Protective Insurance (PTVCA) 10-Q 2013 Q3 Quarterly report

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

                                                                                                                                                                                                                       September 30, 2013                                                                                                0-5534

BALDWIN & LYONS, INC.

(Exact name of registrant as specified in its charter)

INDIANA (State or other jurisdiction of  Incorporation or organization	35-0160330 (I.R.S. Employer Identification Number)
1099 N. Meridian Street, Indianapolis, Indiana (Address of principal executive offices)	46204 (Zip Code)

Registrant's telephone number, including area code:  (317) 636-9800

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days.  Yes  ü     No___

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes  ü     No ____

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ____    Accelerated filer üNon-accelerated filer ____

Small Reporting Company ____

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ____    No ü

Indicate the number of shares outstanding of each of the issuer's classes of common stock as of November 1, 2013:

TITLE OF CLASS                                                              NUMBER OF SHARES OUTSTANDING

  Common Stock, No Par Value:

Class A (voting)                                                                                                2,623,109

Class B (nonvoting)                                                                                        12,299,664

Index to Exhibits located on page 27.

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PART I – FINANCIAL INFORMATION

ITEM 1  FINANCIAL STATEMENTS

Baldwin & Lyons, Inc. and Subsidiaries
Unaudited Consolidated Balance Sheets
(in thousands, except share data)
	September 30		December 31
	2013		2012
Assets
Investments:
Fixed maturities	$	419,754	$	445,669
Equity securities		129,446		107,582
Limited partnerships		59,722		59,954
Short-term		4,419		4,201
		613,341		617,406
Cash and cash equivalents		103,387		71,549
Accounts receivable		93,059		83,400
Reinsurance recoverable		190,790		175,191
Other assets		63,555		32,232
Current federal income taxes		939		3,246
	$	1,065,071	$	983,024
Liabilities and shareholders' equity
Reserves for losses and loss expenses	$	471,548	$	455,454
Reserves for unearned premiums		35,888		37,273
Short-term borrowings		10,000		10,000
Accounts payable and accrued expenses		168,513		125,007
Deferred federal income taxes		11,664		8,578
		697,613		636,312
Shareholders' equity:
Common stock-no par value:
Class A voting -- authorized 3,000,000 shares;
outstanding -- 2013 - 2,623,109; 2012 - 2,623,109		112		112
Class B non-voting -- authorized 20,000,000 shares;
outstanding -- 2013 - 12,299,664; 2012 - 12,290,035		525		524
Additional paid-in capital		50,484		50,275
Unrealized net gains on investments		39,891		35,467
Foreign exchange adjustment		1,694		1,976
Retained earnings		274,752		258,358
		367,458		346,712
	$	1,065,071	$	983,024

See notes to condensed consolidated financial statements.

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Baldwin & Lyons, Inc. and Subsidiaries
Unaudited Consolidated Statements of Operations
(in thousands, except per share data)
	Three Months Ended						Nine Months Ended
	September 30						September 30
	2013			2012			2013			2012
Revenues
Net premiums earned	$	64,448		$	54,853		$	187,321		$	176,059
Net investment income		2,192			2,343			6,587			7,196
Commissions and other income		1,519			1,263			4,441			4,390
Net realized gains on investments, excluding
impairment losses		1,434			9,192			16,574			9,465
Total other-than-temporary impairment losses on investments		(4	)		(411	)		(78	)		(756	)
Net realized gains on investments		1,430			8,781			16,496			8,709
		69,589			67,240			214,845			196,354
Expenses
Losses and loss expenses incurred		36,967			30,477			109,843			99,119
Other operating expenses		20,930			19,209			63,369			57,423
		57,897			49,686			173,212			156,542
Income before federal income taxes		11,692			17,554			41,633			39,812
Federal income taxes		3,921			5,867			14,012			12,569
Net income	$	7,771		$	11,687		$	27,621		$	27,243
Per share data:
Basic and diluted earnings	$	.52		$	.78		$	1.85		$	1.83
Dividends paid to shareholders	$	.25		$	.25		$	.75		$	.75
Reconciliation of shares outstanding:
Average shares outstanding - basic		14,918			14,846			14,902			14,836
Dilutive effect of share equivalents		3			21			19			20
Average shares outstanding - diluted		14,921			14,867			14,921			14,856

See notes to condensed consolidated financial statements.

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Baldwin & Lyons, Inc. and Subsidiaries
Unaudited Consolidated Statements of Comprehensive Income
(in thousands)
	Three Months Ended						Nine Months Ended
	September 30						September 30
	2013			2012			2013			2012
Net income	$	7,771		$	11,687		$	27,621		$	27,243
Other comprehensive income, net of tax:
Unrealized net gains on securities:
Unrealized net gains arising during the period		6,921			6,104			13,699			9,107
Less: reclassification adjustment for net gains
included in net income		(1,067	)		(1,617	)		(9,275	)		(1,220	)
		5,854			4,487			4,424			7,887
Foreign currency translation adjustments		199			362			(282	)		343
Other comprehensive income		6,053			4,849			4,142			8,230
Comprehensive income	$	13,824		$	16,536		$	31,763		$	35,473

See notes to condensed consolidated financial statements.

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Baldwin & Lyons, Inc. and Subsidiaries
Unaudited Consolidated Statements of Cash Flows
(in thousands)
	Nine Months Ended
	September 30
	2013			2012
Net cash provided by operating activities	$	34,822		$	24,242
Investing activities:
Purchases of available-for-sale investments		(273,675	)		(268,842	)
Purchases of limited partnership interests		-			(1,538	)
Proceeds from sales or maturities
of available-for-sale investments		302,726			230,272
Net sales (purchases) of short-term investments		(218	)		95
Other investing activities		(20,308	)		2,113
Net cash provided by (used in) investing activities		8,525			(37,900	)
Financing activities:
Dividends paid to shareholders		(11,227	)		(11,180	)
Net cash used in financing activities		(11,227	)		(11,180	)
Effect of foreign exchange rates on cash and cash equivalents		(282	)		343
Increase (decrease) in cash and cash equivalents		31,838			(24,495	)
Cash and cash equivalents at beginning of period		71,549			89,726
Cash and cash equivalents at end of period	$	103,387		$	65,231

See notes to condensed consolidated financial statements.

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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, 2013.  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 consolidated statements of operations, its proportionate share of the investee’s unrealized as well as realized investment gains or losses.

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

Realized gains and losses on disposals of investments are determined by specific identification of the cost of investments sold and are included in income.  All fixed maturity and equity securities are considered to be available for sale; the related unrealized net gains or losses (net of applicable tax effect) are reflected directly in shareholders’ equity.  Included within available for sale fixed maturity securities are insurance-linked securities and convertible debt securities.  The changes in fair values of insurance-linked securities and portions of the changes in fair values of convertible debt securities are reflected as a component of net realized gains (losses).

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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.

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Notes to Condensed Unaudited Consolidated Financial Statements (continued)

(2) Investments:

The following is a summary of available-for-sale securities at September 30, 2013 and December 31, 2012:

										Net
			Cost or		Gross		Gross			Unrealized
	Fair		Amortized		Unrealized		Unrealized			Gains
	Value		Cost		Gains		Losses			(Losses)
September 30, 2013
Fixed maturities
U.S. government obligations	$	106,136	$	106,045	$	104	$	(13	)	$	91
Residential mortgage-backed securities		14,654		13,534		1,291		(171	)		1,120
Commercial mortgage-backed securities		27,014		27,077		214		(277	)		(63	)
States and municipal obligations		111,419		111,321		481		(383	)		98
Corporate securities		135,355		134,778		2,788		(2,211	)		577
Foreign government obligations		25,176		24,946		479		(249	)		230
Total fixed maturities		419,754		417,701		5,357		(3,304	)		2,053
Equity securities:
Financial institutions		16,085		7,274		9,015		(204	)		8,811
Industrial & miscellaneous		113,361		62,853		51,811		(1,303	)		50,508
Total equity securities		129,446		70,127		60,826		(1,507	)		59,319
Total	$	549,200	$	487,828	$	66,183	$	(4,811	)		61,372
							Applicable federal income taxes				(21,481	)
							Net unrealized gains - net of tax			$	39,891
December 31, 2012
Fixed maturities
U.S. government obligations	$	70,742	$	70,720	$	43	$	(21	)	$	22
Residential mortgage-backed securities		25,040		23,954		1,218		(132	)		1,086
Commercial mortgage-backed securities		11,828		11,006		849		(27	)		822
State and municipal obligations		194,865		194,258		757		(150	)		607
Corporate securities		120,596		118,574		2,923		(901	)		2,022
Foreign government obligations		22,598		22,047		602		(51	)		551
Total fixed maturities		445,669		440,559		6,392		(1,282	)		5,110
Equity securities:
Financial institutions		12,394		5,925		6,542		(73	)		6,469
Industrial & miscellaneous		95,188		52,202		44,568		(1,582	)		42,986
Total equity securities		107,582		58,127		51,110		(1,655	)		49,455
Total	$	553,251	$	498,686	$	57,502	$	(2,937	)		54,565
							Applicable federal income taxes				(19,098	)
							Net unrealized gains - net of tax			$	35,467

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Notes to Condensed Unaudited Consolidated Financial Statements (continued)

The following table summarizes, for fixed maturity and equity security investments in an unrealized loss position at September 30, 2013 and December 31, 2012, respectively, the aggregate fair value and gross unrealized loss categorized by the duration those securities have been continuously in an unrealized loss position.

	September 30, 2013							December 31, 2012
	Number of Securities		Fair Value		Gross Unrealized Loss			Number of Securities		Fair Value		Gross Unrealized Loss
Fixed maturity securities:
12 months or less		508	$	109,803	$	(2,573	)		170	$	90,607	$	(483	)
Greater than 12 months		43		15,170		(731	)		58		19,283		(799	)
Total fixed maturities		551		124,973		(3,304	)		228		109,890		(1,282	)
Equity securities:
12 months or less		21		8,355		(1,341	)		20		6,955		(842	)
Greater than 12 months		4		2,773		(166	)		11		6,640		(813	)
Total equity securities		25		11,128		(1,507	)		31		13,595		(1,655	)
Total fixed maturity and equity securities		576	$	136,101	$	(4,811	)		259	$	123,485	$	(2,937	)

The fair value and the cost or amortized costs of fixed maturity investments at September 30, 2013, 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	$	66,609	$	66,049
Excess of one year to five years		233,763		233,951
Excess of five years to ten years		43,522		42,931
Excess of ten years		6,086		5,829
Contractual maturities		349,980		348,760
Asset-backed securities		69,774		68,941
Total	$	419,754	$	417,701

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Notes to Condensed Unaudited Consolidated Financial Statements (continued)

Following is a summary of the components of net realized gains on investments for the periods presented in the accompanying consolidated statements of operations.

	Three Months Ended						Nine Months Ended
	September 30						September 30
	2013			2012			2013			2012
Fixed maturities:
Gross gains	$	2,043		$	1,508		$	5,695		$	2,850
Gross losses		(1,277	)		(801	)		(3,497	)		(2,952	)
Net realized gains (losses)		766			707			2,198			(102	)
Equity securities:
Gross gains		1,233			2,132			13,838			2,807
Gross losses		(358	)		(353	)		(1,767	)		(828	)
Net realized gains		875			1,779			12,071			1,979
Limited partnerships - net gain (loss)		(211	)		6,295			2,227			6,832
Totals	$	1,430		$	8,781		$	16,496		$	8,709

Net realized gains activity for investments, as shown in the previous table, are further detailed as follows:

	Three Months Ended						Nine Months Ended
	September 30						September 30
	2013			2012			2013			2012
Realized net gains on the disposal of securities	$	1,090		$	1,659		$	11,888		$	1,454
Mark-to-market adjustment		342			456			747			144
Equity in gains (losses) of limited partnership
investments - realized and unrealized		(211	)		6,295			2,227			6,832
Impairment:	��
Write-downs based upon objective criteria		(4	)		(411	)		(78	)		(756	)
Recovery of prior write-downs
upon sale or disposal		213			782			1,712			1,035
Totals	$	1,430		$	8,781		$	16,496		$	8,709

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.

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Notes to Condensed Unaudited Consolidated Financial Statements (continued)

The income from limited partnerships for the quarter and year-to-date periods ending September 30, 2013 includes an estimated $548 and $795 of net unrealized losses respectively, reported to the Company as part of the underlying assets of the various limited partnerships.  The value of limited partnerships at September 30, 2013 includes approximately $3,645 of net unrealized gains reported to the Company as part of the underlying assets of the various limited partnerships. Shareholders’ equity at September 30, 2013 includes approximately $20,814, net of federal income taxes, of earnings undistributed by limited partnerships.

As of September 30, 2013, the Company had committed funds totaling $8,500 related to two bridge loan agreements.  The Company retains possession of these funds which will only be loaned in the unlikely event that long-term financing is unavailable to the counter party in the market.

(3) Reinsurance:

The following table summarizes the Company’s transactions with reinsurers for the 2013 and 2012 comparative periods.

	2013		2012
Quarter ended September 30:
Premiums ceded to reinsurers	$	30,925	$	27,110
Losses and loss expenses
ceded to reinsurers		26,558		19,179
Commissions from reinsurers		5,844		3,550
Nine months ended September 30:
Premiums ceded to reinsurers		87,335		76,329
Losses and loss expenses
ceded to reinsurers		61,806		30,158
Commissions from reinsurers		15,095		10,523

(4) Reportable Segments:

The Company has two reportable business segments in its operations:  Property and Casualty Insurance and Reinsurance.

The Property and Casualty Insurance segment provides multiple line insurance coverage primarily to fleet transportation companies as well as to independent contractors who contract with fleet transportation companies.  In addition, the Company provides private passenger automobile products to individuals, workers’ compensation coverage to small businesses and professional liability products on a selective basis.

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Notes to Condensed Unaudited Consolidated Financial Statements (continued)

The Reinsurance segment accepts property cessions from other insurance companies as well as retrocessions from carefully chosen reinsurance companies, principally reinsuring against catastrophes.  In addition, the Reinsurance segment accepts 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.

	2013						2012
	Direct and Assumed Premium Written		Net Premium Earned		Segment Profit		Direct and Assumed Premium Written		Net Premium Earned		Segment Profit
Three months ended September 30:
Property and Casualty Insurance	$	82,272	$	52,036	$	9,712	$	68,072	$	42,972	$	5,089
Reinsurance		14,278		12,412		1,846		13,165		11,881		5,539
Totals	$	96,550	$	64,448	$	11,558	$	81,237	$	54,853	$	10,628
Nine months ended September 30:
Property and Casualty Insurance	$	233,217	$	149,699	$	20,353	$	208,058	$	139,048	$	18,871
Reinsurance		40,054		37,622		9,525		42,085		37,011		17,013
Totals	$	273,271	$	187,321	$	29,878	$	250,143	$	176,059	$	35,884

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

	Three Months Ended						Nine Months Ended
	September 30						September 30
	2013			2012			2013			2012
Profit:
Segment profit	$	11,558		$	10,628		$	29,878		$	35,884
Net investment income		2,192			2,343			6,587			7,196
Net gains on investments		1,430			8,781			16,496			8,709
Corporate expenses and other		(3,488	)		(4,198	)		(11,328	)		(11,977	)
Income before federal income taxes	$	11,692		$	17,554		$	41,633		$	39,812

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

Management does not identify or allocate assets to reportable segments when evaluating segment performance and depreciation expense is not material for any of the reportable segments.

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Notes to Condensed Unaudited Consolidated Financial Statements (continued)

(5) Debt:

The Company maintains a revolving line of credit with a $30,000 limit and an expiration date of September 23, 2014.  Interest on this line of credit is referenced to LIBOR and can be fixed for periods of up to one year at the Company’s option.  Outstanding drawings on this line of credit were $10,000 as of September 30, 2013 and December 31, 2012.  At September 30, 2013, the effective interest rate was 1.08%.  The Company has $20,000 remaining unused under the line of credit at September 30, 2013. 

(6) Taxes:

As of September 30, 2013, the Company’s 2009 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)

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Notes to Condensed Unaudited Consolidated Financial Statements (continued)

(7) 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 September 30, 2013:
Description	Total		Level 1		Level 2		Level 3
U.S. government obligations	$	106,136	$	106,136	$	-	$	-
Residential mortgage-backed securities		14,654		-		14,654		-
Commercial mortgage-backed securities		27,014		-		27,014		-
State and municipal obligations		111,419		-		111,419		-
Corporate securities		133,107		-		125,745		7,362
Options embedded in convertible securities		2,248		-		2,248		-
Foreign government obligations		25,176		-		25,176		-
Total fixed maturities		419,754		106,136		306,256		7,362
Equity securities		129,446		129,446		-		-
Short term		4,419		4,419		-		-
Cash equivalents		95,058		-		95,058		-
	$	648,677	$	240,001	$	401,314	$	7,362

As of December 31, 2012:
Description	Total		Level 1		Level 2		Level 3
U.S. government obligations	$	70,742	$	70,742	$	-	$	-
Residential mortgage-backed securities		25,040		-		25,040		-
Commercial mortgage-backed securities		11,828		-		11,828		-
State and municipal obligations		194,865		-		194,865		-
Corporate securities		118,945		-		107,263		11,682
Options embedded in convertible securities		1,651		-		1,651		-
Foreign government obligations		22,598		-		22,598		-
Total fixed maturities		445,669		70,742		363,245		11,682
Equity securities		107,582		107,582		-		-
Short term		4,201		4,201		-		-
Cash equivalents		64,450		-		64,450		-
	$	621,902	$	182,525	$	427,695	$	11,682

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Notes to Condensed Unaudited Consolidated Financial Statements (continued)

Level inputs, as defined by FASB Fair Value Measurements, are as follows:

Level Input:	Input Definition:
Level 1	Inputs are unadjusted, quoted prices for identical assets or liabilities in active markets at the measurement date.
Level 2	Inputs other than quoted prices included in Level 1 that are observable for the asset or liability through corroboration with market data at the measurement date.
Level 3	Unobservable inputs that reflect management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date.

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

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

Fixed maturities: Fair values of fixed maturities are based on quoted market prices, where available. These fair values are obtained primarily from third party pricing services, which generally use Level 1 or Level 2 inputs for the determination of fair value to facilitate fair value measurements and disclosures. U.S. government obligations represent Level 1 securities, while Level 2 securities primarily include corporate securities, states and municipal obligations, foreign government obligations, and mortgage-backed securities. For securities not actively traded, the third party pricing services may use quoted market prices of comparable instruments or discounted cash flow analyses, incorporating inputs that are currently observable in the markets for similar securities. Inputs that are often used in the valuation methodologies include, but are not limited to, broker quotes, benchmark yields, credit spreads, default rates and prepayment speeds.

Equity securities: Fair values of equity securities are designated as Level 1 and are based on quoted market prices.

The Level 3 assets consist of an investment portfolio of insurance-linked securities.  The insurance-linked securities are valued using the average of estimated market quotes from multiple insurance-linked securities brokers.  The broker quotes include Level 3 inputs which are significant to the valuation of the insurance-linked securities and typically vary by 0-3% from each other.  There were no Level 3 sales, no transfers into Level 3 and no transfers out of Level 3 during 2013 or 2012.  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 nine months ended September 30, 2013 and for the year ended December 31, 2012:

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Notes to Condensed Unaudited Consolidated Financial Statements (continued)

	2013			2012
Beginning of period balance	$	11,682		$	17,050
Net realized and unrealized gain included in
earnings or changes in net assets		969			1,653
Purchases		-			400
Settlements		(5,289	)		(7,421	)
End of period balance	$	7,362		$	11,682

There were no transfers of assets between Level 1 and Level 2 during the nine months ended September 30, 2013 and 2012.  Transfers between levels, if any, are recorded as of the beginning of the reporting period.

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

Non-financial instruments such as real estate, property and equipment, other assets, deferred income taxes and intangible assets, and certain financial instruments such as reserves for losses and loss expenses are excluded from the fair value disclosures.  Therefore, the fair value amounts cannot be aggregated to determine the Company’s underlying economic value.

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

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

Limited partnerships: The Company accounts for investments in limited partnerships using the equity method of accounting, which requires an investor in a limited partnership to carry the investment at its proportionate share of the limited partnership’s equity.   The underlying assets of the Company’s investments in limited partnerships are typically carried at fair value, and, therefore, the Company’s carrying value of limited partnerships approximates fair value.  As these investments are not actively traded and the corresponding inputs are based on data provided by the investees, they are classified as Level 3.

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

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Notes to Condensed Unaudited Consolidated Financial Statements (continued)

A summary of the carrying value and fair value by level of financial instruments not recorded at fair value on the Company’s consolidated balance sheets at September 30, 2013 and December 31, 2012 are as follows:

	Carrying		Fair Value
	Value		Level 1		Level 2		Level 3		Total
September 30, 2013
Assets:   Limited partnerships	$	59,722	$	-	$	-	$	59,722	$	59,722
Liabilities:   Short-term borrowings		10,000		-		10,000		-		10,000
December 31, 2012
Assets:   Limited partnerships		59,954		-		-		59,954		59,954
Liabilities:   Short-term borrowings		10,000		-		10,000		-		10,000

(8) Restricted Stock:

The Company grants shares of class B restricted stock to the Company’s outside directors, in lieu of cash, as their annual retainer compensation.  The shares are distributed on the vesting date, one year following the date of grant, and have had a total value of $440 for each of the annual periods presented.  The table below provides detail of the stock issuances for 2012 and 2013:

Effective	Number of Shares		Vesting	Service	Value
Date	Issued		Date	Period	Per Share
5/8/2012		20,119	5/8/2013	7/1/2012 - 6/30/2013	$	21.87
5/7/2013		18,106	5/7/2014	7/1/2013 - 6/30/2014	$	24.30

Compensation expense related to the above stock grant is recognized over the period in which the directors render the services.

Effective February 4, 2013, the Company issued 52,389 shares of class B restricted stock to certain of the Company’s executives as a portion of compensation to certain executives under the Company’s 2012 Executive Incentive Bonus Plan.  The restricted shares will vest ratably over a three year period from the date of grant with acceleration for retirement eligible recipients due to the non-substantive post-grant date vesting clause per Accounting Standards Codification 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 $23.69 per share representing a total value of $1,241.  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 2012 Executive Incentive Bonus Plan.

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Notes to Condensed Unaudited Consolidated Financial Statements (continued)

(9) Litigation, Commitments and Contingencies:

In the ordinary, regular and routine course of their business, the Company and its insurance Subsidiaries are frequently involved in various matters of litigation relating principally to claims for insurance coverage provided.  No currently pending matter is deemed by management to be material to the Company.

In February, 2013, the Company purchased a building in Carmel, Indiana to serve as its future home office.  No external funds were utilized for this purchase.  Rather, short-term investments were and will be liquidated to provide for the purchase and necessary renovations which are expected to be completed in late 2013.  A total of $25 million is expected to be capitalized for the acquisition of the home office building.

(10) Accumulated Other Comprehensive Income:

The following table illustrates changes in accumulated other comprehensive income by component for the nine months ending September 30, 2013:

				Unrealized
				holding gains on
	Foreign			available-for-sale
	Currency			securities			Total
Beginning balance	$	1,976		$	35,467		$	37,443
Other comprehensive income
before reclassifications		(282	)		13,699			13,417
Amounts reclassified from
accumulated other
comprehensive income		-			(9,275	)		(9,275	)
Net current-period other
comprehensive income		(282	)		4,424			4,142
Ending balance	$	1,694		$	39,891		$	41,585

 (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.

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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 nine months of 2013, the Company produced positive cash flow from operations totaling $34.8 million, which compares to positive cash flow from operations of $24.2 million generated during the first nine months of 2012.  The increase in cash flow from the 2012 period is primarily due to increased premium volume in 2013.

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 4.35 years at September 30, 2013, which is substantially shorter than the average life of the Company’s liabilities.

Financing activity for the first nine months of 2013 included regular dividend payments to shareholders of $11.2 million ($.75 per share).

The Company’s assets at September 30, 2013 included $95.1 million in investments classified as cash equivalents that were readily convertible to cash without significant market penalty.  An additional $71.7 million of fixed maturity investments (at par) will mature within the twelve-month period following September 30, 2013.  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 September 30, 2013, $43.7 million may be transferred by dividend or loan to the parent company during the remainder of 2013 without approval by, or prior notification to, regulatory authorities.  An additional $230.4 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 $18.0 million at September 30, 2013.

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The Company’s annualized net premium writing to surplus ratio for the first nine months of 2013 was approximately 74%.  Regulatory guidelines generally allow for writings of between 100% and 300% ofsurplus, depending on the line of business.  Accordingly, the Company could increase net premium writings significantly with no need to raise additional capital.  Further, the insurance subsidiaries’ individual capital levels are several times higher than the minimum amounts designated by the National Association of Insurance Commissioners.

Results of Operations

Comparison of Third Quarter, 2013 to Third Quarter, 2012

Direct and assumed premiums written during the third quarter of 2013 increased $15.3 million (18.8%), while net premiums earned increased $9.6 million (17.5%), as compared to the same period of 2012.  The Company’s Property and Casualty Insurance segment reported an increase in premium written of 20.9% and an increase in earned premiums of 21.1% while the Reinsurance segment reported an increase in premium written of 8.5% and an increase in premium earned of 4.5%.  In the Property and Casualty Insurance segment, direct and assumed premiums written were impacted principally by a significant increase in premium from the Company’s core fleet transportation products.  The increases were partially offset by the final termination of the commercial multi-peril program and a reduction in professional liability volume.  The slightly disproportionate impact of the changes on premium written compared to earned is reflective of the normal differences in the recognition of earned premium compared to written as well as the differences in ceding rates on the mix of business inforce.  The increases from the Reinsurance segment relates to growth in the Company’s casualty reinsurance program, partially offset by the continued impact of strategic reduction in global property catastrophe risk implemented effective January 1, 2012.  The following table provides information regarding premiums written and earned for each segment for the quarter ended September 30 (dollars in thousands):

	Direct and Assumed Premium Written		Net Premium Written		Net Premium Earned
2013
Property & Casualty Insurance	$	82,272	$	52,797	$	52,036
Reinsurance		14,278		13,616		12,412
Totals	$	96,550	$	66,413	$	64,448
2012
Property & Casualty Insurance	$	68,072	$	41,488	$	42,972
Reinsurance		13,165		12,586		11,881
Totals	$	81,237	$	54,074	$	54,853

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Premium ceded to reinsurers on insurance business produced by the Property and Casualty Insurance segment averaged 35.8% of premium written for the current quarter compared to 39.1% in the 2012 third quarter, with the decrease associated with final termination of the commercial multi-peril program.

Net investment income, before tax, during the third quarter of 2013 was 6% lower than the third quarter of 2012 due primarily to lower available interest rates for bonds.  Pre-tax bond yields averaged 1.9% during the current quarter compared to 2.1% for the prior year period.  Overall after-tax yields decreased from 1.6% to 1.4% while average invested funds were 4.5% higher.  A portion of this decrease relates to the redeployment of certain invested assets into portfolios which emphasize the generation of realized gains rather than interest income.

The third quarter 2013 net realized investment gains of $1.4 million resulted primarily from $1.1 million in gains reported from direct trading, partially offset by $0.2 million in losses reported from limited partnerships.  Comparative third quarter 2012 overall net realized investment gains were $8.8 million, consisting primarily of $6.3 million in gains from limited partnerships.  Investment gains and losses result from decisions regarding the sale of individual securities and the change in total value of limited partnerships and, as such, should not be expected to be consistent from period to period.

Losses and loss expenses incurred during the third quarter of 2013 increased $6.5 million (21.3%).  The loss ratios for each segment were as follows:

	2013			2012
Property and Casualty Insurance		60.4	%		65.0	%
Reinsurance		44.5			21.6
Total		57.4			55.6

The decrease in loss ratio for the Property and Casualty Insurance segment primarily relates to the Company’s core fleet transportation products.  The increase in the Reinsurance segment loss ratio reflects the normal variation in property reinsurance losses.

Other operating expenses, for the third quarter of 2013, increased $1.7 million, or 9.0%, from the third quarter of 2012.  The ratio of consolidated other operating expenses to operating revenue was 30.7% during the third quarter of 2013 compared to 32.9% for the 2012 third quarter.  This decrease was driven mainly by increased operating revenue during the third quarter of 2013 without equal addition of operating expenses.

The effective federal tax rate on consolidated income for the third quarter of 2013 was 33.5%.  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, and principally lower realized gains on investments, net income decreased $3.9 million during the third quarter of 2013 as compared to the 2012 period.

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Comparison of Nine Months Ended September 30, 2013 to Nine Months Ended September 30, 2012

Direct and assumed premiums written during the first nine months of 2013 increased $23.1 million (9.2%) and net premiums earned increased $11.3 million (6.4%) as compared to the same period of 2012.  The Company’s Property and Casualty Insurance segment reported an increase in written and earned premiums of 12.1% and 7.7%, respectively while the Reinsurance segment reported a 4.8% decrease in written premium but a 1.7% increase in earned premium.  The reasons for the segment fluctuations are similar to those detailed in the quarterly comparison, preceding.  The following table provides information regarding premiums written and earned for each segment for the nine months ended September 30 (dollars in thousands):

	Direct and Assumed Premium Written		Net Premium Written		Net Premium Earned
2013
Property & Casualty Insurance	$	233,217	$	148,965	$	149,699
Reinsurance		40,054		38,067		37,622
Totals	$	273,271	$	187,032	$	187,321
2012
Property & Casualty Insurance	$	208,058	$	133,653	$	139,048
Reinsurance		42,085		40,349		37,011
Totals	$	250,143	$	174,002	$	176,059

Premium ceded to reinsurers on insurance business produced by the Property and Casualty Insurance segment averaged 36.1% of premium written for the current year period compared to 35.8% a year earlier with the slight increase reflective of routine changes in treaty structures as well as the impact of changes in product mix.

Net investment income, before tax, during the first nine months of 2013 was 8.5% lower than the first nine months of 2012 for the same reasons noted in the quarterly comparison.  Overall pre-tax yields averaged 1.9% during the current period compared to 2.0% for the prior year period.  Overall after-tax yields decreased from 1.6% to 1.4%.  Average funds invested were 3.8% higher in the 2013 period as the result of positive cash flow.

Net realized investment gains for the first nine months of 2013 totaled $16.5 million and resulted primarily from $11.9 million in gains from direct trading and $2.2 million in gains from limited partnerships.  Realized investment gains were $8.7 million for the same period of 2012.

Losses and loss expenses incurred during the first nine months of 2013 were $10.7 million (10.8%) higher than that experienced during the first nine months of 2012.  The loss ratios for each segment were as follows:

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	2013			2012
Property and Casualty Insurance		64.8	%		65.0	%
Reinsurance		33.9			23.7
Total		58.6			56.3

The increase in the Reinsurance segment loss ratio reflects the normal variation in property reinsurance losses.

Other operating expenses, for the first nine months of 2013, increased $5.9 million, or 10.4%, from the 2012 nine-month period.  The ratio of consolidated other operating expenses to operating revenue was 31.9% during the 2013 period compared to 30.6% for the 2012 period. This increase was driven mainly the addition to staff and technology expense related to the expansion of existing product lines.

The effective federal tax rate on consolidated income for the first nine months of 2013 was 33.7%.  The effective rate differs from the normal statutory rate primarily as a result of tax-exempt investment income.

As a result of the factors mentioned above, net income increased $0.4 million as compared to the 2012 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, 2012.

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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 September 30, 2013, amounts due from reinsurers on paid and unpaid losses, are estimated to total approximately $185 million.  Of this total, approximately $66 million (36%) 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, absent the inability to collect from reinsurers, such variance would not result in changes in net claim losses incurred by the Company.

At September 30, 2013, limited partnership investments include approximately $37.1 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, 2012.

ITEM 4. CONTROLS AND PROCEDURES

The Company carried out an evaluation as of December 31, 2012, under the supervision and with the participation of management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the disclosure controls and procedures as defined in Rule 13a-15(e) adopted by the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended, the “Exchange Act”. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures are effective in timely alerting the Company to material information required to be disclosed in reports under the Exchange Act. In addition, based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures were effective in ensuring that information required to be disclosed in reports that the Company files or submits under the Exchange Act is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosures. The Company noted no change in internal control over financial reporting that occurred during the last fiscal quarter that materially affected, or is reasonably likely to materially affect, the internal control over financial reporting.

 

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PART II – OTHER INFORMATION

ITEM 5. OTHER INFORMATION

Nothing to report.

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

- 25 -

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     November 5, 2013                                                                       By  /s/ Joseph J. DeVito                                                                                                      

               Joseph J. DeVito, CEO and President

Date     November 5, 2013                                                                       By  /s/ G. Patrick Corydon                                      

               G. Patrick Corydon,

               Executive Vice President – Finance

               (Principal Financial and

               Accounting Officer)

- 26 -

BALDWIN & LYONS, INC.

Form 10-Q for the fiscal quarter ended September 30, 2013

INDEX TO EXHIBITS

Begins on sequential

page number of Form

Exhibit Number                                                                                   10-Q           _

EXHIBIT 31.1                                                                             28

Certification of CEO

pursuant to Section 302 of the

Sarbanes-Oxley Act

EXHIBIT 31.2                                                                             30

Certification of CFO

pursuant to Section 302 of the

Sarbanes-Oxley Act

EXHIBIT 32                                                                              32

Certification of CEO and CFO

pursuant to 18 U.S.C. 1350,

as adopted pursuant to Section

906 of the Sarbanes-Oxley Act

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