ITEM 1. BUSINESS
Baldwin & Lyons, Inc. was incorporated under the laws of the State of Indiana in 1930. Through its divisions and subsidiaries, Baldwin & Lyons, Inc. (referred to herein as "B&L") specializes in marketing and underwriting property and casualty insurance. The Company's 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 37 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.
Approximately 57% of the gross direct premiums written and assumed by the Insurance Subsidiaries during 2001 was attributable to business produced directly by B & L. The remaining 43% consists primarily of business written by Sagamore originating through an extensive network of independent agents.
The Insurance Subsidiaries cede portions of their gross premiums written to several non-affiliated reinsurers under excess of loss and quota-share treaties and by facultative placements. Reinsurance is ceded to spread the risk of loss among several reinsurers. In addition to voluntary reinsurance, described below, the Insurance Subsidiaries participate in numerous mandatory government- operated reinsurance pools which require insurance companies to provide coverages on assigned risks. These assigned risk pools allocate participation to all insurers based upon each insurer's portion of premium writings on a state or national level.
The Insurance Subsidiaries serve various specialty markets as follows:
FLEET TRUCKING INSURANCE - ------------------------
Protective 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 first dollar or small deductible basis. These trucking products are marketed almost exclusively by the B&L agency organization directly to trucking clients although broker or agent intermediaries are used on a limited basis for smaller accounts. The principal types of insurance marketed by Protective are:
- Casualty insurance including motor vehicle liability, physical damage and other liability insurance. - Workers' compensation insurance. - Specialized accident (medical and indemnity) insurance. - Fidelity and surety bonds. - Inland Marine consisting principally of cargo insurance. - "Captive" insurance company products, which are provided through BLI in Bermuda.
B&L also performs a variety of additional services, primarily for Protective's insureds, including risk surveys and analyses, government compliance assistance, loss control and cost studies and research, development, and consultation in connection with new insurance programs including development of computerized systems to assist in monitoring accident data. Extensive claims services are also provided, primarily to clients with self-insurance programs.
VOLUNTARY ASSUMPTION REINSURANCE - --------------------------------
Protective accepts cessions and retrocessions from selected insurance and 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 only a major catastrophic event or series of major events would have a material affect on the Company's financial position. The events of September 11,
2001 materially impacted the Company's operating results in 2001. See page 16 and Note E to the consolidated financial statements for further discussion.
PRIVATE PASSENGER AUTOMOBILE INSURANCE - --------------------------------------
Sagamore markets nonstandard private passenger automobile liability and physical damage coverages to individuals through a network of independent agents in fourteen states.
SMALL FLEET TRUCKING INSURANCE - ------------------------------
Sagamore provides commercial automobile liability, physical damage and cargo insurance to truck owner-operators with twenty-five or fewer power units. These products are marketed through independent agents in the majority of the states in which Sagamore is licensed.
Small Business Workers' Compensation - ------------------------------------
Sagamore also markets worker's compensation insurance to selected small businesses in a few midwestern states. This product is marketed through independent agents.
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. In addition, frequency and severity of claims must be projected. The average severity of claims is influenced 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.
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, 2001 have been reduced by approximately $4.7 million as a result of such discounting. Had the Company not discounted loss and LAE reserves, pretax income would have been approximately $.4 million higher for the year ended December 31, 2001.
The maximum amount for which the Protective insures a trucking risk is $10 million although, occasionally, limits above $10 million are provided but are 100% reinsured. Certain coverages, such as workers' compensation, provide essentially unlimited exposure although the Company protects itself to the extent believed prudent through the purchase of excess insurance for these coverages. After giving effect to current treaty reinsurance arrangements, for the majority of risks insured, Protective's maximum exposure to loss from a single occurrence is approximately $1 million. Protective has revised its treaty arrangements several times in prior years in response to changing market conditions. The current treaty arrangements are effective until June 1, 2002 and cover the entire policy period for all business written through that date. Treaty renewals are expected to occur annually in the foreseeable future. During the past ten years, Protective's maximum exposure to a single occurrence has ranged from zero to approximately $2 million. Because Protective, on occasion, writes multiple year policies and because losses from trucking business take years to develop, losses reported in
the current year may be covered by an older reinsurance treaty with higher or lower loss retention by Protective than the current treaty.
Certain of the previous reinsurance treaties contained aggregate recovery limitations. To the extent that losses in these layers, in the aggregate, exceed these limitations, the Company could be liable for amounts that would otherwise be covered under these reinsurance treaties. No such aggregate limits have been exceeded as of December 31, 2001.
With respect to Sagamore's private passenger automobile and small fleet trucking business, the Company's maximum net exposure for a single occurrence is $100,000 until January 1, 2003. Sagamore's retention under the workers' compensation product is $50,000 for a single occurrence. Sagamore's retention on prior year's business has ranged from the current levels to $250,000 per occurrence.
The following table sets forth a reconciliation of beginning and ending loss and LAE liability balances, for 2001, 2000 and 1999. 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 7 shows the development of the estimated liability, net of reinsurance recoverable, for the ten years prior to 2000.
RECONCILIATION OF LIABILITY FOR LOSSES AND LOSS ADJUSTMENT EXPENSES (GAAP BASIS)
The reconciliation above shows a $.9 million (.7%) savings in the liability for losses and LAE recorded at December 31, 2000. The net savings is reflected in 2001 underwriting income. All major product groups
produced redundancies during each of the years 2001, 2000 and 1999 with the exception of reinsurance assumed in 2001 and private passenger automobile in 2000. The decline in reserve redundancy from 2000 and 1999 results in part from the significantly lower retained loss per occurrence for the Company's large fleet trucking product. In addition, the 2001 development included approximately $2.1 million of additional losses from reinsurance assumed contracts which were not reported to Protective at December 31, 2000. Approximately $1 million of this loss was offset by reinstatement premiums recorded in 2001. A more detailed discussion of reserve savings experienced in recent years is presented below.
The differences between the liability for losses and LAE reported in the accompanying 2001 consolidated financial statements in accordance with generally accepted accounting principles ("GAAP") and that reported in the annual statements filed with state and provincial insurance departments in the United States and Canada in accordance with statutory accounting practices ("SAP") are as follows:
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 4 and 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 7 presents the development of GAAP balance sheet liabilities for each year-end 1991 through 2001, net of all reinsurance credits. The top line of the table shows the estimated liability for unpaid losses and LAE recorded at the balance sheet date for each of the indicated years. The liabilities shown on this line for each year-end have been reduced by amounts relating to loss reserves ceded attributable to insolvent reinsurers, as discussed in the immediately preceding paragraph. This liability represents the estimated amount of losses and LAE for claims arising in all prior years that are unpaid at the balance sheet date, including losses that had been incurred but not yet reported to the Company.
The upper portion of the table shows the reestimated amount of the previously recorded liability based on experience as of the end of each succeeding year. The estimate is increased or decreased as more information becomes known about the frequency and severity of claims.
The "cumulative redundancy" represents the aggregate change in the estimates over all prior years. For example, the 1991 liability has developed a $41.5 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 4.
Historically, the Company's loss developments have been favorable. Reserve developments for all year-ends 1986 through 2000 have produced redundancies as of December 31, 2001. In addition to improvements in reserving methods, loss reserve developments since 1985 have been favorably affected by several other factors. Perhaps the most significant single factor has been the improvement in safety programs by the 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 fewer fatalities and serious accidents. The Company's experience also shows that improved safety and hiring programs have a dramatic impact on the frequency and severity of trucking accidents. Higher self-insured retentions also played a part in reduced insurance losses during the early part 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 2001 is different from that which generated much of the ten-year historical loss data used to establish reserves in the past few years. Savings realized in recent years upon the closing of claims, as reflected in the tables on pages 4 and 7, are attributable to the Company's long-standing policy of reserving for losses realistically and a willingness to settle claims based upon a seasoned evaluation of the underlying exposures. The Company 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 7 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, 2001, the Company had paid $121.0 million of losses and LAE that had been incurred, but not paid, as of December 31, 1991; thus an estimated $36.3 million in losses incurred through 1991 remain unpaid as of the current financial statement date ($157.3 million incurred less $121.0 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 1994, but incurred in 1991, will be included in the cumulative development amount for years-end 1991, 1992, and 1993. 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.
ENVIRONMENTAL MATTERS: The Company's reserves for unpaid losses and loss expenses at December 31, 2001 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 cover these situations on the basis that they were caused by an accident that resulted in the immediate spill of a pollutant. These claims are typically reported and resolved within a short period of time.
However, the Company has also received a few environmental claims that did not result from a "sudden and accidental" event. 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. During the eight years ended December 31, 2001, the Company recorded a total of $10.9
* Amounts shown for 1991 through 2001 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 $597, $611, $554, $542, $457, $498, $480, $436, $358, $301 and $327, respectively.
million in losses incurred with respect to environmental claims. Incurred losses to date include a reserve for incurred but not reported environmental losses of $3.9 million at December 31, 2001.
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 outlined on pages 2 and 3.
Since the mid-1980's, Protective has focused its marketing efforts on large and medium trucking fleets. Protective has its largest market share in the larger trucking fleets (over 150 units). These fleets self-insure a portion of their risk and such self-insurance plans are a specialty of the Company. The indemnity contract provided to self-insured customers is designed to cover all aspects of 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 that do not allow for self-insurance. Protective also offers accident insurance on a group basis to independent contractors under contract to a fleet sponsor. Throughout the 1990's, the market for Protective's products grew increasingly competitive, though this competitive pressure has eased somewhat recently (see comments under "Competition" following).
Since 1992, Protective has accepted reinsurance cessions and retrocessions, principally for catastrophe exposures, from selected reinsurers on an opportunistic basis. Protective is committed to participation in this market provided pricing remains conducive to profitable results. As the result of less favorable pricing in the market, Protective's participation in retrocessions decreased in 1999 and again in 2000 after adjustment for reinstatement premiums discussed later in the RESULTS OF OPERATIONS. However, based on improved pricing in the market late in 2000 and 2001, especially after September 11, 2001, the Company recorded an increase in premium from reinsurance assumed during 2001 and anticipates further increases during 2002.
During 1995, Sagamore entered the private passenger automobile insurance market for nonstandard risks. This program is currently being marketed in fourteen midwestern and southern states. Market acceptance to date has been favorable and approximately $30.1 million of premium was written in this line during 2001.
Sagamore also offers a program of coverages for "small fleet" trucking concerns (owner-operators with one to twenty-five power units). This program was limited to a small geographic area composed of Midwestern states through the end of 1997. However, significant geographic expansion began during 1998 and has continued through 2001. Future expansion into other states is anticipated during 2002. Approximately $11.7 million of premium was written in this program during 2001, an increase in of 18% from the prior year.
During 1997, Sagamore began marketing a small business workers' compensation product in Missouri. Through 1999, growth in this product had been slow, resulting mainly from competitive forces. However, recent developments in the competitive make-up in the states where Sagamore markets this program resulted in approximately $4.3 million in premium written during 2001, an increase of 99% from the prior year.
INVESTMENTS - -----------
The Company manages its invested assets to provide a high degree of flexibility to respond to opportunities in the financial markets and to provide necessary cash flows for operations. The resulting investment strategies emphasize relatively short-term maturities and high asset quality and are designed to produce reasonable returns without jeopardizing principal.
At December 31, 2001 the financial statement value of the Company's investment portfolio was approximately $439 million, including money market instruments classified as cash equivalents. A comparison of the diversification of the Company's investment portfolio, using cost as a basis, is as follows:
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 2001.
Approximately $13.1 million of the fixed maturity portfolio (3.0% of total invested assets) consists of bonds rated as less than investment grade at December 31, 2001. The unrealized net gain on the fixed maturity
portfolio was $4.7 million at December 31, 2001, before income taxes, and compares to a $1.6 million unrealized loss at December 31, 2000.
Equity securities comprise 31% of the financial statement value of the consolidated investment portfolio at December 31, 2001, down from 36% at the prior year-end. The unrealized gains on the equity security portfolio decreased $12.2 million to $45.4 million at December 31, 2001 offsetting similar gains from a year earlier.
A comparison of consolidated investment yields is as follows:
Because of the structure of the Company's investment portfolio, as previously described, investment yields during 2001 were negatively impacted by the repeated interest rate cuts by the Federal Reserve and the depressed equity security markets.
EMPLOYEES - ---------
As of March 1, 2002, the Company had 254 employees. The changes from March 1, 2001 are minor.
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 that preclude private companies from writing this business in those states. Federal law also authorizes the creation of "Risk Retention Groups" which may write insurance coverages similar to those offered by the Company.
ITEM 101(B), (C)(1)(I) AND (VII), AND (D) OF REGULATION S-K:
Reference is made to Note J to the consolidated financial statements which provides information concerning industry segments and is filed herewith under Item 8, Financial Statements and Supplementary Data.
ITEM 2.
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 67,000 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 a contingent back up and disaster recovery site for computer operations.
Baldwin & Lyons, California leases approximately 1,900 square feet of office space in a suburb of Los Angeles, California. All West Coast operations are conducted from these facilities.
The current facilities are expected to be adequate for the Company's operations for the foreseeable future.
ITEM 3.
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.
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 2001.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Class A and Class B common stocks are traded on The Nasdaq Stock Market[TM] 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, 2001, 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 2001 and 2000, as reported by the National Association of Security Dealers, Inc. and published in the financial press. The quotations reflect interdealer prices without retail markup, markdown or commission and do not necessarily represent actual transactions.
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.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
(1) Earnings and book value per share are adjusted for the dilutive effect of stock options outstanding.
(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.
ITEM 7.
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 operations, (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 less than 30% of premiums earned on a consolidated basis and the remaining amount is available for investment for varying periods of time depending on the type of insurance coverage provided. During extended periods of declining net 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 bonds with maximum quality and liquidity. As interest rates have declined and yield curves have not provided a strong incentive to lengthen maturities in recent years, the Company has maintained its short-term position with respect to the vast majority of its fixed maturity investments. The average life of the Company's bond and short-term investment portfolio was 3.8 years and 4.0 years for 2001 and 2000, respectively. The Company also remains an active participant in the equity securities market. Investments made by the Company's domestic insurance subsidiaries are regulated by guidelines promulgated by the National Association of Insurance Commissioners which are designed to provide protection for both policyholders and shareholders.
The Company's assets at December 31, 2001 included $51.5 million in short-term investments which are readily convertible to cash without market penalty and an additional $47.5 million of fixed maturity investments maturing in less than one year. The Company believes that these liquid investments, plus the expected cash flow from current operations, are more than sufficient to provide for projected claim payments and operating cost demands. In addition, the Company's reinsurance program is structured to avoid serious cash drains that might accompany catastrophic losses. In the event competitive conditions produce inadequate rates and the Company chooses to restrict 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 2001 equaled approximately 24% of the combined statutory surplus of these subsidiaries. Premium writings of 200% to 300% of surplus are generally considered acceptable by regulatory authorities. 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 decreased to $288.4 million at December 31, 2001, from $294.0 million at December 31, 2000, including the after tax $13.0 million estimated net loss related to the events of September 11, 2001. The change in shareholders' equity also included $5.0 million of cash dividends to shareholders, a $3.9 million decrease in unrealized net gains on investments and $2.2 million in treasury share purchases. Book value per common share outstanding decreased 1% to $23.73 at December 31, 2001 from $24.01 per share at December 31, 2000.
As more fully discussed in Note G to the consolidated financial statements, at December 31, 2001, $47.6 million, or 16.5% 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 $17.4 million at December 31, 2001.
RESULTS OF OPERATIONS - ---------------------
2001 COMPARED TO 2000
Direct premiums written for 2001 totaled $114.3 million, an increase of $17.2 million (18%) from 2000. This increase is primarily attributable to increases in fleet trucking and independent contractor programs of $13.9 million (52%) and $4.8 million (21%), respectively, from 2000 levels. Direct premium writings from the Company's small business workers' compensation and small trucking fleet programs also increased by $2.2 million and $1.8 million, respectively. These increases were partially offset by a $5.6 million (16%) decrease in direct premium written for the Company's private passenger automobile program. Large trucking fleet and independent contractor volume increases resulted from the addition of new accounts as well as rate increases on renewed accounts. Increases in small business workers' compensation and small fleet were due primarily to geographic expansion, although rates were increased in both divisions during 2001. The decrease in private passenger automobile premium resulted from an effort to reunderwrite the program during 2001, including the implementation of significant rate increases and the termination of producers of unprofitable business.
Premiums assumed from other reinsurers totaled $5.7 million during 2001, an increase of $1.5 million (35%) from 2000. Premiums assumed for 2001 and 2000 included $1.0 million and $1.7 million, respectively, of reinstatement premiums attributable to losses occurring in late 1999. Without these reinstatement premiums, reinsurance assumed volume would have increased 85% from the prior year. Pricing in this market began to improve toward the end of 2000 and throughout 2001, and the Company's participation increased as a result. Management anticipates increased participation during 2002.
Premiums ceded to reinsurers increased $13.5 million (56%) during 2001 to $37.7 million. The percentage of premiums ceded to direct premiums written increased to 33% for 2001 from 25% for 2000 consistent with the increase in direct premiums written for the more heavily reinsured large trucking fleet program discussed above.
After giving effect to changes in unearned premiums, net premiums earned increased 7% to $83.1 million for 2001 from $77.4 million for 2000. Net premiums earned from all trucking-related insurance products increased by $8.3 million (25%). Net premiums earned from the Company's small workers' compensation and voluntary reinsurance assumed programs increased $1.7 million (155%) and $1.1 million (25%), respectively. These increases were partially offset by a $5.7 million (15%) decrease in premiums earned from private passenger automobile.
Net investment income decreased $1.4 million (7.5%) during 2001 reflecting lower overall pre-tax yields on slightly higher average invested assets. The average pre-tax yield on invested assets was 5.0% and 5.5% for 2001 and 2000, respectively. After-tax yields were 3.6% and 3.9% for 2001 and 2000, respectively.
Realized net capital gains were $5.1 million in 2001 compared to $12.5 million for 2000. The current year's net gain consisted of gains on equity securities of $7.3 million and losses on fixed maturities and other investments of $2.2 million. Realized net gains for 2001 and 2000 included other than temporary writedowns totaling $2.1 million and $5.0 million, respectively.
Losses and loss expenses incurred during 2001 increased $24.4 million (42%) to $81.9 million, including a $20 million loss related to the events of September 11, 2001. The 2001 consolidated loss and loss expense ratio was 98.5% compared to 74.2% for 2000. Adjusted for the September 11, 2001 loss, the consolidated loss and loss expense ratio was 74.4%. While the adjusted consolidated loss ratio remained virtually unchanged, individual product lines varied from year-to-year as less favorable loss development in the Company's large fleet trucking product was offset by significant improvement in the Company's private passenger automobile division. The loss and loss expense ratio for private passenger automobile dropped from 94.5% during 2000 to 69.5% during 2001. As previously discussed, improved underwriting selection and rate increases are directly responsible for the improved private passenger automobile results. Because of the high limits provided by the Company to its large trucking fleet insureds, the length of time required to settle larger, more complex claims and the volatility of the trucking liability insurance business, the Company believes it is important to have a high degree of conservatism 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 favorable loss developments are attributable to the Company's long-standing policy of reserving for losses realistically and a willingness to settle claims based upon a seasoned evaluation of its exposures. However, due to the aforementioned changes in the Company's reinsurance structure for its large trucking fleets, whereby a smaller portion of the risk is retained, the impact of future loss developments on the loss and loss expense ratios may not be consistent with prior years.
Other operating expenses for 2001, before credits for allowances from reinsurers, decreased $.3 million (1%) to $34.4 million despite the increase in premium volume described above. Personnel related expenses, including amounts allocated to loss expenses and investment income, increased less than 1% as staff reductions occasioned by the increased use of technology substantially offset wage increases and higher employee benefit expenses. Direct commission expense decreased $.4 million (5%) primarily as the result of lower direct premiums from the Company's private passenger automobile product which carries higher commission rates than the Company's remaining products. Substantially all large fleet trucking business is produced by direct sales efforts of Baldwin & Lyons, Inc. employees and, accordingly, this business does not incur commission expense on a consolidated basis. Ceding commission allowances from reinsurers increased $4.1 million (47%), resulting from increased premium volume ceded under reinsurance agreements covering Protective's fleet trucking business. The ratio of net operating expenses of the insurance subsidiaries to net premiums earned was 24.3% during 2001 compared to 28.0% for 2000, reflecting the higher ceding commission received from reinsurers. Including the agency operations, the ratio of other operating expenses to total revenue, adjusted to remove net realized gains, was 20.6% for 2001 compared with 26.0% for 2000.
The effective federal tax rate for consolidated operations for 2001 was 16.3%. 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 2001 was $5.4 million compared to $19.8 million for 2000. Diluted earnings per share decreased to $.44 in 2001 from $1.57 in 2000 due primarily to the losses related to the events of September 11, 2001. Diluted earnings per share from operations before realized gains on investments was $.17 in 2001 compared to $.93 in 2000.
2000 COMPARED TO 1999
Direct premiums written for 2000 totaled $97.1 million, an increase of $11.0 million (13%) from 1999. This increase is primarily attributable to increases in fleet trucking's large trucking fleet and independent contractor programs of $3.9 million (22%) and $1.6 million (8%), respectively, from 1999 levels. Direct premium writings from the Company's private passenger automobile, small trucking fleet and small business workers' compensation programs also increased by $2.4 million, $2.2 million and $1.2 million, respectively. Large
trucking fleet volume increases resulted primarily from the addition of new accounts. Increases in independent contractor premiums resulted from the addition of new accounts and volume increases on existing accounts, while increases in private passenger automobile, small fleet and small workers' compensation were due primarily to geographic expansion.
Premiums assumed from other reinsurers of $4.2 million during 2000 were relatively unchanged from 1999 although 2000's premium included $1.7 million of reinstatement premium attributable to losses occurring in late 1999. Without this premium, reinsurance assumed volume would have decreased 37% from the prior year. Pricing in this market began to firm up toward the end of 2000.
Premiums ceded to reinsurers increased $5.8 million (32%) during 2000 to $24.2 million. The percentage of premiums ceded to direct premiums written increased to 24.9% for 2000 from 21.3% for 1999 consistent with the increase in direct premiums written for the more heavily reinsured large trucking fleet program discussed above.
After giving effect to changes in unearned premiums, net premiums earned increased 12% to $77.4 million for 2000 from $69.1 million for 1999. Premiums earned from private passenger automobile increased by $6.6 million. Net premiums earned from all trucking-related insurance products increased by $1.7 million (5%), including $1.9 million (32%) for small fleet trucking. Net investment income increased by $.2 million (1%) during 2000 reflecting higher overall pre-tax yields on slightly lower average invested assets. The average pre-tax yield on invested assets was 5.5% and 5.0% for 2000 and 1999, respectively. After-tax yields were 3.9% and 3.6% for 2000 and 1999, respectively.
Realized net capital gains were $12.5 million in 2000 compared to $5.6 million for 1999. The current year net gain consisted of gains on equity securities of $16.0 million and losses on fixed maturities and other investments of $3.5 million.
Losses and loss expenses incurred during 2000 increased $12.6 million (28%) to $57.5 million. The 2000 consolidated loss and loss expense ratio was 74.2% compared to 65.0% for 1999. The increase in the loss and loss expense ratio is primarily attributable to adverse loss development and an increased frequency and severity of claims in the Company's personal automobile division. Changes in the Company's remaining products were generally favorable.
Other operating expenses for 2000, before credits for allowances from reinsurers, increased $2.9 million (9%) to $34.7 million. Personnel related expenses, including amounts allocated to loss expenses and investment income, increased 7% and accounted for approximately 40% of the total operating expense increase, reflecting the fully-employed labor market from which the Company draws. Direct commission expense increased $.9 million (13%) as the result of higher direct premiums from all of the Company's products. Ceding commission allowances from reinsurers increased $1.9 million (28%), resulting from increased premium volume covered under the reinsurance agreements covering Protective's fleet trucking business. The ratio of net operating expenses of the insurance subsidiaries to net premiums earned was 28.1% during 2000 compared to 29.6% for 1999. Including the agency operations, the ratio of other operating expenses to total revenue, adjusted to remove net realized gains, was 26.0% for 2000 compared with 27.5% for 1999. Expenses for 1999 included expenditures in preparation for Year 2000 (Y2K) compliance that were not present in the year 2000.
The effective federal tax rate for consolidated operations for 2000 was 31.8%. This rate is lower than the statutory rate primarily because of tax-exempt investment income.
As a result of the factors mentioned above, net income from consolidated operations for 2000 was $19.7 million compared to $18.6 million for 1999. Diluted earnings per share increased to $1.57 in 2000 from $1.38 in 1999
due primarily to the increase in realized gains on investments. Diluted earnings per share from operations before realized gains on investments was $.93 in 2000 compared to $1.11 in 1999.
CRITICAL ACCOUNTING POLICIES - ----------------------------
The Company's significant accounting policies are discussed in Note A to the Consolidated Financial Statements. The following discussion is provided to highlight areas of the Company's accounting policies which are both material and subject to significant degrees of estimation.
INVESTMENT VALUATION
Over 73% of the Company's assets are composed of investments at December 31, 2001. Less than 1% of these investments, consisting of limited partnerships, do not have readily determinable market values. For these investments, we estimate fair value by reference to the underlying assets of the limited partnerships. All marketable securities are included in the Company's balance sheet at current market value. In determining if and when a decline in market value below cost is other than temporary, we evaluate the market conditions, trends of earnings, price multiples and other key measures for our bonds and common and preferred stocks. When such a decline is considered to be other than temporary, we recognize an impairment loss in the current period operating results to the extent of the decline. Declines which are considered to be temporary are recorded as a reduction in shareholders' equity, net of related federal income tax credits.
REINSURANCE RECOVERABLE
Amounts recoverable under the terms of reinsurance contracts comprise almost 19% of total Company assets as of December 31, 2001. In order to be able to provide the high limits required by the Company's trucking company insureds, we share a significant amount of the insurance risk of the underlying contracts with various insurance entities through the use of reinsurance contracts. Some reinsurance contracts provide that a loss be shared among the Company and its reinsurers on a predetermined pro-rata basis ("quota-share") while other contracts provide that the Company keep a fixed amount of the loss, similar to a deductible, with reinsurers taking all losses above this fixed amount ("excess of loss"). Some losses are covered by a combination of quota-share and excess of loss contracts. The computation of amounts due from reinsurers is based upon the terms of the various contracts and follows the underlying estimation process for loss and loss expense reserves, as described below. Accordingly, the uncertainties inherent in the loss and loss expense reserving process also affect the amounts recorded as recoverable from reinsurers. Estimation uncertainties are greatest for claims which have occurred but which have not yet been reported to the Company. Further, the high limits provided by the Company's insurance policies for trucking liability and workers' compensation, provide more variability in the estimation process than lines of business with lower coverage limits.
It should be noted, however, that a change in the estimate of amounts due from reinsurers on unpaid claims will not, in itself, result in charges or credits to losses incurred. This is because any change in estimated recovery follows the estimate of the underlying loss. Thus, it is the computation of the underlying loss that is critical.
As with any receivable, credit risk exists in the recoverability of reinsurance. This is even more pronounced than in normal receivable situations since recoverable amounts will not be due until the loss is settled which, in some cases, may be many years after the contract was written. If a reinsurer is unable, in the future, to meet the reinsurer's financial commitments under the terms of the contracts, the Company would be responsible for its portion of the loss. The financial strength of each of the Company's reinsurers is reviewed on a continual basis and, should impairment in the ability of a reinsurer be determined to exist, current year operations would be charged in amounts sufficient to provide for the Company's additional liability.
LOSS AND LOSS EXPENSE RESERVES
The Company's reserves for losses and loss expenses ("reserves") are determined based on complex estimation processes using historical experience, current economic information and, when necessary, available industry statistics. Our reserves are evaluated in three basic categories (1)"case basis", (2)"incurred but not reported" and (3)"loss adjustment expense" reserves. Case basis reserves are established for specific known loss occurrences at amounts dependent upon various criteria such as type of coverage, severity and the underlying policy limits, as examples. Case basis reserves are generally estimated by experienced claims adjusters using established Company guidelines and are subject to review by claims management. Incurred but not reported reserves, which are established for those losses which have occurred, but have not yet been reported to the Company, are not linked to specific claims but are computed on a "bulk" basis. Common actuarial methods are used in the establishment of incurred but not reported loss reserves using company historical loss data, consideration of changes in the Company's business and study of current economic trends affecting ultimate claims costs. Loss adjustment expense reserves, or reserves for the costs associated with the investigation and settlement of a claim, are also bulk reserves representing the Company's estimate of the costs associated with the claims handling process. Loss adjustment expense reserves include amounts ultimately allocable to individual claims as well as amounts required for the general overhead of the claims handling operation that are not specifically allocable to individual claims. Historical analyses of the ratio of loss adjusting expenses to losses paid on prior closed claims and study of current economic trends affecting loss settlement costs are used to estimate the loss adjustment reserve needs related to the established loss reserves. Each of these reserve categories contain elements of uncertainty that guaranty variability when compared to the ultimate costs to settle the underlying claims for which the reserves are established.
The reserving process requires us to continuously monitor and evaluate the life cycle of claims based on the class of business and the nature of claims. Our claims range from the very routine private passenger automobile "fender bender" to the highly complex and costly third party bodily injury claim. Reserving for each class of claims requires a set of assumptions based upon historical experience, knowledge of current industry trends and seasoned judgment. The high limits provided in the Company's trucking liability policies provide for greater variation in the reserving process for more serious claims. Court rulings, tort reform (or lack thereof) and trends in jury awards also play a significant role in the estimation process of larger claims. The Company continuously reviews and evaluates loss developments subsequent to each measurement date and adjusts its reserve estimation assumptions, as necessary, in an effort to achieve the best possible estimate of the ultimate remaining loss costs at any point in time.
MARKET RISK - -----------
The Company operates solely within the property and casualty insurance industry and, accordingly, has significant invested assets which are exposed to various market risks. These market risks relate to interest rate fluctuations, 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 Note B to the consolidated financial statements.
The most significant of the three identified market risks relates to prices in the equities market. Though not the largest category of the Company's invested assets, equity securities have the greatest potential for short-term price fluctuation. The market value of the Company's equity positions at December 31, 2001 was $136.4 million or approximately 31% 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 $246.6 million at December 31, 2001. Over half of this portfolio is made up of U. S. government and government agency obligations and state and municipal debt
securities, 86% of the portfolio matures within 5 years and the average life of the Company's fixed maturity investments is approximately 3.8 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.
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 $9.9 million and $12.5 million were recorded at December 31, 2001 and 2000, respectively. The net deferred tax liability at December 31, 2001 included $4.3 million in special tax deposits covered under Section 847 of the Internal Revenue Code, as explained in the following paragraph, which compares to $4.2 million in special tax deposits at December 31, 2000. Adjusted for the special deposits, a net deferred tax liability of $14.2 million was recorded at December 31, 2001 compared to a net deferred tax liability of $16.7 million at December 31, 2000. The decrease in deferred federal taxes payable is primarily attributable to changes in unrealized capital gains in the investment portfolio.
A provision in the Technical and Miscellaneous Revenue Act of 1988 created a mechanism which would allow for a recognizable deferred tax asset specifically for property and casualty loss reserves discounted for tax purposes. Adopted as Section 847 of the Internal Revenue Code, this provision allows an insurer to take a special tax deduction equal to the discount on post 1986 accident year loss and loss expense reserves while making "special estimated tax payments" equal to the amount of the tax benefit derived from the special deduction. The "special estimated tax payments" can be carried forward for fifteen years to offset taxes arising from decreases in the special deduction and can be treated as regular estimated payments or refunded at the end of the carryforward period. Based upon the concerns regarding the recognition of deferred tax assets, the Company adopted the provisions of Section 847 for all tax years 1987 and subsequent and has taken deductions for the entire amount of discount on post- 1986 loss reserves. As mentioned above, special Section 847 estimated tax deposits totaling $4.3 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.
ANNUAL REPORT ON FORM 10-K
ITEM 8
ITEM 8 - -FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
YEAR ENDED DECEMBER 31, 2001
BALDWIN & LYONS, INC.
INDIANAPOLIS, INDIANA
YEAR ENDED DECEMBER 31, 2001
BALDWIN & LYONS, INC.
INDIANAPOLIS, INDIANA
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, 2001 and 2000, and the related consolidated statements of income, changes in equity other than capital, and cash flows for each of the three years in the period ended December 31, 2001. 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 auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the 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, 2001 and 2000, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States. 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 22, 2002
CONSOLIDATED BALANCE SHEETS Baldwin & Lyons, Inc. and Subsidiaries
See notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF INCOME Baldwin & Lyons, Inc. and Subsidiaries
See notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY OTHER THAN CAPITAL Baldwin & Lyons, Inc. and Subsidiaries
See notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS Baldwin & Lyons, Inc. and Subsidiaries
See notes to consolidated financial statements.
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.
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: 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 unless a decline in value is determined to be other than temporary, in which case, the loss is charged to income. 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 principally by the straight-line method.
RESERVES FOR LOSSES AND LOSS EXPENSES: The reserves for losses and loss expenses, certain of which are discounted, are determined using case basis evaluations and statistical analyses and represent estimates of the ultimate cost of all reported and unreported losses which are unpaid at year end. These reserves include estimates of future trends in claim severity and frequency and other factors which could vary as the losses are ultimately settled. Although it is not possible to measure the degree of variability inherent in such estimates, management believes that the reserves for losses and loss expenses are adequate. The estimates are continually reviewed and as adjustments to these reserves become necessary, such adjustments are reflected in current operations.
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.
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, 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 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 defined benefit 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.
NOTE B - INVESTMENTS The following is a summary of available-for-sale securities at December 31:
NOTE B - INVESTMENTS (CONTINUED) Gross realized gains and losses on investments for the years ended December 31 are summarized below:
Gross realized losses in the above table included other than temporary write- downs of $2,081 and $5,000 in 2001 and 2000, respectively.
The fair value and the cost or amortized cost of fixed maturity investments at December 31, 2001, 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.
Major categories of investment income for the years ended December 31 are summarized as follows:
Approximately 31% of purchases and 52% of sales of investments during the three years ended December 31, 2001 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 $1,110, $1,499 and $614 in 2001, 2000 and 1999, respectively.
The Company has holdings in money-market accounts which were managed by or purchased through companies affiliated with certain directors of the Company.
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.
The reserves for losses and loss expenses, net of related reinsurance recoverables, at December 31, 2000, 1999 and 1998 were decreased by $887, $8,107 and $10,609, 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 2001 and 2000, on reserves outstanding at December 31, 2000 and 1999 was insignificant for incurred losses and loss expenses related to environmental damage claims. Reported cases to date 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. Reserves for incurred but not reported environmental losses were $3,900 at December 31, 2001 and 2000. Development during 2001 included $2.1 million of incurred losses and loss expenses on reinsurance assumed reserves outstanding at December 31, 2000 which was partially offset by reinstatement premiums of $1.0 million. Adjusted for reinsurance assumed, management believes that the favorable experience is attributable to the Company's long-standing policy of reserving for losses realistically and a willingness to settle claims based upon a seasoned evaluation of its exposures. The decline in favorable loss developments from 1999 to 2001 is due in part to the significantly lower retained loss per occurrence for the Company's large fleet trucking product. Under terms of reinsurance agreements effective June 1, 1998, the Company's exposure on large fleet trucking losses dropped from $1,000 to $100 per occurrence. These trends were considered in the establishment of the Company's reserves at December 31, 2001.
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, 2001 and 2000, loss reserves have been reduced by approximately $4,724 and $5,096, 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 $2,717 and $2,698 at December 31, 2001 and 2000, respectively.
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 2001, 2000 and 1999 were $736, $657 and $620, respectively.
NOTE E - INCOME TAXES Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's deferred tax assets and liabilities as of December 31 are as follows:
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:
Federal income tax expense consists of the following:
NOTE E - INCOME TAXES (CONTINUED) Cash flows related to federal income taxes paid, net of refunds received, for 2001, 2000 and 1999 were $5,200, $8,807 and $7,367, respectively, including Section 847 special tax deposits. Future tax benefits on approximately $4,298 of deferred tax assets at December 31, 2001 arising from loss reserve discounting are assured based on Section 847 of the Internal Revenue Code.
NOTE F - REINSURANCE The insurance subsidiaries cede portions of their gross premiums written to certain other insurers under excess and quota share treaties and by facultative placements. Risks are reinsured with other companies to permit the recovery of a portion of related direct losses. The Company also serves as an assuming reinsurer under retrocessions from certain other reinsurers. These retrocessions include individual risks as well as aggregate catastrophe treaties. Accordingly, the occurrence of a major catastrophic event can have a significant impact on the Company's operating income. 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 2001, 2000 and 1999 have been reduced by reinsurance ceded premiums of approximately $37,706, $23,943 and $19,037, respectively. Net losses and loss expenses incurred for 2001 and 2000 have been reduced by ceded reinsurance recoveries of approximately $72,701 and $40,586, respectively. Net losses and loss expenses incurred for 1999 have been increased by net savings on reinsured claims of $771. 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 2001, 2000 and 1999 include approximately $5,931, $4,678 and $4,981, respectively, relating to the assumption of reinsurance from other companies and from reinsurance pools. Losses and loss expenses incurred for 2001 included an estimated $20,000 for the Company's exposure from reinsurance assumed treaties related to the events of September 11, 2001.
Components of reinsurance recoverable at December 31 are as follows:
NOTE G - SHAREHOLDERS' EQUITY Changes in common stock outstanding and additional paid-in capital are as follows:
The Company's Class A and Class B common stock has a stated value of approximately $.05 per share.
Shareholders' equity at December 31, 2001 includes $278,249 representing GAAP shareholder's equity of insurance subsidiaries, of which $40,815 may be transferred by dividend or loan to the parent company without approval by, or notification to, regulatory authorities. An additional $189,859 of shareholder's equity of such insurance subsidiaries may be advanced or loaned to the Company with prior notification to and approval from regulatory authorities.
Net income of the insurance subsidiaries, as determined in accordance with statutory accounting practices, was $5,660, $24,309 and $18,212 for 2001, 2000 and 1999, respectively. Consolidated statutory shareholder's equity for these subsidiaries was $273,072 and $291,371 at December 31, 2001 and 2000, respectively.
NOTE H - OTHER OPERATING EXPENSES Details of other operating expenses for the years ended December 31:
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:
No effect on net income was considered to result from the presumed exercise of the options used in calculating diluted earnings per share. The market value options, discussed in Note K, 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.
NOTE J - REPORTABLE SEGMENTS
The Company and 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 first dollar or small deductible basis. The non-standard private passenger automobile segment provides motor vehicle liability and physical damage coverage to individuals. The reinsurance assumed segment accepts retrocessions from selected reinsurance companies, principally reinsuring against catastrophes.
The Company's reportable segments are business units that operate in the property/casualty insurance industry and each offers products to different classes of customers. The reportable segments are managed separately due to the differences in underwriting criteria used to market products to each class of customer and the methods of distribution of the products each reportable segment provides. Segment information shown in the table below as "all other" includes products 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 the fleet trucking segment includes revenue and expense 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 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.
NOTE J - REPORTABLE SEGMENTS (CONTINUED) The following table provides certain profit and loss information for each reportable segment for the years ended December 31:
The following tables are reconciliations of reportable segment revenues and profits to the Company's consolidated revenue and income before federal income taxes, respectively.
The Company, through its subsidiaries, is licensed to do business in all 50 states of the United States, all Canadian provinces and Bermuda. Canadian and Bermuda operations are currently not significant.
One customer of the fleet trucking segment represents approximately $28,864, $23,739 and $22,301 of the Company's consolidated revenue in 2001, 2000 and 1999, respectively.
NOTE K - 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 2001, 2000 or 1999. At December 31, 2001 there were 136,179 shares (Class A) and 375,766 shares (Class B) outstanding which are eligible for repurchase by the Company.
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. All options expire ten years after the date of grant. All of the Company's option plans have received shareholder approval. Approximately 273,000 of such options are available for future grants.
A summary of the Company's stock option activity and related information for the years ended December 31 follows:
The fair value of 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 Accounting Standards Board Statement No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION, 2000 net income and earnings per share would have been reduced by $918 and $.07, respectively, related to the issuance of 1997 market value options. Similarly, 1999 net income and earnings per share would have been reduced by $975 and $.07, respectively, related to these options. There would have been no impact on 2001 net income or earnings per share related to these options.
Exercise prices for options outstanding as of December 31, 2001 were $.33, $1.00 or $25.75. The weighted-average remaining contractual life of options exercisable at either $.33 or $1.00 is 4.9 years with a weighted-average exercise price of $.83. The remaining contractual life of options exercisable at $25.75 is 6 years. The compensation cost that has been charged against income for all stock-based compensation plans, consisting of directors' fees only, was $130, $136 and $139 for 2001, 2000 and 1999, respectively.
During 2001 and 2000, the Company offered loans to certain key employees for the sole purpose of purchasing the Company's Class B common stock in the open market. $2,257 and $1,709 of such full-recourse loans were issued and outstanding at December 31, 2001 and 2000, respectively, and carry an interest rate of 6%, payable annually on the loan anniversary date. The underlying securities serve as collateral for these loans, which must be repaid no later than 10 years from the date of issue.
NOTE L - QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) Quarterly results of operations are as follows:
Third quarter, 2001 results were impacted by the Company's exposure, under certain reinsurance assumed treaties, to the events of September 11, 2001. Losses and loss expenses incurred were increased by $20,000, net loss was increased by $13,000 and earnings per share were reduced by $1.07 as the result of this event.
NOTE M - SUBSEQUENT EVENT During February, 2002, a large block of the Company's Class A and Class B common shares became available from a group of shareholders who recently received the shares via a distribution from a trust which was a major shareholder. The Company repurchased 97,190 and 269,331 of the Class A and Class B shares, respectively, for an aggregate of approximately $7.3 million. In addition, certain executive officers and employees of the Company purchased an aggregate of 251,800 Class B common shares for approximately $5.0 million, funding for which was provided by loans from the Company. The loans bear interest at the current prime rate with principal due no later than ten years from the date of issuance. The Company borrowed $10 million under its bank line of credit in connection with the share purchases.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
No response to this item is required.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information with respect to the directors of the Registrant to be provided under this item is omitted from this Report because the Registrant will file with the Commission a definitive proxy statement pursuant to Regulation 14A involving the election of directors not later than 120 days after the close of its fiscal year.
The information required by Item 10 of this Report with respect to directors which will appear in the definitive proxy statement is incorporated by reference herein.
The executive officers of the Company will serve until the next annual meeting of the Board of Directors and until their respective successors are elected and qualified. Except as otherwise indicated, the occupation of each officer during the past five years has been in his current position with the Company.
The following summary sets forth certain information concerning the Company's executive officers:
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION *
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT *
ITEM 13.
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.
PART IV
ITEM 14.
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, 2001 and 2000
Consolidated Statements of Income and Retained Earnings - Years ended December 31, 2001, 2000 and 1999
Consolidated Statements of Changes in Equity Other Than Capital - Years ended December 31, 2001, 2000 and 1999
Consolidated Statements of Cash Flows - Years ended December 31, 2001, 2000 and 1999
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 II--Condensed Financial Information of the Registrant
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.
3. Listing of Exhibits:
NUMBER & CAPTION FROM EXHIBIT TABLE OF ITEM 601 OF REGULATION S-K EXHIBIT NUMBER AND DESCRIPTION - ----------------------- ---------------------------------------------------
(3) EXHIBIT 3(i)-- (Articles of Incorpor- Articles of Incorporation of Baldwin & Lyons, Inc., ation & By Laws) as amended (Incorporated as an exhibit by reference to Exhibit 3(a) to the Company's Annual Report on Form 10-K for the year ended December 31, 1986)
EXHIBIT 3(ii)-- By-Laws of Baldwin & Lyons, Inc., as restated (Incorporated as an exhibit by reference to Exhibit 3 to the Company's Annual Report on Form 10-K for the year ended December 31, 2000)
(10) EXHIBIT 10(a)-- (Material Contracts) 1981 Employee Stock Purchase Plan (Incorporated as an exhibit by reference to Exhibit A to the Company's definitive Proxy Statement for its Annual Meeting held May 5, 1981)
EXHIBIT 10(b)-- Baldwin & Lyons, Inc. Employee Discounted Stock Option Plan (Incorporated as an exhibit by reference to Appendix A to the Company's definitive Proxy Statement for its Annual Meeting held May 2, 1989)
EXHIBIT 10(c)-- Baldwin & Lyons, Inc. Deferred Directors Fee Option Plan (Incorporated as an exhibit by reference to Exhibit 10(f) to the Company's Annual Report on Form 10-K for the year ended December 31, 1989)
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)
NUMBER & CAPTION FROM EXHIBIT TABLE OF ITEM 601 OF REGULATION S-K EXHIBIT NUMBER AND DESCRIPTION - ----------------------- -----------------------------------------------------
EXHIBIT 10(e)-- Baldwin & Lyons, Inc. Restated Employee Discounted Stock Option Plan. (Incorporated as an exhibit by reference to Exhibit 10(f) to the Company's Annual Report on Form 10-K for the year ended December 31, 1997)
(11) EXHIBIT 11-- (Statement regarding Computation of Per Share Earnings computation of per share earnings)
(21) EXHIBIT 21-- (Subsidiaries of the Subsidiaries of Baldwin & Lyons, Inc. registrant)
(23) EXHIBIT 23-- (Consents of experts Consent of Ernst & Young LLP and counsel)
(24) EXHIBIT 24-- (Powers of Attorney) Powers of Attorney for certain Officers and Directors
(b) No reports on Form 8-K were filed by the Company in the fourth quarter of 2001.
(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 44 through 50 of this report.
SCHEDULE I -- SUMMARY OF INVESTMENTS- OTHER THAN INVESTMENTS IN RELATED PARTIES
FORM 10-K - YEAR ENDED DECEMBER 31, 2001
BALDWIN & LYONS, INC. AND SUBSIDIARIES
(A) All securities listed are considered available-for-sale and, accordingly, are presented at fair value in the financial statements.
SCHEDULE II CONDENSED FINANCIAL INFORMATION OF REGISTRANT
FORM 10-K - YEAR ENDED DECEMBER 31, 2001
BALDWIN & LYONS, INC.
CONDENSED BALANCE SHEETS
See notes to condensed financial statements
SCHEDULE II CONDENSED FINANCIAL INFORMATION OF REGISTRANT
FORM 10-K - YEAR ENDED DECEMBER 31, 2001
BALDWIN & LYONS, INC.
CONDENSED STATEMENTS OF INCOME
See notes to condensed financial statements
SCHEDULE II CONDENSED FINANCIAL INFORMATION OF REGISTRANT
FORM 10-K - YEAR ENDED DECEMBER 31, 2001
BALDWIN & LYONS, INC.
CONDENSED STATEMENTS OF CASH FLOWS
See notes to condensed financial statements
NOTE TO CONDENSED FINANCIAL STATEMENTS--BASIS OF PRESENTATION The Company's investment in subsidiaries is stated at cost plus equity in the undistributed earnings of subsidiaries since the date of acquisition. The Company's share of net income of its subsidiaries is included in income using the equity method. These financial statements should be read in conjunction with the Company's consolidated financial statements.
(A) Allocations of certain expenses have been made to investment income, settlement expenses and other operating expenses and are based on a number of assumptions and estimates. Results among these catagories would change if different methods were applied.
(B) Commissions paid to the Parent Company have been eliminated for this presentation. Commission allowances resulting from reinsurance transactions are offset against other operating expenses. These allowances account for the decreases from year-to-year.
(A) Bad debts written off during the year net of recoveries of previously written off amounts, if any.
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 28, 2002 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 28, 2002 By /s/ Gary W. Miller ------------------------------ Gary W. Miller, Chairman and CEO; Director
March 28, 2002 By /s/ G. Patrick Corydon ------------------------------ G. Patrick Corydon, Senior Vice President - Finance and CFO (Principal Financial Officer and Principal Accounting Officer)
March 28, 2002 By /s/ Joseph DeVito ------------------------------ Joseph DeVito, Director and ExecutiveVice President
March 28, 2002 By /s/ James Good ------------------------------ James Good, Director and Executive Vice President
March 28, 2002 By /s/ Stuart D. Bilton ------------------------------ (*) Stuart D. Bilton, Director
March 28, 2002 By /s/ Otto N. Frenzel III ------------------------------ (*) Otto N. Frenzel III, Director
SIGNATURES (CONTINUED)
March 28, 2002 By /s/ John M. O'Mara ------------------------------ (*) John M. O'Mara, Director
March 28, 2002 By /s/ Thomas H. Patrick ------------------------------ (*) Thomas H. Patrick, Director
March 28, 2002 By /s/ Nathan Shapiro ------------------------------ (*) Nathan Shapiro, Director
March 28, 2002 By /s/ Norton Shapiro ------------------------------ (*) Norton Shapiro, Director
March 28, 2002 By /s/ John D. Weil ------------------------------ (*) John D. Weil, Director
March 28, 2002 By /s/ Robert Shapiro ------------------------------ (*) Robert Shapiro, Director
March 28, 2002 By /s/ John Pigott ------------------------------ (*) John Pigott, Director
(*) By Gary W. Miller, Attorney-in-Fact
ANNUAL REPORT ON FORM 10-K
ITEM 14(c)--CERTAIN EXHIBITS
YEAR ENDED DECEMBER 31, 2001
BALDWIN & LYONS, INC.
INDIANAPOLIS, INDIANA
BALDWIN & LYONS, INC. Form 10-K for the Fiscal Year Ended December 31, 2001
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 to the Company's Annual Report on Form 10-K for the year ended December 31, 2000) N/A
EXHIBIT 10(a)-- 1981 Employees Stock Purchase Plan (Incorporated as an exhibit by reference to Exhibit A to the Company's definitive Proxy Statement for its Annual Meeting held May 5, 1981) N/A
EXHIBIT 10(b)-- Baldwin & Lyons, Inc. Employee Discounted Stock Option Plan (Incorporated as an exhibit by reference to Appendix A to the Company's definitive Proxy Statement for its Annual Meeting held May 2, 1989) N/A
EXHIBIT 10(c)-- Baldwin & Lyons, Inc. Deferred Directors Fee Option Plan (Incorporated as an exhibit by reference to Exhibit 10(f) to the Company's Annual Report on Form 10-K for the year ended December 31, 1989) N/A
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)-- 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. 57
EXHIBIT 21-- Subsidiaries of Baldwin & Lyons, Inc. p. 58
EXHIBIT 23-- Consent of Ernst & Young LLP p. 59
EXHIBIT 24-- Powers of Attorney for certain Officers and Directors p. 60