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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, 2000
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, 2001, based on the closing trade
prices on that date, was approximately $52,324,000.
The number of shares outstanding of each of the issuer's classes of common stock
as of March 15, 2001:
Common Stock, No Par Value:
Class A (voting)2,300,785 shares
Class B (nonvoting)9,874,849 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 1, 2001 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 32 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.
Approximately 49% of the gross direct premiums written and assumed by the
Insurance Subsidiaries during 2000 was attributable to business placed with
Protective by B & L. The remaining 51% consists primarily of business written
by Sagamore 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
below, 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.
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
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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
thirteen 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.
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.
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, 2000 have been reduced by approximately $5.1
million as a result of such discounting. Had the Company not discounted loss
and LAE reserves, pretax income would have been approximately $.5 million higher
for the year ended December 31, 2000.
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.
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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 December 31, 2000. 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, 2000. The Company's reinsurance treaties
relating to trucking risks expire on June 1, 2001. Policies inforce on that
date remain covered until expiration under the current treaties's run-off
provisions. New or renewal trucking risk policies effective after June 1, 2001
will be covered under the yet to be determined provisions of new treaties.
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 2000. 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 2000, 1999 and 1998. 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 2000.
RECONCILIATION OF LIABILITY FOR LOSSES AND LOSS ADJUSTMENT
EXPENSES (GAAP BASIS)
Year Ended December 31,
2000 1999 1998
----------- ----------- -----------
(IN THOUSANDS)
NET OF REINSURANCE RECOVERABLE:
Liability for losses and LAE at the
Beginning of the year $130,702 $143,951 $151,493
Provision for losses and LAE:
Claims occurring during the current year 65,577 55,520 53,278
Claims occurring during prior years (8,107) (10,609) (10,741)
---------- ---------- ----------
57,470 44,911 42,537
Losses and LAE payments:
Claims occurring during the current year 37,671 27,867 24,947
Claims occurring during prior years 30,238 30,215 25,088
---------- ---------- ----------
67,909 58,082 50,035
Change in unpaid portion of uncollectible
Amounts due from reinsurers (57) (78) (44)
---------- ---------- ----------
Liability for losses and LAE at end of year 120,206 130,702 143,951
Reinsurance recoverable on unpaid losses
at end of the year 62,219 42,771 50,481
---------- ---------- ----------
Liability for losses and LAE, gross of
reinsurance recoverable, at end of the year $182,425 $173,473 $194,432
========== ========== ==========
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The reconciliation on page 4 shows an $8.1 million (6.7%) savings in the
liability for losses and LAE recorded at December 31, 1999. The net savings is
reflected in 2000 underwriting income. All major product groups produced
redundancies during each of the years 2000, 1999 and 1998 with the exception of
private passenger automobile in 2000. 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 2000 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 $121,265
Add differences:
Reinsurance recoverable on unpaid losses and LAE 62,219
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 301
Deduct differences:
Estimated salvage and subrogation recoveries recorded on
a cash basis for SAP and on an accrual basis for GAAP (1,600)
--------
Liability reported on a GAAP basis $182,425
========
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 1990 through 2000, 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 1990 liability has developed a $36.6
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 generally been favorable.
Reserve developments for all year-ends 1986 through 1999 have produced
redundancies as of December 31, 2000. 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, increased diesel and gasoline prices during the last two
years may negatively impact 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 2000 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, 2000, the Company had paid $118.7 million
of losses and LAE that had been incurred, but not paid, as of December 31, 1990;
thus an estimated $35.0 million in losses incurred through 1990 remain unpaid as
of the current financial statement date ($153.7 million incurred less $118.7
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 1993, but
incurred in 1990, will be included in the cumulative development amount for
years-end 1990, 1991, and 1992. 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, 2000 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 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000
-------- -------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Liability for Unpaid
Losses and LAE, Net
of Reinsurance
Recoverables * $190,351 $198,790 $188,189 $175,395 $175,012 $161,001
$154,039 $151,013 $143,515 $130,345 $119,905
Liability Reestimated
as of:
One Year Later 178,706 185,452 174,269 152,146 169,528 148,756 146,201 140,272 132,906 122,238
Two Years Later 164,977 171,069 153,548 147,577 159,000 140,811 135,125 128,743 124,878
Three Years Later 157,802 155,977 156,271 144,526 153,833 130,540 123,775 122,211
Four Years Later 149,946 160,477 155,104 142,178 148,390 122,792 119,862
Five Years Later 155,601 159,804 153,528 137,876 143,478 120,410
Six Years Later 155,666 158,972 150,531 134,744 142,475
Seven Years Later 155,038 157,976 147,992 134,540
Eight Years Later 154,453 155,830 148,555
Nine Years Later 153,051 156,380
Ten Years Later 153,705
Cumulative Redundancy $36,646 $42,410 $39,634 $40,855 $32,537 $40,591 $34,177 $28,802 $18,637 $8,107
Cumulative Amount of
Liability Paid Through:
One Year Later $40,939 $41,958 $38,511 $30,297 $45,005 $27,825 $26,934 $25,088 $30,214 $30,239
Two Years Later 63,689 68,706 59,494 58,969 67,219 43,016 43,280 43,311 48,416
Three Years Later 81,746 83,413 82,122 71,375 76,248 55,515 55,834 55,180
Four Years Later 92,313 98,331 91,794 77,702 85,096 62,740 63,998
Five Years Later 103,190 104,915 96,617 82,792 90,331 69,747
Six Years Later 107,579 109,174 100,299 87,316 95,924
Seven Years Later 110,282 112,487 104,625 90,441
Eight Years Later 113,080 116,461 107,668
Nine Years Later 116,540 118,884
Ten Years Later 118,684
* Amounts shown for 1990 through 2000 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 $818, $597, $611,
$554, $542, $457, $498, $480, $436, $358 and $301, respectively.
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environmental cases. During the seven years ended December 31, 2000, the
Company recorded a total of $10.9 million in losses incurred with respect to
environmental claims. Incurred losses to date include a reserve for incurred
but not reported environmental losses of $3.9 million at December 31, 2000.
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).
Since 1992, Protective has accepted retrocessions, principally for catastrophe
exposures, from selected reinsurers on an opportunistic basis. Protective is
committed to participation in this market provided pricing remains conducive to
profitable results. As the result of the recent merger of certain reinsurers
and less favorable pricing in the market, Protective's participation in
retrocessions decreased in 1999 and again in 2000 after adjustment for
reinstatement premiums discussed later in the RESULTS OF OPERATIONS. However,
based on improved pricing in the market late in 2000, the Company expects that
premium from reinsurance assumed will increase during 2001.
During 1995, Sagamore entered the private passenger automobile insurance market
for nonstandard insureds. This program is currently being marketed in thirteen
midwestern and southern states. Market acceptance to date has been favorable
and approximately $35.7 million of premium was written in this line during 2000.
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 has continued through 2000. Future expansion into other states is
anticipated during 2001. Approximately $9.9 million of premium was written in
this program during 2000, an increase in excess of 28% from the prior year.
During 1997, Sagamore began marketing a small business workers' compensation
product in Missouri. Through 1999, growth in this product had been slow
resulting mainly from competitive forces. However, recent developments in the
competitive make-up in the states where Sagamore markets this program resulted
in approximately $2.2 million in premium written during 2000, an increase of
120% from the prior year.
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, 2000 the financial statement value of the Company's investment
portfolio was approximately $442 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
--------------------
2000 1999
-------- --------
Corporate and other bonds 25.3% 27.6%
Common stocks 21.1 20.7
Short-term and other investments 18.7 13.2
Municipal bonds 13.1 13.5
U.S. Government obligations 10.1 13.2
Preferred stocks 6.2 3.8
Mortgage-backed securities 5.5 8.0
-------- --------
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 2000.
MATURITIES OF BONDS AND SHORT-TERM INVESTMENTS AT DECEMBER 31 (PAR VALUE)
2000 1999
-------- --------
Less than one year 41.1% 28.3%
1 to 5 years 42.6 50.8
5 to 10 years 8.0 13.2
More than 10 years 8.3 7.7
-------- --------
100.0% 100.0%
======== ========
Average life of portfolio (years) 4.0 4.3
======== ========
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Approximately $14.2 million of the fixed maturity portfolio (3.2% of total
invested assets) consists of bonds rated as less than investment grade at
December 31, 2000. The unrealized net loss on the fixed maturity portfolio was
$1.6 million at December 31, 2000, before income taxes, and compares to a $5.6
million unrealized loss at December 31, 1999.
Equity securities comprise 36% of the financial statement value of the
consolidated investment portfolio at December 31, 2000, up from 32% at the prior
year-end. The unrealized gains on the equity security portfolio increased $12.1
million to $57.6 million at December 31, 2000.
A comparison of consolidated investment yields is as follows:
2000 1999
-------- --------
Before federal tax:
Investment income 5.5% 5.0%
Investment income plus realized
investment gains 8.7 6.4
After federal tax:
Investment income 3.9 3.6
Investment income plus realized
investment gains 6.1 4.5
EMPLOYEES
As of March 1, 2001, the Company had 267 employees, 263 of whom are engaged
partially or wholly in the business of the Company's Insurance Subsidiaries.
The changes from March 1, 2000 are minor.
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 on a month-to-month basis. 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 2000.
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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, 2000, 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 2000 and 1999, 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:
2000:
FOURTH QUARTER $19.000 $19.000 $23.875 $18.375 $.10
THIRD QUARTER 19.000 15.000 20.250 15.250 .10
SECOND QUARTER 17.500 16.000 19.938 16.000 .10
FIRST QUARTER 21.250 16.500 22.125 16.250 .10
1999:
Fourth Quarter 22.313 19.750 23.938 19.625 .10
Third Quarter 22.375 20.250 23.875 20.188 .10
Second Quarter 22.875 20.000 24.047 20.313 .10
First Quarter 25.688 20.750 26.000 20.188 .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 G to the consolidated
financial statements.
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ITEM 6. SELECTED FINANCIAL DATA
Year Ended December 31
------------------------------------------------------------
2000 1999 1998 1997 1996
---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Net premiums written $ 77,214 $ 72,033 $ 71,943 $ 69,575 $ 61,431
Net premiums earned 77,439 69,114 68,862 61,675 58,743
Net investment income 19,049 18,891 19,060 18,442 19,580
Realized net gains on investments 12,473 5,625 2,855 17,338 6,860
Losses and loss expenses incurred 57,470 44,911 42,537 39,854 33,754
Net income 19,750 18,616 16,895 24,446 21,692
Earnings per share -- net income (1) 1.57 1.38 1.22 1.75 1.51
Cash dividends per share .40 .40 .40 .40 .36
Investment portfolio (3) 442,060 440,797 456,735 475,328 454,791
Total assets 552,164 530,677 544,369 557,015 526,460
Shareholders' equity 294,000 284,783 288,592 293,963 273,122
Book value per share (1) 24.01 21.50 20.91 21.23 19.46
Underwriting ratios (2):
Losses and loss expenses 74.2% 65.0% 61.8% 64.6% 57.5%
Underwriting expenses 28.1% 29.6% 32.0% 33.3% 29.2%
Combined 102.3% 94.6% 93.8% 97.9% 86.7%
(1) Earnings and book value per share are adjusted for the dilutive effect of
stock options outstanding.
(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 net 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 4.0 years and 4.3 years for 2000 and 1999,
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, 2000 included $59.1 million in short-term
investments which are readily convertible to cash without market penalty and an
additional $49.2 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 produce
inadequate rates and the Company chooses to restrict 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 2000
equaled 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 increased to $294.0 million at December 31, 2000, from
$284.8 million at December 31, 1999, including an increase of $11.5 million in
unrealized net gains on investments. The change in shareholders' equity also
included $17.0 million in treasury share purchases and $5.0 million of cash
dividends to shareholders. Book value per common share outstanding increased
12% to $24.01 at December 31, 2000 from $21.50 per share at December 31, 1999.
As more fully discussed in Note G to the consolidated financial statements, at
December 31, 2000, $55.7 million, or 19.0% of shareholders' equity, represented
net assets of the Company's insurance subsidiaries
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15
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 $9.4 million at December 31, 2000.
RESULTS OF OPERATIONS
2000 COMPARED TO 1999
Direct premiums written for 2000 totaled $97.1 million, an increase of $11.0
million (12.8%) from 1999. This increase is primarily attributable to increases
in fleet trucking's large trucking fleet and independent contractor programs of
$3.9 million (22.4%) and $1.6 million (7.8%), respectively, from 1999 levels.
Direct premium writings from the Company's private passenger automobile, small
trucking fleet and small business workers' compensation programs also increased
by $2.4 million, $2.2 million and $1.2 million, respectively. Large trucking
fleet volume increases resulted primarily from the addition of new accounts.
Increases in independent contractor premiums resulted from the addition of new
accounts and volume increases on existing accounts, while increases in private
passenger automobile, small fleet and small workers' compensation were due
primarily to geographic expansion.
Premiums assumed from other reinsurers of $4.2 million during 2000 were
relatively unchanged from 1999 although 2000's premium included $1.7 million of
reinstatement premium attributable to losses occurring in late 1999. Without
this premium, reinsurance assumed volume would have decreased 37% from the prior
year. Pricing in this market began to firm up toward the end of 2000 and
management anticipates increased participation during 2001.
Premiums ceded to reinsurers increased $5.8 million (31.8%) during 2000 to $24.2
million. The percentage of premiums ceded to direct premiums written increased
to 24.9% for 2000 from 21.3% for 1999 consistent with the increase in direct
premiums written for the more heavily reinsured large trucking fleet program
discussed above.
After giving effect to changes in unearned premiums, net premiums earned
increased 12.0% to $77.4 million for 2000 from $69.1 million for 1999. Premiums
earned from private passenger automobile increased by $6.6 million. Net
premiums earned from all trucking-related insurance products increased by $1.7
million (5.3%), including $1.9 million (31.7%) for small fleet trucking.
Net investment income increased by $.2 million (.8%) during 2000 reflecting
higher overall pre-tax yields on slightly lower average invested assets. The
average pre-tax yield on invested assets was 5.5% and 5.0% for 2000 and 1999,
respectively. After-tax yields were 3.9% and 3.6% for 2000 and 1999,
respectively.
Realized net capital gains were $12.5 million in 2000 compared to $5.6 million
for 1999. The current year net gain consisted of gains on equity securities of
$16.0 million and losses on fixed maturities and other investments of $3.5
million.
Losses and loss expenses incurred during 2000 increased $12.6 million (28.0%) to
$57.5 million. The 2000 consolidated loss and loss expense ratio was 74.2%
compared to 65.0% for 1999. The increase in the loss and loss expense ratio is
primarily attributable to adverse loss development and an increased frequency
and severity of claims in the Company's personal automobile division. Changes
in the Company's remaining products were generally favorable. Because of the
high limits provided by the Company to its large trucking fleet insureds, the
length of time required to settle larger, more complex claims and the volatility
of the trucking liability
15
16
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 2000, before credits for allowances from
reinsurers, increased $2.9 million (9.2%) to $34.7 million. Personnel related
expenses, including amounts allocated to loss expenses and investment income,
increased 6.9% and accounted for approximately 40% of the total operating
expense increase, reflecting the fully-employed labor market from which the
Company draws. Direct commission expense increased $.9 million (12.8%) as the
result of higher direct premiums from all of the Company's products. Ceding
commission allowances from reinsurers increased $1.9 million (27.7%), resulting
from increased premium volume covered under the reinsurance agreements covering
Protective's fleet trucking business. The ratio of net operating expenses of
the insurance subsidiaries to net premiums earned was 28.0% during 2000 compared
to 29.6% for 1999. Including the agency operations, the ratio of other
operating expenses to total revenue, adjusted to remove net realized gains, was
26.0% for 2000 compared with 27.5% for 1999. Expenses for 1999 included
expenditures in preparation for Year 2000 (Y2K) compliance that were not present
in the year 2000.
The effective federal tax rate for consolidated operations for 2000 was 31.8%.
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 2000 was $19.7 million compared to $18.6 million for 1999.
Diluted earnings per share increased to $1.57 in 2000 from $1.38 in 1999 due
primarily to the increase in realized gains on investments. Diluted earnings
per share from operations before realized gains on investments was $.93 in 2000
compared to $1.11 in 1999.
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 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
16
17
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 automobile 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%.
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 against a relatively unchanged
consolidated premium base. Changes in the Company's remaining products were
individually insignificant.
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. 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.
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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 $12.5 million and $7.7 million were recorded at December 31, 2000
and 1999, respectively. The net deferred tax liability at December 31, 2000
included $4.2 million in special tax deposits covered under Section 847 of the
Internal Revenue Code, as explained in the following paragraph, which compares
to $5.0 million in special tax deposits at December 31, 1999. Adjusted for the
special deposits, a net deferred tax liability of $16.7 million was recorded at
December 31, 2000 compared to a net deferred tax liability of $12.7 million at
December 31, 1999. The increase 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 $4.2 million have been paid in connection with this election.
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.
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.
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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,
2000 was $158.0 million or approximately 36% 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 $211.8 million at December 31,
2000. Over half of this portfolio is made up of U. S. government and government
agency obligations and state and municipal debt securities, 83% of the portfolio
matures within 5 years and the average life of the Company's fixed maturity
investments is approximately 4.0 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.
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, 2000
BALDWIN & LYONS, INC.
INDIANAPOLIS, INDIANA
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YEAR ENDED DECEMBER 31, 2000
BALDWIN & LYONS, INC.
INDIANAPOLIS, INDIANA
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, 2000 and 1999, 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, 2000. 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, 2000 and 1999, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 2000, 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
February 26, 2001
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CONSOLIDATED BALANCE SHEETS
Baldwin & Lyons, Inc. and Subsidiaries
December 31
-------------------------
2000 1999
---------- ----------
(DOLLARS IN THOUSANDS)
ASSETS
Investments:
Fixed maturities $ 211,810 $ 250,386
Equity securities 157,951 139,300
Short-term and other 40,176 32,467
---------- ----------
409,937 422,153
Cash and cash equivalents 32,814 20,115
Accounts receivable--less allowance
(2000, $1,229; 1999, $1,072) 25,279 24,991
Accrued investment income 3,724 3,697
Reinsurance recoverable 64,690 44,825
Deferred policy acquisition costs 3,674 3,851
Current federal income taxes - 764
Property and equipment--less accumulated depreciation
(2000, $6,224; 1999, $5,537) 8,456 6,894
Notes receivable from employees 1,709 -
Other assets 1,881 3,387
---------- ----------
$ 552,164 $ 530,677
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Reserves:
Losses and loss expenses $ 182,425 $ 173,473
Unearned premiums 24,441 24,432
---------- ----------
206,866 197,905
Reinsurance payable 7,349 11,536
Accounts payable and other liabilities 30,399 28,753
Deferred federal income taxes 12,547 7,700
Current federal income taxes 1,003 -
---------- ----------
258,164 245,894
Shareholders' equity:
Common stock, no par value:
Class A -- authorized 3,000,000 shares;
outstanding -- 2000, 2,300,785 shares;
1999, 2,325,554 shares 123 124
Class B -- authorized 20,000,000 shares;
outstanding -- 2000, 9,870,082 shares;
1999, 10,837,393 shares 526 578
Additional paid-in capital 36,416 39,663
Unrealized net gains on investments 36,237 24,711
Retained earnings 220,698 219,707
---------- ----------
294,000 284,783
---------- ----------
$ 552,164 $ 530,677
========== ==========
See notes to consolidated financial statements.
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CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS
Baldwin & Lyons, Inc. and Subsidiaries
Year Ended December 31
------------------------------------------
2000 1999 1998
------------ ------------ ------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
REVENUE:
Net premiums earned $ 77,439 $ 69,114 $ 68,862
Net investment income 19,049 18,891 19,060
Realized net gains on investments 12,473 5,625 2,855
Commissions, service fees and other income 3,512 2,772 1,806
---------- ---------- ----------
112,473 96,402 92,583
EXPENSES:
Losses and loss expenses incurred 57,470 44,911 42,537
Other operating expenses 26,039 24,985 26,339
---------- ---------- ----------
83,509 69,896 68,876
---------- ---------- ----------
INCOME BEFORE FEDERAL INCOME TAXES 28,964 26,506 23,707
Federal income taxes 9,214 7,890 6,812
---------- ---------- ----------
NET INCOME 19,750 18,616 16,895
Retained earnings at beginning of year 219,707 216,223 206,258
Cash dividends (per share - $.40 per year) (4,994) (5,365) (5,488)
Cost of treasury shares in excess of original issue proceeds (13,572) (9,946) (1,140)
Foreign exchange adjustment (193) 179 (302)
---------- ---------- ----------
RETAINED EARNINGS AT END OF YEAR $ 220,698 $ 219,707 $ 216,223
PER SHARE DATA:
DILUTED:
Income before realized net gains $ .93 $ 1.11 $ 1.09
Realized net gains on investments .64 .27 .13
---------- ---------- ----------
NET INCOME $ 1.57 $ 1.38 $ 1.22
========== ========== ==========
BASIC:
Income before realized net gains $ .93 $ 1.12 $ 1.10
Realized net gains on investments .65 .27 .13
---------- ---------- ----------
NET INCOME $ 1.58 $ 1.39 $ 1.23
========== ========== ==========
See notes to consolidated financial statements.
23
24
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY OTHER THAN CAPITAL
Baldwin & Lyons, Inc. and Subsidiaries
2000 1999 1998
------------ ------------ ------------
(DOLLARS IN THOUSANDS)
BALANCES AT BEGINNING 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
CHANGES ARISING FROM INCOME-PRODUCING ACTIVITIES:
Net income 19,750 18,616 16,895
Gains (losses) on investments:
Holding gains (losses) arising during period,
before federal income taxes 30,205 (2,991) (20,688)
Federal income taxes 10,572 (1,047) (7,241)
---------- ---------- ----------
19,633 (1,944) (13,447)
Gains realized during period included in net income,
before federal income taxes (12,473) (5,625) (2,855)
Federal income taxes (4,366) (1,969) (999)
---------- ---------- ----------
(8,107) (3,656) (1,856)
---------- ---------- ----------
Change in unrealized gains on investments 11,526 (5,600) (15,303)
Foreign exhange adjustment (193) 179 (302)
---------- ---------- ----------
TOTAL REALIZED AND UNREALIZED INCOME 31,083 13,195 1,290
OTHER CHANGES AFFECTING RETAINED EARNINGS:
Cash dividends paid to shareholders (4,994) (5,365) (5,488)
Cost of treasury shares in excess of original issue proceeds (13,572) (9,946) (1,140)
---------- ---------- ----------
(18,566) (15,311) (6,628)
---------- ---------- ----------
TOTAL CHANGES 12,517 (2,116) (5,338)
---------- ---------- ----------
BALANCES AT END OF YEAR:
Retained earnings 220,698 219,707 216,223
Unrealized gains on investments 36,237 24,711 30,311
---------- ---------- ----------
$ 256,935 $ 244,418 $ 246,534
========== ========== ==========
See notes to consolidated financial statements.
24
25
CONSOLIDATED STATEMENTS OF CASH FLOWS
Baldwin & Lyons, Inc. and Subsidiaries
Year Ended December 31
------------------------------------------
2000 1999 1998
------------ ------------ ------------
(DOLLARS IN THOUSANDS)
OPERATING ACTIVITIES
Net income $ 19,750 $ 18,616 $ 16,895
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Change in accounts receivable and unearned premium (279) (2,711) 4,800
Change in accrued investment income (27) 371 (22)
Change in loss and loss expense reserves
and reinsurance recoverable (10,913) (13,030) (8,240)
Change in other assets, other liabilities
and current income taxes (380) 2,237 (2,173)
Amortization of net policy acquisition costs 1,031 1,716 5,945
Net policy acquisition costs deferred (854) (2,323) (6,668)
Provision for deferred income taxes (1,359) 530 2,176
Bond amortization 227 384 217
Loss on sale of property 57 19 28
Depreciation 2,318 1,845 1,311
Net realized gain on investments (13,524) (5,771) (2,701)
Compensation expense related to discounted stock options 136 140 135
---------- ---------- ----------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES (3,817) 2,023 11,703
INVESTING ACTIVITIES
Purchases of fixed maturities and equity securities (132,874) (143,309) (196,774)
Proceeds from maturities 44,185 55,746 92,774
Proceeds from sales of fixed maturities 35,779 23,485 21,785
Proceeds from sales of equity securities 108,063 84,441 80,487
Net purchases of short-term investments (9,671) (8,263) (6,801)
Distributions from limited partnerships 1,799 157 600
Notes receivable from employees (1,709) - -
Purchases of property and equipment (4,121) (2,836) (3,553)
Proceeds from disposals of property and equipment 184 332 128
---------- ---------- ----------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 41,635 9,753 (11,354)
FINANCING ACTIVITIES
Dividends paid to shareholders (4,994) (5,365) (5,488)
Proceeds from sale of common stock 10 15 40
Drawing on line of credit 5,411 8,528 -
Repayment on line of credit (8,528) - -
Cost of treasury shares (17,018) (11,794) (1,348)
---------- ---------- ----------
NET CASH USED IN FINANCING ACTIVITIES (25,119) (8,616) (6,796)
---------- ---------- ----------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 12,699 3,160 (6,447)
Cash and cash equivalents at beginning of year 20,115 16,955 23,402
---------- ---------- ----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 32,814 $ 20,115 $ 16,955
========== ========== ==========
See notes to consolidated financial statements.
25
26
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.
26
27
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.
27
28
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
------------ ------------ ------------ ------------ ------------
2000:
U. S. government obligations $ 38,789 $ 38,911 $ 58 $ (180) $ (122)
Mortgage-backed securities 21,430 21,385 128 (83) 45
Obligations of states and political subdivisions 50,856 50,470 425 (39) 386
Corporate securities 100,735 102,676 878 (2,819) (1,941)
---------- ---------- ---------- ---------- ----------
Total fixed maturities 211,810 213,442 1,489 (3,121) (1,632)
Equity securities 157,951 100,387 66,301 (8,737) 57,564
Short-term and other 40,176 40,358 - (182) (182)
---------- ---------- ---------- ---------- ----------
Total available-for-sale securities $ 409,937 $ 354,187 $ 67,790 $ (12,040) 55,750
========== ========== ========== ==========
Applicable federal income taxes (19,513)
----------
Net unrealized gains - net of tax $ 36,237
==========
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
==========
28
29
NOTE B - INVESTMENTS (CONTINUED)
Gross realized gains and losses on investments for the years ended December 31
are summarized below:
2000 1999 1998
----------- ----------- -----------
Fixed maturities:
Gains $ 666 $ 220 $ 224
Losses (1,209) (2,564) (21)
--------- --------- ---------
Net gains (losses) (543) (2,344) 203
Equity securities:
Gains 22,861 17,747 9,779
Losses (6,866) (9,953) (6,855)
--------- --------- ---------
Net gains 15,995 7,794 2,924
Short-term and other - net gain (loss) (2,979) 175 (272)
--------- --------- ---------
Total net gains $ 12,473 $ 5,625 $ 2,855
========= ========= =========
The fair values and the cost or amortized cost of fixed maturity investments at
December 31, 2000, 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 $ 43 $ 49,272 $ 49,315 $ 43 $ 49,386 $ 49,429
Excess of one year to five years 10,334 105,547 115,881 10,272 105,969 116,241
Excess of five years to ten years 3,657 17,204 20,861 3,630 17,279 20,909
Excess of ten years 7,396 14,477 21,873 7,440 14,508 21,948
--------- --------- --------- --------- --------- ---------
Total maturities 21,430 186,500 207,930 21,385 187,142 208,527
Redeemable preferred stock - 3,880 3,880 - 4,915 4,915
--------- --------- --------- --------- --------- ---------
$ 21,430 $ 190,380 $ 211,810 $ 21,385 $ 192,057 $ 213,442
========= ========= ========= ========= ========= =========
Major categories of investment income for the years ended December 31 are
summarized as follows:
2000 1999 1998
----------- ----------- -----------
Fixed maturities $ 13,951 $ 15,785 $ 15,901
Equity securities 3,327 2,608 2,210
Money market funds 1,778 1,089 1,517
Short-term and other 1,674 565 611
---------- ---------- ----------
20,730 20,047 20,239
Investment expenses (1,681) (1,156) (1,179)
---------- ---------- ----------
NET INVESTMENT INCOME $ 19,049 $ 18,891 $ 19,060
========== ========== ==========
Approximately 31% of purchases and 47% of sales of investments during the three
years ended December 31, 2000 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 $1,499, $614 and $590 in 2000,
1999 and 1998, respectively.
The Company has holdings in money-market accounts which were managed by or
purchased through companies affiliated with certain directors of the Company.
29
30
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,
2000 1999 1998
----------- ----------- -----------
Reserves at the beginning of the year $ 130,702 $ 143,951 $ 151,493
Provision for losses and loss expenses:
Claims occurring during the current year 65,577 55,520 53,278
Claims occurring during prior years (8,107) (10,609) (10,741)
---------- ---------- ----------
Total incurred 57,470 44,911 42,537
Loss and loss expense payments:
Claims occurring during the current year 37,671 27,867 24,947
Claims occurring during prior years 30,238 30,215 25,088
---------- ---------- ----------
Total paid 67,909 58,082 50,035
Change in unpaid portion of uncollectible
amounts due from reinsurers (57) (78) (44)
---------- ---------- ----------
Reserves at the end of the year 120,206 130,702 143,951
Reinsurance recoverable on reserves
at the end of the year 62,219 42,771 50,481
---------- ---------- ----------
Reserves, gross of reinsurance
recoverables, at the end of the year $ 182,425 $ 173,473 $ 194,432
========== ========== ==========
The reserves for losses and loss expenses, net of related reinsurance
recoverables, at December 31, 1999, 1998 and 1997 were decreased by $8,107,
$10,609 and $10,741, 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 2000 and 1999, on reserves outstanding at December 31, 1999 and 1998
included increases of $15 and decreases of $1,082, 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 $3,900 and $5,000 at December 31, 2000 and 1999, respectively.
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, 2000.
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, 2000 and 1999, loss reserves have been reduced by
approximately $5,096 and $5,553, 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 $2,698 and $2,363 at December 31, 2000 and 1999, respectively.
30
31
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 2000, 1999 and 1998
were $657, $620 and $615, 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:
2000 1999
---------- ----------
DEFERRED TAX LIABILITIES:
Unrealized gain on investments $ 19,513 $ 13,306
Deferred acquisition costs 1,315 1,351
Limited partnerships 258 2,007
Salvage and subrogation 560 578
Other 590 598
--------- ---------
Total deferred tax liabilities 22,236 17,840
--------- ---------
DEFERRED TAX ASSETS:
Discounts of loss and loss expense reserves 4,154 5,049
Deferred compensation 2,928 2,433
Unearned premiums 1,692 1,707
Other 915 951
--------- ---------
Total deferred tax assets 9,689 10,140
--------- ---------
NET DEFERRED TAX LIABILITIES $ 12,547 $ 7,700
========= =========
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:
2000 1999 1998
---------- ---------- ----------
Statutory federal income rate applied to
pretax income from operations $ 10,137 $ 9,277 $ 8,297
Tax effect of (deduction):
Tax-exempt investment income (1,390) (1,337) (1,374)
Other 467 (50) (111)
--------- --------- ---------
Federal income tax expense $ 9,214 $ 7,890 $ 6,812
========= ========= =========
Federal income tax expense consists of the following:
2000 1999 1998
---------- ---------- ----------
Taxes (credits) on income from operations:
Current $ 10,573 $ 7,360 $ 4,636
Deferred (1,359) 530 2,176
--------- --------- ---------
$ 9,214 $ 7,890 $ 6,812
========= ========= =========
31
32
NOTE E - INCOME TAXES (CONTINUED)
Cash flows related to federal income taxes paid, net of refunds received, for
2000, 1999 and 1998 were $8,807, $7,367 and $6,533, respectively, including
Section 847 special tax deposits. Future tax benefits on approximately $4,154
of deferred tax assets at December 31, 2000 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 facultative
placements. Risks are reinsured with other companies to permit the recovery of
a portion of related direct losses. Protective also serves as an assuming
reinsurer under retrocessions from certain other reinsurers. These
retrocessions include individual risks as well as aggregate catastrophe
treaties. Accordingly, the occurrence of a major catastrophic event could have
a significant impact on the Company's financial statements. In addition, the
insurance subsidiaries participate in certain involuntary reinsurance pools
which require insurance companies to provide coverages on assigned risks. The
assigned risk pools allocate participation to all insurers based upon each
insurer's portion of premium writings on a state or national level.
Net premiums earned for 2000, 1999 and 1998 have been reduced by reinsurance
ceded premiums of approximately $23,943, $19,037 and $12,337, respectively. Net
losses and loss expenses incurred for 2000 and 1998 have been reduced by
reinsurance recoveries of approximately $40,586 and $10,255, respectively. Net
losses and loss expenses incurred for 1999 have been increased by net savings on
reinsured claims of $771. Ceded reinsurance premiums and loss recoveries for
catastrophe reinsurance contracts were not material. The Company remains liable
to the extent the reinsuring companies are unable to meet their obligations
under reinsurance contracts. Net premiums earned for 2000, 1999 and 1998
include approximately $4,678, $4,981 and $8,338, respectively, relating to the
assumption of reinsurance from other companies and from reinsurance pools.
Components of reinsurance recoverable at December 31 are as follows:
2000 1999
---------- ----------
Paid losses and loss expenses $ 2,197 $ 2,013
Unpaid losses and loss expenses 62,219 42,771
Unearned premiums 274 41
--------- ---------
$ 64,690 $ 44,825
========= =========
32
33
NOTE G - SHAREHOLDERS' EQUITY
Changes in common stock outstanding and additional paid-in capital are as
follows:
Additional
Class A Class B Paid-in
Shares Amount Shares Amount Capital
------------ ------------ ------------ ------------ ------------
Balance at January 1, 1998 2,397,354 $ 128 11,292,445 $ 602 $ 41,361
Discounted stock options issued - - - - 135
Discounted stock options exercised - - 67,475 4 36
Treasury shares purchased (8,900) (1) (57,424) (3) (204)
---------- ---------- ---------- ---------- ----------
Balance at December 31, 1998 2,388,454 127 11,302,496 603 41,328
Discounted stock options issued - - - - 139
Discounted stock options exercised - - 45,297 2 13
Treasury shares purchased (62,900) (3) (510,400) (27) (1,817)
---------- ---------- ---------- ---------- ----------
Balance at December 31, 1999 2,325,554 124 10,837,393 578 39,663
Discounted stock options issued - - - - 136
Discounted stock options exercised - - 17,889 1 9
Treasury shares purchased (24,769) (1) (985,200) (53) (3,392)
---------- ---------- ---------- ---------- ----------
Balance at December 31, 2000 2,300,785 $ 123 9,870,082 $ 526 $ 36,416
========== ========== ========== ========== ==========
The Company's Class A and Class B common stock has a stated value of
approximately $.05.
Shareholders' equity at December 31, 2000 includes $302,858 representing GAAP
shareholder's equity of insurance subsidiaries, of which $42,772 may be
transferred by dividend or loan to the parent company without approval by, or
notification to, regulatory authorities. An additional $204,337 of
shareholder's equity of such in