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
DECEMBERDecember 31, 19971998
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, INDIANA 46204INDIANA46204
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (317) 636-9800
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
(TITLE OF CLASS)
Class A Common Stock, No Par Value
Class B Common Stock, No Par Value
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter periods that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [ X ][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 ][X]
The aggregate market value of Class A and Class B Common Stock held by non-
affiliates of the Registrant as of March 12, 1998,15, 1999, based on the closing trade
prices on that date, was approximately $99,465,000.$88,366,000.
The number of shares outstanding of each of the issuer's classes of common
stock as of March 12, 1998:15, 1999:
Common Stock, No Par Value:
Class A (voting) 2,397,3542,382,654 shares
Class B (nonvoting) 11,302,52011,153,996 shares
The Index to Exhibits is located on pages 52 and 53.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for Annual Meeting of Shareholders to be held
May 5, 19984, 1999 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, itBaldwin & Lyons, Inc.
(referred to herein as "B&L") specializes in marketing and underwriting
property and casualty 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-owned property/casualty insurance company
subsidiaries:subsidiaries are: Protective
Insurance Company (referred to herein as "Protective");, with licenses in all 50
states and all Canadian provinces; Sagamore Insurance Company (referred to
herein as "Sagamore");, which is currently licensed in 27 states; and B & L
Insurance, Ltd. (referred to herein as "BLI")., which is domiciled and licensed
in Bermuda. These subsidiaries are collectively referred to herein as the
"Insurance Subsidiaries." The "Company", as used herein, refers to Baldwin &
Lyons, Inc. and all its subsidiaries unless the context indicates otherwise.
On October 2, 1995, theThe Company sold Protective's subsidiary, Hoosier Insuranceits interest in Amli Realty Company, (referred to hereinInc. ("Amli"), a real
estate development company, during 1996. No gain or loss was recognized on the
Amli sale which was treated as "Hoosier"), for $36.5 million. Included in the
Company's insurance underwriting segmenta non-monetary, tax-free exchange. The
operations of Amli prior to the sale Hoosier marketed
general lines of insurance to individuals and small commercial customers in
Indiana. Income and expense amounts related to Hoosier for the prior periods
and the gain recognized on the sale of Hoosier are reported as discontinued operations.operations in
1996.
The Insurance Subsidiaries serve various specialty markets as follows:
FLEET TRUCKING 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, servingProtective provides coverage for larger customers in the motor carrier industry
which retain substantial amounts of self-insurance as well as for medium-sized
trucking companies on a nationwidefirst dollar or small deductible basis. These trucking
products are marketed by the B&L agency organization directly to trucking
clients without broker or agent intermediaries. The following summary describes briefly the principal types of
insurance placedmarketed by B & L:Protective are:
- Casualty insurance including motor vehicle liability,
and physical damage insurance,and other liability insurance, workers'insurance.
- Workers' compensation insurance, specializedinsurance.
- Specialized accident insurance(medical and fidelityindemnity) insurance.
- Fidelity and surety bonds.
- Inland Marine consisting principally of cargo insurance.
- Property coverages including"Captive" insurance against loss of property or the
use thereof by reason of fire, windstorm or other perils.company products, which are provided through
BLI in Bermuda.
The B & L&L agency force also performs a variety of additional services, primarily
for its clientsProtective's insureds, such as risk surveys and analyses, government
compliance assistance, loss control and cost studies and research, development,
and consultation in connection with new insurance programs including
development of computerized systems to assist in monitoring accident data.
Extensive claims services are also provided, by B & L,
frequently for a fee, primarily to clients with self-insuranceself-
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 1997, approximately 99% was from marketing products for the Insurance
Subsidiaries.
INSURANCE UNDERWRITING OPERATIONS
Underwriting operations are currently conducted as follows:
-VOLUNTARY ASSUMPTION REINSURANCE
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-insurance retention.
2
3
Protective also accepts retrocessions from selected reinsurance companies,
principally reinsuring against catastrophes. Exposures under these
retrocessions are generally in high upper layers, are spread among several
geographic regions and are limited so that any one catastrophic event would not
have a material affect on the Company's financial position. However, a series
of major events covering both individual property and liability risks and high limit
catastrophe pools. Protective is licensedseveral geographic regions within a short period of
time could result in significant losses to do business in all
states, the District of Columbia and all Canadian provinces.
- Sagamore's premiums are produced primarily fromCompany.
PRIVATE PASSENGER AUTOMOBILE INSURANCE
Sagamore markets private passenger automobile liability and physical damage
coverages. In addition,coverages to nonstandard insureds through a network of independent agents in a
number of midwestern states.
2
3
SMALL FLEET TRUCKING INSURANCE
Sagamore writes commercial automobile liability, and physical damage and cargo
insurance for truck owner-operators with ten or fewer power units as
well as workers'units. These
products are marketed through independent agents in the majority of the states
in which Sagamore is licensed.
SMALL BUSINESS WORKERS' COMPENSATION
During 1997, Sagamore began marketing worker's compensation insurance forto
selected small businesses.businesses in the state of Missouri. Sagamore plans to expand
this product line into Indiana and other states in 1999 but premium volume is
currently licensed in twenty-three states.
- BLIexpected to remain modest. This product is 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.marketed through independent
agents.
Approximately 59%44% of the gross direct premiums written and assumed by the
Insurance Subsidiaries during 19971998 was attributable to business placed with
Protective by B & L. The remaining 41%56% consists primarily of business written
by Sagamore within its private passenger automobile, small fleet and small
business workers' compensation programs, originating through an extensive
network of independent agents.
The 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 assumeReinsurance is ceded to spread the risk of loss
among several reinsurers. In addition to voluntary reinsurance, voluntarily from other insurers under retrocession and treaty
arrangements. Reinsurance assumed to date has been comprised primarily of
retrocessional participation in property catastrophe pools. The Company intends
to participate in such retrocessions only as long as premium rates remain at
attractive levels. In addition,described
above, the Insurance Subsidiaries participate in numerous mandatory government-operatedgovernment-
operated reinsurance pools which require insurance companies to provide
coverages on assigned risks. These assigned risk pools allocate participation
to all insurers based upon each insurer's portion of premium writings on a
state or national level.
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 inIn addition, frequency and severity of claims must be projected. The
average severitiesseverity 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, 19971998 have been reduced by approximately
$5.4$5.3 million as a result of such discounting. Had the Company not discounted
loss and LAE reserves, pretax income would have been approximately $.7$.1 million
lowerhigher for the year ended December 31, 1997.1998.
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 treaty reinsurance arrangements whichthat have
been in forceplace since June 1, 1998, only a maximum of $100,000 of an insured loss
for a single occurrence is retained by the past several years,Company. In some cases, the amount
retained by the Company can be zero. Prior to June 1, 1998, the first $1
million of insured loss for a single occurrence iswas retained by the Company.Company
under treaty arrangements although this exposure was routinely reduced through
the use of facultative reinsurance. The Company has reinsured $9
millionexposure in
excess of the first $1 million in coverage liabilityits applicable retention with several companies.
3
4
Certain of thesethe previous reinsurance treaties containcontained aggregate recovery
limitations. To the extent that losses in these layers, in the aggregate,
exceed these limitations, the Company could be liable for amounts whichthat would
otherwise be covered under these reinsurance treaties. TheNo such aggregate
limits have been exceeded as of December 31, 1998. Prior to the restructuring
of the Company's reinsurance structure hastreaties relating to trucking risks, effective
June 1, 1998, reinsurance treaty arrangements had remained relatively constant
since 1986. Prior to September 1, 1986, the Company's maximum exposure on a
$10 million loss relating to its trucking insurance business ranged from
$250,000 to approximately $2 million. The higher exposures were retained
during periods when reasonably priced reinsurance was not available. Very few
losses incurred during these periods, with the exception of environmental
liability losses, remain unsettled at December 31, 1997. Effective September 1, 1986, and
continuing through December 31, 1997, the Company's exposure relating to
trucking risks is limited to $1 million on a $10 million loss, as noted in the
immediately preceding paragraph.1998.
With respect to Sagamore's private passenger automobile, small fleet trucking
and workers' compensation business, the Company's maximum net exposure for a
single occurrence is
$250,000.was $100,000 during 1998. Effective January 1, 1998, this exposure15, 1999,
Sagamore's retention under the workers' compensation product has been reduced
to $100,000$50,000 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 1998, 1997 1996 and 1995.1996. 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 87 shows the development of the estimated liability, net of
reinsurance recoverable, for the ten years prior to 1997.
4
51998.
RECONCILIATION OF LIABILITY FOR LOSSES AND LOSS ADJUSTMENT
EXPENSES (GAAP BASIS)
Year Ended December 31,
1998 1997 1996
1995
----------- ----------- --------------------- ---------- ----------
(IN THOUSANDS)
(IN THOUSANDS)
NET OF REINSURANCE RECOVERABLE:
Liability for losses and LAE at the
beginningBeginning of the year $151,493 $154,537 $161,458 $175,554
Provision for losses and LAE:
Continuing operations:
Claims occurring during the current year 53,278 47,692 45,999 44,238
Claims occurring during prior years (10,741) (7,838) (12,245)
(5,484)
---------- ---------- ------------------ -------- --------
42,537 39,854 33,754 38,754
Losses and LAE payments:
Continuing operations:
Claims occurring during the current year 24,947 15,946 12,891 7,760
Claims occurring during prior years 25,088 26,934 27,825
33,819
Discontinued operations - - 11,186
---------- ---------- ------------------ -------- --------
50,035 42,880 40,716 52,765
Change in unpaid portion of uncollectible
amountsAmounts due from reinsurers (44) (18) 41
(85)
---------- ---------- ------------------ -------- --------
Liability for losses and LAE at end of year 143,951 151,493 154,537
161,458
REINSURANCE RECOVERABLE ON UNPAID
LOSSES AT END OF YEARReinsurance recoverable on unpaid losses
at end of the year 50,481 45,702 42,402
50,031
---------- ---------- ------------------ -------- --------
Liability for losses and LAE, gross of
reinsurance recoverables,recoverable, at end of the year $194,432 $197,195 $196,939
$211,489
========== ========== ================== ======== ========
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5
The above reconciliation shows a $7.8$10.7 million (5.1%(7.1%) savings in the liability
for losses and LAE recorded at December 31, 19961997 and compares to a one-year
savings recognized in 19961997 of $12.2$7.8 million. The net savings is reflected in
19971998 underwriting income. All major coverage groups produced redundancies
during each of the years 1998, 1997 1996 and 1995.1996. A more detailed discussion of
reserve savings experienced in recent years is presented beginning on page 6.below.
The differences between the liability for losses and LAE reported in the
accompanying 19971998 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 $152,258$144,975
Add differences:
Reinsurance recoverable on unpaid losses and LAE 45,70250,481
Additional reserve for reinsurance assumed losses not
reported to the Company at the current year end 480240
Reclassification of loss reserves ceded attributable to insolvent reinsurers 480436
Deduct differences:
Estimated salvage and subrogation recoveries recorded on
a cash basis for SAP and on an accrual basis for GAAP (1,725)
----------(1,700)
--------
Liability reported on a GAAP basis $197,195
==========$194,432
========
Loss reserves ceded attributable to insolvent reinsurers are treated as a
separate liability for SAP purposes but are classified as an addition to loss
reserves in the GAAP consolidated balance sheets. This classification was used
for GAAP since the uncollectible amounts are, in effect, a reversal of
reinsurance credits taken against gross loss and LAE reserves. Losses
incurred, however, do not include charges for uncollectible reinsurance, nor do
the tables on pages 54 and 8,7, since the inability to recover these amounts from
insolvent reinsurers is considered to be a credit loss and is not associated
with the Company's reserving process. Accordingly, loss and LAE developments
would be distorted if amounts related to insolvent reinsurance were included.
The table on page 87 presents the development of GAAP balance sheet liabilities
for each year end 1987year-end 1988 through 19971998, 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 endyear-end have been reduced by amounts
relating to loss reserves ceded attributable to insolvent reinsurers, as
discussed in the immediately preceding paragraph. This liability represents
the estimated amount of losses and LAE for claims arising in all prior years
that are unpaid at the balance sheet date, including losses that had been
incurred but not yet reported to the Company.
The upper portion of the table shows the reestimated amount of the previously
recorded liability based on experience as of the end of each succeeding year.
The estimate is increased or decreased as more information becomes known about
the frequency and severity of claims.
The "cumulative redundancy" represents the aggregate change in the estimates
over all prior years. For example, the 19871988 liability has developed a $12.1$22.9
million redundancy over ten years. That amount has been reflected in income
over the ten years, as shown on the table. The effect on income of changes in
estimates of the liability for losses and LAE during the past three years is
shown in the table on page 5.4.
Historically, the Company's loss developments have been generally favorable.
Reserve developments for all year ends 1987year-ends 1986 through 19961997 have produced
redundancies as of December 31, 1997.1998. In addition to improvements in reserving
methods, loss reserve developments since 19871985 have been favorably affected by 5
6
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 also played a part in reduced insurance losses during
much of this period. Higher retentions not only raise the excess insurance
entry point but also encourage trucking company management to focus even more
intensely on safety programs. Further, reserve savings have been achieved by
the use of structured settlements on certain workers' compensation and
liability claims of a long-term liability nature. Recent developments,
including raising of speed limits in many states and the lack of availability
of qualified drivers, may reverse some of the trends noted during the past
ten years.
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 19971998 is different
from that which generated much of the ten yearten-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 54 and 8,7,
suggest that the Company's insured selection process and the overall effect of
improved safety programs and other positive influences on claim frequency and
severity have more than offset the negative factors anticipated when reserves
were established. The Company and its actuaries will continue to review the
trends noted and, should it appear that such trends are permanent and
projectable, they will be reflected in future reserving method refinements.
The lower section of the table on page 87 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, 1997,1998, the Company had paid $116.5$118.7
million of losses and LAE that had been incurred, but not paid, through the endas of 1987;December
31, 1988; thus an estimated $35.9$36.6 million in losses incurred through 19871988
remain unpaid as of the current financial statement date ($152.4155.3 million
incurred less $116.5$118.7 million paid).
In evaluating this information, it is important to note that the method of
presentation causes development experience to be duplicated. For example, the
amount of any redundancy or deficiency related to losses settled in 1990,1991, but
incurred in 1987,1988, will be included in the cumulative development amount for
year
ends 1987,year-ends 1988, 1989, and 1989.1990. As such, this table does not present accident
or policy year development data which readers
may be more accustomed to analyzing. Also, conditions and trends that have
affected development of the liability in the past may not necessarily occur in
the future. Accordingly, it may not be appropriate to extrapolate future
redundancies or deficiencies based on this table.
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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, 19971998 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 whichthat 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 whichthat 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,Accordingly, the
Company revised the environmental exclusion in its policies in 1986 in an
attempt to prevent the courts from mandating unintended coverages. During 1995
and 1996, the Company recorded adverse development of $7.6 million and $2.4
million, respectively, on such claims. Development during 1997 was minor. This development includesminor but
an additional $1.1 million was recorded during 1998. Incurred losses to date
include a liabilityreserve for incurred but not reported losses and loss expenses of
$5.0 million at December 31, 1997.million.
6
7
ANALYSIS OF LOSS AND LOSS ADJUSTMENT EXPENSE DEVELOPMENT--GAAP BASIS
(DOLLARS IN THOUSANDS)
YEAR ENDED DECEMBER 31 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
-------- -------- -------- -------- -------- -------- -------- -------- -------- -------- --------
Liability for Unpaid
Losses and LAE, Net
of Reinsurance
Recoverables * $178,179 $186,517 $190,351 $198,790 $188,189 $175,395 $175,012 $161,001 $154,039 $151,013 $143,515
Liability Reestimated
as of:
One Year Later 173,990 175,998 178,706 185,452 174,269 152,146 169,528 148,756 146,201 140,272
Two Years Later 161,331 162,434 164,977 171,069 153,548 147,577 159,000 140,811 135,125
Three Years Later 154,851 161,143 157,802 155,977 156,271 144,526 153,833 130,540
Four Years Later 154,075 155,059 149,946 160,477 155,104 142,178 148,390
Five Years Later 149,672 151,138 155,601 159,804 153,528 137,876
Six Years Later 147,993 157,020 155,666 158,972 150,531
Seven Years Later 154,164 158,430 155,038 157,976
Eight Years Later 155,365 157,644 154,453
Nine Years Later 154,773 157,970
Ten Years Later 155,269
Cumulative Redundancy $ 22,910 $ 28,547 $ 35,898 $ 40,814 $ 37,658 $ 37,519 $ 26,622 $ 30,461 $ 18,914 $ 10,741
Cumulative Amount of
Liability Paid
Through:
One Year Later $ 41,889 $ 41,873 $ 40,939 $ 41,958 $ 38,511 $ 30,297 $ 45,005 $ 27,825 $ 26,934 $ 25,088
Two Years Later 67,990 69,330 63,689 68,706 59,494 58,969 67,219 43,016 43,280
Three Years Later 84,940 81,291 81,746 83,413 82,122 71,375 76,248 55,515
Four Years Later 93,651 95,857 92,313 98,331 91,794 77,702 85,096
Five Years Later 98,666 103,035 103,190 104,915 96,617 82,792
Six Years Later 104,425 111,017 107,579 109,174 100,299
Seven Years Later 111,788 114,005 110,282 112,487
Eight Years Later 114,500 116,357 113,080
Nine Years Later 116,260 118,960
Ten Years Later 118,702
* Amounts shown for 1988 through 1998 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 $2,258,
$2,215, $818, $597, $611, $554, $542, $457, $498, $480 and $436,
respectively.
7
8
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) salesare outlined on pages 2 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 (5) other projects.3.
Since the mid-1980's, Protective has focused its marketing efforts toon large and
medium trucking fleets utilizing Company salesmen.fleets. 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
whichthat do not allow for self-insurance. In 1989, Protective began
9
10
offeringalso offers accident
insurance on a group basis to independent contractors under contract to a fleet
sponsor. Since 1989, the market for Protective's products has grown
increasingly competitive (see comments under "Competition", following).
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, Protective has accepted retrocessions for catastrophe
exposures from certain reinsurers on terms whichthat are considered to be very
favorable. This
program was continued during 1997 with premiums earned from these retrocessions
totaling $9.9 million. ToWhile Protective will continue to participate in this market, as
the extent thatresult of the recent merger of certain reinsurers and less favorable
pricing remains favorable on these
retrocessions, this program is expected to continue into 1998. In addition,
Protective assumed certain property and liability reinsurance throughin the market, Protective's participation in a facultative pool managed by another reinsurer starting in
1997.current pools will likely
decrease during 1999.
During the second quarter of 1995, Sagamore entered the private passenger automobile insurance market
for nonstandard insureds. This program is currently being marketed in Indiana
and a half dozen other midwestern states with limited expansion into additional states
during 19981999 anticipated. Market acceptance to date has been favorable and
approximately $23.6$33.9 million of premium was written in this line during 1997.1998.
Sagamore also offers a program of coverages for "small fleet" trucking concerns
(small operators with one to ten power units). This program was limited to a
small geographic area composed of midwesternMidwestern states through the end of 1997.
However, significant geographic expansion is planned for this product groupbegan during 1998 and thereafter.will continue
in 1999. Approximately $3.1$5.3 million of premium was written in this program
during 1997.1998, an increase of almost 70%.
During the first quarter of 1997, Sagamore began marketing a small business
workers' compensation product in Missouri and Illinois.Missouri. To date, growth in this product has
been slow with premium written during 19971998 of $.4$.9 million. ContinuationLimited expansion
plans, including the state of this program is dependent on the results of a review currently
underway by Sagamore's management.Indiana, are planned for 1999.
8
9
INVESTMENTS
The Company manages its invested assets 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.
At December 31, 19971998 the financial statement value of the Company's investment
portfolio was $475$457 million, including money market instruments classified as
cash equivalents. The followingA comparison on page 11,of the diversification of the Company's
bond
and short-term investment portfolios,portfolio, using par valuecost as a basis, indicates the
changes in the portfolio during 1997.
10
11is as follows:
MATURITIES OF BONDS AND SHORT-TERM INVESTMENTS AT DECEMBERDecember 31
(PAR VALUE)1998 1997
1996
--------- ------------------- ----------
Less than one year 34.8% 39.7%
1 to 5 years 41.3 42.2
5 to 10 years 16.9 10.2
More than 10 years 7.0 7.9
--------- ---------U.S. Government obligations 17.6% 24.8%
Common stocks 21.8 21.0
Municipal bonds 16.4 17.0
Corporate and other bonds 23.5 15.7
Mortgage-backed securities 8.8 10.0
Short-term and other investments 10.4 9.9
Preferred stocks 1.5 1.6
-------- --------
100.0% 100.0%
========= =========
Average life of portfolio
(years) 3.6 3.1
========= ================= ========
The Company's concentration of invested assets in relatively short-term
investments provides it with a level of liquidity which is more than adequate
to provide for its anticipated cash flow needs. The structure of the
investment portfolio also provides the Company with the ability to restrict
premium writings during periods of intense competition, which typically result
in inadequate premium rates, and allows the Company to respond to new
opportunities in the marketplace as they arise. The following comparison of
the Company's bond and short-term investment portfolios, using par value as a
basis, indicates the changes in maturities in the portfolio during 1998.
A comparison of the diversification of the Company's investment portfolio, using
cost as a basis, is as follows:
DecemberMATURITIES OF BONDS AND SHORT-TERM INVESTMENTS AT DECEMBER 31 (PAR VALUE)
1998 1997
1996
----------------- ---------
U.S. Government obligations 24.8% 36.8%
Common stocks 21.0 21.8
Municipal bonds 17.0 14.3
Corporate and other bonds 15.7 5.3
Mortgage-backed securities 10.0 12.6
Short-term and other investments 9.9 8.4
Preferred stocks 1.6 .8
--------- ---------Less than one year 23.9% 34.8%
1 to 5 years 50.2 41.3
5 to 10 years 17.2 16.9
More than 10 years 8.7 7.0
-------- --------
100.0% 100.0%
========= ================= ========
Average life of portfolio
(years) 4.6 3.6
======== ========
Approximately $20.9$27.8 million of the fixed maturity portfolio (4.4%(6.1% of total
invested assets) consists of bonds consideredrated as less than investment grade at
December 31, 1997.1998. The unrealized net gainloss on the fixed maturity portfolio was
$2.9$3.9 million at December 31, 1997,1998, before income taxes, and compares to a $.8$2.9
million unrealized gain at December 31, 1996.1997.
Equity securities comprise 33%32% of the financial statement value of the
consolidated investment portfolio at December 31, 1997, up1998, essentially unchanged
from 32% at the prior year end.year-end. The unrealized gains on the equity
9
10
security portfolio increased $9decreased $14.2 million to $67$52.7 million at December 31,
1997.
11
12
A comparison of overall1998. Approximately 80% of the decline in market value during 1998 relates to
the Company's largest single equity holding, UICI. Even considering the
decline in market value of UICI during the year, the market value of this
security was approximately $12.6 million in excess of the Company's cost basis
at December 31, 1998.
A comparison of consolidated investment yields is as follows:
1998 1997
1996
--------- ----------------------------
Before federal tax:
Investment income 5.0% 5.3%5.0%
Investment income plus realized
investment gains 5.7 9.3 7.1
After federal tax:
Investment income 3.6 3.5 3.7
Investment income plus realized
investment gains 4.0 6.4 4.9
EMPLOYEES
As of March 1, 1998,1999, the Company had 243293 employees, 227286 of whom are engaged
partially or primarily in the business of the Company's Insurance Subsidiaries.
The increase in employees from 194243 at March 1, 19971998 is due primarily to the
expansion in Sagamore's private passenger automobile and small business workers' compensationfleet trucking
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 whichthat 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), (C)(1)(I) AND (VII), AND (D) OF REGULATION S-K:
Reference is made to Note KJ to the consolidated financial statements which
provides information concerning industry segments and is filed herewith under
Item 8, Financial Statements and Supplementary Data.
10
12
1311
ITEM 2. PROPERTIES
The Company leases office space at 1099 North Meridian Street, Indianapolis,
Indiana in the Landmark
Building. This building is located approximately one mile from downtown
Indianapolis. The lease covers approximately 65,00067,000 square feet and expires in
August, 2003, with an option to renew for an additional ten years. The
Company's entire operations, with the exception of Baldwin & Lyons, California,
are conducted from these leased facilities.
The Company owns a small building and the adjacent real estate approximately
two miles from its main office. This building contains approximately 3,300
square feet of usable space, and is used primarily as storage facilities and as
a contingent back up and disaster recovery site for computer operations.
Baldwin & Lyons, California leases approximately 2,700 square feet of office
space in a suburb of Los Angeles, California. The lease expires in August,
19982001 with a three yearthree-year renewal option which the company intends to exercise.option. All west coastWest Coast operations are conducted
from these facilities.
The current facilities are expected to be adequate for the Company's operations
for the foreseeable future.
ITEM 3. LEGAL PROCEEDINGS
In the ordinary, regular and routine course of their business, the Company and
its Insurance Subsidiaries are frequently involved in various matters of
litigation relating principally to claims for insurance coverage provided. No
currently pending matter is deemed by management to be material to the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of 1997.1998.
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1412
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS
The Company's Class A and Class B common stocks are traded in the NASDAQ
National Market System and are quoted on the National Association of Securities
Dealers Automated Quotation System ("NASDAQ")The Nasdaq Stock
Marketr under the symbols BWINA and BWINB, respectively. The Class A and Class
B common shares have identical rights and privileges except that Class B shares
have no voting rights other than on matters for which Indiana law requires
class voting. As of December 31, 1997,1998, 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 19971998 and 1996,1997, 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.
ClassCASH
CLASS A ClassCLASS B Cash
---------------------- ---------------------- Dividends
High Low High Low Declared
--------- --------- --------- --------- ---------DIVIDENDS
HIGH LOW HIGH LOW DECLARED
---------- ---------- ---------- ---------- ----------
Year ended December 31:
1997:1998:
FOURTH QUARTER $28$23 1/2 $20 $25 $18 1/2 $.10
THIRD QUARTER 24 1/4 16 1/8 24 20 5/8 .10
SECOND QUARTER 24 21 24 21 1/4 .10
FIRST QUARTER 25 1/8 19 15/16 24 15/16 19 11/16 .10
1997:
Fourth Quarter 28 3/4 $1919 1/4 $2828 3/4 $2020 3/8 $.10
THIRD QUARTERThird Quarter 23 1/2 19 1/4 21 3/4 18 1/2 .10
SECOND QUARTERSecond 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 $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 3/4 168 17 19 17 3/4 18 14 1/4 .08
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.
8 .10
The Company expects to continue its policy of paying regular cash dividends
although there is no assurance as to future dividends because they are
dependent on future earnings, capital requirements and financial conditions and
are subject to regulatory restrictions as described in Note H to the
consolidated financial statements.
1412
15
ITEM13
Item 6. SELECTED FINANCIAL DATA
Year Ended December 31
------------------------------------------------------------
1998 1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- ---------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Net premiums written $ 71,943 $ 69,575 $ 61,431 $ 63,065 $ 61,503
$ 53,820
Net premiums earned 68,862 61,675 58,743 58,793 61,187
53,210
Net investment income and realized19,060 18,442 19,580 20,161 14,734
Realized net gains on investments 35,780 26,440 26,371 15,272 21,4472,855 17,338 6,860 6,210 538
Losses and loss expenses incurred 42,537 39,854 33,754 38,754 32,910
26,960
Income from continuing operations 16,895 24,446 21,334 20,594 20,505
24,654
Net income 16,895 24,446 21,692 29,360 20,791 25,234
Earnings per share -- net income (1) 1.22 1.75 1.51 1.96 1.37 1.62
Cash dividends per share .40 .40 .36 .30 .33
.183
Investment portfolio (3) 456,735 475,328 454,791 424,833 386,646
382,904
Total assets 544,369 557,015 526,460 512,225 503,899
487,522
Shareholders' equity 288,592 293,963 273,122 247,008 205,933 203,380
Book value per share (1) 20.91 21.23 19.46 16.78 13.66 13.01
Underwriting ratios (2):
Losses and loss expenses 61.8% 64.6% 57.5% 65.9% 53.8%
50.7%
Underwriting expenses 32.0% 33.3% 29.2% 28.0% 27.6%
29.9%
Combined 93.8% 97.9% 86.7% 93.9% 81.4% 80.6%
(1) Earnings and book value per share are adjusted for the dilutive effect of
stock options outstanding. 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) Includes money market instruments classified with cash in the Consolidated
Balance Sheets.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
The primary sources of the Company's liquidity are (1) funds generated from
insurance premiums, (2) net investment income and (3) maturing investments.
The Company generally experiences positive cash flow resulting from the fact
that premiums are collected on insurance policies in advance of the
disbursement of funds in payment of claims. Operating costs of the insurance
subsidiaries, other than loss and loss expense payments and commissions paid to
the parent company, generally average between 25% and 35% of premiums earned on
a consolidated basis and the remaining amount is available for investment for
varying periods of time depending on the type of insurance coverage provided.
During extended periods of declining 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. TheRecently, however, the Company has extended
into slightly longer maturity investments in an effort to increase the yield on
its portfolio. As a result, the average life of the Company's bond and short-termshort-
term investment portfolio was 3.64.6 years compared to 3.13.6 years for 1996.1997. 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 whichthat are designed to provide protection for both policyholders
and shareholders.
The Company's assets at December 31, 19971998 included $24.9$26.9 million in short-term
investments which are readily convertible to cash without market penalty and an
additional $76.5$43.3 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 19971998 were
approximately 24%23% of the combined statutory surplus of these subsidiaries.
Premium writings of 200% to 300% of surplus are generally considered acceptable
by regulatory authorities. Further, the statutory capital of each of the
insurance subsidiaries substantially exceeds minimum risk based capital
requirements set by the National Association of Insurance Commissioners.
Accordingly, the Company has the ability to significantly increase its business
without seeking additional capital to meet statutory guidelines.
Shareholders' equity increasedDue primarily to $294.0a $15.3 million at December 31, 1997, from
$273.1 million at December 31, 1996. In addition to current year earnings, this
increase includes a $7.1 million increasedecline in unrealized net gains on
the
Company's investment portfolio from $38.5investments, shareholders' equity decreased to $288.6 million at December 31,
1996 to $45.61998, from $294.0 million at December 31, 1997. The increasechange in shareholders'
equity is net of
$5.1also included $1.3 million in treasury share purchases and $5.5 million
of dividends to shareholders. Book value per common share outstanding
increased 9%decreased 2% to $21.23$20.91 at December 31, 19971998 from $19.46$21.23 per share at December
31, 1996.1997.
1614
1715
As more fully discussed in Note GH to the consolidated financial statements, at
December 31, 1997, $64.81998, $67.6 million, or 22.0%23.4% of shareholders' equity, represented
net assets of the Company's insurance subsidiaries which, at that time, could
not be transferred in the form of dividends, loans or advances to the parent
company due to statutory restrictions on the allowable transfers. However,
management believes that these restrictions pose no material liquidity
concerns for the Company. The financial strength and stability of the
subsidiaries permit ready access by the parent company to short-term and
long-term sources of credit. The parent company had cash and marketable
investments of approximately $40.1$19.2 million at December 31, 1997.1998.
RESULTS OF OPERATIONS
1998 COMPARED TO 1997
Direct premiums written for 1998 totaled $77.9 million, an increase of $11.9
million (17.9%) from 1997. This increase is primarily attributable to an
increase in nonstandard private passenger automobile business of $10.3 million
(43.6%) from 1997. Direct premium writings from small trucking fleet risks and
fleet trucking's "work accident" program also increased by $2.2 million and
$2.0 million, respectively. The new small business workers' compensation
program also generated $.5 million in new premium during 1998. These
increases were partially offset by decreases in the remainder of the Company's
trucking-related products. Market conditions for the Company's large and
medium fleet trucking products continued to be competitive during 1998,
resulting in further downward pressure on pricing. In addition, favorable
claims development from expired retrospectively rated workers' compensation
policies reduced direct premium by $1.0 million in 1998.
Premium writings from reinsurance assumed decreased by $4.8 million (40.7%) to
$6.9 million during 1998. $3.9 million of this decrease is due to the Company
not renewing it's participation in an excess facultative program due to
unfavorable experience. Premiums assumed from voluntary property catastrophe
retrocession pools were also lower during 1998 as the result of reductions in
the Company's shares in these pools during 1998, as well as decreases in gross
pool revenues.
Premium writings ceded to reinsurers increased $4.5 million (55.1%) during 1998
to $12.7 million. The percentage of premiums ceded to direct premiums written
increased to 16.3% for 1998 from 12.4% for 1997, as the Company entered into
new reinsurance agreements for its fleet trucking products, effective June 1,
1998, whereby it ceded more premiums and retained less risk. Reinsurance
retentions were also decreased for the Company's small fleet trucking products
with no material impact on premium ceded.
After giving effect to changes in unearned premiums, net premiums earned
increased 11.7% to $68.9 million for 1998 from $61.7 for 1997. Net premiums
earned from all trucking-related insurance products, including small fleet
trucking, decreased by $3.9 million (11.5%). Premiums earned from voluntary
reinsurance assumed decreased by $1.6 million. The above decreases were offset
by a $12.9 million increase (74.9%) in nonstandard private passenger automobile
premium during 1998.
Net investment income increased by $.6 million (3.3%) during 1998 due to higher
average invested assets while overall pre-tax yields were relatively unchanged.
The average pre-tax yield on invested assets was 5.0% for both 1998 and 1997
while the after-tax yield for 1998 was 3.6% compared to 3.5% for 1997.
Investment expenses, which are netted directly against income, were relatively
unchanged in 1998 and were 5.8% of gross investment income compared to 6.2% for
1997.
Realized net capital gains were $2.8 million in 1998 compared to $17.3 million
for 1997. The current year net gain consisted of gains on equity securities
and fixed maturities of $2.9 million and $.2 million, respectively,
15
16
and losses on other investments of $.3 million. The lower realized net capital
gains during 1998 reflect the realization of losses on several under-performing
issues that were sold during the year.
Losses and loss expenses incurred during 1998 increased $2.7 million (6.7%) to
$42.5 million. The 1998 consolidated loss and loss expense ratio was 61.8%
compared to 64.6% for 1997. Losses and loss expenses incurred for 1998
included adverse development on environmental liability claims of $1.1 million
relating to policies written in the 1970's. The Company has established
provisions for incurred but not reported environmental losses at December 31,
1998 that are believed to be sufficient to cover all anticipated exposure.
Adjusted for the development on environmental liability claims, the
consolidated loss and loss expense ratio for 1998 was 60.2%. The decrease in
the loss and loss expense ratio is principally attributable to an increase in
the savings realized on the closing of prior year claims during 1998 as
compared to 1997. 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.
Other operating expenses for 1998, before credits for allowances from
reinsurers, increased $5.1 million (21.0%) to $29.5 million. Personnel related
expenses, including amounts allocated to loss expenses and investment income,
were essentially unchanged from 1997 levels despite a net 26% increase in the
number of employees during the year, attributable to the expansion of the
Company's new products. Salary expense for 1998 was reduced as the result of
lower accruals for equity appreciation rights which represent a broad-based
employee incentive program which is tied to changes in the Company's book
value. Direct commission expense increased $1.9 million (32.2%) as the result
of increases in premiums from Sagamore's personal automobile, small fleet and
small business workers' compensation products. These increases were partially
offset by the decrease in voluntary reinsurance assumed from catastrophe pools.
Allowances from reinsurers increased $2.4 million (325.3%) resulting from new
reinsurance agreements entered into in 1998 which provide ceding commissions to
Protective on its fleet trucking business. Previous reinsurance treaties
covering Protective's fleet trucking business carried no ceding commission.
The ratio of net operating expenses of the insurance subsidiaries to net
premiums earned was 32.0% during 1998 compared to 33.3% for 1997. 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 29.4% for 1998 compared
with 28.9% for 1997. Expenses for 1998 and 1997 include expenditures for Year
2000 (Y2K) compliance, as discussed more thoroughly elsewhere in this
discussion. While it is not possible to precisely isolate Y2K expenditures
from those for ongoing development of current product lines, management
believes that amounts spent during 1998 for Y2K related issues were higher than
expenditures during 1997.
The effective federal tax rate for consolidated operations for 1998 was 28.7%.
This rate is lower than the statutory rate primarily because of tax-exempt
investment income.
As a result of the factors mentioned above, net income from consolidated
operations for 1998 was $16.9 million compared to $24.4 million for 1997.
Diluted earnings per share decreased to $1.22 in 1998 from $1.75 in 1997 due
primarily to the decrease in realized gains on investments. Diluted earnings
per share from operations before realized gains on investments was $1.09 in
1998 compared to $.94 in 1997.
16
17
1997 COMPARED TO 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-boardacross-the-board declines in the pre-tax yields on invested assets. The
average pre-
taxpre-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. BecauseSee
comments in the foregoing discussion of operations for 1998 compared to 1997
regarding the high
limits provided by the Company to its insureds, the lengthdevelopment 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.prior year reserves.
17
18
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 nonstandard 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 in 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 nonstandard private passenger automobile program
during 1996.
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. See comments in the foregoing
discussion of operations for 1997 compared to 1996 regarding the development
of 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, 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.
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 $1.96 in 1995.
FORWARD-LOOKING INFORMATION
Any forward-looking statements in this report, including without limitation,
statements relating to the Company's plans, strategies, objectives,
expectations, intentions and adequacy of resources, are made pursuant to the
safe harbor provisions of the Private Securities Litigation Reform Act of 1995.
Investors are cautioned that such forward-looking statements involve risks and
uncertainties including without limitation the following: (i) the Company's
plans, strategies, objectives, expectations and intentions are subject to change
at any time at the discretion of the Company; (ii) the Company's business is
highly competitive and the entrance of new competitors into or the expansion of
the operations by existing competitors in the Company's markets and other
changes in the market for insurance products could adversely affect the
Company's plans and results of operations; and (iii) other risks and
uncertainties indicated from time to time in the Company's filings with the
Securities and Exchange Commission.
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 $16.2$10.2 million and $10.7$16.2 million were recorded at
December 31, 19971998 and 1996,1997, respectively. The net deferred tax liability at
December 31, 19971998 included $6.2$5.9 million in special tax deposits covered under
Section 847 of the Internal Revenue Code, as explained in the following
paragraph, which compares to $7.0$6.2 million in special tax deposits at December
31, 1996.1997. Adjusted for the special deposits, a net deferred tax liability of
$22.4$16.1 million was recorded at December 31, 19971998 compared to a net deferred tax
liability of $17.7$22.4 million at December 31, 1996.1997. The increasedecrease 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
18
19
for the entire amount of discount on post-
1986post-1986 loss reserves. As mentioned
above, special Section 847 estimated tax deposits totaling $6.2$5.9 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.
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
NOTE: ANTICIPATED COSTS OF THE COMPANY'S YEAR 2000 PROJECT, AS PROVIDED IN THE
FOLLOWING DISCUSSION, ARE BASED ON MANAGEMENT'S ESTIMATES OF ULTIMATE TOTAL
COSTS AND PERCENTAGES OF COMPLETION WITH RESPECT TO EACH PHASE OF THE PROJECT.
THESE ANTICIPATED COSTS HAVE NOT BEEN AUDITED BY OUR INDEPENDENT AUDITORS.
The Year 2000 Issue is the result of computer programs being written using two
digits rather than four to define the applicable year. Any of the Company's
computer programs or hardware that have time-sensitivedate-sensitive features may recognize a
date using "00" as the year 1900 rather than the year 2000. This could result
in a system failure or miscalculations causing disruptions of 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's plan to resolve the Year 2000 Issue involves the following four
phases: assessment, remediation, testing and implementation. To date, the
Company will communicatehas completed is assessment of all mission critical systems and
continues to evaluate the needs to repair or replace non mission critical
systems. The
19
20
completed assessment indicated that most of the Company's significant
information technology systems could be affected, particularly with respect to
policy and claim processing, billing, general ledger and cash receipts and
disbursements systems. To date, the Company's general ledger system and the
portions of the remaining systems that handle approximately 90% of the
Company's transactions are fully Year 2000 ready.
The Company has communicated 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. Currently,
there is no known third party Year 2000 deficiency believed to pose a serious
threat to the Company's ability to conduct business. 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 significant exposure to contingencies related to the Year 2000 Issue for
the products it has sold.
The Company will continue to 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 ofJune
30, 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 associated with the Year 2000 project can be categorized
into three basic areas:
1) Internal resources, mainly programming and technical personnel, used
to correct internally developed software. The estimated total cost of this
area is anticipated to be approximately $2.5 million with 20% of this amount
relating to future costs.
2) Replacement or upgrade of purchased software. The estimated total
cost of this area is anticipated to be approximately $1.0 million with 25% of
this amount relating to future costs.
3) Upgrading equipment. Most of the hardware replacements and upgrades
to date have not been due to the Year 2000 Issue. More than 80% of the
Company's network equipment has been replaced over the last eighteen months and
all mainframe hardware is less than three years old. Future hardware costs
should not exceed $.3 million.
Management believes it has an effective program in place to resolve all Year
2000 issues in a timely manner. As noted above, the Company has not yet
completed all necessary phases of the Year 2000 project. In the unlikely event
that the Company does not complete all additional phases of this project, the
Company may be unable to process policy and claim transactions on certain of
its less transaction-volume-intensive products. Currently, the Company has no
contingency plans in place in the event this occurs. However, the Company will
evaluate the status of completion of its Year 2000 project by June 30, 1999 and
determine whether such a contingency plan is necessary.
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
20
21
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
23MARKET RISK
The Company operates solely within the property and casualty insurance industry
and, accordingly, has significant invested assets which are exposed to various
market risks. These market risks relate to interest rate fluctuations, foreign
currency translation and equities market prices. All of the Company's invested
assets are classified as available for sale and are listed as such in the
enclosed consolidated financial statements in
Note B.
The most significant of the three identified market risks relates to prices in
the equities market. Though not the largest category of the Company's invested
assets, equity securities have the greatest potential for short-term price
fluctuation. The market value of the Company's equity positions at December
31, 1998 was $148.1 million or approximately 32% of invested assets, including
money market instruments classified as cash. Funds invested in the equities
market are not considered to be assets necessary for the Company to conduct its
daily operations and, therefore, can be committed for extended periods of time.
The long-term nature of the Company's equity investments allows it to invest in
positions where ultimate value, and not short-term market fluctuations, are the
most important feature.
The Company's fixed maturity portfolio totaled $268.3 million at December 31,
1998 and is heavily weighted toward U. S. government and government agency
obligations and state and municipal debt securities. Over 74% of this
portfolio matures within 5 years and the average life of the Company's fixed
maturity investments is approximately 4.6 years. Although the Company is
exposed to interest rate risk on its fixed maturity investments, given the
anticipated duration of the Company's liabilities (principally insurance loss
and loss expense reserves) relative to maturities, even a 100 to 200 basis
point increase in interest rates would not have a significant impact on the
Company's ability to conduct daily operations or to meet its obligations.
The Company's exposure to foreign currency risk is not material.
FORWARD-LOOKING INFORMATION
Any forward-looking statements in this report, including without limitation,
statements relating to the Company's plans, strategies, objectives,
expectations, intentions and adequacy of resources, are made pursuant to the
safe harbor provisions of the Private Securities Litigation Reform Act of 1995.
Investors are cautioned that such forward-looking statements involve risks and
uncertainties including without limitation the following: (i) the Company's
plans, strategies, objectives, expectations and intentions are subject to
change at any time at the discretion of the Company; (ii) the Company's
business is highly competitive and the entrance of new competitors into or the
expansion of the operations by existing competitors in the Company's markets
and other changes in the market for insurance products could adversely affect
the Company's plans and results of operations; and (iii) other risks and
uncertainties indicated from time to time in the Company's filings with the
Securities and Exchange Commission.
OTHER ITEMS
COMPREHENSIVE INCOMESEGMENTS
During 1997,1998, 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.
Statement No. 131 requires companies to use a
21
22
"management approach" in disclosing information about its industry segments.
In compliance with the new standard, the Company has defined its reportable
industry segments to be 1) Fleet trucking 2) Non-standard private passenger
automobile and 3) Voluntary reinsurance assumed. The Company will report segment informationalso offers
products for small trucking fleets and workers' compensation to small business.
However, premiums generated by these products are not material for purposes of
Statement No. 131 and they are included in the "all other" category in Note J
to the consolidated financial statements. The Company has restated all prior
year data included in Note J 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.131.
2322
2423
ANNUAL REPORT ON FORM 10-K
ITEM 8--FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
YEAR ENDED DECEMBER 31, 19971998
BALDWIN & LYONS, INC.
INDIANAPOLIS, INDIANA
2423
2524
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, 19971998 and 1996,1997, 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, 1997.1998. Our audits also included the financial statement
schedules listed in the index at item 14(a). These financial statements and
schedules are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
schedules based on our audits.
We conducted our audits in accordance with 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, 19971998 and 1996,1997, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1997,1998, in conformity with generally
accepted accounting principles. Also, in our opinion, the related financial
statement schedules, when considered in relation to the basic financial
statements taken as a whole, present fairly, in all material respects, the
information set forth therein.
/s/ ERNST & YOUNG LLP
Indianapolis, Indiana
February 26, 19981999
2524
26
25
CONSOLIDATED BALANCE SHEETS
Baldwin & Lyons, Inc. and Subsidiaries
December 31
-------------------------
1998 1997 1996
---------- ----------
(DOLLARS IN THOUSANDS)
ASSETS
Investments:
Fixed maturities $ 276,109268,309 $ 273,828276,109
Equity securities 148,060 158,614 147,196
Short-term and other 22,448 17,902 19,698
--------- ---------
438,817 452,625 440,722
Cash and cash equivalents 16,955 23,402 14,642
Accounts receivable 20,056 21,454 13,967
Accrued investment income 4,068 4,046 3,888
Reinsurance recoverable 52,753 47,276 43,829
Deferred policy acquisition costs 3,245 2,522 1,425
Current federal income taxes 757 - 568
Property and equipment--less accumulated depreciation
(1997, $5,097; 1996, $4,223)(1998, $3.972; 1997, $5,097) 6,253 4,167 3,259
Other assets 1,465 1,523 4,160
--------- ---------
$ 557,015544,369 $ 526,460557,015
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Reserves:
Losses and loss expenses $ 197,195194,432 $ 196,939197,195
Unearned premiums 22,208 18,806 10,835
--------- ---------
216,640 216,001 207,774
Reinsurance payable 11,522 8,428 7,318
Accounts payable and other liabilities 17,430 21,234 27,512
Deferred federal income taxes 10,185 16,249 10,734
Current federal income taxes - 1,140 -
--------- ---------
255,777 263,052 253,338
Shareholders' equity:
Common stock, no par value:
Class A -- authorized 3,000,000 shares;
outstanding -- 1998, 2,388,454 shares;
1997, 2,397,354 shares;
1996, 2,444,329 shares 127 128 130
Class B -- authorized 20,000,000 shares;
outstanding -- 1998, 11,302,496 shares;
1997, 11,292,445 shares;
1996, 11,515,145 shares 603 602 614
Additional paid-in capital 41,328 41,361 42,100
Unrealized net gains on investments 30,311 45,614 38,472
Retained earnings 216,223 206,258 191,806
--------- ---------
288,592 293,963 273,122
--------- ---------
$ 557,015544,369 $ 526,460557,015
========= =========
See notes to consolidated financial statements.
2625
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26
CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS
Baldwin & Lyons, Inc. and Subsidiaries
Year Ended December 31
--------------------------------------------------------------------------------
1998 1997 1996
1995
--------- --------- --------------------- ------------ ------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
REVENUE:
Net premiums earned $ 68,862 $ 61,675 $ 58,743
$ 58,793
Net investment income 19,060 18,442 19,580 20,161
Realized net gains on investments 2,855 17,338 6,860 6,210
Commissions, service fees and other income 1,806 1,655 1,304 1,164
--------- --------- ---------
92,583 99,110 86,487 86,328
EXPENSES:
Losses and loss expenses incurred 42,537 39,854 33,754 38,754
Other operating expenses 26,339 23,633 21,542 17,541
--------- --------- ---------
68,876 63,487 55,296 56,295
--------- --------- ---------
INCOME FROM CONTINUING OPERATIONS
BEFORE FEDERAL INCOME TAXES 23,707 35,623 31,191 30,033
Federal income taxes 6,812 11,177 9,857 9,439
--------- --------- ---------
INCOME FROM CONTINUING OPERATIONS 16,895 24,446 21,334 20,594
DISCONTINUED OPERATIONS, NET OF FEDERAL INCOME TAXES:
Income from discontinued operations - 358 1,126
Gain on sale of Hoosier Insurance CompanyTAXES - - 7,640358
--------- --------- ---------
NET INCOME 16,895 24,446 21,692 29,360
Retained earnings at beginning of year 206,258 191,806 183,360 162,934
Cash dividends (per share - 1998, $.40;
1997, $.40; and 1996, $.36; and 1995, $.30)$.36) (5,488) (5,508) (5,107)
(4,421)
TreasuryCost of treasury shares purchasedin excess of original issue proceeds (1,140) (4,283) (8,112) (4,617)
Foreign exchange adjustment (302) (203) (27) 104
--------- --------- ---------
RETAINED EARNINGS AT END OF YEAR $ 216,223 $ 206,258 $ 191,806 $ 183,360
========= ========= =========
PER SHARE DATA:
DILUTED:
Income before discontinued operations and realized net gains $ 1.09 $ .94 $ 1.18 $ 1.11
Realized net gains on investments .13 .81 .31
.27
Income from discontinuedDiscontinued operations - .02 .07
Gain on sale of Hoosier Insurance Company - - .51.02
--------- --------- ---------
NET INCOME $ 1.22 $ 1.75 $ 1.51 $ 1.96
========= ========= =========
BASIC:
Income before discontinued operations and realized net gains $ 1.10 $ .95 $ 1.19 $ 1.12
Realized net gains on investments .13 .82 .31
.27
Income from discontinuedDiscontinued operations - .03 .08
Gain on sale of Hoosier Insurance Company - - .52.03
--------- --------- ---------
NET INCOME $ 1.23 $ 1.77 $ 1.53 $ 1.99
========= ========= =========
See notes to consolidated financial statements.
2726
28
27
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY OTHER THAN CAPITAL
Baldwin & Lyons, Inc. and Subsidiaries
1998 1997 1996
1995
---------- ---------- ------------------------------------------------------
(DOLLARS IN THOUSANDS)
BALANCES AT BEGINNING OF YEAR:
Retained earnings $ 206,258 $ 191,806 $ 183,360
$ 162,934
Unrealized gains (losses) on investments 45,614 38,472 19,251 (1,111)
--------- --------- ---------
251,872 230,278 202,611 161,823
CHANGES ARISING FROM INCOME-PRODUCING ACTIVITIES:
Net income 16,895 24,446 21,692 29,360
Gains on investments:
Holding gains (losses) arising during period,
before federal income taxes (20,688) 28,326 36,431 37,536
Federal income taxes (7,241) 9,914 12,751 13,138
--------- --------- ---------
(13,447) 18,412 23,680 24,398
Gains realized during period included in net income,
before federal income taxes (2,855) (17,338) (6,860) (6,210)
Federal income taxes (999) (6,068) (2,401) (2,174)
--------- --------- ---------
(1,856) (11,270) (4,459) (4,036)
--------- --------- ---------
Change in unrealized gains or losses on investments (15,303) 7,142 19,221 20,362
Foreign exhange adjustment (302) (203) (27) 104
--------- --------- ---------
TOTAL REALIZED AND UNREALIZED INCOME 1,290 31,385 40,886 49,826
OTHER CHANGES AFFECTING RETAINED EARNINGS:
Cash dividends paid to shareholders (5,488) (5,508) (5,107) (4,421)
Cost of treasury shares purchased in excess of proceeds from original issue proceeds (1,140) (4,283) (8,112) (4,617)
--------- --------- ---------
(6,628) (9,791) (13,219) (9,038)
--------- --------- ---------
TOTAL CHANGES (5,338) 21,594 27,667
40,788
========= ========= =========--------- --------- ---------
BALANCES AT END OF YEAR:
Retained earnings 216,223 206,258 191,806 183,360
Unrealized gains on investments 30,311 45,614 38,472 19,251
--------- --------- ---------
$ 246,534 $ 251,872 $ 230,278 $ 202,611
========= ========= =========
See notes to consolidated financial statements.
2827
29
28
CONSOLIDATED STATEMENTS OF CASH FLOWS
Baldwin & Lyons, Inc. and Subsidiaries
Year Ended December 31
-----------------------------------1998 1997 1996
1995
---------- ---------- ---------------------------------------------------
(DOLLARS IN THOUSANDS)
OPERATING ACTIVITIES
Net Incomeincome $ 16,895 $ 24,446 $ 21,692 $ 29,360
Adjustments to reconcile net income to net cash
provided by operating activities:
Change in accounts receivable and unearned premium 4,800 484 1,780 5,195
Change in accrued investment income (22) (158) 727 (1,140)
Change in losses and loss expenses and reinsurance recoverable (8,240) (3,192) (3,677) (4,744)
Change in other assets, other liabilities and current income taxes (2,173) (2,424) (11,028) (2,417)
Amortization of net policy acquisition costs 5,945 5,742 5,145 2,146
Net policy acquisition costs deferred (6,668) (6,839) (5,806) (2,805)
Provision for deferred income tax creditstaxes (credits) 2,176 1,670 (642)
(312)
Bond amortization 217 372 556
360
Loss (gain) on sale of property 28 3 48
(17)
Depreciation 1,311 995 676 549
Net realized gain on investments (2,701) (17,538) (7,210) (6,597)
Income from discontinued operations - (359) (1,822)
Gain on sale of Hoosier Insurance Company - - (7,640)(359)
Compensation expense related to discounted stock options 135 78 516 402
--------- --------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES 11,703 3,639 2,417 10,518
INVESTING ACTIVITIES
Purchases of long-term investments (196,774) (237,473) (218,611) (246,789)
Proceeds from maturities 92,774 102,065 81,963 64,641
Proceeds from sales of fixed maturities 21,785 10,956 27,860 14,391
Proceeds from sales of equity securities 80,487 138,428 100,976 120,706
Net proceeds from sales (purchases) of short-term investments (6,801) 3,308 10,663 6,126
Net proceeds from the sale of Hoosier Insurance Company - - 35,614
Distributions from limited partnerships 600 366 3,018 3,790
Purchases of property and equipment (3,553) (2,027) (2,359) (887)
Proceeds from disposals of property and equipment 128 121 208 148
--------- --------- ---------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (11,354) 15,744 3,718 (2,260)
FINANCING ACTIVITIES
Dividends paid to shareholders (5,488) (5,508) (5,107) (4,421)
Proceeds from sale of common stock 40 1 - 1,200
Cost of treasury stockshares (1,348) (5,116) (10,182) (5,931)
--------- --------- ---------
NET CASH USED IN FINANCING ACTIVITIES (6,796) (10,623) (15,289) (9,152)
--------- --------- ---------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (6,447) 8,760 (9,154)
(894)--------- --------- ---------
Cash and cash equivalents at beginning of year 23,402 14,642 23,796 24,690
--------- --------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 16,955 $ 23,402 $ 14,642 $ 23,796
========= ========= =========
See notes to consolidated financial statements.
2928
3029
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 Company sold its interestsinterest in Hoosier Insurance
Company (Hoosier) and Amli Realty, Inc.
(Amli)("Amli") in 1995 and 1996, respectively.
Related income and expense amounts for the prior years and the gain recognized
on the sale of Hoosier are reported as discontinued operations.1996. No gain or loss was realized on the Amli sale which was
treated as a non-monetary, tax-free exchange. The consolidated statementsstatement of
cash flows for 1996 and 1995 includeincludes changes in certain assets and liabilities which
are presented without the effects of the salessale of Amli in 1996 and Hoosier in 1995.Amli.
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.
INVESTMENTS: Carrying amounts for fixed maturity securities (bonds, notes and
redeemable preferred stocks) represent fair value and are based on quoted
market prices, where available, or broker/dealer quotes for specific securities
where quoted market prices are not available. Equity securities (nonredeemable
preferred stocks and common stocks) are carried at quoted market prices (fair
value). Other investments are carried at either market value, cost or cost
adjusted for operations of limited partnerships, depending on the nature of the
investment. All fixed maturity and equity securities are considered to be
available for sale; the related unrealized net gains or losses (net of
applicable tax effect) are reflected directly in shareholders' equity.
Although the Company has classified fixed maturity investments as available for
sale, it has the ability to hold its fixed maturity investments to maturity.
Short-term investments are carried at cost which approximates their fair
values. Realized gains and losses on disposals of investments are determined
by specific identification of cost of investments sold and are included in
income.
PROPERTY AND EQUIPMENT: Property and equipment is carried at cost.
Depreciation is computed substantially by the straight-line method.
RESERVES FOR LOSSES AND LOSS EXPENSES: The reserves for losses and loss
expenses 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 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. 29
30
NOTE A - SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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: Accounting Principles Board Opinion No. 25,
ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES,Accounting for Stock Issued to Employees, and related Interpretations are used
in accounting for stock options, stock purchases and equity appreciation rights
which are, from time to time, granted to employees and outside directors.
FEDERAL INCOME TAXES: A consolidated federal income tax return is filed by the
Company and includes all wholly owned subsidiaries.
EARNINGS PER SHARE: Diluted earnings per share of common stock are based on
the average number of shares of Class A and Class B common stock outstanding
during the year, adjusted for the effect, if any, of options outstanding.
Basic earnings per share are presented exclusive of the effect of options
outstanding. See note M.I.
COMPREHENSIVE INCOME: The Company records accumulated other comprehensive
income from unrealized gains and losses on available-for-sale securities as a
separate component of shareholders' equity. Foreign exchange adjustments are
immaterial and the Company has no pension plan.
The enclosed Statement of Changes in Equity Other Than Capital refers to
comprehensive income as Total realized and unrealized income. Items of other
comprehensive income included in this statement are referred to as Change in
unrealized gains (losses) on investments and Foreign exchange adjustment. A
reclassification adjustment to other comprehensive income is made for Gains
realized during period included in net income.
RECLASSIFICATION: Certain prior year balances have been reclassified to
conform to the current year presentation.
3130
32
31
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
---------------------------------------------------------------------------------------------------------------------------------------
1998:
U. S. government obligations $ 72,442 $ 72,012 $ 489 $ (59) $ 430
Mortgage-backed securities 36,295 36,004 311 (20) 291
Obligations of states and political subdivisions 68,319 67,370 956 (7) 949
Corporate securities 91,253 96,808 1,245 (6,800) (5,555)
--------- --------- --------- --------- ---------
Total fixed maturities 268,309 272,194 3,001 (6,886) (3,885)
Equity securities 148,060 95,332 64,452 (11,724) 52,728
Short-term and other 22,448 24,659 444 (2,655) (2,211)
--------- --------- --------- --------- ---------
Total available-for-sale securities $ 438,817 $ 392,185 $ 67,897 $(21,265) 46,632
========= ========= ========= =========
Applicable federal income taxes (16,321)
---------
Net unrealized gains - net of tax $ 30,311
=========
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 $ 451 $ (351) $ 100
Mortgage-backed securities 49,973 49,926 312 (265) 47
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 1,441 (643) 798
Equity securities 147,196 89,344 60,645 (2,793) 57,852
Short-term and other 19,698 19,315 503 (120) 383
Short positions - see note below - - 155 - 155
--------- --------- --------- --------- ---------
Total available-for-sale securities $ 440,722 $ 381,689 $ 62,744 $ (3,556) 59,188
========= ========= ========= =========
Applicable federal income taxes (20,716)
---------
Net unrealized gains - net of tax $ 38,47245,614
=========
Note: The fair value of the Company's short positions at December 31, 1996 was
$744 and is included in accounts payable.
3231
3332
NOTE B - INVESTMENTS (CONTINUED)
Gross realized gains and losses on investments for the years ended December 31
are summarized below:
1998 1997 1996
1995
------------------------------------------------- ------------ ------------
Fixed maturities:
Gains $ 224 $ 317 $ 622
$ 351
Losses (21) (199) (230)
(69)
--------- --------- ------------------- ---------- ----------
Net gains 203 118 392 282
Equity securities:
Gains 9,779 20,836 9,204
11,170
Losses (6,855) (2,633) (2,717)
(4,438)
--------- --------- ------------------- ---------- ----------
Net gains 2,924 18,203 6,487 6,732
Short-term and other - net losses (272) (983) (19)
(804)
--------- --------- ------------------- ---------- ----------
TOTAL NET GAINS $ 2,855 $ 17,338 $ 6,860
$ 6,210
========= ========= =================== ========== ==========
The fair values and the cost or amortized cost of fixed maturity investments at
December 31, 1997,1998, 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 $ -1,434 $ 77,25642,121 $ 77,25643,555 $ -1,424 $ 77,12541,922 $ 77,12543,346
Excess of one year to five years 10,682 116,125 126,807 10,626 115,049 125,6756,606 140,843 147,449 6,509 145,528 152,037
Excess of five years to ten years 12,220 38,391 50,611 12,150 37,123 49,2738,562 42,182 50,744 8,515 41,909 50,424
Excess of ten years 18,032 2,750 20,782 17,772 2,750 20,52219,693 6,199 25,892 19,556 6,240 25,796
--------- --------- --------- --------- --------- ---------
Total maturities 40,934 234,522 275,456 40,548 232,047 272,59536,295 231,345 267,640 36,004 235,599 271,603
Redeemable preferred stock - 653 653669 669 - 591 591
--------- --------- --------- --------- --------- ---------
$ 40,93436,295 $ 235,175232,014 $ 276,109268,309 $ 40,54836,004 $ 232,638236,190 $ 273,186272,194
========= ========= ========= ========= ========= =========
Major categories of investment income for the years ended December 31 are
summarized as follows:
1998 1997 1996
1995
---------- ---------- ---------------------- ------------ ------------
Fixed maturities $ 15,901 $ 16,193 $ 16,769
$ 14,937
Equity securities 2,210 1,729 2,197 2,111
Money market funds 1,517 1,208 1,123 1,263
Short-term and other 611 532 653 2,973
--------- --------- ---------
20,239 19,662 20,742
21,284
Investment expenses (1,179) (1,220) (1,162) (1,123)
--------- --------- ---------
NET INVESTMENT INCOME $ 19,060 $ 18,442 $ 19,580 $ 20,161
========= ========= =========
Approximately 38%29% of purchases and 53%45% of sales of investments during the three
years ended December 31, 19971998 were made through securities broker-dealers in
which certain directors of the Company were officers, directors or owners.
Fees earned by affiliated investment advisors were $590, $604 and $932 in 1998,
1997 and $965 in 1997, 1996, and 1995, respectively. 33
34
NOTE B - INVESTMENTS (CONTINUED)
At December 31, 1997, the Company had investments in common stock and bonds of
UICI, a publicly traded insurance and holding company with current market
capitalization of approximately $1.3 billion. The market value of the Company's
investments in 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 $2,161 and $2,237 at December 31, 1997 and 1996,
respectively, representing limited partnership interests in ventures in which
Amli serves as general partner. A director of the Company is also a director
and officer of Amli. 32
33
NOTE C - LOSS AND LOSS EXPENSE RESERVES
Activity in the reserves for losses and loss expenses is summarized as follows.
All amounts are shown net of reinsurance recoverable.
Year Ended December 31,
1998 1997 1996
1995
----------- ----------- ----------------------- ------------ ------------
Reserves at the beginning of the year $ 151,493 $ 154,537 $ 161,458 $ 175,554
Provision for losses and loss expenses:
Claims occurring during the current year 53,278 47,692 45,999 44,238
Claims occurring during prior years (10,741) (7,838) (12,245) (5,484)
--------- --------- ---------
Total incurred 42,537 39,854 33,754 38,754
Loss and loss expense payments:
Continuing operations:
Claims occurring during the current year 24,947 15,946 12,891 7,760
Claims occurring during prior years 25,088 26,934 27,825 33,819
Discontinued operations - - 11,186
--------- --------- ---------
Total paid 50,035 42,880 40,716 52,765
Change in unpaid portion of uncollectible
amounts due from reinsurers (44) (18) 41 (85)
--------- --------- ---------
Reserves at the end of the year 143,951 151,493 154,537 161,458
Reinsurance recoverable on reserves at the end of the year 50,481 45,702 42,402 50,031
--------- --------- ---------
Reserves, gross of reinsurance
recoverables, at the end of the year $ 194,432 $ 197,195 $ 196,939 $ 211,489
========= ========= =========
The reserves for losses and loss expenses, net of related reinsurance
recoverables, at December 31, 1997, 1996 1995 and 19941995 were decreased by $10,741,
$7,838 $12,245 and $5,484,$12,245, 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 19971998 and 1996,1997, on reserves outstanding at December 31, 1997 and 1996
included $1,070 and 1995
included $8, and $2,395, 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 amounts are
reserves for incurred but not reported environmental losses of $5,000 at both
December 31, 19971998 and 1996.1997. 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, 1997.
34
35
NOTE C - LOSS AND LOSS EXPENSE RESERVES (CONTINUED)1998.
The Company participates in mandatory residual market pools in various states.
The Company records the results from participation in these pools as reported
and records an additional provision in the financial statements for operating
periods unreported by the pools.
Loss reserves on certain permanent total disability workers' compensation
reserves have been discounted to present value at pre-tax rates not exceeding
3.5%. At December 31, 19971998 and 1996,1997, loss reserves have been reduced by
approximately $5,431$5,272 and $4,694,$5,431, 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 $1,700 and $1,725 at both December 31, 1998 and 1997,
respectively.
33
34
NOTE D - EMPLOYEE BENEFIT PLANS
The Company maintains a defined contribution 401(k) Employee Savings and Profit
Sharing Plan ("the Plan") which covers all employees who have completed one
year of service. The Company's contributions to the Plan for 1998, 1997 and
1996.1996 were $615, $585 and $499, respectively.
NOTE DE - 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:
1998 1997
1996
----------- ----------------------- ------------
DEFERRED TAX ASSETS:
Discounts of loss and loss expense reserves $ 6,2105,875 $ 7,0316,210
Deferred compensation 2,326 3,517 3,347
Unearned premiums 1,503 1,292
734
Other 1,108 1,107 1,076
--------- ---------
Total deferred tax assets 10,812 12,126 12,188
--------- ---------
DEFERRED TAX LIABILITIES:
Unrealized gain on investments 16,878 25,119 21,273
Limited partnerships 1,967 1,324 -
Deferred acquisition costs 1,177 884 499
Salvage and subrogation 604595 604
Other 380 444 546
--------- ---------
Total deferred tax liabilities 20,997 28,375 22,922
--------- ---------
NET DEFERRED LIABILITIES $ (16,249)(10,185) $ (10,734)(16,249)
========= =========
Federal income tax expense consists of the following:
1998 1997 1996 1995
---------- ---------- ----------
Taxes (credits) on income from continuing operations:
Current $ 4,636 $ 9,507 $ 10,116
$ 10,343
Deferred 2,176 1,670 (259) (904)
--------- --------- ---------
$ 6,812 $ 11,177 $ 9,857
$ 9,439
========= ========= =========
TaxesDeferred tax on income from discontinued operations:
Current:
Incomeoperations $ - $ - $ 139
Gain on sale - - 3,850
Deferred - 193 326
--------- --------- ---------
$ - $ 193 $ 4,315
========= ========= =========
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:
1998 1997 1996
1995
----------- ----------- --------------------- ---------- ----------
Statutory federal income rate applied to
pretax income from continuing operations $ 8,297 $ 12,468 $ 10,917 $ 10,512
Tax effect of (deduction):
Tax-exempt investment income (1,374) (1,219) (1,079)
(905)
Other (111) (72) 19 (168)
--------- --------- ---------
Federal income tax expense $ 6,812 $ 11,177 $ 9,857 $ 9,439
========= ========= =========
34
35
NOTE E - INCOME TAXES (CONTINUED)
The components of the provision for deferred federal income taxes (credits) are
as follows:
1998 1997 1996 1995
----------- ----------- -----------
Discounts of loss and loss expense reserves $ 335 $ 821 $ 230
$ 498
Limited partnerships 643 1,324 - -
Deferred compensation 1,191 (170) (1,088)
(896)
Other 7 (305) 792 (180)
--------- --------- ---------
PROVISION FOR DEFERRED FEDERAL INCOME TAX $ 2,176 $ 1,670 $ (66) $ (578)
========= ========= =========
Cash flows related to federal income taxes paid, net of refunds received, for
1998, 1997 and 1996 were $6,533, $7,800 and 1995 were $7,800, $11,805, and $13,600, respectively, including
Section 847 special tax deposits. Future tax benefits on approximately $6,210$5,875
of deferred tax assets at December 31, 19971998 arising from loss reserve
discounting is assured based on Section 847 of the Internal Revenue Code.
Note ENOTE F - 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. Protective also serves as an assuming
reinsurer under retrocessions from certain other reinsurers. These
retrocessions include individual risks as well as catastrophe pools.
Accordingly, the occurrence of a major catastrophic event could have a
significant impact on the Company's financial statements. In addition, the
insurance subsidiaries participate in certain involuntary reinsurance pools
which require insurance companies to provide coverages on assigned risks. The
assigned risk pools allocate participation to all insurers based upon each
insurer's portion of premium writings on a state or national level.
Net premiums earned for 1998, 1997 1996 and 19951996 have been reduced by reinsurance
ceded premiums of approximately $12,337, $8,091 $11,698 and $16,340,$11,698, respectively. Net
losses and loss expenses incurred for 1998, 1997 1996 and 19951996 have been reduced by
reinsurance recoveries of approximately $10,255, $11,155 $991 and $26,554,$991,
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 1998, 1997 1996 and 19951996 include
approximately $8,338, $10,609 $10,220 and $12,322,$10,220, respectively, relating to the
assumption of reinsurance from other companies and from reinsurance pools.
Components of reinsurance recoverable at December 31 are as follows:
1998 1997 1996
----------- -----------
Paid losses and loss expenses $ 1,1601,537 $ 1,0851,160
Unpaid losses and loss expenses 50,481 45,702 42,402
Unearned premiums 735 414 342
--------- ---------
$ 47,27652,753 $ 43,82947,276
========= =========
36
37
NOTE FG - OTHER OPERATING EXPENSES
Details of other operating expenses are as follows:
Years Ended December 31
1998 1997 1996 1995
----------- ----------- -----------
Amortization of deferred policy acquisition costs $ 9,108 $ 6,486 $ 6,088
$ 3,792
Other underwriting expenses 11,263 8,314 5,161 5,673
Expense allowances from reinsurers (3,163) (744) (943) (1,646)
--------- --------- ---------
TOTAL UNDERWRITING EXPENSES 17,208 14,056 10,306 7,819
Operating expenses of non-insurance companies 9,131 9,577 11,236 9,722
--------- --------- ---------
TOTAL OTHER OPERATING EXPENSES $ 26,339 $ 23,633 $ 21,542 $ 17,541
========= ========= =========
35
36
NOTE GH - 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, 1995 2,446,0291996 2,476,029 $ 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 $ 128 11,292,445 602 41,361
Discounted stock options issued - - - - 135
Discounted stock options exercised - - 67,475 4 36
Treasury shares purchased (8,900) (1) (57,424) (3) (204)
--------- --------- ---------- --------- ---------
Balance at December 31, 1998 2,388,454 $ 602127 11,302,496 $ 41,361603 $ 41,328
========= ========= ========== ========== ========== ========== =================== =========
The Company's Class A and Class B common stock has a stated value of
approximately $.05. During 1997 1996 and 1995,1996, purchases of treasury stock included
96,214 49,000
and 41,19849,000 shares, respectively, from officers and directors for $1,850
$821
and $644,$821, respectively, at prices based upon the midpoint between the bid and
ask prices on the date of purchase.
Shareholders' equity at December 31, 19971998 includes $273,094$277,355 representing GAAP
shareholder's equity of insurance subsidiaries, of which $38,437$39,055 may be
transferred by dividend or loan to the parent company without approval by, or
notification to, regulatory authorities. An additional $169,879$170,724 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 $18,048, $24,975 and $20,249 for 1998, 1997
and $22,849 for 1997, 1996,
and 1995, respectively. Consolidated statutory shareholder's equity for these
subsidiaries was $248,154$256,290 and $222,720$248,154 at December 31, 1998 and 1997,
respectively.
NOTE I - EARNINGS PER SHARE
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:
1998 1997 1996
----------- ----------- -----------
Average shares outstanding
for basic earnings per share 13,719,728 13,776,881 14,183,922
Dilutive effect of options 146,448 192,371 190,702
---------- ---------- ----------
Average shares outstanding
for diluted earnings per share 13,866,176 13,969,252 14,374,624
========== ========== ==========
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 1996,
respectively.
Note Hwere outstanding at December 31, 1998 and 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.
36
37
NOTE J - Employee Benefit PlansREPORTABLE SEGMENTS
The Company maintainsand its consolidated subsidiaries market and underwrite casualty
insurance in three major specialty areas (reportable segments): (1) fleet
trucking, (2) non-standard private passenger automobile and (3) the assumption
of reinsurance. The fleet trucking segment provides multiple line insurance
coverage to large trucking fleets which generally retain substantial amounts of
self-insurance and to medium-sized trucking fleets on a defined contribution 401(k) Employee Savingsfirst dollar or small
deductible basis. The non-standard private passenger automobile segment
provides motor vehicle liability and Profit
Sharing Plan ("the Plan") which covers all employees who have completed one year
of service.physical damage coverage to individuals.
The reinsurance assumed segment accepts retrocessions from selected reinsurance
companies, principally reinsuring against catastrophes.
The Company's contributionsreportable segments are business units that operate in the
property/casualty insurance industry and each offers products to different
classes of customers. The reportable segments are managed separately due to
the Plandifferences in underwriting criteria used to market products to each class
of customer and the methods of distribution of the products each reportable
segment provides. Segment information shown in the table below as "all other"
includes products marketed and underwritten by the Company in other specialty
areas and the runoff of discontinued product lines.
The Company evaluates performance and allocates resources based on gain or loss
from insurance underwriting operations before income taxes. Underwriting gain
or loss does not include net investment income nor does it include realized
gains or losses on the Company's investment portfolio. All investment-related
revenues are managed at the corporate level. Underwriting gain or loss for 1997, 1996the
fleet trucking segment includes revenue and 1995
were $585, $499expense from the Company's agency
operations since the agency operations serve solely as a direct marketing
facility for this segment. Underwriting gain or loss also includes fee income
generated by each segment in the course of its underwriting operations.
Management does not identify or allocate assets to reportable segments when
evaluating segment performance and $465, respectively.depreciation expense is not material for any
of the reportable segments. The accounting policies of each reportable segment
are the same as those described in the summary of significant accounting
policies.
The following table provides certain profit and loss information for each
reportable segment for the years ended December 31:
Non-standard
Private Voluntary
Fleet Passenger Reinsurance
Trucking Automobile Assumed All Other Totals
----------- ----------- ----------- ----------- -----------
1998:
Direct and assumed premium written $ 37,714 $ 33,919 $ 6,994 $ 5,974 $ 84,601
Net premium earned and fee income 26,599 30,738 8,457 4,180 69,974
Underwriting gain (loss) 6,325 (1,301) 2,839 242 8,105
1997:
Direct and assumed premium written 38,865 23,625 11,307 3,942 77,739
Net premium earned and fee income 31,609 17,832 10,035 3,145 62,621
Underwriting gain (loss) 3,947 (164) 1,444 54 5,281
1996:
Direct and assumed premium written 46,968 13,721 9,158 3,376 73,223
Net premium earned and fee income 36,440 9,679 9,430 3,826 59,375
Underwriting gain (loss) 7,957 538 3,642 (176) 11,961
37
38
NOTE IJ - COMPREHENSIVE INCOME
In June 1997,REPORTABLE SEGMENTS (CONTINUED)
The following tables are reconciliations of reportable segment revenues and
profits to the Financial Accounting Standards Board issued Statement No. 130,
REPORTING COMPREHENSIVE INCOME. Statement No. 130 requires companies to report,
as an addition to netCompany's consolidated revenue and income certain unrealized potentialfrom continuing
operations before federal 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.taxes, respectively.
1998 1997 1996
----------- ----------- -----------
REVENUE:
Net premium earned and fee income $ 69,974 $ 62,621 $ 59,375
Net investment income 19,060 18,442 19,580
Realized net gains on investments 2,855 17,338 6,860
Other income 694 709 672
--------- --------- ---------
Total consolidated revenue $ 92,583 $ 99,110 $ 86,487
========= ========= =========
PROFIT:
Underwriting gain $ 8,105 $ 5,281 $ 11,961
Net investment income 19,060 18,442 19,580
Realized net gains on investments 2,855 17,338 6,860
Corporate expenses (6,313) (5,438) (7,210)
--------- --------- ---------
Income from continuing operations
before federal income taxes $ 23,707 $ 35,623 $ 31,191
========= ========= =========
The Company, has electedthrough its subsidiaries, is licensed to adoptdo business in all 50
states of the provisionsUnited States, all Canadian provinces and Bermuda. Canadian and
Bermuda operations are currently not significant.
One customer of Statement No. 130 asthe fleet trucking segment represents approximately $18,436 of
December 31,
1997.
The Company records accumulated other comprehensive income from unrealized gainsthe Company's 1998 consolidated revenue. This same customer provided revenues
to the fleet trucking segment of approximately $19,278 and losses on available-for-sale securities as a separate component of
shareholders' equity. Foreign exchange adjustments are immaterial$19,152 in 1997 and
the
Company has no pension plan.
The enclosed STATEMENT OF CHANGES IN EQUITY OTHER THAN CAPITAL refers to
comprehensive income as TOTAL REALIZED AND UNREALIZED INCOME. Items of other
comprehensive income included in this statement are referred to as CHANGE IN
UNREALIZED GAINS (LOSSES) ON INVESTMENTS and FOREIGN EXCHANGE ADJUSTMENT. A
reclassification adjustment to other comprehensive income is made for GAINS
REALIZED DURING PERIOD INCLUDED IN NET INCOME.1996, respectively.
NOTE JK - STOCK PURCHASE AND OPTION PLANS
In accordance with the terms of the 1981 Stock Purchase Plan (1981 Plan), the
Company is obligated to repurchase shares issued under the 1981 Plan, at a
price equal to 90% of the book value of the shares at the end of the quarter
immediately preceding the date of repurchase. No shares were repurchased
during 1998, 1997 1996 or 1995.1996. At December 31, 19971998 there were 156,854136,229 shares
(Class A) and 398,641375,766 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.
The Company maintains stock option plans and has reserved an aggregate of
1,050,000 shares of Class B common stock for the granting of stock options to
employees and directors. Discounted 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 JK - 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:
1998 1997 1996 1995
------------------------ ------------------------ ------------------------
Weighted Weighted Weighted
Average Average Average
Excercise Excercise ExcerciseExercise Exercise Exercise
Options Price Options Price Options Price
---------- ---------- ---------- ---------- ---------- ----------
Outstanding at beginning of year 693,221 $ 18.625 196,329 $ .569 168,251 $ .510
293,869 $ 1.863
Granted:
At exercise prices equaling market - - 497,000 25.750 - - - -
At exercise prices below market 6,228 1.000 4,206 .679 29,278 .903
29,782 .893
Exercised 67,475 .590 4,314 .333 1,200 .333 151,200 3.202
Forfeited - - - - 4,200 1.000
--------- --------- ---------
Outstanding at end of year 631,974 20.376 693,221 18.625 196,329 .569 168,251 .510
========= ========= =========
Exercisable at end of year 294,413 14.739 192,015 .575 192,051 .574 163,469 .515
Weighted average fair value
of options granted during the year:
At exercise prices equaling market - - 497,000 8.950 - - - -
At exercise prices below market 6,228 21.682 4,206 18.561 29,278 17.617 29,782 15.429
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
AcountingAccounting Standards Board Statement No. 123, Accounting for Stock-Based
Compensation, the
effect on1998 net income and earnings per share would have been reduced by
$964 and $.07, respectively, related to the issuance of 1997 market value
options. The affect on 1997 earnings resulting from the issuance of these
options during 1997 would not behave been material.
Exercise prices for options outstanding as of December 31, 19971998 were $.33,
$1.00 or $25.75. The weighted-average remaining contractual life of options
exercisable at either $.33 or $1.00 is 4.64.4 years with a weighted-average
exercise price of $.577.$.59. The remaining contractual life of options exercisable
at $25.75 is 109 years. The compensation cost that has been charged against
income for all stock-based compensation plans was $.1 million, $.5$.1 million and
$.5 million for 1998, 1997 1996 and 1995,1996, respectively.
NOTE K - 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 the insurance underwriting segment and other non-affiliated
insurance companies and provides other insurance-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. The 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.
39
40
NOTE K - 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
----------- ----------- -----------
REVENUE:
Insurance underwriting segment:
Net premiums earned $ 61,675 $ 58,743 $ 58,793
Net investment income 17,245 17,505 18,418
Net realized gains 16,530 6,112 5,646
Other income 946 632 448
--------- --------- ---------
REVENUE FROM INSURANCE UNDERWRITING SEGMENT 96,396 82,992 83,305
Insurance brokerage/agency segment:
Commissions, service fees and other income 7,164 7,524 9,354
Net investment income 6,198 4,077 37,743
Net realized gains 808 748 564
--------- --------- ---------
REVENUE FROM INSURANCE BROKERAGE/AGENCY SEGMENT 14,170 12,349 47,661
Eliminations:
Intersegment commission (6,456) (6,852) (8,638)
Intersegment dividends (5,000) (2,002) (36,000)
--------- --------- ---------
$ 99,110 $ 86,487 $ 86,328
========= ========= =========
INCOME (LOSS) FROM CONTINUING OPERATIONS
BEFORE FEDERAL INCOME TAXES:
Insurance underwriting segment $ 36,030 $ 32,080 $ 28,095
Insurance brokerage/agency segment (407) (889) 1,938
--------- --------- ---------
$ 35,623 $ 31,191 $ 30,033
========= ========= =========
The brokerage/agency segment received essentially all of its commission income
from the insurance underwriting segment in 1997, 1996 and 1995. Intersegment
commission rates are generally comparable to the average commission rates paid
by unaffiliated insurance companies. The insurance underwriting segment
received approximately 59% of its direct premium revenue by providing insurance
coverage to customers of the brokerage/agency segment (74% and 86%,
respectively, in 1996 and 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 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 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:
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
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 and 42% and 47%, respectively, in 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
-----------------------------------
IDENTIFIABLE ASSETS
Insurance underwriting segment $ 502,560 $ 464,547 $ 449,679
Insurance brokerage/agency segment 62,979 71,624 73,995
Eliminations (8,524) (9,711) (11,449)
--------- --------- ---------
$ 557,015 $ 526,460 $ 512,225
========= ========= =========
NOTE L - DISCONTINUED OPERATIONS
On November 9, 1996, 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 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.
41
42
NOTE N - QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
Quarterly results of operations are as follows:
Results by Quarter
--------------------------------------------------------------------------------------------------------------------------------------------------------------------------
1998 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 $13,336$ 16,985 $ 18,855 $ 17,293 $ 15,729 $ 13,322 $ 14,987 $ 16,633 $ 16,733
Net investment income 4,623 4,612 4,754 5,071 4,611 4,664 4,534 4,633
4,986 4,877 4,832 4,885
Realized net gains (losses) on investments 2,339 2,285 917 (2,686) 5,444 3,887 4,493 3,514 579 3,105 1,775 1,401
Losses and loss expenses incurred 10,722 10,810 10,521 10,484 8,863 9,486 10,670 10,835
9,761 10,224 7,418 6,351
Income from continuing operationsNet income 4,716 5,621 4,865 1,693 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 operationsNet income $ .34 $ .41 $ .35 $ .12 $ .47 $ .45 $ .45 $ .45 $ .39 $ .29 $ .44 $ .39 $ .37
Discontinued operations - - - - .02 - - -
Net income .47 .45 .45 .39 .31 .44 .39 .37
4239
43
Item40
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
No response to this item is required.
PART III
ItemITEM 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 5758 Chairman, President and CEO 1983 (1)
G. Patrick Corydon 4950 Vice President and Treasurer 1979
Joseph J. DeVito 4647 Vice President 1986
James W. Good 5455 Vice President 1980
James E. Kirschner 5253 Vice President and Secretary 1977 (2)
(1) Mr. Miller was elected Chairman and CEO of the Company in 1997.
(2) Mr. Kirschner was elected Secretary of the Company in 1997.
(2) Mr. Kirschner was elected Secretary1985.
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.
40
41
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 Companyregistrant and its subsidiaries (including the
Report of Independent Auditors) are submitted 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.
43
44
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, 1997 and 1996
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 1995
Consolidated Statements of Cash Flows -
Years ended December 31, 1997, 1996 and 1995
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 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.
44
45Item 8 of this
report.
Consolidated Balance Sheets - December 31, 1998 and 1997
Consolidated Statements of Income and Retained Earnings -
Years ended December 31, 1998, 1997 and 1996
Consolidated Statements of Changes in Equity Other Than Capital -
Years ended December 31, 1998, 1997 and 1996
Consolidated Statements of Cash Flows -
Years ended December 31, 1998, 1997 and 1996
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 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.
41
42
3. Listing of Exhibits:
Number & Caption
fromfromm 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 restated
(Incorporated as an exhibit by reference to
Exhibit 3(ii) to the Company's Quarterly Report
on Form 10-Q for the quarter ended June 30, 1997)May 5, 1998
(10) EXHIBIT 10(a)--
(Material Contracts) 1981 Employee Stock Purchase Plan (Incorporated
as an exhibit by reference to Exhibit A to the
Company's definitive Proxy Statement for its Annual
Meeting held May 5, 1981)
EXHIBIT 10(b)--
Baldwin & Lyons, Inc. Employee Discounted Stock
Option Plan (Incorporated as an exhibit by referencerefer
ence to Appendix A to the Company's definitive Proxy
Statement for its Annual Meeting held May 2, 1989)
EXHIBIT 10(c)--
Baldwin & Lyons, Inc. Deferred Directors Fee
Option Plan (Incorporated as an exhibit by
reference to Exhibit 10(f) to the Company's
Annual Report on Form 10-K for the year ended
December 31, 1989)
EXHIBIT 10(d)--
Baldwin & Lyons, Inc. Amended Employee Discounted
Stock Option Plan (Incorporated as an exhibit by
reference to Exhibit 10(f) to the Company's Annual
Report on Form 10-K for the year ended
December 31, 1989)
EXHIBIT 10(d)--
Baldwin & Lyons, Inc. Amended Employee Discounted
Stock Option Plan (Incorporated as an exhibit by
reference to Exhibit 10(f) to the Company's
Annual Report on Form 10-K for the year ended
December 31, 1992)
45
46
1992)
42
43
Number & Caption
from Exhibit Table of
Item 601 of Regulation
S-K Exhibit Number and Description
- ------------------------ --------------------------------------------------
---------------------- ------------------------------------------
EXHIBIT 10(e)--
Stock Purchase Agreement by and among
General Casualty Company of Wisconsin,
Baldwin & Lyons, Inc. and Protective
Insurance Company as of August 8, 19961995
(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, 1996)1995)
EXHIBIT 10(f)--
Baldwin & Lyons, Inc. Restated Employee Discounted
Stock Option PlanPlan. (Incorporated as an exhibit by
reference to Exhibit 10(f) to the Company's
Annual Report on Form 10-K for the year ended
December 31, 1997)
(11) EXHIBIT 11--
(Statement regarding Computation of Per Share Earnings
computation of per
share earnings)
(21) EXHIBIT 11--
(Statement regarding Computation21--
(Subsidiaries of Per Share Earnings
computationthe Subsidiaries of per
share earnings)
(21)Baldwin & Lyons, Inc.
registrant)
(23) EXHIBIT 21--
(Subsidiaries23--
(Consents of experts Consent of Ernst & Young LLP
and counsel)
(24) EXHIBIT 24--
(Powers of Attorney) Powers of Attorney for certain Officers and
Directors
(b) No reports on Form 8-K were filed by the SubsidiariesCompany in the fourth quarter
of Baldwin & Lyons, Inc.
registrant)
(23) EXHIBIT 23--
(Consents1998.
(c) Exhibits. The response to this portion of experts ConsentItem 14 is submitted as a
separate section of Ernst & Young LLP
and counsel)
(24) EXHIBIT 24--
(Powersthis report.
(d) Financial Statement Schedules. The response to this portion of Attorney) PowersItem
14 is submitted on pages 44 through 48 of Attorney for certain Officers and
Directors
46
47
(b) No reports on Form 8-K were filed by the Company in the fourth quarter of
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 48 through 52 of this report.
47
48
this report.
43
44
SCHEDULE I -- SUMMARY OF INVESTMENTS-
OTHER THAN INVESTMENTS IN RELATED PARTIES
DecemberFORM 10-K - YEAR ENDED DECEMBER 31, 19971998
BALDWIN & LYONS, INC. & LYONS, INC. & SUBSIDIARIES
- ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Column A Column B Column C Column D
- ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------
(DOLLARS IN THOUSANDS)
Amount At
Which Shown
Fair In The Balance
Type of Investment Cost Value Sheet (A)
- ---------------------------------- ----------- ----------------------------------------- -------------- ------------- -------------
Fixed Maturities:
Bonds:
United States government and
government agencies and
authorities $100,279 $100,679 $100,679$72,012 $72,442 $72,442
Mortgage backed securities 40,548 40,934 40,93436,004 36,295 36,295
States, municipalities and
political subdivisions 69,020 69,663 69,66367,370 68,319 68,319
Public utilities 4,897 5,000 5,0007,130 7,504 7,504
All other corporate bonds 57,851 59,180 59,18089,088 83,080 83,080
Redeemable preferred stock 591 653 653590 669 669
--------- --------- ---------
Total fixed maturities 273,186 276,109 276,109272,194 268,309 268,309
Equity Securities:
Common Stocks:
Banks, trust and insurance
companies 27,504 73,903 73,903Companies 27,039 57,685 57,685
Industrial, miscellaneous
and all other 57,705 78,135 78,13562,236 84,418 84,418
Nonredeemable preferred stocks 6,496 6,576 6,5766,057 5,957 5,957
--------- --------- ---------
Total equity securities 91,705 158,614 158,61495,332 148,060 148,060
Short-term and Other:
Certificates of deposit 2,202 2,202 2,202
All other short-term (B) 22,703 22,703 22,7032,033 2,033 2,033
Commercial paper 6,970 6,970 6,970
Other long-term investments 15,356 15,700 15,70015,656 13,445 13,445
--------- --------- ---------
Total short-term and other 40,261 40,605 40,60524,659 22,448 22,448
--------- --------- ---------
Total investments $405,152 $475,328 $475,328$392,185 $438,817 $438,817
========= ========= =========
(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.
4844
49
SCHEDULE III --45
SCHEDULE III - SUPPLEMENTARY INSURANCE INFORMATION
FORM 10-K - YEAR ENDED DECEMBER 31, 1998
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) (A) (A) (B)
Property/Casualty
Insurance
1998 $ 3,245 $194,432 $22,208 --- $68,862 $19,060 $42,537 $9,108 $8,100 $71,943
1997 $2,522 $197,195 $18,8062,522 197,19 518,806 --- $61,675 $18,442 $39,854 $6,486 $7,570 $69,57561,675 18,442 39,854 6,486 7,570 69,575
1996 1,425 196,939 10,835196,93 910,835 --- 58,743 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
(A) Allocations of certain expenses have been made to investment income,
settlement expenses and other operating expenses and are based on a number of
assumptionassumptions and estimates. Results among these catagoriescategories 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.
4945
50
46
SCHEDULE IV -- REINSURANCE
FORM 10-K - YEAR ENDED DECEMBER 31, 1998
BALDWIN & LYONS, INC. & SUBSIDIARIES
(DOLLARS IN THOUSANDS)
- -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Column A Column B Column C Column D Column E Column F
- -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
% of
Ceded Assumed Amount
GrossDirect to Other from Other Net Assumed to
AmountPremiums Companies Companies Amount Net
---------- ---------- ---------- ---------- --------------------- ----------- ----------- ----------- -----------
Premiums Earned -
Property/casualty insurance:
Years Ended December 31:
1998 $ 72,860 $ 12,337 $ 8,338 $ 68,862 12.1
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
5046
51
47
SCHEDULE V--VALUATION AND QUALIFYING ACCOUNTS
FORM 10-K - YEAR ENDED DECEMBER 31, 1998
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:
1998 $396 $1,312 $0 $765 (A) $943
1997 $346 $413 $0 $363346 413 0 363 (A) $396396
1996 300 192 0 146 (A) 346
1995 300 (1) 0 (1)(A) 300
(A) Bad debts written off during the year net of recoveries of previously
written off amounts, if any.
5147
52
48
SCHEDULE VI--SUPPLEMENTAL INFORMATION
CONCERNING PROPERTY/CASUALTY INSURANCE OPERATIONS
FORM 10-K - YEAR ENDED DECEMBER 31, 1998
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 Claim
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:
1998 $3,245 $194,432 $5,272 $22,208 $68,862 $19,060 $53,278 ($10,741) $9,108 $50,035 $71,943
1997 $2,522 $197,195 $5,431 $18,806 $61,675 $18,442 $47,692 ($7,838) $6,486 $42,880 $69,5752,522 197,195 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 61,431
1995 763 211,489 8,096 8,262 58,793 18,418 44,238 (5,484) 3,792 52,765 63,065
(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.
5248
5349
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, 199826, 1999 By /s/ Gary W. Miller (*)
------------------------------------
Gary W. Miller, Chairman
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, 199826, 1999 By /s/ Gary W. Miller (*)
------------------------------------
Gary W. Miller, Chairman
and CEO; Director
March 25, 199826, 1999 By /s/ G. Patrick Corydon
------------------------------------
G. Patrick Corydon, Vice President -
Finance and Treasurer (Principal
Financial Officer and Principal
Accounting Officer)
March 25, 199826, 1999 By /s/ Joseph DeVito (*)
------------------------------------
Joseph DeVito, Director and
Vice President
March 25, 199826, 1999 By /s/ James Good
------------------------------------
James Good, Director and
Vice President
March 25, 199826, 1999 By /s/ Stuart D. Bilton (*)
------------------------------------
Stuart D. Bilton, Director
March 25, 199826, 1999 By /s/ Otto N. Frenzel III (*)
------------------------------------
Otto N. Frenzel III, Director
5349
5450
SIGNATURES (CONTINUED)
March 25, 1998 By /s/ Gregory T. Mutz (*)
------------------------------------
Gregory T. Mutz, Director
March 25, 199826, 1999 By /s/ John M. O'Mara (*)
------------------------------------
John M. O'Mara, Director
March 25, 199826, 1999 By /s/ Thomas H. Patrick (*)
------------------------------------
Thomas H. Patrick, Director
March 25, 199826, 1999 By /s/ Nathan Shapiro (*)
------------------------------------
Nathan Shapiro, Director
March 25, 199826, 1999 By /s/ Norton Shapiro (*)
------------------------------------
Norton Shapiro, Director
March 25, 199826, 1999 By /s/ L. Leslie Waters (*)
------------------------------------
L. Leslie Waters, Director
March 25, 199826, 1999 By /s/ John D. Weil (*)
------------------------------------
John D. Weil, Director
March 25, 199826, 1999 By /s/ Robert Shapiro (*)
------------------------------------
Robert Shapiro, Director
March 25, 199826, 1999 By /s/ John Pigott (*)
------------------------------------
John Pigott, Director
(*) By Gary W. Miller,James E. Kirschner, Attorney-in-Fact
5450
5551
ANNUAL REPORT ON FORM 10-K
ITEM 14(c)--CERTAIN EXHIBITS
YEAR ENDED DECEMBER 31, 19971998
BALDWIN & LYONS, INC.
INDIANAPOLIS, INDIANA
5551
56
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
- ----------------------------------------- --------------------------
52
BALDWIN & LYONS, INC.
Form 10-K for the Fiscal Year
Ended December 31, 1998
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 restated (Incorporated as an
exhibit by reference to Exhibit
3(ii) to the Company's Quarterly
Report on Form 10-Q for the quarterly
ended June 30, 1997) N/A
EXHIBIT 3(ii)--
By-Laws of Baldwin & Lyons, Inc.,
as restated May 5, 1998 p. 54
EXHIBIT 10(a)--
1981 Employees Stock Purchase Plan
(Incorporated as an exhibit by
reference to Exhibit A to the
Company's definitive Proxy
Statement for its Annual Meeting
held May 5, 1981) N/A
EXHIBIT 10(b)--
Baldwin & Lyons, Inc. Employee
Discounted Stock Option Plan
(Incorporated as an exhibit by reference
to Appendix A to the Company's definitive
Proxy Statement for its Annual Meeting
held May 2, 1989) N/A
EXHIBIT 10(c)--
Baldwin & Lyons, Inc. Deferred Directors
Fee Option Plan (Incorporated as an
exhibit by reference to Exhibit 10(f) to the
Company's Annual Report on Form 10-K
for the year ended December 31, 1989) N/A
52
53
INDEX TO EXHIBITS (CONTINUED)
Begins on sequential page
Exhibit No. number of Form 10-K
- --------------------------------- --------------------------
EXHIBIT 10(d)--
Baldwin & Lyons, Inc. Amended Employee
Discounted Stock Option Plan (Incorporated
as an exhibit by reference to Exhibit 10(f)
to the Company's Annual Report on Form 10-K
for the year ended December 31, 1989) N/A
EXHIBIT 10(e)--
Stock Purchase Agreement by and among
General Casualty Company of Wisconsin,
Baldwin & Lyons, Inc. and Protective Insurance
Company as of August 8, 1995 (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) N/A
EXHIBIT 10(f)--
Baldwin & Lyons, Inc. Restated Employee
Discounted Stock Option Plan (Incorporated
as an exhibit by reference to Exhibit 10(f) to
the Company's Annual Report on Form 10-K
for the year ended December 31, 1997) N/A
EXHIBIT 11--
Computation of Per Share Earnings p. 60
EXHIBIT 21--
Subsidiaries of Baldwin & Lyons, Inc. p. 61
EXHIBIT 23--
Consent of Ernst & Young LLP p. 62
EXHIBIT 24--
Powers of Attorney for certain
Officers and Directors p. 63
EXHIBIT 27--
Financial Data Schedule File herewith electronically
53
EX-3
2
AMENDED BY-LAWS
54
EXHIBIT 3(II)
CODE OF BY-LAWS
OF
BALDWIN & LYONS, INC.
(AS AMENDED 5-5-98)
ARTICLE I
CAPITAL STOCK
SECTION 1. STOCK CERTIFICATES As provided by law, each holder of
shares of the corporation shall be entitled to a stock certificate signed by
the president or vice president and attested by the secretary or an assistant
secretary, certifying the number of shares owned by such shareholder and such
other information as may be required by law. The form of such certificate
shall be prescribed by resolution of the Board of Directors.
SECTION 2. LOST OR DESTROYED CERTIFICATES When the stock
certificate of any shareholder is lost or destroyed, a new stock certificate
may be issued to replace such lost or destroyed certificate. Unless waived by
the Board of Directors, the shareholder shall make an affidavit or affirmation
of the fact that his certificate is lost or destroyed, shall advertise the same
in such manner as the Board of Directors may require, and shall give the
corporation a bond of indemnity in the amount and form which the Board of
Directors may prescribe.
SECTION 3. TRANSFER OF SHARES Shares of the corporation shall be
transferable only on the books of the corporation upon the surrender of the
certificate representing the same, either duly endorsed with signature
guaranteed or accompanied by a separate document containing a written
assignment of such certificate duly executed with signature guaranteed. The
requirement for such guaranteeing may be waived by the president or secretary
of the corporation.
SECTION 4. RECOGNITION OF SHAREHOLDERS The corporation shall be
entitled to recognize the exclusive right of a person registered on its books
as the owner of shares to receive dividends and to vote as such owner,
notwithstanding any equitable or other claim to, or interest in, such shares on
the part of any other person.
ARTICLE II
MEETINGS OF SHAREHOLDERS
SECTION 1. PLACE OF MEETINGS As provided in the Articles of
Incorporation, meetings of the shareholders of the corporation shall be held at
such place, either within or without the State of Indiana, as may be specified
in the respective calls, notice or waivers of notice thereof.
54
55
SECTION 2. ANNUAL MEETINGS The annual meeting of the shareholders
of the corporation shall be held at 10:00 a.m. on the first Tuesday in May of
each year, or on such other date five (5) business days prior to or following
this date as may be designated by the Board of Directors.
SECTION 3. SPECIAL MEETINGS Special meetings of the shareholders
may be called by the President, by the Board of Directors, or by shareholders
who hold not less than one-fourth of all outstanding shares which may be voted
on the business proposed to be transacted thereat.
SECTION 4. NOTICE OF MEETINGS Written notice stating the place,
day and hour of any meeting of shareholders and, in the case of special
meetings or when otherwise required by law, the purpose for which any such
meeting is called, shall be delivered or mailed by the Secretary of the
corporation to each shareholder of record entitled to vote at such meeting, at
such address as appears upon the records of the corporation and at least ten
(10) days before the date of such meeting, on being notified of the place, day
and hour thereof by the officers or persons calling the meeting.
SECTION 5. WAIVER OF NOTICE Notice of any meeting may be waived in
writing by any shareholder if the waiver sets forth in reasonable detail the
time and place of the meeting and the purposes thereof. Attendance at any
meeting, in person or by proxy, if the proxy sets forth in reasonable detail
the purposes of such meeting, shall constitute a waiver of notice of such
meeting.
SECTION 6. VOTING RIGHTS Each holder of shares of the corporation
shall have such voting rights as are specified in The Articles of Incorporation
of the corporation.
SECTION 7. DATE OF DETERMINATION OF VOTING RIGHTS The Board of
Directors may fix a stock record date, not exceeding fifty (50) days prior to
the date appointed for any meeting of shareholders, for the purpose of
determining the shareholders entitled to notice of and to vote at such meeting.
In the absence of action by the Board of Directors to fix a stock record date
as herein provided, such stock record date shall be the fourteenth (14th) day
prior to the date of the meeting.
SECTION 8. VOTING BY PROXY A shareholder entitled to vote at any
meeting of shareholders may vote either in person or by proxy, executed in
writing by the shareholder of a duly authorized attorney-in-fact of such
shareholder. (For purposes of this section, a proxy granted by the telegram by
a shareholder shall be deemed "executed in writing by the shareholder".) No
proxy shall be voted at any meeting of shareholders unless the same shall be
filed with the Secretary of the meeting at the commencement thereof. The
general proxy of a fiduciary shall be given the same effect as the general
proxy of any other shareholder. No proxies shall be valid after eleven (11)
months from the date or execution unless a longer term is expressly provided
therein.
No share shall be voted at any meeting:
(a) on which an installment is due and unpaid; or
(b) which shall have been transferred on the books of
the corporation within ten (10) days next preceding
the date of the meeting; or
(c) which belongs to the corporation.
55
56
SECTION 9. VOTING LISTS The Secretary shall make, at least five
(5) days before each meeting of shareholders, a complete list of the
shareholders entitled to vote at such meeting, arranged in alphabetical order,
with the address of each and the number of shares held by each, which list, for
the period of five (5) days prior to such meeting, shall be kept on file at the
principal office of the corporation and shall be subject to inspection by any
shareholder at any time during usual business hours. Such a list shall also be
produced and kept open at the time and place of the meeting and shall be
subject to inspection by any shareholder during the whole time of the meeting.
SECTION 10. QUORUM The persons owning a majority of the stock of
this corporation shall constitute a quorum at any meeting of shareholders, and
be capable of transacting any business thereof, except when otherwise
especially provided by law or by the Articles of Incorporation of this
corporation; but if, at any meeting of the shareholders, there be less than a
quorum present, a majority in interest of the shareholders present in person or
by proxy may adjourn from time to time without notice other than by
announcement at the meeting until the holders of the amount of stock requisite
to constitute a quorum shall attend. At any such adjourned meeting at which a
quorum shall be present, any business may be transacted which might have been
transacted at the meeting as originally notified.
SECTION 11. CONDUCT OF MEETINGS Shareholder's meetings, including
the order of business, shall be conducted in accordance with Roberts' Rules of
Order, Revised, except insofar as the Articles of Incorporation, this Code of
By-Laws, or any rule adopted by the Board of Directors of shareholders may
otherwise provide. The shareholders may, by unanimous consent, waive the
requirement of this section; but such waiver shall not preclude any shareholder
from invoking the requirements of this section at any subsequent meeting.
ARTICLE III
BOARD OF DIRECTORS
SECTION 1. DUTIES AND QUALIFICATIONS The business and affairs of
the corporation shall be managed by a Board of Directors, none of whom need be
shareholders of the corporation.
SECTION 2. NUMBER AND TERMS OF OFFICE There shall be thirteen (13)
(as amended 5-5-98) Directors of the corporation, who shall be elected at each
annual meeting of the shareholders, to serve for a term of one (1) year and
until their successors shall be chosen and qualified, or until removal,
resignation or death. If the annual meeting of the shareholders is not held at
the time designated in these By-Laws, such failure shall not cause any defect
in the existence of the corporation, and the Directors then in office shall
hold over until their successors shall be chosen and qualified.
SECTION 3. VACANCIES Any vacancy in the Board of Directors caused
by death, resignation, incapacity or increase in the number of Directors may be
filled by a majority vote of all the remaining members of the Board of
Directors. Shareholders shall be notified of any increase in the number of
Directors and the name, address, principal occupation and other pertinent
information about any Directors elected by the Board to fill any vacancy in the
next mailing sent to the shareholders following any such increase or election.
Vacancies on the Board of Directors occasioned by removal of a Director shall
be filled by a vote of the shareholders entitled to vote thereon at an annual
or special meeting thereof. Any Director so elected by the Board of Directors
or by the shareholders shall hold office until the next annual or special
meeting of shareholders and until his successor shall be elected and qualified.
56
57
INDEX TO EXHIBITS (CONTINUED)
Begins on sequential page
Exhibit No. number of Form 10-K
- ----------------------------------------- -------------------------
EXHIBIT 10(d)--
Baldwin & Lyons, Inc. Amended Employee
Discounted Stock Option Plan
(Incorporated as an exhibit by reference
to Exhibit 10(f) to he Company's Annual
Report on Form 10-K for the year ended
December 31, 1989) N/A
EXHIBIT 10(e)--
Stock Purchase Agreement by and among
General Casualty Company of Wisconsin,
Baldwin & Lyons, Inc. and Protective
InsuranceCompany as of August 8, 1996
(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, 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. 62
EXHIBIT 21--
Subsidiaries of Baldwin & Lyons, Inc. p. 63
EXHIBIT 23--
Consent of Ernst & Young LLP p. 64
EXHIBIT 24--
Powers of Attorney for certain
Officers and Directors p. 65
SECTION 4. ANNUAL MEETING Unless otherwise agreed upon, the Board
of Directors shall meet each year, immediately following the annual meeting of
the shareholders, at the place where such meeting of shareholders was held, for
the purpose of election of officers of the corporation and consideration of any
other business which may be brought before the meeting. No notice shall be
necessary for the holding of this annual meeting.
SECTION 5. OTHER MEETINGS Other meetings of the Board of Directors
maybe held regularly pursuant to a resolution of the Board to such effect or
may be held upon the call of the President or of any two (2) members of the
Board and upon twenty-four (24) hours notice specifying the time, place and
general purposes of the meeting, given to each Director, either personally or
by mail, telegram or telephone. No notice shall be necessary for any regular
meeting and notice of any other meeting may be waived in writing or by
telegram. Attendance at any such meeting shall constitute waiver of notice of
such meeting. Pursuant to Indiana law, the Board of Directors are authorized
to conduct meetings by telephone or teleconference (added 5-4-82).
SECTION 6. QUORUM One-third (1/3rd) of the whole Board of
Directors (but in no case less than two (2) Directors) shall be necessary to
constitute a quorum for the transaction of any business, except the filing of
vacancies and the act of the majority of the Directors present at a meeting at
which a quorum is present shall be the act of the Board of Directors, unless
the act of a greater number is required by law, the Articles of Incorporation,
or this Code of By-Laws.
SECTION 7. ACTION BY CONSENT Any action which may be taken at any
meeting of the Board, may be taken without a meeting, if prior to such action a
written consent to such action is signed by all members of the Board and such
consent is filed with the minutes of proceedings of the Board.
SECTION 8. COMMITTEES OF THE BOARD OF DIRECTORS The Board of
Directors may, by resolution adopted by a majority of the actual number of
Directors elected and qualified, from time to time designate from among its
members an executive committee or such other committees as it may specify. Any
such committee shall have and exercise all the authority of the Board of
Directors, to the extent provided in such resolution and by law.
ARTICLE IV
OFFICES
SECTION 1. OFFICES AND QUALIFICATION THEREFOR The officers of the
corporation shall consist of a Chairman of the Board of Directors, a President,
an Executive Vice President, one (1) or more Vice Presidents, a Secretary, a
Treasurer and such assistant officers as the Board of Directors shall
designate. The President shall be chosen from among the Directors. Any two
(2) or more offices may be held by the same person, except the duties of the
President and the Secretary shall not be performed by the same person.
SECTION 2. TERMS OF OFFICE Each Officer of the corporation shall
be elected annually by the Board of Directors at its annual meeting and shall
hold office for a term of one (1) year and until his successor shall be duly
elected and qualified.
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SECTION 3. VACANCIES Whenever any vacancies shall occur in any of
the offices of the corporation for any reason, the same may be filled by the
Board of Directors at a special or annual meeting thereof, and any officer so
elected shall hold office until the next annual meeting of the Board of
Directors and until his successor shall be duly elected and qualified.
SECTION 4. REMOVAL Any officer of the corporation may be removed,
with or without cause, by the Board of Directors whenever a majority of such
Board shall vote in favor of such removal.
SECTION 5. COMPENSATION Each officer of the corporation shall
receive such compensation for his service in such office as may be fixed by
action of the Board of Directors, duly recorded.
ARTICLE V
POWERS AND DUTIES OF OFFICERS
SECTION 1. CHAIRMAN OF THE BOARD Subject to the general control of
the Board of Directors, the Chairman shall manage and supervise all the affairs
and personnel of the corporation and shall discharge all the usual functions of
the Chief Executive Officer of a corporation. The Chairman shall preside at
all meetings of the Board and shareholders, and shall have such other powers
and duties as this Code of By-Laws or the Board of Directors may prescribe.
SECTION 2. PRESIDENT The President shall be the chief operating
officer of the corporation. He shall also have all the powers of and perform
the duties incumbent upon the Chairman during his absence or disability. He
shall have such other powers and duties as this Code of By-Laws or the Board of
Directors may prescribe. Shares of other corporations owned by this
corporation may be voted by the President or by such proxies as the President
shall designate. The President shall have authority to execute, with the
Secretary, powers of attorney appointing other corporations, partnerships or
individuals, the agents of the corporation subject to law, the Articles of
Incorporation and this Code of By-Laws.
SECTION 3. EXECUTIVE VICE PRESIDENT The Executive Vice President
shall assist the President in supervising the operations of the corporation
and, subject to the direction of the President, shall manage and supervise the
agency, sales and underwriting operations of the corporation.
SECTION 4. VICE PRESIDENTS The Vice Presidents shall, in the order
designated by the Board of Directors, have all the powers of and perform all
the duties incumbent upon the President during his absence or disability and
shall have such other powers and duties as this Code of By-Laws or the Board of
Directors may prescribe.
SECTION 5. SECRETARY The Secretary shall attend all meetings of
the shareholders and of the Board of Directors, and keep, or cause to be kept,
in a book provided for the purpose, a true and complete record of the
proceedings of such meeting, and he shall perform a like duty, when required,
for all standing committees appointed by the Board of Directors. He shall
attest the execution of all deeds, leases, agreements and other official
documents and shall affix the corporate seal thereto. He shall attend to the
giving and serving of all notices of the corporation required by this Code of
By-Laws, shall have custody of the books (except books of account), records and
corporate seal of the corporation, and in general shall perform all duties
pertaining to the office of Secretary and such other duties as this Code of By-
Laws or the Board of Directors may prescribe.
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SECTION 6. TREASURER The Treasurer shall keep correct and complete
records of account, showing accurately at all times the financial condition of
the corporation. He shall have charge and custody of, and be responsible for,
all funds, notes, securities and other valuables which may from time to time
come into the possession of the corporation. He shall deposit, or cause to be
deposited, all funds of the corporation with such depositories as the Board of
Directors shall designate. He shall furnish at meetings of the Board of
Directors, or whenever required, a statement of the financial condition of the
corporation, and in general shall perform all duties pertaining to the office
of Treasurer and such other duties as this Code of By-Laws or the Board of
Directors may prescribe.
SECTION 7. ASSISTANT OFFICERS Such assistant officers as the Board
of Directors shall from time to time designate and elect shall have such powers
and duties as the officers whom they are elected to assist shall specify and
delegate to them and such other powers and duties as this Code of By-Laws or
the Board of Directors may prescribe. An Assistant Secretary may, in the
absence or disability of the Secretary, attest the execution of all documents
by the corporation and affix the corporate seal thereto.
SECTION 8. DELEGATION OF DUTIES In case of the absence of
inability to act of any officer of the corporation, the Board of Directors may
delegate for the time being the duties of such officer to any other officer or
to any director.
SECTION 9. LOANS TO OFFICERS No loan of money or property or
advancement on account of services to be performed in the future shall be made
to any officer or director of the Corporation, except as may otherwise be
provided by statute (as amended 1-26-83).
ARTICLE VI
MISCELLANEOUS
SECTION 1. CORPORATE SEAL The seal of the corporation shall be
circular in form with the name of the corporation around the top of its
periphery, the word "Indiana" around the bottom of its periphery, and the word
"Seal" through the center.
SECTION 2. EXECUTION OF CONTRACTS AND OTHER DOCUMENTS Unless
otherwise ordered by the Board of Directors, all written contracts and other
documents entered into by the corporation shall be executed on behalf of the
corporation by the President or a Vice President. If the corporate seal is
required to be affixed thereto, it shall be affixed and attested by the
Secretary or an Assistant Secretary.
SECTION 3. FISCAL YEAR The fiscal year of the corporation
commences on the first (1st) day of January and ends on the thirty-first (31st)
day of December of each year.
ARTICLE VII
AMENDMENTS
SECTION 1. AMENDMENTS OF BY-LAWS Subject to law and the Articles of
Incorporation, the power to make, alter, amend or repeal all or any part of
this Code of By-Laws is vested in the Board of Directors. The affirmative vote
of a majority of all the Directors shall be necessary to affect any such
changes in this Code of By-Laws.
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