<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-K/A No. 1
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended 0-8738
- ------------------------------------- -------------------------------------
December 31, 1997 Commission File Number
BANCINSURANCE CORPORATION
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Ohio 31-0790882
- ------------------------------------- -------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
20 East Broad Street, Columbus, Ohio 43215
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number including area code (614) 228-2800
---------------------
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange on
Title of Each Class Which Registered
NONE NONE
- ------------------------------------- -------------------------------------
Securities registered pursuant to Section 12(g) of the Act:
COMMON SHARES, WITHOUT PAR VALUE
- --------------------------------------------------------------------------------
(Title of Class)
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 by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ X ]
On April 24, 1998, the aggregate fair value of the voting stock held by those
other than executive officers and directors of the registrant was $13,111,818.
As of April 24, 1998, the Registrant had 5,843,115 Common Shares, without par
value, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Annual Report to Shareholders for the fiscal year
ended December 31, 1997 are incorporated by reference in Part II.
Portions of the registrant's Proxy Statement for the 1998 Annual Meeting of
Shareholders are incorporated by reference in Part III.
<PAGE> 2
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION
Bancinsurance Corporation's common stock trades on the Nasdaq National Market
tier of The Nasdaq Stock Market under the symbol "BCIS." The following table
sets forth, for the periods indicated, the high and low sale prices for the
Company in the over-the-counter market as reported by the National Quotation
Bureau, Inc. The prices shown represent quotation between dealers, without
adjustment for retail markups, markdowns or commissions, and may not represent
actual transactions. On February 12, 1998, the last reported sale price of the
Company's common stock was $5 1/8.
Low Sale High Sale
-------- ---------
September 30, 1996 3 3 1/4
December 31, 1996 3 3/4 4 1/8
March 31, 1997 4 1/4 5 1/8
June 30, 1997 4 4 1/4
September 30, 1997 4 1/8 4 3/8
December 31, 1997 4 1/2 5
HOLDERS
The number of holders of record of the Company's common stock as of February
12, 1998 was 966.
DIVIDENDS
No cash dividends were declared or paid on the Company's outstanding common
stock in the two most recent fiscal years. The Company intends to retain
earnings to finance the growth of its business and the business of Ohio
Indemnity, BCIS Services and Title Research and, therefore, does not
anticipate paying any cash dividends to holders of its common stock. Any
determination to pay dividends in the future will be at the discretion of the
Company's Board of Directors and will be dependent upon the Company's results
of operations, financial condition, legal and regulatory restrictions, and
other factors deemed relevant at the time. Reference is made to Note 11 to the
Notes to Consolidated Financial Statements for a description of the
restrictions on payment of dividends to the Company from the Subsidiary.
MARKET MAKERS
As of January 31, 1998, the following broker-dealer firms were making a market
in Bancinsurance Corporation common stock:
HERZOG, HEINE, GEDULD, INC. MORGAN, KEEGAN & COMPANY
MAYER & SCHWEITZER INC. NASH WEISS/DIV. OF SHATKIN INV.
MCDONALD & COMPANY SECURITIES, INC. SOUTHLAND SECURITIES CORP.
ANNUAL MEETING
The annual meeting of shareholders will be held on June 2, 1998, at 9:30 A.M.
at the offices of Porter, Wright, Morris & Arthur, 29th Floor, 41 South High
Street, Columbus, Ohio.
2
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ITEM 7. 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. Premium volume principally is earned
as written due to the nature of the monthly policies issued by the Company. The
Company's principal costs are losses and loss adjustment expenses. The principal
factor in determining the level of the Company's profit is the difference
between these premiums earned and losses and loss adjustment expenses incurred.
Loss and loss adjustment expense reserves are estimates of what an insurer
expects to pay on behalf of claimants. The Company is required to maintain
reserves for payment of estimated losses and loss adjustment expenses for both
reported claims and incurred but not reported ("IBNR") claims. The ultimate
liability incurred by the Company may be different from current reserve
estimates.
Loss and loss adjustment expense reserves for IBNR claims are estimated based on
many variables including historical and statistical information, inflation,
legal developments, economic conditions, general trends in claim severity and
frequency and other factors that could affect the adequacy of loss reserves. The
Company reviews case and IBNR reserves monthly and makes appropriate
adjustments.
SUMMARY RESULTS
The following table sets forth period to period changes in selected financial
data:
<TABLE>
<CAPTION>
--------------------------------------------------
PERIOD TO PERIOD INCREASE (DECREASE)
YEARS ENDED DECEMBER 31,
--------------------------------------------------
1996-97 1995-96
--------------------- ----------------------
AMOUNT %CHANGE AMOUNT %CHANGE
---------- ------- ----------- -------
<S> <C> <C> <C> <C>
Premiums written ................ $2,821,062 33.8% $(5,680,346) (40.5%)
Net premiums earned ............. 1,031,139 10.2% (9,645,203) (48.8%)
Net investment income ........... (36,626) (2.3%) 150,682 10.7%
Total revenue ................... 3,125,527 24.6% (9,105,470) (41.7%)
Loss and loss adjustment expense,
net of reinsurance recoveries .. 666,470 12.3% (7,355,610) (57.6%)
Operating expense ............... 2,000,134 53.7% (3,270,301) (46.7%)
Interest expense ................ (88,428) (19.6%) (3,072) (.7%)
Operating income ................ 547,351 17.5% 1,523,513 95.4%
Net income ...................... $ 360,246 15.4% $ 919,962 64.7%
</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 each of the years ended December 31:
1997 1996 1995
--------------------------------
Statutory:
Loss ratio................... 54.4% 53.3% 64.5%
Expense ratio ............... 21.9% 30.4% 48.8%
---- ---- -----
Combined ratio .............. 76.3% 83.7% 113.3%
==== ==== =====
GAAP:
Loss ratio .................. 54.4% 53.3% 64.5%
Expense ratio ............... 22.1% 30.5% 52.2%
---- ---- -----
Combined ratio .............. 76.5% 83.8% 116.7%
==== ==== =====
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.
3
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RESULTS OF OPERATIONS
YEAR ENDED DECEMBER 31, 1997 AS COMPARED TO YEAR ENDED DECEMBER 31, 1996
Premiums Written; Premiums Earned. Premiums written increased 33.8% from
$8,358,499 in 1996 to $11,179,561 in 1997, while premiums earned increased 10.2%
from $10,138,104 in 1996 to $11,169,243 in 1997. Premiums increased due to a
focus on historically profitable core lines of business and complementary
products and services. The addition of a significant new policy in the Ultimate
Loss Insurance Program, a new agency program, growth in the Bonded Service
Program and reductions in return premiums recorded in 1996 associated with the
discontinuance of the Automobile Physical Damage Insurance Program, which had no
premiums written or earned during 1997, primarily contributed to the increases.
Premiums written for Ultimate Loss Insurance increased 47.3% from $5,198,724 in
1996 to $7,656,552 in 1997. Premiums earned for Ultimate Loss Insurance
increased 22.2% from $6,233,308 in 1996 to $7,620,000 in 1997. The increase in
premiums written and premiums earned during 1997 reflected increased premium
volume primarily attributable to a significant new customer added during the
third quarter of 1997. See Note 16 to the Notes to Consolidated Financial
Statements. In addition, a new creditor placed mortgage protection and
collateral protection program during 1997 recorded in the aggregate $624,691 and
$266,578 of premiums written and premiums earned, respectively, in 1997.
Premiums written for the Bonded Service program increased 5.9% from $3,231,642
in 1996 to $3,422,032 in 1997, while premiums earned from the Bonded Service
program increased 5.9% from $3,228,725 in 1996 to $3,420,793 in 1997. The
increases in net premiums written and premiums earned on the Bonded Service
program were primarily attributable to increases in employee enrollment among
existing trust members resulting in higher service fees.
Net Investment Income. Net investment income remained relatively constant from
$1,564,175 in 1996 to $1,527,549 in 1997. Investment income increased from
$1,318,137 in 1996 to $1,344,815 in 1997 primarily resulting from a higher
invested asset position and lengthened maturities on the bond portfolio. Net
realized gains on investments decreased from $246,038 in 1996 to $182,734 in
1997 resulting from the Company's 1997 investment strategy to shelter current
year realized gains that were primarily market driven. The average yield on the
investment portfolio was 5.6% in 1996 and 5.3% in 1997.
Claims Administration. Claims administration fees generated by BCIS Services, a
consolidated subsidiary, accounted for $550,615 of the revenues for 1996 and
$658,884 in 1997. The increase of 19.7% was primarily attributable to an
increase in claims processing and servicing responsibilities.
Title and Appraisal Fees. Title and appraisal fees generated by Title Research,
a consolidated subsidiary, accounted for $1,593,556 of the revenues for 1997.
Title Research commenced business operations in Ohio during the second quarter
of 1997.
Management Fees. Management fees increased from $411,176 in 1996 to $809,345 in
1997. The increase was attributed to recognition of favorable results from a
closed year of operations of the Bonded Service program. See Note 1(k) to the
Notes to Consolidated Financial Statements.
Other Income. Other income increased from $40,804 in 1996 to $71,824 in 1997
primarily as a result of recording $63,657 as a reimbursement for expenses
previously incurred from an insurance product line sold. Expenses totalling
$72,980 for this business are recorded on the income statement as general and
administrative expenses in 1997.
Losses and Loss Adjustment Expenses, Net of Reinsurance Recoveries. Losses and
loss adjustment expenses totaled $5,404,484, or 53.3% of premiums earned in 1996
versus $6,070,954, or 54.4% of premiums earned in 1997. Losses and loss
adjustment expenses, as a percentage of premiums earned, increased for the same
period because net premiums earned increased at a lower percentage rate than the
percentage rate increase in losses and loss adjustment expenses. This result was
primarily due to loss development related to a new policy and deficiency
development on prior year reserves.
The absolute increase in losses and loss adjustment expenses was primarily
attributable to a significant new policy in the Ultimate Loss Insurance Program
which incurred loss and loss adjustment expenses of $1,649,340. See Note 16 to
the Notes to Consolidated Financial Statements. Total loss and loss adjustment
expenses for the Ultimate Loss Insurance Program increased 25.2% from $4,079,921
in 1996 to $5,106,930 in 1997. Loss and loss adjustment expenses for the Bonded
Service Program increased 31.5% from $438,355 in 1996 to $576,502 in 1997 due to
adverse development on prior year reserves. Loss and loss adjustment expenses
from the Automobile Physical Damage Insurance Program decreased from $502,208 in
1996 to $158,136 of net recoveries in 1997 due to higher than anticipated
salvage and subrogation and adequate reserves to handle the runoff associated
with the discontinued program.
4
<PAGE> 5
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 53.7% from
$3,727,668 in 1996 to $5,727,802 in 1997. Commission expense increased 8.6% from
$1,441,430 in 1996 to $1,565,826 in 1997, primarily due to the addition of a new
collateral protection insurance agency program and commission incurred related
to the Bonded Service Program. Other insurance operating expenses increased 9.1%
from $1,551,578 in 1996 to $1,692,041 in 1997, primarily due to increases in
allocable salaries and related benefits, advertising, amortization of bond
premiums, consulting and appraisal and prepaid premium taxes. General and
administrative expenses increased from $734,660 in 1996 to $2,469,935 in 1997
primarily due to operating and administrative expenses incurred by Title
Research from April 2, 1997. Additionally, salaries and related costs,
consulting and depreciation increased during 1997. BCIS Services incurred
operating expenses of $567,343 in 1996 compared with $619,032 in 1997 and Title
Research incurred operating expenses of $1,599,516 during 1997.
Interest Expense. Interest expense decreased from $451,425 in 1996 to $362,997
in 1997 due to lower borrowing levels on the Company's revolving credit line.
Federal Income Taxes. The difference between Federal income taxes, $780,249 in
1996 and $967,354 in 1997, resulted from an increase in the effective tax rate
primarily due to an increase in taxable income. See Note 8 to the Notes to
Consolidated Financial Statements.
Statutory Combined Ratios. The change in the statutory combined ratio from 83.7%
in 1996 to 76.3% in 1997 was primarily attributable to a decrease in loss and
loss adjustment expense experience primarily associated with the discontinuance
of the Automobile Physical Damage Program, which generally carried higher loss
ratios than the Company's core lines.
YEAR ENDED DECEMBER 31, 1996 AS COMPARED TO YEAR ENDED DECEMBER 31, 1995
Premiums Written; Premiums Earned. Premiums written decreased 40.5% from
$14,038,845 in 1995 to $8,358,499 in 1996, while premiums earned decreased 48.8%
from $19,783,307 in 1995 to $10,138,104 in 1996. Premiums decreased primarily
due to the discontinuance of the California Automobile Physical Damage Program.
Automobile insurance premiums were predominantly earned through June 1996 as the
policies expired. The discontinuance of the Automobile Physical Damage Program
resulted in a positive impact on underwriting results although there has been 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 $(110,821) of premiums
written and $573,207 of premiums earned in 1996, compared with $5,272,700 and
$9,507,516 in 1995, a decrease of 102.1% and 94.0% respectively. 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. 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. 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 decrease 5.1% from $5,479,857 in
1995 to $5,198,724 in 1996. Premiums earned for Ultimate Loss Insurance
decreased 8.6% from $6,817,904 in 1995 to $6,233,308 in 1996. The decrease in
premiums written and premiums earned during 1996 reflected decreased premium
volume. The decrease in premiums earned reflects, in addition, the reduction in
unearned premium associated with a canceled policy.
Premiums written for the Bonded Service program remained relatively constant
from $3,285,708 in 1995 to $3,231,642 in 1996, while premiums earned from the
Bonded Service program decreased 2.0% from $3,293,325 in 1995 to $3,228,725 in
1996. The decreases in net premiums written and premiums earned on the Bonded
Service program were primarily attributable to marginal decreases in premium
rates.
Net Investment Income. Net investment income increased 10.7% from $1,413,493 in
1995 to $1,564,175 in 1996 primarily as a result of net realized gains on equity
securities. During 1996, the Company's investment strategy was primarily tax
driven in order to utilize potentially expiring capital loss carryforwards and
to shelter current year realized gains that were primarily market driven. The
average yield on the investment portfolio was 5.8% in 1995 and 5.6% in 1996.
5
<PAGE> 6
Claims Administration. Claims administration income generated by BCIS Services
accounted for $533,354 of the revenues for 1995 and $550,615 in 1996. BCIS
Services commenced business operations in California during the third quarter of
1993.
Management Fees. Management fees were $411,176 in 1996. No such amount was
recognized in 1995. Management fees was attributed to recognition of favorable
results from a closed year of operations of the Bonded Service program. The
Company expects other income to vary from year to year depending on claims
experience of the Bonded Service program. See Note 1(k) to the Notes to
Consolidated Financial Statements.
Losses and Loss Adjustment Expenses, Net of Reinsurance Recoveries. Losses and
loss adjustment expenses totaled $12,760,094, or 64.5% of premiums earned in
1995 versus $5,404,484, or 53.3% of premiums earned in 1996. Losses and loss
adjustment expenses, as a percentage of 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 and higher than
anticipated salvage and subrogation received from the discontinued Automobile
Insurance program.
The decrease in losses and loss adjustment expenses was primarily attributable
to claims from the Automobile Physical Damage Insurance business which in 1995
totaled $8,614,845 compared with $502,208 in 1996. This decrease of 94.2%, was
due to the discontinuance of the Automobile Physical Damage program in 1995. The
losses and loss adjustment expenses for Ultimate Loss Insurance increased 17.0%
from $3,485,742 in 1995 to $4,079,921 in 1996 due to increases in loss expenses.
Losses and loss adjustment expenses for the Bonded Service program increased
from $176,684 in 1995 to $438,355 in 1996 due to increases in reserves.
Operating Expense. Operating expense consists of commission expense, other
insurance operating expense, amortization of deferred policy acquisition costs
and general and administrative expenses. Operating expense decreased 46.7% from
$6,997,969 in 1995 to $3,727,668 in 1996. The decrease in operating expense was
primarily attributable to a 50.0% decrease in 1996 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. Legal
expenses decreased from $590,083 in 1995 to $202,199 in 1996. Operating expense
also decreased as a result of reductions in bond amortization expense,
consulting and supplies. Amortization of deferred policy acquisition costs
decreased 100% from $538,017 in 1995 due to discontinuance of the Automobile
Physical Damage Program. Insurance Department licenses and fees expense
decreased 35.5% from $131,639 in 1995 to $84,957 in 1996 primarily due to
securing additional states authority to accommodate the expansion of the Surety
program during 1995. Additionally, BCIS Services incurred operating expenses of
$567,343 in 1996 compared with $565,910 of operating expenses during 1995.
Interest Expense. Interest expense remained relatively constant from $454,497 in
1995 to $451,425 in 1996.
Federal Income Taxes. The difference between Federal income taxes, $176,698 in
1995 and $780,249 in 1996, resulted from an increase in the effective tax rate
primarily due to lower tax exempt interest in 1996 and increases in taxable
income. See Note 8 to the Notes to Consolidated Financial Statements.
Statutory Combined Ratios. The change in the statutory combined ratio from
113.3% in 1995 to 83.7% in 1996 was primarily attributable to a decrease in loss
and loss adjustment expense experience together with higher than anticipated
salvage and subrogation associated with the discontinued automobile physical
damage insurance program. See "Losses and Loss Adjustment Expenses, Net of
Reinsurance Recoveries."
DISCONTINUED PRODUCTS
The Company recorded $63,657 as a reimbursement for expenses previously incurred
from a product line sold May 31, 1997. The business was engaged (during five
months of 1997) in administering and marketing of service contracts on consumer
goods. Expenses incurred, totalling $72,980, are included in general and
administrative expenses in 1997. See "RESULTS OF OPERATIONS."
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. Premiums were predominantly earned through June
1996 as the policies expired. The Automobile Physical Damage Insurance program
represented (1.3)% and 5.7% of the Company's premiums written and 37.6% and
48.1% of the Company's premiums earned, respectively, for 1996 and 1995. There
were no premiums written or earned during 1997.
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LIQUIDITY AND CAPITAL RESOURCES
The Company is an insurance holding company whose principal asset is the stock
of Ohio Indemnity. The Company is, and will continue to be, dependent on
dividends from Ohio Indemnity to meet its liquidity requirements, including debt
service obligations. The Company has a $10 million credit facility to fund
working capital requirements. Based on statutory limitations, the maximum amount
of dividends that the Company would be able to receive in 1998 from Ohio
Indemnity, absent regulatory consent, is $3,042,840. See Note 11 to the Notes to
Consolidated Financial Statements.
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 (used in) operating activities equalled $(4,907,977), $2,221,928 and
$2,291,171 for the years ended December 31, 1995, 1996, and 1997, respectively.
Net cash used in financing activities was $415,026, $179,307 and $596,877 for
the years ended December 31, 1995, 1996, and 1997, respectively. Net cash
provided by (used in) investing activities of the Company was $6,234,041,
$(1,843,740) and $(1,229,263) for the years ended December 31, 1995, 1996 and
1997, respectively.
BCIS Services derives its funds principally from claims administration fees and
Title Research derives its funds principally from title and appraisal fees which
are sufficient to meet their respective operating obligations. Although it is
impossible to estimate accurately the future cash flows from the operations of
Title Research's business, management believes the Company's effective capital
costs may increase. Management is actively exploring further avenues for
preserving capital and improving liquidity.
The Company maintains a level of cash and liquid short-term investments which it
believes will be adequate to meet anticipated payment obligations without being
required to liquidate intermediate-term and long-term investments through the
end of 1998. 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 end of 1998.
The Company's investments at December 31, 1997 consisted primarily of
investment-grade fixed income securities. Cash and short-term investments at
December 31, 1997 amounted to $7,948,061, 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
held to maturity fixed income securities to maturity or put date. Available for
sale fixed income securities are reported at fair value with unrealized gains or
losses, net of applicable deferred taxes, reflected in shareholders' equity. The
Company earned net investment income of $1,413,493, $1,564,175 and $1,527,549
for the years ended December 31, 1995, 1996 and 1997, respectively.
Interest rate risk is the risk that interest rates will change and cause a
decrease in the value of an insurer's investments. The Company mitigates this
risk by attempting to match the maturity schedule of its assets with the
expected payouts of its liabilities. To the extent that liabilities come due
more quickly than assets mature, an insurer would have to sell assets prior to
maturity and recognized a gain or loss.
The Company's total shareholders' equity increased from $13,710,410 in 1995 to
$15,906,817 in 1996 to $19,079,801 in 1997 representing a 39.2% increase over
the three-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 $477,600 and $458,436 at December 31, 1997
and 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.
NAIC guidelines recommend that a property/casualty insurer's ratio of annual
statutory net premiums written to statutory surplus be no greater than 3 to 1.
At December 31, 1997, the ratio of combined annual statutory net premiums
written by the Subsidiary to its combined statutory surplus was approximately .5
to 1. The relative capital position is reflective of the Company's low
underwriting leverage and conservative investment risk profile.
7
<PAGE> 8
FACTORS TO CONSIDER FORWARD LOOKING
Management has undertaken several initiatives in 1997 which should favorably
impact performance in 1998, although there can be no assurance that this will
occur. The discontinuance of the Automobile Physical Damage Program in
California should allow the Company to improve its profit potential.
The Company's current and future marketing plan is to provide fast and efficient
service in the delivery of coverage and service through a home office, branch
offices and issuing agents. Marketing activities will be directed toward
selected market niches where management believes the Company will be able to
provide customers with additional services.
IMPACT OF THE YEAR 2000 ISSUE
The Year 2000 Issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Any of the Company's
computer programs that have date-sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in a system
failure or miscalculations causing disruptions of operations, including, among
other things, a temporary liability to process transactions or engage in normal
business activities.
The Company will utilize external resources to reprogram, or replace, and test
the software for Year 2000 modifications. The Company plans to complete the Year
2000 project no later than December 31, 1998. The total cost of the Year 2000
project is estimated at $49,500 and will be funded through operating cash flows.
Of the total project cost, approximately $24,880 is attributable to the purchase
and development of new software which will be capitalized. The remaining
$24,620, which will be expensed as incurred is not expected to have a material
affect on the results of operations. To date, the Company has incurred and
expensed approximately $19,620 related to the assessment of, and preliminary
efforts in connection with, its Year 2000 project and the development of a
remediation plan.
The costs of the project and the date on which the Company plans to complete the
Year 2000 modifications are based on management's best estimates, which were
derived utilizing assumptions of future events including the continued
availability of certain resources and other factors. However, there can be no
guarantee that these estimates will be achieved and actual results could differ
from those plans.
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. See Note 17 to the Notes to Consolidated Financial
Statements.
SAFEHARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
Except for the historical information contained herein, the matters discussed in
this Annual Report 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 Form 10-K for the year ended December 31, 1997 and other Securities
and Exchange Commission filings. Actual results may differ materially from
management's expectations.
INFLATION
Although the cumulative effects of inflation on premium growth cannot be fully
determined, increases in the retail price of automobiles have generally resulted
in increased amounts being financed which constitutes one of the bases for
determining premiums on Ultimate Loss Insurance. Despite relatively low
inflation during 1997, the Company has experienced no material adverse
consequences with respect to its growth in premiums.
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INSURANCE REGULATORY MATTERS
On June 20, 1997, the Ohio Department of Insurance issued its triennial
examination report on Ohio Indemnity as of December 31, 1996. The examiners
reported that the financial statements set forth in the report reflected the
financial condition of Ohio Indemnity. Management is not aware of any
recommendations by regulatory authorities which would have, or are reasonably
likely to have, a material effect on the Company's liquidity, capital resources
or results of operations.
The NAIC has developed a risk-based capital measurement formula to be applied to
all property/casualty insurance companies. This formula calculates a minimum
required statutory net worth, based on the underwriting, investment, credit,
loss reserve and other business risks inherent in an individual company's
operations. Under the current formula, any insurance company which does not meet
threshold risk-based capital measurement standards could be forced to reduce the
scope of its operations and ultimately could become subject to statutory
receivership proceedings. Based on the Company's analysis, it appears that the
Company's total adjusted capital is in excess of all required action levels and
that no corrective action will be necessary. The Risk Based Capital provisions
have been enacted into the Ohio Revised Code.
RESERVES
The amount of incurred losses and loss adjustment expenses is dependent upon a
number of factors, including claims frequency and severity, and the nature and
types of losses incurred and the number of policies written. These factors may
fluctuate from year to year and do not necessarily bear any relationship to the
amount of premiums written or earned.
As claims are incurred, provisions are made for unpaid losses and loss
adjustment expenses by accumulating case reserve estimates for claims reported
prior to the close of the accounting period and by estimating IBNR claims based
upon past experience modified for current trends. Notwithstanding the
variability inherent in such estimates, management believes that the provisions
made for unpaid losses and loss adjustment expenses are adequate to meet claims
obligations of the Company. Such estimates are reviewed monthly by management
and annually by an independent consulting actuary and, as adjustments thereto
become necessary, such adjustments are reflected in the Company's results of
operations. The Company's independent consulting actuary has opined that loss
and loss adjustment expense reserve levels, as of December 31, 1997, were
reasonable.
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Signatures
----------
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Company has duly caused this amended report to be signed on its behalf by
the undersigned, thereunto duly authorized.
Bancinsurance Corporation
(Company)
4/29/98 By Si Sokol
------- ------------------------
DATE Si Sokol
Chairman of Board of
Directors, President
(Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934,
this amended report has been signed below by the following persons, which
include the Chief Executive Officer, the Chief Financial Officer and a majority
of the Board of Directors, on behalf of the Registrant and in the capacities and
on the dates indicated:
4/29/98 Si Sokol 4/29/98 Sally Cress
------- -------------------------- ------- --------------------------
DATE Si Sokol DATE Sally Cress
Chairman of Board of Treasurer, Secretary
Directors, President and Chief Financial Officer
Chief Executive Officer and Chief Accounting
Officer
4/29/98 Daniel D. Harkins 4/29/98 Milton O. Lustnauer
------- -------------------------- ------- --------------------------
DATE Daniel D. Harkins DATE Milton O. Lustnauer
Director Director
4/29/98 Saul Sokol 4/29/98 James R. Davis
------- -------------------------- ------- --------------------------
DATE Saul Sokol DATE James R. Davis
Director Director
4/29/98 John S. Sokol
------- --------------------------
DATE John S. Sokol
Director
10
