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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
For the fiscal year ended Commission file number 0-5534
December 31, 1999
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 No.)
1099 North Meridian Street, Indianapolis, Indiana46204
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (317) 636-9800
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
(Title of class)
Class A Common Stock, No Par Value
Class B Common Stock, No Par Value
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 (or for such shorter periods that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ] ___
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of Class A and Class B Common Stock held by non-
affiliates of the Registrant as of March 15, 2000, based on the closing trade
prices on that date, was approximately $57,805,000.
The number of shares outstanding of each of the issuer's classes of common stock
as of March 15, 2000:
Common Stock, No Par Value:
Class A (voting) 2,321,154 shares
Class B (nonvoting) 10,744,887 shares
The Index to Exhibits is located on pages 50 and 51.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for Annual Meeting of Shareholders to be held
May 2, 2000 are incorporated by reference into Part III.
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PART I
ITEM 1. BUSINESS
Baldwin & Lyons, Inc. was incorporated under the laws of the State of Indiana in
1930. Through its divisions and subsidiaries, Baldwin & Lyons, Inc. (referred
to herein as "B&L") specializes in marketing and underwriting property and
casualty insurance. The Company's subsidiaries are: Protective Insurance
Company (referred to herein as "Protective"), with licenses in all 50 states and
all Canadian provinces; Sagamore Insurance Company (referred to herein as
"Sagamore"), which is currently licensed in 28 states; and B & L Insurance, Ltd.
(referred to herein as "BLI"), which is domiciled and licensed in Bermuda. These
subsidiaries are collectively referred to herein as the "Insurance
Subsidiaries." The "Company", as used herein, refers to Baldwin & Lyons, Inc.
and all its subsidiaries unless the context indicates otherwise.
The Insurance Subsidiaries serve various specialty markets as follows:
FLEET TRUCKING INSURANCE
Protective provides coverage for larger customers in the motor carrier industry
which retain substantial amounts of self-insurance as well as for medium-sized
trucking companies on a first dollar or small deductible basis. These trucking
products are marketed by the B&L agency organization directly to trucking
clients without broker or agent intermediaries. The principal types of
insurance marketed by Protective are:
- Casualty insurance including motor vehicle liability, physical damage
and other liability insurance.
- Workers' compensation insurance.
- Specialized accident (medical and indemnity) insurance.
- Fidelity and surety bonds.
- Inland Marine consisting principally of cargo insurance.
- "Captive" insurance company products, which are provided through BLI
in Bermuda.
The B&L agency force also performs a variety of additional services, primarily
for Protective's insureds, such as risk surveys and analyses, government
compliance assistance, loss control and cost studies and research, development,
and consultation in connection with new insurance programs including development
of computerized systems to assist in monitoring accident data. Extensive claims
services are also provided, primarily to clients with self-insurance programs.
VOLUNTARY ASSUMPTION REINSURANCE
Protective accepts retrocessions from selected reinsurance companies,
principally reinsuring against catastrophes. Exposures under these
retrocessions are generally in high upper layers, are spread among several
geographic regions and are limited so that any one catastrophic event would not
have a material affect on the Company's financial position. However, a series
of major events covering several geographic regions within a short period of
time could result in significant losses to the Company.
PRIVATE PASSENGER AUTOMOBILE INSURANCE
Sagamore markets private passenger automobile liability and physical damage
coverages to nonstandard insureds through a network of independent agents in
twelve states.
SMALL FLEET TRUCKING INSURANCE
Sagamore writes commercial automobile liability, physical damage and cargo
insurance for truck owner-operators with ten or fewer power units. These
products are marketed through independent agents in the majority of the states
in which Sagamore is licensed.
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SMALL BUSINESS WORKERS' COMPENSATION
Sagamore also markets worker's compensation insurance to selected small
businesses in a few midwestern states. This product is marketed through
independent agents.
Approximately 49% of the gross direct premiums written and assumed by the
Insurance Subsidiaries during 1999 was attributable to business placed with
Protective by B & L. The remaining 51% consists primarily of business written
by Sagamore within its private passenger automobile, small fleet and small
business workers' compensation programs, originating through an extensive
network of independent agents.
The Insurance Subsidiaries cede portions of their gross premiums written to
certain non-affiliated reinsurers under excess of loss and quota-share treaties
and by facultative placements. Reinsurance is ceded to spread the risk of loss
among several reinsurers. In addition to voluntary reinsurance, described
above, the Insurance Subsidiaries participate in numerous mandatory government-
operated reinsurance pools which require insurance companies to provide
coverages on assigned risks. These assigned risk pools allocate participation
to all insurers based upon each insurer's portion of premium writings on a state
or national level.
PROPERTY/CASUALTY LOSSES AND LOSS ADJUSTMENT EXPENSES
The consolidated financial statements include the estimated liability for unpaid
losses and loss adjustment expenses ("LAE") of the Insurance Subsidiaries. The
liabilities for losses and LAE are determined using case basis evaluations and
statistical projections and represent estimates of the ultimate net cost of all
unpaid losses and LAE incurred through December 31 of each year. These
estimates are subject to the effects of trends in claim severity and frequency
and are continually reviewed and, as experience develops and new information
becomes known, the liability is adjusted as necessary. Such adjustments, either
positive or negative, are reflected in current operations.
Reserves for incurred, but not reported, claims are determined on the basis of
actuarial calculations using historical data. The anticipated effect of
inflation is implicitly considered when estimating liabilities for losses and
LAE. In addition, frequency and severity of claims must be projected. The
average severity of claims is caused by a number of factors that vary with the
individual type of policy written. Future average severities are projected
based on historical trends adjusted for anticipated changes in underwriting
standards, policy provisions, and general economic and social trends. These
anticipated trends are monitored based on actual development and are modified as
new conditions would suggest that changes are necessary.
Loss reserves related to certain permanent total disability (PTD) workers'
compensation claims have been discounted to present value using tables provided
by the National Council on Compensation Insurance which are based upon a pretax
interest rate of 3.5% and adjusted for losses retained by the insured. The loss
and LAE reserves at December 31, 1999 have been reduced by approximately $5.6
million as a result of such discounting. Had the Company not discounted loss
and LAE reserves, pretax income would have been approximately $.3 million lower
for the year ended December 31, 1999.
The maximum amount for which the Company insures a trucking risk is $10 million
although, occasionally, limits above $10 million are provided but are 100%
reinsured. After giving effect to current treaty reinsurance arrangements, for
the majority of risks insured, the Company's range of loss exposures is zero to
$100,000 for a single occurrence. However, the Company continues to retain up
to $1 million of loss exposure per occurrence for certain independent contractor
and other non-trucking risks. Prior to June 1, 1998, the first $1 million of
insured loss for a single occurrence was retained by the Company under treaty
arrangements although this exposure was routinely reduced through the use of
facultative reinsurance. The Company has reinsured exposure in excess of its
applicable retention with several companies.
Certain of the previous reinsurance treaties contained aggregate recovery
limitations. To the extent that losses in these layers, in the aggregate,
exceed these limitations, the Company could be liable for amounts that would
otherwise be covered under these reinsurance treaties. No such aggregate limits
have been exceeded as of
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December 31, 1999. Prior to the restructuring of the Company's reinsurance
treaties relating to trucking risks, effective June 1, 1998, reinsurance treaty
arrangements had remained relatively constant since 1986. Prior to September 1,
1986, the Company's maximum exposure on a $10 million loss relating to its
trucking insurance business ranged from $250,000 to approximately $2 million.
The higher exposures were retained during periods when reasonably priced
reinsurance was not available. Very few losses incurred during these periods,
with the exception of environmental liability losses, remain unsettled at
December 31, 1999.
With respect to Sagamore's private passenger automobile and small fleet trucking
business, the Company's maximum net exposure for a single occurrence was
$100,000 during 1999. Sagamore's retention under the workers' compensation
product was $50,000 for a single occurrence.
The following table sets forth a reconciliation of beginning and ending loss and
LAE liability balances, for 1999, 1998 and 1997. That table is presented net of
reinsurance recoverable to correspond with income statement presentation.
However, a reconciliation of these net reserves to those gross of reinsurance
recoverable, as presented in the balance sheet, is also shown. The table on
page 7 shows the development of the estimated liability, net of reinsurance
recoverable, for the ten years prior to 1999.
RECONCILIATION OF LIABILITY FOR LOSSES AND LOSS ADJUSTMENT
EXPENSES (GAAP BASIS)
Year Ended December 31,
1999 1998 1997
----------- ----------- -----------
(IN THOUSANDS)
NET OF REINSURANCE RECOVERABLE:
Liability for losses and LAE at the
Beginning of the year $143,951 $151,493 $154,537
Provision for losses and LAE:
Continuing operations:
Claims occurring during the current year 55,520 53,278 47,692
Claims occurring during prior years (10,609) (10,741) (7,838)
-------- -------- --------
44,911 42,537 39,854
Losses and LAE payments:
Continuing operations:
Claims occurring during the current year 27,867 24,947 15,946
Claims occurring during prior years 30,215 25,088 26,934
-------- -------- --------
58,082 50,035 42,880
Change in unpaid portion of uncollectible
Amounts due from reinsurers (78) (44) (18)
-------- -------- --------
Liability for losses and LAE at end of year 130,702 143,951 151,493
Reinsurance recoverable on unpaid losses
at end of the year 42,771 50,481 45,702
-------- -------- --------
Liability for losses and LAE, gross of
reinsurance recoverable, at end of the year $173,473 $194,432 $197,195
======== ======== ========
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The reconciliation on page 4 shows a $10.6 million (7.4%) savings in the
liability for losses and LAE recorded at December 31, 1998 and compares to a
one-year savings recognized in 1998 of $10.7 million. The net savings is
reflected in 1999 underwriting income. All major coverage groups produced
redundancies during each of the years 1999, 1998 and 1997. A more detailed
discussion of reserve savings experienced in recent years is presented below.
The differences between the liability for losses and LAE reported in the
accompanying 1999 consolidated financial statements in accordance with
generally accepted accounting principles ("GAAP") and that reported in the
annual statements filed with state and provincial insurance departments
in the United States and Canada in accordance with statutory accounting
practices ("SAP") are as follows:
(IN THOUSANDS)
Liability reported on a SAP basis - net of reinsurance recoverable $131,754
Add differences:
Reinsurance recoverable on unpaid losses and LAE 42,771
Additional reserve for reinsurance assumed losses not
reported to the Company at the current year end 240
Reclassification of loss reserves ceded attributable to insolvent reinsurers 358
Deduct differences:
Estimated salvage and subrogation recoveries recorded on
a cash basis for SAP and on an accrual basis for GAAP (1,650)
--------
Liability reported on a GAAP basis $173,473
========
Loss reserves ceded attributable to insolvent reinsurers are treated as a
separate liability for SAP purposes but are classified as an addition to loss
reserves in the GAAP consolidated balance sheets. This classification was used
for GAAP since the uncollectible amounts are, in effect, a reversal of
reinsurance credits taken against gross loss and LAE reserves. Losses incurred,
however, do not include charges for uncollectible reinsurance, nor do the tables
on pages 4 and 7, since the inability to recover these amounts from insolvent
reinsurers is considered to be a credit loss and is not associated with the
Company's reserving process. Accordingly, loss and LAE developments would be
distorted if amounts related to insolvent reinsurance were included.
The table on page 7 presents the development of GAAP balance sheet liabilities
for each year-end 1989 through 1999, net of all reinsurance credits. The top
line of the table shows the estimated liability for unpaid losses and LAE
recorded at the balance sheet date for each of the indicated years. The
liabilities shown on this line for each year-end have been reduced by amounts
relating to loss reserves ceded attributable to insolvent reinsurers, as
discussed in the immediately preceding paragraph. This liability represents the
estimated amount of losses and LAE for claims arising in all prior years that
are unpaid at the balance sheet date, including losses that had been incurred
but not yet reported to the Company.
The upper portion of the table shows the reestimated amount of the previously
recorded liability based on experience as of the end of each succeeding year.
The estimate is increased or decreased as more information becomes known about
the frequency and severity of claims.
The "cumulative redundancy" represents the aggregate change in the estimates
over all prior years. For example, the 1989 liability has developed a $29.1
million redundancy over ten years. That amount has been reflected in income
over the ten years, as shown on the table. The effect on income of changes in
estimates of the liability for losses and LAE during the past three years is
shown in the table on page 4.
Historically, the Company's loss developments have been generally favorable.
Reserve developments for all year-ends 1986 through 1998 have produced
redundancies as of December 31, 1999. In addition to
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improvements in reserving methods, loss reserve developments since 1985 have
been favorably affected by several other factors. Perhaps the most significant
single factor has been the improvement in safety programs by the trucking
industry in general and by the Company's insureds specifically. Statistics
produced by the American Trucking Association show that driver quality has
improved markedly in the past decade resulting in fewer fatalities and serious
accidents. The Company's experience also shows that improved safety and hiring
programs have had a dramatic impact on the frequency and severity of trucking
accidents. Higher self-insured retentions also played a part in reduced
insurance losses during much of this period. Higher retentions not only raise
the excess insurance entry point but also encourage trucking company management
to focus even more intensely on safety programs. Further, reserve savings have
been achieved by the use of structured settlements on certain workers'
compensation and liability claims of a long-term liability nature. Recent
developments, including raising of speed limits in many states and the lack of
availability of qualified drivers, may reverse some of the trends noted during
the past ten years. Additionally, the recent rise in diesel and gasoline prices
may have a negative impact on incurred losses if smaller trucking operators
begin to sacrifice maintenance and repairs in an effort to offset rising fuel
costs.
The establishment of reserves requires the use of historical data where
available and generally a minimum of ten years of such data is required to
provide statistically valid samples. As previously mentioned, numerous factors
must be considered in reviewing historical data including inflation, tort reform
(or lack thereof), new coverages provided and trends noted in the current book
of business which are different from those present in the historical data.
Clearly, the Company's book of business in 1999 is different from that which
generated much of the ten-year historical loss data used to establish reserves
in the past few years. Savings realized in recent years upon the closing of
claims, as reflected in the tables on pages 4 and 7, suggest that the Company's
insured selection process and the overall effect of improved safety programs and
other positive influences on claim frequency and severity have more than offset
the negative factors anticipated when reserves were established. The Company
and its actuaries will continue to review the trends noted and, should it appear
that such trends are permanent and projectable, they will be reflected in future
reserving method refinements.
The lower section of the table on page 7 shows the cumulative amount paid with
respect to the previously recorded liability as of the end of each succeeding
year. For example, as of December 31, 1999, the Company had paid $122.3 million
of losses and LAE that had been incurred, but not paid, as of December 31, 1989;
thus an estimated $35.1 million in losses incurred through 1989 remain unpaid as
of the current financial statement date ($157.4 million incurred less $122.3
million paid).
In evaluating this information, it is important to note that the method of
presentation causes development experience to be duplicated. For example, the
amount of any redundancy or deficiency related to losses settled in 1992, but
incurred in 1989, will be included in the cumulative development amount for
years-end 1989, 1990, and 1991. As such, this table does not present accident
or policy year development data which readers may be more accustomed to
analyzing. Also, conditions and trends that have affected development of the
liability in the past may not necessarily occur in the future. Accordingly, it
may not be appropriate to extrapolate future redundancies or deficiencies based
on this table.
ENVIRONMENTAL MATTERS: The Company's reserves for unpaid losses and loss
expenses at December 31, 1999 included amounts for liability related to
environmental damage claims. Given the Company's principal business is insuring
trucking companies, it does on occasion receive claims involving a trucking
accident which has resulted in the spill of a pollutant. Certain of the
Company's policies cover these situations on the basis that they were caused by
an accident that resulted in the immediate spill of a pollutant. These claims
are typically reported and resolved within a short period of time.
However, the Company has also received a few environmental claims that did not
result from a "sudden and accidental" event. Some of these claims fall under
policies issued in the 1970's primarily to one account which was involved in the
business of hauling and disposing of hazardous waste. Although the Company had
pollution exclusions in its policies during that period, the courts have ignored
similar exclusions in many
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ANALYSIS OF LOSS AND LOSS ADJUSTMENT EXPENSE DEVELOPMENT--GAAP BASIS
(DOLLARS IN THOUSANDS)
YEAR ENDED DECEMBER 31 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
-------- -------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Liability for Unpaid
Losses and LAE, Net
of Reinsurance
Recoverables * $186,517 $190,351 $198,790 $188,189 $175,395 $175,012 $161,001 $154,039 $151,013 $143,515 $130,345
Liability Reestimated
as of:
One Year Later 175,998 178,706 185,452 174,269 152,146 169,528 148,756 146,201 140,272 132,906
Two Years Later 162,434 164,977 171,069 153,548 147,577 159,000 140,811 135,125 128,743
Three Years Later 161,143 157,802 155,977 156,271 144,526 153,833 130,540 123,775
Four Years Later 155,059 149,946 160,477 155,104 142,178 148,390 122,792
Five Years Later 151,138 155,601 159,804 153,528 137,876 143,478
Six Years Later 157,020 155,666 158,972 150,531 134,744
Seven Years Later 158,430 155,038 157,976 147,992
Eight Years Later 157,644 154,453 155,830
Nine Years Later 157,970 153,051
Ten Years Later 157,372
Cumulative Redundancy $29,145 $37,300 $42,960 $40,197 $40,651 $31,534 $38,209 $30,264 $22,270 $10,609
Cumulative Amount of
Liability Paid
Through:
One Year Later $41,873 $40,939 $41,958 $38,511 $30,297 $45,005 $27,825 $26,934 $25,088 $30,214
Two Years Later 69,330 63,689 68,706 59,494 58,969 67,219 43,016 43,280 43,311
Three Years Later 81,291 81,746 83,413 82,122 71,375 76,248 55,515 55,834
Four Years Later 95,857 92,313 98,331 91,794 77,702 85,096 62,740
Five Years Later 103,035 103,190 104,915 96,617 82,792 90,331
Six Years Later 111,017 107,579 109,174 100,299 87,316
Seven Years Later 114,005 110,282 112,487 104,625
Eight Years Later 116,357 113,080 116,461
Nine Years Later 118,960 116,540
Ten Years Later 122,292
* Amounts shown for 1989 through 1999 do not include the unpaid portion of
uncollectible amounts due from insolvent reinsurers which are classified with
loss and LAE reserves for financial statement purposes of $2,215, $818, $597,
$611, $554, $542, $457, $498, $480, $436 and $358, respectively.
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environmental cases. During the five years ended December 31, 1998, the Company
recorded a total of $12.0 million in losses incurred with respect to
environmental claims. The settlement of several claims during 1999 resulted in
a reduction to these incurred losses of $1.1 million, net of reinsurance.
Incurred losses to date include a reserve for incurred but not reported losses
and loss expenses of $5.0 million.
Establishing reserves for environmental claims is subject to uncertainties that
are greater than those represented by other types of claims. Factors
contributing to those uncertainties include a lack of historical data, long
reporting delays, uncertainty as to the number and identity of insureds with
potential exposure, unresolved legal issues regarding policy coverage, and the
extent and timing of any such contractual liability. Courts have reached
different and sometimes inconsistent conclusions as to when the loss occurred
and what policies provide coverage, what claims are covered, whether there is an
insured obligation to defend, how policy limits are determined, how policy
exclusions are applied and interpreted, and whether cleanup costs represent
insured property damage. Management believes that those issues are not likely
to be resolved in the near future.
However, to date, very few environmental claims have been reported to the
Company. In addition, a review of the businesses of our past and current
insureds indicates that exposure to further claims of an environmental nature is
limited because most of the Company's accounts are not currently, and have not
in the past been, involved in the hauling of hazardous substances. Also, the
revision of the pollution exclusion in the Company's policies in 1986 is
expected to further limit exposure to claims from that point forward. In
addition, the Company has never been presented with an environmental claim
relating to asbestos and, based on the types of business the Company has insured
over the years, it is not expected that the Company will have any asbestos
exposure.
MARKETING
The Company's primary marketing areas are outlined on pages 2 and 3.
Since the mid-1980's, Protective has focused its marketing efforts on large and
medium trucking fleets. Protective has its largest market share in the larger
trucking fleets (over 150 units). These fleets self-insure a portion of their
risk and such self-insurance plans are a specialty of the Company. The
indemnity contract provided to self-insured customers is designed to cover all
aspects of trucking liability, including third party liability, property damage,
physical damage, cargo and workers' compensation, arising from vehicular
accident or other casualty loss. The self-insured program is supplemented with
large deductible workers' compensation policies in states that do not allow for
self-insurance. Protective also offers accident insurance on a group basis to
independent contractors under contract to a fleet sponsor. Since 1989, the
market for Protective's products has grown increasingly competitive (see
comments under "Competition" following).
During the latter part of 1992, in the aftermath of Hurricane Andrew, property
catastrophe reinsurance, which protects insurance companies from such disasters,
became difficult to obtain and prices increased. In light of the favorable
markets, Protective accepted retrocessions for catastrophe exposures from
certain reinsurers on terms that are considered to be very favorable. While
Protective will continue to participate in this market, as the result of the
recent merger of certain reinsurers and less favorable pricing in the market,
Protective's participation in retrocessions decreased in 1998 and again in 1999.
Based on current market conditions, the Company expects that premium from
reinsurance assumed will again decline during 2000.
During 1995, Sagamore entered the private passenger automobile insurance market
for nonstandard insureds. This program is currently being marketed in twelve
midwestern and southern states with expansion into additional states during 2000
anticipated. Market acceptance to date has been favorable and approximately
$33.3 million of premium was written in this line during 1999.
Sagamore also offers a program of coverages for "small fleet" trucking concerns
(owner-operators with one to ten power units). This program was limited to a
small geographic area composed of Midwestern states through
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the end of 1997. However, significant geographic expansion began during 1998
and continued during 1999. Future expansion into other states is anticipated
during 2000. Approximately $7.8 million of premium was written in this program
during 1999, an increase in excess of 45% from the prior year.
During 1997, Sagamore began marketing a small business workers' compensation
product in Missouri. To date, growth in this product has been slow with premium
written during 1999 of $1.0 million, approximately 11% greater than the prior
year. The market for workers' compensation is currently among the most
underpriced in the property/casualty industry. Until pricing returns to a level
which would allow for the reasonable expectation of an underwriting profit,
management does not expect premium volume from this division to increase
significantly.
INVESTMENTS
The Company manages its invested assets to provide a high degree of flexibility
to respond to opportunities in the financial markets and to provide necessary
cash flows for operations. The resulting investment strategies emphasize
relatively short-term maturities and high asset quality and are designed to
produce reasonable returns without jeopardizing principal.
At December 31, 1999 the financial statement value of the Company's investment
portfolio was approximately $441 million, including money market instruments
classified as cash equivalents. A comparison of the diversification of the
Company's investment portfolio, using cost as a basis, is as follows:
December 31
1999 1998
--------- ---------
Corporate and other bonds 27.6% 23.5%
Common stocks 20.7 21.8
Municipal bonds 13.5 16.4
U.S. Government obligations 13.2 17.6
Short-term and other investments 13.2 10.4
Mortgage-backed securities 8.0 8.8
Preferred stocks 3.8 1.5
--------- ---------
100.0% 100.0%
========= =========
The Company's concentration of invested assets in relatively short-term
investments provides it with a level of liquidity which is more than adequate to
provide for its anticipated cash flow needs. The structure of the investment
portfolio also provides the Company with the ability to restrict premium
writings during periods of intense competition, which typically result in
inadequate premium rates, and allows the Company to respond to new opportunities
in the marketplace as they arise. The following comparison of the Company's
bond and short-term investment portfolios, using par value as a basis, indicates
the changes in maturities in the portfolio during 1999.
MATURITIES OF BONDS AND SHORT-TERM INVESTMENTS AT DECEMBER 31 (PAR VALUE)
1999 1998
--------- ---------
Less than one year 28.3% 23.9%
1 to 5 years 50.8 50.2
5 to 10 years 13.2 17.2
More than 10 years 7.7 8.7
--------- ---------
100.0% 100.0%
========= =========
Average life of portfolio
(years) 4.3 4.6
========= =========
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Approximately $21.0 million of the fixed maturity portfolio (4.8% of total
invested assets) consists of bonds rated as less than investment grade at
December 31, 1999. The unrealized net loss on the fixed maturity portfolio was
$5.6 million at December 31, 1999, before income taxes, and compares to a $3.9
million unrealized loss at December 31, 1998.
Equity securities comprise 32% of the financial statement value of the
consolidated investment portfolio at December 31, 1999, essentially unchanged
from the prior year-end. The unrealized gains on the equity security portfolio
decreased $7.2 million to $45.5 million at December 31, 1999.
A comparison of consolidated investment yields is as follows:
1999 1998
-------- --------
Before federal tax:
Investment income 5.0% 5.0%
Investment income plus realized
investment gains 6.4 5.7
After federal tax:
Investment income 3.6 3.6
Investment income plus realized
investment gains 4.5 4.0
EMPLOYEES
As of March 1, 2000, the Company had 268 employees, 260 of whom are engaged
partially or wholly in the business of the Company's Insurance Subsidiaries.
The decrease in employees from 293 at March 1, 1999 is due to greater
efficiencies in operations of the Company's newer divisions and a leveling of
private passenger automobile business during 1999.
COMPETITION
The insurance brokerage and agency business is highly competitive. B & L
competes with a large number of insurance brokerage and agency firms and
individual brokers and agents throughout the country, many of which are
considerably larger than B & L. B & L also competes with insurance companies
which write insurance directly with their customers.
Insurance underwriting is also highly competitive. The Insurance Subsidiaries
compete with other stock and mutual companies and inter-insurance exchanges
(reciprocals). There are numerous insurance companies offering the lines of
insurance which are currently written or may in the future be written by the
Insurance Subsidiaries. Many of these companies have been in business for
longer periods of time, have significantly larger volumes of business, offer
more diversified lines of insurance coverage and have greater financial
resources than the Company. In many cases, competitors are willing to provide
coverage for rates lower than those charged by the Insurance Subsidiaries. Many
potential clients self-insure workers' compensation and other risks for which
the Company offers coverage, and some concerns have organized "captive"
insurance companies as subsidiaries through which they insure their own
operations. Some states have workers' compensation funds that preclude private
companies from writing this business in those states. Federal law also
authorizes the creation of "Risk Retention Groups" which may write insurance
coverages similar to those offered by the Company.
ITEM 101(B), (C)(1)(I) AND (VII), AND (D) OF REGULATION S-K:
Reference is made to Note J to the consolidated financial statements which
provides information concerning industry segments and is filed herewith under
Item 8, Financial Statements and Supplementary Data.
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Item 2. PROPERTIES
The Company leases office space at 1099 North Meridian Street, Indianapolis,
Indiana in the Landmark
Building. This building is located approximately one mile from downtown
Indianapolis. The lease covers approximately 67,000 square feet and expires in
August, 2003, with an option to renew for an additional ten years. The
Company's entire operations, with the exception of Baldwin & Lyons, California,
are conducted from these leased facilities.
The Company owns a small building and the adjacent real estate approximately two
miles from its main office. This building contains approximately 3,300 square
feet of usable space, and is used primarily as storage facilities and as a
contingent back up and disaster recovery site for computer operations.
Baldwin & Lyons, California leases approximately 2,700 square feet of office
space in a suburb of Los Angeles, California. The lease expires in August, 2001
with a three-year renewal option. All West Coast operations are conducted from
these facilities.
The current facilities are expected to be adequate for the Company's operations
for the foreseeable future.
Item 3. LEGAL PROCEEDINGS
In the ordinary, regular and routine course of their business, the Company and
its Insurance Subsidiaries are frequently involved in various matters of
litigation relating principally to claims for insurance coverage provided. No
currently pending matter is deemed by management to be material to the Company.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of 1999.
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PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS
The Company's Class A and Class B common stocks are traded on The Nasdaq Stock
Marketr under the symbols BWINA and BWINB, respectively. The Class A and Class
B common shares have identical rights and privileges except that Class B shares
have no voting rights other than on matters for which Indiana law requires class
voting. As of December 31, 1999, there were approximately 400 record holders of
Class A Common Stock and approximately 500 record holders of Class B Common
Stock.
The table below sets forth the range of high and low sale prices for the Class A
and Class B Common Stock for 1999 and 1998, as reported by the National
Association of Security Dealers, Inc. and published in the financial press. The
quotations reflect interdealer prices without retail markup, markdown or
commission and do not necessarily represent actual transactions.
CASH
CLASS A CLASS B DIVIDENDS
HIGH LOW HIGH LOW DECLARED
--------- --------- --------- --------- ---------
Year ended December 31:
1999:
FOURTH QUARTER $22 5/16 $19 3/4 $23 15/16 $19 5/8 $.10
THIRD QUARTER 22 3/8 20 1/4 23 7/8 20 3/16 .10
SECOND QUARTER 22 7/8 20 24 3/64 20 5/16 .10
FIRST QUARTER 25 11/16 20 3/4 26 20 3/16 .10
1998:
Fourth Quarter 23 1/2 20 25 18 1/2 $.10
Third Quarter 24 1/4 16 1/8 24 20 5/8 .10
Second Quarter 24 21 24 21 1/4 .10
First Quarter 25 1/8 19 15/16 24 15/16 19 11/16 .10
The Company expects to continue its policy of paying regular cash dividends
although there is no assurance as to future dividends because they are dependent
on future earnings, capital requirements and financial conditions and are
subject to regulatory restrictions as described in Note H to the consolidated
financial statements.
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ITEM 6. SELECTED FINANCIAL DATA
YEAR ENDED DECEMBER 31
------------------------------------------------------------
1999 1998 1997 1996 1995
---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
NET PREMIUMS WRITTEN $ 72,033 $ 71,943 $ 69,575 $ 61,431 $ 63,065
NET PREMIUMS EARNED 69,114 68,862 61,675 58,743 58,793
NET INVESTMENT INCOME 18,891 19,060 18,442 19,580 20,161
REALIZED NET GAINS ON INVESTMENTS 5,625 2,855 17,338 6,860 6,210
LOSSES AND LOSS EXPENSES INCURRED 44,911 42,537 39,854 33,754 38,754
INCOME FROM CONTINUING OPERATIONS 18,616 16,895 24,446 21,334 20,594
NET INCOME 18,616 16,895 24,446 21,692 29,360
EARNINGS PER SHARE -- NET INCOME (1) 1.38 1.22 1.75 1.51 1.96
CASH DIVIDENDS PER SHARE .40 .40 .40 .36 .30
INVESTMENT PORTFOLIO (3) 440,797 456,735 475,328 454,791 424,833
TOTAL ASSETS 530,677 544,369 557,015 526,460 512,225
SHAREHOLDERS' EQUITY 284,783 288,592 293,963 273,122 247,008
BOOK VALUE PER SHARE (1) 21.50 20.91 21.23 19.46 16.78
UNDERWRITING RATIOS (2):
Losses and loss expenses 65.0% 61.8% 64.6% 57.5% 65.9%
Underwriting expenses 29.6% 32.0% 33.3% 29.2% 28.0%
Combined 94.6% 93.8% 97.9% 86.7% 93.9%
(1) Earnings and book value per share are adjusted for the dilutive effect of
stock options outstanding. Earnings per share has been restated in accordance
with Financial Accounting Standards Board Statement No. 128, Earnings Per
Share.
(2) Data is for all coverages combined and is presented based upon generally
accepted accounting principles.
(3) Includes money market instruments classified with cash in the Consolidated
Balance Sheets.
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Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
The primary sources of the Company's liquidity are (1) funds generated from
insurance premiums, (2) net investment income and (3) maturing investments. The
Company generally experiences positive cash flow 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 insurance subsidiaries,
other than loss and loss expense payments and commissions paid to the parent
company, generally average between 25% and 35% of premiums earned on a
consolidated basis and the remaining amount is available for investment for
varying periods of time depending on the type of insurance coverage provided.
During extended periods of declining premium volume, however, operating cash
flows may turn negative as loss settlements exceed net premium revenue and
receipts of investment income.
For several years, the Company's investment philosophy has emphasized the
purchase of short-term bonds with maximum quality and liquidity. As interest
rates have remained relatively low and yield curves have been essentially flat
in recent years, the Company has not committed funds to longer term fixed
maturity investments. The average life of the Company's bond and short-term
investment portfolio was 4.3 years and 4.6 years for 1999 and 1998,
respectively. The Company also remains an active participant in the equity
securities market. Investments made by the Company's domestic insurance
subsidiaries are regulated by guidelines promulgated by the National Association
of Insurance Commissioners which are designed to provide protection for both
policyholders and shareholders.
The Company's assets at December 31, 1999 included $35.9 million in short-term
investments which are readily convertible to cash without market penalty and an
additional $44.1 million of fixed maturity investments maturing in less than one
year. The Company believes that these liquid investments, plus the expected
cash flow from current operations, are more than sufficient to provide for
projected claim payments and operating cost demands. In addition, the Company's
reinsurance program is structured to avoid serious cash drains that might
accompany catastrophic losses. In the event competitive conditions continue to
produce inadequate rates and the Company chooses to further reduce volume, the
Company believes that the liquidity of its investment portfolio would permit it
to continue to pay claims as settlements are reached without requiring the
disposal of investments at a loss, regardless of interest rates in effect at the
time.
Net premiums written by the Company's U.S. insurance subsidiaries for 1999 were
approximately 22% of the combined statutory surplus of these subsidiaries.
Premium writings of 200% to 300% of surplus are generally considered acceptable
by regulatory authorities. Further, the statutory capital of each of the
insurance subsidiaries substantially exceeds minimum risk based capital
requirements set by the National Association of Insurance Commissioners.
Accordingly, the Company has the ability to significantly increase its business
without seeking additional capital to meet statutory guidelines.
Shareholders' equity decreased to $284.8 million at December 31, 1999, from
$288.6 million at December 31, 1998, due predominantly to $11.8 million in
treasury share purchases. The change in shareholders' equity also included a
$5.6 million decline in unrealized net gains on investments and $5.4 million of
cash dividends to shareholders. Book value per common share outstanding
increased 3% to $21.50 at December 31, 1999 from $20.91 per share at December
31, 1998.
As more fully discussed in Note H to the consolidated financial statements, at
December 31, 1999, $56.4 million, or 19.8% of shareholders' equity, represented
net assets of the Company's insurance subsidiaries
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which, at that time, could not be transferred in the form of dividends, loans or
advances to the parent company due to statutory restrictions on the allowable
transfers. However, management believes that these restrictions pose no
material liquidity concerns for the Company. The financial strength and
stability of the subsidiaries permit ready access by the parent company to
short-term and long-term sources of credit. The parent company had cash and
marketable investments of approximately $11.0 million at December 31, 1999.
RESULTS OF OPERATIONS
1999 COMPARED TO 1998
Direct premiums written for 1999 totaled $86.1 million, an increase of $8.2
million (10.6%) from 1998. This increase is primarily attributable to an
increase in fleet trucking's independent contractor program of $4.1 million
(24.6%) from 1998. Direct premium writings from small and large trucking fleet
risks also increased by $2.4 million and $2.1 million, respectively. These
increases were partially offset by a small decrease in the Company's private
passenger automobile business where competitive pressures have increased.
Increases in independent contractor premiums resulted from the addition of new
accounts and volume increases on existing accounts. Large fleet trucking volume
increases resulted primarily from the addition of new accounts and small fleet
trucking premium increases were due primarily to geographic expansion.
Premiums assumed from other reinsurers decreased by $3.0 million (42.6%) to $4.0
million during 1999. This decrease is due to non-renewal of the Company's
participation in voluntary property catastrophe retrocession pools during 1999
as pricing in this market continued to weaken.
Premiums ceded to reinsurers increased $5.7 million (44.9%) during 1999 to $18.3
million. The percentage of premiums ceded to direct premiums written increased
to 21.3% for 1999 from 16.3% for 1998, as the Company's new reinsurance
agreements for its fleet trucking products, effective June 1, 1998, were
inforce for the full year. The new treaties provide for the Company to cede
larger portions of its premium as well as the underlying risk.
After giving effect to changes in unearned premiums, net premiums earned
increased .4% to $69.1 million for 1999 from $68.9 million for 1998. Net
premiums earned from all trucking-related insurance products increased by $2.5
million (8.5%), including $2.2 million (59.7%) for small fleet trucking.
Premiums earned from private passenger autobobile increased by $1.0 million.
The above increases were offset by a $3.7 million decrease (43.8%) in voluntary
reinsurance assumed premium during 1999.
Net investment income decreased by $.2 million (.9%) during 1999 due to lower
average invested assets while overall pre-tax yields remained relatively
unchanged from 1998. The average pre-tax yield on invested assets was 5.0% for
both 1999 and 1998 and after-tax yields also remained unchanged at 3.6%.
Investment expenses, which are netted directly against income, were relatively
unchanged in 1999 and were 5.8% of gross investment income for both 1999 and
1998.
Realized net capital gains were $5.6 million in 1999 compared to $2.8 million
for 1998. The current year net gain consisted of gains on equity securities and
other investments of $7.8 million and $.2 million, respectively, and losses on
fixed maturities of $2.3 million.
Losses and loss expenses incurred during 1999 increased $2.4 million (5.6%) to
$44.9 million. The 1999 consolidated loss and loss expense ratio was 65.0%
compared to 61.8% for 1998. The increase in the loss and loss expense ratio is
primarily attributable to incurred loss development on discontinued products and
residual market participation along with growth in the Company's small trucking
fleet program, all of which is measured
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against a relatively unchanged consolidated premium base. Changes in the
Company's remaining products were individually insignificant. Because of the
high limits provided by the Company to its insureds, the length of time required
to settle larger, more complex claims and the volatility of the trucking
liability insurance business, the Company believes it is important to have a
high degree of comfort in its reserving process. As claims are settled in years
subsequent to their occurrence, the Company's claim handling process has,
historically, tended to produce savings from the reserves provided. The Company
believes that favorable loss developments in recent years may be attributable,
at least in part, to changes in trucking safety in general resulting from the
implementation of the national commercial driver license, mandatory drug testing
and an increased awareness by trucking companies of the cost of unsafe
operations. It is further believed that the Company's selection techniques,
minimum safety standards and claims handling have also contributed to this
favorable loss experience. However, due to the aforementioned changes in the
Company's reinsurance structure for its large trucking fleets, whereby a smaller
portion of the risk is retained, the impact of future loss developments on the
loss and loss expense ratios may not be consistent with prior years.
Other operating expenses for 1999, before credits for allowances from
reinsurers, increased $2.3 million (7.8%) to $31.8 million. Personnel related
expenses, including amounts allocated to loss expenses and investment income,
increased $2.4 million (16.1%) from 1998. Personnel expense for 1999 was higher
primarily as the result of accruals for equity appreciation rights, which
represent a broad-based employee incentive program which is tied to changes in
the Company's book value, in addition to regular annual payroll increases.
Direct commission expense decreased $.9 million (11.0%) as the result of the
decline in premiums from voluntary reinsurance assumed, partially offset by
increases in premiums from Sagamore's small fleet and small business workers'
compensation products. Ceding commission allowances from reinsurers increased
$3.7 million (115.7%) resulting from new reinsurance agreements covering
Protective's fleet trucking business. The ratio of net operating expenses of
the insurance subsidiaries to net premiums earned was 29.6% during 1999 compared
to 32.0% for 1998. Including the agency operations, the ratio of other
operating expenses to total revenue, adjusted to remove net realized gains, was
27.5% for 1999 compared with 29.4% for 1998. Expenses for 1999 and 1998 include
expenditures for Year 2000 (Y2K) compliance, as discussed more thoroughly
elsewhere in this discussion. While it is not possible to precisely isolate Y2K
expenditures from those for ongoing development of current product lines,
management believes that amounts spent during 1999 for Y2K related issues were
higher than expenditures during 1998.
The effective federal tax rate for consolidated operations for 1999 was 29.8%.
This rate is lower than the statutory rate primarily because of tax-exempt
investment income.
As a result of the factors mentioned above, net income from consolidated
operations for 1999 was $18.6 million compared to $16.9 million for 1998.
Diluted earnings per share increased to $1.38 in 1999 from $1.22 in 1998 due
primarily to the increase in realized gains on investments. Diluted earnings
per share from operations before realized gains on investments was $1.11 in 1999
compared to $1.09 in 1998.
1998 COMPARED TO 1997
Direct premiums written for 1998 totaled $77.9 million, an increase of $11.9
million (17.9%) from 1997. This increase is primarily attributable to an
increase in nonstandard private passenger automobile business of $10.3 million
(43.6%) from 1997. Direct premium writings from small trucking fleet risks and
fleet trucking's independent contractor program also increased by $2.2 million
and $2.0 million, respectively. The new small business workers' compensation
program also generated $.5 million in new premium during 1998. These increases
were partially offset by decreases in the remainder of the Company's trucking-
related products. Market conditions for the Company's large and medium fleet
trucking products continued to be competitive
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during 1998, resulting in further downward pressure on pricing. In addition,
favorable claims development from expired retrospectively rated workers'
compensation policies reduced direct premium by $1.0 million in 1998.
Premium writings from reinsurance assumed decreased by $4.8 million (40.7%) to
$6.9 million during 1998. $3.9 million of this decrease is due to the Company
not renewing it's participation in an excess facultative program due to
unfavorable experience. Premiums assumed from voluntary property catastrophe
retrocession pools were also lower during 1998 as the result of reductions in
the Company's shares in these pools during 1998, as well as decreases in gross
pool revenues.
Premium writings ceded to reinsurers increased $4.5 million (55.1%) during 1998
to $12.7 million. The percentage of premiums ceded to direct premiums written
increased to 16.3% for 1998 from 12.4% for 1997, as the Company entered into new
reinsurance agreements for its fleet trucking products, effective June 1, 1998,
whereby it ceded more premiums and retained less risk. Reinsurance retentions
were also decreased for the Company's small fleet trucking products with no
material impact on premium ceded.
After giving effect to changes in unearned premiums, net premiums earned
increased 11.7% to $68.9 million for 1998 from $61.7 for 1997. Net premiums
earned from all trucking-related insurance products, including small fleet
trucking, decreased by $3.9 million (11.5%). Premiums earned from voluntary
reinsurance assumed decreased by $1.6 million. The above decreases were offset
by a $12.9 million increase (74.9%) in private passenger automobile premium
during 1998.
Net investment income increased by $.6 million (3.3%) during 1998 due to higher
average invested assets while overall pre-tax yields were relatively unchanged.
The average pre-tax yield on invested assets was 5.0% for both 1998 and 1997
while the after-tax yield for 1998 was 3.6% compared to 3.5% for 1997.
Investment expenses, which are netted directly against income, were relatively
unchanged in 1998 and were 5.8% of gross investment income compared to 6.2% for
1997.
Realized net capital gains were $2.8 million in 1998 compared to $17.3 million
for 1997. The current year net gain consisted of gains on equity securities and
fixed maturities of $2.9 million and $.2 million, respectively, and losses on
other investments of $.3 million. The lower realized net capital gains during
1998 reflect the realization of losses on several under-performing issues which
were sold during the year.
Losses and loss expenses incurred during 1998 increased $2.7 million (6.7%) to
$42.5 million. The 1998 consolidated loss and loss expense ratio was 61.8%
compared to 64.6% for 1997. Losses and loss expenses incurred for 1998 included
adverse development on environmental liability claims of $1.1 million relating
to policies written in the 1970's. The Company has established provisions for
incurred but not reported environmental losses at December 31, 1998 which are
believed to be sufficient to cover all anticipated exposure. Adjusted for the
development on environmental liability claims, the consolidated loss and loss
expense ratio for 1998 was 60.2%. The decrease in the loss and loss expense
ratio is principally attributable to an increase in the savings realized on the
closing of prior year claims during 1998 as compared to 1997. These savings
related predominantly to the Company's trucking and trucking-related business.
See comments in the discussion of operations for 1999 compared to 1998 regarding
the development of prior year loss reserves.
Other operating expenses for 1998, before credits for allowances from
reinsurers, increased $5.1 million (21.0%) to $29.5 million. Personnel related
expenses, including amounts allocated to loss expenses and investment income,
were essentially unchanged from 1997 levels despite a net 26% increase in the
number of employees during the year, attributable to the expansion of the
Company's new products. Salary expense for 1998 was reduced as the result of
lower accruals for equity appreciation rights which represent a broad-based
employee incentive program which is tied to changes in the Company's book value.
Direct commission
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expense increased $1.9 million (32.2%) as the result of increases in premiums
from Sagamore's personal automobile, small fleet and small business workers'
compensation products. These increases were partially offset by the decrease in
voluntary reinsurance assumed from catastrophe pools. Allowances from
reinsurers increased $2.4 million (325.3%) resulting from new reinsurance
agreements entered into in 1998 which provide ceding commissions to Protective
on its fleet trucking business. Previous reinsurance treaties covering
Protective's fleet trucking business carried no ceding commission. The ratio of
net operating expenses of the insurance subsidiaries to net premiums earned was
32.0% during 1998 compared to 33.3% for 1997. Including the agency operations,
which absorbed a portion of the development costs for the Company's new
products, the ratio of other operating expenses to total revenue, adjusted to
remove net realized gains, was 29.4% for 1998 compared with 28.9% for 1997.
Expenses for 1998 and 1997 include expenditures for Year 2000 (Y2K) compliance,
as discussed more thoroughly elsewhere in this discussion. While it is not
possible to precisely isolate Y2K expenditures from those for ongoing
development of current product lines, management believes that amounts spent
during 1998 for Y2K related issues were higher than expenditures during 1997.
The effective federal tax rate for consolidated operations for 1998 was 28.7%.
This rate is lower than the statutory rate primarily because of tax-exempt
investment income.
As a result of the factors mentioned above, net income from consolidated
operations for 1998 was $16.9 million compared to $24.4 million for 1997.
Diluted earnings per share decreased to $1.22 in 1998 from $1.75 in 1997 due
primarily to the decrease in realized gains on investments. Diluted earnings
per share from operations before realized gains on investments was $1.09 in 1998
compared to $.94 in 1997.
FEDERAL INCOME TAX CONSIDERATIONS
The liability method is used in accounting for federal income taxes. Using this
method, deferred tax assets and liabilities are determined based on differences
between financial reporting and tax bases of assets and liabilities and are
measured using the enacted tax rates and laws that will be in effect when the
differences are expected to reverse. The provision for deferred federal income
tax was based on items of income and expense that were reported in different
years in the financial statements and tax returns and were measured at the tax
rate in effect in the year the difference originated. Net deferred tax
liabilities of $7.7 million and $10.2 million were recorded at December 31, 1999
and 1998, respectively. The net deferred tax liability at December 31, 1999
included $5.0 million in special tax deposits covered under Section 847 of the
Internal Revenue Code, as explained in the following paragraph, which compares
to $5.9 million in special tax deposits at December 31, 1998. Adjusted for the
special deposits, a net deferred tax liability of $12.7 million was recorded at
December 31, 1999 compared to a net deferred tax liability of $16.1 million at
December 31, 1998. The decrease in deferred federal taxes payable is primarily
attributable to changes in unrealized capital gains in the investment portfolio.
A provision in the Technical and Miscellaneous Revenue Act of 1988 created a
mechanism which would allow for a recognizable deferred tax asset specifically
for property and casualty loss reserves discounted for tax purposes. Adopted as
Section 847 of the Internal Revenue Code, this provision allows an insurer to
take a special tax deduction equal to the discount on post 1986 accident year
loss and loss expense reserves while making "special estimated tax payments"
equal to the amount of the tax benefit derived from the special deduction. The
"special estimated tax payments" can be carried forward for fifteen years to
offset taxes arising from decreases in the special deduction and can be treated
as regular estimated payments or refunded at the end of the carryforward period.
Based upon the concerns regarding the recognition of deferred tax assets, the
Company adopted the provisions of Section 847 for all tax years 1987 and
subsequent and has taken deductions for the entire amount of discount on post-
1986 loss reserves. As mentioned above, special Section 847 estimated tax
deposits totaling $5.0 million have been paid in connection with this election.
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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; and (iii) other risks and
uncertainties indicated from time to time in the Company's filings with the
Securities and Exchange Commission.
IMPACT OF THE YEAR 2000
In prior years, the Company discussed the nature and progress of its
preparedness plans for the year 2000. In late 1999, the Company completed its
remediation and testing of systems. As a result of those planning and
implementation efforts, the Company experienced no significant disruptions in
mission critical information technology and non-information technology systems
and believes those systems successfully responded to the Year 2000 date change.
Costs associated with the Year 2000 effort were not significant to the Company's
operations during 1999. The Company is not aware of any material problems
resulting from Year 2000 issues, either with its products, its internal systems,
or the products and services of third parties. The Company will continue to
monitor its mission critical computer applications and those of its suppliers
and vendors throughout the year 2000 to ensure that any latent Year 2000 matters
that may arise are addressed promptly.
MARKET RISK
The Company operates solely within the property and casualty insurance industry
and, accordingly, has significant invested assets which are exposed to various
market risks. These market risks relate to interest rate fluctuations, foreign
currency translation and equities market prices. All of the Company's invested
assets are classified as available for sale and are listed as such in the
enclosed consolidated financial statements in
Note B.
The most significant of the three identified market risks relates to prices in
the equities market. Though not the largest category of the Company's invested
assets, equity securities have the greatest potential for short-term price
fluctuation. The market value of the Company's equity positions at December 31,
1999 was $139.3 million or approximately 32% of invested assets, including money
market instruments classified as cash. Funds invested in the equities market
are not considered to be assets necessary for the Company to conduct its daily
operations and, therefore, can be committed for extended periods of time. The
long-term nature of the Company's equity investments allows it to invest in
positions where ultimate value, and not short-term market fluctuations, are the
most important feature.
The Company's fixed maturity portfolio totaled $250.4 million at December 31,
1999 and is heavily weighted toward U. S. government and government agency
obligations and state and municipal debt securities. Over 79% of this portfolio
matures within 5 years and the average life of the Company's fixed maturity
investments is approximately 4.3 years. Although the Company is exposed to
interest rate risk on its fixed maturity investments, given the anticipated
duration of the Company's liabilities (principally insurance loss and loss
expense reserves) relative to maturities, even a 100 to 200 basis point increase
in interest rates would not have a significant impact on the Company's ability
to conduct daily operations or to meet its obligations.
The Company's exposure to foreign currency risk is not material.
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IMPACT OF INFLATION
To the extent possible, the Company attempts to recover the costs of inflation
by increasing the premiums it charges. A majority of the Company's premiums are
charged as a percentage of an insured's gross revenue or payroll. As these
charging bases increase with inflation, so does premium. The remaining premium
rates charged are adjustable only at periodic intervals and often require state
regulatory approval. Such periodic increases in premium rates may lag far
behind cost increases.
To the extent inflation influences yields on investments, the Company is also
affected. The Company maintains a sizable portion of its investment portfolio
in short-term instruments and changes in current market interest rates
correspondingly affect yields on these investments. Further, as inflation
affects current market rates of return, previously committed investments may
rise or decline in value depending on the type and maturity of investment.
Inflation must also be considered by the Company in the creation and review of
loss and loss adjustment expense reserves since portions of these reserves are
expected to be paid over extended periods of time. The anticipated effect of
inflation is implicitly considered when estimating liabilities for losses and
loss adjustment expenses.
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ANNUAL REPORT ON FORM 10-K
ITEM 8--FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
YEAR ENDED DECEMBER 31, 1999
BALDWIN & LYONS, INC.
INDIANAPOLIS, INDIANA
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REPORT OF INDEPENDENT AUDITORS
Shareholders and Board of Directors
Baldwin & Lyons, Inc.
We have audited the accompanying consolidated balance sheets of Baldwin & Lyons,
Inc. and subsidiaries as of December 31, 1999 and 1998, and the related
consolidated statements of income and retained earnings, changes in equity other
than capital, and cash flows for each of the three years in the period ended
December 31, 1999. Our audits also included the financial statement schedules
listed in the Index at Item 14(a). These financial statements and schedules are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements and schedules based on our
audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Baldwin
& Lyons, Inc. and subsidiaries at December 31, 1999 and 1998, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1999, in conformity with accounting
principles generally accepted in the United States. Also, in our opinion, the
related financial statement schedules, when considered in relation to the basic
financial statements taken as a whole, present fairly, in all material respects,
the information set forth therein.
/s/ ERNST & YOUNG LLP
Indianapolis, Indiana
March 2, 2000
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CONSOLIDATED BALANCE SHEETS
Baldwin & Lyons, Inc. and Subsidiaries
December 31
-------------------------
1999 1998
---------- ----------
(DOLLARS IN THOUSANDS)
ASSETS
Investments:
Fixed maturities $ 250,386 $ 268,309
Equity securities 139,300 148,060
Short-term and other 32,467 22,448
--------- ---------
422,153 438,817
Cash and cash equivalents 20,115 16,955
Accounts receivable--less allowance
(1999, $1,072; 1998, $943) 24,991 20,056
Accrued investment income 3,697 4,068
Reinsurance recoverable 44,825 52,753
Deferred policy acquisition costs 3,851 3,245
Current federal income taxes 764 757
Property and equipment--less accumulated depreciation
(1999, $5,537; 1998, $3,972) 6,894 6,253
Other assets 3,387 1,465
--------- ---------
$ 530,677 $ 544,369
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Reserves:
Losses and loss expenses $ 173,473 $ 194,432
Unearned premiums 24,432 22,208
--------- ---------
197,905 216,640
Reinsurance payable 11,536 11,522
Accounts payable and other liabilities 28,753 17,430
Deferred federal income taxes 7,700 10,185
--------- ---------
245,894 255,777
Shareholders' equity:
Common stock, no par value:
Class A -- authorized 3,000,000 shares;
outstanding -- 1999, 2,325,554 shares;
1998, 2,388,454 shares 124 127
Class B -- authorized 20,000,000 shares;
outstanding -- 1999, 10,837,393 shares;
1998, 11,302,496 shares 578 603
Additional paid-in capital 39,663 41,328
Unrealized net gains on investments 24,711 30,311
Retained earnings 219,707 216,223
--------- ---------
284,783 288,592
--------- ---------
$ 530,677 $ 544,369
========= =========
See notes to consolidated financial statements.
23
24
CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS
Baldwin & Lyons, Inc. and Subsidiaries
Year Ended December 31
---------------------------------------------
1999 1998 1997
------------ ------------ ------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
REVENUE:
Net premiums earned $ 69,114 $ 68,862 $ 61,675
Net investment income 18,891 19,060 18,442
Realized net gains on investments 5,625 2,855 17,338
Commissions, service fees and other income 2,772 1,806 1,655
---------- ---------- ----------
96,402 92,583 99,110
EXPENSES:
Losses and loss expenses incurred 44,911 42,537 39,854
Other operating expenses 24,985 26,339 23,633
---------- ---------- ----------
69,896 68,876 63,487
---------- ---------- ----------
INCOME BEFORE FEDERAL INCOME TAXES 26,506 23,707 35,623
Federal income taxes 7,890 6,812 11,177
---------- ---------- ----------
NET INCOME 18,616 16,895 24,446
Retained earnings at beginning of year 216,223 206,258 191,806
Cash dividends (per share - $.40 per year) (5,365) (5,488) (5,508)
Cost of treasury shares in excess of original issue proceeds (9,946) (1,140) (4,283)
Foreign exchange adjustment 179 (302) (203)
---------- ---------- ----------
RETAINED EARNINGS AT END OF YEAR $ 219,707 $ 216,223 $ 206,258
========== ========== ==========
PER SHARE DATA:
DILUTED:
Income before realized net gains $ 1.11 $ 1.09 $ .94
Realized net gains on investments .27 .13 .81
---------- ---------- ----------
NET INCOME $ 1.38 $ 1.22 $ 1.75
========== ========== ==========
BASIC:
Income before realized net gains $ 1.12 $ 1.10 $ .95
Realized net gains on investments .27 .13 .82
---------- ---------- ----------
NET INCOME $ 1.39 $ 1.23 $ 1.77
========== ========== ==========
See notes to consolidated financial statements.
24
25
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY OTHER THAN CAPITAL
Baldwin & Lyons, Inc. and Subsidiaries
1999 1998 1997
------------ ------------ ------------
(DOLLARS IN THOUSANDS)
BALANCES AT BEGINNING OF YEAR:
Retained earnings $ 216,223 $ 206,258 $ 191,806
Unrealized gains on investments 30,311 45,614 38,472
---------- ---------- ----------
246,534 251,872 230,278
CHANGES ARISING FROM INCOME-PRODUCING ACTIVITIES:
Net income 18,616 16,895 24,446
Gains (losses) on investments:
Holding gains (losses) arising during period,
before federal income taxes (2,991) (20,688) 28,326
Federal income taxes (1,047) (7,241) 9,914
---------- ---------- ----------
(1,944) (13,447) 18,412
Gains realized during period included in net income,
before federal income taxes (5,625) (2,855) (17,338)
Federal income taxes (1,969) (999) (6,068)
---------- ---------- ----------
(3,656) (1,856) (11,270)
---------- ---------- ----------
Change in unrealized gains on investments (5,600) (15,303) 7,142
Foreign exhange adjustment 179 (302) (203)
---------- ---------- ----------
TOTAL REALIZED AND UNREALIZED INCOME 13,195 1,290 31,385
OTHER CHANGES AFFECTING RETAINED EARNINGS:
Cash dividends paid to shareholders (5,365) (5,488) (5,508)
Cost of treasury shares in excess of original issue proceeds (9,946) (1,140) (4,283)
---------- ---------- ----------
(15,311) (6,628) (9,791)
---------- ---------- ----------
TOTAL CHANGES (2,116) (5,338) 21,594
---------- ---------- ----------
BALANCES AT END OF YEAR:
Retained earnings 219,707 216,223 206,258
Unrealized gains on investments 24,711 30,311 45,614
---------- ---------- ----------
$ 244,418 $ 246,534 $ 251,872
========== ========== ==========
See notes to consolidated financial statements.
25
26
CONSOLIDATED STATEMENTS OF CASH FLOWS
Baldwin & Lyons, Inc. and Subsidiaries
Year Ended December 31
---------------------------------------------
1999 1998 1997
------------ ------------ ------------
(DOLLARS IN THOUSANDS)
OPERATING ACTIVITIES
Net income $ 18,616 $ 16,895 $ 24,446
Adjustments to reconcile net income to net cash
provided by operating activities:
Change in accounts receivable and unearned premium (2,711) 4,800 484
Change in accrued investment income 371 (22) (158)
Change in losses and loss expenses and reinsurance recoverable (13,030) (8,240) (3,192)
Change in other assets, other liabilities and current income taxes 2,237 (2,173) (2,424)
Amortization of net policy acquisition costs 1,716 5,945 5,742
Net policy acquisition costs deferred (2,323) (6,668) (6,839)
Provision for deferred income taxes 530 2,176 1,670
Bond amortization 384 217 372
Loss on sale of property 19 28 3
Depreciation 1,845 1,311 995
Net realized gain on investments (5,771) (2,701) (17,538)
Compensation expense related to discounted stock options 140 135 78
---------- ---------- ----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 2,023 11,703 3,639
INVESTING ACTIVITIES
Purchases of long-term investments (143,309) (196,774) (237,473)
Proceeds from maturities 55,746 92,774 102,065
Proceeds from sales of fixed maturities 23,485 21,785 10,956
Proceeds from sales of equity securities 84,441 80,487 138,428
Net proceeds from sales (purchases) of short-term investments (8,263) (6,801) 3,308
Distributions from limited partnerships 157 600 366
Purchases of property and equipment (2,836) (3,553) (2,027)
Proceeds from disposals of property and equipment 332 128 121
---------- ---------- ----------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 9,753 (11,354) 15,744
FINANCING ACTIVITIES
Dividends paid to shareholders (5,365) (5,488) (5,508)
Proceeds from sale of common stock 15 40 1
Drawing on line of credit 8,528 - -
Cost of treasury shares (11,794) (1,348) (5,116)
---------- ---------- ----------
NET CASH USED IN FINANCING ACTIVITIES (8,616) (6,796) (10,623)
---------- ---------- ----------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 3,160 (6,447) 8,760
Cash and cash equivalents at beginning of year 16,955 23,402 14,642
---------- ---------- ----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 20,115 $ 16,955 $ 23,402
========== ========== ==========
See notes to consolidated financial statements.
26
27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Baldwin & Lyons, Inc. and Subsidiaries
(DOLLARS IN THOUSANDS)
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION: The consolidated financial statements include the
accounts of Baldwin & Lyons, Inc. and its wholly owned subsidiaries (the
Company). All significant intercompany transactions and accounts have been
eliminated in consolidation.
USE OF ESTIMATES: Preparation of the consolidated financial statements requires
management to make estimates and assumptions that affect the amounts reported in
the consolidated financial statements and accompanying notes. Actual results
could differ from those estimates.
CASH AND CASH EQUIVALENTS: The Company considers investments in money market
funds to be cash equivalents. Carrying amounts for these instruments
approximate their fair values.
INVESTMENTS: Carrying amounts for fixed maturity securities (bonds, notes and
redeemable preferred stocks) represent fair value and are based on quoted market
prices, where available, or broker/dealer quotes for specific securities where
quoted market prices are not available. Equity securities (nonredeemable
preferred stocks and common stocks) are carried at quoted market prices (fair
value). Other investments are carried at either market value, cost or cost
adjusted for operations of limited partnerships, depending on the nature of the
investment. All fixed maturity and equity securities are considered to be
available for sale; the related unrealized net gains or losses (net of
applicable tax effect) are reflected directly in shareholders' equity. Although
the Company has classified fixed maturity investments as available for sale, it
has the ability to hold its fixed maturity investments to maturity. Short-term
investments are carried at cost which approximates their fair values. Realized
gains and losses on disposals of investments are determined by specific
identification of cost of investments sold and are included in income.
PROPERTY AND EQUIPMENT: Property and equipment is carried at cost.
Depreciation is computed substantially by the straight-line method.
RESERVES FOR LOSSES AND LOSS EXPENSES: The reserves for losses and loss
expenses, certain of which are discounted, are determined using case basis
evaluations and statistical analyses and represent estimates of the ultimate
cost of all reported and unreported losses which are unpaid at year end. These
reserves include estimates of future trends in claim severity and frequency and
other factors which could vary as the losses are ultimately settled. Although
it is not possible to measure the degree of variability inherent in such
estimates, management believes that the reserves for losses and loss expenses
are adequate. The estimates are continually reviewed and as adjustments to
these reserves become necessary, such adjustments are reflected in current
operations.
RECOGNITION OF REVENUE AND COSTS: Premiums are earned over the period for which
insurance protection is provided. A reserve for unearned premiums, computed by
the daily pro-rata method, is established to reflect amounts applicable to
subsequent accounting periods. Commissions to unaffiliated companies and other
acquisition costs applicable to unearned premiums are deferred and expensed as
the related premiums are earned. Anticipated investment income is considered in
determining recoverability of deferred acquisition costs.
Reinsurance premiums, commissions, expense reimbursements and reserves related
to reinsured business are accounted for on bases consistent with those used in
accounting for the original policies issued and the terms of the reinsurance
contracts. Premiums ceded to other insurers have been reported as a reduction
of premium income. Amounts applicable to reinsurance ceded for unearned premium
and claim loss reserves have been reported as reinsurance recoverable assets.
Certain reinsurance contracts provide for additional or return premiums and
commissions based upon profits or losses to the reinsurer over prescribed
periods. Estimates of additional or return premiums and commissions are
adjusted quarterly to recognize actual loss experience to date as well as
projected loss experience applicable to the various contract periods.
27
28
STOCK-BASED COMPENSATION: Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees, and related Interpretations are used
in accounting for stock options, stock purchases and equity appreciation rights
which are, from time to time, granted to employees and outside directors.
FEDERAL INCOME TAXES: A consolidated federal income tax return is filed by the
Company and includes all wholly owned subsidiaries.
EARNINGS PER SHARE: Diluted earnings per share of common stock are based on the
average number of shares of Class A and Class B common stock outstanding during
the year, adjusted for the effect, if any, of options outstanding. Basic
earnings per share are presented exclusive of the effect of options outstanding.
See note I.
COMPREHENSIVE INCOME: The Company records accumulated other comprehensive
income from unrealized gains and losses on available-for-sale securities as a
separate component of shareholders' equity. Foreign exchange adjustments are
immaterial and the Company has no pension plan.
The enclosed Statement of Changes in Equity Other Than Capital refers to
comprehensive income as Total realized and unrealized income. Items of other
comprehensive income included in this statement are referred to as Change in
unrealized gains (losses) on investments and Foreign exchange adjustment. A
reclassification adjustment to other comprehensive income is made for Gains
realized during period included in net income.
RECLASSIFICATION: Certain prior year balances have been reclassified to conform
to the current year presentation.
28
29
NOTE B - INVESTMENTS
The following is a summary of available-for-sale securities at December 31:
Cost or Gross Gross Net
Fair Amortized Unrealized Unrealized Unrealized
Value Cost Gains Losses Gains
----------- ----------- ----------- ----------- -----------
1999:
U. S. government obligations $ 52,169 $ 53,091 $ 3 $ (925) $ (922)
Mortgage-backed securities 32,074 32,350 178 (454) (276)
Obligations of states and political subdivisions 54,496 54,643 107 (254) (147)
Corporate securities 111,647 115,872 225 (4,450) (4,225)
--------- --------- --------- --------- ---------
Total fixed maturities 250,386 255,956 513 (6,083) (5,570)
Equity securities 139,300 93,768 56,159 (10,627) 45,532
Short-term and other 32,467 34,412 555 (2,500) (1,945)
--------- --------- --------- --------- ---------
Total available-for-sale securities $ 422,153 $ 384,136 $ 57,227 $ (19,210) 38,017
========= ========= ========= =========
Applicable federal income taxes (13,306)
---------
Net unrealized gains - net of tax $ 24,711
=========
1998:
U. S. government obligations $ 72,442 $ 72,012 $ 489 $ (59) $ 430
Mortgage-backed securities 36,295 36,004 311 (20) 291
Obligations of states and political subdivisions 68,319 67,370 956 (7) 949
Corporate securities 91,253 96,808 1,245 (6,800) (5,555)
--------- --------- --------- --------- ---------
Total fixed maturities 268,309 272,194 3,001 (6,886) (3,885)
Equity securities 148,060 95,332 64,452 (11,724) 52,728
Short-term and other 22,448 24,659 444 (2,655) (2,211)
--------- --------- --------- --------- ---------
Total available-for-sale securities $ 438,817 $ 392,185 $ 67,897 $ (21,265) 46,632
========= ========= ========= =========
Applicable federal income taxes (16,321)
---------
Net unrealized gains - net of tax $ 30,311
=========
29
30
NOTE B - INVESTMENTS (CONTINUED)
Gross realized gains and losses on investments for the years ended December 31
are summarized below:
1999 1998 1997
----------- ----------- -----------
Fixed maturities:
Gains $ 220 $ 224 $ 317
Losses (2,564) (21) (199)
---------- ---------- ----------
Net gains (losses) (2,344) 203 118
Equity securities:
Gains 17,747 9,779 20,836
Losses (9,953) (6,855) (2,633)
---------- ---------- ----------
Net gains 7,794 2,924 18,203
Short-term and other - net gain (loss) 175 (272) (983)
---------- ---------- ----------
TOTAL NET GAINS $ 5,625 $ 2,855 $ 17,338
========== ========== ==========
The fair values and the cost or amortized cost of fixed maturity investments at
December 31, 1999, by contractual maturity, are shown below. Actual maturities
may differ from contractual maturities because borrowers have, in some cases,
the right to call or prepay obligations with or without call or prepayment
penalties. Maturities for mortgage-backed securities are determined on a
specific identification basis.
Fair Values Cost or Amortized Cost
--------------------------------------- ---------------------------------------
Mortgage- Total Mortgage- Total
Backed Fixed Backed Fixed
Securities All Other Maturities Securities All Other Maturities
---------- ---------- ---------- ---------- ---------- ----------
One year or less $ - $ 44,105 $ 44,105 $ - $ 44,124 $ 44,124
Excess of one year to five years 10,872 133,238 144,110 10,909 137,412 148,321
Excess of five years to ten years 8,776 27,152 35,928 8,711 27,939 36,650
Excess of ten years 12,426 9,086 21,512 12,730 9,379 22,109
---------- ---------- ---------- ---------- ---------- ----------
Total maturities 32,074 213,581 245,655 32,350 218,854 251,204
Redeemable preferred stock - 4,731 4,731 - 4,752 4,752
---------- ---------- ---------- ---------- ---------- ----------
$ 32,074 $ 218,312 $ 250,386 $ 32,350 $ 223,606 $ 255,956
========== ========== ========== ========== ========== ==========
Major categories of investment income for the years ended December 31 are
summarized as follows:
1999 1998 1997
----------- ----------- -----------
Fixed maturities $ 15,785 $ 15,901 $ 16,193
Equity securities 2,608 2,210 1,729
Money market funds 1,089 1,517 1,208
Short-term and other 565 611 532
--------- --------- ---------
20,047 20,239 19,662
Investment expenses (1,156) (1,179) (1,220)
--------- --------- ---------
NET INVESTMENT INCOME $ 18,891 $ 19,060 $ 18,442
========= ========= =========
Approximately 27% of purchases and 44% of sales of investments during the three
years ended December 31, 1999 were made through securities broker-dealers in
which certain directors of the Company were officers, directors or owners. Fees
earned by affiliated investment advisors were $614, $590 and $604 in 1999, 1998
and 1997, respectively.
The Company has holdings in money-market accounts which were managed by or
purchased through companies affiliated with certain directors of the Company.
30
31
NOTE C - LOSS AND LOSS EXPENSE RESERVES
Activity in the reserves for losses and loss expenses is summarized as follows.
All amounts are shown net of reinsurance recoverable.
Year Ended December 31,
1999 1998 1997
----------- ----------- -----------
Reserves at the beginning of the year $143,951 $151,493 $154,537
Provision for losses and loss expenses:
Claims occurring during the current year 55,520 53,278 47,692
Claims occurring during prior years (10,609) (10,741) (7,838)
--------- --------- ---------
Total incurred 44,911 42,537 39,854
Loss and loss expense payments:
Claims occurring during the current year 27,867 24,947 15,946
Claims occurring during prior years 30,215 25,088 26,934
--------- --------- ---------
Total paid 58,082 50,035 42,880
Change in unpaid portion of uncollectible
amounts due from reinsurers (78) (44) (18)
--------- --------- ---------
Reserves at the end of the year 130,702 143,951 151,493
Reinsurance recoverable on reserves at the end of the year 42,771 50,481 45,702
--------- --------- ---------
Reserves, gross of reinsurance
recoverables, at the end of the year $173,473 $194,432 $197,195
========= ========= =========
The reserves for losses and loss expenses, net of related reinsurance
recoverables, at December 31, 1998, 1997 and 1996 were decreased by $10,609,
$10,741 and $7,838, respectively, for claims that had occurred on or prior to
those dates. These decreases are the result of the settlement of claims at
amounts lower than previously reserved and changes in estimates of losses
incurred but not reported as part of the normal reserving process. Development
during 1999 and 1998, on reserves outstanding at December 31, 1998 and 1997
included decreases of $1,082 and increases of $1,070, respectively, for incurred
losses and loss expenses related to environmental damage claims. Reported cases
relate primarily to policies issued in the 1970's to one account which was
involved in the business of hauling and disposing of hazardous waste. Included
in the above amounts are reserves for incurred but not reported environmental
losses of $5,000 at both December 31, 1999 and 1998. Adjusted for environmental
claims, management believes that the more favorable than anticipated experience
may be attributable, at least in part, to changes in trucking safety in general
resulting from the implementation of the national commercial driver license,
mandatory drug testing and an increased awareness by trucking companies of the
cost of unsafe operations. It is further believed that the Company's selection
techniques, minimum safety standards and claims handling have also contributed
to the current favorable loss experience. These trends were considered in the
establishment of the Company's reserves at December 31, 1999.
The Company participates in mandatory residual market pools in various states.
The Company records the results from participation in these pools as reported
and records an additional provision in the financial statements for operating
periods unreported by the pools.
Loss reserves on certain permanent total disability workers' compensation
reserves have been discounted to present value at pre-tax rates not exceeding
3.5%. At December 31, 1999 and 1998, loss reserves have been reduced by
approximately $5,553 and $5,272, respectively. Discounting is applied to these
claims since the amount of periodic payments to be made during the lifetime of
claimants is fixed and determinable.
Loss reserves have been reduced by estimated salvage and subrogation recoverable
of approximately $2,363 and $1,700 at December 31, 1999 and 1998, respectively.
31
32
NOTE D - EMPLOYEE BENEFIT PLANS
The Company maintains a defined contribution 401(k) Employee Savings and Profit
Sharing Plan ("the Plan") which covers all employees who have completed one year
of service. The Company's contributions to the Plan for 1999, 1998 and 1997
were $620, $615 and $585, respectively.
NOTE E - INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components
of the Company's deferred tax assets and liabilities as of December 31 are as
follows:
1999 1998
----------- -----------
Deferred tax liabilities:
Unrealized gain on investments $ 13,306 $ 16,878
Limited partnerships 2,007 1,967
Deferred acquisition costs 1,351 1,177
Salvage and subrogation 578 595
Other 598 380
--------- ---------
Total deferred tax liabilities 17,840 20,997
--------- ---------
Deferred tax assets:
Discounts of loss and loss expense reserves 5,049 5,875
Deferred compensation 2,433 2,326
Unearned premiums 1,707 1,503
Other 951 1,108
--------- ---------
Total deferred tax assets 10,140 10,812
--------- ---------
Net deferred tax liabilities $ 7,700 $ 10,185
========= =========
Federal income tax expense consists of the following:
1999 1998 1997
----------- ----------- -----------
Taxes on income from operations:
Current $ 7,360 $ 4,636 $ 9,507
Deferred 530 2,176 1,670
--------- --------- ---------
$ 7,890 $ 6,812 $ 11,177
========= ========= =========
A summary of the difference between federal income tax expense computed at the
statutory rate and that reported in the consolidated financial statements is as
follows:
1999 1998 1997
----------- ----------- -----------
Statutory federal income rate applied to
pretax income from continuing operations $ 9,277 $ 8,297 $ 12,468
Tax effect of (deduction):
Tax-exempt investment income (1,337) (1,374) (1,219)
Other (50) (111) (72)
--------- --------- ---------
Federal income tax expense $ 7,890 $ 6,812 $ 11,177
========= ========= =========
32
33
NOTE E - INCOME TAXES (CONTINUED)
The components of the provision for deferred federal income taxes are as
follows:
1999 1998 1997
----------- ----------- -----------
Discounts of loss and loss expense reserves $ 826 $ 335 $ 821
Limited partnerships 40 643 1,324
Deferred compensation (107) 1,191 (170)
Other (229) 7 (305)
--------- --------- ---------
PROVISION FOR DEFERRED FEDERAL INCOME TAX $ 530 $ 2,176 $ 1,670
========= ========= =========
Cash flows related to federal income taxes paid, net of refunds received, for
1999, 1998 and 1997 were $7,367, $6,533 and $7,800, respectively, including
Section 847 special tax deposits. Future tax benefits on approximately $5,049
of deferred tax assets at December 31, 1999 arising from loss reserve
discounting is assured based on Section 847 of the Internal Revenue Code.
NOTE F - REINSURANCE
The insurance subsidiaries cede portions of their gross premiums written to
certain other insurers under excess and quota share treaties and by f