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, 2002 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 8, 2002:
TITLE OF CLASS NUMBER OF SHARES OUTSTANDING
Common Stock, No Par Value:
Class A (voting) 2,133,362
Class B (nonvoting) 9,512,289
Index to Exhibits located on page 11.
1
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
2002 2001
----------- -----------
ASSETS
Investments:
Fixed maturities $ 239,828 $ 246,632
Equity securities 138,839 136,399
Short-term and other 17,849 27,584
--------- ---------
396,516 410,615
Cash and cash equivalents 54,259 31,840
Accounts receivable 28,066 25,151
Reinsurance recoverable 121,475 111,585
Notes receivable from employees 7,346 2,257
Current federal income taxes - 2,590
Other assets 17,110 17,071
--------- ---------
$ 624,772 $ 601,109
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Reserves for losses and loss expenses $ 257,099 $ 247,143
Reserves for unearned premiums 28,804 23,914
Accounts payable and accrued expenses 32,128 31,783
Note payable to bank 10,000 -
Deferred federal income taxes 9,068 9,909
Current federal income taxes 4,134 -
--------- ---------
341,233 312,749
Shareholders' equity:
Common stock-no par value 621 644
Additional paid-in capital 35,166 36,272
Unrealized net gains on investments 32,029 32,377
Retained earnings 215,723 219,067
--------- ---------
283,539 288,360
--------- ---------
$ 624,772 $ 601,109
========= =========
Number of common and common
equivalent shares outstanding 11,717 12,153
Book value per outstanding share $24.20 $23.73
See notes to condensed consolidated financial statements.
2
3
BALDWIN & LYONS, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Three Months Ended
March 31
--------------------------
2002 2001
----------- -----------
REVENUES
Net premiums earned $ 21,664 $ 19,037
Net investment income 3,883 4,566
Realized net gains on investments 835 6,538
Commissions and other income 1,229 927
--------- ---------
27,611 31,068
EXPENSES
Losses and loss expenses incurred 13,764 14,360
Other operating expenses 5,818 6,297
--------- ---------
19,582 20,657
--------- ---------
INCOME BEFORE FEDERAL INCOME TAXES 8,029 10,411
Federal income taxes 2,570 3,235
--------- ---------
NET INCOME $ 5,459 $ 7,176
========= =========
PER SHARE DATA - DILUTED:
Income before realized net gains $ .41 $ .24
Realized net gains on investments .05 .35
--------- ---------
NET INCOME $ .46 $ .59
========= =========
Dividends $ .10 $ .10
========= =========
RECONCILIATION OF SHARES OUTSTANDING:
Average shares outstanding - basic 11,826 12,175
Dilutive effect of options outstanding 79 80
--------- ---------
Average shares outstanding - diluted 11,905 12,255
========= =========
See notes to condensed consolidated financial statements.
3
4
BALDWIN & LYONS, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
Three Months Ended
March 31
---------------------------
2002 2001
----------- -----------
Net cash provided by (used in) operating activities $ 13,881 ($ 1,511)
Investing activities:
Purchases of long-term investments (38,276) (73,804)
Proceeds from sales or maturities
of long-term investments 40,174 59,029
Net sales of short-term investments 11,995 5,952
Increase in notes receivable from employees (5,036) -
Other investing activities (324) 7,467
--------- ---------
Net cash provided by (used in) investing activities 8,533 (1,356)
Financing activities:
Dividends paid to shareholders (1,143) (1,218)
Cost of treasury stock purchased (8,854) (214)
Drawing on line of credit 10,000 -
Repayment on line of credit - (5,411)
Proceeds from sales of common stock 2 2
--------- ---------
Net cash provided by (used in) financing activities 5 (6,841)
--------- ---------
Increase (decrease) in cash and cash equivalents 22,419 (9,708)
Cash and cash equivalents at beginning of period 31,840 32,814
--------- ---------
Cash and cash equivalents at end of period $ 54,259 $ 23,106
========= =========
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, 2002. Interim financial
statements should be read in conjunction with the Company's annual audited
financial statements.
4
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 2002 and 2001 comparative periods.
2002 2001
----------- -----------
Quarter ended March 31:
Premiums ceded to reinsurers $ 11,670 $ 7,684
Losses and loss expenses
ceded to reinsurers 14,965 22,432
Commissions from reinsurers 3,447 2,762
Deductions from losses and loss expenses shown above represent case basis
activity for the periods presented only and do not include changes in provisions
for incurred but not reported claims which would be covered by existing
reinsurance treaties.
(4) COMPREHENSIVE INCOME OR LOSS: Total realized and unrealized income for the
quarter ended March 31, 2002 was $5,143 and compares to a total realized and
unrealized loss of $3,264 for the quarter ended March 31, 2001.
(5) REPORTABLE SEGMENTS - PROFIT OR 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,
underwriting gain or loss for the fleet trucking segment is computed after
elimination of inter-company commissions and, accordingly, consolidated
underwriting gain or loss presented here will not agree with statutory
underwriting gains or losses which may be quoted elsewhere in the Company's
financial statements.
PRIVATE SMALL
FLEET PASSENGER FLEET REINSURANCE
TRUCKING AUTOMOBILE TRUCKING ASSUMED ALL OTHER TOTALS
----------- ----------- ----------- ----------- ----------- -----------
QUARTER ENDED MARCH 31:
2002:
Direct and assumed premium written $ 21,504 $ 10,869 $ 2,635 $ 1,775 $ 1,442 $ 38,225
Net premium earned and fee income 10,180 7,915 2,219 1,206 831 22,351
Underwriting gain (loss) 4,362 688 303 253 (175) 5,431
2001:
Direct and assumed premium written 14,590 11,078 2,867 1,018 1,257 30,810
Net premium earned and fee income 7,073 8,886 2,047 973 607 19,586
Underwriting gain (loss) 1,668 (426) (32) 626 (251) 1,585
5
6
NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(6) REPORTABLE SEGMENTS - RECONCILIATION TO CONSOLIDATED REVENUE AND
CONSOLIDATED PROFIT OR LOSS: The following tables are reconciliations of
reportable segment revenues and profits to the Company's consolidated revenue
and income before federal income taxes, respectively.
Three Months Ended
March 31
--------------------------
2002 2001
----------- -----------
REVENUE:
Net premium earned and fee income $ 22,351 $ 19,586
Net investment income 3,883 4,566
Realized net gains on investments 835 6,538
Other income 542 378
--------- ---------
TOTAL CONSOLIDATED REVENUE $ 27,611 $ 31,068
========= =========
PROFIT:
Underwriting gain $ 5,431 $ 1,585
Net investment income 3,883 4,566
Realized net gains on investments 835 6,538
Corporate expenses (2,120) (2,278)
--------- ---------
INCOME BEFORE FEDERAL INCOME TAXES $ 8,029 $ 10,411
========= =========
6
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 flows 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 but, in
general, overall premium ceded rates, net of ceding commission allowances, have
not changed significantly since 1999.For the three months ended March 31, 2002,
the Company experienced positive cash flow from operations totaling $13.9
million, a significant improvement from the $1.5 million in negative cash flow
generated during the first quarter of 2001. The primary difference in cash
flows for the periods presented is attributable to an unusually large amount of
trucking insurance claim settlements during the first quarter of 2001 and from
federal tax refunds received during the first quarter of 2002.
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 just over 2 years at March 31, 2002.
The Company's assets at March 31, 2002 included $54.3 million in investments
classified as short-term or cash equivalents which were readily convertible to
cash without significant market penalty. An additional $37.2 million of fixed
maturity investments will mature within the twelve month period following March
31, 2002. 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
March 31, 2002, $41.6 million may be transferred by dividend or loan to the
parent company without approval by, or notification to, regulatory authorities.
An additional $193.7 million of shareholder's equity of the 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 permit ready access by the parent
company to short-term and long-term sources of credit. In addition, the parent
company had cash and marketable securities valued at $16.9 million at March 31,
2002.
7
8
RESULTS OF OPERATIONS
---------------------
COMPARISONS OF FIRST QUARTER, 2002 TO FIRST QUARTER, 2001
---------------------------------------------------------
Net premiums earned during the first quarter of 2002 increased $2.6 million
(14%) as compared to the same period of 2001. The increase is due primarily to
a 44% increase in premiums from the Company's large fleet trucking program as a
tightening market has allowed for rate increases as well as the addition of new
accounts since the first quarter of 2001. In addition, the Company's small
business workers' compensation and small fleet trucking programs increased 40%
and 9%, respectively, due to rate increases and continued geographic expansion.
Offsetting the above increase, net premiums from the Company's private passenger
automobile program decreased 12% resulting from rate increases and a re-
underwriting effort that has allowed this division to operate at a more
profitable level.
Net investment income during the first quarter of 2002 was 15% lower than the
first quarter of 2001 due primarily to the continued decline in investment
yields. The short-term nature of the Company's fixed income investment
portfolio has been negatively impacted by the numerous interest rate reductions
by the Federal Reserve Board since January 1, 2001. Pre-tax yields dropped
nearly a full percentage point from the prior year quarter. After tax yields
posted a similar decline.
The first quarter 2002 net realized gain of $.8 million included net gains on
equity securities and fixed maturity investments of $.5 million and $.3 million,
respectively.
Losses and loss expenses incurred during the first quarter of 2002 were $.6
million lower than the first quarter of 2001, despite higher premium volume, as
the result of significantly improved loss experience in all of the company's
product divisions except for reinsurance assumed which experienced a higher, but
still very favorable, loss ratio during 2002.. Loss and loss expense ratios for
the comparative first quarters were as follows:
2002 2001
--------- ---------
Fleet trucking 67.3% 83.7%
Reinsurance assumed 48.1 18.0
Private passenger automobile 62.9 74.9
Small fleet trucking 56.6 70.2
All lines 63.5 75.4
Other operating expenses for the first quarter of 2002 decreased 7.6% from the
first quarter of 2001 compared with the 14% net premium increase noted above.
The Company cedes a large portion of its direct premiums to reinsurers and these
reinsurance premiums carry significant expense offsets. The ratio of
consolidated other operating expenses to total revenue (adjusted for realized
gains) was 21.7% during the first quarter of 2002 compared to 25.7% for the 2001
first quarter.
The effective federal tax rate for consolidated operations for the first quarter
of 2002 was 32.0% and is less than the statutory rate primarily because of tax
exempt investment income.
As a result of the factors mentioned above, and principally the decrease in net
capital gains on investments, net income decreased $1.7 million compared with
the 2001 first quarter.
8
9
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
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 March 31, 2002.
9
10
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, 2002 By /s/ Gary W. Miller
-------------- --------------------------------
Gary W. Miller, Chairman and CEO
Date May 13, 2002 By /s/ G. Patrick Corydon
-------------- --------------------------------
G. Patrick Corydon,
Senior Vice President - Finance
(Principal Financial and
Accounting Officer)
10
11
BALDWIN & LYONS, INC.
Form 10-Q for the fiscal quarter
ended March 31, 2002
INDEX TO EXHIBITS
BEGINS ON SEQUENTIAL
PAGE NUMBER OF FORM
EXHIBIT NUMBER 10-Q
--------------------------- --------------------------
EXHIBIT 11 Filed herewith electronically
Computation of per share earnings
11