1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
Quarterly Report Under Section 13 or 15 (d)
of the Securities Exchange Act of 1934
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For Quarter Ended Commission file number
June 30, 2007 0-5534
BALDWIN & LYONS, INC.
(Exact name of registrant as specified in its charter)
INDIANA 35-0160330
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
1099 NORTH MERIDIAN STREET, INDIANAPOLIS, INDIANA 46204
- ------------------------------------------------- -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (317) 636-9800
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Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months, and (2) has been subject to such filing
requirements for the past 90 days.
Yes [ X ] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act.
Large accelerated filer [ ] Accelerated filer [ X ] Non-accelerated filer [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of August 7, 2007:
TITLE OF CLASS NUMBER OF SHARES OUTSTANDING
Common Stock, No Par Value:
Class A (voting) 2,650,059
Class B (nonvoting) 12,503,955
Index to Exhibits located on page 16.
Page 1 of a total of 23 pages
2
PART I - FINANCIAL INFORMATION
ITEM 1 FINANCIAL STATEMENTS
BALDWIN & LYONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
JUNE 30 December 31
2007 2006
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ASSETS
Investments:
Fixed maturities $ 354,587 $ 338,466
Equity securities 132,971 129,817
Limited partnerships 67,918 57,313
Short-term 46,574 59,325
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602,050 584,921
Cash and cash equivalents 43,032 35,490
Accounts receivable 30,927 37,994
Reinsurance recoverable 152,910 163,426
Notes receivable from employees 2,180 2,343
Other assets 28,069 27,932
Current federal income taxes - 1,613
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$ 859,168 $ 853,719
============== ==============
LIABILITIES AND SHAREHOLDERS' EQUITY
Reserves for losses and loss expenses $ 394,396 $ 409,412
Reserves for unearned premiums 30,484 32,145
Accounts payable and accrued expenses 37,568 35,681
Current federal income taxes 11,680 -
Deferred federal income taxes 11,079 18,854
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485,207 496,092
Shareholders' equity:
Common stock-no par value 647 646
Additional paid-in capital 46,078 45,692
Unrealized net gains on investments 50,156 47,229
Retained earnings 277,080 264,060
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373,961 357,627
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$ 859,168 $ 853,719
============== ==============
See notes to condensed consolidated financial statements.
3
BALDWIN & LYONS, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Three Months Ended Six Months Ended
March 31 June 30
------------------------------- -------------------------------
2007 2006 2007 2006
-------------- -------------- -------------- --------------
REVENUES
Net premiums earned $ 44,817 $ 42,163 $ 88,992 $ 85,381
Net investment income 4,882 4,736 9,728 9,295
Net gains (losses) on investments 8,772 (1,135) 9,246 5,879
Commissions and other income 1,145 1,848 2,557 3,712
-------------- -------------- -------------- --------------
59,616 47,612 110,523 104,267
EXPENSES
Losses and loss expenses incurred 24,493 27,717 51,385 56,656
Other operating expenses 13,562 12,413 26,408 23,200
-------------- -------------- -------------- --------------
38,055 40,130 77,793 79,856
-------------- -------------- -------------- --------------
INCOME BEFORE FEDERAL INCOME TAXES 21,561 7,482 32,730 24,411
Federal income taxes 6,769 2,055 9,727 7,428
-------------- -------------- -------------- --------------
NET INCOME $ 14,792 $ 5,427 $ 23,003 $ 16,983
============== ============== ============== ==============
PER SHARE DATA:
BASIC EARNINGS $ .98 $ .36 $ 1.52 $ 1.14
============== ============== ============== ==============
DILUTED EARNINGS $ .98 $ .36 $ 1.52 $ 1.14
============== ============== ============== ==============
DIVIDENDS PAID TO SHAREHOLDERS $ .25 $ 1.50 $ .70 $ 1.85
============== ============== ============== ==============
RECONCILIATION OF SHARES OUTSTANDING:
Average shares outstanding - basic 15,147 14,979 15,142 14,893
Dilutive effect of options outstanding 18 43 19 61
-------------- -------------- -------------- --------------
Average shares outstanding - diluted 15,165 15,022 15,161 14,954
============== ============== ============== ==============
See notes to condensed consolidated financial statements.
4
BALDWIN & LYONS, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
Six Months Ended
June 30
2007 2006
-------------- --------------
Net cash provided by operating activities $17,540 $18,730
Investing activities:
Purchases of long-term investments (118,750) (148,592)
Proceeds from sales or maturities
of long-term investments 107,129 105,010
Net sales (purchases) of short-term investments 12,751 (4,151)
Other investing activities (914) 309
-------------- --------------
Net cash provided by (used in) investing activities 216 (47,424)
Financing activities:
Dividends paid to shareholders (10,600) (27,847)
Cost of treasury stock - (401)
Proceeds from sales of common stock 386 6,238
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Net cash used in financing activities (10,214) (22,010)
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Increase (decrease) in cash and cash equivalents 7,542 (50,704)
Cash and cash equivalents at beginning of period 35,490 126,551
-------------- --------------
Cash and cash equivalents at end of period $43,032 $75,847
============== ==============
See notes to condensed consolidated financial statements.
NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(1) BASIS OF PRESENTATION: The accompanying unaudited condensed financial
statements have been prepared in accordance with the instructions to Form 10-Q
and do not include all of the information and notes required by generally
accepted accounting principles for complete financial statements. In the opinion
of management, all adjustments (consisting of normal recurring accruals)
considered necessary for fair presentation have been included. Operating results
for the interim periods are not necessarily indicative of the results that may
be expected for the year ended December 31, 2007. Interim financial statements
should be read in conjunction with the Company's annual audited financial
statements and other disclosures included in the Company's most recent Form
10-K.
(2) FORWARD-LOOKING STATEMENTS: Forward-looking statements in this report are
made pursuant to the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995. Investors are cautioned that such forward-looking statements
involve inherent risks and uncertainties. Readers are encouraged to review the
Company's annual report for its full statement regarding forward-looking
information.
5
NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(3) NET GAINS ON INVESTMENTS: Amounts reported as net gains on investments
consist of three components: (1) net gains or losses realized upon the actual
sale of investments managed directly by the Company's investment managers, (2)
equity in earnings or losses of investments in limited partnerships and (3)
"other-than-temporary impairment" adjustments.
The Company accounts for investments in limited partnerships using the equity
method of accounting, which requires an investor in a limited partnership to
record its proportionate share of the limited partnership's net income. To the
extent that the limited partnership investees are subject to investment company
accounting and, thereby, include both realized and unrealized investment gains
or losses in the determination of net income or loss, then the Company would
also recognize, through its income statement, its proportionate share of the
investee's unrealized as well as realized investment gains or losses. Readers
are cautioned that inclusion of such unrealized gains is not consistent with the
recognition of temporary valuation changes of equity and debt securities that
are directly owned and classified as available for sale and may result in
significant fluctuations in quarterly amounts reported under this caption. In
addition, because of inherent time lags in receiving valuation reports from
certain limited partnership investees, the Company must often rely on
estimations of valuation changes for the most recent month or quarter ended on
the reporting date. To the extent that the actual valuations subsequently
reported differ from estimates utilized, the differences are included in gains
or losses from investments in the quarter reported to the Company.
Following is a summary of the components of net gains or losses on investments
for the periods presented in the accompanying statements of income.
Three Months Ended June 30 Six Months Ended June 30
--------------------------- ---------------------------
2007 2006 2007 2006
------------ ------------ ------------ ------------
Realized net gains on the disposal of securities $ 1,051 $ 1,804 $ 1,517 $ 3,558
Equity in earnings (losses) of limited partnership
investments (realized and unrealized) 7,721 (2,312) 6,824 2,416
Impairment:
Write-downs based upon objective criteria - (763) (63) (763)
Recovery of prior write-downs
upon sale or disposal - 136 968 668
------------ ------------ ------------ ------------
Totals $ 8,772 $ (1,135) $ 9,246 $ 5,879
============ ============ ============ ============
The net gains from limited partnerships for the quarter and year-to-date ending
June 30, 2007 include an estimated $6.5 million and $2.9 million, respectively,
of unrealized gains reported to the Company as part of the operations of the
various limited partnerships. Shareholders' equity at June 30, 2007 includes
approximately $19.5 million, net of deferred federal income taxes, of earnings
undistributed by limited partnerships.
6
NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(4) REINSURANCE: The following table summarizes the Company's transactions with
reinsurers for the 2007 and 2006 comparative periods.
2007 2006
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Quarter ended June 30:
Premiums ceded to reinsurers $ 6,976 $ 5,402
Losses and loss expenses
ceded to reinsurers 5,676 3,215
Commissions from reinsurers 351 121
Six months ended June 30:
Premiums ceded to reinsurers 13,093 13,008
Losses and loss expenses
ceded to reinsurers 10,086 5,115
Commissions from reinsurers 642 811
(5) COMPREHENSIVE INCOME OR LOSS: Total realized and unrealized income for the
quarter ended June 30, 2007 was $18,766 and compares to total realized and
unrealized income of $908 for the quarter ended June 30, 2006. For the six
months ended June 30, 2007, total realized and unrealized income was $26,548 and
compares to total realized and unrealized income of $15,643 for the six months
ended June 30, 2006.
7
NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(6) REPORTABLE SEGMENTS - PROFIT OR LOSS: The following table provides certain
profit and loss information for each reportable segment. All amounts presented
are computed based upon generally accepted accounting principles. Segment profit
for fleet trucking includes the direct marketing agency operations conducted by
the parent company and is computed after elimination of inter-company
commissions. Amounts presented for voluntary reinsurance assumed include
transactions related to certain inter-segment reinsurance agreements.
2007 2006
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Direct and Net Direct and Net
Assumed Premium Segment Assumed Premium Segment
Premium Earned and Profit Premium Earned and Profit
Written Fee Income (Loss) Written Fee Income (Loss)
------------- ------------- ------------- ------------- ------------- -------------
QUARTER ENDED JUNE 30:
PROTECTIVE PRODUCTS:
Fleet trucking $ 31,222 $ 26,088 $ 7,703 $ 29,707 $ 26,617 $ 5,416
Reinsurance assumed 6,830 7,531 2,386 2,874 3,799 983
SAGAMORE PRODUCTS:
Private passenger automobile 4,486 8,254 479 6,322 10,041 751
Small fleet trucking 4,915 4,094 89 6,814 3,530 (445)
All other (144) (71) 162 (255) (93) (310)
------------- ------------- ------------- ------------- ------------- -------------
Totals $ 47,309 $ 45,896 $ 10,819 $ 45,462 $ 43,894 $ 6,395
============= ============= ============= ============= ============= =============
SIX MONTHS ENDED JUNE 30:
Protective products:
Fleet trucking $ 62,107 $ 52,258 $ 13,002 $ 64,269 $ 54,736 $ 10,169
Reinsurance assumed 12,653 13,913 4,418 6,151 7,136 2,853
SAGAMORE PRODUCTS:
Private passenger automobile 14,687 16,947 1,425 20,449 20,278 1,817
Small fleet trucking 11,031 8,189 163 13,545 6,373 (442)
All other (68) 37 363 (15) 227 (77)
------------- ------------- ------------- ------------- ------------- -------------
Totals $100,410 $ 91,344 $ 19,371 $104,399 $ 88,750 $ 14,320
============= ============= ============= ============= ============= =============
8
NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(7) REPORTABLE SEGMENTS - RECONCILIATION TO CONSOLIDATED REVENUE AND
CONSOLIDATED PROFIT OR LOSS: The following tables are reconciliations of
reportable segment revenues and profit or loss to the Company's consolidated
revenue and income before federal income taxes, respectively.
Three Months Ended Six Months Ended
June 30 June 30
2007 2006 2007 2006
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REVENUE:
Net premium earned and fee income $ 45,896 $ 43,894 $ 91,344 $ 88,750
Net investment income 4,882 4,736 9,728 9,295
Net gains (losses) on investments 8,772 (1,135) 9,246 5,879
Other 66 117 205 343
-------------- -------------- -------------- --------------
Total consolidated revenue $ 59,616 $ 47,612 $110,523 $104,267
============== ============== ============== ==============
PROFIT:
Segment profit $10,819 $ 6,395 $ 19,371 $ 14,320
Net investment income 4,882 4,736 9,728 9,295
Net gains (losses) on investments 8,772 (1,135) 9,246 5,879
Corporate expenses (2,912) (2,514) (5,615) (5,083)
-------------- -------------- -------------- --------------
Income before federal income taxes $ 21,561 $ 7,482 $ 32,730 $ 24,411
============== ============== ============== ==============
Management does not identify or allocate assets to reportable segments when
evaluating segment performance and depreciation expense is not material for any
of the reportable segments.
(8) LOANS TO EMPLOYEES: In 2000, 2001 and 2002 the Company provided loans to
certain employees for the sole purpose of purchasing the Company's Class B
common stock in the open market. $7,260 of such full-recourse loans were issued
and $2,180 remain outstanding at June 30, 2007 and carry interest rates of
between 4.75% and 6%, payable annually on the loan anniversary date. The
underlying securities serve as collateral for these loans, which must be repaid
no later than 10 years from the date of issue. No additional loans will be made
under this program.
(9) ACCOUNTING PRONOUNCEMENTS: In July 2006, the Financial Accounting Standards
Board issued FASB Interpretation No. 48, ACCOUNTING FOR UNCERTAINTY IN INCOME
TAXES - AN INTERPRETATION OF FASB STATEMENT 109 ("FIN 48"). Among other things,
FIN 48 creates a model to address uncertainty in tax positions and clarifies the
accounting for income taxes by prescribing a minimum recognition threshold that
all income tax positions must meet before being recognized in the financial
statements. In addition, FIN 48 requires expanded annual disclosures, including
a roll-forward of the beginning and ending aggregate unrecognized tax benefits
as well as specific detail related to tax uncertainties for which it is
reasonably possible the amount of unrecognized tax benefit will significantly
increase or decrease within twelve months. The Company adopted FIN 48 on January
1, 2007 with no adjustment necessary to beginning retained earnings. The total
amount of unrecognized tax benefits from uncertain tax positions at January 1,
2007 was $10.3 million and would have no impact on the Company's effective tax
rate. There were no material changes to the amount recorded for unrecognized tax
benefits from uncertain tax positions during the three months ended June 30,
2007.
The Company recognizes accrued interest and penalties, if any, related to
unrecognized tax benefits in income tax expense and changes in such accruals
would impact the Company's effective tax rate. Amounts accrued for the payment
of interest at June 30, 2007 and December 31, 2006 were not material.
The Company's 2005 and 2006 tax years remain subject to examination by the IRS.
9
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
- -------------------------------------------------------------------
AND RESULTS OF OPERATIONS
- -------------------------
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
The Company generally experiences positive cash flow from operations resulting
from the fact that premiums are collected on insurance policies in advance of
the disbursement of funds in payment of claims. Operating costs of the
property/casualty insurance subsidiaries, other than loss and loss expense
payments and commissions paid to related agency companies, generally average
less than 30% of premiums earned and the remaining amount is available for
investment for varying periods of time pending the settlement of claims relating
to the insurance coverage provided. The Company's cash flow relating to premiums
is significantly affected by reinsurance programs in effect from time-to-time
whereby the Company cedes both premium and risk to other insurance and
reinsurance companies. These programs vary significantly among products and
overall premium ceded rates, net of ceding commission allowances, have generally
decreased since 2001, as Protective Insurance Company has accepted more net risk
under the terms of annual reinsurance treaty renewals. For the six months ended
June 30, 2007, the Company experienced positive cash flow from operations
totaling $17.5 million and compares to $18.7 million generated during the first
half of 2006. The $1.2 million drop in cash flow from the 2006 period is due
primarily to the timing of receipt of reinsurance recoverable on paid claims.
Adjusted for this single item, cash flow from operations increased by $2.6
million, or 16%, in comparison to the prior year period.
For several years, the Company's investment philosophy has emphasized the
purchase of relatively short-term instruments with maximum quality and
liquidity. The average life of the Company's fixed income (bond and short-term
investment) portfolio was 3.4 years at June 30, 2007, up slightly from the prior
year end but still short relative to the Company's liability duration.
Financing activity, other than the payment of dividends to shareholders, is
generally not significant for the Company. Dividends paid during the six months
ended June 30, 2007 totaled $10.6 million and included extra dividends ($.20 per
share) totaling $3.0 million during the first quarter. At $.25 per share, the
quarterly regular dividend commitment for the Company is currently $3.8 million.
The Company's assets at June 30, 2007 included $43.0 million in investments
classified as cash or cash equivalents that were readily convertible to cash
without significant market penalty. An additional $162.4 million of fixed
maturity and short-term investments will mature within the twelve-month period
following June 30, 2007. The Company believes that these liquid investments are
more than sufficient to provide for projected claim payments and operating cost
demands even before consideration of current positive cash flows.
Consolidated shareholders' equity is composed largely of GAAP shareholder's
equity of the insurance subsidiaries. As such, there are statutory restrictions
on the transfer of portions of this equity to the parent holding company. At
June 30, 2007, $42.4 million may be transferred by dividend or loan to the
parent company during the remainder of 2007 without approval by, or prior
notification to, regulatory authorities. An additional $251.9 million of
shareholder's equity of the insurance subsidiaries could, theoretically, be
advanced or loaned to the parent holding company with prior notification to, and
approval from, regulatory authorities, although it is unlikely that transfers of
this size would be practical. The Company believes that these restrictions pose
no material liquidity concerns to the Company. The financial strength and
10
stability of the subsidiaries would permit ready access by the parent company to
short-term and long-term sources of credit. The parent company had cash and
marketable securities valued at $27.8 million at June 30, 2007.
The Company's annualized premium writing to surplus ratio for the first half of
2007 was approximately 37%. Regulatory guidelines generally allow for writings
of at least 200% of surplus. Accordingly, the Company could increase premium
writings significantly with no need to raise additional capital. Further, the
Insurance Subsidiaries' individual capital levels are several times higher than
the minimum amounts designated by the National Association of Insurance
Commissioners.
RESULTS OF OPERATIONS
---------------------
COMPARISONS OF SECOND QUARTER, 2007 TO SECOND QUARTER, 2006
-----------------------------------------------------------
Net premiums earned during the second quarter of 2007 increased $2.7 million
(6%) as compared to the same period of 2006. The Company's independent
contractor, voluntary reinsurance assumed and small fleet products reported
significant increases of $3.8 million (30%), $3.7 million (112%) and $.7 million
(20%), respectively. The higher premium from reinsurance assumed is associated
with the Company's affiliation with Paladin Catastrophe Management which
produced $3.7 million in premium during the second quarter. Increases in
independent contractor and small fleet premiums continued the pattern
experienced throughout 2006 and the first quarter of 2007. These increases were
partially offset by decreases in the Company's large fleet excess and private
passenger automobile products of $3.7 million (36%) and $1.6 million (18%),
respectively, each impacted by competitive market conditions. NOTE: THE
INDEPENDENT CONTRACTOR AND LARGE FLEET EXCESS PRODUCTS ARE INCLUDED IN THE FLEET
TRUCKING SEGMENT.
Direct premiums written and assumed during the second quarter of 2007 totaled
$47.3 million, a 4% increase from the $45.5 million reported a year earlier with
the higher premium concentrated in the independent contractor and reinsurance
assumed products, as discussed in the previous paragraph. Premium ceded to
reinsurers averaged 17.2% of direct premium production for the current quarter
compared to 12.6% a year earlier. The increase in the ceding rate reflects a
higher concentration of premium volume during 2007 in products which are more
heavily reinsured rather than reinsurance rate increases.
Net investment income, before tax, during the second quarter of 2007 was 3%
higher than the second quarter of 2006 due to increases in yields for all
investment categories. The impact of the higher yields was somewhat diminished
by a 4% drop in average invested assets. Overall after tax yields increased by
13% to 3.4%, as municipal bonds comprised a larger portion of the Company's
fixed income portfolio.
The second quarter 2007 net investment gains of $8.8 million were primarily the
result of gains from limited partnership investments and equity securities of
$7.7 million and $1.1 million, respectively. The limited partnership gains were
concentrated in our investment in a limited partnership which invests
exclusively in India. The second quarter 2006 net investment loss of $1.1
million included $2.3 million in losses from limited partnerships. See footnote
3 to the enclosed financial statements for a more detailed discussion regarding
the accounting policies and the net gains or losses reported for the Company's
investments in limited partnerships.
11
Losses and loss expenses incurred during the second quarter of 2007 were $3.2
million lower than that experienced during the second quarter of 2006. This
decrease is principally the result of approximately $5.4 million of favorable
developments on prior year accidents during the 2007 second quarter when
compared to the prior year period when reserve development savings were near
zero. Loss ratios for each of the Company's major product lines were as follows:
2007 2006
-------- --------
Fleet trucking 52.4% 64.9%
Private passenger automobile 68.2 65.5
Small fleet trucking 58.2 78.8
Voluntary reinsurance assumed 49.0 56.0
All lines 54.7 65.7
Other operating expenses for the second quarter of 2007 increased $1.1 million
(9%) from the second quarter of 2006. This increase was primarily attributable
to commissions on independent contractor business produced by outside agents as
well as commissions associated with the doubling of the Company's book of
reinsurance assumed business. Ceding allowances were immaterial in both periods.
The ratio of consolidated other operating expenses to operating revenue
(adjusted for investment gains) was 26.7% during the second quarter of 2007
compared to 25.5% for the 2006 second quarter with the increase resulting
directly from the commission increases previously discussed.
The effective federal tax rate for consolidated operations for the second
quarter of 2007 was 31.4% and is less than the statutory rate primarily because
of tax exempt investment income.
As a result of the factors mentioned above, net income increased $9.4 million
(172.6%) during the second quarter of 2007 as compared with the 2006 second
quarter.
COMPARISONS OF SIX MONTHS ENDED JUNE 30, 2007 TO
------------------------------------------------
SIX MONTHS ENDED JUNE 30, 2006
------------------------------
Net premiums earned during the first six months of 2007 increased $3.6 million
(4%) as compared to the same period of 2006. The increase is due primarily to
increases in premiums from the Company's reinsurance assumed, small fleet
trucking and independent contractor programs of 106%, 33% and 25%, respectively.
Partially offsetting this increase were decreases in premiums from the Company's
large fleet excess and private passenger automobile programs of 39% and 16%,
respectively, resulting from competitive market conditions.
Direct premiums written and assumed during the first half of 2007 totaled $100.4
million, a 4% decrease from the $104.4 million reported a year earlier. This
decrease was due primarily to decreases in large fleet excess, private passenger
automobile and small fleet trucking premiums and was partially offset by
increases in premium writings from the Company's independent contractor and
reinsurance assumed products. Premium ceded to reinsurers averaged 14.9% of
direct premium production for the current period compared to 13.2% a year
earlier.
Net investment income, before tax, was 5% higher, during the first half of 2007,
than the 2006 period for the same reasons as indicated in the quarterly
comparison above. Overall pre-tax and after tax yields were higher during the
current period while average invested funds decreased 4% from the prior year,
largely resulting from cash dividends paid to shareholders.
12
The net gain on investments of $9.2 million for the first six months of 2007
consists of net gains on limited partnership investments and equity securities
of $6.8 million and $2.8 million, respectively, and was partially offset by $.4
million in losses on fixed maturity investments. The gain from limited
partnerships includes both realized and unrealized net income, as reported by
the general partners. For the six months, we have estimated that realized and
unrealized gains totaled $3.9 million and $2.9 million, respectively. See
footnote 3 to the enclosed financial statements for a more detailed discussion
regarding the accounting policies and the net gains or losses reported for the
Company's investments in limited partnerships.
Losses and loss expenses incurred during the first six months of 2007 decreased
$5.3 million from the first six months of 2006, with the lower losses composed
almost entirely of more favorable developments on prior year accidents, as
previously discussed. Loss and loss expense ratios for the comparative six-month
periods were as follows:
2007 2006
-------- --------
Fleet trucking 58.8% 70.0%
Private passenger automobile 65.1 62.5
Small fleet trucking 57.0 74.4
Voluntary reinsurance assumed 48.7 45.4
All lines 57.7 66.4
Other operating expenses increased $3.2 million (14%) during the first six
months of 2007 compared to the same period of 2006. The increase in expenses is
due primarily to non-affiliated agent commissions on independent contractor
business and reinsurance assumed, lower ceding commissions and the fact that the
first quarter of 2006 included the recovery of $.9 million of previously written
off reinsurance bad debts which was recorded as expense offset. The ratio of
other operating expenses to total operating revenue (adjusted for investment
gains) was 26.1% for 2007 compared to 23.6% for 2006 for the reasons mentioned.
The effective federal tax rate for consolidated operations for the first six
months of 2007 was 29.7% and is less than the statutory rate primarily because
of tax exempt investment income.
As a result of the factors mentioned above, net income increased $6.0 million
(35.4%) during the first half of 2007 as compared with the 2006 period.
FORWARD-LOOKING INFORMATION
---------------------------
Any forward-looking statements in this report, including without limitation,
statements relating to the Company's plans, strategies, objectives,
expectations, intentions and adequacy of resources, are made pursuant to the
safe harbor provisions of the Private Securities Litigation Reform Act of 1995.
Investors are cautioned that such forward-looking statements involve risks and
uncertainties including without limitation the following: (i) the Company's
plans, strategies, objectives, expectations and intentions are subject to change
at any time at the discretion of the Company; (ii) the Company's business is
highly competitive and the entrance of new competitors into or the expansion of
the operations by existing competitors in the Company's markets and other
changes in the market for insurance products could adversely affect the
Company's plans and results of operations; (iii) other risks and uncertainties
indicated from time to time in the Company's filings with the Securities and
Exchange Commission; and (iv) other risks and factors which may be beyond the
control or foresight of the Company.
13
CRITICAL ACCOUNTING POLICIES
----------------------------
There have been no changes in the Company's critical accounting policies as
disclosed in the Form 10-K filed for the year ended December 31, 2006
CONCENTRATIONS OF CREDIT RISK
-----------------------------
The insurance subsidiaries cede portions of their gross premiums to numerous
reinsurers under quota share and excess of loss treaties as well as facultative
placements. These reinsurers assume commensurate portions of the risk of loss
covered by the contracts. As losses are reported and reserved, portions of the
gross losses attributable to reinsurers are established as receivable assets and
losses incurred are reduced. At June 30, 2007, amounts due from reinsurers on
paid and unpaid losses, including provisions for incurred but not reported
losses, are estimated to total approximately $153 million. Included in this
total are case basis and estimated IBNR losses of approximately $12.9 million
due from Converium Insurance (North America) Inc. and $3.0 million due from PMA
Re., each of which have reported substantial reserve strengthening and/or
impairment of assets which have negatively affected their reported financial
positions. All amounts due from these reinsurers on paid claims are current as
of June 30, 2007 and the Company has no information at this time to indicate
that all obligations of these reinsurers will not be met.
At June 30, 2007, limited partnership investments includes approximately $44.9
million consisting of three partnerships which are managed by organizations in
which certain of the Company's directors are officers, directors, general
partners or owners. Each of these investments contains profit sharing agreements
to the affiliated organizations.
ITEM 4. CONTROLS AND PROCEDURES
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(a) The Corporation's Chief Executive Officer and Chief Financial Officer
evaluated the disclosure controls and procedures (as defined under Rules
13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended) as
of the end of the period covered by this report. Based upon that evaluation, the
Chief Executive Officer and Chief Financial Officer have concluded that the
Corporation's disclosure controls and procedures are effective.
(b) There were no significant changes in the Corporation's internal control over
financial reporting identified in connection with the foregoing evaluation that
occurred during the Corporation's last fiscal quarter that have affected, or are
reasonably likely to materially affect, the Corporation's internal control over
financial reporting.
14
PART II - OTHER INFORMATION
ITEM 5 OTHER INFORMATION
- ------------------------
During June, 2007, the Company renewed its reinsurance treaties covering the
fleet trucking product under terms similar to the expiring agreements.
ITEM 6 (a) EXHIBITS
- --------------------
NUMBER AND CAPTION FROM EXHIBIT
TABLE OF REGULATION S-K ITEM 601 EXHIBIT NO.
- -------------------------------- ------------------------------
(11) Statement regarding computation EXHIBIT 11 -
of per share earnings Computation of Per Share
Earnings
(31.1) Certification of CEO EXHIBIT 31.1
pursuant to Section 302 of the Certification of CEO
Sarbanes-Oxley Act of 2002
(31.2) Certification of CFO EXHIBIT 31.2
pursuant to Section 302 of the Certification of CFO
Sarbanes-Oxley Act of 2002
(32.1) Certification of CEO EXHIBIT 32.1
pursuant to 18 U.S.C. 1350, as Certification of CEO
adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002
(32.2) Certification of CFO EXHIBIT 32.2
pursuant to 18 U.S.C. 1350, as Certification of CFO
adopted pursuant to Section 906
of the Sarbanes-Oxley Act of 2002
ITEM 6 (b) REPORTS ON FORM 8-K
- -------------------------------
A Form 8-K was filed by the registrant on May 1, 2007 regarding its earnings
announcement for the first quarter of 2007.
15
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BALDWIN & LYONS, INC.
Date AUGUST 8, 2007 By /S/ GARY W. MILLER
----------------- ----------------------------------
Gary W. Miller, Chairman and CEO
Date AUGUST 8, 2007 By /S/ G. PATRICK CORYDON
----------------- ----------------------------------
G. Patrick Corydon,
Senior Vice President - Finance
(Principal Financial and
Accounting Officer)
16
BALDWIN & LYONS, INC.
Form 10-Q for the fiscal quarter
ended June 30, 2007
INDEX TO EXHIBITS
Begins on sequential
page number of Form
Exhibit Number 10-Q
-------------- -----------------------------
EXHIBIT 11 Filed herewith electronically
Computation of per share earnings
EXHIBIT 31.1 Filed herewith electronically
Certification of CEO
pursuant to Section 302 of the
Sarbanes-Oxley Act
EXHIBIT 31.2 Filed herewith electronically
Certification of CFO
pursuant to Section 302 of the
Sarbanes-Oxley Act
EXHIBIT 32.1 Filed herewith electronically
Certification of CEO
pursuant to 18 U.S.C. 1350,
as adopted pursuant to Section
906 of the Sarbanes-Oxley Act
EXHIBIT 32.2 Filed herewith electronically
Certification of CFO
pursuant to 18 U.S.C. 1350,
as adopted pursuant to Section
906 of the Sarbanes-Oxley Act