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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
For the fiscal year ended Commission file number 0-5534
DECEMBER 31, 1996
BALDWIN & LYONS, INC.
(Exact name of registrant as specified in its charter)
INDIANA 35-0160330
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1099 NORTH MERIDIAN STREET, INDIANAPOLIS, INDIANA46204
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (317) 636-9800
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
(TITLE OF CLASS)
Class A Common Stock, No Par Value
Class B Common Stock, No Par Value
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter periods that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [ X ] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ X ]
The aggregate market value of Class A Common Stock (voting stock) held by non-
affiliates of the Registrant as of March 12, 1997, based on the closing trade
price on that date, was approximately $11,489,000.
The number of shares outstanding of each of the issuer's classes of common stock
as of March 12, 1997:
Common Stock, No Par Value:
Class A (voting) 2,440,579 shares
Class B (nonvoting) 11,401,059 shares
The Index to Exhibits is located on pages 54 and 55.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for Annual Meeting of Shareholders to be held
May 6, 1997 are incorporated by reference into Part III.
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PART I
ITEM 1. BUSINESS
Baldwin & Lyons, Inc. was incorporated under the laws of the State of Indiana in
1930. Through its divisions and subsidiaries, it specializes in marketing and
underwriting property and casualty insurance for companies in the motor carrier
industry. The Company's principal lines of business consist of (1) the
insurance brokerage and agency operations and specialized insurance-related
services carried on by Baldwin & Lyons, Inc. (referred to herein as "B & L");
and (2) insurance underwriting operations carried on by B & L's three wholly-
owned property/casualty insurance company subsidiaries: Protective Insurance
Company (referred to herein as "Protective"); Sagamore Insurance Company
(referred to herein as "Sagamore"); and B & L Insurance, Ltd. (referred to
herein as "BLI"). These subsidiaries are collectively referred to herein as the
"Insurance Subsidiaries." The "Company" as used herein refers to Baldwin &
Lyons, Inc. and all its subsidiaries unless the context indicates otherwise.
On November 9, 1996, Amli Realty Co. (Amli) closed an agreement with UICI, a
publicly traded financial services and insurance company, which resulted in UICI
acquiring 100% of Amli's outstanding stock. The Company received 617,278 shares
of UICI common stock, with a market value at December 31, 1996 of approximately
$20 million, in a non-monetary, tax-free exchange for its 38% stake in Amli.
The Company accounted for its minority investment in Amli by the equity method.
The book value of the Company's investment in Amli at the date of the exchange
was $7.5 million. The consolidated statements of income for the years ended
December 31, 1995 and 1994 have been restated to reflect the sale of Amli. The
Company's share of Amli's income from operations for the current and prior
periods is reported as discontinued operations. The consolidated statement of
cash flows for the year ended December 31, 1996 includes changes in certain
assets and liabilities which are presented without the effect of the sale of
Amli. The consolidated balance sheet at December 31, 1995 and the consolidated
statements of cash flows for the years ended December 31, 1995 and 1994 were not
restated.
On October 2, 1995, the Company sold Protective's subsidiary, Hoosier Insurance
Company (referred to herein as "Hoosier"), to General Casualty Company of
Wisconsin, a Winterthur Swiss Insurance Group company, for $36.5 million.
Included in the Company's insurance underwriting segment prior to the sale,
Hoosier marketed general lines of insurance to individuals and small commercial
customers in Indiana. The consolidated statement of income for the year ended
December 31, 1994 was restated to reflect the sale of Hoosier. Income and
expense amounts related to Hoosier for 1995 and 1994 and the gain recognized on
the sale of Hoosier are reported as discontinued operations. The consolidated
statement of cash flows for the year ended December 31, 1995 includes changes in
certain assets and liabilities which are presented without the effect of the
sale of Hoosier. The consolidated statement of cash flows for the year ended
December 31, 1994 was not restated.
INSURANCE BROKERAGE, AGENCY AND SERVICES OPERATIONS
B & L acts as an agent and broker which places casualty, inland marine, property
and other types of insurance, serving customers on a nationwide basis. The
following summary describes briefly the principal types of insurance placed by
B & L:
- Casualty insurance including motor vehicle liability and physical damage
insurance, other liability insurance, workers' compensation insurance,
specialized accident insurance and fidelity and surety bonds.
- Inland Marine consisting principally of cargo insurance.
- Property coverages including insurance against loss of property or the
use thereof by reason of fire, windstorm or other perils.
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B & L also performs a variety of additional services for its clients such as
risk surveys and analyses, government compliance assistance, loss control and
cost studies and research, development, and consultation in connection with new
insurance programs including development of computerized systems to assist in
monitoring accident data. Extensive claims services are also provided by B & L,
frequently for a fee, primarily to clients with self-insurance programs.
B & L has active agency arrangements with a small number of insurance companies,
none of which is exclusive and all of which are terminable at will or on short
notice by either party. Of the commissions received by
B & L in 1996, approximately 98% was from marketing products for the Insurance
Subsidiaries.
INSURANCE UNDERWRITING OPERATIONS
Underwriting operations are currently conducted as follows:
Protective is engaged in direct writing of multiple line property, casualty
and related insurance coverages for large trucking fleets which retain
substantial amounts of self-insurance and for medium-sized trucking
companies on a first-dollar or small deductible basis with no self-
insurance retention. Protective also accepts retrocessions from
reinsurance companies, principally reinsuring against catastrophes.
Protective is licensed to do business in all states, the District of
Columbia and all Canadian provinces.
Sagamore is engaged in writing fully insured and small deductible
automobile liability and physical damage insurance programs for small
trucking operators. In addition, Sagamore markets private passenger
automobile insurance products to non-standard insureds in the state of
Indiana. Sagamore intends to expand its small trucking and private
passenger automobile products into other states during 1997. Sagamore has
also developed a small business workers' compensation product which it will
market beginning in 1997. Sagamore is currently licensed in twenty-one
states.
BLI is an offshore (Bermuda) reinsurance company which, to date, has
provided reinsurance for Protective only. This subsidiary provides the
availability of an insurance profit center concept allowing clients the
advantages of a "captive" insurance company without the attendant expense
or management demands.
Approximately 74% of the gross direct premiums written by the Insurance
Subsidiaries during 1996 was attributable to business placed by B & L. The
remaining 26% consists primarily of business written by Sagamore within its
small fleet and private passenger automobile programs, originating through a
variety of independent agents.
In addition to intercompany reinsurance arrangements, the Insurance Subsidiaries
cede portions of their gross premiums written to certain non-affiliated insurers
under excess of loss and quota-share treaties and by facultative placements.
The Insurance Subsidiaries also assume limited amounts of reinsurance
voluntarily from other insurers under retrocession and treaty arrangements.
During 1996, such voluntary reinsurance assumed included approximately $9.2
million to Protective for its participation in retrocessions from several
property catastrophe reinsurance pools. The Company intends to participate in
such retrocessions only as long as premium rates remain at attractive levels.
Historically, the majority of reinsurance assumed has related to participation
in numerous government-operated 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.
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PROPERTY/CASUALTY LOSSES AND LOSS ADJUSTMENT EXPENSES
The consolidated financial statements include the estimated liability for unpaid
losses and loss adjustment expenses ("LAE") of the Insurance Subsidiaries. The
liabilities for losses and LAE are determined using case basis evaluations and
statistical projections and represent estimates of the ultimate net cost of all
unpaid losses and LAE incurred through December 31 of each year. These
estimates are subject to the effects of trends in claim severity and frequency
and are continually reviewed and, as experience develops and new information
becomes known, the liability is adjusted as necessary. Such adjustments, either
positive or negative, are reflected in current operations. Reserves for
incurred but not reported claims are determined on the basis of actuarial
calculations using historical data. The anticipated effect of inflation is
implicitly considered when estimating liabilities for losses and LAE.
While anticipated price increases due to inflation are considered in estimating
the ultimate claim costs, the increase in average severities of claims is caused
by a number of factors that vary with the individual type of policy written.
Future average severities are projected based on historical trends adjusted for
anticipated changes in underwriting standards, policy provisions, and general
economic and social trends. These anticipated trends are monitored based on
actual development and are modified as new conditions would suggest that changes
are necessary.
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, 1996 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 $3.4 million
higher for the year ended December 31, 1996.
The effect of discounting on loss and LAE developments, such as those presented
in the tables on pages 5 and 7, results in apparent deficiencies which may be
misleading without further explanation. As discounted reserves are adjusted in
years subsequent to their original establishment (to account for the passage of
time or for the payment of losses and LAE), deficiencies are automatically
generated. These deficiencies are, in effect, offset by investment income
earned on the reserves held. However, investment income is not considered in
the accompanying development tables. The Company is presently able to precisely
identify only a portion of the effect of discounting on the loss reserve
developments. The quantified portion of the effect of discounting is shown in
the development table on page 7 and will be discussed in more detail below. It
should be noted, however, that the actual discounting effect is somewhat greater
than the identified amounts presented.
The maximum amount for which the Company insures a trucking risk is $10 million
although occasionally limits above $10 million are provided but are 100%
reinsured. After giving effect to reinsurance arrangements which have been in
force for the past several years, the first $1 million of insured loss for a
single occurrence is retained by the Company. The Company has reinsured $9
million in excess of the first $1 million in coverage liability with several
companies. Certain of these reinsurance treaties contain aggregate recovery
limitations. To the extent that losses in these layers, in the aggregate,
exceed these limitations, the Company could be liable for amounts which would
otherwise be covered under these reinsurance treaties.
The Company's reinsurance structure has remained relatively constant since 1986.
Prior to September 1, 1986, the Company's maximum exposure on a $10 million loss
relating to its trucking insurance business ranged from $250,000 to
approximately $2,000,000. The higher exposures were retained during periods
when reasonably priced reinsurance was not available. Very few losses incurred
during these periods, with the exception of environmental liability losses,
remain unsettled at December 31, 1996. Effective September 1, 1986, and
continuing through December 31, 1996, the Company's exposure relating to
trucking risks is limited to
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$1,000,000 on a $10 million loss, as noted in the immediately preceding
paragraph. With respect to Sagamore's small fleet trucking business, the
Company's maximum net exposure for a single occurrence is $250,000 and for
Sagamore's private passenger automobile business, the Company's maximum exposure
for a single occurrence is $100,000.
The following table sets forth a reconciliation of beginning and ending loss and
LAE liability balances, for 1996, 1995 and 1994. This 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 1996.
RECONCILIATION OF LIABILITY FOR LOSSES AND LOSS ADJUSTMENT
EXPENSES (GAAP BASIS)
Year Ended December 31,
1996 1995 1994
----------- ----------- -----------
NET OF REINSURANCE RECOVERABLE: (IN THOUSANDS)
Liability for losses and LAE at the
beginning of the year $161,458 $175,554 $175,949
Provision for losses and LAE:
Continuing operations:
Claims occurring during the current year 45,999 44,238 55,766
Claims occurring during prior years (12,245) (5,484) (22,856)
Discontinued operations - - 18,573
----------- ----------- -----------
33,754 38,754 51,483
Losses and LAE payments:
Continuing operations:
Claims occurring during the current year 12,891 7,760 9,951
Claims occurring during prior years 27,825 33,819 25,778
Discontinued operations - 11,186 16,137
----------- ----------- -----------
40,716 52,765 51,866
Change in unpaid portion of uncollectible
amounts due from reinsurers 41 (85) (12)
----------- ----------- -----------
Liability for losses and LAE at end of year 154,537 161,458 175,554
REINSURANCE RECOVERABLE ON UNPAID
LOSSES AT END OF YEAR 42,402 50,031 59,655
----------- ----------- -----------
Liability for losses and LAE, gross of
reinsurance recoverables, at end of year $196,939 $211,489 $235,209
=========== =========== ===========
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The reconciliation presented on page 5 shows a $12.2 million (7.6%) savings in
the liability for losses and LAE recorded at December 31, 1995. This savings
includes adverse development totaling $2.4 million relating to environmental
liability claims for policies written in the 1970's. Adjusted for this adverse
development, the savings recorded on prior year claims was $14.6 million and
compares to a one-year savings in 1995, adjusted for environmental liability
claims, of $13.1 million. The net savings is reflected in 1996 underwriting
income. All major coverage groups produced redundancies during each of the
years 1996, 1995 and 1994. A more detailed discussion of reserve savings
experienced in recent years is presented beginning on page 8. Further
discussion regarding environmental matters is included on page 9.
The differences between the liability for losses and LAE reported in the
accompanying 1996 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:
(IN THOUSANDS)
Liability reported on a SAP basis - net of reinsurance recoverable $155,284
Add differences:
Additional reserve for reinsurance assumed losses not
reported to the Company at the current year end 480
Reclassification of loss reserves ceded attributable to insolvent reinsurers 498
Reinsurance recoverable on unpaid losses and LAE 42,402
Deduct differences:
Estimated salvage and subrogation recoveries recorded on
a cash basis for SAP and on an accrual basis for GAAP (1,725)
----------
Liability reported on a GAAP basis $196,939
==========
Loss reserves ceded attributable to insolvent reinsurers are treated as a
separate liability for SAP purposes but are classified as an addition to loss
reserves in the GAAP consolidated balance sheets. This classification was used
for GAAP since the uncollectible amounts are, in effect, a reversal of
reinsurance credits taken against gross loss and LAE reserves. However, losses
incurred have not been affected by the balance sheet classification of these
amounts with loss reserves. Further, the tables on pages 5 and 7 do not include
these amounts in the determination of losses incurred since the inability to
recover these amounts from insolvent reinsurers is a credit loss and is not
associated with the Company's reserving process. Accordingly, loss and LAE
developments would be distorted if amounts related to insolvent reinsurance were
included.
The table on page 7 presents the development of GAAP balance sheet liabilities
for each year end 1986 through 1995 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.
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ANALYSIS OF LOSS AND LOSS ADJUSTMENT EXPENSE DEVELOPMENT--GAAP BASIS
(Dollars in thousands)
Year Ended December 31 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996
- - -------------------- --------- --------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
Liability for Unpaid
Losses and LAE, Net * * * * * * * * * * *
of Reinsurance
Recoverables $148,505 $164,531 $178,179 $186,517 $190,351 $198,790 $188,189 $175,395 $175,012 $161,001 $154,039
Liability Reestimated
as of:
One Year Later 153,388 164,771 173,990 175,998 178,706 185,452 174,269 152,146 169,528 148,756
Two Years Later 155,369 158,108 161,331 162,434 164,977 171,069 153,548 147,577 159,000
Three Years Later 151,435 149,966 154,851 161,143 157,802 155,977 156,271 144,526
Four Years Later 148,447 147,293 154,075 155,059 149,946 160,477 155,104
Five Years Later 145,562 146,814 149,672 151,138 155,601 159,804
Six Years Later 145,227 145,207 147,993 157,020 155,666
Seven Years Later 144,284 144,884 154,164 158,430
Eight Years Later 144,831 152,061 155,365
Nine Years Later 151,740 152,991
Ten Years Later 152,698
Cumulative Redundancy
(Deficiency) (4,193) 11,540 22,814 28,087 34,685 38,986 33,085 30,869 16,012 12,245
Identifiable deficiency
relating to reserve
discounting 3,166 2,516 2,016 1,516 1,116 716 416 - - -
--------- --------- --------- --------- --------- --------- --------- --------- --------- ---------
Adjusted Redundancy
(Deficiency) $(1,027) $14,056 $24,830 $29,603 $35,801 $39,702 $33,501 $30,869 $16,012 $12,245
========= ========= ========= ========= ========= ========= ========= ========= ========= =========
Cumulative Amount of
Liability Paid Through:
One Year Later $37,707 $34,777 $41,889 $41,873 $40,939 $41,958 $38,511 $30,297 $45,005 $27,825
Two Years Later 61,476 62,150 67,990 69,330 63,689 68,706 59,494 58,969 67,219
Three Years Later 80,602 79,848 84,940 81,291 81,746 83,413 82,122 71,375
Four Years Later 91,709 90,357 93,651 95,857 92,313 98,331 91,794
Five Years Later 98,386 97,390 98,666 103,035 103,190 104,915
Six Years Later 102,287 101,329 104,425 111,017 107,579
Seven Years Later 105,799 105,647 111,788 114,005
Eight Years Later 108,736 112,289 114,500
Nine Years Later 115,148 114,903
Ten Years Later 117,411
* Amounts shown for 1986 through 1996 do not include the unpaid portion of
uncollectible amounts due from insolvent reinsurers which are classified with
loss and LAE reserves for financial statement purposes of $3,592, $2,097,
$2,258, $2,215, $818, $597, $611, $554, $542, $457 and $498, respectively.
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The "cumulative redundancy (deficiency)" represents the aggregate change in the
estimates over all prior years. For example, the 1986 liability has developed a
$4.2 million deficiency (shortage) over ten years, before the effects of
discounting are considered. That amount has been reflected in income over the
ten years, as shown on the table. The effect on income of changes in estimates
of the liability for losses and LAE during the past three years is shown in the
first table on page 5.
The "identifiable deficiency relating to reserve discounting" represents the
amount by which the aggregate change in the loss and LAE estimates has been
influenced by the quantified effects of discounting in the loss reserves. As
previously mentioned, the actual effect of discounting is greater than the
amounts shown in the table since certain portions of the change in discounted
amounts are not subject to precise calculation and, therefore, are not
presented in the table. The "adjusted redundancy (deficiency)" is merely the
addition of the previous lines and represents the development after
consideration of the identifiable effects of discounting.
Historically, the Company's loss developments have been generally favorable.
The deficiency shown for the runoff of the December 31, 1986 loss reserves
results from environmental liability losses occurring in the 1970's but not
reported to the Company until the 1990's, as more fully described on page 9.
Even considering these non-recurring losses, the net deficiency for this year is
less than .7% of reserves established at December 31, 1986. Reserve
developments for all year ends 1987 through 1995 have produced redundancies as
of December 31, 1996. In addition to improvements in reserving methods, loss
reserve developments since 1986 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 had a dramatic impact on the
frequency and severity of trucking accidents. Higher self-insured retentions
have also played a part in reduced insurance losses. Higher retentions not only
raise the excess insurance entry point but also encourage trucking company
management to focus even more intensely on safety programs. Further, reserve
savings have been achieved by the use of structured settlements on certain
workers' compensation and liability claims of a long-term liability nature.
The establishment of reserves requires the use of historical data where
available and generally a minimum of ten years of such data is required to
provide statistically valid samples. As previously mentioned, numerous factors
must be considered in reviewing historical data including inflation, tort reform
(or lack thereof), new coverages provided and trends noted in the current book
of business which are different from those present in the historical data.
Clearly, the Company's book of business in 1996 is different from that which
generated much of the ten year historical loss data used to establish reserves
in the past few years. Savings realized in recent years upon the closing of
claims, as reflected in the tables on pages 5 and 7, suggest that the Company's
insured selection process and the overall effect of improved safety programs and
other positive influences on claim frequency and severity have more than offset
the negative factors anticipated when reserves were established. The Company
and its actuaries will continue to review the trends noted and, should it appear
that such trends are permanent and projectable, they will be reflected in future
reserving method refinements.
The lower section of the table on page 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, 1996, the Company had paid $117.4 million
of losses and LAE that had been incurred, but not paid, through the end of 1986;
thus an estimated $35.3 million in losses incurred through 1986 remain unpaid as
of the current financial statement date ($152.7 million incurred less $117.4
million paid).
In evaluating this information, it is important to note that the method of
presentation causes development experience to be duplicated. For example, the
amount of any redundancy or deficiency related to losses settled in 1989, but
incurred in 1986, will be included in the cumulative development amount for year
ends 1986, 1987, and 1988. As such, this table does not present accident or
policy year development data which readers
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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, 1996 included amounts for liability related to
environmental damage claims. Given the Company's principal business is insuring
trucking companies, it does on occasion receive claims involving a trucking
accident which has resulted in the spill of a pollutant. Certain of the
Company's policies may cover these situations on the basis that they were caused
by an accident which resulted in the immediate spill of a pollutant. These
claims are typically reported and resolved within a short period of time.
However, the Company has also received a few environmental claims which did not
result from a "sudden and accidental" event. Some of these claims fall under
policies issued in the 1970's primarily to one account which was involved in the
business of hauling and disposing of hazardous waste. Although the Company had
pollution exclusions in its policies during that period, the courts have ignored
similar exclusions in many environmental cases. As such, the Company revised
the environmental exclusion in its policies in an attempt to prevent the courts
from mandating unintended coverages. During 1994, 1995 and 1996, the Company
recorded adverse development of $.9 million, $7.6 million and $2.4 million,
respectively, on such claims. This development includes a reserve for incurred
but not reported losses of $5.0 million at December 31, 1996.
Establishing reserves for environmental claims is subject to uncertainties that
are greater than those represented by other types of claims. Factors
contributing to those uncertainties include a lack of historical data, long
reporting delays, uncertainty as to the number and identity of insureds with
potential exposure, unresolved legal issues regarding policy coverage, and the
extent and timing of any such contractual liability. Courts have reached
different and sometimes inconsistent conclusions as to when the loss occurred
and what policies provide coverage, what claims are covered, whether there is an
insured obligation to defend, how policy limits are determined, how policy
exclusions are applied and interpreted, and whether cleanup costs represent
insured property damage. Management believes that those issues are not likely
to be resolved in the near future.
However, to date, very few environmental claims have been reported to the
Company. In addition, a review of the businesses of our past and current
insureds indicates that exposure to further claims of an environmental nature is
limited because most of the Company's accounts are not currently, and have not
in the past been, involved in the hauling of hazardous substances. Also, the
revision of the pollution exclusion in the Company's policies in 1986 is
expected to further limit exposure to claims from that point forward. In
addition, the Company has never been presented with an environmental claim
relating to asbestos and, based on the types of business the Company has insured
over the years, it is not expected that the Company will have any asbestos
exposure.
MARKETING
The Company's primary marketing areas are: (1) sales and service of insurance
plans, involving some degree of self-insurance, to large trucking fleets; (2)
sales of insurance programs involving no self-insured retention to medium size
trucking fleets and small operators; (3) the sale of non-standard private
passenger automobile insurance; and (4) other projects.
The sale of insurance to the trucking industry has been subject to many
significant factors in the past ten years. Deregulation of trucking resulted in
many structural changes in the industry and recessionary economic conditions
diminished trucking activity in the early 1980's. At the same time, competition
in commercial insurance stimulated intense price cutting. However, the price
competition abated somewhat in late 1984 continuing into 1985 and 1986 with
several insolvencies among the Company's competitors and other withdrawals from
the trucking insurance market causing increased demand for the Company's
products and services.
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Since 1985, the Company has focused its marketing efforts to large and medium
trucking fleets utilizing Company salesmen and, thereby, eliminated sales to
fleets of less than 20 units. The Company 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 which do not allow for
self-insurance. In 1989, the Company began offering accident insurance on a
group basis to independent contractors under contract to a fleet sponsor. Since
1989, the market for the Company's products has again become increasingly
competitive (see comments under "Competition", following).
During the latter part of 1992, in the aftermath of Hurricane Andrew, property
catastrophe reinsurance, which protects insurance companies from such disasters,
became difficult to obtain and prices increased. In light of the favorable
markets, the Company has accepted retrocessions for catastrophe exposures from
certain reinsurers on terms which are considered to be very favorable. This
program was continued during 1996 with premiums earned from these retrocessions
totaling $9.2 million. To the extent that pricing remains favorable on these
retrocessions, this program is expected to continue into 1997.
Based upon research conducted during 1993, beginning in the second quarter of
1994 the Company reintroduced a program of coverages for "small fleet" trucking
concerns (small operators with one to ten power units). This program is
initially being limited to a small geographic area composed of midwestern
states. Approximately $2.7 million of premium was written in this new program
during 1996 and premium writings of $3 to $4 million are expected for 1997 with
expansion into a limited number of additional states anticipated.
During the second quarter of 1995, the Company entered the private passenger
automobile insurance market for non-standard insureds. This program is
currently being marketed in Indiana, however, at least one new state will be
added during 1997. Market acceptance to date has been favorable and
approximately $13.7 million of premium was written during 1996. Premium
writings of $24 to $27 million are expected for 1997. Again, the future of this
program will be dependent on information derived from and experience of the
Company's limited marketing approach.
The Company will begin marketing a small business workers' compensation product
in one state beginning in 1997. As experience in this limited market warrants,
other states may be added. Premium writings of $3 to $5 million are expected
for 1997.
INVESTMENTS
The Company manages its invested assets conservatively to provide a high degree
of flexibility to respond to opportunities in the financial markets and in the
Company's insurance lines. The resulting investment strategies emphasize
relatively short-term maturities and high asset quality and are designed to
produce reasonable returns without jeopardizing principal. The Company's
investment programs limit risk taking in all major portions of the portfolio.
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At December 31, 1996 the financial statement value of the Company's investment
portfolio was $455 million. The following comparison of the Company's bond and
short-term investment portfolios, using par value as a basis, indicates the
changes in the portfolio during 1996.
Maturities on Bonds and Short-Term Investments at December 31 (Par Value)
1996 1995
--------- ---------
Less than one year 39.7% 35.7%
1 to 5 years 42.2 50.8
5 to 10 years 10.2 6.2
More than 10 years 7.9 7.3
--------- ---------
100.0% 100.0%
========= =========
Average life of portfolio
(years) 3.1 2.9
========= =========
The Company's concentration of invested assets in short-term investments
provides it with a level of liquidity which is more than adequate to provide for
its anticipated cash flow needs. The structure of the investment portfolio also
provides the Company with the ability to restrict premium writings during
periods of intense competition, which typically result in inadequate premium
rates, and allows the Company to respond to new opportunities in the marketplace
as they arise.
A comparison of the diversification of the Company's investment portfolio, using
cost as a basis, is as follows:
December 31
1996 1995
-------- --------
U.S. Government obligations 36.8% 43.9%
Common stocks 21.8 17.9
Municipal bonds 14.3 10.3
Mortgage-backed securities 12.6 10.3
Short-term and other investments 8.4 11.9
Corporate and other bonds 5.3 4.8
Preferred stocks .8 .9
-------- --------
100.0% 100.0%
======== ========
Approximately $4.3 million of the fixed maturity portfolio (.9% of total
invested assets) consists of bonds considered less than investment grade at
December 31, 1996. The unrealized net gain on the fixed maturity portfolio was
$.8 million at December 31, 1996, before income taxes, and compares to a $4.4
million unrealized gain at December 31, 1995.
Equity securities comprise 32% of the financial statement value of the
consolidated investment portfolio at December 31, 1996, up from 23% at the prior
year end. The unrealized gains on the equity security portfolio
increased $33 million, before taxes, from the prior year end, accounting for
nearly the entire increase in the percentage of portfolio composition.
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A comparison of overall investment yields is as follows:
1996 1995
------- -------
Before federal tax:
Investment income 5.3% 5.9%
Investment income plus realized
investment gains 7.1 7.6
After federal tax:
Investment income 3.7 4.1
Investment income plus realized
investment gains 4.9 5.2
EMPLOYEES
As of March 1, 1997, the Company had 194 employees, 183 of whom are engaged
primarily in the business of the Company's Insurance Subsidiaries. The increase
in employees from March 1, 1996 is due primarily to the expansion in the
Company's new private passenger automobile and small business workers'
compensation products.
COMPETITION
The insurance brokerage and agency business is highly competitive. B & L
competes with a large number of insurance brokerage and agency firms and
individual brokers and agents throughout the country, many of which are
considerably larger than B & L. B & L also competes with insurance companies
which write insurance directly with their customers.
Insurance underwriting is also highly competitive. The Insurance Subsidiaries
compete with other stock and mutual companies and inter-insurance exchanges
(reciprocals). There are numerous insurance companies offering the lines of
insurance which are currently written or may in the future be written by the
Insurance Subsidiaries. Many of these companies have been in business for
longer periods of time, have significantly larger volumes of business, offer
more diversified lines of insurance coverage and have greater financial
resources than the Company. In many cases, competitors are willing to provide
coverage for rates lower than those charged by the Insurance Subsidiaries. Many
potential clients self-insure workers' compensation and other risks for which
the Company offers coverage, and some concerns have organized "captive"
insurance companies as subsidiaries through which they insure their own
operations. Some states have workers' compensation funds which preclude private
companies from writing this business in those states. Federal law also
authorizes the creation of "Risk Retention Groups" which may write insurance
coverages similar to those offered by the Company.
In connection with the sale of Hoosier, the Company is restricted from issuing
any contract of insurance, of the type issued by Hoosier, in the state of
Indiana through December 31, 1998.
ITEM 101(b), (c)(1)(i) and (vii), and (d) of REGULATION S-K:
Reference is made to Note L to the consolidated financial statements which
provides information concerning industry segments and is filed herewith under
Item 8, Financial Statements and Supplementary Data.
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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 46,000 square
feet and expires in August, 1998, with an option to renew for an additional
three years. The Company's entire operations, with the exception of Baldwin &
Lyons, California, are conducted from these leased facilities.
The Company owns a small building and the adjacent real estate approximately two
miles from its main office. This building contains approximately 3,300 square
feet of usable space, and is used primarily as storage facilities and as a
contingent back up and disaster recovery site for computer operations.
Baldwin & Lyons, California leases approximately 2,700 square feet of office
space in a suburb of Los Angeles, California. The lease expires in August, 1997
with a three year renewal option which the company intends to exercise. All
west coast operations are conducted from these facilities.
The current facilities are expected to be adequate for the Company's operations
for the foreseeable future.
Item 3. LEGAL PROCEEDINGS
In the ordinary, regular and routine course of their business, the Company and
its Insurance Subsidiaries are frequently involved in various matters of
litigation relating principally to claims for insurance coverage provided. No
currently pending matter is deemed by management to be material to the Company.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of 1996.
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PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS
The Company's Class A Common Stock and Class B Common Stock are traded in the
NASDAQ National Market System and are quoted on the National Association of
Securities Dealers Automated Quotation System ("NASDAQ") under the symbols BWINA
and BWINB, respectively. As of December 31, 1996, 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 1996 and 1995, as reported by the National
Association of Security Dealers, Inc. through NASDAQ and published in the
financial press. The quotations reflect interdealer prices without retail
markup, markdown or commission and do not necessarily represent actual
transactions.
Class A Class B Cash
--------------------- --------------------- Dividends
High Low High Low Declared
--------- --------- --------- --------- ---------
Year ended December 31:
1996:
Fourth Quarter $19 $16 1/2 $18 15/16 $17 3/4 $.10
Third Quarter 19 3/4 18 3/4 20 3/4 18 1/4 .10
Second Quarter 20 1/2 16 1/2 20 3/4 14 1/4 .08
First Quarter 18 3/4 16 3/4 18 14 1/4 .08
1995:
Fourth Quarter $17 3/4 $15 3/4 $16 1/2 $14 1/4 $.08
Third Quarter 17 15 3/4 16 14 7/8 .08
Second Quarter 18 1/4 15 3/4 17 15 1/2 .08
First Quarter 18 1/4 16 1/4 17 5/8 15 .06
The Company expects to continue its policy of paying regular cash dividends
although there is no assurance as to future dividends because they are dependent
on future earnings, capital requirements and financial conditions and are
subject to regulatory restrictions as described in Note H to the consolidated
financial statements.
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Item 6. SELECTED FINANCIAL DATA
Year Ended December
------------------------------------------------------------
1996 1995 1994 1993 1992
---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Net premiums written $ 61,431 $ 63,065 $ 61,503 $ 53,820 $ 54,032
Net premiums earned 58,743 58,793 61,187 53,210 53,694
Net investment income and realized
gains on investments 26,440 26,371 15,272 21,447 20,027
Losses and loss expenses incurred 33,754 38,754 32,910 26,960 34,308
Income from continuing operations 21,334 20,594 20,505 24,654 21,069
Net income 21,692 29,360 20,791 25,234 21,251
Earnings per share -- net income (1) (3) 1.51 1.97 1.37 1.62 1.35
Cash dividends per share (3) .36 .30 .33 .183 .175
Investment portfolio -- statement value 454,791 424,833 386,646 382,904 358,262
Total assets 533,462 512,225 503,899 487,522 476,247
Shareholders' equity 273,122 247,008 205,933 203,380 177,912
Book value per share (1) (3) 19.46 16.78 13.66 13.01 11.41
Underwriting ratios (2):
Losses and loss expenses 57.5% 65.9% 53.8% 50.7% 63.9%
Underwriting expenses 29.2% 28.0% 27.6% 29.9% 24.0%
Combined 86.7% 93.9% 81.4% 80.6% 87.9%
(1) Adjusted for the effect of stock options outstanding
(2) Data is for all coverages combined and is presented based upon generally
accepted accounting principles.
(3) All per share amounts are adjusted for the three-for-one stock split on
November 17, 1993.
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Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
The primary sources of the Company's liquidity are (1) funds generated from
insurance premiums, (2) net investment income and (3) maturing investments. The
Company generally experiences positive cash flow resulting from the fact that
premiums are collected on insurance policies in advance of the disbursement of
funds in payment of claims. Operating costs of the insurance subsidiaries,
other than loss and loss expense payments and commissions paid to the parent
company, generally average between 25% and 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 premium volume, however, operating cash
flows may turn negative as loss settlements exceed net premium revenue and
receipts of investment income.
For several years, the Company's investment philosophy has emphasized the
purchase of short-term instruments with maximum quality and liquidity. As
interest rates have remained relatively low and yield curves have been
essentially flat in recent years, the Company has not committed funds to longer
term fixed maturity investments. The average life of the Company's bond and
short-term investment portfolio was 3.1 years compared to 2.9 years for 1995.
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, 1996 included $19.6 million in short-term
investments which are readily convertible to cash without market penalty and an
additional $94.3 million of fixed maturity investments maturing in less than one
year. The Company believes that these liquid investments, plus the expected
cash flow from current operations, are more than sufficient to provide for
projected claim payments and operating cost demands. In addition, the Company's
reinsurance program is structured to avoid serious cash drains that might
accompany catastrophic losses. In the event competitive conditions continue to
produce inadequate rates and the Company chooses to further reduce volume, the
Company believes that the liquidity of its investment portfolio would permit it
to continue to pay claims as settlements are reached without requiring the
disposal of investments at a loss, regardless of interest rates in effect at the
time.
Net premiums written by the Company's U.S. insurance subsidiaries for 1996 were
approximately 24% of the combined statutory surplus of these subsidiaries.
Premium writings of 200% to 300% of surplus are generally considered acceptable
by regulatory authorities. Accordingly, the Company has the ability to
significantly increase its business without seeking additional capital to meet
statutory guidelines.
Consolidated shareholders' equity increased to $273.1 million at December 31,
1996, from $247.0 million at December 31, 1995. In addition to current year
earnings, this increase includes a $19.2 million increase in unrealized net
gains on the Company's investment portfolio from $19.3 million at December 31,
1995 to $38.5 million at December 31, 1996. The increase in shareholders'
equity is net of $10.2 million in treasury share purchases and $5.1 million of
dividends to shareholders. Book value per common share outstanding increased
16% to $19.46 at December 31, 1996 from $16.78 per share at December 31, 1995.
16
17
As more fully discussed in Note H to the consolidated financial statements, at
December 31, 1996, $20.5 million, or 7.5% of consolidated shareholders' equity,
represented net assets of the Company's insurance subsidiaries which, at that
time, could not be transferred in the form of dividends, loans or advances to
the parent company due to statutory restrictions on the allowable transfers.
However, management believes that these restrictions pose no material liquidity
concerns for the Company. The financial strength and stability of the
subsidiaries permit ready access by the parent company to short-term and long-
term sources of credit. The parent company had cash and marketable investments
of approximately $49.7 million at December 31, 1996.
RESULTS OF OPERATIONS
NOTE: ALL COMPARATIVE AMOUNTS IN THE FOLLOWING DISCUSSION, FOR THE YEAR 1994,
HAVE BEEN ADJUSTED TO REFLECT THE SALE OF HOOSIER INSURANCE COMPANY DURING 1995.
SEE NOTE A FOR MORE INFORMATION WITH RESPECT TO THIS SALE.
1996 COMPARED TO 1995
Direct premiums written for 1996 totaled $63.4 million, a decrease of $4.0
million (6.0%) from 1995. This decrease is primarily attributable to decreases
in the majority of the Company's trucking-related products. Large fleet and
medium fleet trucking premium writings decreased $9.9 million (29.1%) and $.8
million (20.7%), respectively, reflecting the continued intense competition in
these markets which resulted in the non-renewal of several accounts and rate
reductions on those accounts renewed. Premium writings for Protective's "work
accident" program also decreased by $2.1 million (13.8%) from 1995, reflecting
rate reductions on renewed accounts. Decreases in premium writings were also
derived from Sagamore's program for small trucking fleet risks and surety
premiums related to large fleet risks of $.7 million each. The above decreases
were partially offset by an increase in Sagamore's non-standard private
passenger automobile business of $8.8 million (181.6%) from 1995. In addition,
premiums for retrospectively rated workers' compensation policies increased $1.3
million reflecting loss development on prior year policies.
Premium writings from reinsurance assumed decreased by $2.3 million (19.2%) to
$9.9 million during 1996. This decrease relates principally to a $2.1 million
reduction in premiums assumed from voluntary property catastrophe retrocession
pools, to $9.2 million, during 1996. The lower catastrophe assumed premium is
attributable to withdrawal from certain markets by the ceding reinsurers as the
result of declining premium rates.
Premium writings ceded to reinsurers decreased $4.7 million (28.7%) during 1996
to $11.8 million. The percentage of premiums ceded to direct premiums written
decreased to 18.6% for 1996 from 24.5% for 1995 due primarily to the termination
of the quota share treaty on the Company's "work accident" program at the
beginning of 1996. Ceding rates on the Company's primary treaties for 1996 were
consistent with the prior year.
After giving effect to changes in unearned premiums, net premiums earned were
$58.7 million for 1996, nearly unchanged from 1995. Net premiums earned from
all trucking liability insurance products, including small fleet trucking,
decreased by $5.7 million (12.8%). Premiums earned from voluntary reinsurance
assumed decreased by $1.8 million. The above decreases were offset by a $7.6
million increase in Sagamore's non-standard private passenger automobile program
during 1996.
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18
Net investment income decreased by $.6 million (2.9%) during 1996 due to $.9
million non-recurring income from the liquidation of a limited partnership
during 1995. The average pre-tax yield on invested assets for 1996
was 5.3% compared to 5.9% for 1995 while the after-tax yield for 1996 was 3.7%
compared to 4.1% for 1995. Investment expenses, which are netted directly
against income, were relatively unchanged from 1995 and were 5.6% of gross
investment income compared to 5.3% for 1995.
Consolidated realized net capital gains were $6.9 million in 1996 compared to
$6.2 million for 1995. The current year net gain consisted of gains on equity
securities and fixed maturities of $6.5 million and $.4 million, respectively.
Losses and loss expenses during 1996 decreased $5.0 million (12.9%) to $33.8
million. The 1996 consolidated loss and loss expense ratio was 57.5% compared
to 65.9% for 1995. Losses and loss expenses incurred for 1996 and 1995 included
adverse development on environmental liability claims of $2.4 million and $7.6
million, respectively, relating to policies written in the 1970's. Adjusted for
the development on environmental liability claims, the consolidated loss and
loss expense ratios for 1996 and 1995 were 53.4% and 53.0%, respectively. The
consolidated savings on all prior year losses was $12.2 million for 1996
compared to $5.5 million for 1995. Adjusted for the development on
environmental liability claims, savings on prior accident year losses were $14.6
million and $13.1 million during 1996 and 1995, respectively. These savings
related predominantly to the Company's trucking and trucking-related business.
Because of the high limits provided by the Company to its insureds, the length
of time required to settle larger, more complex claims and the volatility of the
trucking liability insurance business, the Company believes it is important to
have a high degree of comfort in its reserving process. As claims are settled
in years subsequent to their occurrence, the Company's claim handling process
has, in recent years, tended to produce savings from the reserves provided. The
Company believes that the favorable loss development may be attributable, at
least in part, to changes in trucking safety in general resulting from the
implementation of the national commercial driver license, mandatory drug testing
and an increased awareness by trucking companies of the cost of unsafe
operations. It is further believed that the Company's selection techniques,
minimum safety standards and claims handling have also contributed to the
current favorable loss experience. The Company has established provisions for
incurred but not reported environmental losses at December 31, 1996 which are
believed to be sufficient to cover all anticipated exposure.
Other operating expenses for 1996, before credits for allowances from
reinsurers, increased $3.3 million (17.2%) to $22.5 million. Salary related
expenses increased $2.1 million (18.7%) due primarily to a 16% increase in the
number of employees, as the Company's new products continue to expand, and
equity appreciation rights accruals which are tied to the Company's book value.
Direct commission expense increased $.9 million (34.5%) as the result of
increases in premiums from Sagamore's personal automobile product. Allowances
from reinsurers decreased $.7 million (42.7%) as the result of the termination
of the quota share reinsurance treaty covering the Company's "work accident"
program. The ratio of net operating expenses of the insurance subsidiaries to
net premiums earned was 29.2% during 1996 compared to 28.0% for 1995. Including
the agency operations, which absorbed much of the development costs for the
Company's new products, the ratio of other operating expenses to total revenue,
adjusted for net realized gains, was 27.1% for 1996 compared with 21.9% for
1995.
The effective federal tax rate for consolidated operations for 1996 was 31.6%.
This rate is lower than the statutory rate primarily because of tax-exempt
investment income.
18
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As a result of the factors mentioned above, income from consolidated continuing
operations for 1996 was $21.3 million compared to $20.6 million for 1995.
The Company's net income for 1996 totaled $21.7 million compared to a record
$29.4 million reported during 1995, which included a $7.6 million gain on the
sale of Hoosier Insurance Company. Earnings per share decreased to $1.51 in
1996 from a record $1.97 in 1995.
1995 COMPARED TO 1994
Direct premiums written for 1995 totaled $67.4 million, an increase of $1.2
million (1.8%) from 1994. This increase is attributable to a myriad of changes
in the Company's product categories. Increases in premium writings were derived
from Sagamore's new product lines for non-standard private passenger automobile
and small trucking fleet risks of $4.9 million and $3.4 million, respectively.
In addition, Protective's "work accident" program produced higher premium volume
for the sixth straight year since this product was introduced, increasing $.9
million, or 6.4%, during 1995. The Company also recorded net additional
premiums for retrospectively rated workers' compensation policies of $.4 million
compared to net returns of $1.2 million during 1994. The above increases were
partially offset by decreases in large fleet and medium fleet trucking premium
writings of $7.1 million (17.2%) and $2.4 million (39.4%) reflecting the
continued intense competition in these markets which resulted in the non-renewal
of several accounts and rate reductions on those accounts renewed.
Premium writings from reinsurance assumed decreased by $.9 million (6.5%) to
$12.2 million during 1995. This decrease relates principally to changes in
reinsurance assumed from mandatory state pools and underwriting associations.
Voluntary reinsurance assumed from property catastrophe retrocession pools was
$11.3 million during 1995, level with 1994. This program has become a
significant source of revenue for the Company and it is expected that these
retrocession assumptions will continue as long as market conditions are
favorable.
Premium writings ceded to reinsurers decreased $1.7 million (9.4%) during 1995
to $16.5 million. The percentage of premiums ceded to direct premiums written
was 24.5% for 1995, unchanged from 1994. Ceding rates on the Company's primary
treaties for 1995 were consistent with the prior year.
After giving effect to changes in unearned premiums, the factors mentioned above
decreased net premiums earned by $2.4 million (3.9%) to $58.8 million for 1995.
Net premiums earned from all trucking liability insurance products, including
small fleet trucking, decreased by $3.6 million (8.2%). Premiums earned from
reinsurance assumed decreased by $1.4 million primarily as the result of a $1.7
million decrease in premium earned from mandatory state pools and underwriting
associations. Premiums earned from worker's compensation products for truckers
increased $1.0 million due primarily to the increase in premiums from the runoff
of older retrospectively rated policies. In addition, premiums earned from
Sagamore's new non-standard automobile program totaled $1.7 million during 1995.
Net investment income increased by $5.4 million (36.8%) during 1995. Income for
1995 includes $.9 million representing income derived from a limited partnership
investment which was liquidated effective December 31, 1995. The average pre-
tax yield on invested assets for 1995 was 5.9% compared to 4.6% for 1994 while
the after-tax yield for 1995 was 4.1% compared to 3.3% for 1994. Investment
expenses, which are netted directly against income, increased approximately $.2
million and were 5.3% of gross investment income in 1995 compared to 6.1% for
1994.
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20
Consolidated realized net capital gains were $6.2 million in 1995 compared to
$.5 million for 1994. The current year net gain consisted of gains on equity
securities and fixed maturities of $6.7 million and $.3 million, respectively,
and losses of $.8 million on short-term and other investments.
Losses and loss expenses during 1995 increased $5.8 million (17.8%) to $38.8
million. The 1995 consolidated loss and loss expense ratio was 65.9% compared
to 53.8% for 1994. The loss and loss expense ratio on current year trucking and
trucking-related accidents actually decreased from 97.8% for 1994 to 76.5% for
1995 as the unusually high frequency and severity experienced during 1994 was
not repeated during the current year. In addition, the loss ratio on
reinsurance assumed under catastrophe retrocessions decreased from 69.9% in 1994
to 42.3% in 1995. However, offsetting these more favorable factors was a
significant decrease in the savings realized on the development of prior year
losses during 1995. The results from 1994 included an unusually high savings on
prior year losses of $22.9 million. During 1995, the Company experienced
adverse development totaling $7.6 million relating to environmental liability
claims for policies written in the 1970's. However, consolidated savings on all
prior year losses was $5.5 million, including the development on environmental
liability claims. Adjusted for the development on environmental liability
claims, savings on prior accident year losses were $13.1 million during 1995.
See comments in the foregoing discussion of operations for 1996 compared to 1995
regarding the development of prior year reserves.
Other operating expenses for 1995, before credits for allowances from
reinsurers, increased $2.2 million (13.1%) to $19.2 million. Salary related
expenses increased $1.9 million (21.6%) due primarily to incentive bonus and
equity appreciation rights accruals which are tied to the Company's operating
results and book value. Commission expense increased $.5 million (24.6%) as the
result of increases in premiums from Sagamore's personal automobile and small
fleet trucking products. The ratio of net operating expenses of the insurance
subsidiaries to net premiums earned was 28.0% during 1995 compared to 27.6% for
1994. Including the agency operations, the ratio of other operating expenses to
total revenue, adjusted for net realized gains, was 21.9% for 1995 compared with
19.8% for 1994.
The effective federal tax rate for consolidated operations for 1995 was 31.4%.
This rate is lower than the statutory rate primarily because of a $.2 million
reduction in current federal taxes payable related to the "fresh start"
provisions of the 1986 Tax Reform Act and because of tax-exempt investment
income. The effective federal tax rate was 32.2% without the effect of the
"fresh start" credits.
As a result of the factors mentioned above, income from consolidated continuing
operations for 1995 was $20.6 million and remained essentially level with that
of 1994. The Company recognized a gain on the sale of Hoosier Insurance Company
of $7.6 million, net of federal income tax, and recorded $.7 million in income
for its share of Hoosier's operations prior to the sale.
The Company's net income for 1995 totaled a record $29.4 million compared to
$20.8 million reported during 1994. Earnings per share increased to a record
$1.97 in 1995 from $1.37 in 1994.
FORWARD-LOOKING INFORMATION
Any forward-looking statements in this report, including without limitation,
statements relating to the Company's plans, strategies, objectives,
expectations, intentions and adequacy of resources, are made pursuant to the
safe harbor provisions of the Private Securities Litigation Reform Act of 1995.
Investors are cautioned that such forward-looking statements involve risks and
uncertainties including without limitation the following:
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21
(i) the Company's plans, strategies, objectives, expectations and intentions are
subject to change at any time at the discretion of the Company; (ii) the
Company's business is highly competitive and the entrance of new competitors
into or the expansion of the operations by existing competitors in the Company's
markets and other changes in the market for insurance products could adversely
affect the Company's plans and results of operations; and (iii) other risks and
uncertainties indicated from time to time in the Company's filings with the
Securities and Exchange Commission.
FEDERAL INCOME TAX CONSIDERATIONS
The liability method is used in accounting for federal income taxes. Using this
method, deferred tax assets and liabilities are determined based on differences
between financial reporting and tax bases of assets and liabilities and are
measured using the enacted tax rates and laws that will be in effect when the
differences are expected to reverse. The provision for deferred federal income
tax was based on items of income and expense that were
reported in different years in the financial statements and tax returns and were
measured at the tax rate in effect in the year the difference originated. Net
deferred tax liabilities of $10.7 million and $.5 million were recorded at
December 31, 1996 and 1995, respectively. The net deferred tax liability at
December 31, 1996 included $7.0 million in special tax deposits covered under
Section 847 of the Internal Revenue Code, as explained in the following
paragraph, which compares to $7.3 million in special tax deposits at December
31, 1995. Adjusted for the special deposits, a net deferred tax liability of
$17.7 million was recorded at December 31, 1996 compared to a net deferred tax
liability of $7.8 million at December 31, 1995. The increase in deferred
federal taxes payable is attributable to changes in unrealized capital gains in
the investment portfolio.
A provision in the Technical and Miscellaneous Revenue Act of 1988 created a
mechanism which would allow for a recognizable deferred tax asset specifically
for property and casualty loss reserves discounted for tax purposes. Adopted as
Section 847 of the Internal Revenue Code, this provision allows an insurer to
take a special tax deduction equal to the discount on post 1986 accident year
loss and loss expense reserves while making "special estimated tax payments"
equal to the amount of the tax benefit derived from the special deduction. The
"special estimated tax payments" can be carried forward for fifteen years to
offset taxes arising from decreases in the special deduction and can be treated
as regular estimated payments or refunded at the end of the carryforward period.
Based upon the concerns regarding the recognition of deferred tax assets, the
Company adopted the provisions of Section 847 for all tax years 1987 and
subsequent and has taken deductions for the entire amount of discount on post-
1986 loss reserves. As mentioned above, special Section 847 estimated tax
deposits totaling $7.0 million have been paid in connection with this election.
IMPACT OF INFLATION
To the extent possible, the Company attempts to recover the costs of inflation
by increasing the premiums it charges. A majority of the Company's premiums are
charged as a percentage of an insured's gross revenue or payroll. As these
charging bases increase with inflation, so does premium. The remaining premium
rates charged are adjustable only at periodic intervals and often require state
regulatory approval. Such periodic increases in premium rates may lag far
behind cost increases.
To the extent inflation influences yields on investments, the Company is also
affected. The Company maintains a sizable portion of its investment portfolio
in short-term instruments and changes in current market interest rates
correspondingly affect yields on these investments. Further, as inflation
affects current market rates of return, previously committed investments may
rise or decline in value depending on the type and maturity of investment.
21
22
Inflation must also be considered by the Company in the creation and review of
loss and loss adjustment expense reserves since portions of these reserves are
expected to be paid over extended periods of time. The anticipated effect of
inflation is implicitly considered when estimating liabilities for losses and
loss adjustment expenses. The importance of continually adjusting reserves is
even more pronounced in a period of extreme inflationary pressure.
22
23
ANNUAL REPORT ON FORM 10-K
ITEM 8--FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
YEAR ENDED DECEMBER 31, 1996
BALDWIN & LYONS, INC.
INDIANAPOLIS, INDIANA
23
24
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, 1996 and 1995, and the related
consolidated statements of income and retained earnings and cash flows for each
of the three years in the period ended December 31, 1996. Our audits also
include the financial statement schedules listed in the index at item 14(a)(1)
and (2). These financial statements and schedules are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Baldwin
& Lyons, Inc. and subsidiaries at December 31, 1996 and 1995, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1996, in conformity with generally
accepted accounting principles. Also, in our opinion, the related financial
statement schedules, when considered in relation to the basic consolidated
financial statements taken as a whole, present fairly in all material respects
the information set forth therein.
/S/ ERNST & YOUNG LLP
Indianapolis, Indiana
February 26, 1997
24
25
CONSOLIDATED BALANCE SHEETS
Baldwin & Lyons, Inc. and Subsidiaries
December 31
-------------------------
1996 1995
---------- ----------
(DOLLARS IN THOUSANDS)
ASSETS
Investments:
Fixed maturities $ 273,828 $ 279,083
Equity securities 147,196 98,428
Short-term 19,579 38,600
Other 14,188 8,722
--------- ---------
454,791 424,833
Cash 7,575 1,369
Accounts receivable 13,967 13,174
Accrued investment income 3,888 4,615
Reinsurance recoverable 43,829 54,702
Deferred policy acquisition costs 1,425 763
Investments in equity subsidiary and its affiliates - 9,582
Current federal income taxes 568 -
Property and equipment--less accumulated depreciation
(1996, $4,223; 1995, $4,030) 3,259 1,832
Other assets 4,160 1,355
---------- ----------
$ 533,462 $ 512,225
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Reserves:
Losses and loss expenses $ 196,939 $ 211,489
Unearned premiums 10,835 8,262
---------- ----------
207,774 219,751
Reinsurance payable 7,318 15,405
Accounts payable and other liabilities 27,568 19,698
Deposits received from insureds 6,946 8,792
Deferred federal income taxes 10,734 450
Current federal income taxes - 1,121
---------- ----------
260,340 265,217
Shareholders' equity:
Common stock, no par value:
Class A -- authorized 3,000,000 shares;
outstanding 1996, 2,444,329 shares;
1995, 2,476,029 shares 130 132
Class B -- authorized 20,000,000 shares;
outstanding 1996, 11,515,145 shares;
1995, 12,101,161 shares 614 645
Additional paid-in capital 42,100 43,620
Unrealized net gains on investments 38,472 19,251
Retained earnings 191,806 183,360
---------- ----------
273,122 247,008
---------- ----------
$ 533,462 $ 512,225
========== ==========
See notes to consolidated financial statements.
25
26
CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS
Baldwin & Lyons, Inc. and Subsidiaries
Year Ended December 31
-------------------------------------
1996 1995 1994
---------- ---------- ----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
REVENUE:
Net premiums earned $ 58,743 $ 58,793 $ 61,187
Net investment income 19,580 20,161 14,734
Realized net gains on investments 6,860 6,210 538
Commissions, service fees and other income 1,304 1,164 1,248
---------- ---------- ----------
86,487 86,328 77,707
EXPENSES:
Losses and loss expenses incurred 33,754 38,754 32,910
Other operating expenses 21,542 17,541 15,296
---------- ---------- ----------
55,296 56,295 48,206
---------- ---------- ----------
INCOME FROM CONTINUING OPERATIONS
BEFORE FEDERAL INCOME TAXES 31,191 30,033 29,501
Federal income taxes 9,857 9,439 8,996
---------- ---------- ----------
INCOME FROM CONTINUING OPERATIONS 21,334 20,594 20,505
DISCONTINUED OPERATIONS, NET OF FEDERAL INCOME TAXES:
Income from discontinued operations 358 1,126 286
Gain on sale of Hoosier Insurance Company - 7,640 -
---------- ---------- ----------
NET INCOME 21,692 29,360 20,791
Retained earnings at beginning of year 183,360 162,934 153,109
Cash dividends (per share - 1996, $.36;
1995, $.30; and 1994, $.33) (5,107) (4,421) (4,913)
Treasury shares purchased (8,112) (4,617) (5,979)
Foreign exchange adjustment (27) 104 (74)
---------- ---------- ----------
RETAINED EARNINGS AT END OF YEAR $ 191,806 $ 183,360 $ 162,934
========== ========== ==========
Per share data:
Average number of common and common equivalent
shares outstanding 14,355,261 14,933,147 15,183,314
Income before discontinued operations and realized net gains $ 1.18 $ 1.11 $ 1.33
Realized net gains on investments .31 .27 .02
Income from discontinued operations .02 .08 .02
Gain on sale of Hoosier Insurance Company - .51 -
---------- ---------- ----------
NET INCOME $ 1.51 $ 1.97 $ 1.37
========== ========== ==========
See notes to consolidated financial statements.
26
27
CONSOLIDATED STATEMENTS OF CASH FLOWS
Baldwin & Lyons, Inc. and Subsidiaries
Year Ended December 31
-----------------------------------
1996 1995 1994
---------- ---------- ----------
(dollars in thousands)
Operating activities
Net Income $ 21,692 $ 29,360 $ 20,791
Adjustments to reconcile net income to net cash
provided by operating activities:
Change in accounts receivable and unearned premium 1,780 5,195 3,944
Change in accrued investment income 727 (1,140) 184
Change in losses and loss expenses and
reinsurance recoverable (3,677) (4,744) (799)
Change in other assets, other liabilities and
current income taxes (4,026) (2,417) 2,169
Amortization of net policy acquisition costs 5,145 2,146 7,928
Net policy acquisition costs deferred (5,806) (2,805) (8,488)
Provision for deferred income tax credits (643) (312) (1,216)
Bond amortization 556 360 1,318
Loss (gain) on sale of property 48 (17) 2
Depreciation 676 549 782
Net realized gain on investments (7,210) (6,597) (469)
Income from discontinued operations (359) (1,822) (404)
Gain on sale of Hoosier Insurance Company - (7,640) -
Compensation expense related to discounted stock options 516 402 72
---------- ---------- ----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 9,419 10,518 25,814
INVESTING ACTIVITIES
Purchases of long-term investments (218,611) (246,789) (171,079)
Proceeds from maturities 81,963 64,641 93,836
Proceeds from sales of fixed maturities 27,860 14,391 18,770
Proceeds from sales of equity securities 100,976 120,706 68,371
Net proceeds from sales of (purchases of) short-term investments 19,021 7,858 (26,477)
Net proceeds from the sale of Hoosier Insurance Company - 35,614 -
Distributions from limited partnerships 3,018 3,790 1,480
Purchases of property and equipment (2,359) (887) (844)
Proceeds from disposals of property and equipment 208 148 92
---------- ---------- ----------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 12,076 (528) (15,851)
FINANCING ACTIVITIES
Dividends paid to shareholders (5,107) (4,421) (4,913)
Proceeds from sale of common stock - 1,200 5
Cost of treasury stock (10,182) (5,931) (7,857)
---------- ---------- ----------
NET CASH USED IN FINANCING ACTIVITIES (15,289) (9,152) (12,765)
---------- ---------- ----------
INCREASE (DECREASE) IN CASH 6,206 838 (2,802)
Cash at beginning of year 1,369 531 3,333
---------- ---------- ----------
CASH AT END OF YEAR $ 7,575 $ 1,369 $ 531
========== ========== ==========
See notes to consolidated financial statements.
27
28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Baldwin & Lyons, Inc. and Subsidiaries
(DOLLARS IN THOUSANDS)
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION: The consolidated financial statements include the
accounts of Baldwin & Lyons, Inc. and its wholly owned subsidiaries (the
Company). All significant intercompany transactions and accounts have been
eliminated in consolidation.
DISCONTINUED OPERATIONS: The consolidated statements of income for 1995 and
1994 have been restated to reflect the sales of Amli Realty, Inc. (Amli) in 1996
and Hoosier Insurance Company (Hoosier) in 1995. Related income and expense
amounts for the current and prior years and the gain recognized on the sale of
Hoosier are reported as discontinued operations. No gain or loss was realized
on the Amli sale which was treated as a non-monetary, tax-free exchange. The
consolidated statements of cash flows for 1996 and 1995 include changes in
certain assets and liabilities which are presented without the effects of the
sales of Amli in 1996 and Hoosier in 1995. The consolidated balance sheet at
December 31, 1995 and the consolidated statements of cash flows for 1995 and
1994 have not been restated.
USE OF ESTIMATES: Preparation of the consolidated financial statements requires
management to make estimates and assumptions that affect the amounts reported in
the consolidated financial statements and accompanying notes. Actual results
could differ from those estimates.
CASH AND CASH EQUIVALENTS: Carrying amounts for these instruments approximate
their fair values. Checks outstanding are classified with accounts payable and
other liabilities.
INVESTMENTS: Carrying amounts for fixed maturity securities (bonds, notes and
redeemable preferred stocks) represent fair value and are based on quoted market
prices, where available, or broker/dealer quotes for specific securities where
quoted market prices are not available. Equity securities (nonredeemable
preferred stocks and common stocks) and other investments are carried at quoted
market prices (fair value). All fixed maturity and equity securities are
considered to be available for sale; the related unrealized net gains or losses
(net of applicable tax effect) are reflected directly in shareholders' equity.
Although the Company has classified fixed maturity investments as available for
sale, it has the ability to hold its fixed maturity investments to maturity.
Short-term investments are carried at cost which approximates their fair values.
Realized gains and losses on disposals of investments are determined by specific
identification of cost of investments sold and are included in income.
PROPERTY AND EQUIPMENT: Property and equipment is carried at cost.
Depreciation is computed substantially by the straight-line method.
RESERVES FOR LOSSES AND LOSS EXPENSES: The reserves for losses and loss
expenses are determined using case basis evaluations and statistical analyses
and represent estimates of the ultimate cost of all reported and unreported
losses which are unpaid at year end. These reserves include estimates of future
trends in claim severity and frequency and other factors which could vary as the
losses are ultimately settled. Although it is not possible to measure the
degree of variability inherent in such estimates, management believes that the
reserves for losses and loss expenses are adequate. The estimates are
continually reviewed and as adjustments to these reserves become necessary, such
adjustments are reflected in current operations.
Certain loss reserves related to permanent total disability claims under
workers' compensation coverages are discounted to present value using tables
provided by the National Council on Compensation Insurance which are based upon
a pretax interest rate of 3.5 percent, and adjusted for losses retained by the
insured.
RECOGNITION OF REVENUE AND COSTS: Premiums are earned over the period for which
insurance protection is provided. A reserve for unearned premiums, computed by
the daily pro-rata method, is established to reflect amounts applicable to
28
29
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RECOGNITION OF REVENUE AND COSTS (CONTINUED): subsequent accounting periods.
Commissions to unaffiliated companies and other acquisition costs applicable to
unearned premiums are deferred and expensed as the related premiums are earned.
Anticipated investment income is considered in determining recoverability of
deferred acquisition costs.
Reinsurance premiums, commissions, expense reimbursements and reserves related
to reinsured business are accounted for on bases consistent with those used in
accounting for the original policies issued and the terms of the reinsurance
contracts. Premiums ceded to other insurers have been reported as a reduction
of premium income. Amounts applicable to reinsurance ceded for unearned premium
and claim loss reserves have been reported as reinsurance recoverable assets.
Certain reinsurance contracts provide for additional or return premiums and
commissions based upon profits or losses to the reinsurer over prescribed
periods. Estimates of additional or return premiums and commissions are
adjusted quarterly to recognize actual loss experience to date as well as
projected loss experience applicable to the various contract periods.
Stock-based Compensation: Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees, and related Interpretations is used in
accounting for stock options, stock purchases and equity appreciation rights
which are, from time to time, granted to employees and outside directors.
Application of Financial Accounting Standards Board Statement No. 123,
Accounting for Stock-Based Compensation, would yield results no different from
those reported.
FEDERAL INCOME TAXES: A consolidated federal income tax return is filed by the
Company and includes all wholly owned subsidiaries.
EARNINGS PER SHARE: 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.
RECLASSIFICATION: Certain prior year balances have been reclassified to conform
to the current year presentation.
29
30
NOTE B - INVESTMENTS
The following is a summary of available-for-sale securities at December 31:
Cost or Gross Gross Net
Fair Amortized Unrealized Unrealized Unrealized
Value Cost Gains Losses Gains
---------- ---------- ---------- ---------- ----------
1996:
U. S. government obligations $145,855 $145,755 $ 451 $ (352) $ 99
Mortgage-backed securities 49,973 49,926 313 (265) 48
Obligations of states and political subdivisions 56,747 56,585 189 (27) 162
Corporate securities 21,253 20,764 489 - 489
---------- ---------- ---------- ---------- ----------
Total fixed maturities 273,828 273,030 1,442 (644) 798
Equity securities 147,196 89,344 60,645 (2,793) 57,852
Short-term and other 33,767 33,383 503 (120) 383
Short positions - see note below - - 155 - 155
---------- ---------- ---------- ---------- ----------
Total available-for-sale securities $454,791 $395,757 $ 62,745 $ (3,557) 59,188
========== ========== ========== ==========
Applicable federal income taxes (20,716)
----------
Net unrealized gains - net of tax $ 38,472
==========
1995:
U. S. government obligations $176,552 $173,375 $ 3,223 $ (46) $ 3,177
Mortgage-backed securities 41,615 40,869 809 (63) 746
Obligations of states and political subdivisions 40,870 40,806 95 (31) 64
Corporate securities 20,046 19,630 443 (27) 416
Total fixed maturities 279,083 274,680 4,570 (167) 4,403
---------- ---------- ---------- ---------- ----------
Equity securities 98,428 73,519 27,955 (3,046) 24,909
Short-term and other 47,322 47,017 516 (211) 305
---------- ---------- ---------- ---------- ----------
Total available-for-sale securities $424,833 $395,216 $ 33,041 $ (3,424) 29,617
========== ========== ========== ==========
Applicable federal income taxes (10,366)
----------
Net unrealized gains - net of tax $ 19,251
==========
Note: The fair value of the Company's short positions at December 31, 1996 was
$744 and is included in accounts payable.
30
31
NOTE B - INVESTMENTS (CONTINUED)
Realized and unrealized gains (losses) on investments for the years ended
December 31 are summarized below:
Short-term Total Gains
Fixed Equity and Other (Losses) on
Maturities Securities Investments Investments
---------- ---------- ---------- ----------
1996:
Realized $ 392 $ 6,487 $ (19) $ 6,860
Change in unrealized (3,605) 32,943 233 29,571
---------- ---------- ---------- ----------
Combined $ (3,213) $ 39,430 $ 214 $ 36,431
========== ========== ========== ==========
1995:
Realized $ 282 $ 6,732 $ (804) $ 6,210
Change in unrealized 9,554 21,997 (225) 31,326
---------- ---------- ---------- ----------
Combined $ 9,836 $ 28,729 $ (1,029) $ 37,536
========== ========== ========== ==========
1994:
Realized $ 23 $ 1,243 $ (728) $ 538
Change in unrealized (7,659) (234) (524) (8,417)
---------- ---------- ---------- ----------
Combined $ (7,636) $ 1,009 $ (1,252) $ (7,879)
========== ========== ========== ==========
Sales of fixed maturity investments during 1996, 1995 and 1994 produced gross
gains of $622, $351 and $494, respectively, and gross losses of $230, $69 and
$471, respectively. Sales of equity securities during 1996, 1995 and 1994
produced gross gains of $9,204, $11,170 and $5,346, respectively, and gross
losses of $2,717, $4,438 and $4,103, respectively.
The carrying amounts and fair values of fixed maturity investments at December
31, 1996, by contractual maturity, are shown below. Actual maturities may
differ from contractual maturities because borrowers have, in some cases, the
right to call or prepay obligations with or without call or prepayment
penalties. Maturities for mortgage-backed securities are determined on a
specific identification basis.
Fair Values Cost or Amortized Cost
----------------------------------- -----------------------------------
Mortgage- Total Mortgage- Total
Backed Fixed Backed Fixed
Securities All Other Maturities Securities All Other Maturities
---------- ---------- ---------- ---------- ---------- ----------
One year or less $ 230 $ 98,053 $ 98,283 $ 228 $ 97,870 $ 98,098
Excess of one year to five years 6,125 116,268 122,393 6,105 116,043 122,148
Excess of five years to ten years 20,680 8,900 29,580 20,780 8,600 29,380
Excess of ten years 22,938 - 22,938 22,813 - 22,813
---------- ---------- ---------- ---------- ---------- ----------
Total maturities 49,973 223,221 273,194 49,926 222,513 272,439
Redeemable preferred stock - 634 634 - 591 591
---------- ---------- ---------- ---------- ---------- ----------
$ 49,973 $223,855 $273,828 $ 49,926 $223,104 $273,030
========== ========== ========== ========== ========== ==========
Major categories of investment income for the years ended December 31 are
summarized as follows:
1996 1995 1994
---------- ---------- ----------
Fixed maturities $ 16,769 $ 14,937 $ 11,601
Equity securities 2,197 2,111 2,148
Short-term and other investments 1,776 4,236 1,943
---------- ---------- ----------
20,742 21,284 15,692
Investment expenses (1,162) (1,123) (958)
---------- ---------- ----------
NET INVESTMENT INCOME $ 19,580 $ 20,161 $ 14,734
========== ========== ==========
31
32
NOTE B - INVESTMENTS (CONTINUED)
Approximately 38% of purchases and 58% of sales of investments during the three
years ended December 31, 1996 were made through securities broker-dealers in
which certain directors of the Company were officers, directors or owners. Fees
paid to affiliated investment advisors were $932, $965 and $627 in 1996, 1995
and 1994, respectively.
Short-term and other investments include holdings in money-market accounts which
were managed by or purchased through companies affiliated with certain directors
of the Company. Other investments includes $2,237 and $2,594 at December 31,
1996 and 1995, respectively, representing limited partnership interests in
ventures in which Amli Realty, Inc. (Amli) serves as general partner. Three
directors of the Company are also directors and/or officers of Amli.
NOTE C - ACCOUNTS RECEIVABLE
Major categories of accounts receivable are as follows:
1996 1995
---------- ----------
Amounts receivable from agents and insureds $ 14,127 $ 13,232
Other 186 242
---------- ----------
14,313 13,474
Less allowances for doubtful accounts 346 300
---------- ----------
$ 13,967 $ 13,174
========== ==========
Note D - Loss and Loss Expense Reserves
Activity in the reserves for losses and loss expenses is summarized as follows.
All amounts are shown net of reinsurance recoverable.
Year Ended December 31,
1996 1995 1994
---------- ---------- ----------
Reserves at the beginning of the year $161,458 $175,554 $175,949
Provision for losses and loss expenses:
Continuing operations:
Claims occurring during the current year 45,999 44,238 55,766
Claims occurring during prior years (12,245) (5,484) (22,856)
Discontinued operations - - 18,573
---------- ---------- ----------
Total incurred 33,754 38,754 51,483
Loss and loss expense payments:
Continuing operations:
Claims occurring during the current year 12,891 7,760 9,951
Claims occurring during prior years 27,825 33,819 25,778
Discontinued operations - 11,186 16,137
---------- ---------- ----------
Total paid 40,716 52,765 51,866
Change in unpaid portion of uncollectible
amounts due from reinsurers 41 (85) (12)
---------- ---------- ----------
Reserves at the end of the year 154,537 161,458 175,554
Reinsurance recoverable on reserves
at the end of the year 42,402 50,031 59,655
---------- ---------- ----------
Reserves, gross of reinsurance
recoverables, at the end of the year $196,939 $211,489 $235,209
========== ========== ==========
32
33
NOTE D - LOSS AND LOSS EXPENSE RESERVES (CONTINUED)
The reserves for losses and loss expenses on continuing operations, net of
related reinsurance recoverables, at December 31, 1995, 1994 and 1993 were
decreased by $12,245, $5,484 and $22,856, 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 1996 and 1995, on reserves outstanding at December
31, 1995 and 1994 included $2,395 and $7,575, respectively, of incurred losses
and loss expenses related to environmental damage claims. Reported cases relate
primarily to policies issued in the 1970's to one account which was involved in
the business of hauling and disposing of hazardous waste. Included in the above
loss and loss expense incurred amounts are reserves for incurred but not
reported environmental losses of $5,000 and $3,000 at December 31, 1996 and
1995, respectively. Adjusted for environmental claims, management believes that
the more favorable than anticipated experience may be attributable, at least in
part, to changes in trucking safety in general resulting from the implementation
of the national commercial driver license, mandatory drug testing and an
increased awareness by trucking companies of the cost of unsafe operations. It
is further believed that the Company's selection techniques, minimum safety
standards and claims handling have also contributed to the current favorable
loss experience. These trends were considered in the establishment of the
Company's reserves at December 31, 1996.
The Company participates in mandatory residual market pools in various states.
The Company records the results from participation in these pools as reported
and records an additional provision in the financial statements for operating
periods unreported by the pools. Management relies on the reserve data provided
by the pools and performs no additional actuarial tests on such data.
Loss reserves on certain permanent total disability workers' compensation
reserves have been discounted to present value at pre-tax rates not exceeding
3.5%. At December 31, 1996 and 1995, loss reserves have been reduced by
approximately $4,694 and $8,096, 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 $1,725 at both December 31, 1996 and 1995.
33
34
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:
1996 1995
---------- ----------
Deferred tax assets:
Discounts of loss and loss expense reserves $ 7,031 $ 7,260
Deferred compensation 3,347 2,260
Unearned premiums 734 527
Other 1,076 1,588
---------- ----------
Total deferred tax assets 12,188 11,635
---------- ----------
Deferred tax liabilities:
Unrealized gain on investments 21,273 10,366
Deferred acquisition costs 499 269
Salvage and subrogation 604 604
Other 546 846
---------- ----------
Total deferred tax liabilities 22,922 12,085
---------- ----------
Net deferred liabilities $ (10,734) $ (450)
========== ==========
Federal income tax expense consists of the following:
1996 1995 1994
---------- ---------- ----------
Taxes (credits) on income from
consolidated continuing operations:
Current $ 10,116 $ 10,343 $ 9,307
Deferred (259) (904) (311)
---------- ---------- ----------
$ 9,857 $ 9,439 $ 8,996
========== ========== ==========
Taxes (credits) on income from
discontinued operations:
Current:
Income $ - $ 139 $ 185
Gain on sale - 3,850 -
Deferred 193 326 (71)
---------- ---------- ----------
$ 193 $ 4,315 $ 114
========== ========== ==========
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:
1996 1995 1994
---------- ---------- ----------
Statutory federal income rate applied to
pretax income from continuing operations $ 10,917 $ 10,512 $ 10,326
Tax effect of (deduction):
Tax-exempt investment income (1,079) (905) (1,120)
Other 19 (168) (210)
---------- ---------- ----------
Federal income tax expense $ 9,857 $ 9,439 $ 8,996
========== ========== ==========
34
35
NOTE E - INCOME TAXES (CONTINUED)
The components of the provision for deferred federal income taxes (credits) are
as follows:
1996 1995 1994
---------- ---------- ----------
Discounts of loss and loss expense reserves $ 230 $ 498 $ (13)
Deferred compensation (1,088) (896) (475)
Other 792 (180) 106
---------- ---------- ----------
Provision for deferred federal income tax $ (66) $ (578) $ (382)
========== ========== ==========
Cash flows related to federal income taxes paid, net of refunds received, for
1996, 1995 and 1994 were $11,805, $13,600 and $13,355, respectively, including
Section 847 special tax deposits. Future tax benefits on approximately $7,031
of deferred tax assets at December 31, 1996 arising from loss reserve
discounting is 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 insurance subsidiaries also assume
voluntary reinsurance from various property catastrophe retrocession pools. The
occurrence of a major catastrophic event could have a significant impact on the
Company's financial statements. In addition, the insurance subsidiaries
participate in certain involuntary reinsurance pools which require insurance
companies to provide coverages on assigned risks. The assigned risk pools
allocate participation to all insurers based upon each insurer's portion of
premium writings on a state or national level.
Net premiums earned for 1996, 1995 and 1994 have been reduced by reinsurance
ceded premiums of approximately $11,698, $16,340 and $18,477, respectively. Net
losses and loss expenses incurred for 1996, 1995 and 1994 have been reduced by
reinsurance recoveries of approximately $991, $26,554 and $20,955, respectively.
Ceded reinsurance premiums and loss recoveries for catastrophe reinsurance
contracts were not material. The Company remains liable to the extent the
reinsuring companies are unable to meet their obligations under reinsurance
contracts. Net premiums earned for 1996, 1995 and 1994 include approximately
$10,220, $12,322 and $13,679, respectively, relating to the assumption of
reinsurance from other companies and from reinsurance pools.
Components of reinsurance recoverable at December 31 are as follows:
1996 1995
---------- ----------
Paid losses and loss expenses $ 1,085 $ 4,214
Unpaid losses and loss expenses 42,402 50,031
Unearned premiums 342 457
---------- ----------
$ 43,829 $ 54,702
========== ==========
NOTE G - EMPLOYEE BENEFIT PLANS
The Company maintains a defined contribution 401(k) Employee Savings and Profit
Sharing Plan ("the Plan") which covers all employees who have completed one year
of service. The Company's contributions to the Plan for 1996, 1995 and 1994
were $499, $465 and $472, respectively.
35
36
NOTE H - SHAREHOLDERS' EQUITY
Changes in common stock outstanding and additional paid-in capital are as
follows:
Class A Class B Additional
-------------------------- ------------------------- Paid-in
Shares Amount Shares Amount Capital
------------ ---------- ------------ ---------- ----------
Balance at January 1, 1994 2,446,029 $ 131 12,917,886 $ 689 $ 45,091
Discounted stock options issued - - - - 72
Discounted stock options exercised - - 11,823 1 4
Treasury shares purchased - - (561,500) (31) (1,847)
------------ ---------- ------------ ---------- ----------
Balance at December 31, 1994 2,446,029 131 12,368,209 659 43,320
Discounted stock options issued - - - - 459
Stock options exercised 30,000 1 121,200 7 1,192
Discounted stock options forfeited - - - - (58)
Treasury shares purchased - - (388,248) (21) (1,293)
------------ ---------- ------------ ---------- ----------
Balance at December 31, 1995 2,476,029 132 12,101,161 645 43,620
Discounted stock options issued - - - - 516
Discounted stock options exercised - - 1,200 - -
Treasury shares purchased (31,700) (2) (587,216) (31) (2,036)
------------ ---------- ------------ ---------- ----------
Balance at December 31, 1996 2,444,329 $ 130 11,515,145 $ 614 $ 42,100
============ ========== ============ ========== ==========
During 1996 and 1995, purchases of Class B treasury stock included 49,000 and
41,198 shares, respectively, from officers and directors for $821 and $644,
respectively, at prices based upon the midpoint between the bid and ask prices
on the date of purchase.
Consolidated shareholders' equity at December 31, 1996 includes $242,622
representing GAAP shareholder's equity of insurance subsidiaries, of which
$35,203 may be transferred by dividend or loan to the parent company without
approval by, or notification to, regulatory authorities. An additional $186,898
of shareholder's equity of such insurance subsidiaries may be advanced or loaned
to the Company with prior notification to regulatory authorities.
Net income of the insurance subsidiaries, as determined in accordance with
statutory accounting practices, was $20,249, $22,849 and $18,377 for 1996, 1995
and 1994, respectively. Consolidated statutory shareholder's equity for these
subsidiaries was $222,720 and $188,592 at December 31, 1996 and 1995,
respectively.
NOTE I - OTHER OPERATING EXPENSES
Details of other operating expenses are as follows:
Years Ended December 31
1996 1995 1994
---------- ---------- ----------
Amortization of deferred policy acquisition costs $ 6,088 $ 3,792 $ 3,281
Other underwriting expenses 5,161 5,673 5,707
Expense allowances from reinsurers (943) (1,646) (1,663)
---------- ---------- ----------
TOTAL UNDERWRITING EXPENSES 10,306 7,819 7,325
Operating expenses of non-insurance companies 11,236 9,722 7,971
---------- ---------- ----------
TOTAL OTHER OPERATING EXPENSES $ 21,542 $ 17,541 $ 15,296
========== ========== ==========
36
37
NOTE J - STOCK PURCHASE AND OPTION PLANS
In accordance with the terms of the 1981 Stock Purchase Plan (1981 Plan), the
Company reserved 300,000 shares (Class A) and 1,200,000 shares (Class B) of its
authorized but unissued common stock for issuance to certain of its employees
and directors. There are no shares of either Class A or Class B common stock
available for issuance at December 31, 1996. The 1981 Plan provides for the
repurchase of shares issued by the Company, based on circumstances, 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
1996, 1995 or 1994. At December 31, 1996 there were 157,179 shares (Class A)
and 398,641 shares (Class B) outstanding which are eligible for repurchase by
the Company.
During 1985, in accordance with the terms of the 1984 Stock Option and Stock
Appreciation Plan (1984 Plan, amended during 1991), the Company granted options
to purchase 30,000 shares (Class A) and 120,000 shares (Class B) of common stock
at the then book value $3.22 per share. These options were exercised during
1995 and no further shares are available for issuance. The exercise of these
options is included in the option table below.
The Company maintains Discounted Stock Option Plans and has reserved an
aggregate of 1,050,000 shares of Class B common stock for the granting of
discounted stock options to employees and directors. Options granted to
employees are generally exercisable immediately while 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.
A summary of the Company's stock option activity, and related information for
the years ended December 31 follows:
1996 1995 1994
----------------------- ------------------------ -----------------------
Weighted Weighted Weighted
Average Average Average
Excercise Excercise Excercise
Options Price Options Price Options Price
---------- ---------- ---------- ---------- ---------- ----------
Outstanding at beginning of year 168,251 $ .510 293,869 $ 1.863 300,670 $ 1.833
Granted 29,278 .903 29,782 .893 5,022 .333
Exercised 1,200 .333 151,200 3.202 11,823 .446
Forfeited - - 4,200 1.000 - -
---------- ---------- ----------
Outstanding at end of year 196,329 .569 168,251 .510 293,869 1.863
========== ========== ==========
Exercisable at end of year 192,051 .574 163,469 .515 288,847 1.890
Weighted average fair value
of options granted during the year 29,278 18.519 29,782 16.322 5,022 14.682
Exercise prices for options outstanding as of December 31, 1996 were either $.33
or $1.00. The weighted-average remaining contractual life of those options is
5.5 years. The compensation cost that has been charged against income for all
stock-based compensation plans was $.5 million, $.5 million and $.1 million for
1996, 1995 and 1994, respectively.
37
38
NOTE K - QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
Quarterly results of operations are as follows:
Results by Quarter
----------------------------------------------------------------------------------------
1996 1995
------------------------------------------- -------------------------------------------
1st 2nd 3rd 4th 1st 2nd 3rd 4th
--------- --------- --------- --------- --------- --------- --------- ---------
Net premiums earned $15,294 $16,142 $13,971 $13,336 $12,858 $15,683 $14,386 $15,866
Net investment income 4,986 4,877 4,832 4,885 4,559 4,711 4,738 6,153
Realized net gains
(losses) on investments 579 3,105 1,775 1,401 (445) 2,171 5,154 (670)
Losses and loss expenses incurred 9,761 10,224 7,418 6,351 8,380 11,548 7,859 10,967
Income from continuing operations 4,270 6,245 5,609 5,210 3,561 5,049 8,229 3,755
Discontinued operations:
Income (loss) 241 28 (19) 108 516 (281) 848 43
Gain on sale - - - - - - 7,464 176
Net income 4,511 6,273 5,590 5,318 4,077 4,768 16,541 3,974
Per share:
Income from continuing operations $ .29 $ .44 $ .39 $ .37 $ .24 $ .34 $ .55 $ .26
Discontinued operations:
Income (loss) .02 - - - .03 (.02) .06 -
Gain on sale - - - - - - .50 .01
Net income .31 .44 .39 .37 .27 .32 1.11 .27
NOTE L - INDUSTRY SEGMENTS
The Company and its consolidated subsidiaries operate within the
property/casualty insurance industry in two identifiable segments: the insurance
brokerage/agency segment and the insurance underwriting segment. The insurance
brokerage/agency segment obtains property and casualty insurance coverage for
its customers from various insurance companies and provides other insurance-
related services. The insurance underwriting segment provides multiple line
property and casualty insurance coverage for its insureds, primarily for
coverage of motor vehicle liability and physical damage and workers'
compensation risks. Both segments specialize primarily in insurance for the
trucking industry.
38
39
NOTE L - INDUSTRY SEGMENTS (CONTINUED)
Intersegment commissions, which are eliminated in the consolidated statements of
income, are included in revenue and income for the insurance brokerage/agency
segment.
Year Ended December 31
1996 1995 1994
--------- --------- ---------
REVENUE:
Insurance underwriting segment:
Net premiums earned $ 58,743 $ 58,793 $ 61,187
Net investment income 17,505 18,418 13,598
Net realized gains 6,112 5,646 583
Other income 632 448 360
---------- ---------- ----------
REVENUE FROM INSURANCE UNDERWRITING SEGMENT 82,992 83,305 75,728
Insurance brokerage/agency segment:
Commissions, service fees and other income 7,524 9,354 10,431
Net investment income 4,077 37,743 8,138
Net realized gains (losses) 748 564 (45)
---------- ---------- ----------
REVENUE FROM INSURANCE BROKERAGE/AGENCY SEGMENT 12,349 47,661 18,524
Eliminations - intersegment commission (6,852) (8,638) (9,543)
- intersegment dividends (2,002) (36,000) (7,002)
---------- ---------- ----------
$ 86,487 $ 86,328 $ 77,707
========== ========== ==========
INCOME (LOSS) FROM CONTINUING OPERATIONS
BEFORE FEDERAL INCOME TAXES:
Insurance underwriting segment $ 32,080 $ 28,095 $ 25,948
Insurance brokerage/agency segment (889) 1,938 3,553
---------- ---------- ----------
$ 31,191 $ 30,033 $ 29,501
========== ========== ==========
The brokerage/agency segment received approximately 98% of its commission income
from the insurance underwriting segment in each of the years 1996, 1995 and
1994. Intersegment commission rates are generally comparable to the average
commission rates paid by unaffiliated insurance companies. The insurance
underwriting segment received approximately 74% of its direct premium income by
providing insurance coverage to customers of the brokerage/agency segment (86%
and 98%, respectively, in 1995 and 1994). Premiums charged by the insurance
underwriting segment to customers of the brokerage/agency segment are comparable
to premiums charged to other insureds for similar insurance coverages.
Intersegment reimbursements for certain expenses (office space, equipment costs,
salaries, etc.) are based upon actual usage and other predetermined allocation
methods. Underwriting expenses of the insurance underwriting segment include
approximately $8,303 in 1996, $7,418 in 1995 and $6,857 in 1994 representing
allocations of general operating expenses from the brokerage/agency segment,
which records these reimbursements as reductions in its operating expenses.
Net premium earned by the insurance underwriting segment is produced in all
states. The following products accounted for more than 10% of net premium
earned by this segment for the years ended December 31, as follows:
1996 1995 1994
--------------------------
Trucking and trucking related 66% 76% 77%
Voluntary reinsurance assumed 16 20 19
Private passenger automobile 16 3 -
Residual market assumed
& assigned risk 2 1 4
One customer of the insurance underwriting segment and the insurance
brokerage/agency segment accounted for 30% and 38% of premiums written and
intersegment commission income, respectively, in 1996. This same customer
accounted for 42% and 47% of premiums written and intersegment commission
income, respectively, in 1995 and 36% and 38%, respectively, in 1994.
39
40
NOTE L - INDUSTRY SEGMENTS (CONTINUED)
Identifiable assets of the insurance underwriting segment and the insurance
brokerage/agency segment give effect to allocations of property and equipment
used by both segments. Capital expenditures and depreciation expense are not
material.
December 31
1996 1995 1994
---------- ---------- ----------
IDENTIFIABLE ASSETS
Insurance underwriting segment $469,963 $449,679 $469,912
Insurance brokerage/agency segment 73,210 73,995 45,054
Eliminations (9,711) (11,449) (11,067)
---------- ---------- ----------
$533,462 $512,225 $503,899
========== ========== ==========
NOTE M - DISCONTINUED OPERATIONS
On November 9, 1996, Amli Realty Co. (Amli) closed an agreement with UICI, a
publicly traded financial services and insurance company, which resulted in UICI
acquiring 100% of Amli's outstanding stock. The Company received 617,278 shares
of UICI common stock, with a market value at December 31, 1996 of approximately
$20 million, in a non-monetary, tax-free exchange for its 38% stake in Amli.
The Company accounted for its minority investment in Amli by the equity method.
The book value of the Company's investment in Amli at the date of the exchange
was $7.5 million.
On October 2, 1995, the Company sold its subsidiary, Hoosier, for $36.5 million.
Included in the Company's insurance underwriting segment, Hoosier marketed
general lines of insurance to individuals and small commercial customers in the
state of Indiana.
40
41
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
No response to this item is required.
PART III
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information with respect to the directors of the Registrant to be provided
under this item is omitted from this Report because the Registrant will file
with the Commission a definitive proxy statement pursuant to Regulation 14A
involving the election of directors not later than 120 days after the close of
its fiscal year.
The information required by Item 10 of this Report with respect to directors
which will appear in the definitive proxy statement is incorporated by reference
herein.
The executive officers of the Company will serve until the next annual meeting
of the Board of Directors and until their respective successors are elected and
qualified. Except as otherwise indicated, the occupation of each officer during
the past five years has been in his current position with the Company.
The following summary sets forth certain information concerning the Company's
executive officers:
Served in
Such Capacity
Name Age Title Since
- - ------------------- ----- ------------------------------ -------------
Gary W. Miller 56 President 1983
G. Patrick Corydon 48 Vice President and Treasurer 1979
Joseph J. DeVito 45 Vice President 1986
James W. Good 53 Vice President 1980
James E. Kirschner 51 Vice President and Secretary 1977 (1)
(1) Mr. Kirschner was elected Secretary of the Company in 1985.
Item 11. EXECUTIVE COMPENSATION *
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT *
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS *
* The information to be provided under Items 11, 12 and 13 is omitted from this
Report because the Registrant will file with the Commission a definitive proxy
statement pursuant to Regulation 14A involving the election of directors not
later than 120 days after the close of its fiscal year. The information
required by these items of this Report which will appear in the definitive proxy
statement is incorporated by reference herein.
41
42
PART IV
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. List of Financial Statements--The following consolidated financial
statements of the registrant and its subsidiaries (including the
Report of Independent Auditors) are submitted in Item 8 of this
report.
Consolidated Balance Sheets - December 31, 1996 and 1995
Consolidated Statements of Income and Retained Earnings - Years ended
December 31, 1996, 1995 and 1994
Consolidated Statements of Cash Flows - Years ended December 31,
1996, 1995 and 1994
Notes to Consolidated Financial Statements
2. List of Financial Statement Schedules--The following consolidated
financial statement schedules of Baldwin & Lyons, Inc. and
subsidiaries are included in Item 14(d):
Pursuant to Article 7:
Schedule I--Summary of Investments--Other than Investments
in Related Parties
Schedule III--Supplementary Insurance Information
Schedule IV--Reinsurance
Schedule V--Valuation and Qualifying Accounts
Schedule VI--Supplemental Information Concerning Property/Casualty
Insurance Operations
All income statement information included in the above schedules for the year
1994 has been restated to remove the effect of Hoosier. All other schedules to
the consolidated financial statements required by Article 7 and Article 5 of
Regulation S-X are not required under the related instructions or are
inapplicable and therefore have been omitted.
42
43
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 amended
(Incorporated as an exhibit by reference to Exhibit
3(b) to the Company's Annual Report on Form 10-K
for the year ended December 31, 1986)
(10) EXHIBIT 10(a)--
(Material Contracts) 1981 Employee Stock Purchase Plan (Incorporated
as an exhibit by reference to Exhibit A to the
Company's definitive Proxy Statement for its Annual
Meeting held May 5, 1981)
EXHIBIT 10(b)(1)--
1984 Stock Option and Appreciation Rights Plan
(Incorporated as an exhibit by reference to Annex A to
the Company's definitive Proxy Statement for its
Annual Meeting held May 7, 1985)
EXHIBIT 10(b)(2)--
March, 1991 amendment to the 1984 Stock Option
and Appreciation Rights Plan (Incorporated as an
exhibit by reference to Exhibit 10(b)(2) of the
Company's Annual Report on Form 10-K for the year
ended December 31, 1990)
EXHIBIT 10(c)--
Baldwin & Lyons, Inc. Employee Discounted Stock
Option Plan (Incorporated as an exhibit by reference
to Appendix A to the Company's definitive Proxy
Statement for its Annual Meeting held May 2, 1989)
43
44
Number & Caption
from Exhibit Table of
Item 601 of Regulation
S-K Exhibit Number and Description
- - ----------------------- ----------------------------------------------------
EXHIBIT 10(d)--
Baldwin & Lyons, Inc. Deferred Directors Fee Option
Plan (Incorporated as an exhibit by reference to
Exhibit 10(f) to the Company's Annual Report on Form
10-K for the year ended December 31, 1989)
EXHIBIT 10(e)--
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)
EXHIBIT 10(f)--
Stock Purchase Agreement by and among General Casualty
Company of Wisconsin, Baldwin & Lyons, Inc. and
Protective Insurance Company as of August 8, 1995
(Incorporated as an exhibit by reference to Exhibit
10(g) to the Company's Annual Report on Form 10-K
for the year ended December 31, 1995)
(11) EXHIBIT 11--
(Statement regarding Computation of Per Share Earnings
computation of per
share earnings)
(21) EXHIBIT 21--
(Subsidiaries of the Subsidiaries of Baldwin & Lyons, Inc.
registrant)
(23) EXHIBIT 23--
(Consents of experts Consent of Ernst & Young LLP
and counsel)
(24) EXHIBIT 24--
(Powers of Attorney) Powers of Attorney for certain Officers and Directors
(27) EXHIBIT 27--
(Financial Data Financial Data Scedule filed herewith electronically
Schedule)
44
45
(b) No reports on Form 8-K were filed by the Company in the fourth quarter of
1996.
(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 46 through 50 of this report.
45
46
SCHEDULE I -- SUMMARY OF INVESTMENTS-
OTHER THAN INVESTMENTS IN RELATED PARTIES
December 31, 1996
BALDWIN & LYONS, INC. & SUBSIDIARIES
- - -------------------------------------------------------------------------
Column A Column B Column C Column D
- - -------------------------------------------------------------------------
(Dollars in thousands)
Amount At
Which Shown
Fair In The Balance
Type of Investment Cost Value Sheet (A)
- - --------------------------------- ---------- ---------- ----------
Fixed Maturities:
Bonds:
United States government and
government agencies and
authorities $145,755 $145,855 $145,855
Mortgage backed securities 49,926 49,973 49,973
States, municipalities and
political subdivisions 56,585 56,747 56,747
Public utilities 100 100 100
All other corporate bonds 20,073 20,518 20,518
Redeemable preferred stock 591 635 635
---------- ---------- ----------
Total fixed maturities 273,030 273,828 273,828
Equity Securities:
Common Stocks:
Banks, trust and insurance
companies 38,244 77,030 77,030
Industrial, miscellaneous
and all other 47,840 66,889 66,889
Nonredeemable preferred stocks 3,260 3,277 3,277
---------- ---------- ----------
Total equity securities 89,344 147,196 147,196
Short-term and Other:
Certificates of deposit 3,110 3,110 3,110
Commercial paper 2,400 2,400 2,400
All other short-term 14,069 14,069 14,069
Other long-term investments 13,804 14,188 14,188
---------- ---------- ----------
Total short-term and other 33,383 33,767 33,767
---------- ---------- ----------
Total investments $395,757 $454,791 $454,791
========== ========== ==========
(A) All securities listed are considered available-for-sale and, accordingly,
are presented at fair value in the financial statements.
46
47
SCHEDULE III -- SUPPLEMENTARY INSURANCE INFORMATION
BALDWIN & LYONS, INC. AND SUBSIDIARIES
(DOLLARS IN THOUSANDS)
- - ---------------------------------------------------------------------------------------------------------------------------------
Column A Column B Column C Column D Column E Column F Column G Column H Column I Column J Column K
- - ---------------------------------------------------------------------------------------------------------------------------------
As of December 31, Year Ended December 31,
--------------------------------------------- ------------------------------------------------------------------
Reserves
for Unpaid Other Benefits, Amortization
Deferred Claims Policy Claims, of Deferred
Policy and Claim Claims and Net Net Losses and Policy Other Net
Acquisition Adjustment Unearned Benefits Premium Investment Settlement Acquisition Operating Premiums
Segment Costs Expenses Premiums Payable Earned Income Expenses Costs Expenses Written
- - ----------------- --------- ----------- --------- --------- -------- --------- ---------- ----------- --------- ---------
(A) (B) (A) (B)
Property/Casualty
Insurance
1996 $1,425 $196,939 $10,835 --- $58,743 $17,505 $33,754 $6,088 $4,218 $61,431
1995 763 211,489 8,262 --- 58,793 18,418 38,754 3,792 4,027 63,065
1994 3,875 235,209 19,164 --- 61,187 13,598 32,910 3,281 4,044 61,502
(A) Allocations of certain expenses have been made to investment income,
settlement expenses and other operating expenses and are based on a number of
assumption and estimates. Results among these catagories would change if
different methods were applied.
(B) Commissions paid to the Parent Company have been eliminated for this
presentation. Commission allowances resulting from reinsurance transactions
are offset against other operating expenses.
47
48
SCHEDULE IV -- REINSURANCE
BALDWIN & LYONS, INC. & SUBSIDIARIES
(DOLLARS IN THOUSANDS)
- - -----------------------------------------------------------------------------------------------
Column A Column B Column C Column D Column E Column F
- - -----------------------------------------------------------------------------------------------
% of
Ceded Assumed Amount
Gross to Other from Other Net Assumed to
Amount Companies Companies Amount Net
---------- ---------- ---------- ---------- ----------
Premiums Earned -
Property/casualty insurance:
Years Ended December 31:
1996 $ 60,221 $ 11,698 $ 10,220 $ 58,743 17.4
1995 62,811 16,340 12,322 58,793 21.0
1994 65,985 18,477 13,679 61,187 22.4
1994 amounts have been adjusted for the sale of Hoosier Insurance Company
48
49
SCHEDULE V--VALUATION AND QUALIFYING ACCOUNTS
BALDWIN & LYONS, INC. & SUBSIDIARIES
(DOLLARS IN THOUSANDS)
- - ------------------------------------------------------------------------------------------
Column A Column B Column C Column D Column E
- - ------------------------------------------------------------------------------------------
Additions
-----------------------
(1) (2)
Charged to
Balance at Charged to Other Balance
Beginning Cost and Accounts- Deductions- at End of
Description of Period Expenses Describe Describe Period
- - ------------------------- ---------- ---------- ---------- ---------- ----------
Allowance for doubtful
accounts:
Years ended December 31:
1996 $300 $192 $0 $146 (A) $346
1995 300 (1) 0 (1)(A) 300
1994 300 5 0 5 (A) 300
(A) Bad debts written off during the year net of recoveries of previously
written off amounts, if any.
49
50
SCHEDULE VI--SUPPLEMENTAL INFORMATION
CONCERNING PROPERTY/CASUALTY INSURANCE OPERATIONS
BALDWIN & LYONS, INC. & SUBSIDIARIES
(DOLLARS IN THOUSANDS)
- - -----------------------------------------------------------------------------------------------------------------------------------
Column A Column B Column C Column D Column E Column F Column G Column H Column I Column J Column K
- - -----------------------------------------------------------------------------------------------------------------------------------
As of December 31, Year Ended December 31,
----------------------------------------- --------------------------------------------------------------------------
Claims and Claims
Reserves Adjustment Expenses Amortiza-
for Unpaid Discount, Incurred Related to tion of
Deferred Claims if -------------------- Deferred Paid Claims
AFFILIATION Policy and Claim Deducted Net (1) (2) Policy and Claim Net
WITH Acquisi- Adjustment in Unearned Earned Investment Current Prior Acquisition Adjustment Premiums
REGISTRANT tion Costs Expenses Column C Premiums Premiums Income Year Years Costs Expenses Written
- - -------------- ---------- --------- ---------- -------- --------- --------- --------- --------- ---------- ---------- ---------
(A) (B)
Consolidated
Property/
Casualty
Subsidiaries:
1996 $1,425 $196,939 $4,694 $10,835 $58,743 $17,505 $45,999 ($12,245) $6,088 $40,716 $61,431
1995 763 211,489 8,096 8,262 58,793 18,418 44,238 (5,484) 3,792 52,765 63,065
1994 3,875 235,209 6,774 19,164 61,187 13,598 55,766 (22,856) 3,281 51,866 61,502
(A) Loss reserves on certain reinsurance assumed and permanent total disability
worker's compensation claims have been discounted to present value using
pretax interest rates not exceeding 3.5%.
(B) 1995 paid claims and claim adjustment expenses include $11,186 related to
Hoosier representing all reserves for unpaid claims and claim adjustment
expenses at December 31, 1994. 1994 paid claims and claim adjustment expenses
include payments made by Hoosier.
50
51
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
BALDWIN & LYONS, INC.
March 25, 1997 By /s/ Gary W. Miller
-----------------------------------
Gary W. Miller, President
(Chief Operating Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
March 25, 1997 By /s/ Gary W. Miller
-----------------------------------
Gary W. Miller, President; Director
March 25, 1997 By /s/ G. Patrick Corydon
-----------------------------------
G. Patrick Corydon, Vice President -
Finance and Treasurer (Principal
Financial Officer and Principal
Accounting Officer)
March 25, 1997 By /s/ Otto N. Frenzel III (*)
-----------------------------------
Otto N. Frenzel III, Director
March 25, 1997 By /s/ John M. O'Mara (*)
-----------------------------------
John M. O'Mara, Director
March 25, 1997 By /s/ Thomas H. Patrick (*)
-----------------------------------
Thomas H. Patrick, Director
March 25, 1997 By /s/ Gregory T. Mutz (*)
-----------------------------------
Gregory T. Mutz, Director
51
52
SIGNATURES (CONTINUED)
March 25, 1997 By /s/ Nathan Shapiro (*)
-----------------------------------
Nathan Shapiro, Director
March 25, 1997 By /s/ Norton Shapiro (*)
-----------------------------------
Norton Shapiro, Director
March 25, 1997 By /s/ L. Leslie Waters (*)
-----------------------------------
L. Leslie Waters, Director
March 25, 1997 By /s/ Stuart D. Bilton (*)
-----------------------------------
Stuart D. Bilton, Director
(*) By Gary W. Miller, Attorney-in-Fact
52
53
ANNUAL REPORT ON FORM 10-K
ITEM 14(c)--CERTAIN EXHIBITS
YEAR ENDED DECEMBER 31, 1996
BALDWIN & LYONS, INC.
INDIANAPOLIS, INDIANA
53
54
BALDWIN & LYONS, INC.
Form 10-K for the Fiscal Year
Ended December 31, 1996
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 amended (Incorporated as an
exhibit by reference to Exhibit
3(b) to the Company's Annual
Report on Form 10-K for the year
ended December 31, 1986) N/A
EXHIBIT 10(a)--
1981 Employees Stock Purchase Plan
(Incorporated as an exhibit by
reference to Exhibit A to the
Company's definitive Proxy
Statement for its Annual Meeting
held May 5, 1981) N/A
EXHIBIT 10(b)(1)--
1984 Stock Option and
Appreciation Rights Plan
(Incorporated as an exhibit by
reference to Annex A to the
Company's Definitive Proxy
Statement for its Annual Meeting
held May 7, 1985) N/A
EXHIBIT 10(b)(2)--
March, 1991 amendment to the 1984
Stock Option and Appreciation
Rights Plan (Incorporated as an
exhibit by reference to Exhibit
10(b)(2) to the Company's Annual
Report on Form 10-K for the year
ended December 31, 1990) N/A
54
55
INDEX TO EXHIBITS (CONTINUED)
Begins on sequential page
Exhibit No. number of Form 10-K
- - ------------------------------------ -------------------------
EXHIBIT 10(c)--
Baldwin & Lyons, Inc. Employee
Discounted Stock Option Plan
(Incorporated as an exhibit by
reference to Appendix A to the
Company's definitive Proxy Statement
for its Annual Meeting held
May 2, 1989) N/A
EXHIBIT 10(d)--
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
EXHIBIT 10(e)--
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(f)--
Stock Purchase Agreement by and among
General Casualty Company of Wisconsin,
Baldwin & Lyons, Inc. and Protective
Insurance Company as of August 8, 1995
(Incorporated as an exhibit by reference
to Exhibit 10(g) to the Company's
Annual Report on Form 10-K for the
year ended December 31, 1995) N/A
EXHIBIT 11--
Computation of Per Share Earnings p. 56
EXHIBIT 21--
Subsidiaries of Baldwin & Lyons, Inc. p. 57
EXHIBIT 23--
Consent of Ernst & Young LLP p. 58
EXHIBIT 24--
Powers of Attorney for certain
Officers and Directors p. 59
EXHIBIT 27--
Financial Data Schecule p. 62
55