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Baldwin & Lyons, Inc. Second and Third Quarter, 2005 Financial Statement Restatement

Posted on: Thursday, 22 December 2005, 18:00 CST

INDIANAPOLIS, Dec. 22 /PRNewswire-FirstCall/ -- Baldwin & Lyons, Inc. today announced that it will file a Form 8-K to report its intention to amend its Forms 10-Q for the quarters ended June 30, 2005 and September 30, 2005. The amendments will result in the reclassification of approximately $5.2 million, previously reported as net unrealized capital gains, after tax, which will now be reported as investment gain revenue in the income statement. As a result, earnings per share attributable to investment gains and net income will increase by twelve cents for the second quarter and twenty-three cents for the third quarter. Operating earnings (defined as net income excluding investment gains), comprehensive income and book value per share are not affected. No interim or annual periods ending prior to June 30, 2005 are affected by this restatement.

Beginning late in 2004, the Company significantly increased its investment in limited partnerships which operate as private investment companies. Many of the underlying assets of these partnerships are foreign publicly-traded and privately-placed securities and venture capital investments. The Company typically owns small percentages of these partnerships. Several of these partnerships reported significant increases in value during 2005, although the vast majority of these increases, when reported, were based upon fair value increases of assets still held rather than the actual realization of gains upon asset disposal. In the second and third quarters of 2005, the Company accounted for these reported increases in value as it would if it held the underlying assets directly, by recording the realized gain component in income and the unrealized gain component directly in equity.

In connection with preparation for its year end financial reporting, management became aware of the fact that authoritative accounting pronouncements require that increases in the unrealized value of investments held through a limited partnership, which marks its underlying assets to market through its income statement, must be accounted for in the investor's income statement, rather than as unrealized gains. It is important to note, however, that if the Company owned and managed the same underlying assets directly, it would account for increases in fair value for some or all of these investments as unrealized.

The total valuation of the affected limited partnership investments was correctly stated in the Company's original financial statements at June 30 and September 30, 2005. Accordingly, this reclassification has no effect on total shareholders' equity, book value per share, operating earnings or comprehensive income for the periods presented. It simply results in the classification of certain unrealized gains to become part of net income.

Because of the increased significance of the Company's investments in limited partnerships, recognition of fluctuations in the unrealized value of the underlying assets in the Company's income statement going forward will result in increased volatility in that portion of net income comprised of investment gains. Appropriate supplemental disclosure will be provided to assist users in fully understanding the significance of these fluctuations.

The Company intends to file restated interim financial statements on Form 10-Q/A for each of the periods ended June 30, 2005 and September 30, 2005 at the earliest possible date and upon completion of an interim review by its independent auditor. The restatements will contain reclassifications, as described above. An unaudited table presenting the expected effects of the revisions to the Company's financial statements is set forth below:

Unaudited Consolidated Statements of Income (in thousands, except per share data) As Originally Reported Adjustment As Adjusted For the three months ended June 30, 2005 Net gains on investments (formerly "Realized net gains on investments") $532 $2,656 $3,188 Federal income taxes 3,611 930 4,541 Net income 7,473 1,726 9,199 Earnings per share: Operating income .48 - .48 Net gains on investments .02 .12 .14 Net income .50 .12 .62 For the six months ended June 30, 2005 Net gains on investments (formerly "Realized net gains on investments") $5,468 $2,656 $8,124 Federal income taxes 8,744 930 9,674 Net income 17,819 1,726 19,545 Earnings per share: Operating income .96 - .96 Net gains on investments .24 .12 .36 Net income 1.20 .12 1.32 For the three months ended September 30, 2005 Net gains on investments (formerly "Realized net gains on investments") $2,962 $5,384 $8,346 Federal income taxes 308 1,885 2,193 Net income 1,152 3,499 4,651 Earnings per share: Operating income (.05) - (.05) Net gains on investments .13 .23 .36 Net income .08 .23 .31 For the nine months ended September 30, 2005 Net gains on investments (formerly "Realized net gains on investments") $8,430 $8,040 $16,470 Federal income taxes 9,052 2,814 11,866 Net income 18,971 5,226 24,197 Earnings per share: Operating income .91 - .91 Net gains on investments .37 .35 .72 Net income 1.28 .35 1.63 Unaudited Balance Sheets (in thousands) As Originally Reported Adjustment As Adjusted June 30, 2005 Total assets $864,238 $ - $864,238 Total liabilities 528,087 - 528,087 Unrealized net gains on investments 41,172 (1,726) 39,446 Retained earnings 256,897 1,726 258,623 Total shareholders' equity 336,151 - 336,151 September 30, 2005 Total assets $867,678 $ - $867,678 Total liabilities 527,534 - 527,534 Unrealized net gains on investments 47,747 (5,226) 42,521 Retained earnings 253,203 5,226 258,429 Total shareholders' equity 340,144 - 340,144

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.

Baldwin & Lyons, Inc.

CONTACT: G. Patrick Corydon of Baldwin & Lyons, Inc., +1-317-636-9800

Web site: http://www.baldwinandlyons.com/

Source: PRNewswire-FirstCall

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