<PAGE> 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, 1996 Commission File Number 0-8738
----------------- -----------------------------
BANCINSURANCE CORPORATION
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
OHIO 31-0790882
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
20 EAST BROAD STREET, COLUMBUS, OHIO 43215
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number including area code (614) 228-2800
----------------
NONE
- --------------------------------------------------------------------------------
Former name, former address and former fiscal year, if changed since last
report.
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO
------- -------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the last practicable date.
CLASS OUTSTANDING AT MARCH 31, 1996
- ------------------------------- -------------------------------
Common stock, without par value 5,785,049
<PAGE> 2
BANCINSURANCE CORPORATION
AND SUBSIDIARIES
INDEX
-----
<TABLE>
<CAPTION>
Page No.
<S> <C>
PART I - FINANCIAL INFORMATION:
Item 1. Financial Statements
Consolidated Balance Sheets as of
March 31, 1996 (unaudited) and December 31, 1995 3
Consolidated Statements of Income for the
three Months Ended March 31, 1996 and 1995 (unaudited) 5
Consolidated Statements of Cash Flows for the
three Months Ended March 31, 1996 and 1995 (unaudited) 6
Notes to Consolidated Financial Statements (unaudited) 8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9
PART II - OTHER INFORMATION AND SIGNATURES
Item 1. Legal Proceedings 15
Item 2. Changes in Securities Not Applicable
Item 3. Default Upon Senior Securities Not Applicable
Item 4. Submission of Matters to a Vote
of Security Holders Not Applicable
Item 5. Other Information Not Applicable
Item 6. Exhibits and Reports on Form 8-K 16
Signatures 17
</TABLE>
2
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements
BANCINSURANCE CORPORATION
AND SUBSIDIARIES
Consolidated Balance Sheets
<TABLE>
<CAPTION>
March 31, December 31,
ASSETS 1996 1995
------ ----------- -------------
(Unaudited)
<S> <C> <C>
Investments:
Held to maturity:
Fixed maturities, at amortized cost (fair value
$3,759,580 in 1996 and $4,390,089 in 1995) $ 3,658,918 $ 4,258,129
Available for sale:
Fixed maturities, at fair value (amortized cost
$9,479,399 in 1996 and $9,222,686 in 1995) 9,757,262 9,563,314
Equity securities, at fair value (cost $3,790,263
in 1996 and $3,175,130 in 1995) 4,132,078 3,465,204
Short-term investments, at cost which
approximates fair value 4,456,525 4,942,924
Securities purchased under agreements to resell 1,255,472 1,158,571
----------- -----------
Total investments 23,260,255 23,388,142
----------- -----------
Cash 1,197,596 482,405
Premiums receivable 665,962 400,397
Reinsurance receivable 283,581 528,726
Reinsurance recoverable on paid losses 358,305 525,102
Deferred policy acquisition costs 347,597 -
Prepaid reinsurance premiums 45,000 514,662
Premium taxes receivable 128,359 138,632
Loans to affiliates 143,744 143,744
Furniture, fixtures and leasehold improvements, net 117,840 129,490
Excess of investment over net assets of subsidiaries 753,738 753,738
Deferred federal income taxes 84,499 55,623
Prepaid federal income taxes 124,435 321,488
Accrued investment income 283,608 231,276
Other assets 104,133 136,809
----------- -----------
Total assets $27,898,652 $27,750,234
=========== ===========
(Continued)
</TABLE>
3
<PAGE> 4
BANCINSURANCE CORPORATION
AND SUBSIDIARIES
Consolidated Balance Sheets, Continued
<TABLE>
<CAPTION>
March 31, December 31,
LIABILITIES AND SHAREHOLDERS' EQUITY 1996 1995
------------------------------------ ----------- ------------
(Unaudited)
<S> <C> <C>
Reserve for unpaid losses and loss adjustment
expenses $ 1,884,788 $ 2,241,881
Unearned premiums 3,254,765 2,997,334
Contract funds on deposit 1,574,893 1,809,012
Return premiums payable 11,326 19,488
Reinsurance premiums payable 501,163 392,716
Note payable to bank 5,716,132 5,616,132
Taxes, licenses, and fees payable 53,291 54,552
Commissions payable 310,516 341,112
Amount due to stock broker - 143,038
Other 412,659 424,559
----------- -----------
Total liabilities 13,719,533 14,039,824
----------- -----------
Commitments and contingent liabilities
Shareholders' equity:
Non-voting preferred stock:
Class A Serial Preference shares without par value; authorized 100,000
shares; no shares issued or
outstanding - -
Class B Serial Preference shares without par value;
authorized 98,646 shares; no shares issued or
outstanding - -
Common stock without par value; authorized
20,000,000 shares; 5,878,277 shares issued 315,567 315,567
Additional paid-in capital 1,466,753 1,466,753
Net unrealized gain on investments 408,987 416,263
Retained earnings 12,240,857 11,699,436
----------- -----------
14,432,164 13,898,019
Less: Treasury stock, at cost (93,228 common
shares at March 31, 1996 and 71,728
at December 31, 1995) (253,045) (187,609)
----------- -----------
Total shareholders' equity 14,179,119 13,710,410
----------- -----------
Total liabilities and shareholders' equity $27,898,652 $27,750,234
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE> 5
BANCINSURANCE CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Income
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1996 1995
---------- -------
<S> <C> <C>
Income:
Premiums written $3,603,751 $9,180,818
(Increase) decrease in unearned premiums (257,432) 133,542
---------- ----------
Premiums earned 3,346,319 9,314,360
Premiums ceded (450,970) (3,032,448)
---------- ----------
Net premiums earned 2,895,349 6,281,912
Investment income (net of expenses of $20,177 and
$48,663 respectively) 339,427 380,423
Net realized gain on investments 3,189 14,628
Claims administration fees 132,883 135,454
Other income 116,979 28,017
---------- ----------
Total revenue 3,487,827 6,840,434
---------- ----------
Losses and operating expenses:
Losses and loss adjustment expenses 1,976,889 7,453,999
Reinsurance recoveries (420,018) (3,258,972)
Commission expense 518,670 1,004,844
Other insurance operating expenses 402,341 653,118
Amortization of deferred policy acquisition
costs - 191,929
General and administrative expenses 187,960 204,329
Interest expense 108,637 155,972
---------- ----------
Total expenses 2,774,479 6,405,219
---------- ----------
Income before federal income taxes 713,348 435,215
Federal income tax expense 171,926 48,249
---------- ----------
Net income $ 541,422 $ 386,966
========== ==========
Net income per common share $ .09 $ .07
========== ==========
Weighted average number of common shares and
equivalents outstanding 5,860,264 5,874,149
---------- ----------
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE> 6
BANCINSURANCE CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1996 1995
---------- ---------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 541,422 $ 386,966
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Net realized gain on investments (3,189) (14,628)
Net realized loss on disposal of equipment 601 -
Depreciation 15,257 16,785
Amortization of bond premium 2,491 2,536
Amortization of deferred policy acquisition costs - 191,929
Deferred federal income tax (benefit) expense (25,128) 64,731
Increase in premiums receivable (265,565) (2,342,706)
Decrease in reinsurance receivable 245,145 94,496
(Increase) decrease in reinsurance recoverable
on paid losses 166,797 (1,344,508)
Increase in deferred policy acquisition costs (347,597) (493,558)
Decrease in prepaid reinsurance premiums 469,662 607,960
Decrease in premium taxes receivable 10,273 -
(Increase) decrease in prepaid federal
income taxes 197,053 (16,483)
(Increase) decrease in accrued investment income (52,332) 40,597
Decrease in other assets 32,676 41,139
Decrease in reserve for unpaid losses
and loss adjustment expenses (357,093) (819,987)
Increase (decrease) in unearned premiums 257,431 (133,542)
Decrease in contract funds on deposit (234,119) (76,401)
Decrease in return premiums payable (8,162) (31,677)
Increase in reinsurance premiums payable 108,447 947,440
Decrease in taxes, licenses and fees payable (1,261) (170,480)
Increase (decrease) in commissions payable (30,596) 346,610
Decrease in other liabilities (11,900) (30,154)
---------- ----------
Net cash provided by (used in) operating
activities 710,313 (2,732,935)
---------- ----------
Cash flows from investing activities:
Proceeds from held to maturity: fixed maturities
due to redemption or maturity 301,779 300,000
Proceeds from available for sale: fixed maturities
sold, redeemed and matured 146,400 2,257,935
Proceeds from available for sale: equity securities
sold 80,027 242,760
Cost of investments purchased:
Held to maturity: fixed maturities (102,906) -
Available for sale: fixed maturities (402,086) (188,575)
Equity securities (295,150) (185,317)
Decrease in amount due to stock brokers (143,038) -
Net (increase) decrease in short-term investments 486,399 (946,749)
Net (increase) decrease in securities purchased under
agreements to resell (96,901) 179,793
Purchase of furniture, fixtures and leasehold
improvements (4,209) (555)
---------- ----------
Net cash provided by (used in)
investing activities (29,685) 1,659,292
----------- ----------
(Continued)
</TABLE>
6
<PAGE> 7
BANCINSURANCE CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Cash Flows, Continued
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1996 1995
---------- ----------
<S> <C> <C>
Cash flows from financing activities:
Proceeds from note payable to bank 700,000 300,000
Repayments of note payable to bank (600,000) -
Acquisition of treasury stock (65,436) -
---------- ----------
Net cash provided by financing activities 34,563 300,000
---------- ----------
Net increase (decrease) in cash 715,191 (773,643)
---------- ----------
Cash at December 31 482,405 (428,633)
---------- ----------
Cash at March 31 $ 1,197,596 $(1,202,276)
=========== ===========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 108,637 $ 130,899
Income taxes - -
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
7
<PAGE> 8
BANCINSURANCE CORPORATION
AND SUBSIDIARIES
Notes To Consolidated Financial Statements (Unaudited)
1. The Consolidated Balance Sheet as of March 31, 1996, the Consolidated
Statements of Income for the three months ended March 31, 1996 and 1995, 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, 1996 and for all periods presented have
been made.
2. Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been omitted. It is suggested that these unaudited Consolidated Financial
Statements be read in conjunction with the financial statements and notes
thereto included in the Company's Form 10-K for the year ended December 31,
1995. The results of operations for the period ended March 31, 1996 are not
necessarily indicative of the results of operations for the full year.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
8
<PAGE> 9
BANCINSURANCE CORPORATION
AND SUBSIDIARIES
Item 2.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
OVERVIEW
The Company's principal sources of revenue are premiums paid by insureds for
insurance policies issued by the Company. The premiums written become premiums
earned for financial statement purposes as the premium is earned incrementally
over the term of each insurance policy and after deducting the amount of premium
ceded to reinsurers pursuant to reinsurance treaties or agreements. 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 ("case reserves") and for 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.
As of July 28, 1995, Ohio Indemnity Company, a wholly owned subsidiary of
the Company or ("Subsidiary" or "Ohio Indemnity"), entered into an agreement
with the California Department of Insurance to discontinue sales and renewals of
private passenger personal lines in automobile physical damage insurance in
California. See "DISCONTINUED PRODUCTS."
SUMMARY RESULTS
The following table sets forth period to period changes in selected
financial data:
<TABLE>
<CAPTION>
PERIOD TO PERIOD INCREASE (DECREASE)
------------------------------------
QUARTER ENDED MARCH 31
----------------------
1995-96
-------
<S> <C>
Premiums written $(5,577,067)
Net premiums earned (3,386,563)
Net investment income (52,435)
Loss and loss adjustment expense,
net of reinsurance recoveries (2,638,156)
Operating expense (945,249)
Interest expense (47,335)
Operating income 278,133
Net income $ 154,456
</TABLE>
The combined ratio, which is the sum of the loss ratio and expense ratio,
determined in accordance with statutory accounting practices, is the traditional
measure of underwriting experience for insurance companies. The following table
reflects the loss, expense and combined ratios of the Subsidiary on both a
statutory and GAAP basis for each quarter ended March 31:
<TABLE>
<CAPTION>
1996 1995
------ ------
<S> <C> <C>
Statutory:
Loss ratio 53.8% 66.8%
Expense ratio 31.9% 32.2%
-------- ------
Combined ratio 85.7% 99.0%
======== ======
</TABLE>
9
<PAGE> 10
<TABLE>
<CAPTION>
1996 1995
------ ------
<S> <C> <C>
GAAP:
Loss ratio 53.8% 66.8%
Expense ratio 22.3% 29.2%
------ ------
Combined ratio 76.1% 96.0%
====== ======
</TABLE>
Investments of the Subsidiary's assets are restricted to certain investments
permitted by Ohio insurance laws. The Company's overall investment policy is
determined by the Company's Board of Directors and is reviewed periodically. The
Company principally invests in investment-grade obligations of states,
municipalities and political subdivisions because the majority of the interest
income from such investments is tax-exempt and such investments have generally
resulted in favorable net yields. The Company has the ability and intent to hold
its fixed income securities to maturity or put date, and as a result carries its
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
QUARTER ENDED MARCH 31, 1996 AS COMPARED TO QUARTER ENDED MARCH 31, 1995
Premiums Written; Net Premiums Earned. Premiums written decreased from
$9,180,818 at March 31, 1995 to $3,603,751 at March 31, 1996, and net premiums
earned decreased from $6,281,912 at March 31, 1995 to $2,895,349 at March 31,
1996. Premiums decreased primarily due to the initial restructuring of the
California Automobile Physical Damage Program in May 1995 and later
discontinuance of sales and renewals on July 28, 1995. It is anticipated that
premium will predominantly be earned through June 1996 as the policies expire.
Management anticipates the discontinuance of the Automobile Physical Damage
Program will result in a positive impact on underwriting results although there
has been and will continue to be a material reduction in premiums associated
with its discontinuance. Nonetheless, there can be no assurance that the
discontinuance will not have a material adverse effect on the Company's
operating results. See "DISCONTINUED PRODUCTS."
Automobile Physical Damage Insurance accounted for $5,443,040 of premiums
written and $3,626,513 of net premiums earned for the first quarter in 1995
compared with $(53,346), due to cancellations, of premiums written and $502,343
of net premiums earned for the first quarter of 1996, a decrease of 101.1% and
86.1% respectfully. The Company began commercially marketing the product in
California in June 1992 and in Arizona in January 1993. In October 1994, the
Company discontinued sales of Automobile Physical Damage insurance in Arizona.
On April 30, 1995, the Company canceled its managing general agent contract for
the sales of Automobile Physical Damage Insurance in California. On May 1, 1995,
the reinsurance agreement applicable to the Automobile Physical Damage written
through its managing general agent was canceled. Reinsurance will remain in
force for all policies written by its managing general agent. In addition, on
May 1, 1995, the Company assumed marketing and underwriting responsibilities and
engaged an independent claims agent to handle subsequent settlements. As of
March 31, 1996, there were $262,160 in premiums written under the restructured
program. On July 28, 1995, Ohio Indemnity Company entered into an agreement with
the California Department of Insurance to discontinue sales and renewals of
private passenger personal lines in automobile physical damage insurance in
California. See "DISCONTINUED PRODUCTS." Premiums earned decreased less
significantly than premiums written as a result of reductions in unearned
premium resulting from the run-off and reductions in premiums written.
Premiums written for Ultimate Loss Insurance decreased from $1,410,891 in
the first quarter of 1995 to $1,365,177 in the first quarter of 1996. Net
premiums earned from Ultimate Loss Insurance decreased from $1,756,941 in the
first quarter of 1995 to $1,666,229 in the first quarter of 1996. Premiums
written decreased primarily from the cancellation of a policy. Net premiums
earned decreased as a result of reductions in unearned premium associated with
the canceled policy and the elimination of continuation coverage on a second
policy.
Premiums written for the Bonded Service program decreased from
$2,333,269 in the
10
<PAGE> 11
first quarter of 1995 to $2,290,579 in the first quarter of 1996, while net
premiums earned from the Bonded Service program decreased from $840,641 in the
first quarter of 1995 to $706,247 in the first quarter of 1996. As of March 31,
1996, the Company services six such groups.
Net Investment Income. Net investment income decreased 13.3% from $395,051
in the first quarter of 1995 to $342,616 in the first quarter of 1996 primarily
as a result of a smaller investment portfolio attributable to the Company's
premium reduction relating to the discontinued Automobile Physical Damage
program.
Claims Administration. Claims administration income generated by BCIS
Services, Inc. ("BCIS Services"), a wholly-owned subsidiary of the Company,
accounted for $135,454 of the revenues for the first quarter of 1995 and
$132,883 in the first quarter of 1996. BCIS Services commenced business
operations in California during 1993.
Other Income. Other income increased from $28,017 in the first quarter of
1995 to $116,979 in the first quarter of 1996. The increase in other income was
primarily due to earnings in the first quarter of 1995 of $4,181 compared with
$13,963 in the first quarter of 1996 attributed to fee income earned and $87,607
attributed to the release of redundant reserves from the aggregate loss fund
established for reserve years 1992 and 1993 in connection with the Bonded
Service program. Reserve year 1994, though not fully developed at March 31,
1996, is expected to yield redundant reserves due to lower-than-anticipated
losses.
Losses and Loss Adjustment Expenses, Net of Reinsurance Recoveries. Losses
and loss adjustment expenses totaled $1,556,871, or 53.8% of net premiums earned
during the first quarter of 1996 versus $4,195,027, or 66.8% of net premiums
earned during the first quarter of 1995. Losses and loss adjustment expenses, as
a percentage of net premiums earned, decreased for the same period because net
premiums earned decreased at a lower percentage rate than the percentage rate
decrease in losses and loss adjustment expenses. This result reflected lower
loss and loss adjustment expense experience, smaller increases in premium volume
and marginal increases in premium rates.
The absolute decrease in losses and loss adjustment expenses was primarily
attributable to initial claims from the Automobile Physical Damage Insurance
business written in the first quarter of 1995 which totalled $3,316,906 compared
with $391,316 during the first quarter of 1996. This decrease of 88.2% was due
to the discontinuance of the Automobile Physical Damage Program. The losses and
loss adjustment expenses for Ultimate Loss Insurance increased 11.9% to $942,427
in the first quarter of 1996 from $842,475 in the first quarter of 1995 due to
increases in loss and loss adjustment expense payments. Losses and loss
adjustment expenses for the Bonded Service program increased from $(67,705) in
1995 to $103,455 in 1996 primarily due to the release of redundant reserves in
the first quarter of 1995.
Operating Expense. Operating expense consists of commission expense, other
insurance operating expense, amortization of deferred policy acquisition costs
and general and administrative expenses. Operating expense decreased 46.0% from
$2,054,220 for the first quarter of 1995 to $1,108,971 in the first quarter of
1996. The decrease in operating expense was primarily attributable to a 48.4%
decrease in non-deferred commission expense and a 100% decrease in policy fees
paid to the general agent in connection with administration of Automobile
Physical Damage Insurance. Policy fees decreased $326,170 due to discontinuance
of the program. Legal expenses decreased from $62,187 during the first quarter
of 1995 to $27,383 during the first quarter of 1996 as a result of legal work
related to a contract dispute. See Part II, Item 2. Legal Proceedings.
Amortization of deferred policy acquisition costs decreased $191,929 due to
discontinuance of the Automobile Physical Damage Program. Operating expense also
decreased as a result of reductions in travel and consulting expenses.
Additionally, BCIS Services incurred operating expenses of $147,475 in the first
quarter of 1995 compared with $147,842 of operating expenses during the first
quarter of 1996.
Interest Expense. Interest expense decreased 30.3% from $155,972 in the
first quarter of 1995 to $108,637 in the first quarter of 1996. The decrease was
due to lower borrowing levels on the Company's revolving credit line and
decreases in the prime rate.
11
<PAGE> 12
Federal Income Taxes. Federal income taxes increased from $48,249 in the
first quarter of 1995 to $171,926 in the first quarter of 1996 primarily due to
a significant increase in pre-tax income due to lower unearned premium deduction
and the recognition of lower losses and loss adjustment expenses in 1996.
Statutory Combined Ratios. The change in the statutory combined ratio from
99.0% at March 31, 1995 to 85.7% at March 31, 1996 was attributable to decreases
of general and administrative expenses and lower loss and loss adjustment
expense experience, together with marginal increases in premium rates.
DISCONTINUED PRODUCTS
On April 30, 1995, the Company canceled its managing general agent contract
for the sales of Automobile Physical Damage Insurance in California. On May 1,
1995, the reinsurance agreement applicable to the Automobile Physical Damage
written through its managing general agent was canceled. Reinsurance will remain
in force for all policies written by its managing general agent. In addition, on
May 1, 1995, the Company assumed marketing and underwriting responsibilities and
engaged an independent claims agent to handle subsequent settlements. On July
28, 1995, Ohio Indemnity entered into an agreement with the California
Department of Insurance to discontinue sales and renewals of private passenger
personal lines in automobile physical damage insurance in California for a
maximum period of three years. It is anticipated that premium will predominantly
be earned through June 1996 as the policies expire. See "RESULTS OF OPERATIONS."
LIQUIDITY AND CAPITAL RESOURCES
The Company is an insurance holding company whose principal asset is the
stock of Ohio Indemnity. The Company is, and will continue to be, dependent on
dividends from the Subsidiary to meet its liquidity requirements, including debt
service obligations. The Company has a $10 million credit facility to fund
working capital requirements. Based on statutory limitations, the maximum amount
of dividends that the Company would be able to receive in 1996 from the
Subsidiary, absent regulatory consent, is $2,660,432.
The Subsidiary derives its funds principally from net premiums written,
reinsurance recoveries, investment income and contributions of capital from the
Company. The principal use of these funds is for payment of losses and loss
adjustment expenses, commissions, operating expenses and income taxes. Net cash
provided by (used in) operating activities equalled $701,313, and ($2,732,935)
for the quarter ended March 31, 1996 and 1995, respectively. Net cash provided
by financing activities was $34,563 for the quarter ended March 31, 1996 and
$300,000 for the quarter ended March 31, 1995. Net cash provided by (used in)
investing activities of the Company was $(29,685) and $1,659,292 for the quarter
ended March 31 1996 and 1995, respectively.
BCIS Services derives its funds principally from claims administration fees
which are sufficient to meet its operating obligations.
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.
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.
The Company's investments at March 31, 1996 consisted primarily of
investment-grade fixed income securities. Cash and short-term investments at
March 31, 1996 amounted to $6,909,593, or 28.3% 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 $395,051 and $342,616 for the quarter ended
12
<PAGE> 13
March 31, 1995 and 1996, respectively.
As of March 31, 1996, 86.4% of the Company's total assets consisted of
investment-grade fixed income securities, equity securities, short-term
investments, other corporate securities and cash. The Company's total
shareholders' equity increased from $10,599,151 at March 31, 1994 to $12,532,217
at March 31, 1995, to $14,179,119 at March 31, 1996, representing a 33.8%
increase over the three-year period. The increase in total shareholders' equity
has strengthened the Company's capital position.
As of March 31, 1996, the Company had a $10.0 million revolving line of
credit with an outstanding balance of $5,716,132. The credit facility has a
maturity date of May 1, 1999 and bears interest at the bank's prime rate (8.25%
per annum at March 31, 1996).
All material capital commitments and financial obligations of the Company
are reflected in the Company's financial statements, except the Company's risk
on surety bonds and state mandated performance bonds, written in connection with
the Bonded Service program. The financial statements include reserves for losses
on such programs for any claims filed and for an estimate of incurred but not
reported losses.
Under applicable insurance statutes and regulations, the Subsidiary is
required to maintain prescribed amounts of capital and surplus as well as
statutory deposits with the appropriate insurance authorities. The Subsidiary is
in compliance with all applicable statutory capital and surplus requirements.
The Subsidiary's investments consist only of permitted investments under Ohio
insurance laws.
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 1996, the Company has experienced no
material adverse consequences with respect to its growth in premiums.
SAFEHARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
Except for the historical information contained herein, the matters discussed in
this Form 10-Q includes forward-looking statements that involve risks and
uncertainties, including, but not limited to, quarterly fluctuations in results,
the management of growth, and other risks detailed from time to time in the
Company's Securities and Exchange Commission filings. Actual results may differ
materially from management expectations.
TRENDS
Management does not know of any trends, events or uncertainties that will have,
or that are reasonably likely to have, a material effect on the Company's
liquidity, capital resources or results of operations.
The Company's results of operations have varied from quarter to quarter
principally because of fluctuations in underwriting results. The Company's
experience indicates that more loans for automobile purchases are financed
during summer months due to seasonal consumer buying habits. The Company expects
that such quarterly fluctuations may lessen as a result of the discontinuance of
the California Automobile Physical Damage Program, although there can be no
assurance that this will occur.
13
<PAGE> 14
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 not yet 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, 1995, were
reasonable.
RECENT ACCOUNTING AND LEGISLATIVE CHANGES
In October 1995, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for
Stock-Based Compensation," which defines a fair value based method of accounting
for employee stock options and similar equity instruments. However, SFAS No. 123
also allows an entity to continue to account for these plans according to
Accounting Principals Board Opinion No. 25 (APB 25), provided pro forma
disclosures of net income and earnings per share are made as if the fair value
based method of accounting defined by SFAS No. 123 had been applied. The Company
expects to continue to measure compensation cost related to employee stock
purchase options using APB 25 and will provide pro forma disclosures as
required. This statement is effective for the year ended December 31, 1996.
14
<PAGE> 15
BANCINSURANCE CORPORATION
AND SUBSIDIARIES
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
-----------------
The Company is routinely a party to litigation incidental to its business, as
well as to other nonmaterial litigation. Management believes that no individual
item of litigation, or group of similar items of litigation, including the
matters referred to below, is likely to result in judgments that will have a
material adverse effect on the financial condition or results of operations of
the Company.
On November 2, 1994 the James L. Miniter Agency, Inc. ("Agent") filed a lawsuit
against Ohio Indemnity alleging that Ohio Indemnity interfered with Agent's
broker relationship with a policyholder. The Agent's complaint also alleged that
Ohio Indemnity violated Massachusetts Unfair Trade Practices Act which provides
for the trebling of damages in some select circumstances. The case is presently
pending in the United States District Court for the District of Massachusetts.
On February 16, 1995 the Agent made a demand for $5 million (its purported
compensatory damages trebled), an amount Ohio Indemnity believes to be
unsupported by the facts or law involved in this matter. On June 2, 1995 Ohio
Indemnity filed a motion for summary judgement seeking to have Agent's lawsuit
dismissed. That motion is presently pending. Should Ohio Indemnity's motion not
be granted, Ohio Indemnity is confident that it will nonetheless prevail in this
action.
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, 1996.
15
<PAGE> 16
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 10, 1996 By: /s/ SI SOKOL
--------------------------------- -----------------------------------
Si Sokol
President and
Chairman of Board of Directors
(Principal Executive Officer)
Date: May 10, 1996 By: /s/ SALLY CRESS
--------------------------------- -----------------------------------
Sally Cress
Treasurer, Secretary
(Principal Financial and
Accounting Officer)
16
<TABLE> <S> <C>
<ARTICLE> 7
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<DEBT-HELD-FOR-SALE> 9,757,262
<DEBT-CARRYING-VALUE> 3,658,918
<DEBT-MARKET-VALUE> 3,759,580
<EQUITIES> 4,132,078
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 23,260,255
<CASH> 1,197,596
<RECOVER-REINSURE> 358,305
<DEFERRED-ACQUISITION> 347,597
<TOTAL-ASSETS> 27,898,652
<POLICY-LOSSES> 1,884,788
<UNEARNED-PREMIUMS> 3,254,765
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 5,716,132
<COMMON> 315,567
0
0
<OTHER-SE> 13,863,552
<TOTAL-LIABILITY-AND-EQUITY> 27,898,652
2,895,349
<INVESTMENT-INCOME> 339,427
<INVESTMENT-GAINS> 3,189
<OTHER-INCOME> 249,862
<BENEFITS> 1,556,871
<UNDERWRITING-AMORTIZATION> 1,108,971
<UNDERWRITING-OTHER> 108,637
<INCOME-PRETAX> 713,348
<INCOME-TAX> 171,926
<INCOME-CONTINUING> 541,422
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 541,422
<EPS-PRIMARY> .09
<EPS-DILUTED> 0
<RESERVE-OPEN> 1,713,155
<PROVISION-CURRENT> 1,003,492
<PROVISION-PRIOR> 553,379
<PAYMENTS-CURRENT> 451,657
<PAYMENTS-PRIOR> 650,000
<RESERVE-CLOSE> 2,168,369
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
