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                                                                                                                                                                                                                                                                                                 ��                                                                                                                                                                                                                                                                                         Commission file number
                                                                                                                   March 31,June 30, 2012                                                                                                                                                                                                                                                                                                                        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 MayAugust 1, 2012:

TITLE OF CLASS                                                              NUMBER OF SHARES OUTSTANDING
  Common Stock, No Par Value:
Class A (voting)                                                                                                 2,623,109
Class B (nonvoting)                                                                                         12,225,82512,244,019


Index to Exhibits located on page 25.27.

 
- 1 -
 

PART I – FINANCIAL INFORMATION

ITEM 1  FINANCIAL STATEMENTS

Baldwin & Lyons, Inc. and Subsidiaries
            
Unaudited Consolidated Balance Sheets            
            
(in thousands, except share data)            
            
 March 31  December 31  June 30  December 31 
 2012  2011  2012  2011 
Assets            
Investments:            
Fixed maturities $425,660  $409,460  $410,648  $409,460 
Equity securities  105,290   88,085   101,077   88,085 
Limited partnerships  58,247   54,705   53,280   54,705 
Short-term  3,293   3,675   3,346   3,675 
  592,490   555,925   568,351   555,925 
                
Cash and cash equivalents  74,358   89,726   87,625   89,726 
Accounts receivable  82,311   74,094   71,537   74,094 
Reinsurance recoverable  128,447   138,404   128,375   138,404 
Notes receivable from employees  -   1,302   -   1,302 
Other assets  42,523   35,370   38,754   35,370 
Current federal income taxes  -   3,354   8,755   3,354 
Deferred federal income taxes  -   7,119   -   7,119 
 $920,129  $905,294  $903,397  $905,294 
                
Liabilities and shareholders' equity                
Reserves for losses and loss expenses $406,296  $421,556  $408,380  $421,556 
Reserves for unearned premiums  43,674   39,919   38,400   39,919 
Short-term borrowings  10,000   10,000   10,000   10,000 
Accounts payable and accrued expenses  123,305   114,758   112,093   114,758 
Current federal income taxes  1,327   - 
Deferred federal income taxes  819   -   3,564   - 
  585,421   586,233   572,437   586,233 
Shareholders' equity:                
Common stock-no par value:                
Class A voting -- authorized 3,000,000 shares;                
outstanding -- 2012 - 2,623,109; 2011 - 2,623,109  112   112   112   112 
Class B non-voting -- authorized 20,000,000 shares;                
outstanding -- 2012 - 12,225,825; 2011 - 12,225,348  522   522 
outstanding -- 2012 - 12,244,019; 2011 - 12,225,348  522   522 
Additional paid-in capital  48,772   48,751   49,187   48,751 
Unrealized net gains on investments  34,257   26,592   29,992   26,592 
Retained earnings  251,045   243,084   251,147   243,084 
  334,708   319,061   330,960   319,061 
 $920,129  $905,294  $903,397  $905,294 


See notes to condensed consolidated financial statements.

 
- 2 -
 

 
 
Baldwin & Lyons, Inc. and Subsidiaries
                  
Unaudited Consolidated Statements of Operations                  
                  
(in thousands, except per share data)                  
                  
 Three Months Ended  Three Months Ended  Six Months Ended 
 March 31  June 30  June 30 
 2012  2011  2012  2011  2012  2011 
Revenues                  
Net premiums earned $61,551  $57,601  $59,655  $62,344  $121,206  $119,945 
Net investment income  2,422   2,653   2,431   2,644   4,853   5,297 
Commissions and other income  1,506   1,607   1,623   1,566   3,128   3,173 
Net realized gains (losses) on investments  5,381   (1,469)
Net realized gains (losses) on investments, excluding                
impairment losses  (5,108)  (1,845)  272   (3,314)
Total other-than-temporary impairment losses on investments  (345)  (118)  (345)  (118)
Net realized losses on investments  (5,453)  (1,963)  (73)  (3,432)
  70,860   60,392   58,256   64,591   129,114   124,983 
                        
Expenses                        
Losses and loss expenses incurred  34,904   65,673   33,739   55,166   68,643   120,839 
Other operating expenses  18,957   18,436   19,257   18,117   38,213   36,553 
  53,861   84,109   52,996   73,283   106,856   157,392 
Income (loss) before federal income taxes  16,999   (23,717)  5,260   (8,692)  22,258   (32,409)
Federal income taxes (benefits)  5,493   (8,519)  1,210   (3,188)  6,702   (11,707)
Net income (loss) $11,506  $(15,198) $4,050  $(5,504) $15,556  $(20,702)
                        
Per share data:                        
Basic and diluted earnings (losses) $.78  $(1.02) $.27  $(.38) $1.05  $(1.40)
                        
Dividends paid to shareholders $.25  $.25  $.25  $.25  $.50  $.50 
                        
Reconciliation of shares outstanding:                        
Average shares outstanding - basic  14,826   14,802   14,837   14,819   14,832   14,810 
Dilutive effect of share equivalents  16   20   23   15   24   21 
Average shares outstanding - diluted  14,842   14,822   14,860   14,834   14,856   14,831 



See notes to condensed consolidated financial statements.









 
- 3 -
 



Baldwin & Lyons, Inc. and Subsidiaries
                  
Unaudited Consolidated Statements of Comprehensive Income (Loss)                  
                  
(in thousands, except per share data)                  
                  
 Three Months Ended  Three Months Ended  Six Months Ended 
 March 31  June 30  June 30 
 2012  2011  2012  2011  2012  2011 
                  
Net income (loss) $11,506  $(15,198) $4,050  $(5,504) $15,556  $(20,702)
                        
Other comprehensive income, net of tax:                        
Unrealized net gains on securities:        
Unrealized holding net gains arising during the period  7,639   3,927 
Less: reclassification adjustment for net gains (losses) included in        
net income (loss)  (26)  46 
Unrealized net gains (losses) on securities:                
Unrealized holding net gains (losses) arising during the period  (4,635)  1,030   3,003   4,956 
Less: reclassification adjustment for net gains (losses)                
included in net income (loss)  (370)  1,089   (397)  1,134 
  7,665   3,881   (4,265)  (59)  3,400   3,822 
                        
Foreign currency translation adjustments  204   227   (223)  61   (19)  288 
                        
Other comprehensive income  7,869   4,108 
Other comprehensive income (loss)  (4,488)  2   3,381   4,110 
                        
Comprehensive income (loss) $19,375  $(11,090) $(438) $(5,502) $18,937  $(16,592)


 
See notes to condensed consolidated financial statements.



 
- 4 -
 


Baldwin & Lyons, Inc. and Subsidiaries            
Unaudited Consolidated Statements of Cash Flows            
            
(in thousands)            
            
 Three Months Ended  Six Months Ended 
 March 31  June 30 
 2012  2011  2012  2011 
            
Net cash provided by operating activities $11,666  $6,621  $22,445  $26,769 
Investing activities:                
Purchases of available-for-sale investments  (104,714)  (100,022)  (165,890)  (182,133)
Purchases of limited partnership interests  (1,538)  -   (1,538)  - 
Proceeds from sales or maturities                
of available-for-sale investments  78,829   96,173   147,345   188,102 
Net sales (purchases) of short-term investments  382   (330)  329   (83)
Other investing activities  3,552   (459)  2,701   (868)
Net cash used in investing activities  (23,489)  (4,638)
Net cash provided by (used in) investing activities  (17,053)  5,018 
Financing activities:                
Dividends paid to shareholders  (3,749)  (3,722)  (7,474)  (7,454)
Repayment on line of credit  -   (5,000)  -   (5,000)
Net cash used in financing activities  (3,749)  (8,722)  (7,474)  (12,454)
                
Effect of foreign exchange rates on cash and cash equivalents  204   227   (19)  288 
                
Decrease in cash and cash equivalents  (15,368)  (6,512)
Increase (decrease) in cash and cash equivalents  (2,101)  19,621 
Cash and cash equivalents at beginning of period  89,726   38,223   89,726   38,223 
Cash and cash equivalents at end of period $74,358  $31,711  $87,625  $57,844 



See notes to condensed consolidated financial statements.

 
- 5 -
 

Notes to Condensed Unaudited Consolidated Financial Statements
 
(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, 2012.  Interim financial statements should be read in conjunction with the Company’s annual audited financial statements and other disclosures included in the Company’s most recent Form 10-K.

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 income statement, its proportionate share of the investee’s unrealized as well as realized investment gains or losses.

Other investments, if any, are carried at either market value or cost, depending on the nature of the investment.  Short-term investments are carried at cost which approximates their fair values.

Realized gains and losses on disposals of investments are determined by specific identification of the 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.  Included within available for sale fixed maturity securities are insurance linked securities and convertible debt securities.  The changes in fair values of insurance-linked securities and portions of the changes in fair values of convertible debt securities are reflected as a component of net realized gains (losses).


 
- 6 -
 

Notes to Condensed Unaudited Consolidated Financial Statements (continued)

With respect to other–than-temporary impairment of 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 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.  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 information in evaluating for impairment without consideration to the Company’s quantitative criteria defined above.

Newly Effective 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 Company had no adjustments upon the adoption of the guidance which was effective January 1, 2012.

 
- 7 -
 

Notes to Condensed Unaudited Consolidated Financial Statements (continued)

In May 2011, the FASB issued updated accounting guidance that changes the wording used to describe many of the requirements in GAAP for measuring fair value and for disclosing information about fair value measurements to ensure consistency between GAAP and International Financial Reporting Standards.  The guidance also expands the disclosures for fair value measurements that are estimated using significant unobservable (Level 3) inputs.  WeThe Company adopted the provisions of Accounting Standards Updates 2011-04 effective January 1, 2012, and have included the additional disclosures required for fair value measurements in Note 8 for the quarterly period ended March 31,June 30, 2012. 

In June 2011, the FASB issued revised accounting guidance that eliminates the option to present the components of other comprehensive income as part of the statement of shareholders' equity. Instead, comprehensive income must be reported in either a single continuous statement of comprehensive income which contains two sections, net income and other comprehensive income, or in two separate but consecutive statements.  A statement complying with these requirements is included in this report.  WeThe Company elected to present the components of comprehensive income in two separate but consecutive financial statements, which is illustrated in the “Consolidated Statements of Comprehensive income.Income (Loss).”

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







 
- 8 -
 

Notes to Condensed Unaudited Consolidated Financial Statements (continued)

(2) Investments:
The following is a summary of available-for-sale securities at March 31,June 30, 2012 and December 31, 2011:

              Net 
     Cost or  Gross  Gross  Unrealized 
  Fair  Amortized  Unrealized  Unrealized  Gains 
  Value  Cost  Gains  Losses  (Losses) 
June 30, 2012:               
   U.S. government obligations $69,433  $69,433  $52  $(52) $- 
   Residential mortgage-backed securities  18,165   18,347   533   (715)  (182)
   Commercial mortgage-backed securities  15,153   14,821   490   (158)  332 
   States and municipal obligations  174,216   173,165   1,092   (41)  1,051 
   Corporate securities  112,182   111,368   1,844   (1,030)  814 
   Foreign government obligations  21,499   21,650   161   (312)  (151)
      Total fixed maturities  410,648   408,784   4,172   (2,308)  1,864 
   Equity securities:                    
   Financial institutions  10,121   5,012   5,260   (151)  5,109 
   Industrial & Miscellaneous  90,956   51,787   41,184   (2,015)  39,169 
      Total equity securities  101,077   56,799   46,444   (2,166)  44,278 
      Total available-for-sale securities $511,725  $465,583  $50,616  $(4,474)  46,142 
                     
              Applicable federal income taxes   (16,150)
                     
              Net unrealized gains - net of tax  $29,992 
                     
December 31, 2011:                    
   U.S. government obligations $73,137  $73,009  $139  $(11) $128 
   Government sponsored entities  349   345   4   -   4 
   Residential mortgage-backed securities  21,872   21,778   619   (525)  94 
   Commercial mortgage-backed securities  11,300   11,388   116   (204)  (88)
   States and municipal obligations  190,035   188,991   1,275   (231)  1,044 
   Corporate securities  91,646   91,949   1,429   (1,732)  (303)
   Foreign government obligations  21,121   21,483   168   (530)  (362)
      Total fixed maturities  409,460   408,943   3,750   (3,233)  517 
   Equity securities:                    
   Financial institutions  9,428   4,955   4,778   (305)  4,473 
   Industrial & Miscellaneous  78,657   42,736   36,921   (1,000)  35,921 
      Total equity securities  88,085   47,691   41,699   (1,305)  40,394 
      Total available-for-sale securities $497,545  $456,634  $45,449  $(4,538)  40,911 
                     
              Applicable federal income taxes   (14,319)
                     
              Net unrealized gains - net of tax  $26,592 


              Net 
     Cost or  Gross  Gross  Unrealized 
  Fair  Amortized  Unrealized  Unrealized  Gains 
  Value  Cost  Gains  Losses  (Losses) 
March 31, 2012:               
   U.S. government obligations $72,810  $72,688  $156  $(34) $122 
   Government sponsored entities  172   170   2   -   2 
   Residential mortgage-backed securities  19,917   19,804   572   (459)  113 
   Commercial mortgage-backed securities  13,614   13,230   503   (119)  384 
   States and municipal obligations  186,148   184,923   1,284   (59)  1,225 
   Corporate securities  110,484   109,279   2,361   (1,156)  1,205 
   Foreign government obligations  22,515   22,294   365   (144)  221 
      Total fixed maturities  425,660   422,388   5,243   (1,971)  3,272 
   Equity securities:                    
   Financial institutions  11,037   5,106   6,035   (104)  5,931 
   Industrial & Miscellaneous  94,253   50,753   44,216   (716)  43,500 
      Total equity securities  105,290   55,859   50,251   (820)  49,431 
      Total available-for-sale securities $530,950  $478,247  $55,494  $(2,791)  52,703 
                     
              Applicable federal income taxes   (18,446)
                     
              Net unrealized gains - net of tax  $34,257 
                     
December 31, 2011:                    
   U.S. government obligations $73,137  $73,009  $139  $(11) $128 
   Government sponsored entities  349   345   4   -   4 
   Residential mortgage-backed securities  21,872   21,778   619   (525)  94 
   Commercial mortgage-backed securities  11,300   11,388   116   (204)  (88)
   States and municipal obligations  190,035   188,991   1,275   (231)  1,044 
   Corporate securities  91,646   91,949   1,429   (1,732)  (303)
   Foreign government obligations  21,121   21,483   168   (530)  (362)
      Total fixed maturities  409,460   408,943   3,750   (3,233)  517 
   Equity securities:                    
   Financial institutions  9,428   4,955   4,778   (305)  4,473 
   Industrial & Miscellaneous  78,657   42,736   36,921   (1,000)  35,921 
      Total equity securities  88,085   47,691   41,699   (1,305)  40,394 
      Total available-for-sale securities $497,545  $456,634  $45,449  $(4,538)  40,911 
                     
              Applicable federal income taxes   (14,319)
                     
              Net unrealized gains - net of tax  $26,592 




 
- 9 -
 

Notes to Condensed Unaudited Consolidated Financial Statements (continued)

The Company has threefive other-than-temporarily impaired fixed maturity securities at March 31, 2012, which were previously impaired.June 30, 2012.  The Company has three and one other-than-temporary impairment losslosses relating to fixed maturity securities recognized in accumulated other comprehensive income as of March 31,June 30, 2012 and December 31, 2011.2011, respectively.

The following table summarizes, for fixed maturity and equity security investments in an unrealized loss position at March 31,June 30, 2012 and December 31, 2011, 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, 2012  December 31, 2011 
  Number of Securities  Fair Value  Gross Unrealized Loss  Number of Securities  Fair Value  Gross Unrealized Loss 
Fixed maturity securities:                  
12 months or less  204  $98,248  $(1,978)  206  $86,470  $(2,303)
Greater than 12 months  35   14,548   (330)  44   11,930   (930)
Total fixed maturities  239   112,796   (2,308)  250   98,400   (3,233)
Equity securities:                        
12 months or less  33   11,244   (1,785)  35   8,317   (1,275)
Greater than 12 months  10   3,460   (381)  4   216   (30)
Total equity securities  43   14,704   (2,166)  39   8,533   (1,305)
Total fixed maturity and equity securities  282  $127,500  $(4,474)  289  $106,933  $(4,538)

  March 31, 2012  December 31, 2011 
  Number of Securities  Fair Value  Gross Unrealized Loss  Number of Securities  Fair Value  Gross Unrealized Loss 
Fixed maturity securities:                  
12 months or less  217  $78,440  $(1,316)  206  $86,470  $(2,303)
Greater than 12 months  35   14,183   (655)  44   11,930   (930)
Total fixed maturities  252   92,623   (1,971)  250   98,400   (3,233)
Equity securities:                        
12 months or less  16   7,069   (781)  35   8,317   (1,275)
Greater than 12 months  4   497   (39)  4   216   (30)
Total equity securities  20   7,566   (820)  39   8,533   (1,305)
Total fixed maturity and equity securities  272  $100,189  $(2,791)  289  $106,933  $(4,538)
 
The fair value and the cost or amortized cost of fixed maturity investments, at March 31,June 30, 2012, 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 $144,610  $144,309  $129,753  $129,659 
Excess of one year to five years  219,069   216,846   211,721   210,120 
Excess of five years to ten years  14,094   13,872   22,174   22,204 
Excess of ten years  3,264   3,098   3,155   3,036 
Total maturities  381,037   378,125   366,803   365,019 
Asset-backed securities  44,623   44,263   43,845   43,765 
 $425,660  $422,388  $410,648  $408,784 


 
- 10 -
 

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 operations.


 Three Months Ended  Three Months Ended  Six Months Ended 
 March 31  June 30  June 30 
 2012  2011  2012  2011  2012  2011 
Fixed maturities:                  
Gross gains $550  $997  $792  $1,161  $1,342  $2,158 
Gross losses  (971)  (1,467)  (1,181)  (402)  (2,152)  (1,869)
Net losses  (421)  (470)
Net gains (losses)  (389)  759   (810)  289 
                        
Equity securities:                        
Gross gains  524   1,031   152   1,198   675   2,229 
Gross losses  (142)  (491)  (333)  (283)  (475)  (773)
Net gains  382   540 
Net gains (losses)  (181)  915   200   1,456 
                        
Limited partnerships - net gain (loss)  5,420   (1,539)  (4,883)  (3,637)  537   (5,177)
                        
                        
Total net gains (losses) $5,381  $(1,469)
Total net losses $(5,453) $(1,963) $(73) $(3,432)


Gains and losses activity for investments, as shown in the previous table, are further detailed as follows:

 Three Months Ended  Three Months Ended  Six Months Ended 
 March 31  June 30  June 30 
 2012  2011  2012  2011  2012  2011 
                  
Realized net gains (losses) on the disposal of securities $(96) $408  $(109) $1,636  $(205) $2,044 
Mark-to-market adjustment  57   (802)  (369)  156   (313)  (645)
Equity in gains (losses) of limited partnership                        
investments - realized and unrealized  5,420   (1,539)  (4,883)  (3,637)  537   (5,177)
Impairment:                        
Write-downs based upon objective criteria  -   -   (345)  (118)  (345)  (118)
Recovery of prior write-downs                        
upon sale or disposal  -   464   253   -   253   464 
                        
Totals $5,381  $(1,469) $(5,453) $(1,963) $(73) $(3,432)


The mark-to-market adjustments in the table above represent the changes in fair value of (1) options embedded in convertible debt securities and (2) insurance-linked securities held by the Company.


 
- 11 -
 

Notes to Condensed Unaudited Consolidated Financial Statements (continued)

The income (loss) from limited partnerships for the quarter and year-to-date periods ending March 31,June 30, 2012 includes an estimated $5,531$1,670 net unrealized losses and $3,861 of net unrealized gains, respectively, reported to the Company as part of the underlying assets of the various limited partnerships.  The value of limited partnerships at March 31,June 30, 2012 includes approximately $1,363$306 of net unrealized gainslosses reported to the Company as part of the underlying assets of the various limited partnerships. Shareholders’ equity at March 31,June 30, 2012 includes approximately $19,104,$15,877, 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 2012 and 2011 comparative periods.
 

 2012  2011  2012  2011 
Quarter ended March 31:      
Quarter ended June 30:      
Premiums ceded to reinsurers $24,748  $21,007  $24,472  $21,438 
Losses and loss expenses                
ceded to reinsurers  7,804   11,080   11,333   14,376 
Commissions from reinsurers  3,835   2,717   3,137   2,597 
        
Six months ended June 30:        
Premiums ceded to reinsurers  49,220   42,445 
Losses and loss expenses        
ceded to reinsurers  19,137   25,829 
Commissions from reinsurers  6,973   5,315 


(4) 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 commercial multi-peril and professional liability products on a limitedselective 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.  In addition, the Reinsurance segment accepts selected professional liability cessions from other insurance companies.



- 12 -

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.




- 12 -

Notes to Condensed Unaudited Consolidated Financial Statements (continued)

 2012  2011  2012  2011 
 Direct and Assumed Premium Written  Net Premium Earned  Segment Profit (Loss)  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 (Loss) 
                                    
Three months ended March 31:                  
Three months ended June 30:                  
                                    
Property and Casualty Insurance $75,226  $47,909  $6,933  $72,104  $45,518  $1,452  $64,760  $48,167  $6,872  $67,309  $47,352  $6,147 
Reinsurance  14,827   13,642   6,137   13,027   12,083   (22,748)  14,094   11,488   5,314   15,722   14,992   (12,470)
                                                
Totals $90,053  $61,551  $13,070  $85,131  $57,601  $(21,296) $78,854  $59,655  $12,186  $83,031  $62,344  $(6,323)
                        
Six months ended June 30:                        
                        
Property and Casualty Insurance $139,986  $96,076  $13,795  $139,413  $92,870  $7,600 
Reinsurance  28,920   25,130   11,461   28,749   27,075   (35,219)
                        
Totals $168,906  $121,206  $25,256  $168,162  $119,945  $(27,619)


The following table reconciles reportable segment income (loss) to the Company’s consolidated income (loss) before federal income taxes.


 Three Months Ended  Three Months Ended  Six Months Ended 
 March 31  June 30  June 30 
 2012  2011  2012  2011  2012  2011 
Profit (Loss):                  
Segment profit (loss) $13,070  $(21,296) $12,186  $(6,323) $25,256  $(27,619)
Net investment income  2,422   2,653   2,431   2,644   4,853   5,297 
Net realized gains (losses) on investments  5,381   (1,469)
Net losses on investments  (5,453)  (1,963)  (73)  (3,432)
Corporate expenses  (3,874)  (3,605)  (3,904)  (3,050)  (7,778)  (6,655)
Income (loss) before federal income taxes $16,999  $(23,717) $5,260  $(8,692) $22,258  $(32,409)


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


- 13 -


Notes to Condensed Unaudited Consolidated Financial Statements (continued)

(5) Loans to Employees:
From 2000 through
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.  The underlying securities served as collateral for these loans.  All employee loans have been paid in full and there is $0as of principal and interest relating to such loans outstanding at March 31,June 30, 2012.  No additional loans will be made under this program.

- 13 -

Notes to Condensed Unaudited Consolidated Financial Statements (continued)

(6) Debt:
The Company maintains a revolving line of credit with a $30,000 limit withand an expiration date of September 23, 2014.  Interest on this line of credit is referenced to LIBOR and can be fixed for periods of up to one year at the Company’sCompany��s option.  Outstanding drawings on this line of credit were $10,000 as of March 31,June 30, 2012 and December 31, 2011.  At March 31,June 30, 2012, the effective interest rate was 1.14%1.15%.  The Company has $20,000 remaining unused under the line of credit at March 31,June 30, 2012.  The current outstanding borrowings were used principally for treasury stock repurchases and extra dividend payments.

(7) Taxes:
As of March 31,June 30, 2012, the Company’s 2008 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.











(Space Intentionally Left Blank)





 
 




 
- 14 -
 

Notes to Condensed Unaudited Consolidated Financial Statements (continued)

(8) 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 March 31, 2012:            
As of June 30, 2012:            
                        
Description Total  Level 1  Level 2  Level 3  Total  Level 1  Level 2  Level 3 
                        
U.S. government obligations $72,810  $72,810  $-  $-  $69,433  $69,433  $-  $- 
Government sponsored entities  172   -   172   - 
Residential mortgage-backed securities  19,917   -   19,917   -   18,165   -   18,165   - 
Commercial mortgage-backed securities  13,614   -   13,614   -   15,153   -   15,153   - 
State and municipal obligations  186,148   -   186,148   -   174,216   -   174,216   - 
Corporate securities  108,667   -   92,923   15,744   110,802   -   97,161   13,641 
Options embedded in convertible securities  1,817       1,817       1,380   -   1,380   - 
Foreign government obligations  22,515   -   22,515   -   21,499   -   21,499   - 
Total fixed maturities  425,660   72,810   337,106   15,744   410,648   69,433   327,574   13,641 
Equity securities  105,290   105,290   -   -   101,077   101,077   -   - 
Short term  3,293   3,169   124       3,346   3,225   121   - 
Cash equivalents  71,474   -   71,474   -   85,098   -   85,098   - 
 $605,717  $181,269  $408,704  $15,744  $600,169  $173,735  $412,793  $13,641 


As of December 31, 2011:                        
                        
Description Total  Level 1  Level 2  Level 3  Total  Level 1  Level 2  Level 3 
                        
U.S. government obligations $73,137  $73,137  $-  $-  $73,137  $73,137  $-  $- 
Government sponsored entities  349   -   349   -   349   -   349   - 
Residential mortgage-backed securities  21,872   -   21,872   -   21,872   -   21,872   - 
Commercial mortgage-backed securities  11,300   -   11,300   -   11,300   -   11,300   - 
State and municipal obligations  190,035       190,035       190,035   -   190,035   - 
Corporate securities  90,141   -   73,091   17,050   90,141   -   73,091   17,050 
Options embedded in convertible securities  1,505   -   1,505   -   1,505   -   1,505   - 
Foreign government obligations  21,121   -   21,121   -   21,121   -   21,121   - 
Total fixed maturities  409,460   73,137   319,273   17,050   409,460   73,137   319,273   17,050 
Equity securities  88,085   88,085   -   -   88,085   88,085   -   - 
Short term  3,675   2,982   693       3,675   2,982   693   - 
Cash equivalents  81,756   -   81,756   -   81,756   -   81,756   - 
 $582,976  $164,204  $401,722  $17,050  $582,976  $164,204  $401,722  $17,050 


 
- 15 -
 

Notes to Condensed Unaudited Consolidated Financial Statements (continued)

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.


The following methods, assumptions and inputs were used to determine the fair value of each class of the following assets recorded at fair value in the consolidated balance sheets:

Cash equivalents:  Cash equivalents primarily consist of highly rated money market funds with maturities of three months or less, and are purchased daily at par value with specified yield rates. Due to underlying assets of these funds, we designate all cash equivalents as Level 2.

Fixed maturities: Fair values of fixed maturities are based on quoted market prices, where available. These fair values are obtained primarily from third party pricing services, which generally use Level I or Level II inputs for the determination of fair value to facilitate fair value measurements and disclosures. U.S. government obligations represent Level I securities, while Level II securities primarily include corporate securities, states and municipal obligations, foreign government obligations, and mortgage-backed securities. For securities not actively traded, the third party pricing services may use quoted market prices of comparable instruments or discounted cash flow analyses, incorporating inputs that are currently observable in the markets for similar securities. Inputs that are often used in the valuation methodologies include, but are not limited to, broker quotes, benchmark yields, credit spreads, default rates and prepayment speeds.

Equity securities: Fair values of equity securities are designated as Level I and are based on quoted market prices.
 
 
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 quotes from multiple insurance-linked securities brokers.  The broker quotes include Level 3 inputs which are significant to the valuation of the insurance-linked securities and vary by 0-3% from each other. There were no Level 3 sales, no transfers into Level 3 and no transfers out of Level 3 during 2012 or 2011.  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 for the threesix months ended March 31,June 30, 2012 and for the year ended December 31, 2011:


 
- 16 -
 


Notes to Condensed Unaudited Consolidated Financial Statements (continued)


 2012  2011  2012  2011 
Beginning of period balance $17,050  $17,242  $17,050  $17,242 
Total gain or losses (realized or unrealized)                
Included in earnings (or changes in net assets)  (206)  387 
included in earnings (or changes in net assets)  (165)  387 
Purchases  400   6,522   400   6,522 
Settlements  (1,500)  (7,101)  (3,644)  (7,101)
End of period balance $15,744  $17,050  $13,641  $17,050 

There were no transfers of assets between levelLevel 1 and levelLevel 2 during the threesix months ended March 31,June 30, 2012 and 2011.  Transfers between levels, if any, are recorded as of the beginning of the reporting period.

In addition to the preceding disclosures on assets recorded at fair value in the consolidated balance sheets, FASB guidance also requires the disclosure of fair values for certain other financial instruments for which it is practicable to estimate fair value, whether or not such values are recognized in the consolidated balance sheets.

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 Company’s underlying economic value.

The carrying amounts reported in the consolidated balance sheets for cash, accounts receivables, reinsurance recoverable, notes receivable, accounts payable and accrued expenses, income taxes receivable or payable and unearned income approximate fair value because of the short term nature of these items.  These assets and liabilities are not included in the table below.

The following methods, assumptions and inputs were used to estimate the fair value of each class of financial instrument:

Limited partnerships: The Company accounts for investments in limited partnerships using the equity method of accounting, which requires an investor in a limited partnership to carry the investment at its proportionate share of the limited partnership’s equity, whichequity.   The underlying assets of the Company’s investments in limited partnerships are carried at fair value, and, therefore, the Company’s carrying value of limited partnerships approximates fair value.  As these investments are not actively traded and the corresponding inputs are based on data provided by the investees, they are classified as Level III.

Short-term borrowings: The fair value of our short-term borrowings is based on quoted market prices for the same or similar debt, or, if no quoted market prices are available, on the current market interest rates available to us for debt of similar terms and remaining maturities.
 
 

- 17 -

Notes to Condensed Unaudited Consolidated Financial Statements (continued)

A summary of the carrying value and fair value by level of financial instruments not recorded at fair value on the Company’s consolidated balance sheet at March 31,June 30, 2012 is as follows:

 

- 17 -

Notes to Condensed Unaudited Consolidated Financial Statements (continued)

 Carrying  Fair Value  Carrying  Fair Value 
 Value  Level 1  Level II  Level III  Total  Value  Level 1  Level II  Level III  Total 
Assets:                              
Limited partnerships $58,247  $-  $-  $58,247  $58,247  $53,280  $-  $-  $53,280  $53,280 
                                        
Liabilities:                                        
Short-term borrowings  10,000   -   10,000   -   10,000   10,000   -   10,000   -   10,000 

 
A summary of the carrying value and fair value of financial instruments not recorded at fair value on the Company’s consolidated balance sheet at December 31, 2011 is as follows:
 

  Carrying  Fair 
  Value  Value 
Assets:      
   Limited partnerships $54,705  $54,705 
         
Liabilities:        
   Short-term borrowings  10,000   10,000 


(9) Restricted Stock:
Effective May 10, 2011, the Company issued a total of 19,558 shares of class B restricted stock to the Company’s outside directors.  These restricted shares became fully vested on May 10, 2012.  These shares represent the annual retainer compensation for outside directors for the period July 1, 2011 through June 30, 2012.  Each share was valued at $22.50 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 May 8, 2012, the Company issued a total of 20,119 shares of class B restricted stock to the Company’s outside directors.  These restricted shares represent the annual retainer compensation for outside directors for the period July 1, 20112012 through June 30, 20122013 and will vest on May 10, 2012.8, 2013.  Vesting will be accelerated only on the condition of death, disability, or change in control of the Company.  Each restricted share is valued at $22.50$21.87 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.


- 18 -

Notes to Condensed Unaudited Consolidated Financial Statements (continued)

 (10) 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 during the period which require recognition or disclosure.





(Space Intentionally Left Blank)

- 18 -

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 threesix months of 2012, the Company experienced positive cash flow from operations totaling $11.7$22.4 million which compares to positive cash flow from operations of $6.6$26.8 million generated during the first threesix months of 2011.  The $5.1$4.4 million increasedecrease in cash flow from the 2011 period is primarily due to higher net premiums and collateral deposits partially offset by higher loss payments associated with the settlement of 2011 catastrophe losses.losses, partially offset by higher net premiums.

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 3.43.35 years at March 31,June 30, 2012, which is substantially shorter than the average life of the Company’s liabilities.

Financing activity for the first threesix months of 2012 included regular dividend payments to shareholders of $3.7$7.5 million ($.25.50 per share).

The Company’s assets at March 31,June 30, 2012 included $71.5$85.1 million in investments classified as cash equivalents that were readily convertible to cash without significant market penalty.  An additional $145.7$131.8 million of fixed maturity investments will mature within the twelve-month period following March 31,June 30, 2012.   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 substantial portions of this equity to the parent company.  At March 31,June 30, 2012, $47.5$44.0 million may be transferred by dividend or loan to the parent company during the remainder of 2012 without approval by, or prior notification to, regulatory authorities.  An additional $193.8$195.8 million of shareholder’s equity of the insurance subsidiaries could, theoretically, be advanced or loaned to the parent company with prior notification to, and approval from, regulatory authorities, although it is unlikely that transfers of this size would be practical.  The Company believes that these restrictions pose no material liquidity concerns to the Company.  The Company also believes that the financial strength and stability of the subsidiaries would permit ready access by the parent company to short-term and long-term sources of credit.  The parent company had cash and marketable securities valued at $9.6$12.5 million at March 31,June 30, 2012.
 
 
 
- 19 -
 

The Company’s annualized net premium writing to surplus ratio for the first threesix months of 2012 was approximately 78%74%.  Regulatory guidelines generally allow for writings of at leastbetween 100% and 300% of surplus.surplus, depending on the line of business.  Accordingly, the Company could increase net 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

Comparison of FirstSecond Quarter, 2012 to FirstSecond Quarter, 2011

NetDirect and assumed premiums written during the firstsecond quarter of 2012 increased $1.7decreased $4.2 million (2.8%(5.0%) and net premiums earned increased $4.0decreased $2.7 million (6.9%(4.3%) as compared to the same period of 2011.  The Company’s Property and Casualty Insurance segment reported a decrease in premium written of 3.8% but an increase in earned premiums of 5.3%1.7% while the Reinsurance segment reported an increasea decrease in premium written of 12.9%10.4% as well as a decrease in premium earned of 23.4%.  In the Property and Casualty Insurance segment,  a planned reduction in commercial multi-peril business combined with lower personal automobile premium resulting from rate increases implemented during 2012 were offset by increased premium from fleet transportation business resulting from higher activity-sensitive premium on existing accounts and professional liability were the main sourcesaddition of the overall increase.new business.  The Company’s two year old casualtyproperty reinsurance program was the main driver of the increasedecrease to the Reinsurance segment.segment, as a strategic reduction in global catastrophe risk was implemented effective January 1, 2012.  The following table provides information regarding premiums written and earned for each segment for the quarter ended March 31June 30 (dollars in thousands):
- 20 -


 Direct and Assumed Premium Written  Net Premium Written  Net Premium Earned 
          Direct and Assumed Premium Written  Net Premium Written  Net Premium Earned 
2012                  
         
Property & Casualty Insurance $75,226  $49,707  $47,909  $64,760  $42,458  $48,167 
Reinsurance  14,827   14,248   13,642   14,094   13,515   11,488 
                        
Totals $90,053  $63,955  $61,551  $78,854  $55,973  $59,655 
                        
2011                        
            
Property & Casualty Insurance $72,104  $49,682  $45,518  $67,309  $49,247  $47,352 
Reinsurance  13,027   12,549   12,083   15,722   15,244   14,992 
                        
Totals $85,131  $62,231  $57,601  $83,031  $64,491  $62,344 


Premium ceded to reinsurers on insurance business produced by the Property and Casualty Insurance segment averaged 33.9%34.4% of premium written for the current quarter compared to 31.1% a year earlier32.8% in the 2011 second quarter, with the increase reflective of minor changes in treaty structures as well as the impact of the proportion of new products which are ceded at significantlygenerally higher proportions than legacy products.

- 20 -

Net investment income, before tax, during the firstsecond quarter of 2012 was 8.7%8.1% lower than the firstsecond quarter of 2011 due primarily to lower available interest rates for bonds.  Pre-tax bond yields averaged 2.2%2.3% during the current quarter compared to 2.5%2.7% for the prior year period.  Overall after-tax yields decreased from 1.8% to 1.6%.1.5% while average invested funds, impacted by positive cash flow, were over 7% higher.  The short term nature of the Company’s fixed income portfolio causes changes in available yields to be quickly reflected in investment income.

The firstsecond quarter 2012 net realized investment gainslosses of $5.4$5.5 million resulted primarily from $5.4$4.9 million in gainslosses reported by limited partnerships.partnerships and $0.4 million in mark-to-market adjustments.  Comparative firstsecond quarter 2011 overall investment losses were $1.5$2.0 million.  Investment gainslosses result from decisions regarding the sale of individual securities and the change in total value of limited partnerships and, as such, are not expected to be consistent from period to period.

Losses and loss expenses incurred during the firstsecond quarter of 2012 were $30.8$21.4 million lower than that experienced during the firstsecond quarter of 2011 due primarily to the impact of the unprecedented level of catastrophe losses during the prior year period.  The loss ratios for each segment were as follows:

 2012  2011 2012 2011
Property and Casualty Insurance  65.4%  74.7%64.5% 66.2%
Reinsurance  26.0   262.3 23.1  159.0
Total  56.7   114.0 56.5 88.5

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Other operating expenses, for the firstsecond quarter of 2012, increased $0.5$1.1 million, or 2.8%6.3%, from the firstsecond quarter of 2011.  The majority of this increase relates to higher gross commissions expense on increased premium volume.salary and salary related expenses which were depressed in 2011as the result of catastrophic losses.  The ratio of consolidated other operating expenses to operating revenue decreased to 29.0%was 30.2% during the firstsecond quarter of 2012 compared to 29.8%27.2% for the 2011 firstsecond quarter.

The effective federal tax rate on consolidated income for the firstsecond quarter of 2012 was $5.5 million.23%.  The effective rate differs from the normal statutory rate primarily as a result of tax-exempt investment income.

As a result of continuedthe factors mentioned above, net income increased $9.6 million during the second quarter of 2012 as compared to the 2011 period.

Comparison of Six Months Ended June 30, 2012 to Six Months Ended June 30, 2011

Direct and assumed premiums written during the first six months of 2012 increased $.7 million (0.4%) and net premiums earned increased $1.3 million (1.1%) as compared to the same period of 2011.  The Company’s Property and Casualty Insurance segment reported an increase in written and earned premiums of .4% and 3.5%, respectively while the Reinsurance segment reported a decrease in earned premium growth coupledof 7.2%.  The reasons for the segment fluctuations are similar to those detailed in the quarterly comparison, preceding.  The following table provides information regarding premiums written and earned for each segment for the six months ended June 30 (dollars in thousands):


  Direct and Assumed Premium Written  Net Premium Written  Net Premium Earned 
2012         
          
Property & Casualty Insurance $139,986  $92,165  $96,076 
Reinsurance  28,920   27,763   25,130 
             
Totals $168,906  $119,928  $121,206 
             
2011            
             
Property & Casualty Insurance $139,413  $98,929  $92,870 
Reinsurance  28,749   27,793   27,075 
             
Totals $168,162  $126,722  $119,945 


Premium ceded to reinsurers on insurance business produced by the Property and Casualty Insurance segment averaged 34.2% of premium written for the current year period compared to 29.0% a year earlier with far fewer catastrophe related lossesthe increase reflective of changes in treaty structures as well as improved performancethe impact of new products which are ceded at generally higher proportions than legacy products.

Net investment income, before tax, during the first six months of 2012 was 8.4% lower than the first six months of 2011 for the same reasons noted in the quarterly comparison.  Overall pre-tax yields averaged 2.0% during the current period compared to 2.4% for the prior year period.  Overall after-tax yields decreased from 1.8% to 1.6%.  Average funds invested were nearly 7% higher in the 2012 period as the result of positive cash flow.
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Net realized investment losses for the first six months of 2012 were less than $.1 million before tax, resulting primarily from $.2 million in losses reported by direct trading securities and $.3 million mark-to-market adjustment, partially offset by a $.5 million gain reported by limited partnerships.  Realized investment losses were $3.4 million for the same period of 2011.

Losses and loss expenses incurred during the first six months of 2012 were $52.2 million lower than that experienced during the first six months of 2011 which included an unprecedented level of catastrophe losses.  The lower loss ratio for the Property and Casualty segment was attributable to improvements in most product groupings.  The loss ratios for each segment were as follows:

 2012 2011
Property and Casualty Insurance65.0% 70.3%
Reinsurance24.7  205.1
Total56.6 100.7

Other operating expenses, for the first six months of 2012, increased $1.7 million, or 4.5%, from the 2011 six-month period.  The majority of this increase relates to the lower salary and salary related expenses during 2011, as noted in the quarterly comparison.  The ratio of consolidated other operating expenses to limited partnership investments,operating revenue was 29.6% during the 2012 period compared to 28.5% for the 2011 period.

The effective federal tax rate on consolidated income for the first six months of 2012 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 $26.7$36.3 million during the first quarter of 2012 as compared to the 2011 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, 2011.


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 March 31,June 30, 2012, amounts due from reinsurers on paid and unpaid losses, are estimated to total approximately $128$122 million.  Of this total, approximately $37$46 million (29%(38%) 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 and loss adjustment expenses 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 March 31,June 30, 2012, limited partnership investments include approximately $40.6$36.5 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 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, 2011.


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.
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(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

NothingAt our Annual Meeting of Shareholders held on May 8, 2012, shareholders voted on the following proposals:

     WITHHOLD 
  FOR AGAINST  (ABSTAIN) 
Advisory vote to approve executive compensation      2,196,857            779                 2,939 
To ratify the appointment of Ernst & Young LLP as our independent registered public accounting firm for the fiscal year ending December 31, 2011      2,109,234                 91,341                   0 

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

Each of the above matters submitted to report.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 2, 2012.


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)           Certification of CEO and CFO                                                                           EXHIBIT 32
pursuant to 18 U.S.C. 1350, as                                                                           Certification of CEO and 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     May 8,August 7, 2012                                                                By   /s//s/ Joseph J. DeVito
Joseph J. DeVito, CEO and President






Date     May 8,August 7, 2012                                                                By   /s//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 March 31,June 30, 2012



INDEX TO EXHIBITS




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


EXHIBIT 31.1                                                                                 2628
Certification of CEO
pursuant to Section 302 of the
Sarbanes-Oxley Act

EXHIBIT 31.2                                                                                 2830
Certification of CFO
pursuant to Section 302 of the
Sarbanes-Oxley Act

EXHIBIT 32                                                                                  3032
Certification of CEO and CFO
pursuant to 18 U.S.C. 1350,
as adopted pursuant to Section
906 of the Sarbanes-Oxley Act

 
 
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