1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
(AMENDMENT NO. 1)
Quarterly Report Under Section 13 or 15 (d)
of the Securities Exchange Act of 1934
------------------------------------------------------
For Quarter Ended Commission file number
JuneSeptember 30, 2005 0-5534
BALDWIN & LYONS, INC.
(Exact name of registrant as specified in its charter)
INDIANA 35-0160330
------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
1099 NORTH MERIDIAN STREET, INDIANAPOLIS, INDIANA 46204
- ------------------------------------------------- -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (317) 636-9800
--------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days.
Yes [ X ] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).
Yes [ X ] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of August 3,November 4, 2005:
TITLE OF CLASS NUMBER OF SHARES OUTSTANDING
Common Stock, No Par Value:
Class A (voting) 2,666,666
Class B (nonvoting) 12,069,52112,120,521
Index to Exhibits located on page 20.
2
BALDWIN & LYONS, INC.
FORM 10-Q/A
EXPLANATORY NOTE
(DOLLARS IN THOUSANDS)
This amendment No. 1 to the Baldwin & Lyons, Inc. Quarterly Report on Form 10-Q
for the quarterly period ended JuneSeptember 30, 2005 (the "Form 10-Q/A") includes
unaudited restated condensed consolidated financial statements as of JuneSeptember
30, 2005 and for the three and sixnine months ended JuneSeptember 30, 2005. The Company
accounts for its investments in limited partnerships using the equity method of
accounting. The accompanying restated condensed consolidated financial
statements, including the notes thereto, have been revised to reflect income
statement recognition of the Company's proportionate share of unrealized
investment gains attributable to certain of the Company's investments in limited
partnerships. See footnote 4 to the enclosed restated condensed consolidated
financial statements for a more detailed discussion regarding the accounting
policies and the net gains reported for the Company's investments in limited
partnerships.
The following table summarizes the restatement effects on the company's
condensed consolidated balance sheets and condensed consolidated statements of
income as of and for the three and sixnine months ended September 30, 2005. The
Company previously filed a Form 10-Q/A for the quarter ending June 30, 2005.2005
regarding the same issue as discussed herein. There were no adjustments
necessary for periods prior to the 2005 second quarter.and third quarters.
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA) AS REPORTED ADJUSTMENT AS RESTATED
--------------- ---------------- ------------------------------- ----------------
FOR THE THREE MONTHS ENDED JUNESEPTEMBER 30, 2005
Net gains on investments $ 5322,962 $ 2,6565,384 $ 3,1888,346
Federal income taxes 3,611 930 4,541308 1,885 2,193
Net income 7,473 1,726 9,1991,152 3,499 4,651
Basic earnings per share .51 .12 .63.08 .24 .32
Diluted earnings per share .50 .12 .62.08 .23 .31
FOR THE SIXNINE MONTHS ENDED JUNESEPTEMBER 30, 2005
Net gains on investments $ 5,4688,430 $ 2,6568,040 $ 8,12416,470
Federal income taxes 8,744 930 9,6749,052 2,814 11,866
Net income 17,819 1,726 19,54518,971 5,226 24,197
Basic earnings per share 1.21 .12 1.331.29 .35 1.64
Diluted earnings per share 1.20 .12 1.321.28 .35 1.63
UNAUDITED BALANCE SHEET
(IN THOUSANDS) AS REPORTED ADJUSTMENT AS RESTATED
--------------- ---------------- ---------------
JUNE---------------- ----------------
SEPTEMBER 30, 2005
Unrealized net gains on investments $ 41,17247,747 $ (1,726)(5,226) $ 39,44642,521
Retained earnings 256,897 1,726 258,623253,203 5,226 258,429
Total shareholders' equity 336,151340,144 - 336,151340,144
3
The restatement had no effect on net cash provided by operating activities as
the change in net income for the three and sixnine months ended JuneSeptember 30, 2005
consisted entirely of non-cash 3 transactions. Except for the effects of the
restatement, this Form 10-Q/A has not been updated for changes in events,
estimates or other developments subsequent to August 3,November 4, 2005, the date of the
original filing of the Quarterly Report on Form 10-Q for the quarterly period
ended JuneSeptember 30, 2005. Please refer to the company's current filings with the
Securities and Exchange Commission for information subsequent to August 3,November 4,
2005.
4
PART I - FINANCIAL INFORMATION
ITEM 1 FINANCIAL STATEMENTS
BALDWIN & LYONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
JUNESEPTEMBER 30 December 31
2005 2004
---------------- -----------------
(AS RESTATED,
SEE NOTES------------------ ------------------
(As Restated,
See Notes 3 ANDand
4)
ASSETS
Investments:
Fixed maturities $ 288,755273,809 $ 331,281
Equity securities 127,888133,732 133,042
Other long-term 32,67340,330 15,989
Short-term 69,93067,130 36,406
---------------- ----------------
519,246------------------ ------------------
515,001 516,718
Cash and cash equivalents 74,39090,495 57,384
Accounts receivable 30,08228,417 33,481
Reinsurance recoverable 216,515213,730 236,466
Notes receivable from employees 2,3532,334 2,514
Other assets 21,65217,701 22,000
---------------- ---------------------------------- ------------------
$ 864,238867,678 $ 868,563
================ ================================== ==================
LIABILITIES AND SHAREHOLDERS' EQUITY
Reserves for losses and loss expenses $ 422,503442,281 $ 441,821
Reserves for unearned premiums 34,54232,315 33,233
6,000
Notes payable to banks 3,000 6,000-
Accounts payable and accrued expenses 57,05238,315 48,224
Current federal income taxes 1,4072,027 660
Deferred federal income taxes 9,58312,596 12,077
---------------- ----------------
528,087------------------ ------------------
527,534 542,015
Shareholders' equity:
Common stock-no par value 629631 628
Additional paid-in capital 37,45338,563 37,083
Unrealized net gains on investments 39,44642,521 44,497
Retained earnings 258,623258,429 244,340
---------------- ----------------
336,151------------------ ------------------
340,144 326,548
---------------- ---------------------------------- ------------------
$ 864,238867,678 $ 868,563
================ ================================== ==================
See notes to condensed consolidated financial statements.
5
BALDWIN & LYONS, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Three Months Ended SixNine Months Ended
JuneSeptember 30 JuneSeptember 30
------------------------------ --------------------------------------------------------------- ----------------------------------
2005 2004 2005 2004
------------- ------------- -------------- ------------- (AS (AS
RESTATED, RESTATED,
SEE NOTES--------------- ---------------
(As (As Restated,
Restated, See Notes 3
SEE NOTESSee Notes 3 ANDand 4)
ANDand 4)
REVENUES
Net premiums earned $ 43,47349,848 $ 43,40344,384 $ 90,132139,981 $ 81,900126,284
Net investment income 3,547 3,008 6,855 6,1803,734 2,958 10,589 9,138
Net gains on investments 3,188 2,290 8,124 8,1088,346 27 16,470 8,135
Other income 1,803 1,803 3,639 3,709
------------- -------------1,645 1,752 5,283 5,461
-------------- ------------- 52,011 50,504 108,750 99,897--------------- ---------------
63,573 49,121 172,323 149,018
EXPENSES
Losses and loss expenses incurred 27,972 29,735 59,584 54,98146,827 36,923 106,411 91,904
Other operating expenses 10,299 7,720 19,947 15,809
------------- -------------9,902 7,286 29,849 23,095
-------------- ------------- 38,271 37,455 79,531 70,790--------------- ---------------
56,729 44,209 136,260 114,999
-------------- ------------- ------------- -------------- ---------------------------- ---------------
INCOME BEFORE FEDERAL INCOME TAXES 13,740 13,049 29,219 29,1076,844 4,912 36,063 34,019
Federal income taxes 4,541 4,185 9,674 9,3442,193 1,452 11,866 10,796
-------------- ------------- ------------- -------------- ---------------------------- ---------------
NET INCOME $ 9,1994,651 $ 8,8643,460 $ 19,54524,197 $ 19,76323,223
============== ============= ============= ============== ============================ ===============
PER SHARE DATA:
BASIC EARNINGS $ .63.32 $ .61.24 $ 1.331.64 $ 1.351.59
============== ============= ============= ============== ============================ ===============
DILUTED EARNINGS $ .62.31 $ .60.23 $ 1.321.63 $ 1.341.57
============== ============= ============= ============== ============================ ===============
DIVIDENDS PAID TO SHAREHOLDERS $ .10 $ .40 $ .35 $ .90
============= =============.15 $ .70 $ 1.05
============== ============= Reconciliation of shares outstanding:=============== ===============
RECONCILIATION OF SHARES OUTSTANDING:
Average shares outstanding - basic 14,728 14,624 14,726 14,61414,764 14,641 14,739 14,623
Dilutive effect of options outstanding 103 171 110 189109 144 115 172
-------------- ------------- ------------- -------------- ---------------------------- ---------------
Average shares outstanding - diluted 14,83114,873 14,785 14,854 14,795
14,836 14,803============== ============= ============= ============== ============================ ===============
See notes to condensed consolidated financial statements.
6
BALDWIN & LYONS, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
SixNine Months Ended
JuneSeptember 30
2005 2004
---------------- ---------------
Net cash provided by operating activities $ 15,80037,620 $ 26,57147,177
Investing activities:
Purchases of long-term investments (54,142) (92,640)(110,125) (132,928)
Proceeds from sales or maturities
of long-term investments 97,880 90,574152,664 129,901
Net sales (purchases)purchases of short-term investments (33,524) 3,479(30,724) (8,019)
Decrease in notes receivable from employees 138 1,364169 1,533
Other investing activities (1,207) (500)(1,470) (627)
---------------- ---------------
Net cash provided by (used in) investing activities 9,145 2,27710,514 (10,140)
Financing activities:
Dividends paid to shareholders (5,153) (13,157)(10,329) (15,354)
Repayment on notes payable (3,000)(6,000) -
Proceeds from sales of common stock 214 3581,306 384
---------------- ---------------
Net cash used in financing activities (7,939) (12,799)(15,023) (14,970)
---------------- ---------------
Increase in cash and cash equivalents 17,006 16,04933,111 22,067
Cash and cash equivalents at beginning of period 57,384 30,078
---------------- ---------------
Cash and cash equivalents at end of period $ 74,39090,495 $ 46,12752,146
================ ===============
See notes to condensed consolidated financial statements.
NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION: The accompanying unaudited condensed financial
statements have been prepared in accordance with the instructions to Form
10Q and do not include all of the information and notes required by
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, 2005. 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 10K.
7
NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(2) FORWARD-LOOKING STATEMENTS: Forward-looking statements in this report are
made pursuant to the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995. Investors are cautioned that such forward-looking statements
involve inherent risks and uncertainties. Readers are encouraged to review the
Company's annual report for its full statement regarding forward-looking
information.
(3) RESTATEMENT: On December 20, 2005, and in conjunction with the Company's
preparations for year-end reporting, the Company concluded that its accounting
treatment for certain of its investments in limited partnerships to be
technically incorrect. As a result, the Company has restated these interim
financial statements for the 2005 secondthird quarter. This discovery will also
affect the Company'sThe Company previously restated
its financial statements for the 2005 thirdsecond quarter which will
also be restated.for the same reason. No
interim or annual periods ending prior to June 30, 2005 are affected by this
restatement.
Accounting principles generally accepted in the United States currently require
an investor in a limited partnership to record their proportionate share of the
investee's net income using the equity method of accounting. 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
investor would also recognize, through its income statement, its proportionate
share of the investee's unrealized as well as realized investment gains or
losses.
The Company invests in limited partnerships that include unrealized investment
gains and losses in the determination of their net income or loss. For the
quarter ending JuneSeptember 30, 2005, as previously reported, the Company recorded
its share of limited partnership unrealized gains in shareholders' equity. The
Company's income statement reflected only gains or losses reported as realized
by the limited partnerships. While the proper carrying value of the investments
was recorded on the Company's balance sheet at JuneSeptember 30, 2005, the Company's
reporting of the portion of the increase in value of the limited partnerships
attributable to unrealized gains as a component of the Company's shareholders'
equity has subsequently been determined to be not in technical compliance with
authoritative accounting guidance. An unaudited table presenting the effects of
the revisions to the Company's financial statements is set forth below:
8
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA) AS REPORTED ADJUSTMENT AS RESTATED
--------------- ---------------- ------------------------------- ----------------
FOR THE THREE MONTHS ENDED JUNESEPTEMBER 30, 2005
Net gains on investments $ 5322,962 $ 2,6565,384 $ 3,1888,346
Federal income taxes 3,611 930 4,541308 1,885 2,193
Net income 7,473 1,726 9,1991,152 3,499 4,651
Basic earnings per share .51 .12 .63.08 .24 .32
Diluted earnings per share .50 .12 .62.08 .23 .31
FOR THE SIXNINE MONTHS ENDED JUNESEPTEMBER 30, 2005
Net gains on investments $ 5,4688,430 $ 2,6568,040 $ 8,12416,470
Federal income taxes 8,744 930 9,6749,052 2,814 11,866
Net income 17,819 1,726 19,54518,971 5,226 24,197
Basic earnings per share 1.21 .12 1.331.29 .35 1.64
Diluted earnings per share 1.20 .12 1.321.28 .35 1.63
UNAUDITED BALANCE SHEET
(IN THOUSANDS) AS REPORTED ADJUSTMENT AS RESTATED
--------------- --- ---------------- --- ---------------
JUNE---------------- ----------------
September 30, 2005
Unrealized net gains on investments $ 41,17247,747 $ (1,726)(5,226) $ 39,44642,521
Retained earnings 256,897 1,726 258,623253,203 5,226 258,429
Total shareholders' equity 336,151340,144 - 336,151340,144
(4) NET GAINS ON INVESTMENTS: Amounts reported as net gain on investments
consist of three components: (1) net gains or losses realized upon the actual
sale of investments managed directly by the Company's investment managers, (2)
changes in the allowance for "other-than-temporary impairment" of investments,
and (3) equity in earnings or losses of investments in 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
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. The Company invests in limited partnerships that include both
realized and unrealized investment gains or losses in the determination of their
net income. Readers are cautioned that inclusion of such unrealized gains is not
consistent with the recognition of temporary valuation changes of equity and
debt securities that are directly owned and held for sale and may result in
significant fluctuations in quarterly amounts reported under this caption. In
addition, because of inherent time lags in receiving valuation reports from
certain limited partnership investees, the Company must rely on estimations of
valuation changes for the most recent month or quarter ended on the reporting
date. To the extent that the actual valuations subsequently reported differ from
estimates utilized, the differences are included in gains from investments in
the quarter reported to the Company.
9
Following is a summary of the components of net gains on investments for the
periods presented in the accompanying statements of income.
THREE MONTHS Three Months SIXNINE MONTHS SixNine Months
ENDED Ended ENDED Ended
JUNESEPTEMBER 30 September 30 SEPTEMBER 30 September 30
2005 June 30, 2004 JUNE 30, 2005 June 30, 2004
--------------- ---------------- ---------------- --------------- --------------- ----------------
Realized net gains on the disposal of securities $ 2,5321,632 $ 1,470721 $ 4,7026,334 $ 6,7197,440
Change in allowance for other-than-temporary
impairment of invested assets 150 975 145 1,113(529) (563) (384) 550
Equity in earnings (losses) of limited partnership
investments (realized and unrealized) 506 (155) 3,277 276
--------------- ---------------7,243 (131) 10,520 145
--------------- ---------------- ---------------- ---------------
Totals $ 3,1888,346 $ 2,29027 $ 8,12416,470 $ 8,1088,135
=============== ================ ================ =============== =============== ================
The limited partnerships in which the Company holds an ownership interest invest
in a broad range of publicly traded and privately held equity and debt
securities, both domestic and foreign, as well as real estate and other business
ventures. The earnings or losses reported by the limited partnerships may be
subject to significant volatility. Readers are cautioned that the recording of
the Company's proportionate share of the limited partnership's earnings or
losses may result in significant fluctuations in the quarterly amounts reported
under this caption.
(5) REINSURANCE: The following table summarizes the Company's transactions with
reinsurers for the 2005 and 2004 comparative periods.
2005 2004
------------ -----------------------
Quarter ended JuneSeptember 30:
Premiums ceded to reinsurers $ 9,4908,225 $ 21,63721,803
Losses and loss expenses
ceded to reinsurers 8,674 30,17019,620 23,465
Commissions from reinsurers 1,950 5,733
Six1,482 5,665
Nine months ended JuneSeptember 30:
Premiums ceded to reinsurers 23,088 40,88631,313 62,688
Losses and loss expenses
ceded to reinsurers 22,888 48,11842,508 71,583
Commissions from reinsurers 5,086 10,9366,568 16,601
(6) COMPREHENSIVE INCOME OR LOSS: Total realized and unrealized income for the
quarter ended JuneSeptember 30, 2005 was $11,170$8,056 and compares to total realized and
unrealized income of $3,286$2,426 for the quarter ended JuneSeptember 30, 2004. For the
sixnine months ended JuneSeptember 30, 2005, total realized and unrealized income was
$14,385$22,441 and compares to total realized and unrealized income of $14,509$16,935 for the
sixnine months ended JuneSeptember 30, 2004.
10
NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(7) REPORTABLE SEGMENTS - PROFIT OR LOSS: The following table provides certain
profit and loss information for each reportable segment. All amounts presented
are computed based upon generally accepted accounting principles. In addition,
segment profit for fleet trucking includes the direct marketing agency
operations conducted by the parent company and is computed after elimination of
inter-company commissions and, accordingly, segment profit presented here will
not agree with statutory underwriting gains for this segment which may be quoted
elsewhere in the Company's financial statements.
2005 2004
-------------------------------------------- ------------------------------------------ DIRECT AND NET-----------------------------------------
Direct and Net ASSUMED PREMIUM SEGMENTDirect and Net
Assumed Premium Segment PREMIUM EARNED AND PROFITAssumed Premium Segment
Premium Earned and Profit WRITTEN FEE INCOME (LOSS)Premium Earned and Profit
Written Fee Income (Loss) Written Fee Income (Loss)
------------ ------------ ----------- ----------- ------------ ------------- ------------ -----------------------
QUARTERTHREE MONTHS ENDED JUNESEPTEMBER 30:
PROTECTIVE PRODUCTS:
Fleet trucking $34,859$39,296 $33,262 $ 27,7896,013 $ 7,79546,688 $ 44,345 $ 25,650 $ 7,14127,689 $7,334
Reinsurance assumed 1,927 2,706 1,121 1,918 2,913 1,7564,498 4,367 (10,534) 1,842 2,195 (2,934)
SAGAMORE PRODUCTS:
Personal division 8,418 11,296 899 8,799 11,600 1,8207,651 10,602 1,607 8,441 11,208 1,549
Commercial division:
Small fleet trucking 4,117 2,289 128 4,338 2,559 1364,045 2,379 8 3,970 2,644 (33)
Workers' compensation 97 837 (146) 3,110 2,125 (441)
------------48 404 (15) 1,790 2,055 (1,440)
------------ ------------ ----------- ----------- ------------ -----------
Total Commercial division 4,214 3,126 (18) 7,448 4,684 (305)4,093 2,783 (7) 5,760 4,699 (1,473)
All other 515 262 (235) 379 307 (105)
------------304 410 102 294 280 (227)
------------ ------------ ----------- ----------- ------------ -----------
Totals $49,933$55,842 $51,424 $(2,819) $ 45,17963,025 $ 9,562 $ 62,889 $ 45,154 $ 10,307
============46,071 $4,249
============ ============ =========== =========== ============ SIX===========
NINE MONTHS ENDED JUNESEPTEMBER 30:
PROTECTIVE PRODUCTS:
Fleet trucking $ 78,106 $ 58,612 $ 14,608 $ 3,516 $ 46,916 $ 13,462$117,402 $91,875 $20,621 $130,204 $74,606 $20,796
Reinsurance assumed 4,418 5,228 2,619 4,836 5,988 3,6638,916 9,596 (7,914) 6,678 8,183 729
SAGAMORE PRODUCTS:
Personal division 23,487 22,325 2,129 23,980 22,828 3,17131,138 32,927 3,737 32,420 34,037 4,720
Commercial division:
Small fleet trucking 7,634 4,489 250 8,203 5,083 46811,679 6,868 258 12,173 7,727 436
Workers' compensation 92 2,222 115 5,898 4,070 (670)
------------140 2,625 100 7,689 6,124 (2,110)
------------ ------------ ----------- ----------- ------------ -----------
Total Commercial division 7,726 6,711 365 14,101 9,153 (202)11,819 9,493 358 19,862 13,851 (1,674)
All other 793 694 (394) 619 549 (187)
------------1,096 1,102 (295) 912 829 (414)
------------ ------------ ----------- ----------- ------------ -----------
Totals $ 114,530 $ 93,570 $ 19,327 $ 27,052 $ 85,434 $19,907$170,371 $144,993 $16,507 $190,076 $131,506 $24,157
============ ============ ======================= =========== ============ =========== ============
11
NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(8) REPORTABLE SEGMENTS - RECONCILIATION TO CONSOLIDATED REVENUE AND
CONSOLIDATED PROFIT OR LOSS: The following tables are reconciliations of
reportable segment revenues and profit or loss to the Company's consolidated
revenue and income before federal income taxes, respectively.
Three Months Ended SixNine Months Ended
JuneSeptember 30 JuneSeptember 30
2005 2004 2005 2004
------------- ------------- --------------- ---------------- --------------- -------------------------------
(AS RESTATED, (AS RESTATED,
SEE NOTES 3 SEE NOTES 3
AND 4) AND 4)
REVENUE:
Net premium earned and fee income $ 45,17951,424 $ 45,15446,071 $ 93,570144,993 $ 85,434131,506
Net investment income 3,547 3,008 6,855 6,1803,734 2,958 10,589 9,138
Net gains on investments 3,188 2,290 8,124 8,1088,346 27 16,470 8,135
Other 97 52 201 17569 65 271 239
------------- ------------- --------------- ---------------- --------------- -----------------
Total consolidated revenue--------------
TOTAL CONSOLIDATED REVENUE $ 52,01163,573 $ 50,50449,121 $ 108,750172,323 $ 99,897149,018
============= ============= =============== ================ =============== ===============================
PROFIT:
Segment profit $ 9,562(2,819) $ 10,3074,249 $ 19,32716,507 $ 19,90724,157
Net investment income 3,547 3,008 6,855 6,1803,734 2,958 10,589 9,138
Net gains on investments 3,188 2,290 8,124 8,1088,346 27 16,470 8,135
Corporate expenses (2,557) (2,556) (5,087) (5,088)(2,417) (2,322) (7,503) (7,411)
------------- ------------- --------------- ---------------- --------------- -----------------
Income before federal income taxes--------------
INCOME BEFORE FEDERAL INCOME TAXES $ 13,7406,844 $ 13,0494,912 $ 29,21936,063 $ 29,10734,019
============= ============= =============== ================ =============== ===============================
(9) LOANS TO EMPLOYEES: In 2000, 2001 and 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. $7,260 of such full-recourse loans were issued
and $2,282$2,266 remain outstanding at JuneSeptember 30, 2005 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.
12
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
between 25% and 35% 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 and
overall premium ceded rates, net of ceding commission allowances, have generally
decreased since 2001, reflectiveas Protective Insurance Company has accepted more net risk
under the terms of the effect of the provisions ofannual reinsurance agreements currently in place.treaty renewals. For the sixnine months ended
JuneSeptember 30, 2005, the Company experienced positive cash flow from operations
totaling $15.8$37.6 million, down significantly from the $26.6$47.2 million generated during the first
halfnine months of 2004. The decrease in positive cash flow is due largely to a $14.6an
$18.6 million increase in net losses paid when compared to the first sixnine months
of 2004. Additionally, collateral deposits held by the Company returned $2.4on its trucking
accounts decreased $4.9 million in deposits held on behalf of
its insureds during the first halfnine months of 2005 compared to
a $3.1$2.6 million increase in deposits held during the 2004 period corresponding
with a decrease in direct premium written. Although direct premium writings
decreased, changes in reinsurance agreements allowed for a modestan increase ($1.4 million)of $5.8
million in net premiums collected when compared to the first sixnine months of
2004. Operating
expense paid, before consideration of ceding commission from reinsurers, also
decreased $6.9 million from the 2004 period commensurate with the decrease in
premium volume.
For several years, the Company's investment philosophy has emphasized the
purchase of relatively short-term instruments with maximum quality and
liquidity. The average life of the Company's fixed income (bond and short-term
investment) portfolio was approximately 2.2 years at JuneSeptember 30, 2005
representing a small decrease from the prior year end as significant portions of
the proceeds from maturing investments and new cash flows have been placed in
short-term investments in anticipation of further interest rate increases.
The Company's assets at JuneSeptember 30, 2005 included $74.4$90.5 million in investments
classified as short-term or cash equivalents that were readily convertible to
cash without significant market penalty. An additional $111.0$105.9 million of fixed
maturity investments will mature within the twelve-month period following
JuneSeptember 30, 2005. The Company believes that these liquid investments are more
than sufficient to provide for projected claim payments and operating cost
demands even before consideration of current positive cash flows.
Consolidated shareholders' equity is composed largely of GAAP shareholder's
equity of the insurance subsidiaries. As such, there are statutory restrictions
on the transfer of portions of this equity to the parent holding company. At
JuneSeptember 30, 2005, $49.3$50.3 million may be transferred by dividend or loan to the
parent company without approval by, or notification to, regulatory authorities.
An additional $201.8$204.9 million of shareholder's equity of the insurance
subsidiaries may be advanced or loaned to the parent holding company with prior
notification to, and approval from, regulatory authorities. The Company believes
that these restrictions pose no material liquidity concerns to the Company. 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.
13
The Company's annualized premium writing to surplus ratio for the first halfnine
months of 2005 was approximately 44%. Regulatory guidelines generally allow for
writings of 200% of surplus. 13
Accordingly, the Company can increase premium writings significantly with no
need to raise additional capital. Further, the Insurance Subsidiaries'
individual capital levels are several times higher than the minimum amounts
designated by the National Association of Insurance Commissioners.
RESULTS OF OPERATIONS
---------------------
COMPARISONS OF SECONDTHIRD QUARTER, 2005 TO SECONDTHIRD QUARTER, 2004
--------------------------------------------------------------------------------------------------------------------
Net premium earned during the secondthird quarter of 2005 was essentially level withincreased $5.5 million (12%)
as compared to the secondthird quarter of 2004. A 9%21% increase in premiums from the
Company's fleet trucking program was partially offset by decreases in the
remainder of the Company's directly written products. In particular, premiums
from the Company's small business workers' compensation program decreased 60%81%
due to its discontinuance late in 2004. The small fleet trucking and private
passenger automobile programs decreased 11% and 3%6%, respectively, due primarily
to competitive pressures in the marketplace. Premium assumed from property
catastrophe pools included approximately $1.8 million in reinstatement premium
during the quarter resulting from Hurricane Katrina exposure.
Direct premiums written and assumed during the secondthird quarter of 2005 totaled
$49.9$55.8 million, a 21%an 11% decrease from the $62.9$63.0 million reported a year earlier.
This decrease is due largely to a $9.5$7.4 million (21%(16%) decrease in direct premiums
written from the Company's fleet trucking program. Included in thisThis decrease is
a return premium adjustment on experience-rated policies within the Company's
Independent Contractor program of approximately $4.1 million which was
significantly higher than the $.4 million return recorded in the second quarter
of 2004 and the average of $1.2 million per quarter for the year 2004. The
remainder of the decrease for fleet trucking is due to
competitive pressures in a softening market. In addition, direct premiums
written for the Company's discontinued small business workers' compensation
product dropped $3.0$1.7 million (97%) from the prior year period. DecreasesThese decreases
were partially offset by a $2.7 million increase in premium writings forpremiums from property
catastrophe pools, including the Company's private passenger automobile and small fleet trucking programs of $.4
million (4%) and $.2 million (5%), respectively, contributed to the decline from
the prior year period.aforementioned reinstatement premium.
Premium ceded to reinsurers averaged 19.8%17.9% of direct premium production for the
current quarter compared to 35.8% a year earlier reflecting changes in
reinsurance agreements whereby theProtective Insurance Company is retaining a
larger portion of risks underwritten. This reduction in premium ceded was
instrumental in allowing for the increase in net premium earned to remain level for the quarter
despite the decline in gross production.
Net investment income, before tax, during the secondthird quarter of 2005 was 18%26%
higher than the secondthird quarter of 2004 due to increases in both average invested
assets and in yields on bonds and short-term investments. Pre-tax yields on
short-term investments quadruplednearly tripled from the prior year period. Overall after
tax yields posted similar increases.
The secondthird quarter 2005 net investment gain of $3.2$8.3 million consisted primarily
of net gains on equity securities and limited partnership investments and direct equity trading of
$2.8$7.2 million and $.6$1.1 million, respectively, and was partially offset by net losses on
fixed maturity investments of $.2 million.respectively. The limited partnerships in which
the Company holds an ownership interest invest in a broad range of publicly
traded and privately held equity and debt securities, both domestic and foreign,
as well as real estate and other business ventures. The earnings or losses
reported by the limited partnerships may be subject to significant volatility.
Readers are cautioned that the recording of the Company's proportionate share of
the limited partnership's earnings or losses may result in significant
fluctuations in the quarterly amounts reported under this caption. See footnote
4 to the enclosed financial statements for a more detailed discussion regarding
the accounting policies and the net gains reported for the Company's investments
in limited partnerships.
14
Losses and loss expenses incurred during the secondthird quarter of 2005 decreased
$1.8increased
$9.9 million from that experienced during the secondthird quarter of 2004.2004 due
primarily to an estimated $14.8 million in
14
losses sustained from Hurricanes Katrina and Rita. Hurricane losses in the third
quarter of 2004 were approximately $5.0 million. Loss ratios for each of the
Company's major product lines were as follows:
2005 2004
------- --------------- --------
Fleet trucking 65.5% 78.4%75.2% 78.8%
Private passenger automobile 65.0 56.756.8 58.2
Small fleet trucking 54.7 60.764.7 67.9
Voluntary reinsurance assumed 40.2 17.8339.4 215.4
Small business workers' compensation 101.9 87.859.2 136.6
All lines 64.3 68.593.9 83.2
The decrease in the fleet trucking ratio is due to the reserve savings on claims
related to the experience-rated policies previously mentioned and a return to
historical levels of frequency and severity. The Company's large policy limits
and net retention of risk in its fleet trucking products may result in
significant variation in loss activity from period to period.
Other operating expenses for the secondthird quarter of 2005 increased 33%36% from the
secondthird quarter of 2004. Adjusted for ceding allowances, operating expenses
decreased 9%12% from the secondthird quarter of 2004 and compares favorably with levelthe
increase in premiums earned for the quarter as many of the Company's expenses do
not vary directly with premium volume. Ceding allowances as a percentage of
direct expenses have declined due to changes in the Company's reinsurance
structure whereby the Company now retains a greater percentage of the risk
compared to prior periods, particularly within the Large and Medium Fleet
trucking products. Ceding allowances totaled $2.0$1.5 million for the 2005 quarter
compared to $5.7million$5.7 million for the 2004 quarter. The ratio of consolidated other
operating expenses to operating revenue was 21.1%17.9% during the secondthird quarter of
2005 compared to 16.0%14.8% for the 2004 second quarter.third quarter, with the loss of ceding
commission adding 9 points to the current year total.
The effective federal tax rate for consolidated operations for the secondthird quarter
of 2005 was 33.0%32.0% and is less than the statutory rate primarily because of tax
exempt investment income. As a result of the factors mentioned above, net income
increased $.3$1.2 million (3.3%(34%) during the secondthird quarter of 2005 as compared with
the 2004 secondthird quarter.
COMPARISONS OF SIXNINE MONTHS ENDED JUNESEPTEMBER 30, 2005 TO
------------------------------------------------
SIX------------------------------------------------------
NINE MONTHS ENDED JUNESEPTEMBER 30, 2004
------------------------------------------------------------------
Net premiums earned increased $8.2$13.7 million (10%(11%) during the first sixnine months
of 2005 as compared to the same period of 2004. The increased premium volume is
primarily attributable to a 26%24% increase in the Company's fleet trucking
product. The Company experienced decreases in the remainder of its directly
written products, primarily from the discontinued small business workers'
compensation product which posted a 44%57% decline. In addition, net premiums
earned for the voluntary
reinsurance assumed, small fleet and private passenger automobile products decreased
14%, 11% and 3%4%, respectively. Premium assumed from property catastrophe pools
increased 21% due solely to the $1.8 million reinstatement premium resulting
from Hurricane Katrina exposure.
Direct premiums written and assumed during the first halfnine of 2005 totaled $114.5$170.4
million, a 10% decrease from the $127.1$190.1 million reported a year earlier. All
directly-written products experienced a decline in direct premium volume for
reasons cited in the comparison of the secondthird quarters. The most significant
decrease wasdecreases were $12.8 million and $7.5 million in the fleet trucking program and
the discontinued small business workers' compensation product, at $5.8 million.respectively.
Premium ceded to reinsurers averaged 21.0%19.4% of direct premium production for the
current period compared to 33.7%34.4% a year earlier. 15
Net investment income during the first halfnine months of 2005 was 11%16% higher than
the 2004 period for the same reasons as indicated in the quarterly comparison
above. After tax investment income was also 11%14% higher than 2004 levels. Overall
pre-tax and after tax yields were higher during
15
the current period while average invested funds increased 4%6% from the prior
year, resulting from positive cash flow.
The net gain on investments of $8.1$16.5 million for the first sixnine months of 2005
consists of net gains on equity securities and limited partnership investments and equity securities
of $5.0$10.5 million and $3.3$6.3 million, respectively, and was partially offset by $.1$.3
million in losses on fixed maturity investments, after consideration of
impairment changes during the period. The limited partnerships in which the
Company holds an ownership interest invest in a broad range of publicly traded
and privately held equity and debt securities, both domestic and foreign, as
well as real estate and other business ventures. The earnings or losses reported
by the limited partnerships may be subject to significant volatility. Readers
are cautioned that the recording of the Company's proportionate share of the
limited partnership's earnings or losses may result in significant fluctuations
in the quarterly amounts reported under this caption. See footnote 4 to the
enclosed financial statements for a more detailed discussion regarding the
accounting policies and the net gains reported for the Company's investments in
limited partnerships.
Losses and loss expenses incurred during the first sixnine months of 2005 increased
$4.6$14.5 million from the first sixnine months of 2004, consistent withdue primarily to the increased
premium volume previously discussed.higher
hurricane losses sustained in 2005 ($9.8 million). Loss and loss expense ratios
for the comparative six-monthnine-month periods were as follows:
2005 2004
------- -------
Fleet trucking 70.1% 77.1%72.0% 77.8%
Private passenger automobile 62.860.9 58.3
Small fleet trucking 54.7 59.258.1 62.2
Voluntary reinsurance assumed 34.4 14.7173.2 68.5
Small business workers' compensation 73.3 85.271.2 102.7
All lines 66.1 67.176.0 72.8
Other operating expenses increased $4.1$6.8 million (26%(29%) during the first sixnine
months of 2005 compared to the same period of 2004. Ceding commission allowances
included in net expenses were $5.1$6.6 million for the 2005 period compared to $10.9$16.6
million in the prior year period, while expenses before consideration of ceding
allowances actually decreased $1.7$3.3 million despite the 10%11% increase in premium
earned. The ratio of other operating expenses to total operating revenue
(adjusted for realized gains) was 19.8%19.2% for 2005 compared to 17.2%16.4% for 2004,
for
reasons mentioned inwith the quarterly comparison.loss of ceding commissions adding over 7 points to the current year
ratio.
The effective federal tax rate for consolidated operations for the first sixnine
months of 2005 was 33.1%32.9% and is less than the statutory rate primarily because
of tax exempt investment income.
As a result of the factors mentioned above, net income decreased $.2increased $1.0 million
(1.1%(4.2%) during the first halfnine months of 2005 as compared with the 2004 period.
16
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.
CRITICAL ACCOUNTING POLICIES
----------------------------
Subsequent to the filing of the Form 10-Q for the quarter ended JuneSeptember 30,
2005, management determined that the accounting policy related to the
recognition of income from limited partnership investments was not in technical
compliance with generally accepted accounting principles. Specifically, that
portion of increases in the valuation of limited partnership investees estimated
to consist of unrealized gains was originally reported by the Company as an
adjustment to shareholders' equity rather than as current income. As such, the
Company accounted for these reported increases in value as it would if it held
the underlying assets directly, by recording the realized gain component in
income and the unrealized gain component directly in equity. As more fully
described in footnotes (3) and (4) starting on page 7, the accompanying
unaudited financial statements have been restated to reflect the correct
accounting treatment, which is to treat all increases in value, realized or
unrealized, as current income. No periods ending prior to June 30, 2005 were
affected by this restatement. There have been no other changes in the Company's
critical accounting policies as disclosed in the Form 10K filed for the year
ended December 31, 2004.
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, 2005, amounts due from reinsurers
on paid and unpaid losses, including provisions for incurred but not reported
losses, are estimated to total approximately $217$214 million. Included in this
total are knowncase basis losses (before consideration of incurred but not reported
losses) of approximately $22$13 million due from Converium Insurance (North
America) Inc., approximately $5$4 million due from PMA Re and approximately $.7$.6
million from Trenwick Re., each of which have reported substantial reserve
strengthening and/or impairment of assets which have negatively affected their
reported financial positions. All amounts due from these reinsurers on paid
claims are current and the Company has no information at this time to indicate
that all obligations of these reinsurers will not be met.
At JuneSeptember 30, 2005, other long-term investments includes approximately $23.8$26.8
million consisting of three limited partnerships which are managed by
organizations in which two of the Company's directors are officers, directors,
general partners or owners. Certain of these investments contain profit sharing
agreements to the affiliated organizations.
17
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 were not effective as of
JuneSeptember 30, 2005 based solely on the impact of the restatement of the enclosed
unaudited condensed consolidated financial statements as of and for the three
and sixnine months ending JuneSeptember 30, 2005.
The Company invests in limited partnerships that include unrealized investment
gains and losses in the determination of their net income or loss. Generally
accepted accounting principles require an investor in a limited partnership to
record their proportionate share of the limited partnership's net income using
the equity method of accounting. To the extent that the limited partnerships
include both realized and unrealized investment gains or losses in the
determination of net income or loss, then the investor would also recognize,
through its income statement, its proportionate share of the limited
partnerships unrealized as well as realized investment gains or losses. For the
three and sixnine months ending JuneSeptember 30, 2005, the Company initially recorded
its share of limited partnership unrealized gains in shareholders' equity and
the Company's income statement reflected only gains or losses reported as
realized by the limited partnerships. The Company has determined that its
accounting for certain limited partnerships was technically incorrect and as a
result, has restated its interim financial statements as of and for the three
and sixnine months ending JuneSeptember 30, 2005.
The restatement resulted from a failure on the part of Company personnel to
recognize that accounting for the ownership of assets through a limited
partnership may be different from accounting for the same assets, if owned
directly. The failure to properly interpret generally accepted accounting
principles, in this instance, resulted in a material change in reported net
income. The restatementincome, but resulted in no change to total invested assets, total assets, total
shareholders' equity, comprehensive income or cash flow.
In the fourth quarter of 2005, the Company's management made the appropriate
changes to its accounting policy for limited partnership investments. Due to the
isolated nature of this error, management is confident this issue has been
remediated.
(b) Other than indicated above, 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. However, subsequent to
JuneSeptember 30, 2005, the Company took the remedial actions described above.
18
PART II - OTHER INFORMATION
ITEM 6 (a) EXHIBITS
- --------------------
NUMBER AND CAPTION FROM EXHIBIT
TABLE OF REGULATION S-K ITEM 601 EXHIBIT NO.
- -------------------------------- -----------
(11) Statement regarding computation EXHIBIT 11 -
of per share earnings Computation of Per Share
Earnings
(31.1) Certification of CEO EXHIBIT 31.1
pursuant to Section 302 of the Certification of CEO
Sarbanes-Oxley Act of 2002
(31.2) Certification of CFO EXHIBIT 31.2
pursuant to Section 302 of the Certification of CFO
Sarbanes-Oxley Act of 2002
(32.1) Certification of CEO EXHIBIT 32.1
pursuant to 18 U.S.C. 1350, as Certification of CEO
adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002
(32.2) Certification of CFO EXHIBIT 32.2
pursuant to 18 U.S.C. 1350, as Certification of CFO
adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002
ITEM 6 (b) REPORTS ON FORM 8-K
- -------------------------------
A Form 8-K was filed by the registrant on April 27,July 29, 2005 regarding its earnings
announcement for the firstsecond quarter of 2005.
A Form 8-K was filed by the registrant on September 21, 2005 regarding the
Company's estimate of losses sustained as the result of Hurricane Katrina.
19
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 JANUARYJanuary 18, 2006 By /S/ GARY W. MILLER
----------------------- --------------------------------
Gary W. Miller, Chairman and CEO
Date JANUARYJanuary 18, 2006 By /S/ G. PATRICK CORYDON
----------------------- --------------------------------
G. Patrick Corydon,
Senior Vice President - Finance
(Principal Financial and
Accounting Officer)
20
BALDWIN & LYONS, INC.
Form 10-Q/A for the fiscal quarter
ended JuneSeptember 30, 2005
INDEX TO EXHIBITS
Begins on sequential
page number of Form
Exhibit Number 10-Q/ABEGINS ON SEQUENTIAL
PAGE NUMBER OF FORM
EXHIBIT NUMBER 10-Q
-------------- ------------------------------------------------------------
EXHIBIT 11 Filed herewith electronically
Computation of per share earnings
EXHIBIT 31.1 Filed herewith electronically
Certification of CEO
pursuant to Section 302 of the
Sarbanes-Oxley Act
EXHIBIT 31.2 Filed herewith electronically
Certification of CFO
pursuant to Section 302 of the
Sarbanes-Oxley Act
EXHIBIT 32.1 Filed herewith electronically
Certification of CEO
pursuant to 18 U.S.C. 1350,
as adopted pursuant to Section
906 of the Sarbanes-Oxley Act
EXHIBIT 32.2 Filed herewith electronically
Certification of CFO
pursuant to 18 U.S.C. 1350,
as adopted pursuant to Section
906 of the Sarbanes-Oxley Act