1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FormFORM 10-Q
Quarterly Report Under Section 13 or 15 (d)
of the Securities Exchange Act of 1934
------------------------------------------------------
For Quarter Ended Commission file number
JuneSeptember 30, 2006 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, IndianaNORTH 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 a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act.
Large accelerated filer [ ] Accelerated filer [ X ] Non-accelerated filer [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of August 3,November 7, 2006:
TITLE OF CLASS NUMBER OF SHARES OUTSTANDING
Common Stock, No Par Value:
Class A (voting) 2,650,059
Class B (nonvoting) 12,457,70512,461,455
Index to Exhibits located on page 16. 2
Page 1 of a total of 23 pages
2
PART I - FINANCIAL INFORMATION
ITEM 1 FINANCIAL STATEMENTS
- ----------------------------
BALDWIN & LYONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
JUNESEPTEMBER 30 December 31
2006 2005
------------------- ------------------
ASSETS
Investments:
Fixed maturities $ 315,619326,560 $ 265,419
Equity securities 126,616131,177 130,785
Limited partnerships 46,60148,666 44,727
Short-term 55,21169,125 51,060
------------------- ------------------
544,047575,528 491,991
Cash and cash equivalents 75,84746,182 126,551
Accounts receivable 28,97238,925 30,270
Reinsurance recoverable 168,249172,316 191,440
Notes receivable from employees 2,2922,321 2,339
Other assets 21,09734,062 17,767
------------------- ------------------
$ 840,504869,334 $ 860,358
=================== ==================
LIABILITIES AND SHAREHOLDERS' EQUITY
Reserves for losses and loss expenses $ 411,565420,072 $ 430,273
Reserves for unearned premiums 35,70535,282 29,688
Accounts payable and accrued expenses 39,44245,822 37,777
Current federal income taxes 1,0022,006 1,881
Deferred federal income taxes 12,45215,118 14,054
------------------- ------------------
500,166518,300 513,673
Shareholders' equity:
Common stock-no par value 645 632
Additional paid-in capital 45,127 38,894
Unrealized net gains on investments 40,82445,407 42,440
Retained earnings 253,742259,855 264,719
------------------- ------------------
340,338351,034 346,685
------------------- ------------------
$ 840,504869,334 $ 860,358
=================== ==================
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 SixNine Months Ended
JuneSeptember 30 JuneSeptember 30
----------------------------------- ---------------------------------
2006 2005 2006 2005
---------------- ----------------------------- -------------- --------------
REVENUES
Net premiums earned $ 42,163 $ 43,473 $ 85,381 $ 90,132$42,333 $49,848 $127,714 $139,981
Net investment income 4,736 3,547 9,295 6,8555,140 3,734 14,435 10,589
Net gains (losses) on investments (1,135) 3,188 5,879 8,1242,958 8,346 8,837 16,470
Commissions and other income 1,848 1,803 3,712 3,6391,418 1,645 5,130 5,283
---------------- -------------- --------------- -------------- 47,612 52,011 104,267 108,750--------------
51,849 63,573 156,116 172,323
EXPENSES
Losses and loss expenses incurred 27,717 27,972 56,656 59,58425,837 46,827 82,493 106,411
Other operating expenses 12,413 10,299 23,200 19,94711,931 9,902 35,131 29,849
---------------- --------------- -------------- --------------
40,130 38,271 79,856 79,53137,768 56,729 117,624 136,260
---------------- --------------- -------------- --------------- --------------
INCOME BEFORE FEDERAL INCOME TAXES 7,482 13,740 24,411 29,21914,081 6,844 38,492 36,063
Federal income taxes 2,055 4,541 7,428 9,6744,202 2,193 11,630 11,866
---------------- --------------- -------------- --------------
NET INCOME $ 5,4279,879 $ 9,199 $ 16,983 $ 19,5454,651 $26,862 $24,197
================ =============== ============== ==============
Per share data:PER SHARE DATA:
BASIC EARNINGS $ .36.65 $ .63.32 $ 1.141.79 $ 1.331.64
================ =============== ============== ==============
DILUTED EARNINGS $ .36.65 $ .62.31 $ 1.141.79 $ 1.321.63
================ =============== ============== ==============
DIVIDENDS PAID TO SHAREHOLDERS $ 1.50.25 $ .10.35 $ 1.852.10 $ .35.70
================ =============== ============== ==============
RECONCILIATION OF SHARES OUTSTANDING:
Average shares outstanding - basic 14,979 14,728 14,893 14,72615,108 14,764 14,965 14,739
Dilutive effect of options outstanding 43 103 61 11022 109 48 115
---------------- --------------- -------------- --------------
Average shares outstanding - diluted 15,022 14,831 14,954 14,83615,130 14,873 15,013 14,854
================ =============== ============== ==============
See notes to condensed consolidated financial statements.
4
BALDWIN & LYONS, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
SixNine Months Ended
JuneSeptember 30
2006 2005
--------------- ----------------------------- -------------
Net cash provided by operating activities $ 18,73014,628 $ 15,80037,620
Investing activities:
Purchases of long-term investments (148,592) (54,142)(191,391) (110,125)
Proceeds from sales or maturities
of long-term investments 105,010 97,880138,776 152,664
Net purchases of short-term investments (4,151) (33,524)(18,065) (30,724)
Decrease in notes receivable from employees 15 138169
Other investing activities 294 (1,207)
--------------- ---------------1,455 (1,470)
-------------- -------------
Net cash provided by (used in) investing activities (47,424) 9,145(69,210) 10,514
Financing activities:
Dividends paid to shareholders (27,847) (5,153)(31,624) (10,329)
Repayment on notes payable - (3,000)(6,000)
Cost of treasury stock (401) -
Proceeds from sales of common stock 6,238 214
--------------- ---------------1,306
-------------- -------------
Net cash used in financing activities (22,010) (7,939)
--------------- ---------------(25,787) (15,023)
-------------- -------------
Increase (decrease) in cash and cash equivalents (50,704) 17,006(80,369) 33,111
Cash and cash equivalents at beginning of period 126,551 57,384
--------------- ----------------------------- -------------
Cash and cash equivalents at end of period $75,847 $74,390
=============== ===============$ 46,182 $ 90,495
============== =============
See notes to condensed consolidated financial statements.
NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION: The accompanying unaudited condensed
consolidated financial statements have been prepared in accordance with the
instructions to Form 10-Q and do not include all of the information and notes
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,
2006. 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 10-K.
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) NET GAINS ON INVESTMENTS: Amounts reported as net gaingains on investments
consist of three components: (1) net gains or losses realized upon the actual
sale of investments managed directly by the Company's investment managers, (2)
changes in
"other-than-temporary impairment" write-downs, and (3) equity in earnings or
losses of investments in limited partnerships.
The Company accounts for investments in limited partnerships using the equity
method of accounting, which requires an investor in a limited partnership to
record its proportionate share of the limited partnership's net income. To the
extent that the limited partnership investees include both realized and
unrealized investment gains or losses in the determination of net income or
loss, then the Company would also recognize, through its income statement, its
proportionate share of the investee's unrealized as well as realized investment
gains or losses. The Company invests in limited partnerships that include both
realized and unrealized investment gains or losses in the determination of their
net income. Readers are cautioned that inclusion of such unrealized gains is not
consistent with the recognition of temporary valuation changes of equity and
debt securities that are directly owned and held for sale and may result in
significant fluctuations in quarterly amounts reported under this caption. In
addition, because of inherent time lags in receiving valuation reports from
certain limited partnership investees, the Company must often rely on
estimations of valuation changes for the most recent month or quarter ended on
the reporting date. To the extent that the actual valuations subsequently
reported differ from estimates utilized, the differences are included in gains
or losses from investments in the quarter reported to the Company.
Following is a summary of the components of net gains on investments for the
periods presented in the accompanying statements of income.
THREE MONTHS Three Months SIXENDED NINE MONTHS Six Months
ENDED
Ended ENDED Ended
JUNESEPTEMBER 30 SEPTEMBER 30
-------------------------------- --------------------------------
2006 June 30, 2005 JUNE 30, 2006 June 30, 2005
----------------- ----------------- ----------------- ------------------------------- -------------- -------------- --------------
Realized net gains on the disposal of securities $ 1,804449 $ 2,5321,632 $ 3,5584,007 $ 4,7026,334
Impairment:
Write-downs based upon objective criteria (763) - (763) (592)(580) (904) (1,343) (1,496)
Recovery of prior write-downs
upon sale or disposal 136 150- 375 668 7371,112
Equity in earnings (losses) of limited partnership
investments (realized and unrealized) (2,312) 506 2,416 3,277
----------------- ----------------- ----------------- -----------------3,089 7,243 5,505 10,520
-------------- -------------- -------------- --------------
Totals $ (1,135)2,958 $ 3,1888,346 $ 5,8798,837 $ 8,124
================= ================= ================= =================16,470
============== ============== ============== ==============
6
The net lossesgains from limited partnerships for the quarter and year-to-date ending
JuneSeptember 30, 2006 include an estimated $4.7$2.0 million and $.6$1.4 million,
respectively, of unrealized lossesgains as 6
reported in the net income or loss of the various limited partnerships.
Shareholders' equity at JuneSeptember 30, 2006 includes approximately $9.8$11.8 million,
net of deferred federal income taxes, of earnings
yet undistributed by limited
partnerships.
(4) REINSURANCE: The following table summarizes the Company's transactions with
reinsurers for the 2006 and 2005 comparative periods.
2006 2005
-------------- ------------------------ -----------
Quarter ended JuneSeptember 30:
Premiums ceded to reinsurers $ 5,4025,961 $ 9,4908,225
Losses and loss expenses
ceded to reinsurers 3,215 8,6747,472 19,620
Commissions from reinsurers 121 1,950
Six177 1,482
Nine months ended JuneSeptember 30:
Premiums ceded to reinsurers 13,008 23,08818,969 31,313
Losses and loss expenses
ceded to reinsurers 5,115 22,88812,587 42,508
Commissions from reinsurers 811 5,086988 6,568
(5) COMPREHENSIVE INCOME OR LOSS: Total realized and unrealized income for the
quarter ended JuneSeptember 30, 2006 was $908$14,473 and compares to total realized and
unrealized income of $11,170$8,056 for the quarter ended JuneSeptember 30, 2005. For the
sixnine months ended JuneSeptember 30, 2006, total realized and unrealized income was
$15,643$30,116 and compares to total realized and unrealized income of $14,385$22,441 for the
sixnine months ended JuneSeptember 30, 2005.
7
NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(6) REPORTABLE SEGMENTS - PROFIT OR 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 for this segment 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.commissions.
2006 2005
--------------------------------------------- -------------------------------------------- DIRECT AND----------------------------------------------
Direct and ASSUMED NET PREMIUM SEGMENTNet Direct and Net
Assumed Net Premium Segment PREMIUM EARNED AND PROFITAssumed Premium Segment
Premium Earned and Profit WRITTEN FEE INCOME (LOSS)Premium Earned and Profit
Written Fee Income (Loss) ------------- ------------- ------------Written Fee Income (Loss)
------------ ------------- ----------- -------------- ------------ ------------
Quarter ended JuneTHREE MONTHS ENDED SEPTEMBER 30:
Protective products:PROTECTIVE PRODUCTS:
Fleet trucking $ 29,70730,561 $ 26,61726,695 $ 5,4166,343 $ 34,85939,296 $ 27,78933,262 $ 7,7956,013
Reinsurance assumed 2,874 3,799 983 1,927 2,706 1,121
Sagamore products:3,322 3,517 1,931 4,498 4,367 (10,534)
SAGAMORE PRODUCTS:
Personal division 6,322 10,041 751 8,418 11,296 8996,965 9,364 419 7,651 10,602 1,607
Commercial division:
Small fleet trucking 6,814 3,530 (445) 4,117 2,289 1286,917 3,945 (22) 4,045 2,379 8
Workers' compensation (20) 39 (148) 97 837 (146)
------------- ------------- ------------- 1 70 48 404 (15)
------------ ------------- ----------- -------------- ------------ ------------
Total Commercial 6,917 3,946 48 4,093 2,783 (7)
division 6,794 3,569 (593) 4,214 3,126 (18)
All other (235) (132) (162) 515 262 (235)
------------- ------------- ------------109 139 (325) 304 410 102
------------ ------------- ----------- -------------- ------------ ------------
Totals $ 45,46247,874 $ 43,89443,661 $ 6,3958,416 $ 49,93355,842 $ 45,179 $9,562
============= ============= ============51,424 $ (2,819)
============ ============= =========== Six months ended June============== ============ ============
NINE MONTHS ENDED SEPTEMBER 30:
Protective products:PROTECTIVE PRODUCTS:
Fleet trucking $ 64,26994,830 $ 54,73681,431 $ 10,16916,513 $ 78,106117,402 $ 58,61291,875 $ 14,60820,621
Reinsurance assumed 6,151 7,136 2,853 4,418 5,228 2,619
Sagamore products:9,473 10,653 4,784 8,916 9,596 (7,914)
SAGAMORE PRODUCTS:
Personal division 20,449 20,278 1,817 23,487 22,325 2,12927,414 29,643 2,237 31,138 32,927 3,737
Commercial division:
Small fleet trucking 13,545 6,373 (442) 7,634 4,489 25020,462 10,318 (464) 11,679 6,868 258
Workers' compensation 49 129 178 92 2,222 115
------------- ------------- ------------130 247 140 2,625 100
------------ ------------- ----------- -------------- ------------ ------------
Total Commercial 20,511 10,448 (217) 11,819 9,493 358
division 13,594 6,502 (264) 7,726 6,711 365
All other (64) 98 (255) 793 694 (394)
------------- ------------- ------------45 237 (581) 1,096 1,102 (295)
------------ ------------- ----------- -------------- ------------ ------------
Totals $ 104,399152,273 $ 88,750132,412 $ 14,32022,736 $ 114,530170,371 $ 93,570144,993 $ 19,327
============= ============= ============16,507
============ ============= =========== ============== ============ ============
8
NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(7) REPORTABLE SEGMENTS - RECONCILIATION TO CONSOLIDATED REVENUE AND
CONSOLIDATED PROFIT OR LOSS: The following tables are reconciliations of
reportable segment revenues and profit or loss to the Company's consolidated
revenue and income before federal income taxes, respectively.
Three Months Ended SixNine Months Ended
JuneSeptember 30 JuneSeptember 30
2006 2005 2006 2005
--------------- ---------------- --------------- ----------------------------- -------------- ------------- --------------
REVENUE:
Net premium earned and fee income $ 43,89443,661 $ 45,17951,424 $ 88,750132,412 $ 93,570144,993
Net investment income 4,736 3,547 9,295 6,8555,140 3,734 14,435 10,589
Net gains (losses) on investments (1,135) 3,188 5,879 8,1242,958 8,346 8,837 16,470
Other 117 97 343 201
--------------- ---------------- --------------- ----------------
TOTAL CONSOLIDATED REVENUE90 69 432 271
------------- -------------- ------------- --------------
Total consolidated revenue $ 47,61251,849 $ 52,01163,573 $ 104,267156,116 $ 108,750
=============== ================ =============== ================172,323
============= ============== ============= ==============
PROFIT:
Segment profit $ 6,3958,416 $ 9,562(2,819) $ 14,32022,736 $ 19,32716,507
Net investment income 4,736 3,547 9,295 6,8555,140 3,734 14,435 10,589
Net gains on investments (1,135) 3,188 5,879 8,1242,958 8,346 8,837 16,470
Corporate expenses (2,514) (2,557) (5,083) (5,087)
--------------- ---------------- --------------- ----------------
INCOME BEFORE FEDERAL INCOME TAXES(2,433) (2,417) (7,516) (7,503)
------------- -------------- ------------- --------------
Income before federal income taxes $ 7,48214,081 $ 13,7406,844 $ 24,41138,492 $ 29,219
=============== ================ =============== ================36,063
============= ============== ============= ==============
Management does not identify or allocate assets to reportable segments when
evaluating segment performance and depreciation expense is not material for any
of the reportable segments.
(8) LOANS TO EMPLOYEES: In 2000, 2001 and 2002 the Company provided loans to
certain 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 $2,292$2,321 remain outstanding at JuneSeptember 30, 2006 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.
(9) ACCOUNTING PRONOUNCEMENTS: In July 2006, FASB issued FASB Interpretation No.
48, Accounting for Uncertainty in Income Taxes ("FIN 48"). Among other things,
FIN 48 creates a model to address uncertainty in tax positions and clarifies the
accounting for income taxes by prescribing a minimum recognition threshold which
all income tax positions must achieve to meet before being recognized in the
financial statements. In addition, FIN 48 requires expanded annual disclosures,
including a roll-forward of the beginning and ending aggregate unrecognized tax
benefits as well as specific detail related to tax uncertainties for which it is
reasonably possible the amount of unrecognized tax benefit will significantly
increase or decrease within twelve months. FIN 48 is effective for us on January
1, 2007. Any differences between the amounts recognized in the statements of
financial position prior to the adoption of FIN 48 and the amounts reported
after adoption are generally accounted for as a cumulative-effect adjustment
recorded to the beginning balance of retained earnings. We are currently
evaluating the impact of FIN 48; however, it is not expected to have a material
impact on the consolidated financial statements upon adoption.
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
less than 30% 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, as Protective Insurance Company has accepted more net risk
under the terms of annual reinsurance treaty renewals. For the sixnine months ended
JuneSeptember 30, 2006, the Company experienced positive cash flow from operations
totaling $18.7$14.6 million and compares to $15.8$37.6 million generated during the first
halfnine months of 2005. With regard to the cash flows relating to the recovery of loss
payments from reinsurers, the current year period included positiveThe $23.0 million drop in cash flow of
$2.4 million and compares to negative cash flow of $4.5 million forfrom the prior
year period. Operating cash flows, other than those related to reinsurance on
losses, were generally consistent with the decrease2005 period
reflects a decline in premium volumerevenue and related deposits and includes $18.5
million refunded on retrospectively rated policies in the run-offthird quarter of losses for2006.
Refunds of this magnitude will not occur in the discontinued workers' compensation product during the
current period.future as most large
retrospective policies have now been finalized.
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 2.42.5 years at JuneSeptember 30, 2006, up slightly from the
prior year end but still short relative to the Company's liability duration.
Financing activity, other than the payment of dividends to shareholders, is
generally not significant for the Company. DuringDividends paid for the second quarter the Company
declarednine months
ended September 30, 2006 totaled $31.6 million and paid anincluded extra cash dividenddividends
totaling $1.25 per share. In addition,$22.6 million. With the regular quarterly dividend of $.10 per share was increased to $.25 per
share. In total, the $1.50 per share paid during the second quarter aggregated
$22.7 million, bringing year to date dividends paid to $27.8 million. Atrate at $.25 per
share, the quarterly dividend commitment for the Company is currently $3.8
million. Also, during the second quarter,and third quarters, stock options, principally
market value stock options granted in 1997, were exercised by employees
producing $6.0$6.2 million in proceeds to the Company. Future proceeds from the
exercise of stock options are not expected to be material.
The Company's assets at JuneSeptember 30, 2006 included $75.8$46.2 million in investments
classified as cash or cash equivalents that were readily convertible to cash
without significant market penalty. An additional $182.6$192.3 million of fixed
maturity investments will mature within the twelve-month period following
JuneSeptember 30, 2006. 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
JuneSeptember 30, 2006, $20.6 million may be transferred by dividend or loan to the
parent company during the remainder of 2006 without approval by, or prior
notification to, regulatory authorities. An additional $235.1$247.9 million of
shareholder's equity of the insurance subsidiaries could, theoretically, be
advanced or loaned to the parent holding company with prior 10 notification to, and
approval from, regulatory authorities, although it is unlikely that transfers of
this size would be practical. The Company believes that these 10
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 $47.3$41.2 million at JuneSeptember 30,
2006.
The Company's annualized premium writing to surplus ratio for the first halfnine
months of 2006 was approximately 43%41%. Regulatory guidelines generally allow for
writings of at least 200% of surplus. Accordingly, the Company could increase
premium writings significantly with no need to raise additional capital.
Further, the Insurance Subsidiaries' individual capital levels are several times
higher than the minimum amounts designated by the National Association of
Insurance Commissioners.
RESULTS OF OPERATIONS
---------------------
COMPARISONS OF SECONDTHIRD QUARTER, 2006 TO SECONDTHIRD QUARTER, 2005
--------------------------------------------------------------------------------------------------------------------
Net premiums earned during the secondthird quarter of 2006 decreased $1.3$7.5 million
(3%(15%) as compared to the same period of 2005. DiscontinuanceThe majority of this decrease is
due to lost accounts in the Company's small business workers' compensation product late in 2004 accounted for $.9
million to this overall decline in premiums for the current quarter. The
remaining $.4 million decrease is composed of a 4% decline in fleet trucking premiumsegment resulting from
competitive conditions in the marketplace. Private passenger automobile and
an 11% decrease inreinsurance assumed premiums also declined by $1.2 million and $1.1 million,
respectively, with the private passenger automobile premium, bothdecline the result of
competitive conditions largelyand the decline in reinsurance assumed resulting from
reinstatement premium recorded in the third quarter of 2005 related to hurricane
Katrina losses. These declines were partially offset by a 54%$1.7 million increase
in small fleet trucking premium earned resulting principally from geographic
expansion
and higher premiums from Protective's reinsurance assumed business.expansion.
Direct premiums written and assumed during the secondthird quarter of 2006 totaled
$45.5$47.9 million, a 9%14% decrease from the $49.9$55.8 million reported a year earlier. As
notedearlier in
line with the lower premium earned, as discussed in the previous paragraph, this decrease was due primarily to decreases in
fleet trucking and private passenger automobile premiums and was partially
offset by increases in premium writings from the Company's small fleet trucking
and reinsurance assumed products.paragraph.
Premium ceded to reinsurers averaged 12.6%13.4% of direct premium production for the
current quarter compared to 19.8%16.1% a year earlier.
Net investment income, before tax, during the secondthird quarter of 2006 was 34%38%
higher than the secondthird quarter of 2005 due to increases in both average invested
assets and in yields on bonds and short-term investments. Pre-tax yields on
short-term investments were nearly double69% higher than the prior year period. Overall
after
taxafter-tax yields posted similar increases.increased by 34% as municipal bonds comprised a larger portion
of the Company's fixed income portfolio during 2006.
The secondthird quarter 2006 net investment lossgain of $1.1$3.0 million consistedresulted primarily
offrom equity in lossesthe net income of limited partnership investments of $2.3$3.1 million
and was
partially offset by net gains on sales of equity securities. While several of
our limited partnership investments were impacted by the declining stock markets
during the second quarter, the net losswhich was concentrated in our investment in a limited partnership which invests
exclusively in India. Gains generated duringDuring the firstthird quarter of 2005, limited partnerships
produced investment gains totaling $7.2 million, again with the majority of this
year from this partnership were largely offset by losses
generatedattributable to trading in the second quarter, resulting inIndian markets, and direct trading of securities
netted a small year-to-date gain.gain of $1.6 million. See footnote 3 to the enclosed financial
statements for a more detailed discussion regarding the accounting policies and
the net gains or losses reported for the Company's investments in limited
partnerships.
Losses and loss expenses incurred during the secondthird quarter of 2006 were nearly
unchanged from$21.0
million lower than that experienced during the secondthird quarter of 2005.2005 primarily
due to hurricane losses occurring during the 2005 third quarter. Loss ratios for
each of the Company's major product lines were as follows:
11
2006 2005
------- ------------- ------
Fleet trucking 64.9% 65.5%62.2% 75.2%
Private passenger automobile 65.5 65.069.5 56.8
Small fleet trucking 78.8 54.760.4 64.7
Voluntary reinsurance assumed 56.0 40.226.0 339.4
All lines 65.7 64.361.0 93.9
The decline in loss ratio for fleet trucking results from favorable experience
in the Company's independent contractor program while the increase in the
small fleet truckingprivate passenger automobile ratio is due to an increase in frequency and
severity of accidents during the current quarter. The 20062005 ratio for voluntary
reinsurance assumed was adversely impacted by $1.0$14.8 million of additional losses reported during the current quarter from the 2005 hurricanes.related to
hurricanes Katrina and Rita (partially offset by $1.8 million in reinstatement
premium).
Other operating expenses, for the secondthird quarter of 2006, increased $2.1$2.0 million,
or 21%20%, from the secondthird quarter of 2005. ThisThe majority of this increase was
attributable entirely to the loss of ceding commission income associated with reinsurance
treaty changes effective in June, 2005. Adjusted for ceding allowances, operating
expenses were level with the second quarter of 2005. Ceding allowances totaled $.1$.2 million
for the 2006 quarter compared to $2.0$1.5 million for the 2005 quarter. Adjusted for
ceding allowances, other operating expenses were 6% higher than the third
quarter of 2005 with most of this increase attributable to commissions on
reinsurance assumed business as contingent commissions for the third quarter of
2005 were reduced significantly as the result of hurricane losses. The ratio of
consolidated other operating expenses to operating revenue was 25.5%24.4% during the
secondthird quarter of 2006 compared to 21.1%17.9% for the 2005 secondthird quarter, with the
loss of ceding commission comprising 3.72.7 percentage points of this change. The
remainder of the increase in the other operating expense ratio is due the
decline in total revenues as a portion of the Company's expenses are fixed.
The effective federal tax rate for consolidated operations for the secondthird quarter
of 2006 was 27.5%29.8% and is less than the statutory rate primarily because of tax
exempt investment income and the impact of net investment losses for the
quarter which carry a higher federal tax rate.income.
As a result of the factors mentioned above, and principally the lack of
hurricane losses during the current quarter partially offset by lower limited
partnership investment gains, net income decreased $3.8increased $5.2 million (41.0%(112.4%) during
the secondthird quarter of 2006 as compared with the 2005 second
quarter.2005.
COMPARISONS OF SIXNINE MONTHS ENDED JUNESEPTEMBER 30, 2006 TO
------------------------------------------------
SIX------------------------------------------------------
NINE MONTHS ENDED JUNESEPTEMBER 30, 2005
------------------------------------------------------------------
Net premiums earned during the sixfirst nine months of 2006 decreased $4.8$12.3 million
(5%(9%) as compared to the same period of 2005. The decrease is due primarily to
decreases in premiums from the Company's fleet trucking and private passenger
automobile and fleet trucking
programs of 10%12% and 7%11%, respectively, resulting from competitive
pressures. In addition, the discontinuance of the Company's small business
workers' compensation product late in 2004 accounted for $2.2$2.6 million of the
overall decline in premiums for the current year period. Partially offsetting
this decrease were increases in premiums from the Company's small fleet trucking
and reinsurance assumed programs of 41%51% and 37%7%, respectively, forrespectively. The increase in
small fleet trucking premium is due primarily to geographic expansion while the
same reasons
as discussedincrease in reinsurance assumed premium reflects rate increases in 2006
exceeding the $1.8 million in hurricane-related reinstatement premium recorded
in the quarterly comparison above.third quarter of 2005.
Direct premiums written and assumed during the first halfnine months of 2006 totaled
$104.4$152.3 million, a 9%an 11% decrease from the $114.5$170.4 million reported a year earlier. As notedearlier
with changes generally in line with the changes in premium earned discussed in
the previous paragraph, this decrease was due primarily to decreases in fleet
trucking and private passenger automobile premiums and was partially offset by
increases in premium writings from the Company's small fleet trucking and
reinsurance assumed products.paragraph. Premium ceded to reinsurers averaged 13.2%13.3% of direct
premium production for the current period compared to 21.0%19.4% a year earlier. 12
Net investment income, before tax, during the first halfnine months of 2006 was 36%
higher than the 2005 period for the same reasons as indicated in the quarterly
comparison above. Overall pre-tax and after tax yields were higher during the
current period while average invested funds increased 7%6% from the prior year. 12
The net gain on investments of $5.9$8.8 million for the first sixnine months of 2006
consists of net gains on equity securities and limited partnership investments and equity securities
of $4.1$5.5 million and $2.4$3.9 million, respectively, and was partially offset by $.6
million in losses on fixed maturity investments. The gain from limited
partnerships includes both realized and unrealized net income, as reported by
the general partners. For the sixnine months, we have estimated that realized and
unrealized gains increased $3.0$4.1 million and $1.4 million, respectively. During
the prior year, limited partnerships reported realized and unrealized gains
totaling $10.5 million while unrealizeddirect securities trading produced gains decreased $.6netting to
$5.9 million. See footnote 3 to the enclosed financial statements for a more
detailed discussion regarding the accounting policies and the net gains or
losses reported for the Company's investments in limited partnerships.
Losses and loss expenses incurred during the first sixnine months of 2006 decreased
$2.9$23.9 million from the first sixnine months of 2005. The majority of the decrease
in losses relates to the hurricane losses experience in the 2005 period. The
remainder of the decrease is consistent with the decreased premium volume
previously discussed. Loss and loss expense ratios for the comparative
six-monthnine-month periods were as follows:
2006 2005
-------- -------------- ------
Fleet trucking 70.0% 70.1%67.4% 72.0%
Private passenger automobile 62.5 62.864.7 60.9
Small fleet trucking 74.4 54.769.0 58.1
Voluntary reinsurance assumed 45.4 34.439.0 173.2
All lines 66.4 66.164.6 76.0
The higherfluctuations in loss ratioratios for the nine months are similar to those
discussed in the quarterly comparisons except that small fleet trucking
is attributable to higherexperienced high frequency and severity of losses principally during the second quarter. The
loss ratio for reinsurance assumed includes $1.5 millionquarter of
losses related to
the 2005 hurricanes which were reported to the Company during 2006. The overall
loss ratio was increased by 1.7 points as the result of the development on
hurricane losses.2006 associated with geographic expansion.
Other operating expenses increased $3.3$5.3 million (16%(18%) during the first sixnine
months of 2006 compared to the same period of 2005. Ceding commission allowances
included in net expenses were $.8$1.0 million for the 2006 period compared to $5.1$6.6
million in the prior year period, while expenses, before consideration of ceding
allowances, decreased $1.0were $.3 million lower than the 2005 period even after consideration
of $.8 million in higher commissions on lower premium volume.reinsurance assumed in 2006. The ratio
of other operating expenses to total operating revenue (adjusted for investment
gains) was 23.6%23.9% for 2006 compared to 19.8%19.2% for 2005 for reasons mentioned inwith the quarterly comparison.entire increase
attributable to the loss of ceding commission credits.
The effective federal tax rate for consolidated operations for the first sixnine
months of 2006 was 30.4%30.2% and is less than the statutory rate primarily because
of tax exempt investment income.
As a result of the factors mentioned above, net income decreased $2.6increased $2.7 million
(13.1%(11.0%) during the first halfnine months of 2006 as compared with the 2005 period.
13
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 10-K filed for the year ended December 31, 2005
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 JuneSeptember 30, 2006, amounts due from reinsurers
on paid and unpaid losses, including provisions for incurred but not reported
losses, are estimated to total approximately $168$172 million. Included in this
total are case basis and estimated IBNR losses of approximately $18.6$18.8 million
due from Converium Insurance (North America) Inc., $5.8$5.0 million due from Quanta
Re. and $3.6 million due from PMA Re., each of which have reported substantial
reserve strengthening and/or impairment of assets which have negatively affected
their reported financial positions. All amounts due from these reinsurers on
paid claims are current as of JuneSeptember 30, 2006 and the Company has no
information at this time to indicate that all obligations of these reinsurers
will not be met.
During the second quarter of 2006, the Company reached a commutation
agreement with Trenwick Re. culminating with a cash settlement to the Company
approximating the value of all reserves previously reported in this section.
At JuneSeptember 30, 2006, limited partnership investments includes approximately
$32.2$35.0 million consisting of three partnerships which are managed by
organizations in which two of the Company's directors are officers, directors,
general partners or owners. Each of these investments contain profit sharing
agreements to the affiliated organizations.
ITEM 4. CONTROLS AND PROCEDURES
- -------------------------------
(a) The Corporation's Chief Executive Officer and Chief Financial Officer
evaluated the disclosure controls and procedures (as defined under Rules
13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended) as
of the end of the period covered by this report. Based upon that evaluation, the
Chief Executive Officer and Chief Financial Officer have concluded that the
Corporation's disclosure controls and procedures are effective.
14
(b) There were no significant changes in the Corporation's internal control over
financial reporting identified in connection with the foregoing evaluation that
occurred during the 14
Corporation's last fiscal quarter that have affected, or are reasonably likely
to materially affect, the Corporation's internal control over financial
reporting.
PART II - OTHER INFORMATION
ITEM 5 OTHER INFORMATION
- ------------------------
During June, 2006, the Company renewed its reinsurance treaties covering the
fleet trucking product under terms similarNothing to the expiring agreements.report.
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
(31.2) Certification of CFO EXHIBIT 31.2
pursuant to Section 302 of the Certification of CFO
Sarbanes-Oxley Act of 2002
(32.1) Certification of CEO EXHIBIT 32.1
pursuant to 18 U.S.C. 1350, as Certification of CEO
adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002
(32.2) Certification of CFO EXHIBIT 32.2
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 MayAugust 1, 2006 regarding its routine
earnings announcement for the second quarter of 2006. A Form 8-K was filed by the
registrant on May 2, 2006 regarding the announcement of an extra dividend and an
increase to the regular quarterly dividend.
15
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BALDWIN & LYONS, INC.
Date August 4,NOVEMBER 8, 2006 By /s/ GARYL/S/ GARY W. MILLER
------------------------------------------------------ --------------------------------
Gary W. Miller, Chairman and CEO
Date August 4,NOVEMBER 8, 2006 By /s//S/ G. PATRICK CORYDON
------------------------------------------------------ ---------------------------------
G. Patrick Corydon,
Senior Vice President - Finance
(Principal Financial and
Accounting Officer)
16
BALDWIN & LYONS, INC.
Form 10-Q for the fiscal quarter
ended JuneSeptember 30, 2006
INDEX TO EXHIBITS
BEGINS ON SEQUENTIAL
PAGE NUMBER OF FORM
EXHIBIT NUMBER 10-Q
-------------- -----------------------------
EXHIBIT 11 17Filed herewith electronically
Computation of per share earnings
EXHIBIT 31.1 18Filed herewith electronically
Certification of CEO
pursuant to Section 302 of the
Sarbanes-Oxley Act
EXHIBIT 31.2 20Filed herewith electronically
Certification of CFO
pursuant to Section 302 of the
Sarbanes-Oxley Act
EXHIBIT 32.1 22Filed herewith electronically
Certification of CEO
pursuant to 18 U.S.C. 1350,
as adopted pursuant to Section
906 of the Sarbanes-Oxley Act
EXHIBIT 32.2 23Filed herewith electronically
Certification of CFO
pursuant to 18 U.S.C. 1350,
as adopted pursuant to Section
906 of the Sarbanes-Oxley Act