10-Q 1 r10q033105.txt FIRST QUARTER FORM 10-Q 1 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, 2005 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 by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes [ X ] No [ ] Indicate the number of shares outstanding of each of the issuer's classes of common stock as of May 3, 2005: TITLE OF CLASS NUMBER OF SHARES OUTSTANDING Common Stock, No Par Value: Class A (voting) 2,666,666 Class B (nonvoting) 12,057,171 Index to Exhibits located on page 13. Page 1 of a total of 20 pages 2 PART I - FINANCIAL INFORMATION ITEM 1 FINANCIAL STATEMENTS
BALDWIN & LYONS, INC. AND SUBSIDIARIES UNAUDITED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT PER SHARE DATA) MARCH 31 December 31 2005 2004 -------------- -------------- ASSETS Investments: Fixed maturities $ 306,287 $ 331,281 Equity securities 124,845 133,042 Short-term and other 81,716 52,395 -------------- -------------- 512,848 516,718 Cash and cash equivalents 62,572 57,384 Accounts receivable 36,294 33,481 Reinsurance recoverable 228,390 236,466 Notes receivable from employees 2,323 2,514 Other assets 22,299 22,000 -------------- -------------- $ 864,726 $ 868,563 ============== ============== LIABILITIES AND SHAREHOLDERS' EQUITY Reserves for losses and loss expenses $ 433,149 $ 441,821 Reserves for unearned premiums 37,573 33,233 Notes payable to banks 6,000 6,000 Accounts payable and accrued expenses 47,799 48,224 Current federal income taxes 5,470 660 Deferred federal income taxes 8,575 12,077 -------------- -------------- 538,566 542,015 Shareholders' equity: Common stock-no par value 628 628 Additional paid-in capital 37,161 37,083 Unrealized net gains on investments 37,395 44,497 Retained earnings 250,976 244,340 -------------- -------------- 326,160 326,548 -------------- -------------- $ 864,726 $ 868,563 ============== ============== See notes to condensed consolidated financial statements.
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BALDWIN & LYONS, INC. AND SUBSIDIARIES UNAUDITED CONSOLIDATED STATEMENTS OF INCOME (IN THOUSANDS, EXCEPT PER SHARE DATA) Three Months Ended March 31 -------------------------------- 2005 2004 -------------- -------------- REVENUES Net premiums earned $ 46,659 $ 38,497 Net investment income 3,308 3,172 Realized net gains on investments 4,936 5,818 Other income 1,836 1,906 -------------- -------------- 56,739 49,393 EXPENSES Losses and loss expenses incurred 31,612 25,246 Other operating expenses 9,648 8,089 -------------- -------------- 41,260 33,335 -------------- -------------- INCOME BEFORE FEDERAL INCOME TAXES 15,479 16,058 Federal income taxes 5,133 5,159 -------------- -------------- NET INCOME $ 10,346 $ 10,899 ============== ============== Per share data: DILUTED EARNINGS $ .70 $ .74 ============== ============== BASIC EARNINGS $ .70 $ .75 ============== ============== DIVIDENDS PAID TO SHAREHOLDERS $ .25 $ .50 ============== ============== RECONCILIATION OF SHARES OUTSTANDING: Average shares outstanding - basic 14,724 14,603 Dilutive effect of options outstanding 121 212 -------------- -------------- Average shares outstanding - diluted 14,845 14,815 ============== ============== See notes to condensed consolidated financial statements.
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BALDWIN & LYONS, INC. AND SUBSIDIARIES UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS) Three Months Ended March 31 2005 2004 ------------- ------------- Net cash provided by operating activities $ 8,970 $ 18,569 Investing activities: Purchases of long-term investments (34,977) (41,605) Proceeds from sales or maturities of long-term investments 51,735 52,778 Net sales (purchases) of short-term investments (16,384) 5,476 Decrease in notes receivable from employees 138 1,093 Other investing activities (614) (222) ------------- ------------- Net cash used in investing activities (102) 17,520 Financing activities: Dividends paid to shareholders (3,681) (7,304) Proceeds from sales of common stock 1 63 ------------- ------------- Net cash used in financing activities (3,680) (7,241) ------------- ------------- Increase in cash and cash equivalents 5,188 28,848 Cash and cash equivalents at beginning of period 57,384 30,078 ------------- ------------- Cash and cash equivalents at end of period $62,572 $58,926 ============= ============= See notes to condensed consolidated financial statements.
NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (1) BASIS OF PRESENTATION: 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, 2005. Interim financial statements should be read in conjunction with the Company's annual audited financial statements and other disclosures included in the Company's most recent Form 10K. 5 NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (2) FORWARD-LOOKING STATEMENTS: 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) REINSURANCE: The following table summarizes the Company's transactions with reinsurers for the 2005 and 2004 comparative periods.
2005 2004 --------------- -------------- Quarter ended March 31: Premiums ceded to reinsurers $ 13,598 $ 19,248 Losses and loss expenses ceded to reinsurers 14,214 17,948 Commissions from reinsurers 3,136 5,202
(4) COMPREHENSIVE INCOME OR LOSS: The Company refers to comprehensive income or loss as realized and unrealized income or loss which is composed of net income or loss and changes in unrealized gains or losses on investments for the periods presented. Total realized and unrealized income for the quarter ended March 31, 2005 was $3,215 and compares to total realized and unrealized income of $11,223 for the quarter ended March 31, 2004. 6 NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (5) REPORTABLE SEGMENTS - PROFIT AND LOSS: The following table provides certain profit and loss information for each reportable segment. All amounts presented are computed based upon generally accepted accounting principles. In addition, segment profit for fleet trucking includes the direct marketing agency operations conducted by the parent company and is computed after elimination of inter-company commissions and, accordingly, segment profit presented here will not agree with statutory underwriting gains for this segment which may be quoted elsewhere in the Company's financial statements.
2005 2004 ------------------------------------------- ------------------------------------------- Net Net Direct and Premium Direct and Premium Assumed Earned Segment Assumed Earned Segment Premium and Fee Profit Premium and Fee Profit Written Income (Loss) Written Income (Loss) ------------- ----------- ----------- ------------ ------------ ----------- THREE MONTHS ENDED MARCH 31: PROTECTIVE PRODUCTS: Fleet trucking $ 43,247 $ 30,822 $ 6,813 $ 39,171 $ 21,267 $ 6,321 Reinsurance assumed 2,491 2,522 1,498 2,918 3,074 1,907 SAGAMORE PRODUCTS: Personal division 15,069 11,029 1,230 15,180 11,228 1,350 Commercial division: Small fleet trucking 3,517 2,200 122 3,865 2,524 332 Workers' compensation (5) 1,386 261 2,788 1,945 (229) ------------- ----------- ----------- ------------ ------------ ----------- Total Commercial division 3,512 3,586 383 6,653 4,469 103 All other 278 431 (159) 241 242 (80) ------------- ----------- ----------- ------------ ------------ ----------- Totals $ 64,597 $48,390 $9,765 $64,163 $40,280 $9,601 ============= =========== =========== ============ ============ ===========
(6) REPORTABLE SEGMENTS - RECONCILIATION TO CONSOLIDATED REVENUE AND CONSOLIDATED PROFIT OR LOSS: The following tables are reconciliations of reportable segment revenues and profit or loss to the Company's consolidated revenue and income from continuing operations before federal income taxes, respectively.
Three Months Ended March 31 2005 2004 ------------- -------------- REVENUE: Net premium earned and fee income $ 48,390 $ 40,280 Net investment income 3,308 3,172 Realized net gains on investments 4,936 5,818 Other 105 123 ------------- -------------- Total consolidated revenue $ 56,739 $ 49,393 ============= ============== PROFIT: Segment profit $ 9,765 $ 9,601 Net investment income 3,308 3,172 Realized net gains on investments 4,936 5,818 Corporate expenses (2,530) (2,533) ------------- -------------- Income before federal income taxes $ 15,479 $ 16,058 ============= ==============
7 NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (7) LOANS TO EMPLOYEES: In 2000, 2001 and 2002 the Company provided loans to certain key employees for the sole purpose of purchasing the Company's Class B common stock in the open market. $7,260 of such full-recourse loans were issued and $2,323 remain outstanding at March 31, 2005 and carry interest rates of between 4.75% and 6%, payable annually on the loan anniversary date. The underlying securities serve as collateral for these loans, which must be repaid no later than 10 years from the date of issue. No additional loans will be made under this program. 8 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 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. The Company's cash flow relating to premiums is significantly affected by reinsurance programs in effect from time-to-time whereby the Company cedes both premium and risk to other insurance and reinsurance companies. These programs vary significantly among products and overall premium ceded rates, net of ceding commission allowances, have generally decreased since 2001, reflective of the effect of the provisions of reinsurance agreements currently in place. For the three months ended March 31, 2005, the Company experienced positive cash flow from operations totaling $9.0 million and compares to positive cash flow of $18.6 million for the three months ended March 31, 2004. The majority of this change resulted from a $9.0 million increase in net paid loss activity during the current quarter and a $4.0 million increase in reinsurance recoverable on paid claims. 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 2.2 years at March 31, 2005 representing a small decrease from the prior year end as large portions of the proceeds from maturing investments and new cash flows have been placed in short-term investments in anticipation of interest rate increases. The Company's assets at March 31, 2005 included $62.6 million in investments classified as short-term or cash equivalents that were readily convertible to cash without significant market penalty. An additional $109.6 million of fixed maturity investments will mature within the twelve-month period following March 31, 2005. The Company believes that these liquid investments are more than sufficient to provide for projected claim payments and operating cost demands even before consideration of current positive cash flows. Consolidated shareholders' equity is composed largely 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 March 31, 2005, $48.2 million may be transferred by dividend or loan to the parent company without approval by, or prior notification to, regulatory authorities. An additional $195.3 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. 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. The parent company had cash and marketable securities valued at $54.4 million at March 31, 2005. The Company's annualized premium writing to surplus ratio for the first quarter of 2005 was approximately 50%. Regulatory guidelines generally allow for writings of at least 200% of surplus. Accordingly, the Company can continue to increase premium writings significantly with no need to raise additional capital. Further, the Insurance Subsidiaries' individual capital levels are several times higher than the minimum amounts designated by the National Association of Insurance Commissioners. 9 RESULTS OF OPERATIONS --------------------- COMPARISONS OF FIRST QUARTER, 2005 TO FIRST QUARTER, 2004 --------------------------------------------------------- Net premiums earned during the first quarter of 2005 increased $8.2 million (21%) as compared to the same period of 2004. The increase is due primarily to a 48% increase in premiums from the Company's fleet trucking program. This increase results from increased premium retained under current reinsurance agreements, increases in trucking revenues of insureds, upon which the majority of fleet trucking premiums are based, and, to a small degree, rate increases. Partially offsetting this increase were decreases in premiums from the Company's reinsurance assumed, small fleet trucking and private passenger automobile programs of 21%, 11% and 3%, reflecting the competitive nature of the markets in which the Company operates. In addition, premium from the Company's discontinued small business workers' compensation product decreased 27%. Direct premiums written and assumed increased to $64.6 million from $64.2 million reported a year earlier. This increase was due primarily to increases in fleet trucking premium and was partially offset by the decrease in premium writings due to the discontinuance of the small workers' compensation product. Premium ceded to reinsurers averaged 21.9% of direct premium production for the current quarter compared to 31.6% a year earlier. Net investment income, before tax, during the first quarter of 2005 was 4% higher than the first quarter of 2004 due primarily to an increase in average invested assets resulting from positive cash flow. Also, pre-tax yields on short-term investments tripled from prior year levels to 2.2% during the current quarter. Overall after tax yields are mostly consistent with the prior year quarter. The first quarter 2005 net realized gain of $4.9 million consisted of net gains on equity securities and limited partnership (equity and hedge fund) investments of $2.2 million and $2.8 million, respectively, partially offset by a $.1 million net loss on bonds. Losses and loss expenses incurred during the first quarter of 2005 increased $6.4 million from that experienced during the first quarter of 2004, which is consistent with the increase in premium volume previously discussed. Loss ratios for each of the Company's major product lines were as follows:
2005 2004 ------ ------ Fleet trucking 74.3% 75.6% Private passenger automobile 60.5 59.9 Small fleet trucking 54.6 57.6 Voluntary reinsurance assumed 28.1 11.8 Small business workers' compensation 55.6 82.4 All lines 67.8 65.6
Other operating expenses for the first quarter of 2005 increased 19% from the first quarter of 2004. Adjusted for ceding allowances, operating expenses decreased 4% from the first quarter of 2004 and compares favorably with the 21% increase in premiums earned from the 2004 quarter as many of the Company's expenses do not vary directly with premium volume. Ceding allowances as a percentage of direct expenses have declined due to changes in the Company's reinsurance structure whereby the Company now retains a greater percentage of the risk compared to prior periods, particularly within the Large and Medium Fleet trucking products. Available capacity within each of the Company's divisions has allowed for the expansion of business with only minimal additions to personnel and other fixed costs over the past year. 10 Management believes that significant additional capacity exists before most divisions would be obliged to incur meaningful increases in personnel or other fixed costs. Ceding allowances totaled $3.1 million for the 2005 quarter compared to $5.2 million for the 2004 quarter. The ratio of consolidated other operating expenses to operating revenue was 18.6% during each of the 2005 and 2004 first quarters. The effective federal tax rate for consolidated operations for the first quarter of 2005 was 33.2% and is less than the statutory rate primarily because of tax exempt investment income. As a result of the factors mentioned above, net income decreased $.6 million (5.1%) during the first quarter of 2005 as compared with the 2004 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 even a small number 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. CRITICAL ACCOUNTING POLICIES ---------------------------- There have been no changes in the Company's critical accounting policies as disclosed in the Form 10K filed for the year ended December 31, 2004. CONCENTRATIONS OF CREDIT RISK ----------------------------- The insurance subsidiaries cede portions of their gross premiums to numerous reinsurers under quota share and excess of loss treaties as well as facultative placements. These reinsurers assume commensurate portions of the risk of loss covered by the contracts. As losses are reported and reserved, portions of the gross losses attributable to reinsurers are established as receivable assets and losses incurred are reduced. At March 31, 2005, amounts due from reinsurers on paid and unpaid losses total approximately $228 million. Included in this total are known losses of approximately $23 million due from Converium Insurance (North America) Inc. and approximately $5 million due from PMA Re each of which have reported substantial reserve strengthening and/or impairment of assets which have negatively affected their previously reported financial positions. All amounts due from these reinsurers on paid claims are current and the Company has no information at this time to indicate that all obligations of these reinsurers will not be met. ITEM 4. CONTROLS AND PROCEDURES (a) The Corporation's Chief Executive Officer and Chief Financial Officer evaluated the disclosure controls and procedures (as defined under Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this report. 11 Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that the Corporation's disclosure controls and procedures are effective. (b) There were no significant changes in the Corporation's internal control over financial reporting identified in connection with the foregoing evaluation that occurred during the Corporation's last fiscal quarter that have affected, or are reasonably likely to materially affect, the Corporation's internal control over financial reporting. 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 (31.1) Certification of CEO EXHIBIT 31.1 pursuant to Section 302 of the Certification of CEO Sarbanes-Oxley Act of 2002 (31.2) Certification of CFO EXHIBIT 31.2 pursuant to Section 302 of the Certification of CFO Sarbanes-Oxley Act of 2002 (32.1) Certification of CEO EXHIBIT 32.1 pursuant to 18 U.S.C. 1350, as Certification of CEO adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (32.2) Certification of CFO EXHIBIT 32.1 pursuant to 18 U.S.C. 1350, as Certification of CFO adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 ITEM 6 (b) REPORTS ON FORM 8-K ------------------------------- A Form 8-K was filed by the registrant on January 28, 2005 regarding its earnings announcement for the fourth quarter and year ended December 31, 2004. 12 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 4, 2005 By /s/ GARY W. MILLER ----------- ------------------ Gary W. Miller, Chairman of the Board and Chief Executive Officer Date MAY 4, 2005 By /s/ G. PATRICK CORYDON ----------- ---------------------- G. Patrick Corydon, Senior Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) 13 BALDWIN & LYONS, INC. Form 10-Q for the fiscal quarter ended March 31, 2005 INDEX TO EXHIBITS BEGINS ON SEQUENTIAL PAGE NUMBER OF FORM EXHIBIT NUMBER 10-Q -------------- ----------------------------- EXHIBIT 11 14 Computation of per share earnings EXHIBIT 31.1 15 Certification of CEO pursuant to Section 302 of the Sarbanes-Oxley Act EXHIBIT 31.2 17 Certification of CFO pursuant to Section 302 of the Sarbanes-Oxley Act EXHIBIT 32.1 19 Certification of CEO pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act EXHIBIT 32.2 20 Certification of CFO pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act