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Executives

Stacy Feit – IR, Financial Relations Board

Gary Miller – Chairman & CEO

Patrick Corydon – EVP and CFO

Analysts

John Gwynn – Morgan Keegan

Gideon King – Loeb Partners

Baldwin & Lyons, Inc. (BWINB) Q1 2008 Earnings Call Transcript May 1, 2008 11:00 AM ET

Operator

Good day everyone and welcome to today's Baldwin & Lyons, Inc. first quarter earnings conference call. Today's call is being recorded. At this time for opening remarks and introductions, I would like to turn the call over to Ms. Stacy Feit from Financial Relations Board. Please go ahead ma'am.

Stacy Feit

Thank you and thank you all for joining us this morning for the Baldwin & Lyons first quarter 2008 conference call. If you did not receive a copy of the press release, you may access it online at the Company's website, which is www.baldwinandlyons.com. I would like to remind everyone that we are hosting a live webcast for the call, which may be accessed on the Company's website as well.

At this time, management would like me to inform you that certain statements during this conference call and in the press release which are not historical may be deemed forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Although Baldwin & Lyons believe the expectations reflected in any forward-looking statements are based on reasonable assumptions, it can give no assurance that its expectations will be obtained. Factors and risks that could cause actual results to differ materially from expectations are detailed in the press release and from time to time within the Company's filings with the SEC.

And now I'd like to introduce Gary Miller, Chairman and Chief Executive Officer of Baldwin & Lyons, and turn the call over to him. Gary, please go ahead.

Gary Miller

Thank you, Stacy. Welcome to our shareholders’ and others interested in Baldwin & Lyons that are joined us on our conference call this morning reporting the Company results for the first quarter of 2008.

Joining me this morning on the call are Joe DeVito, President and Chief Operating Officer of the Company, and Pat Corydon, Senior Vice President and Financial Officer.

I’ll give some brief remarks summarizing our quarterly results with some industry and general business observations. Pat will follow with a more detailed report on the makeup of our quarterly results. At the conclusion of Pat’s remarks, Joe, Pat and I will happy to answer any questions you might have.

In our last quarterly conference call, referring to the Company’s large net retentions on most lines of business rights, its exposure to catastrophe losses, assumed reinsurance, in its fairly heavy investment in equity securities and limited partnerships or hedge funds, I stated the use that the Company may have a not so good quarter every now and then because we can catch a frequency of large losses in any quarter. Catastrophies can happen and equity markets can go down.

As it turned out this quarter, my predictive skills were good. The just completed quarter was not as good. To the possible lease leaving to volatility occurred. We cut some larger losses in our net retained lines in the equity markets as well as interest rates went a wrong direction. The Company had a net loss for the quarter at $0.30 a share. The primary reason for the loss was that significant general decline in the equity markets in the first quarter of 2008.

We call it, just as we were required to report our share of unrealized gains in our participation in limited partnerships as realized gains in prior quarters as (inaudible) up in value, we in turn must report our share of unrealized losses in limited partnerships as realized losses when the markets decline. The realized and unrealized gains and losses in our share of limited partnerships netted to $12 million pre-tax loss for the quarter, all of which we reported as realized loss.

Combined with realized losses on our other investments, we had $13.6 million of investment losses or $0.58 per share. Operating income including a significant decline in investment income could not cover that amount of investment loss and a reported $0.30 per share negative net income is the result.

Unrealized gains in the Company’s investment also followed the markets decline. Tax affected the value of the Company’s investments other than the limited partnerships declined by $2.7 million. That number does not go through the income statement, but does reduce equity and therefore book value.

Book value for the quarter declined from $24.98 to $24.23 per share for a reduction of $0.75 or 3%. Part of that reduction was the payment of $0.25 per share in dividends during the quarter. Had the quarter been a few weeks longer, a different story could be told. For nearly all the reduced equity positions have regained some value. The (inaudible) explained the numbers we saw at March 31.

For the first quarter of 2008 nearly all equity markets declined. The S&P 500 was down by 9.45%, the rest of 2000 by 9.9%, the MSCI global index by 9.75 % and the Bombay Stock Exchange 500 Index by 29.5%. Almost without exception, our limited partnership interests in our investment managers were down by less than their respective comparative indexes, but nonetheless still bounced significant amounts resulting in the loss we reported. Especially dramatic was the India market. A gain of 63% we enjoyed in 2007 was followed by our first quarter 2008 loss of 25%. That means our India investment is still up by 25% at the end of the first quarter of 2008 from the first day of 2007, but it is still hard to loose the gains and report the decline as a loss through the income statement.

Remember we reported a total of $16 million of investment gains in the fourth quarter of 2007. We would prefer that unrealized gains and losses whether in limited partnerships or otherwise stay unrealized gains and losses and out of the income statement until realized. But those are not the rules under which we operate. We saw big swings in quarterly net income, somewhat matching Beagle raw [ph] equity market swings or/and will be the result.

We advised last quarter that we had established new investment with vehicle Maritime [ph] Partners that would be initially be funded by $50 million of Company assets. The goal was to produce results better than the S&P 500 index. To bring you up to date on that venture beginning January 2, Maritime did do better than the S&P 500 loss of 9.45% by losing 8.2% or $4.1 million in volume.

Since the end of that quarter, about half of the loss has been regained. Most of the first quarter of Maritime loss was recognized in the income statement. Pat will give more details on our realized and unrealized gains and losses. In summary, I will say that the last quarter of 2007 and the just completed first quarter of 2008 amply demonstrate how the Company’s net income will fluctuate depending on the movement of equity markets both domestic and international.

Understanding that, a longer horizon and quarterly measurements will be essential for one to gauge performance and returns. On to subject and investments, we will also comment on investment income. This two fits into the category of all good things must come to an end. For several years, we have enjoyed increasing investment income because of generally increasing rates caused by poesy cash flow and by higher available yields as short-term rates were going up.

With the Fed’s response to sub-prime (inaudible) by reducing short-term rates on numerous occasions, and with our redeployment of portions of our investment portfolio, the increase in our investment income ended this quarter. In the just completed quarter, pre-tax investment income declined by 13.3% from last year’s first quarter.

During 2007, we shifted investments in taxable instruments to non-taxable holders. As a result, after-tax investment income declined at the lesser percentage of 6.6% quarter to quarter. While we expect further reductions in interest rates to moderate or stop, the low rates not available for reinvestment of existing higher yielding investments, which will be maturing in the next several quarters will cause investment income to continue to erode in the near future.

As we look to the operations of the Company, it is clear that we are still competing in a soft insurance market. Rates are generally not increasing, although the drivers of loss cause especially medical bills continue to increase at a rate probably outpacing foot core inflation. We’ve (inaudible) so there is a lot of talk about them, probably little action since the first of the year and increasing prima passion to rates, although we’ve seen nothing dramatic occur.

Increasing rates will see a Sagamore’s private passenger product probably most in allowing us to regain loss volume as others come up to Sagamore’s existing still profitable rate levels. In out other products, we’ve seen no significant upward rate movements. Catastrophe rates with the general liabs have seen losses and what appears to be more than ample capacity are trending downward.

Weak trucking levels have probably not appreciably moved in the last three/six months, but renewals are usually at lower average rates than the expiring rates of last year. Our independent contractor business has seen flat rates on renewals and new offering, but medical is a large component of the coverages offered. And as we mentioned those costs continue an upward climb. Competition remains intense, some companies probably following the greener grass on the other side of the fence theory have come into the line of business in which we specialize. Depending on their approach rate aggressiveness, they can disrupt the market for a while.

Meanwhile we continue to do what we do best. We are as aggressive as we believe we can be as our long experience has shown us that we can be, while subscribing into the idea that a profit should be made. We are increasing writings in some of our products but losing business in others as rates go well below our projectable minimum or acceptable levels.

Losses and expenses when compared to premium for the quarter were 5 points better than the fourth quarter of last year. But results were below the first quarter of 2007. Because of lower investment income in this year’s first quarter, we earned $0.28 per share from operations versus $0.30 a share in the fourth quarter of 2007 and well below the $0.52 per share record earnings of the first quarter of last year, the quarter that benefited from some unusual significant resource savings that were not present this year.

Assume catastrophe reinsurance showed the best product profitability this quarter benefiting from the nearly complete lack of storms or other significant loss producing events. Assume reinsurance premiums were up 27% over last year to $7.3 million for the quarter, reflecting increased writings as budgeted. Losses consisting primarily of IBNR changes in expenses produced 52.5% combined ratio for the quarter.

We hope that favorable experience continues, but remember that our book of reinsurance assumed business produced the Paladin is susceptible to spring storms. Too many big storms in the wrong places can hurt assumed reinsurance results in the second quarter. Our fleet trucking package excess business net earned premium was down 9% over the first quarter of last, reflecting some lesser economic activity by our trucking customers, earning less non-fuel surcharge revenues. Some fuel amounts driven in general insurance policy rate reduction year over year.

Results influenced by the mentioned significantly quarterly large claim activity came in at breakeven levels with a combined ratio of 100.4%. As we have many times in past call with fairly large net retentions retained by the Company before reinsurance shares the exposures we’ve insured. Volatility results must be expected from quarter to quarter. And we believe that is what happened this quarter with several large claim, that is the increased loss percentage is the quarter in fluctuation and not necessarily a trend but we closely monitor as we go forward to be certain that is the case.

Our independent contractor programs had a significant premium increases as they change in the products purchase by contractors caused an increase in the average premium for each contractor leased to our major customers. In addition, new volume from the sales effort in our IC2 product discussed in prior conference calls also began contributing to the programs premium base. That sales efforts continues with more counts being added to the IC2 independent contractor program, which increase the number of independent contractors insured and that brings in more premiums dollars each month.

The Company also retains a significant net retention in the insurance coverages making up the independent contractor programs. In the same possible volatility in any periods losses is present. That volatility when stress in the quarter with several large losses causing non-profitability for the line. The combined ratio for the product of 111% on $20.5 million of earned premium produced and underwriting loss for this independent contractor product of $2.2 million.

We are not used to seeing negative results in this line, which has been consistently profitable for many years. But realized it with large retentions and resulting volatility we should look at it as a distant race and not a sprint. We expect long-term results to be significantly better and profitable as they have been in past years without exception. Instead of this product for the first time taken away from quarterly earnings this quarter, we expect the independent contractor product to resume its significant contribution to the Company’s earnings.

We first mentioned our products expansion into the insurance of public transportation risks primarily buses and motor coaches in our 2007 Annual Report. That expansion relies on our core competency of experience in insuring transportation risks. While the cargo is different, people versus freight, many of the same principles apply. This will be a low-cost product extension as the same systems and the same personnel for underwriting loss control, claims and accounting will be used.

And the best news is that we’ve written a fuel accounts to short period following our entry into the market. It seems that the level of service, we are accustomed to providing our trucking claims is well received by public transportation risks that have welcomed an alternative with a professional approach. All products together resulted in our subsidiary Protective Insurance Company reporting a combined ratio of 95.8% on net earned premium that was up 14% from the prior year’s first quarter.

Sagamore Insurance Company continues to face volume challenges, although it remains profitable. In total, Sagamore’s volume declined 27.5% over the first quarter of last year. Its two product line non-standard personal auto insurance and small fleet trucking are seeing heavy price reductions with and probably caused by increased capacity as other insurers expand into the lines. Multivariate rating are (inaudible) by the larger players in the industry has blurred if not eliminated the historical line between the standard and non-standard insurance. Today, most companies have rates and (inaudible) insured and the niche reserved for traditional non-standard companies has largely disappeared.

Our response has been a virtual overhaul of our private passenger insurance product with all new selection and rating technique. Using our score card rating approach that allows nearly limitless rating combinations, we eliminated all historical non-standard existing rating tiers and programs with the shifting of all new codes and renewals into this scorecard model.

So far it is working, conversion rates for renewals are good and new business is increasing. Underwriting results for scorecard rated products are favorable. It will be a big task to get educate all of our existing producers, expand our production base, retain existing business and write meaningful quantities in new business. But we are optimistic that all of the work and effort in causing a complete new approach to this product will pay off.

Similar efforts are underway for the small fleet product written by Sagamore. New rating approaches pay less attention to historical categories and more to end of risk characteristics are being developed. Combined with some general movement which might occur as some less and great results are seen by other, we believe we’ll see the volume tide turn as the year continues.

As volume has declined for Sagamore, non-variable expenses have taken an increased portion of the premium ladler [ph]. However, loss ratios have been acceptable resounding a combined ratio with consideration of fee income of 98%, without fee income the combined ratio was 104%. Maintaining that profitability, while increasing premiums will be a struggle, but the complete revamping of product lines in its own track and allows optimism. We are also engaged in reallocation of reinsurance [ph] committing some of Sagamore’s people time and talents to other products that are now on a faster growth scale both to allocate resources where the best return might be realized and to assist in controlling the portion of Sagamore’s premium dollar that will be spent on expenses.

Baldwin & Lyons’ overall premium volume was up slightly for the quarter with Protective’s increase in volume offsetting Sagamore’s decrease, total earned premium for the Company increased 2.1%. The total Company combined ratio was 98.5%. With that ratio, we are still taking in more premium and we are incurring a loss in expense, but that ratio was not in the areas to which we have become accustomed, and not in the area we expect in the future.

We expect better as the year progress. And now I’ll turn the call over to Pat Corydon for more detail regarding the quarterly results. At the conclusion of Pat’s remark, Joe, Pat or I will be happy to respond any questions you might have. Pat?

Patrick Corydon

Thanks Gary. Premium written this quarter for the consolidated group was up 4% from the first quarter of 2007.This group was concentrated in the trucking independent contractor business, which experienced premium written growth of 43% and reinsurance assumed which increased 27%. As Gary mentioned, premium declines in personal auto at small fleet trucking products offset the majority of these increases. Net premium earned also increased marginally at 2% in line with direct premium written.

Premiums seen at reinsurers averaged 19% of direct premium written this quarter, compared to 13% for the first quarter of 2007. Reflecting changes in reinsurance treaties affected in June 2007 including changes to the reinsurance structure of our independent contractor program to address the larger of workers’ compensation component of this business. Underwriting operations for the quarter produced a consolidated combined ratio of 98.5%, 10 points higher than the first quarter of 2007.

The consolidated loss ratio this quarter was 65.3% compared to a very low 60.9% last year. In addition to a number of severe losses this quarter as commented on earlier, the 2007 quarter was aided by $3.6 million prior reserve savings, while the current quarter savings was only a little over $700,000. As we’ve mentioned several times, Protective’s higher loss retention in recent years provides the positional for more volatility in net development both positive and negative. The savings developed this quarter was on the low end of our historical ranges and was equal to about half of the percent of loss reserves.

While the 2007 first quarter savings was near the top of historical ranges. Included in the consolidated loss ratio comparison is the fact that reinsurance assumed experience a very good quarter with a loss ratio 31%, compared to 48% last year as all programs experienced favorable operations. Adding to the higher combined ratio of this quarter was a 7 point increase in the consolidated expense ratio.

Expense ratios for Sagamore products were impacted by the lower premium volume previously discussed. Also fleet trucking’s expense ratio increased 9 points with two-thirds of this increase related to higher non-affiliated commissions on independent contractor business similar to increases noted in the last half of 2007. The remainder of the increase is attributable to staff additions and system improvement related to new and existing products. The ratio of consolidated operating expenses to operating revenue increased from 26.4% to 30.35 for the quarter with non -affiliated commissions on the independent contractor business making up the majority of this increase.

The overall non-affiliated commission rate, net receiving commissions from reinsurers increased from 6.7% in the 2007 first quarter to 9.7% this quarter. It should be noted that independent contractor premium rates were adjusted to absorb the higher commissions and while this change will resolve in higher expense ratios, profitability should not be impacted by the roughly equal dollar increases in premium and commission expense.

As expected pretax investment income has been negatively impacted by the pervasive declines in the interest rates. Average pretax yield declined 12% from the first quarter of last year. Part of the decline related to increases in proportion of the bond portfolio invested in municipals and after-tax yields declined by only 7%. Bonds purchased this quarter produced 15 basis points lower after-tax yield than those maturing or sold during the quarter.

Yield and hence investment income were also impacted by the deploying of funds in the new investment vehicles including Maritime, which generate less current income with the expectation of long-term gains. All factors considered pre-tax investment income declined 13.3% but after-tax income down 6.7% for the quarter.

There were no significant changes in the average duration but contractual life of our bond portfolio since year end. As Gary noted earlier, investment operations produced $13.6 million in pre-tax losses this quarter, while direct security trading produced $1.6 million of these losses, the bulk of the loss was concentrated in the Company’s limited partnership which produced a net loss of $12 million.

Results were mixed on many of the partnership investments this quarter but the vast majority of the loss was concentrated in our investment in the Indian markets, which declined in value by 26% this quarter in line with the major Indian induces. While this is a large correction, the average annual return for this partnership since inception remains over 25%. Overall, limited partnerships decreased in value by 15% this quarter. Holding gains on the Company’s investment portfolio also decreased $2.7 million after tax this quarter reflecting general conditions.

The Companies total pre-tax return on equity trading for the quarter exclusive of Maritime was a negative 5.9% compared to the S&P 500’s negative 9.45%.

Cash flow from operations was negative by $6.2 million this quarter with reinsurance recoverable accounting for $1.6 million of this total. This compares to $8.5 million in positive cash flow for the comparable 2007 quarter. Majority of the difference relates to the timing of reinsurance premium payments and federal tax deposits as well as lower operating income.

Reinsurance recoverable on unpaid losses declined from $134 million at December 31, 2007 to $131 million this quarter and reinsurance recoverable on paid losses totals only $2.7 million at quarter end all of which is current.

Shareholders equity decreased $11.4 million this quarter including the payment of $3.8 million in cash dividends to shareholders, representing 2% negative return on beginning book value.

We've posted a full set of quarterly financial statements including product level revenue and combined ratio data on our website at baldwinandlyons.com. Click on our Investor Relations page and select Presentations from the drop-down menu. From this page, select the latest financial supplement which can be downloaded using Adobe Acrobat or printed for your use. Also, the additional financial tables included in the Investor Relations section of our website have been updated to include current quarter information.

This concludes our formal presentation. At this time we would be happy to any questions listeners may have.

Question-and-Answer Session

Operator

(Operator instructions) We’ll take our first question with John Gwynn with Morgan Keegan, please go ahead.

John Gwynn – Morgan Keegan

Joe, Gary mentioned that his intuitive response to the large losses in the first quarter is that this is one the fluctuations you have in insurance rather than a trend similar to what we had in 1990 I guess. Would you agree with it?

Joe DeVito

Certainly I’m not a position where we are going to disagree with Gary, John. But seriously, yes, I would. And I would just a bit of correction to what you said, I don’t see as ’99, 2000. I think that what we’ve seen is an unusual new large losses from customers that I might add have been with us for quite some time, which reinforces our belief that they are unusual and unlikely to be repeated.

Gary Miller

John I might add. I think it’s probably more similar. I believe is the last quarter 2003 when we got kicked pretty hard on large excess losses, and then basically in the first quarter of 2004 followed with accident loss experience, and I would probably say it’s more typical to that.

John Gwynn – Morgan Keegan

And the large out loss activity in the fleet trucking line, was that both the independent contractor and others?

Joe DeVito

Yes.

Patrick Corydon

Yes. Both in the excess package and in the (inaudible), and I would tell you that just to underscore just the actual [ph] patterns of the losses themselves would be unlikely to be repeated. Generally not the typical auto accident type factual situations that we would tend to see in the business.

John Gwynn – Morgan Keegan

And Gary, am I right that of your fleet trucking book $20.5 million is earned premium from independent contractor?

Gary Miller

Yes.

John Gwynn – Morgan Keegan

Gary, actually I was actually surprised by the performance in your reinsurance assumed book given the Paladin, the geographic concentration of the Paladin business versus say your coastal exposure in the other part of your book. Was that a matter of lot of loss activity but not enough to attach?

Gary Miller

No. It’s a matter of very little loss activity. But keep your fingers crossed, we are going into the storm season now.

John Gwynn – Morgan Keegan

Yes, yes. Is (inaudible) book, are they about 50-50 now or – any comments?

Gary Miller

Yes, Pat it’s you.

Patrick Corydon

Yes. That’s a good rough ratio for it John, yes 50-50.

John Gwynn – Morgan Keegan

And Gary or Pat in your one of your Annual Report or your K you mentioned a very long time period where you’ve favorable reserve development. Was that 25 years or 30 years like that?

Gary Miller

Yes. It goes back to pre – I think in the pre-1985, ’83,’84 in that range. Certainly since ’85, we’ve had positive or favorable saving developed in every year.

John Gwynn – Morgan Keegan

Okay. Thanks a lot. That’s all I have.

Gary Miller

Thanks John.

Operator

We’ll take our next question with Gideon King with Loeb Partners. Please go ahead.

Gideon King – Loeb Partners

Hi, good morning.

Gary Miller

Morning.

Gideon King – Loeb Partners

I just have one or two questions for you folks. Forgive if you can’t hear me, I have a little bit of a cold. Couple of things that are jumping out of me increasingly and concerning me as one of your largest shareholders’. Is – now first of all, I like to sort of (inaudible) all in on your investment process. At the end I’m sort of sitting in front of your balance sheet here. At the end of ’07, it looks to me like you are exposure to your India investment which I believe is run by affiliates of Board Members was 12% of your book value. And I just wonder if you think that’s prudent and I just wonder what your sort process was at the time when you consider that India, given its high standard deviation in the capital markets. What you saw that through, the 12% might be a bit more and if you could just watched physically talk about your investment process and whether or not you are outsourcing the analysis of these investments, the rates of return relative to the standard deviations etcetera, etcetera. Are you outsourcing that to independent players or whether or not it’s – these decisions are made in the Investment Committee at the Board level, particularly might of the fact that a lot of your hedge fund exposure, which I guess you are calling limited partnership exposure which I guess is that. Is whether affiliates, it’s a little bit concerning by no means am I suggesting that it’s wrong or inappropriate but it is concerning and it is concerning to see this type of loss and I’m also curious to know whether or not this particular fund has outperformed the market when you look at relative risk awards such as return over volatility. That’s my first question.

Patrick Corydon

The India firms is run by its (inaudible) partnership and that is – there are affiliates. Obviously the Board that run the fund, the Investment Committee evaluate the preparative of all investments on a periodic basis. We do rely on both our Fund Managers and our Investment Managers who manage direct investments for us, and though we do not micromanage, their selections and individual players we basically try to oversee and make sure that the balance of our portfolio is correct. I would mention on the India front, that, yes, at year-end ’07 it comprised $44 million of assets. However, that was on a $15 million investment made in ’04 and ’05 and so…

Gideon King – Loeb Partners

As well it should be because look at the Bombay 500 in the Sensex has done. If it done anything less that would of course be dramatically disappointing.

Patrick Corydon

Okay. And I guess we didn’t take the cards off the table and (inaudible) 20-20, perhaps we should but I think that all the decision was made that it had performed well and that we would in a sense let it continue to do so.

Gideon King – Loeb Partners

Did it outperform the Sensex?

Patrick Corydon

Since inception it's performed very close to the Sensex when you consider that some portion of this portfolio is made up of private investments and not public investments and they are not mark to market. If they were mark to mark, and I believe that we would be outperforming index. We are trailing it by just a few percentage points because of those private funds.

Gideon King – Loeb Partners

So does that satisfy or doesn’t satisfy me?

Patrick Corydon

Well, the Board and the Investment Committee here – have determined that was the approach they would take us.

Gideon King – Loeb Partners

And again, is it outsourced? It’s just a Board overseeing this. There’s no independent persons who is sort of questioning the 12% at any given time. And again guys, [ph] 20/20, I understand that. I run funds too and make all kinds of mistakes all the time. Expect for 12% of book value at year end, it’s shocking in India. It’s just shocking and I’m just – I guess I’m suggesting that perhaps you guys consider outsourcing the management of the investments to people who are sort of analyzing it independently and aren’t comprised of people that are affiliates of the entities managing the money. Is that an unreasonable suggestion?

Gary Miller

We will consider all suggestions Gide.

Gideon King – Loeb Partners

Well, may be. Okay. And my second question is, has the same Board at this point sort of look at the stock chart and become frustrated enough with the fact that 3,4,5 years ago our stock is exactly, in fact it’s really higher than where it is right now. And is this Board contemplating forming a special independent committee to figure out exactly what the best way to deploy capital risk. You are essentially well be overcapitalized insurance company with a business that’s not that scalable that hasn’t done anything to really improve your dramatically in a while expect for invest almost as spread of fund or fund to funds. And you are a publically traded company where your voting interest, the voting of family is much greater than its economic interest and it’s becoming increasingly frustrating to me if the stock goes nowhere and granted you do pay dividends for which we are appreciative but the stock just seems to go nowhere and we seem to have this overcapitalized sort of profile and there is no evidence and granted we are not primitive to inside – for the inside deliberations of the Board or anything that’s about to be announced tomorrow morning. But there’s no evidence that there’s going to be a real improvement in terms of the deployment of capital. Investors could also invest in a fund of funds. So, why BWINB as above in line, sorry I call it by its symbol. Why Baldwin & Lyons is a public Company? What’s going guys? When are we going to do something to deploy this capital in a more efficient manner? Are we going to form a special committee to analyze a dividend, a sale, a purchase what are we doing to deploy this capital in a way that makes your stock go up, which I hope is the goal?

Gary Miller

First of to answer your question, there is no special committee.

Gideon King – Loeb Partners

Will you form one? I’m asking you, I’m your shareholder. I’m asking you right here to form one, will you?

Gary Miller

We will consider all suggestions from shareholders’.

Gideon King – Loeb Partners

What are we doing to make our stock go up? And that’s the goal, it’s public Company. I understand you guys own a lot, but I’ve had of it. I’m out of patience and then it’s just too easy just to say well, give and go all your stock, for one you can’t. It’s for two, I think there’s too much liab we have, there’s too much of a futuristic direction to (inaudible) it’s just seems that anything’s happening.

Gary Miller

We have a – shareholders’ will applaud the way we managed the Company all so good, and the fact that it it’s a very stable Company that it has produced favorable a return on equity throughout the years that we have been never reported a large write off, we haven’t made significant miss steps unlike some of the others in the industry that report results and then come crashing back. So, I think your approach in your opinion is certainly valued and then we’ll consider it but we also have to consider other shareholders’ also.

Gideon King – Loeb Partners

But you took a vote amongst your independent shareholders’ and asked whether or not $10 special dividend was appropriate to deploy capital and get it back to shareholders’ instead of putting 12% of book value in India fund. How that they vote for it? I’m happy to have you guys put that on a proxy and submit to a vote. I bet you they would for it. I hope you can understand the frustration, your stock is down from the what – we feel flat of the course of 3, 4 years and in its – I do understand you pay dividend as do many other companies, but it’s just – to me it just doesn’t cut it. Man it’s very frustrating and I receive a call from a shareholder yesterday, who said to me he was very frustrated and what’s to be done. And I said, well, I can’t force these guys hands because they control the Company. Hopefully they will exercise their fiduciary duties than want to do it of their own illusion. So, that’s why I’m asking you do it. I’m asking you form a special committee to finalize these matters because it’s just, it’s too insular the Company is set up, and it’s not fair. So, I’m sure you are going to be mad with me now that I said this on a public form but it’s only because I hopefully like you want the stock to go up. So, those are my two respectful requests that you would form a special committee to analyze these matters and further if you would begin outsource your investment book to independent players so that 12% of our book value is not into the affiliated fund in India.

Gary Miller

Your suggestions and comments will be considered Gideon.

Gideon King – Loeb Partners

Thank you very much.

Operator

And we’ll follow up with John Gwynn from Morgan Keegan. Please go ahead.

John Gwynn – Morgan Keegan

Pat, Euro CTA [ph] right.

Patrick Corydon

Yes, sir.

John Gwynn – Morgan Keegan

I’m not holding you responsible for the way this accounting works. But can you refresh my memory on what the purpose was? Let’s take for instance one of your limited partnerships (inaudible) right?

Patrick Corydon

Maritime is a little bit different structure in that – right now it’s simply we are treating them as investment manager, the ultimately the goal would be to have them actually run a fund of which we would be a personal owner, but right now they are just simply an investment manager.

John Gwynn – Morgan Keegan

Okay. So that loss for the quarter was run through AOCI rather than the income statement, right?

Patrick Corydon

No. Well, as it happens, the trading activity within Maritime this quarter was substantially realized to the income statement. They actually traded securities that was sold then realized losses as opposed to unrealized. So, of the $4.1 million in losses that they incurred in the quarter about $3.5 million of that went to the income statement, John.

John Gwynn – Morgan Keegan

That this is all little bit confusing. Some of this that you’ve done on your own it would have gone through AOCI right?

Patrick Corydon

If we had made exactly the same trade with Maritime, it would accounted for exactly the same way. Now as far as limited partnerships are concerned, (inaudible) rules there and believe me we don’t like them any better than anybody else is that all activity within the limited partnerships has to be recognized to the income statement, realized or unrealized and it has to do with investment company accounting. As I said, we are not big supporters of ad accounting treatment but we don’t have any choice.

John Gwynn – Morgan Keegan

Is there some benefit to all this that I’m missing?

Patrick Corydon

No. It’s simply – I don’t want to give my bandwagon here about the academics that sort of make up accounting rules but I think the theory being that if you have a – it’s difference between investment material for trading and investments that just are available for trade and the accounting rules, let us say that if you have investments that are available for trade but they aren’t really trading securities fetch you the change in value to the income statement or the balance sheet absent any other than temporary impairment. On the other hand if you have trading securities the best your business is to trade securities then you’ve got a run the entire realized and unrealized through the income statement because that’s your business and you can’t leave some of that in your income statement. So, limited partnerships because their underlying business is to trade securities, we have to incorporate that accounting as we move their operations and then their partnerships are obviously passed through entities. As they pass through their operations up to us, we have to use the same mechanic treatment that they use, that’s just unfortunately the rule.

John Gwynn – Morgan Keegan

Okay. Well, thanks.

Operator

This concludes our question and answer session. I would like to turn the conference back over to Mr. Gary Miller for any additional or closing remarks.

Gary Miller

We appreciate you joining us today, and we look forward to be speaking with you again in three months.

Operator

Once again ladies and gentlemen, this concludes today's conference. We thank you for your participation. You may now disconnect.

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Source: Baldwin & Lyons, Inc. Q1 2008 Earnings Call Transcript
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