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
September 30, 2004March 31, 2005 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 November 4, 2004:May 3, 2005:
TITLE OF CLASS NUMBER OF SHARES OUTSTANDING
Common Stock, No Par Value:
Class A (voting) 2,666,666
Class B (nonvoting) 12,009,68312,057,171
Index to Exhibits located on page 17.13.
Page 1 of a total of 20 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)
SEPTEMBER 30MARCH 31 December 31
2005 2004
2003
----------------- ------------------------------ --------------
ASSETS
Investments:
Fixed maturities $ 327,649306,287 $ 321,193331,281
Equity securities 127,558 130,139124,845 133,042
Short-term and other 45,149 36,545
----------------- ----------------
500,356 487,87781,716 52,395
-------------- --------------
512,848 516,718
Cash and cash equivalents 52,145 30,07862,572 57,384
Accounts receivable 40,793 37,33336,294 33,481
Reinsurance recoverable 219,440 185,457228,390 236,466
Notes receivable from employees 3,220 4,828
Current federal income taxes 511 -2,323 2,514
Other assets 17,695 17,634
----------------- ----------------22,299 22,000
-------------- --------------
$ 834,160864,726 $ 763,207
================= ================868,563
============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
Reserves for losses and loss expenses $ 407,724433,149 $ 343,724441,821
Reserves for unearned premiums 37,908 36,80337,573 33,233
Notes payable to banks 6,000 6,000
Accounts payable and accrued expenses 52,637 44,00547,799 48,224
Current federal income taxes - 9015,470 660
Deferred federal income taxes 9,171 13,200
----------------- ----------------
507,440 438,6338,575 12,077
-------------- --------------
538,566 542,015
Shareholders' equity:
Common stock-no par value 625 623628 628
Additional paid-in capital 35,982 35,41937,161 37,083
Unrealized net gains on investments 38,430 44,83737,395 44,497
Retained earnings 251,683 243,695
----------------- ----------------
326,720 324,574
----------------- ----------------250,976 244,340
-------------- --------------
326,160 326,548
-------------- --------------
$ 834,160864,726 $ 763,207
================= ================
Number of common and common
equivalent shares outstanding 14,739 14,752
Book value per outstanding share $22.17 $22.00
868,563
============== ==============
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
Nine Months Ended
September 30 September 30
------------------------------ ------------------------------March 31
--------------------------------
2005 2004
2003 2004 2003
------------- ------------- ------------- --------------------------- --------------
REVENUES
Net premiums earned $ 44,38446,659 $ 37,513 $126,284 $106,17438,497
Net investment income 2,958 2,987 9,138 9,4843,308 3,172
Realized net gains on investments 27 2,048 8,135 5,3354,936 5,818
Other income 1,752 1,547 5,461 4,492
------------- ------------- ------------- -------------
49,121 44,095 149,018 125,4851,836 1,906
-------------- --------------
56,739 49,393
EXPENSES
Losses and loss expenses incurred 36,923 24,411 91,904 68,82231,612 25,246
Other operating expenses 7,286 7,694 23,095 22,822
------------- ------------- -------------
-------------
44,209 32,105 114,999 91,644
------------- ------------- ------------- -------------9,648 8,089
-------------- --------------
41,260 33,335
-------------- --------------
INCOME BEFORE FEDERAL INCOME TAXES 4,912 11,990 34,019 33,84115,479 16,058
Federal income taxes 1,452 3,868 10,796 10,886
------------- ------------- ------------- -------------5,133 5,159
-------------- --------------
NET INCOME $ 3,46010,346 $ 8,122 $23,223 $ 22,955
============= ============= ============= =============
PER SHARE DATA:10,899
============== ==============
Per share data:
DILUTED EARNINGS $ .23.70 $ .55 $ 1.57 $ 1.56
============= ============= ============= =============.74
============== ==============
BASIC EARNINGS $ .24.70 $ .56 $ 1.59 $ 1.58
============= ============= ============= =============.75
============== ==============
DIVIDENDS PAID TO SHAREHOLDERS $ .15.25 $ .10 $ 1.05 $ .30
============= ============= ============= =============.50
============== ==============
RECONCILIATION OF SHARES OUTSTANDING:
Average shares outstanding - basic 14,641 14,558 14,623 14,55714,724 14,603
Dilutive effect of options outstanding 144 184 172 141
------------- ------------- ------------- -------------121 212
-------------- --------------
Average shares outstanding - diluted 14,785 14,742 14,795 14,698
============= ============= ============= =============
14,845 14,815
============== ==============
See notes to condensed consolidated financial statements.
4
BALDWIN & LYONS, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
NineThree Months Ended
September 30March 31
2005 2004 2003
------------- -------------
Net cash provided by operating activities $ 47,1778,970 $ 42,17018,569
Investing activities:
Purchases of long-term investments (132,928) (166,364)(34,977) (41,605)
Proceeds from sales or maturities
of long-term investments 129,901 153,55451,735 52,778
Net purchasessales (purchases) of short-term investments (8,019) (14,489)(16,384) 5,476
Decrease in notes receivable from employees 1,533 2,316138 1,093
Other investing activities (627) (1,920)(614) (222)
------------- -------------
Net cash used in investing activities (10,140) (26,903)(102) 17,520
Financing activities:
Dividends paid to shareholders (15,354) (4,369)
Repayment on line of credit - (7,500)(3,681) (7,304)
Proceeds from sales of common stock 384 51 63
------------- -------------
Net cash used in financing activities (14,970) (11,864)(3,680) (7,241)
------------- -------------
Increase in cash and cash equivalents 22,067 3,4035,188 28,848
Cash and cash equivalents at beginning of period 57,384 30,078 41,699
------------- -------------
Cash and cash equivalents at end of period $52,145 $45,102$62,572 $58,926
============= =============
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 notesfootnotes 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, 2004.2005. Interim financial statements
should be read in conjunction with the Company's annual audited financial
statements.statements and other disclosures included in the Company's most recent Form 10K.
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 20042005 and 20032004 comparative periods.
2005 2004
2003
---------- -------------------------- --------------
Quarter ended September 30:March 31:
Premiums ceded to reinsurers $ 21,80313,598 $ 19,00019,248
Losses and loss expenses
ceded to reinsurers 23,465 18,79514,214 17,948
Commissions from reinsurers 5,665 5,150
Nine months ended September 30:
Premiums ceded to reinsurers 62,688 54,090
Losses and loss expenses
ceded to reinsurers 71,583 61,077
Commissions from reinsurers 16,601 14,7403,136 5,202
(3)(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 September 30, 2004March 31,
2005 was $2,426$3,215 and compares to total realized and unrealized income of $9,547$11,223
for the quarter ended September 30, 2003. For the
nine months ended September 30, 2004, total realized and unrealized income was
$16,935 and compares to total realized and unrealized income of $33,741 for the
nine months ended September 30, 2003.March 31, 2004.
6
NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(4)(5) REPORTABLE SEGMENTS - PROFIT ORAND 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.
2005 2004 2003
------------------------------------------- -------------------------------------------
DIRECT AND NETNet Net
Direct and Net
ASSUMED PREMIUM SEGMENTPremium Direct and Premium
Assumed Earned Segment Assumed Earned Segment
Premium Segment
PREMIUM EARNED AND PROFITand Fee Profit Premium Earned and Fee Profit
WRITTEN FEE INCOME (LOSS) Written FeeIncome (Loss) Written Income (Loss)
------------- ----------- ----------- ------------ ------------ -----------------------
THREE MONTHS ENDED SEPTEMBER 30:MARCH 31:
PROTECTIVE PRODUCTS:
Fleet trucking $ 46,68843,247 $ 27,68930,822 $ 7,3346,813 $ 37,80339,171 $ 21,02321,267 $ 8,2416,321
Reinsurance assumed 1,842 2,195 (2,934) 2,993 2,881 6072,491 2,522 1,498 2,918 3,074 1,907
SAGAMORE PRODUCTS:
Personal division 8,441 11,208 1,549 9,522 10,552 1,16315,069 11,029 1,230 15,180 11,228 1,350
Commercial division:
Small fleet trucking 3,970 2,644 (33) 4,407 2,620 593,517 2,200 122 3,865 2,524 332
Workers' compensation 1,790 2,055 (1,440) 2,595 1,630 (313)(5) 1,386 261 2,788 1,945 (229)
------------- ----------- ----------- ------------ ------------ -----------------------
Total Commercial division 5,760 4,699 (1,473) 7,002 4,250 (254)3,512 3,586 383 6,653 4,469 103
All other 294 280 (227) 224 196 (202)278 431 (159) 241 242 (80)
------------- ----------- ----------- ------------ ------------ -----------------------
Totals $ 63,025 $ 46,071 $ 4,249 $ 57,544 $ 38,902 $ 9,55564,597 $48,390 $9,765 $64,163 $40,280 $9,601
============= =========== =========== ============ ============ ============
NINE MONTHS ENDED SEPTEMBER 30:
PROTECTIVE PRODUCTS:
Fleet trucking $ 130,204 $ 74,606 $ 20,796 $ 108,290 $ 59,933 $ 23,279
Reinsurance assumed 6,678 8,183 729 8,602 8,711 1,590
SAGAMORE PRODUCTS:
Personal division 32,420 34,037 4,720 33,117 30,035 2,647
Commercial division:
Small fleet trucking 12,173 7,727 436 12,744 6,523 237
Workers' compensation 7,689 6,124 (2,110) 7,137 4,315 (792)
------------- ----------- ----------- ------------ ------------ ------------
Total Commercial division 19,862 13,851 (1,674) 19,881 10,838 (555)
All other 912 829 (414) 668 567 (258)
------------- ----------- ----------- ------------ ------------ ------------
Totals $ 190,076 $ 131,506 $ 24,157 $ 170,558 $110,084 $ 26,703
============= =========== =========== ============ ============ ============
7
NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(5)(6) REPORTABLE SEGMENTS - RECONCILIATION TO CONSOLIDATED REVENUE AND
CONSOLIDATED PROFIT OR LOSS: The following tables are reconciliations of
reportable segment revenues and profitsprofit or loss 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 30March 31
2005 2004 2003 2004 2003
------------- --------------
-------------- --------------
REVENUE:
Net premium earned and fee income $ 46,07148,390 $ 38,902 $ 131,506 $ 110,08440,280
Net investment income 2,958 2,987 9,138 9,4843,308 3,172
Realized net gains on investments 27 2,048 8,135 5,3354,936 5,818
Other 65 158 239 582105 123
------------- -------------- -------------- --------------
Total consolidated revenue $ 49,12156,739 $ 44,095 $ 149,018 $ 125,48549,393
============= ============== ============== ==============
PROFIT:
Segment profit $ 4,2499,765 $ 9,555 $ 24,157 $ 26,7039,601
Net investment income 2,958 2,987 9,138 9,4843,308 3,172
Realized net gains on investments 27 2,048 8,135 5,3354,936 5,818
Corporate expenses (2,322) (2,600) (7,411) (7,681)(2,530) (2,533)
------------- -------------- -------------- --------------
Income before federal income taxes $ 4,91215,479 $ 11,990 $ 34,019 $ 33,84116,058
============= ============== ============== ==============
(6) 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 $3,220$2,323 remain outstanding at September 30, 2004March 31, 2005 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.
(7) RECENTLY ISSUED ACCOUNTING STANDARDS: In October 2004, the Financial
Accounting Standards Board ("FASB") finalized the Statement of Financial
Accounting Standards No. 123R, SHARE-BASED PAYMENT, effective for public
companies for interim and annual periods beginning after June 15, 2005.
Statement No. 123R requires all companies to measure compensation cost for all
share-based payments (including employee stock options) at fair value.
Retroactive application of the requirements of FASB 123 to the beginning of the
fiscal year that includes the effective date is permitted, but not required. The
Corporation is currently evaluating the impact, the implementation strategy and
the related timing of implementation of FASB 123R on the consolidated financial
statements.
In March 2004, the FASB's Emerging Issues Task Force ("EITF") approved the
consensus reached on Issue No. 03-1, THE MEANING OF OTHER-THAN-TEMPORARY
IMPAIRMENT AND ITS APPLICATION TO CERTAIN INVESTMENTS. The objective of this
consensus is to provide guidance for identifying impaired investments. EITF 03-1
also provides new disclosure requirements for investments that are deemed to be
temporarily impaired. Originally, the accounting provisions of EITF 03-1 were
effective for all reporting periods beginning after June 15, 2004, while the
disclosure requirements are effective only for annual periods ending after June
15, 2004. In September 2004, the FASB issued two Staff Positions (FSP), FSP EITF
03-1-a and FSP EITF 03-1-1, which delayed the measurement and recognition
paragraphs of the consensus for further
8
discussion. The disclosure requirements remain effective as originally issued
under EITF 03-1 and have been adopted by the company. The Corporation has
evaluated the impact of the adoption of EITF 03-1, as written, and does not
believe the impact is significant to the Corporation's overall results of
operations or financial position at September 30, 2004. However, as currently
written, the consensus could have a significant impact on future results. The
Corporation will continue to monitor the developments of the FASB and EITF
regarding the measurement and recognition paragraphs of this consensus.
9
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 ninethree months ended September 30, 2004,March 31, 2005, the
Company experienced positive cash flow from operations totaling $47.2$9.0 million 12% higher than the $42.2 million inand
compares to positive cash flow generatedof $18.6 million for the three months ended March
31, 2004. The majority of this change resulted from a $9.0 million increase in
net paid loss activity during the first nine months of 2003. Increased premium collectionscurrent quarter and sales of equity
security investments were primarily responsible for the improved cash flow this
year.a $4.0 million increase in
reinsurance recoverable on paid 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 approximately 2.6less than 2.2 years at September 30, 2004 compared
to 2.8 years at DecemberMarch 31, 2003. The2005 representing a
small decrease from the prior year end as large portions of the proceeds from
maturing investments and new cash flows have been placed in the average life resulted
from management's belief that meaningful long termshort-term
investments in anticipation of interest rate increases are
imminent.increases.
The Company's assets at September 30, 2004March 31, 2005 included $52.1$62.6 million in investments
classified as short-term or cash equivalents that were readily convertible to
cash without significant market penalty. An additional $104.9$109.6 million of fixed
maturity investments will mature within the twelve-month period following September 30, 2004.March
31, 2005. 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
September 30, 2004, $47.1March 31, 2005, $48.2 million may be transferred by dividend or loan to the
parent company without approval by, or prior notification to, regulatory
authorities. An additional $196.5$195.3 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 $53.4$54.4
million at September
30, 2004.
10March 31, 2005.
The Company's annualized premium writing to surplus ratio for the first nine
monthsquarter
of 20042005 was approximately 43%50%. 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 structureslevels are
several times higher than the minimum amounts designated by the National
Association of Insurance Commissioners.
9
RESULTS OF OPERATIONS
---------------------
COMPARISONS OF THIRDFIRST QUARTER, 20042005 TO THIRDFIRST QUARTER, 20032004
---------------------------------------------------------
Net premiums earned during the thirdfirst quarter of 20042005 increased $6.9$8.2 million
(18%(21%) as compared to the same period of 2003.2004. The increase is due primarily to a
32%48% increase in premiums from the Company's fleet trucking program resultingprogram. This
increase results from increased premium rateretained under current reinsurance
agreements, increases higherin trucking revenues of insureds, upon which the majority
of fleet trucking premiums are based, and, new accounts. In addition,to a small degree, rate increases.
Partially offsetting this increase were decreases in premiums from the Company's
reinsurance assumed, small fleet trucking and private passenger automobile
programs of 21%, 11% and 3%, reflecting the competitive nature of the markets in
which the Company operates. In addition, premium from the Company's discontinued
small business workers' compensation private passenger automobile and small fleet trucking
programs increased 26%, 5% and 2%, respectively. It should be noted that all of
the Company's product lines are facing increased competitive pressures and,
therefore, such gains are likely to slow in the short term. Also, the Company
announced the discontinuance of its small business workers' compensation program
resulting from poor underwriting performance. This program is now in run-off and
premiums earned from this product will decline as existing policies reach
expiration.decreased 27%.
Direct premiums written and assumed during the third quarter of 2004 totaled
$63.0increased to $64.6 million a 10% increase from the $57.5$64.2
million reported a year earlier. This increase iswas due largelyprimarily to an $8.9 million (24%) increaseincreases in direct
premiums written from the Company's
fleet trucking program. This increasepremium and was partially offset by decreasesthe decrease in premium
writings for the Company's private
passenger automobile and small fleet trucking programs of 11% and 9%,
respectively, primarily due to increased competitive pressures in the past
several months. Several competitors have lowered prices and increased incentives
to producers recently which have impacted premium production for these product
lines. Premiums written bydiscontinuance of the small business workers' compensation division
declined 31% as underwriting restrictions were implemented in an effort to
remediate this product line. Premium assumed from property catastrophe pools
also decreased by 11% from the prior year quarter as a single large property
catastrophe treaty was terminated to maintain the Company's maximum probable
exposure to loss.product.
Premium ceded to reinsurers averaged 36%21.9% of direct premium production for the
current quarter compared to 35%31.6% a year earlier owing to
changes in the mix of business and individual policy characteristics rather than
reinsurance program changes.earlier.
Net investment income, before tax, during the thirdfirst quarter of 2005 was 4%
higher than the first quarter of 2004 was 1% lower
than the third quarter of 2003 due primarily to an increase in average
invested assets resulting from positive cash flow. Also, pre-tax yields on
short-term investments tripled from prior year levels to 2.2% during the continuing historically low
level of investmentcurrent
quarter. Overall after tax yields and the transfer of fixed income investments from
taxable to tax-exempt securities. After tax income increased 3% from the prior
year. Pre-tax yields dropped over 30 basis points fromare mostly consistent with 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 September 30, 2004 as investment mangers kept the
maturities of available funds short in anticipation of increasing interest
rates.
11
The thirdfirst quarter 20042005 net realized gain of $27,000$4.9 million consisted of net gains
on equity securities and limited partnership (equity and hedge fund) investments
of $.8$2.2 million and an increase in impairment charges$2.8 million, respectively, partially offset by a $.1
million net loss on equity
securities and fixed maturity investments of $.6 million. Further depressing
capital gains were net losses on fixed maturity and other investments.bonds.
Losses and loss expenses incurred during the thirdfirst quarter of 20042005 increased
$12.5$6.4 million from that experienced during the thirdfirst quarter of 2003,2004, which is
consistent with the increase in premium volume previously discussed, after
consideration of $5.0 million in losses related to the hurricanes in Florida and
other southeastern states included in the current year quarter.discussed. Loss ratios
for each of the Company's major product lines were as follows:
2005 2004
2003
------- ------------- ------
Fleet trucking 78.8% 65.5%74.3% 75.6%
Private passenger automobile 58.2 60.860.5 59.9
Small fleet trucking 67.9 66.254.6 57.6
Voluntary reinsurance assumed 215.4 60.028.1 11.8
Small business workers' compensation 136.6 80.255.6 82.4
All lines 83.2 65.167.8 65.6
The increase in the fleet 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 Company'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 reported for
the current quarter is relatively high compared to historical experience while
the ratio reported in the third quarter of 2003 was closer to the midpoint of
the historical range. The high loss ratio for reinsurance assumed reflects the
hurricane activity this quarter, as previously mentioned.
Other operating expenses for the thirdfirst quarter of 2004 decreased 5%2005 increased 19% from the
thirdfirst quarter of 2003.2004. Adjusted for ceding allowances, operating expenses
increased less than 1%decreased 4% from the thirdfirst quarter of 20032004 and compares favorably with the 18%21%
increase in premiums earned from the 20032004 quarter as many of the Company's
expenses do not vary directly with premium volume. 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 $5.7 million for the 2004 quarter compared to $5.1
million for the 2003 quarter. 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 fleetLarge and Medium
Fleet trucking products. 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.
10
Management believes that significant additional capacity exists before most
divisions would be obliged to incur meaningful increases in personnel or other
fixed costs. Ceding allowances totaled $3.1 million for the 2005 quarter
compared to $5.2 million for the 2004 quarter. The ratio of consolidated other
operating expenses to operating revenue (defined as total
revenue less realized capital gains) was 14.8%18.6% during the third quarter of 2004
compared to 18.3% for the 2003 third 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 third quarter
of 2004 was 29.6% and is less than the statutory rate primarily because of tax
exempt investment income.
12
As a resulteach of the factors mentioned above , principally the hurricane losses in
the current quarter2005 and
a $2.0 decrease in realized capital gains, net income
decreased $4.7 million (57%) during the third quarter of 2004 as compared with
the 2003 third quarter.
COMPARISONS OF NINE MONTHS ENDED SEPTEMBER 30, 2004 TO
------------------------------------------------------
NINE MONTHS ENDED SEPTEMBER 30, 2003
------------------------------------
Net premiums earned increased $20.1 million (19%) during the first nine months
of 2004 as compared to the same period of 2003. The increased premium volume is
primarily attributable to a 24% 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 41%, 17% and 12%,
respectively, again for reasons discussed in the quarterly comparison.
Direct premiums written and assumed during the first nine months of 2004 totaled
$190.1 million, a 11% increase from the $170.1 million reported a year earlier.
Fleet trucking and small business workers' compensation posted gains of 20% and
8%, respectively while gross production for the other product groups was down
slightly from the prior year. Premium ceded to reinsurers averaged 34.9% of
direct premium production for the current period compared to 33.8% a year
earlier owing to the fact that fleet trucking premium, which carries a higher
average ceding rate, was a greater proportion of total premium in 2004.
Net investment income during the first nine months of 2004 was 4% lower than the
2003 period for the same reasons as indicated in the quarterly comparison above.
After tax investment income for the current year-to-date period was level with
the prior year. Overall pre-tax and after tax yields were lower during the
current period while average invested funds increased 11% from the prior year
resulting from positive cash flow.
The net realized gain on investments of $8.1 million for the first nine months
of 2004 consists of net gains on equity securities and fixed maturity
investments of $7.3 million and $.5 million, respectively, and was partially
offset by $.3 million in losses in short-term and other investments. The net
realized gain also included the reversal of impairment charges on securities
sold of $.6 million during the period, adding to the overall net realized gain.
Losses and loss expenses incurred during the first nine months of 2004 increased
$23.1 million from the first nine months of 2003, consistent with the increased
premium volume and hurricane losses previously discussed. Loss and loss expense
ratios for the comparative nine-month periods were as follows:
2004 2003
------- -------
Fleet trucking 77.8% 65.4%
Private passenger automobile 58.3 62.2
Small fleet trucking 62.2 60.5
Voluntary reinsurance assumed 68.5 62.5
Small business workers' compensation 102.7 80.7
All lines 72.8 64.8
13
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 2004 while 2003 losses were nearer the
midpoint of historical experience.
Other operating expenses increased only 1% during the first nine months of 2004,
compared to the same period of 2003 despite the 19% increase in premium earned.
Ceding commission allowances included in net expenses were $16.6 million for the
2004 period compared to $14.7 million in the prior year period, but the ratio of
ceding commissions to premium earned declined from 14.0% in 2003 to 13.2% in
2004 as Protective retained more risk on trucking policies. The ratio of other
operating expenses to total operating revenue (adjusted for realized gains) was
16.4% for 2004 compared to 19.0% for 2003 for reasons mentioned in the quarterly
comparison.quarters.
The effective federal tax rate for consolidated operations for the first nine
monthsquarter
of 20042005 was 31.7%33.2% 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 $.3decreased $.6 million
(1.2%(5.1%) during the first nine monthsquarter of 20042005 as compared with the 2003 period.
DISCONTINUANCE OF PRODUCT LINE
------------------------------
Sagamore Insurance Company will no longer market and underwrite workers'
compensation coverage for small businesses. This product line, the Company's
smallest with approximately $9.6 million of premium inforce at September 30,
2004 has performed below expectations for several quarters and remediation
measures undertaken late last year have failed to improve underwriting results.
Policies currently inforce will run off through normal expiration dates and all
quotes outstanding will be honored. However, no new business will be written
after December 31, 2004.first quarter.
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 even a small number 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.
142004.
CONCENTRATIONS OF CREDIT RISK
-----------------------------
The insurance subsidiaries cede portions of their gross premiums to numerous
reinsurers under quota share and excess of loss treaties as well as facultative
placements. These reinsurers assume commensurate portions of the risk of loss
covered by the contracts. As losses are reported and reserved, portions of the
gross losses attributable to reinsurers are established as receivable assets and
losses incurred are reduced. At September 30, 2004,March 31, 2005, amounts due from reinsurers on
paid and unpaid losses total approximately $219$228 million. Included in this total
are known losses of approximately $19$23 million due from Converium Insurance
(North America) Inc. and approximately $8$5 million due from PMA Re each of which
have reported substantial reserve strengthening and/or impairment of assets
which have negatively affected their previously reported financial positions.
All amounts currently due from these reinsurers have been receivedon paid claims are current and the Company
has no information at this time to indicate that all obligations of these
reinsurers will not be met.
ITEM 4. CONTROLS AND PROCEDURES
- -------------------------------
Baldwin & Lyons, Inc. management, including the(a) The Corporation's Chief Executive Officer and Chief Financial Officer
have conducted an evaluation ofevaluated the effectiveness of disclosure controls and procedures pursuant to(as defined under Rules
13a-15(e) and 15d-15(e) of the Securities Exchange Act Rule 13a-14.of 1934, as amended) as
of the end of the period covered by this report.
11
Based onupon that evaluation, the Chief Executive Officer and Chief Financial
Officer have concluded that the Corporation's 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.effective.
(b) There have beenwere no significant changes in the Corporation's internal controls,control over
financial reporting identified in connection with the foregoing evaluation that
occurred during the Corporation's last fiscal quarter that have affected, or in factors that could significantlyare
reasonably likely to materially affect, the Corporation's internal controls, subsequent to the date the Chief Executive Officer and Chief
Financial Officer completed their evaluation.
15control over
financial reporting.
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
(31.1) Certification of CEO EXHIBIT 31.1
pursuant to Section 302 of the Certification of CEO
Sarbanes-Oxley Act of 2002
And 18 U.S.C. 1350
(31.2) Certification of CFO EXHIBIT 31.2
pursuant to Section 302 of the Certification of CFO
Sarbanes-Oxley Act of 2002
And 18 U.S.C. 1350
(32.1) Certification of CEO EXHIBIT 32.1
pursuant to Section 906 of the18 U.S.C. 1350, as Certification of CEO
Sarbanes-Oxley Act of 2002
And 18 U.S.C. 1350
(32.2) Certification of CFO EXHIBIT 32.2adopted pursuant to Section 906
of the Certification of CFO
Sarbanes-Oxley Act of 2002
And(32.2) Certification of CFO EXHIBIT 32.1
pursuant to 18 U.S.C. 1350, as Certification of CFO
adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002
ITEM 6 (b) REPORTS ON FORM 8-K
- -------------------------------
A Form 8-K was filed by the registrant on JulyJanuary 28, 20042005 regarding its
earnings announcement for the secondfourth quarter ofand year ended December 31, 2004.
A Form 8-K was also filed by the
registrant on September 2, 2004 regarding the Company's estimate of its exposure
to recent hurricane losses.
1612
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 NOVEMBERMAY 4, 20042005 By /s/ GARY W. MILLER
----------- ------------------ --------------------------------
Gary W. Miller,
Chairman of the Board and
CEOChief Executive Officer
Date NOVEMBERMAY 4, 20042005 By /s/ G. PATRICK CORYDON
------------------ ------------------------------------- ----------------------
G. Patrick Corydon,
Senior Vice President - Financeand
Chief Financial Officer
(Principal Financial and
Accounting Officer)
1713
BALDWIN & LYONS, INC.
Form 10-Q for the fiscal quarter
ended September 30, 2004March 31, 2005
INDEX TO EXHIBITS
BEGINS ON SEQUENTIAL
PAGE NUMBER OF FORM
EXHIBIT NUMBER 10-Q
-------------- -----------------------------
EXHIBIT 11 1814
Computation of per share earnings
EXHIBIT 31.1 1915
Certification of CEO
pursuant to Section 302 of the
Sarbanes-Oxley Act
and 18 U.S.C. 1350
EXHIBIT 31.2 2117
Certification of CFO
pursuant to Section 302 of the
Sarbanes-Oxley Act
andEXHIBIT 32.1 19
Certification of CEO
pursuant to 18 U.S.C. 1350,
EXHIBIT 32.1 23
Certification of CEOas adopted pursuant to Section
906 of the Sarbanes-Oxley Act
andEXHIBIT 32.2 20
Certification of CFO
pursuant to 18 U.S.C. 1350,
EXHIBIT 32.2 24
Certification of CFOas adopted pursuant to Section
906 of the Sarbanes-Oxley Act
and 18 U.S.C. 1350