10-Q 1 l89428ae10-q.txt BANCINSURANCE CORPORATION 10-Q/QTR END 6-30-01 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 Quarterly Period Ended June 30, 2001 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.) 250 East Broad Street, Columbus, Ohio 43215 ------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) (614) 228-2800 -------------------------------------------------------------------------------- (Registrant's telephone number, including area code) 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 12 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 June 30, 2001 ---------------------------------- ------------------------------ Common shares, without par value 5,770,185 2 BANCINSURANCE CORPORATION AND SUBSIDIARIES INDEX Page No. PART I - FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Balance Sheets as of June 30, 2001 (unaudited) and December 31, 2000......................................................3 Consolidated Statements of Income for the three months and six months ended June 30, 2001 and 2000 (unaudited)..................................................5 Consolidated Statements of Comprehensive Income for the three months and six months ended June 30, 2001 and 2000 (unaudited).....................................................................................6 Consolidated Statements of Cash Flows for the six months ended June 30, 2001 and 2000 (unaudited)..................................................7 Notes to Consolidated Financial Statements (unaudited)....................................................8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations......................................................10 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 Records...................................................Not Applicable Item 3. Defaults Upon Senior Securities............................................................Not Applicable Item 4. Submission of Matters to a Vote of Security Holders ...............................................16 Item 5. Other Information .........................................................................Not Applicable Item 6. Exhibits and Reports on Form 8-K...................................................................16 Signatures.................................................................................................17
2 3 PART I - FINANCIAL INFORMATION ITEM 1. Financial Statements BANCINSURANCE CORPORATION AND SUBSIDIARIES Consolidated Balance Sheets
June 30, December 31, Assets 2001 2000 ------ ----------- ----------- (Unaudited) (Note 2) Investments: Held to maturity: Fixed maturities, at amortized cost (fair value $5,258,918 in 2001 and $5,144,356 in 2000) .............................. $ 5,153,003 $ 5,048,466 Available for sale: Fixed maturities, at fair value (amortized cost $15,969,828 in 2001 and $14,323,397 in 2000) ............................ 16,010,417 14,486,863 Equity securities, at fair value (cost $5,834,266 in 2001 and $3,852,659 in 2000) ......................................... 6,148,731 4,823,438 Short-term investments, at cost which approximates fair value ................................................... 3,962,249 6,019,440 ----------- ----------- Total investments .................................................. 31,274,400 30,378,207 ----------- ----------- Cash ............................................................................. 10,731,003 6,560,778 Premiums receivable .............................................................. 5,489,878 2,591,617 Accounts receivable, net of allowance for doubtful accounts ...................... 494,737 441,315 Reinsurance receivable ........................................................... 16,500 20,250 Reinsurance recoverable on paid losses ........................................... 49,589 99,631 Prepaid reinsurance premiums ..................................................... 432,256 50,048 Deferred policy acquisition costs ................................................ 1,608,640 642,787 Estimated earnings in excess of billings on uncompleted codification contracts.... 127,964 159,295 Loans to affiliates .............................................................. 626,740 533,039 Notes receivable ................................................................. 400,000 441,000 Land and building, net ........................................................... -- 34,546 Furniture and equipment, net ..................................................... 196,496 134,691 Excess of investment over net assets of subsidiaries, net ........................ 2,585,236 2,635,424 Intangible asset, net ............................................................ 887,894 422,416 Accrued investment income ........................................................ 406,605 336,803 Amount due from broker ........................................................... -- 100,000 Other assets ..................................................................... 437,818 319,137 ----------- ----------- Total assets ............................................. $55,765,756 $45,900,984 =========== ===========
(Continued) 3 4 BANCINSURANCE CORPORATION AND SUBSIDIARIES Consolidated Balance Sheets, Continued
June 30, December 31, Liabilities and Shareholders' Equity 2001 2000 ------------------------------------ ----------- ------------ (Unaudited) (Note 2) Reserve for unpaid losses and loss adjustment expenses.............................. $ 4,030,900 $ 2,958,615 Unearned premiums................................................................... 5,656,051 2,740,418 Experience rating adjustments payable............................................... 4,145,850 1,316,563 Retrospective premium adjustments payable........................................... 1,600,952 855,567 Funds held under reinsurance treaties............................................... 416,683 - Contract funds on deposit........................................................... 2,113,606 2,073,529 Note payable ...................................................................... 5,543,677 5,142,000 Acquisition liability............................................................... 76,952 159,659 Taxes, licenses, and fees payable................................................... 216,307 216,923 Federal income taxes payable........................................................ 156,683 47,314 Deferred federal income taxes....................................................... 211,277 310,345 Commissions payable................................................................. 1,201,631 821,777 Billings in excess of estimated earnings on uncompleted codification contracts...... 109,916 64,195 Other............................................................................... 758,945 658,720 ----------- ----------- Total liabilities..................................................... 26,239,430 17,365,625 ----------- ----------- Shareholders' equity: Non-voting preferred shares: 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 shares, without par value; authorized 20,000,000 shares; 6,170,341 shares issued................................................... 1,794,141 1,794,141 Additional paid-in capital..................................................... 1,337,242 1,336,805 Accumulated other comprehensive income......................................... 234,335 748,602 Retained earnings.............................................................. 27,965,032 26,464,712 ----------- ----------- 31,330,750 30,344,260 Less: Treasury shares, at cost (400,156 in 2001 and 401,106 in 2000 common shares)............................................. (1,804,424) (1,808,901) ----------- ----------- Total shareholders' equity............................................ 29,526,326 28,535,359 ----------- ----------- Total liabilities and shareholders' equity............................ $55,765,756 $45,900,984 =========== ===========
See accompanying notes to consolidated financial statements. 4 5 BANCINSURANCE CORPORATION AND SUBSIDIARIES Consolidated Statements of Income (Unaudited)
Three Months Ended Six Months Ended June 30, June 30, 2001 2000 2001 2000 ----------- ---------- ----------- ----------- Income: Premiums written ............................ $10,647,694 $5,919,345 $20,649,726 $13,911,157 Decrease (increase) in unearned premiums .... (18,516) 547,938 (2,915,633) (1,781,747) ----------- ---------- ----------- ----------- Premiums earned ............................. 10,629,178 6,467,283 17,734,093 12,129,410 Premiums ceded .............................. (10,915) (67,728) (101,136) (114,229) ----------- ---------- ----------- ----------- Net premiums earned ................... 10,618,263 6,399,555 17,632,957 12,015,181 Investment income (net of expenses of $27,373 and $47,048, respectively) ................ 376,741 428,994 808,622 843,289 Net realized gain (loss) on investments ..... (22,599) (89,284) 399,968 (116,593) Gain on sale of property .................... - - 15,848 - Codification and subscription fees .......... 590,830 599,702 1,184,704 769,963 Claims administration fees .................. - 121,831 - 322,904 Title and appraisal fees .................... - - - 115,724 Management fees ............................. 321,839 71,885 436,417 446,556 Commission fees ............................. 3,732 41,854 67,192 107,101 Other income ................................ 21,426 901,969 48,638 941,052 ----------- ---------- ----------- ----------- Total revenue ......................... 11,910,232 8,476,506 20,594,346 15,445,177 ----------- ---------- ----------- ----------- Losses and operating expenses: Losses and loss adjustment expenses ......... 4,635,553 3,352,395 9,835,346 7,025,687 Reinsurance recoveries ...................... (12,101) (28,926) (73,377) (45,967) Experience rating adjustment ................ 2,691,380 428,915 2,829,287 440,939 Commission expense .......................... 1,716,386 906,001 2,719,454 1,511,675 Other insurance operating expenses .......... 960,894 882,084 1,805,645 1,664,324 General and administrative expenses ......... 727,931 944,291 1,387,411 1,856,662 Interest expense ............................ 8,246 85,467 15,033 179,994 ----------- ---------- ----------- ----------- Total expenses ........................ 10,728,289 6,570,227 18,518,799 12,633,314 ----------- ---------- ----------- ----------- Income before federal income taxes .... 1,181,943 1,906,279 2,075,547 2,811,863 Federal income tax expense ..................... 335,685 593,217 575,226 844,932 ----------- ---------- ----------- ----------- Net income ............................ $ 846,258 $1,313,062 $ 1,500,321 $ 1,966,931 =========== ========== =========== =========== Basic and diluted earnings per share ........... $ .15 $ .22 $ .26 $ .33 =========== ========== =========== ===========
See accompanying notes to consolidated financial statements. 5 6 BANCINSURANCE CORPORATION AND SUBSIDIARIES Consolidated Statements of Comprehensive Income (Unaudited)
Three Months Ended Six Months Ended June 30, June 30, 2001 2000 2001 2000 ---------- ---------- ---------- ---------- Net income ..................................... $ 846,258 $1,313,062 $1,500,321 $1,966,931 Other comprehensive income: Unrealized holding gains (losses) arising during period, net of income tax (benefit) expense of $(264,926) and $72,915, respectively ............................. 257,502 20,696 (514,267) 141,542 ---------- ---------- ---------- ---------- Comprehensive income ........................... $1,103,760 $1,333,758 $ 986,054 $2,108,473 ========== ========== ========== ==========
See accompanying notes to consolidated financial statements. 6 7 BANCINSURANCE CORPORATION AND SUBSIDIARIES Consolidated Statements of Cash Flows (Unaudited)
Six Months Ended June 30, Cash flows from operating activities: 2001 2000 ----------- ----------- Net income ...................................................................... $ 1,500,321 $ 1,966,931 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 ...................................... (399,968) 116,593 Net realized gain on disposal of property .................................... (15,848) - Net realized loss on disposal of equipment ................................... - 798 Net realized loss on debt forgiveness ........................................ - 30,000 Depreciation and amortization ................................................ 113,495 130,436 Deferred federal income tax expense .......................................... 165,858 43,545 Change in premiums receivable ................................................ (2,898,261) (607,244) Change in accounts and reinsurance receivable, net ........................... (381,838) 847,721 Change in deferred policy acquisition costs .................................. (965,853) (407,662) Change in other assets ....................................................... (60,110) (438,472) Change in reserve for unpaid losses and loss adjustment expenses ............. 1,072,285 (160,063) Change in unearned premiums .................................................. 2,915,633 1,746,449 Change in experience rating adjustments payable .............................. 2,829,287 440,939 Change in retrospective premium adjustments payable .......................... 745,385 1,353,113 Change in funds held under reinsurance treaties .............................. 416,683 - Change in contract funds on deposit .......................................... 40,077 (365,479) Change in other liabilities .................................................. 551,846 (440,068) ----------- ----------- Net cash provided by operating activities ................................. 5,628,992 4,222,226 ----------- ----------- Cash flows from investing activities: Proceeds from held to maturity: fixed maturities due to redemption or maturity .. 420,000 895,000 Proceeds from available for sale: fixed maturities sold, redeemed and matured ... 1,939,853 1,044,788 Proceeds from available for sale: equity securities sold ........................ 7,782,033 2,939,973 Cost of investments purchased: Held to maturity: fixed maturities .............................................. - (885,085) Available for sale: fixed maturities ............................................ (4,117,264) (1,598,023) equity securities ........................................... (9,363,343) (3,478,973) Net change in short-term investments ............................................ 2,057,191 1,614,381 Purchase of furniture, automobiles and leasehold improvements ................... (77,193) - Cash used in acquisition of assets .............................................. (403,503) - Cash used in purchase of subsidiary ............................................. - (958,094) Other ........................................................................... - (40,070) ----------- ----------- Net cash used in investing activities ..................................... (1,762,226) (466,103) ----------- ----------- Cash flows from financing activities: Proceeds from note payable to bank .............................................. 9,750,000 8,550,000 Repayments from note payable to bank ............................................ (9,442,000) (6,545,000) Proceeds from stock options exercised ........................................... - 37,563 Acquisition of treasury stock ................................................... (4,541) (982,189) ----------- ----------- Net cash provided by financing activities ................................. 303,459 1,060,374 ----------- ----------- Net increase in cash ............................................................... 4,170,225 4,816,497 ----------- ----------- Cash at December 31 ................................................................ 6,560,778 2,401,312 ----------- ----------- Cash at June 30 .................................................................... $10,731,003 $ 7,217,809 =========== =========== Supplemental disclosures of cash flow information: Cash paid during the year for: Interest ..................................................................... $ 8,372 $ 169,297 =========== =========== Income taxes ................................................................. $ 300,000 $ 745,000 =========== =========== Supplemental disclosure of non-cash investing activities: Common shares issued in purchase acquisition ................................. 9,456 - =========== ===========
See accompanying notes to consolidated financial statements. 7 8 BANCINSURANCE CORPORATION AND SUBSIDIARIES Notes To Consolidated Financial Statements (Unaudited) 1. The Consolidated Balance Sheet as of June 30, 2001, the Consolidated Statements of Income for the three and six months ended June 30, 2001 and 2000, the Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2001 and 2000, and the Consolidated Statements of Cash Flows for the six months ended June 30, 2001 and 2000 have been prepared by us 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 June 30, 2001 and for all periods presented have been made. The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States, for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X. 2. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States, 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 our Annual Report and Form 10-K for the year ended December 31, 2000. The results of operations for the period ended June 30, 2001 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 (the "Codification") guidance, which replaced the Accounting Practices and Procedures manual as the NAIC's primary guidance on statutory accounting. The Codification provides guidance for areas where statutory accounting has been silent and changes current statutory accounting in some areas. Effective January 1, 2001, the Ohio Insurance Department adopted the Codification. The Company has determined that the adoption of Codification did not have a material effect on statutory-basis capital and surplus. The preparation of financial statements in conformity with accounting principles generally accepted in the United States, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the 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. Certain prior year amounts have been reclassified in order to conform to the 2001 presentation. 4. 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. Because we do not hold or own any derivative securities, SFAS 133 does not impact our financial statements. 5. In June 2001, the Financial Accounting Standards Board issued Statements of Financial Accounting Standards No. 141, Business Combinations, and No. 142, Goodwill and Other Intangible Assets, effective for fiscal years beginning after December 15, 2001. Under the new rules, goodwill will no longer be amortized but will be subject to annual impairment tests in accordance with the Statements. Other intangible assets will continue to be amortized over their useful lives. The Company will apply the new rules on accounting for goodwill and other intangible assets beginning in the first quarter of 2002. During 2002, the Company will perform the first of the required impairment tests of goodwill as of January 1, 2002 and has not yet determined what the effect of these tests will be on the earnings and financial position of the Company. 8 9 BANCINSURANCE CORPORATION AND SUBSIDIARIES 6. Supplemental Disclosure For Earnings Per Share
Three Months Ended Six Months Ended June 30, June 30, 2001 2000 2001 2000 ---------- ---------- ---------- ---------- Net income......................................... $ 846,258 $1,313,062 $1,500,321 $1,966,931 ---------- ---------- ---------- ---------- Weighted average common shares outstanding......... 5,768,427 5,867,370 5,768,481 5,938,239 Adjustments for dilutive securities: Dilutive effect of outstanding options.......... 20,337 15,275 17,999 21,369 ---------- ---------- ---------- ---------- Diluted common shares.............................. 5,788,764 5,882,645 5,786,480 5,959,608 ========== ========== ========== ========== Basic and diluted earnings per share............... $ .15 $ .22 $ .26 $ .33
7. On June 20, 2001, American Legal Publishing Corporation, a wholly-owned subsidiary of Bancinsurance Corporation, purchased substantially all the net assets of Justinian Publishing Company, an Ohio Corporation ("Justinian"), for (a) $403,503 in cash; (b) 2,000 common shares, without par value, of Bancinsurance Corporation; and (c) a $100,000 non-interest bearing promissory note due on the first anniversary of the closing date. We paid the acquisition consideration from existing cash reserves. The acquisition was accounted for using the purchase method. The excess of the fair value of the net assets acquired over the purchase price of approximately $478,491 was allocated to a database acquired. The database is comprised of 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 data. 8. 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.
JUNE 30, 2001 -------------------------------------------------------------------------------------------- Municipal Property/Casualty Insurance Code All Consolidated Insurance Agency Publishing Other Totals -------------------------------------------------------------------------------------------- Revenues from external customers.. $18,827,080 $ 67,192 $1,184,704 $ 8,745 $20,087,721 Intersegment revenues ............ 2,940 153,432 - 40,620 196,992 Interest revenue ................. 683,616 70 - 19,931 703,617 Interest expense ................. 4,635 - - 10,398 15,033 Depreciation and amortization .... 6,114 51,482 30,437 25,462 113,495 Segment profit (loss) ............ 2,025,879 113,368 134,402 (1,110) 2,272,539 Income tax expense (benefit) ..... 528,897 61,174 51,105 (65,950) 575,226 Segment assets ................... 49,515,044 2,552,626 1,748,687 3,185,411 57,001,768
JUNE 30, 2000 -------------------------------------------------------------------------------------------- Workers Municipal Property/Casualty Title Compensation Insurance Code All Consolidated Insurance Agency Administration Agency Publishing Other Totals -------------------------------------------------------------------------------------------- Revenues from external customers.. $13,801,925 $115,724 $322,904 $ 108,124 $ 769,963 $ 1,029 $15,119,669 Intersegment revenues ............ 2,940 - - 443,770 - 24,620 471,330 Interest revenue ................. 770,108 - - 27 - 26,703 796,838 Interest expense ................. 3,259 90 - 40 - 176,605 179,994 Depreciation and amortization .... 33,407 419 1,764 53,774 14,501 26,571 130,436 Segment profit (loss) ............ 3,077,901 (37,138) 20,277 275,813 128,393 (182,053) 3,283,193 Income tax expense (benefit) ..... 892,438 - 6,931 111,033 47,082 (212,552) 844,932 Segment assets ................... 41,820,737 - 179,689 2,687,149 1,488,363 4,148,353 50,324,291
9 10 BANCINSURANCE CORPORATION AND SUBSIDIARIES
------------------------------------ June 30, June 30, 2001 2000 ------------------------------------ Revenues --------- Total revenues for reportable segments ...................... $20,087,721 $15,119,669 Interest revenue ............................................ 703,617 796,838 Elimination of intersegment revenues ........................ (196,992) (471,330) ----------- ----------- Total consolidated revenues ................................. $20,594,346 $15,445,177 =========== =========== Profit Total profit for reportable segments ........................ $ 2,273,649 $ 3,465,246 Other loss .................................................. (1,110) (182,053) Elimination of intersegment profits ......................... (196,992) (471,330) ----------- ----------- Income before income taxes .................................. $ 2,075,547 $ 2,811,863 =========== =========== Assets Total assets for reportable segments ........................ $53,816,357 $46,175,938 Other assets ................................................ 3,185,411 4,148,353 Elimination of intersegment receivables ..................... (1,236,012) (1,563,293) ----------- ----------- Consolidated assets ......................................... $55,765,756 $48,760,998 =========== ===========
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. 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 (i) the sum of the premiums earned and investment income and (ii) the sum of 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 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. Our wholly-owned subsidiary, American Legal Publishing Corporation, offers a wide range of publishing services for state and local governments. Our wholly-owned subsidiary, Paul Boardway and Associates, Inc., is a property/casualty insurance agency serving lending institutions. 10 11 BANCINSURANCE CORPORATION AND SUBSIDIARIES SUMMARY RESULTS The following table sets forth period to period changes in selected financial data:
----------------------------------------------------- Period to Period Increase Six Months Ended June 30, ----------------------------------------------------- 2000-2001 ----------------------------------------------------- Amount % Change ----------------------------------------------------- Premiums written.............................................. $6,738,569 48.4% Net premiums earned........................................... 5,617,776 46.8% Net investment income......................................... 481,894 66.3% Total revenue................................................. 5,149,169 33.3% Loss and loss adjustment expense, net of reinsurance recoveries................................ 2,782,249 39.9% Operating expenses............................................ 3,268,197 59.7% Interest expense.............................................. (164,961) (91.6)% Operating income.............................................. (736,316) (26.2)% Net income.................................................... $ (466,610) (23.7)%
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 six months ended June 30:
2001 2000 ---------------- Statutory: Loss ratio.................................... 62.6% 61.8% Expense ratio................................. 27.1% 26.6% ---- ---- Combined ratio................................ 89.7% 88.4% ==== ==== GAAP: Loss ratio.................................... 55.4% 58.1% Expense ratio................................. 37.2% 29.1% ---- ---- Combined ratio................................ 92.6% 87.2% ==== ====
Investment 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 JUNE 30, 2001 AS COMPARED TO JUNE 30, 2000 ------------------------------------------ Premiums Written; Premiums Earned. Premiums written for the six months ended June 30, 2001 increased 48.4% from $13,911,157 at June 30, 2000 to $20,649,726 at June 30, 2001, and premiums earned increased 46.8% from $12,015,181 at June 30, 2000 to $17,632,957 at June 30, 2001. Premiums written increased 79.9% for the three months ended June 30, 2001 versus June 30, 2000, and premiums earned increased 65.9% for the same second quarter comparables. Premiums written for the Lender/Dealer Insurance program increased 59.7% from $10,527,998 in the first six months of 2000 to 11 12 BANCINSURANCE CORPORATION AND SUBSIDIARIES $16,808,954 in the first six months of 2001. Premiums earned from the Lender/Dealer Insurance program increased 52.3% from $10,145,161 in the first six months of 2000 to $15,455,822 in the first six months of 2001. Premiums written for the Lender/Dealer Insurance program increased 32.7% for the three months ended June 30, 2001 versus June 30, 2000. Premiums earned for the Lender/Dealer Insurance program increased 72.9% for the same second quarter comparables. Five major financial institutions were added as customers during the first half of 2001 as a result of increased marketing efforts. In addition, agency relationships were expanded and contributed to substantial growth in our regional and community financial institution customer base. Premiums written for the Unemployment Insurance Protection program increased 13.5% from $3,383,159 for the six months ended June 30, 2000 to $3,840,772 for the six months ended June 30, 2001, and premiums earned from the Unemployment Insurance Protection program increased 16.4% from $1,870,020 to $2,177,136 during the first half of 2000 and 2001, respectively. Premiums written increased 152.4% and premiums earned increased 20.3% for the Unemployment Insurance Protection program for the three months ended June 30, 2001 versus 2000. The increases in premiums written and premiums earned on the Unemployment Insurance Protection program were primarily attributable to higher employment among existing clients. Net Investment Income. Our $31,274,400 investment portfolio is primarily concentrated in investment-grade fixed income securities. Concerning the equity portion of our portfolio, we regularly evaluate factors that may impact the national economy as well as the outlook for corporate profits. Net investment income increased 66.3% from $726,696 in the first six months of 2000 to $1,208,590 in the first six months of 2001, and increased 4.2% from $339,710 to $354,142 in the three months ended June 30, 2000 and 2001, respectively. These increases were primarily due to realized investment gains of $399,968 and realized losses of $22,599 in the first six months and second quarter of 2001, respectively, compared to realized investment losses of $116,593 and $89,284 in the first six months and second quarter of 2000, respectively. Codification and Subscription Fees. Codification and subscription fees generated by American Legal Publishing, our consolidated subsidiary acquired on February 29, 2000, accounted for $769,963 and $599,702 of the revenues for the four months and three months ended June 30, 2000, respectively, compared to $1,184,704 and $590,830 of the revenues for the six months and three months ended June 30, 2001, respectively. Claims Administration Fees. Claims administration fees generated by our BCIS Services subsidiary accounted for $322,904 of the revenues for the first six months of 2000. Claims administration fees accounted for $121,831 of the revenues for the three months ended June 30, 2000. On October 6, 2000, we sold BCIS Services. Title and Appraisal Fees. Title Services and appraisal fees generated by our Custom Title Services subsidiary accounted for $115,724 of the revenues during the first half of 2000. On January 24, 2000, we sold Custom Title Services. Management Fees. Management fees during the six months ended June 30, 2000 were $446,556 and during the six months ended June 30, 2001 were $436,417. Management fees increased from $71,885 for the three months ended June 30, 2000 to $321,839 for the three months ended June 30, 2001. The second quarter comparative increase was attributable to timing differences related to recognition of results from a closed year of operations of the Unemployment Insurance Protection program. We expect management fees to vary from year to year depending on claims experience in the Unemployment Insurance Protection program. Commission Fees. Net commission fees generated by our Paul Boardway and Associates subsidiary accounted for $107,101 and $41,854 of revenues during the six and three months ended June 30, 2000, respectively, compared with $67,192 and $3,732 for the same periods of 2001, respectively. Other Income. Other income declined $880,543 to $21,426 for second quarter 2001 from $901,969 last year. This was principally due to recognition of a one-time payment of $900,000 received during the second quarter of 2000 in connection with the settlement of a dispute with an unaffiliated party. Losses and Loss Adjustment Expenses, Net of Reinsurance Recoveries. Losses and loss adjustment expenses totaled $6,979,720 or 58.1% of net premiums earned during the first six months of 2000 versus $9,761,969 or 55.4% of net premiums earned during the first six months of 2001. Losses and loss adjustment expenses totaled $4,623,452 or 43.5% of net premiums earned during the second quarter of 2001 versus $3,323,469 or 51.9% of net premiums earned during the second quarter of 2000. Loss and loss adjustment expenses for the Lender/Dealer Insurance program increased 38.0% from $6,948,520 during the six months ended June 30, 2000 to $9,588,348 during the six months ended June 30, 2001 and increased 34.6% from $3,363,098 during the 12 13 BANCINSURANCE CORPORATION AND SUBSIDIARIES three months ended June 30, 2000 to $4,527,942 during the three months ended June 30, 2001. These increases were primarily related to growth in Lender/Dealer policies. Losses and loss adjustment expenses for the Unemployment Insurance Protection program increased from $31,200 in 2000 to $173,621 in 2001 resulting from less favorable loss experience on reserves for prior accident years, and further complemented by an increase in the loss and loss adjustment expense ratio for losses and loss adjustment expenses occurring in the current accident year. Operating Expense. Operating expense consists of experience rating adjustments, commission expense, other insurance operating expense and general and administrative expenses. Operating expense increased 59.7% from $5,473,600 for the six months ended June 30, 2000 to $8,741,797 for the six months ended June 30, 2001. Operating expense increased 92.9% from $3,161,291 to $6,096,591 during the three months ended June 30, 2000 and 2001, respectively. The experience rating adjustment increased to $2,691,380 in the second quarter of 2001 from $428,915 in the second quarter 2000. Experience rating adjustments are calculated and adjusted from period to period based on the policy experience to date. Management anticipates that the experience rating adjustment may fluctuate in future quarters based on this calculation. Commission expense increased 79.9% from $1,511,675 for the six months ended June 30, 2000 to $2,719,454 for the six months ended June 30, 2001. Commission expense increased 89.4% from $906,001 to $1,716,386 during the three months ended June 30, 2000 and 2001, respectively. These increases were primarily due to growth in our regional and community financial institution customer base. Other insurance operating expenses increased 8.5% from $1,664,324 in the first six months of 2000 to $1,805,645 in the first six months of 2001 and increased 8.9% from $882,084 to $960,894 during the three months ended June 30, 2000 and 2001, respectively. These increases were primarily due to increases in allocable salaries and related benefits, state and local insurance taxes and rent. General and administrative expenses decreased 25.3% from $1,856,662 in the first six months of 2000 to $1,387,411 in the first six months of 2001. General and administrative expenses decreased 22.9% from $944,291 to $727,931 during the three months ended June 30, 2000 and 2001, respectively. These decreases were primarily due to decreases in claims administration, and title business expenses, as well as outside computer services and consulting services. Paul Boardway and Associates incurred operating expenses of $276,108 during the six months ended June 30, 2000 and $124,113 in the second quarter of 2000 as compared to $123,121 and $52,856 during the same periods in 2001, respectively. American Legal Publishing incurred operating expenses of $641,816 and $501,198 for the six months and three months ended June 30, 2000, respectively, as compared to $1,048,203 and $564,701 during the same periods in 2001, respectively. Interest Expense. Interest expense decreased from $179,994 in the first six months of 2000 to $15,033 in the first six months of 2001 and decreased from $85,467 for the three months ended June 30, 2000 to $8,246 for the three months ended June 30, 2001. These decreases were due to decreases in the prime rate and maintaining a lower borrowing level on our revolving credit line. Federal Income Taxes. Federal income taxes decreased from $844,932 in the first six months of 2000 to $575,226 in the first six months of 2001 and decreased from $593,217 for the three months ended June 30, 2000 to $335,685 for the three months ended June 30, 2001. The effective consolidated income tax rate was 30.0% for the quarter ended June 30, 2000 and 27.7% for the quarter ended June 30, 2001. GAAP Combined Ratio. Ohio Indemnity increased reserves at June 30, 2001 in response to higher reported claims related to Lender/Dealer Insurance products. The combined ratio for Ohio Indemnity for the three and six months ended June 30, 2001 was 96.0% and 92.6%, respectively, versus 94.3% and 87.2% for the three and six months ended June 30, 2000, respectively. The increase in the expense ratio was primarily due to a reclassification of experience rating adjustment expenses at the end of fiscal 2000 and, to a lesser extent, higher commissions, additional staffing, and growth in marketing and product development initiatives. 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. Based on statutory limitations, the maximum amount of dividends that we would be able to receive in 2001 from Ohio Indemnity, absent regulatory consent, is $3,693,686. 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 $5,628,992 and $4,222,226 for the six months ended June 30, 2001 and 2000, respectively. Net cash provided by financing activities was $303,459 for the six months 13 14 BANCINSURANCE CORPORATION AND SUBSIDIARIES ended June 30, 2001 and $1,060,374 for the six months ended June 30, 2000. Net cash used in our investing activities was $1,762,226 and $466,103 for the six months ended June 30, 2001 and 2000, respectively. American Legal Publishing derives its funds principally from codification and subscription fees which are currently sufficient to meet its operating obligations. Paul Boardway and Associates derives its funds principally from commission fees which are currently sufficient to meet its operating obligations. We have 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 attempt to reposition assets to those areas which contribute to our overall financial objectives. Our balance sheet liquidity 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 June 30, 2001 consisted primarily of investment-grade fixed income securities. Cash and short-term investments at June 30, 2001 amounted to $14,693,252 or 35.0% 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 $1,208,590 and $726,696 for the six months ended June 30, 2001 and 2000, 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 our assets with the expected payouts of our 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. Shareholder's equity was $29,526,326 at June 30, 2001, 3.5% higher than at December 31, 2000. Book value per diluted share was $5.10 at June 30, 2001. 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 Unemployment Insurance 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. Such reserves were $206,750 and $368,000 at June 30, 2001 and December 31, 2000, 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, commodity prices 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 June 30, 2001. Our market risk sensitive instruments are entered into for purposes other than trading. 14 15 BANCINSURANCE CORPORATION AND SUBSIDIARIES The carrying value of our investment portfolio as of June 30, 2001 was $31,274,400, 67.7% of which is invested in fixed maturity securities, 19.6% in equity securities and 12.7% 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. 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 "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources." For our investment portfolio, during the quarter ended June 30, 2001, 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, 2000. 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. FACTORS TO CONSIDER FORWARD-LOOKING Going forward, management will consider underwriting, acquisition and investment opportunities which fit our strategy of penetrating niche markets within the financial services industry. 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, expanding financial institution programs and auto dealer service contract programs. We will consider opportunities for underwriting additional non-profit organizations as they continue to consolidate into national trusts and seek to retain and transfer their unemployment claim exposure. 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. Market trends in the automobile industry, and specifically programs offered by captive finance companies, continue to be influenced by weak market conditions. As a result, banks and finance companies, our primary customers, are experiencing lower demand for automobile loans. We anticipate that the continued weakness in the national economy, and, to a lesser extent internal infrastructure improvements, will continue to impact performance during the remainder of 2001. Therefore, earnings for this year will likely be below last year. Nonetheless, long-term growth and profitability are expected to benefit from continued implementation of our business strategy and enhanced information technology capabilities. FORWARD-LOOKING INFORMATION Statements in this "Management's Discussion and Analysis of Financial Condition and Results of Operations" that indicate our 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. 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 Unemployment Insurance will vary with factors beyond our control 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 in our investments; and (iv) the dependence on key management personnel with skills critical to our long-term success. INFLATION We do not believe that inflation has, or will have in the foreseeable future, a material impact upon our operating results. 15 16 BANCINSURANCE CORPORATION AND SUBSIDIARIES INSURANCE REGULATORY MATTERS The NAIC has developed a risk-based capital measurement formula to be applied to all property/casualty insurance companies. This formula calculates a minimum required statutory net worth, based on the underwriting, investment, credit, loss reserve and other business risks inherent in an individual company's operations. Under the current formula, any insurance company which does not meet threshold risk-based capital measurement standards could be forced to reduce the scope of its operations and ultimately could become subject to statutory receivership proceedings. Based on 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, 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 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, 2000, were reasonable. Item 3. Quantitative and Qualitative Disclosures ---------------------------------------- About Market Risk ----------------- The information required by this item is included in "Management's Discussion and Analysis of Financial Condition and Results of Operations - Disclosure About Market Risk." PART II - OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders --------------------------------------------------- We held our Annual Meeting of Shareholders on May 30, 2001 for the purpose of electing six directors to serve one year terms expiring in 2002. The number of votes cast for each candidate and the number of votes withheld with respect to each candidate is as follows: VOTES FOR VOTES WITHHELD --------- -------------- John S. Sokol 4,952,011 16,195 Si Sokol 4,952,011 16,195 Daniel D. Harkins 4,954,850 13,356 Saul Sokol 4,954,430 13,776 William S. Sheley 4,954,325 13,881 Matthew D. Walter 4,954,325 13,881 Item 6. Exhibits and Reports on Form 8-K -------------------------------- (a) Exhibits -------- None. (b) Reports on Form 8-K ------------------- No reports on Form 8-K were filed by the Company during the quarter ended June 30, 2001. 16 17 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. BANCINSURANCE CORPORATION ------------------------- (Company) Date: August 3, 2001 By: Si Sokol -------------------- -------------------------------------------- Si Sokol Chairman and Chief Executive Officer (Principal Executive Officer) Date: August 3, 2001 By: Sally Cress -------------------- -------------------------------------------- Sally Cress Treasurer and Secretary (Principal Financial and Accounting Officer) 17