<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
Amendment No. 1
to
FORM 10-K
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
- ---------------------------------------- ----------
(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 February 12, 1998, the aggregate fair value of the voting stock held by those
other than executive officers and directors of the registrant was $10,714,863.
As of February 12, 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
BANCINSURANCE CORPORATION AND SUBSIDIARIES
1997 FORM 10-K
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
PART I
<S> <C>
Item 1. Business................................................................................ 3
Item 2. Properties.............................................................................. 7
Item 3. Legal Proceedings....................................................................... 7
Item 4. Submission of Matters to a Vote of Security Holders..................................... 7
PART II
Item 5. Market for the Company's Common Stock and Related
Security Holder Matters............................................................. 8
Item 6. Selected Consolidated Financial Data.................................................... 8
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations................................................. 8
Item 7A. Quantitative and Qualitative Disclosures About Market
Risk................................................................................ 8
Item 8. Consolidated Financial Statements and Supplementary Data................................ 8
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure................................................. 8
PART III
Item 10. Directors and Executive Officers of the Company......................................... 8
Item 11. Executive Compensation.................................................................. 8
Item 12. Security Ownership of Certain Beneficial Owners and
Management.......................................................................... 9
Item 13. Certain Relationships and Related Transactions.......................................... 9
Part IV
Item 14. Exhibits, Financial Statement Schedules and Reports on
Form 8-K............................................................................ 9
</TABLE>
<PAGE> 3
Part I
Item 1. Business
GENERAL
The Company is an Ohio insurance holding company engaged primarily in the
underwriting of specialized and niche insurance products and related services
through its wholly-owned insurance subsidiary, Ohio Indemnity Company ("Ohio
Indemnity"). Ohio Indemnity is licensed to transact business in 45 states and
the District of Columbia and on a surplus lines basis in Texas. BCIS Services,
Inc. ("BCIS Services") is incorporated in Ohio as a wholly-owned subsidiary of
the Company. BCIS Services is a non-risk bearing provider of workers'
compensation administration and cost control services to employers who
self-insure workers' compensation coverage. During 1997, Title Research
Corporation ("Title Research") was incorporated in Ohio as a wholly-owned
subsidiary of the Company. Title Research specializes in title, appraisal and
related services which support documentation needs for first and second mortgage
lending requirements. The reference to "the Company" in the following discussion
relates to the Company and its subsidiaries.
PRODUCTS
Most of the Company's net premiums written and premiums earned are derived from
two distinct lines of specialized and niche insurance products and related
services:
Ultimate Loss Insurance. Ultimate Loss Insurance, a form of physical damage
blanket single interest collateral protection insurance, is sold to lending
institutions, such as banks, savings and loan associations, credit unions,
automobile dealers and finance companies. Ultimate Loss Insurance insures such
institutions against damage to pledged collateral in cases where the collateral
is not otherwise insured. The standard policy covers physical damage to the
collateral, not to exceed the lesser of the collateral's fair market value or
the outstanding loan balance. This blanket single interest collateral protection
policy is generally written to cover the lending institution's complete
portfolio of collateralized personal property loans, which consist primarily of
automobile loans. The Company offers supplemental coverages, at additional
premium cost, for losses due to unintentional errors in lien filings and
conversion, confiscation and skip risks. Conversion risk coverage protects the
lender from unauthorized and wrongful taking of the lender's collateral. Skip
risk coverage protects the lender when a delinquent debtor disappears with the
loan collateral.
Since its inception in 1956, the Company has gradually expanded coverage of the
program to include lenders such as banks, savings and loans, credit unions and
finance companies. During 1997, the Company provided Ultimate Loss Insurance
coverage to approximately 300 lending institutions.
The premiums charged for Ultimate Loss Insurance reflect claims experience, loan
volumes and general market conditions.
The Company is test marketing creditor placed collateral and mortgage protection
policies in two states. Collateral and mortgage protection insurance covers
primarily automobile and residential mortgages pledged as security for loans for
which the borrower has not produced evidence of coverage as required by the
lender.
Bonded Service Program. Unemployment compensation is a federally mandated social
insurance program. Private employers finance the payment of unemployment
benefits to their former employees by paying a tax on covered wages. Certain
not-for-profit and governmental entities can elect not to pay the tax but,
instead, reimburse the state for benefits paid to their former employees. This
reimbursing method is usually the least costly option but poses the risk of
having to pay unexpected, unbudgeted benefit costs. The Bonded Service program
alleviates that risk of unexpected loss. The Company has participated since 1989
by bonding specific unemployment compensation servicing commitments of a cost
containment service firm including reimbursement of unemployment benefits.
3
<PAGE> 4
In 1992, the Company agreed to write a similar type bond covering groups of
smaller not-for-profit entities which could realize the cost benefits of being a
reimburser but could not do so on a stand-alone basis. As of December 31, 1997,
the Company services seven (7) such groups.
The cost containment service firm's charge to the participating employer is
based primarily upon historical claims experience, general economic conditions
and other factors specific to the employer. Subscribers to the Bonded Service
program enroll for a term ranging from one to two years and the Company's surety
bond extends for the duration of the term. The Bonded Service program fees
applicable to any renewal term are adjusted based upon the subscriber's
historical claims experience, the subscriber's announced business plans with
respect to significant planned changes in employment, stability of the
subscriber's source of funding and general economic conditions. Since 1989,
annual renewals have averaged 95%.
Some states require that reimbursing employers post a bond as security for the
performance of their reimbursing obligations. On limited occasions, the Company
has provided this mandated bond on behalf of employers enrolled in the Bonded
Service program. The Company's obligations under such bonds may not, in every
case, cease upon termination of an employer's participation in the program. The
financial statements include reserves for losses on such programs for benefits
paid. Such reserves were $477,600 and $458,436 at December 31, 1997 and 1996,
respectively.
BCIS Services, Inc. BCIS Services is a third party administrator (TPA)
specializing in managing workers' compensation obligations assumed by employers
who self-insure this coverage. The contract defines specific servicing
responsibilities for which the client pays agreed upon fees during the duration
of such contract which normally covers one to three years. BCIS Services was
formed in February 1993 and began marketing its programs in July 1993. BCIS
Services does not engage in the business of underwriting or insuring risks of
loss.
BCIS Services assists the client in controlling factors that impact containment
of workplace disability costs from risk control to proactive claims management.
BCIS Services is postured to provide independent claims administration involving
other casualty insurance exposures on a multi-state basis. Independent resources
are engaged to provide specialized control functions as circumstances dictate.
The Company provided cost control services to four employers in California which
generated revenues of $658,884, $533,354 and $550,615 during 1997, 1996 and
1995, respectively.
BCIS Services operated in California only during 1997, 1996 and 1995. There can
be no assurance that this operation will be commercially successful or
profitable.
Title Research Corporation. In April 1997, Title Research, a newly formed,
wholly-owned subsidiary of the Company, purchased substantially all of the net
assets of Title Research Agency, an Ohio corporation. Title Research assists the
consumer mortgage lending industry with various services including title, lien
search, property appraisal, closings and placement of title insurance. Title
Research is engaged in preparation all technical documentation necessary for
home equity lending. Title Research does not engage in the business of
underwriting or insuring title coverage, but represents two title insurance
companies. During 1997, the Company generated title and appraisal fees of
$1,593,556.
Title Research operated primarily in Ohio during 1997. There can be no assurance
that this operation will be commercially successful or profitable.
COMPETITION
The insurance business is highly competitive. There are approximately 3,200
property and casualty insurance companies in the United States, although most of
them are not significant competitors for the specialty lines which the Company
underwrites. Some competing companies offer more diversified insurance coverage
and have greater financial resources than the Company. Competition may include
lower premiums, specialized products, more complete and complex product lines,
greater pricing flexibility, superior service, different marketing techniques,
or better agent compensation. Management believes that one of its competitive
advantages is specializing in limited insurance lines. This specialization
allows the Company to refine its underwriting and claims techniques, which in
turn, provide agents and insureds with superior service.
4
<PAGE> 5
Competition for the Bonded Service program is provided indirectly by insurers
who have designed coverages for reimbursing employers with loss limitation
features similar in concept to the Bonded Service program. The Company believes
that the Bonded Service program has cost savings and other features which enable
the program to compete effectively against providers of loss limitation
coverages. The cost containment service firm, on whom the Company relies for
growth in bond fees, competes with other cost containment service firm's for
cost containment service contracts with not-for-profit organizations, some of
which may require loss limitation coverages.
Concerning BCIS Services, competition includes any brokers, agents, insurance
companies or consultants which provide administrative services to their clients.
The major competitors are TPA's, most of which operate on a regional basis.
There are approximately 51 TPA's in California that specialize in serving
employers who self-insure workers' compensation.
Concerning Title Research, competition includes title companies, brokers,
agents, insurance companies or contractors who provide mortgage services to
their clients. The major competitors are title lien search companies, most of
which operate on a regional basis. There are approximately 1,100 title lien
search companies in Ohio that specialize in first and second mortgage lending
requirements. The title lien industry is highly competitive. Key elements which
affect competition are: price, expertise, service, financial strength and size
of the company.
There can be no assurance that the Company will not face additional competition
in its markets from new or existing competitors.
REINSURANCE
The Company maintains a quota share reinsurance agreement, by which Ohio
Indemnity cedes a portion of its mortgage protection and automobile physical
damage insurance to a reinsurer. This arrangement limits the net claim liability
potential arising from specific policies. This reinsurance agreement does not
relieve the Company from its obligations to policyholders. Consequently, failure
of the reinsurer to honor its obligations could result in losses to the Company.
The Company currently recovers 75% and 50% of the paid losses and loss
adjustment expense applicable to Mortgage Protection and Automobile Physical
Damage insurance policies, respectively.
As of December 31, ceded reinsurance reduced commission expense incurred by
$23,032 in 1997 and increased commission expense incurred by $62,147 and
$121,972 in 1996 and 1995, respectively.
REGULATION
Insurance Company Regulation
Ohio Indemnity, as an Ohio property/casualty insurance company, is subject to
the primary regulatory supervision of the Ohio Department of Insurance. In
addition, Ohio Indemnity is subject to regulation in each jurisdiction in which
it is licensed to write insurance. In general, such regulation is designed to
protect the interests of insurance policyholders rather than the Company or the
Company's shareholders.
Such regulation relates to, among other matters: licensing of insurers and their
agents; authorized lines of business; capital and surplus requirements and
general standards of solvency; financial reports; reserve requirements;
underwriting limitations; investment criteria; transactions with affiliates;
dividend limitations; changes in control and a variety of other financial and
nonfinancial matters.
The principal source of cash available to the Company is dividends from Ohio
Indemnity. The Company is subject to the Ohio Insurance Holding Company System
Regulatory Act, as amended, which requires that a 10-day notice of the proposed
payment of any dividends or other distributions by Ohio Indemnity be given to
the Ohio Superintendent of Insurance. If such dividends or distributions,
together with any other dividends or distributions made within the preceding
twelve months, exceed the greater of: (i) 10% of Ohio Indemnity's statutory
surplus as of the immediately preceding December 31st, or (ii) the net income of
Ohio Indemnity for the immediately preceding calendar year, a 30-day notice of
such proposed dividend or distribution is required to be given to
5
<PAGE> 6
the Superintendent and the Superintendent may disapprove such dividend or
distribution within the 10-day period following receipt of such notice.
Most states have insurance laws requiring that rate schedules and other
information be filed with the state's regulatory authority, either directly or
through a rating organization with which the insurer is affiliated. The
regulatory authority may disapprove a rate filing if it finds that the rates are
inadequate, excessive or unfairly discriminatory. Rates vary by class of
business, hazard assumed and size of risk, and are not necessarily uniform for
all insurers. Many states have recently adopted laws which limit the ability of
insurance companies to effect rate increases. To date, such limitations have had
a limited impact on the Company, and the Company has no knowledge of any such
limitations that may affect its future results of operations, although there can
be no assurance that such limitations will not adversely affect the Company's
results of operations in the future.
All insurance companies must file annual statements in states where they are
authorized to do business and are subject to regular and special examinations by
the regulatory agencies of those states. On June 20, 1997, the Ohio Department
of Insurance issued its triennial examination report on Ohio Indemnity for the
three-year period ended 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, if implemented, would have, or are reasonably likely to have,
a material effect on the Company's liquidity, capital resources or results of
operations. The next triennial review of the Company will be conducted by the
Ohio Superintendent of Insurance in 2000 for the three-year period ending
December 31, 1999.
Numerous states routinely require deposits of assets by insurance companies to
protect policyholders. As of December 31, 1997, securities with a fair value of
approximately $3,999,026 had been deposited by the Company with eleven state
insurance departments. Such deposits must consist of securities which comply
with standards established by the particular state's insurance department. The
deposits, typically required by a state's insurance department on admission to
do insurance business in such state, may be increased periodically as mandated
by applicable statutory or regulatory requirements.
Insurance Holding Company System Regulation
Bancinsurance Corporation is subject to certain provisions of the Ohio Insurance
Holding Company System Regulatory Act, as amended, which governs any direct or
indirect change in control of it and certain affiliated-party transactions
involving it or its assets. No person may acquire, directly or indirectly, 10%
or more of the outstanding voting securities of Ohio Indemnity, unless the Ohio
Superintendent of Insurance has approved such acquisition. The determination of
whether to approve any such acquisition is based on a variety of factors,
including an evaluation of the acquirer's financial condition, the competence of
its management and whether competition in Ohio would be reduced. In addition,
certain material transactions involving Bancinsurance Corporation and Ohio
Indemnity must be disclosed to the Ohio Superintendent of Insurance not less
than 30 days prior to the effective date of the transaction. Such transaction
can be disapproved by the Superintendent within such 30-day period if it does
not meet certain standards. Transactions requiring such approval include, but
are not limited to: sales, purchases or exchanges of assets; loans and
extensions of credit; and investments not in compliance with statutory
guidelines. Ohio Indemnity is also required to file periodic and updated
statements reflecting the current status of its holding company system, the
existence of any related-party transactions and certain financial information
relating to any person who directly or indirectly controls (presumed to exist
with 10% voting control) Ohio Indemnity. Bancinsurance Corporation believes that
it is in compliance with the Ohio Insurance Holding Company System Regulatory
Act and the regulations promulgated thereunder.
The National Association of Insurance Commissioners
All states have adopted the financial reporting form of NAIC, which is typically
referred to as the NAIC "annual statement," and most states, including Ohio,
generally defer to NAIC with respect to statutory accounting practices and
procedures. In this
6
<PAGE> 7
regard, NAIC has a substantial degree of practical influence and is able to
accomplish certain quasi-legislative initiatives through amendments to the NAIC
annual statement and applicable statutory accounting practices and procedures.
The NAIC adopted a Risk Based Capital ("RBC") test applicable to property and
casualty insurers. The RBC calculation serves as a benchmark of insurance
enterprises' solvency by state insurance regulators by establishing statutory
surplus targets which will require certain Company level or regulatory level
actions. 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. These RBC provisions have been enacted into
the Ohio Revised Code.
PENDING LEGISLATION
The insurance industry is under continuous review by both state and federal
legislatures. From time to time various regulatory and legislative changes have
been proposed in the insurance industry which could have an effect on insurers
and reinsurers. Among the proposals that have in the past been, or are at
present being, considered are the possible introduction of federal regulation in
addition to, or in lieu of, the current system of state regulation of insurers,
and other possible restrictions on insurance transactions with unlicensed
insurers. The Company is unable to predict whether any of these proposals will
be adopted, the form in which any such proposals would be adopted or the impact,
if any, such adoption would have on the Company.
EMPLOYEES
As of February 12, 1998, the Company employed 46 full-time employees and 5
part-time employees. The Company is not a party to any collective bargaining
agreement and is not aware of any efforts to unionize its employees.
SERVICE MARKS
The Company has developed common law rights in its service mark, ULTIMATE LOSS
INSURANCE, which is registered in the State of Ohio. The Company has federally
registered its trademark, BI BANCINSURANCE CORPORATION(R) (stylized letters).
Item 2. Properties
The Company leases all of its office space, which as of February 13, 1998,
totalled approximately 17,000 square feet. The home office in Columbus, Ohio
aggregates approximately 7,000 square feet. The lease provides for a monthly
gross rental of $7,817. The leased space is shared with Westford Group, Inc., an
affiliate of the Company through a common officer and principal shareholder.
Rental expense is allocated in accordance with space utilization. BCIS Services'
office in Los Angeles, California occupies approximately 2,900 square feet. The
lease provides for a monthly gross rental of $3,324. Title Research leases
office space at a property located in Hilliard, Ohio which serves as its
corporate headquarters. The office occupies approximately 3,500 square feet.
Title Research's branches lease office space in three locations throughout Ohio
occupying approximately 3,600 square feet. These four leases provide for a
monthly gross rental of $6,322.
Item 3. 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 is likely to result
in judgments that will have a material adverse effect on the financial condition
or results of operations of the Company.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year ended December 31, 1997.
7
<PAGE> 8
PART II
Item 5. Market for the Company's Common Stock and Related Security Holders
Matters
The information required by this item is included under the caption "Market
Information", "Holders", "Dividends", and "Market Makers" in the Company's 1997
Annual Report (the "Annual Report") and is incorporated herein by reference.
Item 6. Selected Financial Data
The information required by this item is included under the caption "Selected
Financial Data" in the Company's Annual Report and is incorporated herein by
reference.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The information required by this item is included under the caption
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" in the Company's Annual Report and is incorporated herein by
reference.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
None.
Item 8. Consolidated Financial Statements and Supplementary Data
The Company's consolidated balance sheets as of December 31, 1997 and 1996, and
the consolidated statements of income, shareholders' equity and cash flows for
each of the three years ended December 31, 1997, 1996 and 1995 and the notes to
the financial statements, together with the independent auditors' report thereon
appear in the Company's Annual Report and are incorporated herein by reference.
The Company's Financial Statement Schedules and Independent Auditors' Report on
Financial Statement Schedules are included in response to Item 14 hereof.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
PART III
Item 10. Directors and Executive Officers of the Company
The information required by this item is included under the captions "Election
of Directors," "Executive Officers of the Corporation" and "Section 16(a)
Beneficial Ownership Reporting Compliance" in the Company's Proxy Statement (the
"Proxy Statement") relating to the Company's 1998 Annual Meeting of Stockholders
to be held on June 2, 1998, and is incorporated herein by reference.
Item 11. Executive Compensation
The information required by this item is included under the captions
"Compensation of Directors" and "Executive Compensation" in the Proxy Statement
and is incorporated herein by reference.
8
<PAGE> 9
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required by this item is included under the caption "Ownership
of Voting Stock" in the Proxy Statement and is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions
The information required by this item is included under the caption "Certain
Relationships and Related Transactions" in the Proxy Statement and is
incorporated herein by reference.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) The following documents are filed as part of this report:
(1) The following financial statements appearing in the Company's
Annual Report are incorporated herein by reference:
Consolidated Balance Sheets as of December 31, 1997 and 1996.
Consolidated Statements of Income for the three years ended
December 31, 1997.
Consolidated Statements of Shareholders' Equity for the three
years ended December 31, 1997.
Consolidated Statements of Cash Flows for the three years ended
December 31, 1997.
Notes to the Consolidated Financial Statements.
Independent Auditors' Report.
(2) Financial Statement Schedules
Included in Part IV of this Report:
Schedule I -- Summary of investments - other than
investments in related parties
Schedule II -- Condensed financial information of
Bancinsurance Corporation
(Parent Company Only)
Independent Auditors' Report on Financial Statement
Schedules
Other schedules are omitted because of the absence of conditions
under which they are required or because the required information
is given in the consolidated financial statements or notes
thereto.
(3) Exhibits
3(a) Amended Articles of Incorporation (reference is made to
Exhibit 3(a) of Form 10-K for the fiscal year ended
December 31, 1984 (file number 0-8738), which is
incorporated herein by reference).
3(b) Amended Code of Regulations (reference is made to
Exhibit 3(b) of Form 10-K for the fiscal year ended
December 31, 1984 (file number 0-8738), which is
incorporated herein by reference).
10(a) Amended Tax Allocation Agreement (reference is made to
Exhibit 10(d) of Form 10-K for the fiscal year ended
December 31, 1983 (file number 0-8738), which is
incorporated herein by reference).
9
<PAGE> 10
10(b) Private Passenger Automobile Physical Damage Quota Share
Reinsurance Agreement between Ohio Indemnity Company and
North American Reinsurance Corporation (reference is made
to Exhibit 10(d) of Form 10-K/A for the fiscal year ended
December 31, 1992 (file number 0-8738), which is
incorporated herein by reference).
10(c) Amended and Restated Unemployment Compensation
Administration Agreement Between Ohio Indemnity Company
and The Gibbens Co., Inc. (The Company has requested that
portions of this Exhibit be given confidential treatment.)
(reference is made to Exhibit 10(e) of Form 10-K/A for the
fiscal year ended December 31, 1992 (file number 0-8738),
which is incorporated herein by reference).
The following are management contracts and compensatory plans and
arrangements in which directors or executive officers
participate:
10(d) Employee Profit Sharing Plan (reference is made to
Exhibit 10(a) of Form 10-K for the fiscal year ended
December 31, 1986 (file number 0-8738), which is
incorporated herein by reference).
10(e) 1984 Stock Option Plan (reference is made to Exhibit 10(d)
of Form 10-K for the fiscal year ended December 31, 1984
(file number 0-8738), which is incorporated herein by
reference).
10(f) 1994 Stock Option Plan - (reference is made to
Exhibit 10(f) of Form 10-Q for the fiscal quarter ended
June 30, 1994 (file number 0-8738), which is incorporated
herein by reference).
13.1 Annual Report to Shareholders for the year ended
December 31, 1997.
21 Subsidiaries of the Company as of December 31, 1997.
23 Consents of independent accountants to incorporation of
their opinions by reference in Registration Statement on
Form S-8.
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 December 31, 1997.
(c) Exhibits
The exhibits to this report begin on page 17.
(d) Financial Statement Schedules
The financial statement schedules and the independent auditors' report
thereon are included on the following pages.
10
<PAGE> 11
Board of Directors and Shareholders
Bancinsurance Corporation:
Our report on the consolidated financial statements of Bancinsurance
Corporation and Subsidiaries has been incorporated by reference in this
Form 10-K from page 22 of the 1997 Annual Report to Shareholders of
Bancinsurance Corporation. In connection with our audits of such financial
statements, we have also audited the related financial statement schedules
listed in the index on page 9 of this Form 10-K.
In our opinion, the financial statement schedules referred to above, when
considered in relation to the basic financial statements taken as a whole,
present fairly, in all material respects, the information required to be
included therein.
/s/ COOPERS & LYBRAND L.L.P.
Columbus, Ohio
February 27, 1998
11
<PAGE> 12
BANCINSURANCE CORPORATION AND SUBSIDIARY
Schedule I - SUMMARY OF INVESTMENTS - OTHER THAN INVESTMENT IN RELATED PARTIES
<TABLE>
<CAPTION>
December 31, 1997
- ------------------------------------------------------------------------------------------------
Column A Column B Column C Column D
-------- -------- -------- --------
Type of Investment Cost (1) Fair Amount at which
Value shown in the
balance sheet
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Held to maturity:
Fixed maturities:
Governments $ 1,160,644 $ 1,187,800 $ 1,160,644
States, territories and
possessions 1,020,723 1,035,250 1,020,723
Political subdivisions of states,
territories and possessions 506,763 536,000 506,763
Special revenue 1,102,064 1,144,976 1,102,064
Other debt securities 50,000 50,000 50,000
Redeemable preferred stocks:
Public utilities 100,000 100,000 100,000
----------- ----------- -----------
Total held to maturity 3,940,194 4,054,026 3,940,194
----------- ----------- -----------
Available for sale:
Fixed maturities:
Governments 853,376 857,540 857,540
States, territories and
possessions 3,098,386 3,143,426 3,143,426
Political subdivisions of states,
territories and possessions 4,961,653 5,103,767 5,103,767
Special revenue 3,672,237 3,806,862 3,806,862
Industrial and miscellaneous 50,000 51,031 51,031
Equity securities:
Nonredeemable preferred stocks:
Public utilities 500,000 483,548 483,548
Banks, trust and insurance
companies 417,312 620,846 620,846
Industrial and miscellaneous 567,050 560,876 560,876
Common stocks:
Banks, trust and insurance
companies 474,390 854,978 854,978
Industrial and miscellaneous 642,398 704,813 704,813
----------- ----------- -----------
Total available for sale 15,236,802 16,187,687 16,187,687
----------- ----------- -----------
Short-term investments
Securities purchased under agreements 5,753,669 5,753,669 5,753,669
to resell 1,048,075 1,048,075 1,048,075
----------- ----------- -----------
Total investments $25,978,740 $27,043,457 $26,929,625
=========== =========== ===========
</TABLE>
(1) Original cost of equity securities, adjusted for any permanent write
downs, and, as to fixed maturities, original cost reduced by repayments,
write downs and adjusted for amortization of premiums or accrual of
discounts.
12
<PAGE> 13
BANCINSURANCE CORPORATION AND SUBSIDIARIES
Schedule II - CONDENSED FINANCIAL INFORMATION OF
BANCINSURANCE CORPORATION (PARENT COMPANY ONLY)
CONDENSED BALANCE SHEETS
December 31, 1997 and 1996
<TABLE>
<CAPTION>
Assets 1997 1996
------ ----------- -----------
<S> <C> <C>
Cash $ 10,673 $ 9,117
Investment in subsidiaries 22,640,505 20,491,962
Other 1,564,445 1,143,067
----------- -----------
$24,215,623 $21,644,146
=========== ===========
Liabilities and Shareholders' Equity
------------------------------------
Note payable to bank $ 5,000,000 $ 5,600,000
Other 135,822 137,329
Shareholders' equity 19,079,801 15,906,817
----------- -----------
$24,215,623 $21,644,146
=========== ===========
</TABLE>
13
<PAGE> 14
BANCINSURANCE CORPORATION AND SUBSIDIARIES
Schedule II - CONDENSED FINANCIAL INFORMATION OF
BANCINSURANCE CORPORATION (PARENT COMPANY ONLY)
CONDENSED STATEMENTS OF INCOME
Years Ended December 31, 1997, 1996, and 1995
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Dividends from subsidiaries $ 1,375,000 $ 650,000 $ 600,000
Other income 36,477 24,777 52,236
General and administrative expenses (503,534) (613,491) (605,132)
----------- ----------- -----------
Net income before tax benefit
and equity in earnings of
subsidiaries 907,943 61,286 47,104
Income tax benefit (181,297) (205,213) (198,655)
----------- ----------- -----------
Net income before equity in
earnings of subsidiaries 1,089,240 266,499 245,759
Equity in undistributed earnings of
subsidiaries 1,612,054 2,074,549 1,175,327
----------- ----------- -----------
Net income $ 2,701,294 $ 2,341,048 $ 1,421,086
=========== =========== ===========
</TABLE>
14
<PAGE> 15
BANCINSURANCE CORPORATION AND SUBSIDIARIES
Schedule II - CONDENSED FINANCIAL INFORMATION OF
BANCINSURANCE CORPORATION (PARENT COMPANY ONLY)
CONDENSED STATEMENTS OF CASH FLOWS
Years Ended December 31, 1997, 1996, and 1995
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 2,701,294 $ 2,341,048 $ 1,421,086
Adjustments to reconcile net income to net
cash provided by operating
activities:
Equity in undistributed net earnings
of subsidiaries (1,679,976) (2,074,549) (1,175,327)
Deferred federal income tax (benefit)
expense -- (108,747) 108,747
(Increase) decrease in notes
receivable (167,500) (145,000) 28,602
Increase in loans to affiliates (71,719) (71,719) (71,719)
Increase in accounts receivable from
subsidiaries (148,455) -- (29,585)
Increase in prepaid federal income
taxes 29,633 291,855 291,632
(Increase) decrease in other assets (63,337) 6,249 21,486
Increase (decrease) in accounts
payable to subsidiaries 25,616 34,129 (259,168)
Increase (decrease) in other
liabilities (27,123) (99,024) 78,587
----------- ----------- -----------
Net cash provided by in operating
activities 598,433 174,242 414,341
----------- ----------- -----------
Cash flows from financing activities:
Proceeds from notes payable to bank 7,525,000 1,790,000 5,100,000
Repayments of notes payable to bank (8,125,000) (1,806,132) (5,400,000)
Proceeds from stock options exercised 3,123 22,500 47,812
Acquisition of treasury stock -- (185,675) (162,838)
----------- ----------- -----------
Net cash used in financing
activities (596,877) (179,307) (415,026)
----------- ----------- -----------
Net increase (decrease) in cash 1,556 (5,065) (685)
----------- ----------- -----------
Cash at beginning of year 9,117 14,182 14,867
----------- ----------- -----------
Cash at end of year $ 10,673 $ 9,117 $ 14,182
=========== =========== ===========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 389,632 $ 425,523 $ 453,855
Income taxes 935,000 530,000 20,000
=========== =========== ===========
</TABLE>
15
<PAGE> 16
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Company has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Bancinsurance Corporation
(Company)
3/15/98 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
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:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
3/15/98 Si Sokol 3/15/98 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
3/15/98 Daniel D. Harkins 3/15/98 Milton O. Lustnauer
- --------- -------------------------- --------- --------------------------
DATE Daniel D. Harkins DATE Milton O. Lustnauer
Director Director
3/15/98 Saul Sokol 3/15/98 James R. Davis
- --------- -------------------------- --------- --------------------------
DATE Saul Sokol DATE James R. Davis
Director Director
3/15/98 John S. Sokol
- --------- --------------------------
DATE John S. Sokol
Director
</TABLE>
16
<PAGE> 17
INDEX OF EXHIBITS
The following is the Index of Exhibits required by Item 601 of
Regulation S-K.
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- -----------
<S> <C>
3(a) Amended Articles of Incorporation (reference is made to Exhibit 3(a) of Form
10-K for the fiscal year ended December 31, 1984 (file number 0-8738), which is
incorporated herein by reference).
3(b) Amended Code of Regulations (reference is made to Exhibit 3(b) of Form 10-K for
the fiscal year ended December 31, 1984 (file number 0-8738), which is
incorporated herein by reference).
10(a) Amended Tax Allocation Agreement (reference is made to Exhibit 10(d) of Form
10-K for the fiscal year ended December 31, 1983 (file number 0-8738), which is
incorporated herein by reference).
10(b) Private Passenger Automobile Physical Damage Quota Share Reinsurance Agreement
between Ohio Indemnity Company and North American Reinsurance Corporation
(reference is made to Exhibit 10(d) of Form 10-K/A for the fiscal year ended
December 31, 1992 (file number 0-8738), which is incorporated herein by
reference).
10(c) Amended and Restated Unemployment Compensation Administration Agreement between
Ohio Indemnity Company and The Gibbens Co., Inc. (The Company has requested that
portions of this Exhibit be given confidential treatment.) (references is made
to Exhibit 10(e) of Form 10-K/A for the fiscal year ended December 31, 1992
(file number 0-8738), which is incorporated herein by reference).
The following are management contracts and compensatory plans and arrangements
in which directors or executive officers participate:
10(d) Employee Profit Sharing Plan (reference is made to Exhibit 10(a) of Form 10-K
for the fiscal year ended December 31, 1986 (file number 0-8738), which is
incorporated herein by reference).
10(e) 1984 Stock Option Plan (reference is made to exhibit 10(d) of From 10-K for the
fiscal year ended December 31, 1984 (file number 0-8738), which is incorporated
herein by reference).
10(f) 1994 Stock Option Plan - (reference is made to Exhibit 10(f) of Form 10-Q for
the fiscal quarter ended June 30, 1994 (file number 0-8738), which is
incorporated herein by reference).
13.1 Annual Report to Shareholders for the year ended December 31, 1997.
21 Subsidiaries of the Company as of December 31, 1997.
23 Consent of independent accountants to incorporation of their opinion by
reference in Registration Statement on Form S-8.
27 Financial Data Schedule.
</TABLE>
17
<PAGE> 1
Exhibit 13.1
BANCINSURANCE
CORPORATION
1997
Annual Report
<PAGE> 2
BANCINSURANCE CORPORATION 1997 ANNUAL REPORT
Bancinsurance Corporation (the "Company") (NASDAQ:BCIS) is a specialty property
insurance holding company primarily engaged, through its property/casualty
insurance subsidiary, Ohio Indemnity Company, in underwriting niche insurance.
Among its products are "Ultimate Loss Insurance," which protects banks and other
lenders against risk arising from theft or damage to certain loan collateral
where the borrower has failed to secure and maintain adequate insurance
coverage. The Company also provides a surety bond program for national
administrative firms that perform certain services for non-profit entities and
operates a third party administrator specializing in certain workers'
compensation programs. Title Research Corporation, acquired in April 1997,
specializes in title, appraisal and related services which support documentation
needs for first and second mortgage lending requirements.
FINANCIAL HIGHLIGHTS
(In thousands, except for per share data)
<TABLE>
<CAPTION>
-------------------------------------------------------------------
YEAR ENDED DECEMBER 31,
1997 1996 1995 1994 1993 1992
-------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA
Net Premiums Earned $11,169 $10,138 $19,783 $25,536 $19,788 $10,657
Net Investment Income 1,528 1,564 1,413 1,561 1,253 782
Other Income 3,133 1,003 614 580 626 459
------- ------- ------- ------- ------- -------
Total Revenue 15,830 12,705 21,810 27,677 21,667 11,898
------- ------- ------- ------- ------- -------
Losses and Loss Adjustment Expenses,
Net of Reinsurance Recoveries 6,071 5,404 12,760 15,565 10,919 5,064
Income Before Federal Income Taxes
and Cumulative Effect Accounting
Change 3,669 3,121 1,598 2,652 2,827 2,896
------- ------- ------- ------- ------- -------
Net Income $ 2,701 $ 2,341 $ 1,421 $ 2,317 $ 2,295 $ 2,138
======= ======= ======= ======= ======= =======
Net Income Per Common Share,
Diluted $ .46 $ .40 $ .24 $ .40 $ .40 $ .37
======= ======= ======= ======= ======= =======
BALANCE SHEET DATA
Total Assets $31,404 $28,275 $27,750 $43,774 $43,612 $28,015
Shareholders' Equity 19,080 15,907 13,710 11,838 9,910 7,581
</TABLE>
[GRAPH]
SHAREHOLDERS' EQUITY
1992 1993 1994 1995 1996 1997
$7,581 $9,710 $11,838 $13,710 $15,907 $19,080
[GRAPH]
NET INCOME
1992 1993 1994 1995 1996 1997
$2,138 $2,295 $2,317 $1,421 $2,341 $2,701
<PAGE> 3
TO OUR SHAREHOLDERS
For Bancinsurance Corporation, 1997 was a year of strategic transition,
capped by solid revenue growth and increased profitability. What Bancinsurance
Corporation developed over the past 12 months-through a sharp focus on our
historically profitable core market, our first acquisition, and an expansion of
our product line and customer base-is a Company that is ideally positioned for
continued growth. Growth in premiums written and earned. Growth in complementary
products and services. Growth in the number and size of financial institutions
served. Growth in net income and shareholder satisfaction.
The Company posted year-end revenues of $15,830,401, a dramatic 25% rise
over 1996. Premiums written increased 34% to $11,179,561 while premiums earned
rose 10% to $11,169,243 in 1997...growth that will continue as Bancinsurance
Corporation extends its reach nationally.
Net income for the year ended December 31, 1997 rose to $2,701,294 from
$2,341,048, a 15% increase. Earnings per share grew to $.46 from $.40 last year.
Our combined ratio, including the loss and loss adjustment expense ratio
plus the operating expense ratio, dropped from 83.9% in 1996 to 76.5% this year,
indicating an underwriting profit more favorable than the property-casualty
industry average.
The April 1997 purchase of Columbus, Ohio-based Title Research Agency-our
first acquisition-marks a significant turning point for Bancinsurance
Corporation. The wholly owned subsidiary, renamed Title Research Corporation,
demonstrates our capacity to recognize and act upon strategically advantageous
opportunities.
Specializing in second mortgage title and lien searches, Title Research
will be marketed to consumer lending departments of Ohio-based financial
institutions currently served by our core Ultimate Loss Insurance product, a
form of physical damage, blanket single interest insurance.
We devoted the second half of 1997 to creating a web-based system to
enhance Title Research's efficiencies and turn-around times. As we enter the new
year, we will cultivate the market for this service, while keeping an eye open
for other acquisitions that may become available as the insurance industry
continued to consolidate.
2
<PAGE> 4
An expanding customer base also contributed to 1997 growth. We signed up a
large national Ultimate Loss Insurance account that had a significant positive
impact on the Company's third and fourth quarter results. Based on that success,
we plan to market our core product to the super-regional and national financial
institutions in 1998, in addition to the smaller community bank market we have
traditionally served.
Among other 1997 firsts, Bancinsurance Corporation signed new agents to
represent our Ultimate Loss product, enhancing our position in the marketplace
and creating new opportunities to grow our core business. We also began test
marketing collateral and mortgage protection policies in two states in
association with a new agent. These products, alternative to Ultimate Loss
Insurance, hold tremendous promise. If successful, they will be introduced
elsewhere in the country later in 1998.
Adding to the year's accomplishments, the management service fee income
generated by our Bonded Service Program-bonding specific unemployment insurance
serving commitments- was much higher than anticipated, significantly more than
previous years.
BCIS Services, Inc.-our third-party administrator specializing in managing
the workers' compensation obligations of self-insured employers-also posted
increased revenues in 1997, thanks largely to an increase in servicing
responsibilities.
Finally A.M. Best, an independent rating organization assigned an "A-"
Excellent rating to Ohio Indemnity Company our consolidated subsidiary, engaged
in underwriting specialized property and casualty insurance.
We are enthused by the Company's performance over the past 12 months and
are committed to the timely and profitable growth of Bancinsurance Corporation
in 1998 and beyond. We are grateful to our shareholders, directors, officers and
employees for their continued support.
Sincerely,
Si Sokol
President and Chief Executive Officer
3
<PAGE> 5
BUSINESS STRATEGY
The Company's business strategy is to maximize underwriting profits through
niche products and services within the insurance industry. During the past
several years, Bancinsurance has expanded into businesses which are
complementary to its core business and long-term objectives. The Company
concentrates on underwriting specialized lines of business where it can utilize
its underwriting and claims management expertise to generate underwriting
profits superior to property/casualty industry results.
PRODUCTS
The Company currently has four distinct lines of niche insurance products and
related services: Ultimate Loss Insurance, Bonded Service Program, BCIS Services
and Title Research.
ULTIMATE LOSS INSURANCE PROGRAM
Ultimate Loss Insurance, a form of physical damage blanket single interest
collateral protection insurance, is sold to lending institutions, such as banks,
savings and loan associations, credit unions, automobile dealers and finance
companies. Ultimate Loss Insurance insures such institutions against damage to
pledged collateral in cases where the collateral is not otherwise insured. The
standard policy covers physical damage to the collateral, not to exceed the
lesser of the collateral's fair market value or the outstanding loan balance.
This blanket single interest collateral protection policy is generally written
to cover the lending institution's complete portfolio of collateralized personal
property loans which consist primarily of automobile loans.
BONDED SERVICE PROGRAM
Bonded Service is a program in which the Company participates by bonding
specific unemployment compensation servicing commitments of a cost containment
service firm including reimbursement of unemployment benefits. Unemployment
Compensation laws of each state permit certain non-profit and governmental
entities to opt out of the state sponsored unemployment compensation program
and, instead, reimburse the state for benefits paid to their former employees.
The Company believes that the Bonded Service Program provides a cost effective
alternative for qualified reimbursing employers.
BCIS SERVICES, INC.
BCIS Services is a third party administrator specializing in managing workers'
compensation obligations assumed by employers who self-insure this coverage. The
contract defines specific servicing responsibilities for which the client pays
agreed upon fees during the duration of such contract.
Services include any that assist the client in controlling factors that impact
containment of workplace disability costs from risk control to proactive claims
management. BCIS Services can provide independent claims administration
involving other casualty insurance exposures on a multi-state basis. BCIS
Services does not engage in underwriting or insuring risks of loss.
TITLE RESEARCH CORPORATION
In April 1997, 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. Title Research assists the consumer
mortgage lending industry with various services including title, lien search,
property appraisal, closings and placement of title insurance. Title Research is
engaged in preparation of all technical documentation necessary for home equity
lending. Title Research does not engage in the business of underwriting or
insuring title coverage, but represents two title insurance companies.
SUMMARY
During the past several years, the Company has pursued select growth
opportunities to build upon existing strengths and industry experience. These
actions by management have resulted in increases in revenue and profitability,
while also creating a stronger, more diversified base of business. From time to
time, we plan to seek additional ways to complement the Company's existing
products and services.
4
<PAGE> 6
BANCINSURANCE CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
- ---------------------------------------------------------------------------------------------------------------------
1997 1996
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Investments (note 2):
Held to maturity:
Fixed maturities, at amortized cost (fair value $4,054,026 in 1997
and $4,086,856 in 1996) ............................................................ $ 3,940,194 $ 4,004,550
Available for sale:
Fixed maturities, at fair value (amortized cost $12,635,652 in 1997
and $11,271,525 in 1996) ........................................................... 12,962,626 11,502,186
Equity securities, at fair value (cost $2,601,150 in 1997 and
$2,602,891 in 1996) ................................................................ 3,225,061 3,031,014
Short-term investments, at cost which approximates fair value ......................... 5,753,669 5,730,923
Securities purchased under agreements to resell ....................................... 1,048,075 1,091,630
----------- -----------
TOTAL INVESTMENTS ................................................................. 26,929,625 25,360,303
----------- -----------
Cash ................................................................................... 1,146,317 681,286
Premiums receivable .................................................................... 755,611 494,322
Accounts receivable, net of allowance for doubtful accounts ............................ 297,519 --
Reinsurance receivable (note 14) ....................................................... 8,000 15,150
Reinsurance recoverable on paid losses (note 14) ....................................... -- 25,143
Prepaid reinsurance premiums (note 14) ................................................. 36,335 --
Loans to affiliates (note 15) .......................................................... 606,182 434,463
Note receivable (note 4) ............................................................... 67,500 --
Furniture, fixtures and leasehold improvements, net .................................... 121,697 86,435
Excess of investment over net assets of subsidiaries, net .............................. 976,610 753,738
Prepaid federal income taxes ........................................................... -- 29,633
Accrued investment income .............................................................. 298,234 308,646
Other assets ........................................................................... 160,802 85,833
----------- -----------
TOTAL ASSETS ...................................................................... $31,404,432 $28,274,952
=========== ===========
</TABLE>
5
<PAGE> 7
BANCINSURANCE CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
- ----------------------------------------------------------------------------------------------------------
1997 1996
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Reserve for unpaid losses and loss adjustment expenses (note 14) ...... $ 1,531,714 $ 1,359,775
Unearned premiums (note 14) ........................................... 698,764 745,787
Contract funds on deposit ............................................. 3,451,371 2,950,108
Reinsurance premiums payable (note 14) ................................ 27,821 503,806
Note payable to bank (note 5) ......................................... 5,000,000 5,600,000
Note payable (note 6) ................................................. 37,073 --
Taxes, licenses, and fees payable ..................................... 150,778 93,566
Deferred federal income taxes ......................................... 296,049 194,755
Federal income taxes payable .......................................... 741 --
Commissions payable ................................................... 493,212 342,258
Other ................................................................. 637,108 578,080
------------ ------------
TOTAL LIABILITIES ................................................ 12,324,631 12,368,135
------------ ------------
Commitments and contingent liabilities (notes 7, 14 and 19)
Shareholders' equity (notes 10, 11 and 12): 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 1,433,329
Net unrealized gain on investments, net of tax (note 2) .............. 627,583 434,797
Retained earnings .................................................... 16,741,778 14,040,484
------------ ------------
19,180,315 16,224,177
Less: Treasury stock, at cost (35,162 common shares in 1997
and 111,020 common shares in 1996) ......................... (100,514) (317,360)
------------ ------------
TOTAL SHAREHOLDERS' EQUITY ....................................... 19,079,801 15,906,817
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ....................... $ 31,404,432 $ 28,274,952
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE> 8
BANCINSURANCE CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
- ---------------------------------------------------------------------------------------------------------------------
1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INCOME:
Premiums written....................................................... $11,179,561 $ 8,358,499 $14,038,845
Decrease in unearned premiums.......................................... 47,023 2,251,545 14,294,905
----------- ----------- -----------
Premiums earned ................................................... 11,226,584 10,610,044 28,333,750
Premiums ceded......................................................... (57,341) (471,940) (8,550,443)
----------- ----------- -----------
Net premiums earned................................................ 11,169,243 10,138,104 19,783,307
Investment income (net of expenses of $68,621, $78,003 and
$78,761, respectively).............................................. 1,344,815 1,318,137 1,387,602
Net realized gain on investments....................................... 182,734 246,038 25,891
Claims administration fees............................................. 658,884 550,615 533,354
Title and appraisal fees............................................... 1,593,556 -- --
Management fees........................................................ 809,345 411,176 --
Other income........................................................... 71,824 40,804 80,190
----------- ----------- -----------
TOTAL REVENUE...................................................... 15,830,401 12,704,874 21,810,344
----------- ----------- -----------
LOSSES AND OPERATING EXPENSES:
Losses and loss adjustment expenses.................................... 6,070,954 5,864,170 21,206,483
Reinsurance recoveries................................................. - (459,686) (8,446,389)
Commission expense..................................................... 1,565,826 1,441,430 2,885,353
Other insurance operating expenses..................................... 1,692,041 1,551,578 2,996,319
Amortization of deferred policy acquisition costs...................... -- -- 397,029
General and administrative expenses.................................... 2,469,935 734,660 719,268
Interest expense ...................................................... 362,997 451,425 454,497
----------- ----------- -----------
TOTAL EXPENSES.................................................... 12,161,753 9,583,577 20,212,560
----------- ----------- -----------
INCOME BEFORE FEDERAL INCOME TAXES................................ 3,668,648 3,121,297 1,597,784
Federal income tax expense (note 8).................................... 967,354 780,249 176,698
----------- ----------- -----------
NET INCOME........................................................ $ 2,701,294 $ 2,341,048 $ 1,421,086
=========== =========== ===========
Net income per common share (note 21).................................. $ .46 $ .41 $ .24
=========== =========== ===========
Net income per common share, assuming dilution (note 21)............... $ .46 $ .40 $ .24
=========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
7
<PAGE> 9
BANCINSURANCE CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
PREFERRED STOCK ADDITIONAL UNREALIZED TOTAL
---------------- COMMON PAID-IN GAIN (LOSS) ON RETAINED TREASURY SHAREHOLDERS'
CLASS A CLASS B STOCK CAPITAL INVESTMENTS EARNINGS STOCK EQUITY
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance December 31, 1994 .. -- -- $315,567 $ 1,586,221 $(149,663) $10,278,350 $(192,051) $ 11,838,424
Net income ............... -- -- -- -- -- 1,421,086 -- 1,421,086
Change in unrealized gain
on investments, net of
income taxes of
$291,538 ................ -- -- -- -- 565,926 -- -- 565,926
Purchase of 60,400 treasury
shares (note 19) ........ -- -- -- -- -- -- (162,838) (162,838)
76,500 shares issued in
connection with the
exercise of stock options
(note 10) ............... -- -- -- (119,468) -- -- 167,280 47,812
---- ---- -------- ----------- --------- ----------- --------- ------------
Balance December 31, 1995 .. -- -- 315,567 1,466,753 416,263 11,699,436 (187,609) 13,710,410
Net income ............... -- -- -- -- -- 2,341,048 -- 2,341,048
Change in unrealized gain
on investments, net of
income taxes of
$9,548 .................. -- -- -- -- 18,534 -- -- 18,534
Purchase of 59,292
treasury shares (note 19) -- -- -- -- -- -- (185,675) (185,675)
20,000 shares issued in
connection with the
exercise of stock
options (note 10) ....... -- -- -- (33,424) -- -- 55,924 22,500
----- ---- -------- ----------- --------- ----------- --------- ------------
Balance December 31, 1996 .. -- -- 315,567 1,433,329 434,797 14,040,484 (317,360) 15,906,817
NET INCOME ............... -- -- -- -- -- 2,701,294 -- 2,701,294
CHANGE IN UNREALIZED GAIN
ON INVESTMENTS, NET OF
INCOME TAXES OF
$99,314 ................. -- -- -- -- 192,786 -- -- 192,786
ISSUE OF 62,500 TREASURY
SHARES IN PURCHASE
ACQUISITION (NOTE 1(F)) . -- -- -- 97,120 -- -- 178,661 275,781
20,000 SHARES ISSUED IN
CONNECTION WITH THE
EXERCISE OF STOCK
OPTIONS (NOTE 10) ....... -- -- -- (35,062) -- -- 38,185 3,123
---- ---- -------- ----------- --------- ----------- --------- ------------
BALANCE DECEMBER 31, 1997 .. -- -- $315,567 $ 1,495,387 $ 627,583 $16,741,778 $(100,514) $ 19,079,801
==== ==== ======== =========== ========= =========== ========= ============
</TABLE>
See accompanying notes to consolidated financial statements.
8
<PAGE> 10
BANCINSURANCE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
- -----------------------------------------------------------------------------------------------------------------------------
1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income ................................................................... $ 2,701,294 $ 2,341,048 $ 1,421,086
Adjustments to reconcile net income to net cash provided by (used in)
operating activities:
Net realized gain on investments ............................................ (182,734) (245,436) (25,891)
Depreciation ................................................................ 113,202 64,605 69,339
Amortization of bond premium (discount) ..................................... 47,530 (19,491) 29,149
Amortization of deferred policy acquisition costs ........................... -- -- 538,017
Deferred federal income tax expense ......................................... 1,980 240,830 363,161
(Increase) decrease in premiums receivable .................................. (261,289) (93,925) 1,588,447
Increase in accounts receivable, net ........................................ (129,374) -- --
Decrease in reinsurance receivable .......................................... 7,150 513,576 799,041
Decrease in reinsurance recoverable on paid losses .......................... 25,143 499,959 1,483,859
Increase in deferred policy acquisition costs ............................... -- -- (140,988)
(Increase) decrease in prepaid reinsurance premiums ......................... (36,335) 514,662 6,455,951
(Increase) decrease in premium taxes receivable ............................. -- 138,632 (138,632)
Increase in loans to affiliates ............................................. (171,719) (216,719) (71,719)
Increase in note receivable ................................................. (67,500) -- --
Decrease in prepaid federal income taxes .................................... 29,633 291,855 291,632
(Increase) decrease in accrued investment income ............................ 10,412 (77,370) 135,097
(Increase) decrease in other assets ......................................... (74,969) (23,024) 33,528
Increase (decrease) in reserve for unpaid losses and loss
adjustment expenses ....................................................... 171,939 (882,106) (2,274,998)
Decrease in unearned premiums ............................................... (47,023) (2,251,547) (14,294,903)
Increase in contract funds on deposit ....................................... 501,263 1,141,096 912,916
Increase (decrease) in reinsurance premiums payable ......................... (475,985) 111,090 (1,378,456)
Decrease in note payable .................................................... (9,750) -- --
Increase (decrease) in taxes, licenses and fees payable ..................... 57,212 39,014 (196,010)
Increase in federal income taxes payable .................................... 741 -- --
Increase (decrease) in commissions payable .................................. 150,954 1,146 (419,428)
Increase (decrease) in other liabilities .................................... (70,604) 134,033 (88,175)
----------- ----------- ------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES ...................... $ 2,291,171 $ 2,221,928 $ (4,907,977)
----------- ----------- ------------
</TABLE>
9
<PAGE> 11
BANCINSURANCE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
- ------------------------------------------------------------------------------------------------------------------
1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash flows from investing activities:
Proceeds from held to maturity: fixed maturities due to
redemption or maturity ...................................... $ 1,259,000 $ 508,779 $ 1,068,590
Proceeds from available for sale: fixed maturities sold,
redeemed and matured ........................................ 2,515,944 3,168,317 5,653,365
Proceeds from available for sale: equity securities sold ...... 2,235,078 1,865,588 781,249
Cost of investments purchased:
Held to maturity: fixed maturities ........................... (1,500,543) (241,682) (602,344)
Available for sale: fixed maturities ......................... (3,908,653) (5,152,466) (188,575)
Equity securities ............................................ (1,763,653) (1,106,028) (426,816)
Increase (decrease) in amount due to stock broker ............. -- (143,038) 143,038
Net increase in short-term investments ........................ (22,746) (787,999) (679,383)
Net decrease in securities purchased under agreements to resell 43,555 66,941 496,471
Purchase of furniture, fixtures and leasehold improvements .... (115,163) (22,152) (11,554)
Cash acquired in purchase of subsidiary ....................... 27,918 -- --
----------- ----------- -----------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES ....... (1,229,263) (1,843,740) 6,234,041
----------- ----------- -----------
Cash flows from financing activities:
Proceeds from note payable to bank ............................ 7,525,000 1,790,000 5,100,000
Repayments of note payable to bank ............................ (8,125,000) (1,806,132) (5,400,000)
Proceeds from stock options exercised ......................... 3,123 22,500 47,812
Acquisition of treasury stock ................................. -- (185,675) (162,838)
----------- ----------- -----------
NET CASH USED IN FINANCING ACTIVITIES ..................... (596,877) (179,307) (415,026)
----------- ----------- -----------
Net increase in cash ........................................... 465,031 198,881 911,038
Cash at beginning of year ...................................... 681,286 482,405 (428,633)
----------- ----------- -----------
CASH AT END OF YEAR ............................................ $ 1,146,317 $ 681,286 $ 482,405
=========== =========== ===========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest ...................................................... $ 389,632 $ 430,662 $ 454,568
=========== =========== ===========
Income taxes .................................................. $ 935,000 $ 530,000 $ 20,000
=========== =========== ===========
Supplemental schedule of noncash investing activities:
Common stock issued in purchase acquisition ................... $ 275,781 -- --
=========== =========== ===========
Transfer of securities from held to maturity to available
for sale at amortized cost (fair value $3,102,454) ............ $ -- $ -- $ 3,110,174
=========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
10
<PAGE> 12
BANCINSURANCE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) ORGANIZATION
Bancinsurance Corporation (the "Company") was incorporated in the
state of Ohio in 1970. The Company is primarily engaged, through its
wholly-owned subsidiary, Ohio Indemnity, in the underwriting of
specialized property and casualty insurance. Insurance written is
principally in two lines of business, ultimate loss insurance and a
bonded service program. Ohio Indemnity is licensed in forty-five
states and the District of Columbia and licensed for surplus lines in
Texas. As such, Ohio Indemnity is subject to the regulations of the
Department of Insurance of the State of Ohio (the Department) and the
regulations of each state in which it operates. During 1993, BCIS
Services, Inc. was incorporated as a wholly-owned subsidiary of the
Company. BCIS Services provides workers' compensation professional
administration and cost control services to employers who self-insure
this obligation. During 1997, Title Research Corporation ("Title
Research") was incorporated in Ohio as a wholly-owned subsidiary of
the Company. Title Research is a title lien search and mortgage
service company. No single customer of the Company accounts for a
predominant share of consolidated revenue, except for two customers in
the Ultimate Loss Insurance program and one customer in the Surety
program. See Note 16.
(B) BASIS OF FINANCIAL STATEMENT PRESENTATION
The accompanying consolidated financial statements have been prepared
in accordance with generally accepted accounting principles ("GAAP")
(which vary in certain respects from reporting practices prescribed or
permitted by the Department). Prescribed statutory accounting
practices include a variety of publications of the National
Association of Insurance Commissioners ("NAIC"), as well as state
laws, regulations, and general administrative rules. Permitted
statutory accounting practices encompass all accounting practices not
so prescribed. Statutory accounting practices differ from GAAP in
that: (1) assets must be included in the statutory statements at
"admitted asset value" and "nonadmitted assets" must be excluded
through a charge against surplus; (2) policy acquisition costs are
charged against income as incurred rather than being deferred and
amortized over the terms of the related policies; (3) ceded
reinsurance balances payable are reflected as a reduction of premiums
in the course of collection rather than as a liability; (4)
adjustments reflecting the revaluation of stocks are carried to the
equity account as unrealized investment gains or losses, without
providing for Federal income taxes; and (5) the fixed maturities are
carried at amortized cost instead of market value with no unrealized
gain or loss reflected in surplus. The effects of these differences on
shareholder's equity and net income are shown in Note 12.
The Company received written approval from the Department to record
management fee income for the redundancy resulting from the
development of the claims paid from the contract funds held on deposit
pursuant to a bond insuring the payment of certain reimbursable
unemployment compensation benefits on behalf of enrolled employers.
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.
(C) CONSOLIDATION POLICY
The accompanying financial statements include the accounts of the
Company and its wholly-owned subsidiaries. All significant
intercompany transactions and balances have been eliminated in
consolidation.
(D) INVESTMENTS
Investments in fixed maturities held as available for sale are carried
at fair value. The net unrealized holding gain or loss, net of
applicable deferred taxes, is shown as a separate component of
shareholders' equity, and is not included in the determination of net
earnings. Investments in held to maturity fixed maturities, which
include bonds and preferred stocks with mandatory redemption features,
where the Company has the ability and intent to hold to maturity or
put date, are carried at amortized cost. As permitted by the Financial
Accounting Standards Board's Special Report entitled "A Guide to
Implementation of Statement 115 an Accounting for Certain Investments
in Debt and Equity Securities", the Company reassessed the
appropriateness of its classifications of all securities held. As a
result, the Company transferred additional securities from its held to
maturity portfolio to available for sale in 1995.
Available for sale equity securities, which include common stocks and
preferred stocks without mandatory redemption features, are reported
at fair value with unrealized gains or losses, net of applicable
deferred taxes, reflected in shareholders' equity. Short-term
investments are reflected at cost which approximates fair value.
11
<PAGE> 13
Realized gains and losses on disposal of investments are determined by
the specific identification method and are included in investment
income. The carrying value of investments is revised and the amount of
revision is charged to net realized losses on investments when
management determines that a decline in the value of an investment is
other than temporary.
(E) ACCOUNTS RECEIVABLE
Accounts receivable at December 31, 1997 are comprised of title and
appraisal billings. Provisions are made periodically to reflect
estimated doubtful accounts.
(F) EXCESS OF INVESTMENT OVER NET ASSETS OF SUBSIDIARY
As allowed by generally accepted accounting principles, the excess of
investment over net assets of Ohio Indemnity acquired is not being
amortized as the acquisition took place on April 22, 1970, and there
is no permanent diminution in value of such excess.
On April 2, 1997, 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. The acquisition was accounted for using the purchase
method. Under the purchase method, the results of operations of the
acquired Company are included prospectively from the date of
acquisition, and the acquisition is allocated to the acquirees'
tangible assets and liabilities based upon their fair values at the
date of acquisition, with any residual being goodwill. The company
amortizes goodwill on a straight-line basis over its estimated
economic life of fifteen years. At December 31, 1997, the net book
value of goodwill associated with the acquisition was $222,872.
(G) RECOGNITION OF REVENUES AND RELATED EXPENSES
Insurance premiums are recorded as revenue over the period of risk
assumed. For the Company's "Ultimate Loss Insurance" products, a form
of physical damage blanket single interest collateral protection
insurance sold to lending institutions, premiums are earned in
relation to the level of exposure assumed. For the surety product,
premiums are earned pro rata. The portion of premiums written
applicable to the unexpired portion of insurance contracts is recorded
in the balance sheet as unearned premiums.
Claims administration fees reported for BCIS Services and title and
appraisal fees reported for Title Research are recorded as revenue in
the period in which the work was performed and/or services provided.
(H) POLICY ACQUISITION COSTS
During 1992 to 1995, the Company wrote a line of business on which it
capitalized and amortized certain policy acquisition costs incurred at
policy issuance. Such costs were deferred and amortized over the term
of the policy to the extent that these deferred costs could be
recovered from future profits, including anticipated investment income
related to the line of business. Certain other lines of business have
acquisition costs that have not been deferred due to the uncertainty
surrounding ultimate profit margins.
(I) RESERVE FOR UNPAID LOSSES AND LOSS ADJUSTMENT EXPENSES Reserve for
unpaid losses and loss adjustment expenses includes case basis
estimates of reported losses and estimates of losses incurred but not
reported based upon past experience. The reserve also includes an
estimate of the loss adjustment expenses to be incurred in the
settlement of items provided for in the reserve for unpaid losses.
These reserves are reported net of amounts recoverable from salvage
and subrogation. Management believes the reserve for unpaid losses and
loss adjustment expenses is adequate. Amounts recoverable from the
reinsurer are estimated in a manner consistent with the reserve for
unpaid losses and loss adjustment expenses and are recorded as a
reinsurance receivable.
(J) REINSURANCE
The Company's reinsurance transactions are attributable to premiums
written in its automobile physical damage business, which was
discontinued in 1995 and for its mortgage protection product. The
Company records its reinsurance transactions in accordance with the
provisions of SFAS No. 113, "Accounting and Reporting for Reinsurance
of Short-Duration and Long-Duration Contracts."
(K) CONTRACT FUNDS ON DEPOSIT
The Company has an agreement with a cost containment service firm
involving a program designed to control the unemployment compensation
costs of certain non-profit employers. Pursuant to this agreement, a
bond has been issued insuring the payment of certain reimbursable
unemployment compensation benefits on behalf of the employers enrolled
in this program. Certain monies allocated toward the payment of these
benefits are held by the Company. The Company and the cost containment
service firm share any redundancy resulting from the development of
the claims to be paid from the contract funds held on deposit. The
Company records these management fees when the loss year has been
closed. Fees of $809,345 and $411,176 were recognized in 1997 and
1996, respectively, as a result of this arrangement. No such amount
was recognized in 1995.
12
<PAGE> 14
(L) DEPRECIATION AND AMORTIZATION
Furniture and fixtures are stated at cost and depreciated using the
straight-line method over a five year useful life. Leasehold
improvements are amortized over the remaining office lease term.
Maintenance, repairs and minor renewals are charged directly to
expense as incurred. When furniture and fixtures are sold or otherwise
disposed of, the related cost and accumulated depreciation are removed
from the accounts and the resulting gains or losses are included in
the accompanying statements of income.
(M) EARNINGS PER SHARE
Effective December 31, 1997, the Company adopted Statement of
Financial Accounting Standards (SFAS) No. 128, "Earnings Per Share."
The statement specified the computation, presentation and disclosure
requirements for earnings per share for entities with publicly held
common stock, and required restatement of all prior period earnings
per share data presented. The impact of the statement on the Company's
earnings per share was not material.
Net income per common share is presented in two prescribed methods.
Net income per common share is calculated by dividing net income
available to common stockholders by the weighted-average number of
common shares outstanding. Net income per common share-assuming
dilution is calculated by dividing net income available to common
stockholders by the weighted-average number of common shares
outstanding adjusted for any dilative potential common shares for the
period.
(N) FEDERAL INCOME TAXES
The Company files a consolidated federal income tax return with its
subsidiaries. Accordingly, deferred tax liabilities and assets have
been recognized for the expected future tax consequences of events
that have been included in the financial statements or tax returns.
Deferred income taxes are recognized at prevailing income tax rates
for temporary differences between financial statement and income tax
bases of assets and liabilities for which income tax benefits will be
realized in future years.
(O) DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair
value of each class of financial instruments for which it is
practicable to estimate that fair value:
Cash, short-term investments and securities purchased under agreements
to resell:
For these short-term investments, the carrying amounts are
reasonable estimates of fair value.
Fixed maturities and equity securities:
Fair values are based upon quoted market prices or dealer quotes
for comparable securities.
Note payable to bank:
Rates currently available to the Company for debt with similar
terms and remaining maturities are used to estimate fair value of
existing debt. The carrying amount is a reasonable estimate of
fair value.
(2) INVESTMENTS
The amortized cost and estimated fair values of investments in held to
maturity and available for sale securities were as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1997
---------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---------------------------------------------------------
<S> <C> <C> <C> <C>
Held to maturity:
Fixed maturities:
US Treasury securities and
obligations of US government
corporations and agencies .. $ 1,160,644 $ 27,156 $ -- $ 1,187,800
Obligations of states and
political subdivisions ..... 2,629,550 88,755 2,079 2,716,226
Other debt securities ....... 50,000 -- -- 50,000
Redeemable preferred stock .... 100,000 -- -- 100,000
----------- ---------- ---------- -----------
3,940,194 115,911 2,079 4,054,026
----------- ---------- ---------- -----------
Available for sale:
Fixed maturities:
US Treasury securities and
obligations of US government
corporations and agencies .. 853,376 4,164 -- 857,540
Obligations of states and
political subdivisions ..... 11,732,276 332,815 11,036 12,054,055
Corporate securities ........ 50,000 1,031 -- 51,031
Equity securities ............. 2,601,150 728,547 104,636 3,225,061
----------- ---------- ---------- -----------
15,236,802 1,066,557 115,672 16,187,687
----------- ---------- ---------- -----------
Totals ................. $19,176,996 $1,182,468 $ 117,751 $20,241,713
=========== ========== ========== ===========
</TABLE>
13
<PAGE> 15
<TABLE>
<CAPTION>
DECEMBER 31, 1996
---------------------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---------------------------------------------------------
<S> <C> <C> <C> <C>
Held to maturity:
Fixed maturities:
US Treasury securities and
obligations of US government
corporations and agencies .. $ 1,039,505 $ 4,856 $ 611 $ 1,043,750
Obligations of states and
political subdivisions ..... 2,315,045 84,994 6,933 2,393,106
Other debt securities ....... 50,000 -- -- 50,000
Redeemable preferred stock .... 600,000 -- -- 600,000
----------- -------- ---------- -----------
4,004,550 89,850 7,544 4,086,856
----------- -------- ---------- -----------
Available for sale:
Fixed maturities:
US Treasury securities and
obligations of US government
corporations and agencies .. 858,006 7,011 367 864,650
Obligations of states and
political subdivisions ..... 10,173,948 239,968 17,566 10,396,350
Corporate securities ........ 239,571 1,615 -- 241,186
Equity securities ............. 2,602,891 507,620 79,497 3,031,014
----------- -------- ---------- -----------
13,874,416 756,214 97,430 14,533,200
----------- -------- ---------- -----------
Totals ................. $17,878,966 $846,064 $ 104,974 $18,620,056
=========== ======== ========== ===========
</TABLE>
The amortized cost and estimated fair value of investments in held to maturity
and available for sale securities at December 31, 1997 by contractual maturity,
are shown below. Expected maturities will differ from contractual maturities
because borrowers may have the right to call or prepay obligations with or
without call or prepayment penalties.
<TABLE>
<CAPTION>
--------------------------------------------------------------
HELD TO MATURITY AVAILABLE FOR SALE
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
--------------------------------------------------------------
<S> <C> <C> <C> <C>
Due in one year or less ..................... $ 199,322 $ 200,000 $ 1,843,455 $ 1,852,185
Due after one year through five years ....... 2,535,801 2,628,076 6,261,709 6,474,874
Due after five years through ten years ...... 856,365 877,050 4,024,567 4,129,567
Due after ten years ......................... 198,706 198,900 505,921 506,000
---------- ----------- ----------- -----------
3,790,194 3,904,026 12,635,652 12,962,626
Redeemable preferred stock .................. 100,000 100,000 -- --
Equity securities ........................... -- -- 2,601,150 3,225,061
Other debt securities ....................... 50,000 50,000 -- --
---------- ----------- ----------- -----------
$3,940,194 $ 4,054,026 $15,236,802 $16,187,687
========== =========== =========== ===========
</TABLE>
Gross investment income, including net realized gains and losses, is
summarized below:
<TABLE>
<CAPTION>
-----------------------------------------------
1997 1996 1995
-----------------------------------------------
<S> <C> <C> <C>
Held to maturity:
Fixed maturities ....................................... $ 246,173 $ 281,850 $ 253,804
Available for sale:
Fixed maturities ....................................... 696,644 664,909 642,621
Equity securities ...................................... 336,173 366,357 260,363
Short-term investments .................................. 296,266 319,228 327,423
Other ................................................... 20,914 9,834 8,043
---------- ---------- ----------
Gross investment income ............................ $1,596,170 $1,642,178 $1,492,254
========== ========== ==========
</TABLE>
14
<PAGE> 16
All fixed maturity investments were income producing for the years ended
December 31, 1997, 1996 and 1995.
Pre-tax net realized gains (losses) on investments were as follows for each of
the years ended December 31:
<TABLE>
<CAPTION>
-----------------------------------------
1997 1996 1995
-----------------------------------------
<S> <C> <C> <C>
Gross realized gains:
Held to maturity: fixed maturities ......................... $ 8,191 $ 3,779 $ 4,250
Available for sale:
fixed maturities ........................................ 6,753 86,529 56,881
equity securities ....................................... 230,869 187,870 77,088
-------- -------- --------
Total gains ............................................. 245,813 278,178 138,219
======== ======== ========
Gross realized losses:
Held to maturity: fixed maturities ......................... 392 5 38,926
Available for sale:
fixed maturities ........................................ 1,503 31,585 58,363
equity securities ....................................... 61,184 550 15,039
-------- -------- --------
Total losses ............................................ 63,079 32,140 112,328
======== ======== ========
Net realized gains ...................................... $182,734 $246,038 $ 25,891
======== ======== ========
</TABLE>
From time to time, the Company purchases securities under agreements to resell
the same securities (repurchase agreements). The amounts advanced under these
agreements represent short-term loans. The fair value of the securities
underlying the agreements approximates the carrying value.
At December 31, 1997, investments having a par value of $3,825,000 were on
deposit with various state insurance departments to meet their respective
regulatory requirements.
(3) DEFERRED POLICY ACQUISITION COSTS
Changes in deferred policy acquisition costs at December 31 are summarized
as follows:
<TABLE>
<CAPTION>
--------------------------------------------
1997 1996 1995
--------------------------------------------
<S> <C> <C> <C>
Deferred, January 1 ...................................... $ -- $ -- $ 397,029
Additions:
Commissions ........................................... -- -- (121,972)
Premium tax ........................................... -- -- 126,889
Salaries .............................................. -- -- 14,099
Ceding commissions .................................... -- -- 121,972
----------- -------- ---------
-- -- 538,017
Amortization to expense .................................. -- -- 538,017
----------- -------- ---------
Deferred, December 31 .................................... $ -- $ -- $ --
=========== ======== =========
</TABLE>
(4) NOTE RECEIVABLE
The promissory note provides for principal and interest payable monthly at
the rate of 7-1/2% per annum with a maturity date Of December 1, 1998.
(5) NOTE PAYABLE TO BANK
As of December 31, 1997, the Company had a $10,000,000 revolving line of
credit with a maturity date of May 1, 2001 and an outstanding balance of
$5,000,000. The revolving credit agreement provides for interest payable
quarterly, at the bank's prime rate less one quarter percent (8.25% per
annum at December 31, 1997).
15
<PAGE> 17
(6) NOTE PAYABLE
In connection with the acquisition of Title Research, the Company agreed to
assume a note payable to the previous owner of a Title Research branch
office. The cognovit note agreement provides for principal and interest
payable monthly at the rate of 6.5% per annum with a maturity date of
April 1, 2001. Annual payments are $13,000 and the outstanding balance was
$37,073 at December 31, 1997.
(7) LEASES AND SHARED EXPENSES
The Company routinely leases premises for use as administrative offices,
vehicles and office equipment under operating leases for varying periods.
Management expects that in the normal course of business, leases will be
renewed or replaced by other leases.
Consolidated rental expenses under operating leases were $202,100, $141,738
and $128,271 in each of the years 1997, 1996 and 1995, respectively.
The future minimum lease payments required under these operating leases, as
of December 31, 1997 follows:
---------------------------------------
YEAR OPERATING
ENDING LEASES
---------------------------------------
1998 $217,570
1999 146,758
2000 91,789
2001 1,005
---------
$457,122
=========
(8) FEDERAL INCOME TAXES
Deferred income taxes for 1997 and 1996 reflect the impact of "temporary
differences" between amounts of assets and liabilities for financial
reporting purposes and such amounts as measured on an income tax basis.
Temporary differences which give rise to the net deferred tax liability
at December 31 are as follows:
<TABLE>
<CAPTION>
---------------------------
1997 1996
---------------------------
<S> <C> <C>
Deferred tax assets:
Unpaid loss and loss adjustment expense reserves ............................ $ 13,660 $ 13,066
Unearned premium reserves ................................................... 61,637 67,305
--------- ---------
Subtotal ................................................................. 75,297 80,371
Deferred tax liabilities:
Unrealized gains on available for sale fixed maturities and equity
securities ............................................................... (323,300) (223,986)
Discounting of anticipated salvage and subrogation .......................... (4,919) (4,919)
Accrued dividends receivable ................................................ (2,389) (3,120)
Other ....................................................................... (40,738) (43,101)
--------- ---------
Net deferred tax liability ............................................... $(296,049) $(194,755)
========= =========
</TABLE>
Net deferred tax assets and federal income tax expense in future years can be
significantly affected by changes in enacted tax rates or by unexpected adverse
events that would impact management's conclusions as to the ultimate
realizability of deferred tax assets.
The provision for federal income taxes at December 31, consists of the
following:
<TABLE>
<CAPTION>
-------------------------------------
1997 1996 1995
-------------------------------------
<S> <C> <C> <C>
Current .................................................. $965,374 $631,144 $(278,189)
Deferred ................................................. 1,980 149,105 454,887
-------- -------- ---------
Federal income tax expense ............................ $967,354 $780,249 $ 176,698
======== ======== =========
</TABLE>
16
<PAGE> 18
The difference between income taxes provided at the Company's effective
tax rate and the 34% federal statutory rate at December 31, is as follows:
<TABLE>
<CAPTION>
-------------------------------------------
1997 1996 1995
-------------------------------------------
<S> <C> <C> <C>
Federal income tax at statutory rate ............................... $1,247,340 $1,061,241 $ 543,247
Dividends received and tax exempt interest deductions .............. (290,738) (284,618) (359,821)
Other .............................................................. 10,752 3,626 (6,728)
---------- ---------- ---------
Federal income tax expense ...................................... $ 967,354 $ 780,249 $ 176,698
========== ========== =========
</TABLE>
(9) BENEFIT PLANS
During 1995, the Company had a profit sharing plan for all employees with
six months of service. Contributions were determined annually by the Board
of Directors. There was no contribution to the plan in 1995.
On January 1, 1996, the Company implemented the Ohio Indemnity Company
Employee 401(k) and Profit Sharing Plan (the "401(k) Plan"). The 401(k)
Plan is available to full-time employees who meet the 401(k) Plan's
eligibility requirements. Under the 401(k) Plan, the Company matches 50% of
the qualified employee's contribution up to 6% of salary. The total cost of
the matching contribution was $68,288 and $24,930 for the year ended
December 31, 1997 and 1996, respectively.
(10) STOCK OPTION PLANS
The Company applies APB Opinion No. 25 and related Interpretations in
accounting for options issued to employees, officers and directors under
its plans. FASB Statement No. 123 "Accounting for Stock-Based Compensation"
("SFAS 123") was issued by the FASB in 1995 and changes the methods for
recognition of cost on plans similar to those used by the Company. Adoption
of SFAS 123 is optional; however, pro forma disclosures as if the Company
adopted the cost recognition requirements under SFAS 123 in 1997, 1996 and
1995 are presented below.
The Company has two stock option plans. The 1984 Plan was open to all
employees of the Company and its subsidiaries. All options were granted
before May 17, 1994 for a term of not more than ten years. The options for
95,000 shares outstanding at December 31, 1997 expire at various dates from
2000 through 2004 and range in option price per share from $.625 to $6.00.
The 1994 Stock Option Plan provides for the grant of options to purchase up
to an aggregate of 500,000 shares, 100,000 shares for any one individual,
of the common stock of the Company. Certain key employees, officers, and
directors of, and consultants and advisors to, the Company and its
subsidiaries are eligible to participate in the Plan. The Plan is
administered by the Stock Option Committee which will determine to whom and
when options will be granted along with the terms and conditions of the
options. The options for 121,500 shares outstanding at December 31, 1997
expire at dates from 2004 to 2007 and range in option price per share from
$2.50 to $6.75.
A summary of the status of the Company's stock options as of December 31,
1997, 1996 and 1995 and changes during the year ended on those dates is
presented below:
<TABLE>
<CAPTION>
1997 1996 1995
------------------------------------------------------------------------
WGTD. AVG. WGTD. AVG. WGTD. AVG.
SHARES EXER. PRICE SHARES EXER. PRICE SHARES EXER. PRICE
------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year............ 185,500 $3.52 199,500 $3.28 237,500 $2.54
Granted..................................... 71,000 4.04 6,000 3.38 38,500 2.55
Exercised................................... (20,000) 1.61 (20,000) 1.125 (76,500) .625
Expired..................................... - - - - - -
Canceled.................................... (20,000) $6.00 - - - -
------- ----- ------- ----- -------- -----
Outstanding at end of year.................. 216,500 $3.64 185,500 $3.52 199,500 $3.28
======= ===== ======= ===== ======== =====
Options exercisable at year-end............. 132,000 159,500 167,000
======= ======= =======
Shares reserved for issuance................ 595,000 635,000 655,000
======= ======= =======
Options available for future grant.......... 378,500 449,500 455,500
======= ======= =======
Weighted average fair value of options
granted during the year................... $2.2211 $2.0535 $1.5969
======= ======= =======
</TABLE>
17
<PAGE> 19
The fair value of each option granted during 1997, 1996 and 1995 is estimated on
the date of grant using the Black-Scholes option-pricing model with the
following assumptions: (1) expected volatility of 47.84% for 1997 and 56.82% for
1996 and 1995, (2) risk-free interest rate of 6.25% for options granted January
2, 1997, 6.83% for options granted April 1, 1997, 6.51% for options granted June
4, 1997, 5.99% for options granted June 15, 1995, 5.58% for options granted
December 21, 1995 and 6.67% for options granted June 15, 1996 and (3) expected
life of 6 years for all years.
The following table summarizes information about stock options outstanding at
December 31, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-----------------------------------------------------------------
NUMBER WGTD. AVG. WGTD. AVG. NUMBER WGTD. AVG.
OUTSTANDING REMAINING EXERCISE EXERCISABLE EXERCISE
RANGE OF EXERCISE PRICES AT 12/31/97 CONTR.LIFE PRICE AT 12/31/97 PRICE
------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ .625 - 1.10................................. 20,000 2.42 $ .625 20,000 $ .625
1.10 - 1.93.................................. 15,000 3.67 1.125 15,000 1.125
1.9375 - 2.50............................... 42,500 7.09 2.368 23,000 2.256
2.875 - 4.31................................ 83,000 8.95 3.908 31,000 3.680
5.25 - 6.75.................................. 56,000 6.07 5.946 56,000 5.946
------- -------
.625 - 6.75................................. 216,500 6.87 3.637 145,000 3.644
======= =======
</TABLE>
Had compensation cost for the Company's 1997, 1996, and 1995 grants for
stock-based compensation plans been determined consistent with SFAS 123, the
Company's net income and net income per common share would approximate the pro
forma amounts below:
<TABLE>
<CAPTION>
------------------------------------------------------------------------------
AS REPORTED PRO FORMA
1997 1996 1995 1997 1996 1995
------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net income......................... $2,701,294 $2,341,048 $1,421,086 $2,686,209 $2,333,507 $1,420,230
---------- ---------- ---------- ---------- ---------- ----------
Net income per common share........ $ .46 $ .41 $ .24 $ .46 $ .40 $ .24
---------- ---------- ---------- ---------- ---------- ----------
</TABLE>
The effects of applying SFAS 123 in this pro forma disclosure are not
indicative of future amounts. Additional awards in future years are
anticipated.
(11) DIVIDEND RESTRICTIONS
Under Ohio law, insurance companies may only pay dividends to shareholders
from shareholders' equity determined in accordance with statutory
accounting practices. Further, Ohio law limits dividends to shareholders,
without prior approval of the Department, to the greater of the prior
year's statutory net income or 10% of statutory shareholders' equity. As of
December 31, 1997, dividends from Ohio Indemnity in 1998 are limited to
$3,042,840 without prior approval of the Department.
(12) STATUTORY SHAREHOLDERS' EQUITY AND NET INCOME
As of December 31, 1997, Ohio Indemnity's statutory surplus and net income
determined in accordance with accounting practices prescribed or permitted
by the Department differed from shareholders' equity and net income
determined in accordance with GAAP by the following:
<TABLE>
<CAPTION>
SHAREHOLDERS' NET
EQUITY/SURPLUS INCOME
-------------- ------
<S> <C> <C>
Statutory ............................................................ $ 22,011,391 $ 3,042,840
Reconciling items:
Non-admitted assets ................................................. 2,689 --
Deferred taxes ...................................................... (293,942) (5,310)
Unrealized gain on available for sale fixed maturities .............. 326,973 --
------------ -----------
GAAP .............................................................. $ 22,047,111 $ 3,037,530
============ ===========
</TABLE>
As of December 31, 1996, Ohio Indemnity's statutory surplus differed from
GAAP shareholders' equity by an amount of $4,116 in nonadmitted assets,
($189,319) for deferred taxes and $230,661 in unrealized gain on available
for sale fixed maturities. Statutory net income for the year ended December
31, 1996 differed from GAAP net income by ($149,103) in deferred taxes.
Statutory net income for the year ended December 31, 1995 differed from
GAAP net income by $(397,029) for deferred acquisition costs and $(449,452)
in deferred taxes.
18
<PAGE> 20
(13) RESERVE FOR UNPAID LOSSES AND LOSS ADJUSTMENT EXPENSES
Activity in the reserve for unpaid losses and loss adjustment expenses is
summarized as follows:
[Dollars in thousands]
<TABLE>
<CAPTION>
---------------------------------
1997 1996 1995
---------------------------------
<S> <C> <C> <C>
Balance at January 1 ......... $ 1,360 $ 2,242 $ 4,517
Less reinsurance recoverables 15 529 1,328
------- ------- -------
Net Balance at January 1 ..... 1,345 1,713 3,189
------- ------- -------
Incurred related to:
Current year ................ 6,074 5,761 12,513
Prior years ................. (3) (357) 247
------- ------- -------
Total incurred ............... 6,071 5,404 12,760
------- ------- -------
Paid related to:
Current year ................ 4,479 4,424 10,659
Prior years ................. 1,413 1,348 3,577
------- ------- -------
Total paid ................... 5,892 5,772 14,236
------- ------- -------
Net Balance at December 31 ... 1,524 1,345 1,713
Plus reinsurance recoverables 8 15 529
------- ------- -------
Balance at December 31 ....... $ 1,532 $ 1,360 $ 2,242
======= ======= =======
</TABLE>
As a result of changes in estimates of insured events in prior years, the
provision for unpaid losses and loss adjustment expenses decreased by
$3,000 in 1997 and $357,000 in 1996 primarily due to higher than
anticipated salvage and subrogation received from the discontinued
Automobile Insurance business. The provision for unpaid losses and loss
adjustment expenses increased by $247,000 in 1995 because of higher than
anticipated losses and related legal expenses in connection with a
discontinued product.
(14) REINSURANCE
The Company maintains a quota share reinsurance agreement for certain
insurance products, by which Ohio Indemnity cedes a portion of its
insurance to a reinsurer. This arrangement limits the net claim liability
potential arising from specific policies. This reinsurance agreement does
not relieve the Company from its obligations to policyholders.
Consequently, failure of the reinsurer to honor its obligations could
result in losses to the Company. The Company currently recovers 75% and 50%
of the paid losses and loss adjustment expense applicable to Mortgage
Protection and Automobile Physical Damage insurance policies, respectively.
As of December 31, ceded reinsurance reduced commission expense incurred by
$23,032 in 1997 and increased commission expense incurred by $62,147 and
$121,972 in 1996 and 1995, respectively.
(15) RELATED PARTIES
Included in loans to affiliates at December 31, 1997 and 1996 is a $19,000
loan to an officer of Ohio Indemnity, originally due December 8, 1997.
Interest only is payable in quarterly installments at the rate of two
points above prime. On December 8, 1997, the loan was renewed and the
maturity was extended to December 8, 1998. The carrying amount of the loan
is a reasonable estimate of fair value.
On July 22, 1996, the Company entered into a commercial financing agreement
with an Administrator for the marketing and servicing of certain
not-for-profit entities in the Bonded Service Program. Under amended terms
of the agreement, the Company provides a line of credit, up to a maximum of
$300,000, effective to April 30, 1998 (the "Renewal Date"). Interest is
payable in quarterly installments at the rate of one point above prime. The
outstanding principal balance is payable in full to the Company on or
before April 30 of each annual term. In addition, the Administrator must
maintain a principal balance of zero for a minimum of 15 consecutive
calendar days during each annual term. At December 31, 1997, the Company
had loaned the Administrator $300,000 under this agreement.
During 1994, the Company entered into a Split-Dollar Insurance Agreement
with a bank, as trustee, for the benefit of an officer/shareholder and his
spouse. The bank has acquired a second-to-die policy on the lives of the
insureds, in the aggregate face amount of $2,700,000. At December 31, 1997,
the Company had loaned the trustee $287,182 under this agreement for
payment of insurance premiums. Amounts loaned by the Company to the trustee
are to be repaid, in full, without interest from any of the following
sources; cash surrender value of the underlying insurance contracts, death
benefits and/or the sale of 15,000 shares of the Company's common stock
contributed by the officer/shareholder to the Trust.
The executive offices of the Company are shared with consolidated
subsidiaries and other affiliated entities. Rental, equipment and
bookkeeping expense are allocated among them pursuant to management fee
agreements.
19
<PAGE> 21
(16) CONCENTRATIONS
A single customer in the Ultimate Loss Insurance program represented
$1,398,541, $1,553,282, and $2,343,398 of the Company's net premiums earned
in 1997, 1996 and 1995, respectively. A new customer in the Ultimate Loss
Insurance program represented $1,866,672 of the Company's net premiums
earned in 1997.
A single customer in the Surety program represented $907,942, $995,241 and
$1,074,126 of the Company's net premiums earned in 1997, 1996 and 1995,
respectively.
(17) QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The Company's results of operations have varied, and in the future may vary
from quarter to quarter principally because of fluctuations in underwriting
results. Consequently, quarterly results are not necessarily indicative of
full year results, nor are they comparable to the results of other
quarters. The following table sets forth certain unaudited quarterly
consolidated financial and operating data:
<TABLE>
<CAPTION>
1997
-------------------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
-------------------------------------------------------
<S> <C> <C> <C> <C>
Net premiums earned ........... $2,117,072 $2,383,011 $3,247,427 $3,421,733
Net investment and other income 526,124 1,370,792 1,211,751 1,552,491
Total revenues ................ 2,643,196 3,753,803 4,459,178 4,974,224
Losses and operating expenses . 1,987,232 2,598,898 3,574,962 4,000,661
Net income .................... 494,552 843,586 658,165 704,991
Net income per common share ... .09 .14 .11 .12
Net income per common share,
assuming dilution ........... .09 .14 .11 .12
</TABLE>
<TABLE>
<CAPTION>
1996
-------------------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
-------------------------------------------------------
<S> <C> <C> <C> <C>
Net premiums earned ........... $2,895,349 $2,624,054 $2,375,207 $2,243,494
Net investment and other income 592,478 684,081 518,975 771,236
Total revenues ................ 3,487,827 3,308,135 2,894,182 3,014,730
Losses and operating expenses . 2,774,479 2,320,842 2,170,779 2,317,477
Net income .................... 541,422 717,403 546,447 535,776
Net income per common share ... .09 .13 .10 .09
Net income per common share,
assuming dilution ........... .09 .13 .09 .09
</TABLE>
(18) REGULATORY STANDARD
Ohio Indemnity is subject to a Risk Based Capital ("RBC") test applicable
to property and casualty insurers. The RBC calculation serves as a
benchmark of insurance enterprises' solvency by state insurance regulators
by establishing statutory surplus targets which will require certain
Company level or regulatory level actions. 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.
(19) COMMON SHARE REPURCHASE PROGRAM
On November 13, 1995, the Board of Directors adopted a common share
repurchase program. The program allows the Company to repurchase up to a
total of 100,000 of its common shares. As of September 5, 1996, the Company
repurchased 100,000 shares. In addition, on September 5, and November 4,
1996, the Board of Directors approved an additional 19,112 and 100,000
common shares for repurchase, respectively. The program expired on December
31, 1997.
20
<PAGE> 22
(20) LITIGATION
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, is
likely to result in judgments that will have a material adverse effect on
the financial condition or results of operations of the Company.
(21) SUPPLEMENTAL DISCLOSURE FOR EARNINGS PER SHARE
<TABLE>
<CAPTION>
-------------------------------------
1997 1996 1995
-------------------------------------
<S> <C> <C> <C>
Net income......................................................... $2,701,294 $2,341,048 $1,421,086
---------- ---------- ----------
Income available to common stockholders,
assuming dilution............................................... $2,701,294 $2,341,048 $1,421,086
---------- ---------- ----------
Weighted average common shares outstanding......................... 5,822,781 5,780,351 5,837,983
Adjustments for dilutive securities:
Dilutive effect of outstanding options.......................... 55,342 50,697 54,019
---------- ----------- ----------
Diluted common shares.............................................. 5,878,123 5,831,048 5,892,002
========== ========== ==========
Net income per common share........................................ $ .46 $ .41 $ .24
Net income per common share, assuming dilution..................... $ .46 $ .40 $ .24
</TABLE>
(22) ADOPTION OF NEW ACCOUNTING STANDARDS
In December 1996, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 127, "Deferral of
the Effective Date of Certain Provisions of FASB Statement No. 125." SFAS
No. 125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities" (issued in June 1996) establishes new
criteria for determining whether a transfer of financial assets should be
accounted for as a sale or as a pledge of collateral in a secured
borrowing, as well as establishes new accounting requirements for pledged
collateral. SFAS No. 127 deferred the implementation of SFAS No. 125 as it
relates to repurchase agreements, dollar-rolls, securities lending and
similar transactions. The Company will adopt SFAS No. 125 in 1998, as
required by SFAS 127; however the implementation of SFAS No. 125 is not
expected to have a material impact on the Company's statement of position
or results of operations.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." Under SFAS No. 130, enterprises that provide a full set of
financial statements that report financial position, results of operations
and cash flows should also include a Statement of Comprehensive Income for
fiscal years beginning after December 15, 1997, with earlier adoption
permitted. The Company intends to adopt SFAS No. 130 in 1998.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information." Under SFAS No. 131, public business
enterprises are required to provide disclosures about operating segments
using the "management approach" for fiscal years beginning after December
15, 1997, with earlier adoption permitted. The Company intends to adopt
SFAS No. 131 in 1998. The Company has not yet determined what its
operating segments will be under SFAS No. 131.
21
<PAGE> 23
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors and Shareholders
Bancinsurance Corporation:
We have audited the consolidated balance sheets of Bancinsurance Corporation and
subsidiaries as of December 31, 1997 and 1996, and the related consolidated
statements of income, shareholders' equity and cash flows, for each of the years
in the three-year period ended December 31, 1997. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements and financial statement schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Bancinsurance
Corporation and subsidiaries as of December 31, 1997 and 1996, and the results
of their operations and their cash flows for each of the years in the three-year
period ended December 31, 1997, in conformity with generally accepted accounting
principles.
/s/ Coopers & Lybrand L.L.P.
Columbus, Ohio
February 27, 1998
22
<PAGE> 24
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:
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
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%
==== ==== =====
</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.
23
<PAGE> 25
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 $7,620,000 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 $624,691 and $266,578 of
premiums written and 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) of 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 the 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.
24
<PAGE> 26
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
ratings 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.
25
<PAGE> 27
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 was $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) of 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.
26
<PAGE> 28
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 $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.
27
<PAGE> 29
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 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.
28
<PAGE> 30
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.
29
<PAGE> 31
MARKET INFORMATION AND DIVIDENDS
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.
<TABLE>
<CAPTION>
Low Sale High Sale
-------- ---------
<S> <C> <C>
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
</TABLE>
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 and BCIS Services 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.
30
<PAGE> 32
BANCINSURANCE CORPORATION
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993 1992 1991
-------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Premiums earned ........... $11,226,584 10,138,104 $19,783,307 $25,535,824 $19,787,858 $10,657,111 $6,852,544
Investment and other income 4,661,158 2,566,770 2,027,037 2,140,734 1,879,007 1,241,158 653,300
Total revenues ............ 15,830,401 12,704,874 21,810,344 27,676,558 21,666,865 11,898,269 7,505,844
Losses and loss adjustment
expenses, net of
reinsurance recoveries .. 6,070,954 5,404,484 12,760,094 15,564,508 10,918,649 5,063,855 3,444,370
Operating expenses ........ 6,090,799 4,179,093 7,452,466 9,459,652 7,506,212 3,938,717 2,786,956
Operating income .......... 3,668,648 3,121,297 1,597,784 2,652,398 2,826,614 2,895,697 1,274,518
Income taxes .............. 967,354 780,249 176,698 335,403 580,379 758,167 332,108
Net income ................ 2,701,294 2,341,048 1,421,086 2,316,995 2,294,822 2,137,530 942,410
Net income per common
share, diluted(1) .... $ .46 $ .40 $ .24 $ .40 $ .40 $ .37 $ .16
</TABLE>
SELECTED BALANCE SHEET DATA
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993 1992 1991
-----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Total assets $31,404,432 $28,274,952 $27,750,234 $43,774,264 $43,612,249 $28,014,631 $15,534,604
Note payable to bank $ 5,000,000 $ 5,600,000 $ 5,616,132 $ 5,916,132 $ 5,316,132 $ 3,500,000 $ 3,350,000
Net shareholders' equity $19,079,801 $15,906,817 $13,710,410 $11,838,424 $ 9,909,742 $ 7,581,232 $ 5,239,984
</TABLE>
(1) Earnings per share assuming dilution is computed by dividing net income
available to common shareholders by the weighted-average number of common
shares outstanding adjusted for any dilative potential common shares for
the period.
31
<PAGE> 33
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------
1990 1989 1988 1987 1986 1985 1984 1983
- --------------------------------------------------------------------------------------------------------------------
<C> <C> <C> <C> <C> <C> <C> <C>
$ 4,596,382 $3,326,437 $3,327,362 $2,717,607 $2,413,136 $1,760,841 $1,479,406 $1,241,397
343,776 379,287 275,331 264,709 192,960 147,136 160,803 114,710
4,940,158 3,705,724 3,602,693 2,982,316 2,606,096 1,907,977 1,640,209 1,356,107
2,582,505 2,119,556 1,957,693 1,418,484 1,280,981 844,401 634,439 625,547
1,739,441 1,074,691 774,083 643,867 544,173 480,737 429,414 328,056
618,212 511,477 870,917 919,965 780,942 582,839 576,356 402,504
178,466 72,596 240,220 258,315 276,392 155,288 182,021 116,239
439,746 438,881 630,697 628,226 504,550 273,420 320,578 298,861
$ .08 $ .08 $ .11 $ .11 $ .08 $ .04 $ .05 $ .06
- --------------------------------------------------------------------------------------------------------------------
1990 1989 1988 1987 1986 1985 1984 1983
- --------------------------------------------------------------------------------------------------------------------
$11,581,617 $7,492,524 $5,755,781 $4,021,011 $3,456,108 $2,680,210 $2,696,888 $2,233,922
$ 3,600,000 $1,600,000 $1,650,000 $ 368,000 $ 388,000 $ 408,200 $ 433,292 $ 458,292
$ 4,247,832 $3,685,010 $3,342,282 $2,777,141 $2,255,976 $1,930,873 $1,640,687 $1,320,109
</TABLE>
32
<PAGE> 34
BOARD OF DIRECTORS
Milton O. Lustnauer
Private Investor
Saul Sokol
Owner
Sokol Insurance Agency
James R. Davis
Vice President
John S. Sokol
Executive Vice President
Daniel D. Harkins
Private Investor
Si Sokol
Chairman
Bancinsurance Corporation
OFFICERS
Si Sokol
Chairman, President and
Chief Executive Officer
John S. Sokol
Executive Vice President
James R. Davis
Vice President
Sally J. Cress
Secretary and Treasurer
33
<PAGE> 35
CORPORATE OFFICE
Bancinsurance Corporation
20 East Broad Street
Columbus, Ohio 43215
SUBSIDIARIES:
Ohio Indemnity Company
20 East Broad Street
Columbus, Ohio 43215
BCIS Services, Inc.
15301 Ventura Blvd.
Sherman Oaks, California 91403
Title Research Corporation
3966 G Brown Park Drive
Hilliard, Ohio 43026
INDEPENDENT ACCOUNTANTS
Coopers & Lybrand L.L.P.
Columbus, Ohio
LEGAL COUNSEL
Porter, Wright, Morris, & Arthur
Columbus, Ohio
TRANSFER AGENT AND REGISTRAR
Communications regarding changes of address, transfer of shares, and lost
certificates should be directed to the Company's stock transfer agent and
registrar:
Fifth Third Bank
Corporate Trust Services
38 Fountain Square Plaza
Mail Drop #1090F5-4129
Cincinnati, Ohio 45263
S.E.C. FORM 10-K
A copy of the Bancinsurance Form 10-K as filed with the Securities and Exchange
Commission is available to shareholders without charge upon written request to
the Corporate Secretary.
COMMON STOCK
Listed: Nasdaq National Market
Quoted: BCIS
34
<PAGE> 1
EXHIBIT 21 - SUBSIDIARIES OF THE COMPANY
BANCINSURANCE CORPORATION
<TABLE>
<CAPTION>
100% 100% 100%
<S> <C> <C>
Ohio Indemnity Company BCIS Services, Inc. Title Research Corporation
(An Insurance Company) (A Cost Containment Provider) (A Title Lien Search Company)
</TABLE>
<PAGE> 1
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statement of
Bancinsurance Corporation's 1984 Stock Option Plan and the 1994 Stock Option
Plan on Form S-8 of our report dated February 27, 1998, on our audits of the
consolidated financial statements of Bancinsurance Corporation as of December
31, 1997 and 1996 and for the years ended December 31 1997, 1996 and 1995 which
report is incorporated by reference in this Annual Report on Form 10-K and our
report on the financial statement schedules of Bancinsurance Corporation as of
December 31, 1997 and 1996 and for the years ended December 31, 1997, 1996 and
1995, included in this Annual Report on Form 10-K.
Columbus, Ohio
February 27, 1998
<TABLE> <S> <C>
<ARTICLE> 7
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<DEBT-HELD-FOR-SALE> 12,962,626
<DEBT-CARRYING-VALUE> 3,940,194
<DEBT-MARKET-VALUE> 4,054,026
<EQUITIES> 3,225,061
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 26,929,625
<CASH> 1,146,317
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 0
<TOTAL-ASSETS> 31,404,432
<POLICY-LOSSES> 1,531,714
<UNEARNED-PREMIUMS> 698,764
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 5,000,000
0
0
<COMMON> 315,567
<OTHER-SE> 18,764,234
<TOTAL-LIABILITY-AND-EQUITY> 31,404,432
11,169,243
<INVESTMENT-INCOME> 1,344,815
<INVESTMENT-GAINS> 182,734
<OTHER-INCOME> 3,133,609
<BENEFITS> 6,070,954
<UNDERWRITING-AMORTIZATION> 5,727,802
<UNDERWRITING-OTHER> 362,997
<INCOME-PRETAX> 3,668,648
<INCOME-TAX> 967,354
<INCOME-CONTINUING> 2,701,294
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,701,294
<EPS-PRIMARY> .46
<EPS-DILUTED> .46
<RESERVE-OPEN> 1,345,000
<PROVISION-CURRENT> 6,074,000
<PROVISION-PRIOR> (3,000)
<PAYMENTS-CURRENT> 4,479,000
<PAYMENTS-PRIOR> 1,413,000
<RESERVE-CLOSE> 1,524,000
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 7
<RESTATED>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<DEBT-HELD-FOR-SALE> 11,502,186
<DEBT-CARRYING-VALUE> 4,004,550
<DEBT-MARKET-VALUE> 4,086,856
<EQUITIES> 3,031,014
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 25,360,303
<CASH> 681,286
<RECOVER-REINSURE> 25,143
<DEFERRED-ACQUISITION> 0
<TOTAL-ASSETS> 28,274,952
<POLICY-LOSSES> 1,359,775
<UNEARNED-PREMIUMS> 745,787
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 5,600,000
0
0
<COMMON> 315,567
<OTHER-SE> 15,591,250
<TOTAL-LIABILITY-AND-EQUITY> 28,274,952
10,138,104
<INVESTMENT-INCOME> 1,318,137
<INVESTMENT-GAINS> 246,038
<OTHER-INCOME> 1,002,595
<BENEFITS> 5,404,484
<UNDERWRITING-AMORTIZATION> 3,727,668
<UNDERWRITING-OTHER> 451,425
<INCOME-PRETAX> 3,121,297
<INCOME-TAX> 780,249
<INCOME-CONTINUING> 2,341,048
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,341,048
<EPS-PRIMARY> .41
<EPS-DILUTED> .40
<RESERVE-OPEN> 1,713,000
<PROVISION-CURRENT> 5,761,000
<PROVISION-PRIOR> (357,000)
<PAYMENTS-CURRENT> 4,424,000
<PAYMENTS-PRIOR> 1,348,000
<RESERVE-CLOSE> 1,345,000
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 7
<RESTATED>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<DEBT-HELD-FOR-SALE> 9,563,314
<DEBT-CARRYING-VALUE> 4,258,129
<DEBT-MARKET-VALUE> 4,390,089
<EQUITIES> 3,465,204
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 23,388,142
<CASH> 482,405
<RECOVER-REINSURE> 525,102
<DEFERRED-ACQUISITION> 0
<TOTAL-ASSETS> 27,750,234
<POLICY-LOSSES> 2,241,881
<UNEARNED-PREMIUMS> 2,997,334
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 5,616,132
0
0
<COMMON> 315,567
<OTHER-SE> 13,394,843
<TOTAL-LIABILITY-AND-EQUITY> 27,750,234
19,783,307
<INVESTMENT-INCOME> 1,387,602
<INVESTMENT-GAINS> 25,891
<OTHER-INCOME> 613,544
<BENEFITS> 12,760,094
<UNDERWRITING-AMORTIZATION> 6,997,969
<UNDERWRITING-OTHER> 454,497
<INCOME-PRETAX> 1,597,784
<INCOME-TAX> 176,698
<INCOME-CONTINUING> 1,421,086
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,421,086
<EPS-PRIMARY> .24
<EPS-DILUTED> .24
<RESERVE-OPEN> 3,189,112
<PROVISION-CURRENT> 12,513,000
<PROVISION-PRIOR> 247,094
<PAYMENTS-CURRENT> 10,659,000
<PAYMENTS-PRIOR> 3,577,051
<RESERVE-CLOSE> 1,713,155
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
