................................ (4,980) (4,980)
----------- -----------
Income before income taxes................................................. $ 1,249,367 $ 953,375
=========== ===========
ASSETS
------
Total assets for reportable segments....................................... $37,807,327 $32,206,896
Other assets............................................................... 3,140,025 2,310,056
Elimination of intersegment receivables.................................... (1,338,280) (853,398)
----------- -----------
Consolidated assets........................................................ $39,609,072 $33,663,554
=========== ===========
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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 (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 for its major line of insurance coverage. 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,
-------------------------------
1998-99
-------------------------------
Amount % Change
------------ --------
Premiums written $ 2,483,940 41.0%
Net premiums earned 1,837,697 47.5%
Net investment income 64,222 18.5%
Total revenue 1,984,694 39.1%
Loss and loss adjustment expense,
net of reinsurance recoveries 1,300,588 53.7%
Operating expense 421,229 26.0%
Interest expense (33,115) (44.8)%
Operating income 295,992 31.0%
Net income $ 173,274 24.5%
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:
1999 1998
------------------------
Statutory:
Loss ratio 65.3% 63.1%
Expense ratio 16.5% 17.5%
---- ----
Combined ratio 81.8% 80.6%
==== ====
GAAP:
Loss ratio 65.3% 63.1%
Expense ratio 16.4% 13.4%
---- ----
Combined ratio 81.7% 76.5%
==== ====
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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, 1999 AS COMPARED TO MARCH 31, 1998
Premiums Written; Premiums Earned. Premiums written increased 41.0% from
$6,051,172 at March 31, 1998 to $8,535,112 at March 31, 1999 while premiums
earned increased 47.5% from $3,866,481 at March 31, 1998 to $5,704,178 at March
31, 1999. Premiums increased due to strong performance in the Company's
expanding core product lines of business.
Premiums written for Ultimate Loss Insurance increased 64.0% from $2,709,195 in
the first quarter of 1998 to $4,444,380 in 1999. Premiums earned for Ultimate
Loss Insurance increased 57.1% from $2,792,527 in the first quarter of 1998 to
$4,386,946 in 1999. The increase in premiums written and premiums earned during
the first quarter of 1999 was primarily attributable to six major financial
institutions added as customers after the first quarter of 1998 and
approximately ninety smaller financial institutions added during 1998 and 1999.
In addition, a creditor-placed collateral and mortgage protection program
recorded, in the aggregate, $11,033 and $168,363 of premiums written and $93,706
and $140,557 of premiums earned during the three months ended March 31, 1998 and
1999, respectively.
Premiums written for the Bonded Service program increased 22.2% from $3,323,617
in the first quarter of 1998 versus $4,062,598 in 1999, while premiums earned
from the Bonded Service program increased 17.6% from $1,048,874 to $1,233,159
during the first quarter of 1998 and 1999, respectively. The increases in
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 increased 18.5% from $346,908 in
the first quarter of 1998 to $411,130 the first quarter of 1999. Net realized
gains on investments increased from $2,932 in the first quarter of 1998 to
$76,845 in 1999 due to changes in investment mix resulting from the application
of the Company's investment strategy in the current market environment. In 1999,
the Company intends to seek growth in investment income by increasing the
average size of the investment portfolio. As new funds become available, they
will be invested in accordance with the Company's strategy of emphasizing after
tax return, which predominantly includes municipal tax-free securities. The
Company strives to maintain a high quality investment portfolio.
Claims Administration Fees. Claims administration fees generated by BCIS
Services Inc. ("BCIS Services"), a consolidated subsidiary, accounted for
$146,068 of the revenues during the first quarter of 1998 and $137,632 during
1999. The decrease of 5.8% was primarily attributable to a decline in claims
processing and servicing responsibilities in 1999.
Title and Appraisal Fees. Title services and appraisal fees generated by Custom
Title Services, Inc. ("Custom Title"), a consolidated subsidiary, accounted for
$477,827 of the revenues for the first quarter of 1998 versus $522,383 in 1999.
This increase of 9.3% was primarily attributable to an increase in the loan
closing segment of the business.
Management Fees. Management fees increased 16.5% from $223,892 during the first
quarter of 1998 to $260,864 in 1999. 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.
Losses and Loss Adjustment Expenses, Net of Reinsurance Recoveries. Losses and
loss adjustment expenses totaled $2,422,028, or 62.6% of net premiums earned
during the first quarter of 1998, versus $3,722,616, or 65.3% of net premiums
earned during the first quarter of 1999. Losses and loss adjustment expenses, as
a percentage of net premiums earned, increased for the comparable period due to
net premiums earned increasing 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
additional claims from the Ultimate Loss Insurance business which increased
55.6% from $2,189,613 in the first quarter of 1998 to $3,406,876 in the first
quarter of 1999 primarily due to the addition of financial institution
customers. Losses and loss adjustment expenses for the Bonded Service program
increased 79.1% from $103,745 in 1998 to $185,855 in 1999 primarily due to
higher redundancy development during the first quarter of 1998 on prior year
reserves.
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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 26.0% from
$1,621,933 in the first quarter of 1998 to $2,043,162 in the first quarter of
1999. Commission expense increased 115.9% from $394,940 in the first quarter of
1998 to $852,701 in the first quarter of 1999, primarily due to both higher
direct and contingent commissions associated with the increase in premiums
written in the Ultimate Loss Insurance and Bonded Service programs. Other
insurance operating expenses increased 9.8% from $390,067 in the first quarter
of 1998 to $428,239 in the first quarter of 1999, primarily due to increases in
premium taxes, audit fees and office supplies. General and administrative
expenses decreased 8.9% from $836,926 in the first quarter of 1998 to $762,222
in the first quarter of 1999 primarily due to decreases in consulting,
advertising and legal. BCIS Services incurred operating expenses of $139,461 in
the first quarter of 1998 compared with $152,510 in the first quarter of 1999
and Custom Title incurred operating expenses of $483,115 during the first
quarter of 1998 versus $547,410 in 1999.
Interest Expense. Interest expense decreased from $73,972 in the first quarter
of 1998 to $40,857 in the first quarter of 1999 due to lower borrowing levels on
the Company's revolving credit line.
Federal Income Taxes. The difference between federal income taxes, $245,874
during the first quarter of 1998 and $368,592 in 1999, resulted from higher
pre-tax income and lower permanent tax differences resulting in a higher
effective tax rate.
Statutory Combined Ratios. The change in the statutory combined ratio from 80.6%
at March 31, 1998 to 81.8% March 31, 1999 was an anticipated increase in the
loss ratio due to management's continuing emphasis on larger accounts in the
Ultimate Loss Insurance program.
DISCONTINUED PRODUCTS
In November 1998, one of the Company's significant Ultimate Loss Insurance
program customers closed their auto finance division as part of an overall
strategy to focus on more profitable areas of lending. This customer represented
24.6% of the Company's premiums written and 38.5% of the Company's premiums
earned during the first quarter of 1998.
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 1999 from Ohio
Indemnity, absent regulatory consent, is $3,718,691.
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 $2,431,032 and $1,711,127 for the
quarter ended March 31, 1999 and 1998, respectively. Net cash used in financing
activities was $250,000 for the quarter ended March 31, 1999 and $50,000 for the
quarter ended March 31, 1998. Net cash provided by (used in) investing
activities of the Company was ($1,532,973) and $248,127 for the quarter ended
March 31, 1999 and 1998, respectively.
BCIS Services derives its funds principally from claims administration fees and
Custom Title 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
Custom Title'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, 1999 consisted primarily of
investment-grade fixed income securities. Cash and short-term investments at
March 31, 1999 amounted to $13,051,607, or 39.0% 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 accumulated other
comprehensive income. The Company earned net investment income of $411,130 and
$346,908 for the three months ended March 31, 1999 and 1998, respectively.
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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 recognize a gain or loss.
The Company's total shareholders' equity increased $3,434,324 to $23,241,890 at
March 31, 1999 from $19,807,566 at March 31, 1998 representing a 17.3% 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 $350,875 and $331,425 at March 31, 1999 and
1998, 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.
DISCLOSURE ABOUT MARKET RISK
The following discussion about the Company's risk-management activities includes
"forward-looking statements" that involve risk and uncertainties. Actual results
could differ materially from those projected in the forward-looking statements.
Market risk is the risk of loss arising from adverse changes in market rates and
prices, such as interest rates, foreign currency exchange rates, and other
relevant market rate or price changes. Market risk is directly influenced by the
volatility and liquidity in the markets in which the related underlying assets
are traded. The Company's market risk sensitive instruments are entered into for
purposes other than trading.
The carrying value of the Company's investment portfolio as of March 31, 1999
was $20,425,599, 82% of which is invested in fixed maturity securities. The
primary market risk to the investment portfolio is interest rate risk associated
with investments in fixed maturity securities as well as fixed-rate short-term
investments. The Company's exposure to equity risk is not significant. The
Company has no foreign exchange risk or direct commodity risk.
For fixed maturity securities, the short-term liquidity needs and the potential
liquidity needs of the business are key factors in managing the portfolio. The
portfolio duration relative to the liabilities' duration is primarily managed
through cash market transactions. For additional information regarding the
Company's objectives and strategies pertaining to the investment portfolio, see
the Liquidity and Capital Resources section of this management's discussion and
analysis (MD&A).
For the Company's investment portfolio, there were no significant changes in the
Company's primary market risk exposures or in how these exposures are managed
compared to the year ended December 31, 1998. The Company does not anticipate
significant changes in the Company's primary market risk exposures or in how
those exposures are managed in future reporting periods based upon what is known
or expected to be in effect in future reporting periods.
The fair values of loans to affiliates and notes payable would not be materially
different as compared to their fair values at December 31, 1998 as interest
rates have remained relatively consistent.
FACTORS TO CONSIDER FORWARD LOOKING
Going forward, management will consider underwriting, acquisition and investment
opportunities which fit the Company's strategy of penetrating niche and
short-tail risk markets. These decisions will be in areas where management feels
they have an understanding of the underwriting and inherent risks. Management is
intent on adding independent agents to expand its market presence. The Company
will further concentrate on penetrating larger financial institutions for
collateral protection insurance and expanding financial institution programs to
include mortgage collateral insurance. Opportunities will be considered for
underwriting additional non-profit organizations as they continue to consolidate
into national trusts and seek to retain and transfer their unemployment claim
exposure.
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. Management expects the discontinuance
of this policy will not have a material adverse effect on the Company's
operating results. See "DISCONTINUED PRODUCTS."
IMPACT OF THE YEAR 2000 ISSUE
State of Readiness. The Year 2000 issue relates to the way computer systems and
programs define calendar dates; they could fail or make miscalculations due to
interpreting a date including "00" to mean 1900, not 2000.
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During fiscal 1997, the Company completed the installation and testing of its
internal financial systems and believes that such systems are Year 2000
compliant. The Company utilizes the latest version of Year 2000 compliant
Platinum SQL software for its internal financial system.
The Company began work on the Year 2000 Compliance issue for all remaining
internal software in fiscal 1997. The scope of the project includes: ensuring
the compliance of all applications, operating systems and hardware on network,
PC platforms and addressing the compliance of key business partners.
The most significant category of key business partners are financial
institutions. Their critical functions include safeguarding and management of
investment portfolios and processing of the Company's operating bank accounts.
Other partner categories include insurance agencies, communication services,
utilities, materials and supplies. Based on the importance of each relationship,
the Company is defining a strategy to determine compliance.
The target for completion of all phases is the third quarter of 1999. The
Company has completed the assessment and strategy phases for applications,
operating systems and hardware. Currently, approximately 60% of all policyholder
network systems are compliant.
The Company has a MCSE (Microsoft Certified Systems Engineer) on staff to review
the impact of its Year 2000 risks. Continuing evaluation by our MCSE in
developing contingency plans and to complete remediation work on separate
portions of the project are on going. Expected completion of all phases is
anticipated by third quarter end 1999.
Costs to Address the Company's Year 2000 Issue. Since the inception of the
project, the Company has incurred external costs of approximately $51,000.
Current estimates project a total expense for the project of $150,000. There has
not been a material adverse impact on the Company's operations or financial
condition as a result of projects being deferred due to resource constraints
caused by the Year 2000 project.
The Company's Contingency Plans. With respect to contingency plans for critical
policyholder systems, the Company recognizes that there is a viable alternative
if these systems are non-compliant. However, the Company has a targeted
completion of critical policyholder systems by third quarter end of 1999,
allowing for unanticipated delays. The Company will continue to reassess the
need for formal contingency plans, based on progress of Year 2000 efforts by the
Company and third parties.
Risks of the Company's Year 2000 Issue. Although the Company expects its
critical systems to be compliant by third quarter 1999 end, there is no
guarantee that these results will be achieved. Specific factors that give rise
to this uncertainty include a possible loss of technical resources to perform
the work, failure to identify all susceptible systems, non-compliance by third
parties whose systems and operations impact the Company, and other similar
uncertainties. A reasonable possible worst case scenario might include one or
more of the Company's significant policyholder systems being non-compliant, but
no loss of current data is anticipated. Such an event will not result in a
material disruption to the Company's operations. Specifically, if a third party
system is not Year 2000 compliant, the Company could experience an interruption
to manage its invested assets and it's operating cash accounts. Should the worst
case scenario occur, it could, depending on its duration, have a material impact
on the Company's results of operations and 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.
FORWARD-LOOKING INFORMATION
Statements in the following discussion that indicate the Company's or
management's intentions, hopes, beliefs, expectations or predictions of the
future are forward-looking statements. It is important to note that the
Company's actual results could differ materially from those projected in such
forward-looking statements. Additional information concerning factors that could
cause actual results to differ materially from those suggested in the
forward-looking statements is contained under the caption "Management's
Discussion and Analysis of Financial Condition and Results of Operations" in the
Company's Annual Report on Form 10-K for the year ended December 31, 1998 filed
with the Securities and Exchange Commission, as the same may be amended from
time to time.
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Forward-looking statements are not guarantees of performance. They involve
risks, uncertainties and assumptions. The future results and shareholder values
of the Company may differ materially from those expressed in these
forward-looking statements. Many of the factors that will determine these
results and values are beyond the Company's ability to control or predict.
Shareholders are cautioned not to put undue reliance on forward-looking
statements. In addition, the Company does not have an intention or obligation to
update forward-looking statements after the date hereof, even if new
information, future events, or other circumstances have made them incorrect or
misleading. For those statements, the Company claims the protection of the safe
harbor for forward-looking statements contained in the Private Securities
Litigation Reform Act of 1995.
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 1999, 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 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, 1998, were
reasonable.
Item 3. Quantitative and Qualitative Disclosures
----------------------------------------
About Market Risk
-----------------
The information required by this item is included under the caption
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Disclosure About Market Risk".
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings
-----------------
On June 11, 1998, the Company filed an action in Franklin County Common Pleas
Court against Brian Delphia d/b/a Delphia Consulting, Inc., a computer
consulting firm, asserting claims for breach of contact relating to a software
development project. The computer consultant brought a counter-claim seeking
payment of $166,500 for outstanding billings. Mr. Delphia filed a second
counter-claim seeking $1,000,000 from the Company for malicious prosecution. The
Company believes both counter-claims are without merit and believes it has
strong defenses to the claims.
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, 1999.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Company
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
BANCINSURANCE CORPORATION
-------------------------
(Company)
Date: May 5, 1999 By: Si Sokol
--------------------- --------------------------------------------
Si Sokol
President and Chairman of Board of Directors
(Principal Executive Officer)
Date: May 5, 1999 By: Sally Cress
--------------------- ---------------------------------------------
Sally Cress
Treasurer and Secretary
(Principal Financial and Accounting Officer)
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