FORM 10-Q
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 March 31, 1997
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 REGISTRANTS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes ____ 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 12,571,000
Part 1. 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
March 31,
-----------------------------
1997 1996
-----------------------------
Revenues:
Brokerage commissions and fees $35,244 $24,135
Investment income 1,785 1,743
-----------------------------
Total revenues 37,029 25,878
Expenses:
Salaries and benefits 16,478 10,468
Travel and marketing 2,699 1,712
General and administrative 6,577 4,587
Amortization of goodwill 590 768
Interest and other expense 276 66
-----------------------------
Total expenses 26,620 17,601
-----------------------------
Income before taxes 10,409 8,277
Income taxes 4,006 3,171
-----------------------------
Net income before minority interest 6,403 5,106
Minority interest, net of tax (41) -
-----------------------------
Net income $ 6,444 $ 5,106
=============================
Net income per share $ 0.50 $ 0.38
=============================
Weighted average number of shares of Common Stock
outstanding 13,001 13,288
=============================
Cash dividends declared per share $ 0.10 $ 0.10
=============================
See accompanying notes.
E. W. Blanch Holdings, Inc.
Consolidated Balance Sheets
(in thousands)
March 31, December 31,
1997 1996
------------------------------------
(Unaudited)
Assets
Current assets:
Cash and cash equivalents $ 6,254 $ 1,069
Due from fiduciary accounts 22,309 13,624
Premium finance notes - 14,931
Prepaid insurance 1,290 1,749
Other current assets 5,896 4,467
------------------------------------
Total current assets 35,749 35,840
Long-term investments, available for sale 9,625 9,793
Property and equipment, net 19,935 13,001
Goodwill, net 31,756 17,490
Other assets 11,631 9,452
Fiduciary accounts--assets 707,890 429,180
------------------------------------
Total assets $816,586 $514,756
====================================
Liabilities and Shareholders' equity
Current liabilities:
Accrued compensation $ 1,729 $ 4,176
Notes payable to banks 918 1,340
Accounts payable 10,160 3,939
Current portion of long-term liabilities 6,922 1,685
Other current liabilities 6,191 2,014
------------------------------------
Total current liabilities 25,920 13,154
Long-term debt, less current portion 14,139 1,188
Other liabilities, less current portion 6,900 2,781
Fiduciary accounts--liabilities 707,890 429,180
------------------------------------
Total liabilities 754,849 446,303
Minority interest 1,634 -
Shareholders' equity 60,103 68,453
------------------------------------
Total liabilities and shareholders' equity $816,586 $514,756
====================================
See accompanying notes.
E. W. Blanch Holdings, Inc.
Consolidated Statements of Cash Flows
(in thousands)
Unaudited
Three months ended March 31,
1997 1996
----------------------------------
Operating Activities
Net income $ 6,444 $ 5,106
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization 1,806 1,403
Changes in operating assets
and liabilities:
Due from fiduciary accounts (2,931) (6,021)
Other current assets (3,803) 590
Accrued compensation (2,453) (1,311)
Accounts payable and other
current liabilities 8,659 1,985
Other, net (192) 42
----------------------------------
Net cash provided by operating activities 7,530 1,794
Investing Activities
Purchases of property and equipment (2,029) (759)
Excess of cash acquired from purchase
of subsidiary 480 -
Proceeds from the sale of a subsidiary 15,092 -
Issuance of finance notes receivable, net (14) (2,173)
Other investing activities, net 428 (374)
---------------------------------
Net cash provided by (used in)
investing activities 13,957 (3,306)
Financing Activities
Purchase of treasury shares (14,550) -
Proceeds from the issuance of treasury
shares to employee benefits plans 1,065 766
Dividends paid (1,326) (1,321)
Repayments on lines of credit, net (1,340) (43)
Payments on long-term debt (347) (541)
Other financing activities, net 196 46
---------------------------------
Net cash used in financing activities (16,302) (1,093)
---------------------------------
Net increase (decrease) in cash
and cash equivalents 5,185 (2,605)
Cash and cash equivalents at
beginning of period 1,069 4,977
---------------------------------
Cash and cash equivalents at end of period $ 6,254 $ 2,372
=================================
See accompanying notes.
E. W. Blanch Holdings, Inc.
Notes to Consolidated Financial Statements
March 31, 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, 1996.
E.W. Blanch Holdings, Inc. ("the Company") and its predecessor organizations
have been in operation since 1957. The Company is a leading international
provider of integrated risk management and distribution services including
reinsurance intermediary services, risk management consulting and administration
services, and primary insurance distribution services. The consolidated
financial statements include the accounts of the Company and its wholly and
majority owned subsidiaries. During the quarter, the Company purchased a 70%
interest in Swire Fraser Insurance (Holdings) Limited (Swire Fraser) and an
additional 20% interest in the Swire Blanch joint venture. The combined
operations of Swire Fraser and Swire Blanch were merged into a single operation
under the Swire Blanch name, which is owned 70% by EWB and 30% by Swire Pacific
Limited (Swire Pacific).
2. Accounting Policies
Principles Of Consolidation
The accompanying consolidated financial statements include the accounts and
operations of the Company and its wholly and majority owned subsidiaries. All
material intercompany accounts and transactions have been eliminated.
Foreign Currency Translation
The Company's primary functional currency is the U.S. dollar. The functional
currency of the Company's foreign operations is the British pound sterling. The
Company translates income and expense accounts at the average rate in effect for
the period. Balance sheet accounts are translated at the period end exchange
rate. Adjustments resulting from the balance sheet translation are reflected in
Shareholders' equity. The cumulative translation adjustment at March 31, 1997 is
a $30,000 loss.
3. New Accounting Pronouncements
The Financial Accounting Standards Board issued Statement No. 128, "Earnings per
Share" in February 1997. The Company will adopt the statement in the fourth
quarter of 1997, as required, and early adoption is not permitted. Upon
adoption, prior periods will be restated. The Company has completed an initial
analysis and does not expect the difference in earnings per share to be
material.
Item 2. 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 that 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, international operations and the impact
of specific engagements and new opportunities. The Company's Annual Report on
Form 10-K filed with the SEC on March 31, 1997 includes a discussion of these
risk factors and is incorporated herein by reference.
General
The Company is a leading international provider of integrated risk
management and distribution services including reinsurance intermediary
services, risk management consulting and administration services, and primary
insurance distribution services.
As discussed above, in February the Company purchased a 70% interest in Swire
Blanch (previously named Swire Fraser). The consideration for the Swire Blanch
purchase included the assumption of certain existing indebtedness of 6.2 million
BPS (British Pounds Sterling) ($10.2 million at purchase date) and a cash
payment of 1.8 million BPS($2.9 million). As part of the purchase agreement,
after a minimum of three years either party has the option to request the
purchase by the Company of the 30% minority interest at a defined formula price.
The combined Swire Fraser and Swire Blanch operations had revenues of 22.6
million BPS ($36.9 million) in 1996, and showed a loss primarily due to the
recognition of charges associated with the Lloyd's Reconstruction and
Reconciliation Agreement and reserves for real estate no longer occupied by
Swire Fraser.
In February the Company purchased 750,000 shares of its common stock, at a
negotiated price of $19.40 per share, from its Chairman. Total consideration was
$14.6 million.
As part of the restructuring of its primary insurance distribution operations,
the Company completed the sale of its premium finance business. The Company
received $15.2 million in exchange for the outstanding stock of the premium
finance subsidiaries. The net proceeds equaled the Company's investment in the
business, resulting in no gain or loss from the transaction.
Due to the integrated nature of the Company's risk management and distribution
business, and because the primary insurance distribution operations after
restructuring are no longer significant, the Company has discontinued its
financial reporting by business segment. The following is a summary of revenues
and income before taxes by geographic area for the periods indicated (in
thousands):
Quarter Ended March 31, 1997
Income before
Revenues taxes
---------------- ------------------
Domestic operations $31,131 $10,132
Foreign operations 5,898 277
---------------- ------------------
$37,029 $10,409
================ ==================
Quarter Ended March 31, 1996
Income before
Revenues taxes
---------------- ------------------
Domestic operations $25,731 $8,130
Foreign operations 147 147
---------------- ------------------
$ 25,878 $ 8,277
================ ==================
Domestic operations include the reinsurance intermediary services provided by
E.W. Blanch Co., Inc. (EWBCo.), the risk management consulting and
administration services provided by Paragon Reinsurance Risk Management
Services, Inc. (Paragon), the program distribution services of Rockwood
Programs, Inc. (Rockwood), the policy distribution capabilities of Alternative
Distribution Managers (Alternative Distribution), and the general agency
operations of Blanch Insurance Services, Inc. (Blanch GA). The services provided
by EWBCo., Paragon, Rockwood and Alternative Distribution are focused on
providing solutions for the management and distribution of risk to a client base
which is primarily comprised of property and casualty insurance companies. These
'
value-added nature of its services, have been able to operate at relatively
higher operating margins. The services provided by Blanch GA are focused on the
primary distribution of insurance to property and casualty insurance companies,
largely through independent insurance agents. Due to the competitive nature of
Blanch GA's business, the Company's profit margins for these services are
relatively lower. Corporate services are also included in Domestic operations.
Foreign operations include Swire Blanch, the Company's international insurance
and reinsurance broker headquartered in London. Swire Balnch includes a Lloyd's
insurance and reinsurance broking operation and international reinsurance
intermediary operations. Swire Blanch also provides financial services through
the sale of pension plans for insurance companies. Primary insurance
distribution services of Swire Blanch include the retail operations of Swire
Renshaw, located in northern England, and Swire Insurance Brokers, located in
Hong Kong. The majority, approximately 75%, of Swire Blanch's revenues are
generated in the United Kingdom with the remainder primarily from the Pacific
Rim. The Company's foreign operations currently do not enjoy the relatively
higher profit margins of the Company's domestic risk management and distribution
services. This is due to a number of factors, including competitive market
conditions for Lloyd's brokers, the small, start-up nature of many of the
international offices, the competitiveness of the Swire Renshaw primary
insurance distribution business, and the capitalization and acquisition costs
associated with the purchase. The Company seeks to grow its international
profitability through the integration of systems, services and expertise in
order to increase revenue production and processing efficiencies.
The Company plans to increase its investments in technology, particularly in the
areas of risk management and risk distribution, which includes both catastrophic
modeling and consulting capabilities.
First Quarter 1997 Compared with First Quarter 1996
Current year operations reflect two months of operations from the Swire Blanch
acquisition discussed above and are reported on a consolidated basis due to the
Company's 70% controlling interest. Revenue recognized in the foreign operations
has a greater proportion of revenue recognized in the first month of each
calendar quarter, similar to the seasonality of the Company's domestic
operations. Prior year results of foreign operations include only the equity in
the earnings of the Swire Blanch international reinsurance intermediary, jointly
owned 50% by the Company and 50% by Swire Pacific.
Brokerage Commissions and Fees
The following are the components of Brokerage commissions and fees for the
quarter ended March 31 (in thousands):
1997 1996
----------------- -----------------
Domestic Operations
Reinsurance brokerage $23,851 $20,794
Risk management fees 1,904 600
Program and policy distribution fees 1,011 129
General agency commissions 2,927 2,465
------------------ -----------------
29,693 23,988
Foreign Operations
Reinsurance brokerage 1,502 147
Specialty lines 1,542 -
Financial services fees 1,466 -
Swire Renshaw 724 -
Swire Insurance Brokers 317 -
----------------- ----------------
5,551 147
----------------- ----------------
$35,244 $24,135
================= ================
Domestic operations reinsurance brokerage increased $3.1 million, or 14.7%, from
the prior year primarily as a result of new production, including continuing
revenue from the California Earthquake Authority contract and property
catastrophe coverage in Florida. Risk management fees includes the consulting
and administration services from Paragon and fees from the licensing and
maintenance of the UniSURe software, a business which began July 1, 1996. These
fees were $1.9 million for the quarter ended March 31, 1997 compared to $0.6
million the prior year, an increase of $1.3 million, or 217.3%. This increase is
attributable to fees related to the licensing and maintenance of the UniSURe
software, $1.0 million, and additional administrative services, $0.3 million.
Program and policy distribution fees increased $0.9 million, or 683.7%, to $1.0
million for the quarter. This increase is primarily the result of new production
which commenced in late 1996. General agency commissions increased $0.5 million,
or 18.7%, to $2.9 million for the quarter ended March 31, 1997 compared to $2.5
million the prior year. This is primarily the result of increased premium
volume, $17.1 million for the quarter ended March 31, 1997 compared to $15.4
million in 1996.
For the two months of international operations in the quarter ended March 31,
1997, reinsurance intermediary services, which include those in London and other
international offices, had $1.5 million in fees. Specialty lines, which includes
the specialty insurance distribution services based in London, contributed $1.5
million of revenues. Financial services fees, generated from the sale of various
pension plan products for insurance companies, were $1.5 million. Finally, Swire
Renshaw and Swire Insurance Brokers generated $0.7 million and $0.3 million of
revenues, respectively, from the primary distribution of insurance from their
offices in northern England and Hong Kong, respectively. For the quarter ended
March 31, 1996 foreign revenues were $0.1 million and comprised only the
Company's 50% equity in the net income of the Swire Blanch joint venture.
Investment Income
1997 1996
---------------- -----------------
Domestic Operations
Fiduciary investment income $1,061 $1,152
Corporate investment income 190 73
Premium finance interest and fees 187 517
----------------- -----------------
1,438 1,742
Foreign Operations
Fiduciary investment income 242 -
Corporate investment income 105 -
----------------- -----------------
347 -
$1,785 $1,742
================= =================
Investment income was $1.8 million for the quarter ended March 31, 1997 compared
to $1.7 million the prior year, an increase of $0.1 million or 2.4%. The primary
sources of investment income are from fiduciary funds, corporate capital, and
premium finance notes.
Fiduciary investment income from domestic operations was $1.1 million for the
quarter ended March 31, 1997 compared to $1.2 million the prior year, a
decrease of $0.1 million or 7.9%. The average balance of domestic funds for the
quarter was $85.9 million (compared to $83.1 million for the prior year), at an
average yield of 5.0% (compared to 5.6% the prior year). Swire Blanch also
earned $0.2 million of fiduciary investment income in the two months ended March
31, 1997.
Corporate investment income from domestic operations increased to $0.2 million
from $0.1 million as a result of larger invested balances in 1997. Swire Blanch
earned $0.1 million of corporate investment income for the two months ended
March 31, 1997.
Premium finance interest and fees were $0.2 million for the quarter ended March
31, 1997 compared to $0.5 million the prior year. The decrease is the result of
the sale of the premium finance business in February 1997.
Expenses
Domestic operating expenses increased $3.5 million to $21.1 million, or 19.9%,
for the quarter ended March 31, 1997 compared to $17.6 million the prior year.
The increase is primarily as a result of an increase of 70 employees as of March
31, 1997 compared to the prior year and normal salary progressions. The increase
in employees is due to increased business levels and businesses acquired or
started in 1996. Domestic operations also experienced increases in travel and
marketing and general and administrative expenses offset by a reduction in
goodwill amortization, the result of the goodwill writedown recorded in fiscal
1996.
Operating expenses for the two months of international operations in the quarter
ended March 31, 1997 were $5.6 million. Similar to the Company's domestic
operations, approximately two-thirds of these expenses relate to salaries and
benefits for employees.
Profit Margins
Operating profit margins, calculated as income before taxes as a percentage of
total revenues, were 32.5% for domestic operations for the quarter ended March
31, 1997, compared to 31.6% for the same period in the prior year. Gross profit
margins, calculated as income before corporate services expenses and before
taxes, were 4.0% for the Blanch GA for the quarter ended March 31, 1997,
compared to a loss of a loss of 11.2% for the same period in the prior year. The
Company's remaining risk management and distributions services earned a gross
profit margin of 51.1% for the quarter ended March 31, 1997, compared to a gross
profit margin of 51.9% for the same period in the prior year.
Operating profit margins, calculated as income before taxes as a percentage of
total revenues, were 4.7% for foreign operations for the two months ended March
31, 1997. Gross profit margins, calculated as income before corporate services
expenses and before taxes, for the quarter ended March 31, 1997 were a loss of
11.2% for the primary insurance distribution operations of Swire Renshaw and
Swire Insurance Brokers and a profit of 11.3% for the remaining reinsurance and
specialty risk management and distribution services.
The Company's combined federal and state effective tax rate for domestic
operations continues to be 39%. The effective tax rate provided for the
Company's foreign operations is expected to be 35%.
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, the purchase of equipment used in the ordinary course of
business, the repayment of outstanding indebtedness, and the distribution of
earnings. The Company's cash and cash equivalents were $6.3 million at March 31,
1997.
The Company generated $7.5 million of cash from operations during the first
three months of 1997 compared with $1.8 million for the same period in 1996. The
increase in operating cash flow in 1997 is primarily due to the timing of cash
distributions from the fiduciary accounts to the Company and the timing of
changes in certain operating assets and liabilities.
Cash flow from investing activities was $14.0 million for the quarter ended
March 31, 1997. During the quarter, the Company received net proceeds of $15.1
million from the sale of its premium finance operations. Consideration for the
Swire Blanch transaction was $2.9 million in cash and the assumption of 6.2
million BPS of debt (approximately $10.2 million at the acquisition date). The
Company believes the operations of Swire Blanch will provide sufficient cash
flows to satisfy the debt. Swire Blanch's cash at the purchase date was $3.4
million, thus providing $0.5 million of net cash from the acquisition. The
Company also used $2.0 million of cash for the purchase of property and
equipment, primarily computerized systems. The Company intends to increase its
investment in such systems. During 1996, the Company used cash in investing
activities primarily for a $2.2 million net issuance of premium finance notes
and $0.8 million for the purchase of property and equipment.
The primary uses of cash for financing activities for the three months ended
March 31, 1997 were $14.6 million for the purchase of treasury stock, $1.3
million of dividends paid to shareholders and $1.3 million for the net repayment
of lines of credit. In the prior year, net cash used by financing activities was
$1.1 million, consisting primarily of cash dividends paid to shareholders. The
Company issued $1.1 million and $0.8 million of treasury stock to fund employee
benefit plans in the quarter ended March 31, 1997 and 1996, respectively.
The Company's long-term investment portfolio at March 31, 1997 was $9.6 million,
comprised of equity and debt instruments. The market value of the Company's
investment portfolio at March 31, 1997 was $0.3 million below cost. 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.
On January 24, 1997, the Board of Directors declared a regular quarterly cash
dividend of $0.10 per share, payable March 3, 1997 to shareholders of record as
of February 7, 1997. On April 24, 1997 the Board of Directors declared a regular
quarterly cash dividend of $0.10 per share, payable June 2, 1997 to shareholders
of record as of May 9, 1997
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 long-term capital needs.
E. W. BLANCH HOLDINGS, INC.
Part II. Other Information
Items 1 through 5 are not applicable and have been omitted.
Item 6. Exhibits and Reports on Form 8-K.
(b.) The registrant filed a Current Report on Form 8-K, dated January 23, 1997,
with respect to the rights agreement between the Company and Norwest Bank
Minnesota, N.A., during the quarter ended March 31, 1997.
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.
E. W.BLANCH HOLDINGS, INC.
Dated: May 14, 1997 /s/ Ian D. Packer
Ian D. Packer
Executive Vice President
and Chief Financial Officer
28
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