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[GRAPHIC OMITTED] G. PATRICK CORYDON
BALDWIN & LYONS, INC. SENIOR VICE PRESIDENT / C.F.O.
[OBJECT OMITTED]
1099 North Meridian Street
Indianapolis, IN 46204
(317) 636-9800
December 15, 2006
Mr. Jim B. Rosenberg
Senior Assistant Chief Accountant
United States Securities and Exchange Commission
100 F Street, N.E.
Washington, D.C. 20549
RE: Form 10-K for the year ended December 31, 2005
File No. 000-05534
Dear Mr. Rosenberg,
We are in receipt of your follow-up letter of November 15, 2006 in connection
with your review of the above captioned filing. This letter will respond to the
questions raised in your letter.
Follow-up Inquiry - MD&A
Critical Accounting Policies
Loss and Loss Expense Reserves, page 28
QUESTION 1. WE NOTE YOUR PROPOSED DISCLOSURE IN RESPONSE TO COMMENT 1 PART A
FROM OUR LETTER. PLEASE REVISE THIS DISCLOSURE TO PRESENT THE LOSS RESERVE
INFORMATION ON A GROSS AND NOT A NET BASIS.
Response:
The Company's loss and loss expense reserves, for each of its significant
segments, are as follows at December 31, 2005 and 2004. Those lines of business
individually comprising less than three percent of the Company's total reserves
are shown in the aggregate as All Other.
DECEMBER 31
--------------------------------
Line of Business (Segment) 2005 2004
--------------- ---------------
Fleet trucking $341,230 $358,510
Voluntary reinsurance assumed 43,721 29,297
Non-standard private passenger automobile 11,615 12,625
Small fleet trucking 10,725 13,643
All other 22,982 26,096
--------------- ---------------
$ 430,273 $ 440,172
=============== ===============
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Given that the Company's provision for losses and loss expenses incurred are
presented on a net of reinsurance basis, the Company believes that it would be
beneficial to present loss reserves, by line of business, both gross and net of
reinsurance ceded amounts in future filings, provided that you would have no
objection to this presentation. We will provide appropriate descriptions of the
differences between gross and net reserves, in addition to existing disclosures.
QUESTION 2. IN YOUR RESPONSE TO PART D OF COMMENT 1, YOU STATE THAT YOU BELIEVE
YOUR CURRENT DISCLOSURE IS MORE MEANINGFUL TO INVESTORS. WE NOTE THAT YOU
DISCUSS YOUR PREMIUMS AND LOSS EXPERIENCE IN YOUR RESULTS OF OPERATIONS SECTION
OF YOUR MD&A BY LINE OF BUSINESS. ALTHOUGH WE DO BELIEVE THAT DISCLOSURE
REGARDING THE TYPE OF INSURANCE IS IMPORTANT IN HELPING AN INVESTOR UNDERSTAND
THE IMPACT OF THE DEVELOPMENT ON YOUR RESULTS OF OPERATIONS, WE CONTINUE TO
BELIEVE THAT LOSS DEVELOPMENT DISCLOSURE BY LINE OF BUSINESS WOULD BE BENEFICIAL
TO INVESTORS TO HELP LINK THE DISCUSSION BETWEEN YOUR RESULTS OF OPERATIONS,
TRENDS IN INCURRED LOSSES AND LOSS DEVELOPMENT. PLEASE RECONCILE YOUR LOSS
DISCLOSURE BY TYPE OF INSURANCE DISCLOSURE TO LOSSES BY TYPE OF BUSINESS. FOR
YOUR RETROSPECTIVELY-RATED DIRECT BUSINESS, PLEASE CONFIRM THAT YOU WILL
QUANTIFY THE AMOUNT OF PREMIUM RETURNED TO POLICYHOLDERS IN YOUR DISCLOSURE. IN
ADDITION, WE BELIEVE THE MATERIALITY OF PRIOR YEAR LOSS DEVELOPMENT SHOULD BE
ASSESSED AS A PERCENTAGE OF NET INCOME IN ADDITION TO PRIOR YEAR LOSS RESERVES.
ACCORDINGLY, IT APPEARS THAT THE $4.5 MILLION OF OTHER PRIOR YEAR LOSS
DEVELOPMENT IS SIGNIFICANT AND SHOULD BE DISCUSSED IN MORE DETAIL. PLEASE
PROVIDE AN EXPANDED DISCUSSION, IN DISCLOSURE-TYPE FORMAT, THAT ADDRESS THE
ITEMS IN COMMENT 1 PART D OF OUR LETTER.
Response:
The Company will modify its disclosure of loss and loss expense incurred
developments to incorporate lines of business in addition to type of insurance
disclosures previously provided. In order to provide a structure for both
disclosures, we propose to modify the table that appeared on page 5 of the 2005
Form 10-K slightly to show only a single line item for "Claims occurring during
prior years:". Two new tables will be added immediately following the first
table which will provide the breakdown of the development on prior year losses
by line of business and type of insurance, respectively. As you requested, we
confirm that we will quantify the amount of premium returned to policyholders
related to savings on retrospectively rated business. Please note that
management agrees that the variability in loss reserve estimates can be
significant with respect to net income, particularly in years when catastrophic
losses cause net income to decline significantly, as happened in 2005, and we
will provide additional discussion, similar to the following, in future periodic
filings. However, management continues to believe that measures against prior
year loss reserves are also meaningful to investors and will continue to include
all such measures. Following is a sample draft of our December 31, 2005
disclosure, beginning on Page 5, with the proposed revisions as described above.
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RECONCILIATION OF LIABILITY FOR LOSSES AND LOSS ADJUSTMENT
EXPENSES (GAAP BASIS)
YEAR ENDED DECEMBER 31,
2005 2004 2003
------------------ ---------------- -----------------
(IN THOUSANDS)
NET OF REINSURANCE RECOVERABLE:
- -------------------------------
Liability for losses and LAE at the
Beginning of the year $ 207,137 $ 162,424 $ 144,267
Provision for losses and LAE:
Claims occurring during the current year 154,314 141,254 109,324
Claims occurring during prior years (13,692) (14,956) (13,586)
------------------ ---------------- -----------------
140,622 126,298 95,738
Payments of losses and LAE:
Claims occurring during the current year 45,286 43,351 37,625
Claims occurring during prior years 60,343 38,234 39,956
------------------ ---------------- -----------------
105,629 81,585 77,581
------------------ ---------------- -----------------
Liability for losses and LAE at end of year 242,130 207,137 162,424
Reinsurance recoverable on unpaid losses
at end of the year 188,143 233,035 180,025
------------------ ---------------- -----------------
Liability for losses and LAE, gross of
reinsurance recoverable, at end of the year $ 430,273 $ 440,172 $ 342,449
================== ================ =================
The reconciliation above shows that a savings of $13.7 million was developed in
the liability for losses and LAE recorded at December 31, 2004, with similar
savings developed during the two prior calendar years. These developments,
presented separately by line of business, were as follows.
YEAR ENDED DECEMBER 31
Line of Business 2005 2004 2003
------------------ ----------------- -----------------
Fleet trucking $ (9,377) $ (11,280) $ (11,474)
Non-standard private passenger automobile (1,868) (1,686) (2,159)
Small fleet trucking (956) (214) (1,077)
Voluntary reinsurance assumed (1,730) (2,909) 399
Small business workers' compensation (756) (334) 705
All other 995 1,467 20
------------------ ----------------- -----------------
$ (13,692) $ (14,956) $ (13,586)
================== ================= =================
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In order to better understand the dynamics of the loss developments shown above,
the following table separates such developments into unique components, which
are discussed below.
YEAR ENDED DECEMBER 31
Type of Insurance 2005 2004 2003
------------------ ----------------- -----------------
Retrospectively-rated direct business $ (8.014) $ (5,400) $ (1,281)
Other direct business (4,468) (6,689) (11,663)
Reinsurance assumed (1,730) (2,909) 399
Involuntary residual markets 1,018 698 618
Environmental losses (498) (656) (1,659)
------------------ ----------------- -----------------
$ (13,692) $ (14,956) $ (13,586)
================== ================= =================
The largest single component of reserve savings in 2005 was the $8 million
related to retrospectively rated policies, which are included in Fleet Trucking
business. The majority of savings on these policies is returned to policyholders
in the form of a retrospective premium adjustment which is recorded concurrently
with the recognition of the reserve development. Accordingly, premium written
and earned during 2005 was reduced by approximately $4.8 million associated with
prior year loss reserve development on these policies and pre-tax income was
increased by approximately $3.2 million, or about 6.3%. The increase in savings
during 2005, compared to the immediately prior years, is associated with
increases in gross premium on these policies during this period with a
concurrent improvement in loss experience from historical levels.
The other direct business amounts include the non-retrospectively rated polices
for Fleet Trucking, non-standard private passenger automobile, small fleet and
small business workers' compensation lines, as well as runoff of discontinued
products which constitute part of the "all other" line of business shown in the
previous table. As shown, the savings from this category, which comprises all of
the Company's directly produced, non-retrospectively rated business, has
declined from $11.7 million in 2003 to $4.5 million during 2005. This change
reflects the Company's continuing process of incorporating more recent loss
development data into its loss reserving formulae. As discussed elsewhere, the
Company has experienced savings in its loss developments for several years owing
to a variety of changes in the trucking industry as well as ongoing refinements
in its reserving methodology. While the Company's basic assumptions have
remained consistent, we continue to update loss data to reflect changing trends
which will result in fluctuations in loss developments over time. Our goal is to
produce an overall estimate of reserves which is sufficient and as close to
expected ultimate losses as possible. The $4.5 million savings developed during
2005 represents approximately 8.9% of pre-tax net income for 2005 but only 2.5%
of December 31, 2004 net loss and LAE reserves on the related business.
The developments for reinsurance assumed and involuntary residual markets, which
netted to $.7 million of savings during 2005, are heavily dependent on the
establishment of case basis and IBNR reserves by other insurance and reinsurance
companies and by managers of state run
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residual market pools. While the Company evaluates the sufficiency of such
reserving, considering the number of different entities involved and the fact
that the Company must rely on external sources of information, the savings or
deficiency developed from these products will likely fluctuate from year to
year. We have found this to be particularly true of reinsurance assumed during
years when large catastrophic events occur near year end.
Factors affecting the development of environmental claims are more fully
discussed in the following paragraphs. The savings recognized in recent years
represent both case basis and IBNR reserve reductions resulting from favorable
outcomes related to large environmental claims.
QUESTION 3. YOU STATE IN YOUR RESPONSE TO COMMENT 1 PART E THAT YOU DID "NOT
ALTER ANY KEY ASSUMPTIONS USED IN THE RESERVING PROCESS AND THE PROCESS HAS
PROVEN TO BE FULLY ADEQUATE WITH NO OVERALL DEFICIENCIES DEVELOPED SINCE 1985."
ALTHOUGH YOU HAVE NOT EXPERIENCED RESERVE DEFICIENCIES YOU HAVE RECOGNIZED
RESERVE REDUNDANCIES. ON PAGE EIGHT YOU DISCLOSE THAT YOUR RESERVE REDUNDANCIES
ARE DUE TO IMPROVEMENTS IN FREQUENCY AND SEVERITY. THEREFORE, IT WOULD APPEAR
THAT YOUR SEVERITY AND FREQUENCY ASSUMPTIONS ARE KEY ASSUMPTIONS THAT IMPACT THE
VOLATILITY OF THE LOSS RESERVES. IF YOU HAVE NOT ADJUSTED YOUR SEVERITY AND
FREQUENCY ASSUMPTIONS IN CALCULATING THE MOST RECENT ESTIMATE OF THE RESERVE
GIVEN THE HISTORICAL CHANGES AND CURRENT TRENDS, PLEASE DISCUSS WHY YOU BELIEVE
YOUR CURRENT ASSUMPTIONS ARE APPROPRIATE.
Response:
As we noted in our previous correspondence, we have not changed our basic
assumptions used in the reserving process for many years. However, we do
continuously update our reserving process to consider recent historical loss
development patterns. Our reference to frequency and severity on page 8 of our
2005 Form 10-K was included in the following sentence. "The Company's experience
also shows that improved safety and hiring programs have a dramatic impact on
the frequency and severity of trucking accidents." This disclosure relates
primarily to our fleet trucking segment and is a retrospective observation of
how safety and hiring programs within the trucking industry appear to have
favorably impacted the incurrence of losses. However, many other factors are
also at play given the variety of products sold by the Company and the
complexity of the fleet trucking business. Some of these factors are policy
limits reaching as high as $10 million per occurrence on fleet trucking
business, large and fluctuating self-insured retention amounts (up to $3 million
per claim) selected by our insureds, the fact that almost all of our fleet
trucking claims are subject to litigation with court and jury involvement,
changes in the levels of reinsurance available and a book of business which, by
its very nature, is susceptible to producing severe claims. These factors
increase the complexity of the reserving process for both case basis and IBNR
losses and LAE.
As shown in the answer to question 2, above, the overall savings, after removal
of retrospective policies, reinsurance assumed and residual markets is a rather
small percentage of the beginning reserves to which they apply. In addition,
this savings has decreased in the past three years as management has
incorporated the positive developments noted in recent historical developments
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into the loss reserving process. This does not, however, constitute a change in
assumptions but rather the application of additional data as it became
available. It appears that it would be helpful to include wording similar to
that presented in response to this question, in addition to the additional
disclosure included in our previous response, in our future filings to tie in
all of these concepts. We will plan to do so.
QUESTION 4. WE HAVE READ YOUR RESPONSE TO COMMENT 1 PART F BUT CONTINUE TO
BELIEVE THAT DISCLOSURE ILLUSTRATING THE EFFECT OF CHANGES IN YOUR KEY
ASSUMPTIONS IS USEFUL TO AN INVESTOR. PLEASE PROVIDE A SENSITIVITY ANALYSIS
AROUND THE KEY LOSS RESERVE ASSUMPTIONS WHICH ILLUSTRATES HOW REASONABLY LIKELY
CHANGES IN THESE ASSUMPTIONS WOULD AFFECT YOUR RESULTS OF OPERATIONS.
Response:
As noted in our previous correspondence, we do not determine ranges of loss
reserve estimates as part of the reserving process nor do we perform any kind of
variability or sensitivity analysis relative to key loss reserving assumptions.
In addressing your comment, we have considered the feasibility of creating a
sensitivity analysis and we do have concerns that, in our case, such an exercise
may not be particularly meaningful because so little of our loss reserving is
subject to factors which are objectively quantifiable, such as medical inflation
rates or changes in the cost of automobile repair. While factors such as this
play a small role in our Company-wide loss reserves, the bulk of our reserves
are more heavily influenced by more subjective factors including the social
inflation surrounding jury awards for serious accidents involving large motor
carriers, the increasing sophistication of plaintiff attorneys handling such
cases and the uncertainty surrounding the reserving for catastrophic losses.
However, we will undertake an effort to develop a sensitivity analysis which
illustrates the impact on our results of operations of reasonably likely changes
in those portions of the Company's significant loss reserving assumptions which
can be objectively quantified. To the extent that the results of our study
provide meaningful and credible information for our investors, we will include
this information in the Company's Form 10-K filing for the year ended December
31, 2006. However, management believes that, with the level of complexity
involved in such a study, including the necessity to accumulate historical data
which we have not routinely maintained to this point, it may require more than a
single Form 10-K season to fully develop a comprehensive analysis that addresses
all significant components. To the extent that our study is ongoing beyond the
filing date of our 2006 Form 10-K, disclosure of that fact will be made.
********
The undersigned acknowledges that:
o The Company is responsible for the adequacy of the disclosures in its
filings.
o We understand that staff comments or changes to disclosure in response to
staff comments do not
foreclose the Commission from taking any action with respect to the
filing.
o The Company may not assert staff comments as a defense in any proceeding
initiated by the Commission or any person under the federal securities
laws of the United States.
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Should you have any further questions or require additional information, please
contact me at your convenience.
Regards,
/S/ G. PATRICK CORYDON
G. Patrick Corydon
Senior Vice President / C.F.O.
Copy: Otto N. Frenzel III, Audit Committee Chairman
John M. O'Mara
John A. Pigott
Nathan Shapiro
Gary W. Miller, Chairman and CEO
Douglas E. Hunter - Ernst & Young, LLP