-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, PUpPAE88yPLkr+4mGFbOgmO4yOyVNIw4UMiIgLbRPpyRTxXsEpHq/eJFRDXh+9JK qWiZkP7NucvL2OADjFCH4A== 0000009346-01-500005.txt : 20010328 0000009346-01-500005.hdr.sgml : 20010328 ACCESSION NUMBER: 0000009346-01-500005 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 20001231 FILED AS OF DATE: 20010327 FILER: COMPANY DATA: COMPANY CONFORMED NAME: BALDWIN & LYONS INC CENTRAL INDEX KEY: 0000009346 STANDARD INDUSTRIAL CLASSIFICATION: INSURANCE AGENTS BROKERS & SERVICES [6411] IRS NUMBER: 350160330 STATE OF INCORPORATION: IN FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-05534 FILM NUMBER: 1580878 BUSINESS ADDRESS: STREET 1: 1099 N MERIDIAN ST STREET 2: STE 700 CITY: INDIANAPOLIS STATE: IN ZIP: 46204 BUSINESS PHONE: 3176369800 MAIL ADDRESS: STREET 1: 1099 NORTH MERIDIAN ST STREET 2: STE 700 CITY: INDIANAPOLIS STATE: IN ZIP: 46204 FORMER COMPANY: FORMER CONFORMED NAME: BALDWIN H C AGENCY INC DATE OF NAME CHANGE: 19720309 10-K 1 form10k-2000.txt FORM 10-K FOR THE YEAR ENDED 12/31/00 2 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 FORM 10-K Annual Report Pursuant to Section 13 or 15(d) of The Securities Exchange Act of 1934 For the fiscal year ended Commission file number 0-5534 DECEMBER 31, 2000 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 and Class B Common Stock held by non- affiliates of the Registrant as of March 15, 2001, based on the closing trade prices on that date, was approximately $52,324,000. The number of shares outstanding of each of the issuer's classes of common stock as of March 15, 2001: Common Stock, No Par Value: Class A (voting)2,300,785 shares Class B (nonvoting)9,874,849 shares The Index to Exhibits is located on pages 50 and 51. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Proxy Statement for Annual Meeting of Shareholders to be held May 1, 2001 are incorporated by reference into Part III. 1 2 PART I ITEM 1. BUSINESS Baldwin & Lyons, Inc. was incorporated under the laws of the State of Indiana in 1930. Through its divisions and subsidiaries, Baldwin & Lyons, Inc. (referred to herein as "B&L") specializes in marketing and underwriting property and casualty insurance. The Company's subsidiaries are: Protective Insurance Company (referred to herein as "Protective"), with licenses in all 50 states and all Canadian provinces; Sagamore Insurance Company (referred to herein as "Sagamore"), which is currently licensed in 32 states; and B & L Insurance, Ltd. (referred to herein as "BLI"), which is domiciled and licensed in Bermuda. These subsidiaries are collectively referred to herein as the "Insurance Subsidiaries." The "Company", as used herein, refers to Baldwin & Lyons, Inc. and all its subsidiaries unless the context indicates otherwise. Approximately 49% of the gross direct premiums written and assumed by the Insurance Subsidiaries during 2000 was attributable to business placed with Protective by B & L. The remaining 51% consists primarily of business written by Sagamore originating through an extensive network of independent agents. The Insurance Subsidiaries cede portions of their gross premiums written to certain non-affiliated reinsurers under excess of loss and quota-share treaties and by facultative placements. Reinsurance is ceded to spread the risk of loss among several reinsurers. In addition to voluntary reinsurance, described below, the Insurance Subsidiaries participate in numerous mandatory government- operated reinsurance pools which require insurance companies to provide coverages on assigned risks. These assigned risk pools allocate participation to all insurers based upon each insurer's portion of premium writings on a state or national level. The Insurance Subsidiaries serve various specialty markets as follows: FLEET TRUCKING INSURANCE Protective provides coverage for larger customers in the motor carrier industry which retain substantial amounts of self-insurance as well as for medium-sized trucking companies on a first dollar or small deductible basis. These trucking products are marketed by the B&L agency organization directly to trucking clients without broker or agent intermediaries. The principal types of insurance marketed by Protective are: - Casualty insurance including motor vehicle liability, physical damage and other liability insurance. - Workers' compensation insurance. - Specialized accident (medical and indemnity) insurance. - Fidelity and surety bonds. - Inland Marine consisting principally of cargo insurance. - "Captive" insurance company products, which are provided through BLI in Bermuda. The B&L agency force also performs a variety of additional services, primarily for Protective's insureds, such as risk surveys and analyses, government compliance assistance, loss control and cost studies and research, development, and consultation in connection with new insurance programs including development of computerized systems to assist in monitoring accident data. Extensive claims services are also provided, primarily to clients with self-insurance programs. VOLUNTARY ASSUMPTION REINSURANCE Protective accepts retrocessions from selected reinsurance companies, principally reinsuring against catastrophes. Exposures under these retrocessions are generally in high upper layers, are spread among several 2 3 geographic regions and are limited so that any one catastrophic event would not have a material affect on the Company's financial position. However, a series of major events covering several geographic regions within a short period of time could result in significant losses to the Company. PRIVATE PASSENGER AUTOMOBILE INSURANCE Sagamore markets private passenger automobile liability and physical damage coverages to nonstandard insureds through a network of independent agents in thirteen states. SMALL FLEET TRUCKING INSURANCE Sagamore writes commercial automobile liability, physical damage and cargo insurance for truck owner-operators with ten or fewer power units. These products are marketed through independent agents in the majority of the states in which Sagamore is licensed. SMALL BUSINESS WORKERS' COMPENSATION Sagamore also markets worker's compensation insurance to selected small businesses in a few midwestern states. This product is marketed through independent agents. LOSSES AND LOSS ADJUSTMENT EXPENSES The consolidated financial statements include the estimated liability for unpaid losses and loss adjustment expenses ("LAE") of the Insurance Subsidiaries. The liabilities for losses and LAE are determined using case basis evaluations and statistical projections and represent estimates of the ultimate net cost of all unpaid losses and LAE incurred through December 31 of each year. These estimates are subject to the effects of trends in claim severity and frequency and are continually reviewed and, as experience develops and new information becomes known, the liability is adjusted as necessary. Such adjustments, either positive or negative, are reflected in current operations. Reserves for incurred, but not reported, claims are determined on the basis of actuarial calculations using historical data. The anticipated effect of inflation is implicitly considered when estimating liabilities for losses and LAE. In addition, frequency and severity of claims must be projected. The average severity of claims is 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, 2000 have been reduced by approximately $5.1 million as a result of such discounting. Had the Company not discounted loss and LAE reserves, pretax income would have been approximately $.5 million higher for the year ended December 31, 2000. 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 current treaty reinsurance arrangements, for the majority of risks insured, the Company's range of loss exposures is zero to $100,000 for a single occurrence. However, the Company continues to retain up to $1 million of loss exposure per occurrence for certain independent contractor and other non-trucking risks. Prior to June 1, 1998, the first $1 million of insured loss for a single occurrence was retained by the Company under treaty arrangements although this exposure was routinely reduced through the use of facultative reinsurance. The Company has reinsured exposure in excess of its applicable retention with several companies. 3 4 Certain of the previous reinsurance treaties contained aggregate recovery limitations. To the extent that losses in these layers, in the aggregate, exceed these limitations, the Company could be liable for amounts that would otherwise be covered under these reinsurance treaties. No such aggregate limits have been exceeded as of December 31, 2000. Prior to the restructuring of the Company's reinsurance treaties relating to trucking risks, effective June 1, 1998, reinsurance treaty arrangements had remained relatively constant since 1986. Prior to September 1, 1986, the Company's maximum exposure on a $10 million loss relating to its trucking insurance business ranged from $250,000 to approximately $2 million. The higher exposures were retained during periods when reasonably priced reinsurance was not available. Very few losses incurred during these periods, with the exception of environmental liability losses, remain unsettled at December 31, 2000. The Company's reinsurance treaties relating to trucking risks expire on June 1, 2001. Policies inforce on that date remain covered until expiration under the current treaties's run-off provisions. New or renewal trucking risk policies effective after June 1, 2001 will be covered under the yet to be determined provisions of new treaties. With respect to Sagamore's private passenger automobile and small fleet trucking business, the Company's maximum net exposure for a single occurrence was $100,000 during 2000. Sagamore's retention under the workers' compensation product was $50,000 for a single occurrence. The following table sets forth a reconciliation of beginning and ending loss and LAE liability balances, for 2000, 1999 and 1998. That table is presented net of reinsurance recoverable to correspond with income statement presentation. However, a reconciliation of these net reserves to those gross of reinsurance recoverable, as presented in the balance sheet, is also shown. The table on page 7 shows the development of the estimated liability, net of reinsurance recoverable, for the ten years prior to 2000. RECONCILIATION OF LIABILITY FOR LOSSES AND LOSS ADJUSTMENT EXPENSES (GAAP BASIS)
Year Ended December 31, 2000 1999 1998 ----------- ----------- ----------- (IN THOUSANDS) NET OF REINSURANCE RECOVERABLE: Liability for losses and LAE at the Beginning of the year $130,702 $143,951 $151,493 Provision for losses and LAE: Claims occurring during the current year 65,577 55,520 53,278 Claims occurring during prior years (8,107) (10,609) (10,741) ---------- ---------- ---------- 57,470 44,911 42,537 Losses and LAE payments: Claims occurring during the current year 37,671 27,867 24,947 Claims occurring during prior years 30,238 30,215 25,088 ---------- ---------- ---------- 67,909 58,082 50,035 Change in unpaid portion of uncollectible Amounts due from reinsurers (57) (78) (44) ---------- ---------- ---------- Liability for losses and LAE at end of year 120,206 130,702 143,951 Reinsurance recoverable on unpaid losses at end of the year 62,219 42,771 50,481 ---------- ---------- ---------- Liability for losses and LAE, gross of reinsurance recoverable, at end of the year $182,425 $173,473 $194,432 ========== ========== ==========
4 5 The reconciliation on page 4 shows an $8.1 million (6.7%) savings in the liability for losses and LAE recorded at December 31, 1999. The net savings is reflected in 2000 underwriting income. All major product groups produced redundancies during each of the years 2000, 1999 and 1998 with the exception of private passenger automobile in 2000. A more detailed discussion of reserve savings experienced in recent years is presented below. The differences between the liability for losses and LAE reported in the accompanying 2000 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 $121,265 Add differences: Reinsurance recoverable on unpaid losses and LAE 62,219 Additional reserve for reinsurance assumed losses not reported to the Company at the current year end 240 Reclassification of loss reserves ceded attributable to insolvent reinsurers 301 Deduct differences: Estimated salvage and subrogation recoveries recorded on a cash basis for SAP and on an accrual basis for GAAP (1,600) -------- Liability reported on a GAAP basis $182,425 ========
Loss reserves ceded attributable to insolvent reinsurers are treated as a separate liability for SAP purposes but are classified as an addition to loss reserves in the GAAP consolidated balance sheets. This classification was used for GAAP since the uncollectible amounts are, in effect, a reversal of reinsurance credits taken against gross loss and LAE reserves. Losses incurred, however, do not include charges for uncollectible reinsurance, nor do the tables on pages 4 and 7, since the inability to recover these amounts from insolvent reinsurers is considered to be a credit loss and is not associated with the Company's reserving process. Accordingly, loss and LAE developments would be distorted if amounts related to insolvent reinsurance were included. The table on page 7 presents the development of GAAP balance sheet liabilities for each year-end 1990 through 2000, net of all reinsurance credits. The top line of the table shows the estimated liability for unpaid losses and LAE recorded at the balance sheet date for each of the indicated years. The liabilities shown on this line for each year-end have been reduced by amounts relating to loss reserves ceded attributable to insolvent reinsurers, as discussed in the immediately preceding paragraph. This liability represents the estimated amount of losses and LAE for claims arising in all prior years that are unpaid at the balance sheet date, including losses that had been incurred but not yet reported to the Company. The upper portion of the table shows the reestimated amount of the previously recorded liability based on experience as of the end of each succeeding year. The estimate is increased or decreased as more information becomes known about the frequency and severity of claims. The "cumulative redundancy" represents the aggregate change in the estimates over all prior years. For example, the 1990 liability has developed a $36.6 million redundancy over ten years. That amount has been reflected in income over the ten years, as shown on the table. The effect on income of changes in estimates of the liability for losses and LAE during the past three years is shown in the table on page 4. Historically, the Company's loss developments have generally been favorable. Reserve developments for all year-ends 1986 through 1999 have produced redundancies as of December 31, 2000. In addition to 5 6 improvements in reserving methods, loss reserve developments since 1985 have been favorably affected by several other factors. Perhaps the most significant single factor has been the improvement in safety programs by the trucking industry in general and by the Company's insureds specifically. Statistics produced by the American Trucking Association show that driver quality has improved markedly in the past decade resulting in fewer fatalities and serious accidents. The Company's experience also shows that improved safety and hiring programs have had a dramatic impact on the frequency and severity of trucking accidents. Higher self-insured retentions also played a part in reduced insurance losses during much of this period. Higher retentions not only raise the excess insurance entry point but also encourage trucking company management to focus even more intensely on safety programs. Further, reserve savings have been achieved by the use of structured settlements on certain workers' compensation and liability claims of a long-term liability nature. Recent developments, including raising of speed limits in many states and the lack of availability of qualified drivers, may reverse some of the trends noted during the past ten years. Additionally, increased diesel and gasoline prices during the last two years may negatively impact incurred losses if smaller trucking operators begin to sacrifice maintenance and repairs in an effort to offset rising fuel costs. 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 2000 is different from that which generated much of the ten-year historical loss data used to establish reserves in the past few years. Savings realized in recent years upon the closing of claims, as reflected in the tables on pages 4 and 7, 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, 2000, the Company had paid $118.7 million of losses and LAE that had been incurred, but not paid, as of December 31, 1990; thus an estimated $35.0 million in losses incurred through 1990 remain unpaid as of the current financial statement date ($153.7 million incurred less $118.7 million paid). In evaluating this information, it is important to note that the method of presentation causes development experience to be duplicated. For example, the amount of any redundancy or deficiency related to losses settled in 1993, but incurred in 1990, will be included in the cumulative development amount for years-end 1990, 1991, and 1992. As such, this table does not present accident or policy year development data which readers may be more accustomed to analyzing. Also, conditions and trends that have affected development of the liability in the past may not necessarily occur in the future. Accordingly, it may not be appropriate to extrapolate future redundancies or deficiencies based on this table. ENVIRONMENTAL MATTERS: The Company's reserves for unpaid losses and loss expenses at December 31, 2000 included amounts for liability related to environmental damage claims. Given the Company's principal business is insuring trucking companies, it does on occasion receive claims involving a trucking accident which has resulted in the spill of a pollutant. Certain of the Company's policies cover these situations on the basis that they were caused by an accident that resulted in the immediate spill of a pollutant. These claims are typically reported and resolved within a short period of time. However, the Company has also received a few environmental claims that did not result from a "sudden and accidental" event. Some of these claims fall under policies issued in the 1970's primarily to one account which was involved in the business of hauling and disposing of hazardous waste. Although the Company had pollution exclusions in its policies during that period, the courts have ignored similar exclusions in many 6 7
ANALYSIS OF LOSS AND LOSS ADJUSTMENT EXPENSE DEVELOPMENT--GAAP BASIS (Dollars in thousands) Year Ended December 31 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- Liability for Unpaid Losses and LAE, Net of Reinsurance Recoverables * $190,351 $198,790 $188,189 $175,395 $175,012 $161,001 $154,039 $151,013 $143,515 $130,345 $119,905 Liability Reestimated as of: One Year Later 178,706 185,452 174,269 152,146 169,528 148,756 146,201 140,272 132,906 122,238 Two Years Later 164,977 171,069 153,548 147,577 159,000 140,811 135,125 128,743 124,878 Three Years Later 157,802 155,977 156,271 144,526 153,833 130,540 123,775 122,211 Four Years Later 149,946 160,477 155,104 142,178 148,390 122,792 119,862 Five Years Later 155,601 159,804 153,528 137,876 143,478 120,410 Six Years Later 155,666 158,972 150,531 134,744 142,475 Seven Years Later 155,038 157,976 147,992 134,540 Eight Years Later 154,453 155,830 148,555 Nine Years Later 153,051 156,380 Ten Years Later 153,705 Cumulative Redundancy $36,646 $42,410 $39,634 $40,855 $32,537 $40,591 $34,177 $28,802 $18,637 $8,107 Cumulative Amount of Liability Paid Through: One Year Later $40,939 $41,958 $38,511 $30,297 $45,005 $27,825 $26,934 $25,088 $30,214 $30,239 Two Years Later 63,689 68,706 59,494 58,969 67,219 43,016 43,280 43,311 48,416 Three Years Later 81,746 83,413 82,122 71,375 76,248 55,515 55,834 55,180 Four Years Later 92,313 98,331 91,794 77,702 85,096 62,740 63,998 Five Years Later 103,190 104,915 96,617 82,792 90,331 69,747 Six Years Later 107,579 109,174 100,299 87,316 95,924 Seven Years Later 110,282 112,487 104,625 90,441 Eight Years Later 113,080 116,461 107,668 Nine Years Later 116,540 118,884 Ten Years Later 118,684
* Amounts shown for 1990 through 2000 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 $818, $597, $611, $554, $542, $457, $498, $480, $436, $358 and $301, respectively. 7 8 environmental cases. During the seven years ended December 31, 2000, the Company recorded a total of $10.9 million in losses incurred with respect to environmental claims. Incurred losses to date include a reserve for incurred but not reported environmental losses of $3.9 million at December 31, 2000. Establishing reserves for environmental claims is subject to uncertainties that are greater than those represented by other types of claims. Factors contributing to those uncertainties include a lack of historical data, long reporting delays, uncertainty as to the number and identity of insureds with potential exposure, unresolved legal issues regarding policy coverage, and the extent and timing of any such contractual liability. Courts have reached different and sometimes inconsistent conclusions as to when the loss occurred and what policies provide coverage, what claims are covered, whether there is an insured obligation to defend, how policy limits are determined, how policy exclusions are applied and interpreted, and whether cleanup costs represent insured property damage. Management believes that those issues are not likely to be resolved in the near future. However, to date, very few environmental claims have been reported to the Company. In addition, a review of the businesses of our past and current insureds indicates that exposure to further claims of an environmental nature is limited because most of the Company's accounts are not currently, and have not in the past been, involved in the hauling of hazardous substances. Also, the revision of the pollution exclusion in the Company's policies in 1986 is expected to further limit exposure to claims from that point forward. In addition, the Company has never been presented with an environmental claim relating to asbestos and, based on the types of business the Company has insured over the years, it is not expected that the Company will have any asbestos exposure. MARKETING The Company's primary marketing areas are outlined on pages 2 and 3. Since the mid-1980's, Protective has focused its marketing efforts on large and medium trucking fleets. Protective has its largest market share in the larger trucking fleets (over 150 units). These fleets self-insure a portion of their risk and such self-insurance plans are a specialty of the Company. The indemnity contract provided to self-insured customers is designed to cover all aspects of trucking liability, including third party liability, property damage, physical damage, cargo and workers' compensation, arising from vehicular accident or other casualty loss. The self-insured program is supplemented with large deductible workers' compensation policies in states that do not allow for self-insurance. Protective also offers accident insurance on a group basis to independent contractors under contract to a fleet sponsor. Since 1989, the market for Protective's products has grown increasingly competitive (see comments under "Competition" following). Since 1992, Protective has accepted retrocessions, principally for catastrophe exposures, from selected reinsurers on an opportunistic basis. Protective is committed to participation in this market provided pricing remains conducive to profitable results. As the result of the recent merger of certain reinsurers and less favorable pricing in the market, Protective's participation in retrocessions decreased in 1999 and again in 2000 after adjustment for reinstatement premiums discussed later in the RESULTS OF OPERATIONS. However, based on improved pricing in the market late in 2000, the Company expects that premium from reinsurance assumed will increase during 2001. During 1995, Sagamore entered the private passenger automobile insurance market for nonstandard insureds. This program is currently being marketed in thirteen midwestern and southern states. Market acceptance to date has been favorable and approximately $35.7 million of premium was written in this line during 2000. Sagamore also offers a program of coverages for "small fleet" trucking concerns (owner-operators with one to ten power units). This program was limited to a small geographic area composed of Midwestern states through 8 9 the end of 1997. However, significant geographic expansion began during 1998 and has continued through 2000. Future expansion into other states is anticipated during 2001. Approximately $9.9 million of premium was written in this program during 2000, an increase in excess of 28% from the prior year. During 1997, Sagamore began marketing a small business workers' compensation product in Missouri. Through 1999, growth in this product had been slow resulting mainly from competitive forces. However, recent developments in the competitive make-up in the states where Sagamore markets this program resulted in approximately $2.2 million in premium written during 2000, an increase of 120% from the prior year. INVESTMENTS The Company manages its invested assets to provide a high degree of flexibility to respond to opportunities in the financial markets and to provide necessary cash flows for operations. The resulting investment strategies emphasize relatively short-term maturities and high asset quality and are designed to produce reasonable returns without jeopardizing principal. At December 31, 2000 the financial statement value of the Company's investment portfolio was approximately $442 million, including money market instruments classified as cash equivalents. A comparison of the diversification of the Company's investment portfolio, using cost as a basis, is as follows: December 31 -------------------- 2000 1999 -------- -------- Corporate and other bonds 25.3% 27.6% Common stocks 21.1 20.7 Short-term and other investments 18.7 13.2 Municipal bonds 13.1 13.5 U.S. Government obligations 10.1 13.2 Preferred stocks 6.2 3.8 Mortgage-backed securities 5.5 8.0 -------- -------- 100.0% 100.0% ======== ======== The Company's concentration of invested assets in relatively short-term investments provides it with a level of liquidity which is more than adequate to provide for its anticipated cash flow needs. The structure of the investment portfolio also provides the Company with the ability to restrict premium writings during periods of intense competition, which typically result in inadequate premium rates, and allows the Company to respond to new opportunities in the marketplace as they arise. The following comparison of the Company's bond and short-term investment portfolios, using par value as a basis, indicates the changes in maturities in the portfolio during 2000. MATURITIES OF BONDS AND SHORT-TERM INVESTMENTS AT DECEMBER 31 (PAR VALUE) 2000 1999 -------- -------- Less than one year 41.1% 28.3% 1 to 5 years 42.6 50.8 5 to 10 years 8.0 13.2 More than 10 years 8.3 7.7 -------- -------- 100.0% 100.0% ======== ======== Average life of portfolio (years) 4.0 4.3 ======== ======== 9 10 Approximately $14.2 million of the fixed maturity portfolio (3.2% of total invested assets) consists of bonds rated as less than investment grade at December 31, 2000. The unrealized net loss on the fixed maturity portfolio was $1.6 million at December 31, 2000, before income taxes, and compares to a $5.6 million unrealized loss at December 31, 1999. Equity securities comprise 36% of the financial statement value of the consolidated investment portfolio at December 31, 2000, up from 32% at the prior year-end. The unrealized gains on the equity security portfolio increased $12.1 million to $57.6 million at December 31, 2000. A comparison of consolidated investment yields is as follows: 2000 1999 -------- -------- Before federal tax: Investment income 5.5% 5.0% Investment income plus realized investment gains 8.7 6.4 After federal tax: Investment income 3.9 3.6 Investment income plus realized investment gains 6.1 4.5 EMPLOYEES As of March 1, 2001, the Company had 267 employees, 263 of whom are engaged partially or wholly in the business of the Company's Insurance Subsidiaries. The changes from March 1, 2000 are minor. COMPETITION The insurance brokerage and agency business is highly competitive. B & L competes with a large number of insurance brokerage and agency firms and individual brokers and agents throughout the country, many of which are considerably larger than B & L. B & L also competes with insurance companies which write insurance directly with their customers. Insurance underwriting is also highly competitive. The Insurance Subsidiaries compete with other stock and mutual companies and inter-insurance exchanges (reciprocals). There are numerous insurance companies offering the lines of insurance which are currently written or may in the future be written by the Insurance Subsidiaries. Many of these companies have been in business for longer periods of time, have significantly larger volumes of business, offer more diversified lines of insurance coverage and have greater financial resources than the Company. In many cases, competitors are willing to provide coverage for rates lower than those charged by the Insurance Subsidiaries. Many potential clients self-insure workers' compensation and other risks for which the Company offers coverage, and some concerns have organized "captive" insurance companies as subsidiaries through which they insure their own operations. Some states have workers' compensation funds that preclude private companies from writing this business in those states. Federal law also authorizes the creation of "Risk Retention Groups" which may write insurance coverages similar to those offered by the Company. ITEM 101(B), (C)(1)(I) AND (VII), AND (D) OF REGULATION S-K: Reference is made to Note J to the consolidated financial statements which provides information concerning industry segments and is filed herewith under Item 8, Financial Statements and Supplementary Data. 10 11 ITEM 2. PROPERTIES The Company leases office space at 1099 North Meridian Street, Indianapolis, Indiana in the Landmark Building. This building is located approximately one mile from downtown Indianapolis. The lease covers approximately 67,000 square feet and expires in August, 2003, with an option to renew for an additional ten years. The Company's entire operations, with the exception of Baldwin & Lyons, California, are conducted from these leased facilities. The Company owns a small building and the adjacent real estate approximately two miles from its main office. This building contains approximately 3,300 square feet of usable space, and is used primarily as 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 on a month-to-month basis. 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 2000. 11 12 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The Company's Class A and Class B common stocks are traded on The Nasdaq Stock Marketr under the symbols BWINA and BWINB, respectively. The Class A and Class B common shares have identical rights and privileges except that Class B shares have no voting rights other than on matters for which Indiana law requires class voting. As of December 31, 2000, 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 2000 and 1999, as reported by the National Association of Security Dealers, Inc. and published in the financial press. The quotations reflect interdealer prices without retail markup, markdown or commission and do not necessarily represent actual transactions.
CASH CLASS A CLASS B DIVIDENDS HIGH LOW HIGH LOW DECLARED --------- --------- --------- --------- --------- Year ended December 31: 2000: FOURTH QUARTER $19.000 $19.000 $23.875 $18.375 $.10 THIRD QUARTER 19.000 15.000 20.250 15.250 .10 SECOND QUARTER 17.500 16.000 19.938 16.000 .10 FIRST QUARTER 21.250 16.500 22.125 16.250 .10 1999: Fourth Quarter 22.313 19.750 23.938 19.625 .10 Third Quarter 22.375 20.250 23.875 20.188 .10 Second Quarter 22.875 20.000 24.047 20.313 .10 First Quarter 25.688 20.750 26.000 20.188 .10
The Company expects to continue its policy of paying regular cash dividends although there is no assurance as to future dividends because they are dependent on future earnings, capital requirements and financial conditions and are subject to regulatory restrictions as described in Note G to the consolidated financial statements. 12 13 ITEM 6. SELECTED FINANCIAL DATA
Year Ended December 31 ------------------------------------------------------------ 2000 1999 1998 1997 1996 ---------- ---------- ---------- ---------- ---------- (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) Net premiums written $ 77,214 $ 72,033 $ 71,943 $ 69,575 $ 61,431 Net premiums earned 77,439 69,114 68,862 61,675 58,743 Net investment income 19,049 18,891 19,060 18,442 19,580 Realized net gains on investments 12,473 5,625 2,855 17,338 6,860 Losses and loss expenses incurred 57,470 44,911 42,537 39,854 33,754 Net income 19,750 18,616 16,895 24,446 21,692 Earnings per share -- net income (1) 1.57 1.38 1.22 1.75 1.51 Cash dividends per share .40 .40 .40 .40 .36 Investment portfolio (3) 442,060 440,797 456,735 475,328 454,791 Total assets 552,164 530,677 544,369 557,015 526,460 Shareholders' equity 294,000 284,783 288,592 293,963 273,122 Book value per share (1) 24.01 21.50 20.91 21.23 19.46 Underwriting ratios (2): Losses and loss expenses 74.2% 65.0% 61.8% 64.6% 57.5% Underwriting expenses 28.1% 29.6% 32.0% 33.3% 29.2% Combined 102.3% 94.6% 93.8% 97.9% 86.7%
(1) Earnings and book value per share are adjusted for the dilutive effect of stock options outstanding. (2) Data is for all coverages combined and is presented based upon generally accepted accounting principles. (3) Includes money market instruments classified with cash in the Consolidated Balance Sheets. 13 14 Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS LIQUIDITY AND CAPITAL RESOURCES The primary sources of the Company's liquidity are (1) funds generated from insurance premiums, (2) net investment income and (3) maturing investments. The Company generally experiences positive cash flow resulting from the fact that premiums are collected on insurance policies in advance of the disbursement of funds in payment of claims. Operating costs of the insurance subsidiaries, other than loss and loss expense payments and commissions paid to the parent company, generally average between 25% and 35% of premiums earned on a consolidated basis and the remaining amount is available for investment for varying periods of time depending on the type of insurance coverage provided. During extended periods of declining net premium volume, however, operating cash flows may turn negative as loss settlements exceed net premium revenue and receipts of investment income. For several years, the Company's investment philosophy has emphasized the purchase of short-term bonds with maximum quality and liquidity. As interest rates have 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 4.0 years and 4.3 years for 2000 and 1999, respectively. The Company also remains an active participant in the equity securities market. Investments made by the Company's domestic insurance subsidiaries are regulated by guidelines promulgated by the National Association of Insurance Commissioners which are designed to provide protection for both policyholders and shareholders. The Company's assets at December 31, 2000 included $59.1 million in short-term investments which are readily convertible to cash without market penalty and an additional $49.2 million of fixed maturity investments maturing in less than one year. The Company believes that these liquid investments, plus the expected cash flow from current operations, are more than sufficient to provide for projected claim payments and operating cost demands. In addition, the Company's reinsurance program is structured to avoid serious cash drains that might accompany catastrophic losses. In the event competitive conditions produce inadequate rates and the Company chooses to restrict volume, the Company believes that the liquidity of its investment portfolio would permit it to continue to pay claims as settlements are reached without requiring the disposal of investments at a loss, regardless of interest rates in effect at the time. Net premiums written by the Company's U.S. insurance subsidiaries for 2000 equaled approximately 22% of the combined statutory surplus of these subsidiaries. Premium writings of 200% to 300% of surplus are generally considered acceptable by regulatory authorities. Further, the statutory capital of each of the insurance subsidiaries substantially exceeds minimum risk based capital requirements set by the National Association of Insurance Commissioners. Accordingly, the Company has the ability to significantly increase its business without seeking additional capital to meet statutory guidelines. Shareholders' equity increased to $294.0 million at December 31, 2000, from $284.8 million at December 31, 1999, including an increase of $11.5 million in unrealized net gains on investments. The change in shareholders' equity also included $17.0 million in treasury share purchases and $5.0 million of cash dividends to shareholders. Book value per common share outstanding increased 12% to $24.01 at December 31, 2000 from $21.50 per share at December 31, 1999. As more fully discussed in Note G to the consolidated financial statements, at December 31, 2000, $55.7 million, or 19.0% of shareholders' equity, represented net assets of the Company's insurance subsidiaries 14 15 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 $9.4 million at December 31, 2000. RESULTS OF OPERATIONS 2000 COMPARED TO 1999 Direct premiums written for 2000 totaled $97.1 million, an increase of $11.0 million (12.8%) from 1999. This increase is primarily attributable to increases in fleet trucking's large trucking fleet and independent contractor programs of $3.9 million (22.4%) and $1.6 million (7.8%), respectively, from 1999 levels. Direct premium writings from the Company's private passenger automobile, small trucking fleet and small business workers' compensation programs also increased by $2.4 million, $2.2 million and $1.2 million, respectively. Large trucking fleet volume increases resulted primarily from the addition of new accounts. Increases in independent contractor premiums resulted from the addition of new accounts and volume increases on existing accounts, while increases in private passenger automobile, small fleet and small workers' compensation were due primarily to geographic expansion. Premiums assumed from other reinsurers of $4.2 million during 2000 were relatively unchanged from 1999 although 2000's premium included $1.7 million of reinstatement premium attributable to losses occurring in late 1999. Without this premium, reinsurance assumed volume would have decreased 37% from the prior year. Pricing in this market began to firm up toward the end of 2000 and management anticipates increased participation during 2001. Premiums ceded to reinsurers increased $5.8 million (31.8%) during 2000 to $24.2 million. The percentage of premiums ceded to direct premiums written increased to 24.9% for 2000 from 21.3% for 1999 consistent with the increase in direct premiums written for the more heavily reinsured large trucking fleet program discussed above. After giving effect to changes in unearned premiums, net premiums earned increased 12.0% to $77.4 million for 2000 from $69.1 million for 1999. Premiums earned from private passenger automobile increased by $6.6 million. Net premiums earned from all trucking-related insurance products increased by $1.7 million (5.3%), including $1.9 million (31.7%) for small fleet trucking. Net investment income increased by $.2 million (.8%) during 2000 reflecting higher overall pre-tax yields on slightly lower average invested assets. The average pre-tax yield on invested assets was 5.5% and 5.0% for 2000 and 1999, respectively. After-tax yields were 3.9% and 3.6% for 2000 and 1999, respectively. Realized net capital gains were $12.5 million in 2000 compared to $5.6 million for 1999. The current year net gain consisted of gains on equity securities of $16.0 million and losses on fixed maturities and other investments of $3.5 million. Losses and loss expenses incurred during 2000 increased $12.6 million (28.0%) to $57.5 million. The 2000 consolidated loss and loss expense ratio was 74.2% compared to 65.0% for 1999. The increase in the loss and loss expense ratio is primarily attributable to adverse loss development and an increased frequency and severity of claims in the Company's personal automobile division. Changes in the Company's remaining products were generally favorable. Because of the high limits provided by the Company to its large trucking fleet insureds, the length of time required to settle larger, more complex claims and the volatility of the trucking liability 15 16 insurance business, the Company believes it is important to have a high degree of comfort in its reserving process. As claims are settled in years subsequent to their occurrence, the Company's claim handling process has, historically, tended to produce savings from the reserves provided. The Company believes that favorable loss developments in recent years 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 this favorable loss experience. However, due to the aforementioned changes in the Company's reinsurance structure for its large trucking fleets, whereby a smaller portion of the risk is retained, the impact of future loss developments on the loss and loss expense ratios may not be consistent with prior years. Other operating expenses for 2000, before credits for allowances from reinsurers, increased $2.9 million (9.2%) to $34.7 million. Personnel related expenses, including amounts allocated to loss expenses and investment income, increased 6.9% and accounted for approximately 40% of the total operating expense increase, reflecting the fully-employed labor market from which the Company draws. Direct commission expense increased $.9 million (12.8%) as the result of higher direct premiums from all of the Company's products. Ceding commission allowances from reinsurers increased $1.9 million (27.7%), resulting from increased premium volume covered under the reinsurance agreements covering Protective's fleet trucking business. The ratio of net operating expenses of the insurance subsidiaries to net premiums earned was 28.0% during 2000 compared to 29.6% for 1999. Including the agency operations, the ratio of other operating expenses to total revenue, adjusted to remove net realized gains, was 26.0% for 2000 compared with 27.5% for 1999. Expenses for 1999 included expenditures in preparation for Year 2000 (Y2K) compliance that were not present in the year 2000. The effective federal tax rate for consolidated operations for 2000 was 31.8%. This rate is lower than the statutory rate primarily because of tax-exempt investment income. As a result of the factors mentioned above, net income from consolidated operations for 2000 was $19.7 million compared to $18.6 million for 1999. Diluted earnings per share increased to $1.57 in 2000 from $1.38 in 1999 due primarily to the increase in realized gains on investments. Diluted earnings per share from operations before realized gains on investments was $.93 in 2000 compared to $1.11 in 1999. 1999 COMPARED TO 1998 Direct premiums written for 1999 totaled $86.1 million, an increase of $8.2 million (10.6%) from 1998. This increase is primarily attributable to an increase in fleet trucking's independent contractor program of $4.1 million (24.6%) from 1998. Direct premium writings from small and large trucking fleet risks also increased by $2.4 million and $2.1 million, respectively. These increases were partially offset by a small decrease in the Company's private passenger automobile business where competitive pressures increased. Increases in independent contractor premiums resulted from the addition of new accounts and volume increases on existing accounts. Large fleet trucking volume increases resulted primarily from the addition of new accounts and small fleet trucking premium increases were due primarily to geographic expansion. Premiums assumed from other reinsurers decreased by $3.0 million (42.6%) to $4.0 million during 1999. This decrease is due to non-renewal of the Company's participation in voluntary property catastrophe retrocession pools during 1999 as pricing in this market continued to weaken. Premiums ceded to reinsurers increased $5.7 million (44.9%) during 1999 to $18.3 million. The percentage of premiums ceded to direct premiums written increased to 21.3% for 1999 from 16.3% for 1998, as the 16 17 Company's new reinsurance agreements for its fleet trucking products, effective June 1, 1998, were inforce for the full year. The new treaties provide for the Company to cede larger portions of its premium as well as the underlying risk. After giving effect to changes in unearned premiums, net premiums earned increased .4% to $69.1 million for 1999 from $68.9 million for 1998. Net premiums earned from all trucking-related insurance products increased by $2.5 million (8.5%), including $2.2 million (59.7%) for small fleet trucking. Premiums earned from private passenger automobile increased by $1.0 million. The above increases were offset by a $3.7 million decrease (43.8%) in voluntary reinsurance assumed premium during 1999. Net investment income decreased by $.2 million (.9%) during 1999 due to lower average invested assets while overall pre-tax yields remained relatively unchanged from 1998. The average pre-tax yield on invested assets was 5.0% for both 1999 and 1998 and after-tax yields also remained unchanged at 3.6%. Realized net capital gains were $5.6 million in 1999 compared to $2.8 million for 1998. The current year net gain consisted of gains on equity securities and other investments of $7.8 million and $.2 million, respectively, and losses on fixed maturities of $2.3 million. Losses and loss expenses incurred during 1999 increased $2.4 million (5.6%) to $44.9 million. The 1999 consolidated loss and loss expense ratio was 65.0% compared to 61.8% for 1998. The increase in the loss and loss expense ratio is primarily attributable to incurred loss development on discontinued products and residual market participation along with growth in the Company's small trucking fleet program, all of which is measured against a relatively unchanged consolidated premium base. Changes in the Company's remaining products were individually insignificant. Other operating expenses for 1999, before credits for allowances from reinsurers, increased $2.3 million (7.8%) to $31.8 million. Personnel related expenses, including amounts allocated to loss expenses and investment income, increased $2.4 million (16.1%) from 1998. Personnel expense for 1999 was higher primarily as the result of accruals for equity appreciation rights, which represent a broad-based employee incentive program which is tied to changes in the Company's book value, in addition to regular annual payroll increases. Direct commission expense decreased $.9 million (11.0%) as the result of the decline in premiums from voluntary reinsurance assumed, partially offset by increases in premiums from Sagamore's small fleet and small business workers' compensation products. Ceding commission allowances from reinsurers increased $3.7 million (115.7%) resulting from new reinsurance agreements covering Protective's fleet trucking business. The ratio of net operating expenses of the insurance subsidiaries to net premiums earned was 29.6% during 1999 compared to 32.0% for 1998. Including the agency operations, the ratio of other operating expenses to total revenue, adjusted to remove net realized gains, was 27.5% for 1999 compared with 29.4% for 1998. Expenses for 1999 and 1998 include expenditures for Year 2000 (Y2K) compliance. While it is not possible to precisely isolate Y2K expenditures from those for ongoing development of current product lines, management believes that amounts spent during 1999 for Y2K related issues were higher than expenditures during 1998. The effective federal tax rate for consolidated operations for 1999 was 29.8%. This rate is lower than the statutory rate primarily because of tax-exempt investment income. As a result of the factors mentioned above, net income from consolidated operations for 1999 was $18.6 million compared to $16.9 million for 1998. Diluted earnings per share increased to $1.38 in 1999 from $1.22 in 1998 due primarily to the increase in realized gains on investments. Diluted earnings per share from operations before realized gains on investments was $1.11 in 1999 compared to $1.09 in 1998. 17 18 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 $12.5 million and $7.7 million were recorded at December 31, 2000 and 1999, respectively. The net deferred tax liability at December 31, 2000 included $4.2 million in special tax deposits covered under Section 847 of the Internal Revenue Code, as explained in the following paragraph, which compares to $5.0 million in special tax deposits at December 31, 1999. Adjusted for the special deposits, a net deferred tax liability of $16.7 million was recorded at December 31, 2000 compared to a net deferred tax liability of $12.7 million at December 31, 1999. The increase in deferred federal taxes payable is primarily attributable to changes in unrealized capital gains in the investment portfolio. A provision in the Technical and Miscellaneous Revenue Act of 1988 created a mechanism which would allow for a recognizable deferred tax asset specifically for property and casualty loss reserves discounted for tax purposes. Adopted as Section 847 of the Internal Revenue Code, this provision allows an insurer to take a special tax deduction equal to the discount on post 1986 accident year loss and loss expense reserves while making "special estimated tax payments" equal to the amount of the tax benefit derived from the special deduction. The "special estimated tax payments" can be carried forward for fifteen years to offset taxes arising from decreases in the special deduction and can be treated as regular estimated payments or refunded at the end of the carryforward period. Based upon the concerns regarding the recognition of deferred tax assets, the Company adopted the provisions of Section 847 for all tax years 1987 and subsequent and has taken deductions for the entire amount of discount on post- 1986 loss reserves. As mentioned above, special Section 847 estimated tax deposits totaling $4.2 million have been paid in connection with this election. FORWARD-LOOKING INFORMATION Any forward-looking statements in this report, including without limitation, statements relating to the Company's plans, strategies, objectives, expectations, intentions and adequacy of resources, are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Investors are cautioned that such forward-looking statements involve risks and uncertainties including without limitation the following: (i) the Company's plans, strategies, objectives, expectations and intentions are subject to change at any time at the discretion of the Company; (ii) the Company's business is highly competitive and the entrance of new competitors into or the expansion of the operations by existing competitors in the Company's markets and other changes in the market for insurance products could adversely affect the Company's plans and results of operations; and (iii) other risks and uncertainties indicated from time to time in the Company's filings with the Securities and Exchange Commission. MARKET RISK The Company operates solely within the property and casualty insurance industry and, accordingly, has significant invested assets which are exposed to various market risks. These market risks relate to interest rate fluctuations, foreign currency translation and equities market prices. All of the Company's invested assets are classified as available for sale and are listed as such in the enclosed consolidated financial statements in Note B. 18 19 The most significant of the three identified market risks relates to prices in the equities market. Though not the largest category of the Company's invested assets, equity securities have the greatest potential for short-term price fluctuation. The market value of the Company's equity positions at December 31, 2000 was $158.0 million or approximately 36% of invested assets, including money market instruments classified as cash. Funds invested in the equities market are not considered to be assets necessary for the Company to conduct its daily operations and, therefore, can be committed for extended periods of time. The long-term nature of the Company's equity investments allows it to invest in positions where ultimate value, and not short-term market fluctuations, are the most important feature. The Company's fixed maturity portfolio totaled $211.8 million at December 31, 2000. Over half of this portfolio is made up of U. S. government and government agency obligations and state and municipal debt securities, 83% of the portfolio matures within 5 years and the average life of the Company's fixed maturity investments is approximately 4.0 years. Although the Company is exposed to interest rate risk on its fixed maturity investments, given the anticipated duration of the Company's liabilities (principally insurance loss and loss expense reserves) relative to maturities, even a 100 to 200 basis point increase in interest rates would not have a significant impact on the Company's ability to conduct daily operations or to meet its obligations. The Company's exposure to foreign currency risk is not material. IMPACT OF INFLATION To the extent possible, the Company attempts to recover the costs of inflation by increasing the premiums it charges. A majority of the Company's premiums are charged as a percentage of an insured's gross revenue or payroll. As these charging bases increase with inflation, so does premium. The remaining premium rates charged are adjustable only at periodic intervals and often require state regulatory approval. Such periodic increases in premium rates may lag far behind cost increases. To the extent inflation influences yields on investments, the Company is also affected. The Company maintains a sizable portion of its investment portfolio in short-term instruments and changes in current market interest rates correspondingly affect yields on these investments. Further, as inflation affects current market rates of return, previously committed investments may rise or decline in value depending on the type and maturity of investment. Inflation must also be considered by the Company in the creation and review of loss and loss adjustment expense reserves since portions of these reserves are expected to be paid over extended periods of time. The anticipated effect of inflation is implicitly considered when estimating liabilities for losses and loss adjustment expenses. 19 20 ANNUAL REPORT ON FORM 10-K ITEM 8--FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA YEAR ENDED DECEMBER 31, 2000 BALDWIN & LYONS, INC. INDIANAPOLIS, INDIANA 20 21 YEAR ENDED DECEMBER 31, 2000 BALDWIN & LYONS, INC. INDIANAPOLIS, INDIANA REPORT OF INDEPENDENT AUDITORS Shareholders and Board of Directors Baldwin & Lyons, Inc. We have audited the accompanying consolidated balance sheets of Baldwin & Lyons, Inc. and subsidiaries as of December 31, 2000 and 1999, and the related consolidated statements of income and retained earnings, changes in equity other than capital, and cash flows for each of the three years in the period ended December 31, 2000. Our audits also included the financial statement schedules listed in the Index at Item 14(a). These financial statements and schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedules based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Baldwin & Lyons, Inc. and subsidiaries at December 31, 2000 and 1999, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2000, in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the related financial statement schedules, when considered in relation to the basic financial statements taken as a whole, present fairly, in all material respects, the information set forth therein. /s/ ERNST & YOUNG LLP Indianapolis, Indiana February 26, 2001 21 22 CONSOLIDATED BALANCE SHEETS Baldwin & Lyons, Inc. and Subsidiaries
December 31 ------------------------- 2000 1999 ---------- ---------- (DOLLARS IN THOUSANDS) ASSETS Investments: Fixed maturities $ 211,810 $ 250,386 Equity securities 157,951 139,300 Short-term and other 40,176 32,467 ---------- ---------- 409,937 422,153 Cash and cash equivalents 32,814 20,115 Accounts receivable--less allowance (2000, $1,229; 1999, $1,072) 25,279 24,991 Accrued investment income 3,724 3,697 Reinsurance recoverable 64,690 44,825 Deferred policy acquisition costs 3,674 3,851 Current federal income taxes - 764 Property and equipment--less accumulated depreciation (2000, $6,224; 1999, $5,537) 8,456 6,894 Notes receivable from employees 1,709 - Other assets 1,881 3,387 ---------- ---------- $ 552,164 $ 530,677 ========== ========== LIABILITIES AND SHAREHOLDERS' EQUITY Reserves: Losses and loss expenses $ 182,425 $ 173,473 Unearned premiums 24,441 24,432 ---------- ---------- 206,866 197,905 Reinsurance payable 7,349 11,536 Accounts payable and other liabilities 30,399 28,753 Deferred federal income taxes 12,547 7,700 Current federal income taxes 1,003 - ---------- ---------- 258,164 245,894 Shareholders' equity: Common stock, no par value: Class A -- authorized 3,000,000 shares; outstanding -- 2000, 2,300,785 shares; 1999, 2,325,554 shares 123 124 Class B -- authorized 20,000,000 shares; outstanding -- 2000, 9,870,082 shares; 1999, 10,837,393 shares 526 578 Additional paid-in capital 36,416 39,663 Unrealized net gains on investments 36,237 24,711 Retained earnings 220,698 219,707 ---------- ---------- 294,000 284,783 ---------- ---------- $ 552,164 $ 530,677 ========== ==========
See notes to consolidated financial statements. 22 23 CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS Baldwin & Lyons, Inc. and Subsidiaries
Year Ended December 31 ------------------------------------------ 2000 1999 1998 ------------ ------------ ------------ (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA) REVENUE: Net premiums earned $ 77,439 $ 69,114 $ 68,862 Net investment income 19,049 18,891 19,060 Realized net gains on investments 12,473 5,625 2,855 Commissions, service fees and other income 3,512 2,772 1,806 ---------- ---------- ---------- 112,473 96,402 92,583 EXPENSES: Losses and loss expenses incurred 57,470 44,911 42,537 Other operating expenses 26,039 24,985 26,339 ---------- ---------- ---------- 83,509 69,896 68,876 ---------- ---------- ---------- INCOME BEFORE FEDERAL INCOME TAXES 28,964 26,506 23,707 Federal income taxes 9,214 7,890 6,812 ---------- ---------- ---------- NET INCOME 19,750 18,616 16,895 Retained earnings at beginning of year 219,707 216,223 206,258 Cash dividends (per share - $.40 per year) (4,994) (5,365) (5,488) Cost of treasury shares in excess of original issue proceeds (13,572) (9,946) (1,140) Foreign exchange adjustment (193) 179 (302) ---------- ---------- ---------- RETAINED EARNINGS AT END OF YEAR $ 220,698 $ 219,707 $ 216,223 PER SHARE DATA: DILUTED: Income before realized net gains $ .93 $ 1.11 $ 1.09 Realized net gains on investments .64 .27 .13 ---------- ---------- ---------- NET INCOME $ 1.57 $ 1.38 $ 1.22 ========== ========== ========== BASIC: Income before realized net gains $ .93 $ 1.12 $ 1.10 Realized net gains on investments .65 .27 .13 ---------- ---------- ---------- NET INCOME $ 1.58 $ 1.39 $ 1.23 ========== ========== ==========
See notes to consolidated financial statements. 23 24 CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY OTHER THAN CAPITAL Baldwin & Lyons, Inc. and Subsidiaries
2000 1999 1998 ------------ ------------ ------------ (DOLLARS IN THOUSANDS) BALANCES AT BEGINNING OF YEAR: Retained earnings $ 219,707 $ 216,223 $ 206,258 Unrealized gains on investments 24,711 30,311 45,614 ---------- ---------- ---------- 244,418 246,534 251,872 CHANGES ARISING FROM INCOME-PRODUCING ACTIVITIES: Net income 19,750 18,616 16,895 Gains (losses) on investments: Holding gains (losses) arising during period, before federal income taxes 30,205 (2,991) (20,688) Federal income taxes 10,572 (1,047) (7,241) ---------- ---------- ---------- 19,633 (1,944) (13,447) Gains realized during period included in net income, before federal income taxes (12,473) (5,625) (2,855) Federal income taxes (4,366) (1,969) (999) ---------- ---------- ---------- (8,107) (3,656) (1,856) ---------- ---------- ---------- Change in unrealized gains on investments 11,526 (5,600) (15,303) Foreign exhange adjustment (193) 179 (302) ---------- ---------- ---------- TOTAL REALIZED AND UNREALIZED INCOME 31,083 13,195 1,290 OTHER CHANGES AFFECTING RETAINED EARNINGS: Cash dividends paid to shareholders (4,994) (5,365) (5,488) Cost of treasury shares in excess of original issue proceeds (13,572) (9,946) (1,140) ---------- ---------- ---------- (18,566) (15,311) (6,628) ---------- ---------- ---------- TOTAL CHANGES 12,517 (2,116) (5,338) ---------- ---------- ---------- BALANCES AT END OF YEAR: Retained earnings 220,698 219,707 216,223 Unrealized gains on investments 36,237 24,711 30,311 ---------- ---------- ---------- $ 256,935 $ 244,418 $ 246,534 ========== ========== ==========
See notes to consolidated financial statements. 24 25 CONSOLIDATED STATEMENTS OF CASH FLOWS Baldwin & Lyons, Inc. and Subsidiaries
Year Ended December 31 ------------------------------------------ 2000 1999 1998 ------------ ------------ ------------ (DOLLARS IN THOUSANDS) OPERATING ACTIVITIES Net income $ 19,750 $ 18,616 $ 16,895 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Change in accounts receivable and unearned premium (279) (2,711) 4,800 Change in accrued investment income (27) 371 (22) Change in loss and loss expense reserves and reinsurance recoverable (10,913) (13,030) (8,240) Change in other assets, other liabilities and current income taxes (380) 2,237 (2,173) Amortization of net policy acquisition costs 1,031 1,716 5,945 Net policy acquisition costs deferred (854) (2,323) (6,668) Provision for deferred income taxes (1,359) 530 2,176 Bond amortization 227 384 217 Loss on sale of property 57 19 28 Depreciation 2,318 1,845 1,311 Net realized gain on investments (13,524) (5,771) (2,701) Compensation expense related to discounted stock options 136 140 135 ---------- ---------- ---------- NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES (3,817) 2,023 11,703 INVESTING ACTIVITIES Purchases of fixed maturities and equity securities (132,874) (143,309) (196,774) Proceeds from maturities 44,185 55,746 92,774 Proceeds from sales of fixed maturities 35,779 23,485 21,785 Proceeds from sales of equity securities 108,063 84,441 80,487 Net purchases of short-term investments (9,671) (8,263) (6,801) Distributions from limited partnerships 1,799 157 600 Notes receivable from employees (1,709) - - Purchases of property and equipment (4,121) (2,836) (3,553) Proceeds from disposals of property and equipment 184 332 128 ---------- ---------- ---------- NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 41,635 9,753 (11,354) FINANCING ACTIVITIES Dividends paid to shareholders (4,994) (5,365) (5,488) Proceeds from sale of common stock 10 15 40 Drawing on line of credit 5,411 8,528 - Repayment on line of credit (8,528) - - Cost of treasury shares (17,018) (11,794) (1,348) ---------- ---------- ---------- NET CASH USED IN FINANCING ACTIVITIES (25,119) (8,616) (6,796) ---------- ---------- ---------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 12,699 3,160 (6,447) Cash and cash equivalents at beginning of year 20,115 16,955 23,402 ---------- ---------- ---------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 32,814 $ 20,115 $ 16,955 ========== ========== ==========
See notes to consolidated financial statements. 25 26 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Baldwin & Lyons, Inc. and Subsidiaries (DOLLARS IN THOUSANDS) NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION: The consolidated financial statements include the accounts of Baldwin & Lyons, Inc. and its wholly owned subsidiaries (the Company). All significant intercompany transactions and accounts have been eliminated in consolidation. USE OF ESTIMATES: Preparation of the consolidated financial statements requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates. CASH AND CASH EQUIVALENTS: The Company considers investments in money market funds to be cash equivalents. Carrying amounts for these instruments approximate their fair values. INVESTMENTS: Carrying amounts for fixed maturity securities (bonds, notes and redeemable preferred stocks) represent fair value and are based on quoted market prices, where available, or broker/dealer quotes for specific securities where quoted market prices are not available. Equity securities (nonredeemable preferred stocks and common stocks) are carried at quoted market prices (fair value). Other investments are carried at either market value, cost or cost adjusted for operations of limited partnerships, depending on the nature of the investment. All fixed maturity and equity securities are considered to be available for sale; the related unrealized net gains or losses (net of applicable tax effect) are reflected directly in shareholders' equity. 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, certain of which are discounted, are determined using case basis evaluations and statistical analyses and represent estimates of the ultimate cost of all reported and unreported losses which are unpaid at year end. These reserves include estimates of future trends in claim severity and frequency and other factors which could vary as the losses are ultimately settled. Although it is not possible to measure the degree of variability inherent in such estimates, management believes that the reserves for losses and loss expenses are adequate. The estimates are continually reviewed and as adjustments to these reserves become necessary, such adjustments are reflected in current operations. RECOGNITION OF REVENUE AND COSTS: Premiums are earned over the period for which insurance protection is provided. A reserve for unearned premiums, computed by the daily pro-rata method, is established to reflect amounts applicable to subsequent accounting periods. Commissions to unaffiliated companies and other acquisition costs applicable to unearned premiums are deferred and expensed as the related premiums are earned. Anticipated investment income is considered in determining recoverability of deferred acquisition costs. Reinsurance premiums, commissions, expense reimbursements and reserves related to reinsured business are accounted for on bases consistent with those used in accounting for the original policies issued and the terms of the reinsurance contracts. Premiums ceded to other insurers have been reported as a reduction of premium income. Amounts applicable to reinsurance ceded for unearned premium and claim loss reserves have been reported as reinsurance recoverable assets. Certain reinsurance contracts provide for additional or return premiums and commissions based upon profits or losses to the reinsurer over prescribed periods. Estimates of additional or return premiums and commissions are adjusted quarterly to recognize actual loss experience to date as well as projected loss experience applicable to the various contract periods. 26 27 STOCK-BASED COMPENSATION: Accounting Principles Board Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, and related Interpretations are used in accounting for stock options, stock purchases and equity appreciation rights which are, from time to time, granted to employees and outside directors. FEDERAL INCOME TAXES: A consolidated federal income tax return is filed by the Company and includes all wholly owned subsidiaries. EARNINGS PER SHARE: Diluted earnings per share of common stock are based on the average number of shares of Class A and Class B common stock outstanding during the year, adjusted for the effect, if any, of options outstanding. Basic earnings per share are presented exclusive of the effect of options outstanding. See note I. COMPREHENSIVE INCOME: The Company records accumulated other comprehensive income from unrealized gains and losses on available-for-sale securities as a separate component of shareholders' equity. Foreign exchange adjustments are immaterial and the Company has no pension plan. The enclosed STATEMENT OF CHANGES IN EQUITY OTHER THAN CAPITAL refers to comprehensive income as TOTAL REALIZED AND UNREALIZED INCOME. Items of other comprehensive income included in this statement are referred to AS CHANGE IN UNREALIZED GAINS (LOSSES) ON INVESTMENTS and FOREIGN EXCHANGE ADJUSTMENT. A reclassification adjustment to other comprehensive income is made for GAINS REALIZED DURING PERIOD INCLUDED IN NET INCOME. RECLASSIFICATION: Certain prior year balances have been reclassified to conform to the current year presentation. 27 28 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 ------------ ------------ ------------ ------------ ------------ 2000: U. S. government obligations $ 38,789 $ 38,911 $ 58 $ (180) $ (122) Mortgage-backed securities 21,430 21,385 128 (83) 45 Obligations of states and political subdivisions 50,856 50,470 425 (39) 386 Corporate securities 100,735 102,676 878 (2,819) (1,941) ---------- ---------- ---------- ---------- ---------- Total fixed maturities 211,810 213,442 1,489 (3,121) (1,632) Equity securities 157,951 100,387 66,301 (8,737) 57,564 Short-term and other 40,176 40,358 - (182) (182) ---------- ---------- ---------- ---------- ---------- Total available-for-sale securities $ 409,937 $ 354,187 $ 67,790 $ (12,040) 55,750 ========== ========== ========== ========== Applicable federal income taxes (19,513) ---------- Net unrealized gains - net of tax $ 36,237 ========== 1999: U. S. government obligations $ 52,169 $ 53,091 $ 3 $ (925) $ (922) Mortgage-backed securities 32,074 32,350 178 (454) (276) Obligations of states and political subdivisions 54,496 54,643 107 (254) (147) Corporate securities 111,647 115,872 225 (4,450) (4,225) Total fixed maturities 250,386 255,956 513 (6,083) (5,570) Equity securities 139,300 93,768 56,159 (10,627) 45,532 Short-term and other 32,467 34,412 555 (2,500) (1,945) ---------- ---------- ---------- ---------- ---------- Total available-for-sale securities $ 422,153 $ 384,136 $ 57,227 $ (19,210) 38,017 ========== ========== ========== ========== Applicable federal income taxes (13,306) ---------- Net unrealized gains - net of tax $ 24,711 ==========
28 29 NOTE B - INVESTMENTS (CONTINUED) Gross realized gains and losses on investments for the years ended December 31 are summarized below:
2000 1999 1998 ----------- ----------- ----------- Fixed maturities: Gains $ 666 $ 220 $ 224 Losses (1,209) (2,564) (21) --------- --------- --------- Net gains (losses) (543) (2,344) 203 Equity securities: Gains 22,861 17,747 9,779 Losses (6,866) (9,953) (6,855) --------- --------- --------- Net gains 15,995 7,794 2,924 Short-term and other - net gain (loss) (2,979) 175 (272) --------- --------- --------- Total net gains $ 12,473 $ 5,625 $ 2,855 ========= ========= =========
The fair values and the cost or amortized cost of fixed maturity investments at December 31, 2000, 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 $ 43 $ 49,272 $ 49,315 $ 43 $ 49,386 $ 49,429 Excess of one year to five years 10,334 105,547 115,881 10,272 105,969 116,241 Excess of five years to ten years 3,657 17,204 20,861 3,630 17,279 20,909 Excess of ten years 7,396 14,477 21,873 7,440 14,508 21,948 --------- --------- --------- --------- --------- --------- Total maturities 21,430 186,500 207,930 21,385 187,142 208,527 Redeemable preferred stock - 3,880 3,880 - 4,915 4,915 --------- --------- --------- --------- --------- --------- $ 21,430 $ 190,380 $ 211,810 $ 21,385 $ 192,057 $ 213,442 ========= ========= ========= ========= ========= =========
Major categories of investment income for the years ended December 31 are summarized as follows: 2000 1999 1998 ----------- ----------- ----------- Fixed maturities $ 13,951 $ 15,785 $ 15,901 Equity securities 3,327 2,608 2,210 Money market funds 1,778 1,089 1,517 Short-term and other 1,674 565 611 ---------- ---------- ---------- 20,730 20,047 20,239 Investment expenses (1,681) (1,156) (1,179) ---------- ---------- ---------- NET INVESTMENT INCOME $ 19,049 $ 18,891 $ 19,060 ========== ========== ==========
Approximately 31% of purchases and 47% of sales of investments during the three years ended December 31, 2000 were made through securities broker-dealers in which certain directors of the Company were officers, directors or owners. Fees earned by affiliated investment advisors were $1,499, $614 and $590 in 2000, 1999 and 1998, respectively. The Company has holdings in money-market accounts which were managed by or purchased through companies affiliated with certain directors of the Company. 29 30 NOTE C - LOSS AND LOSS EXPENSE RESERVES Activity in the reserves for losses and loss expenses is summarized as follows. All amounts are shown net of reinsurance recoverable.
Year Ended December 31, 2000 1999 1998 ----------- ----------- ----------- Reserves at the beginning of the year $ 130,702 $ 143,951 $ 151,493 Provision for losses and loss expenses: Claims occurring during the current year 65,577 55,520 53,278 Claims occurring during prior years (8,107) (10,609) (10,741) ---------- ---------- ---------- Total incurred 57,470 44,911 42,537 Loss and loss expense payments: Claims occurring during the current year 37,671 27,867 24,947 Claims occurring during prior years 30,238 30,215 25,088 ---------- ---------- ---------- Total paid 67,909 58,082 50,035 Change in unpaid portion of uncollectible amounts due from reinsurers (57) (78) (44) ---------- ---------- ---------- Reserves at the end of the year 120,206 130,702 143,951 Reinsurance recoverable on reserves at the end of the year 62,219 42,771 50,481 ---------- ---------- ---------- Reserves, gross of reinsurance recoverables, at the end of the year $ 182,425 $ 173,473 $ 194,432 ========== ========== ==========
The reserves for losses and loss expenses, net of related reinsurance recoverables, at December 31, 1999, 1998 and 1997 were decreased by $8,107, $10,609 and $10,741, 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 2000 and 1999, on reserves outstanding at December 31, 1999 and 1998 included increases of $15 and decreases of $1,082, respectively, for incurred losses and loss expenses related to environmental damage claims. Reported cases relate primarily to policies issued in the 1970's to one account which was involved in the business of hauling and disposing of hazardous waste. Included in the above amounts are reserves for incurred but not reported environmental losses of $3,900 and $5,000 at December 31, 2000 and 1999, 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, 2000. The Company participates in mandatory residual market pools in various states. The Company records the results from participation in these pools as reported and records an additional provision in the financial statements for operating periods unreported by the pools. Loss reserves on certain permanent total disability workers' compensation reserves have been discounted to present value at pre-tax rates not exceeding 3.5%. At December 31, 2000 and 1999, loss reserves have been reduced by approximately $5,096 and $5,553, respectively. Discounting is applied to these claims since the amount of periodic payments to be made during the lifetime of claimants is fixed and determinable. Loss reserves have been reduced by estimated salvage and subrogation recoverable of approximately $2,698 and $2,363 at December 31, 2000 and 1999, respectively. 30 31 NOTE D - EMPLOYEE BENEFIT PLANS The Company maintains a defined contribution 401(k) Employee Savings and Profit Sharing Plan ("the Plan") which covers all employees who have completed one year of service. The Company's contributions to the Plan for 2000, 1999 and 1998 were $657, $620 and $615, respectively. NOTE E - INCOME TAXES Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's deferred tax assets and liabilities as of December 31 are as follows:
2000 1999 ---------- ---------- DEFERRED TAX LIABILITIES: Unrealized gain on investments $ 19,513 $ 13,306 Deferred acquisition costs 1,315 1,351 Limited partnerships 258 2,007 Salvage and subrogation 560 578 Other 590 598 --------- --------- Total deferred tax liabilities 22,236 17,840 --------- --------- DEFERRED TAX ASSETS: Discounts of loss and loss expense reserves 4,154 5,049 Deferred compensation 2,928 2,433 Unearned premiums 1,692 1,707 Other 915 951 --------- --------- Total deferred tax assets 9,689 10,140 --------- --------- NET DEFERRED TAX LIABILITIES $ 12,547 $ 7,700 ========= =========
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:
2000 1999 1998 ---------- ---------- ---------- Statutory federal income rate applied to pretax income from operations $ 10,137 $ 9,277 $ 8,297 Tax effect of (deduction): Tax-exempt investment income (1,390) (1,337) (1,374) Other 467 (50) (111) --------- --------- --------- Federal income tax expense $ 9,214 $ 7,890 $ 6,812 ========= ========= =========
Federal income tax expense consists of the following:
2000 1999 1998 ---------- ---------- ---------- Taxes (credits) on income from operations: Current $ 10,573 $ 7,360 $ 4,636 Deferred (1,359) 530 2,176 --------- --------- --------- $ 9,214 $ 7,890 $ 6,812 ========= ========= =========
31 32 NOTE E - INCOME TAXES (CONTINUED) Cash flows related to federal income taxes paid, net of refunds received, for 2000, 1999 and 1998 were $8,807, $7,367 and $6,533, respectively, including Section 847 special tax deposits. Future tax benefits on approximately $4,154 of deferred tax assets at December 31, 2000 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. Protective also serves as an assuming reinsurer under retrocessions from certain other reinsurers. These retrocessions include individual risks as well as aggregate catastrophe treaties. Accordingly, the occurrence of a major catastrophic event 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 2000, 1999 and 1998 have been reduced by reinsurance ceded premiums of approximately $23,943, $19,037 and $12,337, respectively. Net losses and loss expenses incurred for 2000 and 1998 have been reduced by reinsurance recoveries of approximately $40,586 and $10,255, respectively. Net losses and loss expenses incurred for 1999 have been increased by net savings on reinsured claims of $771. Ceded reinsurance premiums and loss recoveries for catastrophe reinsurance contracts were not material. The Company remains liable to the extent the reinsuring companies are unable to meet their obligations under reinsurance contracts. Net premiums earned for 2000, 1999 and 1998 include approximately $4,678, $4,981 and $8,338, respectively, relating to the assumption of reinsurance from other companies and from reinsurance pools. Components of reinsurance recoverable at December 31 are as follows:
2000 1999 ---------- ---------- Paid losses and loss expenses $ 2,197 $ 2,013 Unpaid losses and loss expenses 62,219 42,771 Unearned premiums 274 41 --------- --------- $ 64,690 $ 44,825 ========= =========
32 33 NOTE G - SHAREHOLDERS' EQUITY Changes in common stock outstanding and additional paid-in capital are as follows:
Additional Class A Class B Paid-in Shares Amount Shares Amount Capital ------------ ------------ ------------ ------------ ------------ Balance at January 1, 1998 2,397,354 $ 128 11,292,445 $ 602 $ 41,361 Discounted stock options issued - - - - 135 Discounted stock options exercised - - 67,475 4 36 Treasury shares purchased (8,900) (1) (57,424) (3) (204) ---------- ---------- ---------- ---------- ---------- Balance at December 31, 1998 2,388,454 127 11,302,496 603 41,328 Discounted stock options issued - - - - 139 Discounted stock options exercised - - 45,297 2 13 Treasury shares purchased (62,900) (3) (510,400) (27) (1,817) ---------- ---------- ---------- ---------- ---------- Balance at December 31, 1999 2,325,554 124 10,837,393 578 39,663 Discounted stock options issued - - - - 136 Discounted stock options exercised - - 17,889 1 9 Treasury shares purchased (24,769) (1) (985,200) (53) (3,392) ---------- ---------- ---------- ---------- ---------- Balance at December 31, 2000 2,300,785 $ 123 9,870,082 $ 526 $ 36,416 ========== ========== ========== ========== ==========
The Company's Class A and Class B common stock has a stated value of approximately $.05. Shareholders' equity at December 31, 2000 includes $302,858 representing GAAP shareholder's equity of insurance subsidiaries, of which $42,772 may be transferred by dividend or loan to the parent company without approval by, or notification to, regulatory authorities. An additional $204,337 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 $23,408, $18,212 and $18,396 for 2000, 1999 and 1998, respectively. Consolidated statutory shareholder's equity for these subsidiaries was $291,371 and $270,948 at December 31, 2000 and 1999, respectively. NOTE H - OTHER OPERATING EXPENSES Details of other operating expenses are as follows:
Years Ended December 31 2000 1999 1998 ----------- ----------- ----------- Amortization of deferred policy acquisition costs $ 9,740 $ 8,538 $ 9,108 Other underwriting expenses 13,103 12,162 11,263 Expense allowances from reinsurers (8,709) (6,822) (3,163) ---------- ---------- ---------- TOTAL UNDERWRITING EXPENSES 14,134 13,878 17,208 Operating expenses of non-insurance companies 11,905 11,107 9,131 ---------- ---------- ---------- TOTAL OTHER OPERATING EXPENSES $ 26,039 $ 24,985 $ 26,339 ========== ========== ==========
33 34 NOTE I - EARNINGS PER SHARE The following is a reconciliation of the denominators used in the calculations of basic and diluted earnings per share for the years ended December 31:
2000 1999 1998 ----------- ----------- ----------- Average shares outstanding for basic earnings per share 12,466,510 13,393,357 13,719,728 Dilutive effect of options 88,612 127,615 146,448 ---------- ---------- ---------- Average shares outstanding for diluted earnings per share 12,555,122 13,520,972 13,866,176 ========== ========== ==========
No effect on net income was considered to result from the presumed exercise of the options used in calculating diluted earnings per share. The market value options, discussed in Note K, were not included in the computation of diluted earnings per share because the exercise price was greater than the average market price of the Company's stock. NOTE J - REPORTABLE SEGMENTS The Company and its consolidated subsidiaries market and underwrite casualty insurance in three major specialty areas (reportable segments): (1) fleet trucking, (2) non-standard private passenger automobile and (3) the assumption of reinsurance. The fleet trucking segment provides multiple line insurance coverage to large trucking fleets which generally retain substantial amounts of self-insurance and to medium-sized trucking fleets on a first dollar or small deductible basis. The non-standard private passenger automobile segment provides motor vehicle liability and physical damage coverage to individuals. The reinsurance assumed segment accepts retrocessions from selected reinsurance companies, principally reinsuring against catastrophes. The Company's reportable segments are business units that operate in the property/casualty insurance industry and each offers products to different classes of customers. The reportable segments are managed separately due to the differences in underwriting criteria used to market products to each class of customer and the methods of distribution of the products each reportable segment provides. Segment information shown in the table below as "all other" includes products marketed and underwritten by the Company in other specialty areas and the runoff of discontinued product lines. The Company evaluates performance and allocates resources based on gain or loss from insurance underwriting operations before income taxes. Underwriting gain or loss does not include net investment income nor does it include realized gains or losses on the Company's investment portfolio. All investment-related revenues are managed at the corporate level. Underwriting gain or loss for the fleet trucking segment includes revenue and expense from the Company's agency operations since the agency operations serve solely as a direct marketing facility for this segment. Underwriting gain or loss also includes fee income generated by each segment in the course of its underwriting operations. Management does not identify or allocate assets to reportable segments when evaluating segment performance and depreciation expense is not material for any of the reportable segments. The accounting policies of each reportable segment are the same as those described in the summary of significant accounting policies. 34 35 NOTE J - REPORTABLE SEGMENTS (CONTINUED) The following table provides certain profit and loss information for each reportable segment for the years ended December 31:
Non-standard Private Voluntary Fleet Passenger Reinsurance Trucking Automobile Assumed All Other Totals ------------ ------------ ------------ ------------ ------------ 2000: Direct and assumed premium written $ 49,258 $ 35,713 $ 4,203 $ 12,216 $ 101,390 Net premium earned and fee income 26,722 39,476 4,521 9,067 79,786 Underwriting gain (loss) 12,582 (9,498) 2,083 262 5,429 1999: Direct and assumed premium written 44,013 33,339 4,015 9,009 90,376 Net premium earned and fee income 26,877 32,467 4,751 6,872 70,967 Underwriting gain (loss) 9,211 (284) 1,647 (1,041) 9,533 1998: Direct and assumed premium written 37,714 33,919 6,994 5,974 84,601 Net premium earned and fee income 26,599 30,738 8,457 4,180 69,974 Underwriting gain (loss) 6,325 (1,301) 2,839 242 8,105
The following tables are reconciliations of reportable segment revenues and profits to the Company's consolidated revenue and income from operations before federal income taxes, respectively.
2000 1999 1998 ----------- ----------- ----------- REVENUE: Net premium earned and fee income $ 79,786 $ 70,967 $ 69,974 Net investment income 19,049 18,891 19,060 Realized net gains on investments 12,473 5,625 2,855 Other income 1,165 919 694 --------- --------- --------- Total consolidated revenue $ 112,473 $ 96,402 $ 92,583 ========= ========= =========
2000 1999 1998 ----------- ----------- ----------- PROFIT: Underwriting gain $ 5,429 $ 9,533 $ 8,105 Net investment income 19,049 18,891 19,060 Realized net gains on investments 12,473 5,625 2,855 Corporate expenses (7,987) (7,543) (6,313) --------- --------- --------- Income from operations before federal income taxes $ 28,964 $ 26,506 $ 23,707 ========= ========= =========
The Company, through its subsidiaries, is licensed to do business in all 50 states of the United States, all Canadian provinces and Bermuda. Canadian and Bermuda operations are currently not significant. One customer of the fleet trucking segment represents approximately $23,739, $22,301 and $18,436 of the Company's consolidated revenue in 2000, 1999 and 1998, respectively. 35 36 NOTE K - STOCK PURCHASE AND OPTION PLANS In accordance with the terms of the 1981 Stock Purchase Plan (1981 Plan), the Company is obligated to repurchase shares issued under the 1981 Plan, at a price equal to 90% of the book value of the shares at the end of the quarter immediately preceding the date of repurchase. No shares were repurchased during 2000, 1999 or 1998. At December 31, 2000 there were 136,179 shares (Class A) and 375,766 shares (Class B) outstanding which are eligible for repurchase by the Company. The Company maintains stock option plans and has reserved an aggregate of 1,050,000 shares of Class B common stock for the granting of stock options to employees and directors. Discounted options granted to employees are generally exercisable immediately while discounted options granted to directors are generally not exercisable for one year from the date of grant. All options expire ten years after the date of grant. A summary of the Company's stock option activity and related information for the years ended December 31 follows:
2000 1999 1998 -------------------------- -------------------------- -------------------------- Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Options Price Options Price Options Price ----------- ----------- ----------- ----------- ----------- ----------- Outstanding at beginning of year 572,248 $ 21.543 631,974 $ 20.376 693,221 $ 18.625 Granted at exercise prices below market 7,842 1.000 6,571 1.000 6,228 1.000 Exercised 17,889 .548 45,297 .333 67,475 .590 Forfeited - - 21,000 25.750 - - --------- --------- --------- Outstanding at end of year 562,201 21.925 572,248 21.543 631,974 20.376 ========= ========= ========= Exercisable at end of year 554,359 22.221 407,010 20.235 294,413 14.739 Weighted average fair value of options granted during the year at exercise prices below market 7,842 17.411 6,571 21.242 6,228 21.682
The fair value of market value options granted during 1997 was determined using a Black Scholes option pricing model with the following assumptions: risk-free interest rate of 5.8%; dividend yield of 1.8%; volatility factor of the expected market price of the Company's common stock of .21; and an expected life of the option of 10 years. If the Company had followed Financial Accounting Standards Board Statement No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION, 2000 net income and earnings per share would have been reduced by $939 and $.07, respectively, related to the issuance of 1997 market value options. Similarly, 1999 and 1998 net income and earnings per share would each have been reduced by $975 and $.07, respectively, related to these options. Exercise prices for options outstanding as of December 31, 2000 were $.33, $1.00 or $25.75. The weighted-average remaining contractual life of options exercisable at either $.33 or $1.00 is 5.3 years with a weighted-average exercise price of $.78. The remaining contractual life of options exercisable at $25.75 is 7 years. The compensation cost that has been charged against income for all stock-based compensation plans, consisting of directors' fees only, was $136, $140 and $135 for 2000, 1999 and 1998, respectively. During 2000, the Company offered loans to certain key employees for the sole purpose of purchasing the Company's Class B common stock in the open market. $1,709 of such full-recourse loans were issued and outstanding at December 31, 2000 and carry an interest rate of 6%, payable annually on the loan anniversary date. The underlying securities serve as collateral for these loans, which must be repaid no later than 10 years from the date of issue. 36 37 NOTE L - QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) Quarterly results of operations are as follows:
Results by Quarter ---------------------------------------------------------------------------------- 2000 1999 --------------------------------------- --------------------------------------- 1ST 2ND 3RD 4TH 1st 2nd 3rd 4th --------- --------- --------- --------- --------- --------- --------- --------- Net premiums earned $19,669 $18,576 $20,417 $18,777 $15,985 $17,705 $17,749 $17,675 Net investment income 4,937 4,727 4,461 4,924 4,668 4,628 4,604 4,991 Realized net gains (losses) on investments 4,466 3,828 1,722 2,457 2,645 853 3,899 (1,772) Losses and loss expenses incurred 13,255 14,418 16,234 13,563 10,960 11,672 10,492 11,787 Net income 6,275 4,637 3,289 5,549 4,959 4,315 6,685 2,657 Per share - diluted: Net income $ .48 $ .37 $ .27 $ .45 $ .36 $ .32 $ .50 $ .20
37 38 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 60 Chairman, President and CEO 1983 (1) G. Patrick Corydon 52 Vice President and Treasurer 1979 Joseph J. DeVito 49 Vice President 1986 James W. Good 57 Vice President 1980 James E. Kirschner 55 Vice President and Secretary 1977 (2) (1) Mr. Miller was elected Chairman and CEO of the Company in 1997. (2) Mr. Kirschner was elected Secretary of the Company in 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. 38 39 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, 2000 and 1999 Consolidated Statements of Income and Retained Earnings - Years ended December 31, 2000, 1999 and 1998 Consolidated Statements of Changes in Equity Other Than Capital - Years ended December 31, 2000, 1999 and 1998 Consolidated Statements of Cash Flows - Years ended December 31, 2000, 1999 and 1998 Notes to Consolidated Financial Statements 2. List of Financial Statement Schedules--The following consolidated financial statement schedules of Baldwin & Lyons, Inc. and subsidiaries are included in Item 14(d): Pursuant to Article 7: Schedule I--Summary of Investments--Other than Investments in Related Parties Schedule III--Supplementary Insurance Information Schedule IV--Reinsurance Schedule V--Valuation and Qualifying Accounts Schedule VI--Supplemental Information Concerning Property/Casualty Insurance Operations All other schedules to the consolidated financial statements required by Article 7 and Article 5 of Regulation S-X are not required under the related instructions or are inapplicable and therefore have been omitted. 39 40 3. Listing of Exhibits: Number & Caption from Exhibit Table of Item 601 of Regulation S-K Exhibit Number and Description - ----------------------- --------------------------------------------------- (3) EXHIBIT 3(i)-- (Articles of Incorpor- Articles of Incorporation of Baldwin & Lyons, Inc., ation & By Laws) as amended (Incorporated as an exhibit by reference to Exhibit 3(a) to the Company's Annual Report on Form 10-K for the year ended December 31, 1986) EXHIBIT 3(ii)-- By-Laws of Baldwin & Lyons, Inc., as restated. (10) EXHIBIT 10(a)-- (Material Contracts) 1981 Employee Stock Purchase Plan (Incorporated as an exhibit by reference to Exhibit A to the Company's definitive Proxy Statement for its Annual Meeting held May 5, 1981) EXHIBIT 10(b)-- Baldwin & Lyons, Inc. Employee Discounted Stock Option Plan (Incorporated as an exhibit by reference to Appendix A to the Company's definitive Proxy Statement for its Annual Meeting held May 2, 1989) EXHIBIT 10(c)-- Baldwin & Lyons, Inc. Deferred Directors Fee Option Plan (Incorporated as an exhibit by reference to Exhibit 10(f) to the Company's Annual Report on Form 10-K for the year ended December 31, 1989) EXHIBIT 10(d)-- Baldwin & Lyons, Inc. Amended Employee Discounted Stock Option Plan (Incorporated as an exhibit by reference to Exhibit 10(f) to the Company's Annual Report on Form 10-K for the year ended December 31, 1992) 40 41 Number & Caption from Exhibit Table of Item 601 of Regulation S-K Exhibit Number and Description - ----------------------- ----------------------------------------------------- EXHIBIT 10(e)-- Baldwin & Lyons, Inc. Restated Employee Discounted Stock Option Plan. (Incorporated as an exhibit by reference to Exhibit 10(f) to the Company's Annual Report on Form 10-K for the year ended December 31, 1997) (11) EXHIBIT 11-- (Statement regarding Computation of Per Share Earnings computation of per share earnings) (21) EXHIBIT 21-- (Subsidiaries of the Subsidiaries of Baldwin & Lyons, Inc. registrant) (23) EXHIBIT 23-- (Consents of experts Consent of Ernst & Young LLP and counsel) (24) EXHIBIT 24-- (Powers of Attorney) Powers of Attorney for certain Officers and Directors (b) No reports on Form 8-K were filed by the Company in the fourth quarter of 2000. (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 42 through 46 of this report. 41 42 SCHEDULE I -- SUMMARY OF INVESTMENTS- OTHER THAN INVESTMENTS IN RELATED PARTIES FORM 10-K - YEAR ENDED DECEMBER 31, 2000 BALDWIN & LYONS, INC. AND SUBSIDIARIES
- -------------------------------------------------------------------------------- - ------------------ Column A Column B Column C Column D - -------------------------------------------------------------------------------- - ------------------ (DOLLARS IN THOUSANDS) Amount At Which Shown Fair In The Balance Type of Investment Cost Value Sheet (A) - ---------------------------------------- -------------- -------------- -------------- Fixed Maturities: Bonds: United States government and government agencies and authorities $ 38,911 $ 38,789 $ 38,789 Mortgage backed securities 21,385 21,430 21,430 States, municipalities and political subdivisions 50,470 50,856 50,856 Public utilities 15,806 16,072 16,072 All other corporate bonds 81,955 80,783 80,783 Redeemable preferred stock 4,915 3,880 3,880 ------------ ------------ ------------ Total fixed maturities 213,442 211,810 211,810 Equity Securities: Common Stocks: Public Utilities 1,192 1,791 1,791 Banks, trust and insurance Companies 19,994 34,768 34,768 Industrial, miscellaneous and all other 60,269 102,334 102,334 Nonredeemable preferred stocks 18,932 19,058 19,058 ------------ ------------ ------------ Total equity securities 100,387 157,951 157,951 Short-term and Other: Certificates of deposit 1,878 1,878 1,878 Commercial paper 25,059 25,059 25,059 Other long-term investments 13,421 13,239 13,239 ------------ ------------ ------------ Total short-term and other 40,358 40,176 40,176 ------------ ------------ ------------ Total investments $ 354,187 $ 409,937 $ 409,937 ============ ============ ============ (A) All securities listed are considered available-for-sale and, accordingly, are presented at fair value in the financial statements.
42 43
SCHEDULE III -- SUPPLEMENTARY INSURANCE INFORMATION FORM 10-K - YEAR ENDED DECEMBER 31, 2000 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 SettlementAcquisition Operating Premiums Segment Costs Expenses Premiums Payable Earned Income Expenses Costs Expenses Written ------------ ----------- ----------- ---------- ---------- ---------- ---------- -------------------------------- ---------- (A) (A) (A) (B) Property/Casualty Insurance 2000 $ 3,674 $ 182,425 $ 24,441 --- $ 77,439 $ 19,049 $ 57,470 $ 9,740 $ 4,394 $ 77,214 1999 3,851 173,473 24,432 --- 69,114 18,891 44,911 8,538 5,340 72,033 1998 3,245 194,432 22,208 --- 68,862 19,060 42,537 9,108 8,100 71,943
(A) Allocations of certain expenses have been made to investment income, settlement expenses and other operating expenses and are based on a number of assumptions and estimates. Results among these categories would change if different methods were applied. (B) Commissions paid to the Parent Company have been eliminated for this presentation. Commission allowances resulting from reinsurance transactions are offset against other operating expenses. 43 44
SCHEDULE IV -- REINSURANCE FORM 10-K - YEAR ENDED DECEMBER 31, 2000 BALDWIN & LYONS, INC. AND SUBSIDIARIES (DOLLARS IN THOUSANDS) - -------------------------------------------------------------------------------- - --------------------------- Column A Column B Column C Column D Column E Column F - -------------------------------------------------------------------------------- - --------------------------- % of Ceded Assumed Amount Direct to Other from Other Net Assumed to Premiums Companies Companies Amount Net ------------ ------------ ------------ ------------ ------------ Premiums Earned - Property/casualty insurance: Years Ended December 31: 2000 $ 96,702 $ 23,943 $ 4,680 $ 77,439 6.0 1999 83,170 19,037 4,981 69,114 7.2 1998 72,861 12,337 8,338 68,862 12.1
44 45
SCHEDULE V--VALUATION AND QUALIFYING ACCOUNTS FORM 10-K - YEAR ENDED DECEMBER 31, 2000 BALDWIN & LYONS, INC. AND 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 (A) Period - -------------------- ------------ ------------ ------------ ------------ ------------ Allowance for doubtful accounts: Years ended December 31: 2000 $ 1,072 $ 1,508 $ - $ 1,351 $ 1,229 1999 943 896 - 767 1,072 1998 396 1,312 - 765 943 (A) Bad debts written off during the year net of recoveries of previously written off amounts, if any.
45 46
SCHEDULE VI--SUPPLEMENTAL INFORMATION CONCERNING PROPERTY/CASUALTY INSURANCE OPERATIONS FORM 10-K - YEAR ENDED DECEMBER 31, 2000 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, ------------------------------------------ ------------------------------------------------------------------------- Claims and Claim Reserves Adjustment Expenses Amortiza- for Unpaid Discount, Incurred Related to tion of Deferred Claims if any -------------------- Deferred Paid Claims AFFILIATION Policy and Claim Deducted Net (1) (2) Policy and Claim Net WITH Acquisi- Adjustment in Unearned Earned Investment Current Prior Acquisition Adjustment Premiums REGISTRANT tion Costs Expenses Column C Premiums Premiums Income Year Years Costs Expenses Written ---------------------- ----------- --------- --------- --------- ---------- ---------- -------------------- ---------- ---------- (A) Consolidated Property/ Casualty Subsidiaries: 2000 $3,674 $182,425 $5,096 $24,441 $77,439 $19,049 $65,557 ($8,107) $9,740 $67,909 $77,214 1999 3,851 173,473 5,553 24,432 69,114 18,891 55,520 (10,609) 8,538 58,082 72,033 1998 3,245 194,432 5,272 22,208 68,862 19,060 53,278 (10,741) 9,108 50,035 71,943 (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%.
46 47 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 27, 2001 By /s/ Gary W. Miller ------------------------------ Gary W. Miller, Chairman and CEO; Director (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 27, 2001 By /s/ Gary W. Miller ----------------------------- Gary W. Miller, Chairman and CEO; Director March 27, 2001 By /s/ G. Patrick Corydon ----------------------------- G. Patrick Corydon, Vice President - Finance and Treasurer (Principal Financial Officer and Principal Accounting Officer) March 27, 2001 By /s/ Joseph DeVito ----------------------------- Joseph DeVito, Director and Vice President March 27, 2001 By /s/ James Good ----------------------------- James Good, Director and Vice President March 27, 2001 By /s/ Stuart D. Bilton ----------------------------- (*) Stuart D. Bilton, Director March 27, 2001 By /s/ Otto N. Frenzel III ----------------------------- (*) Otto N. Frenzel III, Director 47 48 SIGNATURES (CONTINUED) March 27, 2001 By /s/ John M. O'Mara ----------------------------- (*) John M. O'Mara, Director March 27, 2001 By /s/ Thomas H. Patrick ----------------------------- (*) Thomas H. Patrick, Director March 27, 2001 By /s/ Nathan Shapiro ----------------------------- (*) Nathan Shapiro, Director March 27, 2001 By /s/ Norton Shapiro ----------------------------- (*) Norton Shapiro, Director March 27, 2001 By /s/ John D. Weil ----------------------------- (*) John D. Weil, Director March 27, 2001 By /s/ Robert Shapiro ----------------------------- (*) Robert Shapiro, Director March 27, 2001 By /s/ John Pigott ----------------------------- (*) John Pigott, Director (*) By Gary W. Miller, Attorney-in-Fact 48 49 ANNUAL REPORT ON FORM 10-K ITEM 14(c)--CERTAIN EXHIBITS YEAR ENDED DECEMBER 31, 2000 BALDWIN & LYONS, INC. INDIANAPOLIS, INDIANA 49 50 BALDWIN & LYONS, INC. Form 10-K for the Fiscal Year Ended December 31, 2000 INDEX TO EXHIBITS BEGINS ON SEQUENTIAL PAGE EXHIBIT NO. NUMBER OF FORM 10-K - --------------------------------------------- ------------------------- EXHIBIT 3(i)-- Articles of Incorporation of Baldwin & Lyons, Inc. as amended (Incorporated as an exhibit by reference to Exhibit 3(a) to the Company's Annual Report on Form 10-K for the year ended December 31, 1986) N/A EXHIBIT 3(ii)-- By-Laws of Baldwin & Lyons, Inc., as restated p. 52 EXHIBIT 10(a)-- 1981 Employees Stock Purchase Plan (Incorporated as an exhibit by reference to Exhibit A to the Company's definitive Proxy Statement for its Annual Meeting held May 5, 1981) N/A EXHIBIT 10(b)-- Baldwin & Lyons, Inc. Employee Discounted Stock Option Plan (Incorporated as an exhibit by reference to Appendix A to the Company's definitive Proxy Statement for its Annual Meeting held May 2, 1989) N/A EXHIBIT 10(c)-- Baldwin & Lyons, Inc. Deferred Directors Fee Option Plan (Incorporated as an exhibit by reference to Exhibit 10(f) to the Company's Annual Report on Form 10-K for the year ended December 31, 1989) N/A 50 51 INDEX TO EXHIBITS (CONTINUED) BEGINS ON SEQUENTIAL PAGE EXHIBIT NO. NUMBER OF FORM 10-K - ----------------------------------------------- ------------------------- EXHIBIT 10(d)-- Baldwin & Lyons, Inc. Amended Employee Discounted Stock Option Plan (Incorporated as an exhibit by reference to Exhibit 10(f) to the Company's Annual Report on Form 10-K for the year ended December 31, 1989) N/A EXHIBIT 10(e)-- Baldwin & Lyons, Inc. Restated Employee Discounted Stock Option Plan (Incorporated as an exhibit by reference to Exhibit 10(f) to the Company's Annual Report on Form 10-K for the year ended December 31, 1997) N/A EXHIBIT 11-- Computation of Per Share Earnings p. 58 EXHIBIT 21-- Subsidiaries of Baldwin & Lyons, Inc. p. 59 EXHIBIT 23-- Consent of Ernst & Young LLP p. 60 EXHIBIT 24-- Powers of Attorney for certain Officers and Directors p. 61 51 EX-3 2 exh-3.txt AMENDED BY-LAWS 52 EXHIBIT 3(ii) CODE OF BY-LAWS OF BALDWIN & LYONS, INC. (As amended 5-2-00) ARTICLE I CAPITAL STOCK SECTION 1. STOCK CERTIFICATES As provided by law, each holder of shares of the corporation shall be entitled to a stock certificate signed by the president or vice president and attested by the secretary or an assistant secretary, certifying the number of shares owned by such shareholder and such other information as may be required by law. The form of such certificate shall be prescribed by resolution of the Board of Directors. SECTION 2. LOST OR DESTROYED CERTIFICATES When the stock certificate of any shareholder is lost or destroyed, a new stock certificate may be issued to replace such lost or destroyed certificate. Unless waived by the Board of Directors, the shareholder shall make an affidavit or affirmation of the fact that his certificate is lost or destroyed, shall advertise the same in such manner as the Board of Directors may require, and shall give the corporation a bond of indemnity in the amount and form which the Board of Directors may prescribe. SECTION 3. TRANSFER OF SHARES Shares of the corporation shall be transferable only on the books of the corporation upon the surrender of the certificate representing the same, either duly endorsed with signature guaranteed or accompanied by a separate document containing a written assignment of such certificate duly executed with signature guaranteed. The requirement for such guaranteeing may be waived by the president or secretary of the corporation. SECTION 4. RECOGNITION OF SHAREHOLDERS The corporation shall be entitled to recognize the exclusive right of a person registered on its books as the owner of shares to receive dividends and to vote as such owner, notwithstanding any equitable or other claim to, or interest in, such shares on the part of any other person. ARTICLE II MEETINGS OF SHAREHOLDERS SECTION 1. PLACE OF MEETINGS As provided in the Articles of Incorporation, meetings of the shareholders of the corporation shall be held at such place, either within or without the State of Indiana, as may be specified in the respective calls, notice or waivers of notice thereof. 52 53 SECTION 2. ANNUAL MEETINGS The annual meeting of the shareholders of the corporation shall be held at 10:00 a.m. on the first Tuesday in May of each year, or on such other date five (5) business days prior to or following this date as may be designated by the Board of Directors. SECTION 3. SPECIAL MEETINGS Special meetings of the shareholders may be called by the President, by the Board of Directors, or by shareholders who hold not less than one-fourth of all outstanding shares which may be voted on the business proposed to be transacted thereat. SECTION 4. NOTICE OF MEETINGS Written notice stating the place, day and hour of any meeting of shareholders and, in the case of special meetings or when otherwise required by law, the purpose for which any such meeting is called, shall be delivered or mailed by the Secretary of the corporation to each shareholder of record entitled to vote at such meeting, at such address as appears upon the records of the corporation and at least ten (10) days before the date of such meeting, on being notified of the place, day and hour thereof by the officers or persons calling the meeting. SECTION 5. WAIVER OF NOTICE Notice of any meeting may be waived in writing by any shareholder if the waiver sets forth in reasonable detail the time and place of the meeting and the purposes thereof. Attendance at any meeting, in person or by proxy, if the proxy sets forth in reasonable detail the purposes of such meeting, shall constitute a waiver of notice of such meeting. SECTION 6. VOTING RIGHTS Each holder of shares of the corporation shall have such voting rights as are specified in The Articles of Incorporation of the corporation. SECTION 7. DATE OF DETERMINATION OF VOTING RIGHTS The Board of Directors may fix a stock record date, not exceeding fifty (50) days prior to the date appointed for any meeting of shareholders, for the purpose of determining the shareholders entitled to notice of and to vote at such meeting. In the absence of action by the Board of Directors to fix a stock record date as herein provided, such stock record date shall be the fourteenth (14th) day prior to the date of the meeting. SECTION 8. VOTING BY PROXY A shareholder entitled to vote at any meeting of shareholders may vote either in person or by proxy, executed in writing by the shareholder of a duly authorized attorney-in-fact of such shareholder. (For purposes of this section, a proxy granted by the telegram by a shareholder shall be deemed "executed in writing by the shareholder".) No proxy shall be voted at any meeting of shareholders unless the same shall be filed with the Secretary of the meeting at the commencement thereof. The general proxy of a fiduciary shall be given the same effect as the general proxy of any other shareholder. No proxies shall be valid after eleven (11) months from the date or execution unless a longer term is expressly provided therein. No share shall be voted at any meeting: (a) on which an installment is due and unpaid; or (b) which shall have been transferred on the books of the corporation within ten (10) days next preceding the date of the meeting; or (c) which belongs to the corporation. 53 54 SECTION 9. VOTING LISTS The Secretary shall make, at least five (5) days before each meeting of shareholders, a complete list of the shareholders entitled to vote at such meeting, arranged in alphabetical order, with the address of each and the number of shares held by each, which list, for the period of five (5) days prior to such meeting, shall be kept on file at the principal office of the corporation and shall be subject to inspection by any shareholder at any time during usual business hours. Such a list shall also be produced and kept open at the time and place of the meeting and shall be subject to inspection by any shareholder during the whole time of the meeting. SECTION 10. QUORUM The persons owning a majority of the stock of this corporation shall constitute a quorum at any meeting of shareholders, and be capable of transacting any business thereof, except when otherwise especially provided by law or by the Articles of Incorporation of this corporation; but if, at any meeting of the shareholders, there be less than a quorum present, a majority in interest of the shareholders present in person or by proxy may adjourn from time to time without notice other than by announcement at the meeting until the holders of the amount of stock requisite to constitute a quorum shall attend. At any such adjourned meeting at which a quorum shall be present, any business may be transacted which might have been transacted at the meeting as originally notified. SECTION 11. CONDUCT OF MEETINGS Shareholder's meetings, including the order of business, shall be conducted in accordance with Roberts' Rules of Order, Revised, except insofar as the Articles of Incorporation, this Code of By-Laws, or any rule adopted by the Board of Directors of shareholders may otherwise provide. The shareholders may, by unanimous consent, waive the requirement of this section; but such waiver shall not preclude any shareholder from invoking the requirements of this section at any subsequent meeting. ARTICLE III BOARD OF DIRECTORS SECTION 1. DUTIES AND QUALIFICATIONS The business and affairs of the corporation shall be managed by a Board of Directors, none of whom need be shareholders of the corporation. SECTION 2. NUMBER AND TERMS OF OFFICE There shall be twelve (12) (as amended 5-2-00) Directors of the corporation, who shall be elected at each annual meeting of the shareholders, to serve for a term of one (1) year and until their successors shall be chosen and qualified, or until removal, resignation or death. If the annual meeting of the shareholders is not held at the time designated in these By-Laws, such failure shall not cause any defect in the existence of the corporation, and the Directors then in office shall hold over until their successors shall be chosen and qualified. SECTION 3. VACANCIES Any vacancy in the Board of Directors caused by death, resignation, incapacity or increase in the number of Directors may be filled by a majority vote of all the remaining members of the Board of Directors. Shareholders shall be notified of any increase in the number of Directors and the name, address, principal occupation and other pertinent information about any Directors elected by the Board to fill any vacancy in the next mailing sent to the shareholders following any such increase or election. Vacancies on the Board of Directors occasioned by removal of a Director shall be filled by a vote of the shareholders entitled to vote thereon at an annual or special meeting thereof. Any Director so elected by the Board of Directors or by the shareholders shall hold office until the next annual or special meeting of shareholders and until his successor shall be elected and qualified. 54 55 SECTION 4. ANNUAL MEETING Unless otherwise agreed upon, the Board of Directors shall meet each year, immediately following the annual meeting of the shareholders, at the place where such meeting of shareholders was held, for the purpose of election of officers of the corporation and consideration of any other business which may be brought before the meeting. No notice shall be necessary for the holding of this annual meeting. SECTION 5. OTHER MEETINGS Other meetings of the Board of Directors maybe held regularly pursuant to a resolution of the Board to such effect or may be held upon the call of the President or of any two (2) members of the Board and upon twenty-four (24) hours notice specifying the time, place and general purposes of the meeting, given to each Director, either personally or by mail, telegram or telephone. No notice shall be necessary for any regular meeting and notice of any other meeting may be waived in writing or by telegram. Attendance at any such meeting shall constitute waiver of notice of such meeting. Pursuant to Indiana law, the Board of Directors are authorized to conduct meetings by telephone or teleconference (added 5-4-82). SECTION 6. QUORUM One-third (1/3rd) of the whole Board of Directors (but in no case less than two (2) Directors) shall be necessary to constitute a quorum for the transaction of any business, except the filing of vacancies and the act of the majority of the Directors present at a meeting at which a quorum is present shall be the act of the Board of Directors, unless the act of a greater number is required by law, the Articles of Incorporation, or this Code of By-Laws. SECTION 7. ACTION BY CONSENT Any action which may be taken at any meeting of the Board, may be taken without a meeting, if prior to such action a written consent to such action is signed by all members of the Board and such consent is filed with the minutes of proceedings of the Board. SECTION 8. COMMITTEES OF THE BOARD OF DIRECTORS The Board of Directors may, by resolution adopted by a majority of the actual number of Directors elected and qualified, from time to time designate from among its members an executive committee or such other committees as it may specify. Any such committee shall have and exercise all the authority of the Board of Directors, to the extent provided in such resolution and by law. ARTICLE IV OFFICES SECTION 1. OFFICES AND QUALIFICATION THEREFOR The officers of the corporation shall consist of a Chairman of the Board of Directors, a President, an Executive Vice President, one (1) or more Vice Presidents, a Secretary, a Treasurer and such assistant officers as the Board of Directors shall designate. The President shall be chosen from among the Directors. Any two (2) or more offices may be held by the same person, except the duties of the President and the Secretary shall not be performed by the same person. SECTION 2. TERMS OF OFFICE Each Officer of the corporation shall be elected annually by the Board of Directors at its annual meeting and shall hold office for a term of one (1) year and until his successor shall be duly elected and qualified. 55 56 SECTION 3. VACANCIES Whenever any vacancies shall occur in any of the offices of the corporation for any reason, the same may be filled by the Board of Directors at a special or annual meeting thereof, and any officer so elected shall hold office until the next annual meeting of the Board of Directors and until his successor shall be duly elected and qualified. SECTION 4. REMOVAL Any officer of the corporation may be removed, with or without cause, by the Board of Directors whenever a majority of such Board shall vote in favor of such removal. SECTION 5. COMPENSATION Each officer of the corporation shall receive such compensation for his service in such office as may be fixed by action of the Board of Directors, duly recorded. ARTICLE V POWERS AND DUTIES OF OFFICERS SECTION 1. CHAIRMAN OF THE BOARD Subject to the general control of the Board of Directors, the Chairman shall manage and supervise all the affairs and personnel of the corporation and shall discharge all the usual functions of the Chief Executive Officer of a corporation. The Chairman shall preside at all meetings of the Board and shareholders, and shall have such other powers and duties as this Code of By-Laws or the Board of Directors may prescribe. SECTION 2. PRESIDENT The President shall be the chief operating officer of the corporation. He shall also have all the powers of and perform the duties incumbent upon the Chairman during his absence or disability. He shall have such other powers and duties as this Code of By-Laws or the Board of Directors may prescribe. Shares of other corporations owned by this corporation may be voted by the President or by such proxies as the President shall designate. The President shall have authority to execute, with the Secretary, powers of attorney appointing other corporations, partnerships or individuals, the agents of the corporation subject to law, the Articles of Incorporation and this Code of By-Laws. SECTION 3. EXECUTIVE VICE PRESIDENT The Executive Vice President shall assist the President in supervising the operations of the corporation and, subject to the direction of the President, shall manage and supervise the agency, sales and underwriting operations of the corporation. SECTION 4. VICE PRESIDENTS The Vice Presidents shall, in the order designated by the Board of Directors, have all the powers of and perform all the duties incumbent upon the President during his absence or disability and shall have such other powers and duties as this Code of By-Laws or the Board of Directors may prescribe. SECTION 5. SECRETARY The Secretary shall attend all meetings of the shareholders and of the Board of Directors, and keep, or cause to be kept, in a book provided for the purpose, a true and complete record of the proceedings of such meeting, and he shall perform a like duty, when required, for all standing committees appointed by the Board of Directors. He shall attest the execution of all deeds, leases, agreements and other official documents and shall affix the corporate seal thereto. He shall attend to the giving and serving of all notices of the corporation required by this Code of By-Laws, shall have custody of the books (except books of account), records and corporate seal of the corporation, and in general shall perform all duties pertaining to the office of Secretary and such other duties as this Code of By- Laws or the Board of Directors may prescribe. 56 57 SECTION 6. TREASURER The Treasurer shall keep correct and complete records of account, showing accurately at all times the financial condition of the corporation. He shall have charge and custody of, and be responsible for, all funds, notes, securities and other valuables which may from time to time come into the possession of the corporation. He shall deposit, or cause to be deposited, all funds of the corporation with such depositories as the Board of Directors shall designate. He shall furnish at meetings of the Board of Directors, or whenever required, a statement of the financial condition of the corporation, and in general shall perform all duties pertaining to the office of Treasurer and such other duties as this Code of By-Laws or the Board of Directors may prescribe. SECTION 7. ASSISTANT OFFICERS Such assistant officers as the Board of Directors shall from time to time designate and elect shall have such powers and duties as the officers whom they are elected to assist shall specify and delegate to them and such other powers and duties as this Code of By-Laws or the Board of Directors may prescribe. An Assistant Secretary may, in the absence or disability of the Secretary, attest the execution of all documents by the corporation and affix the corporate seal thereto. SECTION 8. DELEGATION OF DUTIES In case of the absence of inability to act of any officer of the corporation, the Board of Directors may delegate for the time being the duties of such officer to any other officer or to any director. SECTION 9. LOANS TO OFFICERS No loan of money or property or advancement on account of services to be performed in the future shall be made to any officer or director of the Corporation, except as may otherwise be provided by statute (as amended 1-26-83). ARTICLE VI MISCELLANEOUS SECTION 1. CORPORATE SEAL The seal of the corporation shall be circular in form with the name of the corporation around the top of its periphery, the word "Indiana" around the bottom of its periphery, and the word "Seal" through the center. SECTION 2. EXECUTION OF CONTRACTS AND OTHER DOCUMENTS Unless otherwise ordered by the Board of Directors, all written contracts and other documents entered into by the corporation shall be executed on behalf of the corporation by the President or a Vice President. If the corporate seal is required to be affixed thereto, it shall be affixed and attested by the Secretary or an Assistant Secretary. SECTION 3. FISCAL YEAR The fiscal year of the corporation commences on the first (1st) day of January and ends on the thirty-first (31st) day of December of each year. ARTICLE VII AMENDMENTS SECTION 1. AMENDMENTS OF BY-LAWS Subject to law and the Articles of Incorporation, the power to make, alter, amend or repeal all or any part of this Code of By-Laws is vested in the Board of Directors. The affirmative vote of a majority of all the Directors shall be necessary to affect any such changes in this Code of By-Laws. 57 EX-11 3 exh-11.txt COMPUTATION OF EARNINGS PER SHARE 58
Baldwin & Lyons, Inc. and Subsidiaries Form 10-K Year Ended December 31, 2000 EXHIBIT 11 COMPUTATION OF PER SHARE EARNINGS Year Ended December 31 -------------------------------------------- 2000 1999 1998 -------------- -------------- -------------- Basic: Average number of Class A and Class B shares outstanding 12,466,510 13,393,357 13,719,728 ============ ============ ============ Net income $19,749,722 $18,615,882 $16,894,697 ============ ============ ============ Per Share Amount $ 1.58 $ 1.39 $ 1.23 ============ ============ ============ Diluted: Average number of Class A and Class B shares outstanding 12,466,510 13,393,357 13,719,728 ============ ============ ============ Dilutive stock options--based on treasury stock method using higher of average or year end market prices 88,612 127,615 146,448 ------------ ------------ ------------ TOTALS 12,555,122 13,520,972 13,866,176 ============ ============ ============ Net income $19,749,722 $18,615,882 $16,894,697 ============ ============ ============ Per Share Amount $ 1.57 $ 1.38 $ 1.22 ============ ============ ============
58 EX-21 4 exh-21.txt LIST OF SUBSIDIARIES 59 EXHIBIT 21 SUBSIDIARIES OF BALDWIN & LYONS, INC. STATE OR JURISDICTION OF ORGANIZATION NAME OR INCORPORATION - ------------------------------ ---------------- Protective Insurance Company Indiana Sagamore Insurance Company (1) Indiana B & L Insurance, Ltd. Bermuda Baldwin & Lyons, California California (1) Wholly-owned subsidiary of Protective Insurance Company 59 EX-23 5 exh-23.txt CONSENT OF INDEPENDENT AUDITORS 60 EXHIBIT 23 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statement dated April 28, 1983 on Form S-8 No. 2-72576 pertaining to the 1981 Stock Purchase Plan, the Registration Statement dated March 29, 1990 on Form S-8 No. 33-34107 pertaining to the Baldwin & Lyons, Inc. Deferred Directors Fee Option Plan, and the Registration Statement dated August 6, 1993 on Form S-8 No. 33- 31316 pertaining to the Baldwin & Lyons, Inc. Employee Discounted Stock Option Plan of our report dated February 26, 2001, with respect to the consolidated financial statements and schedules of Baldwin & Lyons, Inc. and subsidiaries included in the Annual Report (Form 10K) for the year ended December 31, 2000. /S/ ERNST & YOUNG LLP Indianapolis, Indiana March 22, 2001 60 EX-24 6 exh-24.txt POWERS OF ATTORNEY 61 EXHIBIT 24 POWERS OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Gary W. Miller and James Kirschner, or either of them, his true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities noted below to sign the Baldwin & Lyons, Inc. Annual Report on Form 10-K for the fiscal year ended December 31, 2000, and any and all amendments thereto, required to be filed pursuant to the requirements of Sections 12(g), 13, or 15(d) of the Securities and Exchange Act of 1934, as amended, granting unto each of said attorneys-in-fact and agents, full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that each of said attorneys-in-fact and agents, or his substitute, may lawfully do or cause to be done by virtue hereof. Signature and Title Dated: /s/ Gary W. Miller February 14, 2001 - ----------------------------------- ----------------- Gary W. Miller, Chairman of the Board (Principal Executive Officer) /s/ G. Patrick Corydon February 14, 2001 - ----------------------------------- ----------------- G. Patrick Corydon, Vice President (Finance) and Treasurer (Principal Financial and Accounting Officer) /s/ Joseph DeVito February 14, 2001 - ----------------------------------- ----------------- Joseph DeVito, Director and Vice President /s/ James W. Good February 14, 2001 - ----------------------------------- ----------------- James Good, Director and Vice President /s/ Stuart D. Bilton February 14, 2001 - ----------------------------------- ----------------- Stuart D. Bilton, Director /s/ Otto N. Frenzel, III February 20, 2001 - ----------------------------------- ----------------- Otto N. Frenzel, III, Director /s/ John M. O'Mara March 1, 2001 - ----------------------------------- ----------------- John M. O'Mara, Director /s/ Thomas H. Patrick March 2, 2001 - ----------------------------------- ----------------- Thomas H. Patrick, Director /s/ Nathan Shapiro February 14, 2001 - ----------------------------------- ----------------- Nathan Shapiro, Director 61 62 Powers of Attorney (continued) /s/ Norton Shapiro February 14, 2001 - ----------------------------------- ----------------- Norton Shapiro, Director /s/ John D. Weil February 14, 2001 - ----------------------------------- ----------------- John D. Weil, Director /s/ Robert Shapiro February 14, 2001 - ----------------------------------- ----------------- Robert Shapiro, Director /s/ John Pigott February 14, 2001 - ----------------------------------- ----------------- John Pigott, Director 62 -----END PRIVACY-ENHANCED MESSAGE-----