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
March 31, 2005 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 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 May 3, 2005:
TITLE OF CLASS NUMBER OF SHARES OUTSTANDING
Common Stock, No Par Value:
Class A (voting) 2,666,666
Class B (nonvoting) 12,057,171
Index to Exhibits located on page 13.
Page 1 of a total of 20 pages
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PART I - FINANCIAL INFORMATION
ITEM 1 FINANCIAL STATEMENTS
BALDWIN & LYONS, INC. AND SUBSIDIARIES
UNAUDITED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
MARCH 31 December 31
2005 2004
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ASSETS
Investments:
Fixed maturities $ 306,287 $ 331,281
Equity securities 124,845 133,042
Short-term and other 81,716 52,395
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512,848 516,718
Cash and cash equivalents 62,572 57,384
Accounts receivable 36,294 33,481
Reinsurance recoverable 228,390 236,466
Notes receivable from employees 2,323 2,514
Other assets 22,299 22,000
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$ 864,726 $ 868,563
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LIABILITIES AND SHAREHOLDERS' EQUITY
Reserves for losses and loss expenses $ 433,149 $ 441,821
Reserves for unearned premiums 37,573 33,233
Notes payable to banks 6,000 6,000
Accounts payable and accrued expenses 47,799 48,224
Current federal income taxes 5,470 660
Deferred federal income taxes 8,575 12,077
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538,566 542,015
Shareholders' equity:
Common stock-no par value 628 628
Additional paid-in capital 37,161 37,083
Unrealized net gains on investments 37,395 44,497
Retained earnings 250,976 244,340
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326,160 326,548
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$ 864,726 $ 868,563
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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
March 31
--------------------------------
2005 2004
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REVENUES
Net premiums earned $ 46,659 $ 38,497
Net investment income 3,308 3,172
Realized net gains on investments 4,936 5,818
Other income 1,836 1,906
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56,739 49,393
EXPENSES
Losses and loss expenses incurred 31,612 25,246
Other operating expenses 9,648 8,089
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41,260 33,335
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INCOME BEFORE FEDERAL INCOME TAXES 15,479 16,058
Federal income taxes 5,133 5,159
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NET INCOME $ 10,346 $ 10,899
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Per share data:
DILUTED EARNINGS $ .70 $ .74
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BASIC EARNINGS $ .70 $ .75
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DIVIDENDS PAID TO SHAREHOLDERS $ .25 $ .50
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RECONCILIATION OF SHARES OUTSTANDING:
Average shares outstanding - basic 14,724 14,603
Dilutive effect of options outstanding 121 212
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Average shares outstanding - diluted 14,845 14,815
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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)
Three Months Ended
March 31
2005 2004
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Net cash provided by operating activities $ 8,970 $ 18,569
Investing activities:
Purchases of long-term investments (34,977) (41,605)
Proceeds from sales or maturities
of long-term investments 51,735 52,778
Net sales (purchases) of short-term investments (16,384) 5,476
Decrease in notes receivable from employees 138 1,093
Other investing activities (614) (222)
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Net cash used in investing activities (102) 17,520
Financing activities:
Dividends paid to shareholders (3,681) (7,304)
Proceeds from sales of common stock 1 63
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Net cash used in financing activities (3,680) (7,241)
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Increase in cash and cash equivalents 5,188 28,848
Cash and cash equivalents at beginning of period 57,384 30,078
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Cash and cash equivalents at end of period $62,572 $58,926
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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 footnotes 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, 2005. 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 10K.
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NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(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.
(3) REINSURANCE: The following table summarizes the Company's transactions with
reinsurers for the 2005 and 2004 comparative periods.
2005 2004
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Quarter ended March 31:
Premiums ceded to reinsurers $ 13,598 $ 19,248
Losses and loss expenses
ceded to reinsurers 14,214 17,948
Commissions from reinsurers 3,136 5,202
(4) COMPREHENSIVE INCOME OR LOSS: The Company refers to comprehensive income or
loss as realized and unrealized income or loss which is composed of net income
or loss and changes in unrealized gains or losses on investments for the periods
presented. Total realized and unrealized income for the quarter ended March 31,
2005 was $3,215 and compares to total realized and unrealized income of $11,223
for the quarter ended March 31, 2004.
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NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(5) REPORTABLE SEGMENTS - PROFIT AND 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.
2005 2004
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Net Net
Direct and Premium Direct and Premium
Assumed Earned Segment Assumed Earned Segment
Premium and Fee Profit Premium and Fee Profit
Written Income (Loss) Written Income (Loss)
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THREE MONTHS ENDED MARCH 31:
PROTECTIVE PRODUCTS:
Fleet trucking $ 43,247 $ 30,822 $ 6,813 $ 39,171 $ 21,267 $ 6,321
Reinsurance assumed 2,491 2,522 1,498 2,918 3,074 1,907
SAGAMORE PRODUCTS:
Personal division 15,069 11,029 1,230 15,180 11,228 1,350
Commercial division:
Small fleet trucking 3,517 2,200 122 3,865 2,524 332
Workers' compensation (5) 1,386 261 2,788 1,945 (229)
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Total Commercial division 3,512 3,586 383 6,653 4,469 103
All other 278 431 (159) 241 242 (80)
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Totals $ 64,597 $48,390 $9,765 $64,163 $40,280 $9,601
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(6) 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 from continuing operations before federal income taxes,
respectively.
Three Months Ended
March 31
2005 2004
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REVENUE:
Net premium earned and fee income $ 48,390 $ 40,280
Net investment income 3,308 3,172
Realized net gains on investments 4,936 5,818
Other 105 123
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Total consolidated revenue $ 56,739 $ 49,393
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PROFIT:
Segment profit $ 9,765 $ 9,601
Net investment income 3,308 3,172
Realized net gains on investments 4,936 5,818
Corporate expenses (2,530) (2,533)
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Income before federal income taxes $ 15,479 $ 16,058
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NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(7) 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 $2,323 remain outstanding at March 31, 2005 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.
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ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
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OF OPERATIONS
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LIQUIDITY AND CAPITAL RESOURCES
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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 three months ended March 31, 2005, the
Company experienced positive cash flow from operations totaling $9.0 million and
compares to positive cash flow of $18.6 million for the three months ended March
31, 2004. The majority of this change resulted from a $9.0 million increase in
net paid loss activity during the current quarter and a $4.0 million increase in
reinsurance recoverable on paid claims.
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 less than 2.2 years at March 31, 2005 representing a
small decrease from the prior year end as large portions of the proceeds from
maturing investments and new cash flows have been placed in short-term
investments in anticipation of interest rate increases.
The Company's assets at March 31, 2005 included $62.6 million in investments
classified as short-term or cash equivalents that were readily convertible to
cash without significant market penalty. An additional $109.6 million of fixed
maturity investments will mature within the twelve-month period following March
31, 2005. 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
March 31, 2005, $48.2 million may be transferred by dividend or loan to the
parent company without approval by, or prior notification to, regulatory
authorities. An additional $195.3 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 $54.4
million at March 31, 2005.
The Company's annualized premium writing to surplus ratio for the first quarter
of 2005 was approximately 50%. Regulatory guidelines generally allow for
writings of at least 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 levels are
several times higher than the minimum amounts designated by the National
Association of Insurance Commissioners.
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RESULTS OF OPERATIONS
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COMPARISONS OF FIRST QUARTER, 2005 TO FIRST QUARTER, 2004
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Net premiums earned during the first quarter of 2005 increased $8.2 million
(21%) as compared to the same period of 2004. The increase is due primarily to a
48% increase in premiums from the Company's fleet trucking program. This
increase results from increased premium retained under current reinsurance
agreements, increases in trucking revenues of insureds, upon which the majority
of fleet trucking premiums are based, and, to a small degree, rate increases.
Partially offsetting this increase were decreases in premiums from the Company's
reinsurance assumed, small fleet trucking and private passenger automobile
programs of 21%, 11% and 3%, reflecting the competitive nature of the markets in
which the Company operates. In addition, premium from the Company's discontinued
small business workers' compensation product decreased 27%.
Direct premiums written and assumed increased to $64.6 million from $64.2
million reported a year earlier. This increase was due primarily to increases in
fleet trucking premium and was partially offset by the decrease in premium
writings due to the discontinuance of the small workers' compensation product.
Premium ceded to reinsurers averaged 21.9% of direct premium production for the
current quarter compared to 31.6% a year earlier.
Net investment income, before tax, during the first quarter of 2005 was 4%
higher than the first quarter of 2004 due primarily to an increase in average
invested assets resulting from positive cash flow. Also, pre-tax yields on
short-term investments tripled from prior year levels to 2.2% during the current
quarter. Overall after tax yields are mostly consistent with the prior year
quarter.
The first quarter 2005 net realized gain of $4.9 million consisted of net gains
on equity securities and limited partnership (equity and hedge fund) investments
of $2.2 million and $2.8 million, respectively, partially offset by a $.1
million net loss on bonds.
Losses and loss expenses incurred during the first quarter of 2005 increased
$6.4 million from that experienced during the first quarter of 2004, which is
consistent with the increase in premium volume previously discussed. Loss ratios
for each of the Company's major product lines were as follows:
2005 2004
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Fleet trucking 74.3% 75.6%
Private passenger automobile 60.5 59.9
Small fleet trucking 54.6 57.6
Voluntary reinsurance assumed 28.1 11.8
Small business workers' compensation 55.6 82.4
All lines 67.8 65.6
Other operating expenses for the first quarter of 2005 increased 19% from the
first quarter of 2004. Adjusted for ceding allowances, operating expenses
decreased 4% from the first quarter of 2004 and compares favorably with the 21%
increase in premiums earned from the 2004 quarter as many of the Company's
expenses do not vary directly with premium volume. 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 Large and Medium
Fleet trucking products. 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.
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Management believes that significant additional capacity exists before most
divisions would be obliged to incur meaningful increases in personnel or other
fixed costs. Ceding allowances totaled $3.1 million for the 2005 quarter
compared to $5.2 million for the 2004 quarter. The ratio of consolidated other
operating expenses to operating revenue was 18.6% during each of the 2005 and
2004 first quarters.
The effective federal tax rate for consolidated operations for the first quarter
of 2005 was 33.2% and is less than the statutory rate primarily because of tax
exempt investment income.
As a result of the factors mentioned above, net income decreased $.6 million
(5.1%) during the first quarter of 2005 as compared with the 2004 first quarter.
FORWARD-LOOKING INFORMATION
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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 even a small number 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, 2004.
CONCENTRATIONS OF CREDIT RISK
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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 March 31, 2005, amounts due from reinsurers on
paid and unpaid losses total approximately $228 million. Included in this total
are known losses of approximately $23 million due from Converium Insurance
(North America) Inc. and approximately $5 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 due from these reinsurers on paid claims are current 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
(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.
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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
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NUMBER AND CAPTION FROM EXHIBIT
TABLE OF REGULATION S-K ITEM 601 EXHIBIT NO.
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(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 32.1
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 January 28, 2005 regarding its
earnings announcement for the fourth quarter and year ended December 31, 2004.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BALDWIN & LYONS, INC.
Date MAY 4, 2005 By /s/ GARY W. MILLER
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Gary W. Miller,
Chairman of the Board and
Chief Executive Officer
Date MAY 4, 2005 By /s/ G. PATRICK CORYDON
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G. Patrick Corydon,
Senior Vice President and
Chief Financial Officer
(Principal Financial and
Accounting Officer)
13
BALDWIN & LYONS, INC.
Form 10-Q for the fiscal quarter
ended March 31, 2005
INDEX TO EXHIBITS
BEGINS ON SEQUENTIAL
PAGE NUMBER OF FORM
EXHIBIT NUMBER 10-Q
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EXHIBIT 11 14
Computation of per share earnings
EXHIBIT 31.1 15
Certification of CEO
pursuant to Section 302 of the
Sarbanes-Oxley Act
EXHIBIT 31.2 17
Certification of CFO
pursuant to Section 302 of the
Sarbanes-Oxley Act
EXHIBIT 32.1 19
Certification of CEO
pursuant to 18 U.S.C. 1350,
as adopted pursuant to Section
906 of the Sarbanes-Oxley Act
EXHIBIT 32.2 20
Certification of CFO
pursuant to 18 U.S.C. 1350,
as adopted pursuant to Section
906 of the Sarbanes-Oxley Act