<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 June 30, 1997 Commission File Number 0-8738
----------------- -------------------------------
BANCINSURANCE CORPORATION
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Ohio 31-0790882
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
20 East Broad Street, Columbus, Ohio 43215
- --------------------------------------------------------------------------------
(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 June 30, 1997
- ------------------------------- ----------------------------
Common stock, without par value 5,838,115
<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
June 30, 1997 (unaudited) and December 31, 1996 3
Consolidated Statements of Income for the three months and
six months ended June 30, 1997 and 1996 (unaudited) 5
Consolidated Statements of Cash Flows for the
six months ended June 30, 1997 and 1996 (unaudited) 6
Notes to Consolidated Financial Statements (unaudited) 8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9
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 15
Item 5. Other Information Not Applicable
Item 6. Exhibits and Reports on Form 8-K 15
Signatures 16
</TABLE>
2
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements
BANCINSURANCE CORPORATION
AND SUBSIDIARIES
Consolidated Balance Sheets
<TABLE>
<CAPTION>
June 30, December 31,
Assets 1997 1996
- ------ ----------- ------------
(Unaudited)
<S> <C> <C>
Investments:
Held to maturity:
Fixed maturities, at amortized cost (fair value
$4,309,796 in 1997 and $4,086,856 in 1996) $ 4,237,913 $ 4,004,550
Available for sale:
Fixed maturities, at fair value (amortized cost
$12,778,595 in 1997 and $11,271,525 in 1996) 12,984,341 11,502,186
Equity securities, at fair value (cost $2,395,206
in 1997 and $2,602,891 in 1996) 2,948,451 3,031,014
Short-term investments, at cost which
approximates fair value 5,155,028 5,730,923
Securities purchased under agreements to resell 1,580,804 1,091,630
----------- -----------
Total investments 26,906,537 25,360,303
----------- -----------
Cash 820,222 681,286
Premiums receivable 758,460 494,322
Accounts receivable, net of allowance for
uncollectible amounts 293,115 -
Reinsurance receivable 5,613 15,150
Reinsurance recoverable on paid losses 4,517 25,143
Premium taxes receivable 29,993 -
Prepaid commissions 215,849 -
Loans to affiliates 556,182 434,463
Note receivable 75,000 -
Furniture, fixtures and leasehold improvements, net 81,417 86,435
Excess of investment over net assets of subsidiaries 938,499 753,738
Prepaid federal income taxes - 29,633
Accrued investment income 313,096 308,646
Other assets 106,611 85,833
----------- -----------
Total assets $31,105,111 $28,274,952
=========== ===========
</TABLE>
(Continued)
3
<PAGE> 4
BANCINSURANCE CORPORATION
AND SUBSIDIARIES
Consolidated Balance Sheets, Continued
<TABLE>
<CAPTION>
June 30, December 31,
Liabilities and shareholders' Equity 1997 1996
- ------------------------------------ ----------- ------------
(Unaudited)
<S> <C> <C>
Reserve for unpaid losses and loss adjustment
expenses $ 1,458,016 $ 1,359,775
Unearned premiums 1,605,878 745,787
Contract funds on deposit 2,653,056 2,950,108
Reinsurance premiums payable 503,806 503,806
Note payable to bank 6,135,000 5,600,000
Note payable 43,573 -
Federal income taxes payable 40,190 -
Deferred federal income taxes 246,733 194,755
Taxes, licenses, and fees payable 117,048 93,566
Commissions payable 315,909 342,258
Other 399,032 578,080
----------- -----------
Total liabilities 13,518,241 12,368,135
----------- -----------
Commitments and contingent liabilities
Shareholders' equity:
Non-voting preferred stock:
Class A Serial Preference shares without par value; authorized 100,000
shares; no shares issued or
outstanding - -
Class B Serial Preference shares without par value;
authorized 98,646 shares; no shares issued or
outstanding - -
Common stock without par value; authorized
20,000,000 shares; 5,878,277 shares issued 315,567 315,567
Additional paid-in capital 1,506,555 1,433,329
Net unrealized gain on investments 500,933 434,797
Retained earnings 15,378,622 14,040,484
----------- -----------
17,701,677 16,224,177
Less: Treasury stock, at cost (40,162 common
shares at June 30, 1997 and 111,020
at December 31, 1996) (114,807) (317,360)
----------- -----------
Total shareholders' equity 17,586,870 15,906,817
----------- -----------
Total liabilities and shareholders' equity $31,105,111 $28,274,952
=========== ===========
</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 Six Months Ended
June 30, June 30,
1997 1996 1997 1996
---------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Income:
Premiums written $ 1,634,550 $ 1,716,950 $ 5,360,174 $ 5,320,701
(Increase) decrease in
unearned premiums 748,461 944,838 (860,091) 687,406
---------- ----------- ----------- -----------
Premiums earned 2,383,011 2,661,788 4,500,083 6,008,107
Premiums ceded - (37,734) - (488,704)
---------- ----------- ---------- -----------
Net premiums earned 2,383,011 2,624,054 4,500,083 5,519,403
Investment income (net of
expenses of $53,923 and
$31,084, respectively) 358,140 327,842 665,547 667,269
Net realized gain on
investments 52,179 125,386 82,872 128,575
Claims administration fees 169,251 132,571 348,982 265,454
Title and appraisal fees 496,482 - 496,482 -
Other income 294,740 98,282 303,033 215,261
---------- ----------- ---------- -----------
Total revenue 3,753,803 3,308,135 6,396,999 6,795,962
---------- ----------- ---------- -----------
Losses and operating expenses:
Losses and loss adjustment
expenses 975,001 1,469,671 2,113,944 3,446,560
Reinsurance recoveries - (87,756) - (507,774)
Commission expense 303,575 306,691 604,112 825,361
Other insurance operating
expenses 411,804 349,597 680,298 751,938
General and administrative
expenses 783,035 176,621 1,039,895 364,581
Interest expense 125,483 106,018 147,881 214,655
---------- ----------- ---------- -----------
Total expenses 2,598,898 2,320,842 4,586,130 5,095,321
---------- ----------- ---------- -----------
Income before federal
income taxes 1,154,905 987,293 1,810,869 1,700,641
---------- ----------- ---------- -----------
Federal income tax expense 311,319 269,890 472,731 441,816
---------- ----------- ---------- -----------
Net income $ 843,586 $ 717,403 $1,338,138 $ 1,258,825
========== =========== ========== ===========
Net income per common share: $ .14 $ .13 $ .23 $ .22
========== =========== ========== ===========
Weighted average number of
common shares and equivalents
outstanding 5,895,622 5,842,363 5,860,665 5,852,354
========== =========== ========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE> 6
BANCINSURANCE CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
1997 1996
---------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net income $1,338,138 $1,258,825
Adjustments to reconcile net income to net cash
provided by operating activities:
Net realized gain on investments (82,872) (128,575)
Net realized loss on disposal of equipment - 601
Depreciation and amortization 36,811 30,510
Amortization of bond premium (discount) 24,349 (2,227)
Deferred federal income tax expense 17,908 105,677
Increase in premiums receivable (264,138) (375,284)
Increase in accounts receivable (78,109) -
Decrease in reinsurance receivable 9,537 423,285
Decrease in reinsurance recoverable on paid losses 20,626 259,206
Decrease in prepaid reinsurance premiums - 514,662
(Increase) decrease in premium taxes receivable (29,993) 135,701
Increase in prepaid commissions (215,849) (235,150)
Increase in loans to affiliates (121,719) (71,719)
Increase in note receivable (75,000) -
Decrease in prepaid federal income taxes 29,633 161,139
Increase in accrued investment income (4,450) (16,336)
(Increase) decrease in other assets (20,778) 45,266
Increase (decrease) in reserve for unpaid losses
and loss adjustment expenses 98,241 (865,362)
Increase (decrease) in unearned premiums 860,091 (687,407)
Increase (decrease) in contract funds on deposit (297,052) 111,304
Decrease in return premiums payable - (6,929)
Increase in reinsurance premiums payable - 108,044
Decrease in note payable (3,250) -
Increase in federal income taxes payable 40,190 -
Increase (decrease) in taxes, licenses and fees payable 23,482 (21,509)
Decrease in commissions payable (26,349) (147,965)
Decrease in other liabilities (308,680) (86,973)
---------- ----------
Net cash provided by operating activities 970,767 508,784
---------- ----------
Cash flows from investing activities:
Proceeds from held to maturity: fixed maturities
due to redemption or maturity 806,000 408,779
Proceeds from available for sale: fixed maturities
sold, redeemed and matured 618,870 1,553,402
Proceeds from available for sale: equity securities
sold 1,288,799 1,072,900
Cost of investments purchased:
Held to maturity: fixed maturities (1,344,403) (241,682)
Available for sale: fixed maturities (2,141,113) (1,898,816)
Equity securities (702,379) (651,245)
Decrease in amount due to stock brokers - (143,038)
Net (increase) decrease in short-term investments 575,895 (372,166)
Net increase in securities purchased under
agreements to resell (489,174) (988)
Purchase of furniture, fixtures and leasehold
improvements (7,244) (4,209)
Cash acquired in purchase of subsidiary 27,918 -
---------- ----------
Net cash used in investing activities (1,366,831) (277,063)
---------- ----------
</TABLE>
(Continued)
6
<PAGE> 7
BANCINSURANCE CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Cash Flows, Continued
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
1997 1996
---------- ----------
<S> <C> <C>
Cash flows from financing activities:
Proceeds from note payable to bank 5,935,000 1,700,000
Repayments of note payable to bank (5,400,000) (1,316,132)
Acquisition of treasury stock - (101,811)
---------- ----------
Net cash provided by financing activities 535,000 282,057
---------- ----------
Net increase in cash 138,936 513,778
---------- ----------
Cash at December 31 681,286 482,405
---------- ----------
Cash at June 30, $ 820,222 $ 996,183
========== ==========
Spplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 147,881 $ 214,556
========== ==========
Income taxes 385,000 175,000
========== ==========
Supplemental schedule of noncash investing activities:
Common stock issued in purchase acquisition $ 275,781 $ -
========== ==========
</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 June 30, 1997, the Consolidated
Statements of Income for the three and six months ended June 30, 1997 and 1996,
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, 1997 and for all
periods presented have been made.
2. Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been omitted. It is suggested that these unaudited Consolidated Financial
Statements be read in conjunction with the financial statements and notes
thereto included in the Company's Form 10-K for the year ended December 31,
1996. The results of operations for the period ended June 30, 1997 are not
necessarily indicative of the results of operations for the full year.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
3. On April 2, 1997, Title Research Corporation, ("Title Research"), a newly
formed, wholly-owned subsidiary of Bancinsurance Corporation, purchased
substantially all of the net assets of Title Research Agency, an Ohio
corporation, for 62,500 shares of Bancinsurance Corporation common stock, with
a value of $275,781. Title Research is engaged in title, appraisal and related
services which support documentation needs for first and second mortgage
lending requirements. The acquisition has been accounted for as a purchase and
resulted in $187,741 of goodwill. The consolidated statements of income for the
six months ended June 30, 1997, included the operating results of the acquired
business from April 2, 1997.
8
<PAGE> 9
BANCINSURANCE CORPORATION
AND SUBSIDIARIES
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
The Company is an insurance holding company whose principal asset is the
stock of Ohio Indemnity Company ("Ohio Indemnity"). The Company's principal
sources of revenue are premiums paid by insureds for insurance policies issued
by Ohio Indemnity. The premiums written become premiums earned for financial
statement purposes as the premium is earned incrementally over the term of each
insurance policy and after deducting the amount of premium ceded to reinsurers
pursuant to reinsurance treaties or agreements. Ohio Indemnity's principal
costs are losses and loss adjustment expenses. The principal factor in
determining the level of the Ohio Indemnity's profit is the difference between
these premiums earned and losses and loss adjustment expenses incurred.
Loss and loss adjustment expense reserves are estimates of what an insurer
expects to pay on behalf of claimants. Ohio Indemnity is required to maintain
reserves for payment of estimated losses and loss adjustment expenses for both
reported claims ("case reserves") and for incurred but not reported ("IBNR")
claims. The ultimate liability incurred by Ohio Indemnity may be different from
current reserve estimates.
Loss and loss adjustment expense reserves for IBNR claims are estimated
based on many variables including historical and statistical information,
inflation, legal developments, economic conditions, general trends in claim
severity and frequency and other factors that could affect the adequacy of loss
reserves. Ohio Indemnity reviews case and IBNR reserves monthly and makes
appropriate adjustments.
Claims administration fees generated by BCIS Services, Inc. ("BCIS
Services"), a wholly owned subsidiary of the Company, and title and appraisal
fees generated by Title Research are recorded and earned as services are
billed.
SUMMARY RESULTS
The following table sets forth period to period changes in selected
financial data:
<TABLE>
<CAPTION>
Period to Period Increase (Decrease)
Six Months Ended June 30,
1997-96
-------
<S> <C>
Premiums written $ 39,473
Net premiums earned (1,019,320)
Net investment income (47,425)
Claims administration fees 83,528
Title and appraisal fees 496,482
Loss and loss adjustment expense,
net of reinsurance recoveries (824,842)
Operating expense 382,425
Interest expense (66,774)
Operating income 110,228
Net income $ 79,313
</TABLE>
The combined ratio, which is the sum of the loss ratio and expense ratio,
is the traditional measure of underwriting experience for insurance companies.
The following table reflects the loss, expense and combined ratios of Ohio
Indemnity on both a statutory and GAAP basis for the six months ended June 30:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Statutory:
Loss ratio 47.0% 53.2%
Expense ratio 25.3% 29.9%
---- ----
Combined ratio 72.3% 83.1%
==== ====
</TABLE>
9
<PAGE> 10
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
GAAP:
Loss ratio 47.0% 53.2%
Expense ratio 19.7% 25.6%
---- ----
Combined ratio 66.7% 78.8%
==== ====
</TABLE>
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, 1997 as Compared to June 30, 1996
Premiums Written; Net Premiums Earned. Premiums written for the six months
increased from $5,320,701 at June 30, 1996 to $5,360,174 at June 30, 1997, and
net premiums earned decreased from $5,519,403 at June 30, 1996 to $4,500,083 at
June 30, 1997. Premiums written decreased from $1,716,950 during the three
months ended June 30, 1996 to $1,634,550 during the three months ended June 30,
1997, while net premiums earned decreased from $2,624,054 to $2,383,011 during
the same period, respectively. Increases in premiums written for the six months
ended June 30, 1997 compared to June 30, 1996 were primarily associated with
the Bonded Service program along with reductions in return premiums associated
with the discontinuance of the Automobile Physical Damage Insurance program.
Premiums earned decreased due to the change in unearned premiums associated
with the run-off of the Automobile Physical Damage Insurance program in
addition to reductions in unearned premium associated with an Ultimate Loss
Insurance canceled policy.
Premiums written for Ultimate Loss Insurance decreased from $2,748,587 in
the first six months of 1996 to $2,462,306 in the first six months of 1997. Net
premiums earned from Ultimate Loss Insurance decreased from $3,326,971 in the
first six months of 1996 to $2,764,092 in the first six months of 1997.
Premiums written for Ultimate Loss Insurance decreased from $1,383,410 in the
second quarter of 1996 to $1,352,501 in the second quarter of 1997. Net
premiums earned for Ultimate Loss Insurance decreased from $1,660,742 in the
second quarter of 1996 to $1,490,496 in the second quarter of 1997. Premiums
written and net premiums earned decreased as a result of reductions in the
number of loans made by existing policy holders. Additionally, net premiums
earned decreased as a result of reductions in unearned premium associated with
a canceled policy.
Premiums written for the Bonded Service program increased from $2,640,707
in the first six months of 1996 to $2,855,517 in the first six months of 1997,
while net premiums earned from the Bonded Service program increased from
$1,563,359 in the first six months of 1996 to $1,670,525 in the first six
months of 1997 due to increases in premium rates. Premiums written for the
Bonded Service program decreased from $350,128 in the second quarter of 1996 to
$266,272 in the second quarter of 1997 due to the timing of billing issuance,
while net premiums earned marginally increased from $857,112 in the second
quarter of 1996 to $864,049 in the second quarter of 1997.
Automobile Physical Damage Insurance accounted for $73,423 of premium
cancellations and $585,842 of net premiums earned for the first six months in
1996 and $20,077 of premium cancellations and $83,499 of net premiums earned
for the quarter ended June 30, 1996. There were no premiums written or net
premiums earned during the six months ended June 30, 1997. On July 28, 1995,
Ohio Indemnity entered into an agreement with the California Department of
Insurance to discontinue sales and renewals of primate passenger personal lines
in automobile physical damage insurance in California.
10
<PAGE> 11
Net Investment Income. Net investment income decreased from $795,844 in the
first six months of 1996 to $748,419 in the first six months of 1997 and net
investment income decreased from $453,228 in the second quarter of 1996 to
$410,319 in the second quarter of 1997 as a result of allocating bond premium
amortization.
Claims Administration. Claims administration income generated by BCIS
Services, a wholly-owned subsidiary of the Company, accounted for $265,454 of
the revenues for the first six months of 1996 and $348,982 in the first six
months of 1997 and increased from $132,571 in the second quarter of 1996 to
$169,251 in the second quarter of 1997, an increase of 31.5% and 27.7%,
respectively, attributable to an increase in claims processing and servicing
responsibilities.
Title and Appraisal. Title and appraisal income accounted for $496,482 of
the revenues for the three and six months ended June 30, 1997 for the acquired
Title Research business from April 2, 1997.
Other Income. Other income increased from $215,261 in the first six months
of 1996 to $303,033 in the first six months of 1997 and increased from $98,282
to $294,740 in the second quarters, respectively. The increase in other income
was primarily due to earnings in the second quarter of 1997 of $221,985
attributed to recognition of favorable results from a closed year of operations
of the Bonded Service program. During the second quarter of 1996, $98,000 of
redundant reserves were earned. Additionally, the Company recorded $63,657 as a
reimbursement for expenses previously incurred from a line of business sold.
These expenses, totalling $72,980, are included in general and administrative
expenses for the six months ended June 30, 1997.
Losses and Loss Adjustment Expenses, Net of Reinsurance Recoveries. Losses
and loss adjustment expenses totaled $2,938,786, or 53.2% of net premiums
earned during the first six months of 1996 versus $2,113,944, or 47.0% of net
premiums earned during the first six months of 1997. Losses and loss adjustment
expenses totaled $975,001 or 40.9% of net premiums earned during the second
quarter of 1997 versus $1,381,915, or 52.7% of net premiums earned during the
second quarter of 1996. 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 losses and
loss adjustment expense experience and higher than anticipated salvage and
subrogation received from the discontinued Automobile Physical Damage Insurance
program.
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 six months of 1996 which totalled $511,794
compared with $35,838 of net recoveries during the first six months of 1997 and
totaled $21,489 of net recoveries during the second quarter of 1997 compared
with $120,478 during the second quarter of 1996. These decreases were due to
the discontinuance of the Automobile Physical Damage Insurance Program. The
losses and loss adjustment expenses for Ultimate Loss Insurance decreased 21.0%
to $1,609,262 in the first six months of 1997 from $2,036,284 in the first six
months of 1996 and totaled $694,690 for the second quarter of 1997 compared
with $1,093,857 during the second quarter of 1996, due to decreases in losses
and loss adjustment expense payments. Losses and loss adjustment expenses for
the Bonded Service program increased from $207,774 in 1996 to $300,776 in 1997
and increased from $104,319 for the second quarter of 1996 compared with
$165,513 during the second quarter of 1997 primarily due to deficiency
development on prior year reserves.
Operating Expense. Operating expense consists of commission expense, other
insurance operating expense, and general and administrative expenses. Operating
expense increased 19.7% from $1,941,880 for the first six months of 1996 to
$2,324,305 in the first six months of 1997 and increased from $832,909 for the
second quarter of 1996 compared with $1,498,414 during the second quarter of
1997. The increase in operating expense was primarily due to operating and
administrative expenses incurred by the newly formed Title Research
Corporation. Commission expense decreased 26.8% from $825,361 in the first six
months of 1996 to $604,112 in the first six months of 1997 and marginally
decreased from $306,691 to $303,575 in the second quarter. Other insurance
operating expenses decreased 9.5% from $751,938 in the first six months of 1996
to $680,298 in the first six months of 1997 primarily due to decreases in legal
11
<PAGE> 12
expense. General and administrative expenses increased 185.2% from $364,581 in
the first six months of 1996 to $1,039,895 in the first six months of 1997 and
increased 343.3% from $176,621 to $783,035 in the second quarter respectively,
primarily due to operating and administrative expenses of $531,308 incurred by
the Title Research during the second quarter of 1997. Additionally, BCIS
Services incurred operating expenses of $282,438 in the first six months of
1996 compared with $331,911 during the first six months of 1997 and increased
from $134,596 during the second quarter of 1996 to $163,610 during the second
quarter of 1997.
Interest Expense. Interest expense decreased 31.1% from $214,655 in the
first six months of 1996 to $147,891 in the first six months of 1997. The
decrease was due to lower borrowing levels on the Company's revolving credit
line and decreases in the prime rate.
Federal Income Taxes. Federal income taxes increased from $441,816 in the
first six months of 1996 to $472,731 in the first six months of 1997 and
increased from $269,890 to $311,319 in the second quarter, respectively, due to
increases in taxable income primarily resulting from higher nondeductible
unearned premiums.
Statutory Combined Ratios. The statutory combined ratio decreased from
83.1% at June 30, 1996 to 72.3% at June 30, 1997. This decline is reflective of
favorable underwriting experience in the company's core lines of business;
Ultimate Loss Insurance and Bonded Service. In the first six months ended June
30, 1997, underwriting results improved due to the reduction in run-off of the
discontinued automobile program compared with the six months ended June 30,
1996. In addition, higher than anticipated salvage and subrogation, related to
the Automobile Physical Damage Insurance business, was recognized during the
six months ended June 30, 1997.
LIQUIDITY AND CAPITAL RESOURCES
The Company is an insurance holding company whose principal asset is the
stock of Ohio Indemnity. The Company is, and will continue to be, dependent on
dividends from the Ohio Indemnity to meet its liquidity requirements, including
debt service obligations. The Company has a $10 million credit facility to fund
working capital requirements. Based on statutory limitations, the maximum
amount of dividends that the Company would be able to receive in 1997 from Ohio
Indemnity, absent regulatory consent, is $2,890,887.
Ohio Indemnity derives its funds principally from net premiums written,
reinsurance recoveries, investment income and contributions of capital from the
Company. The principal use of these funds is for payment of losses and loss
adjustment expenses, commissions, operating expenses and income taxes. Net cash
provided by operating activities equalled $970,767 and $508,784 for the six
months ended June 30, 1997 and 1996, respectively. Net cash provided by
financing activities was $535,000 for the six months ended June 30, 1997 and
$282,057 for the six months ended June 30, 1996. Net cash used in investing
activities of the Company was $1,366,831 and $277,063 for the six months ended
June 30, 1997 and 1996, respectively.
BCIS Services derives its funds principally from claims administration fees
which are sufficient to meet its operating obligations. Although it is
impossible to estimate accurately the future cash flow from the operations of
the newly acquired title business, management believes its effective capital
costs may increase. Management is actively exploring further avenues for
improving liquidity.
The Company maintains a level of cash and liquid short-term investments
which it believes will be adequate to meet anticipated payment obligations
without being required to liquidate intermediate-term and long-term investments
through the next twelve months. Due to the nature of the risks the Company
insures, losses and loss adjustment expenses emanating from its policies are
characterized by relatively short settlement periods and quick development of
ultimate losses compared to claims emanating from other types of insurance
products. Therefore, the Company believes that it can estimate its cash needs
to meet its loss and expense payment obligations through the next twelve
months.
12
<PAGE> 13
The Company's investments at June 30, 1997 consisted primarily of
investment-grade fixed income securities. Cash and short-term investments at
June 30, 1997 amounted to $7,556,054, or 27.3% 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 $795,844 and $748,419 for the six months ended
June 30, 1996 and 1997, respectively.
The Company's total shareholders' equity increased from $13,115,024 at June
30, 1995 to $14,760,681 at June 30, 1996, to $17,586 870 at June 30, 1997,
representing a 34.1% increase over the three-year period. The increase in total
shareholders' equity is driven by profitable operating earnings and strengthens
the Company's capital position.
All material capital commitments and financial obligations of the Company
are reflected in the Company's financial statements, except the Company's risk
on surety bonds and state mandated performance bonds, written in connection
with the Bonded Service program. The financial statements include reserves for
losses on such programs for any claims filed and for an estimate of incurred
but not reported losses. Such loses were 488,000 and $458,436 at June 30, 1997
and December 31, 1996, respectively.
Under applicable insurance statutes and regulations, Ohio Indemnity is
required to maintain prescribed amounts of capital and surplus as well as
statutory deposits with the appropriate insurance authorities. Ohio Indemnity
is in compliance with all applicable statutory capital and surplus
requirements. Ohio Indemnity's investments consist only of permitted
investments under Ohio insurance laws.
FACTORS TO CONSIDER FORWARD LOOKING
The Company expects to continue expanding its direct sale force, which
should allow the Company to increase its market penetration. These activities
will be directed toward selected market niches where management believes the
Company will be able to provide customers with additional services.
TRENDS
Management does not know of any trends, events or uncertainties that will
have, or that are reasonably likely to have, a material effect on the Company's
liquidity, capital resources or results of operations.
The Company's results of operations have varied from quarter to quarter
principally because of fluctuations in underwriting results. The Company's
experience indicates that more loans for automobile purchases are financed
during summer months due to seasonal consumer buying habits.
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 1997, the Company has experienced no
material adverse consequences with respect to its growth in premiums.
INSURANCE REGULATORY MATTERS
On June 20, 1997, the Ohio Department of insurance issued its triennial
examination report on Ohio Indemnity as of December 31, 1996. The examiners
reported that the financial statements set forth in the report reflected the
financial condition of Ohio Indemnity. Management is not aware of any
recommendations by regulatory authorities which would have, or are reasonably
likely to have, a material effect on the Company's liquidity, capital resources
or results of operations.
13
<PAGE> 14
The NAIC has developed a risk-based capital measurement formula to be
applied to all property/casualty insurance companies. This formula calculates a
minimum required statutory net worth, based on the underwriting, investment,
credit, loss reserve and other business risks inherent in an individual
company's operations. Under the current formula, any insurance company which
does not meet threshold risk-based capital measurement standards could be
forced to reduce the scope of its operations and ultimately could become
subject to statutory receivership proceedings. Based on the Company's analysis,
it appears that the Company's total adjusted capital is in excess of all
required action levels and that no corrective action will be necessary. The
Risk Based Capital provisions have been enacted into the Ohio Revised Code.
RESERVES
The amount of incurred losses and loss adjustment expenses is dependent
upon a number of factors, including claims frequency, severity, the nature and
types of losses incurred, and the number of policies written. These factors may
fluctuate from year to year and do not necessarily bear any relationship to the
amount of premiums written or earned.
As claims are incurred, provisions are made for unpaid losses and loss
adjustment expenses by accumulating case reserve estimates for claims reported
prior to the close of the accounting period and by estimating IBNR claims based
upon past experience modified for current trends. Notwithstanding the
variability inherent in such estimates, management believes that the provisions
made for unpaid losses and loss adjustment expenses are adequate to meet claims
obligations of the Company. Such estimates are reviewed monthly by management
and annually by an independent consulting actuary and, as adjustments thereto
become necessary, such adjustments are reflected in the Company's results of
operations. The Company's independent consulting actuary has opined that loss
and loss adjustment expense reserve levels, as of December 31, 1996, were
reasonable.
SAFEHARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
Except for the historical information contained herein, the matters
discussed in this Form 10-Q, included in "Management's Discussion and Analysis
of Financial Condition and Results of Operations", includes forward-looking
statements that involve risks and uncertainties, including, but not limited to,
quarterly fluctuations in results, the management of growth, and other risks
detailed from time to time in the Company's Securities and Exchange Commission
filings. Actual results may differ materially from management expectations.
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 judgements that
will have a material adverse effect on the financial condition of the Company.
On November 2, 1994, the James L. Miniter Agency, Inc. (the "Agent") filed
a lawsuit against Ohio Indemnity in the Suffolk County Superior Court,
Massachusetts, alleging essentially that Ohio Indemnity had breached its
contractual obligations to the Agent policyholder. On December 2, 1994, Ohio
Indemnity removed the case to the United States District Court for the District
of Massachusetts. On June 7, 1996, a summary judgement was granted in favor of
Ohio Indemnity. An appeal of the judgement was filed by the Agent, however, on
May 12, 1997, the summary judgement was affirmed.
Item 4. Submission of Matters to a Vote of Security Holders
The Company held its Annual Meeting of Shareholders on June 3, 1997 for the
purpose of electing six directors to serve one year terms expiring in 1998.
The number of votes cast for or against each candidate is as follows:
<TABLE>
<CAPTION>
VOTES FOR VOTES WITHHELD
--------- --------------
<S> <C> <C>
Si Sokol 5,159,224 5,500
James R. Davis 5,157,124 7,600
Daniel D. Harkins 5,159,424 5,300
Milton O. Lustnauer 5,159,124 5,600
John S. Sokol 5,158,424 6,300
Saul Sokol 5,157,124 7,600
</TABLE>
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, 1997.
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: August 6, 1997 By: /s/ Si Sokol
----------------------------- --------------------------
Si Sokol
President and
Chairman of Board of Directors
(Principal Executive Officer)
Date: August 6, 1997 By: /s/ Sally Cress
----------------------------- --------------------------
Sally Cress
Treasurer, Secretary
(Principal Financial and
Accounting Officer)
16
<TABLE> <S> <C>
<ARTICLE> 7
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<DEBT-HELD-FOR-SALE> 12,984,341
<DEBT-CARRYING-VALUE> 4,237,913
<DEBT-MARKET-VALUE> 4,309,796
<EQUITIES> 2,948,451
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 26,906,537
<CASH> 820,222
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 0
<TOTAL-ASSETS> 31,105,111
<POLICY-LOSSES> 1,458,016
<UNEARNED-PREMIUMS> 1,605,878
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 6,135,000
0
0
<COMMON> 315,567
<OTHER-SE> 17,271,303
<TOTAL-LIABILITY-AND-EQUITY> 31,105,111
4,500,083
<INVESTMENT-INCOME> 665,547
<INVESTMENT-GAINS> 82,872
<OTHER-INCOME> 1,148,497
<BENEFITS> 2,113,944
<UNDERWRITING-AMORTIZATION> 2,324,305
<UNDERWRITING-OTHER> 147,881
<INCOME-PRETAX> 1,810,869
<INCOME-TAX> 472,731
<INCOME-CONTINUING> 1,338,138
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,338,138
<EPS-PRIMARY> .23
<EPS-DILUTED> .23
<RESERVE-OPEN> 1,345,000
<PROVISION-CURRENT> 673,000
<PROVISION-PRIOR> 1,441,000
<PAYMENTS-CURRENT> 1,047,000
<PAYMENTS-PRIOR> 960,000
<RESERVE-CLOSE> 1,452,000
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
