1SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORMForm 10-Q
Quarterly Report
UnderPursuant to Section 13 or 15 (d)of the Securities Exchange Act of 1934
------------------------------------------------------ For Quarter Ended Commission file number September 30, 2007 0-5534
For Quarter Ended
Commission file number
March 31, 2008
0-5534
BALDWIN & LYONS, INC.
(Exact(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
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 [ ]
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“accelerated filer and large acceleratedfiler"filer” in Rule 12b-2 of the Exchange Act.Large accelerated filer [ ] Accelerated filer [ X ] Non-accelerated filer [ ]
Large accelerated filer ____
Accelerated filer
x
Non-accelerated filer ____
Small Reporting Company ____
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ____ Nox
Indicate the number of shares outstanding of each of the
issuer'sissuer’s classes of common stock as ofNovember 8, 2007: TITLE OF CLASS NUMBER OF SHARES OUTSTANDING Common Stock, No Par Value: Class A (voting) 2,650,059 Class B (nonvoting) 12,572,555May 7, 2008:
TITLE OF CLASS
NUMBER OF SHARES OUTSTANDING
Common Stock, No Par Value:
Class A (voting)
2,650,059
Class B (nonvoting)
12,592,555
Index to Exhibits located on page
16.215.Page 1 of a total of 22 pages
PART I
-– FINANCIAL INFORMATIONITEM 1 FINANCIAL STATEMENTS
BALDWIN & LYONS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED) SEPTEMBER 30 December 31 2007 2006 ------------------- ------------------ASSETS Investments: Fixed maturities $ 365,984 $ 338,466 Equity securities 129,357 129,817 Limited partnerships 74,212 57,313 Short-term 35,258 59,325 ------------------- ------------------ 604,811 584,921 Cash and cash equivalents 37,031 35,490 Accounts receivable 34,033 37,994 Reinsurance recoverable 138,099 163,426 Notes receivable from employees 2,208 2,343 Other assets 28,271 27,932 Current federal income taxes - 1,613 ------------------- ------------------ $ 844,453 $ 853,719 =================== ================== LIABILITIES AND SHAREHOLDERS' EQUITY Reserves for losses and loss expenses $ 378,397 $ 409,412 Reserves for unearned premiums 26,577 32,145 Accounts payable and accrued expenses 39,848 35,681 Current federal income taxes 9,952 - Deferred federal income taxes 12,184 18,854 ------------------- ------------------ 466,957 496,092 Shareholders' equity: Common stock-no par value 650 646 Additional paid-in capital 47,488 45,692 Unrealized net gains on investments 49,222 47,229 Retained earnings 280,136 264,060 ------------------- ------------------ 377,496 357,627 ------------------- ------------------ $ 844,453 $ 853,719 =================== ==================Baldwin & Lyons, Inc. and Subsidiaries
Unaudited Consolidated Balance Sheet
(in thousands, except per share data)
March 31
December 31
2008
2007
Assets
Investments:
Fixed maturities
$ 371,566
$ 338,011
Equity securities
99,361
99,736
Limited partnerships
66,549
80,884
Short-term
20,953
44,768
558,429
563,399
Cash and cash equivalents
63,823
82,137
Accounts receivable
35,095
33,412
Reinsurance recoverable
131,596
132,811
Notes receivable from employees
2,133
2,228
Other assets
31,783
28,846
$ 822,859
$ 842,833
Liabilities and shareholders' equity
Reserves for losses and loss expenses
$ 376,757
$ 378,616
Reserves for unearned premiums
23,651
22,678
Accounts payable and accrued expenses
39,394
39,135
Current federal income taxes
10,578
10,568
Deferred federal income taxes
3,170
11,118
453,550
462,115
Shareholders' equity:
Common stock-no par value
650
650
Additional paid-in capital
47,899
47,899
Unrealized net gains on investments
34,169
36,876
Retained earnings
286,591
295,293
369,309
380,718
$ 822,859
$ 842,833
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 ----------------------------------- --------------------------------- 2007 2006 2007 2006 ---------------- --------------- -------------- --------------REVENUES Net premiums earned $ 44,601 $ 42,333 $ 133,593 $ 127,714 Net investment income 5,040 5,140 14,768 14,435 Net gains on investments 6,421 2,958 15,667 8,837 Commissions and other income 1,214 1,418 3,771 5,130 ---------------- -------------- -------------- --------------- 57,276 51,849 167,799 156,116 EXPENSES Losses and loss expenses incurred 24,949 25,837 76,334 82,493 Other operating expenses 15,555 11,931 41,963 35,131 ---------------- --------------- -------------- -------------- 40,504 37,768 118,297 117,624 ---------------- -------------- -------------- --------------- INCOME BEFORE FEDERAL INCOME TAXES 16,772 14,081 49,502 38,492 Federal income taxes 5,058 4,202 14,786 11,630 ---------------- --------------- -------------- -------------- NET INCOME $ 11,714 $ 9,879 $ 34,717 $ 26,862 ================ =============== ============== ============== PER SHARE DATA: BASIC EARNINGS $ .77 $ .65 $ 2.29 $ 1.79 ================ =============== ============== ============== DILUTED EARNINGS $ .77 $ .65 $ 2.29 $ 1.79 ================ =============== ============== ============== DIVIDENDS PAID TO SHAREHOLDERS $ .60 $ .25 $ 1.30 $ 2.10 ================ =============== ============== ============== RECONCILIATION OF SHARES OUTSTANDING: Average shares outstanding - basic 15,189 15,108 15,158 14,965 Dilutive effect of options outstanding 12 22 17 48 ---------------- --------------- -------------- -------------- Average shares outstanding - diluted 15,201 15,130 15,175 15,013 ================ =============== ============== ==============- 2 -
Baldwin & Lyons, Inc. and Subsidiaries
Unaudited Consolidated Statement of Income
(in thousands, except per share data)
Three Months Ended
March 31
2008
2007
Revenues
Net premiums earned
$ 45,087
$ 44,175
Net investment income
4,200
4,846
Net gains (losses) on investments
(13,575)
474
Commissions and other income
1,301
1,412
37,013
50,907
Expenses
Losses and loss expenses incurred
29,461
26,892
Other operating expenses
15,640
12,846
45,101
39,738
Income (loss) before federal income taxes
(8,088)
11,169
Federal income taxes
(3,480)
2,958
Net income (loss)
($ 4,608)
$ 8,211
Per share data:
Basic earnings
($ .30)
$ .54
Diluted earnings
($ .30)
$ .54
Dividends paid to shareholders
$ .25
$ .45
Reconciliation of shares outstanding:
Average shares outstanding - basic
15,243
15,137
Dilutive effect of options outstanding
0
20
Average shares outstanding - diluted
15,243
15,157
See notes to condensed consolidated financial statements.
4
BALDWIN & LYONS, INC. AND SUBSIDIARIES UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS) Nine Months Ended September 30 2007 2006 --------------- ---------------Net cash provided by operating activities $ 21,633 $ 14,628 Investing activities: Purchases of long-term investments (202,458) (191,391) Proceeds from sales or maturities of long-term investments 178,608 138,776 Net sales (purchases) of short-term investments 24,067 (18,065) Other investing activities (2,374) 1,470 --------------- --------------- Net cash provided by (used in) investing activities (2,157) (69,210) Financing activities: Dividends paid to shareholders (19,734) (31,624) Cost of treasury stock - (401) Proceeds from sales of common stock 1,799 6,238 --------------- --------------- Net cash used in financing activities (17,935) (25,787) --------------- --------------- Increase (decrease) in cash and cash equivalents 1,541 (80,369) Cash and cash equivalents at beginning of period 35,490 126,551 --------------- --------------- Cash and cash equivalents at end of period $ 37,031 $ 46,182 =============== ===============- 3 -
Baldwin & Lyons, Inc. and Subsidiaries
Unaudited Consolidated Statement of Cash Flows
(dollars in thousands)
Three Months Ended
March 31
2008
2007
Net cash provided by (used in) operating activities
($ 6,274)
$ 8,735
Investing activities:
Purchases of long-term investments
(149,244)
(78,819)
Proceeds from sales or maturities
of long-term investments
115,821
56,168
Net sales of short-term investments
23,815
16,997
Other investing activities
1,379
(1,021)
Net cash used in investing activities
(8,229)
(6,675)
Financing activities:
Dividends paid to shareholders
(3,811)
(6,813)
Proceeds from sales of common stock
-
77
Net cash used in financing activities
(3,811)
(6,736)
Decrease in cash and cash equivalents
(18,314)
(4,676)
Cash and cash equivalents at beginning of period
82,137
35,490
Cash and cash equivalents at end of period
$ 63,823
$ 30,814
See notes to condensed consolidated financial statements.
NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTSNotes to Condensed Unaudited Consolidated Financial Statements
(dollars in thousands)
(1)
BASIS OF PRESENTATION: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 U.S. 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 31,2007.2008. Interim financial statements should be read in conjunction with theCompany'sCompany’s annual audited financial statements and other disclosures included in theCompany'sCompany’s most recent Form 10-K.(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.Net Gains (Losses) on Investments:Amounts reported as net gains (losses) on investments consist of three components: (1) net gains or losses realized upon the actual sale of investments managed directly by the 5 NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (3) NET GAINS ON INVESTMENTS:Company'sCompany’s investment managers, (2) equity inrealized and unrealizedearnings or losses of investments in limited partnerships and (3)"other-than-temporary impairment"“other-than-temporary impairment” adjustments.- 4 -
Notes to Condensed Unaudited Consolidated Financial Statements (continued)
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'spartnership’s net income. To the extent that the limited partnership investeesare subject to investment company accounting and, thereby,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 theinvestee'sinvestee’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
classified as availableheld 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
or losses(losses) on investments for the periods presented in the accompanying statements of income.
THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30 SEPTEMBER 30 ------------------------------ ----------------------------- 2007 2006 2007 2006 ------------- ------------- ------------- ------------Realized net gains on the disposal of securities $ 377 $ 449 $ 1,894 $ 4,007 Equity in earnings of limited partnership investments (realized and unrealized) 6,350 3,089 13,174 5,505 Impairment: Write-downs based upon objective criteria (457) (580) (520) (1,343) Recovery of prior write-downs upon sale or disposal 151 - 1,119 668 ------------- ------------- ------------- ------------ Totals $ 6,421 $ 2,958 $ 15,667 $ 8,837 ============= ============= ============= ============
Three Months Ended
March 31
2008
2007
Realized net gains (losses) on the disposal of securities
$ (1,578)
$ 466
Equity in earnings (losses) of limited partnership
investments (realized and unrealized)
(11,991)
(897)
Impairment:
Write-downs based upon objective criteria
(16)
(63)
Recovery of prior write-downs upon sale or disposal
(10)
968
Totals
$ (13,575)
$ 474
The net
gainslosses from limited partnerships for the quarterand year-to-dateendingSeptember 30, 2007March 31, 2008 include an estimated$4.7$20.5 millionand $7.6 million, respectively,of unrealizedgainslosses reported to the Company as part of the operations of the various limited partnerships.Shareholders'Shareholders’ equity atSeptember 30, 2007March 31, 2008 includes approximately$23.5$22.5 million, net of deferred federal income taxes, of earnings undistributed by limited partnerships.6 NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (4) REINSURANCE:- 5 -
Notes to Condensed Unaudited Consolidated Financial Statements (continued)
(3)Reinsurance:The following table summarizes the
Company'sCompany’s transactions with reinsurers for the20072008 and20062007 comparative periods.
2007 2006 ----------- -----------Quarter ended September 30: Premiums ceded to reinsurers $ 9,589 $ 5,961 Losses and loss expenses ceded to reinsurers (9,503) 7,472 Commissions from reinsurers 589 177 Nine months ended September 30: Premiums ceded to reinsurers 22,682 18,969 Losses and loss expenses ceded to reinsurers 583 12,587 Commissions from reinsurers 1,231 988Negative losses and loss expenses ceded for the current quarter include savings recognized on the closing of several large prior year claims in which reinsurance participation was significant. (5) COMPREHENSIVE INCOME OR LOSS:
2008
2007
Quarter ended March 31:
Premiums ceded to reinsurers
$ 9,176
$ 6,117
Losses and loss expenses
ceded to reinsurers
171
4,410
Commissions from reinsurers
644
292
(4)Comprehensive Income or Loss:Total realized and unrealized
incomeloss for the quarter endedSeptember 30, 2007March 31, 2008 was$11,255$7,598 and compares to total realized and unrealized income of$14,473$7,782 for the quarter endedSeptember 30, 2006. For the nine months ended September 30, 2007, total realized and unrealized income was $37,803 and compares to total realized and unrealized income of $30,116 for the nine months ended September 30, 2006.7 NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (6) REPORTABLE SEGMENTS - PROFIT OR LOSS:March 31, 2007.(5)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 U.S. generally accepted accounting principles. 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. Amounts presented for reinsurance assumed include transactions related to certain inter-segment reinsurance agreements.
2007 2006 --------------------------------------- ------------------------------------------ DIRECT Direct AND NET and Net ASSUMED PREMIUM SEGMENT Assumed Premium Segment PREMIUM EARNED AND PROFIT Premium Earned and Profit WRITTEN FEE INCOME (LOSS) Written Fee Income (Loss) ---------- ------------ ------------ ------------ ------------ -----------QUARTER ENDED SEPTEMBER 30: PROTECTIVE PRODUCTS: Fleet trucking $ 34,037 $ 26,188 $ 7,193 $ 30,561 $ 26,695 $ 6,343 Reinsurance assumed 7,720 8,185 915 3,322 3,517 1,931 SAGAMORE PRODUCTS: Private passenger automobile 4,640 7,448 570 6,965 9,364 419 Small fleet trucking 3,847 3,881 57 6,917 3,945 (22) All other 38 47 (80) 109 140 (255) ---------- ------------ ------------ ------------ ------------ ----------- Totals $ 50,282 $ 45,749 $ 8,655 $ 47,874 $ 43,661 $ 8,416 ========== ============ ============ ============ ============ =========== NINE MONTHS ENDED SEPTEMBER 30: PROTECTIVE PRODUCTS: Fleet trucking 96,143 $ 78,448 $ 20,195 $ 94,830 $ 81,431 $ 16,513 Reinsurance assumed 20,373 22,099 5,333 9,473 10,653 4,784 SAGAMORE PRODUCTS: Private passenger automobile 19,327 24,394 1,991 27,414 29,643 2,237 Small fleet trucking 14,878 12,070 221 20,462 10,318 (464) All other (28) 81 285 94 367 (334) ---------- ------------ ------------ ------------ ------------ ----------- Totals $150,693 $137,092 $ 28,025 $152,273 $132,412 $ 22,736 ========== ============ ============ ============ ============ ===========8 NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (7) REPORTABLE SEGMENTS
2008
2007
Direct and Assumed Premium Written
Net Premium Earned and Fee Income
Segment Profit (Loss)
Direct and Assumed Premium Written
Net Premium Earned and Fee Income
Segment Profit (Loss)
Three months ended March 31:
Protective products:
Fleet trucking
$ 37,252
$ 28,597
$ 1,271
$ 30,885
$ 26,172
$ 5,301
Reinsurance assumed
7,385
7,810
3,746
5,823
6,383
2,031
Sagamore products:
Private passenger automobile
7,093
6,349
(14)
10,201
8,693
946
Small fleet trucking
3,438
3,029
74
6,116
4,094
74
All other
82
81
(305)
77
106
200
Totals
$ 55,250
$ 45,866
$ 4,772
$ 53,102
$ 45,448
$ 8,552
-
RECONCILIATION TO CONSOLIDATED REVENUE AND CONSOLIDATED PROFIT OR LOSS:6 -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 loss to the
Company'sCompany’s consolidated revenue and income before federal income taxes, respectively.
Three Months Ended Nine Months Ended September 30 September 30 2007 2006 2007 2006 --------------- --------------- --------------- ---------------REVENUE: Net premium earned and fee income $ 45,749 $ 43,661 $ 137,092 $ 132,412 Net investment income 5,040 5,140 14,768 14,435 Net gains on investments 6,421 2,958 15,667 8,837 Other 66 90 272 432 --------------- --------------- --------------- --------------- Total consolidated revenue $ 57,276 $ 51,849 $ 167,799 $ 156,116 =============== =============== =============== =============== PROFIT: Segment profit $ 8,655 $ 8,416 $ 28,025 $ 22,736 Net investment income 5,040 5,140 14,768 14,435 Net gains on investments 6,421 2,958 15,667 8,837 Corporate expenses (3,344) (2,433) (8,958) (7,516) --------------- --------------- --------------- --------------- Income before federal income taxes $ 16,772 $ 14,081 $ 49,502 $ 38,492 =============== =============== =============== ===============
Three Months Ended
March 31
2008
2007
Revenue:
Net premium earned and fee income
$ 45,866
$ 45,448
Net investment income
4,200
4,846
Net gains (losses) on investments
(13,575)
474
Other
522
139
Total consolidated revenue
$ 37,013
$ 50,907
Profit:
Segment profit
$ 4,772
$ 8,552
Net investment income
4,200
4,846
Net gains (losses) on investments
(13,575)
474
Corporate expenses
(3,485)
(2,703)
Income (loss) before federal income taxes
$ (8,088)
$ 11,169
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:(7)Loans to Employees:In 2000, 2001 and 2002, the Company provided loans to certain employees for the sole purpose of purchasing the
Company'sCompany’s Class B common stock in the open market. $7,260 of such full-recourse loans were issued and$2,208 remain$2,133 remains outstanding atSeptember 30, 2007March 31, 2008 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, the Financial Accounting Standards Board issued FASB Interpretation No. 48, ACCOUNTING FOR UNCERTAINTY IN INCOME TAXES - AN INTERPRETATION OF FASB STATEMENT 109 ("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 that all income tax positions must meet before being recognized in the financial statements. In addition, FIN 48 requires expanded annual disclosures, including a roll-forward(8)Taxes:As 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. The Company adopted FIN 48 onJanuary 1,2007 with no adjustment necessary to beginning retained earnings. The total amount of unrecognized tax benefits from uncertain tax positions at January 1, 2007 was $10.3 million and would have no impact on2008, theCompany's effective tax rate. There were no material changes to the amount recorded for unrecognized tax benefits from uncertain tax positions during the three months ended September 30, 2007. The Company recognizes accrued interest and penalties, if any, related to unrecognized tax benefits in income tax expense and changes in such accruals would impact the Company's9 effective tax rate. Amounts accrued for the payment of interest at September 30, 2007 and December 31, 2006 were not material. The Company'sCompany’s 2005 and2006thereafter tax years remain subject to examination by the IRS.(9)Accounting Pronouncements:In September 2006, the Financial Accounting Standards Board issued Statement No. 157, “Fair Value Measurements” (“SFAS No. 157”), which provides a common definition of fair value and establishes a framework to make the measurement of fair value more consistent and comparable. SFAS No. 157 also requires expanded disclosures about (1) the extent to which companies measure assets and liabilities at fair value, (2) the methods and assumptions used to measure fair value and (3) the effect of fair value measures on earnings. SFAS 157 is effective for financial assets and liabilities on January 1, 2008. The FASB has deferred the implementation of the provisions of SFAS 157 relating to certain nonfinancial assets and liabilities until January 1, 2009. The adoption of SFAS 157 did not have a significant impact on the Company’s consolidated financial condition or results of operations.
- 7 -
Notes to Condensed Unaudited Consolidated Financial Statements (continued)
Beginning January 1, 2008, assets and liabilities recorded at fair value in the consolidated balance sheets are categorized based upon the level of judgment associated with the inputs used to measure their fair value.
The following table summarizes fair value measurements by level at March 31, 2008 for assets measured at fair value on a recurring basis:
Description
Total
Level 1
Level 2
Level 3
Fixed maturies
$ 371,566
$ -
$ 371,566
$ -
Equity securities
99,361
99,361
-
-
Short term
20,953
2,999
17,954
-
Cash equivalents
65,684
-
65,684
-
Derivatives
(113)
-
-
(113)
$ 557,451
$ 102,360
$ 455,204
$ (113)
Level inputs, as defined by FAS 157, are as follows:
LevelInput:
Input Definition:
Level 1
Inputs are unadjusted, quoted prices for identical assets or liabilities in active markets at the measurement date.
Level 2
Inputs other than quoted prices included in Level 1 that are observable for the asset or liability through corroboration with market data at the measurement date.
Level 3
Unobservable inputs that reflect management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date.
A reconciliation of the beginning and ending balances of assets measured at fair value on a recurring basis using Level 3 inputs is as follows:
Description
Derivatives
January 1, 2008 balance
$ -
Total gain or losses (realized or unrealized)
Included in earnings (or changes in net assets)
(1,594)
Included in other comprehensive income
-
Purchases, issuances, and settlements
1,481
Transfers in and/or out of Level 3
-
March 31, 2008 balance
$ (113)
- 8 -
ITEM 2
MANAGEMENT'SMANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS- -------------------------------------------------------------------------------OF OPERATIONS- ------------- LIQUIDITY AND CAPITAL RESOURCESLiquidity 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'sCompany’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 amongproducts and overallproducts. 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 treatyrenewals.renewals, with a moderate decrease in risk retained associated with the treaty renewal in June, 2007. For thefirst nine monthsquarter endedSeptember 30, 2007,March, 2008, the Company experienced negative cash flow from operations totaling $6.3 million and compares to positive cash flow from operationstotaling $21.6 million which compares to $14.6of $8.7 million generated during the firstnine monthsquarter of2006.2007. The$7.0$15 millionincreasechange in cash flow from the 2007 period is primarily dueprimarilytothe 2006 period experiencing a cash usage for refunds of premiums related to retrospectively rated policies partially offset by increased loss payment activity in 2007, includingthe timing of reinsuranceloss recoveries.payable payments and taxes payable as well as the lower operating income in the first quarter of 2008.For several years, the
Company'sCompany’s investment philosophy has emphasized the purchase of relatively short-term instruments with maximum quality and liquidity. The averageexpected life and contractuallife of theCompany'sCompany’s fixed income (bond and short-term investment) portfolio was3.1 and 4.13.9 yearsrespectivelyatSeptember 30, 2007,March 31, 2008, up slightly from the prior year end but still short relative to theCompany'sCompany’s liability duration.Financing activity, other than the payment of dividends to shareholders, is
generallynot significant for the Company.DividendsThe Company paid a regular quarterly dividend of $3.8 million ($.25 per share) during thenine monthsquarter endedSeptember 30, 2007 totaled $19.7 million and included extra dividends totaling $8.3 million.March 31, 2008.The
fourth quarter 2007 regular declared dividend of $.25 per share and the fourth quarter extra declared dividend commitment of $.10 per share for the Company in total is $5.3 million. The Company'sCompany’s assets atSeptember 30, 2007March 31, 2008 included$37.0$63.8 million in investments classified as cash or cash equivalents that were readily convertible to cash without significant market penalty. An additional$105.6$106.3 million of fixed maturityand short-terminvestments will mature within the twelve-month period followingSeptember 30, 2007.March 31, 2008. The Company believes that these liquid investments are more than sufficient to provide for projected claim payments and operating costdemands even before consideration of current positive cash flows.demands.Consolidated
shareholders'shareholders’ equity is composed largely of GAAPshareholder'sshareholder’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. AtSeptember 30, 2007, $35.0March 31, 2008, $54.9 million may be transferred by dividend or loan to the parent company during the remainder of20072008 without approval by, or prior notification to, regulatory authorities. An additional$257.5$221.7 million ofshareholder'sshareholder’s equity of the insurance subsidiaries could, theoretically, be advanced or loaned to the parent holding10company with prior notification to, and approval from, regulatory authorities, although it is unlikely that transfers of this size would be practical. The Company believes that these restrictions pose no material liquidity concerns to the Company. The Company also believes that 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$19.1$15.3 million atSeptember 30, 2007.March 31, 2008.The
Company'sCompany’s annualized premium writing to surplus ratio for the firstnine monthsquarter of20072008 was approximately36%40%. Regulatory guidelines generally allow for writings of at least200%100% of- 9 -
surplus. Accordingly, the Company could increase premium writings significantly with no need to raise additional capital. Further, the
Insurance Subsidiaries'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 THIRD QUARTER,Results of Operations
Comparisons of First Quarter, 2008 to First Quarter, 2007
TO THIRD QUARTER, 2006Net premiums earned during the
thirdfirst quarter of20072008 increased$2.3$.9 million(5%(2%) as compared to the same period of2006.2007. TheCompany'sCompany’s independent contractor and reinsurance assumedand independent contractorproducts reported significant increases of$4.7$3.8 million(163%(22.8%) and$2.6$1.7 million(18.4%(28.9%), respectively. The higher premium from reinsurance assumed is largely associated with theCompany'sCompany’s affiliation with Paladin Catastrophe Managementwhich produced $4.2 million in premium duringand a retrocession program entered into after thethird quarter.first quarter of 2007. Increases in independent contractor premiums continued the pattern experienced throughout2006 and2007 resulting from program changes which increased thefirst six months of 2007.premium paid by individual independent contractors, primarily for workers’ compensation coverages. These increases were partially offset by decreases in theCompany's large fleet excess andCompany’s private passenger automobile, small fleet, and fleet trucking liability products of$3.2$2.1 million(32%(26.7%), $1.3 million (29.7%) and$1.7$.8 million(20%(9.9%), respectively, each impacted by competitive market conditions.NOTE: THE INDEPENDENT CONTRACTOR AND LARGE FLEET EXCESS PRODUCTS ARE BOTH COMPONENTS OF THE FLEET TRUCKING SEGMENT.Note: The independent contractor and fleet trucking liability products are included in the fleet trucking segment.Direct premiums written and assumed during the
thirdfirst quarter of20072008 totaled$50.3$55.3 million, a5%4% increase from the$47.9$53.1 million reported a year earlier withthe higherincreased premium concentrated in the Company’s independent contractor and reinsurance assumedand independent contractorproducts, as discussed in the previous paragraph. Premium ceded to reinsurers averaged22.6%19.2% of direct premium production for the current quarter compared to13.4%13.0% a year earlier.The increase in the ceding rate reflects a higher concentration of premium volume during 2007 in products which are more heavily reinsured and reinsurance treaty renewals effective June 3, 2007 whereby Protective is ceding a larger share of direct premium to reinsurers on fleet trucking business.Net investment income, before tax, during the
thirdfirst quarter of 2008 was 13.3% lower than the first quarter of 2007was 2% lower than the third quarter of 2006 primarilydue to decreases in yields in all categories of investments. Pre-tax yields averaged 3.7% during theredeployment of invested assets to municipal bonds carrying lower pre-tax, but higher after tax yields. After tax investment income increased 5% whencurrent quarter compared to 4.2% for the prior yearthird quarter. Average invested fundsperiod. Overall after-tax yields decreasedapproximately 3% comparedby 7% to 3.1% as thethirdmarket experienced a decline in interest rates in 2008.The first quarter 2008 net investment losses of
2006$13.6 million resulted primarilydue to cash dividends paid to shareholders.from $12.0 million of losses on limited partnerships and an additional $1.6 million of losses on sales of securities. Thethirdfirst quarter 2007netinvestment gainsof $6.4 million and the third quarter 2006 net investment gains of $3.0 millionwereprimarily the result of gains from limited partnership investments.$.5 million. The limited partnershipgainslosses wereprimarilyconcentrated in our investment in a limited partnership which invests exclusively in India. See footnote32 to the enclosed financial statements for a more detailed discussion regarding the accounting policies and the net gains or losses reported for theCompany'sCompany’s investments in limited partnerships.11Losses and loss expenses incurred during the
thirdfirst quarter of20072008 were$.9$2.6 millionlowerhigher than that experienced during thethirdfirst quarter of2006. This decrease is principally the result2007 due to a number ofapproximately $11 million of favorable developmentssevere losses as well as a decline in reserve savings on prioraccident years during the 2007 third quarter, inclusive of savings related to retrospective policies and reinsurance assumed, compared to the prior yearperiodwhen reserve development savings were approximately $7.8 million. Current period losses, including a provision for incurred but not reported losses were approximately 7% higher than the 2006 period, primarily from reinsurance assumed losses associated with Midwest U.S. tornado and hail activity.claims, particularly in fleet trucking. Loss ratios for each of theCompany'sCompany’s major product lines were as follows:
2008
2007
2006 ------- ------
Fleet trucking
49.1% 62.2%74.0%
65.2%
Private passenger automobile
66.1 69.570.4
62.1
Small fleet trucking
59.2 60.453.5
55.7
Reinsurance assumed
66.6 26.031.0
48.4
All lines
56.0 61.065.3
60.9
- 10 -
Other operating expenses, for the
thirdfirst quarter of20072008, increased$3.6$2.8 million,(30%)or 22%, from thethirdfirst quarter of2006. This2007. $2.4 million of this increasewas primarilyis related to commissions paid to non-affiliates on independent contractor business. It should be noted that premium rates on this product were adjusted to allow for these higher commissions and the net dollar impact on pre-tax income is negligible. The remainder of the increase is attributable to commissions onindependent contractor business produced by outside agents as well as commissions associated with the doubling of the Company's book ofreinsurance assumedbusiness. Ceding allowances were immaterialplacements during the first quarter of 2008. The increase inboth periods.other operating expenses is offset by a $.3 million rise in ceded commission offsets, along with a decrease in commissions on small fleet and private passenger automobile products in line with premium volume. The ratio of consolidated other operating expenses to operating revenue(adjusted for investment gains)was30.6%30.9% during thethirdfirst quarter of20072008 compared to24.4%25.5% for the2006 third quarter with the increase resulting directly from the commission increases previously discussed.2007 first quarter.The effective federal tax rate
foron the consolidatedoperationsloss for thethirdfirst quarter of20072008 was30.1%a 43% benefit andis less thandiffers from the normal statutory rateprimarily becauseas a result oftax exempttax-exempt investment income.As a result of the factors mentioned above, net income
increased $1.8decreased $12.8 million(19%) during the third quarter of 2007 as compared with the 2006 third quarter. COMPARISONS OF NINE MONTHS ENDED SEPTEMBER 30, 2007 TO NINE MONTHS ENDED SEPTEMBER 30, 2006 Net premiums earned during the first nine months of 2007 increased $5.9 million (5%) as compared to the same period of 2006. The increase is due primarily to increases in premiums from the Company's reinsurance assumed, independent contractor and small fleet trucking programs of 124%, 23% and, 19% respectively. The higher premium from reinsurance assumed is associated with the Company's affiliation with Paladin Catastrophe Management which produced $10.6 million in premium during the first nine months of 2007. Partially offsetting this increase were decreases in premiums from the Company's large fleet excess and private passenger automobile programs of 37% and 18%, respectively, resulting from competitive market conditions. Direct premiums written and assumed during the first nine months of 2007 totaled $150.7 million, a 1% decrease from the $152.3 million reported a year earlier. This decrease was due primarily to decreases in large fleet excess, private passenger automobile and small fleet trucking premiums and was partially offset by increases in premium writings from the Company's reinsurance assumed and independent contractor products. Premium ceded to reinsurers averaged 17.4% of direct premium production for the current period compared to 13.3% a year earlier.12 Net investment income, before tax, was 2.3% higher, during the first nine months of 2007, than the 2006 period due to increases in pre-tax yields for all investment categories. The impact of the higher pre-tax yields was somewhat diminished by a 4% drop in average invested assets. Average invested funds decreased primarily due to cash dividends paid to shareholders. Net after tax investment income, however, increased 9.4% during the 2007 period as the result of increased use of municipal bonds, as discussed in the quarterly comparison. The net gain on investments of $15.7 million for the first nine months of 2007 consists of net gains on limited partnership investments and equity securities of $13.2 million and $2.9 million, respectively and was offset by $.4 million in losses on fixed maturity investments. The limited partnership gains were primarily concentrated in our investment in a limited partnership which invests exclusively in India. The net gain from limited partnerships includes both realized and unrealized net income, as reported by the general partners. For the nine months, we have estimated that the limited partnership gains were comprised of realized and unrealized gains of $5.6 million and $7.6 million, respectively. The net gain on investments of $8.8 million for the first nine months of 2006 consists of net gains on limited partnership investments and equity securities of $5.5 million and $3.9 million, respectively, and was partially offset by $.6 million in losses on fixed maturity investments. 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 nine months of 2007 decreased $6.2 million from the first nine months of 2006, with the lower losses resulting from favorable developments on prior accident years totaling $20.7 million, including savings on retrospectively rated policies and reinsurance assumed, compared to $14.4 million in savings recognized in the first nine months of 2006. Loss and loss expense ratios for the comparative nine-month periods were as follows:
2007 2006 ------ ------Fleet trucking 55.6% 67.4% Private passenger automobile 65.4 64.7 Small fleet trucking 57.6 69.0 Reinsurance assumed 55.3 39.0 All lines 57.1 64.6Other operating expenses increased $6.8 million (19%(156%) during the firstnine monthsquarter of2007 compared to the same period of 2006. The increase in expenses is due primarily to increased non-affiliated agent commissions on independent contractor business and reinsurance assumed and the fact that the 2006 period included the recovery of $.9 million of previously written off reinsurance bad debts which was recorded as expense offset. The ratio of other operating expenses to total operating revenue (adjusted for investment gains) was 27.6% for 2007 compared to 23.9% for 2006 for the reasons mentioned. The effective federal tax rate for consolidated operations for the first nine months of 2007 was 29.9% 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 $7.9 million (29%) during the first nine months of 20072008 as compared withthe 2006 period. FORWARD-LOOKING INFORMATION2007.Forward-Looking Information
Any forward-looking statements in this report, including without limitation, statements relating to the
Company'sCompany’s plans, strategies, objectives, expectations, intentions and adequacy of13resources, 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) theCompany'sCompany’s plans, strategies, objectives, expectations and intentions are subject to change at any time at the discretion of the Company; (ii) theCompany'sCompany’s business is highly competitive and the entrance of new competitors into or the expansion of the operations by existing competitors in theCompany'sCompany’s markets and other changes in the market for insurance products could adversely affect theCompany'sCompany’s plans and results of operations; (iii) other risks and uncertainties indicated from time to time in theCompany'sCompany’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 POLICIESReaders are encouraged to review the Company’s annual report for its full statement regarding forward-looking information.Critical Accounting Policies
There have been no changes in the
Company'sCompany’s critical accounting policies as disclosed in the Form 10-K filed for the year ended December 31,2006. CONCENTRATIONS OF CREDIT RISK2007.- 11 -
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, 2007,March 31, 2008, amounts due from reinsurers on paid and unpaid losses, including provisions for incurred but not reported losses, are estimated to total approximately$138$132 million.Included in this total are case basis and estimated IBNR losses of approximately $12.7 million due from Converium Insurance (North America) Inc. and $3.0 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 September 30, 2007 and the Company has no information at this time to indicate that all obligations of these reinsurers will not be met.At
September 30, 2007,March 31, 2008, limited partnership investmentsincludeincludes approximately$49.5$46.2 million consisting of three partnerships which are managed by organizations in which certain of theCompany'sCompany’s directors are officers, directors, general partners or owners. Each of these investmentscontainscontain profit sharing agreements to the affiliated organizations.ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes in our exposure to market risk since the disclosure in our Form 10-K for the year ended December 31, 2007.
ITEM 4. CONTROLS AND PROCEDURES
- -------------------------------(a) The
Corporation'sCorporation’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 theCorporation'sCorporation’s disclosure controls and procedures are effective.(b) There were no significant changes in the
Corporation'sCorporation’s internal control over financial reporting identified in connection with the foregoing evaluation that occurred during theCorporation'sCorporation’s last fiscal quarter that have affected, or are reasonably likely to materially affect, theCorporation'sCorporation’s internal control over financial reporting.- 12 -
PART II
-– OTHER INFORMATIONITEM 5 Other Information
Nothing to 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
-
-------------------- NUMBER AND CAPTION FROM EXHIBIT TABLE OF REGULATION S-K ITEM 601 EXHIBIT NO.13 --------------------------------- ----------- (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 August 6, 2007 regarding its earnings announcement for the second quarter of 2007.15SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
BALDWIN & LYONS, INC.
Date November 8, 2007 By /s/ GARY W. MILLER ------------------------ -------------------------------- Gary W. Miller, Chairman and CEO Date November 8, 2007 By /s/ G. PATRICK CORYDON ------------------------ -------------------------------- G. Patrick Corydon, Senior
Date
May 8, 2008
By /s/ Gary W. Miller
Gary W. Miller, Chairman and CEO
Date
May 8, 2008
By
/s/ G. Patrick Corydon
G. Patrick Corydon,
Executive Vice President – Finance
(Principal Financial and
Accounting Officer)
-
Finance (Principal Financial and Accounting Officer)1614 -BALDWIN & LYONS, INC.
Form 10-Q for the fiscal quarter
ended
September 30, 2007March 31, 2008INDEX TO EXHIBITS
BEGINS ON SEQUENTIAL PAGE NUMBER OF FORM EXHIBIT NUMBER 10-Q -------------- ----------------------------- EXHIBIT 11 Filed herewith electronically Computation of per share earnings EXHIBIT 31.1 Filed herewith electronically Certification of CEO pursuant to Section 302 of the Sarbanes-Oxley Act EXHIBIT 31.2 Filed herewith electronically Certification of CFO pursuant to Section 302 of the Sarbanes-Oxley Act EXHIBIT 32.1 Filed 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 Filed herewith electronically Certification of CFO pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
Begins on sequential |
page number of Form |
Exhibit Number | 10-Q |
EXHIBIT 11 | Submitted electronically herewith | ||
Computation of per share earnings | |||
EXHIBIT 31.1 | Submitted electronically herewith | ||
Certification of CEO | |||
pursuant to Section 302 of the | |||
Sarbanes-Oxley Act | |||
EXHIBIT 31.2 | Submitted electronically herewith | ||
Certification of CFO | |||
pursuant to Section 302 of the | |||
Sarbanes-Oxley Act | |||
EXHIBIT 32.1 | Submitted electronically herewith | ||
Certification of CEO | |||
pursuant to 18 U.S.C. 1350, | |||
as adopted pursuant to Section | |||
906 of the Sarbanes-Oxley Act | |||
EXHIBIT 32.2 | Submitted electronically herewith | ||
Certification of CEO | |||
pursuant to 18 U.S.C. 1350, | |||
as adopted pursuant to Section | |||
906 of the Sarbanes-Oxley Act |
- 15 -