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, 2007

 December 31, 2008

BALDWIN & LYONS, INC.

(Exact name of registrant as specified in its charter)

 

Indiana

35-0160330

(State or other jurisdiction of

Incorporation or organization

35-0160330

(I.R.S. Employer

Idenfication No.)

incorporation or organization)

Identification No.)

1099 North Meridian Street, Indianapolis, Indiana

46204

(Address of principal executive offices)

 (Zip46204

(Zip Code)

Registrant’s telephone number, including area code: (317) 636-9800(317) 636-9800

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act:

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)

2,650,0592,623,109 shares

 

Class B (nonvoting)

12,592,55512,130,978 shares

 

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

- 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.

 

-

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.

2

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.

3

 

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

- 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%)

 

 

 

 

 

 

 

 

-

5 -

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.

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6 -

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

7

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

 $247,540$ 235,773

Add differences:

 

Reinsurance recoverable on unpaid losses and LAE

 134,116157,925

 

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

(3,4004,500)

 

 

Liability reported on a GAAP basis

$378,616389,558

 

 

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.

8

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

9

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

 

- 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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

-

11 -

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

- 12 -

Marketing

 

The Company’s primary marketing areas are outlined on pages 2 and 3.

Since the mid-1980’s, Protective has focused its marketing efforts on large and medium trucking fleets. Protective has its largest market share in the larger trucking fleets (over 150 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 -

 

December 31

 

20072008

20062007_

 

Municipal bonds

46.9%50.7%

38.3%46.9%

 

U.S. Government obligations

4.65.0

14.54.6

 

Corporate and other bonds

2.311.2

5.62.3

 

Mortgage-backed securities

2.7

2.82.7

 

Short-term

22.311.2

18.322.3

 

Total fixed maturity and short-term

78.880.8

79.578.8

 

Common stocks

7.67.7

10.37.6

 

Limited partnerships

13.611.5

10.213.6

 

100.0%

100.0%

 

13

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)

 

20072008

20062007

 

Less than one year

41.1%45.3%

62.3%41.1%

 

1 to 5 years

45.340.3

27.045.3

 

5 to 10 years

.57.8

.8.5

 

More than 10 years

13.16.6

9.913.1

 

100.0%

100.0%

 

 

Average life of portfolio (years)

3.73.0

3.03.7

 

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

14

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.

15

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.

16

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 Equity SecuritiesRISK FACTORS

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 15.3% of the market value of the consolidated investment portfolio at December 31, 2007, but only 7.6% of the related cost basis, as long-term holdings have appreciated significantly. The Company’s equity securities portfolio consists of over 90 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 $3.7 million at December 31, 2007 (.7% 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 large unrealized gain at the current year end. 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 and all equity securities are considered to be available for sale. 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 2007, the Company disposed of numerous equity securities primarily to provide funds for a new investment program which was initiated after year end. Most of these disposals occurred during the fourth quarter. These sales generated both gains and losses but netted to a realized gain of $16.8 million. The net effect of other-than-temporary impairment adjustments included in the investment gains from equity securities was a positive $1.0 million, or four cents per share, for the year. 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, 2007, regardless of the evaluation of the issuer or the potential for recovery. Net unrealized gains on the equity security portfolio decreased to $54.5 million, before tax at December 31, 2007 from $73.0 million last year end primarily as the result of disposals, as noted above. The current net unrealized gain consists of $55.9 million of gross

- 15 -



unrealized gains and $1.4 million of gross unrealized losses with the average decline in value on issues where market was less than adjusted cost being 11.9%

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, 2007, the aggregate cost basis of these investments was $33.9 million and the aggregate market value was $80.9 million.

As a group, these investments experienced very favorable earnings during 2007, with the aggregate of the Company’s share of such earnings totaling approximately $23.2 million, producing a 40% pre-tax yield. The current year limited partnership value increase 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 various general partners.

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. At December 31, 2007, the total estimated unrealized gain included in the valuation of the Company’s limited partnership portfolio was $30.4 million. 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.

Investment Yields

The interest rate environment was relatively stable for much of 2007 but began to decline during the third quarter with accelerating decline during the fourth quarter. With few exceptions, the yield curve remained flat with yields on 30 day securities essentially equal to those on five and ten year obligations of similar quality considerations. As previously noted, a substantial portion of the Company’s short-term investments were redeployed to short to medium term municipal bonds during 2007 and 2006 to produce higher after tax yields. Overall, pre-tax net investment income remained flat during 2007 and after tax income increased $1.0 million, or 7%. A comparison of consolidated investment yields, before consideration of investment expenses, is as follows:

 

 2007•

2006The 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.

 

Before federal tax:•

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.

 

Investment income•

4.2%

4.0%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.

 

Investment income plus investment gains•

 12.1

7.3Operating 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.

 

After federal tax:•

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.

 

Investment income•

3.4

3.1The 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.

 

Investment income plus investment gains•

8.5

5.2Given 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.

Readers are also directed to Note B to the consolidated financial statements and to

•

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 Results of Operationsbeginning on page 23 of this document for additional details of investment operations.

Employees

As of December 31, 2007, the Company had 284 employees, representing an increase of 8 employees from December 31, 2006.

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

- 16 -



insurance which are currently written or may in the future be written by the Insurance Subsidiaries. Many of these companies have been in business for longer periods of time, have significantly larger volumes of business, offer more diversified lines of insurance coverage and have greater financial resources than the Company. In many cases, competitors are willing to provide coverage for rates lower than those charged by the Insurance Subsidiaries. Many potential clients self-insure workers’ compensation and other risks for which the Company offers coverage, and some concerns have organized “captive” insurance companies as subsidiaries through which they insure their own operations. Some states have workers’ compensation funds that preclude private companies from writing this business in those states. Federal law also authorizes the creation of “Risk Retention Groups” which may write insurance coverages similar to those offered by the Company.

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 trucking 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 this 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 beginning on page 56 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 captionReinsurance Recoverableand Notes D and L to the consolidated financial statements on pages 28, 48 and 56, respectively, 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 captionProperty/Casualty Losses and Loss Adjustment Expensesbeginning on page 3, the captionLoss and Loss Expense Reservesbeginning on page 29 and Note C to the consolidated financial statements beginning on page 47, respectively, 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 beginning on pages 53 and 56, respectively, of this Form 10-K.

- 17 -

•  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 captionMarket Riskbeginning on page 33 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 Securities and Limited Partnerships beginning on page 15 and Market Risk on page 33 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 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.

17

 

•

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 72,00081,000 square feet and expires in August, 2008,2013, with an option to renew for an additional five years.

 

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.

 

-

18 -

PART II

 

Item 5. MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

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, 2007,2008, there were approximately 400 record holders of Class A Common Stock and approximately 1,000 record holders of Class B Common Stock.

The table below sets forth the range of high and low sale prices for the Class A and Class B Common Stock for 20072008 and 2006,2007, as reported by the National Association of Security Dealers, Inc.NASDAQ and published in the financial press. The quotations reflect interdealer prices without retail markup, markdown or commission and do not necessarily represent actual transactions.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash

 

 

 

 

 

 

 

 

 

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.

Since the fourth quarter of 2003, At times, the Company has paid an extra cash dividend in all but three quarters in recognition of the Company’s more than adequate capitalization, the favorable income tax rates available to individuals on dividends as well as the Company’s excellent earnings over the past threefour years. Total extra dividends paid in 2007 and 2006 were $.65 and $1.70 per share, respectively. The Board intends to address the subject of dividends at each of its future meetings considering the Company’s earnings, returns on investments and its capital needs; however, shareholders should not expect extra dividends, if any, in the future to follow any predetermined pattern.

19

- 19 -

Corporate Performance

 

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, 2002,2003, in each of (i) Baldwin & Lyons, Inc., (ii) Nasdaq Insurance Stocks, and (iii) the Russell 2000 Index. All dividends are assumed to be reinvested.

 


 


 

 

 

 

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

20

- 20 -

Item 6.SELECTED FINANCIAL DATA

 

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, $1.65 and $.25$1.65 per share for 2008, 2007, 2006, 2005 2004 and 2003,2004, respectively.

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.

-

21 -

Item 7.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

FINANCIAL CONDITION AND                             RESULTS OF OPERATIONS

 

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 2007, positive2008, negative cash flow from operations totaled $27.3$3.5 million compared to $16.6a positive $27.3 million in 2006.2007. This comparative increasedecrease in operating cash flow resulted from non-recurring refundsincreases in loss settlements of premium related to retrospectively rated policies during 2006 of approximately $11 million.$24 million and increases in ceded premiums reflecting changes in reinsurance treaties.

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 increaseddecreased from 3.03.7 to 3.73.0 years during 2007 as it was determined that after-tax investment yields could be enhanced by moving portions of the short-term portfolio into high grade municipal bonds with short to moderate maturities.2008. The average duration of the Company’s fixed maturity portfolio is shorter than the contractual maturity average and much shorter than the duration of the Company’s liabilities. The Company also remains an active participant in the equity securities market using capital which is in excess of amounts considered necessary to fund current operations. The long-term horizon for the Company’s equity investments allows it to invest in positions where ultimate value, and not short-term market fluctuation, is the primary focus. Investments made by the Company’s domestic insurance subsidiaries are regulated by guidelines promulgated by the National Association of Insurance Commissioners which are designed to provide protection for both policyholders and shareholders.

The Company’s assets at December 31, 20072008 included $131$58.1 million in short-term and cash equivalent investments which are readily convertible to cash without market penalty and an additional $60.2$128.1 million of fixed maturity investments (at par) maturing in less than one year. The Company believes that these liquid investments, plus the expected cash flow from current operations, are more than sufficient to provide for projected claim payments and operating cost demands. In the event competitive conditions produce inadequate premium rates and the Company chooses to further restrict volume, the liquidity of its investment portfolio would permit management to continue to pay claims as settlements are reached without requiring the disposal of investments at a loss, regardless of interest rates in effect at the time. In addition, the Company’s reinsurance program is structured to avoid serious cash drains that accompany large losses.

Net premiums written by the Company’s U.S. insurance subsidiaries for 20072008 equaled approximately 36%41% of the combined statutory surplus of these subsidiaries. Premium writings of 100% to 200% of surplus are generally considered acceptable by regulatory authorities. Further, the statutory capital of each of the insurance subsidiaries substantially exceeds minimum risk based capital requirements set by the National Association of Insurance Commissioners. Accordingly, the Company has the ability to significantly increase its business without seeking additional capital to meet regulatory guidelines.

As more fully discussed in Note FR to the consolidated financial statements, at December 31, 2007, $70.52008, $86.7 million, or 19%26% of shareholders’ equity, represented net assets of the Company’s insurance subsidiaries which, at that time, could not be transferred in the form of dividends, loans or advances to the parent company because of minimum statutory capital requirements. However, management believes that these restrictions pose no material liquidity concerns for the Company. The financial strength and stability of the subsidiaries permit ready access by the parent company to short-term and long-term sources of credit. The Company maintains a $20 million unsecured line of credit and has no debt$9.0 million of drawings outstanding on this line at December 31, 2007.2008, the proceeds of which were used to purchase treasury stock.

-

22 -

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.

23

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.

24

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%), a small fleet trucking program decrease of $8.3 million (32%) and a large trucking fleet decrease of $14.2 million (22%). These decreases were partially offset by increasesan increase in the Company’s independent contractor programfleet transportation business of $23.9$1.4 million (42%(1%). Decreases The overall net decrease in direct premiums written volume werewas a result of ongoing rate competition and the resultant loss of business. The higher premium volume from the independent contractor 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.

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 assumed increase resulted primarily from new business generated by the Company’s affiliation with Paladin Catastrophe Management. Protective is the exclusive market for property catastrophe business produced by Paladin which focusesfocused on soliciting coverage from insurance companies with risks throughout the U.S. Midwest and limited coastal regions excluding Florida and California. This business complements other reinsurance assumed by ProtectiveCalifornia in different geographic regions. Premium volume from reinsurance assumed 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.2007.

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 truckingtransportation 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 5% to $179.1 million for 2007 from $169.8 million for 2006. Net premiums earned from all trucking-related insurancefleet transportation products (large trucking fleet, independent contractor and small fleet trucking) program increased by $1.8 million (2%). Additionally, net premiums earned from non-affiliated property reinsurance assumed increased by $13.4 million (102%). Net premiums earned from the Company’s private passenger automobile decreased by $6.8 million (19%).

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.

- 23 -

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 truckingtransportation and property

25

reinsurance, assumed, continued low frequency of large trucking claims, and premium volume declines in the Company’s private passenger automobile and small fleet products. The aforementionedproduct. These decreases in loss and loss expenses were largely offset by $12.2 million in losses from the Company’s expansion of its property catastrophe business during 2007. The 2007 consolidated loss and loss expense ratio was 60.2% compared to 66.3% for 2006. The Company’s loss and loss expense ratios for individual product lines are summarized in the following table.

 

 

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 Fleet truckingfleet transportation loss ratio for 2007 was favorably impacted by an increase in savings on prior year losses and a continued low frequency of extremely severe accidents. 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 tend to allow for more volatility in losses. The increase in the private passenger automobile loss ratio is associated with product modifications as competitive market conditions are ongoing. The lower small fleet trucking loss ratio resulted from a decrease in the frequency and severity of current year accidents as the Company discontinued marketing its products in certain unfavorable geographic areas and insured groups. The loss ratio for property reinsurance assumed increased as the result of the Company’s expansion of catastrophe coverages to the U.S. Midwest during 2007. An unusually large number of tornado and hail losses were incurred resulting in a loss ratio of 94.5% on this book of business. The property reinsurance assumed loss ratio for the year was 33.0%, or slightly lower than 2006 on the remainder of our otherproperty reinsurance assumed book of business.

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. Approximately $9.0 million of the $15.9 millionThe savings from fleet trucking relates to favorable claim settlements in the Company’s independent contractor program. The remaining savings relates to the Company’s large fleet trucking 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 large trucking fleet insureds, the length of time necessary to settle larger, more complex claims and the volatility of the truckingfleet 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 truckingtransportation 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 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 workers’ compensation business. Commission expense increased by an additional $2.9 million relatedagents and brokers including commissions relating to commissions on increasedhigher property reinsurance assumed premium volume. Additionally, 2006 operating expenses were favorably impacted by a recovery of nearly $1 million previously written off related to bankrupt reinsurers. After consideration for these three items, expenses before ceding allowances increased $.6 million, or 1.2% from 2006. In general, only commissions to independent agents, premium taxes and other acquisition costs vary directly with premium volume. 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.

Reinsurance ceded credits were $.8 million (69%) higher in 2007, resulting from the Company retaining a lesser percentage of the gross premium for its own account underchanges related to recent reinsurance treaties.

Substantially allA portion of fleet truckingtransportation 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

- 24 -



production of fleet truckingtransportation business. The ratio of net operating expenses of the insurance subsidiaries to net premiums earned was 30.9% during 2007 compared to 26.6% for 2006. Including the agency operations, and after elimination of inter-company commissions, the ratio of other operating expenses to operating revenue (defined as total revenue less gains on investments) was 27.7% for 2007 compared with 24.2% for 2006, reflective of the increase in commission expense, as discussed above.

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.

26

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 Compared to 2005

Direct premiums written for 2006 totaled $184.1 million, a decrease of $25.4 million (12%) from 2005. This decrease is primarily attributable to a decrease in fleet trucking liability premiums of $38.8 million (37%) from 2005 levels. Direct premium writings from the Company’s private passenger automobile program also decreased by $4.5 million (12%). These decreases were partially offset by increases in the Company’s independent contractor and small fleet trucking programs of $7.8 million (15%) and $10.5 million (67%), respectively. Large trucking fleet volume decreased as the result of ongoing rate competition, which resulted in the loss of business and the writing of lower limits for renewed accounts. Increased competitive pressures were also responsible for the decline in premium volume from the private passenger automobile program. The higher premium volume from the independent contractor program resulted from the addition of contractors by existing accounts and the increase in premium volume from the small fleet trucking program was due to geographic expansion, increased marketing efforts and slightly improved competitive conditions.

Premiums assumed from other insurers and reinsurers totaled $12.9 million during 2006, an increase of $1.2 million (10%) from 2005, which included $2.0 million of reinstatement premiums related to the 2005 hurricanes. The increase disregarding reinstatement premiums was 33%, reflective of higher premium rates following the hurricane activity of 2004 and 2005. Premium volume from reinsurance assumed will 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 decreased $14.8 million (37%) during 2006 to $24.8 million as the consolidated percentage of premiums ceded to direct premiums written decreased to 14% for 2006 from 19% for 2005. This decrease is reflective of the Company’s increased retention under reinsurance treaties effective in 2004 through 2006 covering large fleet trucking risks. The Company’s maximum retained loss under these treaties has increased over the last two years and, as a result, a lower percentage of the direct premiums are ceded to reinsurers. There were no other significant changes to reinsurance treaties during 2006.

After giving effect to changes in unearned premiums, net premiums earned decreased 9% to $169.8 million for 2006 from the record $186.2 million for 2005. Excluding inter-company reinsurance arrangements, net premiums earned from all trucking-related insurance products decreased by $9.6 million (7%). Net premiums earned from the Company’s private passenger automobile and discontinued small business workers’ compensation programs also decreased by $4.1 million (11%) and $2.7 million (99%), respectively. An increase in net premiums earned from non-affiliated reinsurance assumed of $1.2 million (10%) was offset by a $1.0 million (73%) decrease in premiums assumed from involuntary residual markets.

Pre-tax investment income increased 32% during 2006 to $19.5 million as yields were up 24% on average and invested assets increased by 5% despite lower cash flow from operations and the payment of over $38 million in cash dividends to shareholders during the year. This improvement followed similar increases in 2005. Short-term pre-tax rates increased most dramatically during 2006, averaging 55% higher than 2005. The after-tax investment income yield increased by 36% from 2005 as the movement of substantial portions of short-term funds into short and moderate term municipal bonds enhanced after-tax yields by 29% compared to the prior year.

Net gains on investments totaled $17.1 million in 2006 compared to $23.0 million in 2005. These totals include gains from both direct securities trading and investments in limited partnerships. The decrease in gains in 2006 is attributable to lower direct investing activities and a $3.6 million decline in the earnings of limited partnership investments. The Company’s investments in limited partnership ventures, consists primarily of securities trading and small venture capital activities and,

- 25 -



to a lesser extent, real estate development. The estimated market value of these investments was $44.7 million at December 31, 2005 and the aggregate of the Company’s share of earnings in these entities totaled approximately $11.2 million during 2006. While this lagged the $14.8 million of appreciation reported during 2005, it represented a return of over 25% for the year. 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 $5.0 million and estimated unrealized income of $6.2 million, as reported to the Company by the general partners. Inception to date unrealized gains included in the December 31, 2006 asset valuation total $23.8 million. The final component of investment gains, consisting of adjustments attributable to “other-than-temporary impairment,” was not significant during 2006 or 2005 and is more fully explained in Note B.

Losses and loss expenses incurred during 2006 decreased $28.0 million (20%) to $112.6 million. The decrease in losses incurred is due primarily to the lack of hurricane losses in 2006 and lower premium volume during 2006. 2006 loss and loss expenses included $1.5 million in hurricane losses, resulting from late reporting by ceding reinsurers of Hurricane Rita and Wilma losses, compared to $17.6 million during 2005. The 2006 consolidated loss and loss expense ratio was 66.3% compared to 75.5% for 2005. The Company’s loss and loss expense ratios for individual product lines are summarized in the following table.

 

 

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

The Fleet trucking loss ratio for 2006 was favorably impacted by an increase in savings on prior year loss developments and a lack of extremely severe accidents. The number of severe fleet trucking losses during 2005 was also below recent historical averages. 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 tend to allow for more volatility in losses. The increase in the private passenger automobile loss ratio is associated with product modifications in response to competitive conditions and the higher small fleet trucking loss ratio resulted largely from geographic expansion with higher loss ratios during the first half of the year and more favorable results in the second half.

The Company produced an overall savings on the handling of prior year claims during 2006 of $16.9 million. This net savings is included in the computation of loss ratios shown in the table insert. Approximately $7.2 million of this savings relates to retrospectively-rated contracts whereby return premiums were recorded concurrently with the loss savings. The majority of the remaining $9.7 million in savings relates to the Company’s large fleet trucking business, generally consistent with, but higher than, recent prior years. Because of the high limits provided by the Company to its large trucking fleet insureds, the length of time required to settle larger, more complex claims and the volatility of the trucking liability insurance business, the Company has long favored 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 large trucking fleets 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 2006, before credits for allowances from reinsurers, increased $1.2 million (2.6%) to $48.7 million. This increase is due primarily to a $1.4 million increase in commission expense related to reinsurance assumed. A large portion of commission on reinsurance assumed is dependent on experience. During 2005, hurricane losses resulted in significant reductions to contingent commissions on this business. The favorable experience during 2006 returned commissions to normal levels in relation to premium volume. Offsetting much of the reinsurance assumed commission change was the recovery during 2006 of nearly $1 million previously written off related to bankrupt reinsurers. After consideration for these two items, expenses before ceding allowances increased $.7 million, or 1.7% from 2005. Because much of the Company’s expense structure is fixed, expenses do not vary directly with revenue, which consists principally of net premiums earned from the insurance subsidiaries. In general, only commissions to independent agents, premium taxes and other acquisition costs vary directly with premium volume.

- 26 -

Reinsurance ceded credits were $6.6 million (85%) lower in 2006, resulting from the Company retaining a greater percentage of the gross premium for its own account under recent reinsurance treaties. This loss of ceding commission was the primary cause for the $7.8 million increase in net operating expenses for the year.

Substantially all fleet trucking 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 fleet trucking business. The ratio of net operating expenses of the insurance subsidiaries to net premiums earned was 26.6% during 2006 compared to 22.0% for 2005. Including the agency operations, and after elimination of inter-company commissions, the ratio of other operating expenses to operating revenue (defined as total revenue less gains on investments) was 24.2% for 2006 compared with 19.0% for 2005, reflective of the loss of nearly 85% of ceding commissions from reinsurers, as discussed above.

The effective federal tax rate for consolidated operations for 2006 was 28.0%. This rate is lower than the statutory rate primarily because of tax-exempt investment income and the reversal of accruals related to tax uncertainties rendered no longer necessary by the conclusion of IRS audits during 2006.

As a result of the factors mentioned above, net income for 2006 was $38.2 million compared to $34.2 million for 2005. Diluted earnings per share increased to $2.54 in 2006 from $2.30 in 2005. Earnings per share from operations, before gains on investments, was $1.80 in 2006 compared to $1.30, including hurricane losses that reduced operating income by $.68 per share in 2005.

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 77%70% of the Company’s assets are composed of investments at December 31, 2007.2008. Approximately 88%89% of these investments are publicly-traded, owned directly and have readily-ascertainable market values. The remaining 12%11% of investments are composed primarily of minority interests in several limited partnerships. These limited partnerships are engaged in the trading of public and non-public equity securities and debt, hedging transactions, real estate development and venture capital investment. These partnerships, themselves, do not have readily-determinable market values. Rather, the fair values recorded are those provided to the Company by the respective partnerships based on the underlying assets of the partnerships. While the majority of the underlying assets at December 31, 20072008 are publicly-traded securities, some have been valued by the respective partnerships using their experience and judgment. In addition, approximately $15.7

Approximately $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 likely to be 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, 2007,2008, the market value of these bond funds, as recorded in the financial statements, was 1.7%17.6% less than cost.

 

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

- 27 -

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 thea decline in value will be recognized in the income statement (other-than-temporary decline) as opposed to a charge to shareholders’ equity (temporary decline). Subsequent recoveries in value of investments which have incurred other-than-temporary impairment adjustments are accounted for as unrealized gains until the security is actually disposed of or sold. At December 31, 2007,2008, unrealized gains include $4.8$7.2 million of appreciation on investments previously adjusted for other-than-temporary impairment, compared to $2.7$11.7 million of impairment write-downs at that date. See Note B to the consolidated financial statements for additional detail with respect to this process. This evaluation process is subject to risks and uncertainties since it is not always clear what has caused a decline in value of an individual security or since some declines may be associated with general market conditions or economic factors which relate to an industry, in general, but not necessarily to an individual issue. The Company has attempted to minimize many of these uncertainties by adopting a largely objective evaluation process which results in income statement recognition of any investment which, over a six month period, is unable to recover from a 20% decline in value from our cost basis. However, to the extent that certain declines in value are reported as unrealized at December 31, 2007,2008, it is possible that future earnings charges will result should the declines in value increase or persist or should the security actually be disposed of while market values are less than cost. At December 31, 2007,2008, the total gross unrealized loss included in the Company’s investment portfolio was less than $2.0approximately $7.0 million. No individual issue constituted a material amount of this total. Had

27

this entire amount been considered other-than-temporary at December 31, 2006,2008, investment gainslosses would have decreasedincreased by $.09$.30 per share for the year, after tax. There would, however, have been no impact on total shareholdersshareholders’ equity or book value per share since the decline in value of these securities was already recognized as a reduction to shareholdersshareholders’ equity at December 31, 2007.

2008.

Reinsurance Recoverable

 

For the three years in the period ended December 31, 2007, reinsuranceReinsurance ceded transactions were as follows:follows for the years ended December 31 (dollars in thousands):

 

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 16%21% of total Company assets as of December 31, 2007.2008. In order to be able to provide the high limits required by the Company’s truckingfleet transportation company insureds, we share a significant amount of the insurance risk of the underlying contracts with various insurance entities through the use of reinsurance contracts. Some reinsurance contracts provide that a loss be shared among the Company and its reinsurers on a predetermined pro-rata basis (“quota-share”) while other contracts provide that the Company keep a fixed amount of the loss, similar to a deductible, with reinsurers taking all losses above this fixed amount (“excess of loss”). Some risks are covered by a combination of quota-share and excess of loss contracts. The computation of amounts due from reinsurers is based upon the terms of the various contracts and follows the underlying estimation process for loss and loss expense reserves, as described below. Accordingly, the uncertainties inherent in the loss and loss expense reserving process also affect the amounts recorded as recoverable from reinsurers. Estimation uncertainties are greatest for claims which have occurred but which have not yet been reported to the Company. Further, the high limits provided by the Company’s insurance policies for truckingfleet transportation liability and workers’ compensation, provide more variability in the estimation process than lines of business with lower coverage limits.

 

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.

- 28 -

 

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 highestsuperior credit ratings available are utilized. However, as noted above, reinsurers are often not called upon to satisfy their obligations for several years and changes in credit worthiness can occur in the interim period. Reviews of the current financial strength of each reinsurer are made continually and, should impairment in the ability of a reinsurer be determined to exist, current year operations would be charged in amounts sufficient to provide for the Company’s additional liability. Such charges 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. See Notes D and L to the consolidated financial statements, on pages 48 and 56, for further discussion of reinsurance and concentrations of credit risk with respect to reinsurance recoverable.

 

28

Loss and Loss Expense Reserves

The Company’s loss and loss expense reserves for each significant segmentproduct group are shown in the following table for direct and assumed and on a net of reinsurance basis at December 31, 2008 and 2007 and 2006.(dollars in thousands). Those lines of businessproduct groups individually comprising less than three percent of the Company’s total reserves are shown in the aggregate as “All other”.

 

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. OurThe Company’s claims range from the very routine private passenger automobile “fender bender” to the highly complex and costly third party bodily injury claim 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 provided in the Company’s truckingfleet transportation liability policies provide for greater volatility in the reserving process for more serious claims. Court rulings, legislative actions and trends in jury awards also play a significant role in the estimation process of larger

- 29 -

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 loss adjustment expenseLAE reserve development.

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.

 

29

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.

- 30 -

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.

30

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. OurAs previously noted, our claims range from the very routine private passenger automobile “fender bender” to the highly complex and costly third party bodily injury claim 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 provided in the Company’s truckingfleet transportation liability policies provide for greater volatility in the reserving process for more serious claims. Court rulings, legislative actions 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. 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 loss adjustment expense reserve development.

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 truckingtransportation excess product where insured’s policies of insurance combine large self-insured retentions with high policy limits, ranges of reserve estimates are not established during the reserving process. However, basic assumptions that could potentially impact future volatility of our valuations of current loss and loss expense reserve estimates include, but are not limited to, the following:

•  Consistency in the individual case reserving processes

•  The selection of loss development factors in the establishment of bulk reserves for incurred but reported losses and loss expenses

•  Projected future loss trend

•  Expected loss ratios for the current book of business, particularly the Company’s large fleet excess product, where the number of accounts insured, selected self-insured

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 Fleet truckingfleet transportation product. Perhaps the most significant example of sensitivity to variation in the key assumptions is the loss ratio selection for the Company’s large fleet excess product for policies subject to certain recent major reinsurance treaties (approximately $77.9$84.9 million, or approximately 27% of, carried direct reserves for Fleet trucking)fleet transportation). A 10 percentage point increase or decrease in the loss factors actually utilized in the Company’s reserve determination at December 31, 2007 would increase or decrease gross and net loss reserves by approximately $12.1 million and $5.9 million, respectively. Similarly, a 20 percentage point increase or decrease would increase or decrease gross and net loss reserves by $24.3 million and $11.8 million, respectively.

- 31 -

 

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, 20072008 and 20062007 consisted of (dollars in thousands):

 

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)

 

31

Deferred tax assets at December 31, 2007,2008, include approximately $10,412$15.6 million related to loss and loss expense reserves of which, $9.6 million relates to policy liability discounts required by the Internal Revenue Code which are perpetual in nature and, in the absence of the termination of business, will not reverse to a material degree in the foreseeable future. An additional $1.0$4.1 million relates to impairment adjustments made to investments, as required by accounting regulations. Deferred tax assets also incluse $7.8 million related to FIN 48 reclassification. See FIN 48 discussion below. The sizable unrealized gains in the Company’s investment portfolios would allow for the recovery of this deferred tax at any time. Limited partnership investments represent $2.4 million of deferred tax assets. The balance of deferred tax assets, approximately $2.9$1.6 million, consists of various normal operating expense accruals and is not considered to be material. As a result of its analysis, management does not consider any of these assets to be impairedhas determined that no valuation allowance is necessary at December 31, 2007.2008.

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 truckingtransportation business, a majority of the Company’s premiums are charged as a percentage of an insured’s gross revenue or payroll. As these charging bases increase with inflation, premium revenues are immediately increased. The remaining premium rates charged are adjustable only at periodic intervals and often require state regulatory approval. Such periodic increases in premium rates may lag far behind cost increases.

 

To the extent inflation influences yields on investments, the Company is also affected. The Company’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

- 32 -

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 investment. (Seeinvestment (see comments under Market Risk, following.)following).

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

32

market value of the Company’s equity positions at December 31, 20072008 was $99.7$63.2 million or approximately 15%12% of invested assets. This market valuation includes $54.5$23.1 million of appreciation over the cost basis of the equity security investments. Funds invested in the equities market are not considered to be assets necessary for the Company to conduct its daily operations and, therefore, can be committed for extended periods of time. The long-term nature of the Company’s equity investments allows it to invest in positions where ultimate value, and not short-term market fluctuations, is the primary focus.

 

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 $338.0$364.3 million at December 31, 2007.2008. Approximately 91%83% of this portfolio is made up of U.S. Government and government agency obligations and state and municipal debt securities; 87%85.6% of the portfolio matures within 5 years; and the average life of the Company’s fixed maturity investments is approximately 3.73.0 years. Although the Company is exposed to interest rate risk on its fixed maturity investments, given the anticipated duration of the Company’s liabilities (principally insurance loss and loss expense reserves) relative to investment maturities, even a 100 to 200 basis point increase in interest rates would not have even a moderate impact on the Company’s ability to conduct daily operations or to meet its obligations.

 

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.

 

We estimate thatA 10 percentage point increase or decrease in the loss factors actually utilized in the Company’s reserve determination at December 31, 2008 would increase or decrease gross loss reserves by approximately $17.2 million. On a 100net basis, a 10 percentage point increase in market interest ratesloss ratio would have resultedincrease net loss reserves by approximately $7.8 million whereas a 10 percentage point decrease would decrease net loss reserves by approximately $9.4 million. Similarly, a 20 percentage point increase or decrease would increase or decrease gross loss reserves by approximately $34.3 million. On a net basis, a 20 percentage point increase in loss ratio would increase net loss reserves by approximately $15.5 million whereas a pre-tax20 percentage point decrease would decrease net loss reserves by approximately $20.4 million with the difference attributable to minimums and maximums included in the fair value of fixed maturity investments of approximately $5.6 million at December 31, 2007. Similarly, a 100 basis point decrease in market interest rates would have resulted in an estimated pre-tax gain in the fair value of these instruments of approximately $6.1 million at December 31, 2007. Note, however, that the hypothetical loss mentioned above would only be realized if the Company was obligated to sell bonds prior to maturity, which is extremely unlikely. The aggregate value of money

- 33 -

market and short-term investments, bonds maturing within twelve months and expected positive cash flow from operations for 2007 is equal to more than 100% of net loss and loss expense reserves at December 31, 2007.various reinsurance contracts.

 

The Company’s exposure to foreign currency risk is not materialmaterial.

33

Contractual Obligations

The table below sets forth the amounts of the Company’s contractual obligations at December 31, 2007.2008.

 

 

 

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 $132.8$160.0 million at December 31, 2007,2008, would approximate that of the above projected direct reserve payout.

 

The investment commitments in the above table relate to maximum unfunded capital obligations for limited partnership investments and other investments at December 31, 2007 and were funded through the disposal of equity securities during the fourth quarter of 2007, the proceeds of which are included in cash equivalent investments at year end.2008.

 

- Borrowings are made under a line of credit with a current expiration of May, 2011.

34 -

ANNUAL REPORT ON FORM 10-K

 

 

 

ITEM 8--FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

 

 

YEAR ENDED DECEMBER 31, 20072008

 

BALDWIN & LYONS, INC.

 

INDIANAPOLIS, INDIANA

 

-

35 -

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, 20072008 and 2006,2007, and the related consolidated statements of income,operations, changes in equity other than capital, and cash flows for each of the three years in the period ended December 31, 2007.2008. Our audits also included the financial statement schedules listed in the Index at Item 15(a). These financial statements and schedules are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and schedules based on our audits.

 

We conducted our audits in accordance with 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, 20072008 and 2006,2007, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2007,2008, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedules, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein.

 

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Baldwin & Lyons, Inc.’s and subsidiaries internal control over financial reporting as of December 31, 2007,2008, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 12, 200816, 2009 expressed an unqualified opinion thereon.

 

 

 

/s/ ERNST & YOUNG LLP

 

 

Indianapolis, Indiana

March 12, 200816, 2009

-

36 -

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

 

                      -

 

               1,613

 

 

 

$ 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.

 

 

 

 

 

 

-

Consolidated Balance Sheets      
Baldwin & Lyons, Inc. and Subsidiaries  
                                                                        

December 31

    

2008

  2007 
Assets  (Dollars in thousands)
Investments:  
   Fixed maturities  $364,280 $338,011 
   Equity securities   63,200  99,736 
   Limited partnerships   59,864  80,884 
   Short-term and other   33,820  44,768 
    521,164  563,399 
Cash and cash equivalents   16,657  82,137 
Accounts receivable--less allowance (2008, $650; 2007, $820)   29,701  33,412 
Accrued investment income   5,019  4,762 
Reinsurance recoverable   159,989  132,811 
Prepaid reinsurance premiums   4,914  5,844 
Deferred policy acquisition costs   2,326  3,193 
Property and equipment--less accumulated depreciation  
   (2008, $9,003; 2007, $7,676)   11,582  9,265 
Notes receivable from employees   2,199  2,228 
Other assets   13,602  5,782 
Deferred federal income taxes   10,590  -- 
   $777,743 $842,833 
Liabilities and Shareholders' Equity  
Reserves:  
   Losses and loss expenses  $389,558 $378,616 
   Unearned premiums   17,183  22,678 
    406,741  401,294 
Reinsurance payable   2,862  7,261 
Short-term borrowings   9,000  -- 
Accounts payable and other liabilities   27,076  31,874 
Current federal income taxes   1,997  10,568 
Deferred federal income taxes   --  11,118 
    447,676  462,115 
Shareholders' equity:  
   Common stock, no par value:  
     Class A voting -- authorized 3,000,000 shares;  
        outstanding -- 2008, 2,623,109; 2007, 2,650,059 shares   112  113 
     Class B non-voting -- authorized 20,000,000 shares;  
        outstanding -- 2008, 12,163,251; 2007, 12,592,555   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 
   $777,743 $842,833 


37 -

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.

 

 

 

 

 

 

 

 

- 38 -


    Consolidated Statements of Changes in Equity Other Than Capital

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

 

 

- 39 -

38

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

See notes to consolidated financial statements.

 

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

 

39

- 

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

 

40 -

Notes to Consolidated Financial Statements

Baldwin & Lyons, Inc. and Subsidiaries

(Dollars in thousands)thousands, except per share data)

 

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 estimates:Estimates: Preparation of the consolidated financial statements requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates.

Cash and cash equivalents:Cash Equivalents: The Company considers investments in money market funds to be cash equivalents. Carrying amounts for these instruments approximate their fair values.

Investments:Carrying amounts for fixed maturity securities (bonds 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.

41

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 premium and are not refundable in the event of policy cancellation.premium. If it is determined that expected losses and deferred expenses will likely exceed the related unearned premiums, the asset representing deferred policy acquisition costs is reduced and an expense is charged against current operations to reflect any such premium deficiency. In the event that the expected premium deficiency exceeds deferred policy acquisition costs, an additional liability would be recorded with a corresponding expense to current operations for the amount of the excess premium deficiency. Anticipated investment income is considered in determining recoverability of deferred

acquisition costs.

- 41 -



Note A - Significant Accounting Policies (continued)

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 assumed contracts covering catastrophic events are recorded concurrently with the related loss.

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 assumed using the periodic method. Under the periodic method, premiums from foreign property reinsurance assumed are recognized as revenue ratably over the contract term, and claims, including an estimate of claims incurred but not reported, are recognized as they occur.

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. Deferred income tax assets and liabilities are recognized for temporary differences between the financial statement and tax return bases of assets and liabilities based on enacted tax rates and laws. The deferred tax benefits of the deferred tax assets are recognized to the extent realization of such benefits is more likely than not. Deferred income tax expense or benefit generally represents the net change in deferred income tax assets and liabilities during the year. Current income tax expense represents the tax consequences of revenues and expenses currently taxable or deductible on various income tax returns for the year reported.

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 “Black-Scholes-Merton”“Black-Scholes” option pricing model to value options granted to employees and non-employee directors in accordance with Statement of Financial Accounting Standards No. 123R,Share-Based Payment, adopted January 1, 2006 with no material effect. Compensation costs for all share-based awards to employees and non-employee directors are measured based on the grant date fair value of the award and are recognized over the period(s) during which the employee or non-employee director is required to perform service in exchange for the award (the vesting period).

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.

42

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 comprehensive income asTotal realized and unrealized income. Itemsitems of other comprehensive income included in this statement are referred to asChange in unrealized gains (losses) on investments andForeign exchange adjustment. A reclassification adjustment to other comprehensive income is made forGains during period included in net income.

Reclassification:Certain prior year balances have been reclassified to conform to the current year presentation.

- 42 -



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

 

-

43 -

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

)

 

TheUnrealized losses in the Company’s fixed maturity investment portfolio is sensitive toare generally the result of interest rate fluctuations which impactas well as the fair valuedisruption of credit markets occasioned by recent financial market turmoil. The largest unrealized loss for any individual securities. Accordingly,issue is approximately 12% of original or adjusted cost and the average unrealized losses onloss for all fixed maturity securities reported above were generally caused by the effectin a loss position at December 31, 2008 is approximately 3% of a rising interest rate environment on certain securities with stated interest rates currently below market rates.original or adjusted cost. The Company has the ability and intent to hold these fixed maturity securities until their full cost can be recovered. Therefore, the Company does not believe the unrealized losses represent an other-than-temporary impairment as of December 31, 2007.2008.

 

The fair value and the cost or amortized cost of fixed maturity investments, at December 31, 2007,2008, by contractual maturity, are shown below. Actual maturities may differ from contractual maturities because borrowers have, in some cases, the right to call or prepay obligations with or without call or prepayment penalties. Pre-refunded municipal bonds are classified based on their pre-refunded call dates.

 

 

 

 

 

 

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

44

- 44 -

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 20072008 net gainslosses from limited partnerships, as shown in the above table, include approximately $15,300$37,000 of unrealized gainslosses as reported in the net incomeloss of the various partnerships. Shareholders’ equity includes approximately $30,500 million,$8,000, net of deferred federal income taxes, of earnings yet undistributed by limited partnerships as of December 31, 2007.2008.

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 $1,600$2,500 to various limited partnerships as of December 31, 2007.2008.

45

Note B – Investments (continued)

The Company has invested a total of $24,000 in three limited partnerships, with an aggregate estimated market value of $58,380$29,878 at December 31, 2007,2008, that are managed by organizations in which two directors of the Company are executive officers, directors and owners. The Company’s ownership interest in these limited partnerships ranges from 4%3% to 25%24%. These limited partnerships added $28,502, net of fees, to investment losses in 2008, and $19,177 $7,942 and $7,145,$7,942, net of fees, to investment gains in 2007 and 2006, and 2005

- 45 -

Note B – Investments (continued)

respectively. During 2008, 2007 2006 and 2005,2006, the Company has recorded management fees of $781, $765 $604 and $481,$604, respectively, and performance-based fees of $0, $4,902 $1,587 and $1,687,$1,587, respectively, to these organizations for management of these limited partnerships. The Company has been informed that the fee rates applied to its investments in these limited partnerships are the same as, or lower than, the fee rates charged to unaffiliated customers for similar investments.

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 $2,349$1,865 and $16,862,$17,467, respectively, at December 31, 2007.2008. The Company has been informed that commission and management rates charged by this broker-dealer to the Company are commensurate with rates charged to non-affiliated customers for similar investments. Total commissions and fees earned by the broker-dealer and affiliates on these transactions and for advice and consulting were approximately $171, $170 and $148 during 2008, 2007 and $279 during 2007, 2006, and 2005, respectively. The Company had previously entered into an agreement with an associate of this broker-dealer for management of a portion of its equity securities portfolio. That agreement was terminated during 2005. That associate earned performance-based compensation and management services fees and expense reimbursements totaling approximately $90 during 2005. The Company has been informed that the broker-dealer retained none of this compensation for its own account.

The fair value of regulatory deposits with various insurance departments in the United States and Canada totaled $23,432$26,023 at December 31, 2007.2008.

Short-term investments at December 31, 20072008 include $2,900$3,000 in foreign time certificates of deposit.

The Company’s limited partnerships include one significant investment accounted for using the equity method, which exceeds 10% of earnings.method. This limited partnership investment’s value as of December 31, 2008 and 2007 was $18,761 and 2006 was $44,716, and $27,492, respectively. At December 31, 2007,2008, the Company’s estimated ownership interest in this limited partnership investment was less than 4%.

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

 

- 46 -

46

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 indicated.indicated for the years ended December 31:

 

 

 

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 $21,284 was$17,077 developed during 20072008 in the settlement of claims occurring on or before December 31, 2006,2007, with similar savings being developed during the prior two calendar years on losses occurring on or before years ended December 31, 20052006 and 2004.2005. These savings are the result of the settlement of claims at amounts lower than previously reserved and changes in estimates of losses incurred but not reported as part of the normal reserving process.

 

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 accident and health business resulted in the concurrent recording of return premiums of approximately $662 $4,738 and $4,484$4,738 for the years ended December 31, 2007 and 2006, and 2005, respectively. Conversely, the deficiency on retrospectively-rated business recorded in 2008 related to approximately $100 of additional premium. As more fully discussed in Note D, the Company has generally increased its per occurrence retention of risk related to truckingtransportation liability business overduring the past several years.period 2001 to 2006. The increased net retention per occurrence is reflected in the increasingly favorable developments on other direct business during 2008, 2007 2006 and 2005.2006. These trends were considered in the establishment of the Company’s reserves at December 31, 20072008 and 2006.2007.

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 $11,100$11.1 million to date and carries a remaining reserve of $8,900$8.9 million at December 31, 2007.2008.

-

47 -

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, 20072008 and 2006,2007, loss reserves have been reduced by approximately $5,591$5,342 and $4,883,$5,591, respectively. Discounting is applied to these claims since the amount of periodic payments to be made during the lifetime of claimants is fixed and determinable.

Loss reserves have been reduced by estimated salvage and subrogation recoverable of approximately $4,069$5,119 and $3,845$4,069 at December 31, 2008 and 2007, and 2006, respectively.

Note D -– Reinsurance

The insurance subsidiaries cede portions of their gross premiums written to certain other insurers under excess and quota share treaties and by facultative placements. Risks are reinsured with other companies to permit the recovery of a portion of related direct losses. Management determines the amount of net exposure it is willing to accept generally on a product line basis. Certain treaties covering large fleet truckingtransportation include annual deductibles which must be exceeded before the Company can recover under the terms of the treaty. In these cases, the Company retains a higher percentage of the direct premium in consideration of the deductible provisions. The Company remains liable to the extent the reinsuring companies are unable to meet their obligations under reinsurance contracts.

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

ReinsuranceThe following table summarizes the magnitude of reinsurance ceded and assumed premiums for 2007, as shown in the table above, are presented net of a retrocession purchased to limiton the Company’s probable maximum loss to amounts considered prudent by management. The cost of this retrocession was $4,800.net premium written and earned for the most recent three years:

 

 

 

 

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 2006 and 20052006 have been reduced by ceded reinsurance recoveries of approximately $53,398, $4,981 and $14,026, and $39,389, respectively. The increase in 2008 recoveries is a result of the Company having reached its annual aggregate deductible on one of its reinsurance treaties. Ceded reinsurance premiums and loss recoveries for catastrophe reinsurance contracts were not material.

Net losses and loss expenses incurred for 2008, 2007 2006 and 20052006 include approximately $22,003, $14,638 and $2,623, and $20,152respectively, relating to property reinsurance assumed from non-affiliated insurance or reinsurance companies, including involuntary residual market pools. The assumed reinsurance losses in 20062008 and 2005 included $1,457 and $17,595 respectively, related to hurricanes Katrina and Wilma, before reinstatement premium.2007 reflect an overall increase in the Company’s reinsurance assumed portfolio.

-

48 -

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

49

- 49 -

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 2005 were $14,502, $16,097, and $12,147, respectively.

 

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, 2007.2008. As of December 31, 2007,2008, the Internal Revenue Service had completed examinations and settled all audits through the Company’s 2004 tax year.

 

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, 20072008 and December 31, 20062007 were not material.

 

A reconciliation of the beginning and ending amounts of unrecognized federal income taxes (credits) is as follows:

 

2007

Balance at January 1, 2007

$10,301

Reductions for tax positions of the current year

  (142)

Reductions for tax positions of prior years

  (2,378)

Balance at December 31, 2007

$7,781

 

 

 

 

 

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

 

 

50

Note F - 50 -Shareholders' Equity

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 


Class A

 

 

 


Class B

 

 

 

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, 20072008 includes $371,712$330,677 representing GAAP shareholder’s equity of insurance subsidiaries, of which $55,363$39,803 may be transferred by dividend or loan to the parent company during calendar year 20082009 with proper notification to, but without approval from, regulatory authorities. An additional $233,951$204,135 of shareholder’s equity of such insurance subsidiaries may be advanced or loaned to the parent company with prior notification to and approval from regulatory authorities.

Net incomeNote G – Other Operating Expenses

 Details of the insurance subsidiaries, as determined in accordance with statutory accounting practices, was $35,605, $26,632, and $18,221 for 2007, 2006 and 2005, respectively. Consolidated statutory surplus for these subsidiaries was $360,965 and $343,974 at December 31, 2007 and 2006, respectively.

Minimum statutory surplus necessaryother operating expenses for the insurance subsidiaries to satisfy statutory risk based capital requirements was $70,489 atyears ended December 31, 2007.31:

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

 

 

- 51 -

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 2005 were $1,132, $1,137, and $1,093, respectively.

 

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, 20072008 there were 158,503124,379 shares (Class A) and 438,583380,833 shares (Class B) outstanding which are eligible for repurchase by the Company.

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 $197, for 2007, 2006, respectively.

51

Note I - Stock Purchase and 2005, respectively.Option Plans (continued)

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 20072008 and 2006.2007. Additionally, no discounted options were outstanding at December 31, 20072008 and 2006.2007. Prior to May, 2005, discounted options were granted to non-employee directors in lieu of cash directors’ fees. In addition, during 2005 non-employee directors were each granted 1,500 options at market value on the date of grant as part of their regular annual directors’ fees. During 2006, all market value options were terminated, without compensation to the directors, and all subsequent directors’ fees have been paid in cash. It is not anticipated that any additional grants will be made to directors under this plan as part of their regular directors’ compensation.

The fair value of the market value options granted during 2005 was determined using a Black-Scholes-Merton option pricing model with the following assumptions: risk-free interest rate of 3.0% and 1.0%, respectively; dividend yield of 1.6%; volatility factor of the expected market price of the Company’s common stock of .30; and an expected life of the option of 7 years.

The weighted-average grant-date fair value of options granted during 2005 at prices below market value was $25.10. The weighted-average grant-date fair value of options granted during 2005 at market was $5.33. The total intrinsic value of options exercised during 2006 was $484. No options were outstanding or exercised during 2007 2006 and 2005 was $0, $484, and $27, respectively.or 2008.

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, 2007. Discounted2008 and no options granted to employees in the past were exercisable immediately. Market value options granted to employees in the past vested over three years. All options expired ten years from the date of grant. No options remainremained outstanding at December 31, 2008 and 2007. Additionally, there were no option exercises during 2008. During 2007 and 2006, all options were exercised at $20.60 per share.

A summary of option activity under the Employee Plan as of December 31, 2007, and changes during the year then ended is presented below:

Aggregate

Intrinsic

Options

Value ($000)

Outstanding at beginning of year

107,350

$              -

Exercised

107,350

Outstanding and exercisable at end of year

-

$              -

- 52 -

Note I - Stock Purchase and Option Plans (continued)

The total intrinsic value of options exercised during 2007 2006 and 20052006 was $722 and $1,684, and $420, respectively. No options were outstanding or exercised during 2008.

Cash received from option exercise under all share-based payment arrangements for the years ended December 31, 2007 2006, and 20052006 was $2,211, , $6,804, and $1,618,6,804, respectively. The federal tax benefit realized for the tax deductions from option exercise of the share-based payment arrangements totaled $253 $759, and $157,$759, respectively, for the years ended December 31, 2007 2006, and 2005.2006. Under the terms of the Employee Plan, $253 $589, and $147,$589, respectively, of tax benefits realized were passed on to employees in the form of cash for the years ended December 31, 2007 2006 and 2005.2006.

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 $2,228$2,199 and $2,343$2,228 relating to such loans was outstanding at December 31, 20072008 and 2006,2007, respectively. Loans carry interest rates ranging from 4.75% to 6%, payable annually. The underlying securities, with value in excess of the related debt, serve as collateral for these full-recourse loans, which must be repaid no later than 10 years from the date of issue. This loan program was terminated in 2002.

Note J - Reportable Segments

The Company andhas two reportable business segments in its consolidated subsidiaries marketoperations: property and underwrite casualty insurance inand property reinsurance. Previously, the Company had four major specialty areas (reportable segments): (1)reportable business segments: fleet trucking, (2)small fleet trucking, private passenger automobile (3)and reinsurance assumed. As of July 1, 2008, the Company completed a restructuring of internal product management whereby divisions, which constituted the previously reported segments other than reinsurance assumed, were eliminated and all functional operations of the Company were vertically integrated. As such, the management of all directly produced property and casualty insurance business is managed as a single segment. Accordingly, the Company has revised its operating segments to reflect the new management structure for all periods presented. Management believes this segment structure better reflects the current operations and future business plan of the Company. Amounts applicable to the historical fleet trucking, small fleet trucking, private passenger automobile segments as well as the all other category, consisting of residual market assignments and (4)discontinued products, for the assumption of reinsurance.current and prior periods have been reclassified into the property and casualty insurance segment. The fleet truckingproperty and casualty insurance segment provides multiple line insurance coverage primarily to large trucking fleets which generally retain substantial amounts of self-insurance andfleet transportation companies as well as to medium-sized trucking fleets on a first dollar or small deductible basis. The private passengerindependent contractors who contract with fleet transportation companies. In addition, personal automobile segment provides motor vehicle liability and physical damage coveragesproducts are provided to individuals. The small fleet truckingproperty reinsurance segment, provides commercial automobile coverages to small trucking fleets and owner/operators. Theformerly known as reinsurance assumed segment accepts cessions from other insurance companies as well as retrocessions from selected reinsurance companies, principally reinsuring against catastrophes.

52

The Company’s reportable segments are business units that operate in the property/casualty insurance industry and each offers products to different classes of customers. The reportable segments are managed separately due to the differences in underwriting criteria used to market products to each class of customer and the methods of distribution of the products each reportable segment provides. Segment information shown in the table below as “all other” includes products provided by the Company to assigned risks and residual markets as well as the runoff of discontinued product lines, including small business workers’ compensation discontinued in the fourth quarter of 2004.Note J - Reportable Segments (continued)

The Company evaluates performance and allocates resources based on gainpast or lossexpected results from insurance underwriting operations before income taxes. Underwriting gain or loss does not include net investment income or gains or losses on the Company’s investment portfolio. All investment-related revenues are managed at the corporate level. Underwriting gain or loss for the fleet truckingproperty and casualty insurance segment includes revenue and expense from the Company’s agency operations since the agency operations serve as an exclusivea primary direct marketing facility for this segment. Underwriting gain or loss also includes fee income generated by each segment in the course of its underwriting operations. Management does not identify or allocate assets to reportable segments when evaluating segment performance and depreciation expense is not material for any of the reportable segments. The accounting policies of each reportable segment are the same as those described in the summary of significant accounting policies.

- 53 -

Note J - Reportable Segments (continued)

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 above amounts for voluntary reinsurance assumed include certain intersegment reinsurance agreements. Intersegment premiums earned during 2007, 2006 and 2005 were $2,314, $2,283 and $1,570, respectively. Intersegment losses and loss expenses incurred during 2007, 2006 and 2005 were $2,994, $3,005 and $1,595, respectively. Reinsurance assumed premium written for 2007 is shown net of $4,800 representing the cost of a retrocession limiting the Company’s probable maximum loss on its assumed book of business.

- 54 -

Note J - Reportable Segments (continued)

The following tables are reconciliations oftable reconciles reportable segment revenues and profits to the Company’s consolidated revenue and income (loss) before federal income taxes, respectively.taxes:

 

 

 

 

 

 

 

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 fleet truckingproperty and casualty insurance segment represents approximately $93,852,$13,773, $13,772 and $69,636 and $62,570 of the Company’s consolidated direct and assumed premium written in 2008, 2007 and 2006, respectively. An additional $99,589, $80,080 and 2005, respectively.$0 for 2008, 2007 and 2006, respectively, is placed with the Company by a non-affiliated broker on behalf of this same customer.

53

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

 

 

Options to purchase 35,422 shares of the Company’s Class B common stock were excluded in 2005 from the above reconciliation in that inclusion would have an anti-dilutive effect.

- 55 -

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, 2007,2008, the Company held collateral in the aggregate amount of $230,464.$214,264.

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 thathat have been reported to the insured or the Company, estimated incurred but not reported losses, and estimates for losses that are expected to occur, within the SIR or deductible, prior to the next collateral adjustment date. In general, the Company attempts to hold collateral equal to 100% of the ultimate losses that would be paid by or due the Company in the event of the insured’s default. Periodic audits are conducted by the Company to evaluate its exposure and the collateral required. If a deficiency in collateral is noted as the result of an audit, additional collateral is requested immediately. Because collateral amounts contain numerous estimates of the Company’s exposure, are adjusted only periodically and are sometimes adjusted based on the financial condition of the insured, the amount of collateral held by the Company at a given point in time may not be sufficient to fully reimburse the Company for all of its guarantees or amounts due in the event of an insured’s default. Further, the Company is not fully collateralized for the guarantees made for, or the deductible amounts that may be due from, the Company’s largest customer, and in the event of that customer’s default, such default may have a material adverse impact on the Company. The Company estimates its uncollateralized exposure related to this Fortune 500 company to be as much as 27%32% of shareholders’ equity at December 31, 2007.2008.

In addition, the Company’s balance sheet includes paid and unpaid amounts recoverable from reinsurers under various agreements totaling $132,812$159,989 at December 31, 2007,2008, as more fully discussed in Note D - Reinsurance. With minor exception, these recoverables are uncollateralized. The three largest estimated amountamounts due from a single reinsurer totaled $19,857individual reinsurers were $23,773, $18,631 and $18,083 at December 31, 2007.2008. Included in the total recoverable amount are case basis and estimated IBNR losses of approximately $8,016$6,907 due from Converium Insurance (North America) Inc. and $2,682 due from PMA Re., each of which reported substantial reserve strengthening and/or impairment of assets in 2005 which have negatively affected their reported financial positions.position. All amounts due from these reinsurersthis reinsurer on paid claims as of December 31, 20072008 are current and the Company has no information at this time to indicate that all obligations of these reinsurersthis reinsurer will not be met.

Investments in limited partnerships include an aggregate of $58,380$29,878 invested in three related partnerships, New Vernon India Fund, New Vernon Global Opportunity Fund and New Vernon North American Opportunity Fund.

54

Note M - New Accounting Pronouncements– Acquisition and related Goodwill and Intangibles

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, “FairFair Value Measurements” (“Measurements(“SFAS No. 157”), which provides a common definition of fair value and establishes a framework to make the measurement of fair value more consistent and comparable. SFAS No. 157 also requires expanded disclosures about (1) the extent to which companies measure assets and liabilities at fair value, (2) the methods and assumptions used to measure fair value and (3) the effect of fair value measures on earnings. The Company adopted SFAS 157, is effective January 1, 2008 for financial assets and liabilities on January 1, 2008.liabilities. The FASB has deferred the implementation of the provisions of SFAS 157 relating to certain nonfinancial assets and liabilities until January 1, 2009. SFAS 157 isdid not expected to have a significant impact on the Company’s consolidated financial condition or results of operations.

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

 

 

 

$

—

 

- 56 -

55

Note MO - New Accounting PronouncementsFair Value (continued)

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, “TheThe Fair Value Option for Financial Assets and Liabilities — Including an Amendment of FASB Statement No. 115”, to permit an entity to choose to measure many financial instruments and certain other items at fair value. Most of the provisions in SFAS No. 159 are elective; however the amendment to SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities,” applies to all entities with available-for-sale and trading securities. The fair value option permits all entities to choose to measure eligible items at fair value at specified election dates. The fair value option may be applied on an instrument-by-instrument basis, is irrevocable and is to be applied to entire instruments and not portions thereof. The Company did not elect the fair value option. SFAS No. 159 isdid not expected to have a significant impact on the Company’s consolidated financial condition or results of operations.

Note P - New Accounting Pronouncements

In December 2007, Financial Accounting Standards Board issued Statement No. 141 (revised 2007), “Business Combinations” (“Business Combinations(“SFAS No. 141(R)”). SFAS No. 141(R) changes the requirements for an acquirer’s recognition and measurement of the assets acquired and the liabilities assumed in a business combination. SFAS No. 141(R) is effective for annual periods beginning after December 15, 2008 and should be applied prospectively for all business combinations entered into after the date of adoption. SFAS 141(R) is not expected to have a significant impact on the Company’s consolidated financial condition or results of operations.

56

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 - 57 -

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.

57

Item 9.         CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON

ACCOUNTING AND FINANCIAL DISCLOSURE

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)) within 90 daysas of the dateend of the filing ofperiod covered by this report. Based on this evaluation, the Company’s CEO and CFO have concluded that the Company’s disclosure controls and procedures were effective in ensuring that information required to be disclosed by the company is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms. In addition, there have not been any significant changes in internal controls or other factors that could significantly affect internal controls subsequent to the date of the company’sCompany’s most recent evaluation.

 

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, 2007.2008. The effectiveness of the Company’s internal control over financial reporting as of December 31, 20072008 has been audited by Ernst & Young LLP, an independent registered public accounting firm, as stated in their report which is included herein.

- 

58 -

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

The Board of Directors and Shareholders of

Baldwin & Lyons, Inc.

We have audited Baldwin & Lyons, Inc.’s and subsidiaries internal control over financial reporting as of December 31, 2007,2008, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the “COSO criteria”). Baldwin & Lyons, Inc.’s and subsidiaries management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the company’sCompany’s internal control over financial reporting based on our audit.

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, 2007,2008, based on the COSO criteria.

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, 20072008 and 2006,2007, and the related consolidated statements of income,operations, changes in equity other than capital, and cash flows for each of the three years in the period ended December 31, 2007,2008, and our report dated March 12, 200816, 2009 expressed an unqualified opinion thereon.

 

/s/ ERNST & YOUNG LLP

Indianapolis, Indiana

March 12, 200816, 2009

- 

59 -

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

6768

Chairman and CEO

1997

Joseph J. DeVito

5657

President and COO

2007 (1)

G. Patrick Corydon

5960

SeniorExecutive Vice President and CFO

1979 (2)

James E. Kirschner

61Craig C. Morfas

Senior 50

Vice President and Secretary

1977 (2)2008 (3)

Mark L. Bonini

4950

Vice President

2001



 

(1) Mr. DeVito was elected President and Chief Operating Officer in February, 2007. He was electedelecteD

     Executive Vice President in 2001 and has served in similar capacity since 1986.

(2) Mr. Corydon and Mr. Kirschner were eachwas elected SeniorExecutive Vice President in 2001.2008.

(3) Mr. Morfas was elected Vice President of the Company in 2007 and Secretary of the Company in 2008.

(3)

Mr. Kirschner was elected Secretary of the Company in 1985.

 

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.

 

-

60 -

PART IV

 

Item 15.EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

 

(a)

1. List of Financial Statements--TheStatements--The following consolidated financial statements of the registrant and its subsidiaries (including the Report of Independent Registered Public Accounting Firm) are submitted in Item 8 of this report.

 

Consolidated Balance Sheets - December 31, 20072008 and 20062007

 

Consolidated Statements of Income and Retained EarningsOperations - Years ended December 31, 2008, 2007 and 2006

December 31, 2007, 2006 and 2005

 

Consolidated Statements of Changes in Equity Other Than Capital - Years ended December 31, 2008,

 

ended December 31, 2007 2006 and 20052006

 

Consolidated Statements of Cash Flows - Years ended December 31, 2008, 2007 and 2006

2007, 2006 and 2005

 

Notes to Consolidated Financial Statements

 

2.

List of Financial Statement Schedules--TheSchedules--The following consolidated 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 S-XS- X are not required under the related instructions or are inapplicable and therefore have been omitted.

 

- 61 -

3. Listing of Exhibits:

61

 

Number & Caption from

   from

Exhibit Table of

Item 601 of Regulation S-K

  Item 601 of Regulation

 

S-K

Exhibit Number and Description

(3) (Articles of Incorporation & By Laws)

EXHIBIT 3(i)-- –

(Articles of Incorpor-

Articles of Incorporation of Baldwin & Lyons, Inc.,

ation & By Laws)

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)

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)

(10)

EXHIBIT 10(a)--

(Material Contracts)

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)--

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)

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)1986)

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)

(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)--
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)

 

EXHIBIT 10(d)10(c)--

Baldwin & Lyons, Inc. Amended Employee Discounted Stock 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, 1992)1989)

- 62 -

 

NumberEXHIBIT 10(d)--

Baldwin & CaptionLyons, Inc. Amended Employee Discounted Stock 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, 1992)

    from Exhibit Table of

   Item 601 of Regulation

 

S-K

Exhibit Number and Description

EXHIBIT 10(e)--




Baldwin & Lyons, Inc. Restated Employee Discounted Stock 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, 1997)

 

(11)(14) (Code of ethics)

EXHIBIT 11--

      (Statement regarding

Computation of Per Share Earnings

      computation of per14--

      share earnings)

(14)

                                                         EXHIBIT 14—

      (Code of ethics) 

Code of Business Conduct of Baldwin & Lyons, Inc. (Incorporated as

an exhibit by reference to Exhibit 14 to the Company’s Annual Report   

Report on Form 10-K for the year ended December 31, 2005)

 

(21) (Subsidiaries of the registrant)

EXHIBIT 21--21­­--

(Subsidiaries of the

Subsidiaries of Baldwin & Lyons, Inc.

62

 registrant)

 

 

(23)Number & Caption from

EXHIBIT 23--Exhibit Table of

Item 601 of Regulation S-K

 

(Consents

Exhibit Number and Description

(23) (Consents of experts and counsel)

EXHIBIT 23--
Consent of Ernst & Young LLP

     and counsel)

 

(24) (Powers of Attorney)

EXHIBIT 24--

(Powers of Attorney)

Powers of Attorney for certain Officers and Directors

 

(31) (Certification)

EXHIBIT 31.131.1--

(Certification)

Certification of CEO pursuant to Section 302 of the Sarbanes-Sarbanes-Oxley Act

 

Oxley Act

 

EXHIBIT 31.231.2--

Certification of CFO pursuant to Section 302 of the Sarbanes-Sarbanes-Oxley Act

 

Oxley Act

(32) (Certification)

EXHIBIT 32.132.1--

(Certification)

Certification of CEO pursuant to Section 906 of the Sarbanes-

OxleySarbanes-Oxley Act and 18 U.S.C. 1350

 

EXHIBIT 32.232.2--

Certification of CFO pursuant to Section 906 of the Sarbanes-

OxleySarbanes-Oxley Act and 18 U.S.C. 1350

 

(b)

A report on Form 8-K was filed by the Company in the fourth quarter of 20072008 to announce its third quarter earnings press release.

 

- 63 -

(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 6564 through 7170 of this report.

 

63

- SCHEDULE I – SUMMARY OF INVESTMENTS-

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.



64 -

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

 

 

 

 

 

 

 

65

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

 

 

 

 

 

 

 

 

 

 

 

66

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

 

 

 

 

 

 

 

67

(A) All securities listed are considered available-for-sale and, accordingly, are presented at fair value in the financial statements.

SCHEDULE III – SUPPLEMENTARY INSURANCE INFORMATION

Investments presented above do not include $87,140 of money market funds classified with cash and cash equivalents in the balance sheet.Form 10-K – Year Ended December 31, 2008

 

- 65 -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

 

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.

68


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

 

Note: Included in Ceded to Other Companies is $5,300, $4,800 and $0 for 2008, 2007 and 2006, respectively, relating to retrocessions associated with premiums assumed from other companies. Amount Assumed to Net percentage above removes the impact of this rectrocession.

69

 

- 66 -SCHEDULE VI – SUPPLEMENTAL INFORMATION

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

 

- 67 -

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

 

 

 

 

 

 

- 68 -

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

- 69 -

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

- 70 -

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 workers'worker's compensation claims have been discounted to present value using pretax interest rates not exceeding 3.5%.

- 71 -

70

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 14, 200824, 2009

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 14, 200824, 2009

By

/s/ Gary W. Miller

 

Gary W. Miller, Chairman and CEO

 

CEO; Director(Chief Executive Officer)

March 14, 2008By           /s/ G. Patrick Corydon

G. Patrick Corydon, Senior Vice

 

President - Finance and CFO (PrincipalMarch 24, 2009

By

/s/ G. Patrick Corydon

 

G. Patrick Corydon, Executive Vice

President and CFO

(Principal Financial and Accounting Officer)

March 14, 200824, 2009

By

/s/ Joseph DeVito

 

Joseph DeVito, Director, President

 

and Chief Operating Officer

 

 

March 14, 2008By           /s/ Stuart D. Bilton(*)

 

March 24, 2009

By

/s/ Stuart D. Bilton

Stuart D. Bilton, Director

 

 

March 14, 200824, 2009

By

/s/ Otto N. Frenzel III(*)

 

Otto N. Frenzel III,IV, Director

 

71

SIGNATURES (CONTINUED)

 

March 14, 200824, 2009

By

/s/ John M. O’Mara(*)

 

John M. O’Mara, Director

 

 

- 72 -

SIGNATURES (CONTINUED)

March 14, 2008

March 24, 2009

By

 /s//s/ Thomas H. Patrick(*)

 

Thomas H. Patrick, Director

 

 

March 14, 2008

March 24, 2009

By

 /s//s/ John Pigott(*)

 

John Pigott, Director

 

March 14, 2008By           /s/ Kenneth D. Sacks(*)

                                                                                                    Kenneth D. Sacks, Director

                                                                                   

March 14, 2008By         /s/ Nathan Shapiro(*)

March 24, 2009

By

/s/ Kenneth D. Sacks

Kenneth D. Sacks, Director

 Nathan Shapiro, Director

March 14, 2008By         /s/ Norton Shapiro(*)

                                                                                                    Norton Shapiro, Director

 

                                                                                   

March 14, 2008By          /s/ Robert Shapiro(*)

                                                                                                     Robert

March 24, 2009

By

/s/ Nathan Shapiro

Nathan Shapiro, Director

 

March 14, 2008By        /s/ Steven A. Shapiro(*)

                                                                                                    Steven A.

March 24, 2009

By

/s/ Norton Shapiro

Norton Shapiro, Director

 

March 14, 2008By       /s/ John D. Weil(*)

March 24, 2009

By

/s/ Robert Shapiro

Robert Shapiro, Director

 John D. Weil, Director

 

March 24, 2009

By

/s/ Steven A. Shapiro

Steven A. Shapiro, Director

(*) By Gary W. Miller, Attorney-in-Fact

 

March 24, 2009

By

/s/ John D. Weil  

John D. Weil, Director

72

- 73 -

ANNUAL REPORT ON FORM 10-K

 

 

 

ITEM 15(c)--CERTAIN EXHIBITS

 

 

YEAR ENDED DECEMBER 31, 20072008

 

BALDWIN & LYONS, INC.

 

INDIANAPOLIS, INDIANA

 

- 74 -

73

BALDWIN & LYONS, INC.

Form 10-K for the Fiscal Year

Ended December 31, 20072008

 

INDEX TO EXHIBITS

 

 

 

Begins on sequential page

Exhibit No.

Begins on sequential page number number of Form 10-K

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

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

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

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

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

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

- 75 -

INDEX TO EXHIBITS (CONTINUED)

 

    Begins on sequential page

EXHIBIT 10(d)--

Baldwin & Lyons, Inc. Amended Employee Discounted Stock Option Plan (Incorporated as an exhibit by reference to Exhibit No.

number of10(f) to the Company’s Annual Report on Form 10-K

EXHIBIT 10(d)--

Baldwin & Lyons, Inc. Amended Employee

Discounted Stock 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(e)--

Baldwin & Lyons, Inc. Restated Employee

Discounted Stock Option Plan (Incorporated

as an exhibit by reference to Exhibit 10(f) to

the Company’s Annual Report on Form 10-K

EXHIBIT 10(e)--
Baldwin & Lyons, Inc. Restated Employee Discounted Stock 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, 1997)

N/A

EXHIBIT 11--

ComputationEXHIBIT 14--

Code of Per Share Earnings

filed herewith electronically

EXHIBIT 14--

Code of Business Conduct, as amended

May 3, 2005 (Incorporated as an exhibit by

reference to Exhibit 14 to the Company’s

Annual Report on Form 10-K for the year

Business Conduct, as amended May 3, 2005 (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)

N/A

 

EXHIBIT 21--

Subsidiaries of Baldwin & Lyons, Inc.

filed electronically herewith electronically

EXHIBIT 23--

Consent of Ernst & Young LLP

filed electronically herewith electronically

EXHIBIT 24--

Powers of Attorney for certain

74

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 electronically

EXHIBIT 31.1--

Certification of CEO pursuant to Section

EXHIBIT 31.1--

Certification of CEO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

filed electronically herewith electronically

EXHIBIT 31.2--

Certification of CFO pursuant to Section

EXHIBIT 31.2--

Certification of CFO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

filed electronically herewith electronically

EXHIBIT 32.1--

Certification of CEO pursuant to 18 U.S.C.

Section 1350, as adopted pursuant to Section

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 herewith electronically

- 76 -

INDEX TO EXHIBITS (CONTINUED)

 

 Begins on sequential page

filed electronically herewith

Exhibit No.EXHIBIT 32.2--

 numberCertification of Form 10-K

EXHIBIT 32.2--

Certification of CFO pursuant to 18 U.S.C. Section 1350, as adopted pursuant to 18 U.S.C.

Section 1350, as adopted pursuant to Section

906 of the Sarbanes-Oxley Act of 2002.

filed electronically herewith electronically

- 77 -

75