-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, VRXqSxVgreZi/0Ronaz4idY1u+N7GLnG3e8rY62mBBhbaKWTytYrAUn//Z2DrGWC vLd6vv/2rp7I5Y8SD1yt+w== 0000009346-07-000016.txt : 20070808 0000009346-07-000016.hdr.sgml : 20070808 20070808112435 ACCESSION NUMBER: 0000009346-07-000016 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20070630 FILED AS OF DATE: 20070808 DATE AS OF CHANGE: 20070808 FILER: COMPANY DATA: COMPANY CONFORMED NAME: BALDWIN & LYONS INC CENTRAL INDEX KEY: 0000009346 STANDARD INDUSTRIAL CLASSIFICATION: FIRE, MARINE & CASUALTY INSURANCE [6331] IRS NUMBER: 350160330 STATE OF INCORPORATION: IN FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-05534 FILM NUMBER: 071034195 BUSINESS ADDRESS: STREET 1: 1099 N MERIDIAN ST STREET 2: STE 700 CITY: INDIANAPOLIS STATE: IN ZIP: 46204 BUSINESS PHONE: 3176369800 MAIL ADDRESS: STREET 1: 1099 NORTH MERIDIAN ST STREET 2: STE 700 CITY: INDIANAPOLIS STATE: IN ZIP: 46204 FORMER COMPANY: FORMER CONFORMED NAME: BALDWIN H C AGENCY INC DATE OF NAME CHANGE: 19720309 10-Q 1 r10q063007.txt FORM 10-Q, SECOND QUARTER 2007 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q Quarterly Report Under Section 13 or 15 (d) of the Securities Exchange Act of 1934 ------------------------------------------------------ For Quarter Ended Commission file number June 30, 2007 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 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 [ X ] Non-accelerated filer [ ] Indicate the number of shares outstanding of each of the issuer's classes of common stock as of August 7, 2007: TITLE OF CLASS NUMBER OF SHARES OUTSTANDING Common Stock, No Par Value: Class A (voting) 2,650,059 Class B (nonvoting) 12,503,955 Index to Exhibits located on page 16. Page 1 of a total of 23 pages 2 PART I - FINANCIAL INFORMATION ITEM 1 FINANCIAL STATEMENTS
BALDWIN & LYONS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED) JUNE 30 December 31 2007 2006 -------------- -------------- ASSETS Investments: Fixed maturities $ 354,587 $ 338,466 Equity securities 132,971 129,817 Limited partnerships 67,918 57,313 Short-term 46,574 59,325 -------------- -------------- 602,050 584,921 Cash and cash equivalents 43,032 35,490 Accounts receivable 30,927 37,994 Reinsurance recoverable 152,910 163,426 Notes receivable from employees 2,180 2,343 Other assets 28,069 27,932 Current federal income taxes - 1,613 -------------- -------------- $ 859,168 $ 853,719 ============== ============== LIABILITIES AND SHAREHOLDERS' EQUITY Reserves for losses and loss expenses $ 394,396 $ 409,412 Reserves for unearned premiums 30,484 32,145 Accounts payable and accrued expenses 37,568 35,681 Current federal income taxes 11,680 - Deferred federal income taxes 11,079 18,854 -------------- -------------- 485,207 496,092 Shareholders' equity: Common stock-no par value 647 646 Additional paid-in capital 46,078 45,692 Unrealized net gains on investments 50,156 47,229 Retained earnings 277,080 264,060 -------------- -------------- 373,961 357,627 -------------- -------------- $ 859,168 $ 853,719 ============== ============== See notes to condensed consolidated financial statements.
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BALDWIN & LYONS, INC. AND SUBSIDIARIES UNAUDITED CONSOLIDATED STATEMENTS OF INCOME (IN THOUSANDS, EXCEPT PER SHARE DATA) Three Months Ended Six Months Ended March 31 June 30 ------------------------------- ------------------------------- 2007 2006 2007 2006 -------------- -------------- -------------- -------------- REVENUES Net premiums earned $ 44,817 $ 42,163 $ 88,992 $ 85,381 Net investment income 4,882 4,736 9,728 9,295 Net gains (losses) on investments 8,772 (1,135) 9,246 5,879 Commissions and other income 1,145 1,848 2,557 3,712 -------------- -------------- -------------- -------------- 59,616 47,612 110,523 104,267 EXPENSES Losses and loss expenses incurred 24,493 27,717 51,385 56,656 Other operating expenses 13,562 12,413 26,408 23,200 -------------- -------------- -------------- -------------- 38,055 40,130 77,793 79,856 -------------- -------------- -------------- -------------- INCOME BEFORE FEDERAL INCOME TAXES 21,561 7,482 32,730 24,411 Federal income taxes 6,769 2,055 9,727 7,428 -------------- -------------- -------------- -------------- NET INCOME $ 14,792 $ 5,427 $ 23,003 $ 16,983 ============== ============== ============== ============== PER SHARE DATA: BASIC EARNINGS $ .98 $ .36 $ 1.52 $ 1.14 ============== ============== ============== ============== DILUTED EARNINGS $ .98 $ .36 $ 1.52 $ 1.14 ============== ============== ============== ============== DIVIDENDS PAID TO SHAREHOLDERS $ .25 $ 1.50 $ .70 $ 1.85 ============== ============== ============== ============== RECONCILIATION OF SHARES OUTSTANDING: Average shares outstanding - basic 15,147 14,979 15,142 14,893 Dilutive effect of options outstanding 18 43 19 61 -------------- -------------- -------------- -------------- Average shares outstanding - diluted 15,165 15,022 15,161 14,954 ============== ============== ============== ==============
See notes to condensed consolidated financial statements. 4
BALDWIN & LYONS, INC. AND SUBSIDIARIES UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS) Six Months Ended June 30 2007 2006 -------------- -------------- Net cash provided by operating activities $17,540 $18,730 Investing activities: Purchases of long-term investments (118,750) (148,592) Proceeds from sales or maturities of long-term investments 107,129 105,010 Net sales (purchases) of short-term investments 12,751 (4,151) Other investing activities (914) 309 -------------- -------------- Net cash provided by (used in) investing activities 216 (47,424) Financing activities: Dividends paid to shareholders (10,600) (27,847) Cost of treasury stock - (401) Proceeds from sales of common stock 386 6,238 -------------- -------------- Net cash used in financing activities (10,214) (22,010) -------------- -------------- Increase (decrease) in cash and cash equivalents 7,542 (50,704) Cash and cash equivalents at beginning of period 35,490 126,551 -------------- -------------- Cash and cash equivalents at end of period $43,032 $75,847 ============== ==============
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 10-Q 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, 2007. 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. (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. 5 NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (3) NET GAINS ON INVESTMENTS: Amounts reported as net gains 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) equity in earnings or losses of investments in limited partnerships and (3) "other-than-temporary impairment" adjustments. 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 are subject to investment company accounting and, thereby, 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. 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 classified as available 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 often 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 or losses from investments in the quarter reported to the Company. Following is a summary of the components of net gains or losses on investments for the periods presented in the accompanying statements of income.
Three Months Ended June 30 Six Months Ended June 30 --------------------------- --------------------------- 2007 2006 2007 2006 ------------ ------------ ------------ ------------ Realized net gains on the disposal of securities $ 1,051 $ 1,804 $ 1,517 $ 3,558 Equity in earnings (losses) of limited partnership investments (realized and unrealized) 7,721 (2,312) 6,824 2,416 Impairment: Write-downs based upon objective criteria - (763) (63) (763) Recovery of prior write-downs upon sale or disposal - 136 968 668 ------------ ------------ ------------ ------------ Totals $ 8,772 $ (1,135) $ 9,246 $ 5,879 ============ ============ ============ ============
The net gains from limited partnerships for the quarter and year-to-date ending June 30, 2007 include an estimated $6.5 million and $2.9 million, respectively, of unrealized gains reported to the Company as part of the operations of the various limited partnerships. Shareholders' equity at June 30, 2007 includes approximately $19.5 million, net of deferred federal income taxes, of earnings undistributed by limited partnerships. 6 NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (4) REINSURANCE: The following table summarizes the Company's transactions with reinsurers for the 2007 and 2006 comparative periods.
2007 2006 ---------------- ---------------- Quarter ended June 30: Premiums ceded to reinsurers $ 6,976 $ 5,402 Losses and loss expenses ceded to reinsurers 5,676 3,215 Commissions from reinsurers 351 121 Six months ended June 30: Premiums ceded to reinsurers 13,093 13,008 Losses and loss expenses ceded to reinsurers 10,086 5,115 Commissions from reinsurers 642 811
(5) COMPREHENSIVE INCOME OR LOSS: Total realized and unrealized income for the quarter ended June 30, 2007 was $18,766 and compares to total realized and unrealized income of $908 for the quarter ended June 30, 2006. For the six months ended June 30, 2007, total realized and unrealized income was $26,548 and compares to total realized and unrealized income of $15,643 for the six months ended June 30, 2006. 7 NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (6) 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. 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. Amounts presented for voluntary reinsurance assumed include transactions related to certain inter-segment reinsurance agreements.
2007 2006 ------------------------------------------- ------------------------------------------- Direct and Net Direct and Net Assumed Premium Segment Assumed Premium Segment Premium Earned and Profit Premium Earned and Profit Written Fee Income (Loss) Written Fee Income (Loss) ------------- ------------- ------------- ------------- ------------- ------------- QUARTER ENDED JUNE 30: PROTECTIVE PRODUCTS: Fleet trucking $ 31,222 $ 26,088 $ 7,703 $ 29,707 $ 26,617 $ 5,416 Reinsurance assumed 6,830 7,531 2,386 2,874 3,799 983 SAGAMORE PRODUCTS: Private passenger automobile 4,486 8,254 479 6,322 10,041 751 Small fleet trucking 4,915 4,094 89 6,814 3,530 (445) All other (144) (71) 162 (255) (93) (310) ------------- ------------- ------------- ------------- ------------- ------------- Totals $ 47,309 $ 45,896 $ 10,819 $ 45,462 $ 43,894 $ 6,395 ============= ============= ============= ============= ============= ============= SIX MONTHS ENDED JUNE 30: Protective products: Fleet trucking $ 62,107 $ 52,258 $ 13,002 $ 64,269 $ 54,736 $ 10,169 Reinsurance assumed 12,653 13,913 4,418 6,151 7,136 2,853 SAGAMORE PRODUCTS: Private passenger automobile 14,687 16,947 1,425 20,449 20,278 1,817 Small fleet trucking 11,031 8,189 163 13,545 6,373 (442) All other (68) 37 363 (15) 227 (77) ------------- ------------- ------------- ------------- ------------- ------------- Totals $100,410 $ 91,344 $ 19,371 $104,399 $ 88,750 $ 14,320 ============= ============= ============= ============= ============= =============
8 NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) (7) 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 Six Months Ended June 30 June 30 2007 2006 2007 2006 -------------- -------------- -------------- -------------- REVENUE: Net premium earned and fee income $ 45,896 $ 43,894 $ 91,344 $ 88,750 Net investment income 4,882 4,736 9,728 9,295 Net gains (losses) on investments 8,772 (1,135) 9,246 5,879 Other 66 117 205 343 -------------- -------------- -------------- -------------- Total consolidated revenue $ 59,616 $ 47,612 $110,523 $104,267 ============== ============== ============== ============== PROFIT: Segment profit $10,819 $ 6,395 $ 19,371 $ 14,320 Net investment income 4,882 4,736 9,728 9,295 Net gains (losses) on investments 8,772 (1,135) 9,246 5,879 Corporate expenses (2,912) (2,514) (5,615) (5,083) -------------- -------------- -------------- -------------- Income before federal income taxes $ 21,561 $ 7,482 $ 32,730 $ 24,411 ============== ============== ============== ==============
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. (8) 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 $2,180 remain outstanding at June 30, 2007 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. (9) ACCOUNTING PRONOUNCEMENTS: In July 2006, the Financial Accounting Standards Board issued FASB Interpretation No. 48, ACCOUNTING FOR UNCERTAINTY IN INCOME TAXES - AN INTERPRETATION OF FASB STATEMENT 109 ("FIN 48"). Among other things, FIN 48 creates a model to address uncertainty in tax positions and clarifies the accounting for income taxes by prescribing a minimum recognition threshold that all income tax positions must meet before being recognized in the financial statements. In addition, FIN 48 requires expanded annual disclosures, including a roll-forward of the beginning and ending aggregate unrecognized tax benefits as well as specific detail related to tax uncertainties for which it is reasonably possible the amount of unrecognized tax benefit will significantly increase or decrease within twelve months. The Company adopted FIN 48 on January 1, 2007 with no adjustment necessary to beginning retained earnings. The total amount of unrecognized tax benefits from uncertain tax positions at January 1, 2007 was $10.3 million and would have no impact on the Company's effective tax rate. There were no material changes to the amount recorded for unrecognized tax benefits from uncertain tax positions during the three months ended June 30, 2007. The Company recognizes accrued interest and penalties, if any, related to unrecognized tax benefits in income tax expense and changes in such accruals would impact the Company's effective tax rate. Amounts accrued for the payment of interest at June 30, 2007 and December 31, 2006 were not material. The Company's 2005 and 2006 tax years remain subject to examination by the IRS. 9 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 and overall premium ceded rates, net of ceding commission allowances, have generally decreased since 2001, as Protective Insurance Company has accepted more net risk under the terms of annual reinsurance treaty renewals. For the six months ended June 30, 2007, the Company experienced positive cash flow from operations totaling $17.5 million and compares to $18.7 million generated during the first half of 2006. The $1.2 million drop in cash flow from the 2006 period is due primarily to the timing of receipt of reinsurance recoverable on paid claims. Adjusted for this single item, cash flow from operations increased by $2.6 million, or 16%, in comparison to the prior year period. For several years, the Company's investment philosophy has emphasized the purchase of relatively short-term instruments with maximum quality and liquidity. The average life of the Company's fixed income (bond and short-term investment) portfolio was 3.4 years at June 30, 2007, up slightly from the prior year end but still short relative to the Company's liability duration. Financing activity, other than the payment of dividends to shareholders, is generally not significant for the Company. Dividends paid during the six months ended June 30, 2007 totaled $10.6 million and included extra dividends ($.20 per share) totaling $3.0 million during the first quarter. At $.25 per share, the quarterly regular dividend commitment for the Company is currently $3.8 million. The Company's assets at June 30, 2007 included $43.0 million in investments classified as cash or cash equivalents that were readily convertible to cash without significant market penalty. An additional $162.4 million of fixed maturity and short-term investments will mature within the twelve-month period following June 30, 2007. 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 June 30, 2007, $42.4 million may be transferred by dividend or loan to the parent company during the remainder of 2007 without approval by, or prior notification to, regulatory authorities. An additional $251.9 million of shareholder's equity of the insurance subsidiaries could, theoretically, be advanced or loaned to the parent holding company with prior notification to, and approval from, regulatory authorities, although it is unlikely that transfers of this size would be practical. The Company believes that these restrictions pose no material liquidity concerns to the Company. The financial strength and 10 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 $27.8 million at June 30, 2007. The Company's annualized premium writing to surplus ratio for the first half of 2007 was approximately 37%. Regulatory guidelines generally allow for writings of at least 200% of surplus. Accordingly, the Company could increase premium writings significantly with no need to raise additional capital. Further, the Insurance Subsidiaries' individual capital levels are several times higher than the minimum amounts designated by the National Association of Insurance Commissioners. RESULTS OF OPERATIONS --------------------- COMPARISONS OF SECOND QUARTER, 2007 TO SECOND QUARTER, 2006 ----------------------------------------------------------- Net premiums earned during the second quarter of 2007 increased $2.7 million (6%) as compared to the same period of 2006. The Company's independent contractor, voluntary reinsurance assumed and small fleet products reported significant increases of $3.8 million (30%), $3.7 million (112%) and $.7 million (20%), respectively. The higher premium from reinsurance assumed is associated with the Company's affiliation with Paladin Catastrophe Management which produced $3.7 million in premium during the second quarter. Increases in independent contractor and small fleet premiums continued the pattern experienced throughout 2006 and the first quarter of 2007. These increases were partially offset by decreases in the Company's large fleet excess and private passenger automobile products of $3.7 million (36%) and $1.6 million (18%), respectively, each impacted by competitive market conditions. NOTE: THE INDEPENDENT CONTRACTOR AND LARGE FLEET EXCESS PRODUCTS ARE INCLUDED IN THE FLEET TRUCKING SEGMENT. Direct premiums written and assumed during the second quarter of 2007 totaled $47.3 million, a 4% increase from the $45.5 million reported a year earlier with the higher premium concentrated in the independent contractor and reinsurance assumed products, as discussed in the previous paragraph. Premium ceded to reinsurers averaged 17.2% of direct premium production for the current quarter compared to 12.6% a year earlier. The increase in the ceding rate reflects a higher concentration of premium volume during 2007 in products which are more heavily reinsured rather than reinsurance rate increases. Net investment income, before tax, during the second quarter of 2007 was 3% higher than the second quarter of 2006 due to increases in yields for all investment categories. The impact of the higher yields was somewhat diminished by a 4% drop in average invested assets. Overall after tax yields increased by 13% to 3.4%, as municipal bonds comprised a larger portion of the Company's fixed income portfolio. The second quarter 2007 net investment gains of $8.8 million were primarily the result of gains from limited partnership investments and equity securities of $7.7 million and $1.1 million, respectively. The limited partnership gains were concentrated in our investment in a limited partnership which invests exclusively in India. The second quarter 2006 net investment loss of $1.1 million included $2.3 million in losses from limited partnerships. See footnote 3 to the enclosed financial statements for a more detailed discussion regarding the accounting policies and the net gains or losses reported for the Company's investments in limited partnerships. 11 Losses and loss expenses incurred during the second quarter of 2007 were $3.2 million lower than that experienced during the second quarter of 2006. This decrease is principally the result of approximately $5.4 million of favorable developments on prior year accidents during the 2007 second quarter when compared to the prior year period when reserve development savings were near zero. Loss ratios for each of the Company's major product lines were as follows:
2007 2006 -------- -------- Fleet trucking 52.4% 64.9% Private passenger automobile 68.2 65.5 Small fleet trucking 58.2 78.8 Voluntary reinsurance assumed 49.0 56.0 All lines 54.7 65.7
Other operating expenses for the second quarter of 2007 increased $1.1 million (9%) from the second quarter of 2006. This increase was primarily attributable to commissions on independent contractor business produced by outside agents as well as commissions associated with the doubling of the Company's book of reinsurance assumed business. Ceding allowances were immaterial in both periods. The ratio of consolidated other operating expenses to operating revenue (adjusted for investment gains) was 26.7% during the second quarter of 2007 compared to 25.5% for the 2006 second quarter with the increase resulting directly from the commission increases previously discussed. The effective federal tax rate for consolidated operations for the second quarter of 2007 was 31.4% 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 $9.4 million (172.6%) during the second quarter of 2007 as compared with the 2006 second quarter. COMPARISONS OF SIX MONTHS ENDED JUNE 30, 2007 TO ------------------------------------------------ SIX MONTHS ENDED JUNE 30, 2006 ------------------------------ Net premiums earned during the first six months of 2007 increased $3.6 million (4%) as compared to the same period of 2006. The increase is due primarily to increases in premiums from the Company's reinsurance assumed, small fleet trucking and independent contractor programs of 106%, 33% and 25%, respectively. Partially offsetting this increase were decreases in premiums from the Company's large fleet excess and private passenger automobile programs of 39% and 16%, respectively, resulting from competitive market conditions. Direct premiums written and assumed during the first half of 2007 totaled $100.4 million, a 4% decrease from the $104.4 million reported a year earlier. This decrease was due primarily to decreases in large fleet excess, private passenger automobile and small fleet trucking premiums and was partially offset by increases in premium writings from the Company's independent contractor and reinsurance assumed products. Premium ceded to reinsurers averaged 14.9% of direct premium production for the current period compared to 13.2% a year earlier. Net investment income, before tax, was 5% higher, during the first half of 2007, than the 2006 period for the same reasons as indicated in the quarterly comparison above. Overall pre-tax and after tax yields were higher during the current period while average invested funds decreased 4% from the prior year, largely resulting from cash dividends paid to shareholders. 12 The net gain on investments of $9.2 million for the first six months of 2007 consists of net gains on limited partnership investments and equity securities of $6.8 million and $2.8 million, respectively, and was partially offset by $.4 million in losses on fixed maturity investments. The gain from limited partnerships includes both realized and unrealized net income, as reported by the general partners. For the six months, we have estimated that realized and unrealized gains totaled $3.9 million and $2.9 million, respectively. See footnote 3 to the enclosed financial statements for a more detailed discussion regarding the accounting policies and the net gains or losses reported for the Company's investments in limited partnerships. Losses and loss expenses incurred during the first six months of 2007 decreased $5.3 million from the first six months of 2006, with the lower losses composed almost entirely of more favorable developments on prior year accidents, as previously discussed. Loss and loss expense ratios for the comparative six-month periods were as follows:
2007 2006 -------- -------- Fleet trucking 58.8% 70.0% Private passenger automobile 65.1 62.5 Small fleet trucking 57.0 74.4 Voluntary reinsurance assumed 48.7 45.4 All lines 57.7 66.4
Other operating expenses increased $3.2 million (14%) during the first six months of 2007 compared to the same period of 2006. The increase in expenses is due primarily to non-affiliated agent commissions on independent contractor business and reinsurance assumed, lower ceding commissions and the fact that the first quarter of 2006 included the recovery of $.9 million of previously written off reinsurance bad debts which was recorded as expense offset. The ratio of other operating expenses to total operating revenue (adjusted for investment gains) was 26.1% for 2007 compared to 23.6% for 2006 for the reasons mentioned. The effective federal tax rate for consolidated operations for the first six months of 2007 was 29.7% 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 $6.0 million (35.4%) during the first half of 2007 as compared with the 2006 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. 13 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, 2006 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 June 30, 2007, amounts due from reinsurers on paid and unpaid losses, including provisions for incurred but not reported losses, are estimated to total approximately $153 million. Included in this total are case basis and estimated IBNR losses of approximately $12.9 million due from Converium Insurance (North America) Inc. and $3.0 million due from PMA 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 as of June 30, 2007 and the Company has no information at this time to indicate that all obligations of these reinsurers will not be met. At June 30, 2007, limited partnership investments includes approximately $44.9 million consisting of three partnerships which are managed by organizations in which certain of the Company's directors are officers, directors, general partners or owners. Each of these investments contains profit sharing agreements to the affiliated organizations. ITEM 4. CONTROLS AND PROCEDURES - ------------------------------- (a) The Corporation's Chief Executive Officer and Chief Financial Officer evaluated the disclosure controls and procedures (as defined under Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this report. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that the Corporation's disclosure controls and procedures are effective. (b) There were no significant changes in the Corporation's internal control over financial reporting identified in connection with the foregoing evaluation that occurred during the Corporation's last fiscal quarter that have affected, or are reasonably likely to materially affect, the Corporation's internal control over financial reporting. 14 PART II - OTHER INFORMATION ITEM 5 OTHER INFORMATION - ------------------------ During June, 2007, the Company renewed its reinsurance treaties covering the fleet trucking product under terms similar to the expiring agreements. 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 May 1, 2007 regarding its earnings announcement for the first quarter of 2007. 15 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. BALDWIN & LYONS, INC. Date AUGUST 8, 2007 By /S/ GARY W. MILLER ----------------- ---------------------------------- Gary W. Miller, Chairman and CEO Date AUGUST 8, 2007 By /S/ G. PATRICK CORYDON ----------------- ---------------------------------- G. Patrick Corydon, Senior Vice President - Finance (Principal Financial and Accounting Officer) 16 BALDWIN & LYONS, INC. Form 10-Q for the fiscal quarter ended June 30, 2007 INDEX TO EXHIBITS Begins 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 EX-11 3 exh-11063007.txt EPS RECONCILIATION 17
BALDWIN & LYONS, INC. FORM 10-Q, EXHIBIT 11 COMPUTATION OF EARNINGS PER SHARE THREE MONTHS ENDED SIX MONTHS ENDED JUNE 30 JUNE 30 ---------------------------------- ---------------------------------- 2007 2006 2007 2006 ---------------- ---------------- ---------------- ---------------- BASIC: Average number of shares outstanding 15,146,926 14,979,396 15,142,039 14,892,523 ================ ================ ================ ================ Net Income $14,791,470 $5,426,984 $23,002,710 $16,983,144 ================ ================ ================ ================ Per share amount $ .98 $ .36 $ 1.52 $ 1.14 ================ ================ ================ ================ DILUTED: Average number of shares outstanding 15,146,926 14,979,396 15,142,039 14,892,523 Dilutive stock options--based on treasury stock method using average market price 18,354 43,131 19,313 61,262 ---------------- ---------------- ---------------- ---------------- Totals 15,165,280 15,022,527 15,161,352 14,953,785 ================ ================ ================ ================ Net Income $14,791,470 $5,426,984 $23,002,710 $16,983,144 ================ ================ ================ ================ Per share amount $ .98 $ .36 $ 1.52 $ 1.14 ================ ================ ================ ================
EX-31 4 exhibit311.txt CEO CERTIFICATION 18 Exhibit 31.1 CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 CERTIFICATION - ------------- I, Gary W. Miller, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Baldwin & Lyons, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and 19 d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: August 8, 2007 /s/ GARY W. MILLER - ------------------------------ Gary W. Miller Chairman of the Board and Chief Executive Officer EX-31 5 exhibit312.txt CFO CERTIFICATION 20 Exhibit 31.2 CERTIFICATION PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002 CERTIFICATION - ------------- I, G. Patrick Corydon, certify that: 1. I have reviewed this report on Form 10-Q of Baldwin & Lyons, Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and 21 d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: August 8, 2007 /s/ G. PATRICK CORYDON - ------------------------- G. Patrick Corydon Senior Vice President and Chief Financial Officer EX-32 6 exhibit321.txt CEO CERTIFICATION 22 Exhibit 32.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Baldwin & Lyons, Inc. (the "Company") on Form 10-Q for the quarterly period ending June 30, 2007 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Gary W. Miller, Chairman of the Board and Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. ss.1350, as adopted pursuant to ss.906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ GARY W. MILLER - ------------------------- Gary W. Miller Chairman of the Board and Chief Executive Officer August 8, 2007 EX-32 7 exhibit322.txt CFO CERTIFICATION 23 Exhibit 32.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Baldwin & Lyons, Inc. (the "Company") on Form 10-Q for the quarterly period ending June 30, 2007 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, G. Patrick Corydon, Senior Vice President and Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. ss.1350, as adopted pursuant to ss.906 of the Sarbanes-Oxley Act of 2002, that: (1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ G. PATRICK CORYDON - ------------------------- G. Patrick Corydon Senior Vice President and Chief Financial Officer August 8, 2007 -----END PRIVACY-ENHANCED MESSAGE-----