UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D. C.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 number0-5534 | |||
|
December 31, 2008
BALDWIN & LYONS, INC.
(Exact name of registrant as specified in its charter)
Indiana |
| ||
(State or other jurisdiction of Incorporation or organization | 35-0160330 (I.R.S. Employer | Idenfication No.) | |
|
|
1099 North Meridian Street, Indianapolis, Indiana |
| ||
(Address of principal executive offices) |
(Zip Code) |
Registrant’s telephone number, including area code: 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 if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes __ No x
Yes oNox
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 o__
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
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.
Large accelerated filer o__ Accelerated filer xNon-accelerated filer o__
The aggregate market value of Class A and Class B Common Stock held by non-affiliates of the Registrant as of June 30, 2007,2008, based on the closing trade prices on that date, was approximately $216,918,000$153,439,000
The number of shares outstanding of each of the issuer’s classes of common stock as of March 3, 2008:2009:
| Common Stock, No Par Value: |
| Class A (voting) |
|
| Class B (nonvoting) |
|
The Index to Exhibits is located on pages 75 through 77.74 and 75.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for Annual Meeting of Shareholders to be held May 6, 20085, 2009 are incorporated by reference into Part III.
- 1 -
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.insurance and the assumption of property reinsurance principally insuring against catastrophes. B&L’s principal subsidiaries are: Protective Insurance Company (referred to herein as “Protective”), with licenses in all 50 states, the District of Columbia and all Canadian provinces; Sagamore Insurance Company (referred to herein as “Sagamore”), which is currently licensed in 47 states; Transportation Specialty Insurance Agency, Inc., (referred to herein as “TIA”), an Ohio based insurance agent and broker; and B&L Insurance, Ltd. (referred to herein as “BLI”), which is domiciled and licensed in Bermuda. These subsidiariesProtective, Sagamore and BLI 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 67% of the gross direct premiums written and assumed by the Insurance Subsidiaries during 20072008 were attributable to business produced directly or indirectly by B&L. Approximately 13%18% of gross premium is assumed from several non-affiliated insurance and reinsurance companies through policies of reinsurance and retrocessions. The remaining 20%15% consists primarily of business written by Sagamore which was originated through an extensive network of independent agents.
The Insurance Subsidiaries cede portions of their gross premiums written to several non-affiliated reinsurers under excess of loss and quota-share treaties and by facultative (individual policy-by-policy) placements. Reinsurance is ceded to spread the risk of loss among several reinsurers. In addition to the assumption of non-affiliated 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. Assigned risk premium typically comprises less than 1% of gross direct premium written and assumed.
The Insurance Subsidiaries serve various specialty markets as follows:
Fleet Trucking InsuranceTransportation
Protective providesThe Insurance Subsidiaries provide coverage for larger companies in the motor carrier industry which retain substantial amounts of self-insurance, for independent contractors utilized by large trucking companies, and for medium-sized and small trucking companies on a first dollar or small deductible basis.basis and for public livery concerns, principally covering fleets of busses. Large fleet trucking products are marketed largely by the B&L agency organization directly to truckingfleet transportation clients and, for one large account, in partnershipbut also through partnerships with a non-affiliated broker. In addition, brokerbrokers and through specialized independent agents. Broker or agent intermediaries are used on a limited basis for certain smaller accounts. 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 for independent contractors.
Fidelity and surety bonds.
Inland Marine consisting principally of cargo insurance.
“Captive” insurance company products, which are provided through BLI in Bermuda.
|
|
|
|
|
|
|
|
|
|
|
|
B&L also performs a variety of additional services, primarily for Protective’s insureds, including 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 handling services are also provided, primarily to clients with self-insurance programs.
Non-affiliated AssumptionProperty Reinsurance
Protective accepts cessions and retrocessions from selected insurance and reinsurance companies, principally reinsuring against catastrophes. Prior to 2007, exposures under these retrocessions were almost exclusively in high upper layers, spread among several geographic regions and limited so that only a major catastrophic event or series of major events wouldcould have a material impact on the Company’s operations or financial position. Beginning in 2007, Protective entered into an exclusive agreement with a non-affiliated reinsurance broker which concentrated on catastrophe losses which attach at much lower levels, primarily covering tornado and hail losses in the U.S. Midwest, windstorm events excluding Florida and U.S.
earthquake excluding California.California and certain Canadian risks. This new business comprised 42%48% of non-affiliated premium assumed during 2007.2008.
- 2 -
Private Passenger Automobile Insurance
Sagamore markets private passenger automobile liability and physical damage coverages to individuals through a network of independent agents in thirty states.
Small Fleet Trucking InsuranceProperty/Casualty Losses and Loss Adjustment Expenses
Sagamore provides commercial automobile liability, physical damage and cargo insurance to truck owner-operators with six or fewer power units. These products are marketed through independent agents in thirty-one states.
The most significant expense category for the Company’s insurance subsidiaries is losses and loss adjustment expenses incurred. A discussion of this expense category follows.
Property/Casualty Losses and Loss Adjustment Expenses
The consolidated financial statements include the estimated liability for unpaid losses and loss adjustment expenses (“LAE”) of the Insurance Subsidiaries. The liabilities for losses and LAE are determined using case basis evaluations and statistical projections and represent estimates of the Company’s ultimate net exposure for 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.
The Company’s reserves for losses and loss expenses (“reserves”) are determined based on evaluations of individual reported claims and by complex estimation processes using historical experience, current economic information and, when necessary, available industry statistics. Reserves are evaluated in three basic categories (1) “case basis”, (2) “incurred but not reported” and (3) “loss adjustment expense” reserves. Case basis reserves, which comprise approximately 64%61% of total net reserves at December 31, 2007,2008, are established for specific known loss occurrences at amounts dependent upon criteria such as type of coverage, severity of injury or property damage and the underlying policy limits, as examples. Case basis reserves are estimated by experienced claims adjusters using established Company guidelines and are subject to review by claims management. Incurred but not reported reserves, which are established for those losses which have occurred, but have not yet been reported to the Company, are computed on a “bulk” basis. Common actuarial methods are employed in the establishment of incurred but not reported loss reserves using company historical loss data, consideration of changes in the Company’s business and study of current economic trends affecting ultimate claims costs. Loss adjustment expense reserves, or reserves for the costs associated with the investigation and settlement of a claim, are also bulk reserves representing the Company’s estimate of the costs associated with the claims handling process. Loss adjustment expense reserves include amounts ultimately allocable to individual claims as well as amounts required for the general overhead of the claims handling operation which are not specifically allocable to individual claims. Historical analyses of the ratio of loss adjusting expenses to losses paid on prior closed claims and study of current economic trends affecting loss settlement costs are used to estimate the loss adjustment reserve needs related to the established loss reserves. Each of these reserve categories contain elements of uncertainty which assure variability when compared to the ultimate costs to settle the underlying claims for which the reserves are established. For a more detailed discussion of the three categories of reserves, see “Loss and Loss Expense Reserves” under the caption, “Critical Accounting Policies” beginning on page 27 in27in Management’s Discussion and Analysis.
The reserving process requires management to continuously monitor and evaluate the life cycle of claims. Our claims range from the very routine private passenger automobile “fender bender” to the highly complex and costly claims involving large tractor-trailer rigs. Reserving for each class of claims requires a set of assumptions based upon historical experience, knowledge of current industry trends and seasoned judgment. The high limits covered by the Company’s truckingfleet transportation liability policies provide for greater volatility in the reserving process for more serious claims. Court rulings, legislative actions, geographic location of the claim under consideration and trends in jury awards also play a significant role in the estimation process of larger claims. The Company continuously reviews and evaluates loss developments subsequent to each measurement date and adjusts its reserve estimation assumptions, as necessary, in an effort to achieve the best possible estimate of the ultimate remaining loss costs at any point in time.
- 3 -
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 those portions of the losses retained by the insured. The loss and LAE reserves at December 31, 20072008 have been reduced by approximately $5.6$5.3 million as a result of such discounting. Had the Company not discounted loss and LAE reserves, pretax income would have been approximately $.7$.2 million lowerhigher for the year ended December 31, 2007.2008.
For policies inforce at December 31, 2007,2008, the maximum amount for which Protective insures a truckingfleet transportation risk is $10 million, less applicable self-insured retentions, although for the majority of policies written, the maximum limits provided by Protective are $5 million. Any limits above $10 million required by customers are either placed directly by Baldwin & Lyons, Inc. with excess carriers or are written by Protective but 100% reinsured. Certain coverages, such as workers’ compensation, provide essentially unlimited exposure, although the Company protects itself to the extent believed prudent through the purchase of excess reinsurance for these coverages. After giving effect to current treaty and facultative reinsurance arrangements Protective’s maximum exposure to loss from a single occurrence isranges from approximately $1.0 million to $1.3 million for the vast majority of risks insured although, for certain losses occurring in prior policy years, Protective’s maximum exposure could be as high as $2.7$2.9 million for a single occurrence. Reinsurance agreements effective since June 3, 2004 include provisions for aggregate deductibles that must be exceeded before the Company can recover under the terms of the treaties. The Company retains a higher percentage of the direct premium (and, therefore, cedes less premium to reinsurers) in consideration of these deductible provisions. Net premiums earned and losses incurred by the Company for 2008, 2007 2006 and 20052006 each include $22,567, $28,427 $23,366 and $15,878,$23,366, respectively, related to such deductible provisions. Protective has revised its treaty arrangements several times in prior years in response to changing market conditions. The current treaty arrangements are effective until June 3, 20082009 and cover the entire policy period for all business written from inception of the treaty on June 3, 20072008 through that date. Treaty renewals are expected to occur annually in the foreseeable future. During the past ten years, Protective’s maximum exposure to a single occurrence has ranged from less than $100,000 to as much as $3.7 million for a very limited number of risks. Because Protective occasionally offers multiple year policies and because losses from truckingfleet transportation business take years to develop, losses reported in the current year may be covered by a number of older reinsurance treaties with higher or lower loss retentions by Protective than those provided by current treaty provisions.
With respect to Sagamore’s private passenger automobile and small fleet trucking business, the Company’s maximum net exposure for a single occurrence has never exceeded $250,000.
The table on page 5 sets forth a reconciliation of beginning and ending loss and LAE liability balances, for 2008, 2007 2006 and 2005.2006. 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 11 shows the development of the estimated liability, net of reinsurance recoverable, for the ten years prior to 2007.2008. The table on page 12 is a summary of the re-estimated liability, before consideration of reinsurance, for the ten years prior to 20072008 as well as the related re-estimated reinsurance recoverable for the same periods.
- 4 -
RECONCILIATION OF LIABILITY FOR LOSSES AND LOSS ADJUSTMENT | RECONCILIATION OF LIABILITY FOR LOSSES AND LOSS ADJUSTMENT | RECONCILIATION OF LIABILITY FOR LOSSES AND LOSS ADJUSTMENT |
| |||||||||||||||||||
EXPENSES (GAAP BASIS) | EXPENSES (GAAP BASIS) | EXPENSES (GAAP BASIS) |
| |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
|
| Year Ended December 31 |
|
|
| Year Ended December 31 |
| |||||||||||||||
|
| 2007 |
| 2006 |
| 2005 |
|
|
| 2008 |
|
|
| 2007 |
|
|
| 2006 |
| |||
NET OF REINSURANCE RECOVERABLE: |
| (In thousands) |
|
|
| (in thousands) |
| |||||||||||||||
Liability for losses and LAE at the |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
beginning of the year |
| $ 249,495 |
| $ 242,130 |
| $ 207,137 | ||||||||||||||||
Beginning of the year |
|
|
| $ | 244,500 |
|
|
| $ | 249,495 |
|
|
| $ | 242,130 |
| ||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for losses and LAE: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Claims occurring during the current year |
| 129,065 |
| 129,551 |
| 154,314 |
|
|
|
| 132,829 |
|
|
|
| 129,065 |
|
|
|
| 129,551 |
|
Claims occurring during prior years |
| (21,284) |
| (16,947) |
| (13,692) |
|
|
|
| (17,077 | ) |
|
|
| (21,284 | ) |
|
|
| (16,947 | ) |
|
| 107,781 |
| 112,604 |
| 140,622 |
|
|
|
| 115,752 |
|
|
|
| 107,781 |
|
|
|
| 112,604 |
|
Payments of losses and LAE: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Claims occurring during the current year |
| 53,820 |
| 45,658 |
| 45,286 |
|
|
|
| 51,649 |
|
|
|
| 53,820 |
|
|
|
| 45,658 |
|
Claims occurring during prior years |
| 58,956 |
| 59,581 |
| 60,343 |
|
|
|
| 76,970 |
|
|
|
| 58,956 |
|
|
|
| 59,581 |
|
|
| 112,776 |
| 105,239 |
| 105,629 |
|
|
|
| 128,619 |
|
|
|
| 112,776 |
|
|
|
| 105,239 |
|
|
|
|
|
|
|
| ||||||||||||||||
Liability for losses and LAE at end of year |
| 244,500 |
| 249,495 |
| 242,130 |
|
|
|
| 231,633 |
|
|
|
| 244,500 |
|
|
|
| 249,495 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Reinsurance recoverable on unpaid losses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
at end of the year |
| 134,116 |
| 159,917 |
| 188,143 |
|
|
|
| 157,925 |
|
|
|
| 134,116 |
|
|
|
| 159,917 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liability for losses and LAE, gross of |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
reinsurance recoverable, at end of the year |
| $ 378,616 |
| $ 409,412 |
| $ 430,273 |
|
|
| $ | 389,558 |
|
|
| $ | 378,616 |
|
|
| $ | 409,412 |
|
|
|
|
|
|
|
|
The reconciliation above shows that a savings of $21.3$17.1 million was developed in the liability for losses and LAE recorded at December 31, 2006,2007, with similar savings developed during the two prior calendar years. The following table is a summary of the $21.3$17.1 million reserve savings by accident year.year (dollars in thousands):
Years in Which Losses Were Incurred |
| Reserve at December 31, 2006 |
| (Savings) Deficiency Recorded During 2007 |
| % (Savings) Deficiency |
| Reserve at December 31, 2007 |
| (Savings) Deficiency Recorded During 2008 |
| % (Savings) Deficiency |
|
|
|
|
|
|
|
|
|
|
| ||||
2007 |
| $ 75,245 |
| $ 3,342 |
| 4.4% |
| ||||||
2006 |
| $ 83,893 |
| $ (5,910) |
| (7.0%) |
| 54,428 |
| (11,587) |
| (21.3%) |
|
2005 |
| 69,412 |
| (6,261) |
| (9.0%) |
| 46,187 |
| (8,709) |
| (18.9%) |
|
2004 |
| 32,886 |
| (6,299) |
| (19.2%) |
| 16,458 |
| (862) |
| (5.2%) |
|
2003 |
| 14,998 |
| (2,635) |
| (17.6%) |
| 8,796 |
| 656 |
| 7.5% |
|
2002 |
| 3,427 |
| (845) |
| (24.7%) | |||||||
2001 & prior |
| 44,879 |
| 666 |
| 1.5% | |||||||
2002 & prior |
| 43,386 |
| 83 |
| .2% |
| ||||||
|
| $ 249,495 |
| $ (21,284) |
| (8.5%) |
| $ 244,500 |
| $ (17,077) |
| (7.0%) |
|
|
|
|
|
|
|
|
-
The savings recorded for these loss years was derived from varied sources, as follows.follows (dollars in thousands):
|
| 2001 & Prior |
| 2002 |
| 2003 |
| 2004 |
| 2005 |
| 2006 |
Losses and allocated loss expenses developed on cases known to exist at December 31, 2006 |
| $ 722 |
| $ (493) |
| $ (1,989) |
| $ (1,307) |
| $ 3,087 |
| $ (4,427) |
Losses and allocated loss expenses reported on cases unknown at December 31, 2006 |
| 570 |
| 22 |
| 280 |
| 656 |
| 8,225 |
| 7,989 |
Unallocated loss expenses paid |
| 166 |
| 52 |
| 257 |
| 669 |
| 648 |
| 1,570 |
Change in reserves for incurred but not reported losses and loss expenses |
| (810) |
| (401) |
| (888) |
| (4,400) |
| (16,070) |
| (11,300) |
Net (savings) deficiency on losses from directly-produced business |
| 648 |
| (820) |
| (2,340) |
| (4,382) |
| (4,110) |
| (6,168) |
(Savings)deficiency reported under reinsurance assumption agreements and residual markets |
| 18 |
| (25) |
| (295) |
| (1,917) |
| (2,151) |
| 258 |
Net (savings) deficiency |
| $ 666 |
| $ (845) |
| $ (2,635) |
| $ (6,299) |
| $ (6,261) |
| $ (5,910) |
|
| 2002 & Prior |
| 2003 |
| 2004 |
| 2005 |
| 2006 |
| 2007 |
Losses and allocated loss expenses developed on cases known to exist at December 31, 2007 |
| $ 759 |
| $ 1,461 |
| $ (314) |
| $ (7,013) |
| $ (1,460) |
| $ 413 |
Losses and allocated loss expenses reported on cases unknown at December 31, 2007 |
| 54 |
| 641 |
| 34 |
| 7,242 |
| 328 |
| 11,192 |
Unallocated loss expenses paid |
| 69 |
| 282 |
| 218 |
| 390 |
| 1,016 |
| 1,745 |
Change in reserves for incurred but not reported losses and allocated and unallocated loss expenses |
| (1,272) |
| (1,711) |
| (645) |
| (9,313) |
| (9,533) |
| (11,424) |
Net (savings) deficiency on losses from directly-produced business |
| (390) |
| 673 |
| (707) |
| (8,694) |
| (9,649) |
| 1,926 |
(Savings) deficiency reported under voluntary reinsurance assumption agreements and residual markets |
| 473 |
| (17) |
| (155) |
| (15) |
| (1,938) |
| 1,416 |
Net savings |
| $ 83 |
| $ 656 |
| $ (862) |
| $ (8,709) |
| $(11,587) |
| $ 3,342 |
Loss and loss expense developments, presented separately by major product line, of business, were as follows.follows for the years ended December 31 (dollars in thousands):
| 2008 |
| 2007 |
| 2006 |
Fleet transportation | $ (15,057) |
| $ (16,456) |
| $ (14,313) |
Private passenger automobile | (1,191) |
| (290) |
| (1,064) |
Property reinsurance | (205) |
| (4,112) |
| (1,288) |
All other | (624) |
| (426) |
| (282) |
| $ (17,077) |
| $ (21,284) |
| $ (16,947) |
|
| Year Ended December 31 | ||||
Line of Business |
| 2007 |
| 2006 |
| 2005 |
|
|
|
|
|
|
|
Fleet trucking |
| $ (15,896) |
| $ (13,749) |
| $ (9,378) |
Private passenger automobile |
| (290) |
| (1,064) |
| (1,934) |
Small fleet trucking |
| (560) |
| (564) |
| (919) |
Reinsurance assumed |
| (4,112) |
| (1,288) |
| (1,730) |
All other |
| (426) |
| (282) |
| 269 |
|
| $ (21,284) |
| $ (16,947) |
| $ (13,692) |
|
|
|
|
|
|
|
The fleet truckingtransportation developments include developed redundancies from retrospectively-rated direct business, as shown in the following table. The “All other” category includes loss activity from involuntary residual markets, assigned risks and run-off of the Company’s discontinued products, including small business workers’ compensation.
-
In order to better understand the dynamics of the loss developments shown above, the following table separates developments into unique components, which are discussed below.below for the years ended December 31 (dollars in thousands):
|
|
|
|
|
| Year Ended December 31 | ||||||||||||
|
|
|
|
|
| 2007 |
| 2006 |
| 2005 | ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
| 2008 |
| 2007 |
| 2006 |
Retrospectively-rated direct business |
|
|
|
|
| $ (1,078) |
| $(7,171) |
| $(8,014) |
|
|
| $336 |
| ($1,078) |
| ($7,171) |
Other direct business |
|
|
|
|
| (16,041) |
| (7,994) |
| (4,468) |
|
|
| (17,217) |
| (16,041) |
| (7,994) |
Reinsurance assumed |
|
|
|
|
| (4,112) |
| (1,288) |
| (1,730) | ||||||||
Property reinsurance |
|
|
| (205) |
| (4,112) |
| (1,288) | ||||||||||
Involuntary residual markets |
|
|
|
|
| (56) |
| (533) |
| 1,018 |
|
|
| (31) |
| (56) |
| (533) |
Environmental damage |
|
|
|
|
| 3 |
| 39 |
| (498) |
|
|
| 40 |
| 3 |
| 39 |
Totals |
|
|
|
|
| $(21,284) |
| $(16,947) |
| $(13,692) |
|
|
| ($17,077) |
| ($21,284) |
| ($16,947) |
|
|
|
|
|
|
|
|
|
|
|
A significant component of the reserve savings in each of the years 2006 and 2005 is attributable to retrospectively-rated policies which are included in Fleet Truckingfleet transportation business. The majority of savings on these policies is returned to policyholders in the form of a retrospective premium adjustment which is recorded concurrently with the recognition of the reserve development. Accordingly, premium written and earned during 2007 2006 and 20052006 was reduced by approximately $.7 million $5.4 million and $4.8$5.4 million, respectively, associated with prior year loss reserve development on these policies and pre-tax income was increased by approximately $.3 million (.4%), and $1.8 million (3.3%), respectively. For 2008, premium written and $3.2earned was increased by approximately $.1 million (6.3%associated with prior year loss reserve development on certain retrospectively-rated workers’ compensation policies and pre-tax income before realized capital losses was reduced by approximately $.4 million (1.3%), respectively.. As shown in 2008 and 2007, the impact of retrospectively-rated policies will be much less significant going forward as the last major policy of this type expired early in 2006.
The other direct business amounts include the non-retrospectively rated polices for Fleet Trucking,fleet transportation and private passenger automobile and small fleet lines, as well as runoff of discontinued products which constitute part of the “all other” line of business shown in the previous table.business. As shown, the savings from this category ranged from $4.5$8.0 million in 20052006 to $16.0$17.4 million in 2007.2008. This fluctuation reflects the variability associated with the larger claims covered by the Company, particularly in more recent periods when the Company’s net retentions have increased. The Company continues to incorporate more recent loss development data into its loss reserving formulae; however, the change from excess of loss to quota share treaties beginning in 2004, as well as the dynamic nature of losses associated with the large fleet truckingtransportation business increases the importance of loss reserve processes which are not overly optimistic.processes. As discussed elsewhere, the Company has historically experienced savings in its loss developments for several years owing to, among other things, its long-standing policy of reserving for losses realistically and a willingness to settle claims based upon a seasoned evaluation of its exposures. While the Company’s basic assumptions have remained consistent, we continue to update loss data to reflect changing trends which can be expected to result in fluctuations in loss developments over time. Our goal is to produce an overall estimate of reserves which is sufficient and as close to expected ultimate losses as possible. The $16.0$17.4 million savings developed during 20072008 represents approximately 20.1%57.3% of pre-tax net income before realized capital losses for 20072008 but only approximately 9% of December 31, 20062007 net loss and LAE reserves on the related business.
The developments for property reinsurance assumed and involuntary residual markets, which netted to $4.2$.2 million of savings during 2007,2008, are heavily dependent on the establishment of case basis and IBNR reserves by other insurance and reinsurance companies and by managers of state run residual market pools. While the Company evaluates the sufficiency of such reserving, considering the number of different entities involved and the fact that the Company must rely on external sources of information, the savings or deficiency developed from these products will likely fluctuate from year to year. We have found this to be particularly true during years when large catastrophic events occur near year end. The larger savings developed during 2007, when compared to priorother years, reflects reductions in estimates of losses related to hurricane losses during 2004 and 2005 including additional reserves recorded by the Company in excess of those estimated by ceding reinsurers.
Factors affecting the development of environmental claims are more fully discussed in the following paragraphs. The savings recognized in 2005 represent both case basis and IBNR reserve reductions resulting from favorable outcomes related to large environmental claims while activityActivity during 2006 and 2007the three year period ending 2008 has been insignificant.
The Company has maintained a consistent, conservative posture in its reserving process and has not significantly altered its assumptions used in the reserving process since the mid - 1980’s. This process has proven to be fully adequate with no overall deficiencies developed since 1985. There were no significant changes in trends related to the numbers of claims
- 7 -
incurred (other than correlative variances with premium volume), average settlement amounts, numbers of claims outstanding at period ends or the averages per claim outstanding during the year ended December 31, 20072008 for most lines of
business. However, the average settlement amounts of severe truckingfleet transportation claims have tended to increase significantly in recent years and trends toward lower frequency in private passenger automobile lines noted in recent years appears to have slowed dramatically during the last half of 2007 while average severity is increasing.years.
In the first table on page 6, the amounts identified as “Net“net (savings) deficiency on losses from directly-produced business” consist of development on cases known at December 31, 2006,2007, losses reported which were previously unknown at December 31, 20062007 (incurred but not reported), unallocated loss expense paid related to accident years 20062007 and prior and changes in the reserves for incurred but not reported losses and loss expenses. Bulk loss reserves are established to provide for potential future adverse development on cases known to the Company and for cases unknown at the reserve date. Changes in the reserves for incurred but not reported losses and loss expenses occur based upon information received on known and newly reported cases during the current year and the effect of that development on the application of standard actuarial methods used by the Company.
Also shown in the aboveprevious table are amounts representing the “(savings) deficiency reported under reinsurance assumption agreements and residual markets”. These amounts relate primarily to the Company’s participation in property catastrophe reinsurance policies and treaties. The Company records its share of losses from these policies and treaties based on reports from the reinsured companies and retrocessionaires and does not directly establish case reserves related to this segment of the Company’s business. The Company does, however, establish additional reserves for property reinsurance assumed losses to supplement case reserves reported by the ceding companies, when considered necessary.
As described on page 4, changes have occurred in the Company’s net per accident exposure under reinsurance agreements in place during the periods presented in the aboveprevious table. It is much more difficult to reserve for losses where policy limits are as high as $10 million per accident as opposed to those losses related to business which carries lower policy limits, such as private passenger automobile. There are fewer policy limit losses in the Company’s historical loss database on which to project future loss developments and the larger the loss, the greater the likelihood that the courts will become involved in the settlement process. As such, the level of uncertainty in the reserving process is much greater when dealing with larger losses and will routinely result in fluctuations among accident year developments.
The differences between the liability for losses and LAE reported in the accompanying 20072008 consolidated financial statements prepared 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(dollars in thousands):
| Liability reported on a SAP basis - net of reinsurance recoverable |
|
Add differences:
| Reinsurance recoverable on unpaid losses and LAE |
|
| Additional reserve for residual market losses not |
| reported to the Company at the current year end | 360 |
Deduct differences:
| Estimated salvage and subrogation recoveries recorded on |
| a cash basis for SAP and on an accrual basis for GAAP | ( |
| Liability reported on a GAAP basis | $ |
The table on page 11 presents the development of GAAP balance sheet insurance reserves for each year-end 19971998 through 2007,2008, 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. This liability represents the estimated amount of losses and LAE for claims arising in all prior years that were unpaid at the respective balance sheet date, including losses that had been incurred, but not yet reported, to the Company.
- 8 -
The upper portion of the table shows the re-estimated amount of the previously recorded liability based on additional information available to the Company 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 individual claims and as claims are settled and paid.
The “cumulative redundancy” represents the aggregate change in the estimates of each calendar year end reserve through December 31, 2007.2008. For example, the 19971998 liability has developed a $33.5$25.2 million redundancy over ten years. That amount has been reflected in income over those ten years, as shown on the table. The effect on income of changes in estimates of the liability for losses and LAE during each of the past three years is shown in the table on page 5.
Historically, the Company’s loss developments have been favorable. Reserve developments for all years ended in the period 1986 through 20062007 have produced redundancies as of December 31, 2007.2008. In addition to refinements 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 truckingfleet transportation 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 a dramatic impact on the frequency and severity of truckingfleet transportation accidents and, more recently, the introduction of numerous safety devices using state-of-the-art technology has reduced rear end and cross over accidents which often produce the most serious injuries. Higher self-insured retentions also play a part in reduced insurance losses. Higher retentions not only raise the excess insurance entry point but also encourage truckingfleet transportation company management to focus even more intensely on safety programs. To a small degree, reserve savings have been achieved by the use of structured settlements on certain workers’ compensation and liability claims of a long-term liability nature.
The establishment of bulk 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, legislative actions, 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 20072008 is different from that which generated much of the ten-year historical loss data used to establish reserves in recent years. Management has noted trends toward significantly higher settlements and jury awards associated with the more serious truckingfleet transportation liability claims over the past several years. The inflationary factors affecting these claims appear to be more subjective in nature and not in line with compensatory equity. In addition to the factors mentioned above, savings realized in recent years upon the closing of claims, as reflected in the tables on pages 5 and 11, are attributable to the Company’s experience in specializing in long-haul trucking business for over 50 years as well as its long-standing policy of reserving for losses realistically and a willingness to settle claims based upon a seasoned evaluation of the underlying exposures. The Company 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 11 shows the cumulative amount paid with respect to the previously recorded calendar year end liability as of the end of each succeeding year. For example, as of December 31, 2007,2008, the Company had paid $87.7$90.8 million of losses and LAE that had been incurred, but not paid, as of December 31, 1997;1998; thus an estimated $29.8$27.6 million (25%(23%) of losses incurred through 19971998 remain unpaid as of the current financial statement date ($117.5118.4 million incurred less $87.7$90.8 million paid). The payment patterns shown in this table demonstrate the “long-tail” nature of much of the Company’s business whereby many claims do not settle for more than ten years.
In evaluating this information, it is important to note that the method of presentation causes some development experience to be duplicated. For example, the amount of any redundancy or deficiency related to losses settled in 2000,2001, but incurred in 1997,1998, will be included in the cumulative development amount for each of the years-end 1997, 1998, 1999, and 1999.2000. As such, this table does not present accident or policy year development data which readerswhichreaders may be more accustomed to analyzing. Rather, this table is intended to present an evaluation of the Company’s ability to establish its liability for losses and loss expenses at a given balance sheet date. It is important to note that conditions and trends that have affected development of the liability in the past may not necessarily occur in the future. Accordingly, it would not be appropriate to extrapolate future redundancies or deficiencies based on this table.
The table presented on page 12 presents loss development data on a gross (before consideration of reinsurance) basis for each of the ten years December 31, 19971998 through December 31, 20062007 as of December 31, 20072008 with a reconciliation of the data to the net amounts shown in the table on page 11. Readers are reminded that the gross data presented on page 12 requires significantly more subjectivity in the estimation of incurred but not reported and loss expense reserves because of the high limits provided by Protective to its truckingfleet transportation customers, much of which has been covered by excess of loss and
- 9 -
facultative reinsurance. This is particularly true of excess of loss treaties where Protective retains risk in only the lower, more predictable, layers of coverage. Accordingly, one would generally expect more variability in development on a gross basis than on a net basis.
Environmental Matters: The Company’s reserves for unpaid losses and loss expenses at December 31, 20072008 included amounts for liability related to environmental damage claims. Given the Company’s principal business is insuring truckingfleet transportation 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 may 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. Most 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 such exclusions in many environmental cases. Beginning with the year 1994 and through the year ended December 31, 2007,2008, the Company has recorded a total of $6.6$5.1 million in losses incurred with respect to environmental claims. The Company received notification in 2007 of a new environmental case involving a former insured during the 1970’s. Discovery regarding this case is in its very early stages; however, management believes exposure to the Company will not be significant. Incurred losses to date include a reserve for incurred but not reported environmental losses of $1.5 million at December 31, 2007.2008.
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 since 1986 is expected to further limit exposure to claims from that point forward.
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 significant asbestos exposure.
Accordingly, management believes that the Company’s exposure to environmental losses beyond those already provided for in the financial statements is not material.
- 10 -
ANALYSIS OF LOSS AND LOSS ADJUSTMENT EXPENSE DEVELOPMENT--GAAP BASIS | ANALYSIS OF LOSS AND LOSS ADJUSTMENT EXPENSE DEVELOPMENT--GAAP BASIS | ANALYSIS OF LOSS AND LOSS ADJUSTMENT EXPENSE DEVELOPMENT--GAAP BASIS |
| |||||||||||||||||||||||||||||||||||||||||||||||||||||
(Dollars in thousands) | (Dollars in thousands) | (Dollars in thousands) |
| |||||||||||||||||||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||
Year Ended December 31 |
| 1997 |
| 1998 |
| 1999 |
| 2000 |
| 2001 |
| 2002 |
| 2003 |
| 2004 |
| 2005 |
| 2006 |
| 2007 |
| 1998 |
| 1999 |
| 2000 |
| 2001 |
| 2002 |
| 2003 |
| 2004 |
| 2005 |
| 2006 |
| 2007 |
| 2008 |
| |||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liability for Unpaid |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Losses and LAE, Net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
of Reinsurance |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recoverables |
| $ 151,013 |
| $ 143,515 |
| $ 130,345 |
| $ 119,905 |
| $ 137,406 |
| $ 144,267 |
| $ 162,424 |
| $ 207,137 |
| $ 242,130 |
| $ 249,495 |
| $ 244,500 |
| $ | 143,515 |
| $ | 130,345 |
| $ | 119,905 |
| $ | 137,406 |
| $ | 144,267 |
| $ | 162,424 |
| $ | 207,137 |
| $ | 242,130 |
| $ | 249,495 |
| $ | 244,500 |
| $ | 231,633 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liability Reestimated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
as of: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One Year Later |
| 140,272 |
| 132,906 |
| 122,238 |
| 119,018 |
| 127,398 |
| 130,681 |
| 147,468 |
| 193,445 |
| 225,183 |
| 228,211 |
|
|
|
| 132,906 |
|
| 122,238 |
|
| 119,018 |
|
| 127,398 |
|
| 130,681 |
|
| 147,468 |
|
| 193,445 |
|
| 225,183 |
|
| 228,211 |
|
| 227,423 |
|
|
|
|
Two Years Later |
| 128,743 |
| 124,878 |
| 124,540 |
| 112,558 |
| 118,055 |
| 125,731 |
| 142,771 |
| 180,455 |
| 209,774 |
|
|
|
|
|
| 124,878 |
|
| 124,540 |
|
| 112,558 |
|
| 118,055 |
|
| 125,731 |
|
| 142,771 |
|
| 180,455 |
|
| 209,774 |
|
| 207,818 |
|
|
|
|
|
|
|
Three Years Later |
| 122,211 |
| 124,367 |
| 119,379 |
| 103,251 |
| 118,712 |
| 124,693 |
| 137,502 |
| 171,332 |
|
|
|
|
|
|
|
| 124,367 |
|
| 119,379 |
|
| 103,251 |
|
| 118,712 |
|
| 124,693 |
|
| 137,502 |
|
| 171,332 |
|
| 200,955 |
|
|
|
|
|
|
|
|
|
|
Four Years Later |
| 122,674 |
| 121,021 |
| 111,476 |
| 105,508 |
| 119,925 |
| 124,714 |
| 134,661 |
|
|
|
|
|
|
|
|
|
| 121,021 |
|
| 111,476 |
|
| 105,508 |
|
| 119,925 |
|
| 124,714 |
|
| 134,661 |
|
| 171,225 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Five Years Later |
| 119,632 |
| 114,456 |
| 113,720 |
| 106,757 |
| 120,757 |
| 124,507 |
|
|
|
|
|
|
|
|
|
|
|
| 114,456 |
|
| 113,720 |
|
| 106,757 |
|
| 120,757 |
|
| 124,507 |
|
| 135,418 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Years Later |
| 113,150 |
| 115,007 |
| 114,546 |
| 107,364 |
| 121,406 |
|
|
|
|
|
|
|
|
|
|
|
|
|
| 115,007 |
|
| 114,546 |
|
| 107,364 |
|
| 121,406 |
|
| 124,609 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Seven Years Later |
| 113,917 |
| 115,321 |
| 115,166 |
| 108,040 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 115,321 |
|
| 115,166 |
|
| 108,040 |
|
| 121,599 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Eight Years Later |
| 114,767 |
| 117,057 |
| 115,964 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 117,057 |
|
| 115,964 |
|
| 107,921 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Years Later |
| 116,110 |
| 118,136 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 118,136 |
|
| 115,927 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ten Years Later |
| 117,532 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 118,352 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative Redundancy | Cumulative Redundancy | $ 33,481 |
| $ 25,379 |
| $ 14,381 |
| $ 11,865 |
| $ 16,000 |
| $ 19,760 |
| $ 27,763 |
| $ 35,805 |
| $ 32,356 |
| $ 21,284 |
|
|
| $ | 25,163 |
| $ | 14,418 |
| $ | 11,984 |
| $ | 15,807 |
| $ | 19,658 |
| $ | 27,006 |
| $ | 35,912 |
| $ | 41,175 |
| $ | 41,677 |
| $ | 17,077 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||||||||||||
Cumulative Amount of |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liability Paid Through: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One Year Later |
| $ 25,088 |
| $ 30,214 |
| $ 30,239 |
| $ 31,132 |
| $ 30,249 |
| $ 39,956 |
| $ 38,234 |
| $ 60,343 |
| $ 59,581 |
| $ 58,956 |
|
|
| $ | 30,214 |
| $ | 30,239 |
| $ | 31,132 |
| $ | 30,249 |
| $ | 39,956 |
| $ | 38,234 |
| $ | 60,343 |
| $ | 59,581 |
| $ | 58,956 |
| $ | 76,970 |
|
|
|
|
Two Years Later |
| 43,311 |
| 48,416 |
| 49,068 |
| 47,060 |
| 55,724 |
| 57,522 |
| 62,380 |
| 84,265 |
| 94,947 |
|
|
|
|
|
| 48,416 |
|
| 49,068 |
|
| 47,060 |
|
| 55,724 |
|
| 57,522 |
|
| 62,380 |
|
| 84,265 |
|
| 94,947 |
|
| 100,990 |
|
|
|
|
|
|
|
Three Years Later |
| 55,180 |
| 60,594 |
| 60,427 |
| 58,618 |
| 64,489 |
| 69,959 |
| 74,198 |
| 102,692 |
|
|
|
|
|
|
|
| 60,594 |
|
| 60,427 |
|
| 58,618 |
|
| 64,489 |
|
| 69,959 |
|
| 74,198 |
|
| 102,692 |
|
| 117,522 |
|
|
|
|
|
|
|
|
|
|
Four Years Later |
| 64,370 |
| 66,679 |
| 69,374 |
| 64,574 |
| 71,038 |
| 76,408 |
| 82,479 |
|
|
|
|
|
|
|
|
|
| 66,679 |
|
| 69,374 |
|
| 64,574 |
|
| 71,038 |
|
| 76,408 |
|
| 82,479 |
|
| 116,198 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Five Years Later |
| 68,807 |
| 74,861 |
| 73,958 |
| 69,316 |
| 75,878 |
| 81,121 |
|
|
|
|
|
|
|
|
|
|
|
| 74,861 |
|
| 73,958 |
|
| 69,316 |
|
| 75,878 |
|
| 81,121 |
|
| 91,607 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Years Later |
| 76,657 |
| 77,957 |
| 78,150 |
| 72,751 |
| 79,668 |
|
|
|
|
|
|
|
|
|
|
|
|
|
| 77,957 |
|
| 78,150 |
|
| 72,751 |
|
| 79,668 |
|
| 85,064 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Seven Years Later |
| 79,428 |
| 81,530 |
| 81,337 |
| 76,126 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 81,530 |
|
| 81,337 |
|
| 76,126 |
|
| 83,405 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Eight Years Later |
| 81,752 |
| 84,451 |
| 84,666 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 84,451 |
|
| 84,666 |
|
| 79,408 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Years Later |
| 84,624 |
| 87,593 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 87,593 |
|
| 87,896 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ten Years Later |
| 87,733 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 90,764 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
ANALYSIS OF LOSS AND LOSS ADJUSTMENT EXPENSE DEVELOPMENT--GAAP BASIS |
|
|
|
|
|
|
| |||||
(Dollars in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31 |
| 1997 | 1998 | 1999 | 2000 | 2001 | 2002 | 2003 | 2004 | 2005 | 2006 | 2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct and Assumed: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liability for Unpaid Losses |
|
|
|
|
|
|
|
|
|
|
|
|
and Loss Adjustment |
|
|
|
|
|
|
|
|
|
|
|
|
Expenses |
| $ 196,715 | $ 193,996 | $ 173,115 | $ 182,124 | $ 246,816 | $ 277,309 | $ 342,449 | $ 440,172 | $ 430,273 | $ 409,412 | $ 378,616 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Liability Reestimated as of |
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007 |
| 144,801 | 153,292 | 179,428 | 213,185 | 261,490 | 297,922 | 322,062 | 387,386 | 372,592 | 374,470 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative (Deficiency) Redundancy |
| 51,914 | 40,704 | (6,313) | (31,061) | (14,674) | (20,613) | 20,387 | 52,786 | 57,681 | 34,942 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ceded: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liability for Unpaid Losses |
|
|
|
|
|
|
|
|
|
|
|
|
and Loss Adjustment |
|
|
|
|
|
|
|
|
|
|
|
|
Expenses |
| 45,702 | 50,481 | 42,770 | 62,219 | 109,410 | 133,042 | 180,025 | 233,035 | 188,143 | 159,917 | 134,116 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Liability Reestimated as of |
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007 |
| 27,269 | 35,156 | 63,464 | 105,145 | 140,084 | 173,415 | 187,401 | 216,054 | 162,818 | 146,259 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative (Deficiency) Redundancy |
| 18,433 | 15,325 | (20,694) | (42,926) | (30,674) | (40,373) | (7,376) | 16,981 | 25,325 | 13,658 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liability for Unpaid Losses |
|
|
|
|
|
|
|
|
|
|
|
|
and Loss Adjustment |
|
|
|
|
|
|
|
|
|
|
|
|
Expenses |
| 151,013 | 143,515 | 130,345 | 119,905 | 137,406 | 144,267 | 162,424 | 207,137 | 242,130 | 249,495 | 244,500 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Liability Reestimated as of |
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2007 |
| 117,532 | 118,136 | 115,964 | 108,040 | 121,406 | 124,507 | 134,661 | 171,332 | 209,774 | 228,211 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative Redundancy |
| 33,481 | 25,379 | 14,381 | 11,865 | 16,000 | 19,760 | 27,763 | 35,805 | 32,356 | 21,284 |
|
ANALYSIS OF LOSS AND LOSS ADJUSTMENT EXPENSE DEVELOPMENT--GAAP BASIS |
|
|
|
|
| |||||||||||||||||||||||||||||
(Dollars in Thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||||||
Year Ended December 31 |
| 1998 |
| 1999 |
| 2000 |
| 2001 |
| 2002 |
| 2003 |
| 2004 |
| 2005 |
| 2006 |
| 2007 |
| 2008 |
| |||||||||||
Direct and Assumed: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liability for Unpaid Losses and LAE |
| $ | 193,996 |
| $ | 173,115 |
| $ | 182,124 |
| $ | 246,816 |
| $ | 277,309 |
| $ | 342,449 |
| $ | 440,172 |
| $ | 430,273 |
| $ | 409,412 |
| $ | 378,616 |
| $ | 389,558 |
|
Liability Reestimated as of December 31, 2007 |
|
| 154,039 |
|
| 182,546 |
|
| 217,210 |
|
| 266,102 |
|
| 299,481 |
|
| 323,721 |
|
| 375,812 |
|
| 352,814 |
|
| 345,072 |
|
| 374,670 |
|
|
|
|
Cumulative (Deficiency) Redundancy |
|
| 39,957 |
|
| (9,431 | ) |
| (35,086 | ) |
| (19,286 | ) |
| (22,172 | ) |
| 18,728 |
|
| 64,360 |
|
| 77,459 |
|
| 64,340 |
|
| 3,946 |
|
|
|
|
Ceded: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liability for Unpaid Losses and LAE |
|
| 50,481 |
|
| 42,770 |
|
| 62,219 |
|
| 109,410 |
|
| 133,042 |
|
| 180,025 |
|
| 233,035 |
|
| 188,143 |
|
| 159,917 |
|
| 134,116 |
|
| 157,925 |
|
Liability Reestimated as of December 31, 2007 |
|
| 35,687 |
|
| 66,619 |
|
| 109,289 |
|
| 144,503 |
|
| 174,872 |
|
| 188,303 |
|
| 204,587 |
|
| 151,859 |
|
| 137,254 |
|
| 147,247 |
|
|
|
|
Cumulative (Deficiency) Redundancy |
|
| 14,794 |
|
| (23,849 | ) |
| (47,070 | ) |
| (35,093 | ) |
| (41,830 | ) |
| (8,278 | ) |
| 28,448 |
|
| 36,284 |
|
| 22,663 |
|
| (13,131 | ) |
|
|
|
Net: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liability for Unpaid Losses and LAE |
|
| 143,515 |
|
| 130,345 |
|
| 119,905 |
|
| 137,406 |
|
| 144,267 |
|
| 162,424 |
|
| 207,137 |
|
| 242,130 |
|
| 249,495 |
|
| 244,500 |
|
| 231,633 |
|
Liability Reestimated as of December 31, 2007 |
|
| 118,352 |
|
| 115,927 |
|
| 107,921 |
|
| 121,599 |
|
| 124,609 |
|
| 135,418 |
|
| 171,225 |
|
| 200,955 |
|
| 207,818 |
|
| 227,423 |
|
|
|
|
Cumulative Redundancy |
|
| 25,163 |
|
| 14,418 |
|
| 11,984 |
|
| 15,807 |
|
| 19,658 |
|
| 27,006 |
|
| 35,912 |
|
| 41,175 |
|
| 41,677 |
|
| 17,077 |
|
|
|
|
- 12 -
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 power 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 truckingfleet transportation 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 of this coverage. Protective also offers work-related accident insurance, on a group basis, to independent contractors under contract to a fleet sponsor. ThroughoutIn addition, Sagamore offers a program of coverages for “small fleet” trucking concerns (owner-operators generally with one to six power units). This program is currently being marketed in thirty-one states through independent agents utilizing much of the 1990’s, the market for Protective’s products grew increasingly competitive. Competitive pressures eased significantlytechnology developed in the period 2001 through 2003, as competitors experienced unfavorable operating results but competitionconjunction with marketing private passenger automobile insurance. More recently, Protective has once again begunexpanded its fleet transportation offerings to increase during 2004 through 2007 (see comments under “Competition” following).include certain public livery risks, principally large and medium sized operators of bus fleets. In 2007,2008, fleet truckingtransportation products generated approximately 67%68% of direct premium written and assumed for the Company.
Since 1992, Protective has accepted reinsurance cessions and retrocessions, principally for catastrophe exposures, from selected reinsurers on an opportunistic basis.insurers and reinsurers. Protective is committed to participation in this market, providedalthough participation levels depend on the adequacy of pricing remains conducivewhich can vary widely from time to profitable results.time. In determining the volume of catastrophe property reinsurance assumed that it will accept, the Company first determines the exposure that it is willing to accept from a single “maximum foreseeable loss” (MFL) and a “probable maximum loss” (PML) within a given geographic area. As retrocessions are offered to the Company, computer models of geographic exposure are evaluated against these maximums and programs are only considered if they do not cause aggregate exposure to exceed the predetermined limits. Currently,Through December 31, 2008, the Company’s estimate of its gross exposure to a MFL or a PML is approximately 10% and 6%11% of consolidated surplus, respectively.surplus. However, this amount is before state and federal tax credits and reinstatement premiums which would significantly reduce the impact of a MFL or a PML on the Company’s surplus.
Since 1995, Sagamore has sold private passenger automobile insurance. This program is currently being marketed in thirty mid-western and southern states through independent agents. Sagamore utilizes state-of-the-art technology extensively in marketing its private passenger automobile insurance product in order to provide superior service to its agents and insureds.
Sagamore also offers a program of coverages for “small fleet” trucking concerns (owner-operators generally with one to six power units). This program is currently being marketed in thirty-one states through independent agents. Small Fleet Trucking shares much of the technology utilized by the private passenger automobile insurance division in marketing its products.
Investments
The Company’s investment portfolio consists ofis essentially divided between (1) funds which are considered necessary to support insurance underwriting activities and (2) excess capital funds. In general, funds invested in fixed maturity and short-term instruments are more than sufficient to cover underwriting operations while equity securities and limited partnerships are utilized to invest excess capital funds. The following discussion will concentrate on the different investment strategies for these two major categories.
At December 31, 20072008 the financial statement value of the Company’s investment portfolio was approximately $651$545 million, including $87$24 million of money market instruments classified as cash equivalents. The adjusted cost of this portfolio was $594 million.$519 million with the $26 million difference carried as pre-tax unrealized gains. A comparison of the allocation of assets within the Company’s investment portfolio, using adjusted cost as a basis, is as follows:follows as of December 31:
- 13 -
|
|
|
|
|
| Municipal bonds |
|
|
| U.S. Government obligations |
|
|
| Corporate and other bonds |
|
|
| Mortgage-backed securities | 2.7 |
|
| Short-term |
|
|
| Total fixed maturity and short-term |
|
|
| Common stocks |
|
|
| Limited partnerships |
|
|
| 100.0% | 100.0% |
Fixed Maturity and Short-Term Investments
Fixed maturity and short-term securities comprised 78.8%77.5% of the market value of the Company’s total invested assets at December 31, 2007.2008. With the exception of U.S. Government obligations, the fixed maturity portfolio is widely diversified with no concentrations in any single industry or municipality. The largest amount invested in any single issuer (non-index fund) was $6.9$7.4 million (1.2%(1.4% of total invested assets) although most individual investments, other than municipal bonds, are less than $500,000.$750,000. The Company does not actively trade fixed maturity securities but typically holds, and has the intent and ability to hold, such investments until maturity. Exceptions exist in the rare instances where the underlying credit for a specific issue is deemed to be diminished. In such cases, the security will be considered for disposal prior to maturity. In addition, fixed maturity securities may be sold when realignment of the portfolio is considered beneficial (i.e. moving from taxable to non-taxable issues) or when valuations are considered excessive compared to alternative investments.
The Investment Committee has determined that the Company’s insurance subsidiaries will, at all times, hold high grade fixed maturity securities and short-term investments with a market value equal to at least 100% of reserves for losses and loss expenses, net of applicable reinsurance credits. At December 31, 2007,2008, investment grade bonds and short-term instruments held by insurance subsidiaries equaled 174%155% of net loss and loss adjustment expense reserves, thus providing a substantial margin above this conservative guideline.
The Company’s concentration of fixed maturity funds 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. During the past several years, short-term taxable yields have approximated those available for five and ten year obligations and, accordingly, the Company had concentrated the investment of new and maturing funds into high quality obligations with maturities of less than one year, which are classified above as short-term. DuringBeginning in 2007, and 2006, it was determined that after-tax investment yields could be enhanced by moving portions of the taxable portfolio into high grade municipal bonds with short to moderate maturities. As a result, the total of investments in municipal bonds increased $68 million and $98 million in 2007 and 2006, respectively and comprises almost half of the value of all invested assets at December 31, 2008 and 2007.
The following comparison of the Company’s bond and short-term investment portfolios, using par value as a basis, indicatesshows the changes in contractual maturities in the portfolio during 2007.2008. Note that the duration of the portfolio is less than the average life shown below because the Company has, in some cases, the right to put obligations and borrowers have, in some cases, the right to call or prepay obligations with or without call or prepayment penalties.
- 14 -
Maturities of Bonds and Short-Term Investments at December 31 (Par Value)
|
|
|
| Less than one year |
|
|
| 1 to 5 years |
|
|
| 5 to 10 years |
|
|
| More than 10 years |
|
|
| 100.0% | 100.0% |
| Average life of portfolio (years) |
|
|
Approximately $15.7$4.1 million of fixed maturity investments (2.4%(.7% of total invested assets) consists of bonds rated as less than investment grade at year end. These investments are primarily composed of shares in threetwo widely diversified high yield bond funds where exposure to default by any single issuer is extremely limited. These funds carry a Morningstar rating of fourthree and five stars. We have included the investments in these funds in the total of non-investment grade bonds since, under the investment guidelines of the funds, the average bond quality rating could fall below BBB. At December 31, 2007, the market value of these bond funds was 1.7% less than cost.
The market value of the consolidated fixed maturity portfolio was $2.2$6.7 million greater than cost at December 31, 2007,2008, before income taxes, which compares to a $.3$2.2 million unrealized lossgain at December 31, 2006.2007. Each individual issue with a market value less than cost at year end was determined to result from interest rate increases and not from credit quality. As has been the Company’s consistent policy, other-than-temporary impairment is recorded for any individual issue which has sustained a decline in current market value of at least 20% below original or adjusted cost, and the decline is ongoing for more than 6 months, regardless of the evaluation of the creditworthiness of the issuer or the specific issue. NoAdditionally, the Company takes into account any known subjective information in evaluating for impairment without consideration to the Company’s 20% threshold. An adjustment of approximately $3.9 million was made to the cost basis of fixed maturity
investments met these criteria at December 31, 2007 or 2006.2008 in accordance with the above guidelines. No adjustments were necessary at December 31, 2007. Gross unrealized losses on fixed maturity securities were $.6$2.7 million in total at December 31, 2007.2008, averaging 3.2% of the related adjusted cost basis.
Equity Securities
Because of the large amount of high quality fixed maturity investments owned, relative to the Company’s loss and loss expense reserves and other liabilities, amounts invested in equity securities are not needed to fund current operations and, accordingly, can be committed for long periods of time. Equity securities comprise 11.6% of the market value of the consolidated investment portfolio at December 31, 2008, but only 7.7% of the related cost basis, as long-term holdings have appreciated significantly, even after the large market downturn of 2008. The Company’s equity securities portfolio consists of over 100 separate issues with diversification from large to small capitalization issuers and among several industries. The largest single equity issue owned has a market value of $2.7 million at December 31, 2008 (.5% of total investments).
In general, the Company maintains a buy-and-hold philosophy with respect to equity securities. Many current holdings have been continuously owned for more than ten years, accounting for the fact that the portfolio, in total, carries a $15 million unrealized gain at the current year end using original cost and over $23 million using adjusted cost. An individual equity security will be disposed of when it is determined by investment managers or the Investment Committee that there is little potential for future appreciation. All equity securities are considered to be available for sale although portfolio turnover is very low. Securities are not sold to meet any quarterly or annual earnings quotas but, rather, are disposed of only when market conditions are deemed to dictate, regardless of the impact, positively or negatively, on current period earnings. In addition, equity securities may be sold when realignment of the portfolio is considered beneficial or when valuations are considered excessive compared to alternative investments.
During 2008, the Company disposed of equity securities which were considered to have less than average near term potential for improvement. These sales generated both gains and losses but netted to a realized loss of $3.3 million before taxes. The net effect of other-than-temporary impairment adjustments, which added to the investment losses from equity securities was a negative $5.1 million for the year before taxes. The reclassification of other-than-temporary unrealized losses to realized occurred on each individual issue where the current market value was at least 20% below original or adjusted cost, and the decline was ongoing for more than 6 months at December 31, 2008, regardless of the evaluation of the issuer or the potential for recovery. Net unrealized gains on the equity security portfolio decreased to $23.1 million, before tax at December 31, 2008 from $54.5 million last year end reflecting the worldwide loss of value in equity securities during 2008. The current net unrealized gain consists of $27.4 million of gross unrealized gains and $4.3 million of gross unrealized losses with the average decline in value on issues where market was less than adjusted cost being just under 20%.
Limited Partnerships
For several years, the Company has invested in various limited partnerships engaged in securities trading activities, real estate development and small venture capital funding, as an alternative to direct equity investments. The funds used for these investments are part of the Company’s excess capital strategy. At December 31, 2008, the aggregate cost basis of active limited partnerships was $47.0 million and the aggregate market value was $59.9 million.
As a group, these investments experienced fair value declines during 2008, with the aggregate of the Company’s share of such losses totaling approximately $33.6 million. The current year limited partnership value decrease is composed of estimated realized income of $3.4 million and estimated unrealized losses of $37.0 million, as reported to the Company by the various general partners. On an inception-to-date basis, active limited partnerships have produced estimated realized income of $19.8 million and estimated unrealized losses of $6.9 million.
The Company follows the equity method of accounting for these investments and records the total change in value as a component of net gains or losses on investments. However, readers are cautioned that, to the extent that reported increases in equity value are unrealized, they can be reduced or eliminated quickly by volatile market conditions. Further, assets purchased with reinvested realized gains can also diminish in value. In addition, a significant minority of the investments included in the limited partnerships do not have readily ascertainable fair market values and, accordingly, values assigned by the general partners may not be realizable upon the sale or disposal of the related assets, which may not occur for several years. Limited partnerships also are highly illiquid investments and the Company’s ability to withdraw funds is generally subject to significant restrictions.
Derivative Securities
During 2008, one of the Company’s investment managers engaged in the direct trading of a limited amount of derivative securities. Derivative trading activity was ceased and all derivative securities were subsequently disposed of in 2008 with all activity for the year resulting in a net realized loss of $2.2 million. The Company holds no derivate securities at December 31, 2008.
Investment Yields
The interest rate environment suffered significant decline during 2008. With few exceptions, the yield curve continued downward with yields on short-term investments falling by more than 50% from 2007. Bond yields declined much more modestly during 2008 and, as previously noted, a substantial portion of the Company’s short-term investments were redeployed to short to medium term municipal bonds during 2007 to produce higher after tax yields. Pre-tax net investment income decreased $2.5 million, or 13% and after tax income decreased $1.3 million, or 8% during 2008. A comparison of consolidated investment yields, before consideration of investment expenses, is as follows:
2008 | 2007 |
Before federal tax: |
Investment income | 3.7% | 4.2% |
Investment income plus investment gains (losses) | (4.9) | 12.1 |
After federal tax: |
Investment income | 3.1 | 3.4 |
Investment income plus investment gains (losses) | (2.5) | 8.5 |
Readers are also directed to Note B to the consolidated financial statements and to the Results of Operationsbeginning on page 23 of this document for additional details of investment operations.
Employees
As of December 31, 2008, the Company had 312 employees, representing an increase of 28 employees from the prior year.
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 significantly 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.
The Company believes it has a competitive advantage in its major lines of business as the result of the extensive experience of its long-tenured management and staff, its superior service and products, its willingness to custom build insurance programs for its large fleet transportation customers and the extensive use of technology with respect to its insureds and independent agent force. However, the Company is not “top-line” oriented and will readily sacrifice premium volume during periods of unrealistic rate competition. Accordingly, should competitors determine to “buy” market share with unprofitable rates, the Company’s Insurance Subsidiaries will generally experience a decline in business until pricing returns to profitable levels.
Availability of Documents
This Form 10-K as well as the Company’s Audit Committee Charter and Code of Conduct will be sent to shareholders without charge upon written request to the Company’s Investor Contact at the corporate address. These documents, along with all other filings with the Securities and Exchange Commission are available for review, download or printing from the Company’s web site at www.baldwinandlyons.com.
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.
Item 1A. RISK FACTORS
• | The Company operates in the Property and Casualty insurance industry where many of its competitors are larger with far greater resources. Please see the caption “Competition” on the previous page above for a complete discussion of this risk factor. |
• | The Company, through its Insurance Subsidiaries, requires collateral from its insureds covering the insureds’ obligations for self-insured retentions or deductibles related to policies of insurance provided. Should the Company, as surety, become responsible for such insured obligations, the collateral held may prove to be insufficient. For further discussion regarding this risk factor, see Note L to the consolidated financial statements of this Form 10-K. |
• | The Company limits its risk of loss from policies of insurance issued by its Insurance Subsidiaries through the purchase of reinsurance coverage from other insurance companies. Such reinsurance does not relieve the Company from its responsibility to policyholders should the reinsurers be unable to meet their obligations to the Company under the terms of the underlying reinsurance agreements. For further discussion regarding this risk factor, see the caption Reinsurance Recoverable beginning on page 28and Notes D and L to the consolidated financial statements of this Form 10-K. |
• | Operating in the Property and Casualty insurance industry, the Company is exposed to loss from policies of insurance issued to its policyholders. A large portion of losses recorded by the Company are estimates of future loss payments to be made. Such estimates of future loss payments may prove to be inadequate. For further discussion of this risk factor, see the caption Property/Casualty Losses and Loss Adjustment Expenses beginning on page 3, the caption Loss and Loss Expense Reserves beginning on page 29 and Note C to the consolidated financial statements of this Form 10-K. |
• | A significant portion of the risk underwritten by the insurance subsidiaries covers property losses resulting from catastrophic events on a worldwide basis. The occurrence and valuation of loss events for this business is highly unpredictable and a single catastrophic event could result in a materially significant loss to the Company. For further discussion of this risk factor, see the caption Property Reinsuranceon page 2, the caption Property/Casualty Losses and Loss Adjustment Expenses beginning on page 3, the caption Loss and Loss Expense Reserves beginning on page 29 and Note C to the consolidated financial statements of this Form 10-K. |
• | The Company derives a significant percentage of its direct premium volume from a single major customer and its independent contractors. Loss of this major customer would severely reduce the Company’s revenue and earnings potential. For further discussion regarding this risk factor, see Notes Jand L to the consolidated financial statements of this Form 10-K. |
• | Given the Company’s significant interest-bearing investment portfolio, a drop in interest rates would likely have an adverse impact on the Company’s earnings. Conversely, an increase in interest rates could have a significant temporary impact on the market value of the Company’s fixed maturity investment portfolio. For further discussion regarding this risk factor, see the caption Market Risk beginning on page 32 of this Form 10-K. |
• | The Company has a large portfolio of equity securities and limited partnership investments which can fluctuate in value with a wide variety of market conditions. For further discussion regarding this risk factor, see the captions
• The Company has a large portfolio of equity securities and limited partnership investments which can fluctuate in value with a wide variety of market conditions. For further discussion regarding this risk factor, see the captions • The Company operates in the Property and Casualty insurance industry where many of its competitors are larger with far greater resources. Please see the caption “Competition” on the previous page above for a complete discussion of this risk factor. • The Company, through its Insurance Subsidiaries, requires collateral from its insureds covering the insureds’ obligations for self-insured retentions or deductibles related to policies of insurance provided. Should the Company, as surety, become responsible for such insured obligations, the collateral held may prove to be insufficient. For further discussion regarding this risk factor, see Note L to the consolidated financial statements of this Form 10-K. • The Company limits its risk of loss from policies of insurance issued by its Insurance Subsidiaries through the purchase of reinsurance coverage from other insurance companies. Such reinsurance does not relieve the Company from its responsibility to policyholders should the reinsurers be unable to meet their obligations to the Company under the terms of the underlying reinsurance agreements. For further discussion regarding this risk factor, see the caption Reinsurance Recoverable beginning on page 28and Notes D and L to the consolidated financial statements of this Form 10-K. • Operating in the Property and Casualty insurance industry, the Company is exposed to loss from policies of insurance issued to its policyholders. A large portion of losses recorded by the Company are estimates of future loss payments to be made. Such estimates of future loss payments may prove to be inadequate. For further discussion of this risk factor, see the caption Property/Casualty Losses and Loss Adjustment Expenses beginning on page 3, the caption Loss and Loss Expense Reserves beginning on page 29 and Note C to the consolidated financial statements of this Form 10-K. • A significant portion of the risk underwritten by the insurance subsidiaries covers property losses resulting from catastrophic events on a worldwide basis. The occurrence and valuation of loss events for this business is highly unpredictable and a single catastrophic event could result in a materially significant loss to the Company. For further discussion of this risk factor, see the caption Property Reinsuranceon page 2, the caption Property/Casualty Losses and Loss Adjustment Expenses beginning on page 3, the caption Loss and Loss Expense Reserves beginning on page 29 and Note C to the consolidated financial statements of this Form 10-K. • The Company derives a significant percentage of its direct premium volume from a single major customer and its independent contractors. Loss of this major customer would severely reduce the Company’s revenue and earnings potential. For further discussion regarding this risk factor, see Notes Jand L to the consolidated financial statements of this Form 10-K. • Given the Company’s significant interest-bearing investment portfolio, a drop in interest rates would likely have an adverse impact on the Company’s earnings. Conversely, an increase in interest rates could have a significant temporary impact on the market value of the Company’s fixed maturity investment portfolio. For further discussion regarding this risk factor, see the caption Market Risk beginning on page 32 of this Form 10-K. • The Company has a large portfolio of equity securities and limited partnership investments which can fluctuate in value with a wide variety of market conditions. For further discussion regarding this risk factor, see the captions Equity Securitiesand Limited Partnershipsbeginning on page 15 and Market Riskon page 32 of this Form 10-K. • The Company operates in a regulated industry. Changes in laws and regulations governing the insurance industry could have a significant impact on the Company’s ability to generate income from its insurance company operations. The ability for the Company’s insurance subsidiaries to increase insurance rates is regulated for significant portions of the Company’s business and such rate increases can be delayed for substantial periods by regulators. Item 2. PROPERTIES The Company leases office space at 1099 North Meridian Street, Indianapolis, Indiana. This building is located approximately one mile from downtown Indianapolis. The lease, renewed in August, 2008, covers approximately The Company owns two buildings and the adjacent real estate approximately two miles and eleven miles from its main office. The buildings contain approximately 3,300 and 15,000 square feet of usable space respectively, and are used primarily as off-site data storage and as a contingent back up and disaster recovery site. The Company leases office space at 5215 Monroe Street, Sylvania, Ohio. The lease covers approximately 3,400 square feet and expires in December, 2012, with an option to renew for an additional five years. The Company’s entire 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 Nothing to report. 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 Market® 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, The table below sets forth the range of high and low sale prices for the Class A and Class B Common Stock for Cash Cash Class A Class B Dividends Class A Class B Dividends High Low High Low Declared High Low High Low Declared Year ended December 31: 2008: Fourth Quarter $ 23.00 $ 13.50 $ 25.75 $ 14.01 $ .25 Third Quarter 23.74 17.97 27.90 17.01 .25 Second Quarter 23.22 20.19 25.99 17.36 .25 First Quarter 26.40 22.60 27.95 23.51 .25 2007: Fourth Quarter $ 28.00 $ 22.83 $ 29.00 $ 25.10 $ .35 28.00 22.83 29.00 25.10 .35 Third Quarter 28.77 25.01 29.61 25.10 .60 28.77 25.01 29.61 25.10 .60 Second Quarter �� 27.85 23.42 26.79 24.25 .25 27.85 23.42 26.79 24.25 .25 First Quarter 29.25 24.03 26.55 23.48 .45 29.25 24.03 26.55 23.48 .45 2006: Fourth Quarter 28.00 25.05 27.68 23.47 .45 Third Quarter 26.75 24.15 26.20 22.90 .25 Second Quarter 28.98 24.09 26.89 22.70 1.50 First Quarter 26.71 22.51 26.55 24.01 .35 The Company has paid quarterly cash dividends continuously since 1974. The current regular quarterly dividend rate is $.25 per share. 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 F to the consolidated financial statements. The following graph shows a five year comparison of cumulative total return for the Corporation’s Class B common shares, the NASDAQ Insurance Stock Index and the Russell 2000 Index. The basis of comparison is a $100 investment at December 31, Period Ending Index 2002 2003 2004 2005 2006 2007 Baldwin & Lyons, Inc. 100.00 153.01 157.99 148.64 172.64 197.11 NASDAQ Insurance Index 100.00 121.43 145.46 158.92 178.17 176.75 Russell 2000 100.00 147.25 174.24 182.18 215.64 212.26 Year Ended December 31 Year Ended December 31 2007 2006 2005 2004 2003 2008 2007 2006 2005 2004 (Dollars in thousands, except per share data) (Dollars in thousands, except per share data) Direct and assumed premiums written $ 202,567 $ 197,064 $ 222,445 $ 247,099 $ 227,614 $ 221,942 $ 207,367 $ 197,064 $ 222,445 $ 247,099 Net premiums earned 179,065 169,766 186,165 172,145 146,153 182,299 179,065 169,766 186,165 172,145 Net investment income 19,595 19,548 14,840 12,287 12,873 17,063 19,595 19,548 14,840 12,287 Net gains (losses) on investments 40,096 17,064 22,981 9,770 9,990 (47,749 ) 40,096 17,064 22,981 9,770 Losses and loss expenses incurred 107,781 112,604 140,622 5 126,298 95,738 115,752 107,781 112,604 140,622 5 126,298 Net income 55,131 38,185 34,223 30,306 33,075 Net income (loss) (7,713 ) 55,131 38,185 34,223 30,306 Earnings per share -- net income 1 3.63 2.54 2.30 2.05 2.25 (.51 ) 3.63 2.54 2.30 2.05 Cash dividends per share 2 1.65 2.55 .95 2.05 .65 1.00 1.65 2.55 .95 2.05 Investment portfolio 3 650,538 626,753 622,920 577,428 515,843 545,491 650,538 626,753 622,920 577,428 Total assets 842,833 853,719 862,081 866,914 768,582 777,743 842,833 853,719 862,081 866,914 Shareholders' equity 380,718 357,627 346,685 326,548 324,574 330,067 380,718 357,627 346,685 326,548 Cost of treasury shares purchased - 401 - - - 8,908 — 401 — — Book value per share 1 24.98 23.60 23.31 22.04 22.00 22.32 24.98 23.60 23.31 22.04 Underwriting ratios 4 Losses and loss expenses 60.2% 66.3% 75.5% 73.4% 65.5% 63.5 % 60.2 % 66.3 % 75.5 % 73.4 % Underwriting expenses 30.9% 26.6% 22.0% 24.0% 26.5% 30.9 % 30.9 % 26.6 % 22.0 % 24.0 % Combined 91.1% 92.9% 97.5% 97.4% 92.0% 94.4 % 91.1 % 92.9 % 97.5 % 97.4 % 1 Earnings and book value per share are adjusted for the dilutive effect of stock options outstanding. 2 Includes extra dividends of $0, $.65, $1.70, $.55, 3 Includes money market instruments classified with cash in the Consolidated Balance Sheets. 4 Data is for all coverages combined, does not include fee income and is presented based upon generally accepted accounting principles. 5 Includes $17,595 relating to Hurricanes Katrina, Rita and Wilma. Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND Liquidity and Capital Resources The primary sources of the Company’s liquidity are (1) funds generated from insurance operations including net investment income, (2) proceeds from the sale of investments and (3) proceeds from maturing investments. The Company generally experiences positive cash flow from operations resulting from the fact that premiums are collected on insurance policies in advance of the disbursement of funds in payment of claims. Operating costs of the insurance subsidiaries, other than loss and loss expense payments, generally average less than 30% 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. Because losses are often settled in periods subsequent to when they are incurred, operating cash flows may, at times, turn negative as loss settlements on claim reserves established in prior years exceed net premium revenue and receipts of investment income. During For several years, the Company’s investment philosophy has emphasized the purchase of short-term bonds with maximum quality and liquidity. As interest rates and yield curves have not provided a strong incentive to lengthen maturities in recent years, the Company has continued to maintain its fixed maturity portfolio at very conservative levels. The average contractual life of the Company’s bond and short-term investment portfolio The Company’s assets at December 31, Net premiums written by the Company’s U.S. insurance subsidiaries for As more fully discussed in Note Results of Operations 2008 Compared to 2007 Direct premiums written for 2008 totaled $182.8 million, an increase of $6.6 million (4%) from 2007. The increase is primarily attributable to an increase in the Company’s fleet transportation business of $8.3 million (6%). The higher premium volume from the fleet transportation program resulted from the addition of contractors by existing accounts and from modifications to the program whereby workers’ compensation coverages were offered to employees of the independent contractors. This increase was partially offset by a decrease in the Company’s private passenger automobile program of $3.1 million (13.0%) due to ongoing rate competition and the resultant loss of business. Premiums assumed from other insurers and reinsurers totaled $39.1 million during 2008, an increase of $8.0 million (26%) from 2007. The property reinsurance increase resulted from increased premiums generated by most of the Company’s programs reflecting increased exposure and, to a lesser extent, higher premium rates. As was the case in 2007, slightly less than half of the net premium volume for this segment is produced through an exclusive marketing arrangement for property catastrophe business produced by Paladin Catastrophe Management, a non-affiliated firm which focuses on soliciting coverage from insurance companies with risks throughout the U.S. Midwest and limited coastal regions excluding Florida and California as well as Canadian exposures. This business complements other property reinsurance by Protective in different geographic regions. Premium volume from property reinsurance will often fluctuate depending on the favorability of pricing for the coverages provided. Further, premium volume for this segment is limited by the Company’s self-imposed limitation to loss from a single catastrophic event. Premiums ceded to reinsurers on direct business increased $6.8 million (21%) during 2008 to $39.8 million as the consolidated percentage of premiums ceded to direct premiums written increased to 21.8% for 2008 from 18.7% for 2007. This increase is reflective of the Company’s decreased retention under reinsurance treaties effective June, 2007, and June, 2008, covering fleet transportation risks, resulting in a higher percentage of the direct premiums ceded to reinsurers. After giving effect to changes in unearned premiums, net premiums earned increased 2% to $182.3 million for 2008 from $179.1 million for 2007. Net premiums earned from fleet transportation insurance products increased by $2.7 million (2%). Additionally, net premiums earned from property reinsurance increased by $6.7 million (23%). Net premiums earned from the Company’s private passenger automobile product decreased by $7.2 million (25%). Pre-tax investment income of $17.1 million reflects a decrease during 2008 compared to 2007 as pre-tax yields were down 12% on average reflecting worldwide lower available rates, principally on short-term investments. After tax investment income decreased by 8% during 2008, compared to the prior year, and is lower than the pre-tax change due to the utilization of municipal bonds at a higher level during 2008. Net losses on investments, before taxes, totaled $47.7 million in 2008 compared to a net gain on investments of $40.1 million last year. These totals include gains and losses from both direct securities trading and investments in limited partnerships. The losses in 2008 are attributable to $11.9 million in fixed maturity and equity security net direct trading losses, $33.6 million in limited partnerships net losses and $2.2 in derivative security net losses. Limited partnership ventures utilized by the Company are primarily engaged in the trading of public and private securities, including foreign securities and small venture capital activities and, to a lesser extent, real estate development. The estimated market value of limited partnership ventures investments was $59.9 million at December 31, 2008 compared to a cost basis of $47.0 million. The aggregate of the Company’s share of earnings in these entities represented a loss of 43% for 2008 versus a positive return of over 40% for 2007. The Company follows the equity method of accounting for its investments in limited partnerships. To the extent that accounting rules require the limited partnerships to include realized and unrealized gains or losses in their net income, the Company’s proportionate share of net income will include unrealized as well as realized gains or losses. The current year limited partnership total is composed of estimated realized gains of $3.4 million and estimated unrealized losses of $37.0 million, as reported to the Company by the general partners. Inception to date unrealized losses included in the December 31, 2008 asset valuation total $6.9 million. Adjustments attributable to “other-than-temporary impairment,” of $9.0 million during 2008 are reflected in fixed maturity and equity security net losses as stated above. Further explanation of “other-than-temporary impairment” can be found in Note B to the consolidated financial statements. Losses and loss expenses incurred during 2008 increased $8.0 million (7%) to $115.8 million. The increase in losses incurred is due to increased current year loss activity, including $5.5 million in losses attributable to hurricanes, and lower savings on prior accident year losses, primarily from property reinsurance. Partially offsetting increases in loss and loss expenses was a $5.5 million decrease in losses from the Company’s private passenger automobile product corresponding to the decline in premium volume for that product. The 2008 consolidated loss and loss expense ratio was 63.5% compared to 60.2% for 2007. The Company’s loss and loss expense ratios for major product lines are summarized in the following table. 2008 2007 Fleet transportation 63.6% 58.4% Private passenger automobile 64.5 67.7 Property reinsurance 63.7 60.8 All lines 63.5 60.2 The fleet transportation loss ratio for 2008 was adversely impacted by increases in reported loss amounts on a handful of severe claims. Also, the loss ratio for the independent contractor product is higher in 2008 as a significant number of insured contractors altered their business structure and therefore transitioned from accident and health to workers’ compensation coverage. Factors such as fluctuations in premium volume, the levels of self-insured retentions and the Company’s higher net retention under reinsurance treaties in recent years allow for more volatility in losses. The decrease in the private passenger automobile loss ratio is due primarily to increased savings on prior years’ losses. The property reinsurance loss ratio was higher in 2008 as the result of hurricane losses, principally Hurricane Ike, which added almost 16 points to the loss ratio for this segment for the year end more than offset a decline in the unusually large amount of tornado and hail losses experienced during 2007. The Company produced an overall savings on the handling of prior year claims during 2008 of $17.1 million. This net savings is included in the computation of loss ratios shown in the previous table, as is the $21.3 million savings produced during 2007 on prior year claims. This savings was distributed among all of the Company’s products, with the majority attributable to the Company’s large fleet transportation business, and is generally consistent with recent prior years before consideration of savings related to retrospectively-rated contracts. Because of the high limits provided by the Company to its fleet transportation insureds, the length of time necessary to settle larger, more complex claims and the volatility of the fleet transportation liability insurance business, the Company believes it is important to take a conservative posture 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. Changes in both gross premium volumes and the Company’s reinsurance structure for its fleet transportation business can have a significant impact on future loss developments and, as a result, loss and loss expense ratios and prior year reserve development may not be consistent year to year. Other operating expenses for 2008, before credits for allowances from reinsurers, increased $3.4 million (6%) to $61.7 million. This increase is due primarily to a $2.4 million increase in commission expense and an $.8 million investment in new product development. The higher commissions reflect expansion of the Company’s distribution channels to include non-affiliated agents. It should be noted that much of the Company’s expense structure is fixed, that is, expenses do not vary directly with revenue, as revenue consists principally of net premiums earned by the insurance subsidiaries. In general, only commissions to non-affiliated agents, premium taxes and other acquisition costs vary directly with premium volume and each of these factors is considered in the pricing of insurance products. Reinsurance ceded credits were $1.2 million (62%) higher in 2008, resulting from the Company ceding a higher percentage of the gross premium to other companies under reinsurance treaties. After consideration of these expense offsets, operating expenses increased $2.2 million, or 4% from the prior year. A portion of the Company’s fleet transportation business is produced by direct sales efforts of Baldwin & Lyons, Inc. employees and, accordingly, this business does not incur commission expense on a consolidated basis. Instead, the expenses of the agency operations, including salaries and bonuses of salesmen, travel expenses, etc. are included in operating expenses. In general, commissions paid by the insurance subsidiaries to the parent company exceed related acquisition costs incurred in the production of the property and casualty insurance business. The ratio of net operating expenses of the insurance subsidiaries to net premiums earned was 30.9% during 2008, level with the prior year. Including the agency operations, and after elimination of inter-company commissions, the ratio of operating expenses to operating revenue (defined as total revenue less gains (losses) on investments) was 28.6% for 2008 compared with 27.7% for 2007. The effective federal tax rate on the consolidated loss for 2008 was a benefit of 60.8%. The effective rate differs from the normal statutory rate as a result of tax-exempt investment income. As a result of the factors mentioned above, and primarily the change in net gains and losses on investments, the Company experienced a net loss for 2008 of $7.7 million compared to net income of $55.1 million for 2007. Diluted earnings per share were a loss of $(.51) in 2008 compared to income of $3.63 in 2007. Earnings per share from operations, defined as income before gains or losses on investments, were $1.55 compared to $1.91 in 2007. 2007 Compared to 2006 Direct premiums written for 2007 totaled $176.1 million, a decrease of $8.0 million (4%) from 2006. This decrease is primarily attributable to a decrease in the Company’s private passenger automobile business of $10.4 million (31%), Premiums assumed from other insurers and reinsurers totaled $26.4 million during 2007, an increase of $13.5 million (105%) from 2006. The property reinsurance Premiums ceded to reinsurers on direct business increased $8.1 million (32.8%) during 2007 to $33.0 million as the consolidated percentage of premiums ceded to direct premiums written increased to 19% for 2007 from 14% for 2006. This increase is reflective of the Company’s decreased retention under reinsurance treaties effective June 2007 covering large fleet After giving effect to changes in unearned premiums, net premiums earned increased 5% to $179.1 million for 2007 from $169.8 million for 2006. Net premiums earned from all Pre-tax investment income of $19.6 million was essentially flat during 2007 compared to 2006 as pre-tax yields were up 4% on average and were largely offset by a 3% decrease in average invested assets. Average invested assets decreased primarily due to the payment of over $25 million in cash dividends to shareholders during the year partially offset by increased cash flow from operations. After tax investment income increased by 7% during 2007, compared to the prior year. The after-tax investment income yield increased by 10% from 2006 reflecting a significantly higher proportion of the Company’s bond portfolio allocated to municipal bonds in 2007. Net gains on investments totaled $40.1 million in 2007 compared to $17.1 million last year. These totals include gains from both direct securities trading and investments in limited partnerships. The gains in 2007 are attributable to $16.8 million in equity security net gains, $23.2 million in limited partnerships net gains and $.1 in debt security net gains. During 2007, the Company disposed of numerous equity securities primarily to provide funds for a new investment program initiated after year end which will be managed by a consolidated entity in 2008. The Company’s investments in limited partnership ventures, consists primarily of securities trading which include foreign securities and small venture capital activities and, to a lesser extent, real estate development. The estimated market value of limited partnership ventures investments was $80.9 million at December 31, 2007 and the aggregate of the Company’s share of earnings in these entities represented a return of over 40% for 2007 and 25% for 2006. The Company follows the equity method of accounting for its investments in limited partnerships. To the extent that the limited partnerships include realized and unrealized gains or losses in their net income, the Company’s proportionate share of net income will include unrealized as well as realized gains or losses. The current year limited partnership total is composed of estimated realized income of $7.9 million and estimated unrealized income of $15.3 million, as reported to the Company by the general partners. Inception to date unrealized gains included in the December 31, 2007 asset valuation total $30.4 million. The final component of investment gains, consisting of adjustments attributable to “other-than-temporary impairment,” was not significant during 2007 or 2006 and is more fully explained in Note B to the consolidated financial statements. Losses and loss expenses incurred during 2007 decreased $4.8 million (4%) to $107.8 million. The decrease in losses incurred is due to increased savings on prior accident year losses, primarily from fleet reinsurance, 2007 2006 Fleet trucking 58.5% 70.7% Private passenger automobile 67.7 64.8 Small fleet trucking 58.1 68.6 Voluntary reinsurance assumed 60.8 35.9 All lines 60.2 66.3 2007 2006 Fleet transportation 58.4% 70.5% Private passenger automobile 67.7 64.8 Property reinsurance 60.8 35.9 All lines 60.2 66.3 The The Company produced an overall savings on the handling of prior year claims during 2007 of $21.3 million. This net savings is included in the computation of loss ratios shown in the table insert, as is the $16.9 million savings produced during 2006 on prior year claims. Other operating expenses for 2007, before credits for allowances from reinsurers, increased $9.7 million (19.9%) to $58.4 million. This increase is due primarily to a $5.2 million increase in commission expense related to increased business produced through non-affiliated Reinsurance ceded credits were $.8 million (69%) higher in 2007, resulting from production of fleet The effective federal tax rate for consolidated operations for 2007 was 30.8%. 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 for 2007 was $55.1 million compared to $38.2 million for 2006. Diluted earnings per share increased to $3.63 in 2007 from $2.54 in 2006. Earnings per share from operations, before gains on investments, was $1.91 compared to $1.80 in 2006. 2006 2005 Fleet trucking 70.7% 73.2% Private passenger automobile 64.8 60.0 Small fleet trucking 68.6 59.2 Voluntary reinsurance assumed 35.9 154.0 Small business workers’ compensation - 62.7 All lines 66.3 75.5 Critical Accounting Policies The Company’s significant accounting policies are discussed in Note A to the consolidated financial statements. The following discussion is provided to highlight areas of the Company’s accounting policies which are material and/or subject to significant degrees of judgment. Investment Valuation All marketable securities are included in the Company’s balance sheet at current fair market value. Approximately Approximately $4.1 million of fixed maturity investments In determining if and when a decline in market value below cost is other-than-temporary, we first make an objective analysis of each individual security where current market value is less than cost. For any security where the unrealized loss exceeds 20% of original or adjusted cost, and where that decline has existed for a period of at least six months, the decline is treated as an other-than-temporary impairment, without any subjective evaluation as to possible future recovery. For individual issues where the decline in value is less than 20% but the amount of the decline is considered significant, we will also evaluate the market conditions, trends of earnings, price multiples and other key measures for the securities to determine if it appears that the decline is other-than-temporary. In those instances, the Company also considers its intent and ability to hold investments until recovery or maturity. For any decline which is considered to be other-than-temporary, we recognize an impairment loss in the current period earnings as an investment loss. Declines which are considered to be temporary are recorded as a reduction in shareholders’ equity, net of related federal income tax credits. It is important to note that all investments included in the Company’s financial statements are valued at current fair market values. The evaluation process for determination of other-than-temporary decline in value of investments does not change these valuations but, rather, determines when this entire amount been considered other-than-temporary at December 31, 2008. Reinsurance Recoverable Year Ended December 31 2007 2006 2005 2008 2007 2006 Premium ceded (reduction to premium earned) $ 32,974 $ 24,841 $ 39,825 $ 41,219 $ 32,974 $ 24,841 Losses ceded (reduction to losses incurred) 4,981 14,026 39,389 53,398 4,981 14,026 Commissions from reinsurers (reduction to operating expenses) 2,044 1,205 7,806 3,084 2,044 1,205 A discussion of the Company’s reinsurance strategies is presented in Item 1, Business, on page 2. Amounts recoverable under the terms of reinsurance contracts comprise approximately It should be noted, however, that a change in the estimate of amounts due from reinsurers on unpaid claims will not, in itself, result in charges or credits to losses incurred. This is because any change in estimated recovery follows the estimate of the underlying loss. Thus, it is the computation of the underlying loss that is critical. As with any receivable, credit risk exists in the recoverability of reinsurance. This is even more pronounced than in normal receivable situations since recoverable amounts are not generally due until the loss is settled which, in some cases, may be many years after the contract was written. If a reinsurer is unable, in the future, to meet its financial commitments under the terms of the contracts, the Company would be responsible for the reinsurer’s portion of the loss. The financial condition of each of the Company’s reinsurers is initially determined upon the execution of a given treaty and only reinsurers with the Loss and Loss Expense Reserves The Company’s loss and loss expense reserves for each significant Direct and Assumed Net Line of Business (Segment) 2007 2006 2007 2006 (dollars in thousands) Fleet trucking $ 293,744 $ 322,849 $ 177,748 $ 178,752 Reinsurance assumed 33,252 34,155 33,252 34,155 Private passenger automobile 11,701 12,692 11,701 12,692 Small fleet trucking 22,736 19,808 8,896 8,741 All other 17,184 19,908 12,903 15,156 $ 378,616 $ 409,412 $ 244,500 $ 249,495 Direct and Assumed Net Line of Business 2008 2007 2008 2007 Fleet transportation $ 325,765 $ 316,480 $ 173,320 $ 186,644 Property reinsurance 37,489 33,252 37,489 33,252 Private passenger automobile 9,802 11,701 9,802 11,701 All other 16,502 17,183 11,022 12,903 $ 389,558 $ 378,616 $ 231,633 $ 244,500 The Company’s reserves for losses and loss expenses (“reserves”) are determined based on complex estimation processes using historical experience, current economic information and, when necessary, available industry statistics. Reserves are evaluated in three basic categories (1) “case basis”, (2) “incurred but not reported” and (3) “loss adjustment expense” reserves. Case basis reserves are established for specific known loss occurrences at amounts dependent upon various criteria such as type of coverage, severity and the underlying policy limits, as examples. Case basis reserves are generally estimated by experienced claims adjusters using established Company guidelines and are subject to review by claims management. Incurred but not reported reserves, which are established for those losses which have occurred, but have not yet been reported to the Company, are not linked to specific claims but are computed on a “bulk” basis. Common actuarial methods are employed in the establishment of incurred but not reported loss reserves using company historical loss data, consideration of changes in the Company’s business and study of current economic trends affecting ultimate claims costs. Loss adjustment expense reserves, or reserves for the costs associated with the investigation and settlement of a claim, are also bulk reserves representing the Company’s estimate of the costs associated with the claims handling process. Loss adjustment expense reserves include amounts ultimately allocable to individual claims as well as amounts required for the general overhead of the claims handling operation that are not specifically allocable to individual claims. Historical analyses of the ratio of loss adjusting expenses to losses paid on prior closed claims and study of current economic trends affecting loss settlement costs are used to estimate the loss adjustment reserve needs related to the established loss reserves. Each of these reserve categories contain elements of uncertainty which assure variability when compared to the ultimate costs to settle the underlying claims for which the reserves are established. The reserving process requires management to continuously monitor and evaluate the life cycle of claims based on the class of business and the nature of claims. claims. The Company continuously reviews and evaluates loss developments subsequent to each measurement date and adjusts its reserve estimation assumptions, as necessary, in an effort to achieve the best possible estimate of the ultimate remaining loss costs at any point in time. Changes to previously established reserve amounts are charged or credited to losses and loss expenses incurred in the accounting periods in which they are determined. Note C to the consolidated financial statements includes additional information relating to loss and The Company’s methods for determining loss and loss expense reserves are essentially identical for interim and annual reporting. A detailed analysis and discussion for each of the above basic reserve categories follows. Reserves for known losses (Case reserves) The Company’s reserves for known claims are determined on an individual case basis and can range from the routine private passenger “fender bender” valued at a few hundred dollars to the very complex long-haul trucking claim involving multiple vehicles, severe injuries and extensive property damage costing several millions of dollars to settle. Each known claim, regardless of complexity, is handled by a claims adjuster experienced with claims of this nature and a “case” reserve, appropriate for the individual loss occurrence, is established. For very routine “short-tail” claims such as private passenger physical damage, the Company initially records a minimum reserve that is based upon historical loss settlements adjusted for current trends. As information regarding the loss occurrence is gathered in the claim handling process, the reserve is adjusted to reflect the anticipated ultimate cost to settle the claim. For more complex claims which can tend toward being “long-tail” in nature, an experienced claims adjuster will review the facts and circumstances surrounding the loss occurrence to make a determination of the reserve to be established. Many of the more complex claims involve litigation and necessitate an evaluation of potential jury awards in addition to the factual information to determine the value of each claim. Each claim is continually monitored and the recorded reserve is increased or decreased relative to information gathered during the settlement life cycle. Reserves for incurred but not reported losses The Company uses both standard actuarial techniques common to most insurance companies as well as techniques developed by the Company in consideration of its specialty business products. For its short-tail lines of business, the Company uses predominantly the incurred or paid loss development factor methods. The Company has found that the use of accident quarter loss development triangles, rather than those based upon accident year, are most responsive to claim settlement trends and fluctuations in premium exposures for its short-tail lines. A minimum of 12 running accident quarters is used to project the reserve necessary for incurred but not reported losses for its short-tail lines. The Company also uses the loss development factor approach for its long-tail lines of business. A minimum of 15 accident years is included in the loss development triangles used to calculate link ratios and the selected loss development factors used to determine the reserves for incurred but not reported losses. A minimum of 20 accident years is used for long-tail workers’ compensation reserve projections. More emphasis is placed on the use of tail factors for the Company’s long-tail lines of business. For the Company’s large fleet trucking risks, which are covered by annually-changing reinsurance agreements and which contain wide-ranging self-insured retentions (“SIR”) as low as $25,000 per loss occurrence and as high as several million dollars per occurrence, traditional actuarial methods are supplemented by other methods in consideration of the Company’s exposures to loss. In situations where the Company’s reinsurance structure, the insured’s SIR selections, policy volume, and other factors are changing, current accident period loss exposures may not be homogenous with historical loss data to allow for reliable projection of future developed losses. Therefore, the Company supplements the above-described actuarial methods with loss ratio reserving techniques developed from our databases to arrive at the reserve for losses incurred but not reported for the calendar/accident period under review. Management relies on its extensive historical pricing and loss history databases to produce reserve factors unique to this specialty business. As losses for a given calendar/accident period develop with the passage of time, management evaluates such development on a quarterly basis and will adjust reserve factors, as necessary, to reflect current judgment with regard to the anticipated ultimate incurred losses. This process continues until all losses are settled for each period subject to this method. Reserves for loss adjustment expenses The Company uses historical analysis of the ratios of allocated loss adjustment expenses paid to losses paid on closed claims to arrive at the expected ultimate incurred loss adjustment expense factors for each of its major products. Once developed, the factors are applied to the expected ultimate incurred losses, including IBNR, on all open claims. The resulting ultimate incurred allocated loss adjustment expense is then reduced by amounts paid to date on all open claims to arrive at the reserve for allocated loss adjustment expenses to be incurred in the future for the handling of specific claims. For those loss adjustment expenses not specific to individual claims (general claims handling expenses referred to as unallocated LAE) the Company uses standard industry loss adjustment expenses paid to losses paid (net of reinsurance) ratio analysis to establish the necessary reserves. The selected factors are applied to 100% of IBNR reserves and to case reserves with consideration given for that portion of loss adjustment expense already paid at the reserve measurement date. Such factors are monitored and revised, as necessary, on a quarterly basis. The reserving process requires management to continuously monitor and evaluate the life cycle of claims based on the class of business and the nature of claims. The Company’s methods for determining loss and loss expense reserves are essentially identical for interim and annual reporting. Sensitivity Analysis - Potential impact on reserve volatility from changes in key assumptions Management is aware of the potential for variation from the reserves established at any particular point in time. Redundancies or deficiencies could develop in future valuations of the currently established loss and loss expense reserve estimates under a variety of reasonably possible scenarios. The Company’s reserve selections are developed to be a “best estimate” of unpaid loss at a point in time and, due to the unique nature of our exposures, particularly in the large fleet retentions, policy limits and reinsurance structure may vary widely period to period Under reasonably possible scenarios, it is conceivable that the Company’s selected loss reserve estimates could be 10%, or more, redundant or deficient. As shown in the table on page 29, the majority of the Company’s reserves for losses and loss expenses, on either a gross or a net of reinsurance basis, relates to the 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 reported at December 31, 2007 2006 2008 2007 Total deferred tax liabilities 33,168 33,659 $ 13,155 $ 33,168 Total deferred tax assets 22,050 14,805 23,745 22,050 Net deferred tax liabilities $ 11,118 $ 18,854 Net deferred tax assets (liabilities) $ 10,590 $ (11,118) Deferred tax assets at December 31, Financial Accounting Standards Board Interpretation (FIN) No. 48,Accounting for Uncertainty in Income Taxes — an Interpretation of FASB Statement No. 109,provides guidance for recognizing and measuring uncertain tax positions, as defined in SFAS No. 109,Accounting for Income Taxes. FIN 48 prescribes a threshold condition that a tax position must meet for any of the benefit of the uncertain tax position to be recognized in the financial statements. Based on this guidance, we regularly analyze tax positions taken or expected to be taken in a tax return based on the threshold condition prescribed under FIN 48. Tax positions that do not meet or exceed this threshold condition are considered uncertain tax positions. We accrue interest related to these uncertain tax positions which is recognized in income tax expense. Penalties, if any, related to uncertain tax positions would be recorded in income tax expenses. Forward-Looking Information Any forward-looking statements in this report including, without limitation, statements relating to the Company’s plans, strategies, objectives, expectations, intentions and adequacy of resources, are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Investors are cautioned that such forward-looking statements involve risks and uncertainties including, without limitation, the following: (i) the Company’s plans, strategies, objectives, expectations and intentions are subject to change at any time at the discretion of the Company; (ii) the Company’s business is highly competitive and the entrance of new competitors into or the expansion of the operations by existing competitors in the Company’s markets and other changes in the market for insurance products could adversely affect the Company’s plans and results of operations; and (iii) other risks and uncertainties indicated from time to time in the Company’s filings with the Securities and Exchange Commission. Impact of Inflation To the extent possible, the Company attempts to recover the costs of inflation by increasing the premiums it charges. Within the fleet To the extent inflation influences yields on investments, the Company is also affected. The Company’s short-term and fixed investment portfolios are structured in direct response to available interest rates over the yield curve. As available market interest rates fluctuate in response to the presence or absence of inflation, the yields on the Company’s investments are impacted. Further, as inflation affects current market rates of return, previously committed investments might increase or decline in value depending on the type and maturity of 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. 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, equities market prices and, to a far lesser extent, foreign currency rate fluctuations. All of the Company’s invested assets, with the exception of investments in limited partnerships, are classified as available for sale and are listed as such in Note B to the consolidated financial statements. 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 a high potential for short-term price fluctuation. The market value of the Company’s equity positions at December 31, Reference is made to the discussion of limited partnership investments in the Critical Accounting Policies portion of this report. All of the market risks, attendant to equity securities, apply to the underlying assets in these partnerships, and to a greater degree because of the generally more aggressive investment philosophies utilized by the partnerships. In addition, these investments are illiquid. There is no primary or secondary market on which these limited partnerships trade and, in most cases, the Company is prohibited from disposing of its limited partnership interests for some period of time and must seek approval from the general partner for any such disposal. Distributions of earnings from these partnerships are largely at the sole discretion of the general partners and distributions are generally not received by the Company for many years after the earnings have been reported. Finally, through the application of the equity method of accounting, the Company’s share of net income reported by the limited partnerships may include significant amounts of unrealized appreciation on the underlying investments. As such, the likelihood that reported income from limited partnership investments will be ultimately returned to the Company in the form of cash is markedly lower than the Company’s other investments, where income is reported only when a security is actually sold. The Company’s fixed maturity portfolio totaled There is an inverse relationship between interest rate fluctuations and the fair value of the Company’s fixed maturity investments. Additionally, the fair value of interest rate sensitive instruments may be affected by the financial strength of the issuer, prepayment options, relative values of alternative investments, liquidity of the investment and other general market conditions. The Company monitors its sensitivity to interest rate risk by measuring the change in fair value of its fixed maturity investments relative to hypothetical changes in interest rates. As previously indicated, several other factors can impact the fair values of fixed maturity investments and, therefore, significant variations in market interest rates could produce quite different results from the hypothetical estimates presented in the next paragraph. The Company’s exposure to foreign currency risk is not Contractual Obligations The table below sets forth the amounts of the Company’s contractual obligations at December 31, Payments Due by Period Total Less than 1 year 1 - 3 Years 3 - 5 Years More Than 5 Years (dollars in millions) Loss and loss expense reserves $ 378.6 $ 106.0 $ 98.4 $ 39.8 $ 134.4 Investment commitments 51.6 51.6 - - - Operating leases 0.8 0.8 - - - Total $ 431.0 $ 158.4 $ 98.4 $ 39.8 $ 134.4 The Company’s loss and loss expense reserves do not have contractual maturity dates and the exact timing of the payment of claims cannot be predicted with certainty. However, based upon historical payment patterns, we have included an estimate of when we might expect our direct loss and loss expense reserves (without the benefit of reinsurance recoveries) to be paid in the preceding table. Timing of the collection of the related reinsurance recoverable, estimated to be The investment commitments in the above table relate to maximum unfunded capital obligations for limited partnership investments ANNUAL REPORT ON FORM 10-K ITEM 8--FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA YEAR ENDED DECEMBER 31, BALDWIN & LYONS, INC. INDIANAPOLIS, INDIANA REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM The Board of Directors and Shareholders of Baldwin & Lyons, Inc. We have audited the accompanying consolidated balance sheets of Baldwin & Lyons, Inc. and subsidiaries as of December 31, We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (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 financial statements referred to above present fairly, in all material respects, the consolidated financial position of Baldwin & Lyons, Inc. and subsidiaries at December 31, We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Baldwin & Lyons, Inc. /s/ ERNST & YOUNG LLP Indianapolis, Indiana March Consolidated Balance Sheets Baldwin & Lyons, Inc. and Subsidiaries December 31 2007 2006 (dollars in thousands) Assets Investments: Fixed maturities $ 338,011 $ 338,466 Equity securities 99,736 129,817 Limited partnerships 80,884 57,313 Short-term and other 44,768 59,325 563,399 584,921 Cash and cash equivalents 82,137 35,490 Accounts receivable--less allowance (2007, $820; 2006, $994) 33,412 37,994 Accrued investment income 4,762 5,009 Reinsurance recoverable 132,811 163,426 Prepaid reinsurance premiums 5,844 3,486 Deferred policy acquisition costs 3,193 4,742 Property and equipment--less accumulated depreciation (2007, $7,676; 2006, $6,875) 9,265 6,347 Notes receivable from employees 2,228 2,343 Other assets 5,782 8,348 Current federal income taxes $ 842,833 $ 853,719 Liabilities and Shareholders’ Equity Reserves: Losses and loss expenses $ 378,616 $ 409,412 Unearned premiums 22,678 32,145 401,294 441,557 Reinsurance payable 7,261 2,696 Accounts payable and other liabilities 31,874 32,985 Current federal income taxes 10,568 - Deferred federal income taxes 11,118 18,854 462,115 496,092 Shareholders’ equity: Common stock, no par value: Class A voting -- authorized 3,000,000 shares; outstanding – 2007 and 2006, 2,650,059 shares 113 113 Class B non-voting -- authorized 20,000,000 shares; outstanding -- 2007, 12,592,555; 2006, 12,485,205 shares 537 533 Additional paid-in capital 47,899 45,692 Unrealized net gains on investments 36,876 47,229 Retained earnings 295,293 264,060 380,718 357,627 $ 842,833 $ 853,719 See notes to consolidated financial statements. December 31 2008 Consolidated Statements of Income Baldwin & Lyons, Inc. and Subsidiaries Year Ended December 31 2007 2006 2005 (dollars in thousands, except per share data) Revenue: Net premiums earned $ 179,065 $ 169,766 $ 186,165 Net investment income 19,595 19,548 14,840 Net gains on investments 40,096 17,064 22,981 Commissions, service fees and other income 5,007 6,691 6,918 243,763 213,069 230,904 Expenses: Losses and loss expenses incurred 107,781 112,604 140,622 Other operating expenses 56,330 47,455 39,607 164,111 160,059 180,229 Income before federal income taxes 79,652 53,010 50,675 Federal income taxes 24,521 14,825 16,452 Net income $ 55,131 $ 38,185 $ 34,223 Per share data: Diluted earnings $ 3.63 $ 2.54 $ 2.30 Basic earnings $ 3.63 $ 2.54 $ 2.32 Dividends $ 1.65 $ 2.55 $ .95 See notes to consolidated financial statements. Baldwin & Lyons, Inc. and Subsidiaries 2007 2006 2005 (dollars in thousands) Balances at beginning of year: Retained earnings $ 264,060 $ 264,719 $ 244,340 Unrealized gains on investments 47,229 42,440 44,497 311,289 307,159 288,837 Changes arising from income-producing activities: Net income 55,131 38,185 34,223 Gains on investments: Pre-tax holding gains on debt and equity securities arising during period 1,027 13,241 4,987 Federal income taxes 359 4,634 1,746 668 8,607 3,241 Pre-tax gains on debt and equity securities included in net income during period (16,955) (5,874) (8,150) Federal income taxes (5,934) (2,056) (2,852) (11,021) (3,818) (5,298) Change in unrealized gains on investments (10,353) 4,789 (2,057) Foreign exchange adjustment 1,164 (20) 186 Total realized and unrealized income 45,942 42,954 32,352 Other changes affecting retained earnings: Cash dividends paid to shareholders (25,062) (38,435) (14,030) Cost of treasury shares in excess of original issue proceeds - (389) - (25,062) (38,824) (14,030) Total changes 20,880 4,130 18,322 Balances at end of year: Retained earnings 295,293 264,060 264,719 Unrealized gains on investments 36,876 47,229 42,440 $ 332,169 $ 311,289 $ 307,159 See notes to consolidated financial statements. Consolidated Statements of Operations Baldwin & Lyons, Inc. and Subsidiaries Year Ended December 31 2008 2007 2006 (dollars in thousands, except per share data) Revenue: Net premiums earned $ 182,299 $ 179,065 $ 169,766 Net investment income 17,063 19,595 19,548 Net realized gains (losses) on investments (47,749 ) 40,096 17,064 Commissions and other income 5,317 5,007 6,691 156,930 243,763 213,069 Expenses: Losses and loss expenses incurred 115,752 107,781 112,604 Other operating expenses 58,577 56,330 47,455 174,329 164,111 160,059 Income (loss) before federal income taxes (17,399 ) 79,652 53,010 Federal income taxes (benefits) (9,686 ) 24,521 14,825 Net income (loss) $ (7,713 ) $ 55,131 $ 38,185 Per share data: Diluted earnings $ ( .51 ) $ 3.63 $ 2.54 Basic earnings $ ( .51 ) $ 3.63 $ 2.54 Dividends $ 1.00 $ 1.65 $ 2.55 Consolidated Statements of Cash Flows Baldwin & Lyons, Inc. and Subsidiaries 2007 2006 2005 (dollars in thousands) Operating activities Net income $ 55,131 $ 38,185 $ 34,223 Adjustments to reconcile net income to net cash provided by operating activities: Change in accounts receivable and unearned premiums (4,891) (5,262) (162) Change in accrued investment income 247 (1,496) 261 Change in reinsurance recoverable on paid losses 4,921 (619) (2,127) Change in losses and loss expenses reserves net of reinsurance (5,097) 7,767 35,433 Change in other assets, other liabilities and current income taxes 5,376 (10,458) (4,389) Amortization of net policy acquisition costs 18,941 12,950 6,259 Net policy acquisition costs deferred (17,392) (13,316) (5,839) Provision for deferred income taxes 5,620 2,222 3,084 Bond amortization 2,453 2,295 2,858 (Gain) loss on sale of property 35 (20) 16 Depreciation 2,337 1,953 2,045 Net gains on investments (40,096) (17,064) (22,981) Excess tax benefit related to stock options (253) (604) - Compensation expense related to discounted stock options - 20 197 Net cash provided by operating activities 27,332 16,553 48,878 Investing activities Purchases of fixed maturities and equity securities (232,147) (246,679) (133,625) Purchases of limited partnership interests (5,995) (4,957) (16,433) Proceeds from maturities 164,739 112,095 124,480 Proceeds from sales of fixed maturities 44,508 37,774 35,559 Proceeds from sales of equity securities 55,866 33,153 43,123 Net sales (purchases) of short-term investments 14,557 (8,265) (14,654) Distributions from limited partnerships 5,565 3,562 2,302 Decrease in principal balance of notes receivable from employees 110 15 169 Purchases of property and equipment (6,225) (3,000) (2,420) Proceeds from disposals of property and equipment 935 116 200 Net cash provided by (used in) investing activities 41,913 (76,186) 38,701 Financing activities Dividends paid to shareholders (25,062) (38,435) (14,030) Proceeds from sale of common stock 2,211 6,804 1,618 Excess tax benefit related to stock options 253 604 - Repayment on line of credit - - (6,000) Cost of treasury shares - (401) - Net cash used in financing activities (22,598) (31,428) (18,412) Increase (decrease) in cash and cash equivalents 46,647 (91,061) 69,168 Cash and cash equivalents at beginning of year 35,490 126,551 57,384 Cash and cash equivalents at end of year $ 82,137 $ 35,490 $ 126,551 Consolidated Statements of Changes in Equity Other Than Capital Baldwin & Lyons, Inc. and Subsidiaries 2008 2007 2006 (dollars in thousands) Balances at beginning of year: Retained earnings $ 295,293 $ 264,060 $ 264,719 Unrealized gains on investments 36,876 47,229 42,440 332,169 311,289 307,159 Changes arising from income-producing activities: Net income (loss) (7,713 ) 55,131 38,185 Gains (losses) on investments: Pre-tax holding gains (losses) on debt and equity securities arising during period (41,058 ) 1,027 13,241 Federal income taxes (14,370 ) 359 4,634 (26,688 ) 668 8,607 Pre-tax gains (losses) on debt and equity securities included in net income (loss) during period (14,188 ) 16,955 5,874 Federal income taxes (4,966 ) 5,934 2,056 (9,222 ) 11,021 3,818 Change in unrealized gains (losses) on investments (17,466 ) (10,353 ) 4,789 Foreign exchange adjustment (1,468 ) 1,164 (20 ) Comprehensive income - total realized and unrealized income (loss) (26,647 ) 45,942 42,954 Other changes affecting retained earnings: Cash dividends paid to shareholders (15,096 ) (25,062 ) (38,435 ) Cost of treasury shares in excess of original issue proceeds (7,302 ) — (389 ) (22,398 ) (25,062 ) (38,824 ) Total changes (49,045 ) 20,880 4,130 Balances at end of year: Retained earnings 263,714 295,293 264,060 Unrealized gains on investments 19,410 36,876 47,229 $ 283,124 $ 332,169 $ 311,289 Consolidated Statements of Cash Flows Baldwin & Lyons, Inc. and Subsidiaries 2008 2007 2006 (dollars in thousands) Operating activities Net income (loss) $ (7,713 ) $ 55,131 $ 38,185 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Change in accounts receivable and unearned premium (165 ) (4,891 ) (5,262 ) Change in accrued investment income (257 ) 247 (1,496 ) Change in reinsurance recoverable on paid losses (3,453 ) 4,921 (619 ) Change in losses and loss expenses reserves net of reinsurance (12,786 ) (5,097 ) 7,767 Change in other assets, other liabilities and current income tax (20,011 ) 5,376 (10,458 ) Amortization of net policy acquisition costs 20,353 18,941 12,950 Net policy acquisition costs deferred (19,485 ) (17,392 ) (13,316 ) Provision for deferred income taxes (14,129 ) 5,620 2,222 Bond amortization 3,427 2,453 2,295 (Gain) loss on sale of property (17 ) 35 (20 ) Depreciation 2,976 2,337 1,953 Net (gain) loss on investments 47,749 (40,096 ) (17,064 ) Excess tax benefit related to stock options — (253 ) (604 ) Compensation expense related to discounted stock options — — 20 Net cash provided by (used in) operating activities (3,511 ) 27,332 16,553 Investing activities Purchases of fixed maturities and equity securities (276,737 ) (232,147 ) (246,679 ) Purchases of limited partnership interests (16,199 ) (5,995 ) (4,957 ) Proceeds from maturities 31,623 164,739 112,095 Proceeds from sales of fixed maturities 161,814 44,508 37,774 Proceeds from sales of equity securities 45,813 55,866 33,153 Net sales (purchases) of short-term investments 10,972 14,557 (8,265 ) Distributions from limited partnerships 3,657 5,565 3,562 Purchase of Transport Insurance Agency (2,661 ) — — Decrease in principal of notes receivable from employees 29 110 15 Purchases of property and equipment (5,348 ) (6,225 ) (3,000 ) Proceeds from disposals of property and equipment 72 935 116 Net cash provided by (used in) investing activities (46,965 ) 41,913 (76,186 ) Financing activities Dividends paid to shareholders (15,096 ) (25,062 ) (38,435 ) Proceeds from sale of common stock — 2,211 6,804 Excess tax benefit related to stock options — 253 604 Drawings on line of credit 9,000 — — Cost of treasury shares (8,908 ) — (401 ) Net cash used in financing activities (15,004 ) (22,598 ) (31,428 ) Increase (decrease) in cash and cash equivalents (65,480 ) 46,647 (91,061 ) Cash and cash equivalents at beginning of year 82,137 35,490 126,551 Cash and cash equivalents at end of year $ 16,657 $ 82,137 $ 35,490 Notes to Consolidated Financial Statements Baldwin & Lyons, Inc. and Subsidiaries (Dollars in 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 inter-company transactions and accounts have been eliminated in consolidation. Use of Cash and Investments:Carrying amounts for fixed maturity securities (bonds and notes) 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 (common stocks) are carried at quoted market prices (fair value). Limited partnerships are accounted for using the equity method with the corresponding change in value recorded as a component of net gains or losses on investments. Other investments are carried at either market value or cost, 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 unless a decline in value is determined to be other-than-temporary, in which case, the loss is charged to income. In determining if and when a decline in market value below cost is other-than-temporary, an objective analysis is made of each individual security where current market value is less than cost. For any security where the unrealized loss exceeds 20% of original or adjusted cost, and where that decline has existed for a period of at least six months, the decline is treated as an other-than-temporary impairment, without subjective evaluation as to possible future recovery. Additionally, the Company takes into account any known subjective information in evaluating for impairment without consideration to the Company’s 20% threshold. Although the Company has classified fixed maturity investments as available for sale, it has the ability to, and generally does, 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 principally by the straight-line method. Goodwill and Other Intangible Assets: Goodwill is not amortized. It is instead tested for impairment in accordance with Statement of Financial Accounting Standards No. 142 Goodwill and Other Intangible Assets, at the reporting-unit level. Goodwill is tested annually (during the fourth quarter) or more often if events or circumstances, such as adverse changes in the business climate, indicate there may be impairment. Intangible assets determined to have indefinite lives are not amortized but instead are tested for impairment at least annually, or more frequently if events or changes in circumstances indicate that the asset might be impaired. The impairment test compares the fair value of the indefinite-lived intangible asset to its carrying amount. Other acquired intangible assets determined to have finite lives, such as customer relationships and employment agreements, are amortized over their estimated useful lives in a manner that best reflects the economic benefits of the intangible asset. In addition, impairment testing is performed on these amortizing intangible assets if impairment indicators are noted. Reserves for Losses and Loss Expenses:The reserves for losses and loss expenses, minor portions 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. Note A - Significant Accounting Policies (continued) 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 premium taxes applicable to unearned premiums are deferred and expensed as the related premiums are earned. The Company does not defer acquisition costs which are not directly variable with the production of acquisition costs. Reinsurance: 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 earned. 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. Estimates of reinstatement premiums on property reinsurance Should impairment in the ability of a reinsurer to satisfy its obligations to the Company be determined to exist, current year operations would be charged in amounts sufficient to provide for the Company’s additional liability. Such charges, when incurred, are included in other operating expenses, rather than losses and loss expenses incurred, since the inability of the Company to collect from reinsurers is a credit risk rather than a deficiency associated with the loss reserving process. The Company accounts for foreign and domestic property reinsurance Federal Income Taxes:A consolidated federal income tax return is filed by the Company and includes all wholly owned subsidiaries. In the ordinary course of business, the Company’s federal income tax returns are audited by the Internal Revenue Service. Share-Based Payments:The Company uses a 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 dilutive effect, if any, of options outstanding. Basic earnings per share are presented exclusive of the effect of options outstanding. SeeNote K - Earnings Per Share. Note A - Significant Accounting Policies (continued) 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 generally not material and the Company has no defined benefit pension plan. The enclosedStatement of Changes in Equity Other Than Capital refers to Reclassification:Certain prior year balances have been reclassified to conform to the current year presentation. Note B - Investments The following is a summary of investments at December 31: The following is a summary of investments at December 31: The following is a summary of investments at December 31: Cost or Gross Gross Net Cost or Gross Gross Net Fair Amortized Unrealized Unrealized Unrealized Fair Amortized Unrealized Unrealized Unrealized Value Cost Gains Losses Gains (Losses) Value Cost Gains Losses Gains (Losses) 2007: U. S. government obligations $ 27,484 $ 27,222 $ 267 $ (5) $ 262 2008: U.S. government obligations $ 26,560 $ 26,050 $ 510 $ — $ 510 Mortgage-backed securities 16,153 16,226 58 (131) (73) 13,490 13,813 157 (480 ) (323 ) Obligations of states and political subdivisions 280,665 278,752 2,337 (424) 1,913 267,152 263,026 5,132 (1,006 ) 4,126 Corporate securities 5,791 5,696 105 (10) 95 51,103 48,793 3,520 (1,210 ) 2,310 Foreign government obligations 7,918 7,868 50 - 50 5,975 5,867 108 — 108 Total fixed maturities 338,011 335,764 2,817 (570) 2,247 364,280 357,549 9,427 (2,696 ) 6,731 Equity securities 99,736 45,251 55,885 (1,400) 54,485 63,200 40,071 27,415 (4,286 ) 23,129 Limited partnerships 80,884 80,884 - - - 59,864 59,864 — — — Short-term 44,768 44,768 - - - 33,820 33,820 — — — Total investments $ 563,399 $ 506,667 $ 58,702 $ (1,970) 56,732 Total available-for-sale securities $ 521,164 $ 491,304 $ 36,842 $ (6,982 ) 29,860 Applicable federal income taxes (10,450 ) Applicable federal income taxes (19,856) Net unrealized gains — net of tax $ 19,410 Net unrealized gains - net of tax $ 36,876 2006: U. S. government obligations $ 66,928 $ 67,291 $ 32 $ (395) $ (363) 2007: U.S. government obligations $ 27,484 $ 27,222 $ 267 $ (5 ) $ 262 Mortgage-backed securities 20,488 20,851 12 (375) (363) 16,153 16,226 58 (131 ) (73 ) Obligations of states and political subdivisions 212,589 212,033 1,134 (578) 556 280,665 278,752 2,337 (424 ) 1,913 Corporate securities 31,721 31,875 118 (272) (154) 5,791 5,696 105 (10 ) 95 Foreign government obligations 6,740 6,722 18 - 18 7,918 7,868 50 — 50 Total fixed maturities 338,466 338,772 1,314 (1,620) (306) 338,011 335,764 2,817 (570 ) 2,247 Equity securities 129,817 56,851 73,442 (476) 72,966 99,736 45,251 55,885 (1,400 ) 54,485 Limited partnerships 57,313 57,313 - - - 80,884 80,884 — — — Short-term 59,325 59,325 - - - 44,768 44,768 — — — Total investments $ 584,921 $ 512,261 $ 74,756 $ (2,096) 72,660 Total available-for-sale securities $ 563,399 $ 506,667 $ 58,702 $ (1,970 ) 56,732 Applicable federal income taxes (19,856 ) Applicable federal income taxes (25,431) Net unrealized gains — net of tax $ 36,876 Net unrealized gains - net of tax $ 47,229 Note B – Investments (continued) The following table summarizes, for fixed maturity and equity security investments in an unrealized loss position at December 31, the aggregate fair value and gross unrealized loss categorized by the duration those securities have been continuously in an unrealized loss position. 2007 2006 2008 2007 Number of Securities Fair Value Gross Unrealized Loss Number of Securities Fair Value Gross Unrealized Loss Number of Securities Fair Value Gross Unrealized Loss Number of Securities Fair Value Gross Unrealized Loss Fixed maturity securities: 12 months or less 15 $ 22,051 $ (476) 83 $ 143,673 $ (674) 12 months of less 47 $ 80,993 $ (2,675 ) 15 $ 22,051 $ (476 ) Greater than 12 months 9 7,551 (94) 59 66,078 (946) 6 1,812 (21 ) 9 7,551 (94 ) Total fixed maturities 24 29,602 (570) 142 209,751 (1,620) 53 82,805 (2,696 ) 24 29,602 (570 ) Equity securities: 12 months or less 15 $ 9,194 (1,230) 10 6,693 (281) 12 months of less 33 11,362 (3,085 ) 15 9,194 (1,230 ) Greater than 12 months 3 1,165 (170) 3 1,604 (195) 14 5,845 (1,201 ) 3 1,165 (170 ) Total equity securities 18 10,359 (1,400) 13 8,297 (476) 47 17,207 (4,286 ) 18 10,359 (1,400 ) Total fixed maturity and equity securities 42 $ 39,961 $ (1,970) 155 $ 218,048 $ (2,096) 100 $ 100,012 $ (6,982 ) 42 $ 39,961 $ (1,970 ) The fair value and the cost or amortized cost of fixed maturity investments, at December 31, Fair Value Cost or Amoritzed Cost Fair Value Cost or Amoritzed Cost One year or less $ 60,214 $ 60,328 $ 121,850 $ 118,399 Excess of one year to five years 211,838 209,443 179,253 176,005 Excess of five years to ten years - - 30,148 29,731 Excess of ten years 49,806 49,767 19,539 19,601 Total maturities 321,858 319,538 350,790 343,736 Mortgage-backed securities 16,153 16,226 13,490 13,813 $ 338,011 $ 335,764 $ 364,280 $ 357,549 Major categories of investment income for the years ended December 31 are summarized as follows: 2008 2007 2006 Fixed maturities $ 14,417 $ 14,329 $ 12,511 Equity securities 1,712 1,866 1,719 Money market funds 1,332 2,613 3,882 Short-term and other 1,649 2,602 3,087 19,110 21,410 21,199 Investment expenses (2,047 ) (1,815 ) (1,651 ) Net investment income $ 17,063 $ 19,595 $ 19,548 Major categories of investment income for the years ended December 31 are summarized as follows: 2007 2006 2005 Fixed maturities $ 14,329 $ 12,511 $ 9,847 Equity securities 1,866 1,719 2,117 Money market funds 2,613 3,882 2,595 Short-term and other 2,602 3,087 1,722 21,410 21,199 16,281 Investment expenses (1,815) (1,651) (1,441) Net investment income $ 19,595 $ 19,548 $ 14,840 Note B – Investments (continued) Gains and losses on investments, including equity method earnings from limited partnerships, for the years ended December 31 are summarized below: 2007 2006 2005 2008 2007 2006 Fixed maturities: Gross gains $ 536 $ 157 $ 265 $ 3,333 $ 536 $ 157 Gross losses (680) (714) (586) (6,806 ) (680 ) (714 ) Net gains (losses) (144) (557) (321) (3,473 ) (144 ) (557 ) Equity securities: Gross gains 19,293 10,226 10,094 4,463 19,293 10,226 Gross losses (2,483) (3,795) (1,529) (12,943 ) (2,483 ) (3,795 ) Net gains 16,810 6,431 8,565 Net gains (losses) (8,480 ) 16,810 6,431 Limited partnerships - net gain 23,141 11,190 14,831 Limited partnerships - net gain (loss) Limited partnerships - net gain (loss) (33,562 ) 23,141 11,190 Other - net gain (loss) 289 - (94) (2,234 ) 289 — Total net gains $ 40,096 $ 17,064 $ 22,981 Total net gains (losses) $ (47,749 ) $ 40,096 $ 17,064 The Gain and loss activity for fixed maturity and equity security investments, as shown in the previous table, include adjustments for other-than-temporary impairment for the years ended December 31 and is summarized as follows: 2007 2006 2005 Cumulative charges to income at beginning of year $ 3,717 $ 5,070 $ 4,523 Writedowns based on objective criteria 593 1,423 1,260 Recovery of prior writedowns upon sale or disposal (1,576) (2,776) (713) Cumulative charges to income at end of year $ 2,734 $ 3,717 $ 5,070 Net pre-tax realized gain (loss) $ 983 $ 1,353 $ ($ 547) Addition (reduction) to earnings per share $ .04 $ .06 $ ($ .02) Unrealized gain on investments previously written down at end of the year - see note below $ 4,878 $ 6,428 $ 5,957 2008 2007 2006 Cumulative charges to income at beginning of year $ 2,734 $ 3,717 $ 5,070 Writedowns based on objective criteria 11,881 593 1,423 Recovery of prior writedowns upon sale or disposal (2,917 ) (1,576 ) (2,776 ) Cumulative charges to income at end of year $ 11,698 $ 2,734 $ 3,717 Net pre-tax realized gain (loss) $ (8,964 ) $ 983 $ 1,353 Addition (reduction) to earnings per share from net pre-tax realized gain (loss) ($ .39 ) $ .04 $ .06 Unrealized gain on investments previously written down at end of the year - see note below $ 7,211 $ 4,878 $ 6,428 Note: Recovery in market value of an investment which has previously been adjusted for other-than-temporary impairment is treated as an unrealized gain until the investment is disposed of. There is no primary or secondary market for the Company’s investments in limited partnerships and, in most cases, the Company is prohibited from disposing of its limited partnership interests for some period of time and must seek approval from the general partner for any such disposal. Distributions of earnings from these partnerships are largely at the sole discretion of the general partners and distributions are generally not received by the Company for many years after the earnings have been reported. The Company has commitments to contribute an additional Note B – Investments (continued) The Company has invested a total of $24,000 in three limited partnerships, with an aggregate estimated market value of respectively. During 2008, 2007 The Company utilized the services of a broker-dealer firm of which a director of the Company is an executive officer and owner. This broker-dealer serves as agent for purchases and sales of securities and manages an equity securities portfolio and fixed maturity portfolio with market values of approximately The fair value of regulatory deposits with various insurance departments in the United States and Canada totaled Short-term investments at December 31, The Company’s limited partnerships include one significant investment accounted for using the equity The Company’s share of earnings from this limited partnership investment was as follows for the years ended December 31: 2007 2006 2005 Estimated realized income $ 4,241 $ 971 $ 1,445 Estimated unrealized income 12,983 5,566 4,510 Equity method earnings $ 17,224 $ 6,537 $ 5,955 2008 2007 2006 Estimated realized income $ 670 $ 4,241 $ 971 Estimated unrealized income (loss) (26,625 ) 12,983 5,566 Net earnings (losses) $ (25,955 ) $ 17,224 $ 6,537 The summarized financial information of the significant limited partnership investment as of and for the years ended December 31 is as follows: 2007 2006 2005 2008 2007 Total assets $ 1,466,882 $ 703,315 $ 366,937 $ 582,920 $ 1,466,882 Total partners' capital 1,389,232 701516 344,903 550,840 1,389,232 Net increase in partners' capital resulting from operations 666,966 161,674 93,998 Net increase (decrease) in partners' capital resulting from operations (858,680 ) 666,966 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, unless otherwise Year Ended December 31 2007 2006 2005 2008 2007 2006 Reserves at the beginning of the year $ 249,495 $ 242,130 $ 207,137 $ 244,500 $ 249,495 $ 242,130 Provision for losses and loss expenses: Claims occurring during the current year 129,065 129,551 154,314 132,829 129,065 129,551 Claims occurring during prior years (21,284) (16,947) (13,692) (17,077 ) (21,284 ) (16,947 ) Total incurred 107,781 112,604 140,622 115,752 107,781 112,604 Loss and loss expense payments: Claims occurring during the current year 53,820 45,658 45,286 51,649 53,820 45,658 Claims occurring during prior years 58,956 59,581 60,343 76,970 58,956 59,581 Total paid 112,776 105,239 105,629 128,619 112,776 105,239 Reserves at the end of the year 244,500 249,495 242,130 231,633 244,500 249,495 Reinsurance recoverable on unpaid losses at the end of the year Reinsurance recoverable on unpaid losses at the end of the year 134,116 159,917 188,143 157,925 134,116 159,917 Reserves, gross of reinsurance recoverable, at the end of the year $ 378,616 $ 409,412 $ 430,273 $ 389,558 $ 378,616 $ 409,412 The table above shows that a savings of The major components of the developments shown above are as follows: Year Ended December 31 2007 2006 2005 Retrospectively-rated direct business $ (1,078) $ (7,171) $(8,014) Other direct business (16,041) (7,994) (4,468) Reinsurance assumed (4,112) (1,288) (1,730) Involuntary residual markets (56) (533) 1,018 Environmental damage 3 39 (498) Totals $(21,984) $(16,947) $(13,692) The major components of the developments shown above are as follows for the years ended December 31: 2008 2007 2006 Retrospectively-rated direct business $ 336 ($1,078 ) ($7,171 ) Other direct business (17,177 ) (16,038 ) (7,955 ) Reinsurance assumed (205 ) (4,112 ) (1,288 ) Involuntary residual markets (31 ) (56 ) (533 ) Totals ($17,077 ) ($21,284 ) ($16,947 ) Favorable loss development is influenced by the Company’s long-standing policy of reserving for losses realistically and a willingness to settle claims based upon a seasoned evaluation of its exposures. Reserve savings developed related to retrospectively-rated The Company has not changed its original estimate for the loss sustained as a result of the terrorist attacks of September 11, 2001. Therefore, there is no impact on the loss developments shown in the above table except for payments against the original established reserves. The Company has paid Note C - Loss and Loss Expense Reserves (continued) The Company participates in mandatory residual market pools in various states. The Company records the results from participation in these pools as the information is reported to the Company and also 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, Loss reserves have been reduced by estimated salvage and subrogation recoverable of approximately Note D 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. Management determines the amount of net exposure it is willing to accept generally on a product line basis. Certain treaties covering The Company also serves as an assuming reinsurer on treaties with direct writing insurance companies for catastrophic property coverages as well as under retrocessions from certain other reinsurers. The retrocessions include individual risks but are comprised primarily of high layer catastrophe treaties. Accordingly, the occurrence of catastrophic events can have a significant impact on the Company’s operations. 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. Historically, the operation of these assigned risk pools have resulted in net losses allocated to the Company although such losses have generally not been material in relation to the Company’s direct and voluntary assumed operations. Premiums Written Premiums Earned 2007 2006 2005 2007 2006 2005 Direct $ 176,121 $ 184,148 $ 209,527 $ 185,566 $ 181,491 $ 212,997 Ceded on direct (32,980) (24,836) (39,652) (32,974) (24,841) (39,825) Assumed 26,446 12,916 12,918 26,473 13,116 12,993 Net $ 169,587 $ 172,228 $ 182,793 $ 179,065 $ 169,766 $ 186,165 Premiums Written Premiums Earned 2008 2007 2006 2008 2007 2006 Direct $ 182,810 $ 176,233 $ 184,538 $ 188,285 $ 185,781 $ 182,077 Ceded on direct (39,828 ) (32,980 ) (24,836 ) (41,214 ) (35,294 ) (27,320 ) Net on direct 142,982 143,253 159,702 147,071 150,487 154,757 Assumed 39,132 31,134 12,526 40,528 33,378 15,009 Ceded on assumed (5,300 ) (4,800 ) — (5,300 ) (4,800 ) — Net on assumed 33,832 26,334 12,526 35,228 28,578 15,009 Net $ 176,814 $ 169,587 $ 172,228 $ 182,299 $ 179,065 $ 169,766 Net losses and loss expenses incurred for 2008, 2007 Net losses and loss expenses incurred for 2008, 2007 Note D – Reinsurance (continued) Components of reinsurance recoverable at December 31 are as follows: Components of reinsurance recoverable at December 31 are as follows: 2007 2006 2008 2007 Unpaid losses and loss expenses, net of valuation allowance Unpaid losses and loss expenses, net of valuation allowance $ 131,727 $ 157,426 Unpaid losses and loss expenses, net of valuation allowance $ 155,455 $ 131,727 Paid losses and loss expenses 1,079 6,000 4,531 1,079 Unearned premiums 6 - 3 5 $ 132,812 $ 163,426 $ 159,989 $ 132,811 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: 2007 2006 2008 2007 Deferred tax liabilities: Unrealized gain on fixed income and equity security investments Unrealized gain on fixed income and equity security investments $ 19,856 $ 25,431 Unrealized gain on fixed income and equity security investments $ 10,450 $ 19,856 Limited partnership investments 10,632 5,278 — 10,632 Deferred acquisition costs 1,118 1,660 814 1,118 Other 1,562 1,290 1,891 1,562 Total deferred tax liabilities 33,168 33,659 13,155 33,168 Deferred tax assets: Discounts of loss and loss expense reserves 8,825 10,006 FIN 48 reclassification 7,781 - Loss and loss expense reserves 15,575 17,755 Limited partnership investments 2,420 — Unearned premiums discount 1,587 2,250 1,203 1,587 Other than temporary investment declines 957 1,301 Other-than-temporary investment declines 4,094 957 Deferred compensation 2,689 1,033 228 1,540 Other 211 215 225 211 Total deferred tax assets 22,050 14,805 23,745 22,050 Net deferred tax liabilities $ 11,118 $ 18,854 Net deferred tax assets (liabilities) $ 10,590 $ (11,118 ) 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: 2007 2006 2005 2008 2007 2006 Statutory federal income rate applied to pretax income $ 27,878 $ 18,553 $ 17,736 Statutory federal income rate applied to pretax income (loss) Statutory federal income rate applied to pretax income (loss) $ (6,090 ) $ 27,878 $ 18,553 Tax effect of (deduction): Tax-exempt investment income (3,298) (2,313) (1,410) (3,649 ) (3,298 ) (2,313 ) Net addition to (reduction of) tax positions 125 (1,617) 96 (192 ) 125 (1,617 ) Other (184) 202 30 245 (184 ) 202 Federal income tax expense $ 24,521 $ 14,825 $ 16,452 Federal income tax expense (benefit) $ (9,686 ) $ 24,521 $ 14,825 Federal income tax expense consists of the following: 2007 2006 2005 Taxes (credits) on pre-tax income: Current $ 18,901 $ 12,603 $ 13,368 Deferred 5,620 2,222 3,084 $ 24,521 $ 14,825 $ 16,452 Note E - Income Taxes (continued) Federal income tax expense consists of the following: The components of the provision for deferred federal income taxes (credits) are as follows: 2007 2006 2005 Limited partnerships $ 5,354 $ 1,871 $ 3,600 Discounts of loss and loss expense reserves 32 92 (1,469) Unearned premium discount 663 (172) 236 Deferred compensation (508) (149) 694 Other than temporary investment declines 344 474 (191) Other (265) 106 214 Provision for deferred federal income tax $ 5,620 $ 2,222 $ 3,084 2008 2007 2006 Taxes (credits) on pre-tax income (loss): Current $ 4,443 $ 18,901 $ 12,603 Deferred (14,129 ) 5,620 2,222 $ (9,686 ) $ 24,521 $ 14,825 The components of the provision for deferred federal income taxes (credits) are as follows: 2008 2007 2006 Limited partnerships $ (13,052 ) $ 5,354 $ 1,871 Discounts of loss and loss expense reserves 354 32 92 Unearned premium discount �� 384 663 (172 ) Deferred compensation 1,310 (508 ) (149 ) Other-than-temporary investment declines (3,137 ) 344 474 Other 12 (265 ) 106 Provision for deferred federal income tax $ (14,129 ) $ 5,620 $ 2,222 Cash flows related to federal income taxes paid, net of refunds received, for 2008, 2007 and 2006 were $11,186, $14,502 and The Company is required to establish a valuation allowance for any portion of the gross deferred tax asset that management believes will not be realized. Management has determined that no such valuation allowance is necessary at December 31, Financial Accounting Standards Board Interpretation (FIN) No. 48, Accounting for Uncertainty in Income Taxes— an Interpretation of FASB Statement No.109, provides guidance for recognizing and measuring uncertain tax positions, as defined in SFAS No. 109, Accounting for Income Taxes. The Company adopted FIN 48 on January 1, 2007 with no adjustment necessary to beginning retained earnings. The total amount of unrecognized tax benefits from uncertain tax positions at January 1, 2007 was $10,301. The tax positions are uncertain as to the timing of deductibility and therefore, if recognized would have no impact on the Company’s effective tax rate. The Company recognizes accrued interest and penalties, if any, related to unrecognized tax benefits in income tax expense and changes in such accruals would impact the Company’s effective tax rate. Amounts accrued for the payment of interest at December 31, A reconciliation of the beginning and ending amounts of unrecognized federal income taxes (credits) is as follows: 2008 2007 Balance at January 1 $ 7,781 $ 10,301 Reductions for tax positions of the current year (271 ) (142 ) Reductions for tax positions of prior years (1,441 ) (2,378 ) Settlements with tax authorities (114 ) — Balance at December 31 $ 5,955 $ 7,781 Note F - Changes in common stock outstanding and additional paid-in capital are as follows: Note F - Shareholders' Equity Changes in common stock outstanding and additional paid-in capital are as follows Additional Paid-in Class A Class B Additional Paid-in Shares Amount Shares Amount Capital Shares Amount Shares Amount Capital Balance at January 1, 2005 2,666,666 $ 114 12,056,124 $ 514 $ 37,083 Stock options issued - - - - 197 Stock options exercised - - 79,547 4 1,614 Balance at December 31, 2005 2,666,666 114 12,135,671 518 38,894 Balance at January 1, 2006 2,666,666 $ 114 12,135,671 $ 518 $ 38,894 Stock options issued - - - - 20 — — — — 20 Stock options exercised - - 349,534 15 6,789 — — 349,534 15 6,789 Treasury shares purchased (16,607) (1) - - (11) (16,607 ) (1 ) — — (11 ) Balance at December 31, 2006 2,650,059 113 12,485,205 533 45,692 2,650,059 113 12,485,205 533 45,692 Stock options exercised - - 107,350 4 2,207 — — 107,350 4 2,207 Balance at December 31, 2007 $ 2,650,059 $ 113 12,592,555 $ 537 $ 47,899 2,650,059 113 12,592,555 537 47,899 Treasury shares purchased (26,950 ) (1 ) (429,304 ) (18 ) (1,587 ) Balance at December 31, 2008 2,623,109 $ 112 12,163,251 $ 519 $ 46,312 The Company’s Class A and Class B common stock has a stated value of approximately $.04 per share. Shareholders’ equity at December 31, Details of Note G - Other Operating Expenses Details of other operating expenses for the years ended December 31: 2007 2006 2005 2008 2007 2006 Amortization of deferred policy acquisition costs $ 20,985 $ 14,155 $ 14,066 Amortization of deferred policy acquisition costs $ 23,437 $ 20,985 $ 14,155 Other underwriting expenses 21,688 18,789 17,656 19,745 21,688 18,789 Expense allowances from reinsurers (2,044) (1,205) (7,806) (3,084 ) (2,044 ) (1,205 ) Total underwriting expenses Total underwriting expenses 40,629 31,739 23,916 Total underwriting expenses 40,098 40,629 31,739 Operating expenses of non-insurance companies 15,701 15,716 15,691 Operating expenses of non-insurance companies 18,479 15,701 15,716 Total other operating expenses Total other operating expenses $ 56,330 $ 47,455 $ 39,607 Total other operating expenses $ 58,577 $ 56,330 $ 47,455 Note H - Employee Benefit Plans The Company maintains a defined contribution 401(k) Employee Savings and Profit Sharing Plan (“the Plan”) which covers nearly all employees who have completed one year of service. The Company’s contributions to the Plan for 2008, 2007 and 2006 were $1,183, $1,132, and Note I - Stock Purchase and Option Plans In accordance with the terms of the 1981 Stock Purchase Plan (1981 Plan), the Company is obligated to repurchase shares issued under the 1981 Plan, at a price equal to 90% of the book value of the shares at the end of the quarter immediately preceding the date of repurchase. No shares have ever been repurchased under the 1981 Plan. At December 31, The Company maintains two stock option plans which are described below. Compensation cost charged against income for those plans was $0, $0, and $20, for 2008, 2007, and Note I - Stock Purchase and Director Option Plan: Under the Director Option Plan (the Director Plan), which is shareholder approved, the Company has reserved 300,000 shares of Class B common stock for the granting of discounted and market value options to non-employee directors. Approximately 167,000 shares of Class B common stock are available for future grants. No options were granted to directors during Employee Option Plan: Under the Employee Option Plan (the Employee Plan), which is shareholder approved, the Company has reserved 1,125,000 shares of Class B common stock for the granting of discounted and market value options to employees. Approximately 259,000 shares of Class B common stock are available for future grants. No options were granted to employees during the three year period ended December 31, The total intrinsic value of options exercised during 2007 Cash received from option exercise under all share-based payment arrangements for the years ended December 31, 2007 The Company’s policy is to issue new shares to satisfy share option exercises. During 2002 and 2001, the Company offered loans to certain employees for the sole purpose of purchasing the Company’s Class B common stock in the open market. Principal and interest totaling Note J - Reportable Segments The Company The Company evaluates performance and allocates resources based on The following table provides certain profit and loss information for each reportable segment for the years ended December 31: 2007 2006 2005 Direct and assumed premium written: Fleet trucking $ 134,723 $ 124,044 $ 155,201 Private passenger automobile 23,603 33,964 38,498 Small fleet trucking 17,796 26,091 15,631 Reinsurance assumed 26,334 12,726 11,519 All Other 111 239 1,597 Totals $ 202,567 $ 197,064 $ 222,446 Net premium earned and fee income: Fleet trucking $ 108,231 $ 107,021 $ 123,101 Private passenger automobile 31,068 38,590 42,818 Small fleet trucking 15,568 14,711 9,362 Reinsurance assumed 28,578 15,009 13,144 All Other 220 530 4,175 Totals $ 183,665 $ 175,861 $ 192,600 Underwriting gain (loss) Fleet trucking $ 24,373 $ 17,754 $ 25,658 Private passenger automobile 1,896 2,737 5,131 Small fleet trucking 220 (402) 380 Reinsurance assumed 5,554 6,933 (8,292) All Other 165 (637) (417) Totals $ 32,208 $ 26,385 $ 22,460 2008 2007 2006 Direct and assumed premium written: Property and casualty insurance $ 182,810 $ 176,233 $ 184,338 Property reinsurance 39,132 31,134 12,726 Totals $ 221,942 $ 207,367 $ 197,064 Net premium earned: Property and casualty insurance $ 147,071 $ 150,487 $ 154,757 Property reinsurance 35,228 28,578 15,009 Totals $ 182,299 $ 179,065 $ 169,766 Underwriting gain Property and casualty insurance $ 20,022 $ 26,654 $ 19,452 Property reinsurance 6,718 5,554 6,933 Totals $ 26,740 $ 32,208 $ 26,385 The 2007 2006 2005 Revenue: Net premium earned and fee income $ 183,665 $ 175,861 $ 192,600 Net investment income 19,595 19,548 14,840 Net gains on investments 40,096 17,064 22,981 Other income 407 596 483 Total consolidated revenue $ 243,763 $ 213,069 $ 230,904 Profit: Underwriting gain $ 32,208 $ 26,385 $ 22,460 Net investment income 19,595 19,548 14,840 Net gains on investments 40,096 17,064 22,981 Corporate expenses (12,247) (9,987) (9,490) Interest expense - - (116) Income before federal income taxes $ 79,652 $ 53,010 $ 50,675 2008 2007 2006 Profit: Underwriting gain $ 26,740 $ 32,208 $ 26,385 Net investment income 17,063 19,595 19,548 Net realized gains (losses) on investments (47,749 ) 40,096 17,064 Corporate expenses (13,453 ) (12,247 ) (9,987 ) Income (loss) before federal income taxes $ (17,399 ) $ 79,652 $ 53,010 The Company, through its subsidiaries, is licensed to do business in all 50 states of the United States, all Canadian provinces and Bermuda. Canadian and Bermuda operations are currently not significant. One customer of the Note K - Earnings Per Share The following is a reconciliation of the denominators used in the calculation of basic and diluted earnings per share for the years ended December 31: 2007 2006 2005 2008 2007 2006 Average share outstanding for basic earnings per share Average share outstanding for basic earnings per share 15,175,074 15,004,377 14,753,133 15,080,149 15,175,074 15,004,377 Dilutive effect of options 14,269 43,094 109,554 — 14,269 43,094 Average shares outstanding for diluted earnings per share Average shares outstanding for diluted earnings per share 15,189,343 15,047,471 14,862,687 15,080,149 15,189,343 15,047,471 Note L - Concentrations of Credit Risk The Company writes policies of excess insurance attaching above a self-insured retention (“SIR”) and also writes policies that contain large, per-claim deductibles. Those losses and claims that fall within the SIR or deductible are obligations of the insured. The Company also writes surety bonds in favor of various regulatory agencies guaranteeing the insured’s payment of claims within the SIR. Losses and claims under a large deductible policy are payable by the Company with reimbursement due the Company from the insured. The Company requires collateral from its insureds to serve as a source of reimbursement if the Company is obligated to pay claims within the SIR by reason of an insured’s default or if the insured fails to reimburse the Company for deductible amounts paid by the Company. Acceptable collateral may be provided in the form of letters of credit on Company approved banks, Company approved marketable securities or cash. At December 31, The amount of collateral required of an insured is determined by the financial condition of the insured, the type of obligations guaranteed by the Company, estimated reserves for incurred losses within the SIR or deductible In addition, the Company’s balance sheet includes paid and unpaid amounts recoverable from reinsurers under various agreements totaling Investments in limited partnerships include an aggregate of Note M On October 31, 2008, the Company purchased Transportation Specialty Insurance Agency, Inc., (“TIA”) of Toledo, Ohio for a cash purchase price of $3,500 which includes a post closing purchase price adjustment related to minimum working capital requirements. TIA is a commercial lines specialty insurance agency primarily focusing on the needs of the transportation industry including trucking independent contractors as well as fleet trucking companies. TIA is part of the Company’s property and casualty insurance segment and is not expected to have any material effect on results of operations, liquidity or capital resources. As part of the purchase, the Company recorded goodwill of $3,221 and intangible assets related to customer relationships and employment agreements of $179 with are included in Other Assets in the consolidated balance sheet. During 2008, the Company had amortization of intangible assets of $8. The Company had no goodwill, intangible assets and related amortization prior to 2008. Note N – Debt The Company has $9,000 outstanding as of December 31, 2008 under the Company’s revolving line of credit at variable interest rates detailed below. No borrowings were outstanding against this line at December 31, 2007. The Company has $11,000 remaining unused under the revolving line of credit. The $9,000 of borrowings was used principally for treasury stock repurchases. Interest Description Maturity 2008 2007 Rate Revolving line of credit June 23, 2011 $ 5,000,000 $ - 0.97% Revolving line of credit June 23, 2011 4,000,000 - 4.03% Total Debt $ 9,000,000 $ - Note O – Fair Value In September 2006, the Financial Accounting Standards Board issued Statement No. 157, Beginning January 1, 2008, assets and liabilities recorded at fair value in the consolidated balance sheets are categorized based upon the level of judgment associated with the inputs used to measure their fair value. The following table summarizes fair value measurements by level at December 31, 2008 for assets measured at fair value on a recurring basis: Description Total Level 1 Level 2 Level 3 Fixed maturities $ 364,280 $ — $ 364,280 $ — Equity securities 63,200 63,200 — — Short term 33,820 2,964 30,856 — Cash equivalents 24,327 — 24,327 — $ 485,627 $ 66,164 $ 419,463 $ — Note Level inputs, as defined by SFAS No. 157, are as follows: LevelInput: Input Definition: Level 1 Inputs are unadjusted, quoted prices for identical assets or liabilities in active markets at the measurement date. Level 2 Inputs other than quoted prices included in Level 1 that are observable for the asset or liability through corroboration with market data at the measurement date. Level 3 Unobservable inputs that reflect management’s best estimate of what market participants would use in pricing the asset or liability at the measurement date. A reconciliation of the beginning and ending balances of assets measured at fair value on a recurring basis using Level 3 inputs is as follows for the year ended December 31: 2008 Beginning of period $ — Total gain or losses (realized or unrealized) Included in earnings (or changes in net assets) (2,234 ) Included in other comprehensive income — Purchases, issuances, and settlements 2,234 Transfers in and/or out of Level 3 — End of period $ — In February 2007, the Financial Accounting Standards Board issued Statement No. 159, Note P - New Accounting Pronouncements In December 2007, Financial Accounting Standards Board issued Statement No. 141 (revised 2007), Note Q - Quarterly Results of Operations (Unaudited) Quarterly results of operations are as follows: Note N - Quarterly Results of Operations (Unaudited) Quarterly results of operations are as follows: Results by Quarter 2007 2006 1st 2nd 3rd 4th 1st 2nd 3rd 4th Net premiums earned $ 44,175 $ 44,817 $ 44,601 $ 45,472 $ 43,218 $ 42,163 $ 42,333 $ 42,052 Net investment income 4,846 4,882 5,040 4,827 4,559 4,736 5,140 5,113 Net gains (losses) on investments 474 8,772 6,421 24,429 7,014 (1,135) 2,958 8,227 Losses and loss expenses incurred 26,892 24,493 24,949 31,447 28,939 27,717 25,837 30,111 Net income 8,211 14,792 11,714 20,414 11,556 5,427 9,879 11,323 Per share - diluted: Net income $ .54 $ .98 $ .77 $ 1.34 $ .78 $ .36 $ .65 $ .75 Results by Quarter 2008 2007 1st 2nd 3rd 4th 1st 2nd 3rd 4th Net premiums earned $ 45,087 $ 46,902 $ 43,579 $ 46,730 $ 44,175 $ 44,817 $ 44,601 $ 45,472 Net investment income 4,200 4,195 4,372 4,296 4,846 4,882 5,040 4,827 Net gains (losses) on investments (13,575 ) (2,960 ) (15,965 ) (15,249 ) 474 8,772 6,421 24,429 Losses and loss expenses incurred 29,461 26,462 30,427 29,402 26,892 24,493 24,949 31,447 Net income (loss) (4,608 ) 6,307 (7,270 ) (2,142 ) 8,211 14,792 11,714 20,414 Net income (loss) per share - diluted $ (.30 ) $ .41 $ (.48 ) $ (.14 ) $ .54 $ .98 $ .77 $ 1.34 Note R - Statutory (Unaudited) Net income of the insurance subsidiaries, as determined in accordance with statutory accounting practices, was $19,064 $35,605 and $26,632 for 2008, 2007 and 2006, respectively. Consolidated statutory surplus for these subsidiaries was $315,529 and $360,965 at December 31, 2008 and 2007, respectively. Minimum statutory surplus necessary for the insurance subsidiaries to satisfy statutory risk based capital requirements was $86,739 at December 31, 2008. Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE No response to this item is required. Item 9A.CONTROLS AND PROCEDURES The Company’s management, under the direction of our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), has performed an evaluation of its disclosure controls and procedures (as defined by Exchange Act rules 13a-15(e) and 15d-15(e)) Management’s Responsibility For Financial Statements Management is responsible for the preparation of the Company’s consolidated financial statements and related information appearing in this report. Management believes that the consolidated financial statements fairly reflect the form and substance of transactions and that the financial statements reasonably present the Company’s financial position and results of operations in conformity with generally accepted accounting principles. Management has included in the Company’s financial statements amounts that are based upon estimates and judgments which it believes are reasonable under the circumstances. Ernst & Young LLP, an independent registered public accounting firm, audits the Company’s consolidated financial statements in accordance with the standards of the Public Company Accounting Oversight Board and provides an objective, independent review of the fairness of reported operating results and financial position. The Board of Directors of the Company has an Audit Committee composed of three non-management Directors. The committee meets periodically with financial management, the internal auditors and the independent registered public accounting firm to review accounting, control, auditing and financial reporting matters. Management’s Report on Internal Control Over Financial Reporting The Company’s management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Under the supervision and with the participation of management, including the chief executive officer and the chief financial officer, the Company conducted an evaluation of the effectiveness of its internal control over financial reporting based on the framework in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation under this framework, management concluded that the Company’s internal control over financial reporting was effective as of December 31, REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM The Board of Directors and Shareholders of Baldwin & Lyons, Inc. We have audited Baldwin & Lyons, Inc. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. In our opinion, Baldwin & Lyons, Inc. and subsidiaries maintained, in all material respects, effective internal control over financial reporting as of December 31, We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Baldwin & Lyons, Inc. and subsidiaries as of December 31, /s/ ERNST & YOUNG LLP Indianapolis, Indiana March PART III Item 10.DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information with respect to the directors of the Registrant to be provided under this item is omitted from this Report because the Registrant will file with the Commission a definitive proxy statement pursuant to Regulation 14A involving the election of directors not later than 120 days after the close of its fiscal year. The information required by Item 10 of this Report with respect to directors which will appear in the definitive proxy statement is incorporated by reference herein. The executive officers of the Company will serve until the next annual meeting of the Board of Directors and until their respective successors are elected and qualified. Except as otherwise indicated, the occupation of each officer during the past five years has been in his current position with the Company. The following summary sets forth certain information concerning the Company’s executive officers: Served in Such Capacity Name Age Title Since Gary W. Miller Chairman and CEO 1997 Joseph J. DeVito President and COO 2007 (1) G. Patrick Corydon 1979 (2) Vice President and Secretary Mark L. Bonini Vice President 2001 (1) Mr. DeVito was elected President and Chief Operating Officer in February, 2007. He was Executive Vice President in 2001 and has served in similar capacity since 1986. (2) Mr. Corydon (3) Mr. Morfas was elected Vice President of the Company in 2007 and Secretary of the Company in 2008. Item 11.EXECUTIVE COMPENSATION* Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT* Item 13.CERTAIN RELATIONSHIPS, RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE* Item 14.PRINCIPAL ACCOUNTANT FEES AND SERVICES* *The information to be provided under Items 11, 12, 13 and 14 is omitted from this Report because the Registrant will file with the Commission a definitive proxy statement pursuant to Regulation 14A involving the election of directors not later than 120 days after the close of its fiscal year. The information required by these items of this Report which will appear in the definitive proxy statement is incorporated by reference herein. PART IV Item 15.EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) 1. List of Financial Consolidated Balance Sheets - December 31, Consolidated Statements of Consolidated Statements of Changes in Equity Other Than Capital - Years ended December 31, 2008, Consolidated Statements of Cash Flows - Years ended December 31, 2008, 2007 and 2006 Notes to Consolidated Financial Statements 2. List of Financial Statement schedules of Baldwin & Lyons, Inc. and subsidiaries are included in Item 15(d): Pursuant to Article 7: Schedule I--Summary of Investments--Other than Investments in Related Parties Schedule II--Condensed Financial Information of the Registrant Schedule III--Supplementary Insurance Information Schedule IV--Reinsurance Schedule VI--Supplemental Information Concerning Property/Casualty Insurance Operations All other schedules to the consolidated financial statements required by Article 7 and Article 5 of Regulation Number & Caption from Exhibit Table of Item 601 of Regulation S-K Exhibit Number and Description (3) (Articles of Incorporation & By Laws) EXHIBIT 3(i) Articles of Incorporation of Baldwin & Lyons, Inc., as amended (Incorporated as an exhibit by reference to Exhibit 3(a) to the EXHIBIT 3(ii)-- (10) (Material Contracts) EXHIBIT 10(a)-- 1981 Employee Stock Purchase Plan (Incorporated as an exhibit by reference to Exhibit A to the Company’s definitive Proxy Statement for its Annual Meeting held May 5, 1981) EXHIBIT 10(b)-- EXHIBIT Baldwin & Lyons, Inc. Baldwin & Plan (Incorporated as an exhibit by reference to Exhibit 10(f) to the Company’s Annual Report on Form 10-K for the year ended December 31, 1992) EXHIBIT 10(e)-- EXHIBIT Code of Business Conduct of Baldwin & Lyons, Inc. (Incorporated as an exhibit by reference to Exhibit 14 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2005) (21) (Subsidiaries of the registrant) EXHIBIT Subsidiaries of Baldwin & Lyons, Inc. Item 601 of Regulation S-K Exhibit Number and Description (23) (Consents of experts and counsel) EXHIBIT 23-- (24) (Powers of Attorney) EXHIBIT 24-- Powers of Attorney for certain Officers and Directors (31) (Certification) EXHIBIT Certification of CEO pursuant to Section 302 of the EXHIBIT Certification of CFO pursuant to Section 302 of the (32) (Certification) EXHIBIT Certification of CEO pursuant to Section 906 of the EXHIBIT Certification of CFO pursuant to Section 906 of the (b) A report on Form 8-K was filed by the Company in the fourth quarter of (c) Exhibits. The response to this portion of Item 15 is submitted as a separate section of this report. (d) Financial Statement Schedules. The response to this portion of Item 15 is submitted on pages OTHER THAN INVESTMENTS IN RELATED PARTIES Form 10-K – Year Ended December 31, 2008 Baldwin & Lyons, Inc. and Subsidiaries (Dollars in thousands) Column A Column B Column C Column D Type of Investment Cost Fair Value Amount At Which Shown In The Balance Sheet (A) Fixed Maturities: Bonds: U.S. government and government agencies and authorities $ 26,050 $ 26,560 $ 26,560 Mortgage backed securities 13,813 13,490 13,490 States, municipalities and political subdivisions 263,026 267,152 267,152 Foreign governments 5,867 5,975 5,975 Public utilities 3,026 3,023 3,023 All other corporate bonds 45,767 48,080 48,080 Total fixed maturities 357,549 364,280 364,280 Equity Securities: Common Stocks: Banks, trust and insurance companies 4,078 8,308 8,308 Industrial, miscellaneous and all other 35,993 54,892 54,892 Total equity securities 40,071 63,200 63,200 Limited partnerships 59,864 59,864 59,864 Short-term: Certificates of deposit 2,964 2,964 2,964 Commercial paper 30,856 30,856 30,856 Total short-term and other 33,820 33,820 33,820 Total investments $ 491,304 $ 521,164 $ 521,164 (A) All securities are presented at fair value in the financial statements. Investments presented above do not include $24,327 of money market funds classified with cash and cash equivalents in the balance sheet. SCHEDULE II CONDENSED FINANCIAL INFORMATION OF REGISTRANT Form 10-K – Year Ended December 31, 2008 Baldwin & Lyons, Inc. Condensed Balance Sheets December 31 2008 2007 Assets Investment in subsidiaries $ 334,087 $ 370,371 Due from affiliates 2,446 3,798 Investments other than subsidiaries: Fixed maturities 11,243 10,116 Limited partnerships 915 1,267 12,158 11,383 Cash and cash equivalents 5,727 11,514 Accounts receivable 6,696 7,280 Notes receivable from employees 2,199 2,228 Other assets 4,467 6,198 Total assets $ 367,780 $ 412,772 Liabilities and shareholders' equity Liabilities: Premiums payable $ 14,009 $ 15,202 Deposits from insureds 12,041 11,677 Notes payable to bank 9,000 — Current payable federal income taxes 129 — Other liabilities 2,534 5,175 37,713 32,054 Shareholders' equity: Common stock: Class A 112 113 Class B 519 537 Additional paid-in capital 46,312 47,899 Unrealized net gains on investments 19,410 36,876 Retained earnings 263,714 295,293 330,067 380,718 Total liabilities and shareholders' equity $ 367,780 $ 412,772 See notes to condensed financial statements SCHEDULE II CONDENSED FINANCIAL INFORMATION OF REGISTRANT Form 10-K – Year Ended December 31, 2008 Baldwin & Lyons, Inc. Condensed Statements of Operations Year Ended December 31 2008 2007 2006 Revenue: Commissions and service fees $ 18,539 $ 16,514 $ 15,024 Dividends from subsidiaries 13,000 20,000 32,500 Net investment income 476 1,082 1,741 Net realized gains (losses) on investments 543 (58 ) 278 Other 657 1,576 135 33,215 39,114 49,678 Expenses: Salary and related items 12,946 13,337 11,426 Other 5,120 3,632 3,810 18,066 16,969 15,236 Income before federal income taxes and equity in undistributed income of subsidiaries 15,149 22,145 34,442 Federal income taxes 671 687 95 14,478 21,458 34,347 Equity in undistributed income (loss) of subsidiaries (22,191 ) 33,673 3,838 Net income (loss) ($7,713 ) $ 55,131 $ 38,185 See notes to condensed financial statements SCHEDULE II CONDENSED FINANCIAL INFORMATION OF REGISTRANT Form 10-K – Year Ended December 31, 2008 Baldwin & Lyons, Inc. Condensed Statements of Cash Flows Year Ended December 31 2008 2007 2006 Net cash provided by operating activities $ 15,072 $ 9,371 $ 21,299 Investing activities: Purchases of long-term investments (8,747 ) (9,781 ) (16,184 ) Sales or maturities of long-term investments 7,552 9,331 13,298 Net sales of short-term investments — 9,890 4,975 Decrease in notes receivable from employees 29 110 15 Distributions from limited partnerships 833 683 2,599 Net purchases of property and equipment (751 ) (2,274 ) (824 ) Purchase of Transport Insurance Agency (3,500 ) — — Other 73 925 111 Net cash provided by (used in) investing activities (4,511 ) 8,884 3,990 Financing activities: Dividends paid to shareholders (15,096 ) (25,062 ) (38,435 ) Drawings on line of credit 9,000 — — Stock option exercises and other — 2,211 6,804 Cost of treasury shares (8,908 ) — (401 ) Capitalization of subsidiary (1,344 ) — — Net cash used in financing activities (16,348 ) (22,851 ) (32,032 ) Increase (decrease) in cash and cash equivalents (5,787 ) (4,596 ) (6,743 ) Cash and cash equivalents at beginning of year 11,514 16,110 22,853 Cash and cash equivalents at end of year $ 5,727 $ 11,514 $ 16,110 See notes to condensed financial statements Notes to Condensed Financial Statements – Basis of Presentation The Company’s investment in subsidiaries is stated at cost plus equity in the undistributed earnings of subsidiaries since the date of acquisition. The Company’s share of net income of its subsidiaries is included in income using the equity method. These financial statements should be read in conjunction with the Company’s consolidated financial statements. SCHEDULE I -- SUMMARY OF INVESTMENTS- OTHER THAN INVESTMENTS IN RELATED PARTIES Form 10-K - Year Ended December 31, 2007 Baldwin & Lyons, Inc. and Subsidiaries Column A Column B Column C Column D (Dollars in thousands) Amount At Which Shown Fair In The Balance Type of Investment Cost Value Sheet (A) Fixed Maturities: Bonds: United States government and government agencies and authorities $ 27,222 $ 27,484 $ 27,484 Mortgage backed securities 16,226 16,153 16,153 States, municipalities and political subdivisions 278,752 280,665 280,665 Foreign governments 7,868 7,918 7,918 Public utilities 250 250 250 All other corporate bonds 5,446 5,541 5,541 Total fixed maturities 335,764 338,011 338,011 Equity Securities: Common Stocks: Banks, trust and insurance companies 5,876 17,387 17,387 Industrial, miscellaneous and all other 39,375 82,349 82,349 Total equity securities 45,251 99,736 99,736 Limited partnerships 80,884 80,884 80,884 Short-term: Certificates of deposit 2,871 2,871 2,871 Commercial paper 41,897 41,897 41,897 Total short-term and other 44,768 44,768 44,768 Total investments $ 506,667 $ 563,399 $ 563,399 SCHEDULE III – SUPPLEMENTARY INSURANCE INFORMATION (Dollars in thousands) Column A Column B Column C Column D Column E Column F Column G Column H Column I Column J Column K As of December 31 Year Ended December 31 Segment Deferred Policy Acquisition Costs Reserves for Unpaid Claims and Claim Adjustment Expenses Unearned Premiums Other Policy Claims and Benefits Payable Net Premium Earned Net Investment Income Benefits, Claims, Losses and Settlement Expenses Amortization of Deferred Policy Acquisition Costs Other Operaing Expenses Net Premiums Written (A) (A) (A)(B) Property/Casualty Insurance 2008 $ 2,326 $ 389,558 $ 17,183 —— $ 182,299 $ 17,063 $ 115,752 $ 23,437 $ 16,661 $ 176,814 2007 3,193 378,616 22,678 —— 179,065 19,595 107,781 20,985 19,644 169,587 2006 4,742 409,412 32,145 —— 169,766 19,548 112,604 14,155 17,584 172,228 (A) Allocations of certain expenses have been made to investment income, settlement expenses and other operating expenses and are based on a number of assumptions and estimates. Results among these categories would change if different methods were applied. (B) Commissions paid to the Parent Company have been eliminated for this presentation. Commission allowances relating to reinsurance ceded are offset against other operating expenses. SCHEDULE IV – REINSURANCE Form 10-K – Year Ended December 31, 2008 Baldwin & Lyons, Inc. and Subsidiaries (Dollars in thousands) SCHEDULE II CONDENSED FINANCIAL INFORMATION OF REGISTRANT Form 10-K - Year Ended December 31, 2007 Baldwin & Lyons, Inc. Condensed Balance Sheet December 31 2007 2006 Assets Investment in subsidiaries $ 370,371 $ 345,963 Due from affiliates 3,798 3,041 Investments other than subsidiaries: Fixed maturities 10,116 9,594 Limited partnerships 1,267 2,020 Short-term - 9,890 11,383 21,504 Cash and cash equivalents 11,514 16,110 Accounts receivable 7,280 12,248 Notes receivable from employees 2,228 2,343 Other assets 6,198 3,596 Total assets $ 412,772 $ 404,805 Liabilities and shareholders' equity Liabilities: Premiums payable $ 15,202 $ 29,453 Deposits from insureds 11,677 13,359 Current payable federal income taxes - 62 Other liabilities 5,175 4,304 32,054 47,178 Shareholders' equity: Common stock: Class A 113 113 Class B 537 533 Additional paid-in capital 47,899 45,692 Unrealized net gains on investments 36,876 47,229 Retained earnings 295,293 264,060 380,718 357,627 Total liabilities and shareholders' equity $ 412,772 $ 404,805 See notes to condensed financial statements Column A Column B Column C Column D Column E Column F Direct Premiums Ceded to Other Companies Assumed from Other Companies Net Amount % of Amount Assumed to Net Premiums Earned - Property/casualty insurance: Years Ended December 31: 2008 $ 188,285 $ 46,514 $ 40,528 $ 182,299 19.3 2007 185,781 40,094 33,378 179,065 16.0 2006 182,077 27,320 15,009 169,766 8.8 CONCERNING PROPERTY/CASUALTY INSURANCE OPERATIONS Form 10-K – Year Ended December 31, 2008 Baldwin & Lyons, Inc. and Subsidiaries (Dollars in thousands) SCHEDULE II CONDENSED FINANCIAL INFORMATION OF REGISTRANT Form 10-K - Year Ended December 31, 2007 Baldwin & Lyons, Inc. Condensed Statements of Income Year Ended December 31 2007 2006 2005 Revenue: Commissions and service fees $ 16,514 $ 15,024 $ 18,640 Dividends from subsidiaries 20,000 32,500 10,000 Net investment income 1,082 1,741 1,339 Net gains (losses) on investments (58) 278 5,632 Other 1,576 135 103 39,114 49,678 35,714 Expenses: Salary and related items 13,337 11,426 10,672 Other 3,632 3,810 4,683 16,969 15,236 15,355 Income before federal income taxes and equity in undistributed income of subsidiaries 22,145 34,442 20,359 Federal income taxes 687 95 3,551 21,458 34,347 16,808 Equity in undistributed income of subsidiaries 33,673 3,838 17,415 Net income $ 55,131 $ 38,185 $ 34,223 See notes to condensed financial statements Column A Column B Column C Column D Column E Column F Column G Column H Column I Column J Column K As of December 31 Year Ended December 31 Claims and Claim Adjustment Expenses Incurred Related to AFFILIATION WITH REGISTRANT Deferred Policy Acquisition Costs Reserves for Unpaid Claims and Claim Adjustment Expenses Discount, if any Deducted in Column C Unearned Premiums Earned Premiums Net Investment Income (1) Current Year (2) Prior Years Amorization of Deferred Policy Acquisition Costs Paid Claims and Claim Adjustment Expeneses Net Premiums Written Consolidated Property/Casualty Subsidiaries: (A) 2008 $ 2,326 $ 389,558 $ 5,342 $ 17,183 $ 182,299 $ 17,063 $ 132,829 $(17,077) $ 23,437 $ 128,619 $ 176,814 2007 3,193 378,616 5,591 22,678 179,065 19,595 129,065 (21,284) 20,985 112,776 169,587 2006 4,742 409,412 4,883 32,145 169,766 19,548 129,551 (16,947) 14,155 105,239 172,228 SCHEDULE II CONDENSED FINANCIAL INFORMATION OF REGISTRANT Form 10-K - Year Ended December 31, 2007 Baldwin & Lyons, Inc. Condensed Statements of Cash Flows Year Ended December 31 2007 2006 2005 Net cash provided by (used in) operating activities $ 9,371 $ 21,299 ($ 493) Investing activities: Purchases of long-term investments (9,781) (16,184) (3,047) Sales or maturities of long-term investments 9,331 13,298 9,965 Net sales of short-term investments 9,890 4,975 5,096 Decrease in notes receivable from employees 110 15 169 Distributions from limited partnerships 683 2,599 1,633 Net purchases of property and equipment (2,274) (824) (544) Other 925 111 199 Net cash provided by investing activities 8,884 3,990 13,471 Financing activities: Dividends paid to shareholders (25,062) (38,435) (14,029) Repayment on line of credit - - (6,000) Stock option exercises and other 2,211 6,804 1,618 Cost of treasury shares - (401) - Net cash used in financing activities (22,851) (32,032) (18,411) Increase (decrease) in cash and cash equivalents (4,596) (6,743) (5,433) Cash and cash equivalents at beginning of year 16,110 22,853 28,286 Cash and cash equivalents at end of year $ 11,514 $ 16,110 $ 22,853 See notes to condensed financial statements SCHEDULE III -- SUPPLEMENTARY INSURANCE INFORMATION Form 10-K - Year Ended December 31, 2007 Baldwin & Lyons, Inc. and Subsidiaries (Dollars in thousands) Column A Column B Column C Column D Column E Column F Column G Column H Column I Column J Column K As of December 31, Year Ended December 31, Reserves for Unpaid Other Benefits, Amortization Deferred Claims Policy Claims, of Deferred Policy and Claim Claims and Net Net Losses and Policy Other Net Acquisition Adjustment Unearned Benefits Premium Investment Settlement Acquisition Operating Premiums Segment Costs Expenses Premiums Payable Earned Income Expenses Costs Expenses Written (A) (A) (A) (B) Property/Casualty Insurance 2007 3,193 378,616 22,678 --- 179,065 19,595 107,781 20,985 19,644 169,587 2006 4,742 409,412 32,145 --- 169,766 19,548 112,604 14,155 17,584 172,228 2005 4,376 430,273 29,688 --- 186,165 14,840 140,622 14,066 9,850 182,793 (A) Allocations of certain expenses have been made to investment income, settlement expenses and other operating expenses and are based on a number of assumptions and estimates. Results among these catagories would change if different methods were applied. (B) Commissions paid to the Parent Company have been eliminated for this presentation. Commission allowances relating to reinsurance ceded are offset against other operating expenses. SCHEDULE IV -- REINSURANCE Form 10-K - Year Ended December 31, 2007 Baldwin & Lyons, Inc. and Subsidiaries (Dollars in thousands) Column A Column B Column C Column D Column E Column F % of Ceded Assumed Amount Direct to Other from Other Net Assumed to Premiums Companies Companies Amount Net Premiums Earned - Property/casualty insurance: Years Ended December 31: 2007 185,566 32,974 26,473 179,065 15.4 2006 181,491 24,841 13,116 169,766 7.7 2005 212,997 39,825 12,993 186,165 7.0 SCHEDULE VI--SUPPLEMENTAL INFORMATION CONCERNING PROPERTY/CASUALTY INSURANCE OPERATIONS Form 10-K - Year Ended December 31, 2007 Baldwin & Lyons, Inc. and Subsidiaries (Dollars in thousands) Column A Column B Column C Column D Column E Column F Column G Column H Column I Column J Column K As of December 31, Year Ended December 31, Reserves Claims and Claim Adjustment Expenses Incurred Related to Amortiza- for Unpaid Discount, tion of Deferred Claims if any Deferred Paid Claims AFFILIATION Policy and Claim Deducted Net (1) (2) Policy and Claim Net WITH Acquisi- Adjustment in Unearned Earned Investment Current Prior Acquisition Adjustment Premiums REGISTRANT tion Costs Expenses Column C Premiums Premiums Income Year Years Costs Expenses Written Consolidated Property/Casualty Subsidiaries: (A) 2007 $ 3,193 $ 378,616 $ 5,591 $ 22,678 $ 179,065 $ 19,595 $ 129,065 ($21,284) $ 20,985 $ 112,776 $ 169,587 2006 4,742 409,412 4,883 32,145 169,766 19,548 129,551 (16,947) 14,155 105,239 172,228 2005 4,376 430,273 4,476 29,688 186,165 14,840 154,314 (13,692) 14,066 105,629 182,793 (A) Loss reserves on certain reinsurance assumed and permanent total disability SIGNATURES Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. BALDWIN & LYONS,INC. March By /s/ Gary W. Miller Gary W. Miller, Chairman and CEO (Chief Executive Officer) Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. March By /s/ Gary W. Miller Gary W. Miller, Chairman and CEO By /s/ G. Patrick Corydon G. Patrick Corydon, Executive Vice President and CFO (Principal Financial and Accounting Officer) March By /s/ Joseph DeVito Joseph DeVito, Director, President and Chief Operating Officer March 24, 2009 By /s/ Stuart D. Bilton Stuart D. Bilton, Director March By /s/ Otto N. Frenzel Otto N. Frenzel SIGNATURES (CONTINUED) March By /s/ John M. O’Mara John M. O’Mara, Director March 24, 2009 By Thomas H. Patrick, Director March 24, 2009 By John Pigott, Director March 24, 2009 By /s/ Kenneth D. Sacks Kenneth D. Sacks, Director March 24, 2009 By /s/ Nathan Shapiro Nathan Shapiro, Director March 24, 2009 By /s/ Norton Shapiro Norton Shapiro, Director March 24, 2009 By /s/ Robert Shapiro Robert Shapiro, Director March 24, 2009 By /s/ Steven A. Shapiro Steven A. Shapiro, Director March 24, 2009 By /s/ John D. Weil John D. Weil, Director ANNUAL REPORT ON FORM 10-K ITEM 15(c)--CERTAIN EXHIBITS YEAR ENDED DECEMBER 31, BALDWIN & LYONS, INC. INDIANAPOLIS, INDIANA BALDWIN & LYONS, INC. Form 10-K for the Fiscal Year Ended December 31, INDEX TO EXHIBITS Exhibit No. Begins on sequential page number EXHIBIT 3(i)-- Articles of Incorporation of Baldwin & Lyons, Inc. as amended (Incorporated as an exhibit by reference to Exhibit 3(a) to the Company’s Annual Report on Form 10-K for the year ended December 31, 1986) N/A EXHIBIT 3(ii)-- By-Laws of Baldwin & Lyons, Inc., as restated (Incorporated as an exhibit by reference to Exhibit 99.1 to the Company’s Current Report on Form 8-K dated May 4, 2004) N/A EXHIBIT 10(a)-- 1981 Employees Stock Purchase Plan (Incorporated as an exhibit by reference to Exhibit A to the Company’s definitive Proxy Statement for its Annual Meeting held May 5, 1981) N/A EXHIBIT 10(b)-- Baldwin & Lyons, Inc. Employee Discounted Stock Option Plan (Incorporated as an exhibit by reference to Appendix A to the Company’s definitive Proxy Statement for its Annual Meeting held May 2, 1989) N/A EXHIBIT 10(c)-- Baldwin & Lyons, Inc. Deferred Directors Fee Option Plan (Incorporated as an exhibit by reference to Exhibit 10(f) to the Company’s Annual Report on Form 10-K for the year ended December 31, 1989) N/A EXHIBIT 10(d)-- Baldwin & Lyons, Inc. Amended Employee Discounted Stock Option Plan (Incorporated as an exhibit by reference to Exhibit for the year ended December 31, 1989) N/A EXHIBIT 10(e)-- N/A Code of Business Conduct, as amended May 3, 2005 (Incorporated as an exhibit by N/A EXHIBIT 21-- Subsidiaries of Baldwin & Lyons, Inc. filed electronically herewith EXHIBIT 23-- Consent of Ernst & Young LLP filed electronically herewith INDEX TO EXHIBITS (CONTINUED) Exhibit No. Begins on sequential page number of Form 10-K EXHIBIT 24-- Powers of Attorney for certain Officers and Directors filed electronically herewith EXHIBIT 31.1-- Certification of CEO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. filed electronically herewith EXHIBIT 31.2-- Certification of CFO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. filed electronically herewith EXHIBIT 32.1-- Certification of CEO pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. filed electronically herewith Section 906 of the Sarbanes-Oxley Act of 2002. filed electronically herewith |