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
September 30, 2009March 31, 2010
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 November 2, 2009:May 1, 2010:
 

TITLE OF CLASSNUMBER OF SHARES OUTSTANDING
Common Stock, No Par Value: 
 Class A (voting)2,623,109 
 Class B (nonvoting)12,109,87812,172,464 

Index to Exhibits located on page 25.24.

 
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PART I – FINANCIAL INFORMATION

ITEM 1  FINANCIAL STATEMENTS

Baldwin & Lyons, Inc. and Subsidiaries
            
Consolidated Balance Sheets            
            
(in thousands, except per share data)            
            
 (Unaudited)     (Unaudited)    
 September 30  December 31  March 31  December 31 
 2009  2008  2010  2009 
Assets            
Investments:            
Fixed maturities $385,837  $379,261  $405,188  $379,922 
Equity securities  80,753   63,200   94,734   85,886 
Limited partnerships  67,680   44,883   71,381   69,436 
Short-term  5,042   33,820   4,039   3,703 
  539,312   521,164   575,342   538,947 
Cash and cash equivalents  53,144   16,657   37,581   79,504 
Accounts receivable  30,043   29,701   40,475   32,535 
Reinsurance recoverable  145,912   159,989   147,567   155,451 
Notes receivable from employees  2,029   2,199   1,938   2,054 
Deferred federal income taxes  -   10,590 
Other assets  44,290   37,443   42,657   42,824 
 $814,730  $777,743  $845,560  $851,315 
                
Liabilities and shareholders' equity                
Reserves for losses and loss expenses $351,269  $389,558  $357,356  $359,031 
Reserves for unearned premiums  22,728   17,183   36,578   25,912 
Short term borrowings  9,000   9,000   10,000   10,000 
Accounts payable and accrued expenses  60,579   29,938   57,436   71,878 
Current federal income taxes  3,208   1,997   6,691   6,507 
Deferred federal income taxes  3,566   -   6,113   5,044 
  450,350   447,676   474,174   478,372 
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 
outstanding -- 2010, 2,623,109; 2009, 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 
outstanding -- 2010, 12,172,464; 2009, 12,109,878  520   517 
Additional paid-in capital  46,227   46,312   47,521   46,337 
Unrealized net gains on investments  30,820   19,410   35,686   31,886 
Retained earnings  286,704   263,714   287,547   294,091 
  364,380   330,067   371,386   372,943 
 $814,730  $777,743  $845,560  $851,315 


See notes to condensed consolidated financial statements.

 
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Baldwin & Lyons, Inc. and Subsidiaries                  
Unaudited Consolidated Statements of Operations                  
                  
(in thousands, except per share data)                  
                  
 Three Months Ended  Nine Months Ended  Three Months Ended 
 September 30  September 30  March 31 
 2009  2008  2009  2008  2010  2009 
Revenues                  
Net premiums earned $45,077  $43,579  $130,283  $135,569  $51,166  $44,164 
Net investment income  3,256   4,372   9,993   12,767   3,024   3,259 
Commissions and other income  1,722   1,019   4,847   3,432   1,749   1,569 
Net realized gains (losses) on investments, excluding                        
impairment losses  15,460   (8,388)  29,359   (24,450)  3,189   (565)
Total other-than-temporary impairment losses on investments  (19)  (7,577)  (2,656)  (8,050)  -   (667)
Net realized gains (losses) on investments  15,441   (15,965)  26,703   (32,500)  3,189   (1,232)
  65,496   33,005   171,826   119,268   59,128   47,760 
Expenses                        
Losses and loss expenses incurred  26,714   30,427   72,689   86,350   43,032   23,888 
Other operating expenses  17,635   15,080   50,603   44,965   16,345   16,916 
  44,349   45,507   123,292   131,315   59,377   40,804 
Income (loss) before federal income taxes  21,147   (12,502)  48,534   (12,047)  (249)  6,956 
Federal income taxes (benefits)  6,807   (5,232)  14,628   (6,476)  (794)  1,515 
Net income (loss) $14,340  $(7,270) $33,906  $(5,571)
Net income $545  $5,441 
                        
Per share data:                        
Basic and diluted earnings $.97  $(.48) $2.30  $(.37) $.04  $.37 
                        
Dividends paid to shareholders $.25  $.25  $.75  $.75  $.50  $.25 
                        
Reconciliation of shares outstanding:                        
Average shares outstanding - basic  14,733   15,012   14,744   15,147   14,756   14,767 
Dilutive effect of options outstanding  1   -   -   -   13   - 
Average shares outstanding - diluted  14,734   15,012   14,744   15,147   14,769   14,767 


See notes to condensed consolidated financial statements.

 
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Baldwin & Lyons, Inc. and Subsidiaries            
Unaudited Consolidated Statements of Cash Flows            
            
(dollars in thousands)      
(in thousands)      
      
       Three Months Ended 
 Nine Months Ended  March 31 
 September 30  2010  2009 
 2009  2008       
Net cash provided by (used in) operating activities $14,649  $(217) $11,690  $(1,246)
Investing activities:                
Purchases of long-term investments  (173,671)  (238,250)  (123,735)  (41,502)
Proceeds from sales or maturities                
of long-term investments  181,291   212,547   78,477   53,408 
Net sales of short-term investments  28,779   2,679 
Net sales (purchases) of short-term investments  (335)  15,541 
Other investing activities  (2,620)  (829)  (931)  (494)
Net cash provided by (used in) investing activities  33,779   (23,853)  (46,524)  26,953 
Financing activities:                
Dividends paid to shareholders  (11,061)  (11,369)  (7,366)  (3,694)
Drawings on line of credit  -   5,000 
Drawings on margin account  -   2,334 
Cost of treasury stock  (880)  (6,040)  -   (880)
Net cash used in financing activities  (11,941)  (10,075)  (7,366)  (4,574)
        
Effect of foreign exchange rates on cash and cash equivalents  277   (336)
        
Increase (decrease) in cash and cash equivalents  36,487   (34,145)  (41,923)  20,797 
Cash and cash equivalents at beginning of period  16,657   82,137   79,504   16,657 
Cash and cash equivalents at end of period $53,144  $47,992  $37,581  $37,454 


See notes to condensed consolidated financial statements.

 
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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, 2009.2010.  Interim financial statements should be read in conjunction with the Company’s annual audited financial statements and other disclosures included in thet he Company’s most recent Form 10-K.

In June 2009, the Financial Accounting Standards Board, or FASB, established the FASB Accounting Standards Codification, or Codification, as the source of 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 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 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.  The Company adopted FASB Subsequent Events guidance on June 30, 2009.   See Note (12) for disclosures related to 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).  The Company accounts for investments in limited partnerships using the equity method of accounting, which requires an investor in a limited partnership to record its proportionate share of the limited partnership’s net income.  To the extent that the limited partnership investees include both realized and unrealized investment gains or losses in the determination of net income or loss, then the Company would also recognize, through its incomeincom e 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.

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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 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,

- 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 operations and the non-credit component of the other-than-temporary impairment is recognized directly in shareholder’s equity (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,rati ngs, 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 FASB OTTI guidance on April 1, 2009, companies 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, subject to an evaluation as to possible future recovery.  Additionally, the Company takes into account any known subjective informationinforma tion in evaluating for impairment without consideration to the Company’s quantitative criteria defined above.

Reclassification:  Certain prior period balances have been reclassified to conform to the current period presentation.presentation and are of a normal recurring nature.

 
- 7 -6 -
 

Notes to Condensed Unaudited Consolidated Financial Statements (continued)

(2) Investments:

The following is a summary of investments at September 30, 2009March 31, 2010 and December 31, 2008:2009:


              Net 
     Cost or  Gross  Gross  Unrealized 
  Fair  Amortized  Unrealized  Unrealized  Gains 
  Value  Cost  Gains  Losses  (Losses) 
March 31, 2010:               
   U.S. government obligations $61,425  $61,275  $188  $(38) $150 
   Government sponsored entities  11,039   10,993   59   (13)  46 
   Residential mortgage-backed securities  34,947   34,221   910   (184)  726 
   Commercial mortgage-backed securities  12,460   12,115   352   (7)  345 
   Obligations of states and                    
       political subdivisions  198,991   197,232   1,951   (192)  1,759 
   Corporate securities  69,857   68,190   1,799   (132)  1,667 
   Foreign government obligations  16,469   16,368   138   (37)  101 
      Total fixed maturities  405,188   400,394   5,397   (603)  4,794 
   Equity securities  94,734   44,627   50,377   (270)  50,107 
   Limited partnerships  71,381   71,381   -   -   - 
   Short-term  4,039   4,039   -   -   - 
      Total available-for-sale securities $575,342  $520,441  $55,774  $(873)  54,901 
                     
      Applicable federal income taxes   (19,215)
                     
      Net unrealized gains - net of tax  $35,686 
                     
December 31, 2009:                    
   U.S. government obligations $54,632  $54,615  $86  $(69) $17 
   Government sponsored entities  5,883   5,825   72   (14)  58 
   Residential mortgage-backed securities  48,377   48,068   572   (263)  309 
   Commercial mortgage-backed securities  5,652   5,655   -   (3)  (3)
   Obligations of states and                    
       political subdivisions  185,469   182,536   2,940   (7)  2,933 
   Corporate securities  72,185   70,791   1,572   (178)  1,394 
   Foreign government obligations  7,724   7,695   29   -   29 
      Total fixed maturities  379,922   375,185   5,271   (534)  4,737 
   Equity securities  85,886   41,568   44,636   (318)  44,318 
   Limited partnerships  69,436   69,436   -   -   - 
   Short-term  3,703   3,703   -   -   - 
      Total available-for-sale securities $538,947  $489,892  $49,907  $(852)  49,055 
                     
      Applicable federal income taxes   (17,169)
                     
      Net unrealized gains - net of tax  $31,886 
              Net 
     Cost or  Gross  Gross  Unrealized 
  Fair  Amortized  Unrealized  Unrealized  Gains 
  Value  Cost  Gains  Losses  (Losses) 
September 30, 2009:               
   U.S. government obligations $58,568  $58,378  $192  $(2) $190 
   Government sponsored entities  4,014   3,927   89   (2)  87 
   Mortgage-backed securities  39,637   39,086   688   (137)  551 
   Obligations of states and                    
       political subdivisions  216,207   211,202   5,110   (105)  5,005 
   Corporate securities  59,835   58,257   1,810   (232)  1,578 
   Foreign government obligations  7,576   7,534   42   -   42 
      Total fixed maturities  385,837   378,384   7,931   (478)  7,453 
   Equity securities  80,753   40,790   40,802   (839)  39,963 
   Limited partnerships  67,680   67,680   -   -   - 
   Short-term  5,042   5,042   -   -   - 
      Total available-for-sale securities $539,312  $491,896  $48,733  $(1,317)  47,416 
                     
  Applicable federal income taxes   (16,596)
                     
  Net unrealized gains - net of tax  $30,820 
                     
December 31, 2008:                    
   U.S. government obligations $21,888  $21,513  $375  $-  $375 
   Government sponsored entities  4,672   4,537   135   -   135 
   Mortgage-backed securities  13,490   13,813   157   (480)  (323)
   Obligations of states and                    
       political subdivisions  267,152   263,026   5,132   (1,006)  4,126 
   Corporate securities  66,084   63,774   3,520   (1,210)  2,310 
   Foreign government obligations  5,975   5,867   108   -   108 
      Total fixed maturities  379,261   372,530   9,427   (2,696)  6,731 
   Equity securities  63,200   40,071   27,415   (4,286)  23,129 
   Limited partnerships  44,883   44,883   -   -   - 
   Short-term  33,820   33,820   -   -   - 
      Total available-for-sale securities $521,164  $491,304  $36,842  $(6,982)  29,860 
                     
  Applicable federal income taxes   (10,450)
                     
  Net unrealized gains - net of tax  $19,410 


The Company has no other-than-temporarily impaired fixed maturity securities at September 30, 2009.March 31, 2010.  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 nine months ended September 30, 2009 and September 30, 2008, respectively.March 31, 2010.

 
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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 September 30, 2009March 31, 2010 and December 31, 2008,2009, respectively, the aggregate fair value and gross unrealized loss categorized by the duration those securities have been continuously in an unrealized loss position.


 September 30, 2009  December 31, 2008  March 31, 2010  December 31, 2009 
 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 or less  59  $29,333  $(258)  47  $80,993  $(2,675)  139  $92,988  $(599)  109  $70,568  $(411)
Greater than 12 months  6   10,673   (220)  6   1,812   (21)  4   1,593   (4)  4   6,220   (123)
Total fixed maturities  65   40,006   (478)  53   82,805   (2,696)  143   94,581   (603)  113   76,788   (534)
Equity securities:                                                
12 months or less  14   4,064   (416)  33   11,362   (3,085)  15   2,051   (106)  21   2,032   (147)
Greater than 12 months  6   2,310   (423)  14   5,845   (1,201)  5   2,555   (164)  8   2,913   (171)
Total equity securities  20   6,374   (839)  47   17,207   (4,286)  20   4,606   (270)  29   4,945   (318)
Total fixed maturity and equity securities  85  $46,380  $(1,317)  100  $100,012  $(6,982)  163  $99,187  $(873)  142  $81,733  $(852)
                        

The fair value and the cost or amortized cost of fixed maturity investments, at September 30, 2009,March 31, 2010, 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 $131,246  $130,006  $154,922  $154,295 
Excess of one year to five years  198,324   193,403   188,230   185,592 
Excess of five years to ten years  7,573   7,036   7,642   7,230 
Excess of ten years  9,057   8,853   6,987   6,941 
Total maturities  346,200   339,298   357,781   354,058 
Mortgage-backed securities  39,637   39,086   47,407   46,336 
 $385,837  $378,384  $405,188  $400,394 
 
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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 operations.

 Three Months Ended  Nine Months Ended  Three Months Ended 
 September 30  September 30  March 31 
 2009  2008  2009  2008  2010  2009 
Fixed maturities:                  
Gross gains $4,666  $9  $6,415  $2,423  $952  $1,509 
Gross losses  (342)  (6,576)  (973)  (7,438)  (427)  (680)
Net gains (losses)  4,324   (6,567)  5,442   (5,015)
Net gains  525   829 
                        
Equity securities:                        
Gross gains  1,463   321   1,078   4,395   1,196   130 
Gross losses  (264)  (2,842)  (2,713)  (6,201)  (477)  (925)
Net gains (losses)  1,199   (2,521)  (1,635)  (1,806)  719   (795)
                        
Limited partnerships - net gain (loss)  9,918   (6,957)  22,896   (23,688)  1,945   (1,266)
                        
Other - net gain (loss)  -   80   -   (1,991)
                
Total net gains (losses) $15,441  $(15,965) $26,703  $(32,500) $3,189  $(1,232)

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 
  March 31 
  2010  2009 
       
Realized net gains (losses) on the disposal of securities $1,244  $(316)
Equity in earnings (losses) of limited partnership        
  investments - realized and unrealized  1,945   (1,266)
Impairment:        
  Write-downs based upon objective criteria  -   (667)
  Recovery of prior write-downs        
    upon sale or disposal  -   1,017 
         
Totals $3,189  $(1,232)
 
  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)

 
- 10 -9 -
 

Notes to Condensed Unaudited Consolidated Financial Statements (continued)

The net income from limited partnerships for the quarter and year-to-date ending September 30, 2009 includeMarch 31, 2010 includes an estimated $9,957 and $19,253, respectively,$2,740 of unrealized gains reported to the Company as part of the operations of the various limited partnerships.  Shareholders’ equity at September 30, 2009March 31, 2010 includes approximately $22,210,$25,372, net of deferred federal income taxes, of earnings undistributed by limited partnerships.

(3) Reinsurance:Reinsurance Ceded:
The following table summarizes the Company’s transactions with reinsurers for the 20092010 and 20082009 comparative periods.
  2010  2009 
Quarter ended March 31:      
   Premiums ceded to reinsurers $15,586  $11,953 
   Losses and loss expenses ceded to reinsurers  (238)  9,376 
   Commissions from reinsurers  2,064   853 

  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 


(4) Comprehensive Income or Loss:
Net comprehensive income for the quarter ended September 30, 2009March 31, 2010 was $22,101$4,622 and compares to net comprehensive lossincome of $12,982$154 for the quarter ended September 30, 2008.  For the first nine months ended September 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.March 31, 2009.

(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, the Company provides private passenger automobile products are provided to individuals.  individuals, and writes commercial multi-peril and professional liability products on a limited basis.

The Property Reinsurance segment accepts property and casualty cessions from other insurance companies as well as retrocessions from selected reinsurance companies, principally reinsuring against catastrophes.   Beginning in 2010, the Reinsurance segment accepts selected professional liability cessions from other insurance companies.

 
- 11 -10 -
 

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.
                   2010  2009 
 2009  2008  Direct and Assumed Premium Written  Net Premium Earned  Segment Profit (Loss)  Direct and Assumed Premium Written  Net Premium Earned  Segment Profit 
 Direct and Assumed Premium Written  Net Premium Earned  Segment Profit  Direct and Assumed Premium Written  Net Premium Earned  Segment Profit (Loss)                   
Three months ended March 31:                  
                                    
Three months ended September 30:                  
Property and Casualty Insurance $54,507  $35,804  $5,826  $43,803  $35,056  $4,345  $65,610  $41,077  $7,124  $49,236  $34,976  $5,501 
Property Reinsurance  9,327   9,273   415   10,584   8,523   (1,980)
                        
Reinsurance  11,808   10,089   (10,052)  9,839   9,188   3,275 
Totals $63,834  $45,077  $6,241  $54,387  $43,579  $2,365  $77,418  $51,166  $(2,928) $59,075  $44,164  $8,776 
                        
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 

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

 Three Months Ended 
 Three Months Ended  Nine Months Ended  March 31 
 September 30  September 30  2010  2009 
 2009  2008  2009  2008       
Profit:                  
Segment profit $6,241  $2,365  $22,959  $17,430 
Segment profit (loss) $(2,928) $8,776 
Net investment income  3,256   4,372   9,993   12,767   3,024   3,259 
Net gains (losses) on investments  15,441   (15,965)  26,703   (32,500)  3,189   (1,232)
Corporate expenses  (3,791)  (3,274)  (11,121)  (9,744)  (3,534)  (3,847)
Income (loss) before federal income taxes $21,147  $(12,502) $48,534  $(12,047) $(249) $6,956 


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 nine 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).

- 12 -11 -

Notes to Condensed Unaudited Consolidated Financial Statements (continued)

(7)(6) 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 $2,029$1,938 relating to such loans remains outstanding at September 30, 2009March 31, 2010 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)(7) Debt:
The Company has $9,000$10,000 outstanding as of both September 30, 2009March 31, 2010 and December 31, 2008,2009, under the Company’s revolving line of credit at variable interest rates detailed below.  The Company has $11,000$10,000 remaining unused under the revolving line of credit.  The $9,000$10,000 of borrowings was used principally for treasury stock repurchases.

Description Maturity September 30, 2009  December 31, 2008  Interest Rate Maturity 2010  2009  Interest Rate 
                      
Revolving line of credit June 23, 2011 $5,000  $5,000   .75% June 23, 2011 $5,000  $5,000   0.75%
Revolving line of credit June 23, 2011  4,000   4,000   1.57% June 23, 2011  5,000   5,000   0.78%
Total Debt   $9,000 ��$9,000     
                 Total Debt $10,000  $10,000     

(9)(8) Taxes:
As of September 30, 2009,March 31, 2010, 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)(9) Fair Value:
In September 2006, the FASB issued guidance on Fair Value Measurements, or FASB Fair Value Measurements guidance.  FASB Fair Value Measurements guidancefair value measurement, which provides a common definition of fair value and establishes a framework to make the measurement of fair value more consistent and comparable.  The FASB Fair Value Measurementsguidance 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 FASB Fair Value Measurements, effective January 1, 2008 for financial assets and liabilities.  The adoption of the provisions related
- 12 -

Notes 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, assetsCondensed Unaudited Consolidated Financial Statements (continued)

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 summarizestables summarize fair value measurements by level at September 30, 2009 for assets measured at fair value on a recurring basis:

As of March 31, 2010:            
             
Description Total  Level 1  Level 2  Level 3 
             
U.S. government obligations $61,425  $-  $61,425  $- 
Government sponsored entities  11,039   -   11,039   - 
Residential mortgage-backed securities  34,947   -   34,947   - 
Commercial mortgage-backed securities  12,460   -   12,460   - 
Obligations of states and                
       political subdivisions  198,991   -   198,991   - 
Corporate securities  69,857   -   54,084   15,773 
Foreign government obligations  16,469   -   16,469   - 
      Total fixed maturities  405,188   -   389,415   15,773 
Equity securities  94,734   94,734   -   - 
Cash equivalents  40,940   -   40,940   - 
  $540,862  $94,734  $430,355  $15,773 


As of December 31, 2009:            
             
Description Total  Level 1  Level 2  Level 3 
             
U.S. government obligations $54,632  $-  $54,632  $- 
Government sponsored entities  5,883   -   5,883   - 
Residential mortgage-backed securities  48,377   -   48,377   - 
Commercial mortgage-backed securities  5,652   -   5,652   - 
Obligations of states and                
       political subdivisions  185,469   -   185,469   - 
Corporate securities  72,185   -   57,298   14,887 
Foreign government obligations  7,724   -   7,724   - 
      Total fixed maturities  379,922   -   365,035   14,887 
Equity securities  85,886   85,886   -   - 
Cash equivalents  83,138   -   83,138   - 
  $548,946  $89,486  $448,173  $14,887 
- 13 - -

Notes to Condensed Unaudited Consolidated Financial Statements (continued)


Description Total  Level 1  Level 2  Level 3 
Fixed maturities $385,837  $-  $385,837  $- 
Equity securities  80,753   80,753   -   - 
Short term  5,042   3,511   1,531   - 
Cash equivalents  56,820   -   56,820   - 
  $528,452  $84,264  $444,188  $- 


Level inputs, as defined by 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,A reconciliation of the FASB issued guidance on determiningbeginning and ending balances of assets measured at fair value when the volume and level of activity for the asset or liability have significantly decreased and identifying transactions that are not orderly.  The FASB guidance provides additional authoritative guidance to assist both issuers and users of financial statements in determining whetheron a marketrecurring basis using Level 3 inputs is active or inactive, and whether a transaction is distressed.  The FASB guidance was effective for us for the quarter ended June 30, 2009.  The adoption of the FASB guidance did not have a material impact on the Company’s consolidated financial position and results of operations.as follows:
  March 31  December 31 
  2010  2009 
Beginning of period balance $14,887  $14,981 
Total gain or losses (realized or unrealized)        
Included in earnings (or changes in net assets)  385   231 
Included in other comprehensive income  (53)  268 
Purchases, issuances, and settlements  554   (593)
Transfers in and/or out of Level 3  -   - 
End of period balance $15,773  $14,887 

In April 2009, the FASB issued guidance on interim disclosures about fair value of financial 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.  The FASB guidance was effective for us for the quarter ended June 30, 2009.  The adoption of the FASB guidance did not have an impact on the Company’s consolidated financial position and results of operations.

- 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 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.

There were no significant transfers of assets between level 1 and level 2 during the first quarter 2010.

- 14 -

Notes to Condensed Unaudited Consolidated Financial Statements (continued)

(11)(10) Restricted Stock Units:Stock:
Effective June 11, 2009, the Company issued 20,900 shares of class B restricted stock units to the Company’s outside directors.  The restricted stock unitsshares will be paid solely in the Company’s class B stock.  The restricted stock unitsshares represent the annual retainer compensation for the outside directors.  The restricted stock unitsdirectors and 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 unitshare is valued at $21.05 per share representing a total value of $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 new directors’ stock plan will be presented to shareholders for approval at the May 2010 annual shareholders meeting.

(12)Effective February 9, 2010, the Company issued 40,061 shares of class B restricted stock to certain of the Company’s executives.  The restricted shares will be paid solely in the Company’s class B stock.  The restricted shares represent compensation for the executives under the Company’s executive incentive bonus plan and additional stock awards approved by the board of directors.  The restricted shares will vest over a three year period from the date of grant and are accelerated for retirement eligible recipients due to non-substantive post-grant date vesting clause per ASC 715, Compensation-Retirement Benefits.  Restricted stock was valued based on the closing price of the stock on the day the award was determined. Non-vest ed restricted shares will be forfeited should an executive’s employment terminate for any reason other than death, disability, or retirement as defined by the Committee.

(11) Subsequent Events:
We have evaluated subsequent events for recognition or disclosure throughin the time of filing these consolidated financial statements filed on Form 10-Q with the U.S. SecuritiesSEC and Exchange Commission on November 4, 2009. Nono events have occurred during this period which requires disclosure or accrual in this document.that require disclosure.

 
- 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 ninethree months of 2009,2010, the Company experienced positive cash flow from operations totaling $14.6$11.7 million which compares to negative cash flow from operations of $.2$1.2 million generated during the first ninethree months of 2008.2009.  The $14.8$12.9 million improvement in cash flow from the 20082009 period is primarily due to higher grossnet premiums received the timing of reinsurance payableand lower gross loss payments, along with lower operating expenses and the timing of tax payments.  These increases were partially offset by a $4.2 million increasedecline in loss payments related to the settlement of several large claims during the 2009 period.investment income.

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 3.63.7 years at September 30, 2009,March 31, 2010, which is substantially shorter than the Company’s liability duration.

Financing activity for the first ninethree months of 20092010 included regular dividend payments of $11.1$7.4 million ($.75.50 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 September 30, 2009March 31, 2010 included $56.8$40.9 million in investments classified as cash equivalents that were readily convertible to cash without significant market penalty.  An additional $206.1$154.4 million of fixed maturity investments will mature within the twelve-month period following September 30, 2009.March 31, 2010.   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 September 30, 2009, $39.0March 31, 2010, $50.9 million may be transferred by dividend or loan to the parent company during the remainder of 20092010 without approval by, or prior notification to, regulatory authorities.  An additional $242.8$233.8 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 concernscon cerns to the Company.  The Company also believes that

- 16 - -

the financial strength and stability of the subsidiaries would permit ready access by the parent

- 16 -

company to short-term and long-term sources of credit.  The parent company had cash and marketable securities valued at $5.0$4.7 million at September 30, 2009.March 31, 2010.

The Company’s annualized premium writing to surplus ratio for the first ninethree months of 20092010 was approximately 43%69.8%.  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.
- 17 -

Results of Operations

Comparisons of ThirdFirst Quarter, 20092010 to ThirdFirst Quarter, 20082009

Net premiums earned during the thirdfirst quarter of 20092010 increased $1.5$7.0 million (3.4%(15.9%) as compared to the same period of 2008.2009.  The Company’s Property and Casualty Insurance and Property Reinsurance segments reported increases of 2.1%17.4% and increases of 8.8%9.8%, respectively.  These changes are in line with expectations and result from the continuing expansion of Property Reinsurance activities and new 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 September 30March 31 (dollars in thousands):

  2010 
  Direct and Assumed Premium Written  Net Premium Written  Net Premium Earned 
Property and Casualty Insurance:         
Fleet Transportation $45,462  $31,973  $31,718 
Private Passenger Automobile  10,799   10,724   6,632 
Commercial Mult-Peril  9,120   7,474   2,531 
Residual Market and All Other  229   164   196 
      Total Property and Casualty Insurance  65,610   50,335   41,077 
Reinsurance:            
   Property  9,990   9,678   9,678 
   Casualty  1,818   1,818   411 
      Total Reinsurance  11,808   11,496   10,089 
             
Totals $77,418  $61,831  $51,166 
             
  2009  
             
Property and Casualty Insurance:            
Fleet Transportation $40,370  $29,135  $29,503 
Private Passenger Automobile  8,723   8,658   5,289 
Commercial Mult-Peril  -   -   - 
Residual Market and All Other  143   142   184 
      Total Property and Casualty Insurance  49,236   37,935   34,976 
Reinsurance:            
   Property  9,839   9,188   9,188 
   Casualty  -   -   - 
      Total Reinsurance  9,839   9,188   9,188 
             
Totals $59,075  $47,123  $44,164 
  2009 
  
Direct and Assumed
Premium Written
  Net Premium Written  Net Premium Earned 
Property and Casualty Insurance         
Fleet Transportation $40,791  $28,223  $28,716 
Private Passenger Automobile  6,406  ��6,327   5,971 
Residual Market and All Other  7,310   3,706   1,117 
   54,507   38,256   35,804 
Property Reinsurance  9,327   9,272   9,273 
Totals $63,834  $47,528  $45,077 
             
   2008 
Property and Casualty Insurance            
Fleet Transportation $39,461  $28,160  $29,705 
Private Passenger Automobile  4,140   4,033   5,133 
Residual Market and All Other  202   201   218 
   43,803   32,394   35,056 
Property Reinsurance  10,584   8,523   8,523 
Totals $54,387  $40,917  $43,579 
             

 
- 17 -18 -
 
 
Premium ceded to reinsurers on insurance business produced by the Property and Casualty Insurance segment averaged 24.8%23.3% of premium earned for the current quarter compared to 19.9%22.5% a year earlier, reflecting the overall increased utilizationuse of both facultative and treaty reinsurance.reinsurance on new products.

Net investment income, before tax, during the thirdfirst quarter of 20092010 was 25.5%7.2% lower than the thirdfirst  quarter of 20082009 due primarily to lower available interest rates, particularly for short-term investments.  Pre-tax yields averaged 3.1%2.7% during the current quarter compared to 3.7%3.1% for the prior year period.  Overall after-tax yields decreased from 3.1%2.7% to 2.5%2.1%.  The short term nature of the Company’s fixed income portfolio causes changes in available yields to be quickly reflected in investment income.

The thirdfirst quarter 20092010 net realized investment gains of $15.4$3.2 million resulted primarily fromis composed of $1.9 million in gains on limited partnerships.partnerships with the balance attributable to direct trading of equity securities.  Comparative thirdfirst quarter 20082009 investment losses were $16.0 million.$1.2 million as both equity securities and limited partnerships posted losses.  The investment realized gains during the current quarter were again 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 thirdfirst quarter of 20092010 were $3.7$19.1 million lowerhigher than that experienced during the thirdfirst quarter of 2008 due primarily to hurricane2009 reflecting net pre-tax catastrophe losses from major earthquakes and windstorms, most notably Earthquake Maule in 2008.Chile, of approximately $18.1 million.  Loss ratios for each of the Company’s major product lines were as follows:

  2009  2008 
Fleet Transportation  57.4%  60.1%
Private Passenger Automobile  67.4   62.2 
Property Reinsurance  61.0   107.4 
All lines  59.3   69.8 

 2010 2009
Fleet Transportation54.9% 55.9%
Private Passenger Automobile79.3 65.6
Commercial Multi-Peril61.0 N/A
Reinsurance - Property189.8 41.1
Reinsurance - Casualty60.1 N/A
All Lines84.1 54.1

Other operating expenses, for the thirdfirst quarter of 2009, increased $2.62010, decreased $.6 million, or 17%3%, from the thirdfirst quarter of 2008.2009.  The majority of this increasedecrease relates to higher ceding commission credits related to certain of the Company’s reinsurance ceded treaties.  All other expenses incurred asremained relatively flat when compared to the result of numerous initiatives byprior period despite 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.in premium volume.  The ratio of consolidated other operating expenses to operating revenue was 35.2%29.3% during the thirdfirst quarter of 20092010 compared to 30.8%34.5% for the 2008 third2009 first quarter.

The effective federal tax rate on the consolidated income for the thirdfirst quarter of 20092010 was 32.2%.  a $.8 million benefit.  The effective rate primarily 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 $21.6decreased $4.9 million during the thirdfirst quarter of 20092010 as compared to the 20082009 period.

- 18 -19 -

Comparisons of Nine Months Ended September 30, 2009 to Nine Months Ended September 30, 2008

Net premiums earned during the first nine months of 2009 decreased $5.3 million (3.9%) as compared to the same period of 2008.  The Company’s Property and Casualty Insurance and Property Reinsurance segments reported decreases of 8.1% and increases of 14.4%, respectively.  These changes compare 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 results from the continuing expansion of Property Reinsurance activities, the lag between written and earned 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 nine months ended September 30 (dollars in thousands):


  2009 
  Direct and Assumed Premium Written  Net Premium Written  Net Premium Earned 
Property and Casualty Insurance         
Fleet Transportation $116,520  $80,927  $82,414 
Private Passenger Automobile  20,372   20,153   17,048 
Residual Market and All Other  12,131   6,013   2,063 
   149,023   107,093   101,525 
Property Reinsurance  29,467   28,733   28,758 
Totals $178,490  $135,826  $130,283 
             
   2008 
Property and Casualty Insurance            
Fleet Transportation $121,418  $90,243  $92,971 
Private Passenger Automobile  15,080   14,789   16,509 
Residual Market and All Other  1,171   1,169   956 
   137,669   106,201   110,436 
Property Reinsurance  27,922   25,123   25,133 
Totals $165,591  $131,324  $135,569 
             

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

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

Net realized investment gains, for the first nine months of 2009, were $26.7 million resulting primarily from gains on limited partnerships.  Realized investment losses were $32.5 million for the same period in 2008.  The realized investment gains during the current period 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 first nine months of 2009 were $13.7 million lower than that experienced during the first nine months of 2008 due to lower earned premium 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 

Other operating expenses, for the first nine months of 2009, increased $5.6 million, or 13%, from the 2008 nine-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 34.9% during the 2009 period compared to 29.6% for the 2008 period.

The effective federal tax rate on consolidated income for the first nine months of 2009 was 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 $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 forfo r 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.

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 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).

2009.

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, 2009,March 31, 2010, amounts due from reinsurers on paid and unpaid losses, are estimated to total approximately $146$148 million.  Of this total, approximately $54$58 million (37%(39%) 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 September 30, 2009,March 31, 2010, limited partnership investments include approximately $46.7$50.5 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.

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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, 2008.2009.

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     November 4, 2009May 5, 2010                                                                By /s/ Gary W. Miller                               
Gary W. Miller, Chairman and CEO






Date     November 4, 2009May 5, 2010                                                                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 September 30, 2009March 31, 2010



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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