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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 2003
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from to
----------------- ----------------------------
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 Identification No.)
incorporation or organization)
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 by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act).
YES [ ] NO [X]
The number of outstanding Common Shares, without par value, of the
registrant as of October 31, 2003 was 4,920,050.
BANCINSURANCE CORPORATION
AND SUBSIDIARIES
INDEX
Page No.
---------
PART I - FINANCIAL INFORMATION:
Item 1. Financial Statements
Consolidated Balance Sheets as of September 30, 2003
(unaudited) and December 31, 2002........................................... 3
Consolidated Statements of Income for the three months and nine
months ended September 30, 2003 and 2002 (unaudited)......................... 5
Consolidated Statements of Comprehensive Income for the three
months and nine months ended September 30, 2003 and 2002 (unaudited)......... 6
Consolidated Statements of Cash Flows for the
nine months ended September 30, 2003 and 2002 (unaudited).................... 7
Notes to Consolidated Financial Statements (unaudited)............................... 8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations................................ 12
Item 3. Quantitative and Qualitative Disclosures About
Market Risk.................................................................. 23
Item 4. Controls and Procedures............................................................ 23
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................................................... 24
Signatures................................................................................. 25
PART I - FINANCIAL INFORMATION
ITEM 1. Financial Statements
BANCINSURANCE CORPORATION
AND SUBSIDIARIES
Consolidated Balance Sheets
September 30, December 31,
Assets 2003 2002
------ ------------- ------------
(Unaudited) (Note 2)
Investments:
Held to maturity:
Fixed maturities, at amortized cost (fair value
$5,094,318 in 2003 and $4,691,903 in 2002) .......................... $ 4,881,357 $ 4,487,749
Available for sale:
Fixed maturities, at fair value (amortized cost
$23,927,854 in 2003 and $15,557,400 in 2002) ........................ 24,086,679 15,912,650
Common stock, at fair value (cost $4,938,804
in 2003 and $4,841,903 in 2002) ..................................... 6,680,826 5,952,213
Preferred stock, at fair value (cost $11,625,004
in 2003 and $875,003 in 2002) ....................................... 11,723,351 917,300
Short-term investments, at cost which
approximates fair value ............................................... 26,640,695 25,135,305
Other invested assets ................................................... 1,049,137 582,137
------------ ------------
Total investments .............................................. 75,062,045 52,987,354
------------ ------------
Cash ......................................................................... 3,218,666 4,306,007
Premiums receivable .......................................................... 7,682,603 5,910,719
Accounts receivable, net ..................................................... 625,695 844,059
Reinsurance recoverables ..................................................... 1,425,069 283,417
Prepaid reinsurance premiums ................................................. 6,500,382 1,228,632
Deferred policy acquisition costs ............................................ 4,914,880 2,653,826
Estimated earnings in excess of billings on uncompleted codification contracts 336,868 224,837
Loans to affiliates .......................................................... 772,059 685,856
Current federal income taxes ................................................. 330,314 295,235
Excess of investment over net assets of subsidiaries, net .................... 753,737 753,737
Intangible assets, net ....................................................... 938,677 994,566
Accrued investment income .................................................... 571,908 328,751
Other assets ................................................................. 1,787,779 1,206,208
------------ ------------
Total assets ................................................... $104,920,682 $ 72,703,204
============ ============
3
BANCINSURANCE CORPORATION
AND SUBSIDIARIES
Consolidated Balance Sheets, Continued
September 30, December 31,
Liabilities and Shareholders' Equity 2003 2002
------------------------------------ ------------- ------------
(Unaudited) (Note 2)
Reserve for unpaid losses and loss adjustment expenses .............................. $ 14,861,794 $ 7,559,503
Unearned premiums ................................................................... 22,512,777 10,304,769
Experience rating adjustments payable ............................................... 6,864,530 4,764,329
Retrospective premium adjustments payable ........................................... 4,127,391 3,951,898
Funds held under reinsurance treaties ............................................... 1,764,922 1,513,297
Contract funds on deposit ........................................................... 1,752,865 1,317,663
Taxes, licenses, and fees payable ................................................... 936,058 297,418
Deferred federal income taxes ....................................................... 747,170 82,027
Commissions payable ................................................................. 2,221,119 1,990,436
Billings in excess of estimated earnings on uncompleted codification contracts ...... 133,067 93,894
Notes payable ....................................................................... 52,796 2,166,355
Other liabilities ................................................................... 1,701,473 1,511,777
Trust preferred debt issued to affiliates ........................................... 15,465,000 8,248,000
------------ ------------
Total liabilities ..................................................... 73,140,962 43,801,366
------------ ------------
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 at September 30, 2003 and December 31, 2002,
4,920,050 shares outstanding at September 30, 2003 and 5,000,291 shares
outstanding at December 31, 2002 ........................................... 1,794,141 1,794,141
Additional paid-in capital ..................................................... 1,337,138 1,337,138
Accumulated other comprehensive income ......................................... 1,319,468 995,186
Retained earnings .............................................................. 33,354,820 30,429,515
------------ ------------
37,805,567 34,555,980
Less: Treasury shares, at cost (1,250,291 common shares at September 30,
2003 and 1,170,050 common shares at December 31, 2002) ..................... (6,025,847) (5,654,142)
------------ ------------
Total shareholders' equity ............................................ 31,779,720 28,901,838
------------ ------------
Total liabilities and shareholders' equity ............................ $104,920,682 $ 72,703,204
============ ============
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,
2003 2002 2003 2002
------------ ------------ ------------ ------------
Income:
Net premiums earned ..................................... $ 15,770,717 $ 11,598,795 $ 42,027,483 $ 30,683,481
Net investment income ................................... 412,290 351,881 1,217,287 1,000,632
Net realized gain (loss) on investments ................. 371,948 (248,844) 839,008 (398,529)
Codification and subscription fees ...................... 913,121 745,017 2,669,797 2,259,726
Management fees ......................................... 45,319 178,826 244,742 638,692
Other income ............................................ 3,299 3,725 60,148 171,860
------------ ------------ ------------ ------------
Total revenue ..................................... 17,516,694 12,629,400 47,058,465 34,355,862
------------ ------------ ------------ ------------
Losses and operating expenses:
Losses and loss adjustment expenses ..................... 11,997,823 8,979,573 27,931,640 20,922,965
Experience rating adjustments ........................... (56,140) (1,013,276) 2,100,201 (798,689)
Commission expense ...................................... 2,094,468 2,086,527 5,419,756 5,370,829
Other insurance operating expenses ...................... 1,259,660 1,208,280 3,953,085 2,961,806
Codification and subscription expenses .................. 904,483 678,079 2,530,466 1,886,995
General and administrative expenses ..................... 271,425 365,290 798,692 875,473
Goodwill impairment ..................................... -- 179,000 -- 179,000
Interest expense ........................................ 117,119 31,304 336,310 71,167
------------ ------------ ------------ ------------
Total expenses .................................... 16,588,838 12,514,777 43,070,150 31,469,546
------------ ------------ ------------ ------------
Income before federal income taxes and
cumulative effect of change in accounting
principle ...................................... 927,856 114,623 3,988,315 2,886,316
Federal income tax expense ................................. 177,681 21,953 1,063,009 822,211
------------ ------------ ------------ ------------
Income before cumulative effect of change in
accounting principle ........................... 750,175 92,670 2,925,306 2,064,105
Cumulative effect of change in accounting principle ........ -- -- -- (1,481,858)
------------ ------------ ------------ ------------
Net income ........................................ $ 750,175 $ 92,670 $ 2,925,306 $ 582,247
============ ============ ============ ============
Basic net income per share:
Before cumulative effect of change in accounting
principle ............................................. $ .15 $ .02 $ .58 $ .37
Cumulative effect of change in accounting principle ..... -- -- -- (.26)
------------ ------------ ------------ ------------
Basic net income per share .............................. $ .15 $ .02 $ .58 $ .11
============ ============ ============ ============
Diluted net income per share:
Before cumulative effect of change in accounting
principle ............................................. $ .15 $ .02 $ .58 $ .36
Cumulative effect of change in accounting principle ..... -- -- -- (.25)
------------ ------------ ------------ ------------
Diluted net income per share ............................ $ .15 $ .02 $ .58 $ .11
============ ============ ============ ============
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,
2003 2002 2003 2002
------------ ------------ ------------ ------------
Net income ................................................. $ 750,175 $ 92,670 $ 2,925,306 $ 582,247
Other comprehensive income:
Unrealized holding gain (loss) on securities
arising during period, net of tax and
reclassification adjustment ........................... (117,006) (109,924) 324,282 (91,137)
------------ ------------ ------------ ------------
Comprehensive income (loss) ................................ $ 633,169 $ (17,254) $ 3,249,588 $ 491,110
============ ============ ============ ============
See accompanying notes to consolidated financial statements.
6
BANCINSURANCE CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
Nine Months Ended
September 30,
2003 2002
------------ ------------
Cash flows from operating activities:
Net income ...................................................................... $ 2,925,306 $ 582,247
Adjustments to reconcile net income to net cash provided by operating activities:
Net realized loss on goodwill impairment ..................................... -- 1,660,858
Net realized (gain) loss on investments ...................................... (839,008) 398,529
Net realized loss on disposal of property and equipment ...................... -- 1,073
Depreciation and amortization ................................................ 296,180 232,476
Deferred federal income tax expense .......................................... 498,089 58,639
Change in assets and liabilities:
Premiums receivable ....................................................... (1,771,884) (450,689)
Accounts and reinsurance receivable, net .................................. (6,195,038) (342,889)
Deferred policy acquisition costs ......................................... (2,261,054) (1,037,404)
Other assets, net ......................................................... (1,058,041) (289,755)
Reserve for unpaid losses and loss adjustment expenses .................... 7,302,291 1,642,895
Unearned premiums ......................................................... 12,208,008 3,845,532
Funds held under reinsurance treaties ..................................... 251,625 392,423
Experience rating adjustments payable ..................................... 2,100,201 (798,688)
Retrospective premium adjustments payable ................................. 175,493 (1,208,153)
Contract funds on deposit ................................................. 435,202 (1,157,031)
Other liabilities, net .................................................... 1,657,297 (450,830)
------------ ------------
Net cash provided by operating activities ............................... 15,724,667 3,079,233
------------ ------------
Cash flows from investing activities:
Proceeds from held to maturity fixed maturities due to redemption or maturity ... 1,100,000 1,245,400
Proceeds from available for sale fixed maturities sold, redeemed or matured ..... 7,852,441 4,554,438
Proceeds from available for sale equity securities sold ......................... 16,255,862 14,599,850
Cost of investments purchased:
Held to maturity fixed maturities ............................................ (1,509,145) (1,102,131)
Available for sale fixed maturities .......................................... (16,238,773) (5,300,325)
Available for sale equity securities ......................................... (26,368,631) (15,525,770)
Net change in short-term investments and other invested assets .................. (1,972,390) (10,945,315)
Purchase of land, property and leasehold improvements ........................... (459,667) (133,731)
Cash used in acquisition of assets .............................................. -- (25,000)
------------ ------------
Net cash used in investing activities ................................... (21,340,303) (12,632,584)
------------ ------------
Cash flows from financing activities:
Proceeds from note payable to bank .............................................. 5,900,000 12,590,000
Repayments of note payable to bank .............................................. (8,000,000) (15,190,000)
Proceeds from issuance of trust preferred debt to an affiliate .................. 7,000,000 --
Acquisition of treasury shares .................................................. (371,705) (3,496,257)
------------ ------------
Net cash provided by (used in) financing activities .................... 4,528,295 (6,096,257)
------------ ------------
Net decrease in cash ............................................................... (1,087,341) (15,649,608)
------------ ------------
Cash at December 31 ................................................................ 4,306,007 19,547,132
------------ ------------
Cash at September 30 ............................................................... $ 3,218,666 $ 3,897,524
============ ============
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest ...................................................................... $ 336,937 $ 67,704
============ ============
Income taxes .................................................................. $ 600,000 $ 1,288,102
============ ============
See accompanying notes to consolidated financial statements.
7
BANCINSURANCE CORPORATION
AND SUBSIDIARIES
Notes To Consolidated Financial Statements (Unaudited)
1. We prepared the Consolidated Balance Sheet as of September 30, 2003, the
Consolidated Statements of Income for the three and nine months ended
September 30, 2003 and 2002, the Consolidated Statements of Comprehensive
Income for the three and nine months ended September 30, 2003 and 2002, and
the Consolidated Statements of Cash Flows for the nine months ended
September 30, 2003 and 2002, without an audit. In the opinion of
management, all adjustments necessary to fairly present the financial
position, results of operations and cash flows at September 30, 2003 and
for all periods presented have been made.
We prepared the accompanying unaudited Consolidated Financial Statements in
accordance with accounting principles generally accepted in the United
States for interim financial information and with the instructions to the
Quarterly Report on 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. We recommend that you read
these unaudited Consolidated Financial Statements together with the
financial statements and notes thereto included in our Annual Report on
Form 10-K for the year ended December 31, 2002. The results of operations
for the period ended September 30, 2003 are not necessarily indicative of
the results of operations for the full year.
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. Effective January 1, 2002, we adopted Statement of Financial Accounting
Standards No. 142, Goodwill and Other Intangible Assets ("SFAS 142"). Under
SFAS 142, we no longer amortize goodwill and intangibles which have
indefinite lives. SFAS 142 requires that we assess goodwill and intangibles
with indefinite lives for impairment at least annually, based on the fair
value of the related reporting segment. Our annual impairment assessment
will be performed in the fourth quarter on an on-going basis, or earlier if
deemed necessary.
As an initial step in the SFAS 142 implementation process, we assigned
goodwill and intangibles to our property/casualty insurance, insurance
agency and municipal code publishing reporting segments. Following such
assignment, the fair value of each reporting segment was compared to its
carrying value. Fair values were determined by discounting estimated future
cash flows.
Based on our impairment testing, a net after-tax impairment charge of
$1,481,858 was recognized as a cumulative effect of change in accounting
principle in the first quarter of 2002. The impairment charge was
associated with the August 1999 acquisition of Paul Boardway and
Associates, Inc.
We dissolved Paul Boardway and Associates, Inc. in 2002. As a result of the
then pending dissolution, the remaining goodwill of $179,000 was recorded
as a pre-tax impairment charge to income in the third quarter of 2002.
Intangible assets as of September 30, 2003 and December 31, 2002 were as
follows:
As of September 30, 2003 As of December 31, 2002
---------------------------------------------- ----------------------------------------------
Accumulated Accumulated
Cost Amortization Net Cost Amortization Net
---------- ------------ ---------- ---------- ------------ ----------
Amortization Intangibles:
Databases ................ $1,008,773 $ 140,431 $ 868,342 $1,008,773 $ 102,562 $ 906,211
Noncompete agreement ..... 120,394 50,059 70,335 120,394 32,039 88,355
---------- ---------- ---------- ---------- ---------- ----------
Total intangible assets ...... $1,129,167 $ 190,490 $ 938,677 $1,129,167 $ 134,601 $ 994,566
========== ========== ========== ========== ========== ==========
8
BANCINSURANCE CORPORATION
AND SUBSIDIARIES
Amortization expense related to amortizable intangible assets was $18,629
and $55,888 for the three and nine months ended September 30, 2003,
respectively, and $18,629 and $61,611 for the three and nine months ended
September 30, 2002, respectively. The estimated amortization expense of
intangible assets for the next five fiscal years ending December 31 is as
follows:
2003 $ 74,518
2004 74,518
2005 74,518
2006 66,518
2007 50,477
4. Supplemental Disclosure For Earnings Per Share:
Three Months Ended Nine Months Ended
September 30, September 30,
2003 2002 2003 2002
---------- ---------- ---------- ----------
Net income ............................... $ 750,175 $ 92,670 $2,925,306 $ 582,247
---------- ---------- ---------- ----------
Weighted average common shares outstanding 4,920,061 5,145,006 4,949,037 5,479,499
Dilutive effect of outstanding options.. 139,168 229,269 79,579 178,705
---------- ---------- ---------- ----------
Diluted common shares .................... 5,059,229 5,374,275 5,028,616 5,658,204
========== ========== ========== ==========
Basic and diluted earnings per share ..... $ .15 $ .02 $ .58 $ .11
========== ========== ========== ==========
5. On April 25, 2002, the Board of Directors adopted a common share repurchase
program. On May 23, 2002, the Board of Directors increased the aggregate
number of common shares available for repurchase under the repurchase
program to 700,000 common shares from 600,000 common shares previously
approved. The repurchase program expires on December 31, 2003. Through
September 30, 2003, we have repurchased 699,465 common shares at an average
price per share of $5.00 under this program. Repurchases were funded by
cash flows from operations.
6. We have three reportable business segments: property/casualty insurance,
insurance agency and municipal code publishing. The following provides
financial information regarding our reportable segments. 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 assumptions were
applied. Depreciation and capital expenditures are not considered material.
September 30, 2003
-----------------------------------------------------------------------------------------------
Municipal
Property/Casualty Insurance Code All Consolidated
Insurance Agency Publishing Other Totals
-----------------------------------------------------------------------------------------------
Revenues from external customers $ 42,953,375 $ 350,175 $ 2,669,797 $ 227,112 $ 46,200,459
Intersegment revenues .......... 4,410 300,657 -- 74,430 379,497
Interest revenue ............... 1,210,274 7 -- 27,222 1,237,503
Interest expense ............... 443 -- 1,521 334,346 336,310
Depreciation and amortization .. 133,393 -- 67,490 95,297 296,180
Segment profit (loss) .......... 4,451,426 260,682 137,823 (482,119) 4,367,812
Income tax expense (benefit) ... 1,275,109 89,570 82,221 (383,891) 1,063,009
Segment assets ................. 94,749,527 499,128 2,261,232 7,987,551 105,497,438
9
BANCINSURANCE CORPORATION
AND SUBSIDIARIES
September 30, 2002
-----------------------------------------------------------------------------------------------
Municipal
Property/Casualty Insurance Code All Consolidated
Insurance Agency Publishing Other Totals
-----------------------------------------------------------------------------------------------
Revenues from external customers $ 31,364,820 $ 7,716 $ 2,259,726 $ 2,008 $ 33,634,270
Intersegment revenues .......... 4,410 151,431 -- 83,430 239,271
Interest revenue ............... 942,467 102 -- 18,294 960,863
Interest expense ............... 15,359 -- 3,642 52,166 71,167
Depreciation and amortization .. 85,788 26,000 74,392 46,296 232,476
Segment profit (loss) .......... 3,392,171 (120,563) 368,016 (514,037) 3,125,587
Income tax expense (benefit) ... 910,045 20,265 138,600 (246,699) 822,211
Segment assets ................. 61,344,048 1,029,896 3,004,891 2,033,690 67,412,525
September 30, September 30,
2003 2002
-----------------------------------
Revenue
Total revenue for reportable segments ............................ $ 46,200,459 $ 33,634,270
Interest revenue ................................................. 1,237,503 960,863
Elimination of intersegment revenue .............................. (379,497) (239,271)
------------- -------------
Total consolidated revenue ....................................... $ 47,058,465 $ 34,355,862
============= =============
Profit
Total profit for reportable segments ............................. $ 4,849,931 $ 3,639,624
Other loss ....................................................... (482,119) (514,037)
Elimination of intersegment profit ............................... (379,497) (239,271)
------------- -------------
Income before federal income tax expense and cumulative effect of
change in accounting principle ................................. $ 3,988,315 $ 2,886,316
============= =============
Assets
Total assets for reportable segments ............................. $ 97,509,887 $ 65,378,835
Other assets ..................................................... 7,987,551 2,033,690
Elimination of intersegment receivables .......................... (576,756) (6,003,762)
------------- -------------
Consolidated assets .............................................. $ 104,920,682 $ 61,408,763
============= =============
7. We have three equity incentive plans which allow for granting options to
certain employees and directors of the Company. We account for compensation
expense related to such transactions using the "intrinsic value" based
method under the provisions of the Accounting Principles Board (APB)
Opinion No. 25, "Accounting for Stock Issued to Employees," and its related
interpretations.
In December 2002, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 148, Accounting for Stock-Based Compensation - Transition and
Disclosure - an amendment of FASB Statement No. 123, to provide alternative
methods for transitioning (on a voluntary basis) to the "fair value" based
method of accounting for stock-based compensation and to require prominent
disclosures about the method of accounting used for stock-based employee
compensation and the effect of the method used on reported results. The
"fair value" of the third quarter 2002 option grants (no options were
granted in the third quarter of 2003) and year to date 2003 and 2002 option
grants were estimated on the date of the grant using the Black Scholes
option-pricing model with the following weighted average assumptions:
For the three months For the nine months ended
ended September 30, September 30,
2003 2002 2003 2002
----- ------ ------- ------
Fair value of options granted........................... - $ 4.50 $ 5.23 $ 4.63
Expected volatility..................................... - 28.97% 27.70% 28.97%
Risk free interest rate................................. - 3.86% 2.75% 4.04%
Expected life (in years)................................ - 6 6 6
10
BANCINSURANCE CORPORATION
AND SUBSIDIARIES
As we account for stock options using the "intrinsic value" based method,
no compensation cost has been recognized in net income for the equity
incentive plans. Had we accounted for all stock-based employee compensation
under the "fair value" based method (SFAS No. 123), net income would have
been reduced as follows:
For the three months ended For the nine months ended
September 30, September 30,
2003 2002 2003 2002
---------- ---------- ---------- ----------
Net income, as reported .................. $ 750,175 $ 92,670 $2,925,306 $ 582,247
Deduct: Total stock-based employee
compensation expense determined
under "fair value" based method for
all awards, net of related tax effects.. -- 9,510 17,807 13,190
---------- ---------- ---------- ----------
Pro forma net income ..................... $ 750,175 $ 83,160 $2,907,499 $ 569,057
========== ========== ========== ==========
Basic and diluted earnings per share would not be impacted if the "fair
value" based method had been applied to all awards. Compensation expense in
the pro forma disclosure is not indicative of future amounts as options
vest over several years and additional grants are generally made each year.
8. In December 2002, we organized BIC Statutory Trust I ("BIC Trust I"), a
Connecticut special purpose business trust, which issued $8,000,000 of
floating rate trust preferred capital securities in an exempt private
placement transaction. In September 2003, we organized BIC Statutory Trust
II ("BIC Trust II"), a Delaware special purpose business trust, which
issued $7,000,000 of floating rate trust preferred capital securities in an
exempt private placement transaction. BIC Trust I and BIC Trust II were
formed for the sole purpose of issuing and selling the floating rate trust
preferred capital securities and investing the proceeds from such
securities in junior subordinated debentures of the Company. In connection
with the issuance of the trust preferred capital securities, the Company
issued junior subordinated debentures of $8,248,000 and $7,217,000 to BIC
Trust I and BIC Trust II, respectively. The floating rate trust preferred
capital securities and the junior subordinated debentures have
substantially the same terms and conditions. BIC Trust I and BIC Trust II
distribute the interest received from the Company on the junior
subordinated debentures to the holders of their floating rate trust
preferred capital securities to fulfill their dividend obligations with
respect to such trust preferred securities. BIC Trust I's floating rate
trust preferred capital securities, and the junior subordinated debentures
issued in connection therewith, pay dividends and interest, as applicable,
on a quarterly basis at a rate equal to three month LIBOR plus four hundred
basis points (5.14% at September 30, 2003), are redeemable at par on or
after December 4, 2007 and mature on December 4, 2032. BIC Trust II's
floating rate trust preferred capital securities, and the junior
subordinated debentures issued in connection therewith, pay dividends and
interest, as applicable, on a quarterly basis at a rate equal to three
month LIBOR plus four hundred and five basis points (5.19% at September 30,
2003), are redeemable at par on or after September 30, 2008 and mature on
September 30, 2033. Interest on the junior subordinated debentures is
charged to income as it accrues.
Interest expense related to the junior subordinated debentures for the
three and nine months ended September 30, 2003 was $111,471 and $333,735,
respectively. There was no interest expense related to the junior
subordinated debentures for the three and nine months ended September 30,
2002.
In January 2003, the FASB issued Interpretation No. 46, Consolidation of
Variable Interest Entities ("FIN 46"), which requires the consolidation of
certain entities considered to be variable interest entities ("VIEs"). An
entity is considered to be a VIE when it has equity investors who lack the
characteristics of having a controlling financial interest, or its capital
is insufficient to permit it to finance its activities without additional
subordinated financial support. Consolidation of a VIE by an investor is
required when it is determined that the investor will absorb a majority of
the VIE's expected losses if they occur, receive a majority of the VIE's
expected residual returns if they occur, or both. The Company adopted FIN
46 on July 1, 2003. Upon adoption, BIC Trust I was deconsolidated effective
July 1, 2003 with prior periods reclassified in the consolidated financial
statements. The deconsolidation did not have any impact on net income. In
accordance with FIN 46, BIC Trust II was not consolidated upon formation in
September 2003.
In May 2003, the FASB issued No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity, which
provides standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity.
The statement is effective for financial instruments entered into or
modified after May 31, 2003 and for pre-existing instruments at the
beginning of the first interim period beginning after June 15, 2003. The
Company adopted SFAS No. 150 on July 1, 2003, with no impact on the
consolidated financial statements.
11
BANCINSURANCE CORPORATION
AND SUBSIDIARIES
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Bancinsurance is a specialty property insurance holding company. We have three
reportable business segments: property/casualty insurance, municipal code
publishing and insurance agency.
Property/Casualty Insurance. Our wholly owned subsidiary, Ohio Indemnity Company
("Ohio Indemnity"), is a specialty property insurance company. Our principal
sources of revenue are premiums paid by insureds for insurance policies written
by Ohio Indemnity. Ohio Indemnity, an Ohio corporation, is licensed in 47
states, the District of Columbia and for surplus lines in Texas. As such, Ohio
Indemnity is subject to the regulations of the Department of Insurance of the
State of Ohio (the "Department") and the regulations of each state in which it
operates. The majority of Ohio Indemnity's premiums are derived from two
distinct lines of business: (1) products designed for automobile lenders/dealers
and (2) unemployment insurance protection and bail bond products.
Our automobile lender/dealer group offers three types of products. First,
ultimate loss insurance, a blanket vendor single interest coverage, is the
primary product we offer to financial institutions nationwide. This product
insures banks and financial institutions against damage to pledged collateral in
cases where the collateral is not otherwise insured. An ultimate loss insurance
policy is generally written to cover a lender's complete portfolio of
collateralized personal property loans, typically automobiles. Second, creditor
placed insurance is an alternative to our traditional blanket vendor single
interest product. While both products cover the risk of damage to uninsured
collateral in a lender's automobile loan portfolio, creditor placed insurance
covers the portfolio through tracking individual borrower's insurance coverage.
The lender purchases physical damage coverage for loan collateral after a
borrower's insurance has lapsed. Third, our guaranteed auto protection insurance
("GAP") pays the difference or gap between the amount owed by the customer on a
lease or loan contract and the amount of primary insurance company coverage in
the event a vehicle is damaged beyond repair or stolen and never recovered. The
GAP product is sold to automobile dealers, lenders and lessors who then sell
coverage directly to the borrower at the time of purchasing or leasing an
automobile.
We offer three types of unemployment insurance protection products: (1) bonded
service, (2) excess of loss and (3) mandated bonds. Our unemployment insurance
protection products are utilized by not-for-profit entities which elect not to
pay the unemployment compensation tax and instead reimburse the state
unemployment agencies for benefits paid by the agencies to the entities' former
employees. Certain national cost containment firms provide programs to ensure
that reimbursing employers discharge their unemployment compensation
commitments. Through its bonded service products, Ohio Indemnity bonds these
national cost containment firms for their program service responsibilities. Ohio
Indemnity also provides excess of loss coverage, under trust arrangements, to
groups of not-for-profit entities that want to declare reimbursing status for
their unemployment insurance obligations. We also underwrite state mandated
surety bonds. Certain states require that reimbursing employers post a bond as a
security for the performance of their reimbursing obligations. Ohio Indemnity
provides this mandated bond on behalf of employers enrolled in the bonded
service program. In addition to the unemployment insurance protection products,
we provide bail bond coverage through an assumed reinsurance agreement for 15%
participation, with other insurers assuming the remaining exposure. This
agreement insures a bail bond company against losses arising from the
nonperformance of bail requirements.
Insurance Agency. In July 2002, we formed Ultimate Services Agency, LLC, an Ohio
limited liability company ("USA"). We formed USA to act as an agency for placing
property and casualty insurance policies offered and underwritten by Ohio
Indemnity and by other property and casualty insurance companies. In the fourth
quarter of 2002, we dissolved our wholly owned subsidiary, Paul Boardway and
Associates, Inc., which previously acted as a property/casualty insurance
agency.
Municipal Code Publishing. Our wholly owned subsidiary, American Legal
Publishing Corporation ("ALPC"), codifies, publishes and distributes ordinances
for over 1,500 municipalities and counties nationwide in addition to state
governments. Ordinance codification is the process of collecting, organizing and
publishing legislation for state and local governments.
12
BANCINSURANCE CORPORATION
AND SUBSIDIARIES
SUMMARY RESULTS
The following table sets forth period-to-period changes in selected financial
data:
PERIOD TO PERIOD INCREASE (DECREASE)
NINE MONTHS ENDED SEPTEMBER 30,
2002-2003
-----------------------------------
Amount % Change
-----------------------------------
Net premiums earned .................................... $11,344,002 37.0%
Net investment income .................................. 216,655 21.7%
Net realized gain on investments ....................... 1,237,537 310.5%
Total revenue .......................................... 12,702,603 37.0%
Losses and loss adjustment expenses, net of reinsurance
recoveries ........................................... 7,008,675 33.5%
Operating expenses ..................................... 4,505,786 43.8%
Interest expense ....................................... 265,143 372.6%
Income before federal income taxes and cumulative effect
of change in accounting principle ................... 1,101,999 38.2%
Cumulative effect of change in accounting principle .... 1,481,858 100.0%
Net income ............................................. 2,343,059 402.4%
The combined ratio, which is the sum of the loss ratio and the expense ratio, is
the traditional measure of underwriting experience for insurance companies. The
statutory combined ratio is the sum of the ratio of losses to premiums earned
plus the ratio of statutory underwriting expenses to premiums written after
reducing both premium amounts by dividends to policyholders. Statutory
accounting principles differ in certain respects from accounting principles
generally accepted in the United States ("GAAP"). Under statutory accounting
principles, policy acquisition costs and other underwriting expenses are
recognized immediately, not at the same time premiums are earned. To convert
underwriting expenses to a GAAP basis, policy acquisition expenses are deferred
and recognized over the period in which the related premiums are earned.
Therefore, the a GAAP combined ratio is the sum of the ratio of losses to
premiums earned plus the ratio of underwriting expenses to premiums earned. The
following table reflects Ohio Indemnity's loss, expense and combined ratios on
both a statutory and a GAAP basis for the nine months ended September 30:
2003 2002
---- ----
Statutory:
Loss ratio ...................... 70.0% 66.5%
Expense ratio ................... 24.2% 28.7%
---- ----
Combined ratio .................. 94.2% 95.2%
==== ====
GAAP:
Loss ratio ...................... 66.5% 68.2%
Expense ratio ................... 27.9% 24.9%
---- ----
Combined ratio .................. 94.4% 93.1%
==== ====
RESULTS OF OPERATIONS
SEPTEMBER 30, 2003 AS COMPARED TO SEPTEMBER 30, 2002
Premiums. Net premiums earned for the third quarter of 2003 increased 36.0% to
$15,770,717 from $11,598,795 for the same quarter of 2002. On a year-to-date
basis, net premiums earned increased 37.0% to $42,027,483 from $30,683,481 in
the same nine-month period of 2002. We attribute these increases in net premiums
earned primarily to growth in our lender/dealer business.
13
BANCINSURANCE CORPORATION
AND SUBSIDIARIES
Net premiums earned related to our ultimate loss and creditor placed insurance
products increased 34.0% to $13,781,161 in the third quarter of 2003 from
$10,284,910 in the third quarter of 2002. This increase included net premiums
earned of $993,178 for creditor placed insurance products, which were introduced
in the fourth quarter of 2002. On a year-to-date basis, net premiums earned for
our ultimate loss and creditor placed insurance products increased 35.4% to
$36,043,359 from $26,620,977 in the same period of 2002, including $3,895,719
for creditor placed insurance products for the nine months ended September 30,
2003. We attribute these increases primarily to new business growth in our
creditor placed insurance products, new ultimate loss policies added during
2003, rate increases with existing ultimate loss customers and volume increases
with existing ultimate loss customers. The increased volume in ultimate loss
insurance was primarily caused by an increase in automobile lending by some of
our large financial institution customers, driven by aggressive financing
offers.
Net premiums earned related to our GAP insurance products increased 143.9% to
$621,616 in the third quarter of 2003 from $254,853 in the same period of 2002.
On a year-to-date basis, GAP net premiums earned increased 187.0% to $1,730,329
from $602,909 in the same period of 2002. We attribute this growth to two
existing large financial institution customers purchasing GAP coverage during
2003.
Net premiums earned related to our unemployment insurance protection and bail
bond products increased 29.2% to $1,367,940 in the third quarter of 2003
compared to $1,059,032 in the same period of 2002. On a year-to-date basis,
unemployment insurance protection and bail bond net premiums earned increased
23.0% to $4,253,795 from $3,459,595 in the same period of 2002. We attribute
this growth primarily to rate increases with existing customers and a new
customer added during 2003.
Net Investment Income. At September 30, 2003, our $75,062,045 investment
portfolio is allocated among fixed income securities, common stock, preferred
stock, short-term investments and other invested assets. We seek to invest in
investment-grade obligations of states and political subdivisions because the
majority of the interest income from such investments is tax-exempt and such
investments have generally resulted in more favorable net yields. Net investment
income increased 17.2% to $412,290 in the third quarter of 2003 from $351,881 in
the third quarter of 2002. On a year-to-date basis, net investment income
increased 21.7% to $1,217,287 from $1,000,632 during the same period of 2002.
These increases were primarily the result of an increase in invested assets,
which were partially offset by lower interest rates and investment yields. The
effective duration of our fixed income portfolio at September 30, 2003 was 6.0
years.
During the third quarter of 2003, we recorded a net realized gain on investments
of $371,948 compared with a net realized loss on investments of $248,844 during
the third quarter of 2002. On a year-to-date basis, we recorded a net realized
gain on investments of $839,008 compared with net realized loss on investments
of $398,529 during the same period of 2002. These increases in net realized gain
on investments were primarily caused by the timing of the sale of individual
securities. We generally decide whether to sell securities based upon investment
opportunities and tax consequences. We regularly evaluate the quality of our
investment portfolio. When we believe that a specific security has suffered an
other-than-temporary decline in value, the difference between cost and estimated
fair value is charged to income as a realized loss on investments. There were
$13,238 and $62,566 in impairment charges included in net realized gain on
investments for the three and nine months ended September 30, 2003,
respectively. There were no impairment charges included in net realized loss on
investments for the three and nine months ended September 30, 2002. For more
information concerning impairment charges, see "Other-Than-Temporary Impairment
of Debt and Equity Securities" below.
Codification and subscription fees. ALPC's codification and subscription fees
accounted for $913,121 of our revenues in the third quarter of 2003 and $745,017
of our revenues in the third quarter of 2002, an increase of 22.6%. On a
year-to-date basis, codification and subscription fees increased 18.1% to
$2,669,797 from $2,259,726 for the nine months ended September 30, 2002. These
increases were primarily the result of new state, city and municipal customers
added during the second half of 2002 and the provision of additional services,
including specialized codification and integrated product offerings.
Management Fees. We have an agreement with a cost containment service firm to
control the unemployment compensation costs of certain non-profit employers.
Pursuant to this agreement, we have issued a surety bond insuring the payment of
certain reimbursable unemployment compensation benefits on behalf of the
employers enrolled in this program. We hold certain monies allocated toward the
payment of these benefits. Together with the cost containment service firm, we
share any residual resulting from the development of benefits to be paid from
the contract funds held on deposit. We record management fees in the period that
the residual is shared with the cost containment service firm. Our management
fees in the third quarter of 2003 decreased 74.7% to $45,319 from $178,826 in
the third quarter of 2002. Management fees decreased 61.7% to $244,724 for the
nine months ended September 30, 2003 from $638,692 a year ago. We attribute this
decrease primarily to rising unemployment insurance protection obligations
related to the increased level of unemployment. We expect management fees to
vary from period to period depending on unemployment levels and claims
experience.
14
BANCINSURANCE CORPORATION
AND SUBSIDIARIES
Other Income. Other income decreased 11.4% to $3,299 in the third quarter of
2003 from $3,725 in the third quarter of 2002. On a year-to-date basis, other
income decreased 65.0% to $60,148 from $171,860 during the same period last
year. The year-to-date decrease was primarily the result of releasing a $100,000
reserve during the first quarter of 2002, related to the dismissal of a dispute
with an unaffiliated party.
Losses and Loss Adjustment Expenses. Losses and loss adjustment expenses
represent claims associated with insured loss events and expenses associated
with adjusting and recording policy claims, respectively. Losses and loss
adjustment expenses increased 33.6% to $11,997,823 in the third quarter of 2003
from $8,979,573 in the same period of 2002. On a year-to-date basis, losses and
loss adjustment expenses increased 33.5% to $27,931,640 from $20,922,965 in the
same nine-month period of 2002. We attribute these increases in losses and loss
adjustment expenses primarily to our lender/dealer business.
Losses and loss adjustment expenses related to our ultimate loss and creditor
placed insurance products increased 22.1% to $10,412,027 in the third quarter of
2003 from $8,525,313 in the third quarter of 2002. On a year-to-date basis,
losses and loss adjustment expenses for our ultimate loss and creditor placed
insurance products increased 25.8% to $24,613,889 from $19,567,494 in the same
period of 2002. We attribute these increases primarily to our growth in premiums
combined with higher frequency of losses and loss adjustment experience. With
the continued slowdown in the U.S. economy and high consumer debt, financial
institutions are experiencing a rise in delinquency dollars. As loan defaults,
bankruptcies and automobile repossessions increased, we experienced a higher
frequency of losses and loss adjustment experience. However, the increased
frequency of losses and loss adjustment experience has been partially offset by
a decrease in the severity of losses and loss adjustment experience. In 2003,
prices for used cars have declined compared to 2002 because of large
dealer/manufacturer incentives offered on new cars. As used car prices have
declined, the severity of losses and loss adjustment experience decreased.
Losses and loss adjustment expenses related to our GAP insurance products rose
453.1% to $1,088,842 in the third quarter of 2003 from $196,844 in the same
period of 2002. On a year-to-date basis, GAP losses and loss adjustment expenses
increased 173.4% to $1,932,133 from $706,660 in the same period of 2002. We
attribute these increases in GAP losses and loss adjustment expenses primarily
to our growth in GAP premiums combined with increased severity of GAP claims.
The lower residual value for used automobiles contributed to the increased
security of claims by creating a larger difference between the outstanding
balance of a customer's loan or lease and the amount of primary insurance
coverage.
Losses and loss adjustment expenses related to our unemployment insurance
protection and bail bond products increased 93.1% to $496,954 in the third
quarter of 2003 from $257,416 in the same period of 2002. On a year-to-date
basis, unemployment insurance protection and bail bond losses and loss
adjustment expenses increased 113.6% to $1,385,618 from $648,811 in the same
period of 2002. We attribute these increases in losses and loss adjustment
expenses primarily to reserve strengthening and increased benefit payments
associated with rising unemployment insurance obligations. We strengthened loss
adjustment expense reserves due to persistent weakness in the national economy.
For more information concerning losses and loss adjustment expenses, see "Losses
and Loss Adjustment Expense Reserves" below.
Operating Expenses. Our operating expenses consist of experience rating
adjustments, commission expense, other insurance operating expenses,
codification and subscription expenses and general and administrative expenses.
Experience rating adjustments increased 94.5% in the third quarter of 2003 to
$(56,140) from $(1,013,276) in the same quarter of 2002. On a year-to-date
basis, experience rating adjustments increased 363.0% to $2,100,201 from
$(798,689) in the same nine month period of 2002. These increases were primarily
related to loss development in our lender/dealer products line. Experience
rating adjustments are calculated and adjusted from period to period based on
policy experience to date and premium growth. Management anticipates that
experience rating adjustments may fluctuate in future quarters based upon this
calculation. On both a quarterly and year-to-date basis, commission expense
remained relatively constant compared to 2002 primarily due to ceding
commissions associated with our creditor placed insurance product and commission
rate adjustments. Other insurance operating expenses increased 4.3% to
$1,259,660 in the third quarter of 2003 from $1,208,280 in the third quarter of
2002. Other insurance operating expenses increased 33.5% to $3,953,085 for the
nine months ended September 30, 2003 from $2,961,806 for the same nine month
period of 2002. We attribute these increases to higher premium taxes, salaries
and benefits. Codification and subscription expenses incurred by ALPC increased
33.4% to $904,483 during the third quarter of 2003 from $678,079 in the same
period of 2002. Codification and subscription expenses increased 34.1% to
$2,530,466 during the first nine months of 2003 from $1,886,995 during the same
nine month period of 2002. These increases were consistent with growth in
codification and subscription revenues and were primarily attributable to
increases in salaries, outside printing, supplies and consulting fees. General
and administrative expenses decreased 25.7% to $271,425 in the third quarter of
2003 from $365,290 in the third quarter of 2002. General and administrative
expenses decreased 8.8% to $798,692 in the first nine months of 2003 from
$875,473 in the first nine months of 2002. This decrease was primarily
attributable to decreases in auditing and consulting expenses which were
partially offset by an increase in salaries and related benefits.
15
BANCINSURANCE CORPORATION
AND SUBSIDIARIES
Interest expense. Interest expense increased 274.1% to $117,119 for the three
months ended September 30, 2003 from $31,304 for the three months ended
September 30, 2002. Interest expense increased 372.6% to $336,310 for the nine
months ended September 30, 2003 from $71,167 for the nine months ended September
30, 2002. These increases were primarily attributable to interest expense in
2003 related to the junior subordinated debentures that we issued in December
2002 in connection with our participation in a trust preferred securities
transaction. See "Liquidity and Capital Resources." The increase in interest
expense from the junior subordinated debentures was partially offset by lower
borrowing levels on the Company's revolving credit line.
Cumulative Effect of Change in Accounting Principle. Effective January 1, 2002,
we adopted Statement of Financial Accounting Standards No. 142, Goodwill and
Other Intangible Assets ("SFAS 142"). Under SFAS 142, we no longer amortize
goodwill and intangibles which have indefinite lives. SFAS 142 requires that we
assess goodwill and intangibles with indefinite lives for impairment at least
annually based on the fair value of the related reporting segment. We will
perform our annual impairment assessment in the fourth quarter on an on-going
basis, or earlier, if deemed necessary.
As an initial step in the SFAS 142 implementation process, we assigned goodwill
and intangibles to our property/casualty insurance, insurance agency and
municipal code publishing business segments. Following such assignment, the fair
value of each business segment was compared to its carrying value. Fair values
were determined by discounting estimated future cash flows.
Based on our impairment testing, a net after-tax impairment charge of $1,481,858
was recognized as a cumulative effect of the change in accounting principle in
the first quarter of 2002. The impairment charge was associated with the August
1999 acquisition of Paul Boardway and Associates, Inc.
We dissolved Paul Boardway and Associates, Inc. in the fourth quarter of 2002.
As a result of the then pending dissolution, the remaining goodwill of $179,000
was recorded as a pre-tax impairment charge to income in the third quarter of
2002.
Amortization expense related to definite-lived intangible assets was $18,629 and
$55,888 in the third quarter and first nine months of 2003, respectively,
compared with $18,629 and $61,611 in the third quarter and first nine months of
2002, respectively.
Federal Income Taxes. In the third quarter of 2003, we recorded a provision of
$177,681 for income taxes, as compared to a provision for income taxes of
$21,953 in the third quarter of 2002. On a year-to-date basis, federal income
tax expense increased 29.3% to $1,063,009 from $822,211 in the same nine-month
period of 2002. The effective consolidated income tax rate was 19.1% and 19.2%
in the third quarters of 2003 and 2002, respectively, and 26.7% and 28.5% for
the first nine months of 2003 and 2002, respectively.
GAAP Combined Ratio. Ohio Indemnity underwrites the Company's specialty
insurance products. Our combined ratio was 94.4% for the nine months ended
September 30, 2003 and 93.1% for the same nine month period of 2002. Our loss
ratio declined to 66.5% for the nine months ended September 30, 2003 from 68.2%
for the same nine month period of 2002, primarily because of the substantial
growth in premiums and a decrease in the severity of losses associated with our
ultimate loss and creditor placed insurance products. This decrease was
partially offset by reserve strengthening in anticipation of higher losses in
future quarters as a result of prolonged weakness in the national economy and
recent automobile credit experience of Ohio Indemnity's customers. Our expense
ratio increased to 27.9% for the nine months ended September 30, 2003 from 24.9%
for the same nine month period of 2002, primarily as a result of the increase in
the experience rating adjustment which was partially offset by the decrease in
commission expense as a percentage of earned premium.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity is a measure of our ability to generate sufficient cash flows to meet
the short and long-term cash requirements of our business operations. The
short-term cash requirements of our property/casualty business primarily consist
of paying losses and loss adjustment expenses and day-to-day operating expenses.
Those requirements are met through cash receipts from operations, which consist
primarily of insurance premiums collected and investment income. Our investment
portfolio is a source of additional liquidity through the sale of readily
marketable fixed maturities, equity securities and short-term investments. After
satisfying our cash requirements, excess cash flows from these underwriting and
investment activities are used to build the investment portfolio and thereby
increase future investment income.
Cash flows provided by operating activities totaled $15,724,667 for the nine
months ended September 30, 2003 compared to $3,079,233 during the same period of
2002. The increase was primarily the result of net premiums collected of
$47,426,025 in the first nine months of 2003 which were 54.6% higher than the
$30,675,327 of net premiums collected in the nine months ended September 30,
2002.
16
BANCINSURANCE CORPORATION
AND SUBSIDIARIES
We maintain a level of cash and liquid short-term investments which we believe
will be adequate to meet our anticipated cash needs without being required to
liquidate intermediate-term and long-term investments through the end of 2003.
Because of the nature of the risks we insure, losses and loss adjustment
expenses emanating from the insurance policies that we issue 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 losses and expenses
through the end of 2003.
Our investment portfolio is allocated among investment-grade fixed income
securities, common stock, preferred stock, short-term investments and other
invested assets. Fixed income securities constitute the largest allocation of
our investment portfolio followed by short-term investments. At September 30,
2003, cash and short-term investments amounted to $29,859,361 or 38.1% of our
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 our
balance sheet at amortized cost because we have the ability and intent to hold
held to maturity fixed income securities to maturity date. Available for sale
fixed income securities and equity securities are reported at fair value with
unrealized gains or losses, net of applicable deferred taxes, reflected in
accumulated other comprehensive income. Short-term investments are reported at
cost, which approximates fair value.
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 investments with the expected
payouts of our liabilities. To the extent that liabilities come due more quickly
than assets mature, we may have to sell assets prior to maturity and recognize a
gain or loss.
In December 2002, we organized BIC Statutory Trust I ("BIC Trust I"), a
Connecticut special purpose business trust, which issued $8,000,000 of floating
rate trust preferred capital securities in an exempt private placement
transaction. In September 2003, we organized BIC Statutory Trust II ("BIC Trust
II"), a Delaware special purpose business trust, which issued $7,000,000 of
floating rate trust preferred capital securities in an exempt private placement
transaction. BIC Trust I and BIC Trust II were formed for the sole purpose of
issuing and selling the floating rate trust preferred capital securities and
investing the proceeds from such securities in junior subordinated debentures of
the Company. In connection with the issuance of the trust preferred capital
securities, the Company issued junior subordinated debentures of $8,248,000 and
$7,217,000 to BIC Trust I and BIC Trust II, respectively. The floating rate
trust preferred capital securities and the junior subordinated debentures have
substantially the same terms and conditions. BIC Trust I and BIC Trust II
distribute the interest received from the Company on the junior subordinated
debentures to the holders of their floating rate trust preferred capital
securities to fulfill their dividend obligations with respect to such trust
preferred securities. BIC Trust I's floating rate trust preferred capital
securities, and the junior subordinated debentures issued in connection
therewith, pay dividends and interest, as applicable, on a quarterly basis at a
rate equal to three month LIBOR plus four hundred basis points (5.14% at
September 30, 2003), are redeemable at par on or after December 4, 2007 and
mature on December 4, 2032. BIC Trust II's floating rate trust preferred capital
securities, and the junior subordinated debentures issued in connection
therewith, pay dividends and interest, as applicable, on a quarterly basis at a
rate equal to three month LIBOR plus four hundred and five basis points (5.19%
at September 30, 2003), are redeemable at par on or after September 30, 2008 and
mature on September 30, 2033. Interest on the junior subordinated debentures is
charged to income as it accrues.
As of September 30, 2003, we have a $13,000,000 unsecured revolving line of
credit with a maturity date of June 30, 2006 with no outstanding balance.
Effective October 20, 2003, the unsecured revolving line of credit was decreased
to $10,000,000. The revolving line of credit provides for interest payable
quarterly at an annual rate equal to 0.75% less than the prime rate. Under the
terms of the revolving credit agreement our consolidated shareholders' equity
must not fall below $20,000,000 and Ohio Indemnity's ratio of net premiums
written to policyholders surplus must exceed 3:1.
We do not anticipate receiving any cash dividends from Ohio Indemnity in 2003.
As of September 30, 2003, we have sufficient capital resources available to fund
interest payments and other administrative expenses. Our line of credit provides
us with additional liquidity that could be used for short-term cash requirements
if cash from operations and investments is not sufficient.
All of our material capital commitments and financial obligations are reflected
in our financial statements, except our risk on surety bonds and state mandated
performance bonds, which are written in connection with our unemployment
insurance protection products. Our financial statements include reserves for
losses on this business for any claims filed and for an estimate of incurred but
not reported losses. Such reserves were $1,057,000 and $888,000 at September 30,
2003 and December 31, 2002, 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.
17
BANCINSURANCE CORPORATION
AND SUBSIDIARIES
ALPC derives its funds principally from codification and subscription fees which
are currently sufficient to meet its operating expenses. USA derives its funds
principally from commission fees which are currently sufficient to meet its
operating expenses.
DISCLOSURE ABOUT MARKET RISK
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 we manage those exposures as of September 30,
2003. Our market risk sensitive instruments are entered into for purposes other
than trading.
The carrying value of our investment portfolio at September 30, 2003 was
$75,062,045, 38.6% of which is invested in fixed income securities, 8.9% in
common stock, 15.6% in preferred stock, 35.5% in short-term investments and 1.4%
in other invested assets. At September 30, 2003, $11,000,000 or 93.8% of total
preferred stock is invested in variable rate preferred stock with reset
provisions at par. The primary market risks to the investment portfolio are
equity price risk associated with investments in common stock and non-variable
rate preferred stock and interest rate risk associated with investments in fixed
income securities and fixed-rate short-term investments. We have no foreign
exchange risk or direct commodity risk.
For fixed income securities, our short-term liquidity needs and the potential
liquidity needs of our business are key factors in managing our portfolio. The
portfolio duration relative to the liabilities' duration is primarily managed
through cash market transactions.
With respect to our investment portfolio, during the quarter ended September 30,
2003, there were no material changes in our primary market risk exposures or in
how these exposures were managed compared to the year ended December 31, 2002.
We do not anticipate material changes in our primary market risk exposures or in
how these exposures are managed in future reporting periods based upon what is
known or expected to be in effect during future reporting periods.
TRENDS
The Company's results of operations have historically varied from quarter to
quarter principally because of fluctuations in underwriting results, and we
expect this trend to continue. The majority of our revenues are dependent on the
demand for our customers' automobile financing programs. Increased automobile
sales generally cause increased demand for automobile financing and our
products. An increase in automobile lending, driven by continued aggressive
financing offers by some of our larger financial institution customers, helped
lender/dealer premium growth during the first three quarters of 2003. We
anticipate that as financing incentives are phased-out, consumer spending on
automobiles may decline. In such event, we would anticipate that automobile
lending may also decrease and cause a decline in the demand for our automobile
lender/dealer products.
Although the economy has shown signs of recovery in the third quarter of 2003,
financial institutions are continuing to experience a rise in delinquency
dollars due to continued corporate downsizing and high consumer debt. Increased
incentives being offered on new cars by dealers and manufacturers have depressed
the value of the used car market, although there were signs late in the third
quarter of 2003 that used car prices are stabilizing. If used car prices
continue to decline, we would anticipate an increase in the severity of losses
and loss adjustment experience for our GAP product and a decrease in the
severity of loss and loss adjustment experience for our ultimate loss insurance
and creditor placed insurance products. If loan defaults, bankruptcies and
automobile repossessions continue to increase in frequency and benefit charges
associated with rising unemployment insurance protection obligations increase,
we would anticipate an increase in the frequency of losses and loss adjustment
experience in the fourth quarter of 2003.
In addition, ALPC's municipal code publishing fees may decline due to state and
local government budget reductions associated with current economic conditions.
Our outlook for the remainder of 2003 remains cautious.
FORWARD-LOOKING INFORMATION
Certain statements made in this report are forward-looking and are made pursuant
to the safe harbor provisions of the Securities Litigation Reform Act of 1995.
These statements include certain discussions relating to future revenue,
underwriting income, premium volume, investment income and other investment
results, business strategies, profitability, liquidity, capital adequacy,
anticipated capital expenditures and business relationships, as well as any
other statements concerning the year 2003 and beyond. The forward-looking
statements involve risks and uncertainties that may cause results to differ
materially from those anticipated in those statements. Factors that might cause
results to differ from those anticipated include, without limitation, changes in
underwriting results affected by adverse economic conditions, fluctuations in
the investment markets, changes in the retail marketplace, changes in the laws
of regulations affecting the operations of the company, changes in the business
tactics or strategies of the company, the financial condition of the
18
BANCINSURANCE CORPORATION
AND SUBSIDIARIES
company's business partners, changes in market forces, litigation and the other
risk factors that have been identified in the company's filing with the SEC, any
one of which might materially affect the operations of the company. Any
forward-looking statements speak only as of the date made. We undertake no
obligation to update any forward-looking statements to reflect events or
circumstances arising after the date on which they are made.
INFLATION
We do not consider the impact of inflation to be material in the analysis of our
overall operations.
INSURANCE REGULATORY MATTERS
The NAIC has developed a risk-based capital measurement formula to be applied to
all property/casualty insurance companies. The risk-based capital measurement
formula has been enacted into the Ohio Revised Code. 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 the applicable risk-based capital measurement threshold could be
forced to reduce the scope of its operations and ultimately could become subject
to statutory receivership proceedings. Based on our analysis, our statutory net
worth is in excess of the applicable thresholds and no corrective action is
necessary.
CRITICAL ACCOUNTING POLICIES
Our discussion and analysis of our financial condition and results of operations
are based upon our consolidated financial statements, which have been prepared
in accordance with GAAP. The preparation of these financial statements requires
us to make estimates, assumptions and judgments that affect the reported amounts
of assets, revenues, liabilities and expenses and related disclosures of
contingent assets and liabilities. We regularly evaluate these estimates,
assumptions and judgments, including those related to insurance revenue and
expense recognition, asset impairment, loss reserves and valuation and
impairment of intangible assets and goodwill. We base our estimates on
historical experience and on various assumptions that we believe to be
reasonable under the circumstances. Actual results may differ from these
estimates under different assumptions or conditions.
We believe the following critical accounting policies require significant
judgments and estimates in the preparation of our consolidated financial
statements.
OTHER-THAN-TEMPORARY IMPAIRMENT OF DEBT AND EQUITY SECURITIES
We continually monitor the difference between our cost and the estimated fair
value of our investments, which involves uncertainty as to whether declines in
value are temporary in nature. If we believe a decline in the value of a
particular available for sale investment is temporary, we record the decline as
an unrealized loss in our shareholders' equity. If we believe the decline in any
investment is "other-than-temporarily impaired," we write down the carrying
value of the investment and record a realized loss on our consolidated statement
of income. Our assessment of a decline in value includes our current judgment as
to the financial position and future prospects of the entity that issued the
investment security. If that judgment changes in the future, we may ultimately
record a realized loss after having originally concluded that the decline in
value was temporary.
The following table summarizes the total pre-tax gross unrealized loss recorded
in our shareholders' equity, by invested asset class, at September 30, 2003 and
December 31, 2002.
September 30, December 31,
2003 2002
-----------------------------
Fixed maturities:
U.S. Treasury securities and obligations of U.S. Government
corporations and agencies ............................................ $ 13,241 $ --
Obligations of states and political subdivisions ........................ 130,536 37,918
Asset-backed securities ................................................. 569 --
Equity securities:
Financial services ...................................................... 5,833 --
Industrial and miscellaneous ............................................ 199,380 215,279
-------- --------
$349,559 $253,197
======== ========
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BANCINSURANCE CORPORATION
AND SUBSIDIARIES
At September 30, 2003, we did not own any material non-investment-grade
securities. We believe that a high quality investment portfolio is more likely
to generate a stable and predictable investment return. Aside from interest rate
risk, we do not believe a material risk, relative to earnings or liquidity, is
inherent in holding investment-grade securities.
The following table summarizes, for all securities in an unrealized loss
position at September 30, 2003, the estimated fair value and pre-tax gross
unrealized loss by length of time those securities have been continuously in an
unrealized loss position.
Gross
Estimated Unrealized
Fair Value Loss
------------------------------
Fixed maturities:
0-6 months ...................................................... $ 7,753,542 $ 51,292
7-12 months ..................................................... 1,672,127 18,581
Greater than 12 months .......................................... 1,871,174 74,473
----------- -----------
Total fixed maturities .................................... 11,296,843 144,346
----------- -----------
Equities:
0-6 months ...................................................... 320,970 74,939
7-12 months ..................................................... 159,060 44,012
Greater than 12 months .......................................... 332,190 86,262
----------- -----------
Total equities ............................................ 812,220 205,213
----------- -----------
Total ..................................................... $12,109,063 $ 349,559
=========== ===========
Based on our evaluation, we do not believe that any of the above securities have
suffered an other-than-temporary decline in value as of September 30, 2003.
However, additional impairments within the portfolio during the remainder of
2003 are possible if current economic and financial conditions worsen.
The following table presents information regarding our fixed maturity
investments, by remaining period to maturity date, that were in an unrealized
loss position at September 30, 2003.
Amortized Estimated
Cost Fair Value
------------------------------
Remaining period to maturity date:
One year or less .................................................. $ -- $ --
Greater than one year but less than or equal to five years ........ 2,602,860 2,598,717
Greater than five years but less than or equal to ten years ....... 1,606,939 1,579,959
Greater than ten years ............................................ 5,532,754 5,420,100
----------- -----------
Total ........................................................... 9,742,553 9,598,776
Asset-backed securities ........................................... 1,698,636 1,698,067
----------- -----------
Total ........................................................... $11,441,189 $11,296,843
=========== ===========
The following discussion summarizes our process of reviewing our investments for
possible impairment.
Fixed Maturities and Redeemable Preferred Stock. On a monthly basis, we review
our fixed maturities and redeemable preferred stock investments for impairment.
We consider the following factors when evaluating potential impairment:
- the length of time and extent to which the estimated fair value has
been less than book value;
- the degree to which any appearance of impairment is attributable to an
overall change in market conditions (e.g., interest rates);
20
BANCINSURANCE CORPORATION
AND SUBSIDIARIES
- the degree to which an issuer is current or in arrears in making
principal and interest/dividend payments on the securities in
question;
- the financial condition and short-term prospects of the issuer,
including any specific events that may influence the issuer's
operations and its ability to make future scheduled principal and
interest payments on a timely basis;
- the independent auditor's report on the issuer's most recent financial
statements;
- buy/hold/sell recommendations of investment advisors and analysts;
- relevant rating history, analysis and guidance provided by rating
agencies and analysts; and
- our ability and intent to hold the security for a period of time
sufficient to allow for recovery in the market value.
Common Stock and Non-redeemable Preferred Stock. On a monthly basis, we review
our common stock and non-redeemable preferred stock investments for impairment.
We consider the following factors when evaluating potential impairment:
- the length of time and extent to which the estimated fair value has
been less than book value;
- whether the decline appears to be related to general market or
industry conditions or is issuer-specific;
- our ability and intent to hold the security for a period of time
sufficient to allow for recovery in the market value;
- the financial condition and short-term prospects of the issuer,
including any specific events that may influence the issuer's
operations;
- the recent income or loss of the issuer;
- the independent auditor's report on the issuer's most recent financial
statements;
- buy/hold/sell recommendations of investment advisors and analysts; and
- rating agency announcements.
In addition to the monthly valuation procedures described above, we continually
monitor developments affecting those invested assets, paying particular
attention to events that might give rise to impairment write-downs. There were
$13,238 and $62,566 in impairment charges included in net realized gain on
investments for the three and nine months ended September 30, 2003,
respectively. There were no impairment charges included in net realized loss on
investments for the three and nine months ended September 30, 2002.
Included in our $371,948 of net realized gain on investments during the third
quarter of 2003 were aggregate losses of $6,670 on $205,800 in sales of fixed
maturity securities. We realized aggregate losses of $39,433 in the third
quarter of 2003 on $179,842 in sales of equity securities. Although we had the
ability to continue holding these investments, our intent to hold them changed
in 2003 due primarily to decisions to modify our asset allocation and duration
within the portfolio to lessen exposure to particular credit industry or tax
considerations. None of these securities were sold out of necessity to raise
cash.
The size of our investment portfolio provides us with flexibility in determining
which individual investments should be sold to achieve our primary investment
goals of assuring our ability to meet our commitments to policyholders and other
creditors and maximizing our investment returns. In order to meet the objective
of maintaining a flexible portfolio that can achieve these goals, our equity and
a majority of our fixed maturity investments are classified as
available-for-sale. We continually evaluate these securities, and our purchases
and sales of investments are based on our cash requirements, the characteristics
of our insurance liabilities and current market conditions. At the time we
determine an other-than-temporary impairment in the value of a particular
investment has occurred, we consider the current facts and circumstances and
make a decision to either record a write-down in the carrying value of the
security or sell the security; in either case, recognizing a realized loss.
LOSSES AND LOSS ADJUSTMENT EXPENSE RESERVES
Our projection of ultimate loss and loss adjustment expense ("LAE") reserves are
estimates of future events, the outcomes of which are unknown to us at the time
the projection is made. Considerable uncertainty and variability are inherent in
the estimation of loss reserves. As a result, it is possible that actual
experience may be materially different than the estimates reported. As such, we
cannot guarantee that future experience will be as expected or recorded by us.
In establishing our September 30, 2003 reserves, we tested our data for
reasonableness, such as ensuring there are no case outstanding reserves on
closed claims, and consistency with data used in our previous estimates. We
found no material discrepancies or inconsistencies in our data.
Our estimates of ultimate loss are based on historical loss development
experience. In using this historical information, we assume that past loss
development is predictive of future development. The majority of our losses are
short-tail in nature and adjustments to reserve amounts occur quickly.
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BANCINSURANCE CORPORATION
AND SUBSIDIARIES
Our estimates allow for changes in claims and underwriting expectations, as now
known or anticipated, which may impact the level of required reserves or the
emergence of losses. However, we do not anticipate any extraordinary changes in
the legal, social or economic environments that could affect the ultimate
outcome of claims or the emergence of claims from causes not currently
recognized in our historical data. Such extraordinary changes or claims
emergence may impact the level of required reserves in ways that are not
presently quantifiable. Thus, while we believe our reserve estimates are
reasonable given the information currently available, actual emergence of losses
could deviate from amounts recorded by us.
We conduct a reserve study using historical loss and loss adjustment expenses by
product line or coverage within product line. We compute a range of reasonable
estimates as well as select an estimate of indicated reserves. The indicated
range includes estimates of expected losses and loss adjustment expenses given
the information currently available to us.
Our indicated reserve range for loss and LAE is $12.8 million to $17.0 million.
As our September 30, 2003 gross reserve of $14.9 million falls within this
range, we believe it is a reasonable provision for our unpaid loss and LAE
obligations as of September 30, 2003.
Our reserves reflect anticipated salvage and subrogation, included as a
reduction to loss reserves in the amount of $207,444. We record reserves on an
undiscounted basis. We do not provide coverage that could reasonably be expected
to produce asbestos and/or environmental liability claims activity or material
levels of exposure to claims-made extended reporting options.
We prepared our analysis based on each category of our business. The first
category is ultimate loss collateral protection provided to banks on automobile
loans. Ultimate loss insurance coverage is provided in two forms. One is
standard coverage and the other is aggregate limit coverage in which the policy
runs at a maximum loss ratio. The second category is creditor placed insurance,
an alternative coverage to our ultimate loss blanket vendor single interest
product. The third category is GAP coverage. Fourth is unemployment insurance
protection coverage to cover the unemployment exposure on non-profit
organizations.
Our premiums written in the nine months ended September 30, 2003 are summarized
in the following table:
Category Written Premium
-------- ---------------
Direct ........ $ 63,975,659
Assumed ....... 228,109
Ceded ......... (15,064,533)
------------
$ 49,139,235
We prepared our estimates of the gross and net loss and allocated LAE (expenses
that can be specifically assigned to a particular claim) liabilities using loss
development triangles for each of our principal insurance products:
- Ultimate Loss Insurance - non-aggregate limit
- Ultimate Loss Insurance - aggregate limit
- Creditor Placed Insurance
- GAP Insurance
- Unemployment Insurance Protection
Our reserve for these independently estimated principal insurance products
comprise the majority of our total recorded loss and allocated LAE reserves as
of September 30, 2003 on a gross and net of reinsurance basis. We prepared
independent estimates for unallocated LAE reserves (expenses associated with
adjusting and recording policy claims, other than those included in allocated
LAE).
Annual accident year loss development triangles were used to estimate ultimate
loss and allocated LAE for the ultimate loss non-aggregate limit policies and
creditor placed, GAP and unemployment insurance protection policies. Our data
for the ultimate loss aggregate limit policies consisted of premium and loss
data and maximum loss ratio by insured bank. This data was used to determine the
required reserve under the maximum loss ratio.
Historical "age-to-age" loss development factors ("LDF") were calculated to
measure the relative development of an accident year from one maturity point to
the next. We then selected appropriate age-to-age LDFs based on these historical
factors. We used the selected factors to project the ultimate losses.
We prepared our estimate of unallocated LAE reserves using the relationship of
calendar year unallocated LAE payments to calendar year loss payments. Our
selected unallocated LAE factor of 3% was selected judgmentally based on a
review of historical unallocated LAE-to-loss payments from 1998 to 2002. The
incurred but not reported ("IBNR") reserve is then split into IBNR on known
claims and IBNR on claims yet to be reported (pure IBNR). This is based on our
assumption that all of the unemployment insurance protection reserve is
22
BANCINSURANCE CORPORATION
AND SUBSIDIARIES
pure IBNR and the ultimate loss, creditor placed and GAP policies will have a
one week lag in claim reporting. The unallocated LAE factor is applied to 50% of
pure IBNR reserves and 50% of the remaining reserves on the premise that half of
our unallocated LAE costs are incurred when the claim is reported and the other
half when the claim is closed.
INSURANCE REVENUE AND EXPENSE RECOGNITION
Premiums for property and casualty related coverages, net of premium ceded to
reinsurers, are recognized as income over the policy period in proportion to the
risk assumed. Policy acquisition costs, primarily commission expenses and
premium taxes, are capitalized and expensed over the terms of the related
policies on the same basis as the related premiums are earned. Selling and
administrative expenses that are not primarily related to premiums written are
expensed as incurred.
CODIFICATION AND SUBSCRIPTION REVENUE AND EXPENSE RECOGNITION
Revenue from municipal code contracts is recognized on the
percentage-of-completion method: completion is measured based on the percentage
of direct labor costs incurred to date compared to estimated direct labor costs
for each contract. While we use available information to estimate total direct
labor costs on each contract, actual experience may vary from estimated amounts.
Under this method, the costs incurred and the related revenues are included in
the income statement as work progresses. Adjustments to contract cost estimates
are made in the periods in which the facts which require such revisions become
known. If a revised estimate indicates a loss, such loss is provided for in its
entirety. The amount by which revenues are earned in advance of contractual
collection dates is an unbilled receivable and the amount by which contractual
billings exceed earned revenues is deferred revenue which is carried as a
liability.
STOCK OPTIONS
We account for compensation expense for stock options under the "intrinsic
value" based method in accordance with the provisions of Accounting Principles
Board Opinion No. 25. Accordingly, no compensation cost has been recognized for
the stock option plans.
INTANGIBLE ASSETS (GOODWILL)
As required by SFAS No. 142, we ceased amortizing goodwill effective January 1,
2002. Based on the impairment test required by SFAS No. 142 that we conducted in
the quarter ended March 31, 2002, a non-recurring, after-tax charge of
$1,481,858 was taken against income and is reported as cumulative effect of
change in accounting principle in the income statement. As of September 30,
2003, our remaining goodwill balance was $753,737.
SPECIAL PURPOSE VEHICLES OR OFF BALANCE SHEET BUSINESS ARRANGEMENTS
We do not utilize any special purpose financing vehicles. We do not have any
off-balance sheet arrangements that either have, or are reasonably likely to
have, a current or future effect on our financial condition, changes in
financial condition, revenues or expenses, results of operations, liquidity,
capital expenditures or capital resources that is considered material. We hold
no fair value contracts for which a lack of marketplace quotations would
necessitate the use of fair value techniques.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required by this item is included under the caption
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Disclosure About Market Risk."
ITEM 4. CONTROLS AND PROCEDURES
With the participation of our management, including our principal executive
officer and principal financial officer, we have evaluated the effectiveness of
our disclosure controls and procedures (as defined in Rules 13a-15 and 15d-15 of
the Securities Exchange Act of 1934 (the "Exchange Act")) as of the end of the
period covered by this report. Based upon that evaluation, our principal
executive officer and principal financial officer have concluded that such
disclosure controls and procedures are effective as of the end of the period
covered by this report to ensure that material information relating to the
Company and its consolidated subsidiaries is made known to them, particularly
during the period for which our periodic reports, including this report, are
being prepared.
In addition, there were no changes during the period covered by this report in
our internal control over financial reporting (as defined in Rules 13a-15 and
15d-15 of the Exchange Act) that have materially affected, or are reasonably
likely to materially affect, our internal control over financial reporting.
23
BANCINSURANCE CORPORATION
AND SUBSIDIARIES
PART II - OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
4(a)* Sixth Amendment to Credit Agreement dated October 20, 2003 by
and among Fifth Third Bank, Central Ohio, Bancinsurance
Corporation and American Legal Publishing Corporation.
4(b)* Indenture dated as of September 30, 2003 by and between
Bancinsurance Corporation and JPMorgan Chase Bank.
4(c)* Amended and Restated Declaration of Trust dated as of September
30, 2003 by and among Bancinsurance Corporation, JPMorgan Chase
Bank, Chase Manhatten Bank USA, National Association, John
Sokol, Si Sokol and Sally Cress.
4(d)* Guarantee Agreement dated as of September 30, 2003 by and
between Bancinsurance Corporation and JPMorgan Chase Bank.
31.1* Certification of Principal Executive Officer Pursuant to Rule
13a-14 under the Securities Exchange Act of 1934, as Adopted
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2* Certification of Principal Financial Officer Pursuant to Rule
13a-14 under the Securities Exchange Act of 1934, as Adopted
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1* Certification of Principal Executive Officer Pursuant to 18
U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
32.2* Certification of Principal Financial Officer Pursuant to 18
U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
The Company furnished a Form 8-K, dated July 30, 2003, on July
31, 2003 to report the issuance of a press release by the Company
announcing results of operations for the second quarter ended
June 30, 2003.
No other reports on Form 8-K were filed during the third quarter
of 2003; however,
The Company furnished a Form 8-K, dated October 1, 2003, on
October 1, 2003 to report the issuance of a press release by the
Company announcing that it raised $7,000,000 of capital through
the issuance of floating rate trust preferred securities by BIC
Statutory Trust II, a special purpose business trust subsidiary
formed by the Company.
The Company furnished a Form 8-K, dated October 29, 2003, on
October 29, 2003 to report the issuance of a press release by the
Company announcing results of operations for the third quarter
ended September 30, 2003.
- -----------------
* Filed with this Report.
24
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
-------------------------
(Registrant)
Date: November 13, 2003 By: /s/ Si Sokol
----------------------------------------------
Si Sokol
Chairman and Chief Executive Officer
(Principal Executive Officer)
Date: November 13, 2003 By: /s/ Sally J. Cress
----------------------------------------------
Sally J. Cress
Treasurer and Secretary
(Principal Financial and Accounting Officer)
25