Attached files
file | filename |
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EX-32.1 - EXHIBIT 32.1 - BANCINSURANCE CORP | c92653exv32w1.htm |
EX-31.2 - EXHIBIT 31.2 - BANCINSURANCE CORP | c92653exv31w2.htm |
EX-31.1 - EXHIBIT 31.1 - BANCINSURANCE CORP | c92653exv31w1.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2009
or
o | 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 incorporation or organization) | (I.R.S. Employer Identification No.) | |
250 East Broad Street, Columbus, Ohio | 43215 | |
(Address of principal executive offices) | (Zip Code) |
(614) 220-5200
(Registrants 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 þ NO o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files). YES o NO o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
Large accelerated filer o | Accelerated filer o | Non-accelerated filer o | Smaller reporting company þ | |||
(Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). YES o NO þ
The number of outstanding common shares, without par value, of the registrant as of October 16,
2009 was 5,205,706.
BANCINSURANCE CORPORATION
AND SUBSIDIARIES
AND SUBSIDIARIES
INDEX
Page No. | ||||||||
3 | ||||||||
4 | ||||||||
6 | ||||||||
7 | ||||||||
8 | ||||||||
30 | ||||||||
50 | ||||||||
51 | ||||||||
51 | ||||||||
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 | |||||||
51 | ||||||||
52 | ||||||||
Exhibit 31.1 | ||||||||
Exhibit 31.2 | ||||||||
Exhibit 32.1 |
2
Table of Contents
BANCINSURANCE CORPORATION
AND SUBSIDIARIES
AND SUBSIDIARIES
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Statements of Operations
(Unaudited)
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
Revenues: |
||||||||||||||||
Net premiums earned |
$ | 11,302,958 | $ | 11,585,058 | $ | 32,695,785 | $ | 36,515,778 | ||||||||
Net investment income |
1,028,303 | 1,002,029 | 2,943,449 | 2,810,609 | ||||||||||||
Net realized gains on investments |
420,776 | 12,473 | 684,942 | 389,633 | ||||||||||||
Other-than-temporary impairments on investments |
(120,805 | ) | (1,171,957 | ) | (2,887,994 | ) | (2,405,678 | ) | ||||||||
Management fees |
(120,888 | ) | 64,924 | 158,766 | 289,238 | |||||||||||
Other income |
3,933 | 10,305 | 15,596 | 28,425 | ||||||||||||
Total revenues |
12,514,277 | 11,502,832 | 33,610,544 | 37,628,005 | ||||||||||||
Expenses: |
||||||||||||||||
Losses and loss adjustment expenses (LAE) |
5,326,399 | 5,500,815 | 15,884,055 | 18,434,823 | ||||||||||||
Discontinued bond program losses and LAE |
33,321 | | 27,321 | (60,929 | ) | |||||||||||
Policy acquisition costs |
2,676,691 | 3,019,874 | 8,160,032 | 8,838,843 | ||||||||||||
Other operating expenses |
1,818,985 | 1,974,022 | 5,787,752 | 5,833,554 | ||||||||||||
SEC investigation expenses |
18,193 | 1,035,773 | 147,725 | 3,096,229 | ||||||||||||
Interest expense |
180,228 | 297,121 | 637,447 | 930,945 | ||||||||||||
Total expenses |
10,053,817 | 11,827,605 | 30,644,332 | 37,073,465 | ||||||||||||
Income (loss) before federal income taxes |
2,460,460 | (324,773 | ) | 2,966,212 | 554,540 | |||||||||||
Federal income tax expense (benefit) |
212,459 | (135,092 | ) | 244,271 | (87,729 | ) | ||||||||||
Net income (loss) |
$ | 2,248,001 | $ | (189,681 | ) | $ | 2,721,941 | $ | 642,269 | |||||||
Net income (loss) per common share: |
||||||||||||||||
Basic |
$ | .43 | $ | (.04 | ) | $ | .53 | $ | .13 | |||||||
Diluted |
$ | .43 | $ | (.04 | ) | $ | .53 | $ | .13 | |||||||
See accompanying notes to condensed consolidated financial statements.
3
Table of Contents
BANCINSURANCE CORPORATION
AND SUBSIDIARIES
AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(Unaudited)
September 30, | December 31, | |||||||
2009 | 2008 | |||||||
Assets |
||||||||
Investments: |
||||||||
Held to maturity: |
||||||||
Fixed maturities, at amortized cost (fair value
$5,339,388 at September 30, 2009 and $5,330,671 at December 31, 2008) |
$ | 5,193,217 | $ | 5,198,068 | ||||
Available for sale: |
||||||||
Fixed maturities, at fair value (amortized cost
$71,331,692 at September 30, 2009 and $67,022,560 at December 31, 2008) |
72,260,110 | 59,675,070 | ||||||
Equity securities, at fair value (cost $7,969,173 at September 30, 2009
and $7,295,353 at December 31, 2008) |
9,757,841 | 6,541,864 | ||||||
Short-term investments, at cost which approximates fair value |
2,281,016 | 5,939,254 | ||||||
Restricted short-term investments, at cost which approximates fair value |
3,585,875 | 3,886,635 | ||||||
Other invested assets |
715,000 | 715,000 | ||||||
Total investments |
93,793,059 | 81,955,891 | ||||||
Cash |
3,352,597 | 5,499,847 | ||||||
Premiums receivable |
6,690,049 | 5,278,710 | ||||||
Reinsurance recoverables |
6,881,588 | 4,836,817 | ||||||
Prepaid reinsurance premiums |
41,276,956 | 35,615,978 | ||||||
Deferred policy acquisition costs |
4,731,406 | 4,535,805 | ||||||
Loans to affiliates |
1,148,203 | 1,093,932 | ||||||
Accrued investment income |
1,077,600 | 1,008,648 | ||||||
Net deferred tax asset |
2,733,237 | 5,583,390 | ||||||
Other assets |
1,562,485 | 1,244,583 | ||||||
Total assets |
$ | 163,247,180 | $ | 146,653,601 | ||||
See accompanying notes to condensed consolidated financial statements.
4
Table of Contents
BANCINSURANCE CORPORATION
AND SUBSIDIARIES
AND SUBSIDIARIES
Condensed Consolidated Balance Sheets, Continued
(Unaudited)
(Unaudited)
September 30, | December 31, | |||||||
2009 | 2008 | |||||||
Liabilities and Shareholders Equity |
||||||||
Reserve for unpaid losses and loss adjustment expenses |
$ | 14,020,933 | $ | 13,680,145 | ||||
Discontinued bond program reserve for unpaid losses and loss adjustment expenses |
6,666,781 | 6,639,460 | ||||||
Unearned premiums |
63,929,251 | 58,201,957 | ||||||
Ceded reinsurance premiums payable |
3,266,889 | 2,431,515 | ||||||
Experience rating adjustments payable |
1,619,802 | 1,046,391 | ||||||
Retrospective premium adjustments payable |
1,639,983 | 1,228,537 | ||||||
Funds held under reinsurance treaties |
756,682 | 651,267 | ||||||
Funds held for account of others |
3,585,875 | 3,886,635 | ||||||
Contract funds on deposit |
2,454,601 | 2,677,244 | ||||||
Taxes, licenses and fees payable |
106,386 | 336,413 | ||||||
Current federal income tax payable |
198,963 | 131,171 | ||||||
Commissions payable |
2,467,749 | 1,837,757 | ||||||
Other liabilities |
2,140,206 | 1,279,728 | ||||||
Bank line of credit |
| 2,500,000 | ||||||
Trust preferred debt issued to affiliates |
15,465,000 | 15,465,000 | ||||||
Total liabilities |
118,319,101 | 111,993,220 | ||||||
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, 2009 and December 31, 2008,
5,205,706 shares outstanding at September 30, 2009 and 5,082,574 shares
outstanding at December 31, 2008 |
1,794,141 | 1,794,141 | ||||||
Additional paid-in capital |
1,426,083 | 1,638,503 | ||||||
Accumulated other comprehensive income (loss) |
1,793,273 | (5,346,647 | ) | |||||
Retained earnings |
44,694,640 | 41,972,699 | ||||||
49,708,137 | 40,058,696 | |||||||
Less: Treasury shares, at cost (964,635 common shares at September 30, 2009
and 1,087,767 at December 31, 2008) |
(4,780,058 | ) | (5,398,315 | ) | ||||
Total shareholders equity |
44,928,079 | 34,660,381 | ||||||
Total liabilities and shareholders equity |
$ | 163,247,180 | $ | 146,653,601 | ||||
See accompanying notes to condensed consolidated financial statements.
5
Table of Contents
BANCINSURANCE CORPORATION
AND SUBSIDIARIES
AND SUBSIDIARIES
Condensed Consolidated Statements of Shareholders Equity
(Unaudited)
Accumulated | ||||||||||||||||||||||||||||||||
Additional | other | Total | ||||||||||||||||||||||||||||||
Preferred Shares | Common | paid-in | comprehensive | Retained | Treasury | shareholders | ||||||||||||||||||||||||||
Class A | Class B | shares | capital | income (loss) | earnings | shares | equity | |||||||||||||||||||||||||
Balance at December 31, 2007 |
| | $ | 1,794,141 | $ | 1,630,394 | $ | 239,041 | $ | 40,611,396 | $ | (5,818,050 | ) | $ | 38,456,922 | |||||||||||||||||
Comprehensive income: |
||||||||||||||||||||||||||||||||
Net income |
| | | | | 642,269 | | 642,269 | ||||||||||||||||||||||||
Unrealized losses, net of tax and
reclassification adjustment |
| | | | (3,793,410 | ) | | | (3,793,410 | ) | ||||||||||||||||||||||
Total comprehensive loss |
(3,151,141 | ) | ||||||||||||||||||||||||||||||
Equity-based compensation expense |
| | | 279,692 | | | | 279,692 | ||||||||||||||||||||||||
84,624 common shares issued in
connection with restricted stock
awards |
| | | (419,735 | ) | | | 419,735 | | |||||||||||||||||||||||
Tax benefit related to vesting of
restricted stock |
| | | 32,790 | | | | 32,790 | ||||||||||||||||||||||||
Balance at September 30, 2008 |
| | $ | 1,794,141 | $ | 1,523,141 | $ | (3,554,369 | ) | $ | 41,253,665 | $ | (5,398,315 | ) | $ | 35,618,263 | ||||||||||||||||
Balance at December 31, 2008 |
| | $ | 1,794,141 | $ | 1,638,503 | $ | (5,346,647 | ) | $ | 41,972,699 | $ | (5,398,315 | ) | $ | 34,660,381 | ||||||||||||||||
Comprehensive income: |
||||||||||||||||||||||||||||||||
Net income |
| | | | | 2,721,941 | | 2,721,941 | ||||||||||||||||||||||||
Unrealized gains, net of tax and
reclassification adjustment |
| | | | 7,139,920 | | | 7,139,920 | ||||||||||||||||||||||||
Total comprehensive income |
9,861,861 | |||||||||||||||||||||||||||||||
Equity-based compensation expense |
| | | 367,765 | | | | 367,765 | ||||||||||||||||||||||||
4,822 common shares repurchased |
| | | | | | (16,395 | ) | (16,395 | ) | ||||||||||||||||||||||
127,954 common shares issued in
connection with restricted stock
awards |
| | | (634,652 | ) | | | 634,652 | | |||||||||||||||||||||||
Tax benefit related to vesting of
restricted stock |
| | | 54,467 | | | | 54,467 | ||||||||||||||||||||||||
Balance at September 30, 2009 |
| | $ | 1,794,141 | $ | 1,426,083 | $ | 1,793,273 | $ | 44,694,640 | $ | (4,780,058 | ) | $ | 44,928,079 | |||||||||||||||||
See accompanying notes to condensed consolidated financial statements.
6
Table of Contents
BANCINSURANCE CORPORATION
AND SUBSIDIARIES
AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
(Unaudited)
Nine Months Ended September 30, | ||||||||
2009 | 2008 | |||||||
Cash flows from operating activities: |
||||||||
Net income |
$ | 2,721,941 | $ | 642,269 | ||||
Adjustments to reconcile net income to net cash provided by (used in) operating activities: |
||||||||
Net realized gains on investments |
(684,942 | ) | (389,633 | ) | ||||
Other-than-temporary impairments on investments |
2,887,994 | 2,405,678 | ||||||
Depreciation and amortization |
350,405 | 471,073 | ||||||
Equity-based compensation expense |
367,765 | 279,692 | ||||||
Deferred federal income tax benefit |
(827,988 | ) | (364,108 | ) | ||||
Change in assets and liabilities: |
||||||||
Premiums receivable |
(1,411,339 | ) | 1,078,658 | |||||
Reinsurance recoverables |
(2,044,771 | ) | (1,024,613 | ) | ||||
Prepaid reinsurance premiums |
(5,660,978 | ) | (7,999,907 | ) | ||||
Deferred policy acquisition costs |
(195,601 | ) | 482,303 | |||||
Other assets, net |
(429,552 | ) | (116,169 | ) | ||||
Reserve for unpaid losses and loss adjustment expenses |
368,109 | 1,824,938 | ||||||
Unearned premiums |
5,727,294 | 6,678,748 | ||||||
Ceded reinsurance premiums payable |
835,374 | (2,332,881 | ) | |||||
Experience rating adjustments payable |
573,411 | (210,050 | ) | |||||
Retrospective premium adjustments payable |
411,446 | (3,149,387 | ) | |||||
Funds held under reinsurance treaties |
105,415 | (2,804 | ) | |||||
Funds held for account of others |
(300,760 | ) | (344,846 | ) | ||||
Contract funds on deposit |
(222,643 | ) | (156,552 | ) | ||||
Taxes, licenses and fees payable |
(230,027 | ) | (404,074 | ) | ||||
SEC investigation expense payable |
(166,503 | ) | (797,189 | ) | ||||
Commissions payable |
629,992 | (115,079 | ) | |||||
Other liabilities, net |
1,072,084 | (320,254 | ) | |||||
Net cash provided by (used in) operating activities |
3,876,126 | (3,864,187 | ) | |||||
Cash flows from investing activities: |
||||||||
Proceeds from held to maturity fixed maturities due to redemption or maturity |
1,574,433 | 1,255,000 | ||||||
Proceeds from available for sale fixed maturities sold, redeemed or matured |
8,770,590 | 13,443,175 | ||||||
Proceeds from available for sale equity securities sold |
9,093,327 | 8,616,745 | ||||||
Cost of held to maturity fixed maturities purchased |
(1,601,321 | ) | (1,293,250 | ) | ||||
Cost of available for sale fixed maturities purchased |
(13,713,645 | ) | (8,384,805 | ) | ||||
Cost of available for sale equity securities purchased |
(11,436,955 | ) | (9,691,466 | ) | ||||
Net change in short-term investments |
3,658,238 | (4,092,434 | ) | |||||
Net change in restricted short-term investments |
300,760 | 344,846 | ||||||
Purchase of land, property and leasehold improvements |
(185,198 | ) | (118,274 | ) | ||||
Net cash (used in) provided by investing activities |
(3,539,771 | ) | 79,537 | |||||
Cash flows from financing activities: |
||||||||
Acquisition of treasury shares |
16,395 | |||||||
Proceeds from bank line of credit |
| 2,500,000 | ||||||
Payments on bank line of credit |
(2,500,000 | ) | | |||||
Net cash (used in) provided by financing activities |
(2,483,605 | ) | 2,500,000 | |||||
Net decrease in cash |
(2,147,250 | ) | (1,284,650 | ) | ||||
Cash at beginning of period |
5,499,847 | 4,151,088 | ||||||
Cash at end of period |
$ | 3,352,597 | $ | 2,866,438 | ||||
Supplemental disclosure of cash flow information |
||||||||
Cash paid during the year for: |
||||||||
Interest |
$ | 655,528 | $ | 936,870 | ||||
Federal income taxes |
$ | 950,000 | $ | 289,000 | ||||
See accompanying notes to condensed consolidated financial statements.
7
Table of Contents
BANCINSURANCE CORPORATION
AND SUBSIDIARIES
AND SUBSIDIARIES
Notes to Condensed Consolidated Financial Statements (Unaudited)
1. | Basis of Presentation |
Unless the context indicates otherwise, all references herein to Bancinsurance, we,
Registrant, us, its, our or the Company refer to Bancinsurance Corporation and its
consolidated subsidiaries.
We prepared the condensed consolidated balance sheet as of September 30, 2009, the
condensed consolidated statements of operations for the three and nine months ended September
30, 2009 and 2008, the condensed consolidated statements of shareholders equity for the nine
months ended September 30, 2009 and 2008 and the condensed consolidated statements of cash flows
for the nine months ended September 30, 2009 and 2008 without an audit. In the opinion of
management, all adjustments (which include normal recurring adjustments) necessary to fairly
present the financial condition, results of operations and cash flows of the Company as of
September 30, 2009 and for all periods presented have been made.
We prepared the accompanying unaudited condensed consolidated financial statements in
accordance with accounting principles generally accepted in the United States of America
(GAAP) for interim financial information and in accordance with Article 8 of Regulation S-X.
Certain information and footnote disclosures normally included in financial statements prepared
in accordance with GAAP have been omitted. We recommend that you read these unaudited condensed
consolidated financial statements together with the Companys Annual Report on Form 10-K for the
fiscal year ended December 31, 2008. The results of operations for the periods ended September
30, 2009 are not necessarily indicative of the results of operations for the full 2009 fiscal
year.
The preparation of financial statements in conformity with GAAP requires management to make
estimates and assumptions that affect the reported amounts of assets and liabilities, the
disclosure of contingent assets and liabilities as of the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period. Actual results could
differ materially from those estimates and assumptions.
Certain prior year amounts have been reclassified in order to conform to the 2009
presentation. One of the reclassifications included a new grouping of expenses in the
accompanying condensed consolidated statements of operations and another reclassification
included our presentation of deferred policy acquisition costs and deferred ceded commissions in
the accompanying condensed consolidated balance sheets.
New Grouping of Expenses
For certain of our expense line items in the statements of operations, we had previously
presented the following: commission expense, other insurance operating expenses and general
& administrative expenses. Beginning in the third quarter of 2008, we eliminated the above
expense line items and replaced them with the following: policy acquisition costs and other
operating expenses. Policy acquisition costs include commission expense, premium taxes and
administrative fees for our unemployment compensation product line. Previously, premium taxes
and administrative fees were included within other insurance operating expenses and commission
expense was its own line item. Other operating expenses now include the previously reported
other insurance operating expenses (with the exception of premium taxes and administrative fees,
which are now included in policy acquisition costs) and general & administrative expenses. The
reason for the change in expense classification was to be more consistent with how other
property and casualty insurance companies present their expenses as well as to separately group
those expenses that are variable with our premium production (i.e., policy acquisition costs).
Presentation of Deferred Policy Acquisition Costs and Deferred Ceded Commissions
We had previously presented deferred ceded commissions as a separate liability line item
within the balance sheet. Beginning in the third quarter of 2009, we began presenting deferred
policy acquisition costs, which is an asset line item within the balance sheet, net of deferred
ceded commissions. The reason for the change in balance sheet classification was to be more
consistent with how other property and casualty insurance companies present their deferred
policy acquisition costs as well as to be consistent with how policy acquisition costs are
reported within our statements of operations, which is net of ceding commissions. The same
change was made to our presentation of changes in assets and liabilities within the condensed
consolidated statements of cash flows.
2. | Recently Issued Accounting Standards |
In June 2009, the FASB issued SFAS No. 168 (Codification reference ASC 105), The FASB
Accounting Standards Codification TM and the Hierarchy of Generally Accepted Accounting
Principlesa replacement of FASB Statement No. 162. SFAS No. 168 sets forth the FASB
Accounting Standards Codification (the Codification) as the single source of authoritative
nongovernmental GAAP. The Codification was launched on July 1, 2009 and is the official source
of authoritative, nongovernmental U.S. GAAP, superseding existing FASB, American Institute of
Certified Public Accountants (AICPA), EITF, and related literature. After the Codification was
launched on July 1, 2009, only one level of authoritative U.S. GAAP exists, other than guidance
issued by the Securities and Exchange Commission. All other accounting literature excluded from
the Codification will be considered non-authoritative. The Codification is effective for interim
and annual periods ending after September 15, 2009. The Company has included references to the
Codification in the notes to the condensed consolidated financial statements.
8
Table of Contents
BANCINSURANCE CORPORATION
AND SUBSIDIARIES
AND SUBSIDIARIES
In September 2006, the Financial Accounting Standards Board (FASB) issued Statement of
Financial Accounting Standards (SFAS) No. 157 (Codification reference ASC 820), Fair Value
Measurements. SFAS No. 157 defines fair value, establishes a framework for measuring fair
value and expands disclosure about fair value measurements. It applies to other pronouncements
that require or permit fair value measurements but does not require any new fair value
measurements. The statement defines fair value as the price that would be received to sell an
asset or paid to transfer a liability in an orderly transaction between market participants at
the measurement date. SFAS No. 157 establishes a fair value hierarchy to increase consistency
and comparability in fair value measurements and disclosures. SFAS No. 157 is effective for
fiscal years beginning after November 15, 2007. In February 2008, the FASB issued FASB Staff
Position (FSP) 157-2 (Codification reference ASC 820), Effective Date of FASB Statement No.
157 (FSP SFAS 157-2), which permits a one-year deferral of the application of SFAS No. 157
for all non-financial assets and non-financial liabilities, except those that are recognized or
disclosed at fair value in the financial statements on a recurring basis (at least annually).
The Company adopted SFAS No. 157 and FSP SFAS 157-2 effective January 1, 2008 for financial
assets and liabilities. The adoption of SFAS No. 157 did not have a material impact on our
condensed consolidated financial statements. The Company adopted SFAS No. 157 for non-financial
assets and non-financial liabilities effective January 1, 2009 which did not have a material
impact on the Companys condensed consolidated financial statements. In October 2008, the FASB
issued FSP 157-3 (Codification reference ASC 820), Determining the Fair Value of a Financial
Asset When the Market for That Asset is Not Active (FSP SFAS 157-3), which clarifies the
application of SFAS No. 157 in a market that is not active. The adoption of this standard did
not have a material impact on the Companys condensed consolidated financial statements.
In January 2009, the FASB issued FSP EITF 99-20-1 (Codification reference ASC 325), Amendments
to the Impairment Guidance of EITF Issue No. 99-20. This FSP amends the impairment guidance in
EITF Issue No. 99-20, Recognition of Interest Income and Impairment on Purchased Beneficial
Interests and Beneficial Interests That Continue to Be Held by a Transferor in Securitized
Financial Assets, to achieve more consistent determination of whether an other-than-temporary
impairment has occurred. This FSP also retains and emphasizes the objective of an
other-than-temporary impairment assessment and the related disclosure requirements in FASB
Statement No. 115 (Codification reference ASC 320), Accounting for Certain Investments in Debt
and Equity Securities, and other related guidance. This FSP will be effective for interim and
annual reporting periods ending after December 15, 2009, and will be applied prospectively.
The Company does not anticipate that this FSP will have a material impact on the Companys
consolidated financial statements.
In April 2009, the FASB issued FSP FAS 141(R)-1 (Codification reference ASC 805), Accounting
for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from
Contingencies. This FSP requires that assets acquired and liabilities assumed in a business
combination that arise from contingencies be recognized at fair value if fair value can be
reasonably estimated. If fair value cannot be reasonably estimated, the asset or liability would
generally be recognized in accordance with SFAS No. 5 (Codification reference ASC 450),
Accounting for Contingencies and FASB Interpretation No. 14 (Codification reference ASC 450),
Reasonable Estimation of the Amount of a Loss. Further, the FASB removed the subsequent
accounting guidance for assets and liabilities arising from contingencies from SFAS No. 141(R)
(Codification reference ASC 805). The requirements of this FSP carry forward without significant
revision the guidance on contingencies of SFAS No. 141, Business Combinations, which was
superseded by SFAS No. 141(R). The FSP also eliminates the requirement to disclose an estimate
of the range of possible outcomes of recognized contingencies at the acquisition date. For
unrecognized contingencies, the FASB requires that entities include only the disclosures
required by SFAS No. 5. The Company adopted this FSP effective January 1, 2009. The adoption of
this FSP did not have an impact on the Companys condensed consolidated financial statements,
and its effects on future periods will depend on the nature and significance of business
combinations subject to this statement.
In April 2009, the FASB also issued the following three Staff Positions, each of which was
adopted by the Company on April 1, 2009 without a material impact on the Companys condensed
consolidated financial statements:
| FSP FAS 157-4 (Codification reference ASC 820), Determining Fair Value When the Volume
and Level of Activity for the Asset or Liability Have Significantly Decreased and
Identifying Transactions That Are Not Orderly (FSP FAS 157-4). This FSP supersedes FSP
FAS 157-3 (Codification reference ASC 820), Determining the Fair Value of a Financial
Asset When the Market for That Asset is Not Active. FSP FAS 157-4 provides additional
guidance on: (1) estimating fair value when the volume and level of activity for an asset
or liability have significantly decreased in relation to the normal market activity for the
asset or liability, and (2) identifying transactions that are not orderly. FSP FAS 157-4
must be applied prospectively and retrospective application is not permitted. |
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BANCINSURANCE CORPORATION
AND SUBSIDIARIES
AND SUBSIDIARIES
| FSP FAS 115-2 and FAS 124-2 (Codification reference ASC 320), Recognition and
Presentation of Other-Than-Temporary Impairments (FSP FAS 115-2 and FAS 124-2). This FSP
provides new guidance on the recognition and presentation of other-than-temporary
impairments (OTTI) for available for sale and held to maturity fixed maturities (equities
are excluded). An impaired security is not recognized as an impairment if management does
not intend to sell the impaired security and it is more likely than not it will not be
required to sell the security before the recovery of its amortized cost basis. If
management concludes a security is other-than-temporarily impaired, the FSP requires that
the difference between the fair value and the amortized cost of the security be presented
as an OTTI charge in the consolidated statements of operations, with an offset for any
noncredit-related loss component of the OTTI charge to be recognized in other comprehensive
income. Accordingly, only the credit loss component of the OTTI amount will have an impact
on the Companys results of operations. The FSP also requires extensive new interim and
annual disclosure for both fixed maturities and equities to provide further disaggregated
information as well as information about how the credit loss component of the OTTI charge
was determined and requiring a roll forward of such amount for each reporting period. |
||
| FSP FAS 107-1 and APB 28-1 (Codification reference ASC 825), Interim Disclosures about
Fair Value of Financial Instruments (FSP FAS 107-1 and APB 28-1). This FSP extends the
disclosure requirements under SFAS No. 107 (Codification reference ASC 825), Disclosures
about Fair Value of Financial Instruments, to interim financial statements and it amends
APB Opinion 28 (Codification reference ASC 270), Interim Financial Reporting, to require
those disclosures in summarized financial information at interim reporting periods. |
In May 2008, the FASB issued SFAS No. 163 (Codification reference ASC 944), Accounting for
Financial Guarantee Insurance Contracts. SFAS No. 163 clarifies how SFAS No. 60 (Codification
reference ASC 944), Accounting and Reporting by Insurance Enterprises, applies to financial
guarantee insurance contracts issued by insurance enterprises, including the recognition and
measurement of premium revenue and claim liabilities. SFAS No. 163 also requires expanded
disclosures about financial guarantee insurance contracts. SFAS No. 163 is effective for
financial statements issued for fiscal years beginning after December 15, 2008, and all interim
periods within those fiscal years, except for disclosures about the insurance enterprises
risk-management activities, which are effective the first period beginning after issuance of
SFAS No. 163. The adoption of SFAS No. 163 did not have a material impact on our condensed
consolidated financial statements because the Company does not provide financial guarantee
insurance contracts.
In May 2009, the FASB issued SFAS No. 165 (Codification reference ASC 855), Subsequent Events.
SFAS No. 165 sets standards for the disclosure of events that occur after the balance-sheet
date, but before financial statements are issued or are available to be issued. SFAS No. 165
sets forth the following: (1) the period after the balance sheet date during which management of
a reporting entity should evaluate events or transactions that may occur for potential
recognition or disclosure in the financial statements; (2) the circumstances under which an
entity should recognize events or transactions occurring after the balance sheet date in its
financial statements; and (3) the disclosures that an entity should make about events or
transactions that occurred after the balance sheet date. SFAS No. 165 is effective for interim
and annual periods ending after June 15, 2009. The Company adopted SFAS No. 165 effective April
1, 2009. The Company uses the date of the filing of its Quarterly Report on Form 10-Q with the
Securities and Exchange Commission as the date through which subsequent events have been
evaluated, which is the same date as the date the financial statements are issued. The adoption
of SFAS No. 165 did not have a material impact on the Companys condensed consolidated financial
statements.
In June 2009, the FASB issued two other new FASB statements: (1) SFAS No. 166, Accounting for
Transfers of Financial Assets, and (2) SFAS No. 167, Amendments to FASB Interpretation No.
46(R). These FASB statements establish new criteria governing whether transfers of financial
assets are accounted for as sales and are expected to result in more variable interest entities
being consolidated. These FASB statements are effective for annual periods beginning after
November 15, 2009. The Company is currently evaluating the impact of adopting these FASB
statements; however, the Company does not anticipate that these FASB statements will have a
material impact on the Companys consolidated financial statements.
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BANCINSURANCE CORPORATION
AND SUBSIDIARIES
AND SUBSIDIARIES
3. | Investments |
The amortized cost, gross unrealized gains and losses and estimated fair value of investments in
held to maturity and available for sale securities at September 30, 2009 and December 31, 2008
were as follows:
September 30, 2009 | ||||||||||||||||
Gross | Gross | Estimated | ||||||||||||||
Amortized | unrealized | unrealized | fair | |||||||||||||
cost | gains | losses | value | |||||||||||||
Held to maturity: |
||||||||||||||||
Fixed maturities: |
||||||||||||||||
U.S. Treasury securities and obligations of
U.S. Government corporations and agencies |
$ | 2,328,432 | $ | 14,440 | $ | | $ | 2,342,872 | ||||||||
Obligations of U.S. states, municipals and political
subdivisions |
2,864,785 | 131,731 | | 2,996,516 | ||||||||||||
Total held to maturity |
5,193,217 | 146,171 | | 5,339,388 | ||||||||||||
Available for sale: |
||||||||||||||||
Fixed maturities: |
||||||||||||||||
Obligations of U.S. states, municipals and political
subdivisions |
69,966,824 | 1,998,695 | 1,683,649 | 70,281,870 | ||||||||||||
Corporate and other taxable debt securities |
1,167,038 | 528,402 | 17,500 | 1,677,940 | ||||||||||||
Redeemable preferred stock |
197,830 | 102,470 | | 300,300 | ||||||||||||
Total fixed maturities |
71,331,692 | 2,629,567 | 1,701,149 | 72,260,110 | ||||||||||||
Equity securities: |
||||||||||||||||
Banks, trusts and insurance companies |
1,261,679 | 787,225 | 1,293 | 2,047,611 | ||||||||||||
Industrial and miscellaneous |
279,559 | 97,141 | | 376,700 | ||||||||||||
Mutual funds |
6,427,935 | 905,595 | | 7,333,530 | ||||||||||||
Total equities |
7,969,173 | 1,789,961 | 1,293 | 9,757,841 | ||||||||||||
Total available for sale |
79,300,865 | 4,419,528 | 1,702,442 | 82,017,951 | ||||||||||||
Total |
$ | 84,494,082 | $ | 4,565,699 | $ | 1,702,442 | $ | 87,357,339 | ||||||||
December 31, 2008 | ||||||||||||||||
Gross | Gross | Estimated | ||||||||||||||
Amortized | unrealized | unrealized | fair | |||||||||||||
cost | gains | losses | value | |||||||||||||
Held to maturity: |
||||||||||||||||
Fixed maturities: |
||||||||||||||||
U.S. Treasury securities and obligations of
U.S. Government corporations and agencies |
$ | 2,306,533 | $ | 43,350 | $ | | $ | 2,349,883 | ||||||||
Obligations of U.S. states, municipals and political
subdivisions |
2,891,535 | 99,232 | 9,979 | 2,980,788 | ||||||||||||
Total held to maturity |
5,198,068 | 142,582 | 9,979 | 5,330,671 | ||||||||||||
Available for sale: |
||||||||||||||||
Fixed maturities: |
||||||||||||||||
Obligations of U.S. states, municipals and political
subdivisions |
64,840,650 | 275,143 | 7,597,616 | 57,518,177 | ||||||||||||
Corporate and other taxable debt securities |
1,800,360 | | 161,717 | 1,638,643 | ||||||||||||
Redeemable preferred stock |
381,550 | 136,700 | | 518,250 | ||||||||||||
Total fixed maturities |
67,022,560 | 411,843 | 7,759,333 | 59,675,070 | ||||||||||||
Equity securities: |
||||||||||||||||
Banks, trusts and insurance companies |
2,137,422 | 580,828 | 205,919 | 2,512,331 | ||||||||||||
Industrial and miscellaneous |
369,277 | 44,309 | 26,440 | 387,146 | ||||||||||||
Mutual funds |
4,788,654 | | 1,146,267 | 3,642,387 | ||||||||||||
Total equities |
7,295,353 | 625,137 | 1,378,626 | 6,541,864 | ||||||||||||
Total available for sale |
74,317,913 | 1,036,980 | 9,137,959 | 66,216,934 | ||||||||||||
Total |
$ | 79,515,981 | $ | 1,179,562 | $ | 9,147,938 | $ | 71,547,605 | ||||||||
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BANCINSURANCE CORPORATION
AND SUBSIDIARIES
AND SUBSIDIARIES
The amortized cost and estimated fair value of fixed maturity investments in held to
maturity and available for sale securities at September 30, 2009, 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.
September 30, 2009 | ||||||||||||||||
Held to Maturity | Available for Sale | |||||||||||||||
Amortized | Estimated | Amortized | Estimated | |||||||||||||
cost | fair value | cost | fair value | |||||||||||||
Due in one year or less |
$ | 1,921,606 | $ | 1,937,564 | $ | 660,000 | $ | 663,737 | ||||||||
Due after one year but less than five years |
2,120,825 | 2,197,590 | 2,323,533 | 2,873,785 | ||||||||||||
Due after five years but less than ten years |
646,018 | 670,899 | 7,757,100 | 7,816,530 | ||||||||||||
Due after ten years |
504,768 | 533,335 | 60,591,059 | 60,906,058 | ||||||||||||
Total |
$ | 5,193,217 | $ | 5,339,388 | $ | 71,331,692 | $ | 72,260,110 | ||||||||
Net investment income for the three and nine months ended September 30, 2009 and 2008 is summarized below:
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
Fixed maturities |
$ | 970,761 | $ | 862,742 | $ | 2,699,878 | $ | 2,489,432 | ||||||||
Equity securities |
117,946 | 154,169 | 326,595 | 443,859 | ||||||||||||
Short-term investments |
5,699 | 38,360 | 82,494 | 50,196 | ||||||||||||
Other |
5,461 | 8,108 | 18,232 | 26,345 | ||||||||||||
Expenses |
(71,564 | ) | (61,350 | ) | (183,750 | ) | (199,223 | ) | ||||||||
Net investment income |
$ | 1,028,303 | $ | 1,002,029 | $ | 2,943,449 | $ | 2,810,609 | ||||||||
The proceeds from sales of available for sale securities (excluding bond calls, prepayments
and maturities) were $14,051,044 and $16,852,930 for the nine months ended September 30, 2009 and
2008, respectively, which includes $7,551,340 and $6,404,314, respectively, from sales of our
money market mutual fund which we buy and sell regularly as part of our liquidity management.
Pre-tax realized gains (losses) on investments, other-than-temporary impairments and changes in
unrealized gains (losses) on available for sale investments were as follows for the three and
nine months ended September 30, 2009 and 2008:
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
Gross realized gains: |
||||||||||||||||
Fixed maturities |
$ | 88,337 | $ | 23,858 | $ | 253,685 | $ | 85,439 | ||||||||
Equity securities |
438,167 | 26,511 | 553,806 | 569,567 | ||||||||||||
Total gains |
526,504 | 50,369 | 807,491 | 655,006 | ||||||||||||
Gross realized losses |
||||||||||||||||
Fixed maturities |
(101,452 | ) | (18,973 | ) | (105,201 | ) | (191,252 | ) | ||||||||
Equity securities |
(4,276 | ) | (18,923 | ) | (17,348 | ) | (74,121 | ) | ||||||||
Total losses |
(105,728 | ) | (37,896 | ) | (122,549 | ) | (265,373 | ) | ||||||||
Net realized gains on investments |
$ | 420,776 | $ | 12,473 | $ | 684,942 | $ | 389,633 | ||||||||
Other-than-temporary impairments |
$ | (120,805 | ) | $ | (1,171,957 | ) | $ | (2,887,994 | ) | $ | (2,405,678 | ) | ||||
Changes in net unrealized gains (losses)
on available for sale investments: |
||||||||||||||||
Fixed maturities |
$ | 4,446,309 | $ | (3,269,274 | ) | $ | 8,275,908 | $ | (4,085,707 | ) | ||||||
Equity securities |
398,233 | (395,892 | ) | 2,542,157 | (1,661,885 | ) | ||||||||||
Net change in net unrealized gains (losses) |
$ | 4,844,542 | $ | (3,665,166 | ) | $ | 10,818,065 | $ | (5,747,592 | ) | ||||||
12
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BANCINSURANCE CORPORATION
AND SUBSIDIARIES
AND SUBSIDIARIES
We continually monitor the difference between the book value and the estimated fair
value of our investments, which involves judgment 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
record the decline as a realized loss through the income
statement. If our judgment changes in the future, we may ultimately record a realized loss for
a security after having originally concluded that the decline in value was temporary. We begin
to monitor a security for other-than-temporary impairment when its fair value to book value
ratio falls below 80%. Our assessment as to whether a security is other-than-temporarily
impaired depends on, among other things: (1) the length of time and extent to which the
estimated fair value has been less than book value; (2) whether the decline appears to be
related to general market or industry conditions or is issuer specific; (3) our current judgment
as to the financial condition and future prospects of the entity that issued the investment
security; and (4) our intent to sell the security or the likelihood that we will be required to
sell the security before its anticipated recovery.
The following table summarizes the fair value to book value ratio for all securities in an
unrealized loss position at September 30, 2009 and December 31, 2008:
September 30, 2009 | ||||||||||||||||||||
Aggregate | ||||||||||||||||||||
Estimated | Gross | fair value to | Percent | |||||||||||||||||
Book | fair | unrealized | book value | of total | ||||||||||||||||
Fair value to book value ratio | value | value | loss | ratio | book value | |||||||||||||||
Fixed maturities: |
||||||||||||||||||||
90% to 99% |
$ | 20,795,279 | $ | 20,124,225 | $ | 671,054 | 96.8 | % | 79.7 | % | ||||||||||
80% to 89% |
3,026,070 | 2,576,047 | 450,023 | 85.1 | 11.6 | |||||||||||||||
70% to 79% |
2,282,287 | 1,702,215 | 580,072 | 74.6 | 8.7 | |||||||||||||||
Total fixed maturities |
26,103,636 | 24,402,487 | 1,701,149 | 93.5 | 100.0 | |||||||||||||||
Equities: |
||||||||||||||||||||
90% to 99% |
152,893 | 151,600 | 1,293 | 99.2 | 100.0 | |||||||||||||||
Total equities |
152,893 | 151,600 | 1,293 | 99.2 | 100.0 | |||||||||||||||
Total |
$ | 26,256,529 | $ | 24,554,087 | $ | 1,702,442 | 93.5 | % | 100.0 | % | ||||||||||
December 31, 2008 | ||||||||||||||||||||
Aggregate | ||||||||||||||||||||
Estimated | Gross | fair value to | Percent | |||||||||||||||||
Book | fair | unrealized | book value | of total | ||||||||||||||||
Fair value to book value ratio | value | value | loss | ratio | book value | |||||||||||||||
Fixed maturities: |
||||||||||||||||||||
90% to 99% |
$ | 22,410,310 | $ | 21,412,638 | $ | 997,672 | 95.5 | % | 40.5 | % | ||||||||||
80% to 89% |
16,775,908 | 14,348,190 | 2,427,718 | 85.5 | 30.3 | |||||||||||||||
70% to 79% |
11,703,885 | 8,920,951 | 2,782,934 | 76.2 | 21.1 | |||||||||||||||
60% to 69% |
4,294,231 | 2,822,767 | 1,471,464 | 65.7 | 7.7 | |||||||||||||||
50% to 59% |
204,298 | 114,774 | 89,524 | 56.2 | 0.4 | |||||||||||||||
Total fixed maturities |
55,388,632 | 47,619,320 | 7,769,312 | 86.0 | 100.0 | |||||||||||||||
Equities: |
||||||||||||||||||||
90% to 99% |
| | | | | |||||||||||||||
80% to 89% |
232,550 | 191,400 | 41,150 | 82.3 | 4.3 | |||||||||||||||
70% to 79% |
4,787,788 | 3,570,322 | 1,217,466 | 74.6 | 88.6 | |||||||||||||||
60% to 69% |
383,915 | 263,905 | 120,010 | 68.7 | 7.1 | |||||||||||||||
Total equities |
5,404,253 | 4,025,627 | 1,378,626 | 74.5 | 100.0 | |||||||||||||||
Total |
$ | 60,792,885 | $ | 51,644,947 | $ | 9,147,938 | 85.0 | % | 100.0 | % | ||||||||||
We continually monitor the credit quality of our fixed maturity investments to gauge our
ability to be repaid principal and interest. We consider price declines of securities in our
other-than-temporary impairment analysis where such price declines provide evidence of declining
credit quality, and we distinguish between price changes caused by credit deterioration, as
opposed to rising interest rates. In our evaluation of credit quality, we consider, among other
things, credit ratings from major rating agencies, including Moodys Industry Services
(Moodys) and Standard & Poors (S&P). The following table shows the composition of fixed
maturity securities in an unrealized loss position at September 30, 2009 and December 31, 2008
by the National Association of Insurance Commissioners (NAIC) rating and the generally
equivalent S&P and Moodys ratings. Not all of these securities are rated by S&P and/or
Moodys.
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BANCINSURANCE CORPORATION
AND SUBSIDIARIES
AND SUBSIDIARIES
September 30, 2009 | ||||||||||||||||||||||||
Aggregate | ||||||||||||||||||||||||
Equivalent | Equivalent | Estimated | Gross | fair value to | Percent | |||||||||||||||||||
NAIC | S&P | Moodys | Book | fair | unrealized | book value | of total | |||||||||||||||||
rating | rating | rating | value | value | loss | ratio | book value | |||||||||||||||||
1FE |
AAA/AA/A | Aaa/Aa/A | $ | 17,897,380 | $ | 17,227,099 | $ | 670,281 | 96.3 | % | 68.6 | % | ||||||||||||
2FE |
BBB | Baa | 8,055,651 | 7,034,604 | 1,021,047 | 87.3 | 30.9 | |||||||||||||||||
3FE |
BB | Ba | 150,605 | 140,784 | 9,821 | 93.5 | 0.5 | |||||||||||||||||
4FE |
B | B | | | | | | |||||||||||||||||
5FE |
CCC or lower | Caa or lower | | | | | | |||||||||||||||||
6FE |
| | | | | |||||||||||||||||||
Total |
$ | 26,103,636 | $ | 24,402,487 | $ | 1,701,149 | 93.5 | % | 100.0 | % | ||||||||||||||
December 31, 2008 | ||||||||||||||||||||||||
Aggregate | ||||||||||||||||||||||||
Equivalent | Equivalent | Estimated | Gross | fair value to | Percent | |||||||||||||||||||
NAIC | S&P | Moodys | Book | fair | unrealized | book value | of total | |||||||||||||||||
rating | rating | rating | value | value | loss | ratio | book value | |||||||||||||||||
1FE |
AAA/AA/A | Aaa/Aa/A | $ | 39,482,827 | $ | 34,523,147 | $ | 4,959,680 | 87.4 | % | 71.3 | % | ||||||||||||
2FE |
BBB | Baa | 15,488,507 | 12,720,581 | 2,767,926 | 82.1 | 28.0 | |||||||||||||||||
3FE |
BB | Ba | 417,298 | 375,592 | 41,706 | 90.0 | 0.7 | |||||||||||||||||
4FE |
B | B | | | | | | |||||||||||||||||
5FE |
CCC or lower | Caa or lower | | | | | | |||||||||||||||||
6FE |
| | | | | |||||||||||||||||||
Total |
$ | 55,388,632 | $ | 47,619,320 | $ | 7,769,312 | 86.0 | % | 100.0 | % | ||||||||||||||
The following table summarizes the estimated fair value and gross unrealized losses
(pre-tax) for all securities in an unrealized loss position at September 30, 2009 and December
31, 2008, distinguishing between those securities which have been continuously in an unrealized
loss position for less than twelve months and twelve months or greater.
Less Than 12 Months | 12 Months or Greater | Total | ||||||||||||||||||||||
Estimated | Gross | Estimated | Gross | Estimated | Gross | |||||||||||||||||||
fair | unrealized | fair | unrealized | fair | unrealized | |||||||||||||||||||
At September 30, 2009 | value | loss | value | loss | value | loss | ||||||||||||||||||
Fixed maturities: |
||||||||||||||||||||||||
Obligations of U.S. states, municipals
and political subdivisions |
$ | 2,833,895 | $ | 46,789 | $ | 21,568,592 | $ | 1,654,360 | $ | 24,402,487 | $ | 1,701,149 | ||||||||||||
Total fixed maturities |
2,833,895 | 46,789 | 21,568,592 | 1,654,360 | 24,402,487 | 1,701,149 | ||||||||||||||||||
Equity securities: |
||||||||||||||||||||||||
Banks, trusts and insurance companies |
151,600 | 1,293 | | | 151,600 | 1,293 | ||||||||||||||||||
Total equities |
151,600 | 1,293 | | | 151,600 | 1,293 | ||||||||||||||||||
Total |
$ | 2,985,495 | $ | 48,082 | $ | 21,568,592 | $ | 1,654,360 | $ | 24,554,087 | $ | 1,702,442 | ||||||||||||
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BANCINSURANCE CORPORATION
AND SUBSIDIARIES
AND SUBSIDIARIES
Less Than 12 Months | 12 Months or Greater | Total | ||||||||||||||||||||||
Estimated | Gross | Estimated | Gross | Estimated | Gross | |||||||||||||||||||
fair | unrealized | fair | unrealized | fair | unrealized | |||||||||||||||||||
At December 31, 2008 | value | loss | value | loss | value | loss | ||||||||||||||||||
Fixed maturities: |
||||||||||||||||||||||||
Obligations of U.S. states, municipals
and political subdivisions |
$ | 25,655,047 | $ | 2,532,779 | $ | 20,575,630 | $ | 5,074,816 | $ | 46,230,677 | $ | 7,607,595 | ||||||||||||
Corporate and other taxable debt securities |
1,294,380 | 155,980 | 94,263 | 5,737 | 1,388,643 | 161,717 | ||||||||||||||||||
Total fixed maturities |
26,949,427 | 2,688,759 | 20,669,893 | 5,080,553 | 47,619,320 | 7,769,312 | ||||||||||||||||||
Equity securities: |
||||||||||||||||||||||||
Banks, trusts and insurance companies |
647,299 | 205,919 | | | 647,299 | 205,919 | ||||||||||||||||||
Industrial and miscellaneous |
81,662 | 26,440 | | | 81,662 | 26,440 | ||||||||||||||||||
Closed-end mutual funds |
970,705 | 279,813 | 2,325,961 | 866,454 | 3,296,666 | 1,146,267 | ||||||||||||||||||
Total equities |
1,699,666 | 512,172 | 2,325,961 | 866,454 | 4,025,627 | 1,378,626 | ||||||||||||||||||
Total |
$ | 28,649,093 | $ | 3,200,931 | $ | 22,995,854 | $ | 5,947,007 | $ | 51,644,947 | $ | 9,147,938 | ||||||||||||
As of September 30, 2009, we had approximately 90 fixed maturity securities and zero equity
securities that have been in an unrealized loss position for 12 months or longer. 89 out of the
90 fixed maturity securities are investment grade (rated BBB and Baa or higher by S&P and
Moodys, respectively). All 90 of the fixed maturity securities are current on interest and
principal and we believe that it is reasonably likely that all contract terms of each security
will be satisfied. The decrease in unrealized loss position for investments as of September 30,
2009 when compared to December 31, 2008 was primarily due to our fixed maturity portfolio as a
result of the changes in the interest rate environment and/or current capital market conditions.
We do not have the intent to sell these fixed maturity securities and we do not believe it is
more likely than not that we will be required to sell these fixed maturity securities before
their anticipated recovery.
Other-than-temporary impairments on investments during the nine months ended September 30, 2009
and 2008 were $2,887,994 and $2,405,678, respectively. The impairment charges during the first
nine months of 2009 were primarily due to the following: (1) $1,316,177 in impairment charges
for four closed-end mutual funds whose fair values were adversely affected by current market
conditions; (2) $572,020 in impairment charges for a corporate fixed maturity security of a
lending institution (SLM Corp. or Sallie Mae) whose fair value was adversely affected by
uncertainty in its investment ratings by certain bond rating agencies; (3) $797,619 in
impairment charges for equity securities of seven financial institutions whose fair values were
adversely affected primarily by the credit markets; (4) $62,157 in impairment charges for an
equity security of an insurance company whose fair value was adversely affected by the current
market conditions; and (5) $78,420 in impairment charges for nine fixed maturity securities that
we intend to sell before their anticipated recovery in order to utilize capital loss carrybacks
for tax purposes.
4. | Trust Preferred Debt Issued to Affiliates |
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. BIC Trust I also issued $248,000 of
floating rate common securities to Bancinsurance. 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 II also issued $217,000 of floating rate common securities to Bancinsurance. 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. The Company has fully and unconditionally guaranteed the obligations of BIC Trust I
and BIC Trust II with respect to the floating rate trust preferred capital securities. 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
Is 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 (4.33% and 6.81% at
September 30, 2009 and 2008, respectively), are redeemable at par and mature on December 4,
2032. BIC Trust IIs 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 (4.33% and 7.81% at September 30, 2009 and 2008, respectively), are redeemable at
par 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 months ended September 30, 2009 and 2008 was $180,575 and $269,673, respectively, and
$606,371 and $876,195 for the nine months ended
September 30, 2009 and 2008, respectively. The terms of the junior subordinated debentures
contain various covenants. As of September 30, 2009, the Company was in compliance with all
such covenants.
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BANCINSURANCE CORPORATION
AND SUBSIDIARIES
AND SUBSIDIARIES
GAAP 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 VIEs expected losses if they occur, receive a majority of the VIEs
expected residual returns if they occur, or both. BIC Trust I and BIC Trust II are not
considered to be VIEs and are not included in the Companys condensed consolidated financial
statements. If they were included in the condensed consolidated financial statements, there
would be no change to net income, only changes in the presentation of the financial statements.
5. | Income Taxes |
Our provision for federal income taxes for the nine months ended September 30, 2009 has been
computed based on our estimated annual effective tax rate. Income before federal income taxes
differs from taxable income principally due to the effect of tax-exempt investment income and
the dividends-received deduction. Deferred taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes.
GAAP prescribes a recognition threshold and measurement attribute for the financial statement
recognition and measurement of a tax position taken or expected to be taken in a tax return. As
a result, we must adjust our financial statements to reflect only those tax positions that are
more-likely-than-not to be sustained.
Based on our evaluation, we have concluded that there are no significant uncertain tax positions
requiring recognition in our condensed consolidated financial statements. Our evaluation was
performed for the tax years ended December 31, 2006, 2007 and 2008, the tax years which remain
subject to examination by major tax jurisdictions as of September 30, 2009. In addition, we do
not believe the Company would be subject to any interest or penalties relative to any open tax
years and, therefore, have not accrued any such amounts. If we were to incur any interest and/or
penalties in connection with income tax deficiencies, we would classify interest in the
interest expense category and classify penalties in the other operating expenses category
within our condensed consolidated statements of operations.
6. | Equity-Based Compensation |
We maintain two equity compensation plans for the benefit of certain of our officers,
directors, employees, consultants and advisors. GAAP requires all equity-based payments to
employees and directors, including grants of stock options and restricted stock, to be
recognized in net income based on the grant date fair value of the award. We are required to
record equity-based compensation expense for all awards granted after January 1, 2006 and the
nonvested portion of previously granted awards outstanding as January 1, 2006.
We have stock options and restricted stock outstanding at September 30, 2009 under two equity
compensation plans (collectively, the Plans), each of which has been approved by our
shareholders. We will issue authorized but unissued shares or treasury shares to satisfy any
future restricted stock awards or the exercise of stock options.
The Bancinsurance Corporation 1994 Stock Option Plan (the 1994 Stock Option Plan) provided for
the grants of options covering up to an aggregate of 500,000 common shares, with a 100,000
common share maximum for any one participant. Key employees, officers and directors of, and
consultants and advisors to, the Company were eligible to participate in the 1994 Stock Option
Plan. The 1994 Stock Option Plan is administered by the Compensation Committee, which
determined to whom and when options were granted along with the terms and conditions of the
options. Under the 1994 Stock Option Plan, options for 96,000 common shares were outstanding at
September 30, 2009, expire at various dates from 2010 to 2013 and range in option price per
share from $4.063 to $6.00. Of the options for 96,000 common shares outstanding, 14,000 have
been granted to our non-employee directors and 82,000 have been granted to employees. All of
the options outstanding were granted to employees and directors for compensatory purposes. No
new options can be granted under the 1994 Stock Option Plan and the plan remains in effect only
with respect to the outstanding options.
The Bancinsurance Corporation 2002 Stock Incentive Plan, as amended (the 2002 Plan), provides
for certain equity-based awards, including grants of stock options and restricted stock,
covering up to an aggregate of 950,000 common shares. Key employees, officers and directors of,
and consultants and advisors to, the Company are eligible to participate in the 2002 Plan. The
2002 Plan is administered by the Compensation Committee, which determines to whom and when
awards will be granted as well as the terms and conditions of the awards. Under the 2002 Plan,
stock options for 595,000 common shares were outstanding at September 30, 2009, expire at
various dates from 2012 to 2019 and range in option price per share from $3.40 to
$8.00. Under the 2002 Plan, 203,281 unvested restricted common shares were also outstanding at
September 30, 2009. Of the total equity-based awards for 798,281 common shares outstanding
under the 2002 Plan, 46,000 have been granted to our non-employee directors and 752,281 have
been granted to employees. All of the equity-based awards outstanding were granted to employees
and directors for compensatory purposes. As of September 30, 2009, there were 85,693 common
shares available for future grant under the 2002 Plan.
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BANCINSURANCE CORPORATION
AND SUBSIDIARIES
AND SUBSIDIARIES
The outstanding restricted stock awards are time-based restricted common shares. Compensation
expense for restricted stock awards is measured using the grant date fair value and recognized
over the respective service period, which matches the vesting period. The outstanding
restricted stock awards vest in equal annual installments on the first, second and third
anniversaries of the date of grant subject to the employees continued employment with the
Company on the applicable anniversary date. For the nine months ended September 30, 2009, the
Company granted 127,954 restricted common shares, having an average grant date fair value of
$3.40 per share. There were 28,208 and 47,116 restricted common shares that vested during the
three and nine months ended September 30, 2009, respectively.
The following table summarizes restricted stock award activity under our 2002 Plan from January
1, 2009 through September 30, 2009:
Weighted-average | ||||||||
grant date fair value | ||||||||
Shares | per common share | |||||||
Outstanding at January 1, 2009 |
122,443 | $ | 5.26 | |||||
Granted |
127,954 | 3.40 | ||||||
Vested |
47,116 | 5.41 | ||||||
Cancelled |
| | ||||||
Outstanding at September 30, 2009 |
203,281 | 4.05 | ||||||
All stock options: (1) have been granted with an exercise price equal to the closing price
of our common shares on the date of grant; (2) each have a 10-year contractual term; (3) with
respect to officers and employees, vest and become exercisable at the rate of 20% per year over
a five-year period (subject to the applicable officers or employees continued employment with
the Company); and (4) with respect to non-employee directors, vest and become exercisable on the
first anniversary of the date of grant (subject to the applicable directors continued service
on the board of directors of the Company). Compensation expense for stock options is measured
on the date of grant at fair value and is recognized over the respective service period, which
matches the vesting period.
The fair value of options granted by the Company is estimated on the date of grant using the
Black-Scholes option pricing model (Black-Scholes model). The Black-Scholes model utilizes
ranges of assumptions such as risk-free rate, expected life, expected volatility and dividend
yield. The risk-free rate is based on the United States Treasury strip curve at the time of the
grant with a term approximating that of the expected option life. We analyze historical data
regarding option exercise behaviors, expirations and cancellations to calculate the expected
life of the options granted, which represents the length of time in years that the options
granted are expected to be outstanding. Expected volatilities are based on historical
volatility over a period of time using the expected term of the option grant and using weekly
stock prices of the Company; however, for options granted after February 4, 2005, we exclude
from our historical volatility the period from February 4, 2005 through January 25, 2006 (the
period in which shareholders could not obtain current financial information for the Company and
could not rely on the Companys 2003, 2002, and 2001 financial statements) as we believe that
our stock price during that period is not relevant in evaluating the expected volatility of the
common shares in the future. A 0% dividend yield is used in the Black-Scholes model based on
historical dividends. For the nine months ended September 30, 2009, the Company granted 12,000
stock options to non-employee directors, having an average grant date fair value of $2.26 per
share using the following assumptions:
Risk-free interest rate |
3.49 | % | ||
Expected life |
7 years | |||
Expected volatility |
66.2 | % | ||
Dividend yield |
0 | % |
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AND SUBSIDIARIES
AND SUBSIDIARIES
The following table summarizes all stock option activity under the Plans from January 1, 2009 through September 30, 2009:
Weighted-average | ||||||||||||||||
exercise price | Weighted-average | Aggregate | ||||||||||||||
Shares | per common share | contractual life (years) | intrinsic value | |||||||||||||
Outstanding at January 1, 2009 |
728,500 | $ | 5.67 | |||||||||||||
Granted |
12,000 | 3.40 | ||||||||||||||
Exercised |
| | ||||||||||||||
Expired |
49,500 | 5.37 | ||||||||||||||
Cancelled |
| | ||||||||||||||
Outstanding at September 30, 2009 |
691,000 | 5.65 | 4.93 | $ | 600 | |||||||||||
Vested and exercisable at September 30, 2009 |
567,200 | 5.59 | 4.55 | $ | |
The aggregate intrinsic value represents the total pre-tax intrinsic value, based on the
closing price of our common shares on the OTC Bulletin Board on September 30, 2009 ($3.45),
which would have been received by the option holders had all option holders exercised their
options and sold the underlying common shares as of that date. Because no vested and
exercisable options were in-the-money at September 30, 2009 (i.e., the exercise price of such
options exceeded the closing price of our common shares), the aggregate intrinsic value was
zero. No stock options were exercised during the three and nine months ended September 30,
2009.
The following table summarizes nonvested stock option activity under the Plans from January 1,
2009 through September 30, 2009:
Weighted-average | ||||||||
grant date fair value | ||||||||
Shares | per common share | |||||||
Nonvested at January 1, 2009 |
169,800 | $ | 2.50 | |||||
Granted |
12,000 | 2.26 | ||||||
Vested |
58,000 | 2.54 | ||||||
Expired |
| | ||||||
Cancelled |
| | ||||||
Nonvested at September 30, 2009 |
123,800 | 2.45 | ||||||
The compensation expense recognized for all equity-based awards is net of forfeitures and
is recognized over the awards respective service periods. We recorded equity-based
compensation expense for the three months ended September 30, 2009 and 2008 of $139,908 and
$102,015 ($92,340 and $67,330 net of tax), respectively, and $367,765 and $279,692 ($242,725 and
$184,597 net of tax) for the nine months ended September 30, 2009 and 2008, respectively. The
equity-based compensation expense is classified within other operating expenses in the
accompanying statements of operations to correspond with the same line item as cash compensation
paid to employees.
As of September 30, 2009, the total pre-tax equity-based compensation expense related to
nonvested stock options and nonvested restricted common shares not yet recognized was $951,888.
The weighted-average period over which this expense is expected to be recognized is
approximately 2.1 years.
The following table summarizes weighted-average information by range of exercise prices for
stock options outstanding and stock options exercisable at September 30, 2009:
Options Outstanding | Options Exercisable | |||||||||||||||||||
Number | Weighted-average | Weighted-average | Number | Weighted-average | ||||||||||||||||
outstanding | remaining | exercise | exercisable | exercise | ||||||||||||||||
Range of Exercise Prices | at 9/30/09 | contractual life (years) | price | at 9/30/09 | price | |||||||||||||||
3.40 |
12,000 | 9.82 | $ | 3.40 | | $ | | |||||||||||||
4.063 - 4.82 |
162,000 | 2.93 | 4.50 | 162,000 | 4.50 | |||||||||||||||
5.00 - 5.30 |
140,000 | 3.57 | 5.18 | 140,000 | 5.18 | |||||||||||||||
6.00 - 6.40 |
248,000 | 6.65 | 6.02 | 160,000 | 6.03 | |||||||||||||||
7.04 - 8.00 |
129,000 | 5.18 | 7.11 | 105,200 | 7.13 | |||||||||||||||
Total ($3.40 - $8.00) |
691,000 | 4.93 | 5.65 | 567,200 | 5.59 | |||||||||||||||
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BANCINSURANCE CORPORATION
AND SUBSIDIARIES
AND SUBSIDIARIES
7. | Other Comprehensive Income |
The components of other comprehensive income (loss) and the related federal income tax effects
for the three and nine months ended September 30, 2009 and 2008 are as follows:
Three Months Ended September 30, 2009 | ||||||||||||
Before-tax | Income tax | Net-of-tax | ||||||||||
amount | expense | amount | ||||||||||
Net unrealized holding gains on securities: |
||||||||||||
Unrealized holding gains arising during 2009 |
$ | 5,144,513 | $ | 1,749,134 | $ | 3,395,379 | ||||||
Less: reclassification adjustments for gains realized
in net income |
299,971 | 101,990 | 197,981 | |||||||||
Net unrealized holding gains |
4,844,542 | 1,647,144 | 3,197,398 | |||||||||
Other comprehensive income |
$ | 4,844,542 | $ | 1,647,144 | $ | 3,197,398 | ||||||
Three Months Ended September 30, 2008 | ||||||||||||
Pre-tax | Income tax | Net-of-tax | ||||||||||
amount | benefit | amount | ||||||||||
Net unrealized holding losses on securities: |
||||||||||||
Unrealized holding losses arising during 2008 |
$ | (4,824,650 | ) | $ | (1,640,381 | ) | $ | (3,184,269 | ) | |||
Less: reclassification adjustments for losses
realized in net income |
(1,159,484 | ) | (394,225 | ) | (765,259 | ) | ||||||
Net unrealized holding losses |
(3,665,166 | ) | (1,246,156 | ) | (2,419,010 | ) | ||||||
Other comprehensive loss |
$ | (3,665,166 | ) | $ | (1,246,156 | ) | $ | (2,419,010 | ) | |||
Nine Months Ended September 30, 2009 | ||||||||||||
Before-tax | Income tax | Net-of-tax | ||||||||||
amount | expense (benefit) | amount | ||||||||||
Net unrealized holding gains on securities: |
||||||||||||
Unrealized holding gains arising during 2009 |
$ | 8,615,013 | $ | 2,929,107 | $ | 5,685,906 | ||||||
Less: reclassification adjustments for losses realized in net income |
(2,203,052 | ) | (749,038 | ) | (1,454,014 | ) | ||||||
Net unrealized holding gains |
10,818,065 | 3,678,145 | 7,139,920 | |||||||||
Other comprehensive income |
$ | 10,818,065 | $ | 3,678,145 | $ | 7,139,920 | ||||||
Nine Months Ended September 30, 2008 | ||||||||||||
Pre-tax | Income tax | Net-of-tax | ||||||||||
amount | benefit | amount | ||||||||||
Net unrealized holding losses on securities: |
||||||||||||
Unrealized holding losses arising during 2008 |
$ | (7,763,637 | ) | $ | (2,639,637 | ) | $ | (5,124,000 | ) | |||
Less: reclassification adjustments for losses realized in net income |
(2,016,045 | ) | (685,455 | ) | (1,330,590 | ) | ||||||
Net unrealized holding losses |
(5,747,592 | ) | (1,954,182 | ) | (3,793,410 | ) | ||||||
Other comprehensive loss |
$ | (5,747,592 | ) | $ | (1,954,182 | ) | $ | (3,793,410 | ) | |||
8. | Reinsurance |
We assume and cede reinsurance with other insurers and reinsurers. Such arrangements serve to
enhance our capacity to write business, provide greater diversification, align the interests of
our business partners with our interests and/or limit our maximum loss arising from certain
risks. Although reinsurance does not discharge the original insurer from its primary liability
to its policyholders, it is the practice of insurers for accounting purposes to treat reinsured
risks as risks of the reinsurer. The primary insurer would reassume liability in those
situations where the reinsurer is unable to meet the obligations it assumed under the
reinsurance agreement. The ability to collect reinsurance is subject to the solvency of the
reinsurers and/or collateral provided under the reinsurance agreement.
Several of our lender service insurance producers have formed sister reinsurance companies, each
of which is commonly referred to as a producer-owned reinsurance company (PORC). The primary
reason for an insurance producer to form a PORC is to realize the underwriting profits and
investment income from the insurance premiums generated by that producer. In return for ceding
business to the PORC, we receive a ceding commission, which is based on a percentage of the
premiums ceded. Such arrangements align the interests of our business partners with our
interests while preserving valued customer relationships. All of our lender service ceded
reinsurance transactions are PORC arrangements.
Effective October 1, 2003, we entered into a producer-owned reinsurance arrangement with a
creditor placed insurance customer whereby 100% of that customers premiums (along with the
associated risk) were ceded to its PORC. For this reinsurance arrangement, we have obtained
collateral in the form of a trust from the reinsurer to secure our obligations. Under the
provisions of the reinsurance agreement, the collateral must be equal to or greater than 102% of
the reinsured reserves and we have immediate access to such collateral if necessary. Effective
April 1, 2008, the policy related to this arrangement was cancelled.
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BANCINSURANCE CORPORATION
AND SUBSIDIARIES
AND SUBSIDIARIES
Under our waste industry products (WIP) program, we assume, write on a direct basis, and cede
certain waste surety bond business under three quota share reinsurance arrangements. First,
effective August 1, 2006, the 50% quota share reinsurance arrangement we entered into in the
second quarter of 2004 was amended whereby we assumed 50% of all waste surety bonds with
liability limits up to $1.2 million from two insurance carriers. Second, effective August 1,
2007, we entered into a 5% quota share reinsurance arrangement whereby we assumed 5% of all
waste surety bonds with liability limits over $1.2 million up to $10.0 million from two
insurance carriers. This reinsurance arrangement is renegotiated annually and was renewed with
similar terms on August 1, 2008. For the August 1, 2009 renewal, our participation was changed
to 12.5%. Third, in addition to assuming business, we also write on a direct basis waste surety
bonds with liability limits up to $5.0 million. We then cede 50% of that business to an
insurance carrier under a reinsurance arrangement. In addition to the quota share
arrangements, we also participate in several facultative reinsurance arrangements. During 2006,
we also began writing directly, assuming and ceding certain contract and escrow surety bond
business under several quota share reinsurance arrangements. This business is included as part
of our WIP program because it is produced by the same general insurance agent that produces the
waste surety bond business.
Effective January 1, 2005, we entered into a producer-owned reinsurance arrangement with a
guaranteed auto protection insurance agent whereby 100% of that agents premiums (along with the
associated risk) were ceded to its PORC. For this reinsurance arrangement, we have obtained
collateral in the form of a letter of credit to secure our obligations. Under the provisions of
the reinsurance agreement, the collateral must be equal to or greater than 102% of the reinsured
reserves and we have immediate access to such collateral if necessary.
Effective January 1, 2007, we entered into a producer-owned reinsurance arrangement with an
equipment physical damage customer whereby 100% of that customers premiums (along with the
associated risk) were ceded to its PORC. For this reinsurance arrangement, we have obtained
collateral in the form of funds held and a letter of credit to secure our obligations. Under
the provisions of the reinsurance agreement, the collateral must be equal to or greater than
102% of the reinsured reserves and we have immediate access to such collateral if necessary.
In addition to the arrangements discussed above, we have other reinsurance arrangements,
including two lender service PORC quota share reinsurance arrangements, one unemployment
compensation facultative reinsurance arrangement, and three reinsurance arrangements for our
vehicle service contract programs. For more information concerning one of our vehicle service
contract programs, see Automobile Service Contract Program below.
From 2001 until the end of the second quarter of 2004, we participated in a bail and immigration
bond program. This program was discontinued in the second quarter of 2004. For more
information concerning this program, see Discontinued Bond Program below.
A reconciliation of direct to net premiums, on both a written and earned basis, for the three
and nine months ended September 30, 2009 and 2008 is as follows:
Three Months Ended | Nine Months Ended | |||||||||||||||||||||||||||||||
September 30, | September 30, | September 30, | September 30, | |||||||||||||||||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||||||||||||||||||
Premiums | Premiums | Premiums | Premiums | |||||||||||||||||||||||||||||
Written | Earned | Written | Earned | Written | Earned | Written | Earned | |||||||||||||||||||||||||
Direct |
$ | 18,880,686 | $ | 16,891,331 | $ | 16,848,318 | $ | 15,851,838 | $ | 53,833,981 | $ | 47,570,911 | $ | 51,475,380 | $ | 48,398,215 | ||||||||||||||||
Assumed |
1,756,167 | 1,110,847 | 1,385,217 | 1,424,927 | 3,919,931 | 3,470,850 | 4,126,657 | 3,884,510 | ||||||||||||||||||||||||
Ceded |
(9,380,018 | ) | (6,699,220 | ) | (8,181,870 | ) | (5,691,707 | ) | (24,006,954 | ) | (18,345,976 | ) | (23,766,855 | ) | (15,766,947 | ) | ||||||||||||||||
Net |
$ | 11,256,835 | $ | 11,302,958 | $ | 10,051,665 | $ | 11,585,058 | $ | 33,746,958 | $ | 32,695,785 | $ | 31,835,182 | $ | 36,515,778 | ||||||||||||||||
The amounts of recoveries pertaining to reinsurance that were deducted from losses and LAE
incurred during the three months ended September 30, 2009 and 2008 were $3,504,266 and
$3,524,018, respectively, and $9,598,706 and $8,448,608 during the nine months ended September
30, 2009 and 2008, respectively. During the three months ended September 30, 2009 and 2008,
ceded reinsurance decreased commission expense incurred by $781,967 and $767,147, respectively,
and by $2,572,814 and $2,513,511 during the nine months ended September 30, 2009 and 2008,
respectively.
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BANCINSURANCE CORPORATION
AND SUBSIDIARIES
AND SUBSIDIARIES
Discontinued Bond Program
Beginning in 2001 and continuing into the second quarter of 2004, we participated as a reinsurer
in a program covering bail and immigration bonds issued by four insurance carriers and produced
by a bail bond agency (collectively, the discontinued bond program or the program). The
liability of the insurance carriers was reinsured to a group of reinsurers, including us. We
assumed 15% of the business from 2001 through 2003 and 5% of the business during the first half
of 2004. This program was discontinued in the second quarter of 2004.
Based on the design of the program, the bail bond agency was to obtain and maintain collateral
and other security and to provide funding for bond losses. The bail bond agency and its
principals were responsible for all losses as part of their program administration. The
insurance carriers and, in turn, the reinsurers were not required to pay losses unless there was
a failure of the bail bond agency. As the bonds were to be 100% collateralized, any losses paid
by the reinsurers were to be recoverable through liquidation of the collateral and collections
from third party indemnitors.
In the second quarter of 2004, we came to believe that the discontinued bond program was not
being operated as it had been represented to us by agents of the insurance carriers who had
solicited our participation in the program, and we began disputing certain issues with respect
to the program, including but not limited to: 1) inaccurate/incomplete disclosures relating to
the program; 2) improper supervision by the insurance carriers of the bail bond agency in
administering the program; 3) improper disclosures by the insurance carriers through the bail
bond agency and the reinsurance intermediaries during the life of the program; and 4) improper
premium and claims administration. Consequently, during the second quarter of 2004, we ceased
paying claims on the program and retained outside legal counsel to review and defend our rights
under the program.
During 2004 and 2005, we entered into arbitrations with the following four insurance carriers
that participated in the discontinued bond program: 1) Aegis Security Insurance Company
(Aegis); 2) Sirius America Insurance Company (Sirius); 3) Harco National Insurance Company
(Harco); and 4) Highlands Insurance Company (Highlands). During 2006, the arbitrations with
Aegis, Sirius and Harco concluded. For Aegis and Sirius, we entered into settlement agreements
with these insurance carriers resolving all disputes between us and these carriers relating to
the discontinued bond program. These settlement agreements also relieved us from any potential
future liabilities with respect to bonds issued by Aegis and Sirius.
For Harco, in August 2006, the Harco arbitration panel issued its Final Decision and Order
ordering each of the reinsurers participating in the arbitration, including us, to pay its
proportionate share of past and future claims paid by Harco, subject to certain adjustments,
offsets and credits (the Final Order). Pursuant to the terms of the Final Order, we have paid
Harco for our proportionate share of all past claims paid by Harco which it has invoiced to us
through September 30, 2009, except as noted below.
During the third quarter of 2009, we received an invoice from Harco for approximately $0.3
million representing our proportionate share of additional claims paid by Harco. We requested
that Harco provide us a detailed accounting of its payment activity. Although Harco indicated
that it would provide us this information, as of September 30, 2009, we have not received such
information. We also requested that Harco provide us information regarding any recoveries that
Harco has received with respect to paid claims and its expected future recoveries. Harco
responded that it has received and continues to receive recoveries but does not believe the
reinsurers are entitled to a proportionate share of such recoveries under the terms of the Final
Order. We disagree with this position. Based on certain recovery information provided by Harco
during the fourth quarter of 2008, we estimate that our proportionate share of Harcos
recoveries that we believe we are entitled to receive under the Final Order is approximately
$0.2 million. We do not intend to pay any current or future Harco invoices until Harco provides
us the requested accounting and we resolve with Harco the reinsurers rights to a proportionate
share of Harcos recoveries.
As of September 30, 2009, we are reserving for Harco losses based on amounts invoiced by Harco
for claims paid and on our proportionate share of Harcos estimate of its future losses under
the program as reflected in the most recent loss information provided to us by Harco (with a
$0.2 million offset for recoveries as noted above).
During the third quarter of 2009, Harco informed us that it had reached an agreement in
principle to settle with the Department of Homeland Security (DHS) regarding Harcos
immigration bond liability under the program. Based on the agreement in principle, Harco
increased its reserves for immigration bonds during the third quarter of 2009 and, as a result,
we increased our reserves by approximately $0.1 million. Harco further informed us that the
agreement in principle would release Harco from any future liability associated with its
immigration bond exposure under the program and Harco is currently working on finalizing the
settlement agreement with DHS, which is subject to final approval by the Department of Justice.
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AND SUBSIDIARIES
Pending Arbitration. Highlands participated as an insurer in the discontinued bond
program for the 2000, 2001 and 2002
program years, and we were one of its reinsurers for the 2001 and 2002 program years. Highlands
was placed in receivership during 2003 (which receivership remains pending). On August 31,
2005, the Highlands Receiver demanded a single consolidated arbitration for the 2000, 2001 and
2002 program years against us and its other reinsurers. In November 2005, we responded to this
demand by requesting a separate arbitration for the 2001 and 2002 program years and seeking
rescission of the reinsurance agreement for the 2001 and 2002 program years, monetary damages
for claims that were paid by us and other appropriate relief. Highlands is seeking to recover
certain of its losses from us under the reinsurance agreement for the 2001 and 2002 program
years. No arbitration panel has yet been constituted. On April 10, 2008, the Highlands
Receiver filed a petition in a Texas state court seeking to compel a single consolidated
arbitration for the 2000, 2001 and 2002 program years against its reinsurers, including us, and
other relief. On June 5, 2008, we responded to the petition. As of September 30, 2009, the
court has not ruled on the petition.
Highlands has entered into settlement agreements with the New Jersey Attorney General for its
New Jersey bail bond obligations and with the DHS for its federal immigration bond obligations
(collectively, the Settlement Agreements). The Settlement Agreements cover both past and
future losses for bonds issued by Highlands. Highlands has invoiced us for our proportionate
share of the settlement value under the Settlement Agreements. Highlands has also provided loss
information to us with respect to potential losses for bail bonds issued in states other than
New Jersey. As of September 30, 2009, we are reserving for Highlands losses based on amounts
invoiced under the Settlement Agreements and on our proportionate share of the most recent
non-New Jersey bail bond loss information provided to us by Highlands. As of both September 30,
2009 and December 31, 2008, our total loss and LAE reserves for Highlands were approximately
$4.8 million.
In October 2009, we reached an agreement in principle with Highlands to settle our dispute.
Based on the agreement in principle, we would pay Highlands $3.0 million to resolve the entire
dispute between us, including potential future liabilities with respect to bonds issued by
Highlands. The proposed settlement is subject to the approval of the Texas state court. Given
the uncertainties associated with the settlement approval process, we have not adjusted our
reserves as of September 30, 2009 to account for the proposed settlement. Once we determine
that the proposed settlement is reasonably certain to be approved, we intend to reduce our
reserve for Highlands to $3.0 million. However, given the uncertainties associated with the
settlement approval process, there can be no assurance that the proposed settlement will be
approved. We do not intend to pay any of the Highlands losses unless and until the arbitration
is settled on a mutually agreeable basis and/or a final binding judgment is made as to our
ultimate liability.
Given the uncertainties of the outcome of the Highlands arbitration and Highlands receivership
proceeding, uncertainties in the future loss information provided by Harco and Highlands and the
inherent volatility in assumed reinsurance, actual losses incurred for the discontinued bond
program could be materially different from our estimated reserves at September 30, 2009. As a
result, future loss development on the discontinued bond program could have a material effect on
our results of operations and/or financial condition.
Loss and LAE Reserves. The following compares our loss and LAE reserves for the
discontinued bond program at September 30, 2009 and December 31, 2008 (dollars in millions):
September 30, | December 31, | |||||||
2009 | 2008 | |||||||
Bail Bonds: |
||||||||
Case reserves |
$ | 0.6 | $ | 0.4 | ||||
Incurred but not reported (IBNR) reserves |
4.0 | 4.2 | ||||||
Total bail bond reserves |
4.6 | 4.6 | ||||||
Immigration Bonds: |
||||||||
Case reserves |
0.2 | 0.2 | ||||||
IBNR reserves |
1.9 | 1.8 | ||||||
Total immigration bond reserves |
2.1 | 2.0 | ||||||
Total loss and LAE reserves |
$ | 6.7 | $ | 6.6 | ||||
For the three and nine months ended September 30, 2009, we recorded a loss of $33,321 and
$27,321, respectively, for the discontinued bond program which was primarily attributable to an
increase in Harcos immigration bond reserve estimate as a result of its agreement in principle
to settle with DHS as described above, which was partially offset by a decrease in Harcos bail
bond reserve estimate. For the nine months ended September 30, 2008, we recorded a benefit of
$60,929 for the discontinued bond program which was primarily attributable to a decrease in
Harcos reserve estimate during the second quarter of 2008. There were no losses for the
discontinued bond program for the three months ended September 30, 2008.
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BANCINSURANCE CORPORATION
AND SUBSIDIARIES
AND SUBSIDIARIES
Automobile Service Contract Program
During 2001, the Company began issuing insurance policies which guarantee the performance
obligations of two automobile service contract providers (the Providers). The Providers are
owned by a common parent. The Company has issued insurance policies covering business produced
by the Providers in five states. Our insurance policies guarantee the fulfillment of the
Providers obligations under the service contracts. Under the program, the Providers maintain
the reserves and related assets and are responsible for the claims administration. The Company
is obligated to pay a claim only if a Provider fails to do so. Under two reinsurance
arrangements, the Company cedes 100% of the business produced to two different insurance
carriers. In addition, the Company obtained collateral in the form of a $4.3 million letter of
credit to secure our obligations under the program. On February 15, 2007, one of the Providers
entered into an Assignment for the Benefit of Creditors liquidation proceeding. On March 2,
2007, the Illinois Department of Insurance moved for, and obtained, an Order of Conservation,
which granted the Illinois Department of Insurance the authority to ascertain the condition and
conserve the assets of that Provider. On April 13, 2007, this Provider filed a voluntary
petition under Chapter 11 of the Bankruptcy Code. On June 12, 2007, the Bankruptcy Court ruled
that the Provider was an eligible debtor for purposes of the Bankruptcy Code. This Provider has
not written any service contracts under our insurance policies after the commencement of the
February 2007 liquidation proceeding. The other Provider has not written any service contracts
under our insurance policies since December 31, 2007.
On August 24, 2007, we drew on the $4.3 million letter of credit, of which approximately $2.7
million was attributable to our obligations in connection with the Provider that is in
bankruptcy and approximately $1.6 million was attributable to our obligations in connection with
the Provider that is not in bankruptcy, and we subsequently obtained an additional $0.5 million
from the Provider that is not in bankruptcy to further secure our insurance obligations. On
December 2, 2008, the Bankruptcy Court entered a ruling approving a settlement and release
agreement between us and the Provider that is in bankruptcy. Under the terms of this settlement
and release agreement, we released from the collateral attributable to the Provider that is in
bankruptcy and held by us approximately $1.0 million to that Providers bankruptcy estate (the
settlement payment) during the fourth quarter of 2008. In exchange for the release of this
collateral, the bankruptcy trustee, on behalf of the Provider that is in bankruptcy, agreed to
release us from any claims by such Provider and any third party, other than those defined
contract claims that are scheduled on the settlement and release agreement (the scheduled
claims). We believe the collateral retained by us attributable to such Provider is sufficient
to pay for the $1.0 million in estimated liability for the scheduled claims as of September 30,
2009. As a result of the settlement and release agreement, the $1.0 million liability
associated with the Provider that is in bankruptcy is reported as reserve for unpaid losses and
loss adjustment expenses in our accompanying balance sheet.
As of September 30, 2009, the Provider that is not in bankruptcy has not defaulted on its
obligations under the service contracts. As of September 30, 2009, the total cash held by us as
collateral for such Provider was approximately $2.1 million, which funds are currently reported
as restricted short-term investments in our accompanying balance sheet. We have estimated the
claim obligations for service contracts issued by this Provider to be approximately $2.0 million
as of September 30, 2009. As the collateral held by us is greater than the estimated claim
obligations, the full $2.1 million is reported as a liability in our accompanying balance sheet
within funds held for account of others.
Because we believe our estimated liability for claims under this program is fully collateralized
and our loss exposure is 100% reinsured, we do not believe the events described above will have
a material adverse impact to us. However, if the Provider that is not in bankruptcy defaults on
its obligations, and if our actual liability for claims under this program exceeds the
collateral held by us and if we are unable to collect on the reinsurance, then this program
could have a material adverse effect on our business, financial condition and/or operating
results.
9. | Commitments and Contingencies |
See Note 13 for information concerning the SEC investigation. See Discontinued Bond Program
in Note 8 for information concerning the Highlands arbitration.
In addition, we are involved in other legal proceedings arising in the ordinary course of
business which are routine in nature and incidental to our business. We currently believe that
none of these matters, either individually or in the aggregate, is reasonably likely to have a
material adverse effect on our financial condition, results of operations or liquidity.
However, because litigation is subject to inherent uncertainties and the outcome of such matters
cannot be predicted with reasonable certainty, there can be no assurance that any one or more of
these matters will not have a material adverse effect on our financial condition, results of
operations and/or liquidity.
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AND SUBSIDIARIES
We also are a guarantor for performance on a bridge loan for a non-executive employee whereby
the collateral held by us under the guaranty is the mortgage secured by residential real estate.
Our risk under the guaranty is that the borrower defaults on the mortgage and the proceeds from
the sale of the residential real estate are not sufficient to cover the amount of the mortgage.
The original mortgage was $550,400. As of September 30, 2009, the principal balance of the
mortgage was $489,776 and the borrower was current on all principal and interest payments. In
the event of default by the borrower, we do not believe our fulfillment of the guaranty would
have a material adverse effect on our financial condition, results of operations or liquidity.
10. | Supplemental Disclosure For Earnings Per Share |
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
Net income (loss) |
$ | 2,248,001 | $ | (189,681 | ) | $ | 2,721,941 | $ | 642,269 | |||||||
Income (loss) available to common
shareholders, assuming dilution |
2,248,001 | (189,681 | ) | 2,721,941 | 642,269 | |||||||||||
Weighted average common shares
outstanding |
5,171,117 | 5,054,979 | 5,112,413 | 5,017,098 | ||||||||||||
Adjustments for dilutive securities: |
||||||||||||||||
Dilutive effect of outstanding
stock options |
82 | | 1,307 | 18,013 | ||||||||||||
Diluted common shares |
5,171,199 | 5,054,979 | 5,113,720 | 5,035,111 | ||||||||||||
Net income (loss) per common share: |
||||||||||||||||
Basic |
$ | 0.43 | $ | (0.04 | ) | $ | 0.53 | $ | 0.13 | |||||||
Diluted |
$ | 0.43 | $ | (0.04 | ) | $ | 0.53 | $ | 0.13 |
11. | Segment Information |
We have two reportable business segments: (1) property/casualty insurance; and (2) insurance
agency. The following tables provide financial information regarding our reportable business
segments, which includes 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. Segment results for the
three and nine months ended September 30, 2009 and 2008 are as follows:
Three Months Ended | ||||||||||||
September 30, 2009 | ||||||||||||
Reportable | ||||||||||||
Property/Casualty | Insurance | Segment | ||||||||||
Insurance | Agency | Total | ||||||||||
Revenues from external customers |
$ | 11,547,327 | $ | | $ | 11,547,327 | ||||||
Intersegment revenues |
| 459,782 | 459,782 | |||||||||
Interest revenue |
959,219 | (78 | ) | 959,141 | ||||||||
Interest expense |
| | | |||||||||
Depreciation and amortization |
49,184 | | 49,184 | |||||||||
Segment profit |
2,461,805 | 459,378 | 2,921,183 | |||||||||
Federal income tax expense |
600,581 | 156,189 | 756,770 |
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AND SUBSIDIARIES
Three Months Ended | ||||||||||||
September 30, 2008 | ||||||||||||
Reportable | ||||||||||||
Property/Casualty | Insurance | Segment | ||||||||||
Insurance | Agency | Total | ||||||||||
Revenues from external customers |
$ | 10,547,280 | $ | | $ | 10,547,280 | ||||||
Intersegment revenues |
| 533,541 | 533,541 | |||||||||
Interest revenue |
937,394 | 287 | 937,681 | |||||||||
Interest expense |
| | | |||||||||
Depreciation and amortization |
37,778 | | 37,778 | |||||||||
Segment profit |
584,371 | 533,709 | 1,118,080 | |||||||||
Federal income tax (benefit) expense |
(118,716 | ) | 181,460 | 62,744 |
Nine Months Ended | ||||||||||||
September 30, 2009 | ||||||||||||
Reportable | ||||||||||||
Property/Casualty | Insurance | Segment | ||||||||||
Insurance | Agency | Total | ||||||||||
Revenues from external customers |
$ | 30,704,504 | $ | | $ | 30,704,504 | ||||||
Intersegment revenues |
| 1,335,806 | 1,335,806 | |||||||||
Interest revenue |
2,880,957 | 96 | 2,881,053 | |||||||||
Interest expense |
| | | |||||||||
Depreciation and amortization |
155,182 | | 155,182 | |||||||||
Segment profit |
3,004,720 | 1,333,831 | 4,338,551 | |||||||||
Federal income tax expense |
344,272 | 453,503 | 797,775 | |||||||||
Segment assets |
158,796,902 | 337,466 | 159,134,368 |
Nine Months Ended | ||||||||||||
September 30, 2008 | ||||||||||||
Reportable | ||||||||||||
Property/Casualty | Insurance | Segment | ||||||||||
Insurance | Agency | Total | ||||||||||
Revenues from external customers |
$ | 34,790,202 | $ | | $ | 34,790,202 | ||||||
Intersegment revenues |
| 1,451,203 | 1,451,203 | |||||||||
Interest revenue |
2,788,952 | 931 | 2,789,883 | |||||||||
Interest expense |
12 | | 12 | |||||||||
Depreciation and amortization |
113,316 | | 113,316 | |||||||||
Segment profit |
3,511,192 | 1,451,761 | 4,962,953 | |||||||||
Federal income tax expense |
429,083 | 493,598 | 922,681 | |||||||||
Segment assets |
146,971,258 | 392,595 | 147,363,853 |
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AND SUBSIDIARIES
The following table provides a reconciliation of the segment results to the consolidated
amounts reported in the condensed consolidated financial statements.
Three Months Ended | Nine Months Ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
Revenues |
||||||||||||||||
Total revenues for reportable segments |
$ | 12,966,250 | $ | 12,018,502 | $ | 34,921,363 | $ | 39,031,288 | ||||||||
Parent company gain |
7,809 | 17,871 | 24,987 | 47,920 | ||||||||||||
Elimination of intersegment revenues |
(459,782 | ) | (533,541 | ) | (1,335,806 | ) | (1,451,203 | ) | ||||||||
Total consolidated revenues |
$ | 12,514,277 | $ | 11,502,832 | $ | 33,610,544 | $ | 37,628,005 | ||||||||
Profit |
||||||||||||||||
Total profit for reportable segments |
$ | 2,921,183 | $ | 1,118,080 | $ | 4,338,551 | $ | 4,962,953 | ||||||||
Parent company SEC investigation expenses |
(18,193 | ) | (1,035,773 | ) | (147,725 | ) | (3,096,229 | ) | ||||||||
Parent company other expenses, net of intersegment eliminations |
(442,530 | ) | (407,080 | ) | (1,224,614 | ) | (1,312,184 | ) | ||||||||
Total consolidated income (loss) before income taxes |
$ | 2,460,460 | $ | (324,773 | ) | $ | 2,966,212 | $ | 554,540 | |||||||
Assets |
||||||||||||||||
Total assets for reportable segments |
$ | 159,134,368 | $ | 147,363,853 | ||||||||||||
Parent company assets |
4,402,743 | 4,544,016 | ||||||||||||||
Elimination of intersegment receivables, net |
(289,931 | ) | (211,414 | ) | ||||||||||||
Total consolidated assets |
$ | 163,247,180 | $ | 151,696,455 | ||||||||||||
12. | Fair Value Measurements |
The Companys estimates of fair value for financial assets and financial liabilities are based
on the framework established under GAAP. The framework is based on the inputs used in valuation,
gives the highest priority to quoted prices in active markets and requires that observable
inputs be used in the valuations when available. The disclosure of fair value estimates is based
on whether the significant inputs used in the valuation are observable. In determining the level
of the hierarchy in which the estimate is disclosed, the highest priority is given to unadjusted
quoted prices in active markets and the lowest priority is given to unobservable inputs that
reflect the Companys significant market assumptions. The three levels of the hierarchy are as
follows:
| Level 1 Quoted prices for identical instruments in active markets. |
||
| Level 2 Quoted prices for similar instruments in active markets; quoted prices for
identical or similar instruments in markets that are not active; and model-derived
valuations in which all significant inputs and significant value drivers are observable
in active markets. |
||
| Level 3 Valuations derived from valuation techniques in which one or more
significant inputs or significant value drivers are unobservable. |
Fair Value Hierarchy
The following table presents the level within the fair value hierarchy at which the Companys
financial assets were measured at fair value on a recurring basis as of September 30, 2009:
September 30, 2009 | ||||||||||||||||
Total | Level 1 | Level 2 | Level 3 | |||||||||||||
Available for sale investments: |
||||||||||||||||
Fixed maturities |
$ | 72,260,110 | $ | 300,300 | $ | 71,959,810 | $ | | ||||||||
Equity securities |
9,757,841 | 9,757,841 | | | ||||||||||||
Total |
$ | 82,017,951 | $ | 10,058,141 | $ | 71,959,810 | $ | | ||||||||
As of September 30, 2009, the Company had no financial liabilities that were measured at
fair value and no financial assets that were measured at fair value on a non-recurring basis.
The Company also did not have any non-financial assets or non-financial liabilities that were
measured at fair value on a recurring or non-recurring basis.
Valuation of Investments
For investments that have quoted market prices in active markets, the Company uses the quoted
market prices as fair value and includes these prices in the amounts disclosed in Level 1 of the
hierarchy. The Company receives the quoted market prices from an independent, nationally
recognized pricing service (the pricing service). When quoted market prices are unavailable,
the Company relies on the pricing service to determine an estimate of fair value and these
prices are included in the amounts disclosed in Level 2 of the hierarchy.
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AND SUBSIDIARIES
AND SUBSIDIARIES
The Company validates the prices received from the pricing service by examining their
reasonableness. The Companys review process includes comparing the pricing services estimated
fair values to the estimated fair values established by our investment custodian (for both
equity and fixed maturity securities) and our outside fixed income investment manager (for fixed
maturity securities). Our investment custodian utilizes the same pricing service as us, and our
outside fixed income investment manager utilizes another nationally recognized pricing service
for the municipal bond portfolio and utilizes the same pricing service as us for taxable bonds
and closed-end mutual funds. Based on this review, any material differences are investigated
and, if we deem prices provided by our pricing service to be materially unreasonable, we would
use the estimated fair value established by our investment custodian and/or outside fixed income
investment manager, depending on which prices seemed more reasonable. As of September 30, 2009,
the Company did not adjust any prices received from its pricing service.
In order to determine the proper disclosure classification for each financial asset, the Company
obtains from its pricing service the pricing procedures and inputs used to price securities in
our portfolio. For our fixed maturity portfolio, the Company also has its outside fixed income
investment manager review its portfolio to ensure the disclosure classification is consistent
with the information obtained from the pricing service.
The following section describes the valuation methods used by the Company for each type of
financial instrument it holds that is carried at fair value.
Available for Sale Equity Securities. The fair values of our equity securities were
based on observable market quotations for identical assets and therefore have been disclosed in
Level 1 of the hierarchy. The Level 1 category includes publicly traded equity securities.
Available for Sale Fixed Maturity Securities. The fair values of our redeemable
preferred stocks were based on observable market quotations for identical assets and therefore
have been disclosed in Level 1 of the hierarchy. A number of the Companys investment grade
bonds are frequently traded in active markets and traded market prices for these securities
existed at September 30, 2009. However, these securities were classified as Level 2 because the
pricing service also utilizes valuation models, which use observable market inputs, in addition
to traded prices. Substantially all of these input assumptions are observable in the
marketplace or can be derived from or supported by observable market data. The Level 2 category
generally includes municipal and corporate bonds.
Fair Value of Financial Instruments
The carrying amount and estimated fair value of financial instruments subject to disclosure
requirements were as follows at September 30, 2009 and December 31, 2008:
September 30, | December 31, | |||||||||||||||
2009 | 2008 | |||||||||||||||
Carrying | Estimated | Carrying | Estimated | |||||||||||||
Amount | fair value | amount | fair value | |||||||||||||
Assets: |
||||||||||||||||
Held to maturity fixed maturities |
$ | 5,193,217 | $ | 5,339,388 | $ | 5,198,068 | $ | 5,330,671 | ||||||||
Available for sale fixed maturities |
72,260,110 | 72,260,110 | 59,675,070 | 59,675,070 | ||||||||||||
Available for sale equity securities |
9,757,841 | 9,757,841 | 6,541,864 | 6,541,864 | ||||||||||||
Short-term investments |
2,281,016 | 2,281,016 | 5,939,254 | 5,939,254 | ||||||||||||
Restricted short-term investments |
3,585,875 | 3,585,875 | 3,886,635 | 3,886,635 | ||||||||||||
Cash |
3,352,597 | 3,352,597 | 5,499,847 | 5,499,847 | ||||||||||||
Liabilities: |
||||||||||||||||
Trust preferred debt issued to affiliates |
15,465,000 | 15,465,000 | 15,465,000 | 15,465,000 | ||||||||||||
Bank line of credit |
| | 2,500,000 | 2,500,000 |
The following methods and assumptions were used to estimate the fair value of each class of
financial instruments for which it is practicable to estimate fair value:
| Cash and short-term investments: The carrying amounts are reasonable estimates of
fair value. |
||
| Fixed maturities and equity securities: See Valuation of Investments above, which
also applies to our held to maturity fixed maturities. |
||
| Trust preferred debt issued to affiliates and bank line of credit: Fair value is
estimated using discounted cash flow calculations based on interest rates currently
being offered for similar obligations with maturities consistent with the obligation
being valued. As the interest rate adjusts regularly, the carrying amount is a
reasonable estimate of fair value. |
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AND SUBSIDIARIES
AND SUBSIDIARIES
13. | Guarantees |
As previously reported, on February 14, 2005, the Company received notification from the SEC
that it was conducting an informal, non-public inquiry regarding the Company. On March 29, 2005,
the Company was notified by the SEC that the informal, non-public inquiry had been converted
into a formal private investigation. On October 23, 2007, the Company and certain of its
current officers (Chief Executive Officer, Chief Financial Officer and Vice President of
Specialty Products) each received a Wells Notice (the Notice) from the staff of the SEC
indicating that the staff was considering recommending that the SEC bring a civil action against
each of them for possible violations of the federal securities laws. The Notice provided the
Company and each officer the opportunity to present their positions to the staff before the
staff recommends whether any action should be taken by the SEC.
On or about November 16, 2009, the Commission filed settled enforcement actions against the
Company and the Chief Executive Officer that resolve the SEC investigation with respect to them.
The settlement relates to one accounting matter in 2003 and first quarter of 2004: reserving for
the Companys since-discontinued bond program. Under the terms of its settlement with
the SEC, the Company consented, without admitting or denying the allegations in the complaint
filed by the SEC, to the entry of a final judgment permanently enjoining the Company from
violating Sections 10(b), 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Securities Exchange Act of
1934, as amended (the Exchange Act), and Rules 10b-5, 12b-20, 13a-1 and 13a-13 thereunder. No
fines, civil penalties or other sanctions were assessed against the Company.
Under the terms of his settlement, the Chief Executive Officer consented, without admitting or
denying the allegations in the complaint filed by the SEC, to the entry of a final judgment
permanently enjoining him from violating Sections 10(b) and 13(b)(5) of the Exchange Act and
Rules 10b-5, 13b2-1 and 13b2-2 thereunder and from aiding and abetting any violation of Sections
10(b), 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Rules 10b-5, 12b-20, 13a-1 and
13a-13 thereunder. He also agreed to pay a $60,000 civil penalty. The Chief Executive Officer
will continue to serve in his current capacities as an officer and a director of the Company.
The settlements are subject to approval by the United States District Court for the District of
Columbia, and will become final upon entry by the Court of a final judgment against the Company
and the Chief Executive Officer. The settlements do not address the SEC investigation of the
Companys Chief Financial Officer and Vice President of Specialty Products concerning the same
matter.
Pursuant to separate undertaking agreements dated November 12, 2007 between the Company and each
officer who received the Notice, the Company has agreed to advance reasonable legal fees and
expenses incurred by each officer in connection with the SEC investigation. The undertaking
agreements require each officer to repay the amounts advanced if it is ultimately determined, in
accordance with Article Five of the Companys Amended and Restated Code of Regulations (the
Regulations), that the officer did not act in good faith or in a manner he reasonably believed
to be in or not opposed to the best interests of the Company with respect to the matters covered
by the SEC investigation. In connection with approving the Companys settlement with the SEC,
the Companys board of directors determined that the Chief Executive Officer is not required to
repay any amounts advanced to him pursuant to his undertaking agreement for legal fees and
expenses incurred in connection with the SEC investigation. Under the Regulations and Ohio law,
the Company may also be required to indemnify each officer in connection with the SEC
investigation.
The Company accounts for the undertaking agreements as guarantee liabilities. In order to
estimate the fair value of future obligations under these undertaking agreements, the Company
periodically obtains estimates from each legal counsel representing the officers involved in the
SEC investigation of the additional legal costs expected to be incurred for the officers to
respond to the Notice under the SECs Wells Notice procedures. Based on these estimates, the
Company recorded a guarantee liability of $215,000 and $370,000 as of September 30, 2009 and
December 31, 2008, respectively, which is included within other liabilities in the accompanying
consolidated balance sheets. The guarantee liability at September 30, 2009 as compared to
December 31, 2008 reflects (1) a decrease of $194,237 as a result of actual legal fees and
expenses incurred for services rendered through September 30, 2009 related to the undertaking
agreements and (2) an increase of $39,237 as a result of a net increase in the estimated future
legal costs related to the undertaking agreements. The guarantee liability at September 30, 2009
includes the legal costs estimated to be incurred in connection with the Chief Executive
Officers settlement with the SEC, and the Company does not expect to incur other material
future legal costs related to the SEC investigation with respect to the Chief Executive Officer.
Due to the inherent uncertainties of the SEC investigation as it relates to the Chief Financial
Officer and Vice President of Specialty Products, (1) the Company cannot estimate with
reasonable certainty any future obligations related to their undertaking agreements beyond the
estimated costs to respond to the Notice and (2) actual future payments related to their
undertaking agreements could be materially different from the estimated fair value ($160,000) of
such future payments as recorded at September 30, 2009.
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14. | Bank Line of Credit |
Bancinsurance Corporation has a $10,000,000 unsecured revolving bank line of credit with a
maturity date of June 30, 2010, having a $0 and $2,500,000 outstanding balance at September 30,
2009 and December 31, 2008, respectively. The terms of the revolving credit agreement contain
various restrictive covenants. As of September 30, 2009, Bancinsurance Corporation was in
compliance with all such covenants. The bank line of credit provides for interest payable
quarterly at an annual rate equal to the prime rate less 75 basis points (2.50% and 4.25% at
September 30, 2009 and 2008, respectively). Interest expense related to the bank line of credit
for the three months ended September 30, 2009 and 2008 was $0 and $27,448, respectively, and
$31,076 and $54,739 for the nine months ended September 30, 2009 and 2008, respectively. The
bank that provides the line of credit is also a policyholder of the Company; however the bank
has no active policies with the Company.
15. | Subsequent Events |
On November 13, 2009, the Board of Directors of the Company declared a cash dividend of $0.50
per share (approximately $2.6 million in the aggregate) payable on December 14, 2009 to holders
of record of the Companys common shares as of the close of business on November 30, 2009.
Also see Discontinued Bond Program in Note 8 and Note 13 for subsequent events related to the
discontinued bond program and SEC investigation, respectively.
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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
FORWARD-LOOKING INFORMATION
Certain statements made in this Quarterly Report on Form 10-Q are forward-looking and are made
pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995.
Forward-looking statements convey our current expectations or forecast future events. All
statements contained in this Quarterly Report on Form 10-Q, other than statements of historical
fact, are forward-looking statements. Forward-looking statements include statements regarding our
future financial condition, results of operations, business strategy, budgets, projected costs and
plans and objectives of management for future operations. The words may, continue, estimate,
intend, plan, will, believe, project, expect, anticipate and similar expressions
generally identify forward-looking statements but the absence of these words does not necessarily
mean that a statement is not forward-looking. Forward-looking statements are not guarantees of
future performance and involve risks and uncertainties that may cause actual results to differ
materially from those statements. Risk factors that might cause actual results to differ from those
statements include, without limitation, economic factors impacting our specialty insurance
products, concentration in specialty insurance products, customer concentration, geographic
concentration, reinsurance risk, possible inadequacy of loss reserves, ability to accurately price
the risks we underwrite, reliance on general agents and major customers, general agents may exceed
their authority, risk of fraud or negligence with our insurance agents, importance of industry
ratings, importance of treasury listing, changes in laws and regulations, dependence on our
insurance subsidiary to meet our obligations, severe weather conditions and other catastrophes,
adverse securities market conditions, changes in interest rates, the current credit markets,
default on debt covenants, dependence on key executives, reliance on information technology and
telecommunication systems, changes in the business tactics or strategies of the Company, the
controlling interest of the Sokol family, the Securities and Exchange Commission (SEC)
investigation, litigation, developments in the discontinued bond program and the automobile service
contract program, and the other risk factors described in the Companys filings with the SEC, any
one of which might materially affect our financial condition, results of operations and/or
liquidity. 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.
OVERVIEW
Bancinsurance Corporation is a specialty property/casualty insurance holding company incorporated
in the State of Ohio in 1970. The Company has two reportable business segments: (1)
property/casualty insurance; and (2) insurance agency. Unless the context indicates otherwise, all
references herein to Bancinsurance, we, Registrant, us, its, our, or the Company
refer to Bancinsurance Corporation and its consolidated subsidiaries.
Products and Services
Property/Casualty Insurance. Our wholly-owned subsidiary, Ohio Indemnity Company (Ohio
Indemnity), is a specialty property/casualty insurance company. Our principal sources of revenue
are premiums and ceded commissions for insurance policies and income generated from our investment
portfolio. Ohio Indemnity, an Ohio corporation, is licensed in 49 states and the District of
Columbia. As such, Ohio Indemnity is subject to the regulations of The Ohio Department of Insurance
(the Department) and the regulations of each state in which it operates. Ohio Indemnitys
premiums are derived from three distinct product lines: (1) lender service; (2) unemployment
compensation; and (3) waste industry.
Our lender service product line offers four types of products. First, ULTIMATE LOSS INSURANCE®
(ULI), 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. A ULI policy is
generally written to cover a lenders complete portfolio of collateralized personal property loans,
typically automobile loans. Second, creditor placed insurance (CPI) is an alternative to our ULI
product. While both products cover the risk of damage to uninsured collateral in a lenders
automobile loan portfolio, CPI covers the portfolio through tracking individual borrowers
insurance coverage. The lender purchases physical damage coverage for loan collateral after a
borrowers insurance has lapsed. Third, our guaranteed auto protection insurance (GAP) pays the
difference or gap between the amount owed by the customer on a loan or lease and the amount of
primary insurance company coverage in the event a vehicle is damaged beyond repair or stolen and
never recovered. Our GAP product is sold to automobile dealers, lenders and lessors and provides
coverage on either an individual or portfolio basis. Fourth, equipment physical damage insurance
(EPD) is an all risk policy written to cover agricultural, construction and commercial equipment
vehicles. EPD was introduced in 2007 and offers insurance protection for financed equipment
purchases. This policy protects both lenders and consumers against the risk of physical damage or
theft of their financed equipment and is available for the term of the loan or an annual basis.
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Our unemployment compensation (UC) products are utilized by entities that are qualified to elect
not to pay unemployment
compensation taxes and instead reimburse state unemployment agencies for benefits paid by the
agencies to the entities former employees.
Through our UCassure® and excess of loss products, we
indemnify the qualified entity for liability associated with its reimbursing obligations. In
addition, we underwrite surety bonds that certain states require employers to post in order to
obtain reimbursing status for their unemployment compensation obligations.
Our waste industry products (WIP) consist of waste, contract and escrow surety bonds produced and
administered by a general insurance agent. Under this program, we assume, write on a direct basis,
and cede certain waste surety bond business under three quota share reinsurance arrangements.
First, effective August 1, 2006, the 50% quota share reinsurance arrangement we entered into in the
second quarter of 2004 was amended whereby we assumed 50% of all waste surety bonds with liability
limits up to $1.2 million from two insurance carriers. Second, effective August 1, 2007, we entered
into a 5% quota share reinsurance arrangement whereby we assumed 5% of all waste surety bonds with
liability limits over $1.2 million up to $10.0 million from two insurance carriers. This
reinsurance arrangement is renegotiated annually and was renewed with similar terms on August 1,
2008. For the August 1, 2009 renewal, our participation was changed to 12.5%. Third, in addition
to assuming business, we also write on a direct basis waste surety bonds with liability limits up
to $5.0 million. We then cede 50% of that business to an insurance carrier under a reinsurance
arrangement. In addition to the quota share arrangements, we also participate in several
facultative reinsurance arrangements. The majority of the waste surety bonds under the program
satisfy the closure/post-closure financial responsibility obligations imposed on solid waste
treatment, storage and disposal facilities pursuant to Subtitles C and D of the Federal Resource
Conservation and Recovery Act. Closure/post-closure bonds cover future costs to close and monitor
a regulated site such as a landfill. In addition to waste surety bonds, our WIP program includes
certain contract and escrow surety bond business which the Company writes directly, assumes and
cedes under several quota share reinsurance arrangements. This business is included as part of our
WIP program because it is produced by the same general agent that produces the waste surety bond
business. All of the surety bonds under the WIP program are fully indemnified by the principal and
collateral is maintained on the majority of the bonds. The indemnifications and collateralization
of this program reduces the risk of loss. All surety bonds written directly and assumed under this
program are produced and administered by a general insurance agent that is affiliated with one of
the insurance carriers participating in the program. The general insurance agent utilizes various
insurance carriers, including the Company, in placing its surety bond business. Our direct premium
volume for this program is determined by the general insurance agents decision to place business
with the Company.
We have certain other specialty products which consist primarily of two vehicle service contract
programs and two contract surety bonds not produced under our WIP program. The premiums produced
under other specialty products are not considered material to our results of operations. Our two
contract surety bonds are for one contractor and are indemnified by the principal which reduces our
risk of loss. For our two vehicle service contract programs, we maintain reinsurance and/or
collateral in excess of our estimated claim obligations, which reduces our risk of loss. For more
information concerning one of the vehicle service contract programs, see Automobile Service
Contract Program in Note 8 to the Condensed Consolidated Financial Statements and
Overview-Automobile Service Contract Program below.
In addition, from 2001 until the end of the second quarter of 2004, the Company participated in a
bail and immigration bond program. This program was discontinued in the second quarter of 2004.
For a more detailed description of this program, see Discontinued Bond Program in Note 8 to the
Condensed Consolidated Financial Statements and Overview-Discontinued Bond Program below.
We sell our insurance products through multiple distribution channels, including three managing
general agents, approximately thirty independent agents and direct sales.
Insurance Agency. In July 2002, we formed Ultimate Services Agency, LLC (USA), a
wholly-owned subsidiary. We formed USA to act as an agency for placing and servicing
property/casualty insurance policies offered and underwritten by Ohio Indemnity and by other
property/casualty insurance companies.
Discontinued Bond Program
Beginning in 2001 and continuing into the second quarter of 2004, we participated as a reinsurer in
a program covering bail and immigration bonds issued by four insurance carriers and produced by a
bail bond agency (collectively, the discontinued bond program or the program). The liability of
the insurance carriers was reinsured to a group of reinsurers, including us. We assumed 15% of the
business from 2001 through 2003 and 5% of the business during the first half of 2004. This program
was discontinued in the second quarter of 2004.
Based on the design of the program, the bail bond agency was to obtain and maintain collateral and
other security and to provide funding for bond losses. The bail bond agency and its principals
were responsible for all losses as part of their program administration. The insurance carriers
and, in turn, the reinsurers were not required to pay losses unless there was a failure of the bail
bond agency. As the bonds were to be 100% collateralized, any losses paid by the reinsurers were
to be recoverable through liquidation of the collateral and collections from third party
indemnitors.
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In the second quarter of 2004, we came to believe that the discontinued bond program was not being
operated as it had been represented to us by agents of the insurance carriers who had solicited our
participation in the program, and we began disputing certain issues with respect to the program,
including but not limited to: 1) inaccurate/incomplete disclosures relating to the program; 2)
improper supervision by the insurance carriers of the bail bond agency in administering the
program; 3) improper disclosures by the insurance carriers through the bail bond agency and the
reinsurance intermediaries during the life of the program; and 4) improper premium and claims
administration. Consequently, during the second quarter of 2004, we ceased paying claims on the
program and retained outside legal counsel to review and defend our rights under the program.
During 2004 and 2005, we entered into arbitrations with the following four insurance carriers that
participated in the discontinued bond program: 1) Aegis Security Insurance Company (Aegis); 2)
Sirius America Insurance Company (Sirius); 3) Harco National Insurance Company (Harco); and 4)
Highlands Insurance Company (Highlands). During 2006, the arbitrations with Aegis, Sirius and
Harco concluded. For Aegis and Sirius, we entered into settlement agreements with these insurance
carriers resolving all disputes between us and these carriers relating to the discontinued bond
program. These settlement agreements also relieved us from any potential future liabilities with
respect to bonds issued by Aegis and Sirius.
For Harco, in August 2006, the Harco arbitration panel issued its Final Decision and Order ordering
each of the reinsurers participating in the arbitration, including us, to pay its proportionate
share of past and future claims paid by Harco, subject to certain adjustments, offsets and credits
(the Final Order). Pursuant to the terms of the Final Order, we have paid Harco for our
proportionate share of all past claims paid by Harco which it has invoiced to us through September
30, 2009, except as noted below.
During the third quarter of 2009, we received an invoice from Harco for approximately $0.3 million
representing our proportionate share of additional claims paid by Harco. We requested that Harco
provide us a detailed accounting of its payment activity. Although Harco indicated that it would
provide us this information, as of September 30, 2009, we have not received such information. We
also requested that Harco provide us information regarding any recoveries that Harco has received
with respect to paid claims and its expected future recoveries. Harco responded that it has
received and continues to receive recoveries but does not believe the reinsurers are entitled to a
proportionate share of such recoveries under the terms of the Final Order. We disagree with this
position. Based on certain recovery information provided by Harco during the fourth quarter of
2008, we estimate that our proportionate share of Harcos recoveries that we believe we are
entitled to receive under the Final Order is approximately $0.2 million. We do not intend to pay
any current or future Harco invoices until Harco provides us the requested accounting and we
resolve with Harco the reinsurers rights to a proportionate share of Harcos recoveries.
As of September 30, 2009, we are reserving for Harco losses based on amounts invoiced by Harco for
claims paid and on our proportionate share of Harcos estimate of its future losses under the
program as reflected in the most recent loss information provided to us by Harco (with a $0.2
million offset for recoveries as noted above).
During the third quarter of 2009, Harco informed us that it had reached an agreement in principle
to settle with the Department of Homeland Security (DHS) regarding Harcos immigration bond
liability under the program. Based on the agreement in principle, Harco increased its reserves for
immigration bonds during the third quarter of 2009 and, as a result, we increased our reserves by
approximately $0.1 million. Harco further informed us that the agreement in principle would release
Harco from any future liability associated with its immigration bond exposure under the program and
Harco is currently working on finalizing the settlement agreement with DHS, which is subject to
final approval by the Department of Justice.
Pending Arbitration. Highlands participated as an insurer in the discontinued bond program
for the 2000, 2001 and 2002 program years, and we were one of its reinsurers for the 2001 and 2002
program years. Highlands was placed in receivership during 2003 (which receivership remains
pending). On August 31, 2005, the Highlands Receiver demanded a single consolidated arbitration
for the 2000, 2001 and 2002 program years against us and its other reinsurers. In November 2005,
we responded to this demand by requesting a separate arbitration for the 2001 and 2002 program
years and seeking rescission of the reinsurance agreement for the 2001 and 2002 program years,
monetary damages for claims that were paid by us and other appropriate relief. Highlands is seeking
to recover certain of its losses from us under the reinsurance agreement for the 2001 and 2002
program years. No arbitration panel has yet been constituted. On April 10, 2008, the Highlands
Receiver filed a petition in a Texas state court seeking to compel a single consolidated
arbitration for the 2000, 2001 and 2002 program years against its reinsurers, including us, and
other relief. On June 5, 2008, we responded to the petition. As of September 30, 2009, the court
has not ruled on the petition.
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Highlands has entered into settlement agreements with the New Jersey Attorney General for its New
Jersey bail bond obligations and with the DHS for its federal immigration bond obligations
(collectively, the Settlement Agreements). The Settlement Agreements cover both past and future
losses for bonds issued by Highlands. Highlands has invoiced us for our proportionate share of the
settlement value under the Settlement Agreements. Highlands has also provided loss information to
us with respect to potential losses for bail bonds issued in states other than New Jersey. As of
September 30, 2009, we are reserving for Highlands losses based on amounts invoiced under the
Settlement Agreements and on our proportionate share of the most recent non-New Jersey bail bond
loss information provided to us by Highlands. As of both September 30, 2009 and December 31, 2008,
our total loss and LAE reserves for Highlands were approximately $4.8 million.
In October 2009, we reached an agreement in principle with Highlands to settle our dispute. Based
on the agreement in principle, we would pay Highlands $3.0 million to resolve the entire dispute
between us, including potential future liabilities with respect to bonds issued by Highlands. The
proposed settlement is subject to the approval of the Texas state court. Given the uncertainties
associated with the settlement approval process, we have not adjusted our reserves as of September
30, 2009 to account for the proposed settlement. Once we determine that the proposed settlement is
reasonably certain to be approved, we intend to reduce our reserve for Highlands to $3.0 million.
However, given the uncertainties associated with the settlement approval process, there can be no
assurance that the proposed settlement will be approved. We do not intend to pay any of the
Highlands losses unless and until the arbitration is settled on a mutually agreeable basis and/or
a final binding judgment is made as to our ultimate liability.
Given the uncertainties of the outcome of the Highlands arbitration and Highlands receivership
proceeding, uncertainties in the future loss information provided by Harco and Highlands and the
inherent volatility in assumed reinsurance, actual losses incurred for the discontinued bond
program could be materially different from our estimated reserves at September 30, 2009. As a
result, future loss development on the discontinued bond program could have a material effect on
our results of operations and/or financial condition.
Loss and LAE Reserves. The following compares our loss and LAE reserves for the
discontinued bond program at September 30, 2009 and December 31, 2008 (dollars in millions):
September 30, | December 31, | |||||||
2009 | 2008 | |||||||
Bail Bonds: |
||||||||
Case reserves |
$ | 0.6 | $ | 0.4 | ||||
Incurred but not reported (IBNR) reserves |
4.0 | 4.2 | ||||||
Total bail bond reserves |
4.6 | 4.6 | ||||||
Immigration Bonds: |
||||||||
Case reserves |
0.2 | 0.2 | ||||||
IBNR reserves |
1.9 | 1.8 | ||||||
Total immigration bond reserves |
2.1 | 2.0 | ||||||
Total loss and LAE reserves |
$ | 6.7 | $ | 6.6 | ||||
For the three and nine months ended September 30, 2009, we recorded a loss of $33,321 and $27,321,
respectively, for the discontinued bond program which was primarily attributable to an increase in
Harcos immigration bond reserve estimate as a result of its agreement in principle to settle with
DHS as described above, which was partially offset by a decrease in Harcos bail bond reserve
estimate. For the nine months ended September 30, 2008, we recorded a benefit of $60,929 for the
discontinued bond program which was primarily attributable to a decrease in Harcos reserve
estimate during the second quarter of 2008. There were no losses for the discontinued bond program
for the three months ended September 30, 2008.
Automobile Service Contract Program
During 2001, the Company began issuing insurance policies which guarantee the performance
obligations of two automobile service contract providers (the Providers). The Providers are
owned by a common parent. The Company has issued insurance policies covering business produced by
the Providers in five states. Our insurance policies guarantee the fulfillment of the Providers
obligations under the service contracts. Under the program, the Providers maintain the reserves
and related assets and are responsible for the claims administration. The Company is obligated to
pay a claim only if a Provider fails to do so. Under two reinsurance arrangements, the Company
cedes 100% of the business produced to two different insurance carriers. In addition, the Company
obtained collateral in the form of a $4.3 million letter of credit to secure our obligations under
the program. On February 15, 2007, one of the Providers entered into an Assignment for the Benefit
of Creditors liquidation proceeding. On March 2, 2007, the Illinois Department of Insurance moved
for, and obtained, an Order of Conservation, which granted the Illinois Department of Insurance the
authority to ascertain the condition and conserve the assets of that Provider. On April 13, 2007,
this Provider filed a voluntary petition under Chapter 11 of the Bankruptcy Code. On June 12,
2007, the Bankruptcy Court ruled that the Provider was an eligible debtor for purposes of the
Bankruptcy Code. This Provider has not written any service contracts under our insurance policies
after the commencement of the February 2007 liquidation proceeding. The other Provider has not
written any service contracts under our insurance policies since December 31, 2007.
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On August 24, 2007, we drew on the $4.3 million letter of credit, of which approximately $2.7
million was attributable to our obligations in connection with the Provider that is in bankruptcy
and approximately $1.6 million was attributable to our obligations in connection with the Provider
that is not in bankruptcy, and we subsequently obtained an additional $0.5 million from the
Provider that is not in bankruptcy to further secure our insurance obligations. On December 2,
2008, the Bankruptcy Court entered a ruling approving a settlement and release agreement between us
and the Provider that is in bankruptcy. Under the terms of this settlement
and release agreement, we released from the collateral attributable to the Provider that is in
bankruptcy and held by us approximately $1.0 million to that Providers bankruptcy estate (the
settlement payment) during the fourth quarter of 2008. In exchange for the release of this
collateral, the bankruptcy trustee, on behalf of the Provider that is in bankruptcy, agreed to
release us from any claims by such Provider and any third party, other than those defined contract
claims that are scheduled on the settlement and release agreement (the scheduled claims). We
believe the collateral retained by us attributable to such Provider is sufficient to pay for the
$1.0 million in estimated liability for the scheduled claims as of September 30, 2009. As a result
of the settlement and release agreement, the $1.0 million liability associated with the Provider
that is in bankruptcy is reported as reserve for unpaid losses and loss adjustment expenses in
our accompanying balance sheet.
As of September 30, 2009, the Provider that is not in bankruptcy has not defaulted on its
obligations under the service contracts. As of September 30, 2009, the total cash held by us as
collateral for such Provider was approximately $2.1 million, which funds are currently reported as
restricted short-term investments in our accompanying balance sheet. We have estimated the claim
obligations for service contracts issued by this Provider to be approximately $2.0 million as of
September 30, 2009. As the collateral held by us is greater than the estimated claim obligations,
the full $2.1 million is reported as a liability in our accompanying balance sheet within funds
held for account of others.
Because we believe our estimated liability for claims under this program is fully collateralized
and our loss exposure is 100% reinsured, we do not believe the events described above will have a
material adverse impact to us. However, if the Provider that is not in bankruptcy defaults on its
obligations, and if our actual liability for claims under this program exceeds the collateral held
by us and if we are unable to collect on the reinsurance, then this program could have a material
adverse effect on our business, financial condition and/or operating results.
SEC Investigation
As previously reported, on February 14, 2005, the Company received notification from the SEC that
it was conducting an informal, non-public inquiry regarding the Company. On March 29, 2005, the
Company was notified by the SEC that the informal, non-public inquiry had been converted into a
formal private investigation. On October 23, 2007, the Company and certain of its current officers
(Chief Executive Officer, Chief Financial Officer and Vice President of Specialty Products) each
received a Wells Notice (the Notice) from the staff of the SEC indicating that the staff was
considering recommending that the SEC bring a civil action against each of them for possible
violations of the federal securities laws. The Notice provided the Company and each officer the
opportunity to present their positions to the staff before the staff recommends whether any action
should be taken by the SEC.
On or about November 16, 2009, the Commission filed settled enforcement actions against the Company
and the Chief Executive Officer that resolve the SEC investigation with respect to them. The
settlement relates to one accounting matter in 2003 and first quarter of 2004: reserving for the
Companys since-discontinued bond program. Under the terms of its settlement with the SEC, the
Company consented, without admitting or denying the allegations in the complaint filed by the SEC,
to the entry of a final judgment permanently enjoining the Company from violating Sections 10(b),
13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Securities Exchange Act of 1934, as amended (the
Exchange Act), and Rules 10b-5, 12b-20, 13a-1 and 13a-13 thereunder. No fines, civil penalties
or other sanctions were assessed against the Company.
Under the terms of his settlement, the Chief Executive Officer consented, without admitting or
denying the allegations in the complaint filed by the SEC, to the entry of a final judgment
permanently enjoining him from violating Sections 10(b) and 13(b)(5) of the Exchange Act and Rules
10b-5, 13b2-1 and 13b2-2 thereunder and from aiding and abetting any violation of Sections 10(b),
13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Rules 10b-5, 12b-20, 13a-1 and 13a-13
thereunder. He also agreed to pay a $60,000 civil penalty. The Chief Executive Officer will
continue to serve in his current capacities as an officer and a director of the Company.
The settlements are subject to approval by the United States District Court for the District of
Columbia, and will become final upon entry by the Court of a final judgment against the Company and
the Chief Executive Officer. The settlements do not address the SEC investigation of the Companys
Chief Financial Officer and Vice President of Specialty Products concerning the same matter.
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Pursuant to separate undertaking agreements dated November 12, 2007 between the Company and each
officer who received the Notice, the Company has agreed to advance reasonable legal fees and
expenses incurred by each officer in connection with the SEC investigation. The undertaking
agreements require each officer to repay the amounts advanced if it is ultimately determined, in
accordance with Article Five of the Companys Amended and Restated Code of Regulations (the
Regulations), that the officer did not act in good faith or in a manner he reasonably believed to
be in or not opposed to the best interests of the Company with respect to the matters covered by
the SEC investigation. In connection with approving the Companys settlement with the SEC, the
Companys board of directors determined that the Chief Executive Officer is not required to repay
any amounts advanced to him pursuant to his undertaking agreement for legal fees and expenses
incurred in connection with the SEC investigation. Under the Regulations and Ohio law, the Company
may also be required to indemnify each officer in connection with the SEC investigation. The
undertaking agreements are accounted for as guarantee liabilities as more fully described in Note
13 to the Condensed
Consolidated Financial Statements.
For the three months ended September 30, 2009 and 2008, the Company incurred expenses of $18,193
and $1,035,773, respectively, related to the SEC investigation. For the third quarter of 2009, the
$18,193 of expenses consisted of (1) $9,652 of Company expenses and (2) a $8,541 net increase in
the Companys guarantee liability associated with the undertaking agreements based on the Companys
receipt of updated estimates from each legal counsel representing the officers involved in the SEC
investigation of the additional legal costs expected to be incurred for the officers to respond to
the Notice under the SECs Wells Notice procedures. For the third quarter of 2008, the $1.0
million of expenses consisted of (1) approximately $0.6 million of Company expenses and (2) an
approximately $0.4 million net increase in the Companys guarantee liability related to the
undertaking agreements. For the nine months ended September 30, 2009 and 2008, the Company incurred
expenses of approximately $0.1 million and $3.1 million, respectively, related to the SEC
investigation. For the first nine months of 2009, the $0.1 million of expenses consisted of (1)
$0.1 million of Company expenses and (2) no material change in the Companys guarantee liability
associated with the undertaking agreements. For the first nine months of 2008, the $3.1 million of
expenses consisted of (1) approximately $2.1 million of Company expenses and (2) an approximately
$1.0 million net increase in the Companys guarantee liability related to the undertaking
agreements.
See Business Outlook-Expenses, Liquidity and Capital Resources and Critical Accounting
Policies-Guarantee Liabilities below and Note 13 to the Condensed Consolidated Financial
Statements for additional information regarding the Companys legal costs associated with the SEC
investigation.
SUMMARY RESULTS
The following table sets forth period-to-period changes in selected financial data:
Period-to-Period Increase (Decrease) | ||||||||||||||||
Three and Nine Months Ended September 30, | ||||||||||||||||
2008-2009 | ||||||||||||||||
Three Months Ended | Nine Months Ended | |||||||||||||||
Amount | % Change | Amount | % Change | |||||||||||||
Net premiums earned |
$ | (282,100 | ) | (2.4 | )% | $ | (3,819,993 | ) | (10.5 | )% | ||||||
Net investment income |
26,274 | 2.6 | % | 132,840 | 4.7 | % | ||||||||||
Net realized gains on investments |
408,303 | 3,273.5 | % | 295,309 | 75.8 | % | ||||||||||
Other-than-temporary impairments on investments |
1,051,152 | (89.7 | )% | (482,316 | ) | 20.0 | % | |||||||||
Management fees |
(185,812 | ) | (286.2 | )% | (130,472 | ) | (45.1 | )% | ||||||||
Total revenues |
1,011,445 | 8.8 | % | (4,017,461 | ) | (10.7 | )% | |||||||||
Losses and LAE |
(141,095 | ) | (2.6 | )% | (2,462,518 | ) | (13.4 | )% | ||||||||
Policy acquisition costs |
(343,183 | ) | (11.4 | )% | (678,811 | ) | (7.7 | )% | ||||||||
Other operating expenses |
(155,037 | ) | (7.9 | )% | (45,802 | ) | (0.8 | )% | ||||||||
SEC investigation expenses |
(1,017,580 | ) | (98.2 | )% | (2,948,504 | ) | (95.2 | )% | ||||||||
Interest expense |
(116,893 | ) | (39.3 | )% | (293,498 | ) | (31.5 | )% | ||||||||
Income before federal income taxes |
2,785,233 | 857.6 | % | 2,411,672 | 434.9 | % | ||||||||||
Net income |
2,437,682 | 1,285.1 | % | 2,079,672 | 323.8 | % |
Net income for the third quarter 2009 was $2,248,001, or $0.43 per diluted share, compared to a net
loss of $(189,681), or $(0.04) per diluted share, a year ago. The most significant factors that
influenced this period-over-period comparison were (1) a $1.1 million ($0.7 million after tax)
decrease in other-than-temporary impairment charges on investments, (2) a $1.0 million ($0.7
million after tax) decrease in expenses related to the SEC investigation and (3) a $0.4 million
($0.3 million after tax) increase in net realized gains on investments primarily due to the timing
of sales of equity securities.
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AND SUBSIDIARIES
For the first nine months of 2009, net income was $2,721,941, or $0.53 per diluted share, compared
to $642,269, or $0.13 per diluted share, for the same period last year. The most significant
factor that influenced this period-over-period comparison was a $2.9 million ($1.9 million after
tax) decrease in expenses related to the SEC investigation.
The combined ratio, which is the sum of the loss ratio and the expense ratio, is the traditional
measure of underwriting experience for property/casualty insurance companies. Our specialty
insurance products are underwritten by Ohio Indemnity, whose results represent the Companys
combined ratio. The statutory combined ratio is the sum of the ratio of losses to premiums earned
plus the ratio of statutory underwriting expenses less management fees to premiums written after
reducing both premium amounts by dividends to policyholders. Statutory accounting principles differ
in certain respects from 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 costs are deferred and
recognized over the period in
which the related premiums are earned. Therefore, the GAAP combined ratio is the sum of the ratio
of losses to premiums earned plus the ratio of underwriting expenses less management fees to
premiums earned. In addition, statutory accounting principles may require additional unearned
premium reserves that result in net premiums earned on a statutory basis differing from that of net
premiums earned on a GAAP basis which also impacts the comparison of the combined ratio for GAAP
and statutory purposes. The following table reflects Ohio Indemnitys loss, expense and combined
ratios on both a statutory and a GAAP basis for the three and nine months ended September 30:
Three Months Ended | Nine Months Ended | |||||||||||||||
2009 | 2008 | 2009 | 2008 | |||||||||||||
GAAP: |
||||||||||||||||
Loss ratio |
49.5 | % | 50.1 | % | 50.7 | % | 52.4 | % | ||||||||
Expense ratio |
40.4 | % | 43.4 | % | 42.3 | % | 40.1 | % | ||||||||
Combined ratio |
89.9 | % | 93.5 | % | 93.0 | % | 92.5 | % | ||||||||
Statutory: |
||||||||||||||||
Loss ratio |
49.8 | % | 50.1 | % | 51.3 | % | 52.4 | % | ||||||||
Expense ratio |
40.4 | % | 44.7 | % | 41.5 | % | 44.3 | % | ||||||||
Combined ratio |
90.2 | % | 94.8 | % | 92.8 | % | 96.7 | % | ||||||||
RESULTS OF OPERATIONS
Three Months Ended September 30, 2009 Compared to Three Months Ended September 30, 2008
Net Premiums Earned. Net premiums earned decreased 2.4%, or $282,100, to $11,302,958 for
the third quarter 2009 from $11,585,058 a year ago principally due to a decrease in premiums for
our ULI and GAP product lines which was partially offset by an increase in premiums for our CPI
product line.
Net premiums earned for ULI decreased 9.1%, or $472,338, to $4,733,196 for the third quarter 2009
from $5,205,534 a year ago. $256,407 of the decrease related to a large financial institution
customer that exited the automobile lending market in the fourth quarter of 2008. The remaining
decrease was principally due to a decline in lending volume for certain of our credit union and
community bank customers which we believe was primarily caused by the national decline in
automobile sales when compared to a year ago. This decrease was partially offset by an increase in
lending volume for two of our large financial institution customers which we believe was primarily
caused by an increase in automobile sales during the third quarter 2009 as a result of the
governments cash-for-clunkers program.
Net premiums earned for CPI increased 148.2%, or $674,352, to $1,129,339 for the third quarter 2009
from $454,987 a year ago primarily due to one of our CPI insurance agents placing more business
with us.
Net premiums earned for GAP decreased 19.5%, or $468,618, to $1,937,253 for the third quarter 2009
from $2,405,871 a year ago primarily due to the cancellation of a poor performing GAP customer in
the second quarter of 2008 combined with a decrease in lending volume for the majority of our GAP
customers. We believe this decline in lending volume was primarily caused by the national decline
in automobile sales.
Net premiums earned for UC products increased 9.6%, or $157,553, to $1,800,765 for the third
quarter 2009 from $1,643,212 a year ago primarily due to pricing increases and new customers added
for our UCassure® product.
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AND SUBSIDIARIES
Net premiums earned for WIP decreased 8.1%, or $146,965, to $1,663,709 for the third quarter 2009
from $1,810,674 a year ago primarily due to a decrease in contract and escrow surety bond business.
For more information concerning premiums, see Business Outlook below.
Net Investment Income. Net investment income increased 2.6%, or $26,274, to $1,028,303 for
the third quarter 2009 from $1,002,029 a year ago principally due to an increase in our average
invested assets during the current quarter when compared to a year ago.
Net Realized Gains on Investments. Net realized gains on investments increased $408,303,
to $420,776 for the third quarter 2009 from $12,473 a year ago primarily due to the timing of sales
of equity securities. We generally decide whether to sell securities based upon investment
opportunities and tax consequences.
For more information concerning net realized gains on investments, see Business Outlook below.
Other-Than-Temporary Impairments on Investments. Other-than-temporary impairments
decreased 89.7%, or $1,051,152, to $120,805 for the third quarter 2009 from $1,171,957 a year ago.
The $120,805 in impairment charges during the third quarter 2009 were due to write-downs on nine
fixed maturity securities and two closed-end mutual funds that we intend to sell before their
anticipated recovery in order to utilize capital loss carrybacks for tax purposes.
For more information concerning impairment charges, see Business Outlook and Critical Accounting
Policies-Other-Than-Temporary Impairment of Investments below and Note 3 to the Condensed
Consolidated Financial Statements.
Management Fees. Our management fees for our UCassure® product decreased
286.2%, or $185,812, to a loss of $(120,888) for the third quarter 2009 compared to revenue of
$64,924 a year ago. The loss in the third quarter of 2009 was primarily due to an increase in
benefit charges. Our current benefit charges may not necessarily correlate with the current
national unemployment experience as the non-profit entities that utilize our UC coverage may have
different factors that are affecting their unemployment rates. We expect management fees to vary
from period to period depending on our customers unemployment levels and benefit charges. For
more information concerning management fees, see Business Outlook below.
Losses and Loss Adjustment Expenses. Losses and LAE represent claims associated with
insured loss events and expenses associated with adjusting and recording policy claims,
respectively. Losses and LAE decreased 2.6%, or $141,095, to $5,359,720 for the third quarter 2009
from $5,500,815 a year ago principally due to a decrease in ULI and UC losses which was partially
offset by an increase in CPI and GAP losses.
ULI losses and LAE decreased 12.4%, or $422,952, to $2,988,161 for the third quarter 2009 from
$3,411,113 a year ago primarily due to the decline in premium described above.
CPI losses and LAE increased 428.6%, or $501,187, to $618,111 for the third quarter 2009 from
$116,924 a year ago primarily due to the growth in premium described above.
GAP losses and LAE increased 26.1%, or $298,326, to $1,442,019 for the third quarter 2009 from
$1,143,693 a year ago. The increase in losses was primarily caused by reserve strengthening which
was partially offset by a decrease in losses as a result of the decline in premium described above.
UC losses and LAE decreased 57.3%, or $375,344, to $279,178 for the third quarter 2009 from
$654,522 a year ago primarily due to the previously disclosed settlement of a dispute with a former
UC customer during the third quarter of 2008, which was partially offset by an increase in reserves
for our UCassure® product as a result of an increase in benefit charges.
WIP losses and LAE decreased 41.7%, or $70,037, to $97,793 for the third quarter 2009 from $167,830
a year ago. For WIP, we record loss and LAE reserves using an expected loss ratio reserving method
as recommended by the primary insurance carrier and reviewed by our independent actuary. For waste
surety bonds, loss and LAE reserves are based on a certain percentage of net premiums earned over
the trailing thirty-six months. For contract and escrow surety bonds, loss and LAE reserves are
based on a certain percentage of total net premiums earned. As a result, the decrease in WIP
losses and LAE for the third quarter 2009 was primarily related to the decline in premiums earned.
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AND SUBSIDIARIES
Discontinued bond program losses and LAE were $33,321 for the third quarter of 2009 compared to
zero a year ago. The losses for the third quarter 2009 were primarily attributable to an increase
in Harcos immigration bond reserve estimate as a result of Harco reaching an agreement in
principle to settle with DHS as described above which was partially offset by a decrease in Harcos
bail bond reserve estimate. See Overview-Discontinued Bond Program above and Discontinued Bond
Program in Note 8 to the Condensed Consolidated Financial Statements for more information
concerning losses and LAE for the discontinued bond program.
Other specialty products losses and LAE decreased $105,598 for the third quarter 2009 compared to a
year ago primarily due to favorable loss development for one of our automobile service contract
programs. See Automobile Service Contract Program above and Automobile Service Contract
Program in Note 8 to the Condensed Consolidated Financial Statements for more information.
For more information concerning losses and LAE, see Business Outlook and Critical Accounting
Policies-Loss and Loss Adjustment Expense Reserves below.
Policy Acquisition Costs. Policy acquisition costs decreased 11.4%, or $343,183, to
$2,676,691 for the third quarter 2009 from $3,019,874 a year ago primarily due to a decrease in
commission expense for our ULI product line as a result of the decline in that business described
above.
Other Operating Expenses. Other operating expenses decreased 7.9%, or $155,037, to
$1,818,985 for the third quarter 2009 from
$1,974,022 a year ago primarily due to legal expenses incurred in the prior year related to the
previously disclosed settlement of a dispute with a former UC customer during the third quarter of
2008.
SEC Investigation Expenses. SEC investigation expenses decreased 98.2%, or $1,017,580, to
$18,193 for the third quarter 2009 from $1,035,773 a year ago. See Overview-SEC Investigation
above, Business Outlook-Expenses, Liquidity and Capital Resources and Critical Accounting
Policies-Guarantee Liabilities below and Note 13 to the Condensed Consolidated Financial
Statements for more information concerning the SEC investigation.
Interest Expense. Interest expense decreased 39.3%, or $116,893, to $180,228 for the third
quarter 2009 from $297,121 a year ago primarily due to declining interest rates on our trust
preferred debt. See Business Outlook and Liquidity and Capital Resources below and Note 4 to
the Condensed Consolidated Financial Statements for a discussion of the Companys trust preferred
debt issued to affiliates (which makes up the majority of the Companys interest expense).
Federal Income Taxes. The Companys effective federal income tax rate was 8.6% for the
third quarter 2009 compared to 41.6% a year ago. This improvement was primarily attributable to the
ratio of tax-exempt investment income when compared to income from operations for each period. For
more information concerning our federal income taxes, see Note 5 to the Condensed Consolidated
Financial Statements.
GAAP Combined Ratio. For the third quarter 2009, the combined ratio decreased to 89.9%
from 93.5% a year ago. The loss ratio improved to 49.5% for the third quarter 2009 from 50.1% a
year ago primarily due to a decrease in the loss ratio for our UC product line which was partially
offset by an increase in the loss ratio for our GAP product line. The expense ratio improved to
40.4% for the third quarter 2009 from 43.4% a year ago primarily due to the decrease in other
operating expenses described above combined with a decrease in the commission expense ratio for our
ULI product line.
Nine Months Ended September 30, 2009 Compared to Nine Months Ended September 30, 2008
Net Premiums Earned. Net premiums earned decreased 10.5%, or $3,819,993, to $32,695,785 for
the first nine months of 2009 from $36,515,778 a year ago principally due to a decrease in premiums
for our ULI and GAP product lines which was partially offset by an increase in premiums for our CPI
product line.
Net premiums earned for ULI decreased 23.1%, or $4,093,054, to $13,601,371 for the first nine
months of 2009 from $17,694,425 a year ago. Approximately $2.1 million of the decrease related to
a large financial institution customer that exited the automobile lending market in the fourth
quarter of 2008. The remaining decrease was principally due to a decline in lending volume for the
majority of our ULI customers. We believe this decline in lending volume was primarily caused by
the national decline in automobile sales when compared to a year ago.
Net premiums earned for CPI increased 124.9%, or $1,226,783, to $2,208,674 for the first nine
months of 2009 from $981,891 a year ago primarily due to one of our CPI insurance agents placing
more business with us.
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AND SUBSIDIARIES
Net premiums earned for GAP decreased 16.8%, or $1,253,106, to $6,200,721 for the first nine months
of 2009 from $7,453,827 a year ago. Approximately $0.7 million of the decrease related to the
cancellation of a poor performing GAP customer in the second quarter of 2008. The remaining
decrease was principally due to a decline in lending volume for the majority of our GAP customers.
We believe this decline in lending volume was primarily caused by the national decline in
automobile sales when compared to a year ago.
Net premiums earned for UC products increased 11.7%, or $576,110, to $5,501,530 for the first nine
months of 2009 from $4,925,420 a year ago primarily due to pricing increases and new customers
added for our UCassure® product combined with an increase in audit premium for our
excess of loss product.
Net premiums earned for WIP decreased 5.3%, or $282,956, to $5,009,274 for the first nine months of
2009 from $5,292,230 a year ago primarily due to a decrease in escrow surety bond business.
For more information concerning premiums, see Business Outlook below.
Net Investment Income. Net investment income increased 4.7%, or $132,840, to $2,943,449
for the first nine months of 2009 from $2,810,609 a year ago principally due to an increase in our
average invested assets during the first nine months of 2009 when compared to a year ago.
Net Realized Gains on Investments. Net realized gains on investments increased 75.8%, or
$295,309, to $684,942 for the first nine months of 2009 from $389,633 a year ago primarily due to
the timing of sales of equity securities. We generally decide whether to
sell securities based upon investment opportunities and tax consequences.
For more information concerning net realized gains on investments, see Business Outlook below.
Other-Than-Temporary Impairments on Investments. Other-than-temporary impairments on
investments increased 20.0%, or $482,316, to $2,887,994 for the first nine months of 2009 from
$2,405,678 a year ago. The impairment charges during the first nine months of 2009 were primarily
due to the following: (1) $1,316,177 in impairment charges for four closed-end mutual funds whose
fair values were adversely affected by current market conditions; (2) $572,020 in impairment
charges for a corporate fixed maturity security of a lending institution (SLM Corp. or Sallie Mae)
whose fair value was adversely affected by uncertainty in its investment ratings by certain bond
rating agencies; (3) $797,619 in impairment charges for equity securities of seven financial
institutions whose fair values were adversely affected primarily by the credit markets; (4) $62,157
in impairment charges for an equity security of an insurance company whose fair value was adversely
affected by the current market conditions; and (5) $78,420 in impairment charges for nine fixed
maturity securities that we intend to sell before their anticipated recovery in order to utilize
capital loss carrybacks for tax purposes.
For more information concerning impairment charges, see Business Outlook and Critical Accounting
Policies-Other-Than-Temporary Impairment of Investments below and Note 3 to the Condensed
Consolidated Financial Statements.
Management Fees. Our management fees for our UCassure® product decreased 45.1%,
or $130,472, to $158,766 for the first nine months of 2009 from $289,238 a year ago primarily due
to an increase in benefit charges. Our current benefit charges may not necessarily correlate with
the current national unemployment experience as the non-profit entities that utilize our UC
coverage may have different factors that are affecting their unemployment rates. We expect
management fees to vary from period to period depending on our customers unemployment levels and
benefit charges. For more information concerning management fees, see Business Outlook below.
Losses and Loss Adjustment Expenses. Losses and LAE decreased 13.4%, or $2,462,518, to
$15,911,376 for the first nine months of 2009 from $18,373,894 a year ago principally due to a
decrease in ULI losses which was partially offset by an increase in GAP losses.
ULI losses and LAE decreased 29.6%, or $3,749,166, to $8,897,175 for the first nine months of 2009
from $12,646,341 a year ago primarily due to the decline in premium described above.
CPI losses and LAE increased 223.9%, or $684,551, to $990,279 for the first nine months of 2009
from $305,728 a year ago primarily due to the growth in premium described above.
GAP losses and LAE increased 30.5%, or $1,237,622, to $5,294,651 for the first nine months of 2009
from $4,057,029 a year ago. The increase in losses was primarily caused by an increase in both
frequency and severity of losses for the majority of our GAP customers which was partially offset
by a decrease in losses as a result of the decline in premium described above. We believe the
increase in severity has primarily related to an overall decline in used automobile values when
compared to a year ago.
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AND SUBSIDIARIES
UC losses and LAE decreased 38.1%, or $361,400, to $587,481 for the first nine months of 2009 from
$948,881 a year ago primarily due to the previously disclosed settlement of a dispute with a former
UC customer during the third quarter of 2008, which was partially offset by an increase in reserves
for our UCassure® product as a result of an increase in benefit charges.
WIP losses and LAE decreased 18.8%, or $88,602, to $381,590 for the first nine months of 2009 from
$470,192 a year ago. For WIP, we record loss and LAE reserves using an expected loss ratio
reserving method as recommended by the primary insurance carrier and reviewed by our independent
actuary. For waste surety bonds, loss and LAE reserves are based on a certain percentage of net
premiums earned over the trailing thirty-six months. For contract and escrow surety bonds, loss
and LAE reserves are based on a certain percentage of total net premiums earned. As a result, the
decrease in WIP losses and LAE for the first nine months of 2009 was primarily related to the
decline in premiums earned.
Discontinued bond program losses and LAE were $27,321 for the first nine months of 2009 which was
primarily attributable to an increase in Harcos immigration bond reserve estimate as a result of
Harco reaching an agreement in principle to settle with DHS as described above which was partially
offset by a decrease in Harcos bail bond reserve estimate. For the nine months ended September
30, 2008, we recorded a benefit of $60,929 for the discontinued bond program which was primarily
attributable to a decrease in Harcos reserve estimate during the second quarter of 2008. See
Overview-Discontinued Bond Program above and Discontinued Bond Program in Note 8 to the
Condensed Consolidated Financial Statements for more information concerning losses and LAE for the
discontinued bond program.
Other specialty products losses and LAE decreased $273,773 for the first nine months of 2009
compared to a year ago primarily due
to favorable loss development for one of our automobile service contract programs. See Automobile
Service Contract Program above and Automobile Service Contract Program in Note 8 to the
Condensed Consolidated Financial Statements for more information.
For more information concerning losses and LAE, see Business Outlook and Critical Accounting
Policies-Loss and Loss Adjustment Expense Reserves below.
Policy Acquisition Costs. Policy acquisition costs decreased 7.7%, or $678,811, to
$8,160,032 for the first nine months of 2009 from $8,838,843 a year ago primarily due to a decrease
in commission expense for our ULI and GAP product lines as a result of the decline in business
described above. This decrease was partially offset by an increase in commission expense for our
CPI product line primarily due to the growth in that business described above.
Other Operating Expenses. Other operating expenses remained relatively flat at $5,787,752
for the first nine months of 2009 compared to $5,833,554 a year ago.
SEC Investigation Expenses. SEC investigation expenses decreased 95.2%, or $2,948,504, to
$147,725 for the first nine months of 2009 from $3,096,229 a year ago. See SEC Investigation
above, Business Outlook-Expenses, Liquidity and Capital Resources and Critical Accounting
Policies-Guarantee Liabilities below and Note 13 to the Condensed Consolidated Financial
Statements for more information concerning the SEC investigation.
Interest Expense. Interest expense decreased 31.5%, or $293,498, to $637,447 for the first
nine months of 2009 from $930,945 a year ago primarily due to declining interest rates on our trust
preferred debt. See Business Outlook and Liquidity and Capital Resources below and Note 4 to
the Condensed Consolidated Financial Statements for a discussion of the Companys trust preferred
debt issued to affiliates (which makes up the majority of the Companys interest expense).
Federal Income Taxes. The Companys effective federal income tax rate was 8.2% for the
first nine months of 2009 compared to (15.8)% a year ago. This increase was primarily attributable
to the ratio of tax-exempt investment income when compared to income from operations for each
period. For more information concerning our federal income taxes, see Note 5 to the Condensed
Consolidated Financial Statements.
GAAP Combined Ratio. For the first nine months of 2009, the combined ratio increased to
93.0% from 92.5% a year ago. The loss ratio improved to 50.7% the first nine months of 2009 from
52.4% a year ago primarily due to a decrease in the loss ratio for our ULI and UC product lines
which was partially offset by an increase in the loss ratio for our GAP and CPI product lines. The
expense ratio increased to 42.3% for the first nine months of 2009 from 40.1% a year ago primarily
due to the amount of other operating expenses relative to the decrease in net premiums earned
combined with a higher commission expense ratio given the decline in lender service business which
has a lower commission structure when compared to our UC and WIP product lines.
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AND SUBSIDIARIES
AND SUBSIDIARIES
BUSINESS OUTLOOK
Lender Service Products
Our lender service premium volume is primarily based on new loans made by our banking customers for
consumer automobile purchases. The recent turmoil in the credit markets has impacted automobile
sales as consumers are struggling to qualify for loans. In addition, many consumers are not
willing to make big purchases, such as for a new automobile. In 2008, the automobile industry
experienced its worst sales results in 15 years. During the first nine months of 2009, General
Motors, Ford, Toyota, Honda, Chrysler and Nissan all reported U.S. sales drops when compared to a
year ago. Overall, U.S. new automobile sales were down approximately 27% for the first nine months
of 2009 when compared to a year ago. As a result, many of our financial institution customers have
experienced declines in lending volume for automobiles during the first nine months of 2009. For
ULI and GAP, our premium collections were down 22% and 30%, respectively, for the first nine months
of 2009 which is generally consistent with the decline in U.S. automobile sales. Although there
was some positive news for automobile sales during the month of August 2009 resulting from the
governments cash-for-clunkers program, it appears that such positive news was reversed in
September 2009 when automobile sales were down 41% from August 2009. Based on the current economic
conditions, we believe it is likely that our lender service premium volume will decline for fiscal
year 2009 when compared to fiscal year 2008; however, we cannot predict how much of a decline we
will experience. In addition, one of our larger ULI financial institution customers exited the
automobile lending market during the fourth quarter of 2008. During 2008, this ULI customer had
net premiums earned of $2.3 million and its combined ratio was 70%. We will not have any earned
premiums from this customer in 2009.
Premiums and ceded commissions for our insurance products are earned over the related contract
periods. For GAP and certain of our ULI and EPD products, the contract period averages
approximately five years. As a result, the impacts of decreased premium volumes and cancelled
business may not be seen in our results immediately and can persist for a number of years.
Conversely, the impacts of increased premium volumes, pricing increases and/or new business may not
be seen in our results immediately and may take several years to fully develop.
Due to the current weak economic conditions, certain of our lender service customers have
experienced an increase in loan defaults, bankruptcies and automobile repossessions. As the rate
of loan defaults, bankruptcies and automobile repossessions increases for our ULI and CPI
customers, we experience an increase in the frequency of losses for these product lines. As the
national economy remains unstable and unemployment levels remain high, our financial institution
customers could experience an increase in loan defaults, bankruptcies and automobile repossessions
in the future. Incentives offered on new cars by dealers and manufacturers have depressed the
value of the used car market. In addition, the higher level of gas prices has lowered the market
value of less fuel-efficient vehicles. As used car prices decline, the gap between the value of
the vehicle and the outstanding loan balance increases and thus the severity of our GAP losses
increases. Where possible, we have taken actions to help mitigate the effects of these trends,
including monitoring the pricing of our products and taking rate actions when necessary. However,
as noted above, rate increases for our longer duration policies may take several years to have an
impact as the rate increase is only for new business while run off of the older business at the old
rate will take place for a number of years.
One of the actions we took to mitigate our increased frequency and severity of losses was
cancelling a poor performing GAP customer in the second quarter of 2008. During 2008 and the first
nine months of 2009, this GAP customer had net premiums earned of $2.4 million and $1.3 million,
respectively, and its combined ratio was 134% and 147%, respectively. As noted above, it will take
a number of years for this block of business to fully run-off.
Effective January 1, 2007, we entered into a producer-owned reinsurance arrangement with an EPD
customer whereby 100% of that customers premiums (along with the associated risk) were ceded to
its PORC. For this reinsurance arrangement, we have obtained collateral in the form of funds held
and a letter of credit to secure our obligations. Under the provisions of the reinsurance
agreement, the collateral must be equal to or greater than 102% of the reinsured reserves and we
have immediate access to such collateral if necessary. This program reduced our commission expense
by $0.8 million in 2008 compared to $0.3 million in 2007. We expect this program to reduce our
commission expense by approximately $1.2 million during fiscal year 2009. As of September 30, 2009,
we had approximately $2.2 million of deferred ceded commissions for this program that will be
earned over approximately four years.
Effective October 1, 2003, we entered into a producer-owned reinsurance arrangement with a CPI
customer whereby 100% of that customers premiums (along with the associated risk) were ceded to
its PORC. For this reinsurance arrangement, we have obtained collateral in the form of a trust
from the reinsurer to secure our obligations. Under the provisions of the reinsurance agreement,
the collateral must be equal to or greater than 102% of the reinsured reserves and we have
immediate access to such collateral if necessary. Effective April 1, 2008, the policy related to
this arrangement was cancelled. During 2008 and 2007, this program reduced our commission expense
by approximately $0.2 million and $0.4 million, respectively, and we expect very little, if any,
earned ceded commission for fiscal year 2009.
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AND SUBSIDIARIES
AND SUBSIDIARIES
Furthermore, we cannot predict how much of an impact, if any, the bankruptcy protection filings of
General Motors and Chrysler will have on our premium volume and/or loss experience.
Unemployment Compensation, Waste Industry and Other Specialty Products
Increased benefit charge levels for our UC customers could result in lower management fees and/or
increased losses for our UC product line. During the first nine months of 2009, we experienced a
20% increase in benefit charges for our UCassure® product when compared to a year ago. We expect
that our excess of loss product will also experience an increase in benefit charges, especially
considering its geographical concentration in California (approximately 35% of this business is in
California). Given the current economic conditions, including rising unemployment, we believe it is
likely that we will continue to experience an increase in benefit charges for fiscal year 2009 when
compared to fiscal year 2008: however, we cannot predict how much of an increase we will experience
or how material the impact will be to us. Where possible, we have taken actions to help mitigate
the effects of these trends, including monitoring the coverage and pricing of our products and
taking actions when necessary. For example, benefit charges paid for our UCassure® product
increased approximately 20% during the first nine months of 2009 when compared to a year ago which
is generally consistent with the rate increases taken for this product for fiscal year 2009.
As discussed in Overview-Products and Services above, effective August 1, 2009, our participation
was changed from 5% to 12.5% for one of the reinsurance arrangements under our WIP program. On an
annualized basis, we estimate that this change in participation should increase our net premiums
earned by approximately $1.5 million.
Since we began participating in the WIP program in 2004 there have not been any claims to date,
other than some contract and escrow surety bond claims. If we were to have significant claims
experience on this program during fiscal year 2009, such claims experience could have a material
impact on our financial performance if our reserves prove to be materially deficient. As of
September 30, 2009, our net loss and LAE reserves for the WIP program were approximately $2.7
million. We currently do not believe that our reserves will be materially deficient. For more
information concerning losses and LAE, see Critical Accounting Policies-Loss and Loss Adjustment
Expense Reserves below.
Furthermore, any developments on the discontinued bond program, including Harco and Highlands loss
development and the Highlands arbitration and receivership proceeding, could have a material
impact on our future results of operations and/or financial condition. See Overview-Discontinued
Bond Program above and Discontinued Bond Program in Note 8 to the Condensed Consolidated
Financial Statements for more information concerning the discontinued bond program.
Expenses
As previously disclosed, the Company concluded three of the discontinued bond program arbitrations
during 2006, and only the Highlands arbitration remains pending. Because there was little
activity in the Highlands arbitration during 2008 and the first nine months of 2009, we incurred
minimal legal costs during such periods for the Highlands arbitration. As disclosed above, we have
reached an agreement in principle with Highlands to settle our dispute. If the proposed settlement
is approved by the Texas state court, we do not expect to incur future material legal costs related
to the Highlands arbitration. However, given the uncertainties associated with the settlement
approval process, there can be no assurance that the proposed settlement will be approved. If the
proposed settlement is not approved, while we do not expect to incur material legal costs for the
Highlands arbitration during the fourth quarter 2009, we cannot predict with reasonable certainty
the amount or range of amounts of legal costs that we will incur for the Highlands arbitration
during future periods following the fourth quarter 2009; however, the amount of such legal costs
could be material to our results of operations when the arbitration proceeding takes place. See
Overview-Discontinued Bond Program above and Discontinued Bond Program in Note 8 to the
Condensed Consolidated Financial Statements for more information regarding the discontinued bond
program arbitrations.
As previously disclosed, during the fourth quarter of 2007, the Company and certain of its current
officers received the Notice from the SEC staff and the Company entered into undertaking agreements
with such officers. As a result of these events, we incurred the following expenses during the
last eight quarters related to the SEC investigation:
4Q2007 | 1Q2008 | 2Q2008 | 3Q2008 | 4Q2008 | 1Q2009 | 2Q2009 | 3Q2009 | |||||||||||||||||||||||||
SEC investigation expenses |
$ | 2,504,122 | $ | 1,450,872 | $ | 609,584 | $ | 1,035,773 | $ | 193,233 | $ | 58,148 | $ | 71,384 | 18,193 |
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BANCINSURANCE CORPORATION
AND SUBSIDIARIES
AND SUBSIDIARIES
As a result of the Companys and the Chief Executive Officers settlements with the SEC, we
anticipate that (1) the Companys total expenses with respect to the SEC investigation during
fiscal year 2009 will be approximately $0.2 million to $0.3 million and (2) any material Company
expenses related to the SEC investigation in future periods after fiscal year 2009 will be limited
to its obligations under the undertaking agreements with the Chief Financial Officer and Vice
President of Specialty Products. Due to the inherent uncertainties of the SEC investigation as it
relates to the Chief Financial Officer and Vice President of Specialty Products, (1) the Company
cannot estimate with reasonable certainty any future obligations related to their undertaking
agreements beyond the estimated costs to respond to the Notice and (2) actual future payments
related to their undertaking agreements could be materially different from the estimated fair value
($160,000) of such future payments as recorded at September 30, 2009.
See Overview-SEC Investigation above, Liquidity and Capital Resources and Critical Accounting
Policies-Guarantee Liabilities below and Note 13 to the Condensed Consolidated Financial
Statements for more information regarding the SEC investigation.
As interest rates rise (fall), it can increase (decrease) the level of interest expense on our
trust preferred debt and any borrowings under our bank line of credit. Interest rates have
declined during the first nine months of 2009 when compared to a year ago. If interest rates
remained the same throughout the remainder fiscal year 2009 as they were at September 30, 2009 and
if we did not draw additional amounts on our bank line of credit, we would experience a $0.4
million decrease in interest expense during fiscal year 2009 when compared to fiscal year 2008.
See Liquidity and Capital Resources below and Notes 4 and 14 to the Condensed Consolidated
Financial Statements for more information concerning our trust preferred debt and revolving line of
credit.
Investments
As of September 30, 2009, approximately 95% of our fixed maturity portfolio was invested in
tax-exempt municipal bonds which consisted primarily of revenue issue bonds (93%) and general
obligation bonds (7%). During the third quarter of 2009, market liquidity for such bonds improved,
but was still being negatively affected by the current economic conditions and recent changes on
Wall Street. Trading desks at firms such as Bear Stearns, Lehman Brothers, Merrill Lynch, and
Wachovia had previously played significant roles in supplying liquidity in the bond markets. With
these brokers no longer in existence or merged into other entities and other financial institutions
accumulating capital, the municipal bond markets witnessed a dramatic widening in bid/ask spreads
and a decrease in trading volume during the second half of 2008. Municipal bond returns from
September through December of 2008 were the worst of any such period in the past 20 years. Returns
for municipal bonds improved considerably during the third quarter of 2009 as municipal bond funds
saw record positive cash flow in the third quarter of 2009, and considerable liquidity returned as
bond traders made markets in more municipal securities, thereby enhancing demand. As a result,
municipal bond prices improved as of September 30, 2009 when compared to December 31, 2008, and the
gross unrealized loss for our fixed maturity portfolio decreased from $7.8 million at December 31,
2008 to $1.7 million at September 30, 2009. The fair value of our fixed
maturity portfolio could also be impacted by credit rating actions and related financial
uncertainty associated with insurance companies that guarantee the obligations of some of our
bonds. While municipal credits continue to demonstrate relative credit quality stability, market
conditions are still somewhat unsettled.
Many of the securities within our equity portfolio have also been negatively impacted by the
current economic conditions. During the first nine months of 2009, we recorded approximately $2.9
million of impairment charges for our investment portfolio (approximately $2.2 million for equity
securities and approximately $0.7 million for fixed maturity securities). A stock market rally
that materialized in mid-March 2009 continued through the third quarter of 2009. As a result, our
equity portfolio improved as of September 30, 2009 when compared to December 31, 2008, and the
gross unrealized loss for our equity portfolio decreased from $1.4 million at December 31, 2008 to
zero at September 30, 2009.
Based on the current economic conditions and our other-than-temporary impairment accounting policy,
additional impairment charges within our investment portfolio are possible during the remainder of
fiscal year 2009. As disclosed in Note 3 to the Condensed Consolidated Financial Statements and
Critical Accounting Policies-Other-Than-Temporary Impairment of Investments below, we begin to
monitor a security for other-than-temporary impairment when its fair value to book value ratio
falls below 80%. As shown in Note 3 to the Condensed Consolidated Financial Statements, as of
September 30, 2009, we did not have any equity securities that had a fair value to book value ratio
below 80%. Assuming the estimated fair value for our equity securities remained the same during
the remainder of 2009 as they were at September 30, 2009, we would not likely record any material
other-than-temporary impairment charges for equity securities during the remainder of 2009. With
respect to those fixed maturity securities having a fair value to book value ratio below 80% as
shown in Note 3 to the Condensed Consolidated Financial Statements, all of these securities are
investment grade and we would likely not have any material other-than-temporary impairment charge
on these securities during the remainder of 2009 unless they were to fall below investment grade.
Due to the inherent uncertainties of the investment markets, we cannot predict with reasonable
certainty the amount or range of amounts of other-than-temporary impairment charges, if any, that
will be recorded during the remainder of 2009; however, if market conditions deteriorate, we
believe that the amount of such other-than-temporary impairment charges could be material to our
results of operations. For more information concerning the unrealized loss position of our
investment portfolio and impairment charges, see Critical Accounting Policies-Other-Than-Temporary
Impairment of Investments below and Note 3 to the Condensed Consolidated Financial Statements.
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AND SUBSIDIARIES
AND SUBSIDIARIES
During the first nine months of 2009, we recorded approximately $0.7 million of net realized gains
on investments primarily due to sales of equity securities that had previously been written down as
an other-than-temporary impairment and then had subsequent recovery in value. We generally decide
whether to sell securities based upon investment opportunities and tax consequences. As of
September 30, 2009, we had approximately $0.8 million of tax capital loss carrybacks that will
expire at the end of 2009. In order to utilize some, if not all, of our tax capital loss
carrybacks prior to their expiration, it is reasonably likely that we will continue to sell
securities during the fourth quarter of 2009 that have previously been written down and have had
subsequent recovery in value. Sales of these securities would generate realized losses for tax
purposes but would likely generate realized gains for book purposes. For example, in October 2009,
we sold fixed maturity and equity securities that generated net realized gains for book purposes of
approximately $0.5 million compared to net realized losses for tax purposes of approximately $0.5
million. Due to the inherent uncertainties of the investment markets, we cannot predict with
reasonable certainty the amount of realized gains (losses) that will be recorded for book purposes
during the remainder of fourth quarter of 2009; however, we believe that the amount of such
realized gains (losses) could be material to our results of operations.
Based on the factors discussed above and the current economic conditions, our outlook for the
remainder of the 2009 fiscal year remains cautious.
LIQUIDITY AND CAPITAL RESOURCES
We are organized in a holding company structure with Bancinsurance Corporation being the parent
company and all of our operations being conducted by Bancinsurance Corporations wholly-owned
subsidiaries, Ohio Indemnity and USA. As of September 30, 2009, our capital structure consisted of
trust preferred debt issued to affiliates and shareholders equity and is summarized in the
following table:
September 30, | December 31, | |||||||
2009 | 2008 | |||||||
Trust preferred debt issued to BIC Statutory Trust I |
$ | 8,248,000 | $ | 8,248,000 | ||||
Trust preferred debt issued to BIC Statutory Trust II |
7,217,000 | 7,217,000 | ||||||
Bank line of credit |
| 2,500,000 | ||||||
Total debt obligations |
15,465,000 | 17,965,000 | ||||||
Total shareholders equity |
44,928,079 | 34,660,381 | ||||||
Total capitalization |
$ | 60,393,079 | $ | 52,625,381 | ||||
Ratio of total debt obligations to total capitalization |
25.6 | % | 34.1 | % |
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. BIC Trust I also issued $248,000 of floating rate common
securities to Bancinsurance Corporation. 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 II
also issued $217,000 of floating rate common securities to Bancinsurance Corporation. BIC Trust I
and BIC Trust II (collectively, the Trusts) 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 Bancinsurance Corporation. In connection with the
issuance of the trust preferred capital securities, Bancinsurance Corporation 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. Bancinsurance Corporation has fully and
unconditionally guaranteed the obligations of the Trusts with respect to the floating rate trust
preferred capital securities. The Trusts distribute the interest received from Bancinsurance
Corporation 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 capital securities. BIC Trust Is 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 (4.33% and 6.81% at September 30, 2009 and 2008, respectively), are redeemable at par and
mature on December 4, 2032. BIC Trust IIs 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 (4.33% and 7.81% at September 30, 2009 and 2008, respectively), are redeemable at par
and mature on September 30, 2033. The proceeds from the junior subordinated debentures were used
for general corporate purposes and provided additional financial flexibility to the Company. The
terms of the junior subordinated debentures contain various covenants. As of September 30, 2009,
Bancinsurance Corporation was in compliance with all such covenants.
Bancinsurance Corporation also has a $10,000,000 unsecured revolving bank line of credit with a
maturity date of June 30, 2010. At September 30, 2009 and December 31, 2008, the outstanding
balance under the line of credit was zero and $2,500,000, respectively. The line of credit
provides for interest payable quarterly at an annual rate equal to the prime rate less 75 basis
points (2.50% and 4.25% at September 30, 2009 and 2008, respectively). The terms of the revolving
credit agreement contain various restrictive covenants. As of September 30, 2009, Bancinsurance
Corporation was in compliance with all such covenants. We utilize the line of credit from time to
time based on short-term cash flow needs, the then current prime rate and expected changes in the
prime rate, Ohio Indemnitys capital position and the dividend limitations on Ohio Indemnity as
discussed below.
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AND SUBSIDIARIES
AND SUBSIDIARIES
The short-term cash requirements of our property/casualty business primarily consist of paying
losses and LAE, reinsurance premiums and day-to-day operating expenses. Historically, we have met
those requirements through (1) cash receipts from operations, which consist primarily of insurance
premiums collected, ceded commissions received and investment income, and (2) our cash and
short-term investment portfolio. In addition, our fixed maturity investment portfolio has
historically generated additional cash flows through bond maturities and calls (over 90% of our
fixed maturity portfolio has call features). When a bond matures or is called by the issuer, the
resulting cash flows are generated without selling the security at a loss. We utilize these cash
flows to either build our cash and short-term investment position or reinvest in other securities,
depending on our liquidity needs. To the extent our cash from operations, cash and short-term
investments and cash flows from bond maturities or calls are not sufficient to meet our liquidity
needs, our investment portfolio is a source of additional liquidity through the sale of readily
marketable fixed maturity and equity securities. As of September 30, 2009, we had $57,463,864 of
available for sale fixed maturity and equity securities that were in an unrealized gain position
that, if necessary, we could sell without recognizing a loss to meet liquidity needs. After
satisfying our cash requirements and meeting our desired cash and short-term investment position,
any excess cash flows from our operating and/or investment activities are used to build our
investment portfolio and thereby increase future investment income. For more information
concerning our investment portfolio, see Critical Accounting Policies-Other-Than-Temporary
Impairment of Investments below and Note 3 to the Condensed Consolidated Financial Statements.
The following table sets forth our cash and short-term investment position at September 30, 2009
and December 31, 2008:
September 30, | December 31, | |||||||
2009 | 2008 | |||||||
Cash and short-term investments |
$ | 5,633,613 | $ | 11,439,101 | ||||
Money market mutual fund(1) |
3,004,556 | 49,096 | ||||||
Total cash and short-term investments |
$ | 8,638,169 | $ | 11,488,197 | ||||
(1) | Even though it is classified as an equity security in our accompanying balance
sheet, we treat the money market mutual fund as a short-term investment for purposes of our
liquidity management because of its liquid nature. |
Given the decrease in expenses associated with the SEC investigation in 2009, we decreased our cash
and short-term investment
position as of September 30, 2009 when compared to December 31, 2008.
Because of the nature of the risks we insure on a direct basis, losses and LAE emanating from the
insurance policies that we issue are generally 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 we can estimate our cash needs to meet our policy obligations and
utilize cash flows from operations and our cash and short-term investment position to meet these
obligations. We consider the relationship between the duration of our policy obligations and our
expected cash flows from operations in determining our cash and short-term investment position. We
maintain a level of cash and liquid short-term investments which we believe will be adequate to
meet our anticipated policy obligations without being required to liquidate intermediate-term and
long-term investments at a loss.
As discussed in Overview-Discontinued Bond Program above and in Discontinued Bond Program in
Note 8 to the Condensed Consolidated Financial Statements, discontinued bond program loss and LAE
reserves were $6.7 million at September 30, 2009. Ultimate payment on the discontinued bond
program may result in a material increase in cash outflows from operations. We consider the
discontinued bond program liabilities and the related Highlands arbitration as we manage our
assets and liabilities. In selecting the maturity of securities in which we invest, we consider
the relationship between the duration of our fixed maturity investments with the expected payout of
our liabilities for the discontinued bond program. There are no significant variations between the
maturity of our investments and the expected payout of our loss and LAE reserves for the
discontinued bond program.
We believe that both liquidity and interest rate risk can be minimized by the asset and liability
management strategy described above. With this strategy, we believe we can pay our policy
obligations as they become due without being required to use our line of credit or liquidate
intermediate-term and long-term investments at a loss; however, in the event that such action is
required, it is not anticipated to have a material impact on our results of operations, financial
condition and/or future liquidity.
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AND SUBSIDIARIES
AND SUBSIDIARIES
USA derives its funds principally from commissions and fees which are currently sufficient to meet
its operating expenses. USA dividends all of its excess funds to Bancinsurance Corporation on a
quarterly basis. Because USA is not an insurance company and is an Ohio limited liability company,
it is not subject to any restrictions on the payment of dividends other than laws affecting the
rights of creditors generally.
As the parent company, Bancinsurance Corporation generates no funds from operations. Bancinsurance
Corporations principal assets are the common shares of Ohio Indemnity and the membership interests
in USA, and its primary sources of funds are (1) dividends from Ohio Indemnity and USA, (2)
borrowings under its bank line of credit and (3) payments received from Ohio Indemnity and USA
under cost and tax sharing agreements. Historically, Bancinsurance Corporations expenses have
primarily consisted of payment of principal and interest on borrowings and legal and audit expenses
directly related to Bancinsurance Corporation, and it has been able to pay these expenses primarily
through use of its cash and invested assets, dividends from its subsidiaries and cost and tax
sharing payments from its subsidiaries.
During 2008, Bancinsurance Corporation experienced a significant increase in expenses and cash
outflow as a result of expenses associated with the SEC investigation. Based on managements
expectation that Bancinsurance Corporation would continue to incur significant expenses and have
significant cash outflows related to the SEC investigation during 2008, Bancinsurance Corporation
drew $2.5 million on its bank line of credit on March 31, 2008. Given the decrease in expenses
associated with the SEC investigation during 2009, Bancinsurance Corporation paid down the entire
$2.5 million balance on the bank line of credit during the second quarter of 2009. At September
30, 2009 and December 31, 2008, Bancinsurance Corporation had total cash and invested assets of
$1.3 million and $3.8 million, respectively. This decrease was primarily due to Bancinsurance
Corporation paying down the $2.5 million balance on the bank line of credit. As a result of the
Companys and the Chief Executive Officers settlements with the SEC, management expects that
Bancinsurance Corporations future expenses will return to historical levels and Bancinsurance
Corporation will be able to meet its cash flow requirements from the sources described above. See
Overview-SEC Investigation and Business Outlook-Expenses above, Critical Accounting
Policies-Guarantee Liabilities below and Note 13 to the Condensed Consolidated Financial
Statements for more information regarding the SEC investigation and related uncertainty associated
with Bancinsurance future expenses as they relate to the SEC investigation with respect to the
Chief Financial Officer and Vice President of Specialty Products.
On November 13, 2009, Bancinsurance Corporations board of directors declared a cash dividend of
$0.50 per share (approximately $2.6 million in the aggregate) payable on December 14, 2009 to
holders of record of its common shares as of the close of business on November 30, 2009. While
Bancinsurance Corporation has not historically paid cash dividends, we believe that, based on our
current capital levels in relation to our current cash requirements, the dividend provides a return
on capital to our shareholders without compromising our capital structure or materially impacting
our liquidity. The declaration and payment of future dividends (if any) are subject to the
discretion of Bancinsurance Corporations board of directors and will depend upon our results of
operations, financial condition, capital levels and requirements, cash requirements and future
prospects, any legal, tax, regulatory and contractual restrictions and other factors deemed
relevant by the board of directors. Accordingly, there can be no assurance that
Bancinsurance Corporation will declare and pay any future dividends.
Ohio Indemnity is restricted by the insurance laws of the State of Ohio as to amounts that can be
transferred to Bancinsurance Corporation in the form of dividends without the prior approval of the
Department. Ohio Indemnity may pay dividends without such prior approval only from earned surplus
and only to the extent that all dividends in the trailing twelve months do not exceed the greater
of 10% of its statutory surplus as of the end of the prior fiscal year or statutory net income for
the prior calendar year. During 2009, the maximum amount of dividends that may be paid to
Bancinsurance Corporation by Ohio Indemnity without such prior approval is $4,516,755. On October
26, 2009, Ohio Indemnitys board of directors declared a cash dividend in an aggregate amount of
$2.5 million that was paid to Bancinsurance Corporation on November 5, 2009. This dividend did not
have a material impact on the Companys liquidity.
As a property/casualty insurer, Ohio Indemnity is subject to a risk-based capital test adopted by
the NAIC and the Department. This test serves as a benchmark of an insurance enterprises solvency
by establishing statutory surplus targets which will require certain company level or regulatory
level actions. Ohio Indemnitys total adjusted capital was in excess of all required action levels
as of September 30, 2009.
Net cash provided by (used in) operating activities was $3,876,126 and $(3,864,187) for the first
nine months of 2009 and 2008, respectively. The increase in cash provided by operating activities
was primarily due to the following: (1) an approximately $3.9 million decrease in legal expenses
paid during the first nine months of 2009 when compared to a year ago related to the SEC
investigation; (2) an increase in net premiums collected of approximately $1.7 million primarily
attributable to $4.5 million of retrospective premium adjustment payments that were made in the
first nine months of 2008 compared to zero in first nine months of 2009, which was partially offset
by a $3.1 million decrease in net premiums collected for our lender service product line; and (3) a
decrease of approximately $2.0 million in net losses and policy acquisition costs paid for the
first nine months of 2009 compared to a year ago primarily due to the decline in lender service
business.
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BANCINSURANCE CORPORATION
AND SUBSIDIARIES
AND SUBSIDIARIES
Net cash (used in) provided by investing activities was $(3,539,771) and $79,537 for the first nine
months of 2009 and 2008, respectively. The decrease was primarily due to the use of certain
investment proceeds to fund operating cash requirements during the first nine months of 2008,
whereas for the first nine months of 2009, excess cash from operations was used to purchase
investments.
Net cash (used in) provided by financing activities was ($2,483,605) and $2,500,000 for the first
nine months of 2009 and 2008, respectively. The cash received in the first nine months of 2008 was
due to a $2,500,000 draw on our bank line of credit during that period. The cash used in the first
nine months of 2009 was primarily due to the pay down of the entire $2,500,000 bank line of credit
during the second quarter of 2009 as described above.
Given our historic cash flows and current financial condition, we believe that the cash flows from
operating and investing activities over the next year and our bank line of credit will provide
sufficient liquidity for the operations of the Company.
CRITICAL ACCOUNTING POLICIES
The preparation of the condensed consolidated 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. We base our estimates on historical experience and on
various assumptions that we believe to be reasonable under the circumstances. Actual results may
differ materially from these estimates, assumptions and judgments under different assumptions or
conditions. Set forth below are the critical accounting policies that we believe require
significant estimates, assumptions and judgments and are critical to an understanding of our
condensed consolidated financial statements.
Other-Than-Temporary Impairment of Investments
We continually monitor the difference between the book value and the estimated fair value of our
investments, which involves judgment 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 record the decline as a realized loss
through the income statement. If our judgment changes in the future, we may ultimately record a
realized loss for a security after having originally concluded that the decline in value was
temporary. We begin to monitor a security for other-than-temporary impairment when its fair value
to book value ratio falls below 80%. The following discussion summarizes our process and factors
considered when evaluating a security for potential impairment.
Fixed Maturity Securities. On a monthly basis, we review our fixed maturity securities 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); |
||
| 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 future prospects of the issuer, including any specific
events that may influence the issuers operations and its ability to make future
scheduled principal and interest payments on a timely basis; |
||
| the independent auditors report on the issuers most recent financial statements; |
||
| the judgment of our outside fixed income investment manager; |
||
| relevant rating history, analysis and guidance provided by rating agencies and
analysts; and |
||
| our intent to sell the security or the likelihood that we will be required to sell
the security before its anticipated recovery. |
We continually monitor the credit quality of our fixed maturity investments to gauge our ability to
be repaid principal and interest. We consider price declines of fixed maturity securities in our
other-than-temporary impairment analysis where such price declines provide evidence of declining
credit quality, and we distinguish between price changes caused by credit deterioration, as opposed
to rising interest rates. In our evaluation of credit quality, we consider, among other things,
credit ratings from major rating agencies, including Moodys Investors Services and Standard &
Poors.
Equity Securities. On a monthly basis, we review our equity securities 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; |
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| the financial condition and future prospects of the issuer, including any specific
events that may influence the issuers operations; |
||
| the recent income or loss of the issuer; |
||
| the independent auditors report on the issuers 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 estimated fair value. |
Under our investment guidelines, we employ what we believe are stringent diversification rules and
balance our investment credit risk and related underwriting risks to minimize total potential
exposure to any one security or type of security. Our fixed maturity and closed-end mutual fund
portfolio is managed by an outside investment manager that operates under investment guidelines
approved by our board of directors. Under our investment guidelines, fixed maturity securities are
required to be investment grade at the time of purchase to protect investments. As of September
30, 2009, approximately 98% of our fixed maturity portfolio was rated investment grade. Our
outside investment manager also monitors the underlying credit quality of our fixed maturity
portfolio. In performing our other-than-temporary impairment analysis for our fixed maturity
securities and closed-end mutual funds, we rely on the analysis of our outside investment manager
regarding the outlook and credit quality of the investment.
See Note 3 to the Condensed Consolidated Financial Statements for information regarding our
securities that were in an unrealized loss position at September 30, 2009 which were not considered
to be other-than-temporarily impaired. For more information concerning other-than-temporary
impairment charges, see Results of Operations-Other-Than-Temporary Impairments on Investments,
Business Outlook-Investments and Liquidity and Capital Resources above and Note 3 to the
Condensed Consolidated Financial Statements.
Loss and Loss Adjustment Expense Reserves
We utilize our internal staff, reports from ceding insurers under assumed reinsurance and an
independent consulting actuary in establishing our loss and LAE reserves. Our independent
consulting actuary reviews our reserves for losses and LAE on a quarterly basis and we consider
this review in establishing the amount of our reserves for losses and LAE.
Our projection of ultimate loss and 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 and LAE reserves. As a result, it is possible
that actual experience may be materially different than the estimates reported. We continually
revise reserve estimates as experience develops and further claims are reported and resolved.
Changes in reserve estimates are recorded in the results of operations in the period in which the
adjustments are made.
Assumed Business. Assumed reinsurance is a line of business with inherent volatility. Since
the length of time required for the losses to be reported through the reinsurance process can be
quite long, unexpected events are more difficult to predict. Our ultimate loss reserve estimates
for assumed reinsurance are dependent upon and based primarily on information received by us from
the underlying ceding insurers.
As discussed in Overview-Discontinued Bond Program above and in Discontinued Bond Program in
Note 8 to the Condensed Consolidated Financial Statements, discontinued bond program loss and LAE
reserves were $6.7 million at September 30, 2009. Given the uncertainties of the outcome of the
Highlands arbitration and receivership proceeding, uncertainties in the future loss information
provided by Harco and Highlands and the inherent volatility in assumed reinsurance, actual losses
incurred for the discontinued bond program could be materially different from our estimated
reserves. As a result, future loss development on the discontinued bond program could have a
material effect on our results of operations and/or financial condition.
For our assumed WIP program, we record loss and LAE reserves using a loss ratio reserving
methodology as recommended by the primary insurance carrier and reviewed by our independent
actuary. The loss ratio method calculates a reserve based on expected losses in relation to
premiums earned. For waste surety bonds, loss and LAE reserves are based on a certain percentage
of net premiums earned over the trailing thirty six months. For contract and escrow surety bonds,
loss and LAE reserves are based on a certain percentage of total net premiums earned.
Direct Business. For our direct business, estimates of ultimate loss and LAE reserves are
based on our historical loss development experience. In using this historical information, we
assume that past loss development is predictive of future loss development. Our assumptions allow
for changes in claims and underwriting operations, as now known or anticipated, which may impact
the level of required reserves or the emergence of losses. We do not currently 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 factors not currently recognized in our
historical data. However, it is possible that we may experience an increase in the frequency for
ULI and CPI losses and an increase in the severity for GAP losses as discussed in Business
Outlook-Lender Service Products above. 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 materially from our estimates and from amounts recorded by us.
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As of September 30, 2009, we conducted a reserve study using historical losses and LAE by product
line or coverage within product line. We prepared our estimates of the gross and net loss and LAE
reserves using annual accident year loss development triangles for the following products:
| ULI limited liability (ULIL) |
||
| ULI non-limited liability (ULIN) |
||
| CPI |
||
| GAP |
Historical age-to-age loss development factors (LDF) were calculated to measure the relative
development for each accident year from one maturity point to the next. Based on the historical
LDF, we selected age-to-age LDF that we believe are appropriate to estimate the remaining future
development for each accident year. These selected factors are used to project the ultimate
expected losses for each accident year. The validity of the results from using a loss development
approach can be affected by many conditions, such as claim department processing changes, a shift
between single and multiple payments per claim, legal changes or variations in our mix of business
from year to year. Also, because the percentage of losses paid for immature years is often low,
development factors are volatile. A small variation in the number of claims paid can have a
leveraging effect that can lead to significant changes in estimated ultimate losses. Therefore,
ultimate values for immature accident years may be based on alternative estimation techniques, such
as the expected loss ratio method or some combination of acceptable actuarial methods.
For our EPD, UC and WIP product lines, we prepared estimates of loss and LAE reserves using
primarily the expected loss ratio method. The estimated loss ratio is based on historical data
and/or loss assumptions related to the ultimate cost expected to settle such claims.
We record reserves on an undiscounted basis. Our reserves reflect anticipated salvage and
subrogation included as a reduction to loss and LAE reserves. 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.
In establishing our reserves, we tested our data for reasonableness, such as ensuring there are no
outstanding case reserves on closed claims, and consistency with data used in our previous
estimates. We found no material discrepancies or inconsistencies in our data. We did not
experience any significant change in the number of claims paid that was inconsistent with our
business, average claim paid or average claim reserve that would be inconsistent with the types of
risks we insured in the respective periods.
In performing our loss reserve analysis, we select a single loss reserve estimate for each product
line that represents managements best estimate based on facts and circumstances then known to
us. Prior to the second quarter of 2008, we also calculated high and low estimates for our lender
service product lines; however, we no longer perform such high and low estimates as the lender
service product lines do not exhibit significant volatility and such additional information is not
considered useful to management.
Equity-Based Compensation Expense
The fair value of stock options granted by us are estimated on the date of grant using the
Black-Scholes option pricing model (Black-Scholes model). The Black-Scholes model utilizes
ranges and assumptions such as risk-free rate, expected life, expected volatility and dividend
yield. The risk-free rate is based on the United States Treasury strip curve at the time of the
grant with a term approximating that of the expected option life. We analyze historical data
regarding option exercise behaviors, expirations and cancellations to calculate the expected life
of the options granted, which represents the length of time in years that the options granted are
expected to be outstanding. Expected volatilities are based on historical volatility over a period
of time using the expected term of the option grant and using weekly stock prices of the Company;
however, for options granted after February 4, 2005, we exclude the period from February 4, 2005
through January 25, 2006 (the period in which shareholders could not obtain current financial
information for the Company and could not rely on the Companys 2003, 2002 and 2001 financial
statements) as we believe that our stock price during that period is not relevant in evaluating
expected volatility of the common shares in the future. Dividend yield is based on historical
dividends. See Note 6 to the Condensed Consolidated Financial Statements for more information
concerning our equity-based compensation expense.
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Legal Matters
We are involved in various legal proceedings arising in the ordinary course of business. An
estimate is made to accrue for a loss contingency relating to any of these legal proceedings if we
believe it is probable that a liability was incurred as of the date of the financial statements and
the amount of loss can be reasonably estimated. Because of the subjective nature inherent in
assessing the outcome of litigation and the potential that an adverse outcome in a legal proceeding
could have a material impact on our financial condition and/or results of operations, such
estimates are considered to be critical accounting estimates. See Note 9 to the Condensed
Consolidated Financial Statements for information concerning the Companys commitments and
contingencies.
Guarantee Liabilities
As disclosed in Note 13 to the Condensed Consolidated Financial Statements, we account for the
undertaking agreements related to the SEC investigation as guarantee liabilities. Due to the
inherent uncertainties of the SEC investigation as it relates to the Chief Financial Officer and
Vice President of Specialty Products, actual future payments related to the undertaking agreements
may be materially different than the guarantee liability recorded at September 30, 2009. Because
of the subjective nature inherent in assessing the estimated future costs associated with the
undertaking agreements and the potential that our estimated future costs may be materially
different than our actual future costs, such estimates are considered to be critical accounting
estimates. See Overview-SEC Investigation, Business Outlook-Expenses and Liquidity and
Capital Resources above and Note 13 to the Condensed Consolidated Financial Statements for more
information regarding the SEC investigation.
Deferred Policy Acquisition Costs
Costs of acquiring insurance business that vary with, and are primarily related to, the production
of new and renewal business are deferred and amortized over the period in which the related
premiums are recognized. Such deferred costs principally consist of up-front commissions and
premium taxes and are reported net of ceding commissions. The method followed in computing
deferred policy acquisition costs limits the amount of such deferred costs to their estimated
realizable value, which gives effect to the premium to be earned, anticipated investment income,
anticipated losses and settlement expenses and certain other costs expected to be incurred as the
premium is earned. Judgments as to the ultimate recoverability of such deferred costs are highly
dependent upon estimated future losses associated with the unearned premium. If such deferred
policy acquisition costs are estimated to be unrecoverable, they will be expensed in the period
identified.
OFF-BALANCE SHEET ARRANGEMENTS
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 we believe to be material to investors.
Item 4. Controls and Procedures
With the participation of our principal executive officer and principal financial officer, our
management has evaluated the effectiveness of our disclosure controls and procedures (as defined in
Rules 13a-15(e) and 15d-15(e) of 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.
In addition, there were no changes that occurred during the last fiscal quarter in our internal
control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act)
that have materially affected, or are reasonably likely to materially affect, our internal control
over financial reporting.
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PART II OTHER INFORMATION
Item 1. Legal Proceedings
Highlands Arbitration. See Overview-Discontinued Bond Program and Business
Outlook-Expenses in Item 2 of Part I above and Discontinued Bond Program in Note 8 to the
Condensed Consolidated Financial Statements for information concerning the Highlands arbitration.
SEC Investigation. See Overview- SEC Investigation, Business Outlook-Expenses and
Liquidity and Capital Resources in Item 2 of Part I above and Note 13 to the Condensed
Consolidated Financial Statements for information concerning the SEC investigation.
In addition, we are involved in other legal proceedings arising in the ordinary course of business
which are routine in nature and incidental to our business. We currently believe that none of
these matters, either individually or in the aggregate, is reasonably likely to have a material
adverse effect on our financial condition, results of operations or liquidity. However, because
litigation is subject to inherent uncertainties and the outcome of such matters cannot be predicted
with reasonable certainty, there can be no assurance that any one or more of these matters will not
have a material adverse effect on our financial condition, results of operations and/or liquidity.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The following table provides information with respect to any purchase made by or on behalf of the
Company or any affiliated purchaser (as defined in Rule 10b-18(a)(3) under the Exchange Act) of
common shares of the Company during the third quarter 2009:
Issuer Purchases of Equity Securities
Total number of | Maximum number (or | |||||||||||||||
shares (or units) | approximate dollar value) | |||||||||||||||
Total number | Average price | purchased as part | of shares (or units) that may | |||||||||||||
of shares (or units) | paid per share | of publicly announced | yet be purchased under the | |||||||||||||
Period | purchased | (or unit) | plans or programs | plans or programs | ||||||||||||
Month #1 (July 1, 2009
through July 31, 2009) |
4,822 | (1) | 3.40 | (1) | | | ||||||||||
Month #2 (August 1, 2009
through August 31, 2009) |
| | | | ||||||||||||
Month #3 (September 1, 2009
through September 30, 2009) |
| $ | | | | |||||||||||
Total |
4,822 | $ | 3.40 | | | |||||||||||
(1) | The 4,822 common shares were acquired by the Company in connection with the delivery
by certain participants in our 2002 Stock Incentive Plan of common shares already owned by such
participants as payment for tax withholdings associated with the vesting of restricted common
shares on July 31, 2009. |
Item 6. Exhibits
Exhibits | ||
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 and Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
* | Filed with this Quarterly Report on Form 10-Q. |
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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 16, 2009
|
By: | /s/ John S. Sokol
Chairman, Chief Executive Officer and President (Principal Executive Officer) |
||||
Date: November 16, 2009
|
By: | /s/ Matthew C. Nolan | ||||
Matthew C. Nolan Vice President, Chief Financial Officer, Treasurer and Secretary (Principal Financial Officer and Principal Accounting Officer) |
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