The Company owns a small building and the adjacent real estate approximately two miles from its main office. This building contains approximately 3,300 square feet of usable space, and is used primarily as a contingent back up and disaster recovery site for computer operations.
(2) Data is for all coverages combined and is presented based upon generally accepted accounting principles.
The primary sources of the Company's liquidity are (1) funds generated from insurance operations, (2) net investment income and (3) maturing investments. The Company generally experiences positive cash flow resulting from the fact that premiums are collected on insurance policies in advance of the disbursement of funds in payment of claims. Operating costs of the insurance subsidiaries, other than loss and loss expense payments and commissions paid to the parent company, generally average less than 30% of premiums earned on a consolidated basis and the remaining amount is available for investment for varying periods of time depending on the type of insurance coverage provided. During extended periods of declining net premium volume, however, operating cash flows may turn negative as loss settlements exceed net premium revenue and receipts of investment income.
Direct premiums written for 2001 totaled $114.3 million, an increase of $17.2 million (18%) from 2000. This increase is primarily attributable to increases in fleet trucking and independent contractor programs of $13.9 million (52%) and $4.8 million (21%), respectively, from 2000 levels. Direct premium writings from the Company's small business workers' compensation and small trucking fleet programs also increased by $2.2 million and $1.8 million, respectively. These increases were partially offset by a $5.6 million (16%) decrease in direct premium written for the Company's private passenger automobile program. Large trucking fleet and independent contractor volume increases resulted from the addition of new accounts as well as rate increases on renewed accounts. Increases in small business workers' compensation and small fleet were due primarily to geographic expansion, although rates were increased in both divisions during 2001. The decrease in private passenger automobile premium resulted from an effort to reunderwrite the program during 2001, including the implementation of significant rate increases and the termination of producers of unprofitable business.
Premiums assumed from other reinsurers totaled $5.7 million during 2001, an increase of $1.5 million (35%) from 2000. Premiums assumed for 2001 and 2000 included $1.0 million and $1.7 million, respectively, of reinstatement premiums attributable to losses occurring in late 1999. Without these reinstatement premiums, reinsurance assumed volume would have increased 85% from the prior year. Pricing in this market began to improve toward the end of 2000 and throughout 2001, and the Company's participation increased as a result. Management anticipates increased participation during 2002.
Direct premiums written for 2000 totaled $97.1 million, an increase of $11.0 million (13%) from 1999. This increase is primarily attributable to increases in fleet trucking's large trucking fleet and independent contractor programs of $3.9 million (22%) and $1.6 million (8%), respectively, from 1999 levels. Direct premium writings from the Company's private passenger automobile, small trucking fleet and small business workers' compensation programs also increased by $2.4 million, $2.2 million and $1.2 million, respectively. Large
Premiums ceded to reinsurers increased $5.8 million (32%) during 2000 to $24.2 million. The percentage of premiums ceded to direct premiums written increased to 24.9% for 2000 from 21.3% for 1999 consistent with the increase in direct premiums written for the more heavily reinsured large trucking fleet program discussed above.
Over 73% of the Company's assets are composed of investments at December 31, 2001. Less than 1% of these investments, consisting of limited partnerships, do not have readily determinable market values. For these investments, we estimate fair value by reference to the underlying assets of the limited partnerships. All marketable securities are included in the Company's balance sheet at current market value. In determining if and when a decline in market value below cost is other than temporary, we evaluate the market conditions, trends of earnings, price multiples and other key measures for our bonds and common and preferred stocks. When such a decline is considered to be other than temporary, we recognize an impairment loss in the current period operating results to the extent of the decline. Declines which are considered to be temporary are recorded as a reduction in shareholders' equity, net of related federal income tax credits.
The Company's fixed maturity portfolio totaled $246.6 million at December 31, 2001. Over half of this portfolio is made up of U. S. government and government agency obligations and state and municipal debt
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Baldwin & Lyons, Inc. and subsidiaries at December 31, 2001 and 2000, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States. Also, in our opinion, the related financial statement schedules, when considered in relation to the basic financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.
The reserves for losses and loss expenses, net of related reinsurance recoverables, at December 31, 2000, 1999 and 1998 were decreased by $887, $8,107 and $10,609, respectively, for claims that had occurred on or prior to those dates. These decreases are the result of the settlement of claims at amounts lower than previously reserved and changes in estimates of losses incurred but not reported as part of the normal reserving process. Development during 2001 and 2000, on reserves outstanding at December 31, 2000 and 1999 was insignificant for incurred losses and loss expenses related to environmental damage claims. Reported cases to date relate primarily to policies issued in the 1970's to one account which was involved in the business of hauling and disposing of hazardous waste. Reserves for incurred but not reported environmental losses were $3,900 at December 31, 2001 and 2000. Development during 2001 included $2.1 million of incurred losses and loss expenses on reinsurance assumed reserves outstanding at December 31, 2000 which was partially offset by reinstatement premiums of $1.0 million. Adjusted for reinsurance assumed, management believes that the favorable experience is attributable to the Company's long-standing policy of reserving for losses realistically and a willingness to settle claims based upon a seasoned evaluation of its exposures. The decline in favorable loss developments from 1999 to 2001 is due in part to the significantly lower retained loss per occurrence for the Company's large fleet trucking product. Under terms of reinsurance agreements effective June 1, 1998, the Company's exposure on large fleet trucking losses dropped from $1,000 to $100 per occurrence. These trends were considered in the establishment of the Company's reserves at December 31, 2001.
Loss reserves on certain permanent total disability workers' compensation reserves have been discounted to present value at pre-tax rates not exceeding 3.5%. At December 31, 2001 and 2000, loss reserves have been reduced by approximately $4,724 and $5,096, respectively. Discounting is applied to these claims since the amount of periodic payments to be made during the lifetime of claimants is fixed and determinable.
Loss reserves have been reduced by estimated salvage and subrogation recoverable of approximately $2,717 and $2,698 at December 31, 2001 and 2000, respectively.
NOTE F - REINSURANCE The insurance subsidiaries cede portions of their gross premiums written to certain other insurers under excess and quota share treaties and by facultative placements. Risks are reinsured with other companies to permit the recovery of a portion of related direct losses. The Company also serves as an assuming reinsurer under retrocessions from certain other reinsurers. These retrocessions include individual risks as well as aggregate catastrophe treaties. Accordingly, the occurrence of a major catastrophic event can have a significant impact on the Company's operating income. In addition, the insurance subsidiaries participate in certain involuntary reinsurance pools which require insurance companies to provide coverages on assigned risks. The assigned risk pools allocate participation to all insurers based upon each insurer's portion of premium writings on a state or national level.
Net premiums earned for 2001, 2000 and 1999 have been reduced by reinsurance ceded premiums of approximately $37,706, $23,943 and $19,037, respectively. Net losses and loss expenses incurred for 2001 and 2000 have been reduced by ceded reinsurance recoveries of approximately $72,701 and $40,586, respectively. Net losses and loss expenses incurred for 1999 have been increased by net savings on reinsured claims of $771. Ceded reinsurance premiums and loss recoveries for catastrophe reinsurance contracts were not material. The Company remains liable to the extent the reinsuring companies are unable to meet their obligations under reinsurance contracts.
The Company's Class A and Class B common stock has a stated value of approximately $.05 per share.
NOTE H - OTHER OPERATING EXPENSES Details of other operating expenses for the years ended December 31:
One customer of the fleet trucking segment represents approximately $28,864, $23,739 and $22,301 of the Company's consolidated revenue in 2001, 2000 and 1999, respectively.
The Company maintains stock option plans and has reserved an aggregate of 1,050,000 shares of Class B common stock for the granting of stock options to employees and directors. Discounted options granted to employees are generally exercisable immediately while discounted options granted to directors are generally not exercisable for one year from the date of grant. All options expire ten years after the date of grant. All of the Company's option plans have received shareholder approval. Approximately 273,000 of such options are available for future grants.
The fair value of market value options granted during 1997 was determined using a Black Scholes option pricing model with the following assumptions: risk-free interest rate of 5.8%; dividend yield of 1.8%; volatility factor of the expected market price of the Company's common stock of .21; and an expected life of the option of 10 years. If the Company had followed Financial Accounting Standards Board Statement No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION, 2000 net income and earnings per share would have been reduced by $918 and $.07, respectively, related to the issuance of 1997 market value options. Similarly, 1999 net income and earnings per share would have been reduced by $975 and $.07, respectively, related to these options. There would have been no impact on 2001 net income or earnings per share related to these options.
During 2001 and 2000, the Company offered loans to certain key employees for the sole purpose of purchasing the Company's Class B common stock in the open market. $2,257 and $1,709 of such full-recourse loans were issued and outstanding at December 31, 2001 and 2000, respectively, and carry an interest rate of 6%, payable annually on the loan anniversary date. The underlying securities serve as collateral for these loans, which must be repaid no later than 10 years from the date of issue.
NOTE M - SUBSEQUENT EVENT During February, 2002, a large block of the Company's Class A and Class B common shares became available from a group of shareholders who recently received the shares via a distribution from a trust which was a major shareholder. The Company repurchased 97,190 and 269,331 of the Class A and Class B shares, respectively, for an aggregate of approximately $7.3 million. In addition, certain executive officers and employees of the Company purchased an aggregate of 251,800 Class B common shares for approximately $5.0 million, funding for which was provided by loans from the Company. The loans bear interest at the current prime rate with principal due no later than ten years from the date of issuance. The Company borrowed $10 million under its bank line of credit in connection with the share purchases.