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
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For Quarter Ended Commission file number
September 30, 2000 0-5534
BALDWIN & LYONS, INC.
(Exact name of registrant as specified in its charter)
INDIANA 35-0160330
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
1099 North Meridian Street, Indianapolis, Indiana 46204
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (317) 636-9800
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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 7, 2000:
TITLE OF CLASS NUMBER OF SHARES OUTSTANDING
Common Stock, No Par Value:
Class A (voting) 2,304,885
Class B (nonvoting) 9,870,082
PART I - FINANCIAL INFORMATION
ITEM 1 FINANCIAL STATEMENTS
BALDWIN & LYONS, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
September 30 December 31
2000 1999
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<C> <C>
<S>
ASSETS
Investments:
Fixed maturities $ 216,578 $ 250,386
Equity securities 164,817 139,300
Short-term and other 33,237 32,467
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414,632 422,153
Cash and cash equivalents 20,248 20,115
Accounts receivable 29,671 24,991
Reinsurance recoverable 61,530 44,825
Current federal income taxes - 764
Other assets 21,291 17,829
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$ 547,372 $ 530,677
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Reserves for losses and loss expenses $ 182,051 $ 173,473
Reserves for unearned premiums 28,226 24,432
Accounts payable and accrued expenses 33,640 40,289
Deferred federal income taxes 12,102 7,700
Current federal income taxes 2,022 -
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258,041 245,894
Shareholders' equity:
Common stock-no par value 649 702
Additional paid-in capital 36,387 39,663
Unrealized net gains on investments 36,020 24,711
Retained earnings 216,275 219,707
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289,331 284,783
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$ 547,372 $ 530,677
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Number of common and common
equivalent shares outstanding 12,251 13,246
Book value per outstanding share $23.62 $21.50
</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 Nine Months Ended
September 30 September 30
-------------------------- --------------------------
2000 1999 2000 1999
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<C> <C> <C> <C>
<S>
REVENUES
Net premiums earned $ 20,417 $ 17,749 $ 58,662 $ 51,439
Net investment income 4,461 4,604 14,125 13,900
Realized net gains on investments 1,722 3,899 10,016 7,397
Commissions and other income 698 698 2,822 1,974
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27,298 26,950 85,625 74,710
EXPENSES
Losses and loss expenses incurred 16,234 10,492 43,907 33,124
Other operating expenses 6,121 6,458 20,362 18,535
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22,355 16,950 64,269 51,659
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INCOME BEFORE FEDERAL INCOME TAXES 4,943 10,000 21,356 23,051
Federal income taxes 1,654 3,315 7,155 7,092
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NET INCOME $ 3,289 $ 6,685 $ 14,201 $ 15,959
========= ========= ========= =========
PER SHARE DATA - DILUTED:
Income before realized net gains $ .18 $ .31 $ .61 $ .82
Realized net gains on investments .09 .19 .51 .35
--------- --------- --------- ---------
NET INCOME $ .27 $ .50 $ 1.12 $ 1.17
========= ========= ========= =========
Dividends $ .10 $ .10 $ .30 $ .30
RECONCILIATION OF SHARES OUTSTANDING:
Average shares outstanding - basic 12,215 13,288 12,565 13,463
Dilutive effect of options outstanding 90 124 96 129
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Average shares outstanding - diluted 12,305 13,412 12,661 13,592
========= ========= ========= =========
</TABLE>
See notes to condensed consolidated financial statements.
BALDWIN & LYONS, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Nine Months Ended
September 30
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2000 1999
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<C> <C>
<S>
Net cash provided by (used in) operating activities ($ 3,251) $ 3,601
Investing activities:
Purchases of long-term investments (109,101) (110,267)
Proceeds from sales or maturities
of long-term investments 145,494 124,831
Net sales (purchases) of short-term investments (1,935) 4,132
Other investing activities (1,672) (2,048)
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Net cash provided by investing activities 32,786 16,648
Financing activities:
Dividends paid to shareholders (3,943) (4,045)
Cost of treasury stock (16,940) (8,704)
Repayment on line of credit (8,528) -
Proceeds from sales of common stock 9 6
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Net cash used in financing activities (29,402) (12,743)
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Increase in cash and cash equivalents 133 7,506
Cash and cash equivalents at beginning of period 20,115 16,955
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Cash and cash equivalents at end of period $ 20,248 $ 24,461
========= =========
</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, 2000. Interim financial statements should be read in
conjunction with the Company's annual audited financial statements.
(2) Forward-looking statements in this report 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 inherent
risks and uncertainties. Readers are encouraged to review the Company's annual
report for its full statement regarding forward-looking information.
(3) The following line items from the Statements of Income are presented net of
the reinsurance amounts shown below.
2000 1999
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Quarter ended September 30:
Net premiums earned $ 6,144 $ 4,737
Losses and loss expenses 7,948 5,783
Other operating expenses (2,231) (1,745)
Nine months ended September 30:
Net premiums earned 16,956 13,739
Losses and loss expenses 27,971 (3,236)
Other operating expenses (6,122) (4,882)
(4) The net realized and unrealized income for the quarter ended September 30,
2000 was $9,076 and compares to a net realized and unrealized loss of $2,834 for
the quarter ended September 30, 1999. For the nine months ended September 30,
2000, total realized and unrealized income was $25,316 and compares to a net
realized and unrealized income of $6,890 for the nine months ended September 30,
1999.
(5) If the Company had adopted Financial Accounting Standards Board Statement
No. 123, Accounting for Stock-Based Compensation, net income for the quarter and
nine months ended September 30, 2000 would have been approximately $254 and $763
lower, respectively ($.02 per share and $.06 per share, respectively).
(6) Through September 30, 2000, the Company purchased 1,005,869 shares of
treasury stock for approximately $16.9 million under its continuing stock
repurchase program.
(7) The following table provides certain profit and loss information for each
reportable segment:
<TABLE>
<CAPTION>
Private Small
Fleet Passenger Fleet
Trucking Automobile Trucking All Other Totals
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<C> <C> <C> <C> <C>
<S>
QUARTER ENDED SEPTEMBER 30:
2000:
Direct and assumed premium written $ 13,298 $ 5,363 $ 2,608 $ 838 $ 22,107
Net premium earned and fee income 7,741 10,314 2,090 675 20,820
Underwriting gain (loss) (a) 4,544 (4,127) (282) 801 936
1999:
Direct and assumed premium written 10,862 8,265 1,589 1,447 22,163
Net premium earned and fee income 6,828 8,266 1,587 1,544 18,225
Underwriting gain (loss) (a) 2,976 303 (2) (17) 3,260
NINE MONTHS ENDED SEPTEMBER 30:
2000:
Direct and assumed premium written $ 35,744 $ 30,878 $ 8,262 $ 4,645 $ 79,529
Net premium earned and fee income 19,936 30,373 5,627 4,716 60,652
Underwriting gain (loss) (a) 9,744 (7,702) (213) 1,846 3,675
1999:
Direct and assumed premium written 32,199 25,329 6,293 4,224 68,045
Net premium earned and fee income 20,119 24,063 4,240 4,369 52,791
Underwriting gain (loss) (a) 7,099 (228) (92) 534 7,313
</TABLE>
(8) The following tables are reconciliations of reportable segment revenues and
profits to the Company's consolidated revenue and income from continuing
operations before federal income taxes, respectively.
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30 September 30
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2000 1999 2000 1999
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<C> <C> <C> <C>
<S>
REVENUE:
Net premium earned and fee income $ 20,820 $ 18,225 $ 60,652 $ 52,791
Net investment income 4,461 4,604 14,125 13,900
Realized net gains on investments 1,722 3,899 10,016 7,397
Other income 295 222 832 622
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Total consolidated revenue $ 27,298 $ 26,950 $ 85,625 $ 74,710
========= ========= ========= =========
PROFIT:
Underwriting gain $ 936 $ 3,260 $ 3,675 $ 7,313
Net investment income 4,461 4,604 14,125 13,900
Realized net gains on investments 1,722 3,899 10,016 7,397
Corporate expenses (2,176) (1,763) (6,460) (5,559)
--------- --------- --------- ---------
Income from continuing operations
before federal income taxes $ 4,943 $ 10,000 $ 21,356 $ 23,051
========= ========= ========= =========
</TABLE>
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
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OF OPERATIONS
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LIQUIDITY AND CAPITAL RESOURCES
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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 25% and 35% 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. However, due to changes in the Company's
reinsurance programs since June, 1998, cash flow is significantly impacted with
respect to its trucking insurance business whereby more risk is ceded to others.
Diminished cash flows have occurred since substantial portions of premiums on
current policies are ceded to reinsurers while losses incurred in periods prior
to June, 1998, (when the Company retained much more risk) are settled with cash
payments. For the nine months ended September 30, 2000, the Company experienced
negative cash flow from operations totaling $3.3 million and compares to
positive cash flow of $3.6 million for the same 1999 period. The change in cash
flows from the prior year period was due primarily to increased payments for
losses.
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 fixed income (bond and short-term
investment) portfolio was less than 3 years at September 30, 2000.
The Company's assets at September 30, 2000 included $20.2 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 $45.3 million will mature within the twelve month period
following September 30, 2000. The Company believes that these liquid
investments are more than sufficient to provide for projected claim payments and
operating cost demands.
Consolidated shareholders' equity is composed essentially of GAAP shareholder's
equity of the insurance subsidiaries. As such, there are statutory restrictions
on the transfer of portions of this equity to the parent holding company. At
September 30, 2000, $41.6 million may be transferred by dividend or loan to the
parent company without approval by, or notification to, regulatory authorities.
An additional $196.7 million of shareholder's equity of the insurance
subsidiaries may be advanced or loaned to the parent holding company with prior
notification to, and approval from, regulatory authorities. Management 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 $10.5 million at September 30, 2000.
RESULTS OF OPERATIONS
---------------------
COMPARISONS OF THIRD QUARTER, 2000 TO THIRD QUARTER, 1999
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Net premiums earned during the third quarter increased $2.7 million (15.0%) as
compared to the same period of 1999. The increased premium volume is primarily
attributable to increases in the Company's private passenger automobile and
small fleet trucking programs of $2.1 million and $.5 million, respectively, and
results largely from geographic expansion. Fleet trucking premiums also
increased $.9 million from the prior year quarter. These increases were
partially offset by a $.9 million decrease in voluntary reinsurance assumed.
Net investment income during the third quarter of 2000 was 3% lower than the
third quarter of 1999. Higher overall pre-tax and after tax yields were offset
by a decrease in invested assets.
The third quarter 2000 net realized gain of $1.7 million consisted of net gains
on equity securities and fixed maturity investments of $2.6 million and $.1
million, respectively and was offset by net losses of $1.0 million on limited
partnership investments
Losses and loss expenses incurred during the third quarter of 2000 increased
$5.7 million from that experienced during the third quarter of 1999. This
increase is due primarily to sharply higher loss costs in the Company's private
passenger automobile product line. Loss and loss expense ratios for the
comparative second quarters were as follows:
2000 1999
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Large and medium fleet trucking 48.8% 53.3%
Private passenger automobile 111.1 60.6
Small fleet trucking 82.0 59.1
All lines 79.5 59.1
Other operating expenses for the third quarter of 2000 decreased 5.2% from the
third quarter of 1999. The consolidated expense ratio of the Company's
insurance subsidiaries was 25.7% for the third quarter of 2000 compared to 29.2%
for the third quarter of 1999. The ratio of consolidated other operating
expenses to total revenue (adjusted for realized gains) was 23.9% during the
third quarter of 2000 compared to 28.0% for the 1999 third quarter. All
decreases in 2000 result from higher ceding commission income related to
reinsurance purchased.
The effective federal tax rate for consolidated operations for the third quarter
of 2000 was 33.5% and is less than the statutory rate primarily because of tax
exempt investment income.
Due primarily to increased losses, net income decreased $3.4 million (50.8%)
during the third quarter of 2000 as compared with the 1999 third quarter.
COMPARISONS OF NINE MONTHS ENDED SEPTEMBER 30, 2000 TO
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NINE MONTHS ENDED SEPTEMBER 30, 1999
------------------------------------
Net premiums earned increased $7.2 million (14.0%) during the first nine months
of 2000 as compared to the same period of 1999. The increased premium volume is
primarily attributable to increases in the Company's private passenger
automobile and small fleet trucking programs of $5.8 million and $1.3 million,
respectively, and results largely from geographic expansion. Net premiums from
the Company's independent contractor program increased $1.0 million and was
offset by decreases in all other fleet trucking product lines.
Net investment income during the 2000 period was 1.6% higher than the 1999
period due to higher overall pre-tax and after tax yields.
The net realized gain on investments of $10.0 million for the first nine months
of 2000 consists of net gains on equity securities of $12.7 million and was
offset by net losses on limited partnership and fixed maturity investments of
$2.1 million and $.6 million, respectively.
Losses and loss expenses incurred during the first nine months of 2000 increased
$10.8 million from the 1999 period due primarily to sharply higher loss costs
for the Company's private passenger automobile program. Loss and loss expense
ratios for the comparative nine-month periods were as follows:
2000 1999
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Fleet trucking 52.3% 61.0%
Private passenger automobile 96.5 66.9
Small fleet trucking 69.8 64.8
All lines 74.8 64.4
Other operating expenses increased $1.8 million (9.9%) during the first nine
months of 2000 compared to the same period of 1999 generally reflecting changes
in premiums earned. The consolidated expense ratio of the Company's insurance
subsidiaries was 28.4% for 2000 compared to 28.5% for 1999. The ratio of other
operating expenses to total revenue (adjusted for realized gains) was 26.9% for
2000 compared to 27.5% for 1999.
The effective federal tax rate for consolidated operations for the first nine
months of 2000 was 33.5% and is less than the statutory rate primarily because
of tax exempt investment income.
Primarily as a result of higher loss costs, net income for the first nine months
of 2000 was $14.2 million, a decrease of 11.0% from the comparable 1999 period.
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.
PART II - OTHER INFORMATION
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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
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, 2000.
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 14, 2000 By /s/ Gary W. Miller
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Gary W. Miller, Chairman and CEO
Date November 14, 2000 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 September 30, 2000
INDEX TO EXHIBITS
Begins on sequential
page number of Form
Exhibit Number 10-Q
---------------- ----------------------------
EXHIBIT 11 Filed herewith electronically
Computation of per share earnings
EXHIBIT 27 Filed herewith electronically
Financial Data Schedule
<TABLE>
<CAPTION>
BALDWIN & LYONS, INC.
FORM 10-Q, EXHIBIT 11
COMPUTATION OF EARNINGS PER SHARE
Three Months Ended Nine Months Ended
September 30 September 30
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2000 1999 2000 1999
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<C> <C> <C> <C>
<S>
BASIC:
Average number of shares
Outstanding 12,214,805 13,288,122 12,565,260 13,462,579
=========== =========== =========== ===========
Net Income $ 3,288,536 $ 6,684,475 $14,200,738 $15,958,560
=========== =========== =========== ===========
Per share amount $ .27 $ .50 $ 1.12 $ 1.17
=========== =========== =========== ===========
DILUTED:
Average number of shares
Outstanding 12,214,805 13,288,122 12,565,260 13,462,579
Dilutive stock options--based on
treasury stock method using
average market price 90,186 124,123 95,278 129,036
----------- ----------- ----------- -----------
Totals 12,304,991 13,412,245 12,660,538 13,591,615
=========== =========== =========== ===========
Net Income $ 3,288,536 $ 6,684,475 $14,200,738 $15,958,560
=========== =========== =========== ===========
Per share amount $ .27 $ .50 $ 1.12 $ 1.17
=========== =========== =========== ===========
</TABLE>
