(1) Earnings per share have been computed by dividing net income by the weighted average number of common shares outstanding during the year, including convertible preferred stock and stock options, which are included as common stock equivalents.
The Company's principal sources of revenue are premiums paid by insureds for insurance policies issued by the Company. The premiums written become premiums earned for financial statement purposes as the premium is earned incrementally over the term of each insurance policy and after deducting the amount of premium ceded to reinsurers pursuant to reinsurance treaties or agreements. The Company's principal costs are losses and loss adjustment expenses. The principal factor in determining the level of the Company's profit is the difference between these premiums earned and losses and loss adjustment expenses incurred.
Loss and loss adjustment expense reserves for IBNR claims are estimated based on many variables including historical and statistical information, inflation, legal developments, economic conditions, general trends in claim severity and frequency and other factors that could affect the adequacy of loss reserves. The Company reviews case and IBNR reserves monthly and makes appropriate adjustments.
As of July 28, 1995, Ohio Indemnity Company, a wholly owned subsidiary of the Company ("Ohio Indemnity"), entered into an agreement with the California Department of Insurance to discontinue sales and renewals of private passenger personal lines in automobile physical damage insurance in California. See "DISCONTINUED PRODUCTS."
The following table sets forth period to period changes in selected financial data:
Premiums written for the Bonded Service program increased 22.8% from $2,675,532 in 1994 to $3,285,708 in 1995, while premiums earned from the Bonded Service program increased 23.6% from $2,664,525 in 1994 to $3,293,325 in 1995. The increases in net premiums written and premiums earned on the Bonded Service program were primarily attributable to the addition in 1995 of one multi-employer group created by the cost containment service firm to service small not-for-profit organizations. As of December 31, 1995, the Company services five such groups.
Net Investment Income. Net investment income decreased 9.4% from $1,560,625 in 1994 to $1,413,493 in 1995 primarily as a result of a smaller investment portfolio attributable to the Company's premium reduction relating to the discontinued Automobile Physical Damage program, offset in part by a higher return on investments in 1995 due to the prevailing interest rate environment. During 1995, the Company's investment
Losses and Loss Adjustment Expenses, Net of Reinsurance Recoveries. Losses and loss adjustment expenses totaled $15,564,508, or 61.0% of premiums earned in 1994 versus $12,760,094, or 64.5% of premiums earned in 1995. Losses and loss adjustment expenses, as a percentage of premiums earned, increased for the same period because net premiums earned increased at a lower percentage rate than the percentage rate increase in losses and loss adjustment expenses. This result reflected higher loss and loss adjustment expense experience, reductions in premium volume and marginal increases in premium rates.
YEAR ENDED DECEMBER 31, 1994 AS COMPARED TO YEAR ENDED DECEMBER 31, 1993
Premiums Written; Premiums Earned. Premiums written decreased 3.4% from $36,884,096 in 1993 to $35,629,799 in 1994, while premiums earned increased 29.0% from $19,787,858 in 1993 to $25,535,824 in 1994.
and loss adjustment expenses. This result reflected higher loss and loss adjustment expense experience, smaller increases in premium volume and marginal increases in premium rates.
The absolute increase in losses and loss adjustment expenses was primarily attributable to initial claims from the Automobile Physical Damage Insurance business written in 1994 which totaled $11,111,284 compared with $7,179,975 in 1993. This increase of 54.8%, was due to higher loss and loss adjustment expense experience in 1994, in part due to the 1994 California earthquake. The losses and loss adjustment expenses for Ultimate Loss Insurance rose 5.1% from $3,884,133 in 1993 to $4,083,264 in 1994 due to higher-than-anticipated loss and loss adjustment expenses related to a discontinued product and increases in loss and loss adjustment expense payments connected with two significant lending institutions. See Note 15 to the Notes to Consolidated Financial Statements. Losses and loss adjustment expenses for the Bonded Service program increased from $(204,363) in 1993 to $316,701 in 1994 due to an increase in reserves.
Federal Income Taxes. The difference between Federal income taxes, $580,379 in 1993 and $335,403 in 1994, provided at the Company's effective tax rate, 20.5% in 1993 and 12.6% in 1994, and the 34% Federal statutory rate was primarily due to a significant portion of pre-tax income representing dividends received and tax-exempt interest deductions, and in 1994 the adjustment resulting from a restructuring of the policy coverage and the policy cancellation with two significant customers in the Ultimate Loss Insurance program. See Note 6 to the Notes to Consolidated Financial Statements.
YEAR ENDED DECEMBER 31, 1993 AS COMPARED TO YEAR ENDED DECEMBER 31, 1992
Automobile Physical Damage Insurance accounted for $26,249,514 of premiums written and $10,925,091 of premiums earned in 1993. These amounts represent 97.1% and 94.0%, respectively, of the increase in 1993 in premiums written and premiums earned. The Company began commercially marketing Automobile Physical Damage Insurance in California in June 1992 and in Arizona in January 1993.
Premiums written for Ultimate Loss Insurance rose 3.1% from $8,543,129 in 1992 to $8,809,547 in 1993. Premiums earned for Ultimate Loss Insurance increased 2.3% from $7,125,358 in 1992 to $7,289,015 in 1993. The marginal increases in net premiums written and premiums earned on Ultimate Loss Insurance were primarily due to the expansion of loan portfolios of existing policyholders. A discontinued product
accounted for (0.3%) of premiums written and 0.1% of premiums earned for 1993.
Claims Administration. Claims administration income generated by BCIS Services accounted for $154,523 of the increase in revenues for 1993. The wholly-owned subsidiary commenced business operations in California during the third quarter of 1993.
Other Income. Other income increased from $459,499 in 1992 to $471,562 in 1993. The increase in other income was primarily due to earnings of $396,612 attributed to the release of redundant reserves from the aggregate loss fund established in connection with the Bonded Service program. A portion of the fees charged to participants in the Bonded Service program by the TPA is used to establish an aggregate loss fund to cover potential losses. If losses reserved do not ultimately develop, a portion of the reserve fund is earned by the Company. The Company expects other income to vary from year to year depending on claims experience of the Bonded Service program.
Interest Expense. Interest expense increased 3.2% from $203,941 in 1992 to $210,401 in 1993. This increase, despite lower interest rates, was due to higher borrowing levels on the Company's revolving credit line.
Statutory Combined Ratios. The change in the statutory combined ratio from 67.7% in 1992 to 80.6% in 1993 was attributable to higher loss and loss adjustment experience and marginal increases in premium rates, together with higher general and administrative expenses.
The Company is an insurance holding company whose principal asset is the stock of Ohio Indemnity. The Company is, and will continue to be, dependent on dividends from the Subsidiary to meet its liquidity requirements, including debt service obligations. The Company has a $10 million credit facility to fund working capital requirements. Based on statutory limitations, the maximum amount of dividends that the Company would be able to receive in 1996 from the Subsidiary, absent regulatory consent, is $2,660,432. See Note 9 to the Notes to Consolidated Financial Statements.
The Subsidiary derives its funds principally from net premiums written, reinsurance recoveries, investment income and contributions of capital from the Company. See "Business - Reinsurance." The principal use of these funds is for payment of losses and loss adjustment expenses, commissions, operating expenses and income taxes. Net cash provided by (used in) operating activities equalled $7,585,553, ($1,713,691) and ($4,907,977) for the years ended December 31, 1993, 1994, and 1995, respectively. Net cash provided by (used in) financing activities was $1,831,757, $459,063 and ($415,026) for the years ended December 31, 1993, 1994, and 1995, respectively. Net cash provided by (used in) investing activities of the Company was ($7,972,659), ($815,304) and $6,234,041 for the years ended December 31, 1993, 1994, and 1995, respectively.
BCIS Services derives its funds principally from claims administration fees which are sufficient to meet its operating obligations.
As of December 31, 1995, 84.3% of the Company's total assets consisted of investment-grade fixed income securities, equity securities, short-term investments, other corporate securities and cash. The Company's total shareholders' equity increased from $9,909,742 in 1993 to $11,838,424 in 1994 to $13,710,410 in 1995 representing a 38.4% increase over the three-year period. The increase in total shareholders' equity has strengthened the Company's capital position.
NAIC guidelines recommend that a property/casualty insurer's ratio of annual statutory net premiums written to statutory surplus be no greater than 3 to 1. At December 31, 1995, the ratio of combined annual statutory net premiums written by the Subsidiary to its combined statutory surplus was approximately 0.68 to 1.
The Company expects to continue expanding its direct sale force, which should allow the Company to increase its market penetration. These activities will be directed toward
selected market niches where management believes the Company will be able to provide customers with additional services.
The Company's results of operations have varied from quarter to quarter principally because of fluctuations in underwriting results. The Company's experience indicates that more loans for automobile purchases are financed during summer months due to seasonal consumer buying habits. The Company expects that such quarterly fluctuations may lessen as a result of the discontinuance of the California Automobile Physical Damage Program, although there can be no assurance that this will occur. See Note 15 to the Notes to Consolidated Financial Statements.
As claims are incurred, provisions are made for unpaid losses and loss adjustment expenses by accumulating case reserve estimates for claims reported prior to the close of the accounting period and by estimating IBNR claims based upon past experience modified for current trends. Notwithstanding the variability inherent in such estimates, management believes that the provisions made for unpaid losses and loss adjustment expenses are adequate to meet claims obligations of the Company. Such estimates are reviewed monthly by management and annually by an independent consulting actuary and, as adjustments thereto become necessary, such adjustments are reflected in the Company's results of operations. The Company's independent consulting actuary has opined that loss and loss adjustment expense reserve levels, as of December 31, 1995, were reasonable.
Consolidated Statements of Cash Flows for the years ended December 31, 1995, 1994 and 1993
Schedule II -- Condensed financial information of Bancinsurance Corporation (Parent Company Only)
We have audited the consolidated balance sheets of Bancinsurance Corporation and subsidiaries as of December 31, 1995 and 1994, and the related consolidated statements of income, shareholders' equity, cash flows, and the financial statement schedules for each of the years in the three-year period ended December 31, 1995, as listed in Item 8 of this Form 10-K. These consolidated financial statements and financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedules based on our audits.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Bancinsurance Corporation and subsidiaries as of December 31, 1995 and 1994, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1995, in conformity with generally accepted accounting principles. In addition, in our opinion, the financial statement schedules referred to above, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information required to be included therein.
Bancinsurance Corporation (the Company) was incorporated in the state of Ohio in 1970. The Company is primarily engaged, through its wholly-owned subsidiary, Ohio Indemnity, in the underwriting of specialized property and casualty insurance. Ohio Indemnity is licensed in forty-four states and the District of Columbia and licensed 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. During 1993, BCIS Services, Inc. was incorporated as a wholly-owned subsidiary of the Company. BCIS Services provides workers' compensation professional administration and cost control services to employers who self-insure this obligation. No single customer of the Company accounts for a predominant share of consolidated revenue, except for one customer in the Ultimate Loss Insurance program and one customer in the Surety program. See Note 14.
its wholly-owned subsidiaries. All significant intercompany transactions and balances have been eliminated in consolidation.
Effective January 1, 1994, the Company adopted SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities" and has reported the cumulative effect of this accounting change, represented by the unrealized gain for available for sale securities of $1,016,646, net of the related deferred income taxes of $345,660 as an increase in shareholders' equity. Investments in fixed maturities held as available for sale are carried at fair value. The net unrealized holding gain or loss, net of applicable deferred taxes, is shown as a separate component of stockholders' equity, and is not included in the determination of net earnings. Prior to the adoption of SFAS No. 115, fixed maturities were reported at cost adjusted for the amortization of premium or discount and other than temporary market value declines. Investments in held to maturity fixed maturities, which include bonds and preferred stocks with mandatory redemption features, where the Company has the ability and intent to hold to maturity or put date, are carried at amortized cost. As permitted by the Financial Accounting Standards Board's Special Report entitled "A Guide to Implementation of Statement 115 an Accounting for Certain Investments in Debt and Equity Securities", the Company reassessed the appropriateness of its classifications of all securities held. As a result, the Company transferred additional securities from its held to maturity portfolio to available for sale.
Available for sale equity securities, which include common stocks and preferred stocks without mandatory redemption features, are reported at fair value with unrealized gains or losses, net of applicable deferred taxes, reflected in shareholders' equity. Short-term investments are reflected at cost which approximates fair value.
As allowed by generally accepted accounting principles, the excess of investment over net assets of Ohio Indemnity acquired is not being amortized as the acquisition took place on April 22, 1970, and there is no permanent diminution in value of such excess.
business. Certain other lines of business have acquisition costs that have not been deferred due to the uncertainty surrounding ultimate profit margins.
The Company's reinsurance transactions are primarily attributable to premiums written in its automobile physical damage business, for which the Company seeks to reduce its loss exposure. The Company records its reinsurance transactions in accordance with the provisions of SFAS No. 113, "Accounting and Reporting for Reinsurance of Short-Duration and Long-Duration Contracts."
The Company has an agreement with a cost containment service firm involving a program designed to control the unemployment compensation costs of certain non-profit employers. Pursuant to this agreement, a bond has been issued insuring the payment of certain reimbursable unemployment compensation benefits on behalf of the employers enrolled in this program. Certain monies allocated toward the payment of these benefits are held by the Company. The Company and cost containment service firm share any redundancy resulting from the development of the claims to be paid from the contract funds held on deposit. The Company recognized $396,612 in redundant reserves which are included in other income in 1993. No redundant reserves were recognized in 1995 or 1994.
Return premiums payable are computed based upon a comparison of reported losses to expected losses with certain insured companies. If actual losses reported are less than expected losses, a return of premium is due to the insured.
Furniture and fixtures are stated at cost and depreciated using the straight-line method over a five year useful life. Leasehold improvements are amortized over the remaining office lease term. Maintenance, repairs and minor renewals are charged directly to expense as incurred. When furniture and fixtures are sold or otherwise disposed of, the related cost and accumulated depreciation are removed from the accounts and the resulting gains or losses are included in the accompanying statements of income.
Bancinsurance Corporation files a consolidated federal income tax return with its subsidiaries. Effective January 1, 1993, the Company adopted the provisions of Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109"). Accordingly, deferred tax liabilities and assets have been recognized for the expected future tax consequences of events that have been included in the financial statements or tax returns. Deferred income taxes are recognized at prevailing income tax rates for temporary differences between financial statement and income tax bases of assets and liabilities and net operating loss carryforwards for which income tax benefits will be realized in future years.
The amortized cost and estimated fair value of investments in held to maturity and available for sale securities at December 31, 1995 by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
Gross investment income, including net realized gains and losses, is summarized below:
Allfixed maturity investments were income producing for the years ended December 31, 1995, 1994 and 1993.
From time to time, the Company purchases securities under agreements to resell the same securities (repurchase agreements). The amounts advanced under these agreements represent short-term loans. The fair value of the securities underlying the agreements approximates the carrying value.
At December 31, 1995, investments having a par value of $3,420,000 were on deposit with various state insurance departments to meet their respective regulatory requirements.
Changes in deferred policy acquisition costs at December 31 are summarized as follows:
As of December 31, 1995, the Company had a $10,000,000 revolving line of credit with a maturity date of May 1, 1999 and an outstanding balance of $5,616,132. The revolving credit agreement bears interest payable quarterly, at the bank's prime rate (8.5% per annum at December 31, 1995). Under the terms of the revolving line of credit agreement, the Company has provided the lending bank a collateral assignment of a $100,000 face value life insurance policy on the life of the President. The policy cash value at December 31, 1995, was $22,148.
Deferred income taxes for 1995 and 1994 reflect the impact of "temporary differences" between amounts of assets and liabilities for financial reporting purposes and such amounts as measured on an income tax basis. Temporary differences which give rise to the net deferred tax asset at December 31 are as follows:
Net deferred tax assets and federal income tax expense in future years can be significantly affected by changes in enacted tax rates or by unexpected adverse events that would impact management's conclusions as to the ultimate realizability of deferred tax assets. The Company has not recorded a valuation allowance, as the deferred tax assets are presently considered to be realizable based on expected reversal of the temporary differences.
The Company has a profit sharing plan for all employees with six months of service. Contributions are determined annually by the Board of Directors. Contributions to the plan were $44,745, and $42,684 in 1994 and 1993, respectively. There was no contribution to the plan in 1995. See Note 20.
The Company has incentive stock option plans for all employees of the Company and its subsidiaries. Non-employee directors are also eligible to receive stock options under the plans. Activity in these plans were as follows:
The 1994 Stock Option Plan (the "Plan") provides for the grant of options to purchase up to an aggregate of 500,000 shares, 100,000 shares for any one individual, of the common stock of the Company. Certain key employees, officers, and directors of, and consultants and advisors to, the Company and its subsidiaries are eligible to participate in the Plan. The Plan is administered by the Stock Option Committee which will determine to whom and when options will be granted along with the terms and conditions of the options. The options for 44,500 shares outstanding at December 31, 1995 expire at dates from 2004 to 2005 and range in option price per share from $2.50 to $6.75.
As of December 31, 1995, Ohio Indemnity's statutory surplus and net income determined in accordance with accounting practices prescribed or permitted by the Department differed from shareholders' equity and net income determined in accordance with GAAP by the following:
Activity in the reserve for unpaid losses and loss adjustment expenses is summarized as follows.
As a result of changes in estimates of insured events in prior years, the provision for unpaid losses and loss adjustment expenses increased by $247,000 in 1995 because of higher-than-anticipated losses and related legal expenses in connection with a discontinued product, and increased by $529,000 in 1994 because of higher- than-anticipated losses from the Automobile Insurance business. The provision for unpaid losses and loss adjustment expenses decreased by $1,421,000 in 1993 because of lower-than-anticipated losses from the Surety and Ultimate Loss Insurance business.
As of December 31, ceded reinsurance reduced commission expense incurred by $121,972, $3,137,726 and $3,732,890 in 1995, 1994 and 1993, respectively.
Included in other assets at December 31, 1995 is a $15,000 loan to an officer/director of the Company. Interest only is payable in monthly installments at the rate of two points above prime through April 10, 1996. In addition, a $19,000 loan to an officer of Ohio Indemnity is included in other assets at December 31, 1995 and 1994. Interest only is payable in quarterly installments at the rate of two points above prime through December 1996. The carrying amounts of these loans are reasonable estimates of fair value.
During 1994, the Company entered into a Split Dollar Insurance Agreement with a bank, as trustee, for the benefit of an officer/shareholder and his spouse. The bank has acquired a second-to-die policy on the lives of the insureds, in the aggregate face amount of $2,700,000. At December 31, 1995, the Company had loaned the trustee $143,744 under this agreement for payment of insurance premiums. Amounts loaned by the Company to the trustee are to be repaid, in full, without interest from any of the following sources; cash surrender value of the underlying insurance contracts, death benefits and/or the sale of 15,000 shares of the Company's common stock contributed by the officer/shareholder to the Trust.
A single customer in the Surety program represented $1,074,126, $1,059,839 and $794,039 of the Company's net premiums earned in 1995, 1994 and 1993, respectively.
During 1993, the National Association of Insurance Commissioners adopted a Risk Based Capital (RBC) test applicable to property and casualty insurers as of December 31, 1994. The RBC calculation serves as a benchmark of insurance enterprises' solvency by state insurance regulators by establishing statutory surplus targets which will require certain Company level or regulatory level actions. Based on the Company's analysis, it appears that the Company's total adjusted capital is in excess of all required action levels and that no corrective action will be necessary. The Risk Based Capital provisions have not yet been enacted into the Ohio Revised Code.
On March 17, 1993, Bancinsurance Corporation filed a registration statement with the SEC in connection with the proposed sale of additional shares of common stock. Later the offering was withdrawn and registration expenses of $415,390 were charged to operations during 1993.
The Company is routinely a party to litigation incidental to its business, as well as to other nonmaterial litigation. Management believes that no individual item of litigation, or group of similar items of litigation, including the matters referred to below, is likely to result in judgments that will have a material adverse effect on the financial condition or results of operations of the Company.