<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended September 30, 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 September 30, 2000
------------------------------- ---------------------------------
Common stock, without par value 5,875,113
<PAGE> 2
<TABLE>
BANCINSURANCE CORPORATION
AND SUBSIDIARIES
INDEX
-----
<CAPTION>
Page No.
<S> <C>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of
September 30, 2000 (unaudited) and December 31, 1999........................................3
Consolidated Statements of Income for the three months and
nine months ended September 30, 2000 and 1999 (unaudited)...................................5
Consolidated Statements of Comprehensive Income for the
three months and nine months ended September 30, 2000 and
1999 (unaudited)............................................................................6
Consolidated Statements of Cash Flows for the
nine months ended September 30, 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..............................................12
Item 3. Quantitative and Qualitative Disclosures About
Market Risk................................................................................19
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...........................................................19
Signatures.........................................................................................20
</TABLE>
2
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements
--------------------
<TABLE>
BANCINSURANCE CORPORATION
AND SUBSIDIARIES
Consolidated Balance Sheets
<CAPTION>
September 30, December 31,
Assets 2000 1999
------ ------------- ------------
(Unaudited) (Note 2)
<S> <C> <C>
Investments:
Held to maturity:
Fixed maturities, at amortized cost (fair value $5,298,388 in 2000 and
$4,897,428 in 1999) ................................................... $ 5,280,827 $ 4,902,028
Available for sale:
Fixed maturities, at fair value (amortized cost $14,371,341 in 2000
and $16,091,394 in 1999) .............................................. 14,192,520 15,649,618
Equity securities, at fair value (cost $4,949,464 in 2000 and
$4,409,620 in 1999) ................................................... 6,104,084 5,059,639
Short-term investments, at cost which approximates fair value ............. 3,612,512 4,254,006
Securities purchased under agreements to resell ........................... 1,775,926 2,393,198
----------- -----------
Total investments ...................................... 30,965,869 32,258,489
----------- -----------
Cash ........................................................................... 7,968,101 2,401,312
Premiums receivable ............................................................ 2,467,768 2,213,278
Accounts receivable, net of allowance for doubtful accounts .................... 442,881 459,684
Reinsurance receivable ......................................................... 1,500 2,250
Reinsurance recoverable on paid losses ......................................... 30,493 --
Prepaid reinsurance premiums ................................................... 94,400 80,420
Deferred policy acquisition costs .............................................. 489,807 219,193
Estimated earnings in excess of billings on uncompleted
codification contracts .................................................... 156,393 --
Loans to affiliates ............................................................ 1,271,039 635,420
Land and building, net ......................................................... 35,508 38,288
Furniture, fixtures and leasehold improvements, net ............................ 158,493 255,369
Excess of investment over net assets of subsidiaries, net ...................... 2,661,900 2,932,701
Intangible asset, net .......................................................... 427,926 --
Accrued investment income ...................................................... 326,079 338,117
Deferred federal income taxes .................................................. -- 324,114
Other assets ................................................................... 374,437 289,478
----------- -----------
Total assets ........................................... $47,872,594 $42,448,113
=========== ===========
</TABLE>
(Continued)
3
<PAGE> 4
<TABLE>
BANCINSURANCE CORPORATION
AND SUBSIDIARIES
Consolidated Balance Sheets, Continued
<CAPTION>
September 30, December 31,
Liabilities and Shareholders' Equity 2000 1999
------------------------------------ ------------- ------------
(Unaudited) (Note 2)
<S> <C> <C>
Reserve for unpaid losses and loss adjustment expenses ......................... $ 5,452,166 $ 5,272,601
Unearned premiums .............................................................. 2,638,330 2,430,776
Contract funds on deposit ...................................................... 2,162,805 2,272,177
Reinsurance premiums payable ................................................... 41,252 12,211
Note payable to bank ........................................................... 4,765,000 5,145,000
Acquisition liability .......................................................... 202,946 619,114
Taxes, licenses, and fees payable .............................................. 144,221 177,357
Return premiums payable ........................................................ 2,065,081 83,524
Federal income taxes payable ................................................... 572,759 90,068
Deferred federal income taxes .................................................. 193,039 --
Commissions payable ............................................................ 456,410 681,732
Billings in excess of estimated earnings on uncompleted
codification contracts .................................................... 67,678 --
Other .......................................................................... 934,056 470,264
----------- -----------
Total liabilities ................................................ 19,695,743 17,254,824
----------- -----------
Commitments and contingent liabilities ......................................... -- --
Shareholders' equity:
Non-voting preferred stock:
Class A Serial Preference shares without par value; authorized 100,000
shares; no shares issued or
outstanding .......................................................... -- --
Class B Serial Preference shares without par value;
authorized 98,646 shares; no shares issued or
outstanding .......................................................... -- --
Common stock without par value; authorized 20,000,000
shares; 6,170,341 shares issued ......................................... 1,794,141 1,794,141
Additional paid-in capital ................................................ 1,336,805 1,442,773
Accumulated other comprehensive income .................................... 644,027 137,440
Retained earnings ......................................................... 25,753,018 22,546,355
----------- -----------
29,527,991 25,920,709
Less: Treasury stock, at cost (295,228 and 147,292
common shares, respectively) .......................................... (1,351,140) (727,420)
----------- -----------
Total shareholders' equity ....................................... 28,176,851 25,193,289
----------- -----------
Total liabilities and shareholders' equity ....................... $47,872,594 $42,448,113
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE> 5
<TABLE>
BANCINSURANCE CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Income
(Unaudited)
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
---------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Income:
Premiums written ................................ $5,201,194 $6,388,893 $19,112,351 $20,718,099
(Increase) decrease in unearned premiums ........ 1,538,895 725,471 (242,852) (1,265,909)
---------- ---------- ----------- -----------
Premiums earned ................................. 6,740,089 7,114,364 18,869,499 19,452,190
Premiums ceded .................................. (59,138) (18,249) (173,367) (77,030)
---------- ---------- ----------- -----------
Net premiums earned ....................... 6,680,951 7,096,115 18,696,132 19,375,160
Investment income (net of expenses for nine
months of $67,285 and $77,742, respectively) .. 407,243 384,522 1,250,532 1,080,275
Net realized gain (loss) on investments ......... (60,399) 49,650 (176,992) 163,094
Codification and subscription fees .............. 565,219 -- 1,335,182 --
Claims administration fees ...................... 104,132 154,292 427,036 415,515
Title and appraisal fees ........................ -- 690,318 115,724 1,851,978
Management fees ................................. 75,147 285,504 521,703 864,702
Commission fees ................................. 22,262 50,054 129,363 50,054
Other income .................................... 9,301 20,529 950,353 71,385
---------- ---------- ----------- -----------
Total revenue ............................. 7,803,856 8,730,984 23,249,033 23,872,163
---------- ---------- ----------- -----------
Losses and operating expenses:
Losses and loss adjustment expenses ............. 3,625,605 4,705,565 11,092,231 12,019,266
Reinsurance recoveries .......................... 4,758 -- (41,209) --
Commission expense .............................. 911,534 1,054,455 2,423,209 2,933,096
Other insurance operating expenses .............. 705,219 619,139 2,369,543 1,711,709
General and administrative expenses ............. 644,972 864,355 2,501,634 2,711,868
Interest expense ................................ 52,554 37,210 232,548 119,907
---------- ---------- ----------- -----------
Total expenses ............................ 5,944,642 7,280,724 18,577,956 19,495,846
---------- ---------- ----------- -----------
Income before federal income taxes ........ 1,859,214 1,450,260 4,671,077 4,376,317
Federal income tax expense ......................... 619,481 415,317 1,464,413 1,277,601
---------- ---------- ----------- -----------
Net income ................................ $1,239,733 $1,034,943 $ 3,206,664 $ 3,098,716
========== ========== =========== ===========
Basic and diluted earnings per share ............... $ .21 $ .17 $ .54 $ .50
========== ========== =========== ===========
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE> 6
<TABLE>
BANCINSURANCE CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Comprehensive Income
(Unaudited)
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net income ............................................................... $1,239,733 $1,034,943 $3,206,664 $3,098,716
Other comprehensive income:
Unrealized holding gains (losses) arising
during the nine month period, net of income tax
(benefit) expense of $260,969 and $(281,010),
respectively ....................................................... 365,045 (314,337) 506,587 (547,223)
---------- ---------- ---------- ----------
Comprehensive income ..................................................... $1,604,778 $ 720,606 $3,713,251 $2,551,493
========== ========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE> 7
<TABLE>
BANCINSURANCE CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
<CAPTION>
Nine Months Ended
September 30,
2000 1999
------------ -----------
<S> <C> <C>
Cash flows from operating activities:
Net income ......................................................................... $ 3,206,664 $ 3,098,716
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 ......................................... 176,992 (163,094)
Net realized loss on disposal of equipment ...................................... 798 628
Net realized loss on debt forgiveness ........................................... 30,000 --
Depreciation and amortization ................................................... 199,370 164,395
Deferred federal income tax expense ............................................. 255,882 96,535
Change in premiums receivable ................................................... (254,490) (553,148)
Change in accounts receivable ................................................... 795,425 (144,595)
Change in other assets .......................................................... (672,899) (991,934)
Change in reserve for unpaid losses and loss adjustment expenses ................ 179,565 2,269,114
Change in unearned premiums ..................................................... 207,554 1,265,908
Change in return premium payable ................................................ 1,981,557 53,370
Change in other liabilities ..................................................... 100,721 (617,637)
------------ -----------
Net cash provided by operating activities .................................... 6,171,828 4,478,258
------------ -----------
Cash flows from investing activities:
Proceeds from held to maturity: fixed maturities due to redemption or maturity ..... 996,905 215,000
Proceeds from available for sale: fixed maturities sold, redeemed and matured ...... 4,113,784 3,847,756
Proceeds from available for sale equity securities sold ............................ 3,340,660 3,569,511
Cost of investments purchased:
Held to maturity: fixed maturities .............................................. (986,990) (200,000)
Available for sale: fixed maturities ............................................ (2,832,558) (7,916,695)
Equity securities ............................................................... (4,044,652) (3,889,755)
Net decrease in short-term investments ............................................. 641,494 218,350
Net (increase) decrease in securities purchased under agreements to resell ......... 617,272 (478,789)
Cash used in purchase of subsidiary ................................................ (958,094) (1,500,000)
Other .............................................................................. (83,171) (215,711)
------------ -----------
Net cash provided by (used in) investing activities .......................... 804,650 (6,350,333)
------------ -----------
Cash flows from financing activities:
Proceeds from note payable to bank ................................................. 12,665,000 7,200,000
Repayments of note payable to bank ................................................. (13,045,000) (6,250,000)
Proceeds from stock options exercised .............................................. 37,563 --
Acquisition of treasury stock ...................................................... (1,067,252) (231,760)
Dividends paid ..................................................................... -- (464)
------------ -----------
Net cash provided by (used in) financing activities .......................... (1,409,689) 717,776
------------ -----------
Net increase (decrease) in cash ....................................................... 5,566,789 (1,154,299)
------------ -----------
Cash at December 31 ................................................................... 2,401,312 4,582,168
------------ -----------
Cash at September 30 .................................................................. $ 7,968,101 $ 3,427,869
============ ===========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest ........................................................................... $ 208,789 $ 113,998
============ ===========
Income taxes ....................................................................... $ 745,000 $ 1,500,000
============ ===========
Supplemental schedule of non-cash investing activities:
Common stock issued in purchase acquisition ........................................ 300,000 --
Common stock received in debenture conversion ...................................... -- 50,000
</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 Sheets as of September 30, 2000, the Consolidated
Statements of Income for the three and nine months ended September 30, 2000 and
1999, the Consolidated Statements of Comprehensive Income for the three and nine
months ended September 30, 2000 and 1999, and the Consolidated Statements of
Cash Flows for the nine months then ended have been prepared by us without an
audit. In the opinion of our management, all adjustments (which include only
normal recurring adjustments) necessary to present fairly the financial
position, results of operations, and cash flow at September 30, 2000 and for all
periods presented have been made.
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10
Regulation S-X.
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 September 30, 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. We have 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 derivatives 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. Our balance sheet and
statements of earnings and cash flows were not materially impacted by the
adoption of this statement.
4. Supplemental Disclosure For Earnings Per Share
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
2000 1999 2000 1999
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net income .................................. $1,239,733 $1,034,943 $3,206,664 $3,098,716
---------- ---------- ---------- ----------
Weighted average common shares outstanding .. 5,844,241 6,129,291 5,906,678 6,133,195
Adjustments for dilutive securities:
Dilutive effect of outstanding options ...... 17,583 84,033 20,134 86,108
---------- ---------- ---------- ----------
Diluted common shares ....................... 5,861,824 6,213,324 5,926,812 6,219,303
========== ========== ========== ==========
Basic and diluted earnings per share ........ $ .21 $ .17 $ .54 $ .50
</TABLE>
8
<PAGE> 9
BANCINSURANCE CORPORATION
AND SUBSIDIARIES
Notes To Consolidated Financial Statements (Unaudited) (Continued)
On May 5, 1999, we declared a 5% common stock dividend to shareholders of record
on May 25, 1999. Accordingly, all common stock share data have been adjusted to
include the effect of the stock dividend.
5. We operate primarily in the property/casualty insurance industry. There are
intersegment management 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>
SEPTEMBER 30, 2000
-----------------------------------------------------------------------------------------------
Property/ Workers Municipal
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 .. $20,680,665 $ 115,724 $427,036 $ 129,363 $1,335,182 $ 5,850 $22,693,820
Intersegment revenues ............. 4,410 -- -- 571,258 -- 50,930 626,598
Interest revenue .................. 1,135,719 -- -- 53 -- 46,039 1,181,811
Interest expense .................. 5,724 90 -- 40 -- 226,694 232,548
Depreciation and amortization ..... 47,252 419 2,746 80,661 26,777 41,515 199,370
Segment profit (loss) ............. 4,870,005 (37,138) (29,844) 330,521 194,203 (30,072) 5,297,675
Income tax expense (benefit) ...... 1,475,562 -- -- 138,483 71,800 (221,432) 1,464,413
Segment assets .................... 42,110,387 -- 127,963 2,486,980 1,496,997 2,963,237 49,185,564
<CAPTION>
SEPTEMBER 30, 1999
----------------------------------------------------------------------------------
Property/ Workers
Casualty Title Compensation Insurance All Consolidated
Insurance Agency Administration Agency Other Totals
----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Revenues from external customers.. $20,558,117 $1,851,778 $415,515 $ 209,115 $ 70 $23,034,595
Intersegment revenues............. 7,110 -- -- 158,974 7,830 173,914
Interest revenue.................. 990,232 -- -- -- 21,250 1,011,482
Interest expense.................. 3,915 1,928 29 -- 114,035 119,907
Depreciation and amortization..... 46,699 47,614 3,528 17,518 49,036 164,395
Segment profit (loss)............. 4,745,569 35,971 (24,194) 130,620 (337,735) 4,550,231
Income tax expense (benefit)...... 1,400,063 14,452 -- 50,242 (187,156) 1,277,601
Segment assets.................... 37,146,588 938,961 238,129 2,296,128 3,457,432 44,077,238
</TABLE>
9
<PAGE> 10
BANCINSURANCE CORPORATION
AND SUBSIDIARIES
Notes To Consolidated Financial Statements (Unaudited) (Continued)
<TABLE>
<CAPTION>
---------------------------------
September 30, September 30,
2000 1999
---------------------------------
<S> <C> <C>
Revenues
--------
Total revenues for reportable segments ... $22,693,820 $23,034,595
Interest revenue ......................... 1,181,811 1,011,482
Elimination of intersegment revenues ..... (626,598) (173,914)
----------- -----------
Total consolidated revenues .............. $23,249,033 $23,872,163
=========== ===========
Profit
------
Total profit for reportable segments ..... $ 5,327,747 $ 4,887,966
Other loss ............................... (30,072) (337,735)
Elimination of intersegment profits ...... (626,598) (173,914)
----------- -----------
Income before income taxes ............... $ 4,671,077 $ 4,376,317
=========== ===========
Assets
------
Total assets for reportable segments ..... $46,222,327 $40,619,806
Other assets ............................. 2,963,237 3,457,432
Elimination of intersegment receivables .. (1,312,970) (1,440,603)
----------- -----------
Consolidated assets ...................... $47,872,594 $42,636,635
=========== ===========
</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 September 30, 2000, we have repurchased 385,570 shares at an average
price per share of $4.71 under this program. Repurchases have been and will
continue to be funded by cash flows from operations.
7. On January 24, 2000, we sold 85.4% of our 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. We contributed the
remaining 14.6 shares of Custom Title in consideration of a 10% capital
investment of $60,000 in the acquiring company. In connection with the sale
transaction, we 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 February 1, 2001.
8. On July 19, 1999, we entered into an Agreement and Plan of Merger with
Westford Group, Inc., an Ohio corporation ("Westford"), whereby Westford would
be merged with and into Bancinsurance. On February 29, 2000, the shareholders of
Westford approved the merger. We 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 us was $958,094. We
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 Bancinsurance. 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, our 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
Notes To Consolidated Financial Statements (Unaudited) (Continued)
9. Included in other income is a $900,000 payment received in May 2000, in
connection with the settlement of a dispute with an unaffiliated party.
10. On July 11, 2000, the Company entered into an Agreement to Rescind and
Release a policy which provided coverage to auto dealers (or agents) who sold
auto warranty contracts. The policy rescission resulted in an underwriting gain
of $243,000 for the nine months ended September 30, 2000 primarily due to the
release of reserves associated with the discontinued program.
11. On October 6, 2000, we sold our wholly-owned subsidiary, BCIS Services,
Inc., for $40,000. A $24,625 gain on disposal of subsidiary will be realized in
the fourth quarter of 2000. The business operates as a third party administrator
specializing in certain workers' compensation programs. Claims administration
fees represented 1.8% and 1.7% of our total revenues for the nine months ended
September 30, 2000 and 1999, respectively.
11
<PAGE> 12
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 our wholly-owned subsidiary, Ohio Indemnity Company ("Ohio
Indemnity"). Premium volume principally is earned as written due to the nature
of the monthly policies we issue. Our principal costs are losses and loss
adjustment expenses. The principal factor in determining the level of our profit
is the difference between these premiums earned, investment income and losses
and loss adjustment expenses incurred.
Losses 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 claims. The ultimate liability incurred by
us may be different from current reserve estimates.
Losses and loss adjustment expense reserves for incurred but not reported 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 incurred but not reported 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, we acquired Paul Boardway and
Associates, Inc. Paul Boardway and Associates 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
became a wholly-owned subsidiary through a merger. 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
Nine Months Ended September 30,
-------------------------------
1999-2000
-------------------------------
Amount % Change
-------------------------------
<S> <C> <C>
Premiums written ........................................ $(1,605,748) (7.8)%
Net premiums earned ..................................... (679,028) (3.5)%
Net investment income ................................... (169,829) (13.7)%
Total revenue ........................................... (623,130) (2.6)%
Losses and loss adjustment expense, net of reinsurance
recoveries ............................................ (968,244) (8.1)%
Operating expense ....................................... (62,287) (.8)%
Interest expense ........................................ 112,641 93.9%
Operating income ........................................ 294,760 6.7%
Net income .............................................. 107,948 3.5%
</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 ("Ohio Indemnity), a consolidated subsidiary, on both a statutory and
GAAP basis for the nine months ended September 30:
12
<PAGE> 13
BANCINSURANCE CORPORATION
AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of
---------------------------------------
Financial Condition and Results of Operations (Continued)
---------------------------------------------
<TABLE>
<CAPTION>
2000 1999
----------------
<S> <C> <C>
Statutory:
Loss ratio......................................... 59.1% 62.0%
Expense ratio...................................... 27.0% 24.1%
---- ----
Combined ratio..................................... 86.1% 86.1%
==== ====
GAAP:
Loss ratio......................................... 59.1% 62.0%
Expense ratio...................................... 25.4% 23.1%
---- ----
Combined ratio..................................... 84.5% 85.1%
==== ====
</TABLE>
Investments of Ohio Indemnity's assets are restricted to the investments
permitted by Ohio's 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 these investments
is tax-exempt and these investments have generally resulted in favorable net
yields. We have the ability and intent to hold our held to maturity fixed income
securities to maturity or the applicable put date, and as a result we carry our
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
September 30, 2000 as Compared to September 30, 1999
Premiums Written; Premiums Earned. Premiums written for the nine months ended
September 30, 2000 decreased 7.8% from $20,718,099 at September 30, 1999 to
$19,112,351 and premiums earned decreased 3.5% from $19,375,160 at September 30,
1999 to $18,696,132 at September 30, 2000. Premiums written decreased 18.6% for
the three months ended September 30, 1999 versus September 30, 2000,
respectively, and premiums earned decreased 5.9% for the same third quarter
comparables. Premiums written for Ultimate Loss Insurance remained relatively
constant from $16,087,673 in the first nine months of 1999 to $16,391,617 in the
first nine months of 2000. Premiums earned from Ultimate Loss Insurance remained
relatively constant from $15,766,967 in the first nine months of 1999 to
$15,799,482 in the first nine months of 2000. Premiums written for Ultimate Loss
Insurance remained relatively constant from $6,084,067 for the three months
ended September 30, 1999 to $6,062,299 for the three months ended September 30,
2000. Premiums earned for Ultimate Loss Insurance remained relatively constant
from $5,894,356 during the third quarter of 1999 versus $5,865,565 for the third
quarter of 2000. Premiums written for the Bonded Service program decreased 19.9%
from $4,491,284 for the nine months ended September 30, 1999 versus $3,595,856
in 2000, while premiums earned from the Bonded Service program decreased 18.8%
from $3,499,508 to $2,842,362 during the first nine months of 1999 and 2000,
respectively. Premiums written decreased 18.0% and premiums earned decreased
6.9% for the Bonded Service program for the three months ended September 30,
1999 versus 2000, respectively. 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. In addition, the decline in premiums
written in the third quarter of 2000 was significantly affected by a $1,250,592
return of premium related to the rescission of a policy which provided coverage
to auto dealers who sold auto warranty contracts. The policy represented earned
premium of $(61,241) during the nine months ended September 30, 2000. See note
10 to the Notes to Consolidated Financial Statements.
13
<PAGE> 14
BANCINSURANCE CORPORATION
AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
---------------------------------------------
Net Investment Income. Net investment income decreased 13.7% from $1,243,369 in
the first nine months of 1999 to $1,073,540 in the first nine months of 2000,
and decreased 20.1% from $434,172 in the three months ended September 30, 1999
to $346,844 in the three months ended September 30, 2000. These decreases were
due to realized investment losses which were $176,992 and $60,399 in the first
nine months and third quarter of 2000, respectively, compared to realized
investment gains of $163,094 and $49,650 in the first nine months and third
quarter of 1999, respectively. In September 2000, the 10% capital investment in
the company which acquired Custom Title Services was deemed impaired. The
impairment was recognized when the future undiscounted cash flow of the asset
was estimated to be insufficient to recover its related carrying value. A
$60,000 loss is included in net realized loss on investments in the Consolidated
Statements of Income.
Codification and Subscription Fees. Codification and subscription fees generated
by our American Legal Publishing subsidiary accounted for $1,335,182 and
$565,219 of the revenues for the nine months and three months ended September
30, 2000. On February 29, 2000, American Legal Publishing became a wholly-owned
subsidiary through a merger.
Claims Administration Fees. Claims administration fees generated by our BCIS
Services subsidiary accounted for $415,515 of the revenues for the first nine
months of 1999 and $427,036 in the first nine months of 2000. Claims
administration fees accounted for $154,292 and $104,132 of the revenues for the
three months ended September 30, 1999 and 2000, respectively. The nine month
increase of $11,512 was attributable to claims processing and servicing
responsibilities provided to two clients acquired by BCIS Services during the
second half of 1999. The third quarter claims administration fees declined due
to a reduction in claims administration services to a new client. See Note 11 to
the Notes to Consolidated Financial Statements.
Title and Appraisal Fees. Title Services and appraisal fees generated by our
Custom Title Services subsidiary accounted for $1,851,978 and $115,724 of the
revenues for the first nine months of 1999 and 2000, respectively. On January
24, 2000, we sold Custom Title. See Note 7 to our Consolidated Financial
Statements.
Management Fees. Management fees decreased from $864,702 during the nine months
ended September 30, 1999 to $521,703 in the nine months ended September 30,
2000. Management fees decreased from $285,504 for the three months ended
September 30, 1999 to $75,147 for the three months ended September 30, 2000. The
decrease was attributable to recognition of less 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 our Paul Boardway and
Associates subsidiary accounted for $50,054 of revenues for the nine and three
month period ending September 30, 1999 compared to $129,363 and $22,262 of
revenues during the nine and three months ended September 30, 2000. Paul
Boardway and Associates was acquired by us during the third quarter of 1999.
Other income. Other income increased by $878,968 to $950,353 for the nine months
ended September 30, 2000, as compared to $71,385 for the nine months ended
September 30, 1999. Other income decreased by $11,228 to $9,301 for the three
months ended September 30, 2000 from $20,529 for the three months ended
September 30, 1999. The nine month increase is attributable to other income of
$900,000 received by us in the second quarter of 2000 in settlement of a dispute
with an unaffiliated party.
Losses and Loss Adjustment Expenses, Net of Reinsurance Recoveries. Losses and
loss adjustment expenses totaled $12,019,266, or 62.0% of net premiums earned
during the first nine months of 1999 versus $11,051,022, or 59.1% of net
premiums earned during the first nine months of 2000. Losses and loss adjustment
expenses totaled $3,630,363 or 54.3% of net premiums earned during the third
quarter of 2000 versus $4,705,565, or 66.3% of net premiums earned during the
third quarter of 1999. Losses and loss adjustment expenses for the Ultimate Loss
Insurance program remained relatively constant from $11,116,223 during the nine
months ended September 30, 1999 to $10,913,170 during the nine months ended
September 30, 2000. Losses and loss adjustment expenses for the Ultimate Loss
Insurance program decreased 4.2%
14
<PAGE> 15
BANCINSURANCE CORPORATION
AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
---------------------------------------------
from $4,182,728 during the three months ended September 30, 1999 to $4,007,012
during the three months ended September 30, 2000. Losses and loss adjustment
expenses for the Bonded Service program decreased 31.7% from $215,075 in 1999 to
$146,805 in 2000, and remained relatively constant from $112,436 to $115,605 for
the three months ended September 1999 and 2000, respectively. These decreases
were primarily due to favorable loss experience on reserves for prior accident
years, and further complemented by the release of $304,664 of loss reserves
associated with the rescission of the auto warranty contract program. See Note
10 to the Notes to Consolidated Financial Statements.
Operating Expense. Operating expense consists of commission expense, other
insurance operating expense and general and administrative expenses. Operating
expense remained relatively constant from $7,356,673 for the nine months ended
September 30, 1999 compared with $7,294,386 during the nine months ended
September 30, 2000. Operating expense decreased 10.9% from $2,537,949 to
$2,261,725 during the three months ended September 30, 1999 and 2000,
respectively. Commission expense decreased 17.4% from $2,933,096 for the nine
months ended September 30, 1999 to $2,423,209 for the nine months ended
September 30, 2000. Commission expense decreased 13.6% from $1,054,455 to
$911,534 in the third quarter, primarily due to the elimination of intersegment
commission expense of $571,258 and $158,974 for the nine months ended September
30, 2000 and 1999, respectively, incurred in connection with our Paul Boardway
and Associates subsidiary. Prior to August 25, 1999, Paul Boardway and
Associates 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 38.4%
from $1,711,709 in the first nine months of 1999 to $2,369,543 in the first nine
months of 2000 and increased 13.9% from $619,139 to $705,219 during the three
months ended September 30, 1999 and 2000, respectively, primarily due to
increases in computer consulting services, taxes, licenses and fees, allocable
salaries and related benefits and legal expense. General and administrative
expenses decreased 7.8% from $2,711,868 in the first nine months of 1999 to
$2,501,634 in the first nine months of 2000. General and administrative expenses
decreased 25.4% from $864,355 to $644,972 in the third quarter of 1999 versus
2000, respectively, primarily due to decreases in title business expenses,
salaries and related benefits, rent and bad debt expense. BCIS Services incurred
operating expenses of $439,680 in the first nine months of 1999 compared with
$456,880 during the first nine months of 2000 and decreased 23.6% from $52,953
during the third quarter of 1999 to $40,449 during the third quarter of 2000 due
to a decline in claims administration services to a new client. Custom Title
discontinued business operations under our ownership January 24, 2000. Paul
Boardway and Associates incurred operating expenses of $351,687 during the nine
months ended September 30, 2000 and $75,578 in the third quarter of 2000 versus
$78,495 for both the nine months and three months ended September 30, 1999.
American Legal Publishing incurred operating expenses of $1,141,227 and $499,411
for the nine months and three months ended September 2000, respectively.
Interest Expense. Interest expense increased from $119,907 in the first nine
months of 1999 to $232,548 in the first nine months of 2000 and increased from
$37,210 for the three months ended September 30, 1999 versus $52,554 for the
three months ended September 30, 2000 due to higher borrowing levels on our
revolving credit line, increases in the prime rate, and interest expense related
to acquisition liabilities.
Federal Income Taxes. Federal income taxes increased 14.6% from $1,277,601 in
the first nine months of 1999 to $1,464,413 in the first nine months of 2000 and
increased 49.2% from $415,317 to $619,481 in the third quarter, respectively.
The effective consolidated income tax rate was 29.2% and 31.4% for the nine
months ended September 1999 and 2000, respectively and 28.6% for the quarter
ended September 30, 1999 and 33.3% for the quarter ended September 30, 2000.
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. On July 11, 2000, we entered into an
Agreement to Rescind and Release a significant policy for a product which
provided coverage to auto dealers (or agents) who sold auto warranty contacts.
Our management does not expect either of these transactions to have a material
adverse effect on our operating results.
15
<PAGE> 16
BANCINSURANCE CORPORATION
AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
---------------------------------------------
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 our liquidity requirements, including debt service
obligations. We have a $10 million credit facility to fund working capital
requirements. The annual renewal of the revolving line of credit is expected
during the fourth quarter of 2000. 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 equaled
$6,171,828 and $4,478,258 for the nine months ended September 30, 2000 and 1999,
respectively. Net cash provided by (used in) financing activities was
$(1,409,689) for the nine months ended September 30, 2000 and $717,776 for the
nine months ended September 30, 1999. Net cash provided by (used in) our
investing activities was $804,650 and $(6,350,333) for the nine months ended
September 30, 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 and Associates from commission fees which are sufficient to meet their
respective operating obligations. We have pursued selected growth opportunities
to build upon existing strengths and industry experience. As each business
segment is continually evaluated with goals of increased revenue and
profitability, management will reposition assets to those areas which contribute
to our overall financial objectives.
Our balance sheet remains favorable as evidenced by invested assets that exceed
liabilities. The liquidity position has been enhanced by positive underwriting
and favorable loss experience.
We maintain a level of cash and liquid short-term investments which we believe
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 our 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 we
can estimate our cash needs to meet our loss and expense payment obligations
through the next twelve months.
Our investments at September 30, 2000 consisted primarily of investment-grade
fixed income securities. Cash and short-term investments at September 30, 2000
amounted to $13,356,539 or 34.3% 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 $1,073,540 and $1,243,369 for the nine months ended September 30, 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.
We have produced favorable equity growth over the past year, driven by operating
earnings which were tempered by our stock repurchase program. Management
believes we are sufficiently capitalized to support future business growth.
16
<PAGE> 17
BANCINSURANCE CORPORATION
AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
---------------------------------------------
All our 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 these programs for any
claims filed and for an estimate of incurred but not reported losses. These
reserves were $288,000 and $356,625 at September 30, 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 September 30, 2000. Our
market risk sensitive instruments are entered into for purposes other than
trading.
The carrying value of our investment portfolio as of September 30, 1999 was
$30,965,869, 62.9% of which is invested in fixed maturity securities and 17.4%
of which is invested in short-term securities. 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.
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 our 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.
17
<PAGE> 18
BANCINSURANCE CORPORATION
AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
---------------------------------------------
On January 24, 2000, we sold Custom Title Services, Inc. and on October 6, 2000,
we sold BCIS Services, Inc. as part of an overall strategy to reposition assets
to those areas which contribute to our overall financial objectives. On February
29, 2000, we acquired Westford Group, Inc. Management does not expect any 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 adverse 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 lessen 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. Some of the factors that could cause actual
results to differ from our forward-looking statements include the following: (i)
the demand for Ultimate Loss and Bonded Service insurance will vary with factors
beyond the control of our Company such as changes in interest rates, level of
automobile financing activity, cost of automobiles, consumer confidence,
unemployment levels, inflation and general economic activity; (ii) the risk that
losses from claims are greater than anticipated such that reserves for possible
claims are inadequate; (iii) the risk that unanticipated adverse changes in
securities markets could result in material losses on investments made by our
Company; and (iv) the dependence on key management personnel with skills
critical to the long-term success of the Company.
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
18
<PAGE> 19
BANCINSURANCE CORPORATION
AND SUBSIDIARIES
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations (Continued)
---------------------------------------------
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.
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 incurred but not
reported 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 claims 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 losses 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
-------------------
No reports on Form 8-K were filed by the Company during the
quarter ended September 30, 2000.
19
<PAGE> 20
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)
Date: November 8, 2000 By: Si Sokol
--------------------- --------------------------------------------
Si Sokol
Chairman and Chief Executive Officer
(Principal Executive Officer)
Date: November 8, 2000 By: Sally Cress
--------------------- --------------------------------------------
Sally Cress
Treasurer and Secretary
(Principal Financial and Accounting Officer)
20
