<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
Quarterly Report Under Section 13 or 15 (d)
of the Securities Exchange Act of 1934
____________________________________________________
For Quarter Ended Commission file number
September 30, 1996 0-5534
BALDWIN & LYONS, INC.
(Exact name of registrant as specified in its charter)
INDIANA 35-0160330
-------- -----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
1099 North Meridian Street, Indianapolis, Indiana 46204
- - ------------------------------------------------- ------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (317) 636-9800
---------------
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, and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of November 6, 1996:
TITLE OF CLASSNUMBER OF SHARES OUTSTANDING
Common Stock, No Par Value:
Class A (voting) 2,444,329
Class B (nonvoting) 11,591,545
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1 FINANCIAL STATEMENTS
- - ----------------------------
<TABLE>
BALDWIN & LYONS, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<CAPTION>
September 30 December 31
1996 1995
------------ ------------
<C> <C>
<S>
ASSETS
Investments:
Fixed maturities $ 273,610 $ 279,083
Equity securities 110,814 98,428
Short-term and other 42,441 47,322
--------- ---------
426,865 424,833
Cash 3,321 1,369
Accounts receivable 14,031 13,174
Reinsurance recoverable 51,096 54,702
Investments in equity
subsidiary and its affiliates 9,910 9,582
Other assets 10,390 8,565
--------- ---------
$ 515,613 $ 512,225
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Reserves for losses and loss expenses $ 208,883 $ 211,489
Reserves for unearned premiums 9,994 8,262
Accounts payable and accrued expenses 37,796 43,895
Deferred federal income taxes 2,515 833
Currently payable federal income taxes 791 738
--------- ---------
259,979 265,217
Shareholders' equity:
Common stock-no par value 752 777
Additional paid-in capital 42,108 43,620
Unrealized net gains on investments 22,804 19,251
Retained earnings 189,970 183,360
--------- ---------
255,634 247,008
--------- ---------
$ 515,613 $ 512,225
========= =========
Number of common and common
equivalent shares outstanding 14,237,238 14,716,630
Book value per outstanding share $17.96 $16.78
See notes to condensed consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
BALDWIN & LYONS, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September
1996 1995 1996 1995
-------- -------- -------- --------
<C> <C> <C> <C>
<S>
REVENUES
Net premiums earned $ 13,971 $ 14,386 $ 45,407 $ 42,928
Net investment income 4,832 4,738 14,695 14,007
Realized net gains on investments 1,775 5,154 5,459 6,880
Commissions and other income 233 250 892 913
-------- -------- -------- --------
20,811 24,528 66,453 64,728
EXPENSES
Losses and loss expenses incurred 7,418 7,859 27,403 27,787
Other operating expenses 5,102 4,350 15,211 12,524
-------- -------- -------- --------
12,520 12,209 42,614 40,311
-------- -------- -------- --------
INCOME FROM CONTINUING OPERATIONS BEFORE
FEDERAL INCOME TAXES AND EQUITY SUBSIDIARY 8,291 12,319 23,839 24,417
Federal income taxes 2,682 4,090 7,715 7,577
-------- -------- -------- --------
NET INCOME FROM CONTINUING OPERATIONS
BEFORE EQUITY SUBSIDIARY 5,609 8,230 16,124 16,840
Income (loss) from equity subsidiary,
net of federal income taxes (19) 248 250 341
-------- -------- -------- --------
NET INCOME FROM CONTINUING OPERATIONS 5,590 8,477 16,374 17,181
DISCONTINUED OPERATIONS,
NET OF FEDERAL INCOME TAXES
Income from operations of
Hoosier Insurance Company - 600 - 742
Gain on sale of Hoosier Insurance Company - 7,464 - 7,464
-------- -------- -------- --------
NET INCOME $ 5,590 $ 16,541 $ 16,374 $ 25,387
======== ======== ======== ========
PER SHARE DATA
Average number of common and common
equivalent shares outstanding 14,264,064 14,844,460 14,398,430 14,997,120
Income before discontinued
operations and realized net gains $ .31 $ .34 $ .89 $ .85
Realized net gains on investments .08 .23 .25 .30
Income from operations of
Hoosier Insurance Company - .04 - .05
Gain on sale of Hoosier Insurance Company - .50 - .50
-------- -------- -------- --------
NET INCOME $ .39 $ 1.11 $ 1.14 $ 1.70
======== ======== ======== ========
Dividends $ .10 $ .08 $ .26 $ .22
======== ======== ======== ========
See notes to condensed consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
BALDWIN & LYONS, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<CAPTION>
Nine months ended
September 30
1996 1995
-------- --------
<C> <C>
<S>
Net cash provided by operating activities $ 7,444 $ 12,518
Investing activities:
Purchases of long-term investments (156,642) (182,160)
Proceeds from sales or maturities
of long term investments 154,524 169,462
Net sales of short-term investments 7,024 5,082
Investment in equity subsidiary 2,506 3,680
Other investing activities (1,542) (413)
-------- --------
Net cash provided by (used in) investing activities 5,870 (4,349)
Financing activities:
Dividends paid to shareholders (3,704) (3,255)
Cost of treasury stock (7,658) (5,362)
Proceeds from sales of common stock - 1,200
-------- --------
Net cash used in financing activities (11,362) (7,417)
-------- --------
Increase in cash 1,952 752
Cash at beginning of year 1,369 531
-------- --------
Cash at end of period $ 3,321 $ 1,283
======== ========
See notes to condensed consolidated financial statements.
</TABLE>
<PAGE>
NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(1) The accompanying unaudited condensed financial statements have been
prepared in accordance with the instructions to Form 10Q and do not include all
of the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary for
fair presentation have been included. Operating results for the interim periods
are not necessarily indicative of the results that may be expected for the year
ended December 31, 1996. Interim financial statements should be read in
conjunction with the Company's annual audited financial statements.
(2) The effective federal income tax rate is less than the statutory rate for
the periods ended September 30, 1996 and September 30, 1995 due primarily to tax
- - -exempt investment income.
(3) The following line items from the Statements of Income are presented net of
the reinsurance amounts shown below.
<TABLE>
<CAPTION>
1996 1995
-------- --------
<C> <C>
<S>
Quarter ended September 30:
Net premiums earned $ 2,765 $ 3,814
Losses and loss expenses 3,137 6,527
Other operating expenses (194) (370)
Nine months ended September 30:
Net premiums earned 9,639 12,462
Losses and loss expenses 5,138 17,913
Other operating expenses (805) (1,211)
</TABLE>
<PAGE>
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
- - ---------------------------------------------------------
CONDITION AND RESULTS OF OPERATIONS
- - -----------------------------------
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
The Company generally experiences positive cash flow from operations resulting
from the fact that premiums are collected on insurance policies in advance of
the disbursement of funds in payment of claims. Operating costs of the
property/casualty insurance subsidiaries, other than loss and loss expense
payments and commissions paid to related agency companies, generally average
between 15% and 20% of premiums earned and the remaining amount is available for
investment for varying periods of time pending the settlement of claims relating
to the insurance coverage provided. For the nine months ended September 30,
1996, positive cash flow from operations totaled $7.4 million, a decrease from
$12.5 million generated during the first nine months of 1995. This decrease was
the result of a decline in cash flows from premiums, reinsurance payments made
under contingency provisions of certain treaties and an increase in federal
income tax estimated payments. These decreases were partially offset by a
decline in losses and loss expenses paid. Recent cash flows have, at times,
lagged behind those of earlier periods because of declining premium volume in
retrospectively rated workers' compensation and fleet trucking liability
businesses. Management expects premium revenues from these products to continue
trending downward during 1996 as the result of competitive pressures in the
trucking insurance markets. It is expected that this decline in trucking
insurance revenues will be mitigated somewhat by anticipated growth in Company's
private passenger automobile program.
For several years, the Company's investment philosophy has emphasized the
purchase of relatively short-term instruments with maximum quality and
liquidity. The average life of the Company's investment portfolio was
approximately 3 years at September 30, 1996.
The Company's assets at September 30, 1996 included $31.6 million in investments
classified as short-term which were readily convertible to cash without
significant market penalty. In addition, fixed maturity investments totaling
$21.0 million will mature prior to December 31, 1996. The Company believes
that these liquid investments are more than sufficient to provide for projected
claim payments and operating cost demands even during a period of declining
premium volume.
Consolidated shareholders' equity totaled $255.6 million at September 30, 1996
and includes $228.5 million representing GAAP shareholder's equity of insurance
subsidiaries, of which $33.7 million may be transferred by dividend or loan to
the parent company without approval by, or notification to, regulatory
authorities. An additional $177.9 million of shareholder's equity of such
insurance subsidiaries may be advanced or loaned to the Company with prior
notification to, and approval from, regulatory authorities. At September 30,
1996, approximately $1.0 million of the Company's consolidated shareholders'
equity represents undistributed earnings of Amli Realty, Inc. and its
affiliates. See comments regarding Amli under Item 5 - Other Information. The
Company believes that these restrictions pose no material liquidity concerns to
the Company. The financial strength and stability of the subsidiaries would
permit ready access by the parent company to short-term and long-term sources of
credit, if necessary. In addition, the parent company had cash and marketable
securities of $42.1 million at September 30, 1996.
RESULTS OF OPERATIONS
---------------------
COMPARISONS OF THIRD QUARTER, 1996 TO THIRD QUARTER, 1995
---------------------------------------------------------
Net premiums earned decreased $.4 million during the third quarter of 1996 as
compared to the same period of 1995. The decreased premium volume is primarily
attributable to decreases in premiums from the Company's large and medium fleet
trucking products of $1.8 million and $.3 million, respectively. In addition,
premiums from the Company's workers' compensation products and voluntary
reinsurance assumed from catastrophe pools decreased by $.5 million and $.6
million, respectively. These decreases were partially offset by increases in
premiums from the Company's private passenger automobile and independent
contractor products of $2.0 million and $.9 million, respectively. Trucking
insurance markets continue to be increasingly competitive and, as a result,
premium volume is expected to be lower over the near term.
Net investment income increased $.1 million (2.0%) during the third quarter of
1996 as increases in invested assets were partially offset by decreases in
yields. Overall pretax yields decreased from 5.6% during the third quarter of
1995 to 5.2% for the current quarter while after tax yields decreased from 3.9%
during the third quarter of 1995 to 3.7% for the third quarter of 1996.
The third quarter 1996 net realized gain of $1.8 million consists of net gains
on equity securities and short-term investments of $1.2 and $.7 million,
respectively, and net losses of $.1 million on other securities.
Losses and loss expenses incurred during the third quarter of 1996 decreased $.4
million from that experienced during the third quarter of 1995. The decrease is
due primarily to favorable experience in the Company's medium fleet trucking and
independent contractor products which decreased $1.7 million and $.8 million,
respectively. The 1995 quarter also included approximately $.9 million in
assumed losses from former subsidiary, Hoosier Insurance Company. These
decreases were partially offset by an increase in losses from the Company's
large fleet trucking business of $1.5 million. In addition, losses from the
Company's private passenger automobile product increased $1.6 million due to
continued growth. Loss and loss expense ratios for the comparative third
quarters were as follows:
<TABLE>
<CAPTION>
1996 1995
----- -----
<C> <C>
<S>
Fleet trucking 50.8% 54.3%
Voluntary reinsurance assumed 33.8 51.2
Small fleet trucking 42.7 70.1
Private passenger automobile 75.7 66.0
Residual market, assigned risk
and all other 95.3 44.7
All lines 53.1 54.6
</TABLE>
Other operating expenses for the third quarter of 1996 increased $.8 million
from the third quarter of 1995. The consolidated expense ratio of the Company's
insurance subsidiaries was 30.6% for the third quarter of 1996 compared to 28.0%
for the third quarter of 1995 due primarily to the higher average commission
rates on private passenger automobile business. In addition, commission rates
on certain of the fleet trucking products were increased during the 1996
quarter. The current quarter expense ratio was also impacted by fixed expenses
attributable to the fleet trucking business as premium volume declined. The
ratio of consolidated other operating expenses to total revenue (excluding
realized gains) increased to 26.8% during the third quarter of 1996 compared to
22.5% for the 1995 third quarter due largely to increases in average commission
rates, lower premium volume from fleet trucking and new product development
costs incurred by the parent company.
The effective federal tax rate for consolidated operations for the third quarter
of 1996 was 32.4% and is less than the statutory rate primarily because of tax
exempt investment income.
As a result of the factors mentioned above, principally the decrease in realized
capital gains after tax of $2.2 million, income from consolidated operations
decreased $2.6 million (31.9%) during 1996 compared with the 1995 third quarter.
The Company's ownership of Amli Realty Inc. increased to 39% during the third
quarter of 1996. The Company's share of Amli's net operating loss was $19,000
for the third quarter of 1996 compared to net income of $247,000 for the third
quarter of 1995. See comments under Item 5 - Other Information, following.
COMPARISONS OF NINE MONTHS ENDED SEPTEMBER 30, 1996 TO
------------------------------------------------------
NINE MONTHS ENDED SEPTEMBER 30, 1995
------------------------------------
Net premiums earned increased $2.5 million (5.8%) during the first nine months
of 1996 as compared to the same period of 1995. This increase is due primarily
to growth in the Company's private passenger automobile product of $5.6 million
In addition, premiums from the Company's independent contractor and small fleet
programs increased $1.9 million and $.8 million, respectively. Premiums from
workers' compensation products also increased $1.8 million, $1.3 million of
which is attributable to loss development on retrospectively rated policies
written in prior years. These increases were offset by a $6.2 million decrease
in trucking premiums, primarily from large fleet, and a combined $1.4 million
decrease in premiums from voluntary and involuntary reinsurance assumed
business. The fleet trucking premium decreases result from the non-renewal of
certain accounts as well as premium reductions and lower net retentions on
accounts renewed during 1996.
Net investment income increased by $.7 million (4.9%) during the first nine
months of 1996 compared to the same period in 1995 for the same reasons
mentioned above for the quarterly comparison. Overall pretax yields decreased
to 5.3% from 5.6% a year earlier while after tax yields decreased from 3.9%
during the first nine months of 1995 to 3.7% for the first nine months of 1996.
The net realized gain on investments of $5.5 million for the first nine months
of 1996 consists of net gains of $4.7 million on equity securities and $.8
million on other investments.
Losses and loss expenses incurred during the first nine months of 1996 were $.4
million lower than the same period of 1995. Medium fleet losses incurred
decreased $5.5 million during the first nine months of 1996 compared to 1995.
In addition, voluntary and involuntary reinsurance assumed losses decreased a
combined $2.3 million for the current year to date compared to the 1995 period.
These decreases were substantially offset by large fleet trucking losses and
growth in the Company's private passenger automobile program resulting in
increases in losses incurred of $3.1 and $4.3 million, respectively.
Loss and loss expense ratios for the comparative nine month periods were as
follows:
<TABLE>
<CAPTION>
1996 1995
----- -----
<C> <C>
<S>
Fleet trucking 62.5% 63.6%
Voluntary reinsurance assumed 39.0 60.6
Small fleet trucking 68.1 99.2
Private passenger automobile 74.7 70.6
Residual market, assigned risk
and all other 50.4 101.8
All lines 60.3 64.7
</TABLE>
Other operating expenses increased $2.7 million (21.5%) during the first nine
months of 1996 compared to the same period of 1995. The consolidated expense
ratio of the Company's insurance subsidiaries was 26.8% for 1996 compared to
29.0% for 1995 due to lower commission rates on most trucking insurance products
effective in 1996 and cost reductions resulting from departmental restructurings
completed during the last half of 1995. The ratio of other operating expenses
to total revenue (excluding realized gains) was 24.9% for 1996 compared to 21.7%
for 1995 due largely to new product development costs incurred by the parent
company.
The effective federal tax rate for consolidated operations for the first nine
months of 1996 was 32.4% and is less than the statutory rate primarily because
of tax exempt investment income.
As a result of the factors mentioned above, principally the decrease in realized
capital gains after tax of $.9 million, income from consolidated operations for
the first nine months of 1996 was $16.1 million, down $.8 million from the
comparable 1995 period.
The Company's share of Amli's net operating income, combined with losses from
its stock transactions, was a net $250,000 in income for the first nine months
of 1996 compared to net income of $341,000 for the same period of 1995. See
comments under Item 5 - Other Information, following.
<PAGE>
PART II - OTHER INFORMATION
ITEM 5 OTHER INFORMATION
- - ------------------------
On October 15, 1996, Amli Realty Co., the Company's 39% owned unconsolidated
subsidiary, entered into an agreement with UICI, a publicly traded financial
services and insurance company, which will result in UICI acquiring all of
Amli's outstanding stock. Upon the anticipated closing of this agreement in
November, the Company will receive approximately 617,000 shares of UICI common
stock which has a current market value of $17.0 million. The Company's book
value of Amli stock to be exchanged was $7.4 million at September 30, 1996.
This exchange will be treated as a tax free reorganization and will result in an
increase in the Company's book value of approximately $.44 per share, using
current market values.
ITEM 6 (a) EXHIBITS
- - --------------------
Number and caption from Exhibit
Table of Regulation S-K Item 601 Exhibit No.
- - -------------------------------- -----------
(11) Statement regarding computation EXHIBIT 11 --
of per share earnings Computation of Per Share
Earnings
(27) Financial Data Schedules EXHIBIT 27
Item 6 (b) REPORTS ON FORM 8-K
- - -------------------------------
No reports on Form 8-K have been filed by the registrant during the three months
ended September 30, 1996.
<PAGE>
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.
BALDWIN & LYONS, INC.
Date November 6, 1996 By /s/ Gary W. Miller
------------------- -----------------------------
Gary W. Miller, President and
Chief Operating Officer
Date November 6, 1996 By /s/ G. Patrick Corydon
------------------- -----------------------------
G. Patrick Corydon,
Vice President - Finance
(Principal Financial and
Accounting Officer)
<PAGE>
BALDWIN & LYONS, INC.
Form 10-Q for the fiscal quarter
ended September 30, 1996
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit Number Description Method of Filing
- - -------------- -------------------------- -----------------------------
<S> <C> <C>
EXHIBIT 11 Computation of Per Share Filed herewith electronically
Earnings
EXHIBIT 27 Financial Data Schedules Filed herewith electronically
</TABLE>
<PAGE>
<TABLE>
Baldwin & Lyons, Inc.
Form 10-Q, Exhibit 11
Computation of Earnings Per Share
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
1996 1995 1996 1995
----------- ----------- ----------- -----------
<C> <C> <C> <C>
<S>
Primary:
Average number of shares
outstanding 14,098,344 14,706,330 14,233,364 14,816,181
Dilutive stock options--based on
treasury stock method using
average market price 165,720 138,130 165,066 180,939
---------- ---------- ---------- ----------
Totals 14,264,064 14,844,460 14,398,430 14,997,120
========== ========== ========== ==========
Net Income $ 5,590,777 $16,542,004 $16,374,455 $25,387,465
=========== =========== =========== ===========
Per share amount $ .39 $ 1.11 $ 1.14 $ 1.70
======= ======== ======== ========
Fully Diluted:
Average number of shares
outstanding 14,098,344 14,706,330 14,233,364 14,816,181
Dilutive stock options--based on
treasury stock method using
average market price 165,720 138,130 165,414 180,939
---------- ---------- ---------- ----------
Totals 14,264,064 14,844,460 14,398,778 14,997,120
========== ========== ========== ==========
Net Income $ 5,590,777 $16,542,004 $16,374,455 $25,387,465
=========== =========== =========== ===========
Per share amount $ .39 $ 1.11 $ 1.14 $ 1.70
======= ======== ======== ========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated balance sheets and consolidated statements of operations enclosed
herein electronically in Form 10Q for the year-to-date, and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<DEBT-HELD-FOR-SALE> 273,610
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 110,814
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 426,865
<CASH> 3,321
<RECOVER-REINSURE> 8,145
<DEFERRED-ACQUISITION> 1,316
<TOTAL-ASSETS> 515,613
<POLICY-LOSSES> 208,883
<UNEARNED-PREMIUMS> 9,994
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 7,455
<NOTES-PAYABLE> 0
0
0
<COMMON> 752
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 515,613
45,407
<INVESTMENT-INCOME> 14,695
<INVESTMENT-GAINS> 5,459
<OTHER-INCOME> 892
<BENEFITS> 27,403
<UNDERWRITING-AMORTIZATION> 4,105
<UNDERWRITING-OTHER> 3,318
<INCOME-PRETAX> 23,839
<INCOME-TAX> 7,715
<INCOME-CONTINUING> 16,124
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 16,374
<EPS-PRIMARY> 1.14
<EPS-DILUTED> 1.14
<RESERVE-OPEN> 161,458<F1>
<PROVISION-CURRENT> 33,078<F1>
<PROVISION-PRIOR> (5,675)<F1>
<PAYMENTS-CURRENT> 7,925<F1>
<PAYMENTS-PRIOR> 21,499<F1>
<RESERVE-CLOSE> 159,437<F1>
<CUMULATIVE-DEFICIENCY> 0
<FN>
<F1>All loss data is presented net of applicable reinsurance recoverable.
</FN>
</TABLE>
