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, 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  üNon-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 AugustNovember 1, 2010:

TITLE OF CLASSNUMBER OF SHARES OUTSTANDING
Common Stock, No Par Value: 
 Class A (voting)2,623,109
 Class B (nonvoting)12,181,359 12,191,820

Index to Exhibits located on page 26.

- 1 -
 

PART I – FINANCIAL INFORMATION

ITEM 1  FINANCIAL STATEMENTS


Baldwin & Lyons, Inc. and Subsidiaries
            
Consolidated Balance Sheets            
            
(in thousands, except per share data)            
            
 (Unaudited)     (Unaudited)    
 June 30  December 31  September 30  December 31 
 2010  2009  2010  2009 
Assets            
Investments:            
Fixed maturities $410,941  $379,922  $421,220  $379,922 
Equity securities  82,380   85,886   89,785   85,886 
Limited partnerships  66,822   69,436   73,100   69,436 
Short-term  4,108   3,703   4,414   3,703 
  564,251   538,947   588,519   538,947 
Cash and cash equivalents  46,785   79,504   39,601   79,504 
Accounts receivable  40,160   32,535   40,506   32,535 
Reinsurance recoverable  138,051   155,451   135,753   155,451 
Notes receivable from employees  1,854   2,054   1,716   2,054 
Other assets  37,518   42,824   34,198   42,824 
 $828,619  $851,315  $840,293  $851,315 
        
Liabilities and shareholders' equity                
Reserves for losses and loss expenses $347,262  $359,031  $345,412  $359,031 
Reserves for unearned premiums  30,956   25,912   34,696   25,912 
Short term debt  10,000   10,000 
Debt  7,000   10,000 
Accounts payable and accrued expenses  71,673   71,878   69,354   71,878 
Current federal income taxes  5,874   6,507   8,679   6,507 
Deferred federal income taxes  196   5,044   2,414   5,044 
  465,961   478,372   467,555   478,372 
Shareholders' equity:                
Common stock-no par value:                
Class A voting -- authorized 3,000,000 shares;                
outstanding -- 2010, 2,623,109; 2009, 2,623,109  112   112   112   112 
Class B non-voting -- authorized 20,000,000 shares;                
outstanding -- 2010, 12,181,359; 2009, 12,109,878  520   517 
outstanding -- 2010, 12,191,820; 2009, 12,109,878  520   517 
Additional paid-in capital  47,742   46,337   47,986   46,337 
Unrealized net gains on investments  25,749   31,886   29,882   31,886 
Retained earnings  288,535   294,091   294,238   294,091 
  362,658   372,943   372,738   372,943 
 $828,619  $851,315  $840,293  $851,315 

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  Three Months Ended  Nine Months Ended 
 June 30  June 30  September 30  September 30 
 2010  2009  2010  2009  2010  2009  2010  2009 
Revenues                        
Net premiums earned $53,523  $41,042  $104,689  $85,206  $52,588  $45,077  $157,277  $130,283 
Net investment income  2,944   3,478   5,968   6,737   2,865   3,256   8,833   9,993 
Commissions and other income  1,673   1,556   3,421   3,125   1,603   1,722   5,024   4,847 
Net realized gains (losses) on investments, excluding                
Net realized gains on investments, excluding                
impairment losses  (2,843)  14,464   347   13,899   10,271   15,460   10,618   29,359 
Total other-than-temporary impairment losses on investments  (15)  (1,970)  (15)  (2,637)  -   (19)  (15)  (2,656)
Net realized gains (losses) on investments  (2,858)  12,494   332   11,262 
Net realized gains on investments  10,271   15,441   10,603   26,703 
  55,282   58,570   114,410   106,330   67,327   65,496   181,737   171,826 
Expenses                                
Losses and loss expenses incurred  31,152   22,087   74,184   45,975   36,084   26,714   110,268   72,689 
Other operating expenses  17,527   16,052   33,872   32,968   17,711   17,635   51,583   50,603 
  48,679   38,139   108,056   78,943   53,795   44,349   161,851   123,292 
Income before federal income taxes  6,603   20,431   6,354   27,387   13,532   21,147   19,886   48,534 
Federal income taxes  1,617   6,306   823   7,821   4,298   6,807   5,121   14,628 
Net income $4,986  $14,125  $5,531  $19,566  $9,234  $14,340  $14,765  $33,906 
                
Per share data:                                
Basic and diluted earnings $.33  $.96  $.37  $1.33  $.62  $.97  $1.00  $2.30 
                                
Dividends paid to shareholders $.25  $.25  $.75  $.50  $.25  $.25  $1.00  $.75 
                                
Reconciliation of shares outstanding:                                
Average shares outstanding - basic  14,786   14,733   14,771   14,750   14,794   14,733   14,779   14,744 
Dilutive effect of options outstanding  16   -   28   -   15   1   30   - 
Average shares outstanding - diluted  14,802   14,733   14,799   14,750   14,809   14,734   14,809   14,744 



See notes to condensed consolidated financial statements.

 
- 3 -
 

Baldwin & Lyons, Inc. and Subsidiaries      
Unaudited Consolidated Statements of Cash Flows      
       
(in thousands)      
       
  Nine Months Ended 
  September 30 
  2010  2009 
       
Net cash provided by operating activities $36,857  $13,822 
Investing activities:        
   Purchases of long-term investments  (297,065)  (173,671)
   Proceeds from sales or maturities        
       of long-term investments  241,158   181,291 
   Net sales (purchases) of short-term investments  (711)  28,779 
   Other investing activities  (2,524)  (2,620)
Net cash provided by (used in) investing activities  (59,142)  33,779 
Financing activities:        
   Dividends paid to shareholders  (14,770)  (11,061)
   Repayment on notes payable  (3,000)  - 
   Cost of treasury stock  -   (880)
Net cash used in financing activities  (17,770)  (11,941)
         
   Effect of foreign exchange rates on cash and cash equivalents  152   827 
         
       Increase (decrease) in cash and cash equivalents  (39,903)  36,487 
Cash and cash equivalents at beginning of period  79,504   16,657 
Cash and cash equivalents at end of period $39,601  $53,144 

Baldwin & Lyons, Inc. and Subsidiaries      
Unaudited Consolidated Statements of Cash Flows      
       
(in thousands)      
       
  Six Months Ended 
  June 30 
  2010  2009 
       
Net cash provided by (used in) operating activities $24,806  $(5,544)
Investing activities:        
   Purchases of long-term investments  (202,444)  (56,653)
   Proceeds from sales or maturities        
       of long-term investments  158,273   80,181 
   Net sales (purchases) of short-term investments  (405)  14,852 
   Other investing activities  (1,862)  (1,690)
Net cash provided by (used in) investing activities  (46,438)  36,690 
Financing activities:        
   Dividends paid to shareholders  (11,081)  (7,377)
   Cost of treasury stock  -   (880)
Net cash used in financing activities  (11,081)  (8,257)
         
   Effect of foreign exchange rates on cash and cash equivalents  (6)  274 
         
       Increase (decrease) in cash and cash equivalents  (32,719)  23,163 
Cash and cash equivalents at beginning of period  79,504   16,657 
Cash and cash equivalents at end of period $46,785  $39,820 


See notes to condensed consolidated financial statements.

 
- 4 -
 

Notes to Condensed Unaudited Consolidated Financial Statements
(dollarsNote that all dollar amounts presented in these notes are 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, 2010.  Interim financial statements should be read in conjunction with the Company’s annual audited financial statements and other disclosures included ini n the Company’s most recent Form 10-K.

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 incomein come 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.

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 presentationWith respect to other than temporary impairment 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,investments, 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

 
- 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 shareholders’ 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,r atings, 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.

 
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 informationinfo rmation 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 and are of a normal recurring nature.











 
- 6 -
 

Notes to Condensed Unaudited Consolidated Financial Statements (continued)

(2) Investments:

The following is a summary of available-for-sale investments at JuneSeptember 30, 2010 and December 31, 2009:


             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, 2010:               
September 30, 2010:               
U.S. government obligations $52,410  $52,203  $207  $-  $207  $60,039  $59,798  $241  $-  $241 
Government sponsored entities  8,300   8,243   58   (1)  57   5,311   5,287   28   (4)  24 
Residential mortgage-backed securities  35,105   34,320   984   (199)  785   40,973   40,295   962   (284)  678 
Commercial mortgage-backed securities  14,024   13,637   407   (20)  387   12,948   12,243   713   (8)  705 
Obligations of states and                                        
political subdivisions  213,118   211,170   1,962   (14)  1,948   211,770   210,092   1,714   (36)  1,678 
Corporate securities  71,452   71,036   1,443   (1,027)  416 
Corporate debt securities  72,242   70,660   1,927   (345)  1,582 
Foreign government obligations  16,532   16,944   82   (494)  (412)  17,937   17,438   523   (24)  499 
Total fixed maturities  410,941   407,553   5,143   (1,755)  3,388   421,220   415,813   6,108   (701)  5,407 
Equity securities  82,380   46,154   37,497   (1,271)  36,226   89,785   49,219   41,386   (820)  40,566 
Limited partnerships  66,822   66,822   -   -   - 
Short-term  4,108   4,108   -   -   - 
Total available-for-sale securities $564,251  $524,637  $42,640  $(3,026)  39,614  $511,005  $465,032  $47,494  $(1,521)  45,973 
                                        
     Applicable federal income taxes   (13,865)             Applicable federal income taxes   (16,091)
                                        
     Net unrealized gains - net of tax  $25,749              Net unrealized gains - net of tax  $29,882 
                                        
December 31, 2009:                                        
U.S. government obligations $54,632  $54,615  $86  $(69) $17  $54,632  $54,615  $86  $(69) $17 
Government sponsored entities  5,883   5,825   72   (14)  58   5,883   5,825   72   (14)  58 
Residential mortgage-backed securities  48,377   48,068   572   (263)  309   48,377   48,068   572   (263)  309 
Commercial mortgage-backed securities  5,652   5,655   -   (3)  (3)  5,652   5,655   -   (3)  (3)
Obligations of states and                                        
political subdivisions  185,469   182,536   2,940   (7)  2,933   185,469   182,536   2,940   (7)  2,933 
Corporate securities  72,185   70,791   1,572   (178)  1,394 
Corporate debt securities  72,185   70,791   1,572   (178)  1,394 
Foreign government obligations  7,724   7,695   29   -   29   7,724   7,695   29   -   29 
Total fixed maturities  379,922   375,185   5,271   (534)  4,737   379,922   375,185   5,271   (534)  4,737 
Equity securities  85,886   41,568   44,636   (318)  44,318   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  $465,808  $416,753  $49,907  $(852)  49,055 
                                        
     Applicable federal income taxes   (17,169)             Applicable federal income taxes   (17,169)
                                        
     Net unrealized gains - net of tax  $31,886              Net unrealized gains - net of tax  $31,886 


The Company has no other-than-temporarily impaired fixed maturity securities at JuneSeptember 30, 2010.  Additionally, the Company had no other-than-temporary impairment losses relating to fixed maturity securities recognized in accumulated other comprehensive income during the sixnine months ended JuneSeptember 30, 2010 and 2009.

 
- 7 -
 

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, 2010 and December 31, 2009, 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, 2010  December 31, 2009  September 30, 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  91  $41,191  $(1,752)  109  $70,568  $(411)  83  $79,009  $(692)  109  $70,568  $(411)
Greater than 12 months  1   813   (3)  4   6,220   (123)  8   1,658   (9)  4   6,220   (123)
Total fixed maturities  92   42,004   (1,755)  113   76,788   (534)  91   80,667   (701)  113   76,788   (534)
Equity securities:                                                
12 months or less  40   7,884   (849)  21   2,032   (147)  19   2,996   (383)  21   2,032   (147)
Greater than 12 months  2   1,446   (422)  8   2,913   (171)  5   2,441   (437)  8   2,913   (171)
Total equity securities  42   9,330   (1,271)  29   4,945   (318)  24   5,437   (820)  29   4,945   (318)
Total fixed maturity and equity securities  134  $51,334  $(3,026)  142  $81,733  $(852)  115  $86,104  $(1,521)  142  $81,733  $(852)
 
The fair value and the cost or amortized cost of fixed maturity investments, at JuneSeptember 30, 2010, by contractual maturity, are shown below.  Actual maturities may ultimately 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 $178,259  $178,254  $181,862  $181,417 
Excess of one year to five years  169,119   167,265   169,645   166,707 
Excess of five years to ten years  7,400   7,135   9,164   8,618 
Excess of ten years  7,034   6,942   6,628   6,533 
Total maturities  361,812   359,596   367,299   363,275 
Mortgage-backed securities  49,129   47,957   53,921   52,538 
 $410,941  $407,553  $421,220  $415,813 



 
- 8 -
 

Notes to Condensed Unaudited Consolidated Financial Statements (continued)

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


 Three Months Ended  Six Months Ended  Three Months Ended  Nine Months Ended 
 June 30  June 30  September 30  September 30 
 2010  2009  2010  2009  2010  2009  2010  2009 
Fixed maturities:                        
Gross gains $888  $305  $1,840  $1,814  $1,311  $4,666  $3,151  $6,415 
Gross losses  (256)  -   (683)  (679)  (293)  (342)  (976)  (973)
Net gains  632   305   1,157   1,135   1,018   4,324   2,175   5,442 
                
Equity securities:                                
Gross gains  1,034   31   2,230   160   3,339   1,463   5,569   1,078 
Gross losses  (239)  (2,087)  (715)  (3,011)  (365)  (264)  (1,080)  (2,713)
Net gains (losses)  795   (2,056)  1,515   (2,851)  2,974   1,199   4,489   (1,635)
                                
Limited partnerships - net gain (loss)  (4,285)  14,245   (2,340)  12,978 
Limited partnerships - net gain  6,279   9,918   3,939   22,896 
                                
Total net gains (losses) $(2,858) $12,494  $332  $11,262 
                
Total net gains $10,271  $15,441  $10,603  $26,703 



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  Three Months Ended  Nine Months Ended 
 June 30  June 30  September 30  September 30 
 2010  2009  2010  2009  2010  2009  2010  2009 
                        
Realized net gains (losses) on the disposal of securities $1,442  $(164) $2,687  $(479)
Equity in earnings (losses) of limited partnership                
Realized net gains on the disposal of securities $3,466  $1,843  $6,153  $1,364 
Equity in earnings of limited partnership                
investments - realized and unrealized  (4,285)  14,245   (2,340)  12,978   6,279   9,918   3,939   22,896 
Impairment:                                
Write-downs based upon objective criteria  (15)  (1,970)  (15)  (2,637)  -   (19)  (15)  (2,656)
Recovery of prior write-downs                                
upon sale or disposal  -   383   -   1,400   526   3,699   526   5,099 
                
Totals $(2,858) $12,494  $332  $11,262  $10,271  $15,441  $10,603  $26,703 



 
- 9 -
 

Notes to Condensed Unaudited Consolidated Financial Statements (continued)

The net lossgain from limited partnerships for the quarter and year-to-date ending JuneSeptember 30, 2010 include an estimated $6,447$5,016 gain and $7,243,$2,227 loss, respectively, of unrealized gains and losses reported to the Company as part of the operationsunderlying assets of the various limited partnerships.  Shareholders’ equity at JuneSeptember 30, 2010 includes approximately $23,115,$27,130, 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 2010 and 2009 comparative periods.
 

 2010  2009  2010  2009 
Quarter ended June 30:      
Quarter ended September 30:      
Premiums ceded to reinsurers $22,833  $14,408  $14,428  $16,305 
Losses and loss expenses                
ceded to reinsurers  2,317   (4,460)  10,387   3,382 
Commissions from reinsurers  2,430   1,327   2,752   1,422 
                
Six months ended June 30:        
Nine months ended September 30:        
Premiums ceded to reinsurers  38,421   26,361   52,848   42,666 
Losses and loss expenses                
ceded to reinsurers  2,078   4,916   8,523   8,298 
Commissions from reinsurers  4,494   2,180   7,246   3,602 


(4) Comprehensive Income or Loss:
Net comprehensive lossincome for the quarter ended JuneSeptember 30, 2010 was $5,234$13,525 and compares to net comprehensive income of $23,888$22,101 for the quarter ended JuneSeptember 30, 2009.  For the first sixnine months ended JuneSeptember 30, 2010, net comprehensive lossincome was $612$12,913 and compares to net comprehensive income of $24,042$46,143 for the sixnine months ended JuneSeptember 30, 2009.

(5) Reportable Segments:
The Company has two reportable business segments in its operations:  Property and Casualty Insurance and 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 to individuals, and writes commercial multi-peril and professional liability products on a limited basis.

The 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.

 
- 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 
  Direct and Assumed Premium Written  Net Premium Earned  Segment Profit (Loss)  Direct and Assumed Premium Written  Net Premium Earned  Segment Profit (Loss) 
Three months ended September 30:                  
Property and Casualty Insurance $59,084  $42,917  $4,942  $54,507  $35,804  $5,826 
Reinsurance  11,671   9,671   (1,476)  9,327   9,273   415 
Totals $70,755  $52,588  $3,466  $63,834  $45,077  $6,241 
                         
Nine months ended September 30:                        
Property and Casualty Insurance $185,847  $128,225  $18,780  $149,023  $101,525  $15,300 
Reinsurance  33,059   29,052   (9,088)  29,467   28,758   7,659 
Totals $218,906  $157,277  $9,692  $178,490  $130,283  $22,959 
                   
  2010  2009 
  Direct and Assumed Premium Written  Net Premium Earned  Segment Profit  Direct and Assumed Premium Written  Net Premium Earned  Segment Profit (Loss) 
                   
Three months ended June 30:                  
                   
Property and Casualty Insurance $61,153  $44,231  $6,715  $45,280  $30,745  $3,973 
Reinsurance  9,580   9,292   2,440   10,301   10,297   3,969 
                         
Totals $70,733  $53,523  $9,155  $55,581  $41,042  $7,942 
                         
Six months ended June 30:                        
                         
Property and Casualty Insurance $126,763  $85,308  $13,838  $94,516  $65,721  $9,473 
Reinsurance  21,388   19,381   (7,612)  20,140   19,485   7,244 
                         
Totals $148,151  $104,689  $6,226  $114,656  $85,206  $16,717 


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


  Three Months Ended  Nine Months Ended 
  September 30  September 30 
  2010  2009  2010  2009 
Profit:            
Segment profit $3,466  $6,241  $9,692  $22,959 
Net investment income  2,865   3,256   8,833   9,993 
Net realized gains on investments  10,271   15,441   10,603   26,703 
Corporate expenses  (3,070)  (3,791)  (9,242)  (11,121)
Income before federal income taxes $13,532  $21,147  $19,886  $48,534 
  Three Months Ended  Six Months Ended 
  June 30  June 30 
  2010  2009  2010  2009 
Profit:            
Segment profit $9,155  $7,942  $6,226  $16,717 
Net investment income  2,944   3,478   5,968   6,737 
Net gains (losses) on investments  (2,858)  12,494   332   11,262 
Corporate expenses  (2,638)  (3,483)  (6,172)  (7,329)
Income before federal income taxes $6,603  $20,431  $6,354  $27,387 


Segment profit includes both net premiums earned and fees and other income.income associated with the business conducted by the segment.

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.

 
- 11 -
 
 
Notes to Condensed Unaudited Consolidated Financial Statements (continued)

(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 $1,854$1,716 relating to such loans remains outstanding at JuneSeptember 30, 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.

(7) Debt:
The Company has $7,000 outstanding as of September 30, 2010 and $10,000 outstanding as of both June 30, 2010 and December 31, 2009, under the Company’sa revolving line of credit at variable interest rates detailed below.  The Company has $10,000$13,000 remaining unused under the revolving line of credit.credit at September 30, 2010.  The $10,000 of borrowings waswere used principally for treasury stock repurchases.

page 12 table
Description Maturity 2010 2009 Interest Rate 
          
          
Revolving line of credit June 23, 2011 $2,000 $5,000  0.85%
Revolving line of credit June 23, 2011  5,000  5,000  0.99%
Total Debt   $7,000 $10,000    


(8) Taxes:
As of JuneSeptember 30, 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.

(9) Fair Value:
In September 2006, the FASB issued guidance on fair 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 guidance 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.






(Space intentionally left blank)




 
- 12 -
 

Notes to Condensed Unaudited Consolidated Financial Statements (continued)

(9) Fair Value:
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 tables summarize fair value measurements by level for assets measured at fair value on a recurring basis:
 

As of June 30, 2010:            
As of September 30, 2010:            
                        
Description Total  Level 1  Level 2  Level 3  Total  Level 1  Level 2  Level 3 
                        
U.S. government obligations $52,410  $-  $52,410  $-  $60,039  $-  $60,039  $- 
Government sponsored entities  8,300   -   8,300   -   5,311   -   5,311   - 
Residential mortgage-backed securities  35,105   -   35,105   -   40,973   -   40,973   - 
Commercial mortgage-backed securities  14,024   -   14,024   -   12,948   -   12,948   - 
Obligations of states and                                
political subdivisions  213,118   -   213,118   -   211,770   -   211,770   - 
Corporate securities  71,452   -   56,487   14,965   72,242   -   55,222   17,020 
Foreign government obligations  16,532   -   16,532   -   17,937   -   17,937   - 
Total fixed maturities  410,941   -   395,976   14,965   421,220   -   404,200   17,020 
Equity securities  82,380   82,380   -   -   89,785   89,785   -   - 
Cash equivalents  46,579   -   46,579   -   39,674   -   39,674   - 
 $539,900  $82,380  $442,555  $14,965  $550,679  $89,785  $443,874  $17,020 



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  $85,886  $448,173  $14,887 



 
- 13 -
 

Notes to Condensed Unaudited Consolidated Financial Statements (continued)

Level inputs, as defined by FASB Fair Value Measurements, are as follows:
page 14 graphic
Level Input:Input Definition:
Level 1Inputs are unadjusted, quoted prices for identical assets or liabilities in active markets at the measurement date.
Level 2Inputs 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 3Unobservable inputs that reflect management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date.


The Level 3 assets consist of an investment portfolio of insurance-linked securities.  The insurance-linked securities are valued using the average of estimated market valuequotes from multiple insurance-linked securities brokers.  The broker quotes include Level 3 inputs which are significant to the valuation of the insurance-linked securities. A reconciliation of the beginning and ending balances of assets measured at fair value on a recurring basis using Level 3 inputs is as follows:


 Three Months Ended  Six Months Ended  Three Months Ended  Nine Months Ended 
 June 30  June 30  September 30  September 30 
 2010  2009  2010  2009  2010  2009  2010  2009 
Beginning of period balance $15,773  $15,280  $14,887  $14,981  $14,965  $15,683  $14,887  $14,981 
Total gain or losses (realized or unrealized)                                
Included in earnings (or changes in net assets)  513   346   898   741   600   191   1,498   932 
Included in other comprehensive income  (876)  57   (929)  (39)  615   638   (314)  599 
Purchases, issuances, and settlements  (445)  -   109   -   840   (497)  949   (497)
Transfers in and/or out of Level 3  -   -   -   -   -   -   -   - 
End of period balance $14,965  $15,683  $14,965  $15,683  $17,020  $16,015  $17,020  $16,015 


We attempt to obtain quotedQuoted market prices are obtained 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.

 
- 14 -
 

Notes to Condensed Unaudited Consolidated Financial Statements (continued)

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 sixnine months ended JuneSeptember 30, 2010 and 2009.

(10) Restricted Stock:
Effective June 11, 2009, the Company issued 20,900 shares of class B restricted stock to the Company’s outside directors.  The restricted shares became fully vested on May 5, 2010 and were paid in an equal number of shares of the Company’s class B stock.  The shares represent the annual retainer compensation for the outside directors for the period July 1, 2009 through June 30, 2010.  Each share was valued at $21.05 per share representing a total value of $440.  Compensation expense related to the above stock grant was recognized over the period in which the directors rendered the services.

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 to certain executives under the Company’s 2009 Executive Incentive Bonus Plan and additional stock awards approved by the Board of Directors.  The restricted shares will vest ratably over a three year period from the date of grant and are accelerated for retirement eligible recipients due to the 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 wasw as granted. Non-vested restricted shares will be forfeited should an executive’s employment terminate for any reason other than death, disability, or retirement as defined by the Compensation Committee.

Effective May 4, 2010, the Company issued 17,754 shares of class B restricted stock to the Company’s outside directors.  The restricted shares will be paid solely in the Company’s class B stock.  These restricted shares represent the annual retainer compensation for the outside directors for the period July 1, 2010 through June 30, 2011 and will vest on May 4, 2011.  Vesting will be accelerated only on the condition of death, disability, or change in control of the Company.  Each restricted share is valued at $24.78 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.

On November 2, 2010, the Company declared a regular quarterly dividend of $.25 per share on the Company’s Class A and Class B Common Stock.  The dividend per share will be payable November 30, 2010 to shareholders of record on November 16, 2010.




- 15 -

Notes to Condensed Unaudited Consolidated Financial Statements (continued)

(11) Subsequent Events:
We have evaluated subsequent events for recognition or disclosure in the consolidated financial statements filed on Form 10-Q with the SEC and no events have occurred subsequent to September 30, 2010 that require recognition or disclosure.

(12) Pending Accounting Standards:
In October 2010, the FASB issued updated guidance to address the diversity in practice for the accounting for costs associated with acquiring or renewing insurance contracts. This guidance modifies the definition of acquisition costs to specify that a cost must be directly related to the successful acquisition of a new or renewal insurance contract in order to be deferred. If application of this guidance would result in the capitalization of acquisition costs that had not previously been capitalized by a reporting entity, the entity may elect not to capitalize those costs. The updated guidance is effective for interim and annual reporting periods beginning after December 15, 2011. We are currently evaluating the impact the adoption of the guidance effectiv e January 1, 2012, will have on our consolidated financial statements.

 
- 1516 -
 

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 2010, the Company experienced positive cash flow from operations totaling $24.8$36.9 million which compares to negativepositive cash flow from operations of $5.5$13.8 million generated during the first sixnine months of 2009.  The $30.3$23.1 million improvement in cash flow from the 2009 period is primarily due to higher net premiums received and lower gross loss payments.  These increases werethat was partially offset by a decline in investment income received.

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, using contractual maturities applied to par value, was 3.73.9 years at JuneSeptember 30, 2010, which is substantially shorter than the Company’s liability duration.average life.

Financing activity for the first sixnine months of 2010 included regular and extra dividend payments of $11.1$14.8 million ($.751.00 per share). and the repayment of $3.0 million under the Company’s line of credit.

The Company’s assets at JuneSeptember 30, 2010 included $46.6$39.7 million in investments classified as cash equivalents that were readily convertible to cash without significant market penalty.  An additional $181.3$185.4 million of fixed maturity investments will mature within the twelve-month period following JuneSeptember 30, 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 JuneSeptember 30, 2010, $47.1$43.7 million may be transferred by dividend or loan to the parent company during the remainder of 2010 without approval by, or prior notification to, regulatory authorities.  An additional $229.5$241.6 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 materialmateria l liquidity concerns to the Company.  The Company also believes that the financial strength and stability of the subsidiaries would permit ready access by the parent

- 17 -

company to short-term and long-term sources of credit.  The parent company had cash and marketable securities valued at $2.5$7.2 million at JuneSeptember 30, 2010.

- 16 -
The Company’s annualized premium writing to surplus ratio for the first sixnine months of 2010 was approximately 63%62%.  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

ComparisonsComparison of SecondThird Quarter, 2010 to SecondThird Quarter, 2009

Net premiums earned during the secondthird quarter of 2010 increased $12.5$7.5 million (30.4%(16.7%) as compared to the same period of 2009.  The Company’s Property and Casualty Insurance segment reported an increase of 43.9%19.9% while the Reinsurance segment reported a decreasean increase of 9.8%4.3%.  These changes are in line with expectations and result from theproduct expansion and continuing marketing efforts in the Property and Casualty Insurance segment and from program changes, effective January 1, 2010, in the Reinsurance segment.segment and introduction of professional liability reinsurance in 2010.  The following table provides information regarding premiums written and earned for major product lines for the quarter ended JuneSeptember 30 (dollars in thousands):


 2010  2010 
 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 $46,249  $33,051  $32,908  $45,840  $31,831  $31,753 
Private Passenger Automobile  5,725   5,637   7,220   6,074   5,984   7,058 
Commercial Mult-Peril  8,435   (607)  3,697   6,426   6,795   3,820 
Residual Market and All Other  744   554   406   744   360   286 
Total Property and Casualty Insurance  61,153   38,635   44,231   59,084   44,970   42,917 
Reinsurance:                        
Property  9,400   9,087   8,972   8,967   8,654   8,769 
Casualty  180   180   320   2,704   2,704   902 
Total Reinsurance  9,580   9,267   9,292   11,671   11,358   9,671 
Totals $70,733  $47,902  $53,523  $70,755  $56,328  $52,588 

The negative net premium written for commercial multi-peril results from reinsurance ceded changes made effective for all inforce premium as of May 1, 2010 whereby additional amounts of previously written but unearned premium will be ceded as the premium is earned.  This is a non-recurring event.

 
- 1718 -
 


 2009  2009 
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 
Commercial Mult-Peril  3,884   1,372   138   7,069   3,462   863 
Residual Market and All Other  794   792   624   241   244   254 
Total Property and Casualty Insurance  45,280   30,901   30,745   54,507   38,256   35,804 
Reinsurance:                        
Property  10,301   10,273   10,297   9,327   9,272   9,273 
Casualty  -   -   -   -   -   - 
Total 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 


Premium ceded to reinsurers on insurance business produced by the Property and Casualty Insurance segment averaged 29.5%30.4% of premium earned for the current quarter compared to 30.9%26.6% a year earlier.earlier reflecting higher reinsurance placements on new products and changes in the mix of business.

Net investment income, before tax, during the secondthird quarter of 2010 was 15.4%12.0% lower than the secondthird quarter of 2009 due primarily to lower available interest rates.rates.  Pre-tax yields averaged 2.7%2.6% during the current quarter compared to 3.4%3.1% for the prior year period.  Overall after-tax yields decreased from 2.8%2.5% to 2.1%1.9%.  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 2010 net realized investment lossesgains of $2.9$10.3 million resulted primarily from $4.3$6.3 million in lossesgains on limited partnerships partially offset by $1.4and $4.0 million in investment gains on direct tradingdisposal of securities.  Comparative secondthird quarter 2009 investment gains were $12.5$15.4 million; however, investment gains occur based on decisions regarding the sale of individual securities and the change in total value of limited partnerships and, as such, are not expected to be comparable from period to period.  The net realized investment losses during the current quarter were impacted by the downturn 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 2010 were $9.1$9.4 million higher than that experienced during the secondthird quarter of 2009 due primarily to property reinsurance and private passenger automobile and property reinsurance losses.  Loss ratios for each of the Company’s major product lines were as follows:

2010 2009 2010  2009 
Fleet Transportation   55.5%    58.2%  62.6%  57.4%
Private Passenger Automobile88.3 71.6  85.7   67.4 
Commercial Multi-Peril50.7 79.4  49.8   46.5 
Reinsurance - Property45.5 31.5  85.5   61.0 
Reinsurance - Casualty59.7 N/A  60.0   N/A 
All Lines58.2 53.8  68.6   59.3 
 
 
- 1819 -
 
Other operating expenses, for the secondthird quarter of 2010 increased $1.5 million, or 9%,were flat from the secondthird quarter of 2009.  The majority of this increase relates to higher gross commission expense and higher state taxes related to increased premium volume.  All other expenses remained relatively flat when compared to the prior period.  The ratio of consolidated other operating expenses to operating revenue decreased to 30.1%31.0% during the secondthird quarter of 2010 compared to 34.8%35.2% for the 2009 secondthird quarter, the decline being reflective of the impact of higher premium on largely fixed operating costs and the impact of first quarter catastrophe losses on contingent commissions duehigher ceding commission offsets related to retrocessionaires (higher losses result in the loss of contingency profit sharing recorded as commission expense).increased reinsurance ceded.

The effective federal tax rate on consolidated income for the secondthird quarter of 2010 was 24.5%31.8%.  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 decreased $9.1$5.1 million during the secondthird quarter of 2010 as compared to the 2009 period.

Comparisons
Comparison of SixNine Months Ended JuneSeptember 30, 2010 to SixNine Months Ended JuneSeptember 30, 2009

Net premiums earned during the first sixnine months of 2010 increased $19.5$27.0 million (22.9%(20.7%) as compared to the same period of 2009.  The Company’s Property and Casualty Insurance and Reinsurance segments reported increases of 29.8%26.3% and decreases of .5%1.0%, respectively, for the same reasons noted in the quarterly comparison above.  The following table provides information regarding premiums written and earned for major product lines for the sixnine months ended JuneSeptember 30 (dollars in thousands):



 2010 
 Direct and Assumed Premium Written  Net Premium Written  Net Premium Earned  2010 
          Direct and Assumed Premium Written  Net Premium Written  Net Premium Earned 
Property and Casualty Insurance:                  
Fleet Transportation $91,711  $65,024  $64,625  $137,551  $96,855  $96,378 
Private Passenger Automobile  16,524   16,361   13,852   22,598   22,345   20,910 
Commercial Mult-Peril  17,555   6,867   6,228   23,981   13,662   10,048 
Residual Market and All Other  973   718   603   1,717   1,078   889 
Total Property and Casualty Insurance  126,763   88,970   85,308   185,847   133,940   128,225 
Reinsurance:                        
Property  19,390   18,765   18,650   28,357   27,419   27,419 
Casualty  1,998   1,998   731   4,702   4,702   1,633 
Total Reinsurance  21,388   20,763   19,381   33,059   32,121   29,052 
Totals $148,151  $109,733  $104,689  $218,906  $166,061  $157,277 


 
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 2009  2009 
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 
Commercial Mult-Peril  3,884   1,372   138   10,953   4,834   1,001 
Residual Market and All Other  937   935   808   1,178   1,179   1,062 
Total Property and Casualty Insurance  94,516   68,837   65,721   149,023   107,093   101,525 
Reinsurance:                        
Property  20,140   19,461   19,485   29,467   28,733   28,758 
Casualty  -   -   -   -   -   - 
Total 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 


Premium ceded to reinsurers on insurance business produced by the Property and Casualty Insurance segment averaged 29.8%30.0% of premium earned for the current year period compared to 28.5%27.9% a year earlier.earlier reflecting higher reinsurance placements on new products and changes in the mix of business.

Net investment income, before tax, during the first sixnine months of 2010 was 11.4%11.6% lower than the first sixnine months of 2009 for the same reasons noted in the quarterly comparison.  Pre-tax yields averaged 2.7% during the current period compared to 3.3%3.2% for the prior year period.  Overall after-tax yields decreased from 2.8%2.7% to 2.1%2.0%.

Net realized investment gains for the first sixnine months of 2010 were $.3$10.6 million, resulting from a $2.7$6.7 million gain on direct tradingdisposal of securities offset by $2.4and a $3.9 million in lossesgain on limited partnerships.  RealizedNet realized investment gains were $11.3$26.7 million for the same period in 2009; however, investment gains occur based on decisions regarding the sale of individual securities and the change in total value of limited partnerships and, as such, are not expected to be comparable from period to period.  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 2010 were $28.2$37.6 million higher than that experienced during the first sixnine months of 2009 with the majority of the increase attributable to catastrophe losses from major earthquakes and windstorms most notably Earthquake Maule in Chile,occurring during the first and third quarters of approximately $18.1 million.2010 totaling $24.1 million with the remainder attributable to increased premium volume.  Loss ratios for each of the Company’s major product lines were as follows:

 2010 2009
Fleet Transportation   55.2%    56.9%
Private Passenger Automobile84.0 68.7
Commercial Multi-Peril54.9 79.4
Reinsurance - Property120.4 36.0
Reinsurance - Casualty59.9 N/A
All Lines70.9 54.0
 
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  2010  2009 
Fleet Transportation  57.6%  57.1%
Private Passenger Automobile  84.6   68.3 
Commercial Multi-Peril  52.9   51.0 
Reinsurance - Property  109.2   44.1 
Reinsurance - Casualty  60.0   N/A 
All Lines  70.1   55.8 

Other operating expenses, for the first sixnine months of 2010, increased $.9$1.0 million, or 3%1.9%, from the 2009 six-monthnine-month period.  The majority of this increase relates to expenses that vary directly with increased premium volume.  The ratio of consolidated other operating expenses to operating revenue was 29.7%30.1% during the 2010 period compared to 34.7%34.9% for the 2009 period, the decline being reflective of the impact of higher premium on largely fixed operating costs, higher ceding commission offsets related to increased reinsurance ceded and the impact of first and third quarter catastrophe losses on contingent commissions due to retrocessionaires (higher losses result in the loss of contingency profit sharing recorded as commission expense).

The effective federal tax rate on consolidated income for the first sixnine months of 2010 was 13.0%25.8%.  The effective rate differs from the normal statutory rate primarily as a result of tax-exempt investment income and is impacted by the large catastrophe losses in the first quarter.income.

As a result of the factors mentioned above, net income decreased by $14.0$19.1 million as compared with the 2009 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 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, 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 JuneSeptember 30, 2010, amounts due from reinsurers on paid and

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unpaid losses, are estimated to total approximately $138$136 million.  Of this total, approximately $61$55 million (44%(40%) 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,Compa ny, 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 claim losses incurred by the Company.

At JuneSeptember 30, 2010, limited partnership investments include approximately $48.0$52.9 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 contains 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, 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 5. OTHER INFORMATION

At our Annual Meeting of Shareholders held on May 4, 2010, shareholders voted on the following proposals:

        WITHHOLD 
  FOR  AGAINST  (ABSTAIN) 
To approve the Baldwin & Lyons Restricted Stock Compensation Plan  1,897,225        491   1,406 
To approve the 2010 Baldwin & Lyons Executive Bonus Plan  1,799,308   95,470   4,340 
To ratify the appointment of Ernst & Young LLP as our independent registered public accounting firm for the fiscal year ending December 31, 2010  1,898,218        800     100 
             

Election of Directors:   All presently serving directors were reelected in an uncontested election.

Each of the above matters submittedNothing to a vote of shareholders was described in greater detail in the definitive proxy soliciting materials which were sent to shareholders and were filed with the Commission on April 1, 2010.report.




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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     AugustNovember 4, 2010                                                                       By  /s/ Gary W. Miller         
     Gary W. Miller, Chairman and CEO






Date     AugustNovember 4, 2010                                                                       By  /s/ G. Patrick Corydon       
     G. Patrick Corydon,
     Executive Vice President – Finance
     (Principal Financial and
      Accounting OfficerOfficer)























 
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BALDWIN & LYONS, INC.

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