1
                                        
                UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                            Washington, D. C.  20549

                                    FORM 10-K

                Annual Report Pursuant to Section 13 or 15(d) of
                       The Securities Exchange Act of 1934

For the fiscal year ended                    Commission file number  0-5534
DECEMBER 31, 19961997

                              BALDWIN & LYONS, INC.
             (Exact name of registrant as specified in its charter)

         INDIANA                                       35-0160330
(State or other jurisdiction of                     (I.R.S. Employer
incorporation or organization)                    Identification No.)

1099 NORTH MERIDIAN STREET, INDIANAPOLIS, INDIANA46204INDIANA        46204
(Address of principal executive offices)               (Zip Code)

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

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

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

                                (TITLE OF CLASS)
                       Class A Common Stock, No Par Value
                       Class B Common Stock, No Par Value

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter periods that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.   Yes  [ X ]    No [   ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.  [ X ]

The aggregate market value of Class A and Class B Common Stock (voting stock) held by non-
affiliates of the Registrant as of March 12, 1997,1998, based on the closing trade
priceprices on that date, was approximately $11,489,000.$99,465,000.

The number of shares outstanding of each of the issuer's classes of common stock
as of March 12, 1997:1998:
      Common Stock, No Par Value:
          Class A  (voting)           2,440,5792,397,354  shares
          Class B  (nonvoting)       11,401,05911,302,520  shares

The Index to Exhibits is located on pages 54 and 55.


                       DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Proxy Statement for Annual Meeting of Shareholders to be held
May 6, 19975, 1998 are incorporated by reference into Part III.

 1 2
                                        
                                        
                                     PART I

ITEM 1.  BUSINESS

Baldwin & Lyons, Inc. was incorporated under the laws of the State of Indiana in
1930.  Through its divisions and subsidiaries, it specializes in marketing and
underwriting property and casualty insurance for companies in the motor carrier
industry.insurance.  The Company's principal lines of
business consist of (1) the insurance brokerage and agency operations and
specialized insurance-related services carried on by Baldwin & Lyons, Inc.
(referred to herein as "B & L"); and (2) insurance underwriting operations
carried on by B & L's three wholly-
ownedwholly-owned property/casualty insurance company
subsidiaries: Protective Insurance Company (referred to herein as "Protective");
Sagamore Insurance Company (referred to herein as "Sagamore"); and B & L
Insurance, Ltd. (referred to herein as "BLI").  These subsidiaries are
collectively referred to herein as the "Insurance Subsidiaries."  The "Company"
as used herein refers to Baldwin & Lyons, Inc. and all its subsidiaries unless
the context indicates otherwise.

On November 9, 1996, Amli Realty Co. (Amli) closed an agreement with UICI, a
publicly traded financial services and insurance company, which resulted in UICI
acquiring 100% of Amli's outstanding stock.  The Company received 617,278 shares
of UICI common stock, with a market value at December 31, 1996 of approximately
$20 million, in a non-monetary, tax-free exchange for its 38% stake in Amli.
The Company accounted for its minority investment in Amli by the equity method.
The book value of the Company's investment in Amli at the date of the exchange
was $7.5 million.  The consolidated statements of income for the years ended
December 31, 1995 and 1994 have been restated to reflect the sale of Amli.  The
Company's share of Amli's income from operations for the current and prior
periods is reported as discontinued operations.  The consolidated statement of
cash flows for the year ended December 31, 1996 includes changes in certain
assets and liabilities which are presented without the effect of the sale of
Amli.  The consolidated balance sheet at December 31, 1995 and the consolidated
statements of cash flows for the years ended December 31, 1995 and 1994 were not
restated.

On October 2, 1995, the Company sold Protective's subsidiary, Hoosier Insurance
Company (referred to herein as "Hoosier"), to General Casualty Company of
Wisconsin, a Winterthur Swiss Insurance Group company, for $36.5 million.  Included in the
Company's insurance underwriting segment prior to the sale, Hoosier marketed
general lines of insurance to individuals and small commercial customers in
Indiana.  The consolidated statement of income for the year ended
December 31, 1994 was restated to reflect the sale of Hoosier.  Income and expense amounts related to Hoosier for 1995 and 1994the prior periods
and the gain recognized on the sale of Hoosier are reported as discontinued
operations.  The consolidated
statement of cash flows for the year ended December 31, 1995 includes changes in
certain assets and liabilities which are presented without the effect of the
sale of Hoosier.  The consolidated statement of cash flows for the year ended
December 31, 1994 was not restated.

INSURANCE BROKERAGE, AGENCY AND SERVICES OPERATIONS

B & L acts as an agent and broker which places casualty, inland marine, property
and other types of insurance, serving customers in the motor carrier industry on
a nationwide basis.  The following summary describes briefly the principal types
of insurance placed by B & L:
     
      - Casualty insurance including motor vehicle liability and physical
        damage insurance, other liability insurance, workers' compensation
        insurance, specialized accident insurance and fidelity and surety bonds.

      - Inland Marine consisting principally of cargo insurance.

      - Property coverages including insurance against loss of property or the
        use thereof by reason of fire, windstorm or other perils. 2

 3

B & L also performs a variety of additional services for its clients such as
risk surveys and analyses, government compliance assistance, loss control and
cost studies and research, development, and consultation in connection with new
insurance programs including development of computerized systems to assist in
monitoring accident data.  Extensive claims services are also provided by B & L,
frequently for a fee, primarily to clients with self-insurance programs.

B & L has active agency arrangements with a small number of insurance companies,
none of which is exclusive and all of which are terminable at will or on short
notice by either party.  Of the commissions received by
B & L in 1996,1997, approximately 98%99% was from marketing products for the Insurance
Subsidiaries.

INSURANCE UNDERWRITING OPERATIONS

Underwriting operations are currently conducted as follows:
     
      -  Protective is engaged in direct writing of multiple line property,
         casualty and related insurance coverages for large trucking fleets 
         which retain substantial amounts of self-insurance and for medium-sized
         trucking companies on a first-dollar or small deductible basis with no
         self-
     insuranceself-insurance retention. 2
 3         

         Protective also accepts retrocessions from reinsurance companies, 
         principally reinsuring against catastrophes.covering both individual property and liability risks and high limit
         catastrophe pools.  Protective is licensed to do business in all 
         states, the District of Columbia and all Canadian provinces.

      -  Sagamore's premiums are produced primarily from private passenger
         automobile liability and physical damage coverages.  In addition,
         Sagamore is engaged in writing fully insured and small deductiblewrites commercial automobile liability and physical damage
         insurance programsfor truck owner-operators with ten or fewer power units as 
         well as workers' compensation insurance for small trucking operators.  In addition, Sagamore markets private passenger
     automobile insurance products to non-standard insureds in the state of
     Indiana.  Sagamore intends to expand its small trucking and private
     passenger automobile products into other states during 1997.  Sagamore has
     also developed a small business workers' compensation product which it will
     market beginning in 1997.businesses. 
         Sagamore is currently licensed in twenty-onetwenty-three states.

      -  BLI is an offshore (Bermuda)a Bermuda domiciled reinsurance company which, to date, has
         provided reinsurance for Protective only.  This subsidiary provides the
         availability of an insurance profit center concept allowing clients the
         advantages of a "captive" insurance company without the attendant 
         expense or management demands.

Approximately 74%59% of the gross direct premiums written by the Insurance
Subsidiaries during 19961997 was attributable to business placed with Protective by
B & L.  The remaining 26%41% consists primarily of business written by Sagamore
within its private passenger automobile, small fleet and private passenger automobilesmall business workers'
compensation programs, originating through a
varietyan extensive network of independent
agents.

In addition to intercompany reinsurance arrangements, theThe Insurance Subsidiaries cede portions of their gross premiums written to
certain non-affiliated insurers under excess of loss and quota-share treaties
and by facultative placements.  The Insurance Subsidiaries also assume
limited amounts of reinsurance voluntarily from other insurers under retrocession and treaty
arrangements.  During 1996, such voluntary reinsuranceReinsurance assumed included approximately $9.2
million to Protective for itsdate has been comprised primarily of
retrocessional participation in retrocessions from several
property catastrophe reinsurance pools.  The Company intends
to participate in such retrocessions only as long as premium rates remain at
attractive levels.  Historically,In addition, the majority of reinsurance assumed has related to participationInsurance Subsidiaries participate in
numerous mandatory government-operated reinsurance pools which require insurance
companies to provide coverages on assigned risks.  TheThese assigned risk pools
allocate participation to all insurers based upon each insurer's portion of
premium writings on a state or national level. 3

 4

PROPERTY/CASUALTY LOSSES AND LOSS ADJUSTMENT EXPENSES

The consolidated financial statements include the estimated liability for unpaid
losses and loss adjustment expenses ("LAE") of the Insurance Subsidiaries.  The
liabilities for losses and LAE are determined using case basis evaluations and
statistical projections and represent estimates of the ultimate net cost of all
unpaid losses and LAE incurred through December 31 of each year.  These
estimates are subject to the effects of trends in claim severity and 
frequency and are continually reviewed and, as experience develops and new 
information becomes known, the liability is adjusted as necessary.  Such 
adjustments, either positive or negative, are reflected in current 
operations.  Reserves for incurred but not reported claims are determined on
the basis of actuarial calculations using historical data.  The anticipated 
effect of inflation is implicitly considered when estimating liabilities for
losses and LAE.

While anticipated price increases due to inflation are considered in estimating
the ultimate claim costs, the increase in average severities of claims is caused
by a number of factors that vary with the individual type of policy written.
Future average severities are projected based on historical trends adjusted for
anticipated changes in underwriting standards, policy provisions, and general
economic and social trends.  These anticipated trends are monitored based on
actual development and are modified as new conditions would suggest that changes
are necessary.

 3
 4

Loss reserves related to certain permanent total disability (PTD) workers'
compensation claims have been discounted to present value using tables provided
by the National Council on Compensation Insurance which are based upon a pretax
interest rate of 3.5% and adjusted for losses retained by the insured.  The loss
and LAE reserves at December 31, 19961997 have been reduced by approximately $4.7$5.4
million as a result of such discounting.  Had the Company not discounted loss
and LAE reserves, pretax income would have been approximately $3.4$.7 million higherlower
for the year ended December 31, 1996.

The effect of discounting on loss and LAE developments, such as those presented
in the tables on pages 5 and 7, results in apparent deficiencies which may be
misleading without further explanation.  As discounted reserves are adjusted in
years subsequent to their original establishment (to account for the passage of
time or for the payment of losses and LAE), deficiencies are automatically
generated.  These deficiencies are, in effect, offset by investment income
earned on the reserves held.  However, investment income is not considered in
the accompanying development tables.  The Company is presently able to precisely
identify only a portion of the effect of discounting on the loss reserve
developments.  The quantified portion of the effect of discounting is shown in
the development table on page 7 and will be discussed in more detail below.  It
should be noted, however, that the actual discounting effect is somewhat greater
than the identified amounts presented.1997.

The maximum amount for which the Company insures a trucking risk is $10 million
although, occasionally, limits above $10 million are provided but are 100%
reinsured.  After giving effect to reinsurance arrangements which have been in
force for the past several years, the first $1 million of  insured loss for a
single occurrence is retained by the Company.  The Company has reinsured $9
million in excess of the first $1 million in coverage liability with several
companies.   Certain of these reinsurance treaties contain aggregate recovery
limitations.  To the extent that losses in these layers, in the aggregate,
exceed these limitations, the Company could be liable for amounts which would
otherwise be covered under these reinsurance treaties.

The Company's reinsurance structure has remained relatively constant since 1986.
Prior to September 1, 1986, the Company's maximum exposure on a $10 million loss
relating to its trucking insurance business ranged from $250,000 to
approximately $2,000,000.$2 million.  The higher exposures were retained during periods
when reasonably priced reinsurance was not available.  Very few losses incurred
during these periods, with the exception of environmental liability losses,
remain unsettled at December 31, 1996.1997.  Effective September 1, 1986, and
continuing through December 31, 1996,1997, the Company's exposure relating to
trucking risks is limited to  4

 5
$1,000,000$1 million on a $10 million loss, as noted in the
immediately preceding paragraph.  With respect to Sagamore's small fleet
trucking business, the Company's maximum net exposure for a single occurrence is
$250,000 and$250,000.  Effective January 1, 1998, this exposure has been reduced to $100,000
for a single occurrence.  For Sagamore's private passenger automobile and small
business workers' compensation products, the Company's maximum exposure for a
single occurrence is $100,000.

The following table on page 5 sets forth a reconciliation of beginning and
ending loss and LAE liability balances, for 1997, 1996 1995 and 1994.  This1995.  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 78 shows the development of the estimated liability, net of
reinsurance recoverable, for the ten years prior to 1996.1997.

 4
 5

RECONCILIATION OF LIABILITY FOR LOSSES AND LOSS ADJUSTMENT EXPENSES (GAAP BASIS) Year Ended December 31, 1997 1996 1995 1994 ----------- ----------- ----------- (IN THOUSANDS) NET OF REINSURANCE RECOVERABLE: (IN THOUSANDS) Liability for losses and LAE at the beginning of the year $154,537 $161,458 $175,554 $175,949 Provision for losses and LAE: Continuing operations: Claims occurring during the current year 47,692 45,999 44,238 55,766 Claims occurring during prior years (7,838) (12,245) (5,484) (22,856) Discontinued operations - - 18,573 ----------- ----------- --------------------- ---------- ---------- 39,854 33,754 38,754 51,483 Losses and LAE payments: Continuing operations: Claims occurring during the current year 15,946 12,891 7,760 9,951 Claims occurring during prior years 26,934 27,825 33,819 25,778 Discontinued operations - - 11,186 16,137 ----------- ----------- --------------------- ---------- ---------- 42,880 40,716 52,765 51,866 Change in unpaid portion of uncollectible amounts due from reinsurers (18) 41 (85) (12) ----------- ----------- --------------------- ---------- ---------- Liability for losses and LAE at end of year 151,493 154,537 161,458 175,554 REINSURANCE RECOVERABLE ON UNPAID LOSSES AT END OF YEAR 45,702 42,402 50,031 59,655 ----------- ----------- --------------------- ---------- ---------- Liability for losses and LAE, gross of reinsurance recoverables, at end of year $197,195 $196,939 $211,489 $235,209 =========== =========== ===================== ========== ==========
5 6 The above reconciliation presented on page 5 shows a $12.2$7.8 million (7.6%(5.1%) savings in the liability for losses and LAE recorded at December 31, 1995. This savings includes adverse development totaling $2.4 million relating to environmental liability claims for policies written in the 1970's. Adjusted for this adverse development, the savings recorded on prior year claims was $14.6 million1996 and compares to a one-year savings in 1995, adjusted for environmental liability claims,1996 of $13.1$12.2 million. The net savings is reflected in 19961997 underwriting income. All major coverage groups produced redundancies during each of the years 1997, 1996 1995 and 1994.1995. A more detailed discussion of reserve savings experienced in recent years is presented beginning on page 8. Further discussion regarding environmental matters is included on page 9.6. The differences between the liability for losses and LAE reported in the accompanying 19961997 consolidated financial statements in accordance with generally accepted accounting principles ("GAAP") and that reported 5 6 in the annual statements filed with state and provincial insurance departments in the United States and Canada in accordance with statutory accounting practices ("SAP") are as follows:
(IN THOUSANDS) Liability reported on a SAP basis - net of reinsurance recoverable $155,284$152,258 Add differences: Reinsurance recoverable on unpaid losses and LAE 45,702 Additional reserve for reinsurance assumed losses not reported to the Company at the current year end 480 Reclassification of loss reserves ceded attributable to insolvent reinsurers 498 Reinsurance recoverable on unpaid losses and LAE 42,402480 Deduct differences: Estimated salvage and subrogation recoveries recorded on a cash basis for SAP and on an accrual basis for GAAP (1,725) ---------- Liability reported on a GAAP basis $196,939$197,195 ==========
Loss reserves ceded attributable to insolvent reinsurers are treated as a separate liability for SAP purposes but are classified as an addition to loss reserves in the GAAP consolidated balance sheets. This classification was used for GAAP since the uncollectible amounts are, in effect, a reversal of reinsurance credits taken against gross loss and LAE reserves. However, lossesLosses incurred, havehowever, do not been affected by the balance sheet classification of these amounts with loss reserves. Further,include charges for uncollectible reinsurance, nor do the tables on pages 5 and 7 do not include these amounts in the determination of losses incurred8, since the inability to recover these amounts from insolvent reinsurers is a credit loss and is not associated with the Company's reserving process. Accordingly, loss and LAE developments would be distorted if amounts related to insolvent reinsurance were included. The table on page 78 presents the development of GAAP balance sheet liabilities for each year end 19861987 through 19951997 net of all reinsurance credits. The top line of the table shows the estimated liability for unpaid losses and LAE recorded at the balance sheet date for each of the indicated years. The liabilities shown on this line for each year end have been reduced by amounts relating to loss reserves ceded attributable to insolvent reinsurers, as discussed in the immediately preceding paragraph. This liability represents the estimated amount of losses and LAE for claims arising in all prior years that are unpaid at the balance sheet date, including losses that had been incurred but not yet reported to the Company. The upper portion of the table shows the reestimated amount of the previously recorded liability based on experience as of the end of each succeeding year. The estimate is increased or decreased as more information becomes known about the frequency and severity of claims.
6 7
ANALYSIS OF LOSS AND LOSS ADJUSTMENT EXPENSE DEVELOPMENT--GAAP BASIS (Dollars in thousands) Year Ended December 31 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 - - -------------------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- Liability for Unpaid Losses and LAE, Net * * * * * * * * * * * of Reinsurance Recoverables $148,505 $164,531 $178,179 $186,517 $190,351 $198,790 $188,189 $175,395 $175,012 $161,001 $154,039 Liability Reestimated as of: One Year Later 153,388 164,771 173,990 175,998 178,706 185,452 174,269 152,146 169,528 148,756 Two Years Later 155,369 158,108 161,331 162,434 164,977 171,069 153,548 147,577 159,000 Three Years Later 151,435 149,966 154,851 161,143 157,802 155,977 156,271 144,526 Four Years Later 148,447 147,293 154,075 155,059 149,946 160,477 155,104 Five Years Later 145,562 146,814 149,672 151,138 155,601 159,804 Six Years Later 145,227 145,207 147,993 157,020 155,666 Seven Years Later 144,284 144,884 154,164 158,430 Eight Years Later 144,831 152,061 155,365 Nine Years Later 151,740 152,991 Ten Years Later 152,698 Cumulative Redundancy (Deficiency) (4,193) 11,540 22,814 28,087 34,685 38,986 33,085 30,869 16,012 12,245 Identifiable deficiency relating to reserve discounting 3,166 2,516 2,016 1,516 1,116 716 416 - - - --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- Adjusted Redundancy (Deficiency) $(1,027) $14,056 $24,830 $29,603 $35,801 $39,702 $33,501 $30,869 $16,012 $12,245 ========= ========= ========= ========= ========= ========= ========= ========= ========= ========= Cumulative Amount of Liability Paid Through: One Year Later $37,707 $34,777 $41,889 $41,873 $40,939 $41,958 $38,511 $30,297 $45,005 $27,825 Two Years Later 61,476 62,150 67,990 69,330 63,689 68,706 59,494 58,969 67,219 Three Years Later 80,602 79,848 84,940 81,291 81,746 83,413 82,122 71,375 Four Years Later 91,709 90,357 93,651 95,857 92,313 98,331 91,794 Five Years Later 98,386 97,390 98,666 103,035 103,190 104,915 Six Years Later 102,287 101,329 104,425 111,017 107,579 Seven Years Later 105,799 105,647 111,788 114,005 Eight Years Later 108,736 112,289 114,500 Nine Years Later 115,148 114,903 Ten Years Later 117,411
* Amounts shown for 1986 through 1996 do not include the unpaid portion of uncollectible amounts due from insolvent reinsurers which are classified with loss and LAE reserves for financial statement purposes of $3,592, $2,097, $2,258, $2,215, $818, $597, $611, $554, $542, $457 and $498, respectively.
7 8 The "cumulative redundancy (deficiency)"redundancy" represents the aggregate change in the estimates over all prior years. For example, the 19861987 liability has developed a $4.2$12.1 million deficiency (shortage)redundancy over ten years, before the effects of discounting are considered.years. That amount has been reflected in income over the ten years, as shown on the table. The effect on income of changes in estimates of the liability for losses and LAE during the past three years is shown in the first table on page 5. The "identifiable deficiency relating to reserve discounting" represents the amount by which the aggregate change in the loss and LAE estimates has been influenced by the quantified effects of discounting in the loss reserves. As previously mentioned, the actual effect of discounting is greater than the amounts shown in the table since certain portions of the change in discounted amounts are not subject to precise calculation and, therefore, are not presented in the table. The "adjusted redundancy (deficiency)" is merely the addition of the previous lines and represents the development after consideration of the identifiable effects of discounting. Historically, the Company's loss developments have been generally favorable. The deficiency shown for the runoff of the December 31, 1986 loss reserves results from environmental liability losses occurring in the 1970's but not reported to the Company until the 1990's, as more fully described on page 9. Even considering these non-recurring losses, the net deficiency for this year is less than .7% of reserves established at December 31, 1986. Reserve developments for all year ends 1987 through 19951996 have produced redundancies as of December 31, 1996.1997. In addition to improvements in reserving methods, loss reserve developments since 19861987 have been favorably affected by several other factors. Perhaps the most significant single factor has been the improvement in safety programs by the trucking industry in general and by the Company's insureds specifically. Statistics produced by the American Trucking Association show that driver quality has improved markedly in the past decade resulting in 6 7 fewer fatalities and serious accidents. The Company's experience also shows that improved safety and hiring programs have had a dramatic impact on the frequency and severity of trucking accidents. Higher self-insured retentions have also played a part in reduced insurance losses.losses during much of this period. Higher retentions not only raise the excess insurance entry point but also encourage trucking company management to focus even more intensely on safety programs. Further, reserve savings have been achieved by the use of structured settlements on certain workers' compensation and liability claims of a long-term liability nature. The establishment of reserves requires the use of historical data where available and generally a minimum of ten years of such data is required to provide statistically valid samples. As previously mentioned, numerous factors must be considered in reviewing historical data including inflation, tort reform (or lack thereof), new coverages provided and trends noted in the current book of business which are different from those present in the historical data. Clearly, the Company's book of business in 19961997 is different from that which generated much of the ten year historical loss data used to establish reserves in the past few years. Savings realized in recent years upon the closing of claims, as reflected in the tables on pages 5 and 7,8, suggest that the Company's insured selection process and the overall effect of improved safety programs and other positive influences on claim frequency and severity have more than offset the negative factors anticipated when reserves were established. The Company and its actuaries will continue to review the trends noted and, should it appear that such trends are permanent and projectable, they will be reflected in future reserving method refinements. The lower section of the table on page 78 shows the cumulative amount paid with respect to the previously recorded liability as of the end of each succeeding year. For example, as of December 31, 1996,1997, the Company had paid $117.4$116.5 million of losses and LAE that had been incurred, but not paid, through the end of 1986;1987; thus an estimated $35.3$35.9 million in losses incurred through 19861987 remain unpaid as of the current financial statement date ($152.7152.4 million incurred less $117.4$116.5 million paid). In evaluating this information, it is important to note that the method of presentation causes development experience to be duplicated. For example, the amount of any redundancy or deficiency related to losses settled in 1989,1990, but incurred in 1986,1987, will be included in the cumulative development amount for year ends 1986, 1987, 1988, and 1988.1989. As such, this table does not present accident or policy year development data which readers 8 9 may be more accustomed to analyzing. Also, conditions and trends that have affected development of the liability in the past may not necessarily occur in the future. Accordingly, it may not be appropriate to extrapolate future redundancies or deficiencies based on this table. 7 8
ANALYSIS OF LOSS AND LOSS ADJUSTMENT EXPENSE DEVELOPMENT--GAAP BASIS (Dollars in thousands) Year Ended December 31 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 - ---------------------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- Liability for Unpaid Losses and LAE, Net of Reinsurance Recoverables * $164,531 $178,179 $186,517 $190,351 $198,790 $188,189 $175,395 $175,012 $161,001 $154,039 $151,013 Liability Reestimated as of: One Year Later 164,771 173,990 175,998 178,706 185,452 174,269 152,146 169,528 148,756 146,201 Two Years Later 158,108 161,331 162,434 164,977 171,069 153,548 147,577 159,000 140,811 Three Years Later 149,966 154,851 161,143 157,802 155,977 156,271 144,526 153,833 Four Years Later 147,293 154,075 155,059 149,946 160,477 155,104 142,178 Five Years Later 146,814 149,672 151,138 155,601 159,804 153,528 Six Years Later 145,207 147,993 157,020 155,666 158,972 Seven Years Later 144,884 154,164 158,430 155,038 Eight Years Later 152,061 155,365 157,644 Nine Years Later 152,991 154,773 Ten Years Later 152,417 Cumulative Redundancy $ 12,114 $ 23,406 $ 28,873 $ 35,313 $ 39,818 $ 34,661 $ 33,217 $ 21,179 $ 20,190 $ 7,838 ======== ======== ======== ======== ======== ======== ======== ======== ======== ======== Cumulative Amount of Liability Paid Through: One Year Later $ 34,777 $ 41,889 $ 41,873 $ 40,939 $ 41,958 $ 38,511 $ 30,297 $ 45,005 $ 27,825 $ 26,934 Two Years Later 62,150 67,990 69,330 63,689 68,706 59,494 58,969 67,219 43,016 Three Years Later 79,848 84,940 81,291 81,746 83,413 82,122 71,375 76,248 Four Years Later 90,357 93,651 95,857 92,313 98,331 91,794 77,702 Five Years Later 97,390 98,666 103,035 103,190 104,915 96,617 Six Years Later 101,329 104,425 111,017 107,579 109,174 Seven Years Later 105,647 111,788 114,005 110,282 Eight Years Later 112,289 114,500 116,357 Nine Years Later 114,903 116,260 Ten Years Later 116,528 * Amounts shown for 1987 through 1997 do not include the unpaid portion of uncollectible amounts due from insolvent reinsurers which are classified with loss and LAE reserves for financial statement purposes of $2,097, $2,258, $2,215, $818, $597, $611, $554, $542, $457, $498 and $480, respectively.
8 9 ENVIRONMENTAL MATTERS: The Company's reserves for unpaid losses and loss expenses at December 31, 19961997 included amounts for liability related to environmental damage claims. Given the Company's principal business is insuring trucking companies, it does on occasion receive claims involving a trucking accident which has resulted in the spill of a pollutant. Certain of the Company's policies may cover these situations on the basis that they were caused by an accident which resulted in the immediate spill of a pollutant. These claims are typically reported and resolved within a short period of time. However, the Company has also received a few environmental claims which did not result from a "sudden and accidental" event. Some of these claims fall under policies issued in the 1970's primarily to one account which was involved in the business of hauling and disposing of hazardous waste. Although the Company had pollution exclusions in its policies during that period, the courts have ignored similar exclusions in many environmental cases. As such, the Company revised the environmental exclusion in its policies in an attempt to prevent the courts from mandating unintended coverages. During 1994, 1995 and 1996, the Company recorded adverse development of $.9 million, $7.6 million and $2.4 million, respectively, on such claims. Development during 1997 was minor. This development includes a reserveliability for incurred but not reported losses and loss expenses of $5.0 million at December 31, 1996.1997. Establishing reserves for environmental claims is subject to uncertainties that are greater than those represented by other types of claims. Factors contributing to those uncertainties include a lack of historical data, long reporting delays, uncertainty as to the number and identity of insureds with potential exposure, unresolved legal issues regarding policy coverage, and the extent and timing of any such contractual liability. Courts have reached different and sometimes inconsistent conclusions as to when the loss occurred and what policies provide coverage, what claims are covered, whether there is an insured obligation to defend, how policy limits are determined, how policy exclusions are applied and interpreted, and whether cleanup costs represent insured property damage. Management believes that those issues are not likely to be resolved in the near future. However, to date, very few environmental claims have been reported to the Company. In addition, a review of the businesses of our past and current insureds indicates that exposure to further claims of an environmental nature is limited because most of the Company's accounts are not currently, and have not in the past been, involved in the hauling of hazardous substances. Also, the revision of the pollution exclusion in the Company's policies in 1986 is expected to further limit exposure to claims from that point forward. In addition, the Company has never been presented with an environmental claim relating to asbestos and, based on the types of business the Company has insured over the years, it is not expected that the Company will have any asbestos exposure. MARKETING The Company's primary marketing areas are: (1) sales and service of insurance plans, involving some degree of self-insurance, to large trucking fleets; (2) sales of insurance programs involving no self-insured retention to medium size trucking fleets and small operators; (3) the sale of non-standard private passenger automobile insurance; (4) the sale of workers' compensation insurance to small businesses; and (4)(5) other projects. The sale of insurance toSince the trucking industry has been subject to many significant factors in the past ten years. Deregulation of trucking resulted in many structural changes in the industry and recessionary economic conditions diminished trucking activity in the early 1980's. At the same time, competition in commercial insurance stimulated intense price cutting. However, the price competition abated somewhat in late 1984 continuing into 1985 and 1986 with several insolvencies among the Company's competitors and other withdrawals from the trucking insurance market causing increased demand for the Company's products and services. 9 10 Since 1985, the Companymid-1980's, Protective has focused its marketing efforts to large and medium trucking fleets utilizing Company salesmen and, thereby, eliminated sales to fleets of less than 20 units. The Companysalesmen. Protective has its largest market share in the larger trucking fleets (over 150 units). These fleets self-insureself- insure a portion of their risk and such self-insurance plans are a specialty of the Company. The indemnity contract provided to self-insured customers is designed to cover all aspects of trucking liability, including third party liability, property damage, physical damage, cargo and workers' compensation, arising from vehicular accident or other casualty loss. The self-insured program is supplemented with large deductible workers' compensation policies in states which do not allow for self-insurance. In 1989, the CompanyProtective began 9 10 offering accident insurance on a group basis to independent contractors under contract to a fleet sponsor. Since 1989, the market for the Company'sProtective's products has again becomegrown increasingly competitive (see comments under "Competition", following). During the latter part of 1992, in the aftermath of Hurricane Andrew, property catastrophe reinsurance, which protects insurance companies from such disasters, became difficult to obtain and prices increased. In light of the favorable markets, the CompanyProtective has accepted retrocessions for catastrophe exposures from certain reinsurers on terms which are considered to be very favorable. This program was continued during 19961997 with premiums earned from these retrocessions totaling $9.2$9.9 million. To the extent that pricing remains favorable on these retrocessions, this program is expected to continue into 1998. In addition, Protective assumed certain property and liability reinsurance through participation in a facultative pool managed by another reinsurer starting in 1997. Based upon research conducted during 1993, beginning inDuring the second quarter of 19941995, Sagamore entered the Company reintroducedprivate passenger automobile insurance market for nonstandard insureds. This program is currently being marketed in Indiana and other midwestern states with limited expansion into additional states during 1998 anticipated. Market acceptance to date has been favorable and approximately $23.6 million of premium was written in this line during 1997. Sagamore also offers a program of coverages for "small fleet" trucking concerns (small operators with one to ten power units). This program is initially beingwas limited to a small geographic area composed of midwestern states.states through the end of 1997. However, significant geographic expansion is planned for this product group during 1998 and thereafter. Approximately $2.7$3.1 million of premium was written in this new program during 1996 and premium writings of $3 to $4 million are expected for 1997 with expansion into a limited number of additional states anticipated.1997. During the secondfirst quarter of 1995, the Company entered the private passenger automobile insurance market for non-standard insureds. This program is currently being marketed in Indiana, however, at least one new state will be added during 1997. Market acceptance to date has been favorable and approximately $13.7 million of premium was written during 1996. Premium writings of $24 to $27 million are expected for 1997. Again, the future of this program will be dependent on information derived from and experience of the Company's limited marketing approach. The Company will begin1997, Sagamore began marketing a small business workers' compensation product in one state beginning in 1997. As experienceMissouri and Illinois. To date, growth in this limited market warrants, other states may be added. Premium writingsproduct has been slow with premium written during 1997 of $3 to $5 million are expected for 1997.$.4 million. Continuation of this program is dependent on the results of a review currently underway by Sagamore's management. INVESTMENTS The Company manages its invested assets conservatively to provide a high degree of flexibility to respond to opportunities in the financial markets and in the Company's insurance lines. The resulting investment strategies emphasize relatively short-termshort - -term maturities and high asset quality and are designed to produce reasonable returns without jeopardizing principal. The Company's investment programs limit risk taking in all major portions of the portfolio. 10 11 At December 31, 19961997 the financial statement value of the Company's investment portfolio was $455 million.$475 million, including money market instruments classified as cash equivalents. The following comparison, on page 11, of the Company's bond and short-term investment portfolios, using par value as a basis, indicates the changes in the portfolio during 1996.1997. 10 11
Maturities on Bonds and Short-Term Investments at DecemberMATURITIES OF BONDS AND SHORT-TERM INVESTMENTS AT DECEMBER 31 (Par Value)(PAR VALUE) 1997 1996 1995 --------- --------- Less than one year 34.8% 39.7% 35.7% 1 to 5 years 41.3 42.2 50.8 5 to 10 years 16.9 10.2 6.2 More than 10 years 7.0 7.9 7.3 --------- --------- 100.0% 100.0% ========= ========= Average life of portfolio (years) 3.6 3.1 2.9 ========= =========
The Company's concentration of invested assets in relatively short-term investments provides it with a level of liquidity which is more than adequate to provide for its anticipated cash flow needs. The structure of the investment portfolio also provides the Company with the ability to restrict premium writings during periods of intense competition, which typically result in inadequate premium rates, and allows the Company to respond to new opportunities in the marketplace as they arise.
A comparison of the diversification of the Company's investment portfolio, using cost as a basis, is as follows:
December 31 1997 1996 1995 -------- ----------------- --------- U.S. Government obligations 24.8% 36.8% 43.9% Common stocks 21.0 21.8 17.9 Municipal bonds 17.0 14.3 10.3Corporate and other bonds 15.7 5.3 Mortgage-backed securities 10.0 12.6 10.3 Short-term and other investments 9.9 8.4 11.9 Corporate and other bonds 5.3 4.8 Preferred stocks 1.6 .8 .9 -------- ----------------- --------- 100.0% 100.0% ======== ================= =========
Approximately $4.3$20.9 million of the fixed maturity portfolio (.9%(4.4% of total invested assets) consists of bonds considered less than investment grade at December 31, 1996.1997. The unrealized net gain on the fixed maturity portfolio was $.8$2.9 million at December 31, 1996,1997, before income taxes, and compares to a $4.4$.8 million unrealized gain at December 31, 1995.1996. Equity securities comprise 32%33% of the financial statement value of the consolidated investment portfolio at December 31, 1996,1997, up from 23%32% at the prior year end. The unrealized gains on the equity security portfolio increased $33$9 million before taxes, from the prior year end, accounting for nearly the entire increase in the percentage of portfolio composition.to $67 million at December 31, 1997. 11 12
A comparison of overall investment yields is as follows: 1997 1996 1995 ------- ---------------- --------- Before federal tax: Investment income 5.0% 5.3% 5.9% Investment income plus realized investment gains 9.3 7.1 7.6 After federal tax: Investment income 3.5 3.7 4.1 Investment income plus realized investment gains 6.4 4.9 5.2
EMPLOYEES As of March 1, 1997,1998, the Company had 194243 employees, 183227 of whom are engaged primarily in the business of the Company's Insurance Subsidiaries. The increase in employees from 194 at March 1, 19961997 is due primarily to the expansion in the Company's newSagamore's private passenger automobile and small business workers' compensation products. COMPETITION The insurance brokerage and agency business is highly competitive. B & L competes with a large number of insurance brokerage and agency firms and individual brokers and agents throughout the country, many of which are considerably larger than B & L. B & L also competes with insurance companies which write insurance directly with their customers. Insurance underwriting is also highly competitive. The Insurance Subsidiaries compete with other stock and mutual companies and inter-insurance exchanges (reciprocals). There are numerous insurance companies offering the lines of insurance which are currently written or may in the future be written by the Insurance Subsidiaries. Many of these companies have been in business for longer periods of time, have significantly larger volumes of business, offer more diversified lines of insurance coverage and have greater financial resources than the Company. In many cases, competitors are willing to provide coverage for rates lower than those charged by the Insurance Subsidiaries. Many potential clients self-insure workers' compensation and other risks for which the Company offers coverage, and some concerns have organized "captive" insurance companies as subsidiaries through which they insure their own operations. Some states have workers' compensation funds which preclude private companies from writing this business in those states. Federal law also authorizes the creation of "Risk Retention Groups" which may write insurance coverages similar to those offered by the Company. In connection with the sale of Hoosier, the Company is restricted from issuing any contract of insurance, of the type issued by Hoosier, in the state of Indiana through December 31, 1998. ITEM 101(b)101(B), (c)(C)(1)(i) and (vii)(I) AND (VII), and (d) ofAND (D) OF REGULATION S-K: Reference is made to Note LK to the consolidated financial statements which provides information concerning industry segments and is filed herewith under Item 8, Financial Statements and Supplementary Data.
12 13 ItemITEM 2. PROPERTIES The Company leases office space at 1099 North Meridian Street, Indianapolis, Indiana in the Landmark Building. This building is located approximately one mile from downtown Indianapolis. The lease covers approximately 46,00065,000 square feet and expires in August, 1998,2003, with an option to renew for an additional threeten years. The Company's entire operations, with the exception of Baldwin & Lyons, California, are conducted from these leased facilities. The Company owns a small building and the adjacent real estate approximately two miles from its main office. This building contains approximately 3,300 square feet of usable space, and is used primarily as storage facilities and as a contingent back up and disaster recovery site for computer operations. Baldwin & Lyons, California leases approximately 2,700 square feet of office space in a suburb of Los Angeles, California. The lease expires in August, 19971998 with a three year renewal option which the company intends to exercise. All west coast operations are conducted from these facilities. The current facilities are expected to be adequate for the Company's operations for the foreseeable future. ItemITEM 3. LEGAL PROCEEDINGS In the ordinary, regular and routine course of their business, the Company and its Insurance Subsidiaries are frequently involved in various matters of litigation relating principally to claims for insurance coverage provided. No currently pending matter is deemed by management to be material to the Company. ItemITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted to a vote of security holders during the fourth quarter of 1996.1997. 13 14 PART II Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's Class A Common Stock and Class B Common Stockcommon stocks are traded in the NASDAQ National Market System and are quoted on the National Association of Securities Dealers Automated Quotation System ("NASDAQ") under the symbols BWINA and BWINB, respectively. The Class A and Class B common shares have identical rights and privileges except that Class B shares have no voting rights other than on matters for which Indiana law requires class voting. As of December 31, 1996,1997, there were approximately 400 record holders of Class A Common Stock and approximately 500 record holders of Class B Common Stock. The table below sets forth the range of high and low sale prices for the Class A and Class B Common Stock for 19961997 and 1995,1996, as reported by the National Association of Security Dealers, Inc. through 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.
Class A Class B Cash --------------------- ------------------------------------------- ---------------------- Dividends High Low High Low Declared --------- --------- --------- --------- --------- Year ended December 31: 1997: FOURTH QUARTER $28 3/4 $19 1/4 $28 3/4 $20 3/8 $.10 THIRD QUARTER 23 1/2 19 1/4 21 3/4 18 1/2 .10 SECOND QUARTER 21 1/2 17 1/2 22 5/8 17 3/8 .10 FIRST QUARTER 18 3/8 17 19 17 3/8 .10 1996: Fourth Quarter $19 $16 1/2 $18 15/16$19 $17 3/4 $.10 Third Quarter 19 3/4 18 3/4 20 3/4 18 1/4 .10 Second Quarter 20 1/2 16 1/2 20 3/4 14 1/4 .08 First Quarter 18 3/4 16 3/4 18 14 1/4 .08 1995: Fourth Quarter $17 3/4 $15 3/4 $16 1/2 $14 1/4 $.08 Third Quarter 17 15 3/4 16 14 7/8 .08 Second Quarter 18 1/4 15 3/4 17 15 1/2 .08 First Quarter 18 1/4 16 1/4 17 5/8 15 .06 The Company expects to continue its policy of paying regular cash dividends although there is no assurance as to future dividends because they are dependent on future earnings, capital requirements and financial conditions and are subject to regulatory restrictions as described in Note G to the consolidated financial statements.
The Company expects to continue its policy of paying regular cash dividends although there is no assurance as to future dividends because they are dependent on future earnings, capital requirements and financial conditions and are subject to regulatory restrictions as described in Note H to the consolidated financial statements.
14 15 ItemITEM 6. SELECTED FINANCIAL DATA
Year Ended December 31 ------------------------------------------------------------ 1997 1996 1995 1994 1993 1992 ---------- ---------- ---------- ---------- ---------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) Net premiums written $ 69,575 $ 61,431 $ 63,065 $ 61,503 $ 53,820 $ 54,032 Net premiums earned 61,675 58,743 58,793 61,187 53,210 53,694 Net investment income and realized gains on investments 35,780 26,440 26,371 15,272 21,447 20,027 Losses and loss expenses incurred 39,854 33,754 38,754 32,910 26,960 34,308 Income from continuing operations 24,446 21,334 20,594 20,505 24,654 21,069 Net income 24,446 21,692 29,360 20,791 25,234 21,251 Earnings per share -- net income (1) (3)1.75 1.51 1.971.96 1.37 1.62 1.35 Cash dividends per share (3).40 .36 .30 .33 .183 .175 Investment portfolio -- statement value(3) 475,328 454,791 424,833 386,646 382,904 358,262 Total assets 533,462557,015 526,460 512,225 503,899 487,522 476,247 Shareholders' equity 293,963 273,122 247,008 205,933 203,380 177,912 Book value per share (1) (3)21.23 19.46 16.78 13.66 13.01 11.41 Underwriting ratios (2): Losses and loss expenses 64.6% 57.5% 65.9% 53.8% 50.7% 63.9% Underwriting expenses 33.3% 29.2% 28.0% 27.6% 29.9% 24.0% Combined 97.9% 86.7% 93.9% 81.4% 80.6% 87.9% (1) AdjustedEarnings and book value per share are adjusted for the dilutive effect of stock options outstandingoutstanding. Earnings per share has been restated in accordance with Financial Accounting Standards Board Statement No. 128, EARNINGS PER SHARE. (2) Data is for all coverages combined and is presented based upon generally accepted accounting principles. (3) All per share amounts are adjusted forIncludes money market instruments classified with cash in the three-for-one stock split on November 17, 1993.Consolidated Balance Sheets.
15 16 ItemITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS LIQUIDITY AND CAPITAL RESOURCES The primary sources of the Company's liquidity are (1) funds generated from insurance premiums, (2) net investment income and (3) maturing investments. The Company generally experiences positive cash flow resulting from the fact that premiums are collected on insurance policies in advance of the disbursement of funds in payment of claims. Operating costs of the insurance subsidiaries, other than loss and loss expense payments and commissions paid to the parent company, generally average between 25% and 30%35% of premiums earned on a consolidated basis and the remaining amount is available for investment for varying periods of time depending on the type of insurance coverage provided. During extended periods of declining premium volume, however, operating cash flows may turn negative as loss settlements exceed net premium revenue and receipts of investment income. For several years, the Company's investment philosophy has emphasized the purchase of short-term instruments with maximum quality and liquidity. As interest rates have remained relatively low and yield curves have been essentially flat in recent years, the Company has not committed funds to longer term fixed maturity investments. The average life of the Company's bond and short-term investment portfolio was 3.13.6 years compared to 2.93.1 years for 1995.1996. The Company also remains an active participant in the equity securities market. Investments made by the Company's domestic insurance subsidiaries are regulated by guidelines promulgated by the National Association of Insurance Commissioners which are designed to provide protection for both policyholders and shareholders. The Company's assets at December 31, 19961997 included $19.6$24.9 million in short-term investments which are readily convertible to cash without market penalty and an additional $94.3$76.5 million of fixed maturity investments maturing in less than one year. The Company believes that these liquid investments, plus the expected cash flow from current operations, are more than sufficient to provide for projected claim payments and operating cost demands. In addition, the Company's reinsurance program is structured to avoid serious cash drains that might accompany catastrophic losses. In the event competitive conditions continue to produce inadequate rates and the Company chooses to further reduce volume, the Company believes that the liquidity of its investment portfolio would permit it to continue to pay claims as settlements are reached without requiring the disposal of investments at a loss, regardless of interest rates in effect at the time. Net premiums written by the Company's U.S. insurance subsidiaries for 19961997 were approximately 24% of the combined statutory surplus of these subsidiaries. Premium writings of 200% to 300% of surplus are generally considered acceptable by regulatory authorities. Accordingly, the Company has the ability to significantly increase its business without seeking additional capital to meet statutory guidelines. Consolidated shareholders'Shareholders' equity increased to $294.0 million at December 31, 1997, from $273.1 million at December 31, 1996, from $247.0 million at December 31, 1995.1996. In addition to current year earnings, this increase includes a $19.2$7.1 million increase in unrealized net gains on the Company's investment portfolio from $19.3 million at December 31, 1995 to $38.5 million at December 31, 1996.1996 to $45.6 million at December 31, 1997. The increase in shareholders' equity is net of $10.2$5.1 million in treasury share purchases and $5.1$5.5 million of dividends to shareholders. Book value per common share outstanding increased 16%9% to $19.46$21.23 at December 31, 19961997 from $16.78$19.46 per share at December 31, 1995.1996. 16 17 As more fully discussed in Note HG to the consolidated financial statements, at December 31, 1996, $20.51997, $64.8 million, or 7.5%22.0% of consolidated 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 due to statutory restrictions on the allowable transfers. However, management believes that these restrictions pose no material liquidity concerns for the Company. The financial strength and stability of the subsidiaries permit ready access by the parent company to short-term and long- termlong-term sources of credit. The parent company had cash and marketable investments of approximately $49.7$40.1 million at December 31, 1996.1997. RESULTS OF OPERATIONS NOTE: ALL COMPARATIVE AMOUNTS IN THE FOLLOWING DISCUSSION, FOR THE YEAR 1994, HAVE BEEN ADJUSTED1997 COMPARED TO REFLECT THE SALE OF HOOSIER INSURANCE COMPANY DURING 1995. SEE NOTE A FOR MORE INFORMATION WITH RESPECT TO THIS SALE.1996 Direct premiums written for 1997 totaled $66.0 million, an increase of $2.6 million (4.2%) from 1996. This increase is primarily attributable to an increase in nonstandard private passenger automobile business of $9.9 million (72.2%) from 1996 offset by decreases in the majority of the Company's trucking- related products although "work accident" program premiums increased $1.7 million (13.2%) from 1996. Premium writings from small trucking fleet risks also increased by $.4 million while the new small business workers' compensation program generated $.4 million in new premium. Large and medium fleet trucking premium writings declined $6.4 million (26.6%) and $.9 million (30.5%), respectively, reflecting the continued intense competition in these markets. In addition, premiums for large deductible workers' compensation policies decreased $2.4 million. Premium writings from reinsurance assumed increased by $1.8 million (18.7%) to $11.7 million during 1997. This increase is due principally to $3.9 million relating to the Company's participation in a new excess facultative program, partially offset by lower premiums assumed from voluntary property catastrophe retrocession pools during 1997. The decreased catastrophe assumed premium is attributable to reductions in the Company's shares in these pools during 1997 as well as decreases in gross pool revenues. Premium writings ceded to reinsurers decreased $3.6 million (30.8%) during 1997 to $8.2 million. The percentage of premiums ceded to direct premiums written decreased to 12.4% for 1997 from 18.6% for 1996 due primarily to the decline in trucking-related premiums which carry larger reinsurance rates than the Company's other products and the increased use of lower cost facultative placements. In addition, ceded premium declined due to the termination of the quota share treaty on the Company's "work accident" program in April, 1996. Ceding rates on the Company's primary treaties for 1997 were consistent with the prior year. After giving effect to changes in unearned premiums, net premiums earned increased 5.0% to $61.7 million for 1997 from $58.7 for 1996. Net premiums earned from all trucking-related insurance products, including small fleet trucking, decreased by $5.3 million (13.7%). Premiums earned from voluntary reinsurance assumed decreased by $.6 million. The above decreases were offset by a $7.9 million increase in nonstandard private passenger automobile premium during 1997. Net investment income decreased by $1.1 million (5.8%) during 1997 due to across - -the-board declines in the pre-tax yields on invested assets. The average pre- tax yield on invested assets for 1997 was 5.0% compared to 5.3% for 1996 while the after-tax yield for 1997 was 3.5% compared to 3.7% for 1996. Investment expenses, which are netted directly against income, were relatively unchanged from 1997 and were 6.2% of gross investment income compared to 5.6% for 1996. 17 18 Realized net capital gains were $17.3 million in 1997 compared to $6.9 million for 1996. The current year net gain consisted of gains on equity securities and fixed maturities of $18.2 million and $.1 million, respectively, and losses on other investments of $1.0 million. Losses and loss expenses incurred during 1997 increased $6.1 million (18.1%) to $39.9 million. The 1997 consolidated loss and loss expense ratio was 64.6% compared to 57.5% for 1996. Losses and loss expenses incurred for 1996 included adverse development on environmental liability claims of $2.4 million relating to policies written in the 1970's. Adjusted for the development on environmental liability claims, the consolidated loss and loss expense ratio for 1996 was 53.4%. The increase in the loss and loss expense ratio is principally attributable to a decline in the savings realized on the closing of prior year claims during 1997 as compared to 1996. These savings related predominantly to the Company's trucking and trucking-related business. Because of the high limits provided by the Company to its insureds, the length of time required to settle larger, more complex claims and the volatility of the trucking liability insurance business, the Company believes it is important to have a high degree of comfort in its reserving process. As claims are settled in years subsequent to their occurrence, the Company's claim handling process has, historically, tended to produce savings from the reserves provided. The Company believes that the favorable loss development may be attributable, at least in part, to changes in trucking safety in general resulting from the implementation of the national commercial driver license, mandatory drug testing and an increased awareness by trucking companies of the cost of unsafe operations. It is further believed that the Company's selection techniques, minimum safety standards and claims handling have also contributed to the current favorable loss experience. The Company has established provisions for incurred but not reported environmental losses at December 31, 1997 which are believed to be sufficient to cover all anticipated exposure. Other operating expenses for 1997, before credits for allowances from reinsurers, increased $1.9 million (8.4%) to $24.4 million. Personnel related expenses, including amounts allocated to loss expenses and investment income, decreased $.4 million (2.7%) despite a net 22% increase in the number of employees during the year, attributable to the expansion of the Company's new products. Salary expense during 1996 was increased, as compared to 1997, by larger accruals for equity appreciation rights which are tied to book value and by the issuance of discounted stock options to employees. Direct commission expense increased $2.4 million (71.6%) as the result of increases in premiums from Sagamore's personal automobile product and voluntary reinsurance assumed from catastrophe pools. Allowances from reinsurers decreased $.2 million (21.2%) as the result of the termination of the quota share reinsurance treaty covering the Company's "work accident" program partially offset by an increase in facultative placements. The ratio of net operating expenses of the insurance subsidiaries to net premiums earned was 33.3% during 1997 compared to 29.2% for 1996. Including the agency operations, which absorbed a portion of the development costs for the Company's new products, the ratio of other operating expenses to total revenue, adjusted to remove net realized gains, was 28.9% for 1997 compared with 27.1% for 1996. The effective federal tax rate for consolidated operations for 1997 was 31.4%. This rate is lower than the statutory rate primarily because of tax-exempt investment income. As a result of the factors mentioned above, income from consolidated continuing operations for 1997 was $24.4 million compared to $21.3 million for 1996 and net income for 1997 totaled $24.4 million compared to $21.7 million reported during 1996. Diluted earnings per share increased to $1.75 in 1997 from $1.51 in 1996 due primarily to the increase in realized gains on investments. 18 19 1996 COMPARED TO 1995 Direct premiums written for 1996 totaled $63.4 million, a decrease of $4.0 million (6.0%) from 1995. This decrease is primarily attributable to decreases in the majority of the Company's trucking-related products. Large fleet and medium fleet trucking premium writings decreased $9.9 million (29.1%) and $.8 million (20.7%), respectively, reflecting the continued intense competition in these markets which resulted in the non-renewal of several accounts and rate reductions on those accounts renewed. Premium writings for Protective's "work accident" program also decreased by $2.1 million (13.8%) from 1995, reflecting rate reductions on renewed accounts. Decreases in premium writings were also derived from Sagamore's program for small trucking fleet risks and surety premiums related to large fleet risks of $.7 million each. The above decreases were partially offset by an increase in Sagamore's non-standardnonstandard private passenger automobile business of $8.8 million (181.6%) from 1995. In addition, premiums for retrospectively rated workers' compensation policies increased $1.3 million reflecting loss development on prior year policies. Premium writings from reinsurance assumed decreased by $2.3 million (19.2%) to $9.9 million during 1996. This decrease relates principally to a $2.1 million reduction in premiums assumed from voluntary property catastrophe retrocession pools, to $9.2 million, during 1996. The lower catastrophe assumed premium is attributable to withdrawal from certain markets by the ceding reinsurers as the result of declining premium rates. Premium writings ceded to reinsurers decreased $4.7 million (28.7%) during 1996 to $11.8 million. The percentage of premiums ceded to direct premiums written decreased to 18.6% for 1996 from 24.5% for 1995 due primarily to the termination of the quota share treaty on the Company's "work accident" program at the beginning ofin April, 1996. Ceding rates on the Company's primary treaties for 1996 were consistent with the prior year. After giving effect to changes in unearned premiums, net premiums earned were $58.7 million for 1996, nearly unchanged from 1995. Net premiums earned from all trucking liability insurance products, including small fleet trucking, decreased by $5.7 million (12.8%). Premiums earned from voluntary reinsurance assumed decreased by $1.8 million. The above decreases were offset by a $7.6 million increase in Sagamore's non-standardnonstandard private passenger automobile program during 1996. 17 18 Net investment income decreased by $.6 million (2.9%) during 1996 due to $.9 million in non-recurring income from the liquidation of a limited partnership during 1995. The average pre-tax yield on invested assets for 1996 was 5.3% compared to 5.9% for 1995 while the after-tax yield for 1996 was 3.7% compared to 4.1% for 1995. Investment expenses, which are netted directly against income, were relatively unchanged from 1995 and were 5.6% of gross investment income compared to 5.3% for 1995. Consolidated realized net capital gains were $6.9 million in 1996 compared to $6.2 million for 1995. The current year net gain consisted of gains on equity securities and fixed maturities of $6.5 million and $.4 million, respectively. Losses and loss expenses during 1996 decreased $5.0 million (12.9%) to $33.8 million. The 1996 consolidated loss and loss expense ratio was 57.5% compared to 65.9% for 1995. Losses and loss expenses incurred for 1996 and 1995 included adverse development on environmental 19 20 liability claims of $2.4 million and $7.6 million, respectively, relating to policies written in the 1970's. Adjusted for the development on environmental liability claims, the consolidated loss and loss expense ratios for 1996 and 1995 were 53.4% and 53.0%, respectively. The consolidated savings on all prior year losses was $12.2 million for 1996 compared to $5.5 million for 1995. Adjusted for the development on environmental liability claims, savings on prior accident year losses were $14.6 million and $13.1 million during 1996 and 1995, respectively. These savings related predominantlySee comments in the foregoing discussion of operations for 1997 compared to 1996 regarding the Company's trucking and trucking-related business. Becausedevelopment of the high limits provided by the Company to its insureds, the length of time required to settle larger, more complex claims and the volatility of the trucking liability insurance business, the Company believes it is important to have a high degree of comfort in its reserving process. As claims are settled in years subsequent to their occurrence, the Company's claim handling process has, in recent years, tended to produce savings from the reserves provided. The Company believes that the favorable loss development may be attributable, at least in part, to changes in trucking safety in general resulting from the implementation of the national commercial driver license, mandatory drug testing and an increased awareness by trucking companies of the cost of unsafe operations. It is further believed that the Company's selection techniques, minimum safety standards and claims handling have also contributed to the current favorable loss experience. The Company has established provisions for incurred but not reported environmental losses at December 31, 1996 which are believed to be sufficient to cover all anticipated exposure.prior year reserves. Other operating expenses for 1996, before credits for allowances from reinsurers, increased $3.3 million (17.2%) to $22.5 million. Salary related expenses increased $2.1 million (18.7%) due primarily to a 16% increase in the number of employees, as the Company's new products continue to expand, and equity appreciation rights accruals which are tied to the Company's book value. Direct commission expense increased $.9 million (34.5%) as the result of increases in premiums from Sagamore's personal automobile product. Allowances from reinsurers decreased $.7 million (42.7%) as the result of the termination of the quota share reinsurance treaty covering the Company's "work accident" program. The ratio of net operating expenses of the insurance subsidiaries to net premiums earned was 29.2% during 1996 compared to 28.0% for 1995. Including the agency operations, which absorbed much of the development costs for the Company's new products, the ratio of other operating expenses to total revenue, adjusted for net realized gains, was 27.1% for 1996 compared with 21.9% for 1995. The effective federal tax rate for consolidated operations for 1996 was 31.6%. This rate is lower than the statutory rate primarily because of tax-exempt investment income. 18 19 As a result of the factors mentioned above, income from consolidated continuing operations for 1996 was $21.3 million compared to $20.6 million for 1995. The Company's net income for 1996 totaled $21.7 million compared to a record $29.4 million reported during 1995, which included a $7.6 million gain on the sale of Hoosier Insurance Company. Earnings per share decreased to $1.51 in 1996 from a record $1.97$1.96 in 1995. 1995 COMPARED TO 1994 Direct premiums written for 1995 totaled $67.4 million, an increase of $1.2 million (1.8%) from 1994. This increase is attributable to a myriad of changes in the Company's product categories. Increases in premium writings were derived from Sagamore's new product lines for non-standard private passenger automobile and small trucking fleet risks of $4.9 million and $3.4 million, respectively. In addition, Protective's "work accident" program produced higher premium volume for the sixth straight year since this product was introduced, increasing $.9 million, or 6.4%, during 1995. The Company also recorded net additional premiums for retrospectively rated workers' compensation policies of $.4 million compared to net returns of $1.2 million during 1994. The above increases were partially offset by decreases in large fleet and medium fleet trucking premium writings of $7.1 million (17.2%) and $2.4 million (39.4%) reflecting the continued intense competition in these markets which resulted in the non-renewal of several accounts and rate reductions on those accounts renewed. Premium writings from reinsurance assumed decreased by $.9 million (6.5%) to $12.2 million during 1995. This decrease relates principally to changes in reinsurance assumed from mandatory state pools and underwriting associations. Voluntary reinsurance assumed from property catastrophe retrocession pools was $11.3 million during 1995, level with 1994. This program has become a significant source of revenue for the Company and it is expected that these retrocession assumptions will continue as long as market conditions are favorable. Premium writings ceded to reinsurers decreased $1.7 million (9.4%) during 1995 to $16.5 million. The percentage of premiums ceded to direct premiums written was 24.5% for 1995, unchanged from 1994. Ceding rates on the Company's primary treaties for 1995 were consistent with the prior year. After giving effect to changes in unearned premiums, the factors mentioned above decreased net premiums earned by $2.4 million (3.9%) to $58.8 million for 1995. Net premiums earned from all trucking liability insurance products, including small fleet trucking, decreased by $3.6 million (8.2%). Premiums earned from reinsurance assumed decreased by $1.4 million primarily as the result of a $1.7 million decrease in premium earned from mandatory state pools and underwriting associations. Premiums earned from worker's compensation products for truckers increased $1.0 million due primarily to the increase in premiums from the runoff of older retrospectively rated policies. In addition, premiums earned from Sagamore's new non-standard automobile program totaled $1.7 million during 1995. Net investment income increased by $5.4 million (36.8%) during 1995. Income for 1995 includes $.9 million representing income derived from a limited partnership investment which was liquidated effective December 31, 1995. The average pre- tax yield on invested assets for 1995 was 5.9% compared to 4.6% for 1994 while the after-tax yield for 1995 was 4.1% compared to 3.3% for 1994. Investment expenses, which are netted directly against income, increased approximately $.2 million and were 5.3% of gross investment income in 1995 compared to 6.1% for 1994. 19 20 Consolidated realized net capital gains were $6.2 million in 1995 compared to $.5 million for 1994. The current year net gain consisted of gains on equity securities and fixed maturities of $6.7 million and $.3 million, respectively, and losses of $.8 million on short-term and other investments. Losses and loss expenses during 1995 increased $5.8 million (17.8%) to $38.8 million. The 1995 consolidated loss and loss expense ratio was 65.9% compared to 53.8% for 1994. The loss and loss expense ratio on current year trucking and trucking-related accidents actually decreased from 97.8% for 1994 to 76.5% for 1995 as the unusually high frequency and severity experienced during 1994 was not repeated during the current year. In addition, the loss ratio on reinsurance assumed under catastrophe retrocessions decreased from 69.9% in 1994 to 42.3% in 1995. However, offsetting these more favorable factors was a significant decrease in the savings realized on the development of prior year losses during 1995. The results from 1994 included an unusually high savings on prior year losses of $22.9 million. During 1995, the Company experienced adverse development totaling $7.6 million relating to environmental liability claims for policies written in the 1970's. However, consolidated savings on all prior year losses was $5.5 million, including the development on environmental liability claims. Adjusted for the development on environmental liability claims, savings on prior accident year losses were $13.1 million during 1995. See comments in the foregoing discussion of operations for 1996 compared to 1995 regarding the development of prior year reserves. Other operating expenses for 1995, before credits for allowances from reinsurers, increased $2.2 million (13.1%) to $19.2 million. Salary related expenses increased $1.9 million (21.6%) due primarily to incentive bonus and equity appreciation rights accruals which are tied to the Company's operating results and book value. Commission expense increased $.5 million (24.6%) as the result of increases in premiums from Sagamore's personal automobile and small fleet trucking products. The ratio of net operating expenses of the insurance subsidiaries to net premiums earned was 28.0% during 1995 compared to 27.6% for 1994. Including the agency operations, the ratio of other operating expenses to total revenue, adjusted for net realized gains, was 21.9% for 1995 compared with 19.8% for 1994. The effective federal tax rate for consolidated operations for 1995 was 31.4%. This rate is lower than the statutory rate primarily because of a $.2 million reduction in current federal taxes payable related to the "fresh start" provisions of the 1986 Tax Reform Act and because of tax-exempt investment income. The effective federal tax rate was 32.2% without the effect of the "fresh start" credits. As a result of the factors mentioned above, income from consolidated continuing operations for 1995 was $20.6 million and remained essentially level with that of 1994. The Company recognized a gain on the sale of Hoosier Insurance Company of $7.6 million, net of federal income tax, and recorded $.7 million in income for its share of Hoosier's operations prior to the sale. The Company's net income for 1995 totaled a record $29.4 million compared to $20.8 million reported during 1994. Earnings per share increased to a record $1.97 in 1995 from $1.37 in 1994. FORWARD-LOOKING INFORMATION Any forward-looking statements in this report, including without limitation, statements relating to the Company's plans, strategies, objectives, expectations, intentions and adequacy of resources, are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Investors are cautioned that such forward-looking statements involve risks and uncertainties including without limitation the following: 20 21 (i) the Company's plans, strategies, objectives, expectations and intentions are subject to change at any time at the discretion of the Company; (ii) the Company's business is highly competitive and the entrance of new competitors into or the expansion of the operations by existing competitors in the Company's markets and other changes in the market for insurance products could adversely affect the Company's plans and results of operations; and (iii) other risks and uncertainties indicated from time to time in the Company's filings with the Securities and Exchange Commission. 20 21 FEDERAL INCOME TAX CONSIDERATIONS The liability method is used in accounting for federal income taxes. Using this method, deferred tax assets and liabilities are determined based on differences between financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. The provision for deferred federal income tax was based on items of income and expense that were reported in different years in the financial statements and tax returns and were measured at the tax rate in effect in the year the difference originated. Net deferred tax liabilities of $10.7$16.2 million and $.5$10.7 million were recorded at December 31, 19961997 and 1995,1996, respectively. The net deferred tax liability at December 31, 19961997 included $7.0$6.2 million in special tax deposits covered under Section 847 of the Internal Revenue Code, as explained in the following paragraph, which compares to $7.3$7.0 million in special tax deposits at December 31, 1995.1996. Adjusted for the special deposits, a net deferred tax liability of $17.7$22.4 million was recorded at December 31, 19961997 compared to a net deferred tax liability of $7.8$17.7 million at December 31, 1995.1996. The increase in deferred federal taxes payable is primarily attributable to changes in unrealized capital gains in the investment portfolio. A provision in the Technical and Miscellaneous Revenue Act of 1988 created a mechanism which would allow for a recognizable deferred tax asset specifically for property and casualty loss reserves discounted for tax purposes. Adopted as Section 847 of the Internal Revenue Code, this provision allows an insurer to take a special tax deduction equal to the discount on post 1986 accident year loss and loss expense reserves while making "special estimated tax payments" equal to the amount of the tax benefit derived from the special deduction. The "special estimated tax payments" can be carried forward for fifteen years to offset taxes arising from decreases in the special deduction and can be treated as regular estimated payments or refunded at the end of the carryforward period. Based upon the concerns regarding the recognition of deferred tax assets, the Company adopted the provisions of Section 847 for all tax years 1987 and subsequent and has taken deductions for the entire amount of discount on post- 1986 loss reserves. As mentioned above, special Section 847 estimated tax deposits totaling $7.0$6.2 million have been paid in connection with this election. IMPACT OF INFLATION To the extent possible, the Company attempts to recover the costs of inflation by increasing the premiums it charges. A majority of the Company's premiums are charged as a percentage of an insured's gross revenue or payroll. As these charging bases increase with inflation, so does premium. The remaining premium rates charged are adjustable only at periodic intervals and often require state regulatory approval. Such periodic increases in premium rates may lag far behind cost increases. To the extent inflation influences yields on investments, the Company is also affected. The Company maintains a sizable portion of its investment portfolio in short-term instruments and changes in current market interest rates correspondingly affect yields on these investments. Further, as inflation affects current market rates of return, previously committed investments may rise or decline in value depending on the type and maturity of investment. 21 22 Inflation must also be considered by the Company in the creation and review of loss and loss adjustment expense reserves since portions of these reserves are expected to be paid over extended periods of time. The anticipated effect of inflation is implicitly considered when estimating liabilities for losses and loss adjustment expenses. 21 22 IMPACT OF THE YEAR 2000 The importanceYear 2000 Issue is the result of continually adjusting reserves is even more pronouncedcomputer programs being written using two digits rather than four to define the applicable year. Any of the Company's computer programs that have time-sensitive features may recognize a date using "00" as the year 1900 rather than the year 2000. This could result in a periodsystem failure or miscalculations causing disruptions of extreme inflationary pressure.operations, including, among other things, a temporary inability to process transactions, send invoices, or engage in normal business activities. The insurance industry is especially aware of the Year 2000 concern given that the majority of its products and services are time and date sensitive (e.g., policy effective periods and loss occurrence dates). The Company has been in the process of developing software for its new and rapidly expanding products since 1995. All internally developed new product software is Year 2000 compliant, with minor exceptions, and currently handles approximately 90% of the Company's processed transactions. The Company is also engaged in an ongoing analysis of its remaining systems to determine the nature and extent of existing deficiencies and the appropriate corrective solutions. The Company believes that with modifications to existing software and conversions to new software, the Year 2000 Issue will not pose significant operational problems for its computer systems. However, if such modifications and conversions are not made, or are not completed on a timely basis, the Year 2000 Issue could have a significant impact on the operations of the Company. The Company will communicate with its significant suppliers and large customers to determine the extent to which the Company's interface systems are vulnerable to third party failures to remediate Year 2000 system deficiencies. It is believed that the Company's total Year 2000 project costs will not be significantly impacted by third party Year 2000 Issues based on presently available information. However, there can be no guarantee that the systems of other companies on which the Company's systems rely will be converted on a timely basis and would not have an adverse effect on the Company's systems. The Company has determined it has no exposure to contingencies related to the Year 2000 Issue for the products it has sold. The Company will utilize existing staff and other internal resources to reprogram and test its internally developed software, and to test its purchased software, for Year 2000 compliance. Any internally developed software that is deemed unworthy of Year 2000 conversion will be replaced with new internally developed or purchased software that is Year 2000 compliant. Any currently owned purchased software for which Year 2000 upgrades are unavailable will also be replaced with purchased software that is Year 2000 compliant. The Company anticipates completing the Year 2000 project by the first quarter of 1999. The majority of the past and future costs associated with the Year 2000 project can be attributed to internal staffing requirements associated with the development of new product software and would have largely been incurred regardless of the Year 2000 Issue. These costs, and the costs associated with the acquisition of Year 2000 compliant software from outside vendors, are not material with respect to the Company's operations or financial position. The costs of the project and the date on which the Company believes it will complete its Year 2000 effort are based on management's best estimates, which were derived utilizing numerous assumptions of future events, including the continued availability of certain resources, third party modification plans and other factors. However, there can be no guarantee that these estimates will be achieved and actual results could differ materially from those anticipated. Specific factors that might cause such material differences include, but are not limited to, the availability and cost of personnel trained in this area, the ability to locate and correct all relevant computer codes, and similar uncertainties. 22 23 OTHER ITEMS COMPREHENSIVE INCOME During 1997, the Company adopted Financial Accounting Standards Board Statement No. 130, REPORTING COMPREHENSIVE INCOME. Statement No. 130 requires companies to report certain unrealized potential income or loss items, previously recognized only in separate components of shareholders' equity, as "other comprehensive income". Companies are also required to report "comprehensive income" that is comprised of net income and such other comprehensive income items. The Company's only material item of other comprehensive income is the unrealized gain or loss associated with its investment portfolio. Management believes that the disclosures required by Statement No. 130 are unnecessary in that all components of such disclosures are currently available in the Company's financial statements. Management also believes that the new disclosures may serve to confuse shareholders and other readers regarding the Company's future earnings and cash flows. The disclosures required by Statement No. 130 should be viewed by the reader with the understanding that there are many factors that might affect the future realizable value of items of other comprehensive income which are beyond management's control. As such, there can be no assurance that amounts recorded as unrealized gains or losses will ever result in a realized transaction. EARNINGS PER SHARE During 1997, the Company adopted Financial Accounting Standards Board Statement No. 128, EARNINGS PER SHARE. Statement No. 128 requires companies to present per share data on both basic (without the dilutive effect of stock equivalents) and diluted bases. The Company has restated all per share data for prior years in conformity with Statement No. 128, with minimal effect on previously reported amounts. SEGMENTS In June, 1997, the Financial Accounting Standards Board issued Statement No. 131, DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION. The Company will report segment information in accordance with Statement No. 131 in its 1998 annual report. At this time, the Company has not completed its analysis of Statement No. 131, but anticipates changes from its current disclosure. 23 24 ANNUAL REPORT ON FORM 10-K ITEM 8--FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA YEAR ENDED DECEMBER 31, 19961997 BALDWIN & LYONS, INC. INDIANAPOLIS, INDIANA 2324 2425 REPORT OF INDEPENDENT AUDITORS Shareholders and Board of Directors Baldwin & Lyons, Inc. We have audited the accompanying consolidated balance sheets of Baldwin & Lyons, Inc., and subsidiaries as of December 31, 19961997 and 1995,1996, and the related consolidated statements of income and retained earnings, changes in equity other than capital, and cash flows for each of the three years in the period ended December 31, 1996.1997. Our audits also includeincluded the financial statement schedules listed in the index at item 14(a)(1) and (2). These financial statements and schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedules based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Baldwin & Lyons, Inc. and subsidiaries at December 31, 19961997 and 1995,1996, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1996,1997, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein. /S//s/ ERNST & YOUNG LLP Indianapolis, Indiana February 26, 19971998 2425 2526
CONSOLIDATED BALANCE SHEETS Baldwin & Lyons, Inc. and Subsidiaries December 31 ------------------------- 1997 1996 1995 ---------- ---------- (DOLLARS IN THOUSANDS) ASSETS Investments: Fixed maturities $ 273,828276,109 $ 279,083273,828 Equity securities 158,614 147,196 98,428 Short-term 19,579 38,600 Other 14,188 8,722and other 17,902 19,698 --------- --------- 454,791 424,833452,625 440,722 Cash 7,575 1,369and cash equivalents 23,402 14,642 Accounts receivable 21,454 13,967 13,174 Accrued investment income 4,046 3,888 4,615 Reinsurance recoverable 47,276 43,829 54,702 Deferred policy acquisition costs 2,522 1,425 763 Investments in equity subsidiary and its affiliates - 9,582 Current federal income taxes - 568 - Property and equipment--less accumulated depreciation (1996, $4,223; 1995, $4,030)(1997, $5,097; 1996, $4,223) 4,167 3,259 1,832 Other assets 1,523 4,160 1,355 ---------- ------------------- --------- $ 533,462557,015 $ 512,225 ========== ==========526,460 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY Reserves: Losses and loss expenses $ 196,939197,195 $ 211,489196,939 Unearned premiums 18,806 10,835 8,262 ---------- ------------------- --------- 216,001 207,774 219,751 Reinsurance payable 8,428 7,318 15,405 Accounts payable and other liabilities 27,568 19,698 Deposits received from insureds 6,946 8,79221,234 27,512 Deferred federal income taxes 16,249 10,734 450 Current federal income taxes 1,140 - 1,121 ---------- ---------- 260,340 265,217--------- --------- 263,052 253,338 Shareholders' equity: Common stock, no par value: Class A -- authorized 3,000,000 shares; outstanding -- 1997, 2,397,354 shares; 1996, 2,444,329 shares; 1995, 2,476,029 shares 128 130 132 Class B -- authorized 20,000,000 shares; outstanding -- 1997, 11,292,445 shares; 1996, 11,515,145 shares; 1995, 12,101,161 shares 602 614 645 Additional paid-in capital 41,361 42,100 43,620 Unrealized net gains on investments 45,614 38,472 19,251 Retained earnings 206,258 191,806 183,360 ---------- ------------------- --------- 293,963 273,122 247,008 ---------- ------------------- --------- $ 533,462557,015 $ 512,225 ========== ==========526,460 ========= ========= See notes to consolidated financial statements.
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CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS Baldwin & Lyons, Inc. and Subsidiaries Year Ended December 31 ------------------------------------------------------------------------- 1997 1996 1995 1994 ---------- ---------- ------------------- --------- --------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) REVENUE: Net premiums earned $ 61,675 $ 58,743 $ 58,793 $ 61,187 Net investment income 18,442 19,580 20,161 14,734 Realized net gains on investments 17,338 6,860 6,210 538 Commissions, service fees and other income 1,655 1,304 1,164 1,248 ---------- ---------- ------------------- --------- --------- 99,110 86,487 86,328 77,707 EXPENSES: Losses and loss expenses incurred 39,854 33,754 38,754 32,910 Other operating expenses 23,633 21,542 17,541 15,296 ---------- ---------- ------------------- --------- --------- 63,487 55,296 56,295 48,206 ---------- ---------- ------------------- --------- --------- INCOME FROM CONTINUING OPERATIONS BEFORE FEDERAL INCOME TAXES 35,623 31,191 30,033 29,501 Federal income taxes 11,177 9,857 9,439 8,996 ---------- ---------- ------------------- --------- --------- INCOME FROM CONTINUING OPERATIONS 24,446 21,334 20,594 20,505 DISCONTINUED OPERATIONS, NET OF FEDERAL INCOME TAXES: Income from discontinued operations - 358 1,126 286 Gain on sale of Hoosier Insurance Company - - 7,640 - ---------- ---------- ------------------- --------- --------- NET INCOME 24,446 21,692 29,360 20,791 Retained earnings at beginning of year 191,806 183,360 162,934 153,109 Cash dividends (per share - 1997, $.40; 1996, $.36; and 1995, $.30; and 1994, $.33)$.30) (5,508) (5,107) (4,421) (4,913) Treasury shares purchased (4,283) (8,112) (4,617) (5,979) Foreign exchange adjustment (203) (27) 104 (74) ---------- ---------- ------------------- --------- --------- RETAINED EARNINGS AT END OF YEAR $ 206,258 $ 191,806 $ 183,360 $ 162,934 ========== ========== ========== Per share data: Average number of common and common equivalent shares outstanding 14,355,261 14,933,147 15,183,314========= ========= ========= PER SHARE DATA: DILUTED: Income before discontinued operations and realized net gains $ .94 $ 1.18 $ 1.11 $ 1.33 Realized net gains on investments .81 .31 .27 .02 Income from discontinued operations - .02 .08 .02.07 Gain on sale of Hoosier Insurance Company - - .51 - ---------- ---------- ------------------- --------- --------- NET INCOME $ 1.75 $ 1.51 $ 1.971.96 ========= ========= ========= BASIC: Income before discontinued operations and realized net gains $ 1.37 ========== ========== ==========.95 $ 1.19 $ 1.12 Realized net gains on investments .82 .31 .27 Income from discontinued operations - .03 .08 Gain on sale of Hoosier Insurance Company - - .52 --------- --------- --------- NET INCOME $ 1.77 $ 1.53 $ 1.99 ========= ========= ========= See notes to consolidated financial statements.
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CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY OTHER THAN CAPITAL Baldwin & Lyons, Inc. and Subsidiaries 1997 1996 1995 ---------- ---------- ---------- (DOLLARS IN THOUSANDS) BALANCES AT BEGINNING OF YEAR: Retained earnings $ 191,806 $ 183,360 $ 162,934 Unrealized gains (losses) on investments 38,472 19,251 (1,111) --------- --------- --------- 230,278 202,611 161,823 CHANGES ARISING FROM INCOME-PRODUCING ACTIVITIES: Net income 24,446 21,692 29,360 Gains on investments: Holding gains arising during period, before federal income taxes 28,326 36,431 37,536 Federal income taxes 9,914 12,751 13,138 --------- --------- --------- 18,412 23,680 24,398 Gains realized during period included in net income, before federal income taxes (17,338) (6,860) (6,210) Federal income taxes (6,068) (2,401) (2,174) --------- --------- --------- (11,270) (4,459) (4,036) --------- --------- --------- Change in unrealized gains or losses on investments 7,142 19,221 20,362 Foreign exhange adjustment (203) (27) 104 --------- --------- --------- TOTAL REALIZED AND UNREALIZED INCOME 31,385 40,886 49,826 OTHER CHANGES AFFECTING RETAINED EARNINGS: Cash dividends paid to shareholders (5,508) (5,107) (4,421) Cost of treasury shares purchased in excess of proceeds from original issue (4,283) (8,112) (4,617) --------- --------- --------- (9,791) (13,219) (9,038) --------- --------- --------- TOTAL CHANGES 21,594 27,667 40,788 ========= ========= ========= BALANCES AT END OF YEAR: Retained earnings 206,258 191,806 183,360 Unrealized gains on investments 45,614 38,472 19,251 --------- --------- --------- $ 251,872 $ 230,278 $ 202,611 ========= ========= ========= See notes to consolidated financial statements.
28 29
CONSOLIDATED STATEMENTS OF CASH FLOWS Baldwin & Lyons, Inc. and Subsidiaries Year Ended December 31 ----------------------------------- 1997 1996 1995 1994 ---------- ---------- ---------- (dollars in thousands)(DOLLARS IN THOUSANDS) Operating activitiesOPERATING ACTIVITIES Net Income $ 24,446 $ 21,692 $ 29,360 $ 20,791 Adjustments to reconcile net income to net cash provided by operating activities: Change in accounts receivable and unearned premium 484 1,780 5,195 3,944 Change in accrued investment income (158) 727 (1,140) 184 Change in losses and loss expenses and reinsurance recoverable (3,192) (3,677) (4,744) (799) Change in other assets, other liabilities and current income taxes (4,026)(2,424) (11,028) (2,417) 2,169 Amortization of net policy acquisition costs 5,742 5,145 2,146 7,928 Net policy acquisition costs deferred (6,839) (5,806) (2,805) (8,488) Provision for deferred income tax credits (643)1,670 (642) (312) (1,216) Bond amortization 372 556 360 1,318 Loss (gain) on sale of property 3 48 (17) 2 Depreciation 995 676 549 782 Net realized gain on investments (17,538) (7,210) (6,597) (469) Income from discontinued operations - (359) (1,822) (404) Gain on sale of Hoosier Insurance Company - - (7,640) - Compensation expense related to discounted stock options 78 516 402 72 ---------- ---------- ------------------- --------- --------- NET CASH PROVIDED BY OPERATING ACTIVITIES 9,4193,639 2,417 10,518 25,814 INVESTING ACTIVITIES Purchases of long-term investments (237,473) (218,611) (246,789) (171,079) Proceeds from maturities 102,065 81,963 64,641 93,836 Proceeds from sales of fixed maturities 10,956 27,860 14,391 18,770 Proceeds from sales of equity securities 138,428 100,976 120,706 68,371 Net proceeds from sales of (purchases of) short-term investments 19,021 7,858 (26,477)3,308 10,663 6,126 Net proceeds from the sale of Hoosier Insurance Company - - 35,614 - Distributions from limited partnerships 366 3,018 3,790 1,480 Purchases of property and equipment (2,027) (2,359) (887) (844) Proceeds from disposals of property and equipment 121 208 148 92 ---------- ---------- ------------------- --------- --------- NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 12,076 (528) (15,851)15,744 3,718 (2,260) FINANCING ACTIVITIES Dividends paid to shareholders (5,508) (5,107) (4,421) (4,913) Proceeds from sale of common stock 1 - 1,200 5 Cost of treasury stock (5,116) (10,182) (5,931) (7,857) ---------- ---------- ------------------- --------- --------- NET CASH USED IN FINANCING ACTIVITIES (10,623) (15,289) (9,152) (12,765) ---------- ---------- ------------------- --------- --------- INCREASE (DECREASE) IN CASH 6,206 838 (2,802)AND CASH EQUIVALENTS 8,760 (9,154) (894) Cash and cash equivalents at beginning of year 1,369 531 3,333 ---------- ---------- ----------14,642 23,796 24,690 --------- --------- --------- CASH AND CASH EQUIVALENTS AT END OF YEARPERIOD $ 7,57523,402 $ 1,36914,642 $ 531 ========== ========== ==========23,796 ========= ========= ========= See notes to consolidated financial statements.
2729 2830 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Baldwin & Lyons, Inc. and Subsidiaries (DOLLARS IN THOUSANDS) NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION: The consolidated financial statements include the accounts of Baldwin & Lyons, Inc. and its wholly owned subsidiaries (the Company). All significant intercompany transactions and accounts have been eliminated in consolidation. DISCONTINUED OPERATIONS: The consolidated statements of income for 1995Company sold its interests in Hoosier Insurance Company (Hoosier) and 1994 have been restated to reflect the sales of Amli Realty, Inc. (Amli) in 1995 and 1996, and Hoosier Insurance Company (Hoosier) in 1995.respectively. Related income and expense amounts for the current and prior years and the gain recognized on the sale of Hoosier are reported as discontinued operations. No gain or loss was realized on the Amli sale which was treated as a non-monetary, tax-free exchange. The consolidated statements of cash flows for 1996 and 1995 include changes in certain assets and liabilities which are presented without the effects of the sales of Amli in 1996 and Hoosier in 1995. The consolidated balance sheet at December 31, 1995 and the consolidated statements of cash flows for 1995 and 1994 have not been restated. USE OF ESTIMATES: Preparation of the consolidated financial statements requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates. CASH AND CASH EQUIVALENTS:Cash and cash equivalents: The Company considers investments in money market funds to be cash equivalents. Carrying amounts for these instruments approximate their fair values. Checks outstanding are classified with accounts payable and other liabilities. INVESTMENTS: Carrying amounts for fixed maturity securities (bonds, notes and redeemable preferred stocks) represent fair value and are based on quoted market prices, where available, or broker/dealer quotes for specific securities where quoted market prices are not available. Equity securities (nonredeemable preferred stocks and common stocks) and other investments are carried at quoted market prices (fair value). Other investments are carried at either market value, cost or cost adjusted for operations of limited partnerships, depending on the nature of the investment. All fixed maturity and equity securities are considered to be available for sale; the related unrealized net gains or losses (net of applicable tax effect) are reflected directly in shareholders' equity. Although the Company has classified fixed maturity investments as available for sale, it has the ability to hold its fixed maturity investments to maturity. Short-term investments are carried at cost which approximates their fair values. Realized gains and losses on disposals of investments are determined by specific identification of cost of investments sold and are included in income. PROPERTY AND EQUIPMENT: Property and equipment is carried at cost. Depreciation is computed substantially by the straight-line method. RESERVES FOR LOSSES AND LOSS EXPENSES: The reserves for losses and loss expenses are determined using case basis evaluations and statistical analyses and represent estimates of the ultimate cost of all reported and unreported losses which are unpaid at year end. These reserves include estimates of future trends in claim severity and frequency and other factors which could vary as the losses are ultimately settled. Although it is not possible to measure the degree of variability inherent in such estimates, management believes that the reserves for losses and loss expenses are adequate. The estimates are continually reviewed and as adjustments to these reserves become necessary, such adjustments are reflected in current operations. Certain loss reserves related to permanent total disability claims under workers' compensation coverages are 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 percent, and adjusted for losses retained by the insured. 30 31 NOTE A - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) RECOGNITION OF REVENUE AND COSTS: Premiums are earned over the period for which insurance protection is provided. A reserve for unearned premiums, computed by the daily pro-rata method, is established to reflect amounts applicable to 28 29 NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) RECOGNITION OF REVENUE AND COSTS (CONTINUED): subsequent accounting periods. Commissions to unaffiliated companies and other acquisition costs applicable to unearned premiums are deferred and expensed as the related premiums are earned. Anticipated investment income is considered in determining recoverability of deferred acquisition costs. Reinsurance premiums, commissions, expense reimbursements and reserves related to reinsured business are accounted for on bases consistent with those used in accounting for the original policies issued and the terms of the reinsurance contracts. Premiums ceded to other insurers have been reported as a reduction of premium income. Amounts applicable to reinsurance ceded for unearned premium and claim loss reserves have been reported as reinsurance recoverable assets. Certain reinsurance contracts provide for additional or return premiums and commissions based upon profits or losses to the reinsurer over prescribed periods. Estimates of additional or return premiums and commissions are adjusted quarterly to recognize actual loss experience to date as well as projected loss experience applicable to the various contract periods. Stock-based Compensation:STOCK-BASED COMPENSATION: Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees,ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, and related Interpretations isare used in accounting for stock options, stock purchases and equity appreciation rights which are, from time to time, granted to employees and outside directors. Application of Financial Accounting Standards Board Statement No. 123, Accounting for Stock-Based Compensation, would yield results no different from those reported. FEDERAL INCOME TAXES: A consolidated federal income tax return is filed by the Company and includes all wholly owned subsidiaries. EARNINGS PER SHARE: EarningsDiluted earnings per share of common stock are based on the average number of shares of Class A and Class B common stock outstanding during the year, adjusted for the effect, if any, of options outstanding. Basic earnings per share are presented exclusive of the effect of options outstanding. See note M. RECLASSIFICATION: Certain prior year balances have been reclassified to conform to the current year presentation. 2931 3032
NOTE B - INVESTMENTS The following is a summary of available-for-sale securities at December 31: Cost or Gross Gross Net Fair Amortized Unrealized Unrealized Unrealized Value Cost Gains Losses Gains ---------- ---------- ---------- ---------- ------------------------------------------------------------------------ 1997: U. S. government obligations $ 100,679 $ 100,279 $ 454 $ (54) $ 400 Mortgage-backed securities 40,934 40,548 443 (57) 386 Obligations of states and political subdivisions 69,663 69,020 650 (7) 643 Corporate securities 64,833 63,339 1,584 (90) 1,494 --------- --------- --------- --------- --------- Total fixed maturities 276,109 273,186 3,131 (208) 2,923 Equity securities 158,614 91,705 71,196 (4,287) 66,909 Short-term and other 17,902 17,558 418 (74) 344 --------- --------- --------- --------- --------- Total available-for-sale securities $ 452,625 $ 382,449 $ 74,745 $ (4,569) 70,176 ========= ========= ========= ========= Applicable federal income taxes (24,562) --------- Net unrealized gains - net of tax $ 45,614 ========= 1996: U. S. government obligations $145,855 $145,755$ 145,855 $ 145,755 $ 451 $ (352)(351) $ 99100 Mortgage-backed securities 49,973 49,926 313312 (265) 4847 Obligations of states and political subdivisions 56,747 56,585 189 (27) 162 Corporate securities 21,253 20,764 489 - 489 ---------- ---------- ---------- ---------- ------------------- --------- --------- --------- --------- Total fixed maturities 273,828 273,030 1,442 (644)1,441 (643) 798 Equity securities 147,196 89,344 60,645 (2,793) 57,852 Short-term and other 33,767 33,38319,698 19,315 503 (120) 383 Short positions - see note below - - 155 - 155 ---------- ---------- ---------- ---------- ------------------- --------- --------- --------- --------- Total available-for-sale securities $454,791 $395,757 $ 62,745440,722 $ (3,557)381,689 $ 62,744 $ (3,556) 59,188 ========== ========== ========== =================== ========= ========= ========= Applicable federal income taxes (20,716) ------------------- Net unrealized gains - net of tax $ 38,472 ========== 1995: U. S. government obligations $176,552 $173,375 $ 3,223 $ (46) $ 3,177 Mortgage-backed securities 41,615 40,869 809 (63) 746 Obligations of states and political subdivisions 40,870 40,806 95 (31) 64 Corporate securities 20,046 19,630 443 (27) 416 Total fixed maturities 279,083 274,680 4,570 (167) 4,403 ---------- ---------- ---------- ---------- ---------- Equity securities 98,428 73,519 27,955 (3,046) 24,909 Short-term and other 47,322 47,017 516 (211) 305 ---------- ---------- ---------- ---------- ---------- Total available-for-sale securities $424,833 $395,216 $ 33,041 $ (3,424) 29,617 ========== ========== ========== ========== Applicable federal income taxes (10,366) ---------- Net unrealized gains - net of tax $ 19,251 =================== Note: The fair value of the Company's short positions at December 31, 1996 was $744 and is included in accounts payable.
3032 3133 NOTE B - INVESTMENTS (CONTINUED) Realized and unrealized gains (losses)
Gross realized gains and losses on investments for the years ended December 31 are summarized below:
Short-term Total Gains Fixed Equity and Other (Losses) on Maturities Securities Investments Investments ---------- ---------- ---------- ----------1997 1996 1995 ------------------------------------- 1996: RealizedFixed maturities: Gains $ 317 $ 622 $ 351 Losses (199) (230) (69) --------- --------- --------- Net gains 118 392 282 Equity securities: Gains 20,836 9,204 11,170 Losses (2,633) (2,717) (4,438) --------- --------- --------- Net gains 18,203 6,487 6,732 Short-term and other - net losses (983) (19) (804) --------- --------- --------- TOTAL NET GAINS $ 6,487 $ (19)17,338 $ 6,860 Change in unrealized (3,605) 32,943 233 29,571 ---------- ---------- ---------- ---------- Combined $ (3,213) $ 39,430 $ 214 $ 36,431 ========== ========== ========== ========== 1995: Realized $ 282 $ 6,732 $ (804) $ 6,210 Change in unrealized 9,554 21,997 (225) 31,326 ---------- ---------- ---------- ---------- Combined $ 9,836 $ 28,729 $ (1,029) $ 37,536 ========== ========== ========== ========== 1994: Realized $ 23 $ 1,243 $ (728) $ 538 Change in unrealized (7,659) (234) (524) (8,417) ---------- ---------- ---------- ---------- Combined $ (7,636) $ 1,009 $ (1,252) $ (7,879) ========== ========== ========== =================== ========= =========
Sales of fixed maturity investments during 1996, 1995The fair values and 1994 produced gross gains of $622, $351 and $494, respectively, and gross losses of $230, $69 and $471, respectively. Sales of equity securities during 1996, 1995 and 1994 produced gross gains of $9,204, $11,170 and $5,346, respectively, and gross losses of $2,717, $4,438 and $4,103, respectively. The carrying amounts and fair valuesthe cost or amortized cost of fixed maturity investments at December 31, 1996,1997, by contractual maturity, are shown below. Actual maturities may differ from contractual maturities because borrowers have, in some cases, the right to call or prepay obligations with or without call or prepayment penalties. Maturities for mortgage-backed securities are determined on a specific identification basis.
Fair Values Cost or Amortized Cost ----------------------------------- ----------------------------------- Mortgage- Total Mortgage- Total Backed Fixed Backed Fixed Securities All Other Maturities Securities All Other Maturities ---------- ---------- ---------- ---------- ---------- ---------- One year or less $ 230- $ 98,05377,256 $ 98,28377,256 $ 228- $ 97,87077,125 $ 98,09877,125 Excess of one year to five years 6,125 116,268 122,393 6,105 116,043 122,14810,682 116,125 126,807 10,626 115,049 125,675 Excess of five years to ten years 20,680 8,900 29,580 20,780 8,600 29,38012,220 38,391 50,611 12,150 37,123 49,273 Excess of ten years 22,938 - 22,938 22,813 - 22,813 ---------- ---------- ---------- ---------- ---------- ----------18,032 2,750 20,782 17,772 2,750 20,522 --------- --------- --------- --------- --------- --------- Total maturities 49,973 223,221 273,194 49,926 222,513 272,43940,934 234,522 275,456 40,548 232,047 272,595 Redeemable preferred stock - 634 634653 653 - 591 591 ---------- ---------- ---------- ---------- ---------- ------------------- --------- --------- --------- --------- --------- $ 49,973 $223,855 $273,82840,934 $ 49,926 $223,104 $273,030 ========== ========== ========== ========== ========== ==========235,175 $ 276,109 $ 40,548 $ 232,638 $ 273,186 ========= ========= ========= ========= ========= =========
Major categories of investment income for the years ended December 31 are summarized as follows: 1997 1996 1995 1994 ---------- ---------- ---------- Fixed maturities $ 16,193 $ 16,769 $ 14,937 $ 11,601 Equity securities 1,729 2,197 2,111 2,148Money market funds 1,208 1,123 1,263 Short-term and other investments 1,776 4,236 1,943 ---------- ---------- ----------532 653 2,973 --------- --------- --------- 19,662 20,742 21,284 15,692 Investment expenses (1,220) (1,162) (1,123) (958) ---------- ---------- ------------------- --------- --------- NET INVESTMENT INCOME $ 18,442 $ 19,580 $ 20,161 $ 14,734 ========== ========== =================== ========= =========
31 32 NOTE B - INVESTMENTS (CONTINUED) Approximately 38% of purchases and 58%53% of sales of investments during the three years ended December 31, 19961997 were made through securities broker-dealers in which certain directors of the Company were officers, directors or owners. Fees paid toearned by affiliated investment advisors were $604, $932 and $965 in 1997, 1996 and $6271995, respectively. 33 34 NOTE B - INVESTMENTS (CONTINUED) At December 31, 1997, the Company had investments in 1996, 1995common stock and 1994, respectively. Short-termbonds of UICI, a publicly traded insurance and otherholding company with current market capitalization of approximately $1.3 billion. The market value of the Company's investments includein UICI was $40,077 with a cost basis of $11,886 at December 31, 1997. The Company has holdings in money-market accounts which were managed by or purchased through companies affiliated with certain directors of the Company. Other investments includes $2,237$2,161 and $2,594$2,237 at December 31, 19961997 and 1995,1996, respectively, representing limited partnership interests in ventures in which Amli Realty, Inc. (Amli) serves as general partner. Three directorsA director of the Company areis also directors and/or officersa director and officer of Amli.
NOTE C - ACCOUNTS RECEIVABLE Major categories of accounts receivable are as follows: 1996 1995 ---------- ---------- Amounts receivable from agents and insureds $ 14,127 $ 13,232 Other 186 242 ---------- ---------- 14,313 13,474 Less allowances for doubtful accounts 346 300 ---------- ---------- $ 13,967 $ 13,174 ========== ==========
Note D - Loss and Loss Expense ReservesLOSS AND LOSS EXPENSE RESERVES Activity in the reserves for losses and loss expenses is summarized as follows. All amounts are shown net of reinsurance recoverable.
Year Ended December 31, 1997 1996 1995 1994 ---------- ---------- --------------------- ----------- ----------- Reserves at the beginning of the year $161,458 $175,554 $175,949$ 154,537 $ 161,458 $ 175,554 Provision for losses and loss expenses: Continuing operations: Claims occurring during the current year 47,692 45,999 44,238 55,766 Claims occurring during prior years (7,838) (12,245) (5,484) (22,856) Discontinued operations - - 18,573 ---------- ---------- ------------------- --------- --------- Total incurred 39,854 33,754 38,754 51,483 Loss and loss expense payments: Continuing operations: Claims occurring during the current year 15,946 12,891 7,760 9,951 Claims occurring during prior years 26,934 27,825 33,819 25,778 Discontinued operations - - 11,186 16,137 ---------- ---------- ------------------- --------- --------- Total paid 42,880 40,716 52,765 51,866 Change in unpaid portion of uncollectible amounts due from reinsurers (18) 41 (85) (12) ---------- ---------- ------------------- --------- --------- Reserves at the end of the year 151,493 154,537 161,458 175,554 Reinsurance recoverable on reserves at the end of the year 45,702 42,402 50,031 59,655 ---------- ---------- ------------------- --------- --------- Reserves, gross of reinsurance recoverables, at the end of the year $196,939 $211,489 $235,209 ========== ========== ==========$ 197,195 $ 196,939 $ 211,489 ========= ========= =========
32 33 NOTE D - LOSS AND LOSS EXPENSE RESERVES (CONTINUED) The reserves for losses and loss expenses, on continuing operations, net of related reinsurance recoverables, at December 31, 1996, 1995 1994 and 19931994 were decreased by $7,838, $12,245 $5,484 and $22,856,$5,484, respectively, for claims that had occurred on or prior to those dates. These decreases are the result of the settlement of claims at amounts lower than previously reserved and changes in estimates of losses incurred but not reported as part of the normal reserving process. Development during 19961997 and 1995,1996, on reserves outstanding at December 31, 1996 and 1995 included $8 and 1994 included $2,395, and $7,575, respectively, of incurred losses and loss expenses related to environmental damage claims. Reported cases relate primarily to policies issued in the 1970's to one account which was involved in the business of hauling and disposing of hazardous waste. Included in the above loss and loss expense incurred amounts are reserves for incurred but not reported environmental losses of $5,000 and $3,000 at both December 31, 19961997 and 1995, respectively.1996. Adjusted for environmental claims, management believes that the more favorable than anticipated experience may be attributable, at least in part, to changes in trucking safety in general resulting from the implementation of the national commercial driver license, mandatory drug testing and an increased awareness by trucking companies of the cost of unsafe operations. It is further believed that the Company's selection techniques, minimum safety standards and claims handling have also contributed to the current favorable loss experience. These trends were considered in the establishment of the Company's reserves at December 31, 1996.1997. 34 35 NOTE C - LOSS AND LOSS EXPENSE RESERVES (CONTINUED) The Company participates in mandatory residual market pools in various states. The Company records the results from participation in these pools as reported and records an additional provision in the financial statements for operating periods unreported by the pools. Management relies on the reserve data provided by the pools and performs no additional actuarial tests on such data. Loss reserves on certain permanent total disability workers' compensation reserves have been discounted to present value at pre-tax rates not exceeding 3.5%. At December 31, 19961997 and 1995,1996, loss reserves have been reduced by approximately $4,694$5,431 and $8,096,$4,694, respectively. Discounting is applied to these claims since the amount of periodic payments to be made during the lifetime of claimants is fixed and determinable. Loss reserves have been reduced by estimated salvage and subrogation recoverable of approximately $1,725 at both December 31, 19961997 and 1995. 33 341996. NOTE ED - INCOME TAXES Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's deferred tax assets and liabilities as of December 31 are as follows:
1997 1996 1995 ---------- --------------------- ----------- Deferred tax assets:DEFERRED TAX ASSETS: Discounts of loss and loss expense reserves $ 7,0316,210 $ 7,2607,031 Deferred compensation 3,517 3,347 2,260 Unearned premiums 1,292 734 527 Other 1,107 1,076 1,588 ---------- ------------------- --------- Total deferred tax assets 12,126 12,188 11,635 ---------- ---------- Deferred tax liabilities:--------- --------- DEFERRED TAX LIABILITIES: Unrealized gain on investments 25,119 21,273 10,366Limited partnerships 1,324 - Deferred acquisition costs 884 499 269 Salvage and subrogation 604 604 Other 444 546 846 ---------- ------------------- --------- Total deferred tax liabilities 28,375 22,922 12,085 ---------- ---------- Net deferred liabilities--------- --------- NET DEFERRED LIABILITIES $ (16,249) $ (10,734) $ (450) ========== =================== =========
Federal income tax expense consists of the following: 1997 1996 1995 1994 ---------- ---------- ---------- Taxes (credits) on income from consolidated continuing operations: Current $ 9,507 $ 10,116 $ 10,343 $ 9,307 Deferred 1,670 (259) (904) (311) ---------- ---------- ------------------- --------- --------- $ 11,177 $ 9,857 $ 9,439 $ 8,996 ========== ========== =================== ========= ========= Taxes (credits) on income from discontinued operations: Current: Income $ - $ 139- $ 185139 Gain on sale - - 3,850 Deferred - Deferred 193 326 (71) ---------- ---------- ------------------- --------- --------- $ - $ 193 $ 4,315 $ 114 ========== ========== =================== ========= =========
35 36 NOTE D - INCOME TAXES (CONTINUED) A summary of the difference between federal income tax expense computed at the statutory rate and that reported in the consolidated financial statements is as follows:
1997 1996 1995 1994 ---------- ---------- --------------------- ----------- ----------- Statutory federal income rate applied to pretax income from continuing operations $ 12,468 $ 10,917 $ 10,512 $ 10,326 Tax effect of (deduction): Tax-exempt investment income (1,219) (1,079) (905) (1,120) Other (72) 19 (168) (210) ---------- ---------- ------------------- --------- --------- Federal income tax expense $ 11,177 $ 9,857 $ 9,439 $ 8,996 ========== ========== =================== ========= =========
34 35 NOTE E - INCOME TAXES (CONTINUED) The components of the provision for deferred federal income taxes (credits) are as follows:
1997 1996 1995 1994 ---------- ---------- --------------------- ----------- ----------- Discounts of loss and loss expense reserves $ 821 $ 230 $ 498 $ (13)Limited partnerships 1,324 - - Deferred compensation (170) (1,088) (896) (475) Other (305) 792 (180) 106 ---------- ---------- ---------- Provision for deferred federal income tax--------- --------- --------- PROVISION FOR DEFERRED FEDERAL INCOME TAX $ 1,670 $ (66) $ (578) $ (382) ========== ========== =================== ========= =========
Cash flows related to federal income taxes paid, net of refunds received, for 1997, 1996 and 1995 were $7,800, $11,805 and 1994 were $11,805, $13,600, and $13,355, respectively, including Section 847 special tax deposits. Future tax benefits on approximately $7,031$6,210 of deferred tax assets at December 31, 19961997 arising from loss reserve discounting is assured based on Section 847 of the Internal Revenue Code. NOTE FNote E - REINSURANCEReinsurance The insurance subsidiaries cede portions of their gross premiums written to certain other insurers under excess and quota share treaties and by facultative placements. Risks are reinsured with other companies to permit the recovery of a portion of related direct losses. The insurance subsidiariesProtective also assume voluntary reinsuranceserves as an assuming reinsurer under retrocessions from various propertycertain other reinsurers. These retrocessions include individual risks as well as catastrophe retrocession pools. TheAccordingly, the occurrence of a major catastrophic event could have a significant impact on the Company's financial statements. In addition, the insurance subsidiaries participate in certain involuntary reinsurance pools which require insurance companies to provide coverages on assigned risks. The assigned risk pools allocate participation to all insurers based upon each insurer's portion of premium writings on a state or national level. Net premiums earned for 1997, 1996 1995 and 19941995 have been reduced by reinsurance ceded premiums of approximately $8,091, $11,698 $16,340 and $18,477,$16,340, respectively. Net losses and loss expenses incurred for 1997, 1996 1995 and 19941995 have been reduced by reinsurance recoveries of approximately $11,155, $991 $26,554 and $20,955,$26,554, respectively. Ceded reinsurance premiums and loss recoveries for catastrophe reinsurance contracts were not material. The Company remains liable to the extent the reinsuring companies are unable to meet their obligations under reinsurance contracts. Net premiums earned for 1997, 1996 1995 and 19941995 include approximately $10,609, $10,220 $12,322 and $13,679,$12,322, respectively, relating to the assumption of reinsurance from other companies and from reinsurance pools.
Components of reinsurance recoverable at December 31 are as follows:
1997 1996 1995 ---------- --------------------- ----------- Paid losses and loss expenses $ 1,0851,160 $ 4,2141,085 Unpaid losses and loss expenses 45,702 42,402 50,031 Unearned premiums 414 342 457 ---------- ------------------- --------- $ 47,276 $ 43,829 ========= =========
36 37 NOTE F - OTHER OPERATING EXPENSES Details of other operating expenses are as follows:
Years Ended December 31 1997 1996 1995 ----------- ----------- ----------- Amortization of deferred policy acquisition costs $ 54,702 ========== ==========6,486 $ 6,088 $ 3,792 Other underwriting expenses 8,314 5,161 5,673 Expense allowances from reinsurers (744) (943) (1,646) --------- --------- --------- TOTAL UNDERWRITING EXPENSES 14,056 10,306 7,819 Operating expenses of non-insurance companies 9,577 11,236 9,722 --------- --------- --------- TOTAL OTHER OPERATING EXPENSES $ 23,633 $ 21,542 $ 17,541 ========= ========= =========
NOTE G - EMPLOYEE BENEFIT PLANS The Company maintains a defined contribution 401(k) Employee Savings and Profit Sharing Plan ("the Plan") which covers all employees who have completed one year of service. The Company's contributions to the Plan for 1996, 1995 and 1994 were $499, $465 and $472, respectively.
35 36
NOTE H - SHAREHOLDERS' EQUITY Changes in common stock outstanding and additional paid-in capital are as follows:
Additional Class A Class B Additional -------------------------- ------------------------- Paid-in Shares Amount Shares Amount Capital ------------ ---------- ------------ ---------- --------------------- ----------- ----------- ----------- ----------- Balance at January 1, 19941995 2,446,029 $ 131 12,917,88612,368,209 $ 689659 $ 45,091 Discounted stock options issued - - - - 72 Discounted stock options exercised - - 11,823 1 4 Treasury shares purchased - - (561,500) (31) (1,847) ------------ ---------- ------------ ---------- ---------- Balance at December 31, 1994 2,446,029 131 12,368,209 659 43,320 Discounted stock options issued - - - - 459 Stock options exercised 30,000 1 121,200 7 1,192 Discounted stock options forfeited - - - - (58) Treasury shares purchased - - (388,248) (21) (1,293) ------------ ---------- ---------------------- ---------- ---------- ---------- Balance at December 31, 1995 2,476,029 132 12,101,161 645 43,620 Discounted stock options issued - - - - 516 Discounted stock options exercised - - 1,200 - - Treasury shares purchased (31,700) (2) (587,216) (31) (2,036) ------------ ---------- ---------------------- ---------- ---------- ---------- Balance at December 31, 1996 2,444,329 $ 130 11,515,145 614 42,100 Discounted stock options issued - - - - 78 Discounted stock options exercised - - 4,314 - 1 Treasury shares purchased (46,975) (2) (227,014) (12) (818) ---------- ---------- ---------- ---------- ---------- Balance at December 31, 1997 2,397,354 $ 614128 11,292,445 $ 42,100 ============602 $ 41,361 ========== ====================== ========== ========== ==========
During 1997, 1996 and 1995, purchases of Class B treasury stock included 96,214, 49,000 and 41,198 shares, respectively, from officers and directors for $1,850, $821 and $644, respectively, at prices based upon the midpoint between the bid and ask prices on the date of purchase. Consolidated shareholders'Shareholders' equity at December 31, 19961997 includes $242,622$273,094 representing GAAP shareholder's equity of insurance subsidiaries, of which $35,203$38,437 may be transferred by dividend or loan to the parent company without approval by, or notification to, regulatory authorities. An additional $186,898$169,879 of shareholder's equity of such insurance subsidiaries may be advanced or loaned to the Company with prior notification to regulatory authorities. Net income of the insurance subsidiaries, as determined in accordance with statutory accounting practices, was $24,975, $20,249 and $22,849 for 1997, 1996 and $18,377 for 1996, 1995, and 1994, respectively. Consolidated statutory shareholder's equity for these subsidiaries was $222,720$248,154 and $188,592$222,720 at December 31, 1997 and 1996, respectively. Note H - Employee Benefit Plans The Company maintains a defined contribution 401(k) Employee Savings and Profit Sharing Plan ("the Plan") which covers all employees who have completed one year of service. The Company's contributions to the Plan for 1997, 1996 and 1995 were $585, $499 and $465, respectively. 37 38 NOTE I - COMPREHENSIVE INCOME In June 1997, the Financial Accounting Standards Board issued Statement No. 130, REPORTING COMPREHENSIVE INCOME. Statement No. 130 requires companies to report, as an addition to net income, certain unrealized potential income or loss items that, previously, were included only as separate components of shareholders' equity until realized. Statement No. 130 requires disclosure of other comprehensive income items related to unrealized gains and losses on securities, foreign currency items and minimum pension liability adjustments. The Company has elected to adopt the provisions of Statement No. 130 as of December 31, 1997. The Company records accumulated other comprehensive income from unrealized gains and losses on available-for-sale securities as a separate component of shareholders' equity. Foreign exchange adjustments are immaterial and the Company has no pension plan. The enclosed STATEMENT OF CHANGES IN EQUITY OTHER OPERATING EXPENSES
Details of other operating expenses are as follows: Years Ended December 31 1996 1995 1994 ---------- ---------- ---------- Amortization of deferred policy acquisition costs $ 6,088 $ 3,792 $ 3,281 Other underwriting expenses 5,161 5,673 5,707 Expense allowances from reinsurers (943) (1,646) (1,663) ---------- ---------- ---------- TOTAL UNDERWRITING EXPENSES 10,306 7,819 7,325 Operating expenses of non-insurance companies 11,236 9,722 7,971 ---------- ---------- ---------- TOTAL OTHER OPERATING EXPENSES $ 21,542 $ 17,541 $ 15,296 ========== ========== ==========
36 37THAN CAPITAL refers to comprehensive income as TOTAL REALIZED AND UNREALIZED INCOME. Items of other comprehensive income included in this statement are referred to as CHANGE IN UNREALIZED GAINS (LOSSES) ON INVESTMENTS and FOREIGN EXCHANGE ADJUSTMENT. A reclassification adjustment to other comprehensive income is made for GAINS REALIZED DURING PERIOD INCLUDED IN NET INCOME. NOTE J - STOCK PURCHASE AND OPTION PLANS In accordance with the terms of the 1981 Stock Purchase Plan (1981 Plan), the Company reserved 300,000 shares (Class A) and 1,200,000 shares (Class B) of its authorized but unissued common stock for issuanceis obligated to certain of its employees and directors. There are no shares of either Class A or Class B common stock available for issuance at December 31, 1996. The 1981 Plan provides for the repurchase of shares issued byunder the Company, based on circumstances,1981 Plan, at a price equal to 90% of the book value of the shares at the end of the quarter immediately preceding the date of repurchase. No shares were repurchased during 1997, 1996 1995 or 1994.1995. At December 31, 19961997 there were 157,179156,854 shares (Class A) and 398,641 shares (Class B) outstanding which are eligible for repurchase by the Company. During 1985, in accordance with the terms of the 1984 Stock Option and Stock Appreciation Plan (1984 Plan, amended during 1991), the Company granted options to purchase 30,000 shares (Class A) and 120,000 shares (Class B) of common stock at the then book value of $3.22 per share. These options were exercised during 1995 and no further shares are available for issuance. The exercise of these options is included in the following option table below.table. The Company maintains Discounted Stock Option Plansstock option plans and has reserved an aggregate of 1,050,000 shares of Class B common stock for the granting of discounted stock options to employees and directors. OptionsDiscounted options granted to employees are generally exercisable immediately while discounted options granted to directors are generally not exercisable for one year from the date of grant. During 1997, the Company issued 497,000 market value options which become exercisable in one- third increments on the first, second and third anniversary of the date of grant, assuming continued employment with the Company of the optionee. All options expire ten years after the date of grant. 38 39 NOTE J - STOCK PURCHASE AND OPTION PLANS (CONTINUED) A summary of the Company's stock option activity and related information for the years ended December 31 follows:
1997 1996 1995 1994 ----------------------- ------------------------ ----------------------------------------------- ------------------------ Weighted Weighted Weighted Average Average Average Excercise Excercise Excercise Options Price Options Price Options Price ---------- ---------- ---------- ---------- ---------- ---------- Outstanding at beginning of year 196,329 $ .569 168,251 $ .510 293,869 $ 1.863 300,670 $ 1.833 GrantedGranted: At exercise prices equaling market 497,000 25.750 - - - - At exercise prices below market 4,206 .679 29,278 .903 29,782 .893 5,022Exercised 4,314 .333 Exercised 1,200 .333 151,200 3.202 11,823 .446 Forfeited - - - - 4,200 1.000 - - ---------- ---------- ------------------- --------- --------- Outstanding at end of year 693,221 18.625 196,329 .569 168,251 .510 293,869 1.863 ========== ========== =================== ========= ========= Exercisable at end of year 192,015 .575 192,051 .574 163,469 .515 288,847 1.890 Weighted average fair value of options granted during the yearyear: At exercise prices equaling market 497,000 8.950 - - - - At exercise prices below market 4,206 18.561 29,278 18.51917.617 29,782 16.322 5,022 14.68215.429
The fair value of the market value options granted during 1997 was determined using a Black Scholes option pricing model with the following assumptions: risk- free interest rate of 5.8%; dividend yield of 1.8%; volatility factor of the expected market price of the Company's common stock of .21; and an expected life of the option of 10 years. If the Company had followed Financial Acounting Standards Board Statement No. 123, Accounting for Stock-Based Compensation, the effect on net income and earnings per share related to the issuance of market value options during 1997 would not be material. Exercise prices for options outstanding as of December 31, 19961997 were either $.33, $1.00 or $1.00.$25.75. The weighted-average remaining contractual life of those options exercisable at either $.33 or $1.00 is 5.54.6 years with a weighted-average exercise price of $.577. The remaining contractual life of options exercisable at $25.75 is 10 years. The compensation cost that has been charged against income for all stock-based compensation plans was $.5$.1 million, $.5 million and $.1$.5 million for 1997, 1996 and 1995, and 1994, respectively.
37 38 NOTE K - QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
Quarterly results of operations are as follows: Results by Quarter ---------------------------------------------------------------------------------------- 1996 1995 ------------------------------------------- ------------------------------------------- 1st 2nd 3rd 4th 1st 2nd 3rd 4th --------- --------- --------- --------- --------- --------- --------- --------- Net premiums earned $15,294 $16,142 $13,971 $13,336 $12,858 $15,683 $14,386 $15,866 Net investment income 4,986 4,877 4,832 4,885 4,559 4,711 4,738 6,153 Realized net gains (losses) on investments 579 3,105 1,775 1,401 (445) 2,171 5,154 (670) Losses and loss expenses incurred 9,761 10,224 7,418 6,351 8,380 11,548 7,859 10,967 Income from continuing operations 4,270 6,245 5,609 5,210 3,561 5,049 8,229 3,755 Discontinued operations: Income (loss) 241 28 (19) 108 516 (281) 848 43 Gain on sale - - - - - - 7,464 176 Net income 4,511 6,273 5,590 5,318 4,077 4,768 16,541 3,974 Per share: Income from continuing operations $ .29 $ .44 $ .39 $ .37 $ .24 $ .34 $ .55 $ .26 Discontinued operations: Income (loss) .02 - - - .03 (.02) .06 - Gain on sale - - - - - - .50 .01 Net income .31 .44 .39 .37 .27 .32 1.11 .27
NOTE L - INDUSTRY SEGMENTS The Company and its consolidated subsidiaries operate within the property/casualty insurance industry in two identifiable segments: the insurance brokerage/agency segment and the insurance underwriting segment. The insurance brokerage/agency segment obtains property and casualty insurance coverage for its customers from variousthe insurance underwriting segment and other non-affiliated insurance companies and provides other insurance- relatedinsurance-related services. The insurance underwriting segment provides multiple line property and casualty insurance coverage for its insureds, primarily for coverage of motor vehicle liability and physical damage and workers' compensation risks. Both segments specialize primarilyThe insurance brokerage/agency segment specializes exclusively in insurance for the trucking industry. The insurance underwriting segment's fleet trucking business is produced by the insurance brokerage/agency segment on a direct basis. Premiums from the private passenger automobile, small fleet trucking and small business workers' compensation markets are produced through an extensive network of independent agents. The insurance underwriting segment also serves as assuming reinsurer on numerous retrocessions from other reinsurers covering both individual property and liability risks and high limit catastrophe pools.
3839 3940 NOTE LK - INDUSTRY SEGMENTS (CONTINUED) Intersegment commissions, which are eliminated in the consolidated statements of income, are included in revenue and income for the insurance brokerage/agency segment.
Year Ended December 31 1997 1996 1995 1994 --------- --------- -------------------- ----------- ----------- REVENUE: Insurance underwriting segment: Net premiums earned $ 61,675 $ 58,743 $ 58,793 $ 61,187 Net investment income 17,245 17,505 18,418 13,598 Net realized gains 16,530 6,112 5,646 583 Other income 946 632 448 360 ---------- ---------- ------------------- --------- --------- REVENUE FROM INSURANCE UNDERWRITING SEGMENT 96,396 82,992 83,305 75,728 Insurance brokerage/agency segment: Commissions, service fees and other income 7,164 7,524 9,354 10,431 Net investment income 6,198 4,077 37,743 8,138 Net realized gains (losses)808 748 564 (45) ---------- ---------- ------------------- --------- --------- REVENUE FROM INSURANCE BROKERAGE/AGENCY SEGMENT 14,170 12,349 47,661 18,524 Eliminations - intersegmentEliminations: Intersegment commission (6,456) (6,852) (8,638) (9,543) - intersegmentIntersegment dividends (5,000) (2,002) (36,000) (7,002) ---------- ---------- ------------------- --------- --------- $ 99,110 $ 86,487 $ 86,328 $ 77,707 ========== ========== =================== ========= ========= INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE FEDERAL INCOME TAXES: Insurance underwriting segment $ 36,030 $ 32,080 $ 28,095 $ 25,948 Insurance brokerage/agency segment (407) (889) 1,938 3,553 ---------- ---------- ------------------- --------- --------- $ 35,623 $ 31,191 $ 30,033 $ 29,501 ========== ========== =================== ========= =========
The brokerage/agency segment received approximately 98%essentially all of its commission income from the insurance underwriting segment in each of the years1997, 1996 1995 and 1994.1995. Intersegment commission rates are generally comparable to the average commission rates paid by unaffiliated insurance companies. The insurance underwriting segment received approximately 74%59% of its direct premium incomerevenue by providing insurance coverage to customers of the brokerage/agency segment (86%(74% and 98%86%, respectively, in 19951996 and 1994)1995). Premiums charged by the insurance underwriting segment to customers of the brokerage/agency segment are comparable to premiums charged to other insureds for similar insurance coverages. Intersegment reimbursements for certain expenses (office space, equipment costs, salaries, etc.) are based upon actual usage and other predetermined allocation methods. Underwriting expenses of the insurance underwriting segment include approximately $10,562 in 1997, $8,303 in 1996 and $7,418 in 1995 and $6,857 in 1994 representing allocations of general operating expenses from the brokerage/agency segment, which records these reimbursements as reductions in its operating expenses. Net premium earned by the insurance underwriting segment is produced in all states.states and all Canadian provinces. The following products accounted for more than 10% of net premium earned by this segment for the years ended December 31, as follows: 1996 1995 1994 -------------------------- Trucking and trucking related 66% 76% 77% Voluntary reinsurance assumed 16 20 19 Private passenger automobile 16 3 - Residual market assumed & assigned risk
1997 1996 1995 ------------------------- Trucking and trucking related 55% 66% 76% Private passenger automobile 28 16 3 Voluntary reinsurance assumed 16 16 20 Other 1 2 1 4
40 41 NOTE K - INDUSTRY SEGMENTS (CONTINUED) One customer of the insurance underwriting segment and the insurance brokerage/agency segment accounted for 29% and 42% of premiums written and intersegment commission income, respectively, in 1997. This same customer accounted for 30% and 38% of premiums written and intersegment commission income, respectively, in 1996. This same customer accounted for1996 and 42% and 47% of premiums written and intersegment commission income, respectively, in 1995 and 36% and 38%, respectively, in 1994. 39 40 NOTE L - INDUSTRY SEGMENTS (CONTINUED)1995. Identifiable assets of the insurance underwriting segment and the insurance brokerage/agency segment give effect to allocations of property and equipment used by both segments. Capital expenditures and depreciation expense are not material.
December 31 1997 1996 1995 1994 ---------- ---------- --------------------------------------------- IDENTIFIABLE ASSETS Insurance underwriting segment $469,963 $449,679 $469,912$ 502,560 $ 464,547 $ 449,679 Insurance brokerage/agency segment 73,21062,979 71,624 73,995 45,054 Eliminations (8,524) (9,711) (11,449) (11,067) ---------- ---------- ---------- $533,462 $512,225 $503,899 ========== ========== ==========--------- --------- --------- $ 557,015 $ 526,460 $ 512,225 ========= ========= =========
NOTE ML - DISCONTINUED OPERATIONS On November 9, 1996, Amli Realty Co. (Amli) closed an agreement with UICI, a publicly traded financial services and insurance company, which resulted in UICI acquiring 100% of Amli's outstanding stock. The Company received 617,278 shares of UICI common stock with a market value at December 31, 1996 of approximately $20 million, in a non-monetary, tax-free exchange for its 38% stake in Amli. The Company accounted for its minority investment in Amli by the equity method. The book value of the Company's investment in Amli at the date of the exchange was $7.5 million. On October 2, 1995, the Company sold its subsidiary, Hoosier, for $36.5 million. Included in the Company's insurance underwriting segment, Hoosier marketed general lines of insurance to individuals and small commercial customers in the state of Indiana. NOTE M - EARNINGS PER SHARE In February, 1997, the Financial Accounting Standards Board issued Statement No. 128, Earnings Per Share. Statement No. 128 redefined the computation of earnings per share and requires companies to report per share earnings on both basic (without dilution) and diluted bases. The effect of restatement of earnings per share for the years 1996 and 1995, resulting from the adoption of Statement No. 128, was not material. The following is a reconciliation of the denominators used in the calculations of basic and diluted earnings per share for the years ended December 31:
1997 1996 1995 ------------------------------------- Average shares outstanding for basic earnings per share 13,776,881 14,183,922 14,756,784 Dilutive effect of options 192,371 190,702 208,648 ---------- ---------- ---------- Average shares outstanding for diluted earnings per share 13,969,252 14,374,624 14,965,432 ========== ========== ==========
No effect on net income was considered to result from the presumed exercise of the options used in calculating diluted earnings per share. Options to purchase 497,000 shares of common stock at $25.75 per share were issued in December, 1997 and were outstanding at December 31, 1997. These options were not included in the computation of diluted earnings per share because the exercise price was greater than the average market price of the Company's stock.
4041 4142 NOTE N - QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) Quarterly results of operations are as follows:
Results by Quarter ------------------------------------------------------------------------------------------- 1997 1996 -------------------------------------------- -------------------------------------------- 1ST 2ND 3RD 4TH 1st 2nd 3rd 4th -------------------------------------------- -------------------------------------------- Net premiums earned $13,322 $14,987 $16,633 $16,733 $15,294 $16,142 $13,971 $13,336 Net investment income 4,611 4,664 4,534 4,633 4,986 4,877 4,832 4,885 Realized net gains on investments 5,444 3,887 4,493 3,514 579 3,105 1,775 1,401 Losses and loss expenses incurred 8,863 9,486 10,670 10,835 9,761 10,224 7,418 6,351 Income from continuing operations 6,573 6,239 6,227 5,407 4,270 6,245 5,609 5,210 Discontinued operations - - - - 241 28 (19) 108 Net income 6,573 6,239 6,227 5,407 4,511 6,273 5,590 5,318 Per share - diluted: Income from continuing operations $ .47 $ .45 $ .45 $ .39 $ .29 $ .44 $ .39 $ .37 Discontinued operations - - - - .02 - - - Net income .47 .45 .45 .39 .31 .44 .39 .37
42 43 Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE No response to this item is required. PART III Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information with respect to the directors of the Registrant to be provided under this item is omitted from this Report because the Registrant will file with the Commission a definitive proxy statement pursuant to Regulation 14A involving the election of directors not later than 120 days after the close of its fiscal year. The information required by Item 10 of this Report with respect to directors which will appear in the definitive proxy statement is incorporated by reference herein. The executive officers of the Company will serve until the next annual meeting of the Board of Directors and until their respective successors are elected and qualified. Except as otherwise indicated, the occupation of each officer during the past five years has been in his current position with the Company. The following summary sets forth certain information concerning the Company's executive officers:
Served in Such Capacity Name Age Title Since - - ------------------- ----- ------------------------------------------------------- ---- ------------------------------------ ------------- Gary W. Miller 5657 Chairman, President and CEO 1983 (1) G. Patrick Corydon 4849 Vice President and Treasurer 1979 Joseph J. DeVito 4546 Vice President 1986 James W. Good 5354 Vice President 1980 James E. Kirschner 5152 Vice President and Secretary 1977 (1)(2) (1) Mr. Miller was elected Chairman and CEO of the Company in 1997. (2) Mr. Kirschner was elected Secretary of the Company in 1985.
Item 11. EXECUTIVE COMPENSATION * Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT * Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS * * The information to be provided under Items 11, 12 and 13 is omitted from this Report because the Registrant will file with the Commission a definitive proxy statement pursuant to Regulation 14A involving the election of directors not later than 120 days after the close of its fiscal year. The information required by these items of this Report which will appear in the definitive proxy statement is incorporated by reference herein.
4143 4244 PART IV Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) 1. List of Financial Statements--The following consolidated financial statements of the registrant and its subsidiaries (including the Report of Independent Auditors) are submitted in Item 8 of this report. Consolidated Balance Sheets - December 31, 19961997 and 19951996 Consolidated Statements of Income and Retained Earnings - Years ended December 31, 1997, 1996 and 1995 Consolidated Statements of Changes in Equity Other Than Capital - Years ended December 31, 1997, 1996 and 19941995 Consolidated Statements of Cash Flows - Years ended December 31, 1997, 1996 1995 and 19941995 Notes to Consolidated Financial Statements 2. List of Financial Statement Schedules--The following consolidated financial statement schedules of Baldwin & Lyons, Inc. and subsidiaries are included in Item 14(d): Pursuant to Article 7: Schedule I--Summary of Investments--Other than Investments in Related Parties Schedule III--Supplementary Insurance Information Schedule IV--Reinsurance Schedule V--Valuation and Qualifying Accounts Schedule VI--Supplemental Information Concerning Property/Casualty Insurance Operations All income statement information included in the above schedules for the year 1994 has been restated to remove the effect of Hoosier. All other schedules to the consolidated financial statements required by Article 7 and Article 5 of Regulation S-X are not required under the related instructions or are inapplicable and therefore have been omitted. 4244 4345 3. Listing of Exhibits:
Number & Caption from Exhibit Table of Item 601 of Regulation S-K Exhibit Number and Description - - ---------------------- --------------------------------------------------------------------------- ------------------------------------------------ (3) EXHIBIT 3(i)-- (Articles of Incorpor- Articles of Incorporation of Baldwin & Lyons, Inc., ation & By Laws) as amended (Incorporated as an exhibit by reference to Exhibit 3(a) to the Company's Annual Report on Form 10-K for the year ended December 31, 1986) EXHIBIT 3(ii)-- By-Laws of Baldwin & Lyons, Inc., as amendedrestated (Incorporated as an exhibit by reference to Exhibit 3(b)3(ii) to the Company's AnnualQuarterly Report on Form 10-K10-Q for the yearquarter ended December 31, 1986)June 30, 1997) (10) EXHIBIT 10(a)-- (Material Contracts) 1981 Employee Stock Purchase Plan (Incorporated as an exhibit by reference to Exhibit A to the Company's definitive Proxy Statement for its Annual Meeting held May 5, 1981) EXHIBIT 10(b)(1)-- 1984Baldwin & Lyons, Inc. Employee Discounted Stock Option and Appreciation Rights Plan (Incorporated as an exhibit by reference to AnnexAppendix A to the Company's definitive Proxy Statement for its Annual Meeting held May 7, 1985)2, 1989) EXHIBIT 10(b)(2)-- March, 1991 amendment to the 1984 Stock Option and Appreciation Rights Plan (Incorporated as an exhibit by reference to Exhibit 10(b)(2) of the Company's Annual Report on Form 10-K for the year ended December 31, 1990) EXHIBIT 10(c)-- Baldwin & Lyons, Inc. Employee Discounted Stock Option Plan (Incorporated as an exhibit by reference to Appendix A to the Company's definitive Proxy Statement for its Annual Meeting held May 2, 1989)
43 44
Number & Caption from Exhibit Table of Item 601 of Regulation S-K Exhibit Number and Description - - ----------------------- ---------------------------------------------------- EXHIBIT 10(d)-- Baldwin & Lyons, Inc. Deferred Directors Fee Option Plan (Incorporated as an exhibit by reference to Exhibit 10(f) to the Company's Annual Report on Form 10-K for the year ended December 31, 1989) EXHIBIT 10(e)10(d)-- Baldwin & Lyons, Inc. Amended Employee Discounted Stock Option Plan (Incorporated as an exhibit by reference to Exhibit 10(f) to the Company's Annual Report on Form 10-K for the year ended December 31, 1992)
45 46
Number & Lyons, Inc. Amended Employee Discounted Stock Option Plan (Incorporated as an exhibit by reference toCaption from Exhibit 10(f) to the Company's Annual Report on Form 10-K for the year ended December 31, 1992)Table of Item 601 of Regulation S-K Exhibit Number and Description - ------------------------ -------------------------------------------------- EXHIBIT 10(f)10(e)-- Stock Purchase Agreement by and among General Casualty Company of Wisconsin, Baldwin & Lyons, Inc. and Protective Insurance Company as of August 8, 19951996 (Incorporated as an exhibit by reference to Exhibit 10(g) to the Company's Annual Report on Form 10-K for the year ended December 31, 1995) (11)1996) EXHIBIT 11-- (Statement regarding Computation of Per Share Earnings computation of per share earnings) (21) EXHIBIT 21-- (Subsidiaries of the Subsidiaries of10(f)-- Baldwin & Lyons, Inc. Restated Employee Discounted Stock Option Plan (11) EXHIBIT 11-- (Statement regarding Computation of Per Share Earnings computation of per share earnings) (21) EXHIBIT 21-- (Subsidiaries of the Subsidiaries of Baldwin & Lyons, Inc. registrant) (23) EXHIBIT 23-- (Consents of experts Consent of Ernst & Young LLP and counsel) (24) EXHIBIT 24-- (Powers of Attorney) Powers of Attorney for certain Officers and Directors (27) EXHIBIT 27-- (Financial Data Financial Data Scedule filed herewith electronically Schedule)
4446 4547 (b) No reports on Form 8-K were filed by the Company in the fourth quarter of 1996.1997. (c) Exhibits. The response to this portion of Item 14 is submitted as a separate section of this report. (d) Financial Statement Schedules. The response to this portion of Item 14 is submitted on pages 4648 through 5052 of this report. 4547 4648
SCHEDULE I -- SUMMARY OF INVESTMENTS- OTHER THAN INVESTMENTS IN RELATED PARTIES December 31, 19961997 BALDWIN & LYONS, INC. & SUBSIDIARIES - - ----------------------------------------------------------------------------------------------------------------------------------------------------- Column A Column B Column C Column D - - ------------------------------------------------------------------------- (Dollars in thousands)---------------------------------------------------------------------------- (DOLLARS IN THOUSANDS) Amount At Which Shown Fair In The Balance Type of Investment Cost Value Sheet (A) - - --------------------------------- ---------- ---------- -------------------------------------------- ----------- ----------- -------------- Fixed Maturities: Bonds: United States government and government agencies and authorities $145,755 $145,855 $145,855$100,279 $100,679 $100,679 Mortgage backed securities 49,926 49,973 49,97340,548 40,934 40,934 States, municipalities and political subdivisions 56,585 56,747 56,74769,020 69,663 69,663 Public utilities 100 100 1004,897 5,000 5,000 All other corporate bonds 20,073 20,518 20,51857,851 59,180 59,180 Redeemable preferred stock 591 635 635 ---------- ---------- ----------653 653 --------- --------- --------- Total fixed maturities 273,030 273,828 273,828273,186 276,109 276,109 Equity Securities: Common Stocks: Banks, trust and insurance companies 38,244 77,030 77,03027,504 73,903 73,903 Industrial, miscellaneous and all other 47,840 66,889 66,88957,705 78,135 78,135 Nonredeemable preferred stocks 3,260 3,277 3,277 ---------- ---------- ----------6,496 6,576 6,576 --------- --------- --------- Total equity securities 89,344 147,196 147,19691,705 158,614 158,614 Short-term and Other: Certificates of deposit 3,110 3,110 3,110 Commercial paper 2,400 2,400 2,4002,202 2,202 2,202 All other short-term 14,069 14,069 14,069(B) 22,703 22,703 22,703 Other long-term investments 13,804 14,188 14,188 ---------- ---------- ----------15,356 15,700 15,700 --------- --------- --------- Total short-term and other 33,383 33,767 33,767 ---------- ---------- ----------40,261 40,605 40,605 --------- --------- --------- Total investments $395,757 $454,791 $454,791 ========== ========== ==========$405,152 $475,328 $475,328 ========= ========= ========= (A) All securities listed are considered available-for-sale and, accordingly, are presented at fair value in the financial statements. (B) Money market instruments classified as cash equivalents.
4648 4749
SCHEDULE III -- SUPPLEMENTARY INSURANCE INFORMATION BALDWIN & LYONS, INC. AND SUBSIDIARIES (DOLLARS IN THOUSANDS) - - ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- Column A Column B Column C Column D Column E Column F Column G Column H Column I Column J Column K - - ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- As of December 31, Year Ended December 31, --------------------------------------------- -------------------------------------------------------------------------------------------------------------- ------------------------------------------------------------------- Reserves for Unpaid Other Benefits, Amortization Deferred Claims Policy Claims, of Deferred Policy and Claim Claims and Net Net Losses and Policy Other Net Acquisition Adjustment Unearned Benefits Premium Investment Settlement Acquisition Operating Premiums Segment Costs Expenses Premiums Payable Earned Income Expenses Costs Expenses Written - - ----------------- --------- ----------- --------- --------- -------- ------------------------ ---------- ----------- --------- ------------------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- (A) (A) (A) (B) (A) (B) Property/Casualty Insurance 1997 $2,522 $197,195 $18,806 --- $61,675 $18,442 $39,854 $6,486 $7,570 $69,575 1996 $1,425 $196,939 $10,8351,425 196,939 10,835 --- $58,743 $17,505 $33,754 $6,088 $4,218 $61,43158,743 17,505 33,754 6,088 4,218 61,431 1995 763 211,489 8,262 --- 58,793 18,418 38,754 3,792 4,027 63,065 1994 3,875 235,209 19,164 --- 61,187 13,598 32,910 3,281 4,044 61,502 (A) Allocations of certain expenses have been made to investment income, settlement expenses and other operating expenses and are based on a number of assumption and estimates. Results among these catagories would change if different methods were applied. (B) Commissions paid to the Parent Company have been eliminated for this presentation. Commission allowances resulting from reinsurance transactions are offset against other operating expenses.
4749 4850
SCHEDULE IV -- REINSURANCE BALDWIN & LYONS, INC. & SUBSIDIARIES (DOLLARS IN THOUSANDS) - - ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- Column A Column B Column C Column D Column E Column F - - ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- % of Ceded Assumed Amount Gross to Other from Other Net Assumed to Amount Companies Companies Amount Net ---------- ---------- ---------- ---------- ---------- Premiums Earned - Property/casualty insurance: Years Ended December 31: 1997 $ 59,157 $ 8,091 $ 10,609 $ 61,675 17.2 1996 $ 60,221 $ 11,698 $ 10,220 $ 58,743 17.4 1995 62,811 16,340 12,322 58,793 21.0 1994 65,985 18,477 13,679 61,187 22.4 1994 amounts have been adjusted for the sale of Hoosier Insurance Company
4850 4951
SCHEDULE V--VALUATION AND QUALIFYING ACCOUNTS BALDWIN & LYONS, INC. & SUBSIDIARIES (DOLLARS IN THOUSANDS) - - ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------- Column A Column B Column C Column D Column E - - ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------- Additions ----------------------- (1) (2) Charged to Balance at Charged to Other Balance Beginning Cost and Accounts- Deductions- at End of Description of Period Expenses Describe Describe Period - - ------------------------- ---------- ---------- ---------- ---------- ------------------------------ ----------- ----------- ----------- ----------- ----------- Allowance for doubtful accounts: Years ended December 31: 1997 $346 $413 $0 $363 (A) $396 1996 $300 $192 $0 $146300 192 0 146 (A) $346346 1995 300 (1) 0 (1)(A) 300 1994 300 5 0 5 (A) 300 (A) Bad debts written off during the year net of recoveries of previously written off amounts, if any.
4951 5052
SCHEDULE VI--SUPPLEMENTAL INFORMATION CONCERNING PROPERTY/CASUALTY INSURANCE OPERATIONS BALDWIN & LYONS, INC. & 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, ----------------------------------------- ---------------------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------- Claims and ClaimsClaim Reserves Adjustment Expenses Amortiza- for Unpaid Discount, Incurred Related to tion of Deferred Claims if --------------------any ------------------- Deferred Paid Claims AFFILIATION Policy and Claim Deducted Net (1) (2) Policy and Claim Net WITH Acquisi- Adjustment in Unearned Earned Investment Current Prior Acquisition Adjustment Premiums REGISTRANT tion Costs Expenses Column C Premiums Premiums Income Year Years Costs Expenses Written - - -------------- ---------- ------------------- ---------- ---------- -------- --------- --------- --------- --------- ---------- -------- -------- ----------- ----------- ---------- --------- (A) (B) Consolidated Property/ Casualty Subsidiaries: 1997 $2,522 $197,195 $5,431 $18,806 $61,675 $18,442 $47,692 ($7,838) $6,486 $42,880 $69,575 1996 $1,425 $196,939 $4,694 $10,835 $58,743 $17,505 $45,999 ($12,245) $6,088 $40,716 $61,4311,425 196,939 4,694 10,835 58,743 17,505 45,999 (12,245) 6,088 40,716 61,431 1995 763 211,489 8,096 8,262 58,793 18,418 44,238 (5,484) 3,792 52,765 63,065 1994 3,875 235,209 6,774 19,164 61,187 13,598 55,766 (22,856) 3,281 51,866 61,502 (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%. (B) 1995 paid claims and claim adjustment expenses include $11,186 related to Hoosier representing all reserves for unpaid claims and claim adjustment expenses at December 31, 1994. 1994 paid claims and claim adjustment expenses include payments made by Hoosier.
5052 5153 SIGNATURES Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. BALDWIN & LYONS, INC. March 25, 19971998 By /s/ Gary W. Miller ----------------------------------------------------------------------- Gary W. Miller, PresidentChairman and CEO (Chief Operating Officer) Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. March 25, 19971998 By /s/ Gary W. Miller ----------------------------------------------------------------------- Gary W. Miller, President;Chairman and CEO; Director March 25, 19971998 By /s/ G. Patrick Corydon ----------------------------------------------------------------------- G. Patrick Corydon, Vice President - Finance and Treasurer (Principal Financial Officer and Principal Accounting Officer) March 25, 19971998 By /s/ Joseph DeVito ------------------------------------ Joseph DeVito, Director and Vice President March 25, 1998 By /s/ James Good ------------------------------------ James Good, Director and Vice President March 25, 1998 By /s/ Stuart D. Bilton (*) ------------------------------------ Stuart D. Bilton, Director March 25, 1998 By /s/ Otto N. Frenzel III (*) ----------------------------------------------------------------------- Otto N. Frenzel III, Director 53 54 SIGNATURES (CONTINUED) March 25, 19971998 By /s/ Gregory T. Mutz (*) ------------------------------------ Gregory T. Mutz, Director March 25, 1998 By /s/ John M. O'Mara (*) ----------------------------------------------------------------------- John M. O'Mara, Director March 25, 19971998 By /s/ Thomas H. Patrick (*) ----------------------------------------------------------------------- Thomas H. Patrick, Director March 25, 1997 By /s/ Gregory T. Mutz (*) ----------------------------------- Gregory T. Mutz, Director 51 52 SIGNATURES (CONTINUED) March 25, 19971998 By /s/ Nathan Shapiro (*) ----------------------------------------------------------------------- Nathan Shapiro, Director March 25, 19971998 By /s/ Norton Shapiro (*) ----------------------------------------------------------------------- Norton Shapiro, Director March 25, 19971998 By /s/ L. Leslie Waters (*) ----------------------------------------------------------------------- L. Leslie Waters, Director March 25, 19971998 By /s/ StuartJohn D. BiltonWeil (*) ----------------------------------- Stuart------------------------------------ John D. Bilton,Weil, Director March 25, 1998 By /s/ Robert Shapiro (*) ------------------------------------ Robert Shapiro, Director March 25, 1998 By /s/ John Pigott (*) ------------------------------------ John Pigott, Director (*) By Gary W. Miller, Attorney-in-Fact 5254 5355 ANNUAL REPORT ON FORM 10-K ITEM 14(c)--CERTAIN EXHIBITS YEAR ENDED DECEMBER 31, 19961997 BALDWIN & LYONS, INC. INDIANAPOLIS, INDIANA 5355 54 BALDWIN & LYONS, INC. Form 10-K for the Fiscal Year Ended December 31, 199656
BALDWIN & LYONS, INC. Form 10-K for the Fiscal Year Ended December 31, 1997 INDEX TO EXHIBITS
Begins on sequential page Exhibit No. number of Form 10-K - - --------------------------------- -------------------------------------------------------------------- -------------------------- EXHIBIT 3(i)-- Articles of Incorporation of Baldwin & Lyons, Inc. as amended (Incorporated as an exhibit by reference to Exhibit 3(a) to the Company's Annual Report on Form 10-K for the year ended December 31, 1986) N/A EXHIBIT 3(ii)-- By-Laws of Baldwin & Lyons, Inc., as amendedrestated (Incorporated as an exhibit by reference to Exhibit 3(b)3(ii) to the Company's AnnualQuarterly Report on Form 10-K10-Q for the yearquarterly ended December 31, 1986)June 30, 1997) N/A EXHIBIT 10(a)-- 1981 Employees Stock Purchase Plan (Incorporated as an exhibit by reference to Exhibit A to the Company's definitive Proxy Statement for its Annual Meeting held May 5, 1981) N/A EXHIBIT 10(b)(1)-- 1984 Stock Option and Appreciation Rights Plan (Incorporated as an exhibit by reference to Annex A to the Company's Definitive Proxy Statement for its Annual Meeting held May 7, 1985) N/A EXHIBIT 10(b)(2)-- March, 1991 amendment to the 1984 Stock Option and Appreciation Rights Plan (Incorporated as an exhibit by reference to Exhibit 10(b)(2) to the Company's Annual Report on Form 10-K for the year ended December 31, 1990) N/A
54 55 INDEX TO EXHIBITS (CONTINUED)
Begins on sequential page Exhibit No. number of Form 10-K - - ------------------------------------ ------------------------- EXHIBIT 10(c)-- Baldwin & Lyons, Inc. Employee Discounted Stock Option Plan (Incorporated as an exhibit by reference to Appendix A to the Company's definitive Proxy Statement for its Annual Meeting held May 2, 1989) N/A EXHIBIT 10(d)10(c)-- Baldwin & Lyons, Inc. Deferred Directors Fee Option Plan (Incorporated as an exhibit by reference to Exhibit 10(f) to the Company's Annual Report on Form 10-K for the year ended December 31, 1989) N/A
56 57
INDEX TO EXHIBITS (CONTINUED) Begins on sequential page Exhibit No. number of Form 10-K for the year ended December 31, 1989) N/A- ----------------------------------------- ------------------------- EXHIBIT 10(e)10(d)-- Baldwin & Lyons, Inc. Amended Employee Discounted Stock Option Plan (Incorporated as an exhibit by reference to Exhibit 10(f) to thehe Company's Annual Report on Form 10-K for the year ended December 31, 1989) N/A EXHIBIT 10(f)10(e)-- Stock Purchase Agreement by and among General Casualty Company of Wisconsin, Baldwin & Lyons, Inc. and Protective Insurance CompanyInsuranceCompany as of August 8, 19951996 (Incorporated as an exhibit by reference to Exhibit 10(g) to the Company's Annual Report on Form 10-K for the year ended December 31, 1995)1996) N/A EXHIBIT 10(f)-- Baldwin & Lyons, Inc. Restated Employee Discounted Stock Option Plan p. 58 EXHIBIT 11-- Computation of Per Share Earnings p. 5662 EXHIBIT 21-- Subsidiaries of Baldwin & Lyons, Inc. p. 5763 EXHIBIT 23-- Consent of Ernst & Young LLP p. 5864 EXHIBIT 24-- Powers of Attorney for certain Officers and Directors p. 59 EXHIBIT 27-- Financial Data Schecule p. 6265
5557