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
September 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
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(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 November 8, 2007:
TITLE OF CLASS NUMBER OF SHARES OUTSTANDING
Common Stock, No Par Value:
Class A (voting) 2,650,059
Class B (nonvoting) 12,572,555
Index to Exhibits located on page 16.
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PART I - FINANCIAL INFORMATION
ITEM 1 FINANCIAL STATEMENTS
BALDWIN & LYONS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
SEPTEMBER 30 December 31
2007 2006
------------------- ------------------
ASSETS
Investments:
Fixed maturities $ 365,984 $ 338,466
Equity securities 129,357 129,817
Limited partnerships 74,212 57,313
Short-term 35,258 59,325
------------------- ------------------
604,811 584,921
Cash and cash equivalents 37,031 35,490
Accounts receivable 34,033 37,994
Reinsurance recoverable 138,099 163,426
Notes receivable from employees 2,208 2,343
Other assets 28,271 27,932
Current federal income taxes - 1,613
------------------- ------------------
$ 844,453 $ 853,719
=================== ==================
LIABILITIES AND SHAREHOLDERS' EQUITY
Reserves for losses and loss expenses $ 378,397 $ 409,412
Reserves for unearned premiums 26,577 32,145
Accounts payable and accrued expenses 39,848 35,681
Current federal income taxes 9,952 -
Deferred federal income taxes 12,184 18,854
------------------- ------------------
466,957 496,092
Shareholders' equity:
Common stock-no par value 650 646
Additional paid-in capital 47,488 45,692
Unrealized net gains on investments 49,222 47,229
Retained earnings 280,136 264,060
------------------- ------------------
377,496 357,627
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$ 844,453 $ 853,719
=================== ==================
See notes to condensed consolidated financial statements.
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BALDWIN & LYONS, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Three Months Ended Nine Months Ended
September 30 September 30
----------------------------------- ---------------------------------
2007 2006 2007 2006
---------------- --------------- -------------- --------------
REVENUES
Net premiums earned $ 44,601 $ 42,333 $ 133,593 $ 127,714
Net investment income 5,040 5,140 14,768 14,435
Net gains on investments 6,421 2,958 15,667 8,837
Commissions and other income 1,214 1,418 3,771 5,130
---------------- -------------- -------------- ---------------
57,276 51,849 167,799 156,116
EXPENSES
Losses and loss expenses incurred 24,949 25,837 76,334 82,493
Other operating expenses 15,555 11,931 41,963 35,131
---------------- --------------- -------------- --------------
40,504 37,768 118,297 117,624
---------------- -------------- -------------- ---------------
INCOME BEFORE FEDERAL INCOME TAXES 16,772 14,081 49,502 38,492
Federal income taxes 5,058 4,202 14,786 11,630
---------------- --------------- -------------- --------------
NET INCOME $ 11,714 $ 9,879 $ 34,717 $ 26,862
================ =============== ============== ==============
PER SHARE DATA:
BASIC EARNINGS $ .77 $ .65 $ 2.29 $ 1.79
================ =============== ============== ==============
DILUTED EARNINGS $ .77 $ .65 $ 2.29 $ 1.79
================ =============== ============== ==============
DIVIDENDS PAID TO SHAREHOLDERS $ .60 $ .25 $ 1.30 $ 2.10
================ =============== ============== ==============
RECONCILIATION OF SHARES OUTSTANDING:
Average shares outstanding - basic 15,189 15,108 15,158 14,965
Dilutive effect of options outstanding 12 22 17 48
---------------- --------------- -------------- --------------
Average shares outstanding - diluted 15,201 15,130 15,175 15,013
================ =============== ============== ==============
See notes to condensed consolidated financial statements.
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BALDWIN & LYONS, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
Nine Months Ended
September 30
2007 2006
--------------- ---------------
Net cash provided by operating activities $ 21,633 $ 14,628
Investing activities:
Purchases of long-term investments (202,458) (191,391)
Proceeds from sales or maturities
of long-term investments 178,608 138,776
Net sales (purchases) of short-term investments 24,067 (18,065)
Other investing activities (2,374) 1,470
--------------- ---------------
Net cash provided by (used in) investing activities (2,157) (69,210)
Financing activities:
Dividends paid to shareholders (19,734) (31,624)
Cost of treasury stock - (401)
Proceeds from sales of common stock 1,799 6,238
--------------- ---------------
Net cash used in financing activities (17,935) (25,787)
--------------- ---------------
Increase (decrease) in cash and cash equivalents 1,541 (80,369)
Cash and cash equivalents at beginning of period 35,490 126,551
--------------- ---------------
Cash and cash equivalents at end of period $ 37,031 $ 46,182
=============== ===============
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.
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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 realized and unrealized 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 NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
------------------------------ -----------------------------
2007 2006 2007 2006
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Realized net gains on the disposal of securities $ 377 $ 449 $ 1,894 $ 4,007
Equity in earnings of limited partnership
investments (realized and unrealized) 6,350 3,089 13,174 5,505
Impairment:
Write-downs based upon objective criteria (457) (580) (520) (1,343)
Recovery of prior write-downs
upon sale or disposal 151 - 1,119 668
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Totals $ 6,421 $ 2,958 $ 15,667 $ 8,837
============= ============= ============= ============
The net gains from limited partnerships for the quarter and year-to-date ending
September 30, 2007 include an estimated $4.7 million and $7.6 million,
respectively, of unrealized gains reported to the Company as part of the
operations of the various limited partnerships. Shareholders' equity at
September 30, 2007 includes approximately $23.5 million, net of deferred federal
income taxes, of earnings undistributed by limited partnerships.
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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 September 30:
Premiums ceded to reinsurers $ 9,589 $ 5,961
Losses and loss expenses
ceded to reinsurers (9,503) 7,472
Commissions from reinsurers 589 177
Nine months ended September 30:
Premiums ceded to reinsurers 22,682 18,969
Losses and loss expenses
ceded to reinsurers 583 12,587
Commissions from reinsurers 1,231 988
Negative losses and loss expenses ceded for the current quarter include savings
recognized on the closing of several large prior year claims in which
reinsurance participation was significant.
(5) COMPREHENSIVE INCOME OR LOSS: Total realized and unrealized income for the
quarter ended September 30, 2007 was $11,255 and compares to total realized and
unrealized income of $14,473 for the quarter ended September 30, 2006. For the
nine months ended September 30, 2007, total realized and unrealized income was
$37,803 and compares to total realized and unrealized income of $30,116 for the
nine months ended September 30, 2006.
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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. 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 reinsurance assumed include transactions related to
certain inter-segment reinsurance agreements.
2007 2006
--------------------------------------- ------------------------------------------
DIRECT Direct
AND NET 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 SEPTEMBER 30:
PROTECTIVE PRODUCTS:
Fleet trucking $ 34,037 $ 26,188 $ 7,193 $ 30,561 $ 26,695 $ 6,343
Reinsurance assumed 7,720 8,185 915 3,322 3,517 1,931
SAGAMORE PRODUCTS:
Private passenger automobile 4,640 7,448 570 6,965 9,364 419
Small fleet trucking 3,847 3,881 57 6,917 3,945 (22)
All other 38 47 (80) 109 140 (255)
---------- ------------ ------------ ------------ ------------ -----------
Totals $ 50,282 $ 45,749 $ 8,655 $ 47,874 $ 43,661 $ 8,416
========== ============ ============ ============ ============ ===========
NINE MONTHS ENDED SEPTEMBER 30:
PROTECTIVE PRODUCTS:
Fleet trucking 96,143 $ 78,448 $ 20,195 $ 94,830 $ 81,431 $ 16,513
Reinsurance assumed 20,373 22,099 5,333 9,473 10,653 4,784
SAGAMORE PRODUCTS:
Private passenger automobile 19,327 24,394 1,991 27,414 29,643 2,237
Small fleet trucking 14,878 12,070 221 20,462 10,318 (464)
All other (28) 81 285 94 367 (334)
---------- ------------ ------------ ------------ ------------ -----------
Totals $150,693 $137,092 $ 28,025 $152,273 $132,412 $ 22,736
========== ============ ============ ============ ============ ===========
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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 Nine Months Ended
September 30 September 30
2007 2006 2007 2006
--------------- --------------- --------------- ---------------
REVENUE:
Net premium earned and fee income $ 45,749 $ 43,661 $ 137,092 $ 132,412
Net investment income 5,040 5,140 14,768 14,435
Net gains on investments 6,421 2,958 15,667 8,837
Other 66 90 272 432
--------------- --------------- --------------- ---------------
Total consolidated revenue $ 57,276 $ 51,849 $ 167,799 $ 156,116
=============== =============== =============== ===============
PROFIT:
Segment profit $ 8,655 $ 8,416 $ 28,025 $ 22,736
Net investment income 5,040 5,140 14,768 14,435
Net gains on investments 6,421 2,958 15,667 8,837
Corporate expenses (3,344) (2,433) (8,958) (7,516)
--------------- --------------- --------------- ---------------
Income before federal income taxes $ 16,772 $ 14,081 $ 49,502 $ 38,492
=============== =============== =============== ===============
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 $2,208 remain outstanding at September 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 September
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
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effective tax rate. Amounts accrued for the payment of interest at
September 30, 2007 and December 31, 2006 were not material.
The Company's 2005 and 2006 tax years remain subject to examination by the IRS.
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 first nine months
ended September 30, 2007, the Company experienced positive cash flow from
operations totaling $21.6 million which compares to $14.6 million generated
during the first nine months of 2006. The $7.0 million increase in cash flow
from the 2007 period is due primarily to the 2006 period experiencing a cash
usage for refunds of premiums related to retrospectively rated policies
partially offset by increased loss payment activity in 2007, including the
timing of reinsurance loss recoveries.
For several years, the Company's investment philosophy has emphasized the
purchase of relatively short-term instruments with maximum quality and
liquidity. The average expected life and contractual life of the Company's fixed
income (bond and short-term investment) portfolio was 3.1 and 4.1 years,
respectively at September 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 nine months
ended September 30, 2007 totaled $19.7 million and included extra dividends
totaling $8.3 million. The fourth quarter 2007 regular declared dividend of $.25
per share and the fourth quarter extra declared dividend commitment of $.10 per
share for the Company in total is $5.3 million.
The Company's assets at September 30, 2007 included $37.0 million in investments
classified as cash or cash equivalents that were readily convertible to cash
without significant market penalty. An additional $105.6 million of fixed
maturity and short-term investments will mature within the twelve-month period
following September 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
September 30, 2007, $35.0 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 $257.5 million of
shareholder's equity of the insurance subsidiaries could, theoretically, be
advanced or loaned to the parent holding
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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 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 $19.1 million at September 30, 2007.
The Company's annualized premium writing to surplus ratio for the first nine
months of 2007 was approximately 36%. 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 THIRD QUARTER, 2007 TO THIRD QUARTER, 2006
Net premiums earned during the third quarter of 2007 increased $2.3 million (5%)
as compared to the same period of 2006. The Company's reinsurance assumed and
independent contractor products reported significant increases of $4.7 million
(163%) and $2.6 million (18.4%), respectively. The higher premium from
reinsurance assumed is associated with the Company's affiliation with Paladin
Catastrophe Management which produced $4.2 million in premium during the third
quarter. Increases in independent contractor premiums continued the pattern
experienced throughout 2006 and the first six months of 2007. These increases
were partially offset by decreases in the Company's large fleet excess and
private passenger automobile products of $3.2 million (32%) and $1.7 million
(20%), respectively, each impacted by competitive market conditions. NOTE: THE
INDEPENDENT CONTRACTOR AND LARGE FLEET EXCESS PRODUCTS ARE BOTH COMPONENTS OF
THE FLEET TRUCKING SEGMENT.
Direct premiums written and assumed during the third quarter of 2007 totaled
$50.3 million, a 5% increase from the $47.9 million reported a year earlier with
the higher premium concentrated in the reinsurance assumed and independent
contractor products, as discussed in the previous paragraph. Premium ceded to
reinsurers averaged 22.6% of direct premium production for the current quarter
compared to 13.4% 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 and reinsurance treaty renewals effective June 3, 2007 whereby
Protective is ceding a larger share of direct premium to reinsurers on fleet
trucking business.
Net investment income, before tax, during the third quarter of 2007 was 2% lower
than the third quarter of 2006 primarily due to the redeployment of invested
assets to municipal bonds carrying lower pre-tax, but higher after tax yields.
After tax investment income increased 5% when compared to the prior year third
quarter. Average invested funds decreased approximately 3% compared to the third
quarter of 2006 primarily due to cash dividends paid to shareholders.
The third quarter 2007 net investment gains of $6.4 million and the third
quarter 2006 net investment gains of $3.0 million were primarily the result of
gains from limited partnership investments. The limited partnership gains were
primarily concentrated in our investment in a limited partnership which invests
exclusively in India. 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.
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Losses and loss expenses incurred during the third quarter of 2007 were $.9
million lower than that experienced during the third quarter of 2006. This
decrease is principally the result of approximately $11 million of favorable
developments on prior accident years during the 2007 third quarter, inclusive of
savings related to retrospective policies and reinsurance assumed, compared to
the prior year period when reserve development savings were approximately $7.8
million. Current period losses, including a provision for incurred but not
reported losses were approximately 7% higher than the 2006 period, primarily
from reinsurance assumed losses associated with Midwest U.S. tornado and hail
activity. Loss ratios for each of the Company's major product lines were as
follows:
2007 2006
------- ------
Fleet trucking 49.1% 62.2%
Private passenger automobile 66.1 69.5
Small fleet trucking 59.2 60.4
Reinsurance assumed 66.6 26.0
All lines 56.0 61.0
Other operating expenses for the third quarter of 2007 increased $3.6 million
(30%) from the third 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 30.6% during the third quarter of 2007
compared to 24.4% for the 2006 third quarter with the increase resulting
directly from the commission increases previously discussed.
The effective federal tax rate for consolidated operations for the third quarter
of 2007 was 30.1% 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 $1.8 million
(19%) during the third quarter of 2007 as compared with the 2006 third quarter.
COMPARISONS OF NINE MONTHS ENDED SEPTEMBER 30, 2007 TO
NINE MONTHS ENDED SEPTEMBER 30, 2006
Net premiums earned during the first nine months of 2007 increased $5.9 million
(5%) as compared to the same period of 2006. The increase is due primarily to
increases in premiums from the Company's reinsurance assumed, independent
contractor and small fleet trucking programs of 124%, 23% and, 19% respectively.
The higher premium from reinsurance assumed is associated with the Company's
affiliation with Paladin Catastrophe Management which produced $10.6 million in
premium during the first nine months of 2007. Partially offsetting this increase
were decreases in premiums from the Company's large fleet excess and private
passenger automobile programs of 37% and 18%, respectively, resulting from
competitive market conditions.
Direct premiums written and assumed during the first nine months of 2007 totaled
$150.7 million, a 1% decrease from the $152.3 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 reinsurance assumed and
independent contractor products. Premium ceded to reinsurers averaged 17.4% of
direct premium production for the current period compared to 13.3% a year
earlier.
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Net investment income, before tax, was 2.3% higher, during the first nine months
of 2007, than the 2006 period due to increases in pre-tax yields for all
investment categories. The impact of the higher pre-tax yields was somewhat
diminished by a 4% drop in average invested assets. Average invested funds
decreased primarily due to cash dividends paid to shareholders. Net after tax
investment income, however, increased 9.4% during the 2007 period as the result
of increased use of municipal bonds, as discussed in the quarterly comparison.
The net gain on investments of $15.7 million for the first nine months of 2007
consists of net gains on limited partnership investments and equity securities
of $13.2 million and $2.9 million, respectively and was offset by $.4 million in
losses on fixed maturity investments. The limited partnership gains were
primarily concentrated in our investment in a limited partnership which invests
exclusively in India. The net gain from limited partnerships includes both
realized and unrealized net income, as reported by the general partners. For the
nine months, we have estimated that the limited partnership gains were comprised
of realized and unrealized gains of $5.6 million and $7.6 million, respectively.
The net gain on investments of $8.8 million for the first nine months of 2006
consists of net gains on limited partnership investments and equity securities
of $5.5 million and $3.9 million, respectively, and was partially offset by $.6
million in losses on fixed maturity investments. 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 nine months of 2007 decreased
$6.2 million from the first nine months of 2006, with the lower losses resulting
from favorable developments on prior accident years totaling $20.7 million,
including savings on retrospectively rated policies and reinsurance assumed,
compared to $14.4 million in savings recognized in the first nine months of
2006. Loss and loss expense ratios for the comparative nine-month periods were
as follows:
2007 2006
------ ------
Fleet trucking 55.6% 67.4%
Private passenger automobile 65.4 64.7
Small fleet trucking 57.6 69.0
Reinsurance assumed 55.3 39.0
All lines 57.1 64.6
Other operating expenses increased $6.8 million (19%) during the first nine
months of 2007 compared to the same period of 2006. The increase in expenses is
due primarily to increased non-affiliated agent commissions on independent
contractor business and reinsurance assumed and the fact that the 2006 period
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 27.6%
for 2007 compared to 23.9% for 2006 for the reasons mentioned.
The effective federal tax rate for consolidated operations for the first nine
months of 2007 was 29.9% 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 $7.9 million
(29%) during the first nine months 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
13
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.
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 September 30, 2007, amounts due from reinsurers
on paid and unpaid losses, including provisions for incurred but not reported
losses, are estimated to total approximately $138 million. Included in this
total are case basis and estimated IBNR losses of approximately $12.7 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 September 30, 2007 and the Company has no information at this time to
indicate that all obligations of these reinsurers will not be met.
At September 30, 2007, limited partnership investments include approximately
$49.5 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.
PART II - OTHER INFORMATION
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
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A Form 8-K was filed by the registrant on August 6, 2007 regarding its earnings
announcement for the second 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 November 8, 2007 By /s/ GARY W. MILLER
------------------------ --------------------------------
Gary W. Miller, Chairman and CEO
Date November 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 September 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