<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended March 31, 2000 Commission File Number 0-8738
------------------------- ------------------------------
BANCINSURANCE CORPORATION
-------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Ohio 31-0790882
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
20 East Broad Street, Columbus, Ohio 43215
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number including area code (614) 228-2800
--------------
None
- --------------------------------------------------------------------------------
Former name, former address and former fiscal year, if changed since last
report.
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days.
YES X NO
-----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the last practicable date.
Class Outstanding at March 31, 2000
- ------------------------------- -----------------------------
Common stock, without par value 5,883,789
<PAGE> 2
BANCINSURANCE CORPORATION
AND SUBSIDIARIES
INDEX
-----
<TABLE>
<CAPTION>
Page No.
<S> <C>
PART I - FINANCIAL INFORMATION:
Item 1. Financial Statements
Consolidated Balance Sheets as of
March 31, 2000 (unaudited) and December 31, 1999............................................ 3
Consolidated Statements of Income for the
three months ended March 31, 2000 and 1999 (unaudited)...................................... 5
Consolidated Statements of Comprehensive Income for the
three months ended March 31, 2000 and 1999 (unaudited)...................................... 6
Consolidated Statements of Cash Flows for the
three months ended March 31, 2000 and 1999 (unaudited)...................................... 7
Notes to Consolidated Financial Statements (unaudited).............................................. 8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations............................................... 11
Item 3. Quantitative and Qualitative Disclosures About
Market Risk................................................................................. 16
PART II - OTHER INFORMATION AND SIGNATURES
Item 1. Legal Proceedings.................................................................. Not Applicable
Item 2. Changes in Securities and Use of Proceeds.......................................... Not Applicable
Item 3. Default Upon Senior Securities..................................................... Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders ............................... Not Applicable
Item 5. Other Information.................................................................. Not Applicable
Item 6. Exhibits and Reports on Form 8-K.................................................................. 16
Signatures................................................................................................ 17
</TABLE>
2
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
BANCINSURANCE CORPORATION
AND SUBSIDIARIES
Consolidated Balance Sheets
<TABLE>
<CAPTION>
March 31, December 31,
ASSETS 2000 1999
-------------- -------------
(Unaudited)
<S> <C> <C>
Investments:
Held to maturity:
Fixed maturities, at amortized cost (fair value
$5,092,613 and $4,897,428, respectively)................................... $ 5,514,680 $ 4,902,028
Available for sale:
Fixed maturities, at fair value (amortized cost
$16,102,273 and $16,0091,394, respectively)................................ 15,780,656 15,649,618
Equity securities, at fair value (cost $5,279,002
and $4,409,620, respectively).............................................. 5,991,962 5,059,639
Short-term investments, at cost which
approximates fair value...................................................... 3,398,863 4,254,006
Securities purchased under agreements to resell................................ 3,717,925 2,393,198
------------ -------------
Total investments..................................................... 34,404,086 32,258,489
------------ -------------
Cash ............................................................................... 2,399,806 2,401,312
Premiums receivable................................................................. 2,827,700 2,213,278
Accounts receivable, net of allowance for
doubtful accounts................................................................. 706,623 459,684
Reinsurance receivable.............................................................. 12,750 2,250
Reinsurance recoverable on paid losses.............................................. 6,541 -
Prepaid reinsurance premiums........................................................ 80,708 80,420
Deferred policy acquisition costs................................................... 743,338 219,193
Estimated earnings in excess of billings on
uncompleted codification contracts............................................. 130,701 -
Loans to affiliates................................................................. 1,063,320 635,420
Land and building, net.............................................................. 37,995 38,288
Furniture, fixtures and leasehold improvements, net................................. 135,236 255,369
Excess of investment over net assets of subsidiaries, net........................... 2,712,560 2,932,701
Intangible asset, net............................................................... 438,945 -
Accrued investment income........................................................... 369,586 338,117
Deferred federal income taxes....................................................... 211,202 324,114
Other assets........................................................................ 517,990 289,478
------------ -------------
Total assets................................................ $ 46,799,087 $ 42,448,113
============ =============
</TABLE>
(Continued)
3
<PAGE> 4
BANCINSURANCE CORPORATION
AND SUBSIDIARIES
Consolidated Balance Sheets, Continued
<TABLE>
<CAPTION>
March 31, December 31,
LIABILITIES AND SHAREHOLDERS' EQUITY 2000 1999
------------ ------------
(Unaudited)
<S> <C> <C>
Reserve for unpaid losses and loss adjustment expenses.............................. $ 5,245,782 $ 5,272,601
Unearned premiums................................................................... 4,725,163 2,430,776
Contract funds on deposit........................................................... 1,916,628 2,272,177
Reinsurance premiums payable........................................................ 44,853 12,211
Note payable to bank................................................................ 6,900,000 5,145,000
Acquisition liability............................................................... 563,105 619,114
Taxes, licenses, and fees payable................................................... 83,975 177,357
Return premiums payable............................................................. 627,697 83,524
Federal income taxes payable........................................................ 160,587 90,068
Commissions payable................................................................. 481,146 681,732
Billings in excess of estimated earnings on uncompleted
codification contracts......................................................... 98,199 -
Other............................................................................... 643,819 470,264
------------ ------------
Total liabilities..................................................... 21,490,954 17,254,824
------------ ------------
Commitment and contingent liabilities
Shareholders' equity:
Non-voting preferred stock:
Class A Serial Preference shares without par value; authorized 100,000
shares; no shares issued or
outstanding............................................................... - -
Class B Serial Preference shares without par value;
authorized 98,646 shares; no shares issued or
outstanding............................................................... - -
Common stock without par value; authorized
20,000,000 shares; 6,170,341 shares issued................................... 1,794,141 1,794,141
Additional paid-in capital..................................................... 1,414,818 1,442,773
Accumulated other comprehensive income......................................... 258,286 137,440
Retained earnings.............................................................. 23,200,223 22,546,355
------------ ------------
26,667,468 25,920,709
Less: Treasury stock, at cost (286,552 and
147,292 common shares, respectively)....................................... (1,359,335) (727,420)
------------- -------------
Total shareholders' equity............................................ 25,308,133 25,193,289
------------ ------------
Total liabilities and shareholders' equity............................ $ 46,799,087 $ 42,448,113
============ ============
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE> 5
BANCINSURANCE CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Income
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
2000 1999
------------ ---------
<S> <C> <C>
Income:
Premiums written................................................................. $ 7,991,812 $ 8,535,112
Increase in unearned premiums.................................................... (2,329,685) (2,800,771)
----------- ----------
Premiums earned........................................................... 5,662,127 5,734,341
Premiums ceded................................................................... (46,501) (30,163)
----------- ----------
Net premiums earned....................................................... 5,615,626 5,704,178
Investment income (net of expenses of $7,031 and
$9,620, respectively).......................................................... 414,295 334,285
Net realized gain (loss) on investments.......................................... (27,309) 76,845
Codification and subscription fees............................................... 170,261 -
Claims administration fees....................................................... 201,073 137,632
Title and appraisal fees......................................................... 115,724 522,383
Management fees.................................................................. 374,671 260,864
Commission fees.................................................................. 65,247 -
Other income..................................................................... 39,083 19,815
---------- ----------
Total revenue............................................................. 6,968,671 7,056,002
---------- ----------
Losses and operating expenses:
Losses and loss adjustment expenses.............................................. 3,685,316 3,722,616
Reinsurance recoveries........................................................... (17,041) -
Commission expense............................................................... 605,674 852,701
Other insurance operating expenses............................................... 782,240 428,239
Cost of sales.................................................................... 94,380 -
General and administrative expenses.............................................. 817,991 762,222
Interest expense................................................................. 94,527 40,857
---------- ----------
Total expenses............................................................ 6,063,087 5,806,635
---------- ----------
Income before federal income taxes........................................ 905,584 1,249,367
Federal income tax expense............................................................ 251,715 368,592
---------- ----------
Net income................................................................ $ 653,869 $ 880,775
========== ==========
Net income per common share........................................................... $ .11 $ .14
========== ==========
Net income per common share, assuming dilution........................................ $ .11 $ .14
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE> 6
BANCINSURANCE CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
2000 1999
------------ -----------
<S> <C> <C>
Net income............................................................................ $ 653,869 $ 880,775
Other comprehensive income:
Unrealized holding gains (losses) arising during
period, net of income tax (benefit) expense of
$62,254 and $(73,856), respectively.......................................... 120,846 (143,367)
------------ -----------
Comprehensive income.................................................................. $ 774,715 $ 737,408
============ ===========
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE> 7
BANCINSURANCE CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
2000 1999
------------ ----------
<S> <C> <C>
Cash flows from operating activities:
Net income....................................................................... $ 653,869 $ 880,775
Adjustments to reconcile net income to net cash
provided by operating activities:
Net realized gain on disposal of subsidiary................................. (35,311) -
Net realized gain (loss) on investments..................................... 27,309 (76,845)
Net realized loss on disposal of equipment.................................. - 437
Depreciation and amortization............................................... 62,545 44,143
Deferred federal income tax expense......................................... 50,960 15,725
Increase in premiums receivable............................................. (614,422) (733,901)
(Increase) decrease in accounts receivable.................................. 532,389 (40,285)
Increase in deferred policy acquisition costs............................... (524,145) (477,070)
Increase in other assets.................................................... (238,540) (413,074)
Increase (decrease) in reserve for unpaid losses
and loss adjustment expenses............................................. (26,819) 202,155
Increase in unearned premiums............................................... 2,294,387 2,800,771
Increase in return premium payable.......................................... 544,173 382,097
Increase (decrease) in contract funds on deposit............................ (355,549) 332,269
Decrease in other liabilities............................................... (503,013) (486,165)
---------- ----------
Net cash provided by operating activities................................ 1,867,833 2,431,032
---------- ----------
Cash flows from investing activities:
Proceeds from held to maturity: fixed maturities
due to redemption or maturity.................................................. 275,000 -
Proceeds from available for sale: fixed maturities
sold, redeemed and matured..................................................... 214,000 1,195,121
Proceeds from available for sale: equity securities
sold......................................................................... 1,219,392 1,164,321
Cost of investments purchased:
Held to maturity: fixed maturities........................................... (496,484) -
Available for sale: fixed maturities......................................... (636,206) (2,114,034)
Equity securities............................................................ (2,103,759) (928,697)
Net (increase) decrease in short-term investments................................ 855,143 (366,236)
Net increase in securities purchased under agreements to resell.................. (1,324,727) (369,823)
Other............................................................................ (8,733) (113,625)
Cash used in purchase of subsidiary.............................................. (958,094) -
----------- -----------
Net cash used in investing activities.................................... (2,964,468) (1,532,973)
----------- -----------
Cash flows from financing activities:
Proceeds from note payable to bank............................................... 3,900,000 2,000,000
Repayments from note payable to bank............................................. (2,145,000) (2,250,000)
Proceeds from stock options exercised............................................ 31,313 -
Acquisition of treasury stock.................................................... (691,184) -
----------- ----------
Net cash provided by (used in) financing activities....................... 1,095,129 (250,000)
---------- -----------
Net increase (decrease) in cash....................................................... (1,506) 648,059
----------- ----------
Cash at December 31................................................................... 2,401,312 4,582,168
---------- ----------
Cash at March 31...................................................................... $2,399,806 $5,230,227
========== ==========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest......................................................................... $ 89,728 $ 40,857
========== ==========
Income taxes..................................................................... $ 150,000 $ 250,000
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
7
<PAGE> 8
BANCINSURANCE CORPORATION
AND SUBSIDIARIES
Notes To Consolidated Financial Statements (Unaudited)
1. The Consolidated Balance Sheet as of March 31, 2000, the Consolidated
Statements of Income for the three months ended March 31, 2000 and 1999,
the Consolidated Statements of Comprehensive Income for the three months
ended March 31, 2000 and 1999, and the Consolidated Statements of Cash
Flows for the three months then ended have been prepared by Bancinsurance
Corporation (the "Company") without an audit. In the opinion of management,
all adjustments (which include only normal recurring adjustments) necessary
to present fairly the financial position, results of operations, and cash
flows at March 31, 2000 and for all periods presented have been made.
2. Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been omitted. It is suggested that these unaudited
Consolidated Financial Statements be read in conjunction with the financial
statements and notes thereto included in the Company's Form 10-K for the
year ended December 31, 1999. The results of operations for the period
ended March 31, 2000 are not necessarily indicative of the results of
operations for the full year.
In 1998, the National Association of Insurance Commissioners ("NAIC")
adopted the Codification of Statutory Accounting Principles guidance, which
will replace the current Accounting Practices and Procedures manual as the
NAIC's primary guidance on statutory accounting. The NAIC is now
considering amendments to the Codification guidance that would also be
effective upon implementation. The Codification provides guidance for areas
where statutory accounting has been silent and changes current statutory
accounting in some areas. The Ohio Insurance Department has adopted the
Codification guidance, effective January 1, 2001. The Company has not
estimated the potential effect of the Codification guidance adopted by the
Department.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
3. In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement establishes accounting
and reporting standards for derivative instruments and requires recognition
of all derivatives as assets or liabilities in the statement of financial
position and measurement of those instruments at fair value. The statement,
as amended, is effective for fiscal years beginning after June 15, 2000.
The Company's balance sheet and statements of earnings and cash flows will
not be materially impacted by this statement, upon adoption.
4. Supplemental Disclosure For Earnings Per Share
<TABLE>
<CAPTION>
Three Months Ended
March 31,
2000 1999
------------- -----------
<S> <C> <C>
Net income...................................................................... $ 653,869 $ 880,775
------------- -----------
Income available to common stockholders,
assuming dilution........................................................... $ 653,869 $ 880,775
------------- -----------
Weighted average common shares outstanding...................................... 6,009,108 6,135,179
Adjustments for dilutive securities:
Dilutive effect of outstanding options...................................... 35,907 90,858
------------- -----------
Diluted common shares........................................................... 6,045,015 6,226,037
============= ===========
Net income per common share..................................................... $ .11 $ .14
Net income per common share, assuming dilution.................................. $ .11 $ .14
</TABLE>
On May 5, 1999, the Company declared a 5% stock dividend to shareholders of
record on May 25, 1999. Accordingly, all common share data have been adjusted to
include the effect of the stock dividend.
8
<PAGE> 9
BANCINSURANCE CORPORATION
AND SUBSIDIARIES
Notes To Consolidated Financial Statements (Unaudited) (Continued)
5. During 1997, SFAS No. 131, "Disclosures about Segments of an Enterprise and
Related Information" was issued. This SFAS was adopted by the Company as of
January 1, 1998. SFAS No. 131 requires disclosure of revenues and other
information based on the way management organizes the segments of the
business for making operating decisions and assessing performance.
The Company operates primarily in the property/casualty insurance industry.
There are intersegment management fees and commission fees. The allocations
of certain general expenses within segments are based on a number of
assumptions, and the reported operating results would change if different
methods were applied. Depreciation and capital expenditures are not
considered material.
<TABLE>
<CAPTION>
MARCH 31, 2000
-------------------------------------------------------------------------------------------------
WORKERS MUNICIPAL
PROPERTY/CASUALTY TITLE COMPENSATION INSURANCE CODE ALL CONSOLIDATED
INSURANCE AGENCY ADMINISTRATION AGENCY PUBLISHING OTHER TOTALS
-------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenues from external customers $ 6,231,497 $ 115,724 $ 201,073 $ 65,758 $ 170,261 $ 524 $ 6,784,837
Intersegment revenues........... 1,470 - - 207,834 - 2,310 211,614
Interest revenue................ 383,395 - - 9 - 12,044 395,448
Interest expense................ 1,607 90 - - - 92,830 94,527
Depreciation and amortization... 17,815 419 882 26,888 3,418 13,123 62,545
Segment profit (loss)........... 1,129,358 (37,138) 28,861 121,605 29,780 (155,268) 1,117,198
Income tax expense (benefit).... 305,543 - 9,818 49,973 10,803 (124,422) 251,715
Segment assets.................. 39,888,282 - 143,990 2,525,743 1,496,738 3,611,575 47,666,328
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1999
-------------------------------------------------------------------------------------------------
WORKERS
PROPERTY/CASUALTY TITLE COMPENSATION ALL CONSOLIDATED
INSURANCE AGENCY ADMINISTRATION OTHER TOTALS
-------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues from external customers $ 6,087,080 $ 522,527 $ 137,632 $ - $ 6,747,239
Intersegment revenues........... 2,370 - - 2,610 4,980
Interest revenue................ 307,627 - - 6,116 313,743
Interest expense................ 780 718 20 39,339 40,857
Depreciation and amortization... 14,744 15,345 1,178 12,876 44,143
Segment profit (loss)........... 1,365,511 (24,883) (14,878) (71,403) 1,254,347
Income tax expense (benefit).... 407,120 - - (38,528) 368,592
Segment assets.................. 36,820,587 799,466 187,274 3,140,025 40,947,352
</TABLE>
9
<PAGE> 10
BANCINSURANCE CORPORATION
AND SUBSIDIARIES
Notes To Consolidated Financial Statements (Unaudited) (Continued)
<TABLE>
<CAPTION>
----------------------------------------------
MARCH 31, MARCH 31,
2000 1999
----------------------------------------------
REVENUES
---------
<S> <C> <C>
Total revenues for reportable segments..................................... $ 6,784,837 $ 6,747,239
Interest revenue........................................................... 395,448 313,743
Elimination of intersegment revenues....................................... (211,614) (4,980)
----------- -----------
Total consolidated revenues................................................ $ 6,968,671 $ 7,056,002
=========== ===========
PROFIT
------
Total profit for reportable segments....................................... $ 1,272,466 $ 1,325,750
Other loss ................................................................ (155,268) (71,403)
Elimination of intersegment profits........................................ (211,614) (4,980)
----------- -----------
Income before income taxes................................................. $ 905,584 $ 1,249,367
=========== ===========
ASSETS
------
Total assets for reportable segments....................................... $44,054,753 $37,807,327
Other assets............................................................... 3,611,575 3,140,025
Elimination of intersegment receivables.................................... (867,241) (1,338,280)
----------- -----------
Consolidated assets........................................................ $46,799,087 $39,609,072
=========== ===========
</TABLE>
6. On August 16, 1999, the Board of Directors adopted a common share
repurchase program. The program allows the Company to repurchase, from time
to time, up to a total of 500,000 of its common shares. The program will
expire on December 31, 2000. As of March 31, 2000, the Company repurchased
288,390 shares at an average price per share of $4.95 under this program.
Repurchases have been and will continue to be funded by cash flows from
operations.
7. On January 24, 2000, the Company sold 85.4 of the Company's 100 shares of
Custom Title Services, Inc. for $350,000 in the form of a promissory note.
The note bears interest at the prime rate, payable quarterly commencing
March 1, 2000, and is payable as to principal quarterly commencing March 1,
2002. The Company contributed the remaining 14.6 shares of Custom Title in
consideration of a 10% capital investment of $60,000 in the acquiring
company. The carrying amount of the investment is a reasonable estimate of
fair value. In connection with the sale transaction, the Company loaned
$91,000 to the acquiring company. The associated promissory note provides
for interest at the prime rate and is payable in full as to interest and
principal on August 1, 2000.
8. On July 19, 1999, the Company entered into an Agreement and Plan of Merger
with Westford Group, Inc., an Ohio corporation ("Westford"), whereby
Westford would be merged with and into the Company. On February 29, 2000,
the shareholders of Westford approved the merger. The Company paid the
Westford shareholders cash in the amount of $.70 per share for each share
of Westford common stock, without par value. The total amount of the merger
consideration paid by the Company was $958,094. The Company paid the merger
consideration from existing cash reserves. Immediately following the new
merger, Westford was dissolved and Westford's wholly-owned subsidiary,
American Legal Publishing Corporation ("ALPC") became the surviving entity
as a wholly-owned subsidiary of the Company. ALPC offers a wide range of
publishing services including information management, document imaging, and
electronic publishing solutions for state and local governments. They
currently publish, supplement and distribute codes of ordinances for over
1,000 municipalities. The merger was accounted for as a purchase and,
accordingly, the Company's financial statements reflect them from the date
of acquisition. The excess of the fair value of net assets acquired over
the purchase price of approximately $440,780 was allocated to a database
acquired. Pro forma data for the merger is not included as the effect is
not material to the Company's financial statements. The database is
comprised of the municipal code data and related files. Provision for
amortization of the database is based on an estimated useful life of twenty
years reflecting the long-lived nature of the municipal codes.
10
<PAGE> 11
BANCINSURANCE CORPORATION
AND SUBSIDIARIES
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Bancinsurance Corporation is a specialty property insurance holding company. Our
principal sources of revenue are premiums paid by insureds for insurance
policies issued by us. Premium volume principally is earned as written due to
the nature of the monthly policies issued by the us for our major line of
insurance coverage. Our principal costs are losses and loss adjustment expenses.
The principal factor in determining our level of 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. We are required to maintain reserves for
payment of estimated losses and loss adjustment expenses for both reported
claims and incurred but not reported or IBNR claims. The ultimate liability
incurred by us 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. We
review case and IBNR reserves monthly and make appropriate adjustments.
During 1993, BCIS Services, Inc. was incorporated as our wholly-owned
subsidiary. BCIS Services provides workers' compensation professional
administration and cost control services to employers who self-insure this
obligation. BCIS Services derives its revenues principally from claims
administration fees. On August 25, 1999, Paul Boardway and Associates, Inc. was
acquired as our wholly-owned subsidiary. Paul Boardway is a property/casualty
insurance agency serving lending institutions and derives its revenues
principally from commission fees. On February 29, 2000, American Legal
Publishing Corporation was merged with and into us as a wholly-owned subsidiary.
American Legal Publishing's primary business consists of the codification of
municipal and county codes of ordinances and the supplementing thereof.
SUMMARY RESULTS
The following table sets forth period to period changes in selected financial
data:
<TABLE>
<CAPTION>
-----------------------------------------------------------
Period to Period Increase (Decrease)
Three Months Ended March 31,
-----------------------------------------------------------
1999-2000
-----------------------------------------------------------
Amount % Change
------ --------
<S> <C> <C>
Premiums written.............................................. $ (543,300) (6.4) %
Net premiums earned........................................... (88,552) (1.6) %
Net investment income......................................... (24,144) (5.9) %
Total revenue................................................. (87,331) (1.2) %
Loss and loss adjustment expenses,
net of reinsurance recoveries................................ (54,341) (1.5) %
Operating expenses............................................ 257,123 12.6 %
Interest expense.............................................. 53,670 131.4 %
Operating income.............................................. (343,783) (27.5) %
Net income.................................................... (226,906) (25.8) %
</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
Company, a consolidated subsidiary, on both a statutory and GAAP basis for the
three months ended March 31:
11
<PAGE> 12
2000 1999
---------------------
Statutory:
Loss ratio.................................. 65.3% 65.3%
Expense ratio............................... 20.5% 16.5%
---- ----
Combined ratio.............................. 85.8% 81.8%
==== ====
GAAP:
Loss ratio.................................. 65.3% 65.3%
Expense ratio............................... 18.7% 16.4%
---- ----
Combined ratio.............................. 84.0% 81.7%
==== ====
Investments of Ohio Indemnity's assets are restricted to certain investments
permitted by the Ohio insurance laws. Our overall investment policy is
determined by our board of directors and is reviewed periodically. We
principally invest 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. We have 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 our fixed income securities mature, there can be no assurance that
we will be able to reinvest in securities with comparable yields.
RESULTS OF OPERATIONS
MARCH 31, 2000 AS COMPARED TO MARCH 31, 1999
Premiums Written; Premiums Earned. Premiums written decreased 6.4% from
$8,535,112 at March 31, 1999 to $7,991,812 at March 31, 2000 while premiums
earned decreased 1.6% from $5,704,178 at March 31, 1999 to $5,615,626 at March
31, 2000. Premiums written for Ultimate Loss Insurance increased 3.8% from
$4,444,380 in the first quarter of 1999 to $4,613,597 in 2000. Premiums earned
for Ultimate Loss Insurance increased 2.0% from $4,386,946 in the first quarter
of 1999 to $4,475,486 in 2000. Premiums increased for the comparable quarters
primarily due to acquisition and lending activities of existing policyholders.
Premiums written for the Bonded Service program decreased 18.6% from $4,062,598
in the first quarter of 1999 versus $3,307,744 in 2000, while premiums earned
from the Bonded Service program decreased 17.0% from $1,233,159 to $1,023,308
during the first quarter of 1999 and 2000. The decreases in premiums written and
premiums earned on the Bonded Service program were primarily attributable to a
reduction in premium associated with a decline in risk exposure resulting from
higher deductibles on two significant policies and the loss of a trust.
Net Investment Income. Net investment income decreased 5.9% from $411,130 in the
first quarter of 1999 to $386,986 the first quarter of 2000, due to a decrease
in realized investment losses which were $27,309 in the first quarter of 2000
compared to $76,845 in the first quarter of 1999.
Codification and Subscription Fees. Codification and subscription fees generated
by American Legal Publishing, a consolidated subsidiary, accounted for $170,261
of the revenues for the first quarter of 2000. American Legal Publishing was
merged with and into us on February 29, 2000.
Claims Administration Fees. Claims administration fees generated by BCIS
Services, a consolidated subsidiary, accounted for $137,632 of the revenues
during the first quarter of 1999 and $201,073 during 2000. The increase of 46.1%
was attributable to claims processing and servicing responsibilities provided to
two clients acquired by BCIS Services during the second half of 1999.
Title and Appraisal Fees. Title services and appraisal fees generated by Custom
Title Services, Inc., a consolidated subsidiary, accounted for $522,383 of the
revenues during the first quarter of 1999 and $115,724 during the first quarter
of 2000. On January 24, 2000, we sold Custom Title. See Note 7 to the Notes to
Consolidated Financial Statements.
Management Fees. Management fees increased from $260,864 during the first
quarter of 1999 to $374,671 in 2000. The increase was attributable to
recognition of more favorable results from a closed year of operations of the
Bonded Service program. We expect management fees to vary from year to year
depending on claims experience in the Bonded Service program.
Commission Fees. Net commission fees generated by Paul Boardway, a consolidated
subsidiary, accounted for $65,247 of revenues during the first quarter of 2000.
Paul Boardway was acquired by us during the third quarter of 1999.
12
<PAGE> 13
Losses and Loss Adjustment Expenses, Net of Reinsurance Recoveries. Losses and
loss adjustment expenses totaled $3,722,616, or 65.3% of net premiums earned
during the first quarter of 1999, versus $3,668,275, or 65.3% of net premiums
earned during the first quarter of 2000. Losses and loss adjustment expenses, as
a percentage of net premiums earned, remained constant for the comparable
period. Loss and loss adjustment expenses for the Ultimate Loss Insurance
program remained relatively constant from $3,406,876 in the first quarter of
1999 to $3,413,092 in the first quarter of 2000. Losses and loss adjustment
expenses for the Bonded Service program decreased 79.4% from $185,855 in 1999 to
$38,329 in 2000 primarily due to favorable loss experience on reserves for prior
accident years, and further complemented by a decrease in the loss and loss
adjustment expense ratio for losses and loss adjustment expenses occurring in
the current accident year.
Operating Expenses. Operating expense consists of commission expense, other
insurance operating expense, cost of sales and general and administrative
expenses. Operating expenses increased 12.6% from $2,043,162 in the first
quarter of 1999 to $2,300,285 in the first quarter of 2000. Commission expense
decreased 29.0% from $852,701 in the first quarter of 1999 to $605,674 in the
first quarter of 2000, primarily due the elimination of intersegment commission
expense of $207,834 incurred in connection with Paul Boardway. Prior to August
25, 1999, Paul Boardway was an unaffiliated independent insurance agency.
Subsequent to the acquisition, all intercompany commission transactions and
balances have been eliminated in consolidation. Other insurance operating
expenses increased 82.7% from $428,239 in the first quarter of 1999 to $782,240
in the first quarter of 2000, primarily due to increases in allocable salaries
and related benefits, consulting and computer services, legal and insurance
department licenses and fees. General and administrative expenses increased 7.3%
from $762,222 in the first quarter of 1999 to $817,991 in the first quarter of
2000 primarily due to increases in temporary services, amortization, shareholder
expense and outside computer services. BCIS Services incurred operating expenses
of $152,510 in the first quarter of 1999 compared with $172,297 in the first
quarter of 2000. Custom Title's operating expenses decreased from $547,410
during the three months ended March 31, 1999 compared with $152,861 in 2000.
Custom Title discontinued business operations under our ownership January 24,
2000. Paul Boardway incurred operating expenses of $151,995 the first quarter of
2000. American Legal Publishing incurred operating expenses of $140,618 in
March, 2000.
Interest Expense. Interest expense increased from $40,857 in the first quarter
of 1999 to $94,527 in the first quarter of 2000 due to higher borrowing levels
on our revolving credit line and increases in the prime rate .
Federal Income Taxes. Federal income taxes decreased 31.7% from $368,592 during
the first quarter of 1999 to $251,715 in 2000, respectively. The effective
consolidated income tax rate was 29.5% for the quarter ended March 31, 1999 and
27.8% for the quarter ended March 31, 2000.
Statutory Combined Ratios. The change in the statutory combined ratio from 81.8%
at March 31, 1999 to 85.8% March 31, 2000 was an anticipated increase in the
loss ratio due to management's continuing emphasis on larger accounts in the
Ultimate Loss Insurance program.
DISCONTINUED PRODUCTS
On January 24, 2000, we entered into an agreement for the sale of Custom Title
Services, Inc. as part of an overall strategy to focus on historically
profitable core lines of business. Our management does not expect this
transaction to have a material adverse effect on our operating results.
LIQUIDITY AND CAPITAL RESOURCES
We are an insurance holding company whose principal asset is the stock of Ohio
Indemnity. We are, and will continue to be, dependent on dividends from Ohio
Indemnity to meet its liquidity requirements, including debt service
obligations. We have a $10 million credit facility to fund working capital
requirements. Based on statutory limitations, the maximum amount of dividends
that we would be able to receive in 2000 from Ohio Indemnity, absent regulatory
consent, is $3,644,602.
Ohio Indemnity derives its funds principally from net premiums written,
reinsurance recoveries, investment income and contributions of capital from us.
The principal use of these funds is for payment of losses and loss adjustment
expenses, commissions, operating expenses and income taxes. Net cash provided by
operating activities equalled $1,867,833 and $2,431,032 for the quarter ended
March 31, 2000 and 1999, respectively. Net cash provided by (used in) financing
activities was $1,095,129 for the quarter ended March 31, 2000 and $(250,000)
for the quarter ended March 31, 1999. Net cash used in our investing activities
was $2,964,468 and $1,532,973 for the quarter ended March 31, 2000 and 1999,
respectively.
BCIS Services derives its funds principally from claims administration fees,
American Legal Publishing from codification and subscription fees and Paul
Boardway from commission 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 these business segments, our management
believes our effective capital costs may increase. Management is actively
exploring further avenues for preserving capital and improving liquidity.
13
<PAGE> 14
Our balance sheet liquidity remains favorable as evidenced by invested assets
that significantly exceed liabilities. The liquidity position has been enhanced
by increased premiums, positive underwriting, favorable loss experience and
investment income.
We maintain a level of cash and liquid short-term investments which it believes
will be adequate to meet anticipated payment obligations without being required
to liquidate intermediate-term and long-term investments through the next twelve
months. Due to the nature of the risks we insure, 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, we believe that it
can estimate its cash needs to meet its loss and expense payment obligations
through the next twelve months.
Our investments at March 31, 2000 consisted primarily of investment-grade fixed
income securities. Cash and short-term investments at March 31, 2000 amounted to
$9,516,594, or 25.9% of total cash and invested assets. The fair values of our
held to maturity fixed income securities are subject to market fluctuations but
are carried on the balance sheet at amortized cost because we have 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
accumulated other comprehensive income. We earned net investment income of
$386,986 and $411,130 for the three months ended March 31, 2000 and 1999,
respectively.
Interest rate risk is the risk that interest rates will change and cause a
decrease in the value of an insurer's investments. We mitigate this risk by
attempting to ladder 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, we would have to sell assets prior to maturity and recognize
a gain or loss.
Our total shareholders' equity increased $2,066,243 to $25,308,133 at March 31,
2000, from $23,241,890 at March 31, 1999 representing a 8.9% increase over the
one-year period. Driven by profitable operating earnings, the increase in total
shareholders' equity has strengthened our capital position.
All material capital commitments and financial obligations are reflected in our
financial statements, except our 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 $248,500 and $350,875 at March 31, 2000 and 1999, 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.
DISCLOSURE ABOUT MARKET RISK
The following discussion about our risk-management activities includes
"forward-looking statements" that involve risk and uncertainties. Actual results
could differ materially from those projected in the forward-looking statements.
Market risk is the risk of loss arising from adverse changes in market rates and
prices, such as interest rates, foreign currency exchange rates, and other
relevant market rate or price changes. Market risk is directly influenced by the
volatility and liquidity in the markets in which the related underlying assets
are traded. The following is a discussion of our primary market risk exposures
and how those exposures are currently managed as of March 31, 2000. Our market
risk sensitive instruments are entered into for purposes other than trading.
The carrying value of our investment portfolio as of March 31, 2000 was
$34,404,086, 61.9% of which is invested in fixed maturity securities and 20.7%
of which is invested in short-term investments. The primary market risk to the
investment portfolio is interest rate risk associated with investments in fixed
maturity securities as well as fixed-rate short-term investments. Our exposure
to equity risk is not significant. We have no foreign exchange risk or direct
commodity risk.
For fixed maturity securities, the short-term liquidity needs and the potential
liquidity needs of the business are key factors in managing the portfolio. The
portfolio duration relative to the liabilities' duration is primarily managed
through cash market transactions. For additional information regarding our
objectives and strategies pertaining to the investment portfolio, see the
Liquidity and Capital Resources section of this Management's Discussion and
Analysis.
For our investment portfolio, there were no significant changes in our primary
market risk exposures or in how these exposures are managed compared to the year
ended December 31, 1999. We do not anticipate significant changes in our primary
market risk exposures or in how those exposures are managed in future reporting
periods based upon what is known or expected to be in effect in future reporting
periods.
14
<PAGE> 15
The fair values of loans to affiliates and notes payable would not be materially
different as compared to their fair values at December 31, 1999 as interest
rates have remained relatively consistent.
FACTORS TO CONSIDER FORWARD-LOOKING
Going forward, management will consider underwriting, acquisition and investment
opportunities which fit our strategy of penetrating niche markets. These
decisions will be in areas where management feels they have an understanding of
the underwriting and inherent risks. Management is intent on adding independent
agents to expand its market presence. We will further concentrate on penetrating
larger financial institutions for collateral protection insurance and expanding
financial institution programs to include mortgage collateral insurance.
Opportunities will be considered for underwriting additional non-profit
organizations as they continue to consolidate into national trusts and seek to
retain and transfer their unemployment claim exposure.
On January 24, 2000, we entered into an agreement for the sale of Custom Title
Services, Inc. as part of an overall strategy to focus on historically
profitable core lines of business. On February 29, 2000, Westford Group, Inc.
was merged with and into us. Management expects neither of these transactions
will have a material adverse effect on our operating results.
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 our liquidity,
capital resources or results of operations.
Our results of operations have varied from quarter to quarter principally
because of fluctuations in underwriting results. Our experience indicates that
more loans for automobile purchases are financed during summer months due to
seasonal consumer buying habits. Codification and subscription fees vary
principally because of fluctuations in production. Sales typically increase
during the second and third quarters as a result of sales to basic code
subscribers. We expect that such quarterly fluctuations may lesson as the
percentage of our new sales are made to clients with fiscal years other than
December 31, although there can be no assurance that this will occur.
FORWARD-LOOKING INFORMATION
Statements in this "Management's Discussion and Analysis of Financial Condition
and Results of Operations" that indicate our or management's intentions, hopes,
beliefs, expectations or predictions of the future are forward-looking
statements. It is important to note that our actual results could differ
materially from those projected in such forward-looking statements.
Forward-looking statements are not guarantees of performance. They involve
risks, uncertainties and assumptions. Our future results and shareholder values
may differ materially from those expressed in these forward-looking statements.
Many of the factors that will determine these results and values are beyond our
ability to control or predict. Shareholders are cautioned not to put undue
reliance on forward-looking statements. In addition, we do not have an intention
or obligation to update forward-looking statements after the date hereof, even
if new information, future events, or other circumstances have made them
incorrect or misleading. For those statements, we claim the protection of the
safe harbor for forward-looking statements contained in the Private Securities
Litigation Reform Act of 1995.
INFLATION
Although the cumulative effects of inflation on premium growth cannot be fully
determined, increases in the retail price of automobiles have generally resulted
in increased amounts being financed which constitutes one of the bases for
determining premiums on Ultimate Loss Insurance. Despite relatively low
inflation during 2000, we have experienced no material adverse consequences with
respect to its growth in premiums.
INSURANCE REGULATORY MATTERS
On June 20, 1997, the Ohio Department of Insurance issued its triennial
examination report on Ohio Indemnity as of December 31, 1996. The examiners
reported that the financial statements set forth in the report reflected the
financial condition of Ohio Indemnity. Management is not aware of any
recommendations by regulatory authorities which would have, or are reasonably
likely to have, a material effect on our 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 our analysis, it appears that our 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.
15
<PAGE> 16
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 our
claim obligations. 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 our results of operations. Our
independent consulting actuary has opined that loss and loss adjustment expense
reserve levels, as of December 31, 1999, were reasonable.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK
The information required by this item is included under the caption
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Disclosure About Market Risk".
PART II - OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
Item 27 Financial Data Schedule
(b) REPORTS ON FORM 8-K
A Form 8-K was filed by us as of February 29, 2000 (Item 5).
16
<PAGE> 17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, we have
duly caused this report to be signed on our behalf by the undersigned thereunto
duly authorized.
BANCINSURANCE CORPORATION
-------------------------
(Company)
Date: May 10, 2000 By: Si Sokol
--------------------- --------------------------------
Si Sokol
Chairman
(Principal Executive Officer)
Date: May 10, 2000 By: Sally Cress
--------------------- --------------------------------
Sally Cress
Treasurer and Secretary
(Principal Financial and Accounting Officer)
17
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<ARTICLE> 7
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<DEBT-HELD-FOR-SALE> 15,780,656
<DEBT-CARRYING-VALUE> 5,514,680
<DEBT-MARKET-VALUE> 5,092,613
<EQUITIES> 5,991,962
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 34,404,086
<CASH> 2,399,806
<RECOVER-REINSURE> 6,541
<DEFERRED-ACQUISITION> 743,338
<TOTAL-ASSETS> 46,799,087
<POLICY-LOSSES> 5,245,782
<UNEARNED-PREMIUMS> 4,725,163
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 6,900,000
0
0
<COMMON> 1,794,141
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5,615,626
<INVESTMENT-INCOME> 414,295
<INVESTMENT-GAINS> (27,309)
<OTHER-INCOME> 966,059
<BENEFITS> 3,668,275
<UNDERWRITING-AMORTIZATION> 2,300,285
<UNDERWRITING-OTHER> 94,527
<INCOME-PRETAX> 905,584
<INCOME-TAX> 251,715
<INCOME-CONTINUING> 653,869
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<NET-INCOME> 653,869
<EPS-BASIC> .11
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<RESERVE-OPEN> 5,273,000
<PROVISION-CURRENT> 6,511,000
<PROVISION-PRIOR> (2,843,000)
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