-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, JIQldzjEpghov9H0SWhobvC6MvvGUg6wHdcU0TKEDWzWcNgk+B6EPW/ol2RK6wsy jFhrLMy3GSINpoAnMaq6eA== 0000009346-98-000008.txt : 19980817 0000009346-98-000008.hdr.sgml : 19980817 ACCESSION NUMBER: 0000009346-98-000008 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980630 FILED AS OF DATE: 19980814 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: BALDWIN & LYONS INC CENTRAL INDEX KEY: 0000009346 STANDARD INDUSTRIAL CLASSIFICATION: INSURANCE AGENTS BROKERS & SERVICES [6411] IRS NUMBER: 350160330 STATE OF INCORPORATION: IN FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-05534 FILM NUMBER: 98687319 BUSINESS ADDRESS: STREET 1: 1099 N MERIDIAN ST STREET 2: STE 700 CITY: INDIANAPOLIS STATE: IN ZIP: 46204 BUSINESS PHONE: 3176369800 MAIL ADDRESS: STREET 1: 1099 NORTH MERIDIAN ST STREET 2: STE 700 CITY: INDIANAPOLIS STATE: IN ZIP: 46204 FORMER COMPANY: FORMER CONFORMED NAME: BALDWIN H C AGENCY INC DATE OF NAME CHANGE: 19720309 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 June 30, 1998 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 August 7, 1998: TITLE OF CLASS NUMBER OF SHARES OUTSTANDING Common Stock, No Par Value: Class A (voting) 2,394,854 Class B (nonvoting) 11,346,520 Index to Exhibits located on page 13. PART I - FINANCIAL INFORMATION ITEM 1 FINANCIAL STATEMENTS BALDWIN & LYONS, INC. AND SUBSIDIARIES UNAUDITED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT PER SHARE DATA)
June 30 December 31 1998 1997 ----------- ----------- ASSETS Investments: Fixed maturities $ 266,174 $ 276,109 Equity securities 168,245 158,614 Short-term and other 17,807 17,902 ----------- ----------- 452,226 452,625 Cash and cash equivalents 23,426 23,402 Accounts receivable 28,262 21,454 Reinsurance recoverable 46,507 47,276 Other assets 14,059 12,258 ----------- ----------- $ 564,480 $ 557,015 =========== =========== LIABILITIES AND SHAREHOLDERS' EQUITY Reserves for losses and loss expenses $ 195,122 $ 197,195 Reserves for unearned premiums 27,535 18,806 Accounts payable and accrued expenses 30,014 29,662 Deferred federal income taxes 14,254 16,249 Current federal income taxes 1,353 1,140 ----------- ----------- 268,278 263,052 Shareholders' equity: Common stock-no par value 733 730 Additional paid-in capital 41,416 41,361 Unrealized net gains on investments 40,538 45,614 Retained earnings 213,515 206,258 ----------- ----------- 296,202 293,963 ----------- ----------- $ 564,480 $ 557,015 =========== =========== Number of common and common equivalent shares outstanding 13,850 13,845 Book value per outstanding share $21.39 $21.23
See notes to condensed consolidated financial statements. BALDWIN & LYONS, INC. AND SUBSIDIARIES UNAUDITED CONSOLIDATED STATEMENTS OF INCOME (IN THOUSANDS, EXCEPT PER SHARE DATA)
Three Months Ended Six Months Ended June 30 June 30 -------------------------- -------------------------- 1998 1997 1998 1997 ----------- ----------- ----------- ----------- REVENUES Net premiums earned $ 18,855 $ 14,987 $ 35,840 $ 28,309 Net investment income 4,612 4,664 9,235 9,275 Realized net gains on investments 2,285 3,887 4,624 9,331 Commissions and other income 454 441 769 819 ----------- ----------- ----------- ----------- 26,206 23,979 50,468 47,734 EXPENSES Losses and loss expenses incurred 10,810 9,486 21,532 18,349 Other operating expenses 7,304 5,421 14,098 10,623 ----------- ----------- ----------- ----------- 18,114 14,907 35,630 28,972 ----------- ----------- ----------- ----------- INCOME BEFORE FEDERAL INCOME TAXES 8,092 9,072 14,838 18,762 Federal income taxes 2,471 2,833 4,501 5,950 ----------- ----------- ----------- ----------- NET INCOME $ 5,621 $ 6,239 $ 10,337 $ 12,812 =========== =========== =========== =========== PER SHARE DATA - BASIC AND DILUTED: Income before realized net gains $ .30 $ .26 $ .53 $ .48 Realized net gains on investments .11 .18 .22 .43 ----------- ----------- ----------- ----------- NET INCOME $ .41 $ .44 $ .75 $ .91 =========== =========== =========== =========== DIVIDENDS $ .10 $ .10 $ .20 $ .20 =========== =========== =========== =========== RECONCILIATION OF SHARES OUTSTANDING: Average shares outstanding - basic 13,737 13,822 13,716 13,844 Dilutive effect of options outstanding 137 190 159 190 ----------- ----------- ----------- ----------- Average shares outstanding - diluted 13,874 14,012 13,875 14,034 =========== =========== =========== ===========
See notes to condensed consolidated financial statements. BALDWIN & LYONS, INC. AND SUBSIDIARIES UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS)
Six Months Ended June 30 -------------------------- 1998 1997 ----------- ----------- Net cash provided by operating activities $ 8,208 $ 6,863 Investing activities: Purchases of long-term investments (97,539) (113,595) Proceeds from sales or maturities of long-term investments 93,181 127,556 Net sales (purchases) of short-term investments (2) 629 Other investing activities (839) (1,060) ----------- ----------- Net cash provided by investing activities (5,199) 13,530 Financing activities: Dividends paid to shareholders (2,744) (2,768) Cost of treasury stock (280) (3,088) Proceeds from sales of common stock 39 1 ----------- ----------- Net cash used in financing activities (2,985) (5,855) ----------- ----------- Increase in cash and cash equivalents 24 14,537 Cash and cash equivalents at beginning of period 23,402 12,117 ----------- ----------- Cash and cash equivalents at end of period $ 23,426 $ 26,655 =========== ===========
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, 1998. 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.
1998 1997 ---------- ---------- Quarter ended June 30: Net premiums earned $ 2,468 $ 1,914 Losses and loss expenses 382 5,269 Other operating expenses (528) (120) Six months ended June 30: Net premiums earned 4,772 3,869 Losses and loss expenses 511 2,353 Other operating expenses (770) (329)
(4) The net realized and unrealized loss for the quarter ended June 30, 1998 was $1,938 and compares to total realized and unrealized income of $15,621 for the quarter ended June 30, 1997. For the six months ended June 30, 1998, total realized and unrealized income was $5,159 and compares to total realized and unrealized income of $9,772 for the six months ended June 30, 1997. (5) If the Company had adopted Financial Accounting Standards Board Statement No. 123, Accounting for Stock-Based Compensation, net income for the quarter and six months ended June 30, 1998 would have been approximately $255 and $509 lower, respectively ($.02 per share and $.04 per share, respectively). 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. For the six months ended June 30, 1998, positive cash flow from operations totaled $8.2 million, an increase from $6.9 million generated during the first half of 1997. The increased cash flows are associated with increased premium volume from the Company's new products, primarily private passenger automobile coverages. Management expects direct premium revenues from trucking insurance products to remain level during the remainder of 1998; however, overall gross insurance revenues are expected to increase due to continued growth in the Company's private passenger automobile program. New reinsurance arrangements, effective June 1, 1998, will result in significant reductions in net premiums earned on the Company's fleet trucking products starting with the third quarter. Management anticipates that losses and underwriting expenses will also be reduced significantly as the result of these new arrangements. 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 approximately 3 years at June 30, 1998. The Company's assets at June 30, 1998 included $26.9 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 $76.3 million will mature within the twelve month period following June 30, 1998. The Company believes that these liquid investments are more than sufficient to provide for projected claim payments and operating cost demands. Consolidated shareholders' equity totaled $296.2 million at June 30, 1998 and includes $278.9 million representing GAAP shareholder's equity of insurance subsidiaries, of which $39.4 million may be transferred by dividend or loan to the parent company without approval by, or notification to, regulatory authorities. An additional $213.7 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. 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 $42.0 million at June 30, 1998. RESULTS OF OPERATIONS --------------------- COMPARISONS OF SECOND QUARTER, 1998 TO SECOND QUARTER, 1997 ----------------------------------------------------------- Net premiums earned increased $3.9 million during the second quarter of 1998 as compared to the same period of 1997. The increased premium volume is primarily attributable to the continued growth of the Company's private passenger automobile program, premiums from which totaled $8.1 million for the quarter, an increase of $4.1 million (103%) from the prior year. Premiums earned for this program have increased each quarter since its inception in 1995. Declines in premium earned from the Company's fleet trucking products and voluntary assumptions from property catastrophe pools of $.2 million and $.3 million, respectively, were largely offset by growth in the Company's small fleet trucking and small business workers' compensation programs. Net investment income during the second quarter of 1998 was level with the second quarter of 1997. Overall pre-tax and after tax yields were consistent with the second quarter of 1997. The second quarter 1998 net realized gain of $2.3 million consists of net gains on equity securities of $2.6 million and net losses of $.3 million on other securities. Losses and loss expenses incurred during the second quarter of 1998 increased $1.3 million from that experienced during the second quarter of 1997. The increase is due primarily to the continued growth from the Company's private passenger automobile business. Loss and loss expense ratios for the comparative second quarters were as follows:
1998 1997 -------- -------- Large and medium fleet trucking 65.6% 52.5% Voluntary reinsurance assumed 6.1 79.8 Private passenger automobile 70.0 76.5 Small fleet trucking 45.7 35.4 All lines 57.3 63.3
Approximately 5.5 points of the 1998 loss ratio for fleet trucking results from less favorable development on 1997 and prior claims with the remainder coming from current year accidents. Voluntary reinsurance assumed loss ratios were lower as the result of favorable experience on all inforce treaties. In addition, the 1997 quarter included $1.0 million in adverse development on losses from a former wholly-owned subsidiary under a reinsurance treaty which is no longer inforce. The fluctuations in the loss ratios for the other lines are not considered unusual. Other operating expenses for the second quarter of 1998 increased $1.9 million from the second quarter of 1997. The consolidated expense ratio of the Company's insurance subsidiaries was 34.1% for the second quarter of 1998 compared to 32.2% for the second quarter of 1997. The increase in the consolidated expense ratio reflects the effect of promotional and system development costs associated with the Company's new product lines which, for GAAP purposes, can not be deferred and amortized over the life of policies written. The ratio of consolidated other operating expenses to total revenue (adjusted for realized gains) was 30.5% during the second quarter of 1998 compared to 27.0% for the 1997 second quarter. The effective federal tax rate for consolidated operations for the second quarter of 1998 was 30.5% and is less than the statutory rate primarily because of tax exempt investment income. As a result of the factors mentioned above, principally lower realized capital gains, net income decreased $.6 million (9.9%) during the second quarter of 1998 as compared with the 1997 second quarter. COMPARISONS OF SIX MONTHS ENDED JUNE 30, 1998 TO ------------------------------------------------ SIX MONTHS ENDED JUNE 30, 1997 ------------------------------ Net premiums earned increased $7.5 million (25.8%) during the first six months of 1998 as compared to the same period of 1997. The increased premium volume is primarily attributable to the continued growth of the Company's private passenger automobile program. Premium earned from this program totaled $14.3 million for the year to date, an increase of $7.1 million (98%) from the prior year period. The Company also experienced modest growth in its small fleet trucking and small business workers' compensation programs while premiums from the Company's fleet trucking products and voluntary reinsurance assumed were level with 1997. Net investment income during the first half of 1998 was level with the 1997 period. Overall pre-tax and after tax yields were consistent with 1997 yields. The net realized gain on investments of $4.6 million for the first six months of 1998 consists nearly entirely of net gains on equity securities. Losses and loss expenses incurred during the first six months of 1998 increased $3.2 million from the first six months of 1997 for the same reasons provided for the quarterly comparison above. Loss and loss expense ratios for the comparative six month periods were as follows:
1998 1997 -------- -------- Fleet trucking 56.5% 60.1% Voluntary reinsurance assumed 40.0 62.9 Private passenger automobile 76.2 75.5 Small fleet trucking 56.4 46.0 All lines 60.1 64.8
Other operating expenses increased $3.5 million (32.7%) during the first six months of 1998 compared to the same period of 1997. The consolidated expense ratio of the Company's insurance subsidiaries was 34.1% for 1998 compared to 31.8% for 1997 for the same reasons provided above for the quarterly comparison. The ratio of other operating expenses to total revenue (adjusted for realized gains) was 30.8% for 1998 compared to 27.7% for 1997. The effective federal tax rate for consolidated operations for the first six months of 1998 was 30.3% and is less than the statutory rate primarily because of tax exempt investment income. As a result of lower realized capital gains, net income for the first six months of 1998 was $10.3 million, down 19.3% from the comparable 1997 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. YEAR 2000 --------- The Year 2000 Issue is the result of computer programs being written using two digits rather than four to define the applicable year. Any of the Company's computer programs that have time-sensitive features may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in a system failure or miscalculations causing disruptions of operations, including, among other things, a temporary inability to process transactions, send invoices, or engage in normal business activities. The insurance industry is especially aware of the Year 2000 concern given that the majority of its products and services are time and date sensitive (e.g., policy effective periods and loss occurrence dates). The Company has been in the process of developing software for its new and rapidly expanding products since 1995. All internally developed new product software is Year 2000 compliant, with minor exceptions, and currently handles approximately 90% of the Company's processed transactions. The Company is also engaged in an ongoing analysis of its remaining systems to determine the nature and extent of existing deficiencies and the appropriate corrective solutions. The Company believes that with modifications to existing software and conversions to new software, the Year 2000 Issue will not pose significant operational problems for its computer systems. However, if such modifications and conversions are not made, or are not completed on a timely basis, the Year 2000 Issue could have a significant impact on the operations of the Company. The Company is in communication with its significant suppliers and large customers to determine the extent to which the Company's interface systems are vulnerable to third party failures to remediate Year 2000 system deficiencies. It is believed that the Company's total Year 2000 project costs will not be significantly impacted by third party Year 2000 Issues based on presently available information. However, there can be no guarantee that the systems of other companies on which the Company's systems rely will be converted on a timely basis and would not have an adverse effect on the Company's systems. The Company has determined it has no significant exposure to contingencies related to the Year 2000 Issue for the products it has sold. The Company will utilize existing staff and other internal resources to reprogram and test its internally developed software, and to test its purchased software, for Year 2000 compliance. Any internally developed software that is deemed unworthy of Year 2000 conversion will be replaced with new internally developed or purchased software that is Year 2000 compliant. Any currently owned purchased software for which Year 2000 upgrades are unavailable will also be replaced with purchased software that is Year 2000 compliant. The Company anticipates completing the Year 2000 project by the first quarter of 1999. The majority of the past and future costs associated with the Year 2000 project can be attributed to internal staffing requirements associated with the development of new product software and would have largely been incurred regardless of the Year 2000 Issue. These costs, and the costs associated with the acquisition of Year 2000 compliant software from outside vendors, are not material with respect to the Company's operations or financial position. With regard to computer hardware and other non-information technology systems, the Company continuously reviews these areas and maintains, as nearly as possible, the most current hardware available. Again, this effort has been necessitated more as a result of the rapid growth of the Company's new products rather than Year 2000 concerns. As such, management does not anticipate potential problems with hardware and other non-information technology systems to be significant. The costs of the project and the date on which the Company believes it will complete its Year 2000 effort are based on management's best estimates, which were derived utilizing numerous assumptions of future events, including the continued availability of certain resources, third party modification plans and other factors. However, there can be no guarantee that these estimates will be achieved and actual results could differ materially from those anticipated. Specific factors that might cause such material differences include, but are not limited to, the availability and cost of personnel trained in this area, the ability to locate and correct all relevant computer codes, and similar uncertainties. 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 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 June 30, 1998. 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 August 13, 1998 By /s/ Gary W. Miller -------------------- -------------------------------- Gary W. Miller, Chairman and CEO Date August 13, 1998 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 June 30, 1998 INDEX TO EXHIBITS Begins on sequential page number of Form Exhibit Number 10-Q --------------------------------- ---------------------------- EXHIBIT 11 File herewith electronically Computation of per share earnings EXHIBIT 27 File herewith electronically Financial Data Schedule BALDWIN & LYONS, INC. FORM 10-Q, EXHIBIT 11 COMPUTATION OF EARNINGS PER SHARE
Three Months Ended Six Months Ended June 30 June 30 --------------------------- --------------------------- 1998 1997 1998 1997 ------------ ------------ ------------ ------------ BASIC: Average number of shares outstanding 13,736,511 13,821,503 13,716,236 13,844,111 ============ ============ ============ ============ Net Income $ 5,621,301 $ 6,238,679 $10,337,382 $12,811,548 ============ ============ ============ ============ Per share amount $ .41 $ .44 $ .75 $ .91 DILUTED: Average number of shares outstanding 13,736,511 13,821,503 13,716,236 13,844,111 Dilutive stock options--based on treasury stock method using average market price 137,177 190,053 158,527 190,204 ------------ ------------ ------------ ------------ Totals 13,873,688 14,011,556 13,874,763 14,034,315 ============ ============ ============ ============ Net Income $ 5,621,301 $ 6,238,679 $10,337,382 $12,811,548 ============ ============ ============ ============ Per share amount $ .41 $ .44 $ .75 $ .91 ============ ============ ============ ============
EX-27 2
7 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. 1,000 6-MOS DEC-31-1998 JAN-01-1998 JUN-30-1998 266,174 0 0 168,245 0 0 452,226 23,426 7,250 4,061 564,480 195,122 27,535 56 4,486 0 0 0 730 0 564,480 35,840 9,235 4,624 769 21,532 4,542 5,134 14,838 4,501 10,337 0 0 0 10,337 .75 .75 151,493 28,492 (6,960) 9,171 13,939 149,915 0 Includes money market cash equivalents. Basic earnings per share. All loss data is presented net of applicable reinsurance recoverable.
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