Protective Insurance 10Q 2017 Q2 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 the Quarterly Period Ended Commission file number

June 30, 2017 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)
111 Congressional Boulevard, Carmel, Indiana (Address of principal executive offices)	46032 (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 (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes  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  No ____

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer", "accelerated filer", "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer ____ Accelerated filer  Non-accelerated filer ____

Smaller reporting company ____ Emerging growth company ____

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ____

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

Indicate the number of shares outstanding of each of the issuer's classes of common stock as of August 1, 2017:

Common Stock, No Par Value: Class A (voting) 2,623,109

Class B (nonvoting) 12,498,758

15,121,867

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PART I – FINANCIAL INFORMATION

Baldwin & Lyons, Inc. and Subsidiaries
Unaudited Consolidated Balance Sheets
(in thousands, except share data)

	June 30			December 31
	2017			2016
Assets
Investments:
Fixed maturities	$	469,015		$	491,904
Equity securities		187,917			119,945
Limited partnerships		67,087			76,469
Short-term and other		1,500			1,500
		725,519			689,818

Cash and cash equivalents		81,080			62,976
Accounts receivable		70,339			64,984
Reinsurance recoverable		299,380			255,024
Other assets		69,979			78,732
Current federal income taxes recoverable		9,995			2,603
	$	1,256,292		$	1,154,137

Liabilities and shareholders' equity
Reserves for losses and loss expenses	$	627,725		$	576,330
Reserves for unearned premiums		31,660			21,694
Short-term borrowings		20,000			20,000
Accounts payable and other liabilities		162,000			120,356
Deferred federal income taxes		14,136			11,412
		855,521			749,792
Shareholders' equity:
Common stock-no par value:
Class A voting -- authorized 3,000,000 shares;
outstanding -- 2017 - 2,623,109; 2016 - 2,623,109		112			112
Class B non-voting -- authorized 20,000,000 shares;
outstanding -- 2017 - 12,498,758; 2016 - 12,460,900		533			532
Additional paid-in capital		55,205			54,286
Unrealized net gains on investments		42,866			34,051
Foreign exchange adjustment		(378	)		(831	)
Retained earnings		302,433			316,195
		400,771			404,345
	$	1,256,292		$	1,154,137

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						Six Months Ended
	June 30						June 30
	2017			2016			2017			2016
Revenues
Net premiums earned	$	67,996		$	68,726		$	141,971		$	135,635
Net investment income		4,716			3,549			8,408			6,988
Commissions and other income		1,400			1,463			2,380			2,828
Net realized gains on investments, excluding
impairment losses		3,327			1,375			9,621			12,447
Total other-than-temporary impairment losses on investments		(31	)		(1,095	)		(31	)		(3,155	)
Net realized gains on investments		3,296			280			9,590			9,292
		77,408			74,018			162,349			154,743

Expenses
Losses and loss expenses incurred		71,754			42,666			120,353			81,289
Other operating expenses		26,834			22,437			52,998			43,101
		98,588			65,103			173,351			124,390
Income (loss) before federal income taxes (benefits)		(21,180	)		8,915			(11,002	)		30,353
Federal income taxes (benefits)		(8,837	)		2,946			(5,414	)		10,272
Net income (loss)	$	(12,343	)	$	5,969		$	(5,588	)	$	20,081

Per share data:
Basic and diluted earnings (loss)	$	(.82	)	$	.40		$	(.37	)	$	1.33

Dividends paid to shareholders	$	.27		$	.26		$	.54		$	.52

See notes to condensed consolidated financial statements.

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Baldwin & Lyons, Inc. and Subsidiaries
Unaudited Consolidated Statements of Comprehensive Income (Loss)
(in thousands)

	Three Months Ended						Six Months Ended
	June 30						June 30
	2017			2016			2017			2016

Net income (loss)	$	(12,343	)	$	5,969		$	(5,588	)	$	20,081

Other comprehensive income (loss), net of tax:
Unrealized net gains on securities:
Unrealized net gains arising during the period		5,147			3,348			11,137			2,572
Less: reclassification adjustment for net gains (losses)
included in net income (loss)		1,667			(452	)		2,322			6,822
		3,480			3,800			8,815			(4,250	)

Foreign currency translation adjustments		388			124			453			543

Other comprehensive income (loss)		3,868			3,924			9,268			(3,707	)

Comprehensive income (loss)	$	(8,475	)	$	9,893		$	3,680		$	16,374

See notes to condensed consolidated financial statements.

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Baldwin & Lyons, Inc. and Subsidiaries
Unaudited Consolidated Statements of Cash Flows
(in thousands)

	Six Months Ended
	June 30
	2017			2016

Net cash provided by operating activities	$	23,164		$	22,741
Investing activities:
Purchases of available-for-sale investments		(231,601	)		(215,228	)
Proceeds from sales or maturities
of available-for-sale investments		221,818			188,245
Net sales of short-term investments		-			720
Other investing activities		12,444			(1,112	)
Net cash provided by (used in) investing activities		2,661			(27,375	)
Financing activities:
Dividends paid to shareholders		(8,174	)		(7,902	)
Net cash used in financing activities		(8,174	)		(7,902	)

Effect of Foreign exchange rates on cash and cash equivalents		453			543

Increase (decrease) in cash and cash equivalents		18,104			(11,993	)
Cash and cash equivalents at beginning of period		62,976			73,538
Cash and cash equivalents at end of period	$	81,080		$	61,545

See notes to condensed consolidated financial statements.

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Notes to Unaudited Condensed Consolidated Financial Statements

(All dollar amounts presented in these notes are in thousands, except per share data)

(1) Summary of Significant Accounting Policies

Description of Business: Baldwin & Lyons, Inc. (the "Company"), based in Carmel, Indiana, is a specialty property-casualty insurer providing liability coverage for large to small-sized trucking and public transportation fleets. The Company operates as one reportable property and casualty insurance segment, offering a range of products and services, the most significant being commercial automobile and workers' compensation insurance products.

The Company determined that its business constituted one reportable property and casualty insurance segment as of January 1, 2017. During 2016 and prior years, the Company had two reportable segments – property and casualty insurance and reinsurance. The Company moved to a single reportable segment based on how its operating results are regularly reviewed by the Company's chief operating decision maker when making decisions about how resources are to be allocated to the segment and assessing its performance. The prior period segment information throughout this Quarterly Report on Form 10-Q was updated to conform to the current year presentation.

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. 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 Annual Report on Form 10-K. Operating results for interim periods are not necessarily indicative of results that may be expected for the year ending December 31, 2017.

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

Short-term and other investments are carried at cost, which approximates their fair values.

Realized gains and losses on disposals of investments are recorded on the trade date and 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 convertible debt securities. A portion of the changes in fair values of convertible debt securities are reflected as a component of net realized gains (losses) on investments.

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Notes to Unaudited Condensed Consolidated Financial Statements (continued)

In accordance with the Financial Accounting Standards Board's ("FASB") other-than-temporary impairment guidance, 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 condensed consolidated statements of operations. For impaired fixed maturity securities that the Company does not intend to sell or in cases where 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 condensed 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. The net present value is calculated by discounting the Company's best estimate of projected future cash flows at the appropriate effective interest rate.

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 a set percentage of original or adjusted cost, and where that decline has existed for a period of at least one year, the decline is treated as an other-than-temporary impairment. Additionally, the Company takes into account any known subjective information in evaluating for impairment, separate from consideration of the Company's quantitative criteria defined above, as well as the Company's intent and ability to retain the equity security for a period of time sufficient to allow for such recovery in fair value.

- 7 -

Notes to Unaudited Condensed Consolidated Financial Statements (continued)

Recent Accounting Pronouncements: In January 2016, the FASB issued Accounting Standards Update "ASU" 2016-01, Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities, or ASU 2016-01. The amendments in ASU 2016-01 change the accounting for non-consolidated equity investments that are not accounted for under the equity method of accounting by requiring changes in fair value to be recognized in income. Under current guidance, changes in fair value for investments of this nature are recognized in accumulated other comprehensive income as a component of shareholders' equity. Additionally, ASU 2016-01 simplifies the impairment assessment of equity investments without readily determinable fair values; requires entities to use the exit price when estimating the fair value of financial instruments; and modifies various presentation disclosure requirements for financial instruments. ASU 2016-01 is effective for interim and annual reporting periods beginning after December 15, 2017. The Company does not expect the guidance to have a material impact on its financial position or liquidity.

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606), as amended by subsequently issued ASUs, to clarify the principles for recognizing revenue. While insurance contracts are not within the scope of this updated guidance, the Company's service and fee income could be subject to this updated guidance. The updated guidance requires an entity to recognize revenue as performance obligations are met, in order to reflect the transfer of promised goods or services to customers in an amount that reflects the consideration the entity is entitled to receive for those goods or services. The following steps are applied in the updated guidance: (1) identify the contract(s) with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract; and (5) recognize revenue when, or as, the entity satisfies a performance obligation. In August 2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, which deferred the effective date of ASU 2014-09 to the quarter ending March 31, 2018. The Company has performed an initial evaluation of the impact this guidance will have on its results of operations, financial position or liquidity.

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), or ASU 2016-02. Upon the effective date, ASU 2016-02 will supersede the current lease guidance in ASC Topic 840, Leases. Under the new guidance, lessees will be required to recognize for all leases, with the exception of short-term leases, a lease liability, which is a lessee's obligation to make lease payments arising from a lease, measured on a discounted basis. Concurrently, lessees will be required to recognize a right-of-use asset, which is an asset that represents the lessee's right to use, or control the use of, a specified asset for the lease term. ASU 2016-02 is effective for interim and annual reporting periods beginning after December 15, 2018, with early adoption permitted. The guidance is required to be applied using a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative periods presented in the financial statements. The Company is currently evaluating the effects that adoption of ASU 2016-02 will have on its consolidated financial statements, results of operations and cash flows.

- 8 -

Notes to Unaudited Condensed Consolidated Financial Statements (continued)

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, or ASU 2016-13. This update introduces a current expected credit loss model for measuring expected credit losses for certain types of financial instruments held at the reporting date based on historical experience, current conditions and reasonable supportable forecasts. ASU 2016-13 replaces the current incurred loss model for measuring expected credit losses, requires expected losses on available-for-sale debt securities to be recognized through an allowance for credit losses rather than as reductions in the amortized cost of the securities, and provides for additional disclosure requirements. ASU 2016-

13 is effective for interim and annual reporting periods beginning after December 15, 2019, with early adoption permitted for interim and annual reporting periods beginning after December 15,

2018. The Company is currently evaluating the effects that adoption of ASU 2016-13 will have on its consolidated financial statements, results of operations and cash flows.

In January 2017, the FASB issued ASU No. 2017-04, Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, or ASU 2017-04. This amendment removes Step 2 of the goodwill impairment test under current guidance, which requires a hypothetical purchase price allocation. The new guidance requires an impairment charge to be recognized for the amount by which the carrying amount exceeds the reporting unit's fair value. ASU 2017-04 is effective for interim and annual reporting periods beginning after December 15, 2020, with early adoption permitted. The Company does not expect the guidance to have a material impact on its results of operations, financial position or liquidity.

- 9 -

Notes to Unaudited Condensed Consolidated Financial Statements (continued)

(2) Investments:

The following is a summary of available-for-sale securities at June 30, 2017 and December 31, 2016:

										Net
			Cost or		Gross		Gross			Unrealized
	Fair		Amortized		Unrealized		Unrealized			Gains
	Value		Cost		Gains		Losses			(Losses)
June 30, 2017
Fixed maturities
Agency collateralized mortgage obligations	$	7,927	$	7,196	$	732	$	(1	)	$	731
Agency mortgage-backed securities		15,852		15,834		73		(55	)		18
Asset-backed securities		41,543		40,354		1,263		(74	)		1,189
Bank loans		21,557		21,496		135		(74	)		61
Certificates of deposit		3,127		3,125		2		-			2
Collateralized mortgage obligations		6,590		6,203		426		(39	)		387
Corporate securities		151,672		150,973		1,841		(1,142	)		699
Mortgage-backed securities		23,962		23,305		1,046		(389	)		657
Municipal obligations		112,718		112,280		745		(307	)		438
Non-U.S. government obligations		27,096		27,700		406		(1,010	)		(604	)
U.S. government obligations		56,971		57,247		32		(308	)		(276	)
Total fixed maturities		469,015		465,713		6,701		(3,399	)		3,302
Equity securities:
Consumer		43,293		21,242		22,374		(323	)		22,051
Energy		7,630		5,470		2,356		(196	)		2,160
Financial		39,549		28,156		11,581		(188	)		11,393
Industrial		28,093		9,591		18,593		(91	)		18,502
Technology		9,507		4,117		5,390		-			5,390
Mutual fund		53,088		52,288		1,323		(523	)		800
Other		6,757		4,408		2,526		(177	)		2,349
Total equity securities		187,917		125,272		64,143		(1,498	)		62,645

Total	$	656,932	$	590,985	$	70,844	$	(4,897	)		65,947

							Applicable federal income taxes				(23,081	)

							Net unrealized gains - net of tax			$	42,866

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Notes to Unaudited Condensed Consolidated Financial Statements (continued)

										Net
			Cost or		Gross		Gross			Unrealized
	Fair		Amortized		Unrealized		Unrealized			Gains
	Value		Cost		Gains		Losses			(Losses)
December 31, 2016
Fixed maturities
Agency collateralized mortgage obligations	$	6,171	$	6,000	$	171	$	-		$	171
Agency mortgage-backed securities		4,770		4,751		57		(38	)		19
Asset-backed securities		45,183		45,207		458		(482	)		(24	)
Bank loans		10,349		10,222		149		(22	)		127
Certificates of deposit		3,117		3,126		-		(9	)		(9	)
Collateralized mortgage obligations		9,104		9,096		290		(282	)		8
Corporate securities		142,683		143,356		1,643		(2,316	)		(673	)
Mortgage-backed securities		24,571		23,904		1,132		(465	)		667
Municipal obligations		129,335		130,204		391		(1,260	)		(869	)
Non-U.S. government obligations		24,681		26,461		230		(2,010	)		(1,780	)
U.S. government obligations		91,940		92,234		74		(368	)		(294	)
Total fixed maturities		491,904		494,561		4,595		(7,252	)		(2,657	)
Equity securities:
Consumer		32,576		15,231		17,656		(311	)		17,345
Energy		12,842		5,641		7,203		(2	)		7,201
Financial		31,186		22,417		8,998		(229	)		8,769
Industrial		21,145		6,239		15,098		(192	)		14,906
Technology		8,858		4,117		4,769		(28	)		4,741
Mutual fund		6,995		6,930		121		(56	)		65
Other		6,343		4,327		2,181		(165	)		2,016
Total equity securities		119,945		64,902		56,026		(983	)		55,043

Total	$	611,849	$	559,463	$	60,621	$	(8,235	)		52,386

							Applicable federal income taxes				(18,335	)

							Net unrealized gains - net of tax			$	34,051

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Notes to Unaudited Condensed Consolidated Financial Statements (continued)

The following table summarizes, for fixed maturity and equity security investments in an unrealized loss position at June 30, 2017 and December 31, 2016, 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, 2017							December 31, 2016
	Number of Securities		Fair Value		Gross Unrealized Loss			Number of Securities		Fair Value		Gross Unrealized Loss
Fixed maturity securities:
12 months or less		330	$	260,883	$	(2,007	)		397	$	291,048	$	(4,380	)
Greater than 12 months		31		8,398		(1,392	)		54		32,054		(2,872	)
Total fixed maturities		361		269,281		(3,399	)		451		323,102		(7,252	)

Equity securities:
12 months or less		48		50,707		(1,498	)		35		20,698		(983	)
Greater than 12 months		-		-		-			-		-		-
Total equity securities		48		50,707		(1,498	)		35		20,698		(983	)
Total fixed maturity and equity securities		409	$	319,988	$	(4,897	)		486	$	343,800	$	(8,235	)

The fair value and the cost or amortized costs of fixed maturity investments at June 30, 2017, 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	$	45,007	$	45,001
Excess of one year to five years		268,334		269,180
Excess of five years to ten years		55,658		54,616
Excess of ten years		4,272		4,154
Contractual maturities		373,271		372,951
Asset-backed securities		95,744		92,762
Total	$	469,015	$	465,713

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Notes to Unaudited Condensed Consolidated Financial Statements (continued)

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

	Three Months Ended						Six Months Ended
	June 30						June 30
	2017			2016			2017			2016
Fixed maturities:
Gross gains	$	4,804		$	565		$	5,692		$	1,842
Gross losses		(4,776	)		(1,140	)		(6,149	)		(4,036	)
Net realized gains (losses)		28			(575	)		(457	)		(2,194	)

Equity securities:
Gross gains		2,892			1,126			4,498			16,636
Gross losses		(355	)		(1,248	)		(468	)		(3,948	)
Net realized gains (losses)		2,537			(122	)		4,030			12,688

Limited partnerships - net gain (loss)		731			977			6,017			(1,202	)


Total net gains	$	3,296		$	280		$	9,590		$	9,292

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

	Three Months Ended						Six Months Ended
	June 30						June 30
	2017			2016			2017			2016

Realized net gains (losses) on the disposal of securities	$	2,243		$	(1,142	)	$	2,642		$	7,167
Mark-to-market adjustment		249			(133	)		(35	)		(434	)
Equity in gains (losses) of limited partnership
investments - realized and unrealized		731			977			6,017			(1,202	)
Impairment:
Write-downs based upon objective criteria		(31	)		(1,095	)		(31	)		(3,155	)
Recovery of prior write-downs
upon sale or disposal		104			1,673			997			6,916

Total net gains	$	3,296		$	280		$	9,590		$	9,292

The mark-to-market adjustments in the table above represent the changes in fair value of options embedded in convertible debt securities held by the Company.

Shareholders' equity at June 30, 2017 included approximately $28,669, net of federal income taxes, of reported earnings which remain undistributed by limited partnerships.

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Notes to Unaudited Condensed Consolidated Financial Statements (continued)

At June 30, 2017, limited partnership investments included approximately $39,479 invested in two 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, pursuant to which a portion of the gains will be paid to the affiliated organizations.

The Company's limited partnerships include one investment which primarily invests in public and private equity markets in India. The limited partnership investment's value as of June 30, 2017 and 2016 was $26,673 and $28,074, respectively. At June 30, 2017, the Company's estimated ownership interest in this limited partnership investment was approximately 5%. The Company's share of earnings (losses) from this limited partnership investment was $4,520 and ($196) for the six months ended June 30, 2017 and 2016, respectively.

	Six Months Ended
	June 30
	2017		2016
Total assets	$	497,901	$	464,045
Total partners' capital		497,901		458,178
Net increase (decrease) in partners' capital resulting from operations		80,173		(5,764	)

At June 30, 2017, the Company's invested assets, excluding limited partnership investments, included approximately $23,485 in portfolios managed by organizations in which certain of the Company's directors are officers, directors, general partners or owners.

(3) Reinsurance:

The following table summarizes the Company's transactions with reinsurers for the 2017 and 2016 comparative periods.

	2017		2016
Three months ended June 30:
Premiums ceded to reinsurers	$	45,791	$	32,073
Losses and loss expenses
ceded to reinsurers		52,396		19,520
Commissions from reinsurers		6,387		9,914

Six months ended June 30:
Premiums ceded to reinsurers	$	77,099	$	63,336
Losses and loss expenses
ceded to reinsurers		71,870		48,845
Commissions from reinsurers		13,795		20,688

- 14 -

Notes to Unaudited Condensed Consolidated Financial Statements (continued)

(4) Loss and Loss Expense Reserves:

Activity in the reserves for losses and loss expenses for the six months ended June 30 is summarized as follows. All amounts are shown net of reinsurance, unless otherwise indicated.

	2017		2016
Reserves at the beginning of the year	$	324,767	$	301,753

Provision for losses and loss expenses:
Claims occurring during the current year		103,666		83,052
Claims occurring during prior years		16,687		(1,763	)
Total incurred		120,353		81,289

Loss and loss expense payments:
Claims occurring during the current year		23,548		18,973
Claims occurring during prior years		84,628		56,372
Total paid		108,176		75,345
Reserves at the end of the period		336,944		307,697

Reinsurance recoverable on unpaid losses at the end of the period		290,781		233,651
Reserves, gross of reinsurance
recoverable, at the end of the period	$	627,725	$	541,348

The table above shows that a deficiency of $16,687 developed during the first six months of 2017 in the settlement of claims occurring on or before December 31, 2016. This development is composed of individual claim savings and deficiencies which, in the aggregate, have resulted from the settlement of claims at amounts higher or lower than previously reserved and from changes in estimates of losses incurred but not reported as part of the normal reserving process.

(5) Segment Information:

The Company has one reportable business segment in its operations: Property and Casualty Insurance. 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 workers' compensation coverage for a variety of classes outside the transportation industry.

- 15 -

Notes to Unaudited Condensed Consolidated Financial Statements (continued)

The following table summarizes segment revenues for the three and six months ended June 30, 2017 and 2016:

	Three Months Ended				Six Months Ended
	June 30				June 30
	2017		2016		2017		2016

Revenues:
Net premiums earned	$	67,996	$	68,726	$	141,971	$	135,635
Net investment income		4,716		3,549		8,408		6,988
Net realized gains on investments		3,296		280		9,590		9,292
Other		1,400		1,463		2,380		2,828
Total revenues	$	77,408	$	74,018	$	162,349	$	154,743

(6) Debt:

The Company maintains a revolving line of credit with a $40,000 limit and an expiration date of September 23, 2018. 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 $20,000 as of both June 30, 2017 and December 31, 2016. At June 30, 2017, the effective interest rate was 2.32%. The Company has $20,000 remaining and unused under the line of credit at June 30, 2017. The current outstanding borrowings were used for general corporate purposes.

(7) Taxes:

As of June 30, 2017, the Company's calendar years 2016, 2015 and 2014 remain subject to examination by the Internal Revenue Service. The effective federal income tax rate differs from the normal statutory rate primarily as a result of tax-exempt investment income.

- 16 -

Notes to Unaudited Condensed Consolidated Financial Statements (continued)

(8) Fair Value:

Assets and liabilities recorded at fair value in the condensed 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, 2017:

Description	Total		Level 1		Level 2		Level 3

Fixed maturities:
Agency collateralized mortgage obligations	$	7,927	$	-	$	7,927	$	-
Agency mortgage-backed securities		15,852		-		15,852		-
Asset-backed securities		41,543		-		37,748		3,795
Bank loans		21,557		-		-		21,557
Certificates of deposit		3,127		3,127		-		-
Collateralized mortgage obligations		6,590		-		5,593		997
Corporate securities		146,521		-		145,695		826
Options embedded in convertible securities		5,153		-		5,153		-
Mortgage-backed securities		23,962		-		22,141		1,821
Municipal obligations		112,717		-		112,503		214
Non-U.S. government obligations		27,095		3,261		23,834		-
U.S. government obligations		56,971		-		56,971		-
Total fixed maturities		469,015		6,388		433,417		29,210
Equity securities:
Consumer		43,293		43,293		-		-
Energy		7,630		7,630		-		-
Financial		43,169		43,169		-		-
Industrial		29,069		28,093		976		-
Technology		9,507		9,507		-		-
Mutual fund		48,492		48,492		-		-
Other		6,757		6,757		-		-
Total equity securities		187,917		186,941		976		-
Short term		1,500		1,500		-		-
Cash equivalents		77,298		-		77,298		-
Total	$	735,730	$	194,829	$	511,691	$	29,210

- 17 -

Notes to Unaudited Condensed Consolidated Financial Statements (continued)

As of December 31, 2016:

Description	Total		Level 1		Level 2		Level 3

Fixed maturities:
Agency collateralized mortgage obligations	$	6,171	$	-	$	6,171	$	-
Agency mortgage-backed securities		4,770		-		4,770		-
Asset-backed securities		45,183		-		37,919		7,264
Bank loans		10,349		-		-		10,349
Certificates of deposit		3,117		3,117		-		-
Collateralized mortgage obligations		9,104		-		6,409		2,695
Corporate securities		137,932		-		135,794		2,138
Options embedded in convertible securities		4,751		-		4,751		-
Mortgage-backed securities		24,571		-		22,206		2,365
Municipal obligations		129,335		-		129,190		145
Non-U.S. government obligations		24,681		-		24,419		262
U.S. government obligations		91,940		-		91,940		-
Total fixed maturities		491,904		3,117		463,569		25,218
Equity securities:
Consumer		32,576		32,576		-		-
Energy		12,842		12,842		-		-
Financial		31,186		30,943		243		-
Industrial		21,145		20,262		883		-
Technology		8,858		8,858		-		-
Mutual fund		6,995		-		6,995		-
Other		6,343		6,343		-		-
Total equity securities		119,945		111,824		8,121		-
Short term		1,500		1,500		-		-
Cash equivalents		59,683		-		59,683		-
Total	$	673,032	$	116,441	$	531,373	$	25,218

Level inputs, as defined by the FASB guidance, 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.

- 18 -

Notes to Unaudited Condensed Consolidated Financial Statements (continued)

The Company's Level 3 assets consist of a portfolio of asset and mortgage-backed securities, bank loans, collateralized mortgage obligations, corporate securities and a limited amount of municipal and foreign government obligations. The assets are valued using various unobservable inputs including extrapolated data, proprietary models and indicative quotes. Transfers into Level 3 relate to securities previously classified as Level 2. 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, 2017 and for the year ended December 31, 2016:

	2017			2016
Beginning of period balance	$	25,218		$	16,793
Total gains or losses (realized or unrealized)
included in income		443			1,846
Purchases		16,857			5,540
Settlements		(12,847	)		(8,791	)
Transfers into Level 3		148			10,202
Transfers out of Level 3		(609	)		(372	)
End of period balance	$	29,210		$	25,218

Quoted market prices are obtained 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 the Company's assumptions, including discount rates and estimates of future cash flows. Potential taxes and other transaction costs have not been considered in estimating fair values.

Transfers between levels, if any, are recorded as of the beginning of the reporting period. There were no significant transfers of assets between Level 1 and Level 2 during the six months ended June 30, 2017 and 2016.

In addition to the preceding disclosures on assets recorded at fair value in the condensed 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 condensed consolidated balance sheets.

Non-financial instruments such as real estate, property and equipment, other assets, deferred income taxes and intangible assets, and certain financial instruments such as policy reserve liabilities are excluded from the fair value disclosures. Therefore, the fair value amounts cannot be aggregated to determine the underlying economic value of the Company. 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 carried primarily 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.

- 19 -

Notes to Unaudited Condensed Consolidated Financial Statements (continued)

Short-term borrowings: The fair value of the Company's 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 the Company for debt of similar terms and remaining maturities.

A summary of the carrying value and fair value by level of financial instruments not recorded at fair value on the Company's condensed consolidated balance sheets at June 30, 2017 and December 31, 2016 are as follows:

	Carrying		Fair Value
	Value		Level 1		Level 2		Level 3		Total

June 30, 2017
Assets: Limited partnerships	$	67,087	$	-	$	-	$	67,087	$	67,087
Liabilities: Short-term borrowings		20,000		-		20,000		-		20,000

December 31, 2016
Assets: Limited partnerships		76,469		-		-		76,469		76,469
Liabilities: Short-term borrowings		20,000		-		20,000		-		20,000

(9) 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 an aggregate total value of $440 for each of the 2016 and 2017 annual periods presented. The table below provides detail of the stock issuances for 2016 and 2017:

				Value
				Per Share
Effective	Number of Shares	Vesting	Service	on Grant
Date	Issued	Date	Period	Date

5/10/2016	17,677	5/10/2017	7/1/2016 - 6/30/2017	$24.89

5/9/2017	18,183	5/9/2018	7/1/2017 - 6/30/2018	$24.20

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

Effective February 8, 2017, the Company awarded 20,181 shares of Class B restricted stock to certain of the Company's executives under the Company's Restricted Stock Compensation Plan. The restricted shares represent a portion of the calendar year 2016 compensation to certain executives under the terms of the Company's Executive Incentive Bonus Plan. The restricted shares will vest over a three-year period from the date of grant and will be distributed solely in the Company's Class B common stock. The restricted shares were valued based on the closing price of the Company's Class B common stock on the day the award was granted. Each share was valued at $23.80 per share, representing a total value of $480. 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 of the Company's Board of Directors.

- 20 -

Notes to Unaudited Condensed Consolidated Financial Statements (continued)

(10) 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.

(11) Accumulated Other Comprehensive Income:

The following table illustrates changes in accumulated other comprehensive income by component for the six months ended June 30, 2017:

				Unrealized
				holding gains on
	Foreign			available-for-sale
	Currency			securities			Total

Beginning balance	$	(831	)	$	34,051		$	33,220

Other comprehensive income
before reclassifications		453			11,137			11,590

Amounts reclassified from
accumulated other
comprehensive income		-			(2,322	)		(2,322	)
			��
Net current-period other
comprehensive income		453			8,815			9,268

Ending balance	$	(378	)	$	42,866		$	42,488

(12) Other Operating Expenses:

During 2015, the Company entered into a consulting contract with an insurance brokerage firm of which a director of the Company is CEO and a Managing Director. The consulting contract provides for an annual fee of $300 for 2017 and 2016, respectively. The Company also has a brokerage agreement with this entity. The Company incurred commission expense in connection with insurance policies written in 2017 and 2016 under this brokerage agreement. Total commission expense for the three months ended June 30, 2017 and 2016 was $205 and $140, respectively. Total commission expense for the six months ended June 30, 2017 and 2016 was $359 and $140, respectively.

- 21 -

Notes to Unaudited Condensed Consolidated Financial Statements (continued)

(13) Subsequent Events:

The Company has evaluated subsequent events for recognition or disclosure in these condensed consolidated financial statements filed on Form 10-Q with the Securities and Exchange Commission and no events have occurred through the filing date of this Form 10-Q which require recognition or disclosure.

- 22 -

ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

The Company specializes in marketing and underwriting insurance for the transportation industry. Backed by its long history, the Company offers diverse products in the property and casualty insurance market. The Company operates as one reportable property and casualty insurance segment, offering a range of products and services, the most significant being commercial automobile and workers' compensation insurance products.

Liquidity and Capital Resources

The primary sources of the Company's liquidity are (1) funds generated from insurance operations, including net investment income, (2) proceeds from the sale of investments, and (3) proceeds from maturing investments.

The Company generally experiences positive cash flow from operations. Premiums are collected on insurance policies in advance of the disbursement of funds in payment of claims. Operating costs of the Company's property/casualty insurance subsidiaries, other than loss and loss expense payments and commissions paid to related agency companies, generally average less than one-third of net premiums earned on a consolidated basis, and the remaining amount is available for investment for varying periods of time depending on the type of insurance coverage provided and the timing of the claim payments. Because losses are often settled in periods subsequent to when they are incurred, operating cash flows may, at times, become negative as loss settlements on claim reserves established in prior years exceed current revenues. The Company's cash flow relating to premiums is significantly affected by reinsurance programs in effect from time-to-time, whereby the Company cedes both premium and risk to other insurance and reinsurance companies. These programs vary significantly among products, and certain contracts call for reinsurance payment patterns which do not coincide with the collection of premiums by the Company from its insureds.

For the first six months of 2017, the Company produced positive cash flow from operations totaling $23.2 million, which compares to positive cash flow from operations of $22.7 million generated during the first six months of 2016. The increase in cash flow from the 2016 period was mainly due to higher premium volume during the first six months of 2017.

- 23 -

For several years, the Company's investment philosophy has emphasized the purchase of short-term bonds with superior quality and liquidity. As flat yield curves have not provided incentive to lengthen maturities in recent years, the Company has continued to maintain its fixed maturity portfolio at short-term levels. The average contractual life of the Company's fixed maturity and short-term investment portfolio increased slightly to 5.0 years during the second quarter of 2017. The average duration of the Company's fixed maturity portfolio remains much shorter than both the contractual maturity average and the duration of the Company's liabilities. The Company also remains an active participant in the equity securities market using capital which is in excess of amounts considered necessary to fund current operations. The long-term horizon for the Company's equity investments allows it to invest in positions where ultimate value, and not short-term market fluctuation, is the primary focus. Investments made by the Company's domestic property/casualty insurance subsidiaries are regulated by guidelines promulgated by the National Association of Insurance Commissioners, which are designed to provide protection for both policyholders and shareholders.

The net cash provided by investing activities totaled $2.7 million for the first six months of 2017. This compares to net cash used in investing activities of $27.4 million during the 2016 period. The changes in cash provided by (used in) investing activities is the result of the normal timing of maturities and purchases and sales in our investment portfolio.

Financing activity for the first six months of 2017 consisted solely of the regular cash dividend payments to shareholders of $8.2 million ($.54 per share). Financing activity for the first six months of 2016 consisted solely of the regular cash dividend payments to shareholders of $7.9 million ($.52 per share).

The Company maintains a revolving line of credit with a $40.0 million limit and an expiration date of September 23, 2018. 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 $20.0 million as of both June 30, 2017 and December 31, 2016. At June 30, 2017, the effective interest rate was 2.32%. The Company had $20.0 million remaining under the line of credit at June 30, 2017. The Company's revolving line of credit has three financial covenants, each of which were met as of June 30, 2017. The three financial covenants relate to a minimum Generally Accepted Accounting Principles net worth, a minimum statutory surplus and a minimum A.M. Best rating.

The Company's assets at June 30, 2017 included $78.8 million in investments classified as cash equivalents that were readily convertible to cash without significant market penalty. An additional $45.0 million of fixed maturity investments will mature within the twelve-month period following June 30, 2017. The Company believes that these liquid investments, plus the expected cash flow from premium collections, are more than sufficient to provide for projected claim payments and operating cost demands. In the event competitive conditions produce inadequate premium rates and the Company chooses to further restrict volume, the liquidity of its investment portfolio would permit management to continue to pay claims as settlements are reached without requiring the disposal of investments at a loss, regardless of interest rates in effect at the time. In addition, the Company's reinsurance program is structured to avoid significant cash outlays that accompany large losses.

- 24 -

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, 2017, $54.3 million may be transferred by dividend or loan to the parent company during the remainder of 2017 without approval by, or prior notification to, regulatory authorities. An additional $247.5 million of shareholders' equity of the Company's insurance subsidiaries could be advanced or loaned to the parent company with prior notification to, and approval from, regulatory authorities, although transfers of this size would not 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 Company's insurance subsidiaries would permit access by the parent company to short-term and long-term sources of credit when needed. The parent company had cash and marketable securities valued at $31.1 million at June 30, 2017.

Net premiums written by the Company's insurance subsidiaries for the first six months of 2017 equaled approximately 77% of the combined statutory surplus of these subsidiaries, a level consistent with the past several years. Premium writings of up to 100% and in some cases up to 200% of surplus are generally considered acceptable by regulatory authorities. Further, the statutory capital of each of the Company's insurance subsidiaries substantially exceeded minimum risk based capital requirements set by the National Association of Insurance Commissioners as of June 30, 2017. Accordingly, the Company has the ability to significantly increase its business without seeking additional capital to meet regulatory guidelines.

Results of Operations

Comparison of Second Quarter 2017 to Second Quarter 2016

The following table provides information regarding premiums written and earned for the quarters ended June 30 (dollars in thousands):

	2017		2016

Gross Premiums Written	$	119,007	$	100,046
Net Premiums Written		72,707		67,669
Net Premiums Earned		67,996		68,726

Gross premiums written during the second quarter of 2017 increased $19.0 million (19.0%), while net premiums earned decreased $0.7 million (1.1%), as compared to the same period in 2016. The higher gross premiums written were due to increases in sales of both commercial automobile and workers' compensation products and is consistent with the Company's growth strategy. The difference in the percentage change for premiums written compared to earned is reflective of the normal differences in the financial statement recognition of earned premiums compared to written, as well as differences in reinsurance ceding rates on the mix of business in-force.

Premiums ceded to reinsurers on the Company's insurance business averaged 38.9% of gross premiums written for the second quarter of 2017 compared to 32.4% in the 2016 second quarter.

The decrease in net premiums earned, compared to growth in gross premiums written, was a function of premium adjustment provisions in the Company's historical commercial automobile reinsurance treaties. This historical reinsurance structure, which was revised in the current reinsurance treaty renewal, causes an adjustment for ceded premiums when the ultimate loss estimate changes for a reinsurance treaty year.

- 25 -

Net investment income during the second quarter of 2017 was 32.9% higher than the second quarter of 2016 due primarily to increased dividends and increased yields on the Company's fixed maturity securities resulting in redeployment of assets to higher yielding issues. After-tax investment income increased by 34.1% during the second quarter of 2017 compared to the 2016 second quarter, reflecting the mix between taxable and tax-exempt investment income.

The second quarter 2017 net realized investment gains of $3.3 million resulted primarily from $2.6 million in gains from trading activities and $.7 million in gains from the Company's investments in limited partnerships. Comparative second quarter 2016 net realized investment gains were $.3 million, consisting primarily of $1.0 million in gains reported from the Company's investments in limited partnerships partially offset by $.7 million in realized losses from trading activities. Realized investment gains and losses result from decisions regarding overall portfolio realignment as well as the sale of individual securities, including the change in aggregate 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 second quarter of 2017 increased $29.1 million (68.2%) compared to the 2016 second quarter, resulting in a loss ratio of 105.5%, compared to a loss ratio of 62.1% during the second quarter of 2016. The year-over-year increase in losses and loss expenses and in the loss ratio reflected significant unfavorable loss experience as well as $16.6 million in prior year reserve strengthening due to unfavorable development from prior year claims, particularly from infrequent, but severe loss events during the second quarter of 2017.

Other operating expenses for the second quarter of 2017 increased $4.4 million, or 19.6%, from the second quarter of 2016. The increase in other operating expenses was due to increased commission expenses. The ratio of consolidated other operating expenses to net premiums earned plus net investment income plus commissions and other income (collectively, "operating revenue") was 34.6% during the second quarter of 2017 compared to 30.4% for the 2016 second quarter.

The effective federal tax rate on consolidated income (loss) for the second quarter of 2017 was 41.7% compared to 33.0% for the 2016 second quarter. 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 primarily the increase in losses and loss expenses incurred and additional reserve strengthening, net income decreased $18.3 million during the second quarter of 2017 as compared to the 2016 second quarter.

- 26 -

Comparison of Six Months Ended June 30, 2017 to Six Months Ended June 30, 2016

The following table provides information regarding premiums written and earned for the six months ended June 30 (dollars in thousands):

	2017		2016

Gross Premiums Written	$	229,035	$	196,199
Net Premiums Written		150,237		132,234
Net Premiums Earned		141,971		135,635

Gross premiums written during the first six months of 2017 increased $32.8 million (16.7%), while net premiums earned increased $6.3 million (4.7%), as compared to the same period in 2016. The higher premiums were due to increases in sales of both commercial automobile and workers' compensation products and is consistent with the Company's growth strategy. The difference in the percentage change for premiums written compared to earned is reflective of the normal differences in the financial statement recognition of earned premiums compared to written, as well as differences in reinsurance ceding rates on the mix of business in-force.

Premiums ceded to reinsurers on the Company's insurance business averaged 34.4% of gross premiums written for the 2017 period compared to 32.6% a year earlier. The change in net premiums earned, compared to growth in gross premiums written, was a function of premium adjustment provisions in the Company's historical commercial automobile reinsurance treaties. This historical reinsurance structure, which was revised in the current reinsurance treaty renewal, causes an adjustment for ceded premiums when the ultimate loss estimate changes for a reinsurance treaty year.

Net investment income during the first six months of 2017 was 20.3% higher than the first six months of 2016 due primarily to increased dividends and increased yields on the Company's fixed maturity securities resulting in redeployment of assets to higher yielding issues, as well as a 4.0% increase in average funds invested resulting from positive cash flow. After-tax investment income increased by 21.2% during the first six months of 2017 compared to the 2016 period, reflecting the mix between taxable and tax-exempt investment income.

Net realized investment gains for the first six months of 2017 totaled $9.6 million and resulted primarily from $6.0 million in gains from the Company's investments in limited partnerships and $3.6 million in gains from trading activities. For the same period of 2016, overall net realized investment gains were $9.3 million, consisting primarily of $10.5 million in gains reported from trading activities, partially offset by $1.2 million in realized losses from the Company's investments in limited partnerships. Realized investment gains and losses result from decisions regarding overall portfolio realignment as well as the sale of individual securities, including the change in aggregate 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 first six months of 2017 increased $39.1 million (48.1%) compared to the first six months of 2016, resulting in a loss ratio of 84.8%, compared to a loss ratio of 59.9% during the first six months of 2016. The year-over-year increase in losses and loss expenses and in the loss ratio reflected significant unfavorable loss experience as well as $16.7 million in prior year reserve strengthening due to unfavorable development from prior year claims, particularly from infrequent, but severe loss events during the first six months of 2017 also due in part to a number of severe public transportation losses.

- 27 -

Other operating expenses for the first six months of 2017 increased $9.9 million, or 23.0%, from the first six months of 2016. The increase in other operating expenses was primarily due to increased commission expenses. The ratio of consolidated other operating expenses to net premiums earned plus net investment income plus commissions and other income (collectively, "operating revenue") was 33.9% during the 2017 period compared to 29.6% for the 2016 period.

The effective federal tax rate on consolidated income (loss) for the first six months of 2017 was 49.2% compared to 33.8% for the 2016 period. 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 primarily the increase in losses and loss expenses incurred and additional reserve strengthening, net income decreased $25.7 million during the first six months of 2017 as compared to the 2016 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 are based on current expectations and assumptions that are subject to risks and uncertainties that could cause actual results to differ materially from such forward-looking statements. These risks and uncertainties include 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 including, but not limited to, those risks set forth in Part I, Item 1A, Risk Factors, in the Company's Annual Report on Form 10-K for the year ended December 31, 2016; and (iv) other risks and factors which may be beyond the control or foresight of the Company. Readers of this report are cautioned not to place undue reliance on these forward-looking statements. While the Company believes the assumptions on which the forward-looking statements are based are reasonable, there can be no assurance that these forward-looking statements will prove to be accurate. The Company expressly disclaims any obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

Critical Accounting Policies

There have been no changes in the Company's critical accounting policies as disclosed in the Company's Annual Report on Form 10-K filed for the year ended December 31, 2016.

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Concentrations of Credit Risk

The Company's 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, 2017, amounts due from reinsurers on paid and unpaid losses are estimated to total approximately $296 million. 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.

Off-Balance Sheet Arrangements

The Company has no off-balance sheet arrangements.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

There have been no material changes in the Company's exposure to market risk since the disclosure in the Company's Annual Report on Form 10-K for the year ended December 31, 2016.

ITEM 4. CONTROLS AND PROCEDURES

The Company carried out an evaluation as of June 30, 2017, 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 Company's 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, or the "Exchange Act". Based upon 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 (a) recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms; and (b) 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 its internal control over financial reporting that occurred during the period covered by this report 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 1A. RISK FACTORS

In addition to the information set forth in this Quarterly Report on Form 10-Q and before deciding to invest in, or retain, shares of the Company's common stock, you also should carefully review and consider the information contained in the Company's other reports and periodic filings that it makes with the Securities and Exchange Commission, including, without limitation, the information contained under the caption Part I, Item 1A "Risk Factors" in its Annual Report on Form 10-K for the year ended December 31, 2016. Those risk factors could materially affect the Company's business, financial condition and results of operations. There have been no material changes from the risk factors previously disclosed in the Company's Annual Report on Form 10-K for the year ended December 31, 2016.

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ITEM 6 (a) EXHIBITS

Number and caption from Exhibit

Table of Regulation S-K Item 601 Exhibit No.

(10.1)

Baldwin & Lyons, Inc. Annual Incentive Plan, incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed May 15, 2017.

(10.2)

Baldwin & Lyons, Inc. Long-Term Incentive Plan, incorporated by reference to Exhibit 10.2 to the Company's Current Report on Form 8-K filed May 15, 2017.

(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

adopted pursuant to Section 906 and CFO

of the Sarbanes-Oxley Act of 2002

(101)

The following materials from Baldwin & Lyons, Inc.'s Quarterly Report on Form 10-Q for the quarter ended June 30, 2017, formatted in XBRL (eXtensible Business Reporting Language): (1) the Consolidated Balance Sheets, (2) the Consolidated Statements of Operations, (3) the Consolidated Statements of Comprehensive Income (Loss), (4) the Consolidated Statements of Cash Flows, and (5) the Notes to Unaudited Condensed Consolidated Financial Statements.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

BALDWIN & LYONS, INC.

Date August 9, 2017 By /s/ W. Randall Birchfield

W. Randall Birchfield,

Chief Executive Officer & President

Date August 9, 2017 By /s/ William C. Vens

William C. Vens,

Chief Financial Officer

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INDEX TO EXHIBITS

Exhibit Number

EXHIBIT 10.1

Baldwin & Lyons, Inc. Annual Incentive Plan, incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed May 15, 2017.

EXHIBIT 10.2

Baldwin & Lyons, Inc. Long-Term Incentive Plan, incorporated by reference to Exhibit 10.2 to the Company's Current Report on Form 8-K filed May 15, 2017.

EXHIBIT 31.1

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

EXHIBIT 31.2

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

EXHIBIT 32

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

EXHIBIT 101

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Positive
Negative
Uncertain
Constraining
Legalese
Litigous
Readability	H.S. freshman Avg

Protective Insurance (PTVCA) 10-Q2017 Q2 Quarterly report

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