10-Q 1 l90791ae10-q.txt BANCINSURANCE CORPORATION FORM 10-Q 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 September 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) 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 September 30, 2001 -------------------------------- ----------------------------------------- Common shares, without par value 5,770,185 BANCINSURANCE CORPORATION AND SUBSIDIARIES INDEX -----
Page No. PART I - FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Balance Sheets as of September 30, 2001 (unaudited) and December 31, 2000........................................3 Consolidated Statements of Income for the three months and nine months ended September 30, 2001 and 2000 (unaudited)...................................5 Consolidated Statements of Comprehensive Income for the three months and nine months ended September 30, 2001 and 2000 (unaudited)............................................................................6 Consolidated Statements of Cash Flows for the nine months ended September 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 Proceeds............................................Not Applicable Item 3. Defaults Upon Senior Securities......................................................Not Applicable Item 4. Submission of Matters to a Vote of Security Holders .................................Not Applicable Item 5. Other Information ...................................................................Not Applicable Item 6. Exhibits and Reports on Form 8-K...........................................................16 Signatures.........................................................................................17
2 PART I - FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS BANCINSURANCE CORPORATION AND SUBSIDIARIES Consolidated Balance Sheets
September 30, December 31, Assets 2001 2000 ------ ------------------ --------------- (Unaudited) (Note 2) Investments: Held to maturity: Fixed maturities, at amortized cost (fair value $5,106,917 in 2001 and $5,144,356 in 2000)................................. $ 4,949,840 $ 5,048,466 Available for sale: Fixed maturities, at fair value (amortized cost $14,692,270 in 2001 and $14,323,397 in 2000)............................... 14,980,643 14,486,863 Equity securities, at fair value (cost $6,208,564 in 2001 and $3,852,659 in 2000)............................................ 6,195,227 4,823,438 Short-term investments, at cost which approximates fair value...................................................... 4,261,358 6,019,440 -------------- --------------- Total investments..................................................... 30,387,068 30,378,207 -------------- --------------- Cash ............................................................................... 16,749,955 6,560,778 Premiums receivable................................................................. 4,425,805 2,591,617 Accounts receivable, net of allowance for doubtful accounts......................... 543,134 441,315 Reinsurance receivable.............................................................. 63,921 20,250 Reinsurance recoverable on paid losses.............................................. 62,818 99,631 Prepaid reinsurance premiums........................................................ 645,939 50,048 Deferred policy acquisition costs................................................... 1,605,132 642,787 Estimated earnings in excess of billings on uncompleted codification contracts...... 146,083 159,295 Loans to affiliates................................................................. 669,720 533,039 Notes receivable.................................................................... 400,000 441,000 Land and building, net.............................................................. - 34,546 Furniture and equipment, net........................................................ 187,138 134,691 Excess of investment over net assets of subsidiaries, net........................... 2,559,916 2,635,424 Intangible asset, net............................................................... 876,403 422,416 Deferred federal income taxes....................................................... 72,316 - Accrued investment income........................................................... 331,154 336,803 Amount due from broker.............................................................. - 100,000 Other assets........................................................................ 466,093 319,137 -------------- --------------- Total assets................................................ $ 60,192,595 $ 45,900,984 ============== ===============
(Continued) 3 BANCINSURANCE CORPORATION AND SUBSIDIARIES Consolidated Balance Sheets, Continued
September 30, December 31, Liabilities and Shareholders' Equity 2001 2000 ------------------------------------ --------------- ------------- (Unaudited) (Note 2) Reserve for unpaid losses and loss adjustment expenses.............................. $ 4,634,376 $ 2,958,615 Unearned premiums................................................................... 6,089,704 2,740,418 Reinsurance premiums payable........................................................ 698 - Experience rating adjustments payable............................................... 5,349,617 1,316,563 Retrospective premium adjustments payable........................................... 2,805,491 855,567 Funds held under reinsurance treaties............................................... 658,652 - Contract funds on deposit........................................................... 2,078,412 2,073,529 Note payable ...................................................................... 5,095,258 5,142,000 Acquisition liability............................................................... 30,000 159,659 Taxes, licenses, and fees payable................................................... 398,676 216,923 Federal income taxes payable........................................................ 391,955 47,314 Deferred federal income taxes....................................................... - 310,345 Commissions payable................................................................. 1,419,019 821,777 Billings in excess of estimated earnings on uncompleted codification contracts...... 126,507 64,195 Other............................................................................... 911,320 658,720 ------------- ------------- Total liabilities..................................................... 29,989,685 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......................................... 181,523 748,602 Retained earnings.............................................................. 28,694,427 26,464,712 ------------- ------------- 32,007,333 30,344,260 Less: Treasury shares, at cost (400,156 in 2001 and 401,106 in 2000 common shares)............................................. (1,804,423) (1,808,901) -------------- ------------ Total shareholders' equity............................................ 30,202,910 28,535,359 ------------- ------------- Total liabilities and shareholders' equity............................ $ 60,192,595 $ 45,900,984 ============= =============
See accompanying notes to consolidated financial statements. 4 BANCINSURANCE CORPORATION AND SUBSIDIARIES Consolidated Statements of Income (Unaudited)
Three Months Ended Nine Months Ended September 30, September 30, 2001 2000 2001 2000 -------------- -------------- -------------- -------------- Income: Premiums written............................... $ 10,589,460 $ 5,201,194 $ 31,239,186 $ 19,112,351 (Increase) decrease in unearned premiums....... (433,653) 1,538,895 (3,349,286) (242,852) -------------- -------------- -------------- -------------- Premiums earned ............................... 10,155,807 6,740,089 27,889,900 18,869,499 Premiums ceded ................................ (57,569) (59,138) (158,705) (173,367) -------------- -------------- -------------- -------------- Net premiums earned...................... 10,098,238 6,680,951 27,731,195 18,696,132 Investment income.............................. 319,328 407,243 1,127,950 1,250,532 Net realized gain (loss) on investments........ 6,035 (60,399) 406,003 (176,992) Gain on sale of property....................... - - 15,848 - Codification and subscription fees............. 708,168 565,219 1,892,872 1,335,182 Claims administration fees..................... - 104,132 - 427,036 Title and appraisal fees....................... - - - 115,724 Management fees................................ 234,889 75,147 671,306 521,703 Commission fees................................ (259) 22,262 66,933 129,363 Other income................................... 52,132 9,301 100,770 950,353 -------------- -------------- -------------- -------------- Total revenue............................ 11,418,531 7,803,856 32,012,877 23,249,033 -------------- -------------- -------------- -------------- Losses and operating expenses: Losses and loss adjustment expenses............ 5,889,648 3,098,547 15,724,994 10,124,234 Reinsurance recoveries......................... (62,882) 4,758 (136,259) (41,209) Experience rating adjustments.................. 1,203,767 527,058 4,033,054 967,997 Commission expense............................. 1,865,760 911,534 4,585,214 2,423,209 Other insurance operating expenses............. 858,765 705,219 2,664,410 2,369,543 General and administrative expenses............ 644,714 644,972 2,032,125 2,501,634 Interest expense............................... 10,479 52,554 25,512 232,548 -------------- -------------- -------------- -------------- Total expenses........................... 10,410,251 5,944,642 28,929,050 18,577,956 -------------- -------------- -------------- -------------- Income before federal income taxes....... 1,008,280 1,859,214 3,083,827 4,671,077 Federal income tax expense........................ 278,884 619,481 854,110 1,464,413 -------------- -------------- -------------- -------------- Net income .............................. $ 729,396 $ 1,239,733 $ 2,229,717 $ 3,206,664 ============== ============== ============== ============== Basic and diluted earnings per share.............. $ .13 $ .21 $ .39 $ .54 ============== ============== ============== ==============
See accompanying notes to consolidated financial statements. 5 BANCINSURANCE CORPORATION AND SUBSIDIARIES Consolidated Statements of Comprehensive Income (Unaudited)
Three Months Ended Nine Months Ended September 30, September 30, 2001 2000 2001 2000 -------------- -------------- -------------- -------------- Net income............................................. $ 729,396 $ 1,239,733 $ 2,229,717 $ 3,206,664 Other comprehensive income: Unrealized holding gains (losses) on securities arising during the nine month period, net of income tax (benefit) expense of $(293,264) and $260,969, respectively........................... (55,010) 365,045 (569,277) 506,587 -------------- -------------- -------------- -------------- Comprehensive income................................... $ 674,386 $ 1,604,778 $ 1,660,440 $ 3,713,251 ============== ============== ============== ==============
See accompanying notes to consolidated financial statements. 6 BANCINSURANCE CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows (Unaudited) Nine Months Ended September 30, 2001 2000 --------------- -------------- Cash flows from operating activities: Net income ...................................................................... $ 2,229,717 $ 3,206,664 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 ...................................... (406,003) 176,992 Net realized gain on disposal of property .................................... (15,848) -- Net realized loss on disposal of equipment ................................... 2,243 798 Net realized loss on debt forgiveness ........................................ -- 30,000 Depreciation and amortization ................................................ 198,892 199,370 Deferred federal income tax (benefit) expense ................................ (89,397) 255,882 Change in operating assets and liabilities: Premiums receivable ....................................................... (1,834,188) (254,490) Accounts and reinsurance receivable, net .................................. (704,568) 795,425 Deferred policy acquisition costs ......................................... (962,345) (270,614) Other assets .............................................................. (85,167) (402,285) Reserve for unpaid losses and loss adjustment expenses .................... 1,685,761 (788,432) Unearned premiums ......................................................... 3,349,286 207,554 Experience rating adjustments payable ..................................... 4,033,054 967,997 Retrospective premium adjustments payable ................................. 1,949,924 1,981,557 Funds held under reinsurance treaties ..................................... 658,652 -- Other liabilities ......................................................... 1,316,051 100,721 ------------ ------------ Net cash provided by operating activities .............................. 11,326,064 6,171,828 ------------ ------------ Cash flows from investing activities: Proceeds from held to maturity: fixed maturities due to redemption or maturity .. 620,000 996,905 Proceeds from available for sale: fixed maturities sold, redeemed and matured ... 4,500,016 4,113,784 Proceeds from equity securities sold ............................................ 10,120,816 3,340,660 Cost of investments purchased: Held to maturity: fixed maturities .......................................... -- (986,990) Available for sale: fixed maturities ......................................... (5,414,702) (2,832,558) equity securities ......................................... (12,071,767) (4,044,652) Net change in short-term investments ............................................ 1,758,082 1,258,766 Purchase of furniture and equipment ............................................. (99,448) (76,006) Cash used in acquisition of assets .............................................. (403,503) -- Cash used in purchase of subsidiary ............................................. -- (958,094) Other ........................................................................... 160 (7,165) ------------ ------------ Net cash provided by (used in) investing activities .................... (990,346) 804,650 ------------ ------------ Cash flows from financing activities: Proceeds from note payable to bank .............................................. 14,750,000 12,665,000 Repayments of note payable to bank .............................................. (14,892,000) (13,045,000) Proceeds from stock options exercised ........................................... -- 37,563 Acquisition of treasury stock ................................................... (4,541) (1,067,252 ------------ ------------ Net cash used in financing activities .................................. (146,541) (1,409,689) ------------ ------------ Net increase in cash ............................................................... 10,189,177 5,566,789 ------------ ------------ Cash at December 31 ................................................................ 6,560,778 2,401,312 ------------ ------------ Cash at September 30 ............................................................... $ 16,749,955 $ 7,968,101 ============ ============ Supplemental disclosures of cash flow information: Cash paid during the year for: Interest ........................................................................ $ 11,210 $ 208,789 ============ ============ Income taxes .................................................................... $ 600,000 $ 745,000 ============ ============ Supplemental schedule of non-cash investing activities: Common shares issued in purchase acquisition .................................... 9,456 300,000
See accompanying notes to consolidated financial statements. 7 BANCINSURANCE CORPORATION AND SUBSIDIARIES Notes To Consolidated Financial Statements (Unaudited) 1. The Consolidated Balance Sheet as of September 30, 2001, the Consolidated Statements of Income for the three and nine months ended September 30, 2001 and 2000, the Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2001 and 2000, and the Consolidated Statements of Cash Flows for the nine months ended September 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 flow at September 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 on Form 10-K for the year ended December 31, 2000. The results of operations for the period ended September 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 BANCINSURANCE CORPORATION AND SUBSIDIARIES 6. Supplemental Disclosure For Earnings Per Share
Three Months Ended Nine Months Ended September 30, September 30, 2001 2000 2001 2000 ------------ ------------ ------------ ------------ Net income..................................... $ 729,396 $ 1,239,733 $ 2,229,717 $ 3,206,664 ------------ ------------ ------------ ------------ Weighted average common shares outstanding..... 5,770,185 5,844,241 5,769,055 5,906,678 Adjustments for dilutive securities: Dilutive effect of outstanding options....... 25,155 17,583 17,418 20,134 ------------ ------------ ------------ ------------ Diluted common shares.......................... 5,795,340 5,861,824 5,786,473 5,926,812 ============ ============ ============ ============ Basic and diluted earnings per share........... $ .13 $ .21 $ .39 $ .54
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.
September 30, 2001 ---------------------------------------------------------------------------------------------- Municipal Property/Casualty Insurance Code All Consolidated Insurance Agency Publishing Other Totals ---------------------------------------------------------------------------------------------- Revenues from external customers $ 29,302,948 $ 66,933 $ 1,892,872 $ 25,548 $ 31,288,301 Intersegment revenues........... 4,410 255,931 - 60,930 321,271 Interest revenue................ 1,018,257 94 - 27,496 1,045,847 Interest expense................ 10,363 - 1,581 13,568 25,512 Depreciation and amortization... 25,488 76,802 54,452 42,150 198,892 Segment profit (loss)........... 2,952,173 143,147 248,685 (260,178) 3,083,827 Income tax expense (benefit).... 765,236 77,038 94,380 (82,544) 854,110 Segment assets.................. 53,829,934 2,606,035 1,887,436 3,401,685 61,725,090 September 30, 2000 --------------------------------------------------------------------------------------------- Workers Municipal Property/Casualty Title Compensation Insurance Code All Consolidated Insurance Agency Administration Agency Publishing Other Totals --------------------------------------------------------------------------------------------- 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
9 BANCINSURANCE CORPORATION AND SUBSIDIARIES
--------------------------------------------------- September 30, September 30, 2001 2000 --------------------------------------------------- REVENUES Total revenues for reportable segments..................................... $ 31,288,301 $ 22,693,820 Interest revenue........................................................... 1,045,847 1,181,811 Elimination of intersegment revenues....................................... (321,271) (626,598) ------------- ------------- Total consolidated revenues................................................ $ 32,012,877 $ 23,249,033 ============= ============= PROFIT Total profit for reportable segments....................................... $ 3,665,276 $ 5,327,747 Other loss ................................................................ (260,178) (30,072) Elimination of intersegment profits........................................ (321,271) (626,598) ------------- ------------- Income before income taxes................................................. $ 3,083,827 $ 4,671,077 ============= ============= ASSETS Total assets for reportable segments....................................... $ 58,323,405 $ 46,222,327 Other assets............................................................... 3,401,685 2,963,237 Elimination of intersegment receivables.................................... (1,532,495) (1,312,970) ------------- ------------- Consolidated assets........................................................ $ 60,192,595 $ 47,872,594 ============= =============
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. 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. 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 BANCINSURANCE CORPORATION AND SUBSIDIARIES SUMMARY RESULTS The following table sets forth period to period changes in selected financial data:
----------------------------------------------------- Period to Period Increase Nine Months Ended September 30, ----------------------------------------------------- 2000-2001 ----------------------------------------------------- Amount % Change ----------------------------------------------------- Premiums written.............................................. $ 12,126,835 63.5% Net premiums earned........................................... 9,035,063 48.3% Net investment income......................................... 460,413 42.9% Total revenue................................................. 8,763,844 37.7% Losses and loss adjustment expenses, net of reinsurance recoveries............................... 5,505,710 54.6% Operating expenses............................................ 5,052,420 61.1% Interest expense.............................................. (207,036) (89.0)% Operating income.............................................. (1,587,250) (34.0)% Net income.................................................... (976,947) (30.5)%
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 nine months ended September 30:
2001 2000 ------------------------- Statutory: Loss ratio.............................................................. 63.8% 59.1% Expense ratio........................................................... 26.0% 27.0% ---- ---- Combined ratio.......................................................... 89.8% 86.1% ==== ==== GAAP: Loss ratio.............................................................. 56.2% 53.9% Expense ratio........................................................... 43.7% 30.1% ---- ---- Combined ratio.......................................................... 99.9% 84.0% ==== ====
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 intend to hold our held to maturity fixed income securities to maturity or the applicable put date. 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, 2001 AS COMPARED TO SEPTEMBER 30, 2000 Premiums Written; Premiums Earned. Premiums written for the nine months ended September 30, 2001 increased 63.5% from $19,112,351 at September 30, 2000 to $31,239,186 at September 30, 2001. Premiums earned increased 48.3% from $18,696,132 at September 30, 2000 to $27,731,195 at September 30, 2001. Premiums written increased 103.6% for the three months ended September 30, 2001 versus September 30, 2000. Premiums earned increased 51.1% for the same third quarter comparables. Premiums written for the Lender/Dealer Insurance programs increased 74.1% from $15,516,495 11 BANCINSURANCE CORPORATION AND SUBSIDIARIES in the first nine months of 2000 to $27,014,238 in the first nine months of 2001. Premiums earned from the Lender/Dealer Insurance programs increased 54.1% from $15,853,770 in the first nine months of 2000 to $24,438,046 in the first nine months of 2001. Premiums written for the Lender/Dealer Insurance programs increased 104.6% for the three months ended September 30, 2001 versus September 30, 2000. Premiums earned for the Lender/Dealer Insurance programs increased 57.3% for the same quarter comparables. Our Ultimate Loss Insurance product added a major financial institution as a customer during 2001 as a result of increased marketing efforts. In addition, we expanded sales through agency relationships to regional and community financial institutions. Premiums written and earned for our Guaranteed Auto Protection ("GAP") product increased from $164,705 and $18,603 in the nine months ended September 30, 2000 to $1,289,039 and $342,260 in the nine months ended September 30, 2001, respectively. A significant portion of this increase resulted from an agent transferring a book of GAP business to our Company. Premiums written for the Unemployment Insurance Protection program increased 11.2% from $3,595,856 in the nine months ended September 30, 2000 to $3,998,733 in the nine months ended September 30, 2001. Premiums earned from the Unemployment Insurance Protection program increased 12.6% from $2,842,362 in the first nine months of 2000 to $3,199,500 in the first nine months of 2001. Premiums written decreased 25.7% and premiums earned increased 5.1% for the Unemployment Insurance Protection program for the three months ended September 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. During the third quarter of 2001, we assumed Bail Bond coverage in New Jersey. Premiums written and earned were $226,215 and $93,649 during the nine months ended September 30, 2001, respectively. Net Investment Income. Our $30,387,068 investment portfolio is primarily concentrated in investment-grade fixed income securities. With respect to 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 42.9% from $1,073,540 in the first nine months of 2000 to $1,533,953 in the first nine months of 2001, and decreased 6.2% from $346,844 in the three months ended September 30, 2000 to $325,363 in the three months ended September 30, 2001. The nine month increase was primarily due to realized investment gains of $406,003 in 2001 compared to realized investment losses of $176,992 in 2000. The three month decline was primarily due to a decrease in interest earned on short-term investments. Codification and Subscription Fees. Codification and subscription fees generated by American Legal Publishing, our consolidated subsidiary, accounted for $1,335,182 and $565,219 of the revenues for the nine months and three months ended September 30, 2000, respectively, compared to $1,892,872 and $708,168 of the revenues for the nine and three months ended September 30, 2001, respectively. Claims Administration Fees. Claims administration fees generated by BCIS Services, our former consolidated subsidiary, accounted for $427,036 of the revenues for the first nine months of 2000. Claims administration fees accounted for $104,132 of the revenues for the three months ended September 30, 2000. On October 6, 2000, we sold BCIS Services. Title and Appraisal Fees. Title Services and appraisal fees generated by Custom Title Services, our former consolidated subsidiary, accounted for $115,724 of the revenues for the first nine months of 2000. On January 24, 2000, we sold Custom Title. Management Fees. Management fees for the nine months ended September 30, 2000 were $521,703 and for the nine months ended September 30, 2001 were $671,306. Management fees increased from $75,147 for the three months ended September 30, 2000 to $234,889 for the three months ended September 30, 2001. The third 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 Paul Boardway and Associates, our consolidated subsidiary, accounted for $129,363 and $22,262 of the revenues for the nine and three month periods ending September 30, 2000, respectively, compared with $66,933 and $(259) of the revenues for the nine and three month periods ended September 30, 2001, respectively. Other income. Other income declined from $950,353 for the nine months ended September 30, 2000 to $100,770 for the nine months ended September 30, 2001. 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. 12 BANCINSURANCE CORPORATION AND SUBSIDIARIES Losses and Loss Adjustment Expenses, Net of Reinsurance Recoveries. Losses and loss adjustment expenses totaled $10,083,025, or 53.9% of net premiums earned, during the first nine months of 2000 compared with $15,588,735, or 56.2% of net premiums earned during the first nine months of 2001. Losses and loss adjustment expenses totaled $5,826,766, or 57.7% of net premiums earned, during the third quarter of 2001, compared with $3,103,305, or 46.5% of net premiums earned, during the third quarter of 2000. Losses and loss adjustment expenses for the Lender/Dealer Insurance programs increased 52.4% from $9,991,220 during the nine months ended September 30, 2000 to $15,229,848 during the nine months ended September 30, 2001 and increased 85.4% from $3,042,700 during the three months ended September 30, 2000 to $5,641,500 during the three months ended September 30, 2001. These increases were primarily due to significant losses attributed to the growth in the number of policies issued for our Lender/Dealer insurance programs. Our GAP product incurred losses and loss adjustment expenses of $16,471 and $150,614 during the nine months ended September 30, 2000 and 2001, respectively, and $11,115 and $44,062 during the three months ended September 30, 2000 and 2001, respectively. Losses and loss adjustment expenses for the Unemployment Insurance Protection program increased from $91,805 in the first nine months of 2000 to $302,697 in the first nine months of 2001. This increase resulted from less favorable loss experience on reserves for prior accident years and an increase in the loss and loss adjustment expense ratio for losses and loss adjustment expenses occurring in the current accident year. Our Bail Bond Insurance program incurred loss and loss adjustment expense of $56,190 during the third quarter of 2001. Operating Expenses. Operating expenses consist of experience rating adjustments, commission expense, other insurance operating expense and general and administrative expenses. Operating expenses increased 61.1% from $8,262,383 for the nine months ended September 30, 2000 to $13,314,803 for the nine months ended September 30, 2001. Operating expenses increased 64.0% from $2,788,783 to $4,573,006 during the three months ended September 30, 2000 and 2001, respectively. The experience rating adjustment increased to $1,203,767 in the third quarter of 2001 from $527,058 in the third 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 89.2% from $2,423,209 for the nine months ended September 30, 2000 to $4,585,214 for the nine months ended September 30, 2001. Commission expense increased 104.7% from $911,534 to $1,865,760 during the three months ended September 30, 2000 and 2001, respectively. These increases were primarily due to growth in our regional and community financial institution and GAP customer base. Other insurance operating expenses increased 12.4% from $2,369,543 in the first nine months of 2000 to $2,664,410 in the first nine months of 2001 and increased 21.8% from $705,219 to $858,765 during the three months ended September 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 18.8% from $2,501,634 in the first nine months of 2000 to $2,032,125 in the first nine months of 2001. General and administrative expenses were $644,972 and $644,714 during the three months ended September 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 $351,687 during the nine months ended September 30, 2000 and $75,578 in the third quarter of 2000 compared with $195,659 and $72,538 during the same periods in 2001, respectively. American Legal Publishing incurred operating expenses of $1,141,227 and $499,411 during the nine months and three months ended September 2000, respectively, compared with $1,644,187 and $595,984 during the same periods in 2001, respectively. Interest Expense. Interest expense decreased from $232,548 in the first nine months of 2000 to $25,512 in the first nine months of 2001 and from $52,554 for the three months ended September 30, 2000 to $10,479 for the three months ended September 30, 2001. These decreases were due to reductions in the prime rate and maintaining a lower borrowing level on our revolving credit line. Federal Income Taxes. Federal income taxes decreased from $1,464,413 in the first nine months of 2000 to $854,110 in the first nine months of 2001 and from $619,481 for the three months ended September 30, 2000 to $278,884 for the three months ended September 30, 2001. The effective consolidated income tax rate was 33.3% for the quarter ended September 30, 2000 and 27.7% for the quarter ended September 30, 2001. GAAP Combined Ratio. The combined ratio for Ohio Indemnity for the nine months ended September 30, 2001 was 99.9% compared with 84.0% for the nine months ended September 30, 2000. The loss ratio increased 2.3 percentage points for the first nine months of 2001 as a result of substantially higher losses associated with the Lender/Dealer Insurance programs as a result of a weaker national economy. 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. 13 BANCINSURANCE CORPORATION AND SUBSIDIARIES 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 $11,326,064 and $6,171,828 for the nine months ended September 30, 2001 and 2000, respectively. Net cash provided by (used in) our investing activities was $(990,346) and $804,650 for the nine months ended September 30, 2001 and 2000, respectively. Net cash used in financing activities was $146,541 for the nine months ended September 30, 2001 and $1,409,689 for the nine months ended September 30, 2000. 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 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, 2001 consisted primarily of investment-grade fixed income securities. Cash and short-term investments at September 30, 2001 amounted to $21,011,313 or 44.6% 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 intend 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 $1,533,953 and $1,073,540 for the nine months ended September 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 $30,202,910 at September 30, 2001, 5.8% higher than at December 31, 2000. Book value per diluted share was $5.22 at September 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 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. Such reserves were $301,125 and $288,000 at September 30, 2001 and 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. 14 BANCINSURANCE CORPORATION AND SUBSIDIARIES 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 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, 2001. Our market risk sensitive instruments are entered into for purposes other than trading. The carrying value of our investment portfolio as of September 30, 2001 was $30,387,068, 65.6% of which is invested in fixed maturity securities, 20.4% in equity securities and 14.0% 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 September 30, 2001, there were no material 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 material 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 intends to add 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 In our third quarter, we experienced a material increase in loss and loss adjustment expenses. We attribute this increase primarily to the condition of the national economy. Specifically, we believe that rising unemployment levels and increased loan defaults and automobile repossessions contributed to such increase. To the extent that unemployment levels continue to rise, loan defaults and automobile repossessions continue to increase in frequency and the national economy continues to weaken, we anticipate that this trend will continue during our fourth quarter. We also anticipate that our premiums earned in the fourth quarter will be affected by the condition of the national economy. Specifically, the tragedies of September 11, 2001 motivated captive finance companies of automobile manufacturers to offer 0% financing programs. As a result, banks and finance companies, our primary customers, are experiencing lower demand for automobile loans. Although we are uncertain of the long-term impact of this trend, we anticipate that it will cause a decrease in premiums earned by our Lender/Dealer Insurance programs during our fourth quarter. 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 and shareholder values 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 have no obligation and we do not intend to update forward-looking statements after the date hereof, even if new information, future events or 15 BANCINSURANCE CORPORATION AND SUBSIDIARIES 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 varies 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. 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, 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 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 September 30, 2001. 16 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. BANCINSURANCE CORPORATION ------------------------- (Company) Date: November 7, 2001 By: Si Sokol -------------------- ------------------------------------------- Si Sokol Chairman and Chief Executive Officer (Principal Executive Officer) Date: November 7, 2001 By: Sally Cress -------------------- ------------------------------------------- Sally Cress Treasurer and Secretary Principal Financial and Accounting Officer) 17