<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 September 30, 1998 Commission File Number 0-8738
------------------ -----------------------------
BANCINSURANCE CORPORATION
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Ohio 31-0790882
- ------------------------------- ----------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
20 East Broad Street, Columbus, Ohio 43215
- --------------------------------------------------------------------------------
(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 September 30, 1998
- ------------------------------- -----------------------------------
Common stock, without par value 5,843,115
<PAGE> 2
BANCINSURANCE CORPORATION
AND SUBSIDIARIES
INDEX
-----
<TABLE>
<CAPTION>
Page
PART I - FINANCIAL INFORMATION:
<S> <C>
Item 1. Financial Statements
Consolidated Balance Sheets as of September 30,
1998 (unaudited) and December 31, 1997 3
Consolidated Statements of Income for the three months and
nine months ended September 30, 1998 and 1997 (unaudited) 5
Consolidated Statements of Comprehensive Income for the three 6
months and nine months ended September 30, 1998 and 1997
(unaudited)
Consolidated Statements of Cash Flows for the nine months
ended September 30, 1998 and 1997 (unaudited) 7
Notes to Consolidated Financial Statements (unaudited) 8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9
Item 3. Quantitative and Qualitative Disclosures About
Market Risk Not Applicable
PART II - OTHER INFORMATION AND SIGNATURES
Item 1. Legal Proceedings 15
Item 2. Changes in Securities 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>
September 30, December 31,
Assets 1998 1997
- ------ -------------- --------------
(Unaudited)
<S> <C> <C>
Investments:
Held to maturity:
Fixed maturities, at amortized cost (fair value
$4,684,913 in 1998 and $4,054,026 in 1997) $ 4,528,095 $ 3,940,194
Available for sale:
Fixed maturities, at fair value (amortized cost
$11,770,565 in 1998 and $12,635,652 in 1997) 12,182,309 12,962,626
Equity securities, at fair value (cost $2,889,700
in 1998 and $2,601,150 in 1997) 3,220,575 3,225,061
Short-term investments, at cost which
approximates fair value 6,379,748 5,753,669
Securities purchased under agreements to resell 648,171 1,048,075
-------------- --------------
Total investments 26,958,898 26,929,625
-------------- --------------
Cash 3,470,383 1,146,317
Premiums receivable 1,078,438 755,611
Accounts receivable, net of allowance for
uncollectible amounts 267,297 297,519
Reinsurance receivable 5,250 8,000
Reinsurance recoverable on paid losses 11,074 -
Prepaid reinsurance premiums 24,686 36,335
Premium taxes receivable 18,468 -
Prepaid commissions 145,518 -
Loans to affiliates 677,901 606,182
Note receivable 21,031 67,500
Furniture, fixtures and leasehold improvements, net 162,542 121,697
Excess of investment over net assets of subsidiaries,
net 968,428 976,610
Accrued investment income 294,764 298,234
Prepaid federal income taxes 6,015 -
Other assets 238,686 160,802
-------------- --------------
Total assets $ 34,349,379 $ 31,404,432
============== ==============
(Continued)
</TABLE>
3
<PAGE> 4
BANCINSURANCE CORPORATION
AND SUBSIDIARIES
Consolidated Balance Sheets, Continued
<TABLE>
<CAPTION>
September 30, December 31,
Liabilities and Shareholders' Equity 1998 1997
- ------------------------------------ ------------ ------------
(Unaudited)
<S> <C> <C>
Reserve for unpaid losses and loss adjustment
expenses $ 1,965,570 $ 1,531,714
Unearned premiums 1,427,904 698,764
Contract funds on deposit 2,884,021 3,451,371
Reinsurance premiums payable 6,602 27,821
Note payable to bank 5,000,000 5,000,000
Note payable 30,665 37,073
Taxes, licenses, and fees payable 174,157 150,778
Deferred federal income taxes 211,144 296,049
Federal income taxes payable - 741
Commissions payable 309,416 493,212
Other 974,921 637,108
------------ ------------
Total liabilities 12,984,400 12,324,631
------------ ------------
Commitments and contingent liabilities
Shareholders' equity:
Non-voting preferred stock:
Class A Serial Preference shares without par value;
authorized 100,000 shares; no shares issued or
outstanding - -
Class B Serial Preference shares without par value;
authorized 98,646 shares; no shares issued or
outstanding - -
Common stock without par value; authorized
20,000,000 shares; 5,878,277 shares issued 315,567 315,567
Additional paid-in capital 1,495,387 1,495,387
Accumulated other comprehensive income 490,128 627,583
Retained earnings 19,164,411 16,741,778
------------ ------------
21,465,493 19,180,315
Less: Treasury stock, at cost (35,162 common
shares at September 30, 1998 and December
31, 1997) (100,514) (100,514)
------------ ------------
Total shareholders' equity 21,364,979 19,079,801
------------ ------------
Total liabilities and shareholders' equity $ 34,349,379 $ 31,404,432
============ ============
</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 Nine months Ended
September 30, September 30,
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Income:
Premiums written $ 4,025,837 $ 2,965,371 $ 14,703,804 $ 8,325,545
(Increase) decrease in
unearned premiums 675,344 311,734 (729,139) (548,357)
------------ ------------ ------------ ------------
Premiums earned 4,701,181 3,277,105 13,974,665 7,777,188
Premiums ceded (15,964) (29,678) (57,482) (29,678)
------------ ------------ ------------ ------------
Net premiums earned 4,685,217 3,247,427 13,917,183 7,747,510
Investment income (net of
expenses of $45,378 and
$85,830, respectively) 346,801 362,386 1,040,456 1,027,933
Net realized gain (loss) on
investments (1,025) 115,926 49,968 198,798
Claims administration fees 152,046 146,698 443,810 495,680
Title and appraisal fees 488,991 561,200 1,458,696 1,057,682
Management fees 668,978 30,667 1,130,185 252,652
Other income 3,888 - 30,896 75,922
------------ ------------ ------------ ------------
Total revenue 6,344,896 4,464,304 18,071,194 10,856,177
------------ ------------ ------------ ------------
Losses and operating expenses:
Losses and loss adjustment
expenses 2,825,170 1,900,712 8,768,324 4,014,656
Commission expense 657,526 487,693 1,642,507 1,091,805
Other insurance operating
expenses 458,445 360,535 1,422,559 1,040,833
General and administrative
expenses 1,244,681 719,589 2,659,228 1,754,358
Interest expense 64,827 111,559 221,795 259,440
------------ ------------ ------------ ------------
Total expenses 5,250,649 3,580,088 14,714,413 8,161,092
------------ ------------ ------------ ------------
Income before federal
income taxes 1,094,247 884,216 3,356,781 2,695,085
------------ ------------ ------------ ------------
Federal income tax expense 310,083 226,051 934,148 698,782
------------ ------------ ------------ ------------
Net income $ 784,164 $ 658,165 $ 2,422,633 $ 1,996,303
============ ============ ============ ============
Net income per common share $ .13 $ .11 $ .41 $ .34
============ ============ ============ ============
Net income per common share,
assuming dilution $ .13 $ .11 $ .41 $ .34
============ ============ ============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE> 6
BANCINSURANCE CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C>
Net income $ 784,164 $ 658,165 $ 2,422,633 $ 1,996,303
Other comprehensive income, net of tax:
Unrealized holding gains
(losses) on securities
arising during period (78,674) 97,265 (137,455) 163,401
------------ ------------ ------------ ------------
Comprehensive income $ 705,490 $ 755,430 $ 2,285,178 $ 2,159,704
============ ============ ============ ============
</TABLE>
6
<PAGE> 7
<TABLE>
<CAPTION>
BANCINSURANCE CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited) Nine Months Ended
September 30,
1998 1997
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 2,422,633 $ 1,996,303
Adjustments to reconcile net income to net cash
provided by operating activities:
Net realized gain on investments (49,968) (198,798)
Depreciation 69,231 65,867
Amortization of bond premium 42,256 40,266
Increase in premiums receivable (322,827) (444,593)
Increase in prepaid commissions (145,518) (115,499)
Increase in other assets (56,891) (514,691)
Increase in reserve for unpaid losses and loss
adjustment expenses 433,856 229,327
Increase in unearned premiums 729,140 548,357
Increase (decrease) in contract funds on deposit (567,350) 213,934
Decrease in reinsurance premiums payable (21,219) (463,673)
Increase (decrease) in commissions payable (183,796) 62,746
Increase (decrease) in other liabilities 354,043 (272,221)
------------ ------------
Net cash provided by operating activities 2,703,590 1,147,325
------------ ------------
Cash flows used in investing activities:
Proceeds from held to maturity: fixed maturities
due to redemption or maturity 340,000 1,156,000
Proceeds from available for sale: fixed maturities
sold, redeemed and matured 1,012,000 1,389,619
Proceeds from available for sale equity securities
sold 2,198,975 1,777,748
Cost of investments purchased:
Held to maturity: fixed maturities (411,469) (1,344,403)
Available for sale: fixed maturities (207,946) (3,539,635)
Equity securities (2,935,211) (1,139,966)
Net (increase) decrease in short-term investments (626,079) 962,146
Net (increase) decrease securities purchased under
agreements to resell 399,904 (276,873)
Purchase of furniture, fixtures and leasehold
improvements (149,923) (54,907)
Proceeds from disposal of equipment 225 -
Cash acquired in purchase of subsidiary - 27,918
------------ ------------
Net cash used in investing activities (379,524) (1,042,353)
------------ ------------
Cash flows from financing activities:
Proceeds from note payable to bank 5,950,000 7,525,000
Repayments of note payable to bank (5,950,000) (6,585,000)
Proceeds from stock options exercised - 3,125
------------ ------------
Net cash provided by financing activities - 943,125
------------ ------------
Net increase in cash 2,324,066 1,048,097
------------ ------------
Cash at December 31 1,146,317 681,286
------------ ------------
Cash at September 30, $ 3,470,383 $ 1,729,383
============ ============
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 221,795 $ 259,440
============ ============
Income taxes 955,000 760,000
============ ============
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 Sheets as of September 30, 1998, the Consolidated
Statements of Income for the three and nine months ended September 30, 1998 and
1997, the Consolidated Statements of Comprehensive Income for the three and nine
months ended September 30, 1998 and 1997, and the Consolidated Statements of
Cash Flows for the nine 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 September 30, 1998 and for all periods presented have been made.
2. Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been omitted. It is suggested that these unaudited Consolidated Financial
Statements be read in conjunction with the financial statements and notes
thereto included in the Company's Form 10-K for the year ended December 31,
1997. The results of operations for the period ended September 30, 1998 are not
necessarily indicative of the results of operations for the full year.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
3. Prior period financial statements have been restated to reflect the adoption
of Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting on
Comprehensive Income". SFAS No. 130 establishes standards for reporting and
display of comprehensive income and its components. In June 1997, the Financial
Accounting Standards Board issued SFAS 131, "Disclosures About Segments of an
Enterprise and Related Information". This statement requires certain disclosures
about products and services, geographic areas and major customers. The segment
and other information disclosures are required for the year ended December 31,
1998. These standards, expand or modify disclosures and, accordingly, have no
impact on the Company's consolidated results of operations, financial position
or cash flows.
4. Supplemental Disclosure For Earnings Per Share
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net income $ 784,164 $ 658,165 $ 2,422,633 $ 1,996,303
------------ ------------ ------------ ------------
Income available to common
stockholders, assuming
dilution $ 784,164 $ 658,165 $ 2,422,633 $ 1,996,303
------------ ------------ ------------ ------------
Weighted average common
shares outstanding 5,843,115 5,839,365 5,843,115 5,815,928
Adjustments for dilutive
securities:
Dilutive effect of
outstanding options 99,955 53,187 96,604 52,821
------------ ------------ ------------ ------------
Diluted common shares 5,943,070 5,892,552 5,939,719 5,868,749
============ ============ ============ ============
Net income per common share $ .13 $ .11 $ .41 $ .34
Net income per common share,
assuming dilution $ .13 $ .11 $ .41 $ .34
</TABLE>
8
<PAGE> 9
BANCINSURANCE CORPORATION
AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of
---------------------------------------
Financial Condition and Results of Operations
---------------------------------------------
The following discussion should be read in conjunction with the consolidated
financial statements of the Company and the notes thereto and the other
financial information included elsewhere in this Quarterly Report on Form 10-Q,
as well as the factors set forth under the caption "Forward-Looking Information"
below.
OVERVIEW
Bancinsurance Corporation is a specialty property insurance holding company.
The Company's principal sources of revenue are premiums paid by insureds for
insurance policies issued by the Company's wholly-owned subsidiary, Ohio
Indemnity Company ("Ohio Indemnity"). 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)
Nine Months Ended September 30,
--------------------------------------------
1997-98
--------------------------------------------
<S> <C>
Premiums written $ 6,378,259
Net premiums earned 6,169,673
Net investment income (137,307)
Claims administration fees (51,870)
Title and appraisal fees 401,014
Loss and loss adjustment expense,
net of reinsurance recoveries 4,753,668
Operating expense 1,837,298
Interest expense (37,645)
Operating income 661,696
Net income 426,330
</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 nine months ended September
30:
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
Statutory:
Loss ratio 63.0% 51.8%
Expense ratio 22.5% 25.2%
------------ ------------
Combined ratio 85.5% 77.0%
============ ============
</TABLE>
9
<PAGE> 10
<TABLE>
<CAPTION>
1998 1997
------------ ------------
<S> <C> <C>
GAAP:
Loss ratio 63.0% 51.8%
Expense ratio 20.9% 22.5%
------------ ------------
Combined ratio 83.9% 74.3%
============ ============
</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
SEPTEMBER 30, 1998 AS COMPARED TO SEPTEMBER 30, 1997
Premiums Written; Net Premiums Earned. Premiums written for the nine months
increased from $8,325,545 at September 30, 1997 to $14,703,804 at September 30,
1998, and net premiums earned increased from $7,747,510 at September 30, 1997 to
$13,917,183 at September 30, 1998. Premiums written increased from $2,965,371
during the three months ended September 30, 1997 to $4,025,837 during the three
months ended September 30, 1998, while net premiums earned increased from
$3,247,427 to $4,685,217 during the same period, respectively. Premiums
increased due to strong performance in the Company's expanding core product
lines of business. The addition of two significant new policies in the Ultimate
Loss Insurance Program, a new agency program and growth in the Bonded Service
program contributed to the increases.
Premiums written for Ultimate Loss Insurance increased from $5,084,097 in
the first nine months of 1997 to $10,507,500 in the first nine months of 1998.
Net premiums earned from Ultimate Loss Insurance increased from $5,095,369 in
the first nine months of 1997 to $10,521,409 in the first nine months of 1998.
Premiums written for Ultimate Loss Insurance increased from $2,621,791 in the
third quarter of 1997 to $3,473,720 in the third quarter of 1998. Net premiums
earned for Ultimate Loss Insurance increased from $2,331,277 in the third
quarter of 1997 to $3,371,687 in the third quarter of 1998. The increase in
premiums written and premiums earned during the first nine months of 1998
reflected increased premium volume primarily attributable to a significant new
customer added during the third quarter of 1997 and a second added during the
second quarter of 1998. In addition, a new creditor-placed mortgage protection
and collateral protection program added during the fourth quarter of 1997
recorded in the aggregate $258,579 and $295,009 of premiums written and earned,
respectively, in 1998.
Premiums written for the Bonded Service program increased from $3,175,635 in
the first nine months of 1997 to $3,617,730 in the first nine months of 1998,
while net premiums earned from the Bonded Service program increased from
$2,554,603 in the first nine months of 1997 to $2,890,348 in the first nine
months of 1998 due to increases in premium rates. The increases in net premiums
written and premiums earned on the Bonded Service program were primarily
attributable to increases in employee enrollment among existing trust members
resulting in higher service fees. Premiums written for the Bonded Service
program decreased from $320,118 in the third quarter of 1997 to $241,481 in the
third quarter of 1998 due to the timing of billing issuance, while net premiums
earned increased from $884,078 in the third quarter of 1997 to $949,155 in the
third quarter of 1998.
Net Investment Income. Net investment income decreased from $1,226,731 in
the first nine months of 1997 to $1,090,424 in the first nine months of 1998 and
net investment income decreased from $478,312 in the third quarter of 1997 to
$345,776 in the third quarter of 1998. Investment income was relatively constant
as additional income due to growth in invested assets from positive cash flow
was offset by declining interest rates and a shift from income producing
preferred stocks to common stocks. Investment
10
<PAGE> 11
yield has been relatively low due to the high allocation of short-term
investments and emphasis on tax-exempt bonds in the portfolio. Realized gains on
investments sold, redeemed or matured decreased 74.9% from the nine months ended
September 30, 1997 to the nine months ended September 30, 1998 and decreased
from a $115,926 realized gain during the three months ended September 30, 1997
to a realized loss of $1,025 during the three months ended September 30, 1998,
principally due to recent stock market declines.
Claims Administration. Claims administration fees generated by BCIS
Services, Inc. ("BCIS Services"), a consolidated subsidiary, accounted for
$495,680 of the revenues of the first nine months of 1997 and $443,810 in the
first nine months in 1998, and increased from $146,698 in the third quarter of
1997 to $152,046 in the third quarter of 1998. The decrease in the nine month
comparables was primarily attributable to a decrease in claims processing and
servicing responsibilities. The increase during the third quarter was
attributable to additional services performed for a customer during the third
quarter ended September 30, 1998.
Title and Appraisal Fees. Title and appraisal fees generated by Title
Research Corporation ("Title Research"), a consolidated subsidiary, accounted
for $1,057,682 and $1,458,696 of the revenues for the nine months ended
September 30, 1997 versus 1998 and $561,200 and $488,991 of the revenues during
the three months ended September 30, 1997 versus 1998, respectively. Title
Research commenced business operations in Ohio during the second quarter of
1997.
Management Fees. Management fees were $1,130,185 for the nine months ended
September 30, 1998 and $668,978 for the three months ended September 30, 1998.
Management fees were $252,652 for the nine months ended September 30, 1997 and
$30,667 during the third quarter of 1997. The increase was attributed to
recognition of favorable results from a closed period of operations of the
Surety programs. The Company expects management fees to vary from period to
period depending on claims experience in the Surety programs.
Other Income. Other income decreased from $75,922 in the first nine months
of 1997 to $30,896 in the first nine months of 1998 and was $3,888 in the three
months ended September 30, 1998. The decrease was primarily the result of
recording $63,657 as a reimbursement for expenses previously incurred from an
insurance product line sold during the second quarter of 1997.
Losses and Loss Adjustment Expenses, Net of Reinsurance Recoveries. Losses
and loss adjustment expenses totaled $4,014,656, or 51.8% of net premiums earned
during the first nine months of 1997 versus $8,768,324, or 63.0% of net premiums
earned during the first nine months of 1998. Losses and loss adjustment expenses
totaled $1,900,712 or 58.5% of net premiums earned during the third quarter of
1997 versus $2,825,170, or 60.3% of net premiums earned during the third quarter
of 1998. Losses and loss adjustment expenses, as a percentage of net premiums
earned, increased for the comparable periods because net premiums earned
increased at a lower percentage rate than the percentage rate increase in losses
and loss adjustment expenses. This anticipated increase is primarily the result
of losses associated with two significant new policies in the Ultimate Loss
Insurance program.
The absolute increase in losses and loss adjustment expenses was
attributable to initial claims primarily associated with two significant new
policies in the Ultimate Loss Insurance business which increased from $3,276,767
during the nine months ended September 30, 1997 to $8,071,128 during the nine
months ended September 30, 1998 and totalled $1,667,505 during the third quarter
of 1997 compared with $2,491,877 the third quarter of 1998. Loss and loss
adjustment expenses for Ultimate Loss Insurance business increased primarily due
to a significant new customer added during the third quarter of 1997 and a
second added during the second quarter of 1998. Losses and loss adjustment
expenses for the Bonded Service program decreased from $461,658 in 1997 to
$217,978 in 1998 and decreased from $160,882 for the third quarter of 1997
compared with $115,136 during the third quarter of 1998. These decreases were
due to redundancy development on prior year reserves combined with timing
differences on the release of prior accident year reserves.
11
<PAGE> 12
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 47.3% from
$3,886,996 for the first nine months of 1997 to $5,724,294 for the first nine
months of 1998 and increased 50.6% from $1,567,817 for the third quarter of 1997
compared with $2,360,652 during the third quarter of 1998. Commission expense
increased 50.5% from $1,091,085 in the first nine months of 1997 to $1,642,507
in the first nine months of 1998 and increased 34.8% from $487,693 to $657,526
in the third quarter, primarily due to higher direct commissions in the Ultimate
Loss Insurance Program and both higher direct and contingent commissions in the
Bonded Service Program. Other insurance operating expenses increased 36.7% from
$1,040,833 in the first nine months of 1997 to $1,422,559 in the first nine
months of 1998 and increased 27.2% from $360,535 to $458,445 during the three
months ended September 30, 1997 and 1998, respectively, primarily due to
increases in allocable salaries and related benefits, legal, premium taxes, rent
and outside computer services. General and administrative expenses increased
51.6% from $1,754,358 in the first nine months of 1997 to $2,659,228 in the
first nine months of 1998, primarily due to recognition of three quarters of
operating and administrative expenses incurred by Title Research Corporation (a
purchase business combination in 1997) versus only two quarters of expense
recognition during 1997. General and administrative expenses increased 73.0%
from $719,589 to $1,244,681 in the third quarter of 1997 versus 1998,
respectively, primarily due to increases in legal and consulting. Title Research
incurred operating expenses of $1,035,606 in the six months ended September 30,
1997 compared with $1,560,014 during the nine months ended September 30, 1998
and increased from $505,137 during the third quarter of 1997 to $542,681 during
the third quarter of 1998. BCIS Services incurred operating expenses of $474,630
in the first nine months of 1997 compared with $425,851 during the nine months
of 1998 and remained relatively constant from $142,552 during the third quarter
of 1997 to $143,668 during the third quarter of 1998.
Interest Expense. Interest expense decreased due to lower borrowing levels
on the Company's revolving credit line.
Federal Income Taxes. The difference between federal income taxes, $698,782
in the first nine months of 1997 to $934,148 in the first nine months of 1998
and $226,051 to $310,083 in the third quarter, respectively, resulted from
higher pre-tax income and lower permanent tax differences resulting in a higher
effective tax rate.
LIQUIDITY AND CAPITAL RESOURCES
The Company is an insurance holding company whose principal asset is the
stock of Ohio Indemnity. The Company is, and will continue to be, dependent on
dividends from the Ohio Indemnity to meet its liquidity requirements, including
debt service obligations. The Company has a $10 million credit facility to fund
working capital requirements. Based on statutory limitations, the maximum amount
of dividends that the Company would be able to receive in 1998 from Ohio
Indemnity, absent regulatory consent, is $3,042,840.
Ohio Indemnity derives its funds principally from net premiums written,
reinsurance recoveries, investment income and contributions of capital from the
Company. The principal use of these funds is for payment of losses and loss
adjustment expenses, commissions, operating expenses and income taxes.
BCIS Services derives its funds principally from claims administration fees
and Title Research derives its funds principally from title and appraisal fees
which are sufficient to meet their respective operating obligations. Although it
is impossible to estimate accurately the future cash flows from the operations
of Title Research's business, management believes the Company's effective
capital costs may increase. Management is actively exploring further avenues for
preserving capital and improving liquidity.
The Company maintains a level of cash and liquid short-term investments
which it believes will be adequate to meet anticipated payment obligations
without being required to liquidate intermediate-term and long-term investments
through the next twelve months. Due to the nature of the risks the Company
insures, losses and loss adjustment expenses emanating from its policies are
characterized by relatively short settlement periods and quick development of
ultimate losses compared to claims
12
<PAGE> 13
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.
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, the Company would have to sell assets prior to
maturity and recognize a gain or loss.
The Company's total shareholders' equity increased $3,019,554 to $21,364,979
at September 30, 1998 from $18,345,425 at September 30, 1997 representing a
16.5% increase over the one-year period. Driven by profitable operating
earnings, the increase in total shareholders' equity has strengthened the
Company's capital position.
All material capital commitments and financial obligations of the Company
are reflected in the Company's financial statements, except the Company's risk
on surety bonds and state mandated performance bonds, written in connection with
the Bonded Service program. The financial statements include reserves for losses
on such programs for any claims filed and for an estimate of incurred but not
reported losses. Such loses were $355,275 and $477,600 at September 30, 1998 and
December 31, 1997, respectively.
Under applicable insurance statutes and regulations, Ohio Indemnity is
required to maintain prescribed amounts of capital and surplus as well as
statutory deposits with the appropriate insurance authorities. Ohio Indemnity is
in compliance with all applicable statutory capital and surplus requirements.
Ohio Indemnity's investments consist only of permitted investments under Ohio
insurance laws.
FACTORS TO CONSIDER FORWARD LOOKING
The Company expects to continue expanding its direct sale force, which
should allow the Company to increase its market penetration. These activities
will be directed toward selected market niches where management believes the
Company will be able to provide customers with additional services.
One of the Company's significant Ultimate Loss Insurance program customers
decided to close their auto finance division as part of an overall strategy to
focus on more profitable areas of lending, however, they will continue to
service the existing auto loan portfolio as the loans pay off. Management
expects the discontinuance of this operation will result in a gradual decline in
premium volume although policy coverage under existing loans will continue
in-force during the next two to four years.
IMPACT OF THE YEAR 2000 ISSUE
State of Readiness. The Year 2000 issue relates to the way computer systems and
programs define calendar dates; they could fail or make miscalculations due to
interpreting a date including "00" to mean 1900, not 2000.
During fiscal 1997, the Company completed the installation and testing of its
internal financial systems and believes that such systems are Year 2000
compliant. The Company utilizes the latest version of Year 2000 compliant
Platinum SQL software for its internal financial system.
The Company began work on the Year 2000 Compliance issue for all remaining
internal software in fiscal 1997. The scope of the project includes: ensuring
the compliance of all applications, operating systems and hardware on network,
PC platforms; and addressing the compliance of key business partners.
The most significant category of key business partners are financial
institutions. Their critical functions include safeguarding and management of
investment portfolios and processing of the Company's operating bank accounts.
Other partner categories include insurance agencies, communication services,
utilities; materials and supplies. Based on the importance of each relationship,
the Company is defining a strategy to determine compliance.
13
<PAGE> 14
The target for completion of all phases is the second quarter of 1999. The
Company has completed the assessment and strategy phases for applications,
operating systems and hardware. Currently, approximately 45% of all policyholder
network systems are compliant.
The Company has not had an independent review of its Year 2000 risks or
estimates. However, experts have been engaged to assist in developing estimates
and to complete remediation work on separate portions of the project.
Costs to Address the Company's Year 2000 Issue. Since the inception of the
project, the Company has incurred external costs of approximately $51,000.
Current estimates project a total expense for the project of $150,000. Current
year costs are expected to be $75,000, which are expensed as incurred. There has
not been a material adverse impact on the Company's operations or financial
condition as a result of projects being deferred due to resource constraints
caused by the year 2000 project.
The Company's Contingency Plans. With respect to contingency plans for critical
policyholder systems, the Company recognizes that there is no viable alternative
if these systems are non-compliant. Thus, the Company targeted completion of
critical policyholder systems by second quarter end of 1999, allowing for
unanticipated delays. The Company will continue to reassess the need for formal
contingency plans, based on progress of Year 2000 efforts by the Company and
third parties.
Risks of the Company's Year 2000 Issue. Although the Company expects its
critical systems to be compliant by second quarter 1999 end, there is no
guarantee that these results will be achieved. Specific factors that give rise
to this uncertainty include a possible loss of technical resources to perform
the work, failure to identify all susceptible systems, non-compliance by third
parties whose systems and operations impact the Company, and other similar
uncertainties. A reasonable possible worst case scenario might include one or
more of the Company's significant policyholder systems being non-compliant. Such
an event could result in a material disruption to the Company's operations.
Specifically, the Company could experience an interruption to its ability to
collect and process premiums, process claims payments, safeguard and manage its
invested assets and operating cash accounts, accurately maintain policyholder
information and perform adequate custom service. Should the worst case scenario
occur, it could, depending on its duration, have a material impact on the
Company's results of operations and financial position.
TRENDS
Management does not know of any trends, events or uncertainties that will
have, or that are reasonably likely to have, a material effect on the Company's
liquidity, capital resources or results of operations.
The Company's results of operations have varied from quarter to quarter
principally because of fluctuations in underwriting results. The Company's
experience indicates that more loans for automobile purchases are financed
during summer months due to seasonal consumer buying habits. Title and appraisal
fees are closely related to the level of real estate activity and the average
price of real estate sales. The availability of funds to finance purchases
directly affects real estate sales. Other factors include consumer confidence,
economic conditions, supply and demand, mortgage interest rates and family
income levels. Historically, the first quarter has had the least real estate
activity, while the remaining quarters have been more active. Fluctuations in
mortgage interest rates can cause shifts in real estate activity outside the
normal seasonal pattern.
FORWARD-LOOKING INFORMATION
Statements in the following discussion that indicate the Company's or
management's intentions, hopes, beliefs, expectations or predictions of the
future are forward- looking statements. It is important to note that the
Company's actual results could differ materially from those projected in such
forward-looking statements. Additional information concerning factors that could
cause actual results to differ materially from those suggested in the
forward-looking statements is contained under the caption "Management's
Discussion and Analysis of Financial Condition and Results of Operations" in the
Company's Annual Report on Form 10-K for the year ended December 31, 1997 filed
with the Securities and Exchange Commission, as the same may be amended from
time to time.
14
<PAGE> 15
Forward-looking statements are not guarantees of performance. They involve
risks, uncertainties and assumptions. The future results and shareholder values
of the Company may differ materially from those expressed in these
forward-looking statements. Many of the factors that will determine these
results and values are beyond the Company's ability to control or predict.
Shareholders are cautioned not to put undue reliance on forward-looking
statements. In addition, the Company does not have an intention or obligation to
update forward-looking statements after the date hereof, even if new
information, future events, or other circumstances have made them incorrect or
misleading. For those statements, the Company claims the protection of the safe
harbor for forward-looking statements contained in the Private Securities
Litigation Reform Act of 1995.
INFLATION
Although the cumulative effects of inflation on premium growth cannot be
fully determined, increases in the retail price of automobiles have generally
resulted in increased amounts being financed which constitutes one of the bases
for determining premiums on Ultimate Loss Insurance. Despite relatively low
inflation during the first six months of 1998, the Company has experienced no
material adverse consequences with respect to its growth in premiums.
INSURANCE REGULATORY MATTERS
The NAIC has developed a risk-based capital measurement formula to be
applied to all property/casualty insurance companies. This formula calculates a
minimum required statutory net worth, based on the underwriting, investment,
credit, loss reserve and other business risks inherent in an individual
company's operations. Under the current formula, any insurance company which
does not meet threshold risk-based capital measurement standards could be forced
to reduce the scope of its operations and ultimately could become subject to
statutory receivership proceedings. Based on the Company's analysis, it appears
that the Company's total adjusted capital is in excess of all required action
levels and that no corrective action will be necessary. The Risk Based Capital
provisions have been enacted into the Ohio Revised Code.
RESERVES
The amount of incurred losses and loss adjustment expenses is dependent upon
a number of factors, including claims frequency, severity, the nature and types
of losses incurred, and the number of policies written. These factors may
fluctuate from year to year and do not necessarily bear any relationship to the
amount of premiums written or earned.
As claims are incurred, provisions are made for unpaid losses and loss
adjustment expenses by accumulating case reserve estimates for claims reported
prior to the close of the accounting period and by estimating IBNR claims based
upon past experience modified for current trends. Notwithstanding the
variability inherent in such estimates, management believes that the provisions
made for unpaid losses and loss adjustment expenses are adequate to meet claims
obligations of the Company. Such estimates are reviewed monthly by management
and annually by an independent consulting actuary and, as adjustments thereto
become necessary, such adjustments are reflected in the Company's results of
operations. The Company's independent consulting actuary has opined that loss
and loss adjustment expense reserve levels, as of December 31, 1997, were
reasonable.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
-----------------
On June 11, 1998, the Company filed an action in Franklin County Common Pleas
Court against Brian Delphia d/b/a Delphia Carr and Delphia Consulting, Inc., a
computer consulting firm, asserting claims for breach of contract relating to a
software development project. The computer consultant brought a counter-claim
seeking payment of $166,500 for outstanding billings. Mr. Delphia filed a second
counter-claim seeking $1,000,000 from the Company for malicious prosecution. The
Company believes both counter-claims are without merit and believes it has
strong defenses to the claims.
15
<PAGE> 16
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 September 30, 1998.
16
<PAGE> 17
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: November 6, 1998 By: /s/ Si Sokol
--------------------------------- ---------------------------------
Si Sokol
President and
Chairman of Board of Directors
(Principal Executive Officer)
Date: November 6, 1998 By: /s/ Sally Cress
--------------------------------- ---------------------------------
Sally Cress
Treasurer and Secretary
(Principal Financial and
Accounting Officer)
17
<TABLE> <S> <C>
<ARTICLE> 7
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<DEBT-HELD-FOR-SALE> 12,182,309
<DEBT-CARRYING-VALUE> 4,528,095
<DEBT-MARKET-VALUE> 4,684,913
<EQUITIES> 3,220,575
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 26,958,898
<CASH> 3,470,383
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 0
<TOTAL-ASSETS> 34,349,379
<POLICY-LOSSES> 1,965,570
<UNEARNED-PREMIUMS> 1,427,904
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 5,000,000
0
0
<COMMON> 315,567
<OTHER-SE> 21,049,412
<TOTAL-LIABILITY-AND-EQUITY> 34,349,379
13,917,183
<INVESTMENT-INCOME> 1,040,456
<INVESTMENT-GAINS> 49,968
<OTHER-INCOME> 3,063,587
<BENEFITS> 8,768,324
<UNDERWRITING-AMORTIZATION> 5,724,294
<UNDERWRITING-OTHER> 221,795
<INCOME-PRETAX> 3,356,781
<INCOME-TAX> 934,148
<INCOME-CONTINUING> 2,422,633
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,422,633
<EPS-PRIMARY> .41
<EPS-DILUTED> .41
<RESERVE-OPEN> 1,524,000
<PROVISION-CURRENT> 8,805,000
<PROVISION-PRIOR> (37,000)
<PAYMENTS-CURRENT> 6,901,000
<PAYMENTS-PRIOR> 1,431,000
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