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
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For Quarter Ended Commission file number
March 31,September 30, 2003 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, INDIANANorth 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
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Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).
Yes X No
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Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of May 9,November 6, 2003:
TITLE OF CLASS NUMBER OF SHARES OUTSTANDING
Common Stock, No Par Value:
Class A (voting) 2,666,666
Class B (nonvoting) 11,890,97911,900,602
Index to Exhibits located on page 15.
Page 1 of a total of 1822 pages
PART I - FINANCIAL INFORMATION
ITEM 1 FINANCIAL STATEMENTS
BALDWIN & LYONS, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
March 31SEPTEMBER 30 December 31
2003 2002
------------------ ------------------
ASSETS
Investments:
Fixed maturities $ 293,335311,675 $ 290,155
Equity securities 99,950118,146 105,441
Short-term and other 5,99722,529 9,158
------------------ ------------------
399,282452,350 404,754
Cash and cash equivalents 53,21845,102 41,699
Accounts receivable 39,06040,809 33,646
Reinsurance recoverable 147,236154,566 137,870
Notes receivable from employees 7,3465,163 7,494
Current federal income taxes - 1,701
Other assets 17,57819,537 17,298
------------------ ------------------
$ 663,720717,527 $ 644,462
================== ==================
LIABILITIES AND SHAREHOLDERS' EQUITY
Reserves for losses and loss expenses $ 284,867309,214 $ 277,744
Reserves for unearned premiums 36,48239,317 29,016
Accounts payable and accrued expenses 42,57243,885 39,854
Note payable to bank - 7,500
7,500
CurrectCurrent federal income taxes 1,3862,284 -
Deferred federal income taxes 4,1098,756 5,760
------------------ ------------------
376,916403,456 359,874
Shareholders' equity:
Common stock-no par value 621 621
Additional paid-in capital 35,28335,359 35,248
Unrealized net gains on investments 28,40939,659 29,640
Retained earnings 222,491238,432 219,079
------------------ ------------------
286,804314,071 284,588
------------------ ------------------
$ 663,720717,527 $ 644,462
================== ==================
Number of common and common
equivalent shares outstanding 14,64614,701 14,645
Book value per outstanding share $19.58$21.36 $19.43
See notes to condensed consolidated financial statements.
-2-- 2 -
BALDWIN & LYONS, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Three Months Ended March 31
-----------------------------------Nine Months Ended
September 30 September 30
---------------------------------- ----------------------------------
2003 2002 2003 2002
--------------- --------------- ---------------- -------------------------------
REVENUES
Net premiums earned $ 31,701 $21,66437,513 $27,040 $106,174 $74,569
Net investment income 3,373 3,8832,987 3,524 9,484 11,200
Realized net gains (losses) on investments (2,452) 835
Commissions and other2,048 (4,972) 5,335 (4,872)
Other income 1,502 1,2291,547 1,288 4,492 3,801
--------------- --------------- ---------------- ----------------
34,124 27,611---------------
44,095 26,880 125,485 84,698
EXPENSES
Losses and loss expenses incurred 20,511 13,76424,411 17,388 68,822 48,289
Other operating expenses 6,983 5,8187,694 5,461 22,822 16,909
--------------- --------------- ---------------- ---------------
32,105 22,849 91,644 65,198
--------------- --------------- ---------------- 27,494 19,582
---------------- -------------------------------
INCOME BEFORE FEDERAL INCOME TAXES 6,630 8,02911,990 4,031 33,841 19,500
Federal income taxes 2,098 2,5703,868 1,200 10,886 6,288
--------------- --------------- ---------------- -------------------------------
NET INCOME $ 4,5328,122 $ 5,4592,831 $22,955 $ 13,212
=============== =============== ================ ===============================
PER SHARE DATA:
DILUTED EARNINGS $ .31.55 $ .37.19 $ 1.56 $ .90
=============== =============== ================ ===============================
BASIC EARNINGS $ .31.56 $ .37.19 $ 1.58 $ .90
=============== =============== ================ ===============================
DIVIDENDS PAID TO SHAREHOLDERS $ .10 $ .08 $ .30 $ .24
=============== =============== ================ ===============================
RECONCILIATION OF SHARES OUTSTANDING:
Average shares outstanding - basic 14,554 14,78314,558 14,553 14,557 14,630
Dilutive effect of options outstanding 184 102 98141 102
--------------- --------------- ---------------- -------------------------------
Average shares outstanding - diluted 14,656 14,88114,742 14,655 14,698 14,732
=============== =============== ================ ===============================
See notes to condensed consolidated financial statements.
- 3 -
BALDWIN & LYONS, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
ThreeNine Months Ended
March 31September 30
2003 2002
-------------- ---------------
Net cash provided by operating activities $ 9,21842,170 $ 13,88116,837
Investing activities:
Purchases of long-term investments (46,204) (38,276)(166,364) (123,809)
Proceeds from sales or maturities
of long-term investments 49,473 40,174153,554 108,011
Net sales (purchases) of short-term investments 989 11,995(14,489) 17,994
Decrease (increase) in notes receivable from employees 75 (5,036)2,316 (4,976)
Other investing activities (576) (324)(1,920) (1,254)
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Net cash provided byused in investing activities 3,757 8,533(26,903) (4,034)
Financing activities:
Dividends paid to shareholders (1,457) (1,143)(4,369) (3,472)
Cost of treasury stock purchased - (8,854)(8,978)
Drawing on line of credit - 10,000
Repayment on line of credit (7,500) -
Proceeds from sales of common stock 15 2
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Net cash provided by (used in)used in financing activities (1,456) 5(11,864) (2,448)
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Increase in cash and cash equivalents 11,519 22,4193,403 10,355
Cash and cash equivalents at beginning of period 41,699 31,840
-------------- ---------------
Cash and cash equivalents at end of period $53,218 $54,259$45,102 $42,195
============== ===============
See notes to condensed consolidated financial statements.
NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION: The accompanying unaudited condensed financial
statements have been prepared in accordance with the instructions to Form 10Q
and do not include all of the information and footnotesnotes 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, 2003. Interim financial statements
should be read in conjunction with the Company's annual audited financial
statements and other disclosures included in the Company's most recent Form 10K.statements.
- 4 -
NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(2) FORWARD-LOOKING STATEMENTS: Forward-looking statements in this report are
made pursuant to the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995. Investors are cautioned that such forward-looking statements
involve inherent risks and uncertainties. Readers are encouraged to review the
Company's annual report for its full statement regarding forward-looking
information.
(3) REINSURANCE: The following table summarizes the Company's transactions with
reinsurers for the 2003 and 2002 comparative periods.
2003 2002
------------- ------------------------- ------------
Quarter ended March 31:September 30:
Premiums ceded to reinsurers $ 17,71319,000 $ 11,67016,853
Losses and loss expenses
ceded to reinsurers 21,156 14,96518,795 8,557
Commissions from reinsurers 4,825 3,4475,150 4,551
Nine months ended September 30:
Premiums ceded to reinsurers 54,090 44,318
Losses and loss expenses
ceded to reinsurers 61,077 27,890
Commissions from reinsurers 14,740 12,342
(4) COMPREHENSIVE INCOME OR LOSS: The Company refers to comprehensive income or
loss as realized and unrealized income or loss which is composed of net income
or loss and changes in unrealized gains or losses on investments for the periods
presented. Total realized and unrealized income for the
quarter ended March 31,September 30, 2003 was $3,638$9,547 and compares to a total realized and
unrealized loss of $2,638 for the quarter ended September 30, 2002. For the nine
months ended September 30, 2003, total realized and unrealized income was
$33,741 and compares to a total realized and unrealized loss of $5,143$1,059 for the
quarternine months ended March 31,September 30, 2002.
- 5 -
NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(5) REPORTABLE SEGMENTS - PROFIT ANDOR LOSS: The following table provides certain
profit and loss information for each reportable segment. All amounts presented
are computed based upon generally accepted accounting principles. In addition,
underwriting gain or losssegment profit for the fleet trucking segmentincludes the direct marketing agency
operations conducted by the parent company and is computed after elimination of
inter-company commissions and, accordingly, consolidated
underwriting gain or losssegment profit presented here will
not agree with statutory underwriting gains or lossesfor this segment which may be quoted
elsewhere in the Company's financial statements.
PRIVATE SMALL SMALL BUSINESS
FLEET PASSENGER FLEET REINSURANCE WORKERS'
TRUCKING AUTOMOBILE TRUCKING2003 2002
------------------------------------------ -----------------------------------------
DIRECT AND Direct and
ASSUMED COMPENSATION TOTALS
-----------NET PREMIUM Assumed Net Premium
PREMIUM EARNED AND SEGMENT Premium Earned and Segment
WRITTEN FEE INCOME PROFIT (LOSS) Written Fee Income Profit (Loss)
------------- -------------- ------------ ---------- ----------- ---------------- ------------------------ ------------- ------------
QUARTERTHREE MONTHS ENDED MARCH 31:
2003:
Direct andSEPTEMBER 30:
PROTECTIVE PRODUCTS:
Fleet trucking $ 37,803 $ 21,023 $ 8,241 $ 28,899 $ 14,055 $ 6,495
Reinsurance assumed premium written2,993 2,881 607 2,504 2,327 329
SAGAMORE PRODUCTS:
Personal division 9,522 10,552 1,163 7,434 8,570 623
Commercial division:
Small fleet trucking 4,407 2,620 59 2,884 2,076 405
Workers' compensation 2,595 1,630 (313) 1,720 926 15
------------- -------------- ------------ ------------- ------------- ------------
Total Commercial division 7,002 4,250 (254) 4,604 3,002 420
All other 224 196 (202) 223 178 (350)
------------- -------------- ------------ ------------- ------------- ------------
Totals $ 34,43857,544 $ 13,73738,902 $ 3,5779,555 $ 2,82343,664 $ 2,19228,132 $ 56,870
Net premium earned and fee income 18,107 9,243 1,792 2,559 1,132 32,932
Underwriting gain (loss) (a) 6,879 636 153 483 (10) 8,299
2002:
Direct and7,517
============= ============== ============ ============= ============= ============
NINE MONTHS ENDED SEPTEMBER 30:
PROTECTIVE PRODUCTS:
Fleet trucking $ 108,290 $ 59,933 $ 23,279 $ 77,545 $ 37,958 $ 15,943
Reinsurance assumed premium written 21,504 10,869 2,635 1,775 1,374 38,225
Net premium earned and fee income 10,597 7,915 2,219 1,206 773 22,768
Underwriting gain (loss) (a) 4,362 688 303 253 (131) 5,431
(a) Segment profit or loss includes the direct marketing agency operations conducted by Baldwin & Lyons, Inc. after intercompany
eliminations.
8,602 8,711 1,590 6,450 5,684 969
SAGAMORE PRODUCTS:
Personal division 33,117 30,035 2,647 27,036 24,979 1,933
Commercial division:
Small fleet trucking 12,744 6,523 237 8,629 6,466 1,112
Workers' compensation 7,137 4,315 (792) 4,354 2,531 40
------------- -------------- ------------ ------------- ------------- ------------
Total Commercial division 19,881 10,838 (555) 12,983 8,997 1,152
All other 668 567 (258) 359 295 (345)
------------- -------------- ------------ ------------- ------------- ------------
Totals $ 170,558 $ 110,084 $ 26,703 $ 124,373 $ 77,913 $ 19,652
============= ============== ============ ============= ============= ============
- 56 -
NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(6) REPORTABLE SEGMENTS - RECONCILIATION TO CONSOLIDATED REVENUE AND
CONSOLIDATED PROFIT OR LOSS: The following tables are reconciliations of
reportable segment revenues and profit or lossprofits to the Company's consolidated revenue
and income from continuing operations before federal income taxes, respectively.
Three Months Ended Nine Months Ended
September 30 September 30
2003 2002 ------------ --------------2003 2002
------------- ------------- ------------- -------------
REVENUE:
Net premium earned and fee income $ 32,93238,902 $ 22,76828,132 $ 110,084 $ 77,913
Net investment income 3,373 3,8832,987 3,524 9,484 11,200
Realized net gains (losses) on investments (2,452) 8352,048 (4,972) 5,335 (4,872)
Other income 271 125
------------ --------------
TOTAL CONSOLIDATED REVENUE158 196 582 457
------------- ------------- ------------- -------------
Total consolidated revenue $ 34,12444,095 $ 27,611
============ ==============26,880 $ 125,485 $ 84,698
============= ============= ============= =============
PROFIT:
Underwriting gainSegment profit $ 8,2999,555 $ 5,4317,517 $ 26,703 $ 19,652
Net investment income 3,373 3,8832,987 3,524 9,484 11,200
Realized net gains (losses) on investments (2,452) 8352,048 (4,972) 5,335 (4,872)
Corporate expenses (2,590) (2,120)
------------ --------------
INCOME BEFORE FEDERAL INCOME TAXES(2,600) (2,038) (7,681) (6,480)
------------- ------------- ------------- -------------
Income before federal income taxes $ 6,63011,990 $ 8,029
============ ==============4,031 $ 33,841 $ 19,500
============= ============= ============= =============
(7) LOANS TO EMPLOYEES: TheIn 2000, 2001 and 2002 the Company has provided loans to
certain key employees for the sole purpose of purchasing the Company's Class B
common stock in the open market. $7,346$7,260 of such full-recourse loans were issued
and $5,163 remain outstanding at March 31,September 30, 2003 and carry interest rates of
between 4.75% and 6%, payable annually on the loan anniversary date. The
underlying securities serve as collateral for these loans, which must be repaid
no later than 10 years from the date of issue. No additional loans will be made
under this program.
(8) STOCK SPLIT: All share and per share amounts are adjusted for the
five-for-
fourfive-for-four stock split on February 17, 2003.
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ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND - -----------------------------------------------------------------------
RESULTS
OF OPERATIONS
- ---------------------
LIQUIDITY AND CAPITAL RESOURCES
The Company generally experiences positive cash flow from operations resulting
from the fact that premiums are collected on insurance policies in advance of
the disbursement of funds in payment of claims. Operating costs of the
property/casualty insurance subsidiaries, other than loss and loss expense
payments and commissions paid to related agency companies, generally average
between 25% and 35% of premiums earned and the remaining amount is available for
investment for varying periods of time pending the settlement of claims relating
to the insurance coverage provided. The Company's cash flowsflow relating to premiums
areis significantly affected by reinsurance programs in effect from time-to-time
whereby the Company cedes both premium and risk to other insurance and
reinsurance companies. These programs vary significantly among products and
overall premium ceded rates, net of ceding commission allowances, have increased
slightly over the past two years as premium volume in the Company's large fleet
trucking division have increased relative to other products. The average ceding
rate on large fleet trucking liability business hadgenerally
decreased since 2000 as
Protective has retained more risk but still is substantially higher than2001, reflective of the ceding rate on other products.effect of the provisions of reinsurance
agreements currently in place. For the threenine months ended March 31,September 30, 2003, the
Company experienced positive cash flow from operations totaling $9.2$42.2 million, and
compares toa
significant improvement from the $16.8 million in positive cash flow of $13.9 million forgenerated
during the threefirst nine months ended March
31,of 2002. The decreaseprimary difference in cash flows comparedfor
the periods presented is attributable to the 2002 period is due
primarily to large claim settlements made during March, 2003, which were heavily
covereda 53% increase in premiums collected
net of reinsurance. The increase in premium collections was partially offset by
reinsurance. Reinsurance recoverable on paid claims increased $5.6
million from December 31, 2002,a related increase in operating expenses that normally follows such a premium
volume increase as a result. Payments of these amounts were
received in April. The first quarter of 2002 also included $3.5 million inwell as an increase federal income tax recoveries not present in the current year first quarter.taxes paid.
For several years, the Company's investment philosophy has emphasized the
purchase of relatively short-term instruments with maximum quality and
liquidity. The average life of the Company's fixed income (bond and short-term
investment) portfolio was approximately 2.53.8 years at March 31,September 30, 2003 compared
to 2.9 years at December 31, 2002.
The Company's assets at March 31,September 30, 2003 included $53.2$45.1 million in investments
classified as short-term or cash equivalents whichthat were readily convertible to
cash without significant market penalty. An additional $74.8 million$72.4 of fixed maturity
investments will mature within the twelve monthtwelve-month period following March
31,September 30,
2003. The Company believes that these liquid investments are more than
sufficient to provide for projected claim payments and operating cost demands
even before consideration of current positive cash flows.
Consolidated shareholders' equity is composed largely of GAAP shareholder's
equity of the insurance subsidiaries. As such, there are statutory restrictions
on the transfer of portions of this equity to the parent holding company. At
March 31,September 30, 2003, $40.8$44.4 million may be transferred by dividend or loan to the
parent company without approval by, or prior notification to, regulatory
authorities. An additional $182.3$203.0 million of shareholder's equity of the
insurance subsidiaries may be advanced or loaned to the parent holding company
with prior notification to, and approval from, regulatory authorities. The
Company believes that these restrictions pose no material liquidity concerns to
the Company. The financial strength and stability of the subsidiaries would
permit ready access by the parent company to short-term and long-term - 7 -
sources of
credit. The Company has borrowed $7.5 million under bank lines of
credit in connection with recent purchases of treasury stock. Interest expense
related to these borrowings is included in corporate expenses and is not
material. In addition, the parent company had cash and marketable securities valued at $33.8$39.8
million at March 31,September 30, 2003.
- 8 -
The Company's annualized premium writing to surplus ratio for the first quarternine
months of 2003 was approximately 60%51%. Regulatory guidelines generally allow for
writings of 200% of surplus. Accordingly, the Company can continue to increase
premium writings significantly with no need to raise additional capital.
Further, the Insurance Subsidiaries' individual capital structureslevels are several times
higher than the minimum amounts designated by the National Association of
Insurance Commissions.Commissioners.
RESULTS OF OPERATIONS
---------------------
COMPARISONS OF FIRSTTHIRD QUARTER, 2003 TO FIRSTTHIRD QUARTER, 2002
----------------------------------------------------------
Net premiums earned during the firstthird quarter of 2003 increased $10.0$10.5 million
(46%(39%) as compared to the same period of 2002. The increase is due primarily to a
77%51% increase in premiums from the Company's fleet trucking program as the market
has allowed the Company to maintain rate levels while continuing to add new
accounts over the past five quarters.year. In addition, premiums from the Company's
voluntary reinsurance assumed program increased 91% due primarily to rate
increases and increased participation under existing agreements. Premiums from the Company's small
business workers' compensation, small fleet trucking and private passenger
automobile programs increased 44%82%, 25% and 17%23%, respectively, due to rate
increases andby competitors, which allow Sagamore's pricing to be more competitive,
as well as continued geographic expansion.
NetDirect and assumed premiums written during the third quarter of 2003 totaled
$57.5 million, a 32% increase from the Company's small fleet
trucking program decreased 19% reflecting the intense competition in this market
segment which has only recently subsided. The decline in premium from this
division reflects the Company's philosophy that allows business to be lost
rather than lowering prices to meet unrealistic competition.
Direct premiums written and assumed increased at approximately the same rate as
net premium earned, totaling $56.9 million, or 49% greater than the $38.2$43.7 million reported a year earlier.
All divisions experienced direct premium growth ranging from 26%20% to 60%53% when
compared to the firstthird quarter of 2002. Premium ceded to reinsurers averaged
32.8%35.0% of direct premium production for the current quarter compared to 32.0%41.1% a
year earlier.
Net investment income, before tax, during the firstthird quarter of 2003 was 13%15%
lower than the firstthird quarter of 2002 due primarily to the continued decline incontinuing
historically low level of investment yields. The short-term nature of the
Company's fixed income investment portfolio has been negatively impacted by the
numerous interest rate reductions by the Federal Reserve Board since January 1,
2001. Pre-tax yields dropped nearly three-quarters of a percentage point from
the prior year quarter. After tax yields posted a similar decline. There was no significant change in the mixslightly smaller decline as a
portion of investments in the Company's fixed income portfolio during the quarter.was converted from taxable to
tax-exempt securities. The average life of the Company's fixed income portfolio
decreasedincreased from 2.9 years at the prior year endyear-end to 2.53.8 years at March 31, 2003 reflecting management's continuing decision not to
commit funds for longer terms as long as interest rates remain at 50 year lows.September 30,
2003.
The firstthird quarter 2003 net realized lossgain of $2.5$2.0 million consisted of net lossesgains
on the disposal of equity securities, short-term investments and fixed
maturities and of $1.6$1.9 million, $.8$.2 million and $.1 million, respectively. The net realized loss
included chargesabove
gains were partially offset by a charge for other-than-temporary impairment on
equity securities and
fixed maturitiesinvestments of $1.3 million and $.4 million, respectively.$.2 million.
- 89 -
Losses and loss expenses incurred during the firstthird quarter of 2003 increased
$6.7$7.0 million from that experienced during the firstthird quarter of 2002, consistent
with the increase in premium volume previously discussed. Loss ratios for each
of the Company's major product lines were as follows:
2003 2002
---- ----
Large and medium fleet trucking 67.6% 67.3%65.5% 64.4%
Private passenger automobile 63.2 62.960.8 63.8
Small fleet trucking 53.7 56.666.2 44.3
Voluntary reinsurance assumed 66.2 48.160.0 70.8
Small business workers' compensation 60.5 62.580.2 61.7
All lines 64.7 63.565.1 64.3
The increase in the Small Fleet Trucking loss ratio resulted from higher
frequency and severity of claims compared to an unusually low third quarter of
2002. The 2003 Small Business Workers' Compensation loss ratio reflects
continuing reevaluation of the adequacy of prior period loss reserving.
Other operating expenses for the firstthird quarter of 2003 increased 20%41% from the
firstthird quarter of 2002. Adjusted for ceding allowances, operating expenses
increased 28% from the third quarter of 2002 and after consideration of ceding allowances, comparescompare favorably with the 46%39%
increase in premiums earned from the 2002 quarter as many of the Company's
expenses do not vary directly with premium volume. Ceding allowances as a
percentage of direct expenses have declined due to changes in the Company's
reinsurance structure whereby the Company now retains a greater percentage of
the risk compared to prior periods, particularly within the fleet trucking
product. In addition, ceding allowance rates are slightly lower under current
reinsurance agreements compared to rates in effect under prior period
agreements. Available capacity within each of the Company's divisions has
allowed for the expansion of business with only minimal additions to personnel
and other fixed costs over the past year. Management believes that significant
additional capacity exists before most divisions would be obliged to incur
meaningful increases in personnel or other fixed costs. The Company cedes a
large portion of its direct premiums to reinsurers and these reinsurance
premiums carry significant expense offsets. Total cedingCeding allowances totaled $4.8$5.2
million for the 2003 quarter compared to $3.4$4.6 million for the 2002 quarter. The
ratio of consolidated other operating expenses to operating revenue was 19.1%18.3%
during the firstthird quarter of 2003 compared to 21.7%17.1% for the 2002 first quarter.third quarter
reflecting the diminished effect of ceding commissions, contingent commissions
to non-affiliated agents resulting from lower loss ratios and increases in
payroll resulting from expanding business.
The effective federal tax rate for consolidated operations for the firstthird quarter
of 2003 was 31.6%32.3% and differs fromis less than the statutory rate primarily because of tax
exempt investment income.
As a result of the factors mentioned above, principally the change in net
realized capital gains, net income decreased $.9increased $5.3 million (186.9%) during the
firstthird quarter of 2003 as compared with the 2002 second quarter.
- 10 -
COMPARISONS OF NINE MONTHS ENDED SEPTEMBER 30, 2003 TO
NINE MONTHS ENDED SEPTEMBER 30, 2002
Net premiums earned increased $31.6 million (42%) during the first quarter. After
removingnine months
of 2003 as compared to the same period of 2002. The increased premium volume is
primarily attributable to a 61% increase in the Company's fleet trucking product
for the same reasons mentioned above in the quarterly comparison. In addition,
net premiums earned for the private passenger automobile, voluntary reinsurance
assumed, and small business workers' compensation products increased 20%, 38%
and 73%, respectively, all for reasons discussed in the quarterly comparison.
Direct premiums written and assumed during the first nine months of 2003 totaled
$170.6 million, a 37% increase from the $124.4 million reported a year earlier.
All divisions experienced direct premium growth ranging from 22% to 64% when
compared to the first nine months of 2002. Premium ceded to reinsurers averaged
33.4% of direct premium production for the current year-to-date compared to
37.8% a year earlier.
Net investment income during the first nine months of 2003 was 15% lower than
the 2002 period for the same reasons as indicated in the quarterly comparison
above. Overall pre-tax and after tax yields were lower during the current period
consistent with the change in net investment income.
The net realized capital transactions, incomegain on investments of $5.3 million for the first nine months
of 2003 consists of net gains on the disposal of equity securities and fixed
maturity investments of $7.0 million and $.6 million, respectively, and was
partially offset by $.2 million in losses in short-term and other investments.
The net realized gain was also partially offset by charges for
other-than-temporary impairment on equity securities and fixed maturities of
$1.6 million and $.4 million, respectively.
Losses and loss expenses incurred during the first nine months of 2003 increased
approximately $1.2$20.5 million from the first nine months of 2002, consistent with the increased
premium volume previously discussed. Loss and loss expense ratios for the
comparative nine-month periods were as follows:
2003 2002
---- ----
Large and medium fleet trucking 65.4% 67.6%
Private passenger automobile 62.2 64.1
Small fleet trucking 60.5 50.0
Voluntary reinsurance assumed 62.5 64.7
Small business workers' compensation 80.7 57.3
All lines 64.8 64.8
The increase in the loss and loss expense ratio for small business workers'
compensation is due to reserve strengthening of prior period cases resulting
from a reevaluation of exposures for this product. Because of the relatively
small size of this product, the higher product loss ratio did not have a
material impact on the consolidated loss ratio.
Other operating expenses increased $5.9 million (35%) during the first nine
months of 2003 compared to the same period of 2002. Ceding commission allowances
included in net expenses were $14.7 million for the 2003 period compared to
$12.3 million in the prior year period. The ratio of other operating expenses to
total revenue (adjusted for realized gains) was 19.0% for 2003 quarter.compared to 18.9%
for 2002. The slight increase in this ratio is due to the same reasons mentioned
in the quarterly comparison.
- 11 -
The effective federal tax rate for consolidated operations for the first nine
months of 2003 was 32.2% and is less than the statutory rate primarily because
of tax exempt investment income.
As a result of the factors mentioned above, principally the change in net
realized capital gains, net income increased $9.7 million (73.8%) during the
first nine months of 2003 as compared with the 2002 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.
CRITICAL ACCOUNTING POLICIES
There have been no changes in the Company's critical accounting policies as
disclosed in the Form 10K filed for the year ended December 31, 2002.
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ITEM 4. CONTROLS AND PROCEDURES
Baldwin & Lyons, Inc. management, including the Chief Executive Officer and
Chief Financial Officer, have conducted an evaluation of the effectiveness of
disclosure controls and procedures pursuant to Exchange Act Rule 13a-14. Based
on that evaluation, the Chief Executive Officer and Chief Financial Officer
concluded that the disclosure controls and procedures are effective in ensuring
that all material information required to be filed in this quarterly report has
been made known to them in a timely fashion. There have been no significant
changes in internal controls, or in factors that could significantly affect
internal controls, subsequent to the date the Chief Executive Officer and Chief
Financial Officer completed their evaluation.
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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
(99.1) Certification of CEO EXHIBIT 99.1
pursuant to Section 302 of the Certification of CEO
Sarbanes-Oxley Act of 2002
And 18 U.S.C. 1350 Certification of CEO
(99.2) Certification of CFO EXHIBIT 99.2
pursuant to Section 302 of the Certification of CFO
Sarbanes-Oxley Act of 2002
And 18 U.S.C. 1350
(99.3) Certification of CEO EXHIBIT 99.3
pursuant to Section 906 of the Certification of CEO
Sarbanes-Oxley Act of 2002
And 18 U.S.C. 1350
(99.4) Certification of CFO EXHIBIT 99.4
pursuant to Section 906 of the Certification of CFO
Sarbanes-Oxley Act of 2002
And 18 U.S.C. 1350
ITEM 6 (b) REPORTS ON FORM 8-K
- -------------------------------
No reports onA Form 8-K have beenwas filed by the registrant duringon July 25, 2003 regarding its earnings
announcement for the three months
ended March 31,second quarter of 2003.
-10-13 -
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BALDWIN & LYONS, INC.
Date May 9,November 6, 2003 By /s//S/ Gary W. Miller
----------- ------------------------------------------ -----------------------------------
Gary W. Miller, Chairman of the Board and Chief Executive OfficerCEO
Date May 9,November 6, 2003 By /s//S/ G. Patrick Corydon
----------- --------------------------------------------- -----------------------------------
G. Patrick Corydon,
Senior Vice President and
Chief Financial Officer- Finance
(Principal Financial and
Accounting Officer)
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BALDWIN & LYONS, INC.
CERTIFICATIONS PURSUANT TO
SECTION 302 OF
THE SARBANES-OXLEY ACT OF 2002
CERTIFICATION
- -------------
I, Gary W. Miller, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Baldwin & Lyons, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing
date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
- 12 -
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: May 9, 2003
/s/ Gary W. Miller
- ------------------
Gary W. Miller
Chairman of the Board
and Chief Executive Officer
CERTIFICATION
- -------------
I, G. Patrick Corydon, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Baldwin & Lyons, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
- 13 -
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the filing
date of this quarterly report (the "Evaluation Date"); and
c) presented in
this quarterly report our conclusions about the effectiveness of the
disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to record,
process, summarize and report financial data and have identified for the
registrant's auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: May 9, 2003
/s/ G. Patrick Corydon
- ----------------------
G. Patrick Corydon
Senior Vice President and
Chief Financial Officer
- 14 -
BALDWIN & LYONS, INC.
Form 10-Q for the fiscal quarter
ended March 31,September 30, 2003
INDEX TO EXHIBITS
Begins on sequential
page number of Form
Exhibit NumberBEGINS ON SEQUENTIAL
PAGE NUMBER OF FORM
EXHIBIT NUMBER 10-Q
-------------- -----------------------------------------------------------
EXHIBIT 11 Filed herewith electronically
Computation of per share earnings
EXHIBIT 99.1 Filed herewith electronically
Certification of CEO
pursuant to Section 302 of the
Sarbanes-Oxley Act
and 18 U.S.C. 1350
EXHIBIT 99.2 Filed herewith electronically
Certification of CFO
pursuant to Section 302 of the
Sarbanes-Oxley Act
and 18 U.S.C. 1350
EXHIBIT 99.3 Filed herewith electronically
Certification of CEO
pursuant to Section 906 of the
Sarbanes-Oxley Act
and 18 U.S.C. 1350
EXHIBIT 99.4 Filed herewith electronically
Certification of CFO
pursuant to Section 906 of the
Sarbanes-Oxley Act
and 18 U.S.C. 1350
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