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$159,813,000.
Common Stock, No Par Value: | Class A (voting) | 2,623,109 shares | |
| Class B (nonvoting) | 12,170,839 shares |
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The Index to Exhibits is located on pages 7478 and 75.
79. United States earthquake, excluding California, and certain Canadian risks. RECONCILIATION OF LIABILITY FOR LOSSES AND LOSS ADJUSTMENT EXPENSES (GAAP BASIS) Year Ended December 31 2008 2007 2006 NET OF REINSURANCE RECOVERABLE: (in thousands) Liability for losses and LAE at the Beginning of the year $ 244,500 $ 249,495 $ 242,130 Provision for losses and LAE: Claims occurring during the current year 132,829 129,065 129,551 Claims occurring during prior years (17,077 ) (21,284 ) (16,947 ) 115,752 107,781 112,604 Payments of losses and LAE: Claims occurring during the current year 51,649 53,820 45,658 Claims occurring during prior years 76,970 58,956 59,581 128,619 112,776 105,239 Liability for losses and LAE at end of year 231,633 244,500 249,495 Reinsurance recoverable on unpaid losses at end of the year 157,925 134,116 159,917 Liability for losses and LAE, gross of reinsurance recoverable, at end of the year $ 389,558 $ 378,616 $ 409,412 Years in Which Losses Were Incurred Reserve at December 31, 2007 (Savings) Deficiency Recorded During 2008 % (Savings) Deficiency 2007 $ 75,245 $ 3,342 4.4% 2006 54,428 (11,587) (21.3%) 2005 46,187 (8,709) (18.9%) 2004 16,458 (862) (5.2%) 2003 8,796 656 7.5% 2002 & prior 43,386 83 .2% $ 244,500 $ (17,077) (7.0%) 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 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) 2008 2007 2006 Retrospectively-rated direct business $336 ($1,078) ($7,171) Other direct business (17,217) (16,041) (7,994) Property reinsurance (205) (4,112) (1,288) Involuntary residual markets (31) (56) (533) Environmental damage 40 3 39 Totals ($17,077) ($21,284) ($16,947) business. However, the average settlement amounts of severe de velopments. The difference between loss developments before consideration of reinsurance, as presented on page 12, and those net of reinsurance, as shown on page 11 do not impact the Company’s operating results as all such differences are borne by reinsurers. that resulted in the immediate spill of a pollutant. These claims are typically reported and resolved within a short period of time. 2009. 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 Liability for Unpaid Losses and LAE, Net of Reinsurance Recoverables $ 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 132,906 122,238 119,018 127,398 130,681 147,468 193,445 225,183 228,211 227,423 Two Years Later 124,878 124,540 112,558 118,055 125,731 142,771 180,455 209,774 207,818 Three Years Later 124,367 119,379 103,251 118,712 124,693 137,502 171,332 200,955 Four Years Later 121,021 111,476 105,508 119,925 124,714 134,661 171,225 Five Years Later 114,456 113,720 106,757 120,757 124,507 135,418 Six Years Later 115,007 114,546 107,364 121,406 124,609 Seven Years Later 115,321 115,166 108,040 121,599 Eight Years Later 117,057 115,964 107,921 Nine Years Later 118,136 115,927 Ten Years Later 118,352 Cumulative Redundancy $ 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 $ 30,214 $ 30,239 $ 31,132 $ 30,249 $ 39,956 $ 38,234 $ 60,343 $ 59,581 $ 58,956 $ 76,970 Two Years Later 48,416 49,068 47,060 55,724 57,522 62,380 84,265 94,947 100,990 Three Years Later 60,594 60,427 58,618 64,489 69,959 74,198 102,692 117,522 Four Years Later 66,679 69,374 64,574 71,038 76,408 82,479 116,198 Five Years Later 74,861 73,958 69,316 75,878 81,121 91,607 Six Years Later 77,957 78,150 72,751 79,668 85,064 Seven Years Later 81,530 81,337 76,126 83,405 Eight Years Later 84,451 84,666 79,408 Nine Years Later 87,593 87,896 Ten Years Later 90,764 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 Fixed Maturity and Short-Term Investments including catastrophe bonds. other-than-temporary impairment adjustments to fixed maturity securities, which increased realized losses, was a negative $3.9 million. The current net unrealized gain consists of $5.2 million of gross unrealized gains and $.5 million of gross unrealized losses. During losses. Readers are also directed to The Company operates in the Property and Casualty insurance industry where many of its competitors are larger with far greater resources. The Company election of directors and approval of significant corporate transactions. The interests of these stockholders may conflict with those of other stockholders, limit marketability of the stock and this concentration of voting power has the potential to delay, defer or prevent a change in control. 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. 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. The Company derives a significant percentage of its direct premium volume from a single major customer, FedEx Ground and certain of its subsidiaries and related entities, and from insurance coverage provided to its independent contractors. Loss of this major customer would severely reduce the Company’s revenue and earnings potential. 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. In this regard, FedEx Ground and certain of its subsidiaries and related entities, utilizes significant self-insured retentions and deductibles under policies of insurance provided by the Company’s insurance subsidiaries. In the case of FedEx Ground, the Company has determined that the financial strength of the customer is sufficient to allow for holding only partial collateral at this time. Should the Company become The Company has a large portfolio of equity securities and limited partnership investments which can fluctuate in value with a wide variety of market Cash Class A Class B Dividends 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 Third Quarter 28.77 25.01 29.61 25.10 .60 Second Quarter 27.85 23.42 26.79 24.25 .25 First Quarter 29.25 24.03 26.55 23.48 .45 Year Ended December 31 2008 2007 2006 2005 2004 (Dollars in thousands, except per share data) Direct and assumed premiums written $ 221,942 $ 207,367 $ 197,064 $ 222,445 $ 247,099 Net premiums earned 182,299 179,065 169,766 186,165 172,145 Net investment income 17,063 19,595 19,548 14,840 12,287 Net gains (losses) on investments (47,749 ) 40,096 17,064 22,981 9,770 Losses and loss expenses incurred 115,752 107,781 112,604 140,622 5 126,298 Net income (loss) (7,713 ) 55,131 38,185 34,223 30,306 Earnings per share -- net income 1 (.51 ) 3.63 2.54 2.30 2.05 Cash dividends per share 2 1.00 1.65 2.55 .95 2.05 Investment portfolio 3 545,491 650,538 626,753 622,920 577,428 Total assets 777,743 842,833 853,719 862,081 866,914 Shareholders' equity 330,067 380,718 357,627 346,685 326,548 Cost of treasury shares purchased 8,908 — 401 — — Book value per share 1 22.32 24.98 23.60 23.31 22.04 Underwriting ratios 4 Losses and loss expenses 63.5 % 60.2 % 66.3 % 75.5 % 73.4 % Underwriting expenses 30.9 % 30.9 % 26.6 % 22.0 % 24.0 % Combined 94.4 % 91.1 % 92.9 % 97.5 % 97.4 % to reinsurers. 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 pr oducts. 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 judgment are highlighted below. shareholder’s equity (accumulated other comprehensive income). this entire amount been considered other-than-temporary at December 31, 2009. 2008 2007 2006 Premium ceded (reduction to premium earned) $ 41,219 $ 32,974 $ 24,841 Losses ceded (reduction to losses incurred) 53,398 4,981 14,026 Commissions from reinsurers (reduction to operating expenses) 3,084 2,044 1,205 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 2008 2007 Total deferred tax liabilities $ 13,155 $ 33,168 Total deferred tax assets 23,745 22,050 Net deferred tax assets (liabilities) $ 10,590 $ (11,118) sale. market value of the S&P 500 and Indian BSE 500 indices (dollars in thousands). 2009. 2009 December 31 2008 Consolidated Statements of Operations Baldwin & Lyons, Inc. and Subsidiaries Year Ended December 31 2008 2007 2006 (dollars in thousands, except per share data) Revenue: Net premiums earned $ 182,299 $ 179,065 $ 169,766 Net investment income 17,063 19,595 19,548 Net realized gains (losses) on investments (47,749 ) 40,096 17,064 Commissions and other income 5,317 5,007 6,691 156,930 243,763 213,069 Expenses: Losses and loss expenses incurred 115,752 107,781 112,604 Other operating expenses 58,577 56,330 47,455 174,329 164,111 160,059 Income (loss) before federal income taxes (17,399 ) 79,652 53,010 Federal income taxes (benefits) (9,686 ) 24,521 14,825 Net income (loss) $ (7,713 ) $ 55,131 $ 38,185 Per share data: Diluted earnings $ ( .51 ) $ 3.63 $ 2.54 Basic earnings $ ( .51 ) $ 3.63 $ 2.54 Dividends $ 1.00 $ 1.65 $ 2.55 Consolidated Statements of Changes in Equity Other Than Capital Baldwin & Lyons, Inc. and Subsidiaries 2008 2007 2006 (dollars in thousands) Balances at beginning of year: Retained earnings $ 295,293 $ 264,060 $ 264,719 Unrealized gains on investments 36,876 47,229 42,440 332,169 311,289 307,159 Changes arising from income-producing activities: Net income (loss) (7,713 ) 55,131 38,185 Gains (losses) on investments: Pre-tax holding gains (losses) on debt and equity securities arising during period (41,058 ) 1,027 13,241 Federal income taxes (14,370 ) 359 4,634 (26,688 ) 668 8,607 Pre-tax gains (losses) on debt and equity securities included in net income (loss) during period (14,188 ) 16,955 5,874 Federal income taxes (4,966 ) 5,934 2,056 (9,222 ) 11,021 3,818 Change in unrealized gains (losses) on investments (17,466 ) (10,353 ) 4,789 Foreign exchange adjustment (1,468 ) 1,164 (20 ) Comprehensive income - total realized and unrealized income (loss) (26,647 ) 45,942 42,954 Other changes affecting retained earnings: Cash dividends paid to shareholders (15,096 ) (25,062 ) (38,435 ) Cost of treasury shares in excess of original issue proceeds (7,302 ) — (389 ) (22,398 ) (25,062 ) (38,824 ) Total changes (49,045 ) 20,880 4,130 Balances at end of year: Retained earnings 263,714 295,293 264,060 Unrealized gains on investments 19,410 36,876 47,229 $ 283,124 $ 332,169 $ 311,289 Consolidated Statements of Cash Flows Baldwin & Lyons, Inc. and Subsidiaries 2008 2007 2006 (dollars in thousands) Operating activities Net income (loss) $ (7,713 ) $ 55,131 $ 38,185 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Change in accounts receivable and unearned premium (165 ) (4,891 ) (5,262 ) Change in accrued investment income (257 ) 247 (1,496 ) Change in reinsurance recoverable on paid losses (3,453 ) 4,921 (619 ) Change in losses and loss expenses reserves net of reinsurance (12,786 ) (5,097 ) 7,767 Change in other assets, other liabilities and current income tax (20,011 ) 5,376 (10,458 ) Amortization of net policy acquisition costs 20,353 18,941 12,950 Net policy acquisition costs deferred (19,485 ) (17,392 ) (13,316 ) Provision for deferred income taxes (14,129 ) 5,620 2,222 Bond amortization 3,427 2,453 2,295 (Gain) loss on sale of property (17 ) 35 (20 ) Depreciation 2,976 2,337 1,953 Net (gain) loss on investments 47,749 (40,096 ) (17,064 ) Excess tax benefit related to stock options — (253 ) (604 ) Compensation expense related to discounted stock options — — 20 Net cash provided by (used in) operating activities (3,511 ) 27,332 16,553 Investing activities Purchases of fixed maturities and equity securities (276,737 ) (232,147 ) (246,679 ) Purchases of limited partnership interests (16,199 ) (5,995 ) (4,957 ) Proceeds from maturities 31,623 164,739 112,095 Proceeds from sales of fixed maturities 161,814 44,508 37,774 Proceeds from sales of equity securities 45,813 55,866 33,153 Net sales (purchases) of short-term investments 10,972 14,557 (8,265 ) Distributions from limited partnerships 3,657 5,565 3,562 Purchase of Transport Insurance Agency (2,661 ) — — Decrease in principal of notes receivable from employees 29 110 15 Purchases of property and equipment (5,348 ) (6,225 ) (3,000 ) Proceeds from disposals of property and equipment 72 935 116 Net cash provided by (used in) investing activities (46,965 ) 41,913 (76,186 ) Financing activities Dividends paid to shareholders (15,096 ) (25,062 ) (38,435 ) Proceeds from sale of common stock — 2,211 6,804 Excess tax benefit related to stock options — 253 604 Drawings on line of credit 9,000 — — Cost of treasury shares (8,908 ) — (401 ) Net cash used in financing activities (15,004 ) (22,598 ) (31,428 ) Increase (decrease) in cash and cash equivalents (65,480 ) 46,647 (91,061 ) Cash and cash equivalents at beginning of year 82,137 35,490 126,551 Cash and cash equivalents at end of year $ 16,657 $ 82,137 $ 35,490 quantitative criteria defined above. 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. 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. 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. Note B - Investments The following is a summary of investments at December 31: Cost or Gross Gross Net Fair Amortized Unrealized Unrealized Unrealized Value Cost Gains Losses Gains (Losses) 2008: U.S. government obligations $ 26,560 $ 26,050 $ 510 $ — $ 510 Mortgage-backed securities 13,490 13,813 157 (480 ) (323 ) Obligations of states and political subdivisions 267,152 263,026 5,132 (1,006 ) 4,126 Corporate securities 51,103 48,793 3,520 (1,210 ) 2,310 Foreign government obligations 5,975 5,867 108 — 108 Total fixed maturities 364,280 357,549 9,427 (2,696 ) 6,731 Equity securities 63,200 40,071 27,415 (4,286 ) 23,129 Limited partnerships 59,864 59,864 — — — Short-term 33,820 33,820 — — — Total available-for-sale securities $ 521,164 $ 491,304 $ 36,842 $ (6,982 ) 29,860 Applicable federal income taxes (10,450 ) Net unrealized gains — net of tax $ 19,410 2007: U.S. government obligations $ 27,484 $ 27,222 $ 267 $ (5 ) $ 262 Mortgage-backed securities 16,153 16,226 58 (131 ) (73 ) Obligations of states and political subdivisions 280,665 278,752 2,337 (424 ) 1,913 Corporate securities 5,791 5,696 105 (10 ) 95 Foreign government obligations 7,918 7,868 50 — 50 Total fixed maturities 338,011 335,764 2,817 (570 ) 2,247 Equity securities 99,736 45,251 55,885 (1,400 ) 54,485 Limited partnerships 80,884 80,884 — — — Short-term 44,768 44,768 — — — Total available-for-sale securities $ 563,399 $ 506,667 $ 58,702 $ (1,970 ) 56,732 Applicable federal income taxes (19,856 ) Net unrealized gains — net of tax $ 36,876 2008 2007 Number of Securities Fair Value Gross Unrealized Loss Number of Securities Fair Value Gross Unrealized Loss Fixed maturity securities: 12 months of less 47 $ 80,993 $ (2,675 ) 15 $ 22,051 $ (476 ) Greater than 12 months 6 1,812 (21 ) 9 7,551 (94 ) Total fixed maturities 53 82,805 (2,696 ) 24 29,602 (570 ) Equity securities: 12 months of less 33 11,362 (3,085 ) 15 9,194 (1,230 ) Greater than 12 months 14 5,845 (1,201 ) 3 1,165 (170 ) Total equity securities 47 17,207 (4,286 ) 18 10,359 (1,400 ) Total fixed maturity and equity securities 100 $ 100,012 $ (6,982 ) 42 $ 39,961 $ (1,970 ) 2009. Fair Value Cost or Amoritzed Cost One year or less $ 121,850 $ 118,399 Excess of one year to five years 179,253 176,005 Excess of five years to ten years 30,148 29,731 Excess of ten years 19,539 19,601 Total maturities 350,790 343,736 Mortgage-backed securities 13,490 13,813 $ 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 2008 2007 2006 Fixed maturities: Gross gains $ 3,333 $ 536 $ 157 Gross losses (6,806 ) (680 ) (714 ) Net gains (losses) (3,473 ) (144 ) (557 ) Equity securities: Gross gains 4,463 19,293 10,226 Gross losses (12,943 ) (2,483 ) (3,795 ) Net gains (losses) (8,480 ) 16,810 6,431 Limited partnerships - net gain (loss) (33,562 ) 23,141 11,190 Other - net gain (loss) (2,234 ) 289 — Total net gains (losses) $ (47,749 ) $ 40,096 $ 17,064 2009. 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 sold. 2009. 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 2008 2007 Total assets $ 582,920 $ 1,466,882 Total partners' capital 550,840 1,389,232 Net increase (decrease) in partners' capital resulting from operations (858,680 ) 666,966 2008 2007 2006 Reserves at the beginning of the year $ 244,500 $ 249,495 $ 242,130 Provision for losses and loss expenses: Claims occurring during the current year 132,829 129,065 129,551 Claims occurring during prior years (17,077 ) (21,284 ) (16,947 ) Total incurred 115,752 107,781 112,604 Loss and loss expense payments: Claims occurring during the current year 51,649 53,820 45,658 Claims occurring during prior years 76,970 58,956 59,581 Total paid 128,619 112,776 105,239 Reserves at the end of the year 231,633 244,500 249,495 Reinsurance recoverable on unpaid losses at the end of the year 157,925 134,116 159,917 Reserves, gross of reinsurance recoverable, at the end of the year $ 389,558 $ 378,616 $ 409,412 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 ) 2008. 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 2008 2007 Unpaid losses and loss expenses, net of valuation allowance $ 155,455 $ 131,727 Paid losses and loss expenses 4,531 1,079 Unearned premiums 3 5 $ 159,989 $ 132,811 2008 2007 Deferred tax liabilities: Unrealized gain on fixed income and equity security investments $ 10,450 $ 19,856 Limited partnership investments — 10,632 Deferred acquisition costs 814 1,118 Other 1,891 1,562 Total deferred tax liabilities 13,155 33,168 Deferred tax assets: Loss and loss expense reserves 15,575 17,755 Limited partnership investments 2,420 — Unearned premiums discount 1,203 1,587 Other-than-temporary investment declines 4,094 957 Deferred compensation 228 1,540 Other 225 211 Total deferred tax assets 23,745 22,050 Net deferred tax assets (liabilities) $ 10,590 $ (11,118 ) 2008 2007 2006 Statutory federal income rate applied to pretax income (loss) $ (6,090 ) $ 27,878 $ 18,553 Tax effect of (deduction): Tax-exempt investment income (3,649 ) (3,298 ) (2,313 ) Net addition to (reduction of) tax positions (192 ) 125 (1,617 ) Other 245 (184 ) 202 Federal income tax expense (benefit) $ (9,686 ) $ 24,521 $ 14,825 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 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 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, 2009, 2008 and 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 Additional Paid-in Shares Amount Shares Amount Capital Balance at January 1, 2006 2,666,666 $ 114 12,135,671 $ 518 $ 38,894 Stock options issued — — — — 20 Stock options exercised — — 349,534 15 6,789 Treasury shares purchased (16,607 ) (1 ) — — (11 ) Balance at December 31, 2006 2,650,059 113 12,485,205 533 45,692 Stock options exercised — — 107,350 4 2,207 Balance at December 31, 2007 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 2008 2007 2006 Amortization of deferred policy acquisition costs $ 23,437 $ 20,985 $ 14,155 Other underwriting expenses 19,745 21,688 18,789 Expense allowances from reinsurers (3,084 ) (2,044 ) (1,205 ) Total underwriting expenses 40,098 40,629 31,739 Operating expenses of non-insurance companies 18,479 15,701 15,716 Total other operating expenses $ 58,577 $ 56,330 $ 47,455 2007. 2007. December 31: 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 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 2008 2007 2006 Average share outstanding for basic earnings per share 15,080,149 15,175,074 15,004,377 Dilutive effect of options — 14,269 43,094 Average shares outstanding for diluted earnings per share 15,080,149 15,189,343 15,047,471 $202,316. 2009. 2009. $0 during 2009, 2008 and 2007, respectively. 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 $ - The following 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 $ — 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. 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 ACCOUNTING AND FINANCIAL DISCLOSURE was elected President and Chief Operating Officer in February, 2007. He was elected Executive Vice President in 2001 and (2) Mr. Corydon was elected Executive Vice President (3) Mr. Morfas was elected Vice President (a) Consolidated Balance Sheets - December 31, Consolidated Statements of Changes in Equity Other Than Capital - Years ended December 31, 2009, 2008 Consolidated Statements of Cash Flows - Years ended December 31, 2009, 2008 Notes to Consolidated Financial Statements 2. 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 Number & Caption from (3) (Articles of Incorporation & By Laws) (10) (Material Contracts) (23) (Consents of experts and counsel) (24) (Powers of Attorney) (31) (Certification) (32) (Certification) (b) A report on Form 8-K was filed by the Company in the fourth quarter of (c) Exhibits. The response to this portion of Item 15 is submitted as a separate section of this report. (d) Financial Statement Schedules. The response to this portion of Item 15 is submitted on pages 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 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 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 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 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 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 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 By /s/ Gary W. Miller (Chief Executive Officer) /s/ Gary W. Miller (Chief Executive Officer) /s/ G. Patrick Corydon President and CFO /s/ Joseph DeVito and Chief Operating Officer /s/ Stuart D. Bilton /s/ Otto N. Frenzel IV /s/ John M. O’Mara /s/ Thomas H. Patrick /s/ John Pigott /s/ Kenneth D. Sacks /s/ Nathan Shapiro /s/ Norton Shapiro /s/ Robert Shapiro /s/ Steven A. Shapiro /s/ John D. Weil 2009 20095, 20094, 2010 are incorporated by reference into Part III.“B&L”"B&L") specializes in marketing and underwriting property and casualty 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”"Protective"), with licenses in all 50 states, the District of Columbia and all Canadian provinces; Protective Specialty Insurance Company (referred to herein as “Protective Specialty”), which is currently approved for excess and surplus lines in 40 states; Sagamore Insurance Company (referred to herein as “Sagamore”"Sagamore"), which is currently licensed in 47 states;states and a pproved for excess and surplus lines business in one additional state; Transportation Specialty Insurance Agency, Inc., (referred to herein as “TIA”"TIA"), an Ohio based insurance agent and broker; and B&L Insurance, Ltd. (referred to herein as “BLI”"BLI"), which is domiciled and licensed in Bermuda. Protective, Protective Specialty, Sagamore and BLI are collectively referred to herein as the “Insurance"Insurance Subsidiaries.”" The “Company”"Company", as used herein, refers to Baldwin & Lyons, Inc. and all its subsidiaries unless the context indicates otherwise.67%61% of the gross direct premiums written and assumed by the Insurance Subsidiaries during 20082009 were attributable to business produced directly or indirectly by B&L. Approximately 18%17% of gross premium is assumed from several non-affiliated insurance and reinsurance companies through policies of reinsurance and retrocessions. The remaining 15%22% consists primarily of business which was originated through an extensive network of independent agents.insurer’sinsurer'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.variousa variety of specialty markets as follows:busses.buses and is collectively referred to as Fleet Transportation. Large fleet trucking products are marketed largely by the B&L agency organization directly to fleet transportation clients but also through partnerships with a non-affiliated brokers and through specialized independent agents. Broker or agent intermediaries are typically used for smaller accounts. The principal types of Fleet Transportation insurance marketed by Protectivethe Insurance Subsidi aries 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.- Casualty insurance including motor vehicle liability, physical damage and other liability insurance. Fidelity and surety bonds.- Workers' compensation insurance. Inland Marine consisting principally of cargo insurance.- Specialized accident (medical and indemnity) insurance for independent contractors. - Fidelity and surety bonds. “Captive” insurance company products, which are provided through BLI in Bermuda.- Inland Marine consisting principally of cargo insurance. - “Captive” insurance company products, which are provided through BLI in Bermuda. Protective’sthe Company’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 customers in monitoring their accident data. Extensive claims handling services are also provided, primarily to clients with self-insurance programs.Property ProtectivePrior to 2007, exposures under theseApproximately 60% of current net reinsurance assumptions are from retrocessions were almost exclusively in high upper layers, spread worldwide among several geographic regionsregions. All major retrocessions are concentrated in upper layers of coverage and limitedcontain lossBeginning in 2007, Protective entered intoThe remaining 40% of current net reinsurance assumptions are produced through an exclusive agreement with a non-affiliated reinsurance broker, which concentrated onPaladin Catastrophe Management ("Paladin"). Business produced by Paladin covers catastrophe losses which attach at much lower levels, primarily covering tornado and hail losses in the U.S. Midwest,United States, windstorm events excluding Florida and U.S. This business comprised 48% of non-affiliated premium assumed during 2008.Sagamoreprivate passenger automobilePrivate Passenger Automobile liability and physical damage coverages to individuals through a network of independent agents in thirty states.The most significant expense category for the Company’s insurance subsidiaries is lossesincurred.incurred typically comprise nearly two-thirds of the Company’s operating expenses. A discussion of this expense category follows.(“LAE”("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.net reserves at December 31, 2008,2009, 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 experiencedexperienc ed 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 whichw hich 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 27in 29 in Management’s Discussion and Analysis.private passenger automobilePrivate Passenger Automobile “fender bender” to the highly complex and costly claims involving large tractor-trailer rigs.rigs and large-scale losses resulting from catastrophic events. 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 fleet transportationFleet 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 rolerol e in the estimation process of larger claims. The Companyworkers’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, 20082009 have been reduced by approximately $5.3$6.7 million as a result of such discounting. Had the Company not discounted loss and LAE reserves, pretax income would have been approximately $.2$1.3 million higherlower for the year ended December 31, 2008.32009.2008,2009, the maximum amount for which Protective insures a fleet transportationFleet 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 singles ingle occurrence ranges from approximately $1.0 million to $1.3$2.2 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 $2.9 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 2009, 2008 2007 and 20062007 each include $15,833, $22,567 $28,427 and $23,366,$28,427, 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 JuneJuly 3, 20092010 and cover the entire policy period for all business written from inception of the treaty on June 3, 20082009 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 fleet transportationFleet 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.Sagamore’sthe Company's private passenger automobile and small fleet trucking business, the Company’sCompany's maximum net exposure for a single occurrence has never exceeded $250,000.2007 and 2006.2007. 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 2008.2009. The table on page 12 is a summary of the re-estimated liability, before consideration of reinsurance, for the ten years prior to 20082009 as well as the related re-estimated reinsurance recoverable for the same periods.RECONCILIATION OF LIABILITY FOR LOSSES AND LOSS ADJUSTMENT EXPENSES (GAAP BASIS) Year Ended December 31 2009 2008 2007 NET OF REINSURANCE RECOVERABLE: (in thousands) Liability for losses and LAE at the Beginning of the year $ 231,633 $ 244,500 $ 249,495 Provision for losses and LAE: Claims occurring during the current year 108,935 132,829 129,065 Claims occurring during prior years (9,584 ) (17,077 ) (21,284 ) 99,351 115,752 107,781 Payments of losses and LAE: Claims occurring during the current year 41,302 51,649 53,820 Claims occurring during prior years 84,777 76,970 58,956 126,079 128,619 112,776 Other reserve adjustment (1,652 ) - - Liability for losses and LAE at end of year 203,253 231,633 244,500 Reinsurance recoverable on unpaid losses at end of the year 155,778 157,925 134,116 Liability for losses and LAE, gross of reinsurance recoverable, at end of the year $ 359,031 $ 389,558 $ 378,616 $17.1$9.6 million was developed in the liability for losses and LAE recorded at December 31, 2007,2008, with similar savings developed duringcomparative developments for the two priorprevious calendar years. The following table is a summary of the $17.1$9.6 million reserve savings by accident year (dollars in thousands):Years in Which Losses Were Incurred Reserve at December 31, 2008 (Savings) Deficiency Recorded During 2009 % (Savings) Deficiency 2008 $ 81,180 $ (2,368 ) (2.9 %) 2007 43,625 1,088 2.5 % 2006 23,395 (7,141 ) (30.5 %) 2005 28,406 (1,397 ) (4.9 %) 2004 11,216 (1,427 ) (12.7 %) 2003 & prior 43,811 1,661 3.8 % $ 231,633 $ (9,584 ) (4.1 %) savings(savings) deficiency recorded for these loss years was derived from varied sources, as follows (dollars in thousands): 2003 & Prior 2004 2005 2006 2007 2008 Losses and allocated loss expenses developed on cases known to exist at December 31, 2008 $ 1,089 $ 331 $ (763 ) $ (1,413 ) $ (323 ) $ 2,271 Losses and allocated loss expenses reported on cases unknown at December 31, 2008 (IBNR) 212 - 282 56 567 9,606 Unallocated loss expenses paid 136 218 577 303 1,062 1,273 Change in reserves for incurred but not reported losses and allocated and unallocated loss expenses 373 (1,591 ) (2,035 ) (4,498 ) 1,063 (22,905 ) Net (savings) deficiency on losses from directly-produced business 1,810 (1,042 ) (1,939 ) (5,552 ) 2,369 (9,755 ) (Savings)deficiency reported under reinsurance assumption agreements and residual markets (149 ) (385 ) 542 (1,589 ) (1,281 ) 7,387 Net savings $ 1,661 $ (1,427 ) $ (1,397 ) $ (7,141 ) $ 1,088 $ (2,368 ) The fleet transportation developments include developed redundancies 2009 2008 2007 Fleet Transportation $ (12,877 ) $ (15,057 ) $ (16,456 ) Private Passenger Automobile (1,373 ) (1,191 ) (290 ) Reinsurance 3,942 (205 ) (4,112 ) Involuntary residual markets 584 (31 ) (56 ) All other 140 (593 ) (370 ) $ (9,584 ) $ (17,077 ) $ (21,284 ) retrospectively-rated direct business, asdirectly-produced business" consist of development on cases known at December 31, 2008, losses reported which were previously unknown at December 31, 2008 (incurred but not reported), unallocated loss expense paid related to accident years 2008 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.following table.table are amounts representing the "(Savings) deficiency reported under reinsurance assumption agreements and residual markets". These amounts relate to the Company's participation in property catastrophe reinsurance policies and treaties. The “All other” category includes loss activityCompany records its share of losses from involuntary residual markets, assigned risks and run-off of discontinued products, including small business workers’ compensation.In order to better understand the dynamics of the loss developments shown above, the following table separates developments into unique components, which are discussed below for the years ended December 31 (dollars in thousands):A significant component of the reserve savings in 2006 is attributable to retrospectively-rated policies which are included in fleet 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 and 2006 was reduced by approximately $.7 million and $5.4 million, respectively, associated with prior year loss reserve development on these policies and pre-tax income was increasedtreaties 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 Reinsurance losses to supplement case reserves reported by approximately $.3 million (.4%) and $1.8 million (3.3%), respectively. For 2008, premium written and earned was increased by approximately $.1 million associated with prior year lossthe ceding companies, when considered necessary.on certain retrospectively-rated workers’ compensation policies and pre-tax income before realized capital losses was reduced by approximately $.4 million (1.3%). 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 transportation and private passenger automobile lines, as well as runoff of discontinued products which constitute part of the “all other” line of business.savings. As shown, the savings from this category ranged from $8.0$12.9 million in 20062009 to $17.4$16.5 million in 2008.2007. This fluctuation reflects the variability associated with the larger claims covered by the Company, particularly in periods when the Company’s net retentions 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 asthe widely fluctuating use of facultative reinsurance on larger risks, and the dynamic nature of losses associated with the fleet transportationFleet Transportation business as well as the timing of settlement of large claims increases the importancelikelihood of variability i n loss reserve processes.developments from period to period. As discussed elsewhere, the Company has historically experienced savings in its loss developments 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 $17.4 million savings developed during 2008 represents approximately 57.3% of pre-tax net income before realized capital losses for 2008 but only approximately 9% of December 31, 2007 net loss and LAE reserves on the related business. property reinsurance and involuntary residual markets, which netted to $.2a $4.5 million of savingsdeficiency during 2008,2009, 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.end, such was the case in 2008 with the occurrence of Hurricane Ike in September. The larger savings developed during 2007, when comparedc ompared to other 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.20082009 has been insignificant.1980’s.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 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, 20082009 for most lines offleet transportationFleet Transportation claims have tended to increase significantly in recent years.In the first table on page 6, the amounts identified as “net (savings) deficiency on losses from directly-produced business” consist of development on cases known at December 31, 2007, losses reported which were previously unknown at December 31, 2007 (incurred but not reported), unallocated loss expense paid related to accident years 2007 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 previous table are amounts representing the “(savings) deficiency reported under reinsurance assumption agreements and residual markets”. These amounts relate 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 losses to supplement case reserves reported by the ceding companies, when considered necessary.Company’sCompany's net per accident exposure under reinsurance agreements in place during the periods presented in the previous table. It is much more difficult to reserve for losses where policy limits are as high as $10 million per accident as opposed to those losses related to business which carries lower policy limits, such as private passenger automobile.Private Passenger Automobile. There are fewer policy limit losses in the Company’sCompany's historical loss database on which to project future loss developments and the larger the loss, the greater the likelihood that the courts will become involved in the settlement process. As such, the level of uncertainty in the reserving process is much greater when dealing with larger losses and will routinely result in fluctuations among accident year developments.20082009 consolidated financial statements prepared in accordance with U.S. generally accepted accounting principles (“GAAP”("GAAP") and that reported in the annual statements filed with state and provincial insurance departments in the United States and Canada in accordance with statutory accounting practices (“SAP”("SAP") are as follows (dollars in thousands):Liability reported on a SAP basis - net of reinsurance recoverable$ 235,773Add differences:Reinsurance recoverable on unpaid losses and LAE157,925Additional reserve for residual market losses notreported to the Company at the current year end360Deduct differences:Estimated salvage and subrogation recoveries recorded ona cash basis for SAP and on an accrual basis for GAAP(4,500)Liability reported on a GAAP basis$ 389,558 Liability reported on a SAP basis - net of reinsurance recoverable $ 207,993 155,778 360 (5,100 ) Liability reported on a GAAP basis $ 359,031 19981999 through 2008,2009, 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.“cumulative redundancy”"cumulative redundancy" represents the aggregate change in the estimates of each calendar year end reserve through December 31, 2008.2009. For example, the 19981999 liability has developed a $25.2$14.3 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 5.20072008 have produced redundancies as of December 31, 2008.2009. 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 fleet transportationFleet 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 dramaticdrama tic impact on the frequency and severity of fleet transportationFleet 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 fleet transportationFleet 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’workers' compensation and liability claims of a long-term liability nature.Company’sCompany's book of business in 20082009 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 fleet transportationFleet 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.2008,2009, the Company had paid $90.8$90.9 million of losses and LAE that had been incurred, but not paid, as of December 31, 1998;1999; thus an estimated $27.6$25.2 million (23%(22%) of losses incurred through 19981999 remain unpaid as of the current financial statement date ($118.4116.1 million incurred less $90.8$90.9 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.2001,2002, but incurred in 1998,1999, will be included in the cumulative development amount for each of the years-end 1998, 1999, 2000, and 2000.2001. As such, this table does not present accident or policy year development data whichreaderswhich readers 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 theth e future. Accordingly, it would not be appropriate to extrapolate future redundancies or deficiencies based on this table.each of the same ten yearsyear period December 31, 19981999 through December 31, 20072008, as of December 31, 20082009, 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 fleet transportationFleet Transportation customers, much of which has been covered by excess of loss and 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 expecte xpect more variability in development on a gross basis than on a net basis.Company’sCompany's reserves for unpaid losses and loss expenses at December 31, 20082009 included amounts for liability related to environmental damage claims. Given the Company’sCompany's principal business is insuring fleet transportationFleet 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’sCompany's policies may cover these situations on the basis that they were caused by an accident“sudden"sudden and accidental”accidental" event. Most of these claims fall under policies issued in the 1970’s1970'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, 2008,2009, the Company has recorded a total of $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 early stages;continues; 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, 2008.thosetho se issues are not likely to be resolved in the near future.Company’sCompany'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’sCompany's policies since 1986 is expected to further limit exposure to claims from that point forward.Company’sCompany's exposure to environmental losses beyond those already provided for in the financial statements is not material.ANALYSIS OF LOSS AND LOSS ADJUSTMENT EXPENSE DEVELOPMENT--GAAP BASIS (Dollars in thousands) Year Ended December 31 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Liability for Unpaid Losses and LAE, Net of Reinsurance Recoverables $ 130,345 $ 119,905 $ 137,406 $ 144,267 $ 162,424 $ 207,137 $ 242,130 $ 249,495 $ 244,500 $ 231,633 $ 203,253 Liability Reestimated as of: One Year Later 122,238 119,018 127,398 130,681 147,468 193,445 225,183 228,211 227,423 222,049 Two Years Later 124,540 112,558 118,055 125,731 142,771 180,455 209,774 207,818 216,730 Three Years Later 119,379 103,251 118,712 124,693 137,502 171,332 200,955 199,503 Four Years Later 111,476 105,508 119,925 124,714 134,661 171,225 198,376 Five Years Later 113,720 106,757 120,757 124,507 135,418 171,005 Six Years Later 114,546 107,364 121,406 124,609 136,623 Seven Years Later 115,166 108,040 121,599 124,606 Eight Years Later 115,964 107,921 121,409 Nine Years Later 115,927 107,893 Ten Years Later 116,085 Cumulative Redundancy $ 14,260 $ 12,012 $ 15,997 $ 19,661 $ 25,801 $ 36,132 $ 43,754 $ 49,992 $ 27,770 $ 9,584 Cumulative Amount of Liability Paid Through: One Year Later $ 30,239 $ 31,132 $ 30,249 $ 39,956 $ 38,234 $ 60,343 $ 59,581 $ 58,956 $ 76,970 $ 84,777 Two Years Later 49,068 47,060 55,724 57,522 62,380 84,265 94,947 100,990 124,870 Three Years Later 60,427 58,618 64,489 69,959 74,198 102,692 117,522 127,011 Four Years Later 69,374 64,574 71,038 76,408 82,479 116,198 136,652 Five Years Later 73,958 69,316 75,878 81,121 91,607 124,176 Six Years Later 78,150 72,751 79,668 85,064 96,009 Seven Years Later 81,337 76,126 83,405 88,239 Eight Years Later 84,666 79,408 86,465 Nine Years Later 87,896 82,431 Ten Years Later 90,878 Year Ended December 31 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Direct and Assumed: Liability for Unpaid Losses and Loss Adjustment Expenses $ 173,115 $ 182,124 $ 246,816 $ 277,309 $ 342,449 $ 440,172 $ 430,273 $ 409,412 $ 378,616 $ 389,558 $ 359,030 Liability Reestimated as of December 31, 2009 181,893 214,918 262,405 294,210 318,883 367,387 339,221 312,871 332,161 349,070 �� Cumulative (Deficiency) Redundancy (8,778 ) (32,794 ) (15,589 ) (16,901 ) 23,566 72,785 91,052 96,541 46,455 40,488 Ceded: Liability for Unpaid Losses and Loss Adjustment Expenses 42,770 62,219 109,410 133,042 180,025 233,035 188,143 159,917 134,116 157,925 155,778 Liability Reestimated as of December 31, 2009 65,808 107,025 140,996 169,604 182,260 196,382 140,845 113,368 115,431 127,021 Cumulative (Deficiency) Redundancy (23,038 ) (44,806 ) (31,586 ) (36,562 ) (2,235 ) 36,653 47,298 46,549 18,685 30,904 Net: Liability for Unpaid Losses and Loss Adjustment Expenses 130,345 119,905 137,406 144,267 162,424 207,137 242,130 249,495 244,500 231,633 203,253 Liability Reestimated as of December 31, 2009 116,085 107,893 121,409 124,606 136,623 171,005 198,376 199,503 216,730 222,049 Cumulative Redundancy 14,260 12,012 15,997 19,661 25,801 36,132 43,754 49,992 27,770 9,584 Company’sCompany's primary marketing areas are outlined on pages 2 and 3.Sincemid-1980’s, ProtectiveCompany 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 fleet transportationFleet Transportation liability, including third party liability, property damage, physical damage, cargo and workers’workers' compensation, arising from vehicular accident or other casualty loss. The self-insured program is supplemented with large deductible workers’workers' compensation policies in states that do not allow for self-insurance of this coverage. Protective also offers work-related accident insurance,insuran ce, on a group basis, to independent contractors under contract to a fleet sponsor.sponsor as well as workers’ compensation coverage to employees of independent contractors who are fleet owners. In addition, Sagamore offers a program of coverages for “small fleet”"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 technology developed in conjunction with marketing private passenger automobilePrivate Passenger Automobile insurance. More recently, Protective has expanded its fleet transportationFleet Transportation offerings to include certain public livery risks, principally large and medium sized operators of bus fleets. In 2008, fleet transportation2009, Fleet Transportation products generated approximately 68%65% of direct premium written and assumed for the Company.Protectivethe Company has accepted reinsurance cessions and retrocessions, principally for catastrophe exposures, from selected insurers and reinsurers. Protective is committed to participation in this market, although participation levels depend on the adequacy of pricing which can vary widely from time to time. In determining the volume of catastrophe property reinsurance that it will accept, the Company first determines the exposure that it is willing to accept from a single “probable maximum loss” (PML), generally defined as a 1-in-250 year event (.4% probability of occurrence), 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 exposureexpos ure to exceed the predetermined limits. ThroughAs of December 31, 2008,2009, the Company’s estimate of its gross exposure to a PML is approximately 11%12% of consolidated surplus. However, this amount is before state and federal tax credits and reinstatement premiums which would significantly reduce the impact of a PML on the Company’s surplus.Sagamorethe Company has sold private passenger automobilePrivate 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 automobilePrivate Passenger Automobile insurance product in order to provide superior service to its agents and insureds.20082009 the financial statement value of the Company’sCompany's investment portfolio was approximately $545$622 million, including $24$83 million of money market instruments classified as cash equivalents. The adjusted cost of this portfolio was $519$573 million with the $26$49 million difference carried as pre-tax unrealized gains.Company’sCompany's investment portfolio, using adjusted cost as a basis, is as follows as of December 31:20082007_Municipal bonds50.7%46.9%U.S. Government obligations5.04.6 2009 2008 Obligations of states and political subdivisions 31.9 % 51.0 % Short-term and money markets 15.1 11.2 Corporate securities 12.4 12.4 U.S. government obligations 9.5 4.2 Residential mortgage-backed securities 8.4 2.0 Foreign government obligations 1.3 1.2 Government sponsored entities 1.0 0.9 Commercial mortgage-backed securities 1.0 0.7 Total fixed maturities 80.6 83.6 Equity securities 7.3 7.7 Limited partnerships (equity basis) 12.1 8.7 100.0 % 100.0 % Corporate and other bonds11.22.3Mortgage-backed securities2.72.7Short-term11.222.3Total fixed maturity and short-term80.878.8Common stocks7.77.6Limited partnerships11.513.6100.0%100.0%77.5%75.1% of the market value of the Company’s total invested assets at December 31, 2008. With the exception of2009. Excluding U.S. Governmentgovernment obligations, the fixed maturity portfolio is widely diversified with no concentrations in any single industry, geographic location or municipality. The largest amount invested in any single issuer (non-index fund) was $7.4$7.3 million (1.4%(1.6% of total invested assets) although most individual investments, other than municipal bonds, are less than $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 consideredconsi dered 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.2008,2009, investment grade bonds and short-term instruments held by insurance subsidiaries equaled 155%182% of net loss and loss adjustment expense reserves, thus providing a substantial margin above this conservative guideline.Company’sCompany'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. Beginning in 2007, 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 comprises almost half of the value of all invested assets at December 31, 2008 and 2007.Company’s bondCompany's fixed maturity and short-term investment portfolios, using par value as a basis, shows the changes in contractual maturities in the portfolio during 2008.2009. 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.Maturities The Company’s maturities of Bondsbonds and Short-Term Investmentsshort-term investments at par value at December 31 (Par Value)
are summarized in the following table:20082007Less than one year45.3%41.1%1 to 5 years40.345.3 2009 2008 Less than one year 55.6 % 45.3 % 1 to 5 years 29.4 40.3 5 to 10 years 3.4 7.8 More than 10 years 11.6 6.6 100.0 % 100.0 % Average life of portfolio (years) 3.8 3.0 5 to 10 years7.8.5More than 10 years6.613.1100.0%100.0%Average life of portfolio (years)3.03.7$4.1$34.1 million of fixed maturity investments (.7%(5.5% of total invested assets) consists of bonds rated as less than investment grade at year end. These investments are primarily composedinclude a diversified portfolio of shares in two widely diversified high yield bond funds where exposure to default by any single issuer is extremely limited. These funds carry a Morningstar rating of three and five stars. We have included theover 40 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.$6.7$4.7 million greater than cost at December 31, 2008,2009, before income taxes, which compares to a $2.2$6.7 million unrealized gain at December 31, 2007.2008. 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. The Company analyzes fixed maturity securities for other-than-temporary impairment (“OTTI”) in accordance with the Financial Accounting Standards Board (“FASB”) OTTI guidance issued in April 2009. As has been the Company’s consistent policy, other-than-temporary impairment is recordedconsidered 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. Additionally, the Company takes into account any known subjective information in evaluating for impairment without consideration to the Company’s 20% threshold. An adjustmentThe net effect of approximately $3.9 million was madeother-than-temporary impairment adjustments to the cost basis of fixed maturityinvestments at December 31, 2008 in accordance with the above guidelines. No adjustments were necessary at December 31, 2007. Gross unrealized losses on fixed maturity securities, were $2.7which added to investment gains, was a positive $3.9 million in total at December 31,for the year, before taxes. In 2008, averaging 3.2%the net effect of the related adjusted cost basis.11.6%13.8% of the market value of the consolidated investment portfolio at December 31, 2008,2009, but only 7.7%7.3% of the related cost basis, as long-term holdings have appreciated significantly, even after the large market downturn of 2008.significantly. 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$3.3 million at December 31, 2008 (.5%2009 (.7% of total investments).$15$35 million pre-tax unrealized gain at the current year end using original cost and over $23$44 million using cost adjusted cost.for other-than-temporary impairment. 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 arear e 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.2008,2009, 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 lossgain of $3.3$2.1 million before taxes.added to thedecreased investment lossesgains from equity securities, was a negative $5.1$1.4 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,the date of write-down, regardless of the evaluation of the issuer or the potential for recovery. Additionally, the Company takes into account any known subjective information in evaluating for impairment without consideration to the Company’s 20% threshold. Net unrealized gains on the equity security portfolio decreasedincreased to $23.1$44.3 million, before tax at December 31, 20082009 from $54.5$23.1 million last year end reflectingreflect ing the worldwide losssignificant recovery of valueequity markets in equity securities during 2008.2009. The current net unrealized gain consists of $27.4$44.6 million of gross unrealized gains and $4.3$.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%.2008,2009, the aggregate cost basis of activeoriginal investment in the limited partnerships was $47.0$31.0 million and the aggregate market value was $59.9$69.4 million.declinesincreases during 2008,2009, with the aggregate of the Company’s share of such lossesgains totaling approximately $33.6 million.$25.6 million as reported by the limited partnerships. The current year limited partnership value decreaseincrease is composed of estimated realized income of $3.4$3.6 million and estimated unrealized lossesgains of $37.0$22.0 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$23.4 million and estimated unrealized lossesgains of $6.9$15.0 million.Derivative SecuritiesDuring 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.suffered significantcontinued to decline during 2008. With few exceptions, the yield curve continued downward with yields on2009, particularly for short-term investments falling by more than 50% from 2007. Bond yields declined much more modestly during 2008 and, as previously noted,investments. As 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-taxresult, pre-tax net investment income decreased $2.5$3.1 million, or 13%18% and after tax income decreased $1.3$3.0 million, or 8%20% during 2008.2009. A comparison of consolidated investment yields, before consideration of investment expenses, is as follows:20082007Before federal tax:Investment income3.7%4.2% 2009 2008 Before federal tax: Investment income 3.3 % 3.7 % Investment income plus investment gains (losses) 9.6 (4.9 ) After federal tax: Investment income 2.7 3.1 Investment income plus investment gains (losses) 6.8 (2.5 ) Investment income plus investment gains (losses)(4.9)12.1After federal tax:Investment income3.13.4Investment income plus investment gains (losses)(2.5)8.5Note B to the consolidated financial statements and to the Results of Operationsbeginning on page 2324 of this document for additional details of investment operations.2008,2009, the Company had 312293 employees, representing an increasea decrease of 2819 employees from the prior year.workers’workers' compensation and other risks for which the Company offersoff ers coverage, and some concerns have organized “captive”"captive" insurance companies as subsidiaries through which they insure their own operations. Some states have workers’workers' compensation funds that preclude private companies from writing this business in those states. Federal law also authorizes the creation of “Risk"Risk Retention Groups”Groups" which may write insurance coverages similar to those offered by the Company. 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.•Please seeFurther, this industry is heavily regulated. Changes in laws and regulations governing the caption “Competition”insurance industry could have a significant impact on the previous page aboveCompany’s ability to generate income from its insurance company operations. The Company’s principal subsidiaries are regulated and licensed in all 50 of the United States, the District of Columbia, all Canadian provinces and Bermuda. The Company is obliged to comply with numerous complex and varied governmental regulations in order to maintain its authority to write insurance business. Failure to maintain compliance could result in various governmental regulators preventing the Company from writing new business and therefore havi ng a material impact on the Company. Further, the ability for a complete discussionthe Company’s insurance subsidiaries to adjust insurance rates is regulated for significant portions of this risk factor.•throughhas two classes of common stock with unequal voting rights. The Company is effectively controlled by its Insurance Subsidiaries, requires collateral fromprincipal stockholders and management, which limits other stockholders’ ability to influence operations. The Company’s executive officers, directors and principal stockholders and their affiliates control nearly 70% of the outstanding shares of voting Class A common stock and 39% of the outstanding shares of non-voting Class B common stock. These parties effectively control the Company; direct its insureds coveringaffairs, exert significant influence in 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 thisAs a result, we are subject to credit risk factor, seerelating to our ability to recover amounts due from reinsurers. While the caption Reinsurance Recoverable beginning on page 28and Notes Dcompany has not experienced any significant reinsurance losses for almost twenty five years, certain of our reinsurance carriers have experienced deteriorating financial conditions or have been downgraded by rating agencies. If we are not able to collect the amounts due to us from reinsurers, the resultant credit losses could materially adversely affect our results of operations, equity, business and L to the consolidatedinsurer financial statements of this Form 10-K.strength.•For further discussionReserves represent our best estimate at a given point in time. Insurance reserves are not an exact calculation of this risk factor, seeliability but instead are complex estimates derived by us, generally utilizing a variety of reserve estimation techniques from numerous assumptions and expectations about future events, many of which are highly uncertain, such as estimates of claims severity, frequency of claims, inflation, claims handling, case reserving policies and procedures, underwriting and pricing policies, changes in the caption Property/Casualty Losseslegal and Loss Adjustment Expenses beginningregulator y environment and the lag time between the occurrence of an insured event and the time of its ultimate settlement. Many of these uncertainties are not precisely quantifiable and require significant judgment on page 3,our part. As trends in underlying claims develop, particularly in so-called “long tail” or long duration coverages, we are sometimes required to revise our reserves. This results in a charge to our earnings in the caption Lossamount of the adjusted reserves, recorded in the period the change in estimate is made. These charges can be substantial and Loss Expense Reserves beginningcan have a material effect, either positively or negatively, on page 29our results of operations and Note C to the consolidated financial statements of this Form 10-K.•For further discussionCatastrophe losses are an inevitable part of this risk factor, seeour business. Various events can cause catastrophe losses, including hurricanes, windstorms, earthquakes, hail, explosions, severe winter weather, and fires, and their frequency and severity are inherently unpredictable. In addition, longer-term natural catastrophe trends may be changing and new types of catastrophe losses may be developing due to climate change, a phenomenon that has been associated with extreme weather events linked to rising temperatures, and includes effects o n global weather patterns, greenhouse gases, sea, land and air temperatures, sea levels, rain, and snow. The extent of our losses from catastrophes is a function of both the caption Property Reinsurancetotal amount of our insured exposures in the affected areas and the severity of the events themselves. In addition, as in the case of catastrophic losses generally, it can take many months, or even years, for the ultimate cost to us to be finally determined. As our claim experience develops on page 2,a particular catastrophe, we may be required to adjust our reserves to reflect our revised estimates of the caption Property/Casualty Losses and Loss Adjustment Expenses beginningtotal cost of claims. While the eventual occurrence of catastrophic losses is expected, we are prohibited by U.S. generally accepted accounting principles from establishing reserves for the expected future occurrence of these losses (such as is done in the life insurance industry). Accordingly, upon the occurrence of such a loss, it will likely have a material adverse impact on page 3, the caption Loss and Loss Expense Reserves beginning on page 29 and Note C toCompany’s results of operations in the consolidated financial statements of this Form 10-K.•For further discussion regarding this risk factor, see Notes Jand L to the consolidated financial statements of this Form 10-K.•responsible for this customer’s self-insured retention and deductible obligations, the collateral held could be insufficient and the Company could sustain a significant operating loss. · 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.earnings and financial position. Conversely, an increase in interest rates could have a significant temporary impact on the market value of the Company’s fixed maturity investment portfolio. ForThe functioning of the fixed income markets, the values of the investments the Company holds and the Company’s ability to liquidate them may be adversely affected if those markets are disrupted by a change in interest rates or otherwise affected by significant negative factors, including, without limitation: local, national, or international events, such as regulatory changes, wars, or terrorist attacks; a recession, depression, or other adverse developments in either the U.S. or other economies th at adversely affects the value of securities held in the Company’s portfolio; financial weakness or failure of one or more financial institutions that play a prominent role in securities markets or act as a counterparty for various financial instruments, which could further discussion regarding this risk factor, seedisrupt the caption Market Risk beginning on page 32markets; inactive markets for specific kinds of this Form 10-K.securities, or for the securities of certain issuers or in certain sectors, which could result in decreased valuations and impact the Company’s ability to sell a specific security or a group of securities at a reasonable price when desired; a significant change in inflation expectations, or the onset of deflation or stagflation. If the fixed-income were to suffer a decrease in value to a substantial degree, the Company’s liquidity, financial position, and financial results could be materially adversely affected. Under these circumstances, the Company’s income from these investments could be materially reduced, and declines in the value of certai n securities could further reduce the Company’s results of operations, equity, business and insurer financial strength.•conditions. For further discussion regarding this risk factor, seeconditions. A decline in the captions Equity Securitiesaggregate value of the equity securities and Limited Partnershipsbeginning on page 15 and Market Riskon page 32 of this Form 10-K.•The Company operateslimited partnership investments would be expected to result in a regulated industry. Changescommensurate decline both 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 portionsvalue of the Company’s equity securities and limited partnership investments and in the Company’s shareholders equity. The resultant decline could materially adversely affect the Company’s results of operations, equity, business and such rate increases can be delayed for substantial periods by regulators.Company’sCompany's entire operations are conducted from these facilities. The current facilities are expected to be adequate for the Company’sCompany's operations for the foreseeable future.REGISTRANT’SREGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS2008,2009, there were approximately 400 record holders of Class A Common Stock and approximately 1,000 record holders of Class B Common Stock.20082009 and 2007,2008, as reported by 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 Class A Class B Dividends High Low High Low Declared 2009: Fourth Quarter $ 24.38 $ 21.10 $ 24.98 $ 21.38 $ .25 Third Quarter 22.70 17.32 24.39 19.19 .25 Second Quarter 20.69 17.25 21.52 17.76 .25 First Quarter 18.00 15.40 �� 20.76 14.28 .25 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 restrictions as described in Note F to the consolidated financial statements.restrictions. At times, the Company has paid an extra cash dividend in recognition of the Company’s more than adequate capitalization theand favorable income tax rates available to individuals on dividends as well as the Company’s excellent earnings over the past four years.earnings. 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 expectex pect extra dividends, if any, in the future to follow any predetermined pattern.2003,2004, 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 12/31/04 12/31/05 12/31/06 12/31/07 12/31/08 12/31/09 Baldwin & Lyons, Inc. 100.00 94.08 109.27 124.76 86.68 123.43 NASDAQ Insurance Index 100.00 109.25 122.49 121.52 107.34 107.94 Russell 2000 100.00 104.55 123.76 121.82 80.66 102.58 Year Ended December 31 2009 2008 2007 2006 2005 (Dollars in thousands, except per share data) Direct and assumed premiums written $ 250,159 $ 221,942 $ 207,367 $ 197,064 $ 222,445 Net premiums earned 181,300 182,299 179,065 169,766 186,165 Net investment income 13,971 17,063 19,595 19,548 14,840 Net gains (losses) on investments 30,816 (47,750 ) 40,096 17,064 22,981 Losses and loss expenses incurred 99,351 115,752 107,781 112,604 140,622 5 Net income (loss) 44,802 (7,713 ) 55,131 38,185 34,223 3.04 (.51 ) 3.63 2.54 2.30 1.00 1.00 1.65 2.55 .95 622,085 545,491 650,538 626,753 622,920 Total assets 851,315 777,743 842,833 853,719 862,081 Shareholders' equity 372,943 330,067 380,718 357,627 346,685 Cost of treasury shares purchased 880 8,908 - 401 - 25.31 22.32 24.98 23.60 23.31 Losses and loss expenses 54.8 % 63.5 % 60.2 % 66.3 % 75.5 % Underwriting expenses 35.8 % 30.9 % 30.9 % 26.6 % 22.0 % Combined 90.6 % 94.4 % 91.1 % 92.9 % 97.5 % 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, and $1.65 per share for 2008, 2007, 2006, 2005 and 2004, respectively. 53 Includes money market instruments classified with cash in the Consolidated Balance Sheets.4 Data is for all coverages combined, does not include fee income and is presented based upon generally accepted accounting principles.5 Includes $17,595 relating to Hurricanes Katrina, Rita and Wilma.Item 7.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION ANDoperatingoper ating cash flows may, at times, turnbecome negative as loss settlements on claim reserves established in prior years exceed net premium revenue and receipts of investment income.current revenues. During 2008, negative2009, positive cash flow from operations totaled $3.5$30.7 million compared to a positive $27.3negative $2.0 million in 2007.2008. This comparative decreaseincrease in operating cash flow resulted from increases in loss settlementsgross premiums and decreases in losses paid in 2009, as well as the timing of $24 million and increases inpremiums ceded premiums reflecting changes in reinsurance treaties.interest rates andflat 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 conservativeshort-term levels. The average contractual life of the Company’s bond and short-term investment portfolio decreasedincreased from 3.73.0 to 3.03.8 years during 2008.2009. 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.20082009 included $58.1$86.8 million in short-term and cash equivalent investments which are readily convertible to cash without market penalty and an additional $128.1$168.7 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 serioussignificant cash drainsoutlays that accompany large losses.20082009 equaled approximately 41%40% 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 R to the consolidated financial statements, at2008, $86.72009, $68.0 million, or 26%18% 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 $9.0$10.0 million of drawings outstanding on this line at December 31, 2008,2009, the proceeds of which were used to purchaselargely for the repurchase of treasury stock.shares. 2009 2008 Fleet Transportation 56.0 % 63.6 % Private Passenger Automobile 70.6 64.5 Reinsurance 40.9 63.7 All lines 54.8 63.5 Company’s fleet transportationCompany's Fleet Transportation business of $8.3 million (6%). The higher premium volume from the fleet transportationFleet 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 automobilePrivate Passenger Automobile program of $3.1 million (13.0%) due to ongoing rate competition and the resultant loss of business.property reinsurance increase resulted from increased premiums generated by most of the Company’s programsAs 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.Company’sCompany's decreased retention under reinsurance treaties effective June, 2007, and June, 2008, covering fleet transportationFleet Transportation risks, resulting in a higher percentage of the direct premiums ceded to reinsurers.fleet transportationFleet 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 automobileCompany's Private Passenger Automobile product decreased by $7.2 million (25%).$59.9$44.9 million at December 31 , 2008 compared to a cost basis of $47.0$32.0 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"other-than-temporary impairment,”" of $9.0 million during 2008 are reflectedreflecte d 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.property reinsurance. Partially offsetting increases in loss and loss expenses was a $5.5 million decrease in losses from the Company’s private passenger automobilePrivate 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’sCompany'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 Reinsurance 63.7 60.8 All lines 63.5 60.2 fleet transportationFleet 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 automobilePrivate 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, principallyprincipal ly Hurricane Ike, which added almost 16 points to theCompany’sCompany's large fleet transportationFleet 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 transportationFleet Transportation insureds, the length of time necessary to settle larger, more complex claims and the volatility of the fleet transportationFleet 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’sCompany's claim handling process has, historically, tended to produce savings from the reserves provided. Changes in both gross premium volumes and the Company’sCompany's reinsurance structure for its fleet transportationFleet 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.products.fleet transportationFleet 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 2007.2007 Compared to 2006Direct 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%), partially offset by an increase in the Company’s fleet transportation business of $1.4 million (1%) The overall net decrease in direct premiums written volume was a result of ongoing rate competition and the resultant loss of business.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 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 focused on soliciting coverage from insurance companies with risks throughout the U.S. Midwest and limited coastal regions excluding Florida and California in 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 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 5% to $179.1 million for 2007 from $169.8 million for 2006. Net premiums earned from all fleet transportation products increased by $1.8 million (2%). Additionally, net premiums earned from non-affiliated property reinsurance 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.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 transportation and propertyreinsurance, continued low frequency of large trucking claims, and premium volume declines in the Company’s private passenger automobile product. These decreases 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.The fleet 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 loss ratio for property reinsurance 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 loss ratio for the year was 33.0%, or slightly lower than 2006 on the remainder of our property reinsurance 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. The savings 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 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 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 agents and brokers including commissions relating to higher property reinsurance 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.Reinsurance ceded credits were $.8 million (69%) higher in 2007, resulting from changes related to recent reinsurance treaties.A portion of 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 fleet transportation 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.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. 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.70%73% of the Company’s assets are composed of investments at December 31, 2008.2009. Approximately 89% of these investments are publicly-traded, owned directly and have readily-ascertainable market values. The remaining 11% of investments are composed primarily of minority interests in several limited partnerships. These limited partnerships are20082009 are publicly-traded securities, some have been valued by the respective partnerships using their experience and judgment.Approximately $4.1 millioninvestments (.7%securities only and provides new guidance on the recognition and presentation of total invested assets) consistsother-than-temporary impairments. In addition, the FASB OTTI guidance requires additional disclosures related to other-than-temporary impairments. Under this revised guidance, if a fixed maturity security is in an unrealized loss position and the Company has the intent to sell the fixed maturity security, or it is more likely than not that the Company will have to sell the fixed maturity security before recovery of bonds rated as less than investment grade at year end. These investments are primarily composed of sharesits amortized cost basis, the decline in two widely diversified high yield bond funds where exposure to default by any single issuervalue is likelydeemed to be limited. These funds carry a Morningstar rating of threeother-than-temporary and five stars. We have included theis recorded to net realized losses on investments in these fundsthe consolidated statements of operations. For impaired fixed maturity securities that the Company does not intend to sell or it is more likely than not that the Company will not have to sell such securities, but the Company expects that it will not fully recover the amortized cost basis, the credit component of the other-than-temporary impairment is recognized in net realized losses on investments in the totalconsolidated statements of non-investment grade bonds since, underoperations and the investment guidelinesnon-credit component of the funds, the average bond quality rating could fall below BBB. At December 31, 2008, the market value of these bond funds, as recordedother-than-temporary impairment is recognized directly in the financial statements, was 17.6% less than cost.aan equity security’s decline in market value below cost is other-than-temporary, we first make an objective analysis of each individual equity security where current market value is less than cost. For any equity 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.other-than-t emporary. In those instances, the Company also considers its intent and ability to hold equity investments until recovery or maturity.recovery. For any decline which is considered to be other-than-temporary, we recognize an impairment loss in the current period earnings as an investment loss. Declines which are considered to be temporary are recorded as a reduction in shareholders’ equity, net of related federal income tax credits.2008,2009, unrealized gains include $7.2$9.4 million of appreciation on investments previously adjusted for other-than-temporary impairment, comparedcom pared to $11.7$9.2 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.as described above. However, to the extent that certain declines in value are reported as unrealized at December 31, 2008,2009, 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, 2008,2009, the total gross unrealized loss included in the Company’s investment portfolio was approximately $7.0$.9 million. No individualindi vidual issue constituted a material amount of this total. Had2008,2009, investment lossesgains would have increaseddecreased by $.30$.04 per share for the year, after tax. There would, however, have been no impact on total shareholders’ equity or book value per share since the decline in value of these securities was already recognized as a reduction to shareholders’ equity at December 31, 2008. 2009 2008 2007 Premium ceded (reduction to premium earned) $ 60,818 $ 46,514 $ 40,094 Losses ceded (reduction to losses incurred) 22,025 53,398 4,981 Commissions from reinsurers (reduction to operating expenses) 5,352 3,084 2,044 21%18% of total Company assets as of December 31, 2008.2009. In order to be able to provide the high limits required by the Company’s fleet transportationFleet 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 andan d 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 fleet transportationFleet Transportation liability and workers’ compensation, provide more variability in the estimation process than lines of business with lower coverage limits.reinsurer’sreinsurer'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 superior 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 creditcr edit 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 riskloss rather than a deficiency associated with the loss reserving process. See Notes D and L to the consolidated financial statements, for further discussion of reinsurance and concentrations of credit risk with respect to reinsurance recoverable.direct and assumedon both a gross (before consideration of reinsurance) and on a net of reinsurance basis at December 31, 20082009 and 20072008 (dollars in thousands). Those product 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 2009 2008 2009 2008 Fleet Transportation $ 297,781 $ 325,765 $ 147,854 $ 173,320 Reinsurance 34,814 37,489 34,814 37,489 Private Passenger Automobile 10,293 9,802 9,802 9,802 All other 16,143 16,502 10,783 11,022 $ 359,031 $ 389,558 $ 203,253 $ 231,633 reportedreport ed 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. The Company’s claims range from the very routine private passenger automobilePrivate 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 fleet transportationFleet 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 LAE reserve development.regardingregardin g 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.private passenger automobilePrivate 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 fleet transportationFleet 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.fleet transportationFleet Transportation 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 currentcurren t loss and loss expense reserve estimates include, but are not limited to, the following:Consistency in the individual case reserving processesThe selection of loss development factors in the establishment of bulk reserves for incurred but reported losses and loss expensesProjected future loss trend· Consistency in the individual case reserving processes 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· 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 fleet transportationFleet 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 $84.9$91.7 million, or approximately 27%31% of carried direct reserves for fleet transportation)Fleet Transportation).20082009 and 20072008 consisted of (dollars in thousands): 2009 2008 Total deferred tax liabilities $ 27,249 $ 13,155 Total deferred tax assets 22,205 23,745 Net deferred tax assets (liabilities) $ (5,044 ) $ 10,590 2008,2009, include approximately $15.6$15.3 million related to loss and loss expense reserves of which, $9.6$8.7 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 $4.1$3.2 million relates to impairment adjustments made to investments, as required by accounting regulations. The sizable unrealized gains in the Company’s investment portfolios would allow for the recovery of this deferred tax at any time. Limited partnership investmentsDeferred ceding commissions represent $2.4$1.0 million of deferred tax assets. The balance of deferred tax assets, approximately $1.6$2.7 million, consists of various normal operating expenseexpens e accruals and is not considered to be material. As a result of its analysis, management has determined that no valuation allowance is necessary at December 31, 2008.Financial Accounting Standards Board Interpretation (FIN) No. 48, Accounting for Uncertainty in Income Taxes— an Interpretation of 2009.Statement No.109, provides guidance for recognizing and measuring uncertain tax positions as defined in SFAS No. 109, Accounting for Income Taxes. FIN 48and 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.prescribed. 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.fleet transportationFleet Transportation 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. 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’sCompany'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.Company’sCompany's invested assets, equity securities have a high potential for short-term price fluctuation. TheCompany’sCompany's equity positions at December 31, 20082009 was $63.2$85.9 million or approximately 12%14% of invested assets. This market valuation includes $23.1$44.3 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’sCompany's equity investments allows it to invest in positions where ultimate value, and not short-term market fluctuations, is the primary focus.distributionsdistribution s 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.Company’sCompany's fixed maturity portfolio totaled $364.3$379.9 million at December 31, 2008.2009. Approximately 83%65% of this portfolio is made up of U.S. Government and government agency obligations and state and municipal debt securities; 85.6%85% of the portfolio matures within 5 years; and the average life of the Company’sCompany's fixed maturity investments is approximately 3.03.8 years. Although the Company is exposed to interest rate risk on its fixed maturity investments, given the anticipated duration of the Company’sCompany'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’sCompany's ability to conduct daily operations or to meet its obligations.Company’sCompany'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.inbelow.next paragraph.A 10 percentage point increase or decrease inestimated effects on the loss factors actually utilized in the Company’s reserve determinationfair value of financial instruments at December 31 2008 would increase or decrease gross loss reserves by approximately $17.2 million. Ondue to an instantaneous change in yield rates of 100 basis points and a net basis, a 10 percentage point increase in loss ratio would increase 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 20 percentage point decrease would decrease net loss reserves by approximately $20.4 million with the difference attributable to minimums and maximums included10% decline in the various reinsurance contracts. Fair Interest Equity Value Rate Risk Risk 2009: U.S. government obligations $ 54,632 $ (929 ) $ - Government sponsored entities 5,883 (113 ) - Residential mortgage-backed securities 48,377 (1,135 ) Commercial mortgage-backed securities 5,652 (133 ) - Obligations of states and political subdivisions 185,469 (2,848 ) - Corporate securities 72,185 (1,804 ) - Foreign government obligations 7,724 (131 ) - Total fixed maturities 379,922 (7,093 ) - Equity securities 85,886 - (8,590 ) Limited partnerships 69,436 - (9,040 ) Short-term 3,703 - - Total available-for-sale securities $ 538,947 $ (7,093 ) $ (17,630 ) 2008: U.S. government obligations $ 21,888 $ (557 ) $ - Government sponsored entities 4,672 (130 ) - Residential mortgage-backed securities 10,248 (327 ) - Commercial mortgage-backed securities 3,242 (104 ) - Obligations of states and political subdivisions 267,152 (6,384 ) - Corporate securities 66,084 (1,953 ) - Foreign government obligations 5,975 (152 ) - Total fixed maturities 379,261 (9,607 ) - Equity securities 63,200 - (6,321 ) Limited partnerships 44,883 - (5,879 ) Short-term 33,820 - - Total fixed maturities and other investments $ 521,164 $ (9,607 ) $ (12,200 ) Company’sfollowing tables present the estimated effects on the fair value of financial instruments at December 31 due to an instantaneous change in yield rates of 150 basis points and a 15% decline in the S&P 500 and Indian BSE 500 indices (dollars in thousands). Fair Interest Equity Value Rate Risk Risk 2009: U.S. government obligations $ 54,632 $ (1,384 ) $ - Government sponsored entities 5,883 (168 ) - Residential mortgage-backed securities 48,377 (1,680 ) - Commercial mortgage-backed securities 5,652 (196 ) - Obligations of states and political subdivisions 185,469 (3,948 ) - Corporate securities 72,185 (2,670 ) - Foreign government obligations 7,724 (195 ) - Total fixed maturities 379,922 (10,241 ) - Equity securities 85,886 - (12,884 ) Limited partnerships 69,436 - (13,560 ) Short-term 3,703 - - Total fixed maturities and other investments $ 538,947 $ (10,241 ) $ (26,444 ) 2008: U.S. government obligations $ 21,888 $ (845 ) $ - Government sponsored entities 4,672 (197 ) - Residential mortgage-backed securities 10,248 (492 ) - Commercial mortgage-backed securities 3,242 (156 ) - Obligations of states and political subdivisions 267,152 (9,263 ) - Corporate securities 66,084 (2,947 ) - Foreign government obligations 5,975 (231 ) - Total fixed maturities 379,261 (14,131 ) - Equity securities 63,200 - (9,481 ) Limited partnerships 44,883 - (8,819 ) Short-term 33,820 - - Total fixed maturities and other investments $ 521,164 $ (14,131 ) $ (18,300 ) Company’sCompany's contractual obligations at December 31, 2008. 2009.
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 $ 359.0 $ 110.9 $ 99.8 $ 40.9 $ 107.4 Investment commitments 2.2 2.2 - - - Operating leases 5.6 1.5 2.9 1.2 - Borrowings 10.0 - 10.0 - - Total $ 376.8 $ 114.6 $ 112.7 $ 42.1 $ 107.4 $160.0$155.5 million at December 31, 2008,2009, would approximate that of the above projected direct reserve payout.2008.May,June 23, 2011.ITEM 8--FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA200820082009 and 2007,2008, and the related consolidated statements of operations, changes in equity other than capital, and cash flows for each of the three years in the period ended December 31, 2008.2009. 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’sCompany's management. Our responsibility is to express an opinion on these financial statements and schedules based on our audits.20082009 and 2007,2008, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2008,2009, 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.2008,2009, 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 16, 200911, 2010 expressed an unqualified opinion thereon./s/ ERNST & YOUNG LLP16, 200911, 2010Consolidated Balance Sheets Baldwin & Lyons, Inc. and Subsidiaries 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 Baldwin & Lyons, Inc. and Subsidiaries December 31 2009 2008 (dollars in thousands) Assets Investments: Fixed maturities $ 379,922 $ 379,261 Equity securities 85,886 63,200 Limited partnerships 69,436 44,883 Short-term and other 3,703 33,820 538,947 521,164 Cash and cash equivalents 79,504 16,657 Accounts receivable--less allowance (2009, $566; 2008, $650) 32,535 29,701 Accrued investment income 3,786 5,019 Reinsurance recoverable 155,451 159,989 Prepaid reinsurance premiums 10,651 4,914 Deferred policy acquisition costs 4,905 2,326 Property and equipment--less accumulated depreciation (2009, $9,551; 2008, $9,003) 13,332 11,582 Notes receivable from employees 2,054 2,199 Other assets 10,150 13,602 Deferred federal income taxes - 10,590 $ 851,315 $ 777,743 Liabilities and Shareholders' Equity Reserves: Losses and loss expenses $ 359,031 $ 389,558 Unearned premiums 25,912 17,183 384,943 406,741 Reinsurance payable 21,705 2,862 Short-term borrowings 10,000 9,000 Accounts payable and other liabilities 50,173 27,076 Current federal income taxes 6,507 1,997 Deferred federal income taxes 5,044 - 478,372 447,676 Shareholders' equity: Common stock, no par value: Class A voting -- authorized 3,000,000 shares; outstanding -- 2009, 2,623,109; 2008, 2,623,109 shares 112 112 Class B non-voting -- authorized 20,000,000 shares; outstanding -- 2009, 12,109,878; 2008, 12,163,251 shares 517 519 Additional paid-in capital 46,337 46,312 Unrealized net gains on investments 31,886 19,410 Retained earnings 294,091 263,714 372,943 330,067 $ 851,315 $ 777,743 Consolidated Statements of Operations Baldwin & Lyons, Inc. and Subsidiaries Year Ended December 31 2009 2008 2007 (dollars in thousands, except per share data) Revenue: Net premiums earned $ 181,300 $ 182,299 $ 179,065 Net investment income 13,971 17,063 19,595 Commissions and other income 6,562 5,317 5,007 Net realized gains (losses) on investments, excluding impairment losses 33,662 (35,868 ) 40,689 Total other-than-temporary impairment losses on investments (2,846 ) (11,881 ) (593 ) Net realized gains (losses) on investments 30,816 (47,749 ) 40,096 232,649 156,930 243,763 Expenses: Losses and loss expenses incurred 99,351 115,752 107,781 Other operating expenses 69,032 58,577 56,330 168,383 174,329 164,111 Income (loss) before federal income taxes 64,266 (17,399 ) 79,652 Federal income taxes (benefits) 19,464 (9,686 ) 24,521 Net income (loss) $ 44,802 $ (7,713 ) $ 55,131 Per share data: Diluted earnings $ 3.04 $ ( .51 ) $ 3.63 Basic earnings $ 3.04 $ ( .51 ) $ 3.63 Cash dividends paid $ 1.00 $ 1.00 $ 1.65 Consolidated Statements of Changes in Equity Other Than Capital Baldwin & Lyons, Inc. and Subsidiaries 2009 2008 2007 (dollars in thousands) Balances at beginning 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 Changes arising from income-producing activities: Net income (loss) 44,802 (7,713 ) 55,131 Gains (losses) on investments: Pre-tax holding gains (losses) on debt and equity securities arising during period 24,442 (41,058 ) 1,027 Applicable federal income taxes 8,555 (14,370 ) 359 15,887 (26,688 ) 668 Pre-tax gains (losses) on debt and equity securities included in net income (loss) during period 5,248 (14,188 ) 16,955 Applicable federal income taxes 1,837 (4,966 ) 5,934 3,411 (9,222 ) 11,021 Change in unrealized gains (losses) on investments 12,476 (17,466 ) (10,353 ) Foreign exchange adjustment 1,001 (1,468 ) 1,164 Comprehensive income - total realized and unrealized income (loss) 58,279 (26,647 ) 45,942 Other changes affecting retained earnings: Cash dividends paid to shareholders (14,744 ) (15,096 ) (25,062 ) Cost of treasury shares in excess of original issue proceeds (682 ) (7,302 ) - (15,426 ) (22,398 ) (25,062 ) Total changes 42,853 (49,045 ) 20,880 Balances at end of year: Retained earnings 294,091 263,714 295,293 Unrealized gains on investments 31,886 19,410 36,876 $ 325,977 $ 283,124 $ 332,169 Baldwin & Lyons, Inc. and Subsidiaries Year Ended December 31 2009 2008 2007 (dollars in thousands) Operating activities Net income (loss) $ 44,802 $ (7,713 ) $ 55,131 Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities: Change in accounts receivable and unearned premium 5,066 (165 ) (4,891 ) Change in accrued investment income 1,233 (257 ) 247 Change in reinsurance recoverable on paid losses 2,577 (3,453 ) 4,921 Change in losses and loss expenses reserves net of reinsurance (28,569 ) (12,786 ) (5,097 ) Change in other assets, other liabilities and current income taxes 21,324 (18,543 ) 4,211 Amortization of net policy acquisition costs 23,475 20,353 18,941 Net policy acquisition costs deferred (26,054 ) (19,485 ) (17,392 ) Provision for deferred income taxes 9,561 (14,129 ) 5,620 Bond amortization 3,643 3,427 2,453 (Gain) loss on sale of property 14 (17 ) 35 Depreciation 3,355 2,976 2,337 Net (gain) loss on investments (30,816 ) 47,749 (40,096 ) Excess tax benefit related to stock options - - (253 ) Compensation expense related to restricted stock 1,085 - - Net cash provided by (used in) operating activities 30,696 (2,043 ) 26,167 Investing activities Purchases of fixed maturities and equity securities (220,769 ) (276,737 ) (232,147 ) Purchases of limited partnership interests (7 ) (16,199 ) (5,995 ) Distributions from limited partnerships 1,022 3,657 5,565 Proceeds from maturities 105,336 31,623 164,739 Proceeds from sales of fixed maturities 121,722 161,814 44,508 Proceeds from sales of equity securities 13,328 45,813 55,866 Net sales (purchases) of short-term investments 30,118 10,972 14,557 Purchase of subsidiary - (2,661 ) - Decrease in principal of notes receivable from employees 143 29 110 Purchases of property and equipment (5,307 ) (5,348 ) (6,225 ) Proceeds from disposals of property and equipment 188 72 935 Net cash provided by (used in) investing activities 45,774 (46,965 ) 41,913 Financing activities Dividends paid to shareholders (14,744 ) (15,096 ) (25,062 ) Proceeds from sale of common stock - - 2,211 Excess tax benefit related to stock options - - 253 Drawings on line of credit 11,000 9,000 - Repayment on line of credit (10,000 ) - - Cost of treasury shares (880 ) (8,908 ) - Net cash used in financing activities (14,624 ) (15,004 ) (22,598 ) Effect of foreign exchange rates on cash and cash equivalents 1,001 (1,468 ) 1,165 Increase (decrease) in cash and cash equivalents 62,847 (65,480 ) 46,647 Cash and cash equivalents at beginning of year 16,657 82,137 35,490 Cash and cash equivalents at end of year $ 79,504 $ 16,657 $ 82,137 “Company”“Company"). All significant inter-company transactions and accounts have been eliminated in consolidation.couldwill differ from those estimates. (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). LimitedThe Company accounts for investments in limited partnerships are accounted for using the equity method withof accounting, which requires an investor in a limited partnership to record its proportionate share of the corresponding change in value recorded as a component oflimited partnership’s net income. To the extent that the limited partnership investees include both realized and unrealized investment gains or losses on investments. in the determination of net income or loss, then the Company would also recognize , through its statement of operations, its proportionate share of the investee’s unrealized as well as realized investment gains or losses.without subjectivesubject to an evaluation as to possible future recovery. Additionally, the Company takes into account any known subjective informationinforma tion 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.cost.cost, less accumulated depreciation. Depreciation is computed principally by the straight-line method.Statement of Financial Accounting Standards No. 142 Goodwill and Other Intangible Assets,FASB Guidance, 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 theirthe ir 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.suchsuc h adjustments are reflected in current operations.Note A - Significant Accounting Policies (continued)quarterlyquar terly 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 contracts covering catastrophic events are recorded concurrently with the related loss. property reinsurance using the periodic method. Under the periodic method, premiums from foreign property reinsurance 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.consequences ofliability associated with 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.“Black-Scholes”"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.FASB Guidance. 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).optionsshare-based awards outstanding. Basic earnings per share are presented exclusive of the effect of optionsshare-based awards outstanding. See Note K - Earnings Per Share.Note A - Significant Accounting Policies (continued)Note B - Investments The following is a summary of investments at December 31: Net Cost or Gross Gross Unrealized Fair Amortized Unrealized Unrealized Gains Value Cost Gains Losses (Losses) 2009: U.S. government obligations $ 54,632 $ 54,615 $ 86 $ (69 ) $ 17 Government sponsored entities 5,883 5,825 72 (14 ) 58 Residential mortgage-backed securities 48,377 48,068 572 (263 ) 309 Commercial mortgage-backed securities 5,652 5,655 - (3 ) (3 ) Obligations of states and political subdivisions 185,469 182,536 2,940 (7 ) 2,933 Corporate securities 72,185 70,791 1,572 (178 ) 1,394 Foreign government obligations 7,724 7,695 29 - 29 Total fixed maturities 379,922 375,185 5,271 (534 ) 4,737 Equity securities 85,886 41,568 44,636 (318 ) 44,318 Limited partnerships 69,436 69,436 - - - Short-term 3,703 3,703 - - - Total available-for-sale securities $ 538,947 $ 489,892 $ 49,907 $ (852 ) 49,055 Applicable federal income taxes (17,169 ) Net unrealized gains - net of tax $ 31,886 2008: U.S. government obligations $ 21,888 $ 21,513 $ 375 $ - $ 375 Government sponsored entities 4,672 4,537 135 - 135 Residential mortgage-backed securities 10,248 10,115 157 (24 ) 133 Commercial mortgage-backed securities 3,242 3,698 - (456 ) (456 ) Obligations of states and political subdivisions 267,152 263,026 5,132 (1,006 ) 4,126 Corporate securities 66,084 63,774 3,520 (1,210 ) 2,310 Foreign government obligations 5,975 5,867 108 - 108 Total fixed maturities 379,261 372,530 9,427 (2,696 ) 6,731 Equity securities 63,200 40,071 27,415 (4,286 ) 23,129 Limited partnerships 44,883 44,883 - - - Short-term 33,820 33,820 - - - Total available-for-sale securities $ 521,164 $ 491,304 $ 36,842 $ (6,982 ) 29,860 Applicable federal income taxes (10,450 ) �� Net unrealized gains - net of tax $ 19,410 2009 2008 Number of Securities Fair Value Gross Unrealized Loss Number of Securities Fair Value Gross Unrealized Loss Fixed maturity securities: 12 months or less 109 $ 70,568 $ (411 ) 47 $ 80,993 $ (2,675 ) Greater than 12 months 4 6,220 (123 ) 6 1,812 (21 ) Total fixed maturities 113 76,788 (534 ) 53 82,805 (2,696 ) Equity securities: 12 months or less 21 2,032 (147 ) 33 11,362 (3,085 ) Greater than 12 months 8 2,913 (171 ) 14 5,845 (1,201 ) Total equity securities 29 4,945 (318 ) 47 17,207 (4,286 ) Total 142 $ 81,733 $ (852 ) 100 $ 100,012 $ (6,982 ) 12%9% of original or adjusted cost and the average unrealized loss for all fixed maturity securities in a loss position at December 31, 20082009 is approximately 3%less than 1% of original or adjusted cost. The Company has the ability and intentdoes not intend to hold thesesell any fixed maturity securities until their fulland it is not more likely than not that the Company will have to sell any fixed maturity security before recovery of its amortized cost can be recovered.basis. Therefore, the Company does not believe the unrealized losses represent an other-than-temporary impairment as of December 31, 2008.2008,2009, 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 Amortized Cost One year or less $ 160,086 42.1 % $ 158,818 42.3 % Excess of one year to five years 149,586 39.4 146,991 39.2 Excess of five years to ten years 9,619 2.5 9,123 2.4 Excess of ten years 6,602 1.8 6,530 1.8 Total maturities 325,893 85.8 321,462 85.7 Mortgage-backed securities 54,029 14.2 53,723 14.3 $ 379,922 100.0 % $ 375,185 100.0 % 2009 2008 2007 Fixed maturities $ 14,151 $ 14,417 $ 14,329 Equity securities 1,327 1,712 1,866 Money market funds 162 1,332 2,613 Short-term and other 328 1,649 2,602 15,968 19,110 21,410 Investment expenses (1,997 ) (2,047 ) (1,815 ) Net investment income $ 13,971 $ 17,063 $ 19,595 The 2008 net losses from limited partnerships, as shown in the above table, include approximately $37,000 of unrealized losses as reported in the net loss of the various partnerships. Shareholders’ 2009 2008 2007 Fixed maturities: Gross gains $ 8,646 $ 3,333 $ 536 Gross losses (1,505 ) (6,806 ) (680 ) Net gains (losses) 7,141 (3,473 ) (144 ) Equity securities: Gross gains 1,533 4,463 19,293 Gross losses (3,426 ) (12,943 ) (2,483 ) Net gains (losses) (1,893 ) (8,480 ) 16,810 Limited partnerships - net gain (loss) 25,568 (33,562 ) 23,141 Other - net gain (loss) - (2,234 ) 289 Total net gains (losses) $ 30,816 $ (47,749 ) $ 40,096 $8,000,$24,000, net of deferred federal income taxes, of earnings yet undistributed by limited partnerships as of December 31, 2008. 2009 2008 2007 Cumulative charges to income at beginning of year $ 11,698 $ 2,734 $ 3,717 Writedowns based on objective and subjective criteria 2,846 11,881 593 Recovery of prior writedowns upon sale or disposal (5,309 ) (2,917 ) (1,576 ) Cumulative charges to income at end of year $ 9,235 $ 11,698 $ 2,734 Net pre-tax realized gain (loss) $ 2,463 $ (8,964 ) $ 983 Addition (reduction) to earnings per share from net after-tax realized gain (loss) $ .11 $ (.39 ) $ .04 Unrealized gain on investments previously written down at end of the year - see note below $ 9,379 $ 7,211 $ 4,878 disposed of.$2,500$2,200 to various limited partnerships as of December 31, 2008.2009.$29,878$48,469 at December 31, 2008,2009, 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 3% to 24%25%. These limited partnerships added $28,502, net of fees, to investment losses in 2008,$18,591, ($25,502) and $19,177, and $7,942, net of fees, to investment gains (losses) in 20072009, 2008 and 2006,2007, respectively. During 2009, 2008 2007 and 2006,2007, the Company has recorded management fees of $632, $781 $765 and $604,$765, respectively, and performance-based fees of $1,247, $0 $4,902 and $1,587,$4,902, 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.a directortwo directors of the Company is anare executive officerofficers and owner.owners. 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 $1,865$2,329 and $17,467,$18,474, respectively, at December 31, 2008.2009. 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 $173, $171 and $170 during 2009, 2008 and $148 during 2008, 2007, and 2006, respectively.$26,023$28,128 at December 31, 2008.20082009 include $3,000$3,600 in foreign time certificates of deposit.2007 was $18,761, and $44,716, respectively. At December 31, 2008,2009, the Company’s estimated ownership interest in this limited partnership investment was less than 4%.Company’sCompany's share of earnings from this limited partnership investment was as follows for the years ended December 31: 2009 2008 2007 Estimated realized income $ 593 $ 670 $ 4,241 Estimated unrealized income (loss) 10,322 (26,625 ) 12,983 Net earnings (losses) $ 10,915 $ (25,955 ) $ 17,224 46 2009 2008 Total assets $ 914,927 $ 582,920 Total partners' capital 843,633 550,840 Net increase (decrease) in partners' capital resulting from operations 333,12 (858,680 ) indicated for the years ended December 31:indicated. 2009 2008 2007 Reserves at the beginning of the year $ 231,633 $ 244,500 $ 249,495 Provision for losses and loss expenses: Claims occurring during the current year 108,935 132,829 129,065 Claims occurring during prior years (9,584 ) (17,077 ) (21,284 ) Total incurred 99,351 115,752 107,781 Loss and loss expense payments: Claims occurring during the current year 41,302 51,649 53,820 Claims occurring during prior years 84,777 76,970 58,956 Total paid 126,079 128,619 112,776 Other reserve adjustment (1,652 ) - - Reserves at the end of the year 203,253 231,633 244,500 Reinsurance recoverable on unpaid losses at the end of the year 155,778 157,925 134,116 Reserves, gross of reinsurance recoverable, at the end of the year $ 359,031 $ 389,558 $ 378,616 $17,077$9,584 was developed during 20082009 in the settlement of claims occurring on or before December 31, 2007,2008 with similarcomparative developments for the two previous calendar years. The net savings developed duringfor each year are composed of individual claim savings and deficiencies which, in the prior two calendar years on losses occurring on or before years ended December 31, 2006 and 2005. These savings are the result ofaggregate have resulted from the settlement of claims at amounts lower than previously reserved and from changes in estimates of losses incurred but not reported as part of the normal reserving process. (Savings) Deficiency Developed 2009 2008 2007 Directly produced property and casualty insurance $ (14,110 ) $ (16,841 ) $ (17,116 ) Reinsurance assumed 3,942 (205 ) (4,112 ) Involuntary residual markets 584 (31 ) (56 ) Totals $ (9,584 ) $ (17,077 ) $ (21,284 ) Reserve savings developedLoss reserves pertaining to the Company’s reinsurance business are established largely by the ceding reinsurers although the Company may adjust such reserves if management determines that additional reserves could be necessary. Accordingly, the fluctuation in loss developments related to retrospectively-ratedreinsurance assumed will tend to be more pronounced than those experienced on directly produced business resultedwhich is reserved by Company personnel. In addition, changes in the concurrent recording of return premiums of approximately $662 and $4,738 for the years ended December 31, 2007 and 2006, 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 increased its per occurrence retention of risk related to transportation liability business during the period 2001 to 2006. The increasedCompany’s net retention per occurrenceunder reinsurance treaties will impact developments as more or less business is reflected in the increasingly favorable developments on other direct business during 2008, 2007 and 2006.retained. These trendstre nds were considered in the establishment of the Company’s reserves at December 31, 20082009 and 2007.$11.1$11.2 million to date and carries a remaining reserve of $8.9$8.8 million at December 31, 2008.472009.Note C - Loss and Loss Expense Reserves (continued)20082009 and 2007,2008, loss reserves have been reduced by approximately $5,342$6,656 and $5,591,$5,342, 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.$5,119$5,724 and $4,069$5,119 at December 31, 2009 and 2008, and 2007, respectively.Risks are reinsuredReinsurance treaties 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 fleet transportationFleet Transportation 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.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’sCompany's operations. In addition, the insurance subsidiaries participate in certain involuntary reinsurancemandatory residual market 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.magnitudeimpact of reinsurance ceded and assumed on the Company’s net premium written and earned for the most recent three years: Premiums Written Premiums Earned 2009 2008 2007 2009 2008 2007 Direct $ 209,129 $ 182,810 $ 176,233 $ 200,341 $ 188,285 $ 185,781 Ceded on direct (58,643 ) (39,828 ) (32,980 ) (59,330 ) (41,214 ) (35,294 ) Net direct 150,486 142,982 143,253 141,011 147,071 150,487 Assumed 41,030 39,132 31,134 41,777 40,528 33,378 Ceded on assumed (1,488 ) (5,300 ) (4,800 ) (1,488 ) (5,300 ) (4,800 ) Net assumed 39,542 33,832 26,334 40,289 35,228 28,578 Net $ 190,028 $ 176,814 $ 169,587 $ 181,300 $ 182,299 $ 179,065 2007 and 20062007 have been reduced by ceded reinsurance recoveries of approximately $22,025, $53,398 $4,981 and $14,026,$4,981, respectively. The increase in 2009 and 2008 recoveries is a result of the Company having reached its annual aggregate deductible on onecertain of its reinsurance treaties.treaties and from increases in workers’ compensation business which is heavily reinsured. Ceded reinsurance premiums and loss recoveries for catastrophe reinsurance contracts were not material.2007 and 20062007 include approximately $17,070, $22,003 $14,638 and $2,623,$14,638, respectively, relating to property reinsurance from non-affiliated insurance or reinsurance companies, including involuntary residual market pools. The assumed reinsurance losses in 2008 and 2007 reflect an overall increase in the Company’s reinsurance assumed portfolio. 2009 2008 Case unpaid losses, net of valuation allowance $ 87,467 $ 88,349 Incurred but not reported unpaid losses and loss expenses $ 66,030 $ 67,106 Paid losses and loss expenses 1,954 4,531 Unearned premiums - 3 $ 155,451 $ 159,989 Company’sCompany's deferred tax assets and liabilities as of December 31 are as follows: 2009 2008 Deferred tax liabilities: Unrealized gain on fixed income and equity security investments $ 17,169 $ 10,450 Limited partnership investments 5,252 - Deferred acquisition costs 2,748 814 Salvage and subrogation 1,785 1,575 Other 295 316 Total deferred tax liabilities 27,249 13,155 Deferred tax assets: Loss and loss expense reserves 15,274 15,575 Limited partnership investments - 2,420 Unearned premiums discount 1,814 1,203 Other-than-temporary investment declines 3,232 4,094 Deferred compensation 560 228 Deferred ceding commission 1,032 - Other 293 225 Total deferred tax assets 22,205 23,745 Net deferred tax assets (liabilities) $ (5,044 ) $ 10,590 49 2009 2008 2007 Statutory federal income rate applied to pretax income (loss) $ 22,493 $ (6,090 ) $ 27,878 Tax effect of (deduction): Tax-exempt investment income (2,682 ) (3,649 ) (3,298 ) Net addition to (reduction of) tax positions (405 ) (192 ) 125 Other 58 245 (184 ) Federal income tax expense (benefit) $ 19,464 $ (9,686 ) $ 24,521 Federal income tax expense consists of the following:The components of the provision for deferred federal income taxes (credits) are as follows:Federal income tax expense consists of the following: 2009 2008 2007 Taxes (credits) on pre-tax income (loss): Current $ 9,903 $ 4,443 $ 18,901 Deferred 9,561 (14,129 ) 5,620 $ 19,464 $ (9,686 ) $ 24,521 2009 2008 2007 Limited partnerships $ 7,672 $ (13,052 ) $ 5,354 Discounts of loss and loss expense reserves 946 354 32 Unearned premium discount (611 ) 384 663 Deferred compensation (350 ) 1,310 (508 ) Other-than-temporary investment declines 862 (3,137 ) 344 Deferred acquisitions costs and ceding commission 902 (304 ) (542 ) Other 140 316 277 Provision for deferred federal income tax $ 9,561 $ (14,129 ) $ 5,620 2006 were $11,186, $14,502, and $16,097, respectively.2008,2009, 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, AccountingUncertaintyuncertainty in Income Taxes— an Interpretation of FASB Statement No.109, provides guidanceincome taxes for recognizing and measuring uncertain tax positions, as defined in SFAS No. 109, Accounting for Income Taxes.positions. 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. TheCompany’s tax positions are uncertain only as to the timing of deductibility and therefore, if recognized would have no impact on the Company’s effective tax rate. December 31, 2007 were not material. 2009 2008 Balance at January 1 $ 5,955 $ 7,781 Reductions for tax positions of the current year (850 ) (271 ) Additions for tax positions of prior years 1,833 - Reductions for tax positions of prior years - (1,441 ) Settlements with tax authorities (338 ) (114 ) Balance at December 31 $ 6,600 $ 5,955 Note F - Shareholders' EquityChanges in common stock outstanding and additional paid-in capital are as follows:
Class A
Class B Changes in common stock outstanding and additional paid-in capital are as follows: Additional Class A Class B Paid-in Shares Amount Shares Amount Capital Balance at January 1, 2007 2,650,059 113 12,485,205 533 45,692 Stock options exercised - - 107,350 4 2,207 Balance at December 31, 2007 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 Treasury shares purchased - - (53,373 ) (2 ) (195 ) Restricted stock grant - - - - 220 Balance at December 31, 2009 2,623,109 $ 112 12,109,878 $ 517 $ 46,337 Company’sCompany's Class A and Class B common stock has a stated value of approximately $.04 per share.20082009 includes $330,677$373,769 representing GAAP shareholder’sshareholders’ equity of insurance subsidiaries, of which $39,803$54,211 may be transferred by dividend or loan to the parent company during calendar year 20092010 with proper notification to, but without approval from, regulatory authorities. An additional $204,135$233,043 of shareholder’sshareholders’ equity of such insurance subsidiaries maycould, under existing regulations, be advanced or loaned to the parent company with prior notification to and approval from regulatory authorities.Note G – Other Operating Expenses Details of other operating expenses for the years ended December 31:Note G - Other Operating Expenses Details of other operating expenses for the years ended December 31: 2009 2008 2007 Amortization of gross deferred policy acquisition costs $ 28,827 $ 23,437 $ 20,985 Other underwriting expenses 23,794 19,745 21,688 Expense allowances from reinsurers (5,352 ) (3,084 ) (2,044 ) Total underwriting expenses 47,269 40,098 40,629 Operating expenses of non-insurance companies 21,763 18,479 15,701 Total other operating expenses $ 69,032 $ 58,577 $ 56,330 (“("the Plan”Plan") which covers nearly all employees who have completed one year of service. The Company’sCompany's contributions to the Plan for 2009, 2008 and 2007 were $1,292, $1,183 and 2006 were $1,183, $1,132, and $1,137, respectively.20082009, there were 124,379 shares (Class A) and 380,833 shares (Class B) outstanding which are eligible for repurchase by the Company. Compensation cost charged against income for those plans was $0, $0, and $20, for 2008, 2007, and 2006, respectively.Note I - Stock Purchase and Option Plans (continued)167,000146,000 shares of Class B common stock are available for future grants. No options were granted to directors during 2008 and 2007.the three year period ended December 31, 2009. Additionally, no discounted options were outstanding at December 31,or Prior to May, 2005, discounted options were granted to non-employee directors in lieu of cash 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. The total intrinsic value of options exercised during 2006 was $484. No options were outstanding or exercised during 2007 or 2008.20082009 and no options remained outstanding at December 31, 2008 and 2007.for the same three year period. Additionally, there were no option exercises during 2009 or 2008. During 2007, and 2006, all options were exercised at $20.60 per share. The total intrinsic value of options exercised during 2007 was $722. No compensation cost was charged against income for the Employee Plan for 2009, 2008 and 2006 was $722 and $1,684, respectively. No options were outstanding or exercised during 2008.yearsyear ended December 31, 2007 and 2006 was $2,211, and 6,804, respectively.$2,211. The federal tax benefit realized for the tax deductions from option exercise of the share-based payment arrangements totaled $253 and $759, respectively, for the yearsyear ended December 31, 2007 and 2006.2007. Under the terms of the Employee Plan, $253 and $589, respectively, ofthe entire tax benefitsbenefit realized werewas passed on to employees in the form of cash for the yearsyear ended December 31, 2007 and 2006.Company’sCompany's policy is to issue new shares to satisfy share option exercises.Company’sCompany's Class B common stock in the open market. Principal and interest totaling $2,199$2,054 and $2,228$2,199 relating to such loans was outstanding at December 31, 20082009 and 2007,2008, 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.property reinsurance. Previously, the Company had four reportable business segments: fleet trucking, small fleet trucking, private passenger automobile 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 discontinued products, for the current and prior periods have been reclassified into the property and casualty insurance segment. The property and casualty insurance segment provides multiple line insurance coverage primarily to fleet transportationFleet Transportation companies as well asand to independent contractors who contract with fleet transportationFleet Transportation companies. In addition, the Company offers individual personal automobile products are provided to individuals.coverage, business owners’ policies and commercial property business. The property reinsurance segment formerly known as reinsurance assumed accepts cessions from other insurance companies as well as retrocessions from selected reinsurance companies, principally reinsuring against catastrophes.Note J - Reportable Segments (continued)Company’sCompany's investment portfolio. All investment-related revenues are managed at the corporate level. Underwriting gain or loss for the property and casualty insurance segment includes revenue and expense from the Company’sCompany's agency operations since the agency operations serve as a primary direct marketing facility for this segment. 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 reportablerepor table segment are the same as those described in the summary of significant accounting policies. 2009 2008 2007 Direct and assumed premium written: Property and casualty insurance $ 209,129 $ 182,810 $ 176,233 Reinsurance 41,030 39,132 31,134 Totals $ 250,159 $ 221,942 $ 207,367 Net premium earned: Property and casualty insurance $ 141,011 $ 147,071 $ 150,487 Reinsurance 40,289 35,228 28,578 Totals $ 181,300 $ 182,299 $ 179,065 Underwriting gain: Property and casualty insurance $ 22,190 $ 20,022 $ 26,654 Reinsurance 12,065 6,718 5,554 Totals $ 34,255 $ 26,740 $ 32,208 2009 2008 2007 Profit: Underwriting gain $ 34,255 $ 26,740 $ 32,208 Net investment income 13,971 17,063 19,595 Net realized gains (losses) on investments 30,816 (47,749 ) 40,096 Corporate expenses (14,776 ) (13,453 ) (12,247 ) Income (loss) before federal income taxes $ 64,266 $ (17,399 ) $ 79,652 $13,772 and $69,636$13,772 of the Company’s consolidated direct and assumed premium written in 2009, 2008 2007 and 2006,2007, respectively. An additional $107,724, $99,589 and $80,080 for 2009, 2008 and $0 for 2008, 2007, and 2006, respectively, is placed with the Company by a non-affiliated broker on behalf of independent contractors of this same customer. 2009 2008 2007 Average share outstanding for basic earnings per share 14,741,487 15,080,149 15,175,074 Dilutive effect of options 11,992 - 14,269 Average shares outstanding for diluted earnings per share 14,753,479 15,080,149 15,189,343 (“SIR”("SIR") and also writes policies that contain large, per-claim deductibles. Those losses and claims that fall within the SIR or deductible limits are obligations of the insured. The Company also writes surety bonds in favor of various regulatory agencies guaranteeing the insured’sinsureds’ payment of claims within the SIR. Losses and claims under a large deductible policypolicies are payable by the Company with reimbursement due the Company from the insured.insureds. 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.2008,2009, the Company held collateral in the aggregate amount of $214,264.hatthat 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 thean 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 requestedr equested 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,FedEx Ground and certain of its subsidiaries and related entities, and in the event of that customer’stheir default, such default may have a material adverse impact on the Company. The Company estimates its uncollateralized exposure related to this Fortune 500 companycustomer to be as much as 32% of shareholders’shareholders' equity at December 31, 2008.Company’sCompany's balance sheet includes paid and estimated unpaid amounts recoverable from reinsurers under various agreements totaling $159,989$155,451 at December 31, 2008,2009, as more fully discussed in Note D - Reinsurance. With minor exception, theseThese recoverables are largely uncollateralized. The threetwo largest estimated amounts due from individual reinsurers were $23,773, $18,631$29,681 and $18,083$27,709 at December 31, 2008. Included in the total recoverable amount are case basis and estimated IBNR losses of approximately $6,907 due from Converium Insurance (North America) Inc., which reported substantial reserve strengthening and/or impairment of assets in 2005 which have negatively affected their reported financial position. All amounts due from this reinsurer on paid claims as of December 31, 2008 are current and the Company has no information at this time to indicate that all obligations of this reinsurer will not be met.$29,878$48,469 invested in three relatedlimited partnerships, New Vernon India Fund, New Vernon Global Opportunity Fund and New Vernon North American Opportunity Fund.54Fund that are managed by organizations in which two directors of the Company are executive officers, directors and owners.$3,500 which includes a post closing purchase price adjustment related to minimum working capital requirements.$3,500. 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.segment. As part of the purchase, the Company recorded goodwill of $3,221$3,152 and intangible assets related to customer relationships and employment agreements of $179 with are included in Other Assets in the consolidated balance sheet.2008, the2009, a post closing purchase price adjustment was made to goodwill as outlined below:Balance at December 31, 2008 $ 3,221 Post closing purchase price adjustment (69 ) Balance at December 31, 2009 $ 3,152 $8. The Company had no goodwill, intangible assets$47, $8 and related amortization prior to 2008.$9,000$10,000 outstanding as of December 31, 20082009 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$10,000 remaining unused under the revolving line of credit. The $9,000 ofcurrently outstanding borrowings waswere used principally for treasury stock repurchases.Description Maturity 2009 2008 Interest Rate Revolving line of credit June 23, 2011 $ 5,000 5,000 0.73 % Revolving line of credit June 23, 2011 5,000 4,000 0.78 % Total Debt $ 10,000 $ 9,000 Financial Accounting Standards BoardFASB issued Statement No. 157, Fair Value Measurements(“SFAS No. 157”),guidance on fair value measurement, 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. 157The FASB guidance 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,the FASB guidance, effective January 1, 2008 for financial assets and 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 157guidance did not have a significant impact on the Company’s consolidated financial condition or results of operations.Beginning January 1, 2008, assetstable summarizestables summarize fair value measurements by level at December 31, 2008 for assets measured at fair value on a recurring basis:55As of December 31, 2009:Description Total Level 1 Level 2 Level 3 U.S. government obligations $ 54,632 $ - $ 54,632 $ - Government sponsored entities 5,883 - 5,883 - Residential mortgage-backed securities 48,377 - 48,377 - Commercial mortgage-backed securities 5,652 - 5,652 - Obligations of states and political subdivisions 185,469 - 185,469 - Corporate securities 72,185 - 57,298 14,887 Foreign government obligations 7,724 - 7,724 - Total fixed maturities $ 379,922 - 365,035 14,887 Equity securities 85,886 85,886 - - Short term 3,703 3,600 103 - Cash equivalents 83,138 - 83,138 - $ 552,649 $ 89,486 $ 448,276 $ 14,887 -– Fair Value (continued)Description Total Level 1 Level 2 Level 3 U.S. government obligations $ 21,888 $ - $ 21,888 $ - Government sponsored entities 4,672 - 4,672 - Residential mortgage-backed securities 10,248 - 10,248 - Commercial mortgage-backed securities 3,242 - 3,242 - Obligations of states and political subdivisions 267,152 - 267,152 - Corporate securities 66,084 - 51,103 14,981 Foreign government obligations 5,975 - 5,975 - Total fixed maturities $ 379,261 - 364,280 14,981 Equity securities 63,200 63,200 - - Short term 33,820 2,964 30,856 - Cash equivalents 24,327 - 24,327 - $ 500,608 $ 66,164 $ 419,463 $ 14,981 SFAS No. 157,the FASB guidance, are as follows:yearyears ended December 31:2008Beginning of period$—Total gain or losses (realized or unrealized)Included in earnings (or changes in net assets)(2,234)Included in other comprehensive income—Purchases, issuances, and settlements2,234Transfers in and/or out of Level 3—End of period$—In February 2007, the Financial Accounting Standards Board issued Statement No. 159, The 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 did not have a significant impact on the Company’s consolidated financial condition or results of operations.Note P 2009 2008 Beginning of period balance $ 14,981 $ - Total gain or losses (realized or unrealized) Included in earnings (or changes in net assets) 231 - Included in other comprehensive income 268 - Purchases, issuances, and settlements (593 ) 14,981 Transfers in and/or out of Level 3 - - December 31 balance $ 14,887 $ 14,981 New Accounting PronouncementsIn December 2007, Financial Accounting Standards Board issued Statement No. 141 (revised 2007), 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.5660 - Quarterly results of operations are as follows: Results by Quarter 2009 2008 1st 2nd 3rd 4th 1st 2nd 3rd 4th Net premiums earned $ 44,164 $ 41,042 $ 45,077 $ 51,017 $ 45,087 $ 46,902 $ 43,579 $ 46,730 Net investment income 3,259 3,478 3,256 3,978 4,200 4,195 4,372 4,296 Net gains (losses) on investments (1,232 ) 12,494 15,441 4,113 (13,575 ) (2,960 ) (15,965 ) (15,249 ) Losses and loss expenses incurred 23,888 22,087 26,714 26,662 29,461 26,462 30,427 29,402 Net income (loss) 5,441 14,125 14,340 10,896 (4,608 ) 6,307 (7,270 ) (2,142 ) Net income (loss) per share - diluted $ .37 $ .96 $ .97 $ .74 $ (.30 ) $ .41 $ (.48 ) $ (.14 ) Quarterly Results of Operations (Unaudited)Quarterly results of operations are as follows:Note R - Statutory (Unaudited)$26,632 for 2008, 2007, and 2006, respectively. Consolidated statutory surplus for these subsidiaries was $315,529$356,658 and $360,965$315,529 at December 31, 2009 and 2008, and 2007, respectively.$86,739$68,040 at December 31, 2008.2009. 2010 $ 1,509 2011 1,530 2012 1,501 2013 1,022 2014 36 Thereafter - Total minimum payments required $ 5,598 Company’sCompany'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’sSEC'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’sManagement’s2008.2009. The effectiveness of the Company’sCompany's internal controlcontr ol over financial reporting as of December 31, 20082009 has been audited by Ernst & Young LLP, an independent registered public accounting firm, as stated in their report which is included herein.subsidiariessubsidiaries’ internal control over financial reporting as of December 31, 2008,2009, 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. and subsidiariessubsidiaries’ 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’s internal control over financial reporting based on our audit.authorizationsauth orizations 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.2008,2009, based on the COSO criteria.20082009 and 2007,2008, and the related consolidated statements of operations, changes in equity other than capital, and cash flows for each of the three years in the period ended December 31, 2008,2009, and our report dated March 16, 200911, 2010 expressed an unqualified opinion thereon.16, 200911, 2010Company’sCompany's executive officers:Joseph J. DeVito 58 President and COO 2007 (1) G. Patrick Corydon 61 Executive Vice President and CFO 1979 (2) Craig C. Morfas 51 Vice President and Secretary 2008 (3) Mark L. Bonini 51 Vice President 2001 Served inSuch CapacityNameAgeTitleSinceGary W. Miller68Chairman and CEO1997Joseph J.(1) Mr. DeVito57COO2007 (1)G. Patrick Corydon60CFO1979 (2)Craig C. Morfas50and Secretary2008 (3)Mark L. Bonini502001(1) Mr. DeVito was elected President and Chief Operating Officer in February, 2007. He was electeD Executive Vice President in 2001 and has served in similar capacity since 1986.(2) Mr. Corydon was elected Executive Vice President in 2008.(3) Mr. Morfas was elected Vice President of the Company in 2007 and Secretary of the Company in 2008.(a)20082009 and 2007Consolidated Statements of Operations - Years ended December 31, 2009, 2008 2007 and 20062007 and 20062007 and 2006S- XS-X are not required under the related instructions or are inapplicable and therefore have been omitted.Company’sCompany's Annual Report on Form 10-K for the year ended December 31, 1986)Company’sCompany's definitive Proxy Statement for its Annual Meeting held May 5, 1981)Company’sCompany's Annual Report on Form 10-K for the year ended December 31, 1989)Company’sCompany's Annual Report on Form 10-K for the year ended December 31, 1992)Number & Caption fromExhibit Table ofItem 601 of Regulation S-KExhibit Number and DescriptionSarbanes-OxleySarbanes-20082009 to announce its third quarter earnings press release.6468 through 7074 of this report.SCHEDULE I – SUMMARY OF INVESTMENTS-OTHER THAN INVESTMENTS IN RELATED PARTIESForm 10-K – Year Ended December 31, 2008Baldwin & Lyons, Inc. and Subsidiaries(Dollars in thousands)(A)All securities are presented at fair value in the financial statements. Investments presented above do not include $24,327 of money market funds classified with cash and cash equivalents in the balance sheet.SCHEDULE I -- SUMMARY OF INVESTMENTS- OTHER THAN INVESTMENTS IN RELATED PARTIES Form 10-K - Year Ended December 31, 2009 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: U.S. government obligations $ 54,615 $ 54,632 $ 54,632 Government sponsored entities 5,825 5,883 5,883 Mortgage-backed securities 53,723 54,029 54,029 Obligations of states and political subdivisions 182,536 185,469 185,469 Foreign governments 7,695 7,724 7,724 All other corporate bonds 70,791 72,185 72,185 Total fixed maturities 375,185 379,922 379,922 Equity Securities: Common Stocks: Industrial, miscellaneous and all other 41,568 85,886 85,886 Total equity securities 41,568 85,886 85,886 Limited partnerships 69,436 69,436 69,436 Short-term: Certificates of deposit 3,600 3,600 3,600 Commercial paper 103 103 103 Total short-term and other 3,703 3,703 3,703 Total investments $ 489,892 $ 538,947 $ 538,947 SCHEDULE IICONDENSED FINANCIAL INFORMATION OF REGISTRANTForm 10-K – Year Ended December 31, 2008Baldwin & Lyons, Inc.Condensed Balance SheetsSCHEDULE II CONDENSED FINANCIAL INFORMATION OF REGISTRANT Form 10-K Baldwin & Lyons, Inc. Condensed Balance Sheets December 31 2009 2008 Assets Investment in subsidiaries $ 376,447 $ 334,087 Due from affiliates 4,260 2,446 Investments other than subsidiaries: Fixed maturities 10,679 11,243 Limited partnerships 809 915 11,488 12,158 Cash and cash equivalents 8,182 5,727 Accounts receivable 5,744 6,696 Notes receivable from employees 2,054 2,199 Other assets 5,894 4,467 Total assets $ 414,069 $ 367,780 Liabilities and shareholders' equity Liabilities: Premiums payable $ 15,019 $ 14,009 Deposits from insureds 12,863 12,041 Notes payable to bank 10,000 9,000 Current payable federal income taxes 693 129 Other liabilities 2,551 2,534 41,126 37,713 Shareholders' equity: Common stock: Class A 112 112 Class B 517 519 Additional paid-in capital 46,337 46,312 Unrealized net gains on investments 31,886 19,410 Retained earnings 294,091 263,714 372,943 330,067 Total liabilities and shareholders' equity $ 414,069 $ 367,780 See notes to condensed financial statements SCHEDULE IICONDENSED FINANCIAL INFORMATION OF REGISTRANTForm 10-K – Year Ended December 31, 2008Baldwin & Lyons, Inc.Condensed Statements of OperationsSCHEDULE II CONDENSED FINANCIAL INFORMATION OF REGISTRANT Form 10-K Baldwin & Lyons, Inc. Condensed Statements of Operations Year Ended December 31 2009 2008 2007 Revenue: Commissions and service fees $ 19,182 $ 18,539 $ 16,514 Dividends from subsidiaries 15,000 13,000 20,000 Net investment income 506 476 1,082 Net realized gains (losses) on investments 37 543 (58 ) Other 92 657 1,576 34,817 33,215 39,114 Expenses: Salary and related items 14,145 12,946 13,337 Other 5,274 5,120 3,632 19,419 18,066 16,969 Income before federal income taxes and equity in undistributed income of subsidiaries 15,398 15,149 22,145 Federal income tax (benefit) (496 ) 671 687 15,894 14,478 21,458 Equity in undistributed income (loss) of subsidiaries 28,908 (22,191 ) 33,673 Net income (loss) $ 44,802 $ (7,713 ) $ 55,131 SCHEDULE IICONDENSED FINANCIAL INFORMATION OF REGISTRANTForm 10-K – Year Ended December 31, 2008Baldwin & Lyons, Inc.Condensed Statements of Cash FlowsNotesSCHEDULE II CONDENSED FINANCIAL INFORMATION OF REGISTRANT Form 10-K Baldwin & Lyons, Inc. Condensed Statements of Cash Flows Year Ended December 31 2009 2008 2007 Net cash provided by operating activities $ 18,309 $ 15,072 $ 9,371 Investing activities: Purchases of long-term investments (6,803 ) (8,747 ) (9,781 ) Sales or maturities of long-term investments 7,343 7,552 9,331 Net sales of short-term investments - - 9,890 Decrease in notes receivable from employees 143 29 110 Distributions from limited partnerships 23 833 683 Net purchases of property and equipment (2,124 ) (751 ) (2,274 ) Purchase of Transport Insurance Agency - (3,500 ) - Other 188 73 925 Net cash provided by (used in) investing activities (1,230 ) (4,511 ) 8,884 Financing activities: Dividends paid to shareholders (14,744 ) (15,096 ) (25,062 ) Drawing on line of credit 11,000 9,000 - Repayment on line of credit (10,000 ) - - Stock option exercises and other - - 2,211 Cost of treasury shares (880 ) (8,908 ) - Capitalization of subsidiary - (1,344 ) - Net cash used in financing activities (14,624 ) (16,348 ) (22,851 ) Increase (decrease) in cash and cash equivalents 2,455 (5,787 ) (4,596 ) Cash and cash equivalents at beginning of year 5,727 11,514 16,110 Cash and cash equivalents at end of year $ 8,182 $ 5,727 $ 11,514 See notes to condensed financial statements Statements – BasisStatements--Basis of PresentationCompany’sCompany's investment in subsidiaries is stated at cost plus equity in the undistributed earnings of subsidiaries since the date of acquisition. The Company’sCompany'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’sCompany's consolidated financial statements.SCHEDULE III – SUPPLEMENTARY INSURANCE INFORMATIONForm 10-K – Year Ended December 31, 2008Baldwin & Lyons, Inc.SCHEDULE III -- SUPPLEMENTARY INSURANCE INFORMATION Form 10-K 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 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 2009 $ 4,905 $ 359,031 $ 25,912 --- $ 181,300 $ 13,971 $ 99,351 $ 28,827 $ 18,442 $ 190,028 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 Subsidiaries(Dollars in thousands)(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.68SCHEDULE IV – REINSURANCEForm 10-K – Year Ended December 31, 2008Baldwin & Lyons, Inc. and Subsidiaries(Dollars in thousands)SCHEDULE IV -- REINSURANCE Form 10-K 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: 2009 $ 200,341 $ 60,818 $ 41,777 $ 181,300 22.2 2008 188,285 46,514 40,528 182,299 19.3 2007 185,781 40,094 33,378 179,065 16.0 $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.SCHEDULE VI – SUPPLEMENTAL INFORMATIONCONCERNING PROPERTY/CASUALTY INSURANCE OPERATIONSForm 10-K – Year Ended December 31, 2008Baldwin & Lyons, Inc. and Subsidiaries(Dollars in thousands)(A) Loss reserves on certain reinsurance assumed and permanent total disability worker's compensation claims have been discounted to present value using pretax interest rates not exceeding 3.5%.70- 73 -SCHEDULE VI--SUPPLEMENTAL INFORMATION CONCERNING PROPERTY/CASUALTY INSURANCE OPERATIONS Form 10-K 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 Amortiza- for Unpaid Discount, Adjustment Expenses tion of Deferred Claims if any Incurred Related to 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 (A) Consolidated Property/Casualty Subsidiaries: 2009 $ 4,905 $ 359,031 $ 6,656 $ 25,912 $ 181,300 $ 13,971 $ 108,935 $ (9,584 ) $ 28,827 $ 126,079 $ 190,028 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 (A) Loss reserves on certain reinsurance assumed and permanent total disability worker's compensation claims have been discounted to present value using pretax interest rates not exceeding 3.5%. March 11, 2010 BALDWIN& LYONS, INC.March 24, 2009March 11, 2010 March 24, 2009March 11, 2010 March 24, 2009March 11, 2010 March 24, 2009March 11, 2010 March 24, 2009Stuart D. Bilton, DirectorMarch 11, 2010 March 24, 2009SIGNATURES (CONTINUED)March 11, 2010 March 24, 2009John M. O’Mara, DirectorMarch 11, 2010 March 24, 2009Thomas H. Patrick, DirectorMarch 11, 2010 March 24, 2009John Pigott, DirectorMarch 11, 2010 March 24, 2009Kenneth D. Sacks, DirectorMarch 11, 2010 March 24, 2009Nathan Shapiro, DirectorMarch 11, 2010 March 24, 2009Norton Shapiro, DirectorMarch 11, 2010 March 24, 2009Robert Shapiro, DirectorMarch 11, 2010 March 24, 2009Steven A. Shapiro, DirectorMarch 11, 2010 March 24, 2009John D. Weil, DirectorITEM 15(c)--CERTAIN EXHIBITS20082008Company’sCompany's Annual Report on FormCompany’sCompany's Current Report on Form 8-K dated May 4, 2004)Company’sCompany's definitive Proxy Statement for its Annual MeetingCompany’sCompany's definitive Proxy Statement for its Annual Meeting held May 2, 1989)Company’sCompany's Annual Report on Form 10-KCompany’sCompany's Annual Report on Form 10-K for the year ended December 31, 1989)Company’sCompany's Annual Report on Form 10-K for the year ended December 31, 1997)INDEX TO EXHIBITS (CONTINUED) Company’sCompany's Annual Report on Form 10-K for the yearINDEX TO EXHIBITS (CONTINUED)Exhibit No.Begins on sequential page number of Form 10-K75
