SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.  20549

Form 10-Q

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

For Quarter Ended
JuneSeptember 30, 2009
Commission file number
0-5534

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

INDIANA
(State or other jurisdiction of
 Incorporation or organization
35-0160330
(I.R.S. Employer
Identification Number)
 
1099 N. Meridian Street, Indianapolis, Indiana
(Address of principal executive offices)
 
46204
(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   ü      No___

 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes   ü      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  ü 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 ____    No  ü

Indicate the number of shares outstanding of each of the issuer's classes of common stock as of August 1,November 2, 2009:
 
TITLE OF CLASSNUMBER OF SHARES OUTSTANDING
Common Stock, No Par Value: 
 Class A (voting)2,623,109 
 Class B (nonvoting)12,109,878 

Index to Exhibits located on page 23.25.

 
- 1 - -
 

PART I – FINANCIAL INFORMATION

ITEM 1  FINANCIAL STATEMENTS

Baldwin & Lyons, Inc. and Subsidiaries
      
Consolidated Balance Sheets      
       
(in thousands, except per share data)      
       
  (Unaudited)    
  June 30  December 31 
  2009  2008 
Assets      
Investments:      
   Fixed maturities $359,207  $379,261 
   Equity securities  67,891   63,200 
   Limited partnerships  57,790   44,883 
   Short-term  18,969   33,820 
   503,857   521,164 
Cash and cash equivalents  39,820   16,657 
Accounts receivable  29,450   29,701 
Reinsurance recoverable  148,739   159,989 
Notes receivable from employees  2,145   2,199 
Deferred federal income taxes  3,984   10,590 
Other assets  37,747   37,443 
  $765,742  $777,743 
         
Liabilities and shareholders' equity        
Reserves for losses and loss expenses $349,575  $389,558 
Reserves for unearned premiums  20,274   17,183 
Short term borrowings  9,000   9,000 
Accounts payable and accrued expenses  39,270   29,938 
Current federal income taxes  1,770   1,997 
   419,889   447,676 
Shareholders' equity:        
   Common stock-no par value  629   631 
   Additional paid-in capital  46,117   46,312 
   Unrealized net gains on investments  23,613   19,410 
   Retained earnings  275,494   263,714 
   345,853   330,067 
  $765,742  $777,743 


See notes to condensed consolidated financial statements.
2
Baldwin & Lyons, Inc. and Subsidiaries            
Unaudited Consolidated Statements of Income            
             
(in thousands, except per share data)            
             
  Three Months Ended  Six Months Ended 
  June 30  June 30 
  2009  2008  2009  2008 
Revenues            
Net premiums earned $41,042  $46,902  $85,206  $91,990 
Net investment income  3,478   4,195   6,737   8,395 
Commissions and other income  1,556   1,113   3,125   2,413 
Net realized gains (losses) on investments, excluding                
impairment losses  14,464   (2,503)  13,899   (16,062)
Total other-than-temporary impairment losses on investments  (1,970)  (457)  (2,637)  (473)
Net realized gains (losses) on investments  12,494   (2,960)  11,262   (16,535)
   58,570   49,250   106,330   86,263 
Expenses                
Losses and loss expenses incurred  22,087   26,462   45,975   55,923 
Other operating expenses  16,052   14,245   32,968   29,885 
   38,139   40,707   78,943   85,808 
Income before federal income taxes  20,431   8,543   27,387   455 
Federal income taxes (benefits)  6,306   2,236   7,821   (1,244)
Net income $14,125  $6,307  $19,566  $1,699 
                 
Per share data:                
Basic and diluted earnings $.96  $.41  $1.33  $.11 
                 
    Dividends paid to shareholders $.25  $.25  $.50  $.50 
                 
Reconciliation of shares outstanding:                
   Average shares outstanding - basic and diluted  14,733   15,189   14,750   15,215 


Baldwin & Lyons, Inc. and Subsidiaries
      
Consolidated Balance Sheets      
       
(in thousands, except per share data)      
       
  (Unaudited)    
  September 30  December 31 
  2009  2008 
Assets      
Investments:      
   Fixed maturities $385,837  $379,261 
   Equity securities  80,753   63,200 
   Limited partnerships  67,680   44,883 
   Short-term  5,042   33,820 
   539,312   521,164 
Cash and cash equivalents  53,144   16,657 
Accounts receivable  30,043   29,701 
Reinsurance recoverable  145,912   159,989 
Notes receivable from employees  2,029   2,199 
Deferred federal income taxes  -   10,590 
Other assets  44,290   37,443 
  $814,730  $777,743 
         
Liabilities and shareholders' equity        
Reserves for losses and loss expenses $351,269  $389,558 
Reserves for unearned premiums  22,728   17,183 
Short term borrowings  9,000   9,000 
Accounts payable and accrued expenses  60,579   29,938 
Current federal income taxes  3,208   1,997 
Deferred federal income taxes  3,566   - 
   450,350   447,676 
Shareholders' equity:        
   Common stock-no par value:        
   Class A voting -- authorized 3,000,000 shares;        
      outstanding -- 2009, 2,623,109; 2008, 2,623,109  112   112 
   Class B non-voting -- authorized 20,000,000 shares;        
      outstanding -- 2009, 12,109,878; 2008, 12,163,251  517   519 
   Additional paid-in capital  46,227   46,312 
   Unrealized net gains on investments  30,820   19,410 
   Retained earnings  286,704   263,714 
   364,380   330,067 
  $814,730  $777,743 


See notes to condensed consolidated financial statements.

 
3- 2 - -
 


Baldwin & Lyons, Inc. and Subsidiaries      
Unaudited Consolidated Statements of Cash Flows      
       
(dollars in thousands)      
       
  Six Months Ended 
  June 30 
  2009  2008 
       
Net cash used in operating activities $(5,270) $(9,750)
Investing activities:        
   Purchases of long-term investments  (56,653)  (235,147)
   Proceeds from sales or maturities        
       or long-term investments  80,181   198,640 
   Net sales of short-term investments  14,852   28,310 
   Other investing activities  (1,690)  2 
Net cash provided by (used in) investing activities  36,690   (8,195)
Financing activities:        
   Dividends paid to shareholders  (7,377)  (7,610)
   Drawings on line of credit  -   5,000 
   Drawings on margin account  -   15,526 
   Cost of treasury stock  (880)  (4,227)
Net cash provided by (used in) financing activities  (8,257)  8,689 
       Increase (decrease) in cash and cash equivalents  23,163   (9,256)
Cash and cash equivalents at beginning of period  16,657   82,137 
   Cash and cash equivalents at end of period $39,820  $72,881 
Baldwin & Lyons, Inc. and Subsidiaries            
Unaudited Consolidated Statements of Operations            
             
(in thousands, except per share data)            
             
  Three Months Ended  Nine Months Ended 
  September 30  September 30 
  2009  2008  2009  2008 
Revenues            
Net premiums earned $45,077  $43,579  $130,283  $135,569 
Net investment income  3,256   4,372   9,993   12,767 
Commissions and other income  1,722   1,019   4,847   3,432 
Net realized gains (losses) on investments, excluding                
impairment losses  15,460   (8,388)  29,359   (24,450)
Total other-than-temporary impairment losses on investments  (19)  (7,577)  (2,656)  (8,050)
Net realized gains (losses) on investments  15,441   (15,965)  26,703   (32,500)
   65,496   33,005   171,826   119,268 
Expenses                
Losses and loss expenses incurred  26,714   30,427   72,689   86,350 
Other operating expenses  17,635   15,080   50,603   44,965 
   44,349   45,507   123,292   131,315 
Income (loss) before federal income taxes  21,147   (12,502)  48,534   (12,047)
Federal income taxes (benefits)  6,807   (5,232)  14,628   (6,476)
Net income (loss) $14,340  $(7,270) $33,906  $(5,571)
                 
Per share data:                
Basic and diluted earnings $.97  $(.48) $2.30  $(.37)
                 
    Dividends paid to shareholders $.25  $.25  $.75  $.75 
                 
Reconciliation of shares outstanding:                
   Average shares outstanding - basic  14,733   15,012   14,744   15,147 
   Dilutive effect of options outstanding  1   -   -   - 
   Average shares outstanding - diluted  14,734   15,012   14,744   15,147 


See notes to condensed consolidated financial statements.

 
- 3 - -
Baldwin & Lyons, Inc. and Subsidiaries      
Unaudited Consolidated Statements of Cash Flows      
       
(dollars in thousands)      
       
  Nine Months Ended 
  September 30 
  2009  2008 
Net cash provided by (used in) operating activities $14,649  $(217)
Investing activities:        
   Purchases of long-term investments  (173,671)  (238,250)
   Proceeds from sales or maturities        
       of long-term investments  181,291   212,547 
   Net sales of short-term investments  28,779   2,679 
   Other investing activities  (2,620)  (829)
Net cash provided by (used in) investing activities  33,779   (23,853)
Financing activities:        
   Dividends paid to shareholders  (11,061)  (11,369)
   Drawings on line of credit  -   5,000 
   Drawings on margin account  -   2,334 
   Cost of treasury stock  (880)  (6,040)
Net cash used in financing activities  (11,941)  (10,075)
       Increase (decrease) in cash and cash equivalents  36,487   (34,145)
Cash and cash equivalents at beginning of period  16,657   82,137 
   Cash and cash equivalents at end of period $53,144  $47,992 


See notes to condensed consolidated financial statements.

- 4 - -
 

Notes to Condensed Unaudited Consolidated Financial Statements
(dollars in thousands, except per share data)

(1) Summary of Significant Accounting Policies:
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, 2009.  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.

Subsequent Events:In MayJune 2009, the Financial Accounting Standards Board, or FASB, issued Statementestablished the FASB Accounting Standards Codification, or Codification, as the source of Financial Accounting Statements,authoritative GAAP recognized by the FASB in the preparation of financial statements. Rules and interpretive releases of the U.S. Securities and Exchange Commission, or FAS, No. 165, SEC, under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants.  The Codification became effective for the Company on September 30, 2009, and supersedes all then-existing non-SEC accounting and reporting standards. All other non-grandfathered non-SEC accounting literature not included in the Codification became non-authoritative. The Codification does not change or alter existing GAAP and, therefore, the adoption of the Codification did not have a material impact on our consolidated financial position and results of operations.

Subsequent Events: In May 2009, the FASB issued disclosure guidance on subsequent events, or FASB Subsequent Events.  FAS 165 guidance.  FASB Subsequent Events guidance establishes standards of accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued. Entities are required to disclose the date through which subsequent events have been evaluated and the basis for that date.  FAS 165 is effective on a prospective basis for interim and annual periods ending after June 15, 2009.  The Company adopted FAS 165FASB Subsequent Events guidance on June 30, 2009.   See Note (12) for disclosures related to FAS 165.FASB Subsequent Events guidance.

 
Investments:  Carrying amounts for fixed maturity securities represent fair value and are based on quoted market prices, where available, or broker/dealer quotes for specific securities where quoted market prices are not available.  Equity securities are carried at quoted market prices (fair value).  LimitedThe Company accounts for investments in limited partnerships are accounted for using the equity method withof accounting, which requires an investor in a limited partnership to record its proportionate share of the corresponding change in value recorded as a component oflimited partnership’s net income.  To the extent that the limited partnership investees include both realized and unrealized investment gains or losses on investments.  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.
Other investments, if any, are carried at either market value or cost, depending on the nature of the investment.  Short-term investments are carried at cost which approximates their fair values.

- 5 - -

Notes to Condensed Unaudited Consolidated Financial Statements (continued)

Realized gains and losses on disposals of investments are determined by specific identification of cost of investments sold and are included in income.  All fixed maturity and equity securities are considered to be available for sale; the related unrealized net gains or losses (net of applicable tax effect) are reflected directly in shareholders’ equity.

In April 2009, the FASB issued guidance on the recognition and presentation of other-than-temporary impairments, or FASB Staff Position, or FSP, No. FAS 115-2 and FAS 124-2, Recognition and Presentation of Other-Than-Temporary Impairments, or the FSP.OTTI guidance.  The FSPFASB OTTI guidance applies to fixed maturity securities only and provides new guidance on the recognition and presentation of other-than-temporary impairments.  In addition, the FSPFASB OTTI guidance requires additional disclosures related to other-than-temporary impairments.   Under this revised guidance, if a fixed maturity security is in an unrealized loss position and the Company has the intent to sell the fixed maturity security, or it is more likely than not that the Company will have to sell the fixed maturity security before recovery of its amortized cost basis, the decline in value is deemed to be other-than-temporary and is recorded to net realized losses on investments in the consolidated statements of income.operations.   For impaired fixed maturity securities that the Company does not intend to sell or it is more likely than not that the Company will not have to sell such securities,

5

Notes to Condensed Unaudited Consolidated Financial Statements (continued)

but the Company expects that it will not fully recover the amortized cost basis, the credit component of the other-than-temporary impairment is recognized in net realized losses on investments in the consolidated statements of incomeoperations and the non-credit component of the other-than-temporary impairment is recognized directly in shareholder’s equity (other(accumulated other comprehensive income).

The credit component of an other-than-temporary impairment is determined by comparing the net present value of projected future cash flows with the amortized cost basis of the fixed maturity security.  The net present value is calculated by discounting the Company’s best estimate of projected future cash flows at the effective interest rate implicit in the fixed maturity security at the date of acquisition.  For mortgage-backed and asset-backed securities, cash flow estimates are based on assumptions regarding the underlying collateral including prepayment speeds, vintage, type of underlying asset, geographic concentrations, default rates, recoveries and changes in value. For all other debt securities, cash flow estimates are driven by assumptions regarding probability of default, including changes in credit ratings, and estimates regarding timing and amount of recoveries associated with a default.  Furthermore, unrealized losses caused by non-credit related factors related to fixed maturity securities for which the Company expects to fully recover the amortized cost basis continue to be recognized in accumulated other comprehensive income.  Upon adoption of the FSPFASB OTTI guidance on April 1, 2009, the Company wascompanies were required to record a cumulative-effect adjustment to reclassify, for fixed maturity securities previously impaired but still held, the non-credit component of previously recognized other-than-temporary impairments from retained earnings to accumulated other comprehensive income.  Since no previously impaired fixed maturity securities were held at April 1, 2009, no cumulative effect adjustment was required.

- 6 - -
Notes to Condensed Unaudited Consolidated Financial Statements (continued)

The unrealized net gains or losses (net of applicable tax effect) related to equity securities are reflected directly in shareholders’ equity, unless a decline in value is determined to be other-than-temporary, in which case the loss is charged to income.  In determining if and when a decline in market value below cost is other-than-temporary, an objective analysis is made of each individual security where current market value is less than cost.   For any equity security where the unrealized loss exceeds 20% of original or adjusted cost, and where that decline has existed for a period of at least six months, the decline is treated as an other-than-temporary impairment, without subjectivesubject to an evaluation as to possible future recovery.  Additionally, the Company takes into account any known subjective information in evaluating for impairment without consideration to the Company’s 20% threshold.quantitative criteria defined above.

The Company accounts for investments in limited partnerships usingReclassification:  Certain prior period balances have been reclassified to conform to 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.current period presentation.

 
6- 7 - -
 

Notes to Condensed Unaudited Consolidated Financial Statements (continued)

(2) Investments:

The following is a summary of investments at JuneSeptember 30, 2009 and December 31, 2008:



             Net              Net 
    Cost or  Gross  Gross  Unrealized     Cost or  Gross  Gross  Unrealized 
 Fair  Amortized  Unrealized  Unrealized  Gains  Fair  Amortized  Unrealized  Unrealized  Gains 
 Value  Cost  Gains  Losses  (Losses)  Value  Cost  Gains  Losses  (Losses) 
June 30, 2009:               
September 30, 2009:               
U.S. government obligations $23,441  $23,294  $159  $(12) $147  $58,568  $58,378  $192  $(2) $190 
Government sponsored entities  4,629   4,529   100   -   100   4,014   3,927   89   (2)  87 
Mortgage-backed securities  9,942   9,674   275   (7)  268   39,637   39,086   688   (137)  551 
Obligations of states and                                        
political subdivisions  252,860   247,768   5,257   (165)  5,092   216,207   211,202   5,110   (105)  5,005 
Corporate securities  61,284   59,042   2,860   (618)  2,242   59,835   58,257   1,810   (232)  1,578 
Foreign government obligations  7,051   7,021   30   -   30   7,576   7,534   42   -   42 
Total fixed maturities  359,207   351,328   8,681   (802)  7,879   385,837   378,384   7,931   (478)  7,453 
Equity securities  67,891   39,444   30,254   (1,807)  28,447   80,753   40,790   40,802   (839)  39,963 
Limited partnerships  57,790   57,790   -   -   -   67,680   67,680   -   -   - 
Short-term  18,969   18,969   -   -   -   5,042   5,042   -   -   - 
Total available-for-sale securities $503,857  $467,531  $38,935  $(2,609)  36,326  $539,312  $491,896  $48,733  $(1,317)  47,416 
                                        
     Applicable federal income taxes   (12,713) Applicable federal income taxes   (16,596)
                                        
     Net unrealized gains - net of tax  $23,613  Net unrealized gains - net of tax  $30,820 
                                        
December 31, 2008:                                        
U.S. government obligations $21,888  $21,513  $375  $-  $375  $21,888  $21,513  $375  $-  $375 
Government sponsored entities  4,672   4,537   135   -   135   4,672   4,537   135   -   135 
Mortgage-backed securities  13,490   13,813   157   (480)  (323)  13,490   13,813   157   (480)  (323)
Obligations of states and                                        
political subdivisions  267,152   263,026   5,132   (1,006)  4,126   267,152   263,026   5,132   (1,006)  4,126 
Corporate securities  66,084   63,774   3,520   (1,210)  2,310   66,084   63,774   3,520   (1,210)  2,310 
Foreign government obligations  5,975   5,867   108   -   108   5,975   5,867   108   -   108 
Total fixed maturities  379,261   372,530   9,427   (2,696)  6,731   379,261   372,530   9,427   (2,696)  6,731 
Equity securities  63,200   40,071   27,415   (4,286)  23,129   63,200   40,071   27,415   (4,286)  23,129 
Limited partnerships  44,883   44,883   -   -   -   44,883   44,883   -   -   - 
Short-term  33,820   33,820   -   -   -   33,820   33,820   -   -   - 
Total available-for-sale securities $521,164  $491,304  $36,842  $(6,982)  29,860  $521,164  $491,304  $36,842  $(6,982)  29,860 
                                        
     Applicable federal income taxes   (10,450) Applicable federal income taxes   (10,450)
                                        
     Net unrealized gains - net of tax  $19,410  Net unrealized gains - net of tax  $19,410 


The Company has no other-than-temporarily impaired fixed maturity securities at JuneSeptember 30, 2009.  Additionally, the Company had no other-than-temporary impairment losses relating to fixed maturity securities recognized in accumulated other comprehensive income during the three and sixnine months ended JuneSeptember 30, 2009 and JuneSeptember 30, 2008, respectively.

 
7- 8 - -
 

Notes to Condensed Unaudited Consolidated Financial Statements (continued)

The following table summarizes, for fixed maturity and equity security investments in an unrealized loss position at JuneSeptember 30, 2009 and December 31, 2008, respectively, the aggregate fair value and gross unrealized loss categorized by the duration those securities have been continuously in an unrealized loss position.


 June 30, 2009  December 31, 2008  September 30, 2009  December 31, 2008 
 Number of Securities  Fair Value  Gross Unrealized Loss  Number of Securities  Fair Value  Gross Unrealized Loss  Number of Securities  Fair Value  Gross Unrealized Loss  Number of Securities  Fair Value  Gross Unrealized Loss 
Fixed maturity securities:                                    
12 months of less  17  $21,830  $(236)  47  $80,993  $(2,675)
12 months or less  59  $29,333  $(258)  47  $80,993  $(2,675)
Greater than 12 months  11   6,200   (566)  6   1,812   (21)  6   10,673   (220)  6   1,812   (21)
Total fixed maturities  28   28,030   (802)  53   82,805   (2,696)  65   40,006   (478)  53   82,805   (2,696)
Equity securities:                                                
12 months of less  23   6,688   (935)  33   11,362   (3,085)
12 months or less  14   4,064   (416)  33   11,362   (3,085)
Greater than 12 months  16   8,773   (872)  14   5,845   (1,201)  6   2,310   (423)  14   5,845   (1,201)
Total equity securities  39   15,461   (1,807)  47   17,207   (4,286)  20   6,374   (839)  47   17,207   (4,286)
Total fixed maturity and equity securities  67  $43,491  $(2,609)  100  $100,012  $(6,982)  85  $46,380  $(1,317)  100  $100,012  $(6,982)
                                                

 
The fair value and the cost or amortized cost of fixed maturity investments, at JuneSeptember 30, 2009, by contractual maturity, are shown below.  Actual maturities may differ from contractual maturities because borrowers have, in some cases, the right to call or prepay obligations with or without call or prepayment penalties. Pre-refunded municipal bonds are classified based on their pre-refunded call dates.
 Fair Value  Cost or Amortized Cost 
 Fair Value  
 
Cost or Amortized Cost
       
One year or less $150,817  $147,807  $131,246  $130,006 
Excess of one year to five years  162,592   158,508   198,324   193,403 
Excess of five years to ten years  21,443   20,947   7,573   7,036 
Excess of ten years  14,413   14,392   9,057   8,853 
Total maturities  349,265   341,654   346,200   339,298 
Mortgage-backed securities  9,942   9,674   39,637   39,086 
 $359,207  $351,328  $385,837  $378,384 
        



 
8- 9 - -
 

Notes to Condensed Unaudited Consolidated Financial Statements (continued)

Following is a summary of the components of net gains (losses) on investments for the periods presented in the accompanying statements of income.operations.


            
 Three Months Ended  Six Months Ended  Three Months Ended  Nine Months Ended 
 June 30  June 30  September 30  September 30 
 2009  2008  2009  2008  2009  2008  2009  2008 
Fixed maturities:                        
Gross gains $305  $1,127  $1,814  $2,414  $4,666  $9  $6,415  $2,423 
Gross losses  -   (399)  (679)  (862)  (342)  (6,576)  (973)  (7,438)
Net gains (losses)  305   728   1,135   1,552   4,324   (6,567)  5,442   (5,015)
                                
Equity securities:                                
Gross gains  31   2,347   160   4,075   1,463   321   1,078   4,395 
Gross losses  (2,087)  (816)  (3,011)  (3,359)  (264)  (2,842)  (2,713)  (6,201)
Net gains (losses)  (2,056)  1,531   (2,851)  716   1,199   (2,521)  (1,635)  (1,806)
                                
Limited partnerships - net gain (loss)  14,245   (4,741)  12,978   (16,732)  9,918   (6,957)  22,896   (23,688)
                                
Other - net gain (loss)  -   (478)  -   (2,071)  -   80   -   (1,991)
                                
Total net gains (losses) $12,494  $(2,960) $11,262  $(16,535) $15,441  $(15,965) $26,703  $(32,500)


Gain and loss activity for fixed maturity and equity security investments, as shown in the previous table, include adjustments for other-than-temporary impairment as summarized below:

 
  Three Months Ended  Six Months Ended 
  June 30  June 30 
  2009  2008  2009  2008 
Realized net gains (losses) on the disposal of securities $(164) $2,030  $(479) $452 
Equity in earnings (losses) of limited partnership                
  investments - realized and unrealized  14,245   (4,741)  12,978   (16,731)
Impairment:                
  Write-downs based upon objective criteria  (1,970)  (457)  (2,637)  (473)
  Recovery of prior write-downs                
    upon sale or disposal  383   208   1,400   217 
Totals $12,494  $(2,960) $11,262  $(16,535)

 
 
  Three Months Ended  Nine Months Ended 
  September 30  September 30 
  2009  2008  2009  2008 
Realized net gains (losses) on the disposal of securities $1,843  $(1,431) $1,364  $(980)
Equity in earnings (losses) of limited partnership                
  investments - realized and unrealized  9,918   (6,957)  22,896   (23,688)
Impairment:                
  Write-downs based upon objective criteria  (19)  (7,577)  (2,656)  (8,050)
  Recovery of prior write-downs                
    upon sale or disposal  3,699   -   5,099   218 
Totals $15,441  $(15,965) $26,703  $(32,500)

 
9- 10 - -
 

Notes to Condensed Unaudited Consolidated Financial Statements (continued)

The net income from limited partnerships for the quarter and year-to-date ending JuneSeptember 30, 2009 include an estimated $13,507$9,957 and $9,295,$19,253, respectively, of unrealized gains reported to the Company as part of the operations of the various limited partnerships.  Shareholders’ equity at JuneSeptember 30, 2009 includes approximately $16,213,$22,210, net of deferred federal income taxes, of earnings undistributed by limited partnerships.

 (3) Reinsurance:
The following table summarizes the Company’s transactions with reinsurers for the 2009 and 2008 comparative periods.
 

  2009  2008 
Three months ended September 30:      
   Premiums ceded to reinsurers $16,305  $11,088 
   Losses and loss expenses        
      ceded to reinsurers  3,382   23,730 
   Commissions from reinsurers  1,422   814 
         
Nine months ended September 30:        
   Premiums ceded to reinsurers  42,666   30,353 
   Losses and loss expenses        
      ceded to reinsurers  8,298   46,744 
   Commissions from reinsurers  3,602   2,262 

 


  2009  2008 
Quarter ended June 30:      
Premiums ceded to reinsurers $14,408  $10,087 
Losses and loss expenses ceded to reinsurers  (4,460)  22,843 
Commissions from reinsurers  1,327   804 
         
Six months ended June 30:        
Premiums ceded to reinsurers  26,361   19,265 
Losses and loss expenses ceded to reinsurers  4,916   23,014 
Commissions from reinsurers  2,180   1,448 

(4) Comprehensive Income or Loss:
Net comprehensive income for the quarter ended JuneSeptember 30, 2009 was $23,888 and compares to net comprehensive income of $1,120 for the quarter ended June 30, 2008.  For the first six months ended June 30, 2009, net comprehensive income was $24,402$22,101 and compares to net comprehensive loss of $6,478$12,982 for the sixquarter ended September 30, 2008.  For the first nine months ended JuneSeptember 30, 2009, net comprehensive income was $46,143 and compares to net comprehensive loss of $19,460 for the nine months ended September 30, 2008.

(5) Reportable Segments:
The Company has two reportable business segments in its operations:  Property and Casualty Insurance and Property Reinsurance.  The Property and Casualty Insurance segment provides multiple line insurance coverage primarily to fleet transportation companies as well as to independent contractors who contract with fleet transportation companies.  In addition, private passenger automobile products are provided to individuals.  The Property Reinsurance segment accepts cessions from other insurance companies as well as retrocessions from selected reinsurance companies, principally reinsuring against catastrophes.


 
10- 11 - -
 

Notes to Condensed Unaudited Consolidated Financial Statements (continued)

The following table provides certain revenue and profit and loss information for each reportable segment.  All amounts presented are computed based upon U.S. generally accepted accounting principles.  Segment profit for Property and Casualty Insurance includes the direct marketing agency operations conducted by the parent company for this segment and is computed after elimination of inter-company commissions.

                   
  2009  2008 
  Direct and Assumed Premium Written  Net Premium Earned  Segment Profit  Direct and Assumed Premium Written  Net Premium Earned  Segment Profit (Loss) 
                   
Three months ended September 30:                  
Property and Casualty Insurance $54,507  $35,804  $5,826  $43,803  $35,056  $4,345 
Property Reinsurance  9,327   9,273   415   10,584   8,523   (1,980)
                         
Totals $63,834  $45,077  $6,241  $54,387  $43,579  $2,365 
                         
Nine months ended September 30:                        
Property and Casualty Insurance $149,023  $101,525  $15,300  $137,669  $110,436  $13,109 
Property Reinsurance  29,467   28,758   7,659   27,922   25,133   4,321 
                         
Totals $178,490  $130,283  $22,959  $165,591  $135,569  $17,430 

                   
  2009  2008 
  Direct and Assumed Premium Written  Net Premium Earned  Segment Profit  Direct and Assumed Premium Written  Net Premium Earned  Segment Profit 
Three months ended June 30:                  
                   
Property and Casualty Insurance $45,280  $30,745  $3,973  $45,998  $38,103  $7,737 
Property Reinsurance  10,301   10,297   3,969   9,952   8,799   2,555 
                         
Totals $55,581  $41,042  $7,942  $55,950  $46,902  $10,292 
                         
Six months ended June 30:                        
                         
Property and Casualty Insurance $94,516  $65,721  $9,473  $93,866  $75,380  $8,765 
Property Reinsurance  20,140   19,485   7,244   17,338   16,610   6,301 
                         
Totals $114,656  $85,206  $16,717  $111,204  $91,990  $15,066 


The following table reconciles reportable segment profit to the Company’s consolidated income before federal income taxes, respectively.

 Three Months Ended  Six Months Ended  Three Months Ended  Nine Months Ended 
 June 30  June 30  September 30  September 30 
 2009  2008  2009  2008  2009  2008  2009  2008 
Profit:                        
Segment profit $7,942  $10,292  $16,717  $15,066  $6,241  $2,365  $22,959  $17,430 
Net investment income  3,478   4,195   6,737   8,395   3,256   4,372   9,993   12,767 
Net gains (losses) on investments  12,494   (2,960)  11,262   (16,535)  15,441   (15,965)  26,703   (32,500)
Corporate expenses  (3,483)  (2,984)  (7,329)  (6,471)  (3,791)  (3,274)  (11,121)  (9,744)
Income before federal income taxes $20,431  $8,543  $27,387  $455 
Income (loss) before federal income taxes $21,147  $(12,502) $48,534  $(12,047)

Segment profit includes both net premiums earned and fees and other income.

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.

(6) Shareholders’ Equity:
During the first sixnine months of 2009, the Company purchased 53,373 shares of the Company’s Class B common stock in the open market for $880 ($16.48 average price per share).


11- 12 - -

Notes to Condensed Unaudited Consolidated Financial Statements (continued)

(7) Loans to Employees:
From 2000 through 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.  Principal and interest totaling $2,145$2,029 relating to such loans remains outstanding at JuneSeptember 30, 2009 and carry interest rates of between 4.75% and 6%, payable annually on the loan anniversary date.  The underlying securities serve as collateral for these loans, which must be repaid no later than 10 years from the date of issue. No additional loans will be made under this program.

(8) Debt:
The Company has $9,000 outstanding as of both JuneSeptember 30, 2009 and December 31, 2008, under the Company’s revolving line of credit at variable interest rates detailed below.  The Company has $11,000 remaining unused under the revolving line of credit.  The $9,000 of borrowings was used principally for treasury stock repurchases.

DescriptionMaturity June 30, 2009  December 31, 2008  Interest Rate  Maturity September 30, 2009  December 31, 2008  Interest Rate
                     
Revolving line of creditJune 23, 2011 $5,000,000  $5,000,000   .82% June 23, 2011 $5,000  $5,000   .75%
Revolving line of creditJune 23, 2011  4,000,000   4,000,000   4.03% June 23, 2011  4,000   4,000   1.57%
Total Debt  $9,000,000  $9,000,000        $9,000 ��$9,000     
                           

(9) Taxes:
As of JuneSeptember 30, 2009, the Company’s 2005 and subsequent tax years remain subject to examination by the IRS.  The effective rate differs from the normal statutory rate primarily as a result of tax-exempt investment income.

(10) Fair Value:
In September 2006, the FASB issued FAS 157, guidance on Fair Value Measurements, (“SFAS No. 157”), which or FASB Fair Value Measurements guidance.  FASB Fair Value Measurements guidance provides a common definition of fair value and establishes a framework to make the measurement of fair value more consistent and comparable.  SFAS No. 157FASB Fair Value Measurements 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.  The Company adopted SFAS 157,FASB Fair Value Measurements, effective January 1, 2008 for financial assets and liabilities.  The adoption of the provisions related to certain non-financial assets and liabilities had no impact on the financial position or results of operations at January 1, 2009.   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 JuneSeptember 30, 2009 for assets measured at fair value on a recurring basis:


12- 13 - -

Notes to Condensed Unaudited Consolidated Financial Statements (continued)


Description Total  Level 1  Level 2  Level 3  Total  Level 1  Level 2  Level 3 
Fixed maturities $359,207  $-  $359,207  $-  $385,837  $-  $385,837  $- 
Equity securities  67,891   67,891   -   -   80,753   80,753   -   - 
Short term  18,969   3,440   15,529   -   5,042   3,511   1,531   - 
Cash equivalents  44,623   -   44,623   -   56,820   -   56,820   - 
 $490,690  $71,331  $419,359  $-  $528,452  $84,264  $444,188  $- 


Level inputs, as defined by SFAS No. 157,FASB Fair Value Measurements, are as follows:


Level Input:  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.

In April 2009, the FASB issued FSP No. FAS 157-4, Determining Fair Value Whenguidance on determining fair value when the Volumevolume and Levellevel of Activityactivity for the Assetasset or Liability Have Significantly Decreasedliability have significantly decreased and Identifying Transactions That Are Not Orderly, or FSP 157-4.  FSP 157-4identifying transactions that are not orderly.  The FASB guidance provides additional authoritative guidance to assist both issuers and users of financial statements in determining whether a market is active or inactive, and whether a transaction is distressed.  The FSPFASB guidance was effective for us for the quarter ended June 30, 2009.  The adoption of FSP 157-4the FASB guidance did not have a material impact on the Company’s consolidated financial position and results of operations.

In April 2009, the FASB issued FSP No. FAS 107-1 and APB 28-1, Interim Disclosuresguidance on interim disclosures about Fair Valuefair value of Financial Instruments, or FSP 107-1 and APB 28-1.   FSP 107-1 and APB 28-1financial instruments.   The FASB guidance requires disclosures about fair value of financial instruments for interim reporting periods of publicly traded companies as well as in annual financial statements.  FSP 107-1 and APB 28-1The FASB guidance was effective for us for the quarter ended June 30, 2009.  The adoption of FSP 107-1 and APB 28-1the FASB guidance did not have an impact on the Company’s consolidated financial position and results of operations.




 
13- 14 - -
 

Notes to Condensed Unaudited Consolidated Financial Statements (continued)

We attempt to obtain quoted market prices for these disclosures whenever possible.  Where quoted market prices are not available, fair values are estimated using present value or other valuation techniques.  These techniques are significantly affected by our assumptions, including discount rates and estimates of future cash flows.  Potential taxes and other transaction costs have not been considered in estimating fair values.

Non-financial instruments such as real estate, property and equipment, other current assets, deferred income taxes and intangible assets, and certain financial instruments such as policy reserve liabilities are excluded from the fair value disclosures.  Therefore, the fair value amounts cannot be aggregated to determine the underlying economic value to the Company.

The carrying amounts reported in the consolidated balance sheets for cash, accounts receivables, reinsurance recoverable, notes receivable, accounts payable and accrued expenses, income taxes payable, short term borrowings and unearned income approximate fair value because of the short term nature of these items.

 
(11) Restricted Stock Units:
Effective June 11, 2009, the Company issued 20,900 restricted stock units to the Company’s outside directors.  The restricted stock units will be paid solely in the Company’s class B stock.  The restricted stock units represent the annual retainer compensation for the outside directors.  The restricted stock units will vest on May 5, 2010.  Vesting will be accelerated only on the condition of death, disability, or change in control of the Company.  Each restricted stock unit is valued at $21.05 per share representing a total value of $440,000.$440.  Compensation expense related to the above stock grant is to be recognized over the period in which the directors render the services which will also coincide with the vesting period.   The 20,900 restricted stock units are antidilutive and are not included in the dilutive earnings per share.   The new directors’ stock plan will be presented to shareholders for approval at the May 2010 annual shareholders meeting.

(12) Subsequent Events:
We have evaluated subsequent events for recognition or disclosure through the time of filing these consolidated financial statements on Form 10-Q with the U.S. Securities and Exchange Commission on August 5,November 4, 2009. No events have occurred during this period which requirerequires disclosure or accrual in this document.

 
14- 15 - -
 

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. For the first sixnine months of 2009, the Company experienced negativepositive cash flow from operations totaling $5.3$14.6 million which compares to negative cash flow from operations of $9.7$.2 million generated during the first sixnine months of 2008.  The $4.4$14.8 million improvement in cash flow from the 2008 period is primarily due to higher gross premiums received, the timing of reinsurance payable payments and the timing of tax payments.  These increases were partially offset by an $8.3a $4.2 million increase in loss payments related to the settlement of several large claims during the 2009 period.

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 2.33.6 years at JuneSeptember 30, 2009, which is substantially shorter than the Company’s liability duration.

Financing activity for the first sixnine months of 2009 included regular dividend payments of $7.4$11.1 million ($.50.75 per share), and the purchase of $.9 million of the Company’s common stock on the open market under the Company’s previously announced stock repurchase program.

The Company’s assets at JuneSeptember 30, 2009 included $44.6$56.8 million in investments classified as cash equivalents that were readily convertible to cash without significant market penalty.  An additional $214.9$206.1 million of fixed maturity investments will mature within the twelve-month period following JuneSeptember 30, 2009.   The Company believes that these liquid investments are more than sufficient to provide for projected claim payments and operating cost demands.

Consolidated shareholders’ equity is composed largely of GAAP shareholders’ 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, 2009, $41.4$39.0 million may be transferred by dividend or loan to the parent company during the remainder of 2009 without approval by, or prior notification to, regulatory authorities.  An additional $223.8$242.8 million of shareholder’s equity of the insurance subsidiaries could, theoretically, be advanced or loaned to the parent holding company 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

 
15- 16 - -
 

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 $3.8$5.0 million at JuneSeptember 30, 2009.

The Company’s annualized premium writing to surplus ratio for the first sixnine months of 2009 was approximately 40%43%.  Regulatory guidelines generally allow for writings of at least 100% 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, 2009 to SecondThird Quarter, 2008

Net premiums earned during the secondthird quarter of 2009 decreased $5.9increased $1.5 million (12.5%(3.4%) as compared to the same period of 2008.  The Company’s Property and Casualty Insurance and Property Reinsurance segments reported decreasesincreases of 19.3%2.1% and increases of 17.0%8.8%, respectively.  These changes are in line with expectations and result from the continuing expansion of Property Reinsurance activities and continued highly competitive market conditions and increased utilization of reinsurance for productsnew marketing efforts in the Property and Casualty Insurance segment.   The following table provides information regarding premiums written and earned for major product lines for the quarter ended June 30:September 30 (dollars in thousands):

 2009  2009 
 Direct and Assumed Premium Written  Net Premium Written  Net Premium Earned  
Direct and Assumed
Premium Written
  Net Premium Written  Net Premium Earned 
Property and Casualty Insurance                  
Fleet Transportation $35,359  $23,569  $24,195  $40,791  $28,223  $28,716 
Private Passenger Automobile  5,243   5,168   5,788   6,406  ��6,327   5,971 
Residual Market and All Other  4,678   2,164   762   7,310   3,706   1,117 
  45,280   30,901   30,745   54,507   38,256   35,804 
Property Reinsurance  10,301   10,273   10,297   9,327   9,272   9,273 
Totals $55,581  $41,174  $41,042  $63,834  $47,528  $45,077 
                        
 2008   2008 
Property and Casualty Insurance                        
Fleet Transportation $41,268  $30,897  $31,902  $39,461  $28,160  $29,705 
Private Passenger Automobile  3,847   3,761   5,547   4,140   4,033   5,133 
Residual Market and All Other  883   887   654   202   201   218 
  45,998   35,545   38,103   43,803   32,394   35,056 
Property Reinsurance  9,952   8,789   8,799   10,584   8,523   8,523 
Totals
 $55,950  $44,334  $46,902  $54,387  $40,917  $43,579 
            


- 17 - -
Premium ceded to reinsurers on insurance business writtenproduced by the Property and Casualty Insurance segment averaged 26.4%24.8% of premium productionearned for the current quarter compared to

16

20.5% 19.9% a year earlier, reflecting the overall increased utilization of both facultative and treaty reinsurance.

Net investment income, before tax, during the secondthird quarter of 2009 was 17.1%25.5% lower than the secondthird quarter of 2008 due primarily to lower available interest rates, particularly for short-term investments and lower average invested assets.  Pre-tax yields averaged 3.36%3.1% during the current quarter compared to 3.59%3.7% for the prior year period.  Overall after-tax yields decreased from 3.01%3.1% to 2.84%2.5%.  The short term nature of the Company’s fixed income portfolio causes changes in available yields to be quickly reflected in investment income.

The secondthird quarter 2009 net realized investment gains of $12.5$15.4 million resulted primarily from gains on limited partnerships.  Comparative secondthird quarter 2008 investment losses were $3.0$16.0 million.  The investment realized gains during the current quarter were favorably impacted by the recovery of value in the global equity markets.  See footnote 2 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 2009 were $4.4$3.7 million lower than that experienced during the secondthird quarter of 2008 due primarily to lower premium volume for the fleet transportation product.hurricane losses in 2008.  Loss ratios for each of the Company’s major product lines were as follows:



20092008 2009  2008 
Fleet Transportation58.2%58.5%  57.4%  60.1%
Private Passenger Automobile71.660.8  67.4   62.2 
Property Reinsurance31.550.5  61.0   107.4 
All lines53.856.4  59.3   69.8 


Other operating expenses, for the secondthird quarter of 2009, increased $1.8$2.6 million, or 13%17%, from the secondthird quarter of 2008.  The majority of this increase relates to expenses incurred as the result of numerous initiatives by the Company relating to entry into new products and markets, for which revenues have yet to be realized.  It is expected that such organizational expenses will be ongoing throughout 2009 although revenue associated with this activity is expected to increase gradually during this period.  The ratio of consolidated other operating expenses to operating revenue was 34.8%35.2% during the secondthird quarter of 2009 compared to 27.3%30.8% for the 2008 secondthird quarter.

The effective federal tax rate on consolidated income for the secondthird quarter of 2009 was 30.8%32.2%.  The effective rate differs from the normal statutory rate primarily as a result of tax-exempt investment income.

As a result of the factors mentioned above, net income increased $7.8$21.6 million during the secondthird quarter of 2009 as compared to the 2008 period.


17- 18 - -

Comparisons of SixNine Months Ended JuneSeptember 30, 2009 to SixNine Months Ended JuneSeptember 30, 2008

Net premiums earned during the first sixnine months of 2009 decreased $6.8$5.3 million (7.4%(3.9%) as compared to the same period of 2008.  The Company’s Property and Casualty Insurance and Property Reinsurance segments reported decreases of 12.8%8.1% and increases of 17.3%14.4%, respectively.  These changes arecompare to increases in gross premiums written of 7.8% for the same periods.  The decline in earned premium despite an increase in premium written is in line with expectations and resultresults from the continuing expansion of Property Reinsurance activities, the lag between written and continued highly competitive market conditionsearned premium for annual term policies and increased utilization of reinsurance for products in the Property and Casualty Insurance segment.   The following table provides information regarding premiums written and earned for major product lines for the sixnine months ended June 30:September 30 (dollars in thousands):


 2009  2009 
 Direct and Assumed Premium Written  Net Premium Written  Net Premium Earned  Direct and Assumed Premium Written  Net Premium Written  Net Premium Earned 
Property and Casualty Insurance                  
Fleet Transportation $75,729  $52,704  $53,698  $116,520  $80,927  $82,414 
Private Passenger Automobile  13,966   13,826   11,077   20,372   20,153   17,048 
Residual Market and All Other  4,821   2,307   946   12,131   6,013   2,063 
  94,516   68,837   65,721   149,023   107,093   101,525 
Property Reinsurance  20,140   19,461   19,485   29,467   28,733   28,758 
Totals $114,656  $88,298  $85,206  $178,490  $135,826  $130,283 
                        
 2008   2008 
Property and Casualty Insurance                        
Fleet Transportation $81,958  $62,084  $63,267  $121,418  $90,243  $92,971 
Private Passenger Automobile  10,940   10,756   11,376   15,080   14,789   16,509 
Residual Market and All Other  968   967   737   1,171   1,169   956 
  93,866   73,807   75,380   137,669   106,201   110,436 
Property Reinsurance  17,338   16,600   16,610   27,922   25,123   25,133 
Totals $111,204  $90,407  $91,990  $165,591  $131,324  $135,569 
            

Premium ceded to reinsurers on insurance business writtenproduced by the Property and Casualty Insurance segment averaged 24.4%24.5% of premium productionearned for the current year period compared to 20.5%19.2% a year earlier, reflecting the overall increased utilization of both facultative and treaty reinsurance.

Net investment income, before tax, during the first sixnine months of 2009 was 19.8%21.7% lower than the first sixnine months of 2008 for the same reasons noted in the quarterly comparison.  Pre-tax
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yields averaged 3.29%3.2% during the current period compared to 3.63%3.7% for the prior year period.  Overall after-tax yields decreased from 3.05%3.1% to 2.82%2.7%.

Net realized investment gains, for the first sixnine months of 2009, were $11.3$26.7 million resulting primarily from gains on limited partnerships.  Realized investment losses were $16.5$32.5 million for the same period in 2008.  The realized investment gains during the current period were favorably

18

impacted by the recovery of value in the global equity markets.  See footnote 2 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 2009 were $9.9$13.7 million lower than that experienced during the first sixnine months of 2008 due to lower earned premium volume.volume and lower hurricane losses.  Loss ratios for each of the Company’s major product lines were as follows:


  2009  2008 
Fleet Transportation  57.1%  63.6%
Private Passenger Automobile  68.3   64.6 
Property Reinsurance  44.1   63.7 
All lines  55.8   63.7 
 20092008
Fleet Transportation56.9%65.2%
Private Passenger Automobile68.765.7
Property Reinsurance36.041.3
All lines54.060.8

Other operating expenses, for the first sixnine months of 2009, increased $3.1$5.6 million, or 10%13%, from the 2008 six-monthnine-month period.  The majority of this increase relates to expenses incurred as the result of numerous initiatives by the Company relating to entry into new products and markets, for which revenues have yet to be realized.  It is expected that such organizational expenses will be ongoing throughout 2009 although revenue associated with this activity is expected to increase gradually during this period.  The ratio of consolidated other operating expenses to operating revenue was 34.7%34.9% during the 2009 period compared to 29.1%29.6% for the 2008 period.

The effective federal tax rate on consolidated income for the first sixnine months of 2009 was 28.6%30.1%.  The effective rate differs from the normal statutory rate primarily as a result of tax-exempt investment income.

As a result of the factors mentioned above, net income increased by $17.9$39.5 million as compared with the 2008 period.


Forward-Looking Information

Any forward-looking statements in this report, including without limitation, statements relating to the Company’s plans, strategies, objectives, expectations, intentions and adequacy of resources, are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995.  Investors are cautioned that such forward-looking statements involve risks and uncertainties including without limitation the following:  (i) the Company’s plans, strategies, objectives, expectations and intentions are subject to change at any time at the discretion of the Company;  (ii) the Company’s business is highly competitive and the entrance of new
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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.  Readers are encouraged to review the Company’s annual report for its full statement regarding forward-looking information.

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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, 2008.2008 except for the following paragraph.

In April 2009, the FASB issued guidance on the recognition and presentation of other-than-temporary impairments, or FASB OTTI guidance.  The FASB OTTI guidance applies to fixed maturity securities only and provides new guidance on the recognition and presentation of other-than-temporary impairments.  In addition, the FASB OTTI guidance requires additional disclosures related to other-than-temporary impairments.   Under this revised guidance, if a fixed maturity security is in an unrealized loss position and the Company has the intent to sell the fixed maturity security, or it is more likely than not that the Company will have to sell the fixed maturity security before recovery of its amortized cost basis, the decline in value is deemed to be other-than-temporary and is recorded to net realized losses on investments in the consolidated statements of operations.   For impaired fixed maturity securities that the Company does not intend to sell or it is more likely than not that the Company will not have to sell such securities, but the Company expects that it will not fully recover the amortized cost basis, the credit component of the other-than-temporary impairment is recognized in net realized losses on investments in the consolidated statements of operations and the non-credit component of the other-than-temporary impairment is recognized directly in shareholder’s equity (accumulated other comprehensive income).


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, 2009, amounts due from reinsurers on paid and unpaid losses, are estimated to total approximately $149$146 million.  Of this total, approximately $58$54 million (39%(37%) represents the Company’s provision for incurred but not reported losses and loss adjustment expenses attributable to reinsurers.  Because of the large policy limits reinsured by the Company, the ultimate amount of incurred but not reported losses attributable to reinsurers could vary significantly from the estimate provided; however, such variance would not result in changes in net losses incurred by the Company.

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At JuneSeptember 30, 2009, limited partnership investments include approximately $39.3$46.7 million consisting of three partnerships which are managed by organizations in which certain 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 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, 2008.

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.

(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 Corporation's last fiscal quarter that have affected, or are reasonably likely to materially affect, the Corporation's internal control over financial reporting.


 
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PART II – OTHER INFORMATION


ITEM 4 Submission of Matters to a Vote of Security Holders.

Nothing to report.


ITEM 5 Other Information

Nothing to report.


ITEM 6 (a)  EXHIBITS

Number and caption from Exhibit


Table of Regulation S-K Item 601                                                                                   Exhibit No.


(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

 
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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 5,November 4, 2009                                                              By /s/ Gary W. Miller        
Gary W. Miller, Chairman and CEO






Date     August 5,November 4, 2009                                                              By /s/ G. Patrick Corydon      
G. Patrick Corydon,
Executive Vice President – Finance
(Principal Financial and
  Accounting Officer)



 
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BALDWIN & LYONS, INC.

Form 10-Q for the fiscal quarter ended JuneSeptember 30, 2009



INDEX TO EXHIBITS




Begins on sequential
page number of Form
Exhibit Number                                                                                     10-Q            


EXHIBIT 31.1                                                                  electronically filed herewith
Certification of CEO
pursuant to Section 302 of the
Sarbanes-Oxley Act

EXHIBIT 31.2                                                                  electronically filed herewith
Certification of CFO
pursuant to Section 302 of the
Sarbanes-Oxley Act

EXHIBIT 32.1                                                                  electronically filed 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                                                                  electronically filed herewith
Certification of CFO
pursuant to 18 U.S.C. 1350,
as adopted pursuant to Section
906 of the Sarbanes-Oxley Act



 
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