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
JuneSeptember 30, 1999 0-5534
BALDWIN & LYONS, INC.
(Exact name of registrant as specified in its charter)
INDIANA 35-0160330
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
1099 North Meridian Street, Indianapolis, Indiana 46204
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (317) 636-9800
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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 6,November 5, 1999:
TITLE OF CLASS NUMBER OF SHARES OUTSTANDING
Common Stock, No Par Value:
Class A (voting) 2,363,0542,325,554
Class B (nonvoting) 10,918,49610,872,296
PART I - FINANCIAL INFORMATION
ITEM 1 FINANCIAL STATEMENTS
BALDWIN & LYONS, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
JUNESEPTEMBER 30 December 31
1999 1998
----------- ----------------------- ------------
ASSETS
Investments:
Fixed maturities $ 249,522247,806 $ 268,309
Equity securities 154,468145,246 148,060
Short-term and other 23,37019,745 22,448
----------- -----------
427,360---------- ----------
412,797 438,817
Cash and cash equivalents 16,92524,461 16,955
Accounts receivable 24,80425,724 20,056
Reinsurance recoverable 40,39843,988 52,753
Current federal income taxes - 757
Other assets 17,82417,426 15,031
----------- --------------------- ----------
$ 527,311524,396 $ 544,369
=========== ===================== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Reserves for losses and loss expenses $ 173,647176,647 $ 194,432
Reserves for unearned premiums 25,63225,380 22,208
Accounts payable and accrued expenses 29,19831,714 28,952
Deferred federal income taxes 10,6115,481 10,185
Current federal income taxes 8222,328 -
----------- -----------
239,910---------- ----------
241,550 255,777
Shareholders' equity:
Common stock-no par value 709 730
Additional paid-in capital 40,04940,044 41,328
Unrealized net gains on investments 30,67321,128 30,311
Retained earnings 215,970220,965 216,223
----------- -----------
287,401---------- ----------
282,846 288,592
----------- --------------------- ----------
$ 527,311524,396 $ 544,369
=========== ===================== ==========
Number of common and common
equivalent shares outstanding 13,40413,388 13,800
Book value per outstanding share $21.44$21.13 $20.91
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 SixNine Months Ended
JuneSeptember 30 JuneSeptember 30
-------------------------- --------------------------------------------------- -------------------------
1999 1998 1999 1998
----------- ----------- ----------- --------------------- ---------- ---------- ----------
REVENUES
Net premiums earned $ 17,70517,749 $ 18,85517,293 $ 33,6901,439 $ 35,84053,133
Net investment income 4,628 4,612 9,296 9,2354,604 4,754 13,900 13,989
Realized net gains on investments 853 2,285 3,498 4,6243,899 917 7,397 5,541
Commissions and other income 713 454 1,276 769
----------- ----------- ----------- -----------
23,899 26,206 47,760 50,468698 509 1,974 1,278
---------- ---------- ---------- ----------
26,950 23,473 74,710 73,941
EXPENSES
Losses and loss expenses incurred 11,672 10,810 22,632 21,53210,492 10,521 33,124 32,053
Other operating expenses 6,082 7,304 12,077 14,098
----------- ----------- ----------- -----------
17,754 18,114 34,709 35,630
----------- ----------- ----------- -----------6,458 6,087 18,535 20,185
---------- ---------- ---------- ----------
16,950 16,608 51,659 52,238
---------- ---------- ---------- ----------
INCOME BEFORE FEDERAL INCOME TAXES 6,145 8,092 13,051 14,83810,000 6,865 23,051 21,703
Federal income taxes 1,830 2,471 3,777 4,501
----------- ----------- ----------- -----------3,315 2,000 7,092 6,501
---------- ---------- ---------- ----------
NET INCOME $ 4,3156,685 $ 5,6214,865 $ 9,27415,959 $ 10,337
=========== =========== =========== ===========15,202
========== ========== ========== ==========
PER SHARE DATA - BASIC AND DILUTED:
Income before realized net gains $ .28.31 $ .30.31 $ .51.82 $ .53.84
Realized net gains on investments .19 .04 .11 .17 .22
----------- ----------- ----------- -----------.35 .26
---------- ---------- ---------- ----------
NET INCOME $ .32.50 $ .41.35 $ .681.17 $ .75
=========== =========== =========== ===========1.10
========== ========== ========== ==========
Dividends $ .10 $ .10 $ .20.30 $ .20
=========== =========== =========== ===========.30
========== ========== ========== ==========
RECONCILIATION OF SHARES OUTSTANDING:
Average shares outstanding - basic 13,473 13,737 13,551 13,71613,288 13,740 13,463 13,724
Dilutive effect of options outstanding 124 130 129 137 130 159
----------- ----------- ----------- -----------150
---------- ---------- ---------- ----------
Average shares outstanding - diluted 13,60213,412 13,870 13,592 13,874
13,681 13,875
=========== =========== =========== ===================== ========== ========== ==========
See notes to condensed consolidated financial statements.
BALDWIN & LYONS, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
SixNine Months Ended
JuneSeptember 30
-------------------------------------------------
1999 1998
----------- --------------------- ----------
Net cash provided by (used in)
operating activities ($ 1,402) $ 8,2083,601 $ 9,346
Investing activities:
Purchases of long-term investments (75,958) (97,539)(110,267) (136,854)
Proceeds from sales or maturities
of long-term investments 89,606 93,181124,831 153,305
Net sales (purchases) of short-term investments 209 (2)4,132 (2,903)
Other investing activities (1,498) (839)
----------- -----------(2,048) (1,719)
--------- ---------
Net cash provided by (used in) investing activities 12,359 (5,199)16,648 11,829
Financing activities:
Dividends paid to shareholders (2,716) (2,744)(4,045) (4,118)
Cost of treasury stock (8,273) (280)(8,704) (446)
Proceeds from sales of common stock 2 39
----------- -----------6 40
--------- ---------
Net cash used in financing activities (10,987) (2,985)
----------- -----------(12,743) (4,524)
--------- ---------
Increase (decrease) in cash and cash equivalents (30) 247,506 16,651
Cash and cash equivalents at beginning of period 16,955 23,402
----------- -------------------- ---------
Cash and cash equivalents at end of period $ 16,92524,461 $ 23,426
=========== ===========40,053
========= =========
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, 1999. 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.
1999 1998
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Quarter ended JuneSeptember 30:
Net premiums earned $ 4,8454,737 $ 2,4683,501
Losses and loss expenses (10,128) 3855,783 2,315
Other operating expenses (1,723) (528)
Six(1,745) (1,093)
Nine Months ended JuneSeptember 30:
Net premiums earned 9,002 4,77213,739 8,273
Losses and loss expenses (9,020) 511(3,236) 2,826
Other operating expenses (3,138) (770)(4,882) (1,863)
(4) TotalThe net realized and unrealized incomeloss for the quarter ended JuneSeptember 30,
1999 was $11,696$2,834 and compares to totala net realized and unrealized lossesloss of $1,938$18,373
for the quarter ended JuneSeptember 30, 1998. For the sixnine months ended JuneSeptember
30, 1999, total realized and unrealized income was $9,724$6,890 and compares to totala net
realized and unrealized incomeloss of $5,159$13,214 for the sixnine months ended JuneSeptember 30,
1998.
(5) If the Company had adopted Financial Accounting Standards Board Statement
No. 123, Accounting for Stock-Based Compensation, net income for the quarter
and sixnine months ended JuneSeptember 30, 1999 would have been approximately $255$254 and
$509$763 lower, respectively ($.02 per share and $.04$.06 per share, respectively).
(6) Through JuneSeptember 30, 1999, the Company purchased 401,800422,300 shares of
treasury stock for approximately $8.3$8.7 million under its continuing stock
repurchase program.
(7) The following table provides certain profit and loss information for each
reportable segment:
Private Voluntary
Fleet Passenger Reinsurance
Trucking Automobile Assumed All Other Totals
----------- ----------- ----------- ----------- -----------
QUARTER ENDED JUNESEPTEMBER 30:
1999:
Direct and assumed premium written $ 11,19210,862 $ 8,0748,265 $ 1,4911,182 $ 3,0221,854 $ 23,77922,163
Net premium earned and fee income 7,133 8,110 1,317 1,639 18,1996,828 8,266 1,346 1,785 18,225
Underwriting gain (loss) 1,912 (127) 933 (159) 2,5592,976 303 344 (363) 3,260
1998:
Direct and assumed premium written 9,743 11,000 2,260 1,875 24,8789,130 5,840 1,066 1,261 17,297
Net premium earned and fee income 7,815 8,209 2,123 1,012 19,1596,299 8,288 1,924 1,076 17,587
Underwriting gain (loss) 1,386 (464) 1,255 484 2,661
SIX2,543 656 412 (571) 3,040
NINE MONTHS ENDED JUNESEPTEMBER 30:
1999:
Direct and assumed premium written $ 21,33732,199 $ 17,06425,329 $ 2,0943,276 $ 5,3877,241 $ 45,88268,045
Net premium earned and fee income 13,291 15,797 2,243 3,235 34,56620,119 24,063 3,589 5,020 52,791
Underwriting gain (loss) 4,123 (531) 838 (377) 4,0537,099 (228) 1,182 (740) 7,313
1998:
Direct and assumed premium written 19,551 22,029 4,307 3,350 49,23728,681 27,869 5,373 4,611 66,534
Net premium earned and fee income 15,187 14,537 4,766 1,805 36,29521,486 22,825 6,690 2,881 53,882
Underwriting gain (loss) 3,375 (1,591) 1,484 505 3,7735,918 (935) 1,896 (66) 6,813
(8) The following tables are reconciliations of reportable segment revenues
and profits to the Company's consolidated revenue and income from continuing
operations before federal income taxes, respectively.
Three Months Ended SixNine Months Ended
JuneSeptember 30 JuneSeptember 30
-------------------------- ------------------------------------------------- -----------------------
1999 1998 1999 1998
----------- ----------- ----------- --------------------- ---------- ---------- ----------
REVENUE:
Net premium earned and fee income $ 18,19918,225 $ 19,15917,587 $ 34,56652,791 $ 36,29553,882
Net investment income 4,628 4,612 9,296 9,2354,604 4,754 13,900 13,989
Realized net gains on investments 853 2,285 3,498 4,6243,899 917 7,397 5,541
Other income 219 150 400 314
----------- ----------- ----------- -----------222 215 622 529
--------- --------- --------- ---------
Total consolidated revenue $ 23,89926,950 $ 26,20623,473 $ 47,76074,710 $ 50,468
=========== =========== =========== ===========73,941
========= ========= ========= =========
PROFIT:
Underwriting gain $ 2,5593,260 $ 2,6643,040 $ 4,0537,313 $ 3,7736,813
Net investment income 4,628 4,612 9,296 9,2354,604 4,754 13,900 13,989
Realized net gains on investments 853 2,285 3,498 4,6243,899 917 7,397 5,541
Corporate expenses (1,895) (1,469) (3,796) (2,794)
----------- ----------- ----------- -----------(1,763) (1,846) (5,559) (4,640)
--------- --------- --------- ---------
Income from continuing operations
before federal income taxes $ 6,14510,000 $ 8,0926,865 $ 13,05123,051 $ 14,838
=========== =========== =========== ===========21,703
========= ========= ========= =========
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
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OF OPERATIONS
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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 sixnine months ended
JuneSeptember 30, 1999, negativepositive cash flow from operations totaled $1.4$3.6 million, and compares to
positive cash flow of $8.2a
decrease from $9.3 million generated during the first halfnine months of 1998. The
decreased cash flows resulted from an increase in premiums ceded under new
treaty arrangements effective June 1, 1998 with respect to the Company's
trucking liability insurance products, lower premiums assumed under catastrophe
retrocessions and increased claim settlement activity. These decreases were
partially offset by decreases in operating expenses and federal income tax
payments. The new reinsurance arrangements limit the Company's exposure to
loss and provide significant acquisition expense recovery which partially
offsets the reduction in net premiums earned on current policies. However, as
the Company continues to settle older claims, which carried higher retentions,
management expects cash flows will be decreased from historical levels when
reserves were established for such claims.
For several years, the Company's investment philosophy has emphasized the
purchase of relatively short-term instruments with maximum quality and
liquidity. The average life of the Company's fixed income (bond and short-term
investment) portfolio was less than 3 years at JuneSeptember 30, 1999.
The Company's assets at JuneSeptember 30, 1999 included $16.9$24.5 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 $44.2$36.8 million will mature within the twelve month
period following JuneSeptember 30, 1999. 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 $287.4$282.8 million at JuneSeptember 30, 1999
and includes $286.3$278.3 million representing GAAP shareholder's equity of insurance
subsidiaries, of which $40.3$39.4 million may be transferred by dividend or loan to
the parent company without approval by, or notification to, regulatory
authorities. An additional $181.3$175.1 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. The CompanyManagement
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 readily
marketable
securities valued at $8.5$7.2 million at JuneSeptember 30, 1999.
RESULTS OF OPERATIONS
-------------------------------------------
COMPARISONS OF SECONDTHIRD QUARTER, 1999 TO SECONDTHIRD QUARTER, 1998
--------------------------------------------------------------------------------------------------------------------
Net premiums earned increased $.5 million during the secondthird quarter of 1999 decreased $1.1 million as
compared to the same period of 1998. The decreased premium volume is primarily
attributable to declines inNet premiums from the Company's fleet trucking products and voluntary
reinsurance assumed from catastrophe pools. The decrease was offset partially
by continued growth in the Company's small fleet
trucking program.program increased $.6 million (56%) as the result of geographic
expansion. Net premiums from voluntary reinsurance assumed and fleet trucking each declined $.8 million
while premiums from smalllarge fleet trucking increased $.5 million (9%)
primarily in independent contractor programs. Voluntary reinsurance assumed
premiums were off $.6 million. While direct
premiums from trucking products increased $1.4 million from(30%) as the second quarterresult of 1998, lower net premiums resulted from new treaty reinsurance arrangements,
effective June 1, 1998, whereby the Company retains less risk exposure than
under previous treaties.non-renewal of several
treaties during 1999.
Net investment income during the secondthird quarter of 1999 was level with3% lower than the
secondthird quarter of 1998. Overall pre-tax and after tax yields were consistent
with the secondthird quarter of 1998.
The secondthird quarter 1999 net realized gain of $.9$3.9 million consistedconsists almost
entirely of net gains on equity securities and short-term investmentssecurities. The Company sold approximately 25%
of $.6its holdings in UICI during the current quarter, realizing $3.8 million and $.7 million,
respectively, and was partially offset by net losses of $.4 million on other
securities.in
capital gains.
Losses and loss expenses incurred during the secondthird quarter of 1999 increased
$.9 million from that experienced duringwere level
with the secondthird quarter of 1998. The
increase is due primarily to the continued growth from the Company's small fleet
trucking business and changes in loss activity from the Company's discontinued
products which produced redundancies during the 1998 quarter. Loss and loss expense ratios for the
comparative secondthird quarters were as follows:
1999 1998
--------- ----------------- --------
Large and medium fleet trucking 71.5% 65.6%53.3% 55.9%
Voluntary reinsurance assumed 14.3 6.157.9 56.4
Private passenger automobile 69.2 70.060.6 60.3
Small fleet trucking 68.8 45.759.1 100.2
All lines 65.9 57.359.1 60.8
The increase in the fleet trucking loss ratio is due to less favorable loss
development on prior year accidents and increased current year loss activity
when compared to the 1998 second quarter. The current quarter's ratio was also
impacted by the new reinsurance treaties effective June 1, 1998 whereby the
Company has significantly limited its exposure to loss while ceding off the
majority of its direct liability premium writings. The increasedecrease in the loss and loss expense ratio for the small fleet trucking
program is due primarily to current year loss activity.premium growth without a corresponding increase in
losses and losses incurred.
Other operating expenses for the secondthird quarter of 1999 decreased $1.2increased $.4 million
from the secondthird quarter of 1998.1998 due primarily to expenditures relating to data
processing, including year 2000 compliance expenses. The consolidated expense
ratio of the Company's insurance subsidiaries was 27.0%29.2% for the secondthird quarter
of 1999 compared to 34.1%28.3% for the secondthird quarter of 1998. The decrease in the
consolidated expense ratio reflects the effect of ceding commission income
generated from new reinsurance treaties effective June 1, 1998. The ratio of
consolidated other operating expenses to total revenue (adjusted for realized
gains) was 26.4%28.0% during the secondthird quarter of 1999 compared to 30.5%27.0% for the
1998 secondthird quarter.
The effective federal tax rate for consolidated operations for the secondthird
quarter of 1999 was 29.8%33.2% and is less than the statutory rate primarily because
of tax exempt investment income.
Primarily as a result of lowerhigher realized capital gains, net income decreased $1.3increased
$1.8 million (23.2%(37.4%) during the secondthird quarter of 1999 as compared with the 1998
secondthird quarter.
COMPARISONS OF SIXNINE MONTHS ENDED JUNESEPTEMBER 30, 1999 TO
------------------------------------------------
SIX------------------------------------------------------
NINE MONTHS ENDED JUNESEPTEMBER 30, 1998
------------------------------------------------------------------
Net premiums earned decreased $2.1$1.7 million (6.0%(4.7%) during the first sixnine months
of 1999 as compared to the same period of 1998. The decreased premium volume is
primarilynon-renewal of several
reinsurance assumed treaties during 1999, attributable to declinesovercapacity and
weaker prices in this market, resulted in a $3.1 million decrease in net earned
premium. The Company does not expect to replace this premium in the Company'snear term
unless market conditions improve significantly. Gross direct fleet trucking
products and
voluntarypremium written increased $3.5 from the prior year, largely attributable to
independent contractor programs. However, new reinsurance assumed from catastrophe pools. The decrease was offset
partially by continued growthtreaties effective
June 1, 1998, resulted in the Company's small fleet truckingceding of larger portions of both risk and
private
passenger automobile programs. Netpremium to reinsurers subsequent to that date, resulting in a decrease in net
premiums from voluntary reinsurance assumed
and fleet trucking declined $2.5 million and $1.9 million, respectively, while
premiumsearned of $1.4 million. Premiums earned from small fleet trucking and
private passenger automobile programs increased $1.1$1.7 million and $.9$.7 million,
respectively. While direct premiums from trucking
products increased $1.8 million from the first six months of 1998, lower net
premiums resulted from new treaty reinsurance arrangements, effective June 1,
1998, wherebyrespectively, as the Company retains less risk exposure than under previous
treaties.continues to expand both products geographically.
Net investment income during the first half of 1999 period was level with the 1998 period.
Overall pre-tax and after tax yields were also consistent with 1998 yields.
The net realized gain on investments of $3.5$7.4 million for the first sixnine months
of 1999 consists nearly entirely of net gains on equity securities. The
Company sold approximately 31% of its holdings in UICI during the current year,
realizing $4.9 million in capital gains.
Losses and loss expenses incurred during the first sixnine months of 1999
increased $1.1 million from the first six months of 1998 forperiod due primarily to the same reasons indicatedgrowth in the
quarterly comparison above.independent contractor and small fleet programs. This increase was partially
offset by decreases in the remaining fleet trucking products, due to the new
reinsurance agreements, and voluntary reinsurance assumed from catastrophe
pools. Loss and loss expense ratios for the comparative six monthnine-month periods
were as follows:
1999 1998
--------- ----------------- --------
Fleet trucking 65.0% 56.5%61.0% 56.3%
Voluntary reinsurance assumed 52.0 40.054.2 44.7
Private passenger automobile 70.2 76.266.9 70.4
Small fleet trucking 68.2 56.464.8 74.1
All lines 67.2 60.1
Other operating expenses decreased $2.0 million (14.4%64.4 60.3
Other operating expenses decreased $1.6 million (8.2%) during the first nine
months of 1999 compared to the same period of 1998 as the result of higher
ceding commissions relating to reinsurance ceded. The consolidated expense
ratio of the Company's insurance subsidiaries was 28.5% for 1999 compared to
32.2% for 1998. The ratio of other operating expenses to total revenue
(adjusted for realized gains) was 27.5% for 1999 compared to 29.5% for 1998.
The effective federal tax rate for consolidated operations for the first nine
months of 1999 was 30.8% and is less than the statutory rate primarily because
of tax exempt investment income.
As a result of higher realized capital gains and a decrease in operating
expenses due to reinsurance expense offsets, net income for the first nine
months of 1999 was $16.0 million, up 5.0% from the comparable 1998 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
---------
NOTE: ANTICIPATED COSTS OF THE COMPANY'S YEAR 2000 PROJECT, AS PROVIDED IN THE
FOLLOWING DISCUSSION, ARE BASED ON MANAGEMENT'S ESTIMATES OF ULTIMATE TOTAL
COSTS AND PERCENTAGES OF COMPLETION WITH RESPECT TO EACH PHASE OF THE PROJECT.
THESE ANTICIPATED COSTS HAVE NOT BEEN AUDITED BY OUR INDEPENDENT AUDITORS.
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 or hardware that have date-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
nearly all of the Company's processed transactions. The Company is also
engaged in an ongoing analysis of any 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 completed on a timely basis, the Year 2000 Issue could
have a significant impact on the operations of the Company.
The Company's plan to resolve the Year 2000 Issue involves the following four
phases: assessment, remediation, testing and implementation. To date, the
Company has completed its assessment of all mission critical systems and
continues to evaluate the needs to repair or replace non-mission critical
systems. The completed assessment indicated that most of the Company's
significant information technology systems could be affected, particularly with
respect to policy and claim processing, billing, general ledger and cash
receipts and disbursements systems. To date, the Company's general ledger
system and the portions of the remaining systems that handle virtually all of
the Company's transactions are fully Year 2000 ready. What remains is the
ongoing discovery and repair of minor Year 2000 issues which will continue
throughout the remainder of 1999 and early in the new year as systems meet the
final test of live transactions.
The Company has communicated 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. Currently,
there is no known third party Year 2000 deficiency believed to pose a serious
threat to the Company's ability to conduct business. However, there can be no
assurance that other companies have accurately assessed their Year 2000 status
and reported it to the Company. 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 continue to utilize existing staff and other internal
resources to reprogram and test its internally developed software, and to test
its purchased or licensed software, for Year 2000 compliance. All internally
developed software that was deemed unworthy of Year 2000 conversion has been
replaced with new internally developed or purchased or licensed software that
is Year 2000 compliant. All currently owned purchased or licensed software for
which Year 2000 upgrades are unavailable have also been replaced with purchased
or licensed software that is Year 2000 compliant. The Company has completed
virtually all Year 2000 project items and is continuing to test the first six
months of 1999 compared to the same period of 1998. The consolidated expense
ratio of the Company's insurance subsidiaries was 28.2% for 1999 compared to
34.1% for 1998 and declined for the same reasons provided above for the
quarterly comparison. The ratio of other operating expenses to total revenue
(adjusted for realized gains) was 27.3% for 1999 compared to 30.8% for 1998.
The effective federal tax rate for consolidated operations for the first six
months of 1999 was 28.9% and is less than the statutory rate primarily because
of tax exempt investment income.
Primarily as a result of lower realized capital gains, net income for the first
six months of 1999 was $9.3 million, down 10.3% from the comparable 1998 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
---------
NOTE: ANTICIPATED COSTS OF THE COMPANY'S YEAR 2000 PROJECT, AS PROVIDED IN THE
FOLLOWING DISCUSSION, ARE BASED ON MANAGEMENT'S ESTIMATES OF ULTIMATE TOTAL
COSTS AND PERCENTAGES OF COMPLETION WITH RESPECT TO EACH PHASE OF THE PROJECT.
THESE ANTICIPATED COSTS HAVE NOT BEEN AUDITED BY OUR INDEPENDENT AUDITORS.
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 or hardware that have date-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
nearly all of the Company's processed transactions. The Company is also engaged
in an ongoing analysis of any 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 completed on a timely basis, the Year 2000 Issue could have a significant
impact on the operations of the Company.
The Company's plan to resolve the Year 2000 Issue involves the following four
phases: assessment, remediation, testing and implementation. To date, the
Company has completed its assessment of all mission critical systems and
continues to evaluate the needs to repair or replace non mission critical
systems. The completed assessment indicated that most of the Company's
significant information technology systems could be affected, particulary with
respect to policy and claim processing, billing, general ledger and cash
receipts and disbursements systems. To date, the Company's general ledger
system and the portions of the remaining systems that handle approximately 99%
of the Company's transactions are fully Year 2000 ready.
The Company has communicated 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. Currently,
there is no known third party Year 2000 deficiency believed to pose a serious
threat to the Company's ability to conduct business. However, there can be no
assurance that other companies have accurately assessed their Year 2000 status
and reported it to the Company. 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 continue to utilize existing staff and other internal resources
to reprogram and test its internally developed software, and to test its
purchased or licensed 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 or licensed software that is
Year 2000 compliant. Any currently owned purchased or licensed software for
which Year 2000 upgrades are unavailable will also be replaced with purchased or
licensed software that is Year 2000 compliant. The Company has completed nearly
all of its Year 2000 project and will complete any remaining testing and
implementation of updated
systems during the fourth quarter ended December 31, 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. The costs associated with the
Year 2000 project can be categorized into three basic areas:
1) Internal resources, mainly programming and technical personnel, used to
modify internally developed software. The estimated total cost of this area is
approximately $2.5 million and has been expended with minor exceptions through
the end of 1999.
2) Replacement or upgrade of purchased or licensed software. The estimated
total cost of this area is approximately $1.0 million and has been expended.
3) Upgrading equipment. Most of the hardware replacements and upgrades to
date have not been due to the Year 2000 Issue. More than 95% of the Company's
network equipment has been replaced over the last two years and all mainframe
hardware is less than three years old. Future hardware costs are expected to
be minimal.
As noted above, the Company has completed all necessary phases of the Year 2000
project with minor exceptions. In the unlikely event that the Company does not
complete all remaining phases of this project, the Company may be unable to
process policy and claim transactions on certain of its less transaction-volume-
intensive products. Currently, the Company has no contingency plans in place
in the event this occurs and does not believe such a plan will be necessary at
this time.
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 September 30, 1999.
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 November 12, 1999 By /s/ Gary W. Miller
------------------------- --------------------------------
Gary W. Miller, Chairman and CEO
Date November 12, 1999 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 September 30, 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. The
costs associated with the Year 2000 project can be categorized into three basic
areas:
1) Internal resources, mainly programming and technical personnel, used to
modify internally developed software. The estimated total cost of this area is
anticipated to be approximately $2.5 million with approximately 5% of this
amount relating to future costs and approximately 95% already incurred.
2) Replacement or upgrade of purchased or licensed software. The estimated
total cost of this area is approximately $1.0 million and has been expended.
3) Upgrading equipment. Most of the hardware replacements and upgrades to
date have not been due to the Year 2000 Issue. More than 95% of the Company's
network equipment has been replaced over the last twenty-one months and all
mainframe hardware is less than three years old. Future hardware costs are
expected to be minimal.
Management believes it has an effective program in place to resolve all Year
2000 issues in a timely manner. As noted above, the Company has nearly
completed all necessary phases of the Year 2000 project. In the unlikely event
that the Company does not complete all remaining phases of this project, the
Company may be unable to process policy and claim transactions on certain of its
less transaction-volume-intensive products. Currently, the Company has no
contingency plans in place in the event this occurs and does not believe such a
plan will be necessary at this time.
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, 1999.
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 12, 1999 By /s/ Gary W. Miller
------------------------- --------------------------------
Gary W. Miller, Chairman and CEO
Date August 12, 1999 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, 1999
INDEX TO EXHIBITS
Begins on sequential
page number of Form
Exhibit Number 10-Q
-------------- ------------------------------
EXHIBIT 11 Filed herewith electronically
Computation of per share earnings
EXHIBIT 27 Filed 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 SixNine Months Ended
JuneSeptember 30 JuneSeptember 30
---------------------------- ----------------------------
1999 1998 1999 1998
------------- ------------- ------------- -------------
BASIC:
Average number of shares
Outstanding 13,473,583 13,736,511 13,551,253 13,716,236
============= ============= ============= =============13,288,122 13,740,369 13,462,579 13,724,368
============ ============ ============ ============
Net Income $ 4,315,0966,684,475 $ 5,621,3014,864,509 $ 9,274,08515,958,560 $ 10,337,382
============= ============= ============= =============15,201,891
============ ============ ============ ============
Per share amount $ .32.50 $ .41.35 $ .681.17 $ .75
============= ============= ============= =============1.10
============ ============ ============ ============
DILUTED:
Average number of shares
Outstanding 13,473,583 13,736,511 13,551,253 13,716,23613,288,122 13,740,369 13,462,579 13,724,368
Dilutive stock options--based on
treasury stock method using
average market price 128,594 137,177 130,173 158,527
------------- ------------- ------------- -------------124,123 130,172 129,036 149,986
------------ ------------ ------------ ------------
Totals 13,602,177 13,873,688 13,681,426 13,874,763
============= ============= ============= =============13,412,245 13,870,541 13,591,615 13,874,354
============ ============ ============ ============
Net Income $ 4,315,0966,684,475 $ 5,621,3014,864,509 $ 9,274,08515,958,560 $ 10,337,382
============= ============= ============= =============15,201,891
============ ============ ============ ============
Per share amount $ .32.50 $ .41.35 $ .681.17 $ .75
============= ============= ============= =============1.10
============ ============ ============ ============