SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 1996
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ________ to ___________
Commission file number: 1-11794
E. W. Blanch Holdings, Inc.
State or other jurisdiction of (I.R.S. Employer
incorporation or organization Identification No.)
Delaware 41-1741779
E. W. Blanch Holdings, Inc.
3500 West 80th Street, Minneapolis, Minnesota 55431
612-835-3310
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 (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No ____
(APPLICABLE ONLY TO CORPORATE REGISTRANTS)
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of the latest practicable date.
Title Outstanding
Common Stock par value $.01 per share 13,258,555
Part I. Financial Information
Item 1. Financial Statements
E. W. Blanch Holdings, Inc.
Consolidated Statements of Income
(in thousands, except per share amounts)
Unaudited
Three months ended Nine months ended
September 30, September 30,
-------------------- -------------------
1996 1995 1996 1995
-------------------- -------------------
Revenues:
Brokerage commissions and fees $27,948 $25,072 $73,196 $68,734
Investment income 1,880 2,132 5,381 5,740
-------------------- -------------------
Total revenues 29,828 27,204 78,577 74,474
Expenses:
Salaries and benefits 10,985 9,860 32,075 30,397
Travel and marketing 1,735 1,631 5,313 4,487
General and administrative 5,091 4,050 14,404 11,907
Amortization of goodwill 784 745 2,320 2,235
Interest and other expense 62 109 172 287
------------------- ------------------
Total expenses 18,657 16,395 54,284 49,313
------------------- ------------------
Income before taxes 11,171 10,809 24,293 25,161
Income taxes 4,312 4,178 9,393 9,740
------------------- ------------------
Net income $6,859 $6,631 $14,900 $15,421
=================== ==================
Net income per share $0.52 $0.49 $1.12 $1.13
=================== ==================
Weighted average number of shares
of Common Stock outstanding 13,296 13,656 13,292 13,652
=================== ===================
Cash dividends declared per share $0.10 $0.10 $0.30 $0.30
=================== ===================
See accompanying notes.
E. W. Blanch Holdings, Inc.
Consolidated Balance Sheets
(in thousands)
September 30, December 31,
1996 1995
----------------------------------
(Unaudited)
Assets
Current assets:
Cash and cash equivalents $ 1,775 $ 4,977
Due from fiduciary accounts 11,173 4,537
Premium finance notes 15,954 12,212
Prepaid insurance 2,308 1,212
Other current assets 4,617 2,117
---------------------------------
Total current assets 35,827 25,055
Long-term investments, available for sale 7,691 7,035
Property and equipment, net 12,177 9,386
Goodwill, net 37,748 38,939
Other assets 2,607 2,143
Fiduciary accounts--assets 433,408 414,855
---------------------------------
Total assets $529,458 $497,413
=================================
Liabilities and Shareholders' equity
Current liabilities:
Accrued compensation $ 2,427 $ 3,311
Notes payable to banks 6,100 4,500
Accounts payable 3,252 3,848
Current portion of long-term liabilities 799 582
Other current liabilities 1,616 1,379
--------------------------------
Total current liabilities 14,194 13,620
Long-term debt, less current portion 1,071 350
Deferred income taxes 1,782 1,320
Other liabilities, less current portion 406 589
Fiduciary accounts--liabilities 433,408 414,855
--------------------------------
Total liabilities 450,861 430,734
Shareholders' equity 78,597 66,679
--------------------------------
Total liabilities and shareholders' equity $529,458 $497,413
================================
See accompanying notes.
E. W. Blanch Holdings, Inc.
Consolidated Statements of Cash Flows
(in thousands)
Unaudited
Nine months ended September 30,
1996 1995
----------------------------------
Operating Activities
Net income $ 14,900 $ 15,421
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation and amortization 4,458 3,792
Equity in the earnings of Swire Blanch (207) (185)
Loss on sale of investments 26 91
Changes in operating assets
and liabilities:
Due from fiduciary accounts (6,636) (248)
Other current assets (4,222) (3,152)
Accrued compensation (884) (23)
Accounts payable and other
current liabilities 89 (170)
Other, net (260) 650
----------------------------------
Net cash provided by operating activities 7,264 16,176
Investing Activities
Purchases of property and equipment (2,950) (3,038)
Purchases of investments (1,227) (200)
Issuance of finance notes receivable, net (3,773) (5,379)
Acquisition of subsidiary, net of cash - (4,874)
Sales and other disposals of investments 513 11,122
Other investing activities, net (84) (171)
----------------------------------
Net cash used in investing activities (7,521) (2,540)
Financing Activities
Proceeds from sale of treasury shares 928 -
Dividends paid (3,971) (4,096)
Net (repayments) borrowings on lines of credit 1,557 (3,875)
Payments on long-term debt (1,275) (288)
Other financing activities, net (184) (230)
----------------------------------
Net cash (used in) provided by
financing activities (2,945) (8,489)
----------------------------------
Net increase/(decrease) in cash and
cash equivalents (3,202) 5,147
Cash and cash equivalents at
beginning of period 4,977 1,338
----------------------------------
Cash and cash equivalents at end of period $ 1,775 $ 6,485
==================================
See accompanying notes.
E. W. Blanch Holdings, Inc.
Notes to Consolidated Financial Statements
September 30, 1996
1. Organization and Basis of Presentation
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and in accordance with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they 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 a fair
presentation have been included. Operating results for the interim periods are
not necessarily indicative of the results for the full year. For further
information, refer to the consolidated financial statements and footnotes
thereto included in the Company's annual report to shareholders for the year
ended December 31, 1995.
2. Shareholder's Equity
In 1996, the Company began using treasury shares to fund employee benefit plans
which include common shares of Company stock as an investment option.
3. Credit Facility
In August 1996, the Company entered into a $30 million credit facility with
Ranger Funding Corporation ("Ranger"), a special purpose corporation established
by NationsBank, N.A., pursuant to which Ranger issues commercial paper for the
benefit of the Company. The Company has a $30 million line of credit with a
syndicate of banks including Norwest Bank Minnesota N.A., Nations Bank of Texas
N.A., and Morgan Guaranty Trust Company, which expires on April 30, 1999. This
line of credit functions as a backup liquidity facility whose capacity is
reduced by any amounts borrowed from Ranger. Interest rates on loans made by
Ranger approximate market commercial paper rates at the time of the borrowing by
the Company, thereby providing a lower cost of funds to the Company than
borrowings under the line of credit. A minimum of $5 million must be borrowed,
but there are no facility fees or covenants. However, as a condition of the
loan, the Company is required to maintain certain qualifying ratings from
Moody's Investor's Service and Standard & Poor's Corporation. This facility is
subject to annual renewal. The Company had $5 million outstanding, at a rate of
5.96%, on the Ranger facility at September 30, 1996.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operation
E. W. Blanch Holdings, Inc.
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Forward Looking Statements Except for the historical information contained
herein, the matters discussed in this quarterly report on Form 10-Q are forward
looking statements for purposes of the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995. These statements involve risks and
uncertainties, many of which are outside the Company's control and, accordingly,
actual results may differ materially. These risks and uncertainties include
competition, dependence on key personnel, market conditions in the insurance and
reinsurance industries, government regulation, fiduciary funds, and the impact
of specific engagements. The Company's Form 8-K filed with the SEC on March 22,
1996 includes a discussion of these risk factors and is incorporated herein by
reference. General The Company is a leading provider of integrated risk
management and distribution services including reinsurance intermediary
services, risk management consulting and administration services, and wholesale
insurance services. The Company categorizes its business operations into three
segments: reinsurance services, wholesale insurance services, and general
corporate services. The following is a summary of the revenues and pretax income
(loss) of each business segment for the periods indicated (in thousands):
Quarter Ended September 30, 1996
Brokerage Pre-tax
commissions Investment Total income
and fees Income Revenues (loss)
----------- ---------- -------- --------
Reinsurance services $23,324 $1,104 $24,428 $11,964
Wholesale insurance services 4,777 672 5,449 50
General corporate services - 458 458 (843)
Eliminations (153) (354) (507) -
----------- ---------- -------- --------
$27,948 $1,880 $29,828 $11,171
=========== ========== ======== ========
Quarter Ended September 30, 1995
Brokerage Pre-tax
commissions Investment Total income
and fees Income Revenues (loss)
----------- ---------- -------- --------
Reinsurance services $21,447 $1,420 $22,867 $12,943
Wholesale insurance services 3,625 572 4,197 (665)
General corporate services - 421 421 (1,469)
Elimination - (281) (281) -
---------- ---------- -------- --------
$25,072 $2,132 $27,204 $10,809
========== ========== ======== ========
Nine Months Ended September 30, 1996
Brokerage Pre-tax
commissions Investment Total income
and fees Income Revenues (loss)
----------- ----------- ---------- ---------
Reinsurance services $60,670 $3,136 $63,806 $28,133
Wholesale insurance services 12,679 1,982 14,661 (777)
General corporate services - 1,261 1,261 (3,063)
Eliminations (153) (998) (1,151) -
----------- ----------- ---------- ---------
$73,196 $5,381 $78,577 $24,293
=========== =========== ========== =========
Nine Months Ended September 30, 1996
Brokerage Pre-tax
commissions Investment Total income
and fees Income Revenues (loss)
----------- ---------- ---------- ---------
Reinsurance services $56,377 $3,564 $59,941 $30,818
Wholesale insurance services 12,357 1,695 14,052 (1,550)
General corporate services - 966 966 (4,107)
Eliminations - (485) (485) -
----------- ---------- ---------- ---------
$68,734 $5,740 $74,474 $25,161
=========== ========== ========== =========
Reinsurance services continue to be the primary source of the Company's revenues
and pre-tax income, and include the reinsurance intermediary services provided
by E. W. Blanch Co., Inc. (EWB Co.), the risk management services provided by
Paragon Reinsurance Risk Management Services, Inc. (Paragon) and E.W. Blanch
Capital Risk Solutions, Inc. (Capital Risk Solutions), and the 50% interest in
the international reinsurance services of Swire Blanch Holdings Limited (Swire
Blanch).
Wholesale insurance services include the wholesale insurance distribution,
alternative distribution and premium finance services provided by Blanch
Insurance Services, Inc. and the association dues and distribution of
specialized insurance products business performed by InsGroup, which was
acquired on January 1, 1996. Also included in the wholesale segment effective
January 1, 1996, is EWB Co.'s unit which specializes in life, accident/health
and medical professional liability reinsurance. The operations of this unit were
combined with Medical Reinsurance Corporation (MRC), a wholly owned subsidiary
of E.W. Blanch Wholesale Insurance Services, Inc., and the combined operation
has the capability to produce, underwrite and place insurance and reinsurance on
behalf of accident/health and medical professional liability companies. Prior
year segment information has been restated to conform with the current year
presentation. MRC had pre-tax income of $0.4 million in the quarter ended
September 30, 1996 and pre-tax loss of $0.2 million in the quarter ended
September 30, 1995. MRC had pre-tax income for the nine months ended September
30, 1996 of $0.4 million compared to $0.1 million of pre-tax income for the nine
months ended September 30, 1995.
General corporate services includes investment income from corporate
investments, corporate expenses such as legal, finance, corporate development,
and the office of the chief executive, and results of other insignificant
operations.
Reinsurance services revenues for the third quarter of 1996 rose 6.8% from the
third quarter of 1995 due primarily to new account production and growth in
existing business. This revenue increase was offset by an increase in expenses,
resulting in a decrease in pre-tax income for the third quarter of 1996 compared
to the same period a year ago. Based on several significant production
opportunities, including an opportunity related to the California Earthquake
Authority discussed below, the Company remains optimistic about its ability to
grow the revenues and earnings of its core reinsurance services business.
The Company is engaged as the lead reinsurance intermediary by the California
Earthquake Authority (the "CEA"). The California Legislature passed the
necessary legislation to enact the CEA as of December 1, 1996 in late August.
The legislation was then signed and enacted into law by the Governor in late
September. As passed, the legislation requires participation by insurers
representing at least 70% of California's residential earthquake market. The CEA
is in the process of securing this 70% participation threshold which is expected
to be achieved by November 15, 1996. The legislation also required a tax-exempt
status ruling from the Internal Revenue Service, which has been received.
Required capacity commitments from the reinsurance marketplace have been
achieved. The Company remains optimistic that the necessary participation by
insurers representing 70% of the residential earthquake market will be obtained,
however, there are no assurances that this will happen.
During the quarter, the Company, through its wholly owned subsidiary Paragon,
expanded its risk management servicing capabilities by acquiring a reinsurance
software system and certain assets of The UniSURe Corporation. Paragon will
market, develop, and support this software product, as well as provide
outsourcing services. The Company expects an immaterial loss from this software
product in 1996.
The Company plans to continue to increase its expenditures in the development of
risk management services through the expansion of its Capital Risk Solutions
subsidiary as well as its catastrophe modeling and consulting capabilities,
including the development of a proprietary model.
The wholesale insurance business began to show profitable results during the
third quarter of 1996, as a result of increases in premium volume. However,
there can be no assurances as to such future profitability. The Company is in
the process of completing a strategic review of the future opportunities for the
wholesale operation, including an evaluation of the associated goodwill.
During the quarter, the wholesale operation announced the formation of Rockwood
Programs, Inc. to manage, market, and underwrite program business to insurance
clients. This unit will also serve as an outsourced marketing department to
insurers and other program administrators by providing research, telemarketing,
marketing consulting, production of marketing materials and administration of a
comprehensive "back office" to its clients. This unit is expected to have an
immaterial loss in the last half of 1996.
The Company continues to be involved with significant alternative distribution
opportunities. There was continued progress made on these opportunities during
the quarter, specifically including the announcement by Allstate Insurance
Company to transfer certain Florida homeowners policies on renewal to Clarendon
National Insurance Company starting in November 1996. The Company remains
optimistic that its alternative distribution opportunities will begin to
generate meaningful revenues later in 1996, but no assurances can be given as to
the completion of these transactions or the timing.
Third Quarter 1996 Compared with Third Quarter 1995
Reinsurance Services
The following are the components of Brokerage commissions and fees for the
reinsurance services segment for the quarter ended September 30 (in thousands):
Quarter ended September 30,
----------------------------------
1996 1995
---------------- ----------------
Reinsurance brokerage $22,198 $20,976
Risk management fees 1,015 378
Equity in Swire Blanch 111 93
---------------- ----------------
$23,324 $21,447
================ ================
Reinsurance brokerage increased $1.2 million, or 5.8%, to $22.2 million for the
quarter ended September 30, 1996 compared to $21.0 million the prior year. The
components of the net increase were as follows: new business production, $3.3
million, offset by non-continuing business, $1.5 million, declines on existing
business, $0.7 million, and other net increases, $0.1 million. The $0.7 million
decline on existing business is attributed to continuing competitive market
conditions and decreases in clients' ceded volume offset by other net increases.
Risk management fees were $1.0 million for the quarter ended September 30, 1996
compared to $0.4 million the prior year. The increase from the prior period is
primarily due to sales and maintenance fees associated with the reinsurance
software system acquired on July 1, 1996, which contributed $0.5 million of fee
income. Fiduciary investment income declined $0.3 million or 22.2% to $1.1
million for the quarter ended September 30, 1996 compared to $1.4 million the
prior year. The average balance for the quarter ended September 30, 1996 was
$82.7 million compared to $92.7 million at September 30, 1995. The average yield
was 5.2% for the quarter ended September 30, 1996 compared to 6.1% the prior
year. Operating expenses prior to overhead allocations, increased 21.4% for the
quarter ended September 30, 1996 primarily due to increases in salaries and
benefits as a result of key staff additions in the risk management services area
(primarily in Capital Risk Solutions and Paragon's Catastrophe Modeling and
Consulting Group) and normal salary progressions. Other expense increases were
experienced in travel and marketing, office rent, management and consulting
expense, and amortization of software.
Wholesale Insurance Services
The following are the components of Brokerage commissions and fees for the
wholesale insurance services segment for the quarter ended September 30 (in
thousands):
Quarter ended September 30,
-----------------------------------
1996 1995
------------------ -------------
General agency commissions and fees $3,191 $2,888
Medical Reinsurance Corporation
commissions and fees 1,413 737
Other commissions and fees 173 -
------------------ -------------
$4,777 $3,625
================== ==============
General agency commissions and fees increased $0.3 million in the third quarter
of 1996 compared to a year ago. Total written premium and fees for the quarter
ended September 30 are as follows (in thousands):
Quarter ended September 30,
--------------------------------------------------------
1996 1995
-------------------------- -------------------------
Written Written
premium and % of Total premium and % of Total
fees fees
------------ ----------- ------------- ----------
Commercial lines $ 9,281 35.3% $ 8,091 45.2%
Special risks 8,597 31.7 6,924 38.7
Personal lines 8,266 31.4 2,068 11.6
NAFTA/Mexican National 183 0.6 805 4.5
------------ ----------- ------------- ----------
$26,327 100.0% $17,888 100.0%
============ =========== ============= ==========
Although premiums and related revenues in Personal lines have increased as a
result of lower rates, the Company has experienced unfavorable loss ratios in
this line of business.
Medical Reinsurance Corporation commissions and fees increased $0.7 million, or
91.7%, to $1.4 million for the quarter ended September 30, 1996 compared to $0.7
million the prior year.
Other commissions and fees result primarily from dues and fees earned by
InsGroup, acquired effective January 1, 1996. InsGroup is an association of more
than 80 independent property/casualty insurance agencies located throughout the
United States.
The following are the components of Investment income of the wholesale insurance
services segment for the quarter ended September 30 (in thousands):
Quarter ended September 30,
----------------------------------------
1996 1995
----------------- -----------------
Premium finance interest and fees $ 585 $ 518
Fiduciary investment income 80 54
Net realized gain/(loss) on
sales of investments 7 -
----------------- -----------------
$ 672 $ 572
================= =================
Premium finance interest and fees increased $79,000, or 15.3%, to $0.6 million
for the quarter ended September 30, 1996 compared to $0.5 million the prior
year. The increase results from growth of the outstanding balance of premium
finance notes. The outstanding balance of premium finance notes was $15.9
million at a weighted average rate of 12.6% at September 30, 1996, compared to
$12.2 million at 13.5% at December 31, 1995, and $11.9 million at 14.7% at
September 30, 1995.
Fiduciary investment income increased $26,000 from the prior year. The average
invested balance for the quarter was $5.3 million compared to $3.3 million the
prior year. The average yield was 5.1% for the quarter ended September 30, 1996
compared to 6.1% the prior year.
Operating expenses prior to overhead allocations, increased 13.5% for the
quarter ended September 30, 1996, compared to the quarter ended September 30,
1995. This increase is comprised primarily of the expenses associated with the
InsGroup and Rockwood operations, an increase in interest expense related to the
growth in premium finance notes, and an increase in general and administrative
expenses, resulting primarily from changes in claims processing.
General Corporate Services and Eliminations
Corporate investment income of $0.5 million, approximates the prior year and is
comprised of $0.1 million of interest income from investment securities and $0.4
million of inter-company interest charged to the wholesale insurance segment to
fund the premium finance operation. Investment securities income declined $0.1
million, or 50%, to $0.1 million for the quarter ended September 30, 1996
compared to the prior year. The prior year amount includes $0.2 million interest
income on investment securities, $0.2 million of inter-company interest charged
to the wholesale insurance segment and $0.1 million in losses on the sales of
investment securities. The decline in investment income is due to sales of
securities in 1995, primarily to fund the October 1995 purchase of treasury
stock, which resulted in a smaller investment portfolio of $7.7 million at
September 30, 1996, compared to $13.6 million at September 30, 1995. The Company
continues to employ its available funds to generate greater investment returns
in its premium finance business rather than making passive investments in
securities.
General corporate expenses, for the quarter ended September 30, 1996,
approximate the prior year resulting primarily from lower salary and benefit
expenses offset by additional office space, losses on the sale of real estate,
and other net expense increases.
Income Taxes
The Company's effective tax rate, after adjustment for equity in the income of
Swire Blanch which is already reflected on an after tax basis, continues to be
39%.
Nine months ended September 30, 1996 compared to nine months ended September 30,
1995
Reinsurance Services
The following are the components of Brokerage commissions and fees for the
reinsurance services segment for the nine months ended September 30 (in
thousands):
Nine months ended September 30,
---------------------------------------------
1996 1995
------------------- -------------------
Reinsurance brokerage $58,284 $54,931
Risk management fees 2,179 1,261
Equity in Swire Blanch 207 185
------------------- -------------------
$60,670 $56,377
=================== ===================
Reinsurance brokerage increased $3.4 million, or 6.1%, to $58.3 million for the
nine months ended September 30, 1996 compared to $54.9 million the prior year.
The components of the net increase were as follows: new business production,
$10.1 million, offset by non-continuing business, $5.1 million, declines on
existing business, $1.8 million, and other net increases, $0.2 million. The $1.8
million decline on existing business is attributed to a reduction in catastrophe
contract premium adjustments and continuing competitive market conditions offset
by other net increases in clients' ceded volume.
Risk management fees were $2.2 million for the nine months ended September 30,
1996 compared to $1.3 million the prior year. The increase from the prior period
is primarily sales and maintenance fees associated with the reinsurance software
system acquired on July 1, 1996, which contributed $0.5 million of fee income.
Fiduciary investment income declined $0.5 million or 12.0% to $3.1 million for
the nine months ended September 30, 1996 compared to $3.6 million for the prior
year. The average balance for the nine months ended September 30, 1996 was $76.9
million compared to $80.8 million at September 30, 1995. The average yield was
5.4% for the nine months ended September 30, 1996 compared to 5.9% the prior
year.
Operating expenses, prior to overhead allocations, increased 17.6% for the nine
months ended September 30, 1996 primarily due to net increases in salaries and
benefits as a result of key staff additions in the risk management services area
(primarily in Capital Risk Solutions and Paragon's Catastrophe Modeling and
Consulting Group) and normal salary progressions. Other expense increases were
experienced in travel and marketing, office rent, management and consulting
expense, and amortization of software.
Wholesale Insurance Services
The following are the components of Brokerage commissions and fees for the
wholesale insurance services segment for the nine months ended September 30 (in
thousands):
Nine months ended September 30,
--------------------------------
1996 1995
-------------- --------------
General agency commissions and $ 8,417 $ 8,672
Medical Reinsurance Corporation
commissions and fees 3,228 3,685
Other commissions and fees 1,034 -
-------------- --------------
$12,679 $12,357
============== ==============
General agency commissions and fees declined $0.3 million, or 2.9%, to $8.4
million for the nine months ended September 30, 1996 compared to $8.7 million
for the nine months ended September 30, 1995, due primarily to declines in
NAFTA/Mexican National business, offset by increases in Personal lines and
Special risks. Total written premium and fees for the nine months ended
September 30, are as follows (in thousands):
Nine months ended September 30,
--------------------------------------------------------
1996 1995
-------------------------- ----------------------------
Written Written
premium and % of Total premium and % of Total
fees fees
------------ ---------- ------------- -------------
Commercial lines $25,224 39.8% $25,193 47.4%
Special risks 17,842 28.1 15,678 29.5
Personal lines 19,454 30.7 9,362 17.6
NAFTA/Mexican National 903 1.4 2,962 5.5
------------ ---------- ------------- -------------
$63,423 100.0% $53,195 100.0%
============ ========== ============= =============
Although premiums and related revenues in Personal lines have increased as a
result of lower rates, the Company has experienced unfavorable loss ratios in
this line of business.
Medical Reinsurance Corporation commissions and fees declined $0.5 million, or
12.4%, to $3.2 million for the nine months ended September 30, 1996 compared to
$3.7 million the prior year. The decline from the prior year results primarily
from lost business.
Other commissions and fees result primarily from dues and fees earned by
InsGroup, acquired effective January 1, 1996. InsGroup is an association of more
than 80 independent property/casualty insurance agencies located throughout the
United States.
The following are the components of Investment income for the wholesale
insurance services segment for the nine months ended September 30 (in
thousands):
Nine months ended September 30,
----------------------------------------
1996 1995
----------------- -----------------
Premium finance interest and fee $1,683 $1,455
Fiduciary investment income 293 240
Net realized gain/(loss) on
sales of investments 6 -
----------------- -----------------
$1,982 $1,695
================= =================
Premium finance interest and fees increased $228,000, or 15.7%, to $1.7 million
for the nine months ended September 30, 1996 compared to $1.5 million the prior
year. The increase results from the continued growth of the outstanding balance
of premium finance notes. The outstanding balance of premium finance notes was
$15.9 million at a weighted average rate of 12.6% at September 30, 1996,
compared to $12.2 million at 13.5% at December 31, 1995, and $11.9 million at
14.7% at September 30, 1995.
Fiduciary investment income increased slightly from the prior year as a result
of larger average balances. The average invested balance for the nine months
ended September 30, 1996 was $8.0 million compared to $5.4 million the prior
year. The average yield was 5.0% for the nine month ended September 30, 1996
compared to 6.1% the prior year.
Operating expenses, prior to overhead allocations, increased 6.5% for the nine
months ended September 30, 1996, compared to the nine months ended September 30,
1995. This increase is comprised primarily of expenses associated with the
InsGroup and Rockwood operations, an increase in interest expense related to the
growth in premium finance notes, and general and administrative expenses,
resulting primarily from changes in claims processing, offset by reductions in
salary and benefits, resulting from the effects of staff reductions which
occurred in the second quarter of 1995.
General Corporate Services and Eliminations
Corporate investment income for the nine months ended September 30, 1996 is $1.3
million and is comprised of $0.3 million of interest income from investment
securities and $1.0 million of inter-company interest charged to the wholesale
insurance segment to fund the premium finance operation. The prior year amount
was $1.0 million and is comprised of $0.6 million of investment securities
income, $0.5 million of inter-company interest charged to the wholesale segment
and $0.1 million of losses on sales of investment securities. Investment
securities income declined $0.3 million, or 50%, to $0.3 million for the nine
months ended September 30, 1996 compared to the prior year. The decline in
investment securities income is due to sales of securities in 1995, primarily to
fund the October 1995 purchase of treasury stock, which resulted in a smaller
investment portfolio of $7.7 million at September 30, 1996, compared to $13.6
million at September 30, 1995. The Company has generally employed its available
funds to generate greater investment returns in its premium finance business
rather than making passive investments in securities.
General corporate expenses increased 0.6% for the nine months ended September
30, 1996, compared to the prior year. This increase results primarily from
additional office space, losses on the sale of real estate, and other net
expense increases, offset by decreases in salary and benefits expense.
Income Taxes
The Company's effective tax rate, after adjustment for equity in the income of
Swire Blanch which is already reflected on an after tax basis, continues to be
39%.
Liquidity and Capital Resources
The Company's sources of funds consist primarily
of brokerage commissions and fees and investment income. Funds are applied
generally to the payment of operating expenses, to the purchase of equipment
used in the ordinary course of business, to the repayment of outstanding
indebtedness and to the distribution of earnings. The Company's cash and cash
equivalents were $1.8 million at September 30, 1996. The Company's long-term
investment portfolio at September 30, 1996 was $7.7 million. The largest
component of the portfolio is comprised of municipal securities that are exempt
from federal income taxes, are rated "AA" or better by a major rating
organization, and have an average maturity of 2.8 years with an average yield of
5.2%. The Company also maintains some equity investments. The market value of
the Company's investment portfolio at September 30, 1996 is $42,000 less than
cost, compared to $0.1 million below cost at December 31, 1995. Cash, short-term
investments and the Company's line of credit are available and managed for the
payment of its operating and capital expenditures. The Company is not subject to
any regulatory capital requirements in connection with its business.
The Company generated $7.3 million of cash from operations during the first nine
months of 1996 compared with $16.2 million for the same period in 1995. Cash
provided by operating activities reflects the net income of the Company adjusted
for the non-cash charges of depreciation and amortization, equity in the income
of Swire Blanch, gains and losses on the sale of investment securities and
equipment, and changes in other working capital accounts. The change from the
prior period is primarily a result of timing differences in payments from the
fiduciary accounts.
Net cash used in investing activities was $7.5 million during the first nine
months of 1996, compared with $2.5 million during the first nine months of 1995.
The 1996 amount includes net issuance of premium finance notes, $3.8 million,
purchases of property and equipment, $3.0 million, and purchases of investments,
$1.2 million, offset by sales of investments, $0.5 million, and other net
decreases, $0.1 million. The 1995 amount includes the net issuance of $5.4
million of premium finance notes, $3.0 million of purchases of property and
equipment, offset by $11.1 million from sales and disposals of investments, and
other net investments of $5.0 million. Premium finance notes are part of the
wholesale insurance operation. The Company has increased its investments in
computerized information systems in an effort to improve information reporting
and the efficient processing of its business. The Company intends to continue to
increase its investments in such systems.
Net cash used in financing activities for the nine months ended September
30, 1996 was $2.9 million and consisted primarily of $4.0 million in dividends
paid to shareholders, $1.3 million of payments on long term debt and other net
uses of $0.2 million, offset by other net borrowings on lines on credit, $1.6
million, and proceeds of sales of treasury shares, $0.9 million. The Company
began using treasury shares to fund employee benefit plans in 1996. In the prior
year, net cash used by financing activities was $8.5 million, consisting
primarily of $4.1 million of cash dividends paid to shareholders, $3.9 million
of net borrowings on lines of credit, and other net cash used of $0.5 million.
On April 29, 1996, the Company's previous $25.0 million line of credit with a
syndicate of banks, including Norwest Bank Minnesota, N.A., Nations Bank of
Texas N.A., and Morgan Guaranty Trust Company of New York, expired. The Company
renewed a $30.0 million facility with the same syndicate of banks for a term of
three years. The facility includes two borrowing methods: short term based on a
floating rate, at 75 basis points less than the base rate and longer term (30,
60, or 90 days), at 75 basis points over the LIBOR rate. The base rate is
defined as the greater of the prime rate or 150 basis points over the federal
funds rate. The approximate rates for these two borrowing methods were 7.4% and
6.4% respectively at September 30, 1996. Additionally, the Company pays a
commitment fee of 25 basis points on unused balances.
In August 1996, the Company entered into a $30 million credit facility with
Ranger Funding Corporation ("Ranger"), a special purpose corporation established
by NationsBank, N.A., pursuant to which Ranger issues commercial paper for the
benefit of the Company. The Company has a $30 million line of credit with a
syndicate of banks including Norwest Bank Minnesota N.A., Nations Bank of Texas
N.A., and Morgan Guaranty Trust Company, which expires on April 30, 1999. This
line of credit functions as a backup liquidity facility whose capacity is
reduced by any amounts borrowed from Ranger. Interest rates on loans made by
Ranger approximate market commercial paper rates at the time of the borrowing by
the Company, thereby providing a lower cost of funds to the Company than
borrowings under the line of credit. A minimum of $5 million must be borrowed,
but there are no facility fees or covenants. However, as a condition of the
loan, the Company is required to maintain certain qualifying ratings from
Moody's Investor's Service and Standard & Poor's Corporation. This facility is
subject to annual renewal. The Company had $5 million outstanding, at a rate of
5.96%, on the Ranger facility at September 30, 1996.
On October 24, 1996 the Board of Directors declared a regular quarterly cash
dividend of $0.10 per share payable December 2, 1996 to shareholders of record
as of November 8, 1996.
The Company believes that its cash and investments, combined with its borrowing
facilities and internally generated funds, will be sufficient to meet its
present and reasonably foreseeable capital needs.
Part II. Other Information
Items 1, 2, 3, 4, and 5 are not applicable and have been omitted
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 27. Financial Data Schedule
Pursuant to instruction 4 (iii) of Item 601 (b) of Regulation S-K, copies of
certain instruments defining the rights of holders of certain debt of the
registrant are not filed and the registrant agrees to furnish copies thereof to
the Securities and Exchange Commission upon request.
(b) The Company filed no Current Reports on Form 8-K during the quarter ended
September 30, 1996.
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.
E. W. Blanch Holdings, Inc.
By: /s/ Tom S. Nelson
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Tom S. Nelson
Executive Vice President and Chief Accounting Officer
Date: November 14, 1996