SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
Form 10-Q
Quarterly Report Pursuant to Section 13 or 15 (d)
of the Securities Exchange Act of 1934
For Quarter Ended Commission file number
June 30, 2011 0-5534
BALDWIN & LYONS, INC.
(Exact name of registrant as specified in its charter)
INDIANA (State or other jurisdiction of Incorporation or organization | 35-0160330 (I.R.S. Employer Identification Number) |
1099 N. Meridian Street, Indianapolis, Indiana (Address of principal executive offices) | 46204 (Zip Code) |
Registrant's telephone number, including area code: (317) 636-9800
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days. Yes ü No___
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ü No ____
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ____ Accelerated filer ü Non-accelerated filer ____
Small Reporting Company ____
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ____ No ü
Indicate the number of shares outstanding of each of the issuer's classes of common stock as of August 1, 2011:
TITLE OF CLASS NUMBER OF SHARES OUTSTANDING
Common Stock, No Par Value:
Class A (voting) 2,623,109
Class B (nonvoting) 12,212,590
Index to Exhibits located on page 26.
PART I – FINANCIAL INFORMATION
ITEM 1 FINANCIAL STATEMENTS
Baldwin & Lyons, Inc. and Subsidiaries | | | | | | |
| Unaudited Consolidated Balance Sheets | | | | | | |
| | | | | | | |
| (in thousands, except per share data) | | | | | | |
| | | | | | | |
| | | | | | | |
| | | June 30 | | | December 31 | |
| | | 2011 | | | 2010 | |
| Assets | | | | | | |
| Investments: | | | | | | |
| Fixed maturities | | $ | 417,176 | | | $ | 415,554 | |
| Equity securities | | | 104,933 | | | | 96,657 | |
| Limited partnerships | | | 71,873 | | | | 77,352 | |
| Short-term | | | 4,308 | | | | 4,225 | |
| | | | 598,290 | | | | 593,788 | |
| | | | | | | | | |
| Cash and cash equivalents | | | 57,844 | | | | 38,223 | |
| Accounts receivable | | | 52,297 | | | | 42,953 | |
| Reinsurance recoverable | | | 133,775 | | | | 127,228 | |
| Notes receivable from employees | | | 1,381 | | | | 1,414 | |
| Other assets | | | 36,755 | | | | 34,340 | |
| Current federal income taxes | | | 3,259 | | | | - | |
| | | $ | 883,601 | | | $ | 837,946 | |
| | | | | | | | | |
| Liabilities and shareholders' equity | | | | | | | | |
| Reserves for losses and loss expenses | | $ | 402,789 | | | $ | 344,520 | |
| Reserves for unearned premiums | | | 43,527 | | | | 29,819 | |
| Short-term borrowings | | | 10,000 | | | | 15,000 | |
| Accounts payable and accrued expenses | | | 78,704 | | | | 66,441 | |
| Current federal income taxes | | | - | | | | 6,659 | |
| Deferred federal income taxes | | | 3,290 | | | | 6,772 | |
| | | | 538,310 | | | | 469,211 | |
Shareholders' equity: | | | | | | | | |
| Common stock-no par value: | | | | | | | | |
| Class A voting -- authorized 3,000,000 shares; | | | | | | | | |
| outstanding -- 2011, 2,623,109; 2010, 2,623,109 | | | 112 | | | | 112 | |
| Class B non-voting -- authorized 20,000,000 shares; | | | | | | | | |
| outstanding -- 2011, 12,212,590; 2010, 12,187,009 | | | 521 | | | | 520 | |
Additional paid-in capital | | | 48,475 | | | | 47,874 | |
| Unrealized net gains on investments | | | 37,716 | | | | 33,894 | |
| Retained earnings | | | 258,467 | | | | 286,335 | |
| | | | 345,291 | | | | 368,735 | |
| | | $ | 883,601 | | | $ | 837,946 | |
See notes to condensed consolidated financial statements.
| Baldwin & Lyons, Inc. and Subsidiaries | | | | | | | | | | | | |
| Unaudited Consolidated Statements of Operations | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| (in thousands, except per share data) | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | Three Months Ended | | | Six Months Ended | |
| | | June 30 | | | June 30 | |
| | | 2011 | | | 2010 | | | 2011 | | | 2010 | |
| Revenues | | | | | | | | | | | | |
| Net premiums earned | | $ | 62,344 | | | $ | 53,523 | | | $ | 119,945 | | | $ | 104,689 | |
| Net investment income | | | 2,644 | | | | 2,944 | | | | 5,297 | | | | 5,968 | |
| Commissions and other income | | | 1,566 | | | | 1,673 | | | | 3,173 | | | | 3,421 | |
| Net realized gains (losses) on investments, excluding | | | | | | | | | | | | | | | | |
| impairment losses | | | (1,845 | ) | | | (2,843 | ) | | | (3,314 | ) | | | 347 | |
| Total other-than-temporary impairment losses on investments | | | (118 | ) | | | (15 | ) | | | (118 | ) | | | (15 | ) |
| Net realized gains (losses) on investments | | | (1,963 | ) | | | (2,858 | ) | | | (3,432 | ) | | | 332 | |
| | | | 64,591 | | | | 55,282 | | | | 124,983 | | | | 114,410 | |
| | | | | | | | | | | | | | | | | |
| Expenses | | | | | | | | | | | | | | | | |
| Losses and loss expenses incurred | | | 55,166 | | | | 31,152 | | | | 120,839 | | | | 74,184 | |
| Other operating expenses | | | 18,117 | | | | 17,527 | | | | 36,553 | | | | 33,872 | |
| | | | 73,283 | | | | 48,679 | | | | 157,392 | | | | 108,056 | |
| Income (loss) before federal income taxes | | | (8,692 | ) | | | 6,603 | | | | (32,409 | ) | | | 6,354 | |
| Federal income taxes (benefits) | | | (3,188 | ) | | | 1,617 | | | | (11,707 | ) | | | 823 | |
| Net income (loss) | | $ | (5,504 | ) | | $ | 4,986 | | | $ | (20,702 | ) | | $ | 5,531 | |
| | | | | | | | | | | | | | | | | |
| Per share data: | | | | | | | | | | | | | | | | |
| Basic and diluted earnings (losses) | | $ | (.38 | ) | | $ | .33 | | | $ | (1.40 | ) | | $ | .37 | |
| | | | | | | | | | | | | | | | | |
| Dividends paid to shareholders | | $ | .25 | | | $ | .25 | | | $ | .50 | | | $ | .75 | |
| | | | | | | | | | | | | | | | | |
| Reconciliation of shares outstanding: | | | | | | | | | | | | | | | | |
| Average shares outstanding - basic | | | 14,819 | | | | 14,786 | | | | 14,810 | | | | 14,771 | |
Dilutive effect of share equivalents | | | 15 | | | | 16 | | | | 21 | | | | 28 | |
| Average shares outstanding - diluted | | | 14,834 | | | | 14,802 | | | | 14,831 | | | | 14,799 | |
See notes to condensed consolidated financial statements.
| Baldwin & Lyons, Inc. and Subsidiaries | | | | | | |
| Unaudited Consolidated Statements of Cash Flows | | | | | | |
| | | | | | | |
| (in thousands) | | | | | | |
| | | | | | | |
| | | Six Months Ended | |
| | | June 30 | |
| | | 2011 | | | 2010 | |
| | | | | | | |
| Net cash provided by operating activities | | $ | 26,769 | | | $ | 24,806 | |
| Investing activities: | | | | | | | | |
| Purchases of long-term investments | | | (182,133 | ) | | | (202,444 | ) |
| Proceeds from sales or maturities | | | | | | | | |
| of long-term investments | | | 188,102 | | | | 158,273 | |
| Net purchases of short-term investments | | | (83 | ) | | | (405 | ) |
| Other investing activities | | | (868 | ) | | | (1,862 | ) |
| Net cash provided by (used in) investing activities | | | 5,018 | | | | (46,438 | ) |
| Financing activities: | | | | | | | | |
| Dividends paid to shareholders | | | (7,454 | ) | | | (11,081 | ) |
| Repayment on line of credit | | | (5,000 | ) | | | - | |
| Net cash used in financing activities | | | (12,454 | ) | | | (11,081 | ) |
| | | | | | | | | |
| Effect of foreign exchange rates on cash and cash equivalents | | | 288 | | | | (6 | ) |
| | | | | | | | | |
| Increase (decrease) in cash and cash equivalents | | | 19,621 | | | | (32,719 | ) |
| Cash and cash equivalents at beginning of period | | | 38,223 | | | | 79,504 | |
| Cash and cash equivalents at end of period | | $ | 57,844 | | | $ | 46,785 | |
See notes to condensed consolidated financial statements.
Notes to Condensed Unaudited Consolidated Financial Statements
(All dollar amounts presented in these notes are in thousands, except per share data)
(1) Summary of Significant Accounting Policies
Basis of Presentation: The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and do not include all of the information and notes required by U.S. Generally Accepted Accounting Principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for fair presentation have been included. Operating results for the interim periods are not necessarily indicative of the results that may be expected for the year ended December 31, 2011. Interim financial statements should be read in conjunction with the Company’s annual audited financial statements and other disclosures included in the Company’s most recent Form 10-K.
Investments: Carrying amounts for fixed maturity securities represent fair value and are based on quoted market prices, where available, or broker/dealer quotes for specific securities where quoted market prices are not available. Equity securities are carried at quoted market prices (fair value). The Company accounts for investments in limited partnerships using the equity method of accounting, which requires an investor in a limited partnership to record its proportionate share of the limited partnership’s net income. To the extent that the limited partnership investees include both realized and unrealized investment gains or losses in the determination of net income or loss, then the Company would also recognize, through its income statement, its proportionate share of the investee’s unrealized as well as realized investment gains or losses.
Other investments, if any, are carried at either market value or cost, depending on the nature of the investment. Short-term investments are carried at cost which approximates their fair values.
Realized gains and losses on disposals of investments are determined by specific identification of cost of investments sold and are included in income. All fixed maturity and equity securities are considered to be available for sale; the related unrealized net gains or losses (net of applicable tax effect) are reflected directly in shareholders’ equity. Included within available for sale fixed maturity securities are insurance linked securities and convertible debt securities. The changes in fair values of insurance-linked securities and portions of the changes in fair values of convertible debt securities are reflected as a component of net realized gains (losses).
Notes to Condensed Unaudited Consolidated Financial Statements (continued)
With respect to other than temporary impairment of investments, if a fixed maturity security is in an unrealized loss position and the Company has the intent to sell the fixed maturity security, or it is more likely than not that the Company will have to sell the fixed maturity security before recovery of its amortized cost basis, the decline in value is deemed to be other-than-temporary and is recorded to net realized losses on investments in the consolidated statements of operations. For impaired fixed maturity securities that the Company does not intend to sell or it is more likely than not that the Company will not have to sell such securities, but the Company expects that it will not fully recover the amortized cost basis, the credit component of the other-than-temporary impairment is recognized in net realized losses on investments in the consolidated statements of operations and the non-credit component of the other-than-temporary impairment is recognized directly in shareholders’ equity (accumulated other comprehensive income).
The credit component of an other-than-temporary impairment is determined by comparing the net present value of projected future cash flows with the amortized cost basis of the fixed maturity security. Furthermore, unrealized losses caused by non-credit related factors related to fixed maturity securities for which the Company expects to fully recover the amortized cost basis continue to be recognized in accumulated other comprehensive income.
The unrealized net gains or losses (net of applicable tax effect) related to equity securities are reflected directly in shareholders’ equity, unless a decline in value is determined to be other-than-temporary, in which case the loss is charged to income. In determining if and when a decline in market value below cost is other-than-temporary, an objective analysis is made of each individual security where current market value is less than cost. For any equity security where the unrealized loss exceeds 20% of original or adjusted cost, and where that decline has existed for a period of at least six months, the decline is treated as an other-than-temporary impairment, subject to an evaluation as to possible future recovery. Additionally, the Company takes into account any known subjective information in evaluating for impairment without consideration to the Company’s quantitative criteria defined above.
Reclassification: Certain prior period balances have been reclassified to conform to the current period presentation and are of a normal recurring nature.
Notes to Condensed Unaudited Consolidated Financial Statements (continued)
(2) Investments:
The following is a summary of available-for-sale securities at June 30, 2011 and December 31, 2010:
| | | | | | | | | | | Net | |
| | | | Cost or | | Gross | | Gross | | | Unrealized | |
| | Fair | | Amortized | | Unrealized | | Unrealized | | | Gains | |
| | Value | | Cost | | Gains | | Losses | | | (Losses) | |
| June 30, 2011: | | | | | | | | | | | |
| U.S. government obligations | $ | 57,738 | | $ | 57,584 | | $ | 172 | | $ | (18 | ) | | $ | 154 | |
| Government sponsored entities | | 1,688 | | | 1,680 | | | 8 | | | - | | | | 8 | |
| Residential mortgage-backed securities | | 28,964 | | | 28,459 | | | 867 | | | (362 | ) | | | 505 | |
| Commercial mortgage-backed securities | | 18,866 | | | 18,759 | | | 269 | | | (162 | ) | | | 107 | |
| States and political | | | | | | | | | | | | | | | | |
| subdivisions obligations | | 191,416 | | | 190,006 | | | 1,423 | | | (13 | ) | | | 1,410 | |
| Corporate securities | | 93,336 | | | 91,702 | | | 1,915 | | | (281 | ) | | | 1,634 | |
| Foreign government obligations | | 25,168 | | | 24,353 | | | 906 | | | (91 | ) | | | 815 | |
| Total fixed maturities | | 417,176 | | | 412,543 | | | 5,560 | | | (927 | ) | | | 4,633 | |
| Equity securities: | | | | | | | | | | | | | | | | |
| Financial institutions | | 11,227 | | | 5,030 | | | 6,270 | | | (73 | ) | | | 6,197 | |
| Industrial & Miscellaneous | | 93,706 | | | 46,511 | | | 48,098 | | | (903 | ) | | | 47,195 | |
| Total equity securities | | 104,933 | | | 51,541 | | | 54,368 | | | (976 | ) | | | 53,392 | |
| Total available-for-sale securities | $ | 522,109 | | $ | 464,084 | | $ | 59,928 | | $ | (1,903 | ) | | | 58,025 | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | Applicable federal income taxes | | | | (20,309 | ) |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | Net unrealized gains - net of tax | | | $ | 37,716 | |
| | | | | | | | | | | | | | | | | |
| December 31, 2010: | | | | | | | | | | | | | | | | |
| U.S. government obligations | $ | 62,998 | | $ | 62,882 | | $ | 150 | | $ | (34 | ) | | $ | 116 | |
| Government sponsored entities | | 3,324 | | | 3,325 | | | 7 | | | (8 | ) | | | (1 | ) |
| Residential mortgage-backed securities | | 37,101 | | | 36,513 | | | 847 | | | (259 | ) | | | 588 | |
| Commercial mortgage-backed securities | | 14,714 | | | 14,417 | | | 405 | | | (108 | ) | | | 297 | |
| States and political | | | | | | | | | | | | | | | | |
| subdivisions obligations | | 192,706 | | | 192,236 | | | 1,006 | | | (536 | ) | | | 470 | |
| Corporate securities | | 84,417 | | | 83,121 | | | 1,931 | | | (635 | ) | | | 1,296 | |
| Foreign government obligations | | 20,294 | | | 20,095 | | | 354 | | | (155 | ) | | | 199 | |
| Total fixed maturities | | 415,554 | | | 412,589 | | | 4,700 | | | (1,735 | ) | | | 2,965 | |
| Equity securities: | | | | | | | | | | | | | | | | |
| Financial institutions | | 11,477 | | | 4,945 | | | 6,559 | | | (27 | ) | | | 6,532 | |
| Industrial & Miscellaneous | | 85,180 | | | 42,532 | | | 42,947 | | | (299 | ) | | | 42,648 | |
| Total equity securities | | 96,657 | | | 47,477 | | | 49,506 | | | (326 | ) | | | 49,180 | |
| Total available-for-sale securities | $ | 512,211 | | $ | 460,066 | | $ | 54,206 | | $ | (2,061 | ) | | | 52,145 | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | Applicable federal income taxes | | | | (18,251 | ) |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | Net unrealized gains - net of tax | | | $ | 33,894 | |
Notes to Condensed Unaudited Consolidated Financial Statements (continued)
The Company has no other-than-temporarily impaired fixed maturity securities at June 30, 2011. Additionally, the Company had no other-than-temporary impairment losses relating to fixed maturity securities recognized in accumulated other comprehensive income as of June 30, 2011 and December 31, 2010.
The following table summarizes, for fixed maturity and equity security investments in an unrealized loss position at June 30, 2011 and December 31, 2010, respectively, the aggregate fair value and gross unrealized loss categorized by the duration those securities have been continuously in an unrealized loss position.
| | | June 30, 2011 | | | December 31, 2010 | |
| | | Number of Securities | | | Fair Value | | | Gross Unrealized Loss | | | Number of Securities | | | Fair Value | | | Gross Unrealized Loss | |
| Fixed maturity securities: | | | | | | | | | | | | | | | | | | |
| 12 months or less | | | 107 | | | $ | 58,790 | | | $ | (676 | ) | | | 214 | | | $ | 152,505 | | | $ | (1,525 | ) |
| Greater than 12 months | | | 9 | | | | 2,297 | | | | (251 | ) | | | 16 | | | | 5,460 | | | | (210 | ) |
| Total fixed maturities | | | 116 | | | | 61,087 | | | | (927 | ) | | | 230 | | | | 157,965 | | | | (1,735 | ) |
| Equity securities: | | | | | | | | | | | | | | | | | | | | | | | | |
| 12 months or less | | | 12 | | | | 4,395 | | | | (255 | ) | | | 3 | | | | 1,676 | | | | (66 | ) |
| Greater than 12 months | | | 11 | | | | 2,347 | | | | (721 | ) | | | 7 | | | | 2,394 | | | | (260 | ) |
| Total equity securities | | | 23 | | | | 6,742 | | | | (976 | ) | | | 10 | | | | 4,070 | | | | (326 | ) |
| Total fixed maturity and equity securities | | | 139 | | | $ | 67,829 | | | $ | (1,903 | ) | | | 240 | | | $ | 162,035 | | | $ | (2,061 | ) |
The fair value and the cost or amortized cost of fixed maturity investments, at June 30, 2011, by contractual maturity, are shown below. Actual maturities may ultimately differ from contractual maturities because borrowers have, in some cases, the right to call or prepay obligations with or without call or prepayment penalties. Pre-refunded municipal bonds are classified based on their pre-refunded call dates.
| | | Fair Value | | | Cost or Amortized Cost | |
| | | | | | | |
| One year or less | | $ | 106,229 | | | $ | 105,712 | |
| Excess of one year to five years | | | 241,396 | | | | 238,246 | |
| Excess of five years to ten years | | | 15,417 | | | | 15,162 | |
| Excess of ten years | | | 6,304 | | | | 6,205 | |
| Total maturities | | | 369,346 | | | | 365,325 | |
| Mortgage-backed securities | | | 47,830 | | | | 47,218 | |
| | | $ | 417,176 | | | $ | 412,543 | |
Notes to Condensed Unaudited Consolidated Financial Statements (continued)
Following is a summary of the components of net realized gains (losses) on investments for the periods presented in the accompanying statements of income.
| | | Three Months Ended | | | Six Months Ended | |
| | | June 30 | | | June 30 | |
| | | 2011 | | | 2010 | | | 2011 | | | 2010 | |
| Fixed maturities: | | | | | | | | | | | | |
| Gross gains | | $ | 1,161 | | | $ | 888 | | | $ | 2,158 | | | $ | 1,840 | |
| Gross losses | | | (402 | ) | | | (256 | ) | | | (1,869 | ) | | | (683 | ) |
| Net gains | | | 759 | | | | 632 | | | | 289 | | | | 1,157 | |
| | | | | | | | | | | | | | | | | |
| Equity securities: | | | | | | | | | | | | | | | | |
| Gross gains | | | 1,198 | | | | 1,034 | | | | 2,229 | | | | 2,230 | |
| Gross losses | | | (283 | ) | | | (239 | ) | | | (773 | ) | | | (715 | ) |
| Net gains | | | 915 | | | | 795 | | | | 1,456 | | | | 1,515 | |
| | | | | | | | | | | | | | | | | |
| Limited partnerships - net loss | | | (3,637 | ) | | | (4,285 | ) | | | (5,177 | ) | | | (2,340 | ) |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| Total net gains (losses) | | $ | (1,963 | ) | | $ | (2,858 | ) | | $ | (3,432 | ) | | $ | 332 | |
Gain and loss activity for investments, as shown in the previous table, are further detailed as follows:
| | | Three Months Ended | | | Six Months Ended | |
| | | June 30 | | | June 30 | |
| | | 2011 | | | 2010 | | | 2011 | | | 2010 | |
| | | | | | | | | | | | | |
| Realized net gains (losses) on the disposal of securities | | $ | 1,636 | | | $ | 1,442 | | | $ | 2,044 | | | $ | 2,687 | |
| Mark-to-market adjustment | | | 156 | | | | - | | | | (645 | ) | | | - | |
| Equity in (losses) of limited partnership | | | | | | | | | | | | | | | | |
| investments - realized and unrealized | | | (3,637 | ) | | | (4,285 | ) | | | (5,177 | ) | | | (2,340 | ) |
| Impairment: | | | | | | | | | | | | | | | | |
| �� Write-downs based upon objective criteria | | | (118 | ) | | | (15 | ) | | | (118 | ) | | | (15 | ) |
| Recovery of prior write-downs | | | | | | | | | | | | | | | | |
| upon sale or disposal | | | - | | | | - | | | | 464 | | | | - | |
| | | | | | | | | | | | | | | | | |
| Totals | | $ | (1,963 | ) | | $ | (2,858 | ) | | $ | (3,432 | ) | | $ | 332 | |
The mark-to-market adjustments in the table above represent the changes in fair value of (1) options embedded in convertible debt securities and (2) insurance-linked securities held by the Company.
Notes to Condensed Unaudited Consolidated Financial Statements (continued)
The net loss from limited partnerships for the quarter and year-to-date ending June 30, 2011 includes an estimated $2,708 and $7,199, respectively, of unrealized losses reported to the Company as part of the underlying assets of the various limited partnerships. The value of limited partnerships at June 30, 2011 includes approximately $9.2 million of unrealized gains reported to the Company as part of the underlying assets of the various limited partnerships. Shareholders’ equity at June 30, 2011 includes approximately $26,271, net of deferred federal income taxes, of earnings undistributed by limited partnerships.
(3) Reinsurance:
The following table summarizes the Company’s transactions with reinsurers for the 2011 and 2010 comparative periods.
| | | 2011 | | | 2010 | |
| Quarter ended June 30: | | | | | | |
| Premiums ceded to reinsurers | | $ | 21,438 | | | $ | 17,666 | |
| Losses and loss expenses | | | | | | | | |
| ceded to reinsurers | | | 14,376 | | | | 118 | |
| Commissions from reinsurers | | | 2,597 | | | | 2,430 | |
| | | | | | | | | |
| Six months ended June 30: | | | | | | | | |
| Premiums ceded to reinsurers | | | 42,445 | | | | 34,819 | |
| Losses and loss expenses | | | | | | | | |
| ceded to reinsurers | | | 25,829 | | | | (1,831 | ) |
| Commissions from reinsurers | | | 5,315 | | | | 4,494 | |
(4) Comprehensive Income or Loss:
Net comprehensive loss for the quarter ended June 30, 2011 was $5,502 and compares to net comprehensive loss of $5,234 for the quarter ended June 30, 2010. For the first six months ended June 30, 2011, net comprehensive loss was $16,592 and compares to net comprehensive loss of $612 for the first six months ended June 30, 2010.
(5) Reportable Segments:
The Company has two reportable business segments in its operations: Property and Casualty Insurance and Reinsurance.
The Property and Casualty Insurance segment provides multiple line insurance coverage primarily to fleet transportation companies as well as to independent contractors who contract with fleet transportation companies. In addition, the Company provides private passenger automobile products to individuals, and commercial multi-peril and professional liability products on a limited basis.
Notes to Condensed Unaudited Consolidated Financial Statements (continued)
The Reinsurance segment accepts property and casualty cessions from other insurance companies as well as retrocessions from selected reinsurance companies, principally reinsuring against catastrophes. In addition, the Reinsurance segment accepts selected professional liability cessions from other insurance companies.
The following table provides certain revenue and profit and loss information for each reportable segment. All amounts presented are computed based upon U.S. Generally Accepted Accounting Principles. Segment profit for Property and Casualty Insurance includes the direct marketing agency operations conducted by the parent company for this segment and is computed after elimination of inter-company commissions.
| | | 2011 | | | 2010 | |
| | | Direct and Assumed Premium Written | | | Net Premium Earned | | | Segment Profit (Loss) | | | Direct and Assumed Premium Written | | | Net Premium Earned | | | Segment Profit (Loss) | |
| | | | | | | | | | | | | | | | | | | |
| Three months ended June 30: | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | |
| Property and Casualty Insurance | | $ | 67,309 | | | $ | 47,352 | | | $ | 6,147 | | | $ | 61,153 | | | $ | 44,231 | | | $ | 6,715 | |
| Reinsurance | | | 15,722 | | | | 14,992 | | | | (12,470 | ) | | | 9,580 | | | | 9,292 | | | | 2,440 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Totals | | $ | 83,031 | | | $ | 62,344 | | | $ | (6,323 | ) | | $ | 70,733 | | | $ | 53,523 | | | $ | 9,155 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Six months ended June 30: | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Property and Casualty Insurance | | $ | 139,413 | | | $ | 92,870 | | | $ | 7,600 | | | $ | 126,763 | | | $ | 85,308 | | | $ | 13,838 | |
| Reinsurance | | | 28,749 | | | | 27,075 | | | | (35,219 | ) | | | 21,388 | | | | 19,381 | | | | (7,612 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Totals | | $ | 168,162 | | | $ | 119,945 | | | $ | (27,619 | ) | | $ | 148,151 | | | $ | 104,689 | | | $ | 6,226 | |
The following table reconciles reportable segment loss to the Company’s consolidated loss before federal income benefits, respectively.
| | | Three Months Ended | | | Six Months Ended | |
| | | June 30 | | | June 30 | |
| | | 2011 | | | 2010 | | | 2011 | | | 2010 | |
| Profit (Loss): | | | | | | | | | | | | |
| Segment profit (loss) | | $ | (6,323 | ) | | $ | 9,155 | | | $ | (27,619 | ) | | $ | 6,226 | |
| Net investment income | | | 2,644 | | | | 2,944 | | | | 5,297 | | | | 5,968 | |
| Net gains (losses) on investments | | | (1,963 | ) | | | (2,858 | ) | | | (3,432 | ) | | | 332 | |
| Corporate expenses | | | (3,050 | ) | | | (2,638 | ) | | | (6,655 | ) | | | (6,172 | ) |
| Income (loss) before federal income taxes | | $ | (8,692 | ) | | $ | 6,603 | | | $ | (32,409 | ) | | $ | 6,354 | |
Segment profit (loss) includes both net premiums earned and fees and other income (loss) associated with the business conducted by the segment.
Notes to Condensed Unaudited Consolidated Financial Statements (continued)
Management does not identify or allocate assets to reportable segments when evaluating segment performance and depreciation expense is not material for any of the reportable segments.
(6) Loans to Employees:
From 2000 through 2002, the Company provided loans to certain employees for the sole purpose of purchasing the Company’s Class B common stock in the open market. Principal and interest totaling $1,381 relating to such loans remains outstanding at June 30, 2011 and carry interest rates between 4.75% and 6%, payable annually on the loan anniversary date. The underlying securities serve as collateral for these loans, which must be repaid no later than 10 years from the date of issue. No additional loans will be made under this program.
(7) Debt:
The Company had $10,000 outstanding as of June 30, 2011 and $15,000 outstanding as of December 31, 2010, under a revolving line of credit which expires September 23, 2011. Borrowings under the line carry variable interest rates which range from .69% to .81%, and averaged .73% at June 30, 2011. The Company has $10,000 remaining unused under the revolving line of credit at June 30, 2011. The borrowings were used principally for treasury stock repurchases and extra dividend payments.
(8) Taxes:
As of June 30, 2011, the Company’s 2005 and subsequent tax years remain subject to examination by the IRS. The effective rate differs from the normal statutory rate primarily as a result of tax-exempt investment income.
(Space intentionally left blank)
Notes to Condensed Unaudited Consolidated Financial Statements (continued)
(9) Fair Value:
Assets and liabilities recorded at fair value in the consolidated balance sheets are categorized based upon the level of judgment associated with the inputs used to measure their fair value. The following tables summarize fair value measurements by level for assets measured at fair value on a recurring basis:
| As of June 30, 2011: | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| Description | | Total | | | Level 1 | | | Level 2 | | | Level 3 | |
| | | | | | | | | | | | | |
| U.S. government obligations | | $ | 57,738 | | | $ | 57,738 | | | $ | - | | | $ | - | |
| Government sponsored entities | | | 1,688 | | | | - | | | | 1,688 | | | | - | |
| Residential mortgage-backed securities | | | 28,964 | | | | - | | | | 28,964 | | | | - | |
| Commercial mortgage-backed securities | | | 18,866 | | | | - | | | | 18,866 | | | | - | |
| States and political | | | | | | | | | | | | | | | | |
| subdivisions obligations | | | 191,416 | | | | - | | | | 191,416 | | | | - | |
| Corporate securities | | | 93,336 | | | | - | | | | 76,482 | | | | 16,854 | |
| Foreign government obligations | | | 25,168 | | | | - | | | | 25,168 | | | | - | |
| Total fixed maturities | | | 417,176 | | | | 57,738 | | | | 342,584 | | | | 16,854 | |
| Equity securities | | | 104,933 | | | | 104,933 | | | | - | | | | - | |
| Short term | | | 4,308 | | | | 4,308 | | | | - | | | | | |
| Cash equivalents | | | 58,240 | | | | - | | | | 58,240 | | | | - | |
| | | $ | 584,657 | | | $ | 166,979 | | | $ | 400,824 | | | $ | 16,854 | |
| As of December 31, 2010: | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| Description | | Total | | | Level 1 | | | Level 2 | | | Level 3 | |
| | | | | | | | | | | | | |
| U.S. government obligations | | $ | 62,998 | | | $ | 62,998 | | | $ | - | | | $ | - | |
| Government sponsored entities | | | 3,324 | | | | - | | | | 3,324 | | | | - | |
| Residential mortgage-backed securities | | | 37,101 | | | | - | | | | 37,101 | | | | - | |
| Commercial mortgage-backed securities | | | 14,714 | | | | - | | | | 14,714 | | | | - | |
| States and political | | | | | | | | | | | | | | | | |
| subdivisions obligations | | | 192,706 | | | | - | | | | 192,706 | | | | - | |
| Corporate securities | | | 84,417 | | | | - | | | | 67,175 | | | | 17,242 | |
| Foreign government obligations | | | 20,294 | | | | - | | | | 20,294 | | | | - | |
| Total fixed maturities | | | 415,554 | | | | 62,998 | | | | 335,314 | | | | 17,242 | |
| Equity securities | | | 96,657 | | | | 96,657 | | | | - | | | | - | |
| Short term | | | 4,225 | | | | 4,021 | | | | 204 | | | | | |
| Cash equivalents | | | 41,385 | | | | - | | | | 41,385 | | | | - | |
| | | $ | 557,821 | | | $ | 163,676 | | | $ | 376,903 | | | $ | 17,242 | |
Notes to Condensed Unaudited Consolidated Financial Statements (continued)
Level inputs, as defined by FASB Fair Value Measurements, are as follows:
| Level Input: | | Input Definition: |
| | | |
| Level 1 | | Inputs are unadjusted, quoted prices for identical assets or liabilities in active markets at the measurement date. |
| | | |
| Level 2 | | Inputs other than quoted prices included in Level 1 that are observable for the asset or liability through corroboration with market data at the measurement date. |
| | | |
| Level 3 | | Unobservable inputs that reflect management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date. |
Quoted market prices are obtained for investment securities whenever possible. Where quoted market prices are not available, fair values are estimated using present value or other valuation techniques. These techniques are significantly affected by our assumptions, including discount rates and estimates of future cash flows. Potential taxes and other transaction costs have not been considered in estimating fair values.
The Level 3 assets consist of an investment portfolio of insurance-linked securities. The insurance-linked securities are valued using the average of estimated market quotes from multiple insurance-linked securities brokers. The broker quotes include Level 3 inputs which are significant to the valuation of the insurance-linked securities. A reconciliation of the beginning and ending balances of assets measured at fair value on a recurring basis using Level 3 inputs is as follows for the six months ended June 30, 2011 and the year ended December 31, 2010:
| | | 2011 | | | 2010 | |
| Beginning of period balance | | $ | 17,242 | | | $ | 14,887 | |
| Total gain or losses (realized or unrealized) | | | | | | | | |
| Included in earnings (or changes in net assets) | | | 60 | | | | 1,938 | |
| Included in other comprehensive income | | | - | | | | (397 | ) |
| Purchases | | | 5,522 | | | | 9,136 | |
| Settlements | | | (5,261 | ) | | | (8,322 | ) |
| Transfers in and/or out of Level 3 | | | (709 | ) | | | - | |
| End of period balance | | $ | 16,854 | | | $ | 17,242 | |
Non-financial instruments such as real estate, property and equipment, other assets, deferred income taxes and intangible assets, and certain financial instruments such as policy reserve
liabilities are excluded from the fair value disclosures. Therefore, the fair value amounts cannot be aggregated to determine the underlying economic value to the Company.
Notes to Condensed Unaudited Consolidated Financial Statements (continued)
The carrying amounts reported in the consolidated balance sheets for cash, accounts receivables, reinsurance recoverable, notes receivable, accounts payable and accrued expenses, income taxes receivable or payable, short term borrowings and unearned income approximate fair value because of the short term nature of these items.
There were no significant transfers of assets between level 1 and level 2 during the six months ended June 30, 2011 and 2010.
Transfers between levels, if any, are recorded as of the beginning of the reporting period.
(10) Restricted Stock:
Effective May 4, 2010, the Company issued a total of 17,754 shares of class B restricted stock to the Company’s outside directors. These restricted shares became fully vested on May 4, 2011. These shares represent the annual retainer compensation for outside directors for the period July 1, 2010 through June 30, 2011. Each share was valued at $24.78 per share representing a total value of $440. Compensation expense related to the above stock grant was recognized over the period in which the directors rendered the services.
Effective February 9, 2011, the Company issued a total of 14,473 shares of class B restricted stock to certain of the Company’s executives. The restricted shares represent compensation to the executives under the Company’s 2010 Executive Incentive Bonus Plan which will be paid solely in the Company’s class B stock. The restricted shares will vest ratably over a three year period from the date of grant and are accelerated for retirement eligible recipients due to the non-substantive post-grant date vesting clause per ASC 715, Compensation-Retirement Benefits. Restricted stock was valued based on the closing price of the stock on the day the award was granted. Each share was valued at $23.39 per share representing a total value of $339. Non-vested restricted shares will be forfeited should an executive’s employment terminate for any reason other than death, disability, or retirement as defined by the Compensation Committee.
Effective May 10, 2011, the Company issued a total of 19,558 shares of class B restricted stock to the Company’s outside directors. These restricted shares represent the annual retainer compensation for outside directors for the period July 1, 2011 through June 30, 2012 and will vest on May 10, 2012. Vesting will be accelerated only on the condition of death, disability, or change in control of the Company. Each restricted share is valued at $22.50 per share representing a total value of $440. Compensation expense related to the above stock grant is to be recognized over the period in which the directors render the services which will also coincide with the vesting period.
Notes to Condensed Unaudited Consolidated Financial Statements (continued)
(11) Subsequent Events:
We have evaluated subsequent events for recognition or disclosure in the consolidated financial statements filed on Form 10-Q with the SEC and no events have occurred during the period which require recognition or disclosure.
(12) Pending Accounting Standards:
In October 2010, the FASB issued updated guidance to address the diversity in practice for the accounting for costs associated with acquiring or renewing insurance contracts. This guidance modifies the definition of acquisition costs to specify that a cost must be directly related to the successful acquisition of a new or renewal insurance contract in order to be deferred. If application of this guidance would result in the capitalization of more acquisition costs than had previously been capitalized by a reporting entity, the entity may elect not to capitalize the additional costs. The updated guidance is effective for interim and annual reporting periods beginning after December 15, 2011. We are currently evaluating the impact the adoption of the guidance effective January 1, 2012, will have on our consolidated financial statements. We expect no significant adjustments.
In May 2011, the FASB issued updated accounting guidance that changes the wording used to describe many of the requirements in GAAP for measuring fair value and for disclosing information about fair value measurements to ensure consistency between GAAP and International Financial Reporting Standards. The guidance also expands the disclosures for fair value measurements that are estimated using significant unobservable (Level 3) inputs. We are currently evaluating the impact that the adoption of the guidance effective January 1, 2012, will have on our consolidated financial statements.
In June 2011, the FASB issued revised accounting guidance that eliminates the option to present the components of other comprehensive income as part of the statement of shareholders' equity. Instead, comprehensive income must be reported in either a single continuous statement of comprehensive income which contains two sections, net income and other comprehensive income, or in two separate but consecutive statements. The guidance will be effective for public companies during the interim and annual periods beginning after December 15, 2011 with early adoption permitted. This new guidance is to be applied retrospectively. We have not adopted this guidance and currently we are evaluating the impact that our adoption of this guidance will have on the presentation of our consolidated financial statements.
ITEM 2 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Liquidity and Capital Resources
The Company generally experiences positive cash flow from operations resulting from the fact that premiums are collected on insurance policies in advance of the disbursement of funds in payment of claims. Operating costs of the property/casualty insurance subsidiaries, other than loss and loss expense payments and commissions paid to related agency companies, generally average less than 30% of premiums earned and the remaining amount is available for investment for varying periods of time pending the settlement of claims relating to the insurance coverage provided. The Company’s cash flow relating to premiums is significantly affected by reinsurance programs in effect from time-to-time whereby the Company cedes both premium and risk to other insurance and reinsurance companies. These programs vary significantly among products. For the first six months of 2011, the Company experienced positive cash flow from operations totaling $26.8 million which compares to positive cash flow from operations of $24.8 million generated during the first six months of 2010. The $2.0 million increase in cash flow from the 2010 period is primarily due to higher net premium volume.
The Company's investment philosophy has emphasized the purchase of relatively short-term instruments with maximum quality and liquidity. The average life of the Company's fixed income (bond and short-term investment) portfolio, using contractual maturities applied to par value, was 3.9 years at June 30, 2011, which is substantially shorter than the Company’s liability average life.
Financing activity for the first six months of 2011 included regular dividend payments to shareholders of $7.5 million ($.50 per share) and the repayment of $5.0 million under the Company’s line of credit.
The Company’s assets at June 30, 2011 included $58.2 million in investments classified as cash equivalents that were readily convertible to cash without significant market penalty. An additional $110.1 million of fixed maturity investments will mature within the twelve-month period following June 30, 2011. The Company believes that these liquid investments are more than sufficient to provide for projected claim payments and operating cost demands.
Consolidated shareholders’ equity is composed largely of GAAP shareholders’ equity of the insurance subsidiaries. As such, there are statutory restrictions on the transfer of substantial portions of this equity to the parent company. At June 30, 2011, $48.9 million may be transferred by dividend or loan to the parent company during the remainder of 2011 without approval by, or prior notification to, regulatory authorities. An additional $213.6 million of shareholder’s equity of the insurance subsidiaries could, theoretically, be advanced or loaned to the parent company with prior notification to, and approval from, regulatory authorities, although it is unlikely that transfers of this size would be practical. The Company believes that these restrictions pose no material liquidity concerns to the Company. The Company also believes that the financial strength and stability of the subsidiaries would permit ready access by the parent
company to short-term and long-term sources of credit. The parent company had cash and marketable securities valued at $5.2 million at June 30, 2011.
The Company’s annualized premium writing to surplus ratio for the first six months of 2011 was approximately 75%. Regulatory guidelines generally allow for writings of at least 100% of surplus. Accordingly, the Company could increase premium writings significantly with no need to raise additional capital. Further, the insurance subsidiaries’ individual capital levels are several times higher than the minimum amounts designated by the National Association of Insurance Commissioners.
Results of Operations
Comparison of Second Quarter, 2011 to Second Quarter, 2010
Net premiums written during the second quarter of 2011 increased $12.3 million (17.4%) and net premiums earned increased $8.8 million (16.5%) as compared to the same period of 2010. The Company’s Property and Casualty Insurance segment reported an increase in earned premiums of 7.1% while the Reinsurance segment reported an increase of 61.3%. In the Property and Casualty Insurance segment, Fleet transportation and Professional Liability were the main sources of the overall increase. An expected increase in reinsurance earned premium from professional liability offerings was the primary source of the overall increase in the Reinsurance segment with the remainder attributable to reinstatement premium associated with property catastrophe events. The following table provides information regarding premiums written and earned for each segment for the quarter ended June 30 (dollars in thousands):
| | | Direct and Assumed Premium Written | | | Net Premium Written | | | Net Premium Earned | |
| 2011 | | | | | | | | | |
| | | | | | | | | | |
| Property & Casualty Insurance | | $ | 67,309 | | | $ | 49,247 | | | $ | 47,352 | |
| Reinsurance | | | 15,722 | | | | 15,244 | | | | 14,992 | |
| | | | | | | | | | | | | |
| Totals | | $ | 83,031 | | | $ | 64,491 | | | $ | 62,344 | |
| | | | | | | | | | | | | |
| 2010 | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| Property & Casualty Insurance | | $ | 61,153 | | | $ | 38,635 | | | $ | 44,231 | |
| Reinsurance | | | 9,580 | | | | 9,267 | | | | 9,292 | |
| | | | | | | | | | | | | |
| Totals | | $ | 70,733 | | | $ | 47,902 | | | $ | 53,523 | |
Premium ceded to reinsurers on insurance business produced by the Property and Casualty Insurance segment averaged 28.8% of premium earned for the current quarter compared to 32.8% a year earlier with the reduction primarily reflective of retentions by the Company on newer lines of business.
Net investment income, before tax, during the second quarter of 2011 was 10.2% lower than the second quarter of 2010 due primarily to lower available interest rates for bonds. Pre-tax yields averaged 2.4% during the current quarter compared to 2.7% for the prior year period. Overall after-tax yields decreased from 2.1% to 1.8%. The short term nature of the Company’s fixed income portfolio causes changes in available yields to be quickly reflected in investment income.
The second quarter 2011 net realized investment losses of $2.0 million resulted primarily from $3.6 million losses reported by limited partnerships, partially offset by $1.6 million in investment gains on direct trading of securities. Mark-to-market and other-than-temporary impairment adjustments were not significant for the quarter. Comparative second quarter 2010 investment losses were $2.9 million. Investment gains result from decisions regarding the sale of individual securities and the change in total value of limited partnerships and, as such, are not expected to be consistent from period to period.
Losses and loss expenses incurred during the second quarter of 2011 were $24.0 million higher than that experienced during the second quarter of 2010 due primarily to large reinsurance losses related to catastrophic tornados in Alabama and Missouri occurring in the quarter as well as increased estimates of first quarter catastrophic losses in New Zealand and Japan. The loss ratios for each segment were as follows:
| | | 2011 | | | 2010 | |
| Property and Casualty Insurance | | | 66.2% | | | | 60.8% | |
| Reinsurance | | | 159.0 | | | | 46.0 | |
| Total | | | 88.5 | | | | 58.2 | |
The impact of major catastrophic losses recorded in the second quarter added approximately 110 points to the Reinsurance segment loss ratio and 26 points to the total loss ratio for the quarter. No major catastrophic events occurred during the second quarter of 2010.
Other operating expenses, for the second quarter of 2011, increased $0.6 million, or 3.4%, from the second quarter of 2010. The majority of this increase relates to higher gross commissions expense on increased premium volume. The ratio of consolidated other operating expenses to operating revenue decreased to 27.2% during the second quarter of 2011 compared to 30.1% for the 2010 second quarter.
The effective federal tax on consolidated income for the second quarter of 2011 was a $3.2 million benefit. The effective rate differs from the normal statutory rate primarily as a result of tax-exempt investment income.
As a result of the factors mentioned above, most notably the catastrophic property losses, net income decreased $10.5 million during the second quarter of 2011 as compared to the 2010 period.
Comparisons of Six Months Ended June 30, 2011 to Six Months Ended June 30, 2010
Direct premiums written during the first six months of 2011 were 13.5% higher than the 2010 period and net premiums earned increased a similar 14.6% compared to the same period of 2010. The Company’s Property and Casualty Insurance and Reinsurance segments reported earned premium increases of 8.9% and 39.7%, respectively, for the same reasons noted in the second quarter comparison above. The following table provides information regarding premiums written and earned for major product lines for the six months ended June 30 (dollars in thousands):
| | | Direct and Assumed Premium Written | | | Net Premium Written | | | Net Premium Earned | |
| 2011 | | | | | | | | | |
| | | | | | | | | | |
| Property & Casualty Insurance | | $ | 139,413 | | | $ | 98,929 | | | $ | 92,870 | |
| Reinsurance | | | 28,749 | | | | 27,793 | | | | 27,075 | |
| | | | | | | | | | | | | |
| Totals | | $ | 168,162 | | | $ | 126,722 | | | $ | 119,945 | |
| | | | | | | | | | | | | |
| 2010 | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| Property & Casualty Insurance | | $ | 126,763 | | | $ | 88,970 | | | $ | 85,308 | |
| Reinsurance | | | 21,388 | | | | 20,763 | | | | 19,381 | |
| | | | | | | | | | | | | |
| Totals | | $ | 148,151 | | | $ | 109,733 | | | $ | 104,689 | |
Premium ceded to reinsurers on insurance business produced by the Property and Casualty Insurance segment averaged 29.0% of premium earned for the current year period compared to 29.8% a year earlier, the decrease reflective of the impact of newer products.
Net investment income, before tax, during the first six months of 2011 was 11.2% lower than the first six months of 2010 for the same reasons noted in the quarterly comparison. Pre-tax yields averaged 2.4% during the current period compared to 2.7% for the prior year period. Overall after-tax yields decreased from 2.1% to 1.8%.
Net realized investment losses for the first six months of 2011 were $3.4 million, resulting primarily from $5.2 million in losses reported by limited partnerships, partially offset by a $2.5 million gain on direct trading securities. Mark-to-market and other-than-temporary impairment adjustments were not material during the period. Realized investment gains were only $0.3 million for the same period in 2010; however, investment gains occur based on decisions regarding the sale of individual securities and the change in total value of limited partnerships and, as such, are not expected to be consistent from period to period.
Losses and loss expenses incurred during the first six months of 2011 were $46.7 million higher than that experienced during the first six months of 2010 with the majority of the increase attributable to catastrophe losses from major earthquakes in Japan and New Zealand, excessive
flooding in Australia and tornados in Alabama and Missouri. Loss ratios for each of the Company’s major product lines were as follows:
| | | 2011 | | | 2010 | |
| Property & Casualty Insurance | | | 70.3% | | | | 60.1% | |
| Reinsurance | | | 205.1 | | | | 118.1 | |
| Total | | | 100.7 | | | | 70.9 | |
While the first half of 2010 also included significant catastrophic losses, the magnitude of the 2011 losses was much greater. The approximate impact on the above loss ratios of major catastrophic events was:
2011 Reinsurance segment 152 %
2011 Total 33 %
2010 Reinsurance segment 99 %
2010 Total 17 %
Other operating expenses, for the first six months of 2011, increased $2.7 million, or 7.9%, from the 2010 six-month period. The majority of this increase relates to expenses that vary directly with increased premium volume. The ratio of consolidated other operating expenses to operating revenue declined to 28.5% during the 2011 period compared to 29.7% for the 2010 period.
The effective federal tax on consolidated income for the first six months of 2011 was an $11.7 million benefit. The effective rate differs from the normal statutory rate primarily as a result of tax-exempt investment income.
As a result of the factors mentioned above, net income decreased by $26.2 million as compared with the 2010 period.
Forward-Looking Information
Any forward-looking statements in this report, including without limitation, statements relating to the Company’s plans, strategies, objectives, expectations, intentions and adequacy of resources, are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Investors are cautioned that such forward-looking statements involve risks and uncertainties including without limitation the following: (i) the Company’s plans, strategies, objectives, expectations and intentions are subject to change at any time at the discretion of the Company; (ii) the Company’s business is highly competitive and the entrance of new competitors into or the expansion of the operations by existing competitors in the Company’s markets and other changes in the market for insurance products could adversely affect the Company’s plans and results of operations; (iii) other risks and uncertainties indicated from time to time in the Company’s filings with the Securities and Exchange Commission; and (iv) other risks and factors which may be beyond the control or foresight of the Company. Readers are
encouraged to review the Company’s annual report for its full statement regarding forward-looking information.
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, 2010.
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, 2011, amounts due from reinsurers on paid and unpaid losses, are estimated to total approximately $134 million. Of this total, approximately $57 million (43%) represents the Company’s provision for incurred but not reported losses and loss adjustment expenses attributable to reinsurers. Because of the large policy limits reinsured by the Company, the ultimate amount of incurred but not reported losses and loss adjustment expenses attributable to reinsurers could vary significantly from the estimate provided; however, such variance would not result in changes in net claim losses incurred by the Company.
At June 30, 2011, limited partnership investments include approximately $52.1 million consisting of three partnerships which are managed by organizations in which certain of the Company’s directors are officers, directors, general partners or owners. Each of these investments contains profit sharing agreements to the affiliated organizations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes in our exposure to market risk since the disclosure in our Form 10-K for the year ended December 31, 2010.
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.
PART II – OTHER INFORMATION
ITEM 5. OTHER INFORMATION
At our Annual Meeting of Shareholders held on May 10, 2011, shareholders voted on the following proposals:
| | | | | | WITHHOLD | |
| | FOR | | AGAINST | | (ABSTAIN) | |
| Advisory vote to approve executive compensation | 2,178,435 | | 149 | | 2,100 | |
| Advisory vote to set the frequency of shareholder votes to approve executive compensation as annually | 2,125,334 | | 52,501 | | 2,849 | |
| To ratify the appointment of Ernst & Young LLP as our independent registered public accounting firm for the fiscal year ending December 31, 2011 | 2,180,683 | | 1 | | 0 | |
Election of Directors: All presently serving directors were reelected in an uncontested election.
Each of the above matters submitted to a vote of shareholders was described in greater detail in the definitive proxy soliciting materials which were sent to shareholders and were filed with the Commission on April 4, 2011.
ITEM 6 (a) EXHIBITS
Number and caption from Exhibit
Table of Regulation S-K Item 601 Exhibit No.
(31.1) Certification of CEO EXHIBIT 31.1
pursuant to Section 302 of the Certification of CEO
Sarbanes-Oxley Act of 2002
(31.2) Certification of CFO EXHIBIT 31.2
pursuant to Section 302 of the Certification of CFO
Sarbanes-Oxley Act of 2002
(32) Certification of CEO and CFO EXHIBIT 32
pursuant to 18 U.S.C. 1350, as Certification of CEO and CFO
adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002
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 9, 2011 By /s/ Joseph J. DeVito
Joseph J. DeVito, CEO and President
Date August 9, 2011 By /s/ G. Patrick Corydon
G. Patrick Corydon,
Executive Vice President – Finance
(Principal Financial and
Accounting Officer)
BALDWIN & LYONS, INC.
Form 10-Q for the fiscal quarter ended June 30, 2011
INDEX TO EXHIBITS
Begins on sequential
page number of Form
Exhibit Number 10-Q
EXHIBIT 31.1 electronically filed herewith
Certification of CEO
pursuant to Section 302 of the
Sarbanes-Oxley Act
EXHIBIT 31.2 electronically filed herewith
Certification of CFO
pursuant to Section 302 of the
Sarbanes-Oxley Act
EXHIBIT 32 electronically filed herewith
Certification of CEO and CFO
pursuant to 18 U.S.C. 1350,
as adopted pursuant to Section
906 of the Sarbanes-Oxley Act
