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
------------------------------------------------------
For Quarter Ended Commission file number
September 30, 2004 0-5534
BALDWIN & LYONS, INC.
(Exact name of registrant as specified in its charter)
INDIANA 35-0160330
------- ----------
(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
--------------
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 an accelerated filer (as
defined in Rule 12b-2 of the Act).
Yes X No
----- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock as of November 4, 2004:
TITLE OF CLASS NUMBER OF SHARES OUTSTANDING
Common Stock, No Par Value:
Class A (voting) 2,666,666
Class B (nonvoting) 12,009,683
Index to Exhibits located on page 17.
2
PART I - FINANCIAL INFORMATION
ITEM 1 FINANCIAL STATEMENTS
- ----------------------------
BALDWIN & LYONS, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
SEPTEMBER 30 December 31
2004 2003
----------------- ----------------
ASSETS
Investments:
Fixed maturities $ 327,649 $ 321,193
Equity securities 127,558 130,139
Short-term and other 45,149 36,545
----------------- ----------------
500,356 487,877
Cash and cash equivalents 52,145 30,078
Accounts receivable 40,793 37,333
Reinsurance recoverable 219,440 185,457
Notes receivable from employees 3,220 4,828
Current federal income taxes 511 -
Other assets 17,695 17,634
----------------- ----------------
$ 834,160 $ 763,207
================= ================
LIABILITIES AND SHAREHOLDERS' EQUITY
Reserves for losses and loss expenses $ 407,724 $ 343,724
Reserves for unearned premiums 37,908 36,803
Accounts payable and accrued expenses 52,637 44,005
Current federal income taxes - 901
Deferred federal income taxes 9,171 13,200
----------------- ----------------
507,440 438,633
Shareholders' equity:
Common stock-no par value 625 623
Additional paid-in capital 35,982 35,419
Unrealized net gains on investments 38,430 44,837
Retained earnings 251,683 243,695
----------------- ----------------
326,720 324,574
----------------- ----------------
$ 834,160 $ 763,207
================= ================
Number of common and common
equivalent shares outstanding 14,739 14,752
Book value per outstanding share $22.17 $22.00
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 Nine Months Ended
September 30 September 30
------------------------------ ------------------------------
2004 2003 2004 2003
------------- ------------- ------------- -------------
REVENUES
Net premiums earned $ 44,384 $ 37,513 $126,284 $106,174
Net investment income 2,958 2,987 9,138 9,484
Realized net gains on investments 27 2,048 8,135 5,335
Other income 1,752 1,547 5,461 4,492
------------- ------------- ------------- -------------
49,121 44,095 149,018 125,485
EXPENSES
Losses and loss expenses incurred 36,923 24,411 91,904 68,822
Other operating expenses 7,286 7,694 23,095 22,822
------------- ------------- -------------
-------------
44,209 32,105 114,999 91,644
------------- ------------- ------------- -------------
INCOME BEFORE FEDERAL INCOME TAXES 4,912 11,990 34,019 33,841
Federal income taxes 1,452 3,868 10,796 10,886
------------- ------------- ------------- -------------
NET INCOME $ 3,460 $ 8,122 $23,223 $ 22,955
============= ============= ============= =============
PER SHARE DATA:
DILUTED EARNINGS $ .23 $ .55 $ 1.57 $ 1.56
============= ============= ============= =============
BASIC EARNINGS $ .24 $ .56 $ 1.59 $ 1.58
============= ============= ============= =============
DIVIDENDS PAID TO SHAREHOLDERS $ .15 $ .10 $ 1.05 $ .30
============= ============= ============= =============
RECONCILIATION OF SHARES OUTSTANDING:
Average shares outstanding - basic 14,641 14,558 14,623 14,557
Dilutive effect of options outstanding 144 184 172 141
------------- ------------- ------------- -------------
Average shares outstanding - diluted 14,785 14,742 14,795 14,698
============= ============= ============= =============
See notes to condensed consolidated financial statements.
4
BALDWIN & LYONS, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
Nine Months Ended
September 30
2004 2003
------------- -------------
Net cash provided by operating activities $ 47,177 $ 42,170
Investing activities:
Purchases of long-term investments (132,928) (166,364)
Proceeds from sales or maturities
of long-term investments 129,901 153,554
Net purchases of short-term investments (8,019) (14,489)
Decrease in notes receivable from employees 1,533 2,316
Other investing activities (627) (1,920)
------------- -------------
Net cash used in investing activities (10,140) (26,903)
Financing activities:
Dividends paid to shareholders (15,354) (4,369)
Repayment on line of credit - (7,500)
Proceeds from sales of common stock 384 5
------------- -------------
Net cash used in financing activities (14,970) (11,864)
------------- -------------
Increase in cash and cash equivalents 22,067 3,403
Cash and cash equivalents at beginning of period 30,078 41,699
------------- -------------
Cash and cash equivalents at end of period $52,145 $45,102
============= =============
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
10Q 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, 2004. Interim financial statements should be read in conjunction with
the Company's annual audited financial statements.
5
NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(2) REINSURANCE: The following table summarizes the Company's transactions with
reinsurers for the 2004 and 2003 comparative periods.
2004 2003
---------- -----------
Quarter ended September 30:
Premiums ceded to reinsurers $ 21,803 $ 19,000
Losses and loss expenses
ceded to reinsurers 23,465 18,795
Commissions from reinsurers 5,665 5,150
Nine months ended September 30:
Premiums ceded to reinsurers 62,688 54,090
Losses and loss expenses
ceded to reinsurers 71,583 61,077
Commissions from reinsurers 16,601 14,740
(3) COMPREHENSIVE INCOME OR LOSS: Total realized and unrealized income for the
quarter ended September 30, 2004 was $2,426 and compares to total realized and
unrealized income of $9,547 for the quarter ended September 30, 2003. For the
nine months ended September 30, 2004, total realized and unrealized income was
$16,935 and compares to total realized and unrealized income of $33,741 for the
nine months ended September 30, 2003.
6
NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(4) 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. In addition,
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 and, accordingly, segment profit presented here will
not agree with statutory underwriting gains for this segment which may be quoted
elsewhere in the Company's financial statements.
2004 2003
------------------------------------------- -------------------------------------------
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)
------------- ----------- ----------- ------------ ------------ ------------
THREE MONTHS ENDED SEPTEMBER 30:
PROTECTIVE PRODUCTS:
Fleet trucking $ 46,688 $ 27,689 $ 7,334 $ 37,803 $ 21,023 $ 8,241
Reinsurance assumed 1,842 2,195 (2,934) 2,993 2,881 607
SAGAMORE PRODUCTS:
Personal division 8,441 11,208 1,549 9,522 10,552 1,163
Commercial division:
Small fleet trucking 3,970 2,644 (33) 4,407 2,620 59
Workers' compensation 1,790 2,055 (1,440) 2,595 1,630 (313)
------------- ----------- ----------- ------------ ------------ ------------
Total Commercial division 5,760 4,699 (1,473) 7,002 4,250 (254)
All other 294 280 (227) 224 196 (202)
------------- ----------- ----------- ------------ ------------ ------------
Totals $ 63,025 $ 46,071 $ 4,249 $ 57,544 $ 38,902 $ 9,555
============= =========== =========== ============ ============ ============
NINE MONTHS ENDED SEPTEMBER 30:
PROTECTIVE PRODUCTS:
Fleet trucking $ 130,204 $ 74,606 $ 20,796 $ 108,290 $ 59,933 $ 23,279
Reinsurance assumed 6,678 8,183 729 8,602 8,711 1,590
SAGAMORE PRODUCTS:
Personal division 32,420 34,037 4,720 33,117 30,035 2,647
Commercial division:
Small fleet trucking 12,173 7,727 436 12,744 6,523 237
Workers' compensation 7,689 6,124 (2,110) 7,137 4,315 (792)
------------- ----------- ----------- ------------ ------------ ------------
Total Commercial division 19,862 13,851 (1,674) 19,881 10,838 (555)
All other 912 829 (414) 668 567 (258)
------------- ----------- ----------- ------------ ------------ ------------
Totals $ 190,076 $ 131,506 $ 24,157 $ 170,558 $110,084 $ 26,703
============= =========== =========== ============ ============ ============
7
NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(5) REPORTABLE SEGMENTS - RECONCILIATION TO CONSOLIDATED REVENUE AND
CONSOLIDATED PROFIT OR LOSS: The following tables are reconciliations of
reportable segment revenues and profits to the Company's consolidated revenue
and income before federal income taxes, respectively.
Three Months Ended Nine Months Ended
September 30 September 30
2004 2003 2004 2003
------------- -------------- -------------- --------------
REVENUE:
Net premium earned and fee income $ 46,071 $ 38,902 $ 131,506 $ 110,084
Net investment income 2,958 2,987 9,138 9,484
Realized net gains on investments 27 2,048 8,135 5,335
Other 65 158 239 582
------------- -------------- -------------- --------------
Total consolidated revenue $ 49,121 $ 44,095 $ 149,018 $ 125,485
============= ============== ============== ==============
PROFIT:
Segment profit $ 4,249 $ 9,555 $ 24,157 $ 26,703
Net investment income 2,958 2,987 9,138 9,484
Realized net gains on investments 27 2,048 8,135 5,335
Corporate expenses (2,322) (2,600) (7,411) (7,681)
------------- -------------- -------------- --------------
Income before federal income taxes $ 4,912 $ 11,990 $ 34,019 $ 33,841
============= ============== ============== ==============
(6) LOANS TO EMPLOYEES: In 2000, 2001 and 2002 the Company provided loans to
certain key 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 $3,220 remain outstanding at September 30, 2004 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.
(7) RECENTLY ISSUED ACCOUNTING STANDARDS: In October 2004, the Financial
Accounting Standards Board ("FASB") finalized the Statement of Financial
Accounting Standards No. 123R, SHARE-BASED PAYMENT, effective for public
companies for interim and annual periods beginning after June 15, 2005.
Statement No. 123R requires all companies to measure compensation cost for all
share-based payments (including employee stock options) at fair value.
Retroactive application of the requirements of FASB 123 to the beginning of the
fiscal year that includes the effective date is permitted, but not required. The
Corporation is currently evaluating the impact, the implementation strategy and
the related timing of implementation of FASB 123R on the consolidated financial
statements.
In March 2004, the FASB's Emerging Issues Task Force ("EITF") approved the
consensus reached on Issue No. 03-1, THE MEANING OF OTHER-THAN-TEMPORARY
IMPAIRMENT AND ITS APPLICATION TO CERTAIN INVESTMENTS. The objective of this
consensus is to provide guidance for identifying impaired investments. EITF 03-1
also provides new disclosure requirements for investments that are deemed to be
temporarily impaired. Originally, the accounting provisions of EITF 03-1 were
effective for all reporting periods beginning after June 15, 2004, while the
disclosure requirements are effective only for annual periods ending after June
15, 2004. In September 2004, the FASB issued two Staff Positions (FSP), FSP EITF
03-1-a and FSP EITF 03-1-1, which delayed the measurement and recognition
paragraphs of the consensus for further
8
discussion. The disclosure requirements remain effective as originally issued
under EITF 03-1 and have been adopted by the company. The Corporation has
evaluated the impact of the adoption of EITF 03-1, as written, and does not
believe the impact is significant to the Corporation's overall results of
operations or financial position at September 30, 2004. However, as currently
written, the consensus could have a significant impact on future results. The
Corporation will continue to monitor the developments of the FASB and EITF
regarding the measurement and recognition paragraphs of this consensus.
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
between 25% and 35% 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, reflective of the effect of the provisions of reinsurance
agreements currently in place. For the nine months ended September 30, 2004, the
Company experienced positive cash flow from operations totaling $47.2 million,
12% higher than the $42.2 million in positive cash flow generated during the
first nine months of 2003. Increased premium collections and sales of equity
security investments were primarily responsible for the improved cash flow this
year.
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 approximately 2.6 years at September 30, 2004 compared
to 2.8 years at December 31, 2003. The decrease in the average life resulted
from management's belief that meaningful long term interest rate increases are
imminent.
The Company's assets at September 30, 2004 included $52.1 million in investments
classified as short-term or cash equivalents that were readily convertible to
cash without significant market penalty. An additional $104.9 million of fixed
maturity investments will mature within the twelve-month period following
September 30, 2004. 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, 2004, $47.1 million may be transferred by dividend or loan to the
parent company without approval by, or notification to, regulatory authorities.
An additional $196.5 million of shareholder's equity of the insurance
subsidiaries may be advanced or loaned to the parent holding company with prior
notification to, and approval from, regulatory authorities. 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 $53.4 million at September
30, 2004.
10
The Company's annualized premium writing to surplus ratio for the first nine
months of 2004 was approximately 43%. Regulatory guidelines generally allow for
writings of 200% of surplus. Accordingly, the Company can continue to increase
premium writings significantly with no need to raise additional capital.
Further, the Insurance Subsidiaries' individual capital structures are several
times higher than the minimum amounts designated by the National Association of
Insurance Commissioners.
RESULTS OF OPERATIONS
---------------------
COMPARISONS OF THIRD QUARTER, 2004 TO THIRD QUARTER, 2003
---------------------------------------------------------
Net premiums earned during the third quarter of 2004 increased $6.9 million
(18%) as compared to the same period of 2003. The increase is due primarily to a
32% increase in premiums from the Company's fleet trucking program resulting
from premium rate increases, higher trucking revenues upon which premiums are
based and new accounts. In addition, premiums from the Company's small business
workers' compensation, private passenger automobile and small fleet trucking
programs increased 26%, 5% and 2%, respectively. It should be noted that all of
the Company's product lines are facing increased competitive pressures and,
therefore, such gains are likely to slow in the short term. Also, the Company
announced the discontinuance of its small business workers' compensation program
resulting from poor underwriting performance. This program is now in run-off and
premiums earned from this product will decline as existing policies reach
expiration.
Direct premiums written and assumed during the third quarter of 2004 totaled
$63.0 million, a 10% increase from the $57.5 million reported a year earlier.
This increase is due largely to an $8.9 million (24%) increase in direct
premiums written from the Company's fleet trucking program. This increase was
partially offset by decreases in premium writings for the Company's private
passenger automobile and small fleet trucking programs of 11% and 9%,
respectively, primarily due to increased competitive pressures in the past
several months. Several competitors have lowered prices and increased incentives
to producers recently which have impacted premium production for these product
lines. Premiums written by the small business workers' compensation division
declined 31% as underwriting restrictions were implemented in an effort to
remediate this product line. Premium assumed from property catastrophe pools
also decreased by 11% from the prior year quarter as a single large property
catastrophe treaty was terminated to maintain the Company's maximum probable
exposure to loss. Premium ceded to reinsurers averaged 36% of direct premium
production for the current quarter compared to 35% a year earlier owing to
changes in the mix of business and individual policy characteristics rather than
reinsurance program changes.
Net investment income, before tax, during the third quarter of 2004 was 1% lower
than the third quarter of 2003 due primarily to the continuing historically low
level of investment yields and the transfer of fixed income investments from
taxable to tax-exempt securities. After tax income increased 3% from the prior
year. Pre-tax yields dropped over 30 basis points from the prior year quarter.
After tax yields posted a smaller decline as the Company holds a larger
percentage of tax-exempt securities in its fixed income portfolio. The average
life of the Company's fixed income portfolio decreased from 2.8 years at the
prior year end to 2.6 years at September 30, 2004 as investment mangers kept the
maturities of available funds short in anticipation of increasing interest
rates.
11
The third quarter 2004 net realized gain of $27,000 consisted of net gains on
equity securities of $.8 million and an increase in impairment charges on equity
securities and fixed maturity investments of $.6 million. Further depressing
capital gains were net losses on fixed maturity and other investments.
Losses and loss expenses incurred during the third quarter of 2004 increased
$12.5 million from that experienced during the third quarter of 2003, which is
consistent with the increase in premium volume previously discussed, after
consideration of $5.0 million in losses related to the hurricanes in Florida and
other southeastern states included in the current year quarter. Loss ratios for
each of the Company's major product lines were as follows:
2004 2003
------- -------
Fleet trucking 78.8% 65.5%
Private passenger automobile 58.2 60.8
Small fleet trucking 67.9 66.2
Voluntary reinsurance assumed 215.4 60.0
Small business workers' compensation 136.6 80.2
All lines 83.2 65.1
The increase in the fleet trucking ratio is due to higher frequency and severity
of reported claims and a smaller redundancy on the closing of prior year claims
compared to the prior year quarter. The Company's large policy limits and net
retention of risk in its fleet trucking products allows for significant
variation in loss activity from period to period. The loss ratio reported for
the current quarter is relatively high compared to historical experience while
the ratio reported in the third quarter of 2003 was closer to the midpoint of
the historical range. The high loss ratio for reinsurance assumed reflects the
hurricane activity this quarter, as previously mentioned.
Other operating expenses for the third quarter of 2004 decreased 5% from the
third quarter of 2003. Adjusted for ceding allowances, operating expenses
increased less than 1% from the third quarter of 2003 and compares favorably
with the 18% increase in premiums earned from the 2003 quarter as many of the
Company's expenses do not vary directly with premium volume. Available capacity
within each of the Company's divisions has allowed for the expansion of business
with only minimal additions to personnel and other fixed costs over the past
year. Management believes that significant additional capacity exists before
most divisions would be obliged to incur meaningful increases in personnel or
other fixed costs. The Company cedes a large portion of its direct premiums to
reinsurers and these reinsurance premiums carry significant expense offsets.
Ceding allowances totaled $5.7 million for the 2004 quarter compared to $5.1
million for the 2003 quarter. Ceding allowances, as a percentage of direct
expenses, have declined due to changes in the Company's reinsurance structure
whereby the Company now retains a greater percentage of the risk compared to
prior periods, particularly within the fleet trucking products. The ratio of
consolidated other operating expenses to operating revenue (defined as total
revenue less realized capital gains) was 14.8% during the third quarter of 2004
compared to 18.3% for the 2003 third quarter reflecting the relationship of
operating expenses to growing revenues as discussed earlier in this paragraph.
The effective federal tax rate for consolidated operations for the third quarter
of 2004 was 29.6% and is less than the statutory rate primarily because of tax
exempt investment income.
12
As a result of the factors mentioned above , principally the hurricane losses in
the current quarter and a $2.0 decrease in realized capital gains, net income
decreased $4.7 million (57%) during the third quarter of 2004 as compared with
the 2003 third quarter.
COMPARISONS OF NINE MONTHS ENDED SEPTEMBER 30, 2004 TO
------------------------------------------------------
NINE MONTHS ENDED SEPTEMBER 30, 2003
------------------------------------
Net premiums earned increased $20.1 million (19%) during the first nine months
of 2004 as compared to the same period of 2003. The increased premium volume is
primarily attributable to a 24% increase in the Company's fleet trucking product
for the same reasons mentioned above in the quarterly comparison. In addition,
net premiums earned for the small business workers' compensation, small fleet
and private passenger automobile products increased 41%, 17% and 12%,
respectively, again for reasons discussed in the quarterly comparison.
Direct premiums written and assumed during the first nine months of 2004 totaled
$190.1 million, a 11% increase from the $170.1 million reported a year earlier.
Fleet trucking and small business workers' compensation posted gains of 20% and
8%, respectively while gross production for the other product groups was down
slightly from the prior year. Premium ceded to reinsurers averaged 34.9% of
direct premium production for the current period compared to 33.8% a year
earlier owing to the fact that fleet trucking premium, which carries a higher
average ceding rate, was a greater proportion of total premium in 2004.
Net investment income during the first nine months of 2004 was 4% lower than the
2003 period for the same reasons as indicated in the quarterly comparison above.
After tax investment income for the current year-to-date period was level with
the prior year. Overall pre-tax and after tax yields were lower during the
current period while average invested funds increased 11% from the prior year
resulting from positive cash flow.
The net realized gain on investments of $8.1 million for the first nine months
of 2004 consists of net gains on equity securities and fixed maturity
investments of $7.3 million and $.5 million, respectively, and was partially
offset by $.3 million in losses in short-term and other investments. The net
realized gain also included the reversal of impairment charges on securities
sold of $.6 million during the period, adding to the overall net realized gain.
Losses and loss expenses incurred during the first nine months of 2004 increased
$23.1 million from the first nine months of 2003, consistent with the increased
premium volume and hurricane losses previously discussed. Loss and loss expense
ratios for the comparative nine-month periods were as follows:
2004 2003
------- -------
Fleet trucking 77.8% 65.4%
Private passenger automobile 58.3 62.2
Small fleet trucking 62.2 60.5
Voluntary reinsurance assumed 68.5 62.5
Small business workers' compensation 102.7 80.7
All lines 72.8 64.8
13
With reference to comments regarding the increase in the fleet trucking loss
ratio in the quarterly comparison, current accident year losses were near the
upper end of historical ranges in 2004 while 2003 losses were nearer the
midpoint of historical experience.
Other operating expenses increased only 1% during the first nine months of 2004,
compared to the same period of 2003 despite the 19% increase in premium earned.
Ceding commission allowances included in net expenses were $16.6 million for the
2004 period compared to $14.7 million in the prior year period, but the ratio of
ceding commissions to premium earned declined from 14.0% in 2003 to 13.2% in
2004 as Protective retained more risk on trucking policies. The ratio of other
operating expenses to total operating revenue (adjusted for realized gains) was
16.4% for 2004 compared to 19.0% for 2003 for reasons mentioned in the quarterly
comparison.
The effective federal tax rate for consolidated operations for the first nine
months of 2004 was 31.7% 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 $.3 million
(1.2%) during the first nine months of 2004 as compared with the 2003 period.
DISCONTINUANCE OF PRODUCT LINE
------------------------------
Sagamore Insurance Company will no longer market and underwrite workers'
compensation coverage for small businesses. This product line, the Company's
smallest with approximately $9.6 million of premium inforce at September 30,
2004, has performed below expectations for several quarters and remediation
measures undertaken late last year have failed to improve underwriting results.
Policies currently inforce will run off through normal expiration dates and all
quotes outstanding will be honored. However, no new business will be written
after December 31, 2004.
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.
CRITICAL ACCOUNTING POLICIES
----------------------------
There have been no changes in the Company's critical accounting policies as
disclosed in the Form 10K filed for the year ended December 31, 2003.
14
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, 2004, amounts due from reinsurers
on paid and unpaid losses total approximately $219 million. Included in this
total are known losses of approximately $19 million due from Converium Insurance
(North America) Inc. and approximately $8 million due from PMA Re each of which
have reported substantial reserve strengthening and/or impairment of assets
which have negatively affected their previously reported financial positions.
All amounts currently due from these reinsurers have been received and the
Company has no information at this time to indicate that all obligations of
these reinsurers will not be met.
ITEM 4. CONTROLS AND PROCEDURES
- -------------------------------
Baldwin & Lyons, Inc. management, including the Chief Executive Officer and
Chief Financial Officer, have conducted an evaluation of the effectiveness of
disclosure controls and procedures pursuant to Exchange Act Rule 13a-14. Based
on that evaluation, the Chief Executive Officer and Chief Financial Officer
concluded that the disclosure controls and procedures are effective in ensuring
that all material information required to be filed in this quarterly report has
been made known to them in a timely fashion. There have been no significant
changes in internal controls, or in factors that could significantly affect
internal controls, subsequent to the date the Chief Executive Officer and Chief
Financial Officer completed their evaluation.
15
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
And 18 U.S.C. 1350
(31.2) Certification of CFO EXHIBIT 31.2
pursuant to Section 302 of the Certification of CFO
Sarbanes-Oxley Act of 2002
And 18 U.S.C. 1350
(32.1) Certification of CEO EXHIBIT 32.1
pursuant to Section 906 of the Certification of CEO
Sarbanes-Oxley Act of 2002
And 18 U.S.C. 1350
(32.2) Certification of CFO EXHIBIT 32.2
pursuant to Section 906 of the Certification of CFO
Sarbanes-Oxley Act of 2002
And 18 U.S.C. 1350
ITEM 6 (b) REPORTS ON FORM 8-K
- -------------------------------
A Form 8-K was filed by the registrant on July 28, 2004 regarding its earnings
announcement for the second quarter of 2004. A Form 8-K was also filed by the
registrant on September 2, 2004 regarding the Company's estimate of its exposure
to recent hurricane losses.
16
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 4, 2004 By /s/ GARY W. MILLER
------------------ --------------------------------
Gary W. Miller, Chairman and CEO
Date NOVEMBER 4, 2004 By /s/ G. PATRICK CORYDON
------------------ --------------------------
G. Patrick Corydon,
Senior Vice President - Finance
(Principal Financial and
Accounting Officer)
17
BALDWIN & LYONS, INC.
Form 10-Q for the fiscal quarter
ended September 30, 2004
INDEX TO EXHIBITS
BEGINS ON SEQUENTIAL
PAGE NUMBER OF FORM
EXHIBIT NUMBER 10-Q
-------------- -----------------------------
EXHIBIT 11 18
Computation of per share earnings
EXHIBIT 31.1 19
Certification of CEO
pursuant to Section 302 of the
Sarbanes-Oxley Act
and 18 U.S.C. 1350
EXHIBIT 31.2 21
Certification of CFO
pursuant to Section 302 of the
Sarbanes-Oxley Act
and 18 U.S.C. 1350
EXHIBIT 32.1 23
Certification of CEO
pursuant to Section 906 of the
Sarbanes-Oxley Act
and 18 U.S.C. 1350
EXHIBIT 32.2 24
Certification of CFO
pursuant to Section 906 of the
Sarbanes-Oxley Act
and 18 U.S.C. 1350