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
March 31, 1997 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 May 9, 1997:
TITLE OF CLASS NUMBER OF SHARES OUTSTANDING
Common Stock, No Par Value:
Class A (voting) 2,436,379
Class B (nonvoting) 11,396,059
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>
MARCH 31 December 31
1997 1996
----------- -----------
<C> <C>
<S>
ASSETS
Investments:
Fixed maturities $ 270,105 $ 273,828
Equity securities 122,504 147,196
Short-term and other 21,671 22,223
--------- ---------
414,280 443,247
Cash and cash equivalents 27,170 12,117
Accounts receivable 15,134 13,967
Reinsurance recoverable 40,315 43,829
Current federal income taxes - 568
Other assets 11,036 12,732
--------- ---------
$ 507,935 $ 526,460
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Reserves for losses and loss expenses $ 194,321 $ 196,939
Reserves for unearned premiums 12,425 10,835
Accounts payable and accrued expenses 30,912 34,830
Deferred federal income taxes 5,749 10,734
Currently payable federal income taxes 868 -
--------- ---------
244,275 253,338
Shareholders' equity:
Common stock-no par value 738 744
Additional paid-in capital 41,709 42,100
Unrealized net gains on investments 26,092 38,472
Retained earnings 195,121 191,806
--------- ---------
263,660 273,122
--------- ---------
$ 507,935 $ 526,460
========= =========
Number of common and common
equivalent shares outstanding 13,998,312 14,034,248
Book value per outstanding share $18.84 $19.46
</TABLE>
See notes to condensed consolidated financial statements.
BALDWIN & LYONS, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
MARCH 31
1997 1996
----------- -----------
<C> <C>
<S>
REVENUES
Net premiums earned $ 13,322 $ 15,294
Net investment income 4,611 4,986
Realized net gains on investments 5,444 579
Commissions and other income 378 328
--------- ---------
23,755 21,187
EXPENSES
Losses and loss expenses incurred 8,863 9,761
Other operating expenses 5,202 5,116
--------- ---------
14,065 14,877
INCOME FROM CONTINUING OPERATIONS
BEFORE FEDERAL INCOME TAXES 9,690 6,310
Federal income taxes 3,117 2,040
--------- ---------
NET INCOME FROM CONTINUING OPERATIONS 6,573 4,270
Discontinued operations,
net of federal income taxes - 241
--------- ---------
NET INCOME $ 6,573 $ 4,511
========= =========
PER SHARE DATA
Average number of common and common
equivalent shares outstanding 14,063,048 14,596,622
Income before discontinued
operations and realized net gains $ .22 $ .26
Realized net gains on investments .25 .03
Discontinued operations - .02
--------- ---------
NET INCOME $ .47 $ .31
========= =========
Dividends $ .10 $ .08
========= =========
</TABLE>
See notes to condensed consolidated financial statements.
BALDWIN & LYONS, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
Three months ended
March 31
1997 1996
----------- -----------
<C> <C>
<S>
Net cash provided by operating activities $ 3,555 $ 4,784
Investing activities:
Purchases of long-term investments (61,770) (63,975)
Proceeds from sales or maturities
of long term investments 75,603 58,588
Net sales of short-term investments 2,011 3,455
Distributions from limited partnerships 130 2,427
Other investing activities (845) (326)
--------- ---------
Net cash provided by investing activities 15,129 169
Financing activities:
Dividends paid to shareholders (1,386) (1,163)
Cost of treasury stock (2,246) (4,803)
Proceeds from sales of common stock 1 -
--------- ---------
Net cash used in financing activities (3,631) (5,966)
--------- ---------
Increase (decrease) in
cash and cash equivalents 15,053 (1,013)
Cash and cash equivalents
at beginning of year 12,117 18,014
--------- ---------
Cash and cash equivalents
at end of period $ 27,170 $ 17,001
========= =========
</TABLE>
See notes to condensed consolidated financial statements.
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, 1997. Interim financial statements should be read in
conjunction with the Company's annual audited financial statements.
(2) Certain prior year balances have been reclassified to conform to the
current period presentation.
(3) The effective federal income tax rate is less than the statutory rate for
the periods ended March 31, 1997 and March 31, 1996 due primarily to tax-exempt
investment income.
(4) The following line items from the Statements of Income are presented net of
the reinsurance amounts shown below.
<TABLE>
<CAPTION>
Quarter Ending
March 31
1997 1996
--------- ---------
<C> <C>
<S>
Net premiums earned $ 1,955 $ 4,012
Losses and loss expenses (2,915) 5,086
Other operating expenses (209) (491)
</TABLE>
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 30% 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 three months ended March 31, 1997,
positive cash flow from operations totaled $3.6 million, a decrease from $4.8
million generated during the first quarter of 1996, due primarily to the decline
in the Company's premium volume. Recent cash flows have, at times, lagged
behind those of earlier periods because of declining premium volume in
retrospectively rated workers' compensation and large fleet trucking liability
businesses. Management expects premium revenues to continue trending downward
during 1997 as the result of competitive pressures in the trucking insurance
markets. This decline in trucking insurance revenues is expected to be
mitigated somewhat by continued growth in Company's personal 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 March 31, 1997. The Company would benefit from
increasing interest rates since a large portion of its investment portfolio is
available for reinvestment.
The Company's assets at March 31, 1997 included $35.1 million in investments
classified as short-term or cash equivalents which were readily convertible to
cash without significant market penalty. In addition, fixed maturity
investments totaling $69.5 million will mature prior to December 31, 1997. 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 $263.7 million at March 31, 1997 and
includes $235.1 million representing GAAP shareholder's equity of insurance
subsidiaries, of which $43.0 million may be transferred by dividend or loan to
the parent company without approval by, or notification to, regulatory
authorities. An additional $173.9 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. 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 valued at $51.2 million at March 31, 1997.
RESULTS OF OPERATIONS
---------------------
COMPARISONS OF FIRST QUARTER, 1997 TO FIRST QUARTER, 1996
---------------------------------------------------------
Net premiums earned decreased $2.0 million during the first quarter of 1997 as
compared to the same period of 1996. The decreased premium volume is primary
attributable to decreases in premiums from the Company's large and medium fleet
trucking products totaling $2.3 million. In addition, premiums from the
Company's workers' compensation products decreased by $1.2 million. All of
these decreases are attributable to the non-renewal of business and lower rates
on policies renewed resulting from the intense competition in the large fleet
trucking insurance market during 1996 and continuing into 1997. These decreases
were partially offset by an increase in premiums from the Company's private
passenger automobile product of $1.7 million or more than double the premium
earned in the first quarter of 1996.
Net investment income decreased $.4 million (7.5%) during the first quarter of
1997, as compared to the first quarter of 1996, due to decreases in yields in
nearly all investment categories. Overall pretax yields decreased from 5.4%
during the first quarter of 1996 to 5.0% for the current quarter while after tax
yields decreased from 3.8% during the first quarter of 1996 to 3.5% for the
first quarter of 1997.
The first quarter 1997 net realized gain of $5.4 million consists of net gains
on equity securities of $5.5 million and net losses on short-term investments of
$.1 million.
Losses and loss expenses incurred during the first quarter of 1997 decreased $.9
million from that experienced during the first quarter of 1996. The decrease is
due primarily to declines in premium volume in the Company's large fleet
trucking products. The large fleet trucking decreases were partially offset by
increases, due to continued growth, in losses from the Company's private
passenger automobile business. Loss and loss expense ratios for the comparative
first quarters were as follows:
<TABLE>
<CAPTION>
1997 1996
-------- --------
<C> <C>
<S>
Large and medium fleet trucking 68.4% 60.9%
Voluntary reinsurance assumed 45.5 45.0
Private passenger automobile 74.2 84.8
Small fleet trucking 57.5 134.7
Residual market and assigned risk - 55.7
All lines 66.5 63.8
</TABLE>
Other operating expenses for the first quarter of 1997 were level with that of
the first quarter of 1996. The consolidated expense ratio of the Company's
insurance subsidiaries, however, was 31.5% for the first quarter of 1997
compared to 25.6% for the first quarter of 1996. The increase in the
consolidated expense ratio reflects a decline in trucking premium relative to
fixed costs and startup expenses, with insufficient volume to minimize ratios,
in the Company's new product lines. The ratio of consolidated other operating
expenses to total revenue (adjusted for realized gains) increased to 28.4%
during the first quarter of 1997 compared to 24.8% for the 1996 first quarter.
The effective federal tax rate for consolidated operations for the first quarter
of 1997 was 32.2% and is less than the statutory rate primarily because of tax
exempt investment income.
As a result of the factors mentioned above, income from consolidated operations
increased $2.3 million (54.0%) during 1997 compared with the 1996 first quarter.
FORWARD-LOOKING INFORMATION
---------------------------
Any forward-looking statements in this report, including without limitation,
statements relating to the Company's plans, strategies, objectives,
expectations, intentions and adequacy of resources, are made pursuant to the
safe harbor provisions of the Private Securities Litigation Reform Act of 1995.
Investors are cautioned that such forward-looking statements involve risks and
uncertainties including without limitation the following: (i) the Company's
plans, strategies, objectives, expectations and intentions are subject to change
at any time at the discretion of the Company; (ii) the Company's business is
highly competitive and the entrance of new competitors into or the expansion of
the operations by existing competitors in the Company's markets and other
changes in the market for insurance products could adversely affect the
Company's plans and results of operations; (iii) other risks and uncertainties
indicated from time to time in the Company's filings with the Securities and
Exchange Commission; and (iv) other risks and factors which may be beyond the
control or foresight of the company.
EFFECT OF NEW ACCOUNTING PRONOUNCEMENTS
---------------------------------------
In February 1997, the Financial Accounting Standards Board issued Statement No.
128, Earnings per Share, which is required to be adopted on December 31, 1997.
At that time, the Company will be required to change the method currently used
to compute earnings per share and to restate all prior periods. Under the new
requirements for calculating primary earnings per share, the dilutive effect of
stock options will be excluded. No material impact is expected on primary
earnings per share for the first quarter ended March 31, 1997 and March 31, 1996
as a result of the adoption of Statement 128. The impact of Statement 128 on
the calculation of fully diluted earnings per share for these quarters is also
not expected to be material.
PART II - OTHER INFORMATION
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 Schedule EXHIBIT 27 --
Financial Data Schedule
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 March 31, 1997.
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 May 13, 1997 By /s/ Gary W. Miller
--------------- -----------------------------
Gary W. Miller, President and
Chief Executive Officer
Date May 13, 1997 By /s/ G. Patrick Corydon
--------------- -----------------------------
G. Patrick Corydon,
Vice President - Finance
(Principal Financial and
Accounting Officer)
BALDWIN & LYONS, INC.
Form 10-Q for the fiscal quarter
ended March 31, 1997
INDEX TO EXHIBITS
Exhibit Number Method of Filing
-------------- ----------------
EXHIBIT 11 Filed herewith electronically
Computation of per share earnings
EXHIBIT 27
Financial Data Schedule Filed herewith electronically
BALDWIN & LYONS, INC.
FORM 10-Q, EXHIBIT 11
COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
Three Months Ended
March 31
-----------------------------
1997 1996
----------- -----------
<C> <C>
<S>
PRIMARY:
Average number of shares
outstanding 13,874,171 14,432,521
Dilutive stock options--based on
treasury stock method using
average market price 188,877 164,101
---------- ----------
Totals 14,063,048 14,596,622
========== ==========
Net Income $6,572,869 $4,510,680
========== ==========
Per share amount $ .47 $ .31
========== ==========
FULLY DILUTED:
Average number of shares
outstanding 13,874,171 14,432,521
Dilutive stock options--based on
treasury stock method using
average market price 188,877 164,101
---------- ----------
Totals 14,063,048 14,596,622
========== ==========
Net Income $6,572,869 $4,510,680
========== ==========
Per share amount $ .47 $ .31
========== ==========
</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> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> MAR-31-1997
<DEBT-HELD-FOR-SALE> 270,105
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 122,504
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 414,280
<CASH> 27,170<F1>
<RECOVER-REINSURE> 7,194
<DEFERRED-ACQUISITION> 1,674
<TOTAL-ASSETS> 507,935
<POLICY-LOSSES> 194,321
<UNEARNED-PREMIUMS> 12,425
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 6,755
<NOTES-PAYABLE> 0
0
0
<COMMON> 738
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 507,935
13,322
<INVESTMENT-INCOME> 4,611
<INVESTMENT-GAINS> 5,444
<OTHER-INCOME> 378
<BENEFITS> 8,863
<UNDERWRITING-AMORTIZATION> 1,813
<UNDERWRITING-OTHER> 839
<INCOME-PRETAX> 9,690
<INCOME-TAX> 3,117
<INCOME-CONTINUING> 6,573
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,573
<EPS-PRIMARY> .47
<EPS-DILUTED> .47
<RESERVE-OPEN> 154,537<F2>
<PROVISION-CURRENT> 11,116<F2>
<PROVISION-PRIOR> (3,441)<F2>
<PAYMENTS-CURRENT> 2,538<F2>
<PAYMENTS-PRIOR> 5,923<F2>
<RESERVE-CLOSE> 154,939<F2>
<CUMULATIVE-DEFICIENCY> 0
<FN>
<F1>Cash includes cash equivalents.
<F2>All loss data is presented net of applicable reinsurance recoverable.
</FN>
</TABLE>
