1
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-Q

                   Quarterly Report Under Section 13 or 15 (d)
                     of the Securities Exchange Act of 1934


             ------------------------------------------------------

       For Quarter Ended                        Commission file number
         March 31,June 30, 2004                                  0-5534

                              BALDWIN & LYONS, INC.
             (Exact name of registrant as specified in its charter)

           INDIANA                                    35-0160330
           -------                                    ----------
(State or other jurisdiction of                    (I.R.S. Employer
 incorporation or organization)                  Identification Number)

1099 NORTH MERIDIAN STREET, INDIANAPOLIS, INDIANA       46204
- -------------------------------------------------       -----
   (Address of principal executive offices)           (Zip Code)

Registrant's telephone number, including area code:  (317) 636-9800
                                                     --------------

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days.
Yes    X       No
     -----        -----

Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).
Yes    X       No
     -----------        -----

Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of May 5,August 4, 2004:


       TITLE OF CLASS                        NUMBER OF SHARES OUTSTANDING

Common Stock, No Par Value:
      Class A (voting)                                 2,666,666
      Class B (nonvoting)                             11,955,64211,969,746


Index to Exhibits located on page 13.15.

                          Page 1 of a total of 2022 pages

 2
                         PART I - FINANCIAL INFORMATION

ITEM 1  FINANCIAL STATEMENTS
- ----------------------------

BALDWIN & LYONS, INC. AND SUBSIDIARIES UNAUDITED CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT PER SHARE DATA) MARCH 31JUNE 30 December 31 2004 2003 ---------------- ----------------- ASSETS Investments: Fixed maturities $ 322,216322,445 $ 321,193 Equity securities 126,637127,367 130,139 Short-term and other 32,04333,538 36,545 ---------------- ----------------- 480,896483,350 487,877 Cash and cash equivalents 58,92646,127 30,078 Accounts receivable 40,64439,109 37,333 Reinsurance recoverable 192,384208,872 185,457 Notes receivable from employees 3,5993,362 4,828 Other assets 18,62718,814 17,634 ---------------- ----------------- $ 795,076799,634 $ 763,207 ================ ================= LIABILITIES AND SHAREHOLDERS' EQUITY Reserves for losses and loss expenses $ 358,650377,328 $ 343,724 Reserves for unearned premiums 43,22141,068 36,803 Accounts payable and accrued expenses 45,13743,157 44,005 Current federal income taxes 5,179781 901 Deferred federal income taxes 14,29810,911 13,200 ---------------- ----------------- 466,485473,245 438,633 Shareholders' equity: Common stock-no par value 623624 623 Additional paid-in capital 35,51835,881 35,419 Unrealized net gains on investments 45,24039,788 44,837 Retained earnings 247,210250,096 243,695 ---------------- ----------------- 328,591326,389 324,574 ---------------- ----------------- $ 795,076799,634 $ 763,207 ================ ================= Number of common and common equivalent shares outstanding 14,75114,765 14,752 Book value per outstanding share $22.28$22.11 $22.00
See notes to condensed consolidated financial statements. 3
BALDWIN & LYONS, INC. AND SUBSIDIARIES UNAUDITED CONSOLIDATED STATEMENTS OF INCOME (IN THOUSANDS, EXCEPT PER SHARE DATA) Three Months Ended March 31Six Months Ended June 30 June 30 ------------------------------ ------------------------------ 2004 2003 2004 2003 ------------- ------------- ------------- ------------- REVENUES Net premiums earned $ 38,497 $31,70143,403 $ 36,960 $81,900 $68,661 Net investment income 3,172 3,3733,008 3,124 6,180 6,497 Realized net gains (losses) on investments 5,818 (2,452)2,290 5,739 8,108 3,287 Other income 1,906 1,5021,803 1,443 3,709 2,945 ------------- ------------- 49,393 34,124------------- ------------- 50,504 47,266 99,897 81,390 EXPENSES Losses and loss expenses incurred 25,246 20,51129,735 23,900 54,981 44,411 Other operating expenses 8,089 6,9837,720 8,145 15,809 15,128 ------------- ------------- 33,335 27,494------------- ------------- 37,455 32,045 70,790 59,539 ------------- ------------- ------------- ------------- INCOME BEFORE FEDERAL INCOME TAXES 16,058 6,63013,049 15,221 29,107 21,851 Federal income taxes 5,159 2,0984,185 4,920 9,344 7,018 ------------- ------------- ------------- ------------- NET INCOME $ 10,8998,864 $ 4,53210,301 $19,763 $ 14,833 ============= ============= ============= ============= PER SHARE DATA: DILUTED EARNINGS $ .74.60 $ .31.70 $ 1.34 $ 1.01 ============= ============= ============= ============= BASIC EARNINGS $ .75.61 $ .31.71 $ 1.35 $ 1.02 ============= ============= ============= ============= DIVIDENDS PAID TO SHAREHOLDERS $ .50.40 $ .10 $ .90 $ .20 ============= ============= ============= ============= RECONCILIATION OF SHARES OUTSTANDING: Average shares outstanding - basic 14,603 14,55414,624 14,558 14,614 14,556 Dilutive effect of options outstanding 212 102171 157 189 116 ------------- ------------- ------------- ------------- Average shares outstanding - diluted 14,815 14,65614,795 14,715 14,803 14,672 ============= ============= ============= =============
See notes to condensed consolidated financial statements. 4
BALDWIN & LYONS, INC. AND SUBSIDIARIES UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS) ThreeSix Months Ended March 31June 30 2004 2003 ------------- ------------- Net cash provided by operating activities $ 18,56926,571 $ 9,21825,565 Investing activities: Purchases of long-term investments (41,605) (46,204)(92,640) (90,297) Proceeds from sales or maturities of long-term investments 52,778 49,47390,574 104,475 Net sales (purchases) of short-term investments 5,476 9893,479 (8,946) Decrease in notes receivable from employees 1,093 751,364 495 Other investing activities (222) (576)(500) (1,278) ------------- ------------- Net cash provided by investing activities 17,520 3,7572,277 4,449 Financing activities: Dividends paid to shareholders (7,304) (1,457)(13,157) (2,913) Repayment on line of credit - (7,500) Proceeds from sales of common stock 63 1358 4 ------------- ------------- Net cash used in financing activities (7,241) (1,456)(12,799) (10,409) ------------- ------------- Increase in cash and cash equivalents 28,848 11,51916,049 19,605 Cash and cash equivalents at beginning of period 30,078 41,699 ------------- ------------- Cash and cash equivalents at end of period $58,926 $53,218$46,127 $61,304 ============= =============
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, 2004. 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. 5 NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (2) FORWARD-LOOKING STATEMENTS: Forward-looking statements in this report are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Investors are cautioned that such forward-looking statements involve inherent risks and uncertainties. Readers are encouraged to review the Company's annual report for its full statement regarding forward-looking information. (3) REINSURANCE: The following table summarizes the Company's transactions with reinsurers for the 2004 and 2003 comparative periods.
2004 2003 ---------------- ----------------------------- ------------ Quarter ended March 31:June 30: Premiums ceded to reinsurers $ 19,24821,637 $ 17,71317,377 Losses and loss expenses ceded to reinsurers 17,948 21,09330,170 21,189 Commissions from reinsurers 5,202 4,8255,733 4,765 Six months ended June 30: Premiums ceded to reinsurers 40,886 35,090 Losses and loss expenses ceded to reinsurers 48,118 42,282 Commissions from reinsurers 10,936 9,590
(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,June 30, 2004 was $11,223$3,286 and compares to total realized and unrealized income of $3,638$20,556 for the quarter ended March 31,June 30, 2003. For the six months ended June 30, 2004, total realized and unrealized income was $14,509 and compares to total realized and unrealized income of $24,194 for the six months ended June 30, 2003. 6 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, segment profit for fleet trucking includes the direct marketing agency operations conducted by the parent company and is computed after elimination of inter-company commissions and, accordingly, segment profit presented here will not agree with statutory underwriting gains for this segment which may be quoted elsewhere in the Company's financial statements.
2004 2003 -------------------------------------------- ---------------------------------------------------------------------------------------- --------------------------------------------- DIRECT AND Direct and ASSUMED NET PREMIUM SEGMENT Assumed Net Premium Segment PREMIUM EARNED AND PROFIT Premium Earned and Profit WRITTEN FEE INCOME (LOSS) Written Fee Income (Loss) -------------- --------------- ----------- --------------- -------------- ---------------------- ------------- ------------ ------------ ------------- ------------ THREE MONTHSQUARTER ENDED MARCH 31: PROTECTIVE PRODUCTS:JUNE 30: Protective products: Fleet trucking $ 39,17144,345 $ 21,26725,650 $ 6,3217,141 $ 34,43836,048 $ 18,10720,803 $ 6,8798,153 Reinsurance assumed 2,918 3,074 1,907 2,823 2,559 483 SAGAMORE PRODUCTS:1,918 2,913 1,756 2,786 3,271 500 Sagamore products: Personal division 15,180 11,228 1,350 13,737 9,243 6368,799 11,600 1,820 9,857 10,241 849 Commercial division: Small fleet trucking 3,865 2,524 332 3,577 1,792 1534,338 2,559 136 4,760 2,111 24 Workers' compensation 2,788 1,945 (229) 2,192 1,132 (10) -------------- --------------- ----------- --------------- -------------- ----------3,110 2,125 (441) 2,350 1,553 (469) ------------ ------------- ------------ ------------ ------------- ------------ Total Commercial division 6,653 4,469 103 5,769 2,924 1437,448 4,684 (305) 7,110 3,664 (445) All other 241 242 (80) 103 99 158 -------------- --------------- ----------- --------------- -------------- ----------379 307 (105) 342 272 (207) ------------ ------------- ------------ ------------ ------------- ------------ Totals $ 64,16362,889 $ 40,28045,154 $ 9,60110,307 $ 56,87056,143 $ 32,93238,251 $ 8,299 ============== =============== =========== =============== ============== ==========8,850 ============ ============= ============ ============ ============= ============ SIX MONTHS ENDED JUNE 30: Protective products: Fleet trucking $ 83,516 $ 46,916 $ 13,462 $ 70,486 $ 38,910 $ 15,034 Reinsurance assumed 4,836 5,988 3,663 5,609 5,830 983 Sagamore products: Personal division 23,980 22,828 3,171 23,594 19,484 1,485 Commercial division: Small fleet trucking 8,203 5,083 468 8,337 3,903 177 Workers' compensation 5,898 4,070 (670) 4,542 2,685 (480) ------------ ------------- ------------ ------------ ------------- ------------ Total Commercial division 14,101 9,153 (202) 12,879 6,588 (303) All other 619 549 (187) 445 371 (50) ------------ ------------- ------------ ------------ ------------- ------------ Totals $ 127,052 $ 85,434 $ 19,907 $ 113,013 $ 71,183 $ 17,149 ============ ============= ============ ============ ============= ============
7 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 March 31Six Months Ended June 30 June 30 2004 2003 ---------------- -----------------2004 2003 -------------- --------------- -------------- -------------- REVENUE: Net premium earned and fee income $ 40,28045,154 $ 32,93238,251 $ 85,434 $ 71,183 Net investment income 3,172 3,3733,008 3,124 6,180 6,497 Realized net gains (losses) on investments 5,818 (2,452)2,290 5,739 8,108 3,287 Other 123 271 ---------------- ----------------- TOTAL CONSOLIDATED REVENUE52 152 175 423 -------------- --------------- -------------- -------------- Total consolidated revenue $ 49,39350,504 $ 34,124 ================ =================47,266 $ 99,897 $ 81,390 ============== =============== ============== ============== PROFIT: Segment profit $ 9,60110,307 $ 8,2998,850 $ 19,907 $ 17,149 Net investment income 3,172 3,3733,008 3,124 6,180 6,497 Realized net gains (losses) on investments 5,818 (2,452)2,290 5,739 8,108 3,287 Corporate expenses (2,533) (2,590) ---------------- ----------------- INCOME BEFORE FEDERAL INCOME TAXES(2,556) (2,492) (5,088) (5,082) -------------- --------------- -------------- -------------- Income before federal income taxes $ 16,05813,049 $ 6,630 ================ =================15,221 $ 29,107 $ 21,851 ============== =============== ============== ==============
7 NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (7) LOANS TO EMPLOYEES: In 2000, 2001 and 2002 the Company provided loans to certain key employees for the sole purpose of purchasing the Company's Class B common stock in the open market. $7,260 of such full-recourse loans were issued and $3,599$3,362 remain outstanding at March 31,June 30, 2004 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 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 flow relating to premiums is significantly affected by reinsurance programs in effect from time-to-time whereby the Company cedes both premium and risk to other insurance and reinsurance companies. These programs vary significantly among products and overall premium ceded rates, net of ceding commission allowances, have generally decreased since 2001, reflective of the effect of the provisions of reinsurance agreements currently in place. For the threesix months ended March 31,June 30, 2004, the Company experienced positive cash flow from operations totaling $18.6$26.6 million, and compares toup slightly from the $25.5 million in positive cash flow generated during the first half of $9.22003. Increased premium collections were largely offset by related increases in losses paid and operating expenses that normally follow such a premium volume increase. In addition, premium deposits held on behalf of insureds rose by $2.2 million for the three months ended Marchfrom December 31, 2003. The majority of this change resulted from a $2.0 million decrease in reinsurance recoverable on paid claims during the current quarter compared to a $5.6 million increase in such recoverables during the prior year first quarter. 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 2.6 years at March 31,June 30, 2004 compared to 2.8 years at December 31, 2003. The decrease in the average life resulted from management's belief that meaningful long term interest rate increases are imminent. The Company's assets at March 31,June 30, 2004 included $58.9$46.1 million in investments classified as short-term or cash equivalents that were readily convertible to cash without significant market penalty. An additional $90.2$89.8 million of fixed maturity investments will mature within the twelve-month period following March 31,June 30, 2004. 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,June 30, 2004, $47.0$47.2 million may be transferred by dividend or loan to the parent company without approval by, or prior notification to, regulatory authorities. An additional $198.8$199.8 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 sources of credit. The parent company had cash and marketable securities valued at $48.0$48.6 million at March 31,June 30, 2004. 9 The Company's annualized premium writing to surplus ratio for the first quarterhalf of 2004 was approximately 46%43%. Regulatory guidelines generally allow for writings of at least 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 levelsstructures are several times higher than the minimum amounts designated by the National Association of Insurance Commissions. 9Commissioners. RESULTS OF OPERATIONS --------------------- COMPARISONS OF FIRSTSECOND QUARTER, 2004 TO FIRSTSECOND QUARTER, 2003 -------------------------------------------------------------------------------------------------------------------- Net premiums earned during the firstsecond quarter of 2004 increased $6.8$6.4 million (21%(17%) as compared to the same period of 2003. The increase is due primarily to an 18%a 24% 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. In addition, premiums from the Company's small business workers' compensation, small fleet trucking and private passenger automobile programs increased 68%37%, 35%20% and 20%12%, respectively, due largely to rate increases by competitors, which allow Sagamore's pricing to be more competitive.as these products also found increased market acceptance. Direct premiums written and assumed increased approximately 13% to $64.2during the second quarter of 2004 totaled $62.9 million, a 12% increase from $56.9the $56.1 million reported a year earlier. All divisions, excluding voluntary reinsurance assumed, experiencedThis increase is due largely to an $8.3 million (23%) increase in direct premiums written from the Company's fleet trucking program. This increase was partially offset by decreases in premium growth ranging from 8%writings for the Company's private passenger automobile and small fleet trucking programs of 11% and 9%, respectively, due to 27% when compared toa concentration of renewals in the first quarter for each of 2003.these two products and due to increased competitive pressure in the past few months. Several competitors have lowered prices and increased incentives to producers recently which, if continued, will impact premium production for these product lines. Premium ceded to reinsurers averaged 31.6%35.8% of direct premium production for the current quarter compared to 32.8% a year earlier.earlier owing to changes in the mix of business and individual policy characteristics rather than reinsurance program changes. Net investment income, before tax, during the firstsecond quarter of 2004 was 6%4% lower than the firstsecond quarter of 2003 due primarily to the continuing 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 50 basis points from the prior year quarter. After tax yields posted a smaller decline as the Company holds a larger percentage of tax-exempt securities in its fixed income portfolio. The average life of the Company's fixed income portfolio decreased from 2.8 years at the prior year end to 2.6 years at March 31, 2004.June 30, 2004 as investment mangers kept available funds short in anticipation of increasing interest rates which began late in the quarter. The firstsecond quarter 2004 net realized gain of $5.8$2.3 million consisted of net gains on equity securities of $1.7 million and a decrease in impairment charges on fixed maturities and short-termmaturity investments of $4.9 million, $.6 million$1.0 million. The above gains were partially offset by a net loss on short term and $.2 million, respectively.fixed maturity investments. 10 Losses and loss expenses incurred during the firstsecond quarter of 2004 increased $4.7$5.8 million from that experienced during the firstsecond quarter of 2003, which is consistent with the increase in premium volume previously discussed. Loss ratios for each of the Company's major product lines were as follows:
2004 2003 ---- ---- Large and medium fleetFleet trucking 75.6% 67.6%78.4% 63.3% Private passenger automobile 59.9 63.256.7 62.7 Small fleet trucking 57.6 53.760.7 59.2 Voluntary reinsurance assumed 11.8 66.217.8 61.8 Small business workers' compensation 82.4 60.587.8 96.1 All lines 65.668.5 64.7
The increase in the Large and Medium Fleet Truckingfleet trucking ratio is due to higher frequency and severity of reported claims and a smaller redundancy on the closing of prior year claims compared to the prior year quarter. The 2004 Small Business Workers' CompensationCompany's large policy limits and net retention of risk in its fleet trucking products allows for significant variation in loss activity from period to period. The loss ratio reflectsreported for the current quarter is relatively high current year losscompared to historical experience on a very small bookwhile the ratio reported in the second quarter of business.2003 was closer to the low end of the historical range. The low loss ratio for reinsurance assumed reflects the lack of major catastrophes this quarter. Other operating expenses for the firstsecond quarter of 2004 increased 16%decreased 5% from the firstsecond quarter of 2003. Adjusted for ceding allowances, operating expenses increased only 13%4% from the firstsecond quarter of 2003 and comparecompares favorably with the 21%17% increase in premiums earned from the 2003 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 10 reinsurance structure whereby the Company now retains a greater percentage of the risk compared to prior periods, particularly within the Large and Medium Fleetfleet trucking products. 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. Ceding allowances totaled $5.2$5.7 million for the 2004 quarter compared to $4.8 million for the 2003 quarter. The ratio of consolidated other operating expenses to operating revenue (defined as total revenue less realized capital gains) was 18.6%16.0% during the firstsecond quarter of 2004 compared to 19.1%19.6% for the 2003 first quarter.second quarter reflecting the relationship of operating expenses to growing revenues as discussed earlier in this paragraph. The effective federal tax rate for consolidated operations for the firstsecond quarter of 2004 was 32.1% and is less than the statutory rate primarily because of tax exempt investment income. As a result of the factors mentioned above , principally the changea $3.4 decrease in net realized capital gains, net income increased $6.4decreased $1.4 million (140.5%(14%) during the firstsecond quarter of 2004 as compared with the 2003 second quarter. 11 COMPARISONS OF SIX MONTHS ENDED JUNE 30, 2004 TO ------------------------------------------------ SIX MONTHS ENDED JUNE 30, 2003 ------------------------------ Net premiums earned increased $13.2 million (19%) during the first quarter.six months of 2004 as compared to the same period of 2003. The increased premium volume is primarily attributable to a 21% 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 small business workers' compensation, small fleet and private passenger automobile products increased 50%, 27% and 16%, respectively, again for reasons discussed in the quarterly comparison. Direct premiums written and assumed during the first half of 2004 totaled $127.1 million, a 12% increase from the $113.0 million reported a year earlier. All divisions, excluding voluntary reinsurance assumed and small fleet trucking, experienced direct premium growth with the Company's fleet trucking and small business workers' compensation products posting the most significant gains at 18% and 30%, respectively. Premium ceded to reinsurers averaged 33.7% of direct premium production for the current period compared to 32.6% a year earlier. Net investment income during the first half of 2004 was 5% lower than the 2003 period for the same reasons as indicated in the quarterly comparison above. After tax investment income declined only 1.5% owing to the increase in holdings of tax-exempt municipal bonds in 2004. Overall pre-tax and after tax yields were lower during the current period while average invested funds increased 12% from the prior year resulting from positive cash flow. The net realized gain on investments of $8.1 million for the first six months of 2004 consists of net gains on equity securities and fixed maturity investments of $6.8 million and $1.5 million, respectively, and was partially offset by $.2 million in losses in short-term and other investments, after consideration of impairment changes during the period. Losses and loss expenses incurred during the first six months of 2004 increased $10.6 million from the first six months of 2003, consistent with the increased premium volume previously discussed. Loss and loss expense ratios for the comparative six-month periods were as follows:
2004 2003 ---- ---- Fleet trucking 77.1% 65.3% Private passenger automobile 58.3 62.9 Small fleet trucking 59.2 56.7 Voluntary reinsurance assumed 14.7 63.7 Small business workers' compensation 85.2 81.1 All lines 67.1 64.7
With reference to comments regarding the increase in the fleet trucking loss ratio in the quarterly comparison, current accident year losses were near the upper end of historical ranges in both of the 2004 quarters while 2003 losses were nearer the midpoint of historical experience. Other operating expenses increased $.7 million (5%) during the first six months of 2004 compared to the same period of 2003. Ceding commission allowances included in net expenses were $10.9 million for the 2004 period compared to $9.6 million in the prior year period. The ratio of other operating expenses to total operating revenue (adjusted for realized gains) was 17.2% for 2004 compared to 19.4% for 2003 for reasons mentioned in the quarterly comparison. 12 The effective federal tax rate for consolidated operations for the first six months of 2004 was 32.1% and is less than the statutory rate primarily because of tax exempt investment income. As a result of the factors mentioned above, net income increased $4.9 million (33.2%) during the first half of 2004 as compared with the 2003 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, 2003. 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. 1113 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 -- computation- of per share earnings Computation of Per Share Earnings (99.1)(31.1) Certification of CEO EXHIBIT 99.131.1 pursuant to Section 302 of the Certification of CEO Sarbanes-Oxley Act of 2002 And 18 U.S.C. 1350 (99.2)(31.2) Certification of CFO EXHIBIT 99.231.2 pursuant to Section 302 of the Certification of CFO Sarbanes-Oxley Act of 2002 And 18 U.S.C. 1350 (99.3)(32.1) Certification of CEO EXHIBIT 99.332.1 pursuant to Section 906 of the Certification of CEO Sarbanes-Oxley Act of 2002 And 18 U.S.C. 1350 (99.4)(32.2) Certification of CFO EXHIBIT 99.432.2 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 - ------------------------------- A Form 8-K was filed by the registrant on January 29,April 28, 2004 regarding its earnings announcement for the fourthfirst quarter of 2004. A Form 8-K was also filed by the registrant on May 4, 2004 regarding amendments to its By-laws and year ended December 31, 2003.Code of Conduct. 1214 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 6,AUGUST 4, 2004 By /s/ GaryGARY W. Miller ----------------------------------MILLER -------------- ------------------------- Gary W. Miller, Chairman of the Board and Chief Executive OfficerCEO Date MAY 6,AUGUST 4, 2004 By /s/ G. Patrick Corydon ----------------------------------PATRICK CORYDON -------------- ------------------------- G. Patrick Corydon, Senior Vice President and Chief Financial Officer- Finance (Principal Financial and Accounting Officer) 1315 BALDWIN & LYONS, INC. Form 10-Q for the fiscal quarter ended March 31,June 30, 2004 INDEX TO EXHIBITS Begins on sequential page number of Form Exhibit Number 10-Q -------------- ------------------------------------------------- EXHIBIT 11 Filed herewith electronically16 Computation of per share earnings EXHIBIT 99.1 Filed herewith electronically31.1 17 Certification of CEO pursuant to Section 302 of the Sarbanes-Oxley Act and 18 U.S.C. 1350 EXHIBIT 99.2 Filed herewith electronically31.2 19 Certification of CFO pursuant to Section 302 of the Sarbanes-Oxley Act and 18 U.S.C. 1350 EXHIBIT 99.3 Filed herewith electronically32.1 21 Certification of CEO pursuant to Section 906 of the Sarbanes-Oxley Act and 18 U.S.C. 1350 EXHIBIT 99.4 Filed herewith electronically32.2 22 Certification of CFO pursuant to Section 906 of the Sarbanes-Oxley Act and 18 U.S.C. 1350