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, 20142017
BALDWIN & LYONS, INC.
(Exact name of registrant as specified in its charter)
Indiana (State or other jurisdiction of Incorporation or organization) | 35-0160330 (I.R.S. Employer Identification No.) |
111 Congressional Boulevard, Carmel, Indiana (Address of principal executive offices) | 46032 (Zip Code) |
Registrant's telephone number, including area code: (317) 636-9800
Securities registered pursuant to Section 12(b) of the Act:
None (Title of class)Name of Each Exchange on which Registered
Class A Common Stock, No Par Value The Nasdaq Stock Market, LLC
Class B Common Stock, No Par Value The Nasdaq Stock Market, LLC
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
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes -___ No ü✓
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes -___ No ü✓
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 periodsperiod that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes -ü✓ No ___ Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ✓ 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. -
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.filer, a smaller reporting company or an emerging growth company. See definitionthe definitions of “accelerated filer"large accelerated filer", "accelerated filer", "smaller reporting company" and large accelerated filer”"emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer ____ Accelerated filer ü✓ Non-accelerated filer ____ Smaller reporting company____ Emerging growth company ____
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ______
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes -___ No ü✓
The aggregate market value of Class A and Class B Common Stock held by non-affiliates of the Registrant as of June 30, 2014,2017, based on the closing trade prices on that date, was approximately $253,547,000.
$266,182,000.
The number of shares outstanding of each of the issuer's classes of common stock as of March 1, 2015:2018:
Common Stock, No Par Value: Class A (voting) 2,623,109 shares
Class B (nonvoting) 12,397,344 shares12,387,703
The Index to Exhibits is located on page 82.
15,010,812
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the Annual Meeting of Shareholders to be held on May 12, 20158, 2018 are incorporated by reference into Part III.III of this Annual Report on Form 10-K.
FORWARD-LOOKING STATEMENTS
The disclosures in this Form 10-K contain "forward-looking statements" (within the meaning of the Private Securities Litigation Reform Act of 1995). All statements, trend analyses and other information contained in this Form 10-K relative to markets for our products and trends in our operations or financial results, as well as other statements including words such as "may," "target," "anticipate," "believe," "plan," "estimate," "expect," "intend," "project," and other similar expressions, constitute forward-looking statements.
Investors are cautioned that such forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties that could cause actual results to differ materially from such forward-looking statements, many of which are difficult to predict and generally beyond our control. Investors are cautioned not to place undue reliance on these forward-looking statements that speak only as of the date hereof. Investors are also urged to carefully review and consider the various disclosures made by us, which attempt to advise interested parties of the factors that affect our business, including "Risk Factors" set forth in Part I, Item 1A hereof and our reports filed with the U.S. Securities and Exchange Commission, or SEC, from time to time. Except to the extent otherwise required by federal securities laws, we do not undertake any obligation to republish revised forward-looking statements to reflect events or circumstances after the date hereof.
Factors that could contribute to these differences include, among other things:
| · | general economic conditions, including weakness of the financial markets, prevailing interest rate levels and stock and credit market performance, which may affect or continue to affect (among other things) our ability to sell our products and to collect amounts due to us, our ability to access capital resources and the costs associated with such access to capital and the market value of our investments; |
| · | our ability to obtain adequate premium rates and manage our growth strategy; |
| · | increasing competition in the sale of our insurance products and services resulting from the entrance of new competitors into, or the expansion of the operations of existing competitors in, our markets and our ability to retain existing customers; |
| · | other changes in the markets for our insurance products; |
| · | changes in the legal or regulatory environment, which may affect the manner in which claims are adjusted or litigated, including loss and loss adjustment expense; |
| · | legal or regulatory changes or actions, including those relating to the regulation of the sale, underwriting and pricing of insurance products and services and capital requirements; |
| · | technology or network security disruptions; |
| · | adequacy of insurance reserves; |
| · | availability of reinsurance and ability of reinsurers to pay their obligations; |
| · | our ability to attract and retain qualified employees; |
| · | tax law and accounting changes; and |
| · | legal actions brought against us. |
Some of the significant risks and uncertainties that could cause actual results to differ materially from our expectations and projections are described more fully in Item 1A "Risk Factors" of this report. You should read that information in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Part II, Item 7 of this report and our Consolidated Financial Statements and related notes in Part II, Item 8 of this report.
PART I
Item 1. BUSINESS
Baldwin & Lyons, Inc. (referred to herein as "B&L") 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")B&L engages in marketing and underwriting property, liability and casualty insurance includingworkers' compensation coverage for trucking and public transportation fleets, as well as coverage for trucking industry independent contractors. In addition, B&L offers workers' compensation coverage for a variety of operations outside the assumption of property and casualty risks, as a reinsurer of other companies.
transportation industry.
B&L’s&L's principal subsidiaries are:
| 1. | Protective Insurance Company (referred(referred to herein as "Protective"), which is licensed by insurance authorities in all 50 states, the District of Columbia, all Canadian provinces and Puerto Rico; |
| 2. | Protective Specialty Insurance Company (referred to herein as “Protective Specialty”"Protective Specialty"), which is currently approved for excess and surplus lines business by insurance authorities in 48 states and the District of Columbia and licensed in Indiana; |
| 3. | Sagamore Insurance Company (referred(referred to herein as "Sagamore"), which is licensed by insurance authorities in 49 states and the District of Columbia and approved for excess and surplus lines business in one additional state; |
| 4. | B&L Brokerage Services, Inc., (referred to herein as "BLBS"), an Indiana domiciled insurance broker licensed in all 50 states and the District of Columbia; and |
| 5. | B&L Insurance, Ltd. (referred to herein as "BLI"), which is domiciled and licensed in Bermuda. |
Protective, Protective Specialty, Sagamore and BLI are collectively referred to herein as the "Insurance Subsidiaries." The "Company", "we", "us" and "our", as used herein, refers to Baldwin & Lyons, Inc.B&L and all its subsidiaries unless the context clearly indicates otherwise.
Approximately 83% of the non-reinsurance property and casualty insurance premiums written by the Insurance Subsidiaries during 2014 were attributable to business produced by B&L or in association with broker partners. The remaining 17% was originated through a selected network of independent agents on both a retail and wholesale basis and through a limited number of arrangements with managing general agencies.
As is a common practice in the property &and casualty insurance industry, the Insurance Subsidiaries share (referred to as ceding)or "cede" portions of their gross premiums written with several non-affiliated reinsurers under excess of loss and quota-share treaties covering predetermined groups of risks and by facultative (individual(individual policy-by-policy) placements. Reinsurance is ceded to spread the risk of loss from individual accidentsclaims or groups of accidentsclaims among several reinsurers and is an integral part of the Company’sCompany's business.
In 2017, the Insurance Subsidiaries primarily served the fleet transportation market, although the Insurance Subsidiaries continue to support previously written policies in specialty markets for which the Company has discontinued operations. Continuing operations and targeted growth are expected to occur in our core business of fleet transportation and workers' compensation.
The Insurance Subsidiaries serveCompany determined that its business constituted one reportable property and casualty insurance segment as of January 1, 2017. During 2016 and prior years, the Company had two reportable segments – property and casualty insurance and reinsurance. The Company moved to a variety of specialty markets as follows:single reportable segment based on how its operating results are regularly reviewed by the Company's chief operating decision maker when making decisions about how resources are to be allocated to the segment and assessing its performance. The prior year segment information throughout this Annual Report on Form 10-K was updated to conform to the current year presentation.
Product Lines
Fleet Transportation
The Insurance Subsidiaries provide coverage for larger companies in the motor carrier industry whichthat retain substantial amounts of self-insurance, for independent contractors utilized by trucking companies, for medium-sized and small trucking companies on a first dollar or small deductible basis, and for public livery concerns, principally covering fleets of commercial buses.buses and taxis. This group of products is collectively referred to as fleet transportation. Large fleet trucking products are marketed both by the B&L agency organization directly to fleet transportation clients and also through relationships with non-affiliated brokers and specialized agents. Products for small and intermediate fleets and independent contractors are marketed through relationships with non-affiliated brokers and specialized agents. In some cases, the Insurance Subsidiaries will provide customized product offerings to specific markets through partnerships with brokers or program administrators. In most cases, the Company's fleet transportation policies are written on an "occurrence" basis (i.e. we may be liable for claims that occurred when our policy was in place with an insured, regardless of when those claims are reported to us; and it may take months or even years for claims to be reported to us).
The principal types of fleet transportation insurance marketed by the Insurance Subsidiaries are:
| - | Commercial motor vehicle liability, physical damage and general liability insurance. |
| - | Workers' compensation insurance. |
| - | Specialized accident (medical and indemnity) insurance for independent contractors ofin the trucking concerns.industry. |
| - | Non-trucking motor vehicle liability insurance for independent contractors. |
| - | Fidelity and surety bonds. |
| - | Inland Marine insurance consisting principally of cargo insurance. |
| - | “Captive” insurance company products, which are provided through BLI in Bermuda. |
B<he Insurance Subsidiaries also performs perform a variety of additional services, primarily for the Company’sCompany's insureds, including risk surveys and analyses, safety program design and monitoring, 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 customers in monitoring their accident data. ExtensiveB&L also provides claims handling services, are also provided, primarily to excess clients with self-insurance programs.
Reinsurance AssumptionsWorkers' Compensation
The Insurance Subsidiaries provide workers' compensation insurance for the fleet transportation industry, primarily to employees of motor carriers or independent contractors providing services in the transportation industry. In 2017, workers' compensation coverage was marketed beyond fleet transportation clients to a variety of non-transportation operations such as light manufacturing, restaurants, retailers, and professional services on both a first-dollar and deductible basis. Non-transportation workers' compensation is marketed through relationships with non-affiliated brokers and specialized agents. In addition, we have developed customized non-transportation workers' compensation programs which are marketed through non-affiliated agent partners. In most cases, the Company's workers' compensation policies are written on an "occurrence" basis (i.e. we may be liable for claims that occurred when our policy was in place with an insured, regardless of when those claims are reported to us; and it may take months or even years for claims to be reported to us).
Discontinued Products
In the first quarter of 2016, the Company has, for over 20 years,discontinued its reinsurance assumed professional liability line of products. These products are in run-off but continued earning premiums in 2017. Prior to that, the Company accepted cessions and retrocessions from selected insurance and reinsurance companies, providing reinsurance coverage for both property and casualty events. Participation in reinsurance markets fluctuated based on market conditions for these products. The Company's reinsurance assumed policies were written on both an "occurrence" basis and a "claims-made" basis.
Approximately 39% of net premium earned from reinsurance assumed in 2014 was related to property coverages, principally reinsuring against catastrophic events. All retrocessional property reinsurance was terminated prior to January 1, 2014 as the result of deteriorating market conditions. Property reinsurance premium for 2014 was limited to United States wind and earthquake business produced through a single exclusive managing general agency partnership. Effective July 1, 2014, this final property catastrophe exposure was not renewed and as of June 30, 2015, no property reinsurance risk will remain inforce.
The remaining 61% of net reinsurance premium earned during 2014 relates to professional liability coverages provided to domestic insurance companies and produced through a network of independent brokers.
In additionthe fourth quarter of 2016, the Company discontinued its professional liability line of products. Prior to that, the assumption of risks described above, 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 direct premium writings onCompany marketed a state or national level. Assigned risk premium typically comprises less than 1% of gross direct premium written and assumed by the Insurance Subsidiaries and are included with the property and casualty segment because they are linked to premiums written and earned by that segment.
Private Passenger Automobile Insurance
The Company markets private passenger automobile liability and physical damage coverages to individuals through a network of independent agents in thirty states.
Professional Liability
The Company markets a wide variety of professional liability products through wholesale and retail agents on both an admitted and surplus lines basis throughout the United States, specializing in smaller insureds. Some professional liability policies renewed in 2017 as required by state regulations and existing policies remained inforce through 2017. In most cases, the Company's professional liability policies were written on a "claims-made" basis. Under claims-made policies, the Company was generally only liable for claims when a policy was in place with our insured, however we were potentially liable for claims reported to us, even if the claim event occurred before we had a policy in place with the insured.
Property/Casualty Losses and Loss Adjustment Expenses
Losses and loss adjustment expenses incurred typicallyon average comprise nearlyapproximately two-thirds of the Company’sCompany's operating expenses. A discussion of this expense category follows.
The Company's consolidated balance sheets as of December 31, 2017 and 2016 set forth in Part II, Item 8 of this Annual Report on Form 10-K include the estimated liability for unpaid losses and loss adjustment expenses ("LAE") of the Insurance Subsidiaries before the application of reinsurance credits (gross reserves). The liabilities for losses and LAE are determined using case basis evaluations and statistical projections and represent estimates of the Company’sCompany's ultimate exposure for 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 as recorded.
The Company’sCompany's reserves for losses and loss expenses are determined based on evaluations of individual reported claims and by actuarial estimation processes using historical experience, current economic information and, when necessary, available industry statistics. “Case basis”"Case basis" loss reserves which comprise approximately 63% of total gross reserves at December 31, 2014, are evaluated on an individual case-by-case basis by experienced claims adjusters
using established Company guidelines and are monitored by claims management. Additionally, “bulk”"bulk" reserves , which comprise approximately 37% of total gross reserves at December 31, 2014 are established for (1) those losses which have occurred, but have not yet been reported to the Company (“("incurred but not reported”reported" claims), (2) provisions for any possible deficiencies in the case reserving process and (3) the expected external and internal costs to fully settle each claim, (“loss adjustment expenses).also referred to as LAE. Common actuarial methods are employed in the establishment of bulk reserves using Company historical loss data, consideration of changes in the Company’sCompany's business and study of current economic trends affecting ultimate claims costs. Loss adjustment expense reserves include amounts ultimately allocable to individual claims as well as amounts required for the general overhead of the claims handling operation which are not specifically allocable to individual claims. Historical analyses of the ratio of loss adjusting expenses to losses paid on prior closed claims and study of current economic trends affecting loss settlement costs are used to estimate the loss adjustment reserve needs relatedrelative to the established loss reserves. Each of these reserve categories contain elements of uncertainty which assure variability when compared to the ultimate costs to settle the underlying claims for which the reserves are established. For a more detailed discussion of the three categories of reserves, see “"Loss and Loss Expense Reserves”Reserves" under the caption, “Critical"Critical Accounting Policies” beginning on page 28Policies" noted in Part II, Item 7, "Management’sManagement's Discussion and Analysis.
The reserving process requires management to continuously monitorAnalysis of Financial Condition and evaluate the life cycleResults of claims. Our claims range from the very routine private passenger automobile “fender bender” to the highly complex and costly claims involving large tractor-trailer rigs and large-scale losses resulting from catastrophic events. Reserving for each class Operations," of claims requires a set of assumptions based upon historical experience, knowledge of current industry trends and seasoned judgment. The high limits provided by the Company’s fleet transportation liability policies provide for greater volatility in the reserving process for more serious claims. Court rulings, legislative actions, geographic location of the claim under consideration and trends in jury awards also play a significant role in the estimation process of larger claims. The Company continuously reviews and evaluates loss developments subsequent to each measurement date and adjusts its reserve estimation assumptions, as necessary, in an effort to achieve the best possible estimate of the ultimate remaining loss costs at any point in time.
Loss reserves related to certain permanent total disability (PTD) workers' compensation claims have been discounted to present value using tables provided by the National Councilthis Annual Report on Compensation Insurance which are based upon a pretax interest rate of 3.5% and adjusted for those portions of the losses retained by the insured. The loss and LAE reserves at December 31, 2014 have been reduced by approximately $3.1 million as a result of such discounting. Had the Company not discounted loss and LAE reserves, pretax income would have been approximately $2.8 million higher for the year ended December 31, 2014.Form 10-K.
For policies inforce at December 31, 2014,2017, the maximum amount for which the Company insures a fleet transportation risk is $10 million, less applicable self-insured retentions, although for the majority of policies written, the maximum limits provided by the Company are $5 million or less. Occasionally, limits above $10 million required by customers are placed directly by Baldwin & Lyons, Inc.the Company with non-affiliated carriers or written by the Company but 100% reinsured with non-affiliated reinsurers. Certain coverages, such as workers’workers' compensation, provide essentially unlimited exposure,do not have policy limits, although the Company protects itself to the extent believed prudent through the purchase of excess reinsurance for these coverages.
After giving effect to treaty and facultative reinsurance arrangements, the Company’sCompany's maximum exposure to loss from a single occurrence for currently inforce business ranges from approximately $.25 million to $1.3 million for the vast majority of risks insured although,(those with policy limits of $5 million or less) is approximately:
| · | $0.25 million to $1.3 million for policies written on or after July 3, 2016, and |
| · | $0.8 million to $4.1 million for policies written on or after July 3, 2017. |
However, for certain losses occurring within(those with policy limits up to $10 million) the past five policy years, maximum exposure could be as high asas:
| · | $2.5 million for policies written on or after July 3, 2016, and |
| · | $8.0 million for policies written on or after July 3, 2017. |
The change in the Company's single occurrence loss exposure described above (from a range of $0.25 million to $2.5 million in 2016, to a range of $0.8 million to $8.0 million in 2017) is offset by a change in the reinsurance structure for these risks. As of July 3, 2017, the Company no longer utilizes sliding scale ceding premium provisions in its reinsurance arrangements for these risks, instead utilizing a flat ceding premium percentage.
The economic exposure from a single occurrence. Certain reinsurance agreements effective since June 3, 2005 include provisions for aggregate deductibles that must be exceeded before the Company can recoverclaim occurrence remains relatively consistent year over year; however, under the termscurrent flat ceding premium provision, more of the treaties. The Company retains a higher percentageeconomic exposure will flow through loss expense moving forward, whereas in prior periods, utilizing the sliding scale ceding premium provisions, more of the direct premium (and, therefore, cedes less premium to reinsurers)economic exposure was reflected in consideration of these deductible provisions.lower net premiums earned. For both periods discussed above, the Company's has limited economic exposure for losses occurring in treaty years that have loss and allocated loss adjustment expense ratios greater than approximately 86.5%.
The Company is a cedent under numerous reinsurance treaties covering its varied product lines. Treaties are typically written on an annual basis, each with its own renewal date throughout thedate. However, treaty terms may occasionally be agreed to for periods beyond one year. Treaty renewals are expected to largely continue to occur annually in the foreseeable future. Because losses from certain of the Company’sCompany's products can experience delays in being reported and can take years to develop,settle, losses reported to the Company in the current year may be covered by a number of older reinsurance treaties with higher or lower net loss exposures than those provided by current treaty provisions.
The table on page 5below sets forth a reconciliation of beginning and ending loss and LAE liability balances for 2014, 20132017, 2016 and 2012. That2015. This table is presentedincludes reserves, net of reinsurance recoverable, to correspond with our income statement presentation. However,presentation, but also includes a reconciliation of these net reserves to thosebeginning and ending loss and LAE liability, gross of reinsurance recoverable, as presented in the balance sheet, is also shown. The table on page 11 shows the development of the estimated liability,sheet. All amounts are shown net of reinsurance, recoverable, for the ten years prior to 2014. The table on page 12 is a summary of the re-estimated liability, before consideration of reinsurance, for the ten years prior to 2014 as well as the related re-estimated reinsurance ceded for the same periods.unless otherwise indicated.
| | | 2017 | | | 2016 | | | 2015 | |
| Reserves, gross of reinsurance | | | | | | | | | |
| recoverable, at the beginning of the year | | $ | 576,330 | | | $ | 513,596 | | | $ | 506,102 | |
| Reinsurance recoverable on unpaid losses at the beginning of the year | | | 251,563 | | | | 211,843 | | | | 210,519 | |
| Reserves at the beginning of the year | | | 324,767 | | | | 301,753 | | | | 295,583 | |
| | | | | | | | | | | | | |
| Provision for losses and loss expenses: | | | | | | | | | | | | |
| Claims occurring during the current year | | | 228,303 | | | | 172,645 | | | | 165,812 | |
| Claims occurring during prior years | | | 19,215 | | | | 13,836 | | | | (10,062 | ) |
| Total incurred losses and loss expenses | | | 247,518 | | | | 186,481 | | | | 155,750 | |
| | | | | | | | | | | | | |
| Loss and loss expense payments: | | | | | | | | | | | | |
| Claims occurring during the current year | | | 67,234 | | | | 54,239 | | | | 56,710 | |
| Claims occurring during prior years | | | 132,920 | | | | 109,228 | | | | 92,870 | |
| Total paid | | | 200,154 | | | | 163,467 | | | | 149,580 | |
| Reserves at the end of the year | | | 372,131 | | | | 324,767 | | | | 301,753 | |
| | | | | | | | | | | | | |
| Reinsurance recoverable on unpaid losses at the end of the year | | | 308,143 | | | | 251,563 | | | | 211,843 | |
| Reserves, gross of reinsurance | | | | | | | | | | | | |
| recoverable, at the end of the year | | $ | 680,274 | | | $ | 576,330 | | | $ | 513,596 | |
| RECONCILIATION OF LIABILITY FOR LOSSES AND LOSS ADJUSTMENT | |
| EXPENSES (GAAP BASIS) | |
| | | | | | | | | | |
| | | Year Ended December 31 | |
| | | 2014 | | | 2013 | | | 2012 | |
| NET OF REINSURANCE RECOVERABLE: | | | | | (in thousands) | | | | |
| Liability for losses and LAE at the | | | | | | | | | |
| Beginning of the year | | $ | 288,088 | | | $ | 289,236 | | | $ | 290,092 | |
| | | | | | | | | | | | | |
| Provision for losses and LAE: | | | | | | | | | | | | |
| Claims occurring during the current year | | | 169,950 | | | | 156,264 | | | | 147,964 | |
| Claims occurring during prior years | | | (10,354 | ) | | | (5,563 | ) | | | (9,875 | ) |
| | | | 159,596 | | | | 150,701 | | | | 138,089 | |
| Payments of losses and LAE: | | | | | | | | | | | | |
| Claims occurring during the current year | | | 59,826 | | | | 47,908 | | | | 44,942 | |
| Claims occurring during prior years | | | 92,275 | | | | 103,941 | | | | 94,003 | |
| | | | 152,101 | | | | 151,849 | | | | 138,945 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| Liability for losses and LAE at end of year | | | 295,583 | | | | 288,088 | | | | 289,236 | |
| | | | | | | | | | | | | |
| Reinsurance recoverable on unpaid losses | | | | | | | | | | | | |
| at end of the year | | | 210,519 | | | | 186,382 | | | | 166,218 | |
| | | | | | | | | | | | | |
| Liability for losses and LAE, gross of | | | | | | | | | | | | |
| reinsurance recoverable, at end of the year | | $ | 506,102 | | | $ | 474,470 | | | $ | 455,454 | |
The reconciliation above shows that the Company’sCompany's estimate of net losses on 20132016 and prior accidents is approximately $10.4$19.2 million lowerhigher at December 31, 20142017 than was provided in loss reserves at December 31, 20132016 (referred to as “reserve savings”a "reserve deficiency"), with comparative. This compares to a $13.8 million reserve deficiency on prior accident years in 2016 and a $10.0 million reserve savings for the two previous calendarreported in 2015 related to prior accident years.
The following table is a summary of the 20142017 calendar year reserve savingsdeficiency by accident year (dollars in thousands):
| Years in Which Losses Were Incurred | | Reserve at December 31, 2013 | | | (Savings) Deficiency Recorded During 2014 | | | % (Savings) Deficiency | |
| | | | | | | |
| 2013 | | $ | 108,356 | | | $ | (9,060 | ) | | | (8.4 | %) |
| 2012 | | | 63,718 | | | | (5,533 | ) | | | (8.7 | %) |
| 2011 | | | 45,278 | | | | 6,405 | | | | 14.1 | % |
| 2010 | | | 16,001 | | | | 2,238 | | | | 14.0 | % |
| 2009 | | | 8,171 | | | | (1,991 | ) | | | (24.4 | %) |
| 2008 & prior | | | 46,564 | | | | (2,413 | ) | | | (5.2 | %) |
| | | | | | | | | | | | | |
| | | $ | 288,088 | | | $ | (10,354 | ) | | | (3.6 | %) |
The (savings) deficiency recorded for these loss years was derived from varied sources, as follows (dollars in thousands):
| Years in Which Losses Were Incurred | | Reserve at December 31, 2016 | | | (Savings) Deficiency Recorded During 2017 1 | | | % (Savings) Deficiency | |
| | | | | | | |
| 2016 | | $ | 118,406 | | | $ | (8,561 | ) | | | (7.2 | %) |
| 2015 | | | 69,463 | | | | (3,863 | ) | | | (5.6 | %) |
| 2014 | | | 50,739 | | | | 3,688 | | | | 7.3 | % |
| 2013 | | | 22,186 | | | | 17,418 | | | | 78.5 | % |
| 2012 | | | 16,414 | | | | 6,234 | | | | 38.0 | % |
| 2011 & Prior | | | 47,559 | | | | 4,299 | | | | 9.0 | % |
| | | | | | | | | | | | | |
| | | $ | 324,767 | | | $ | 19,215 | | | | 5.9 | % |
| | | 2008 & Prior | | | 2009 | | | 2010 | | | 2011 | | | 2012 | | | 2013 | |
| | | | | | | | | | | | | | | | | | | |
| Losses and allocated loss expenses developed on cases known to exist at December 31, 2013 | | $ | 1,261 | | | $ | (976 | ) | | $ | 1,770 | | | $ | 7,267 | | | $ | (1,191 | ) | | $ | 12,974 | |
| Losses and allocated loss expenses reported on cases unknown at December 31, 2013 | | | 116 | | | | 5 | | | | 54 | | | | 58 | | | | 2,089 | | | | 6,585 | |
| Unallocated loss expenses paid | | | 286 | | | | 69 | | | | 271 | | | | 738 | | | | 910 | | | | 1,976 | |
| Change in reserves for incurred but not reported losses and allocated and unallocated loss expenses | | | (3,235 | ) | | | (989 | ) | | | (862 | ) | | | (1,844 | ) | | | (4,217 | ) | | | (28,538 | ) |
| Net (savings) deficiency on losses from directly-produced business | | | (1,572 | ) | | | (1,891 | ) | | | 1,233 | | | | 6,219 | | | | (2,409 | ) | | | (7,003 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| (Savings) deficiency reported under voluntary reinsurance assumption agreements and residual markets | | | (841 | ) | | | (100 | ) | | | 1,005 | | | | 186 | | | | (3,124 | ) | | | (2,057 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Net (savings) deficiency | | $ | (2,413 | ) | | $ | (1,991 | ) | | $ | 2,238 | | | $ | 6,405 | | | $ | (5,533 | ) | | $ | (9,060 | ) |
Loss and loss expense development savings, presented separately by segment, were as follows for the years ended December 31 (dollars in thousands):
| | | 2014 | | | 2013 | | | 2012 | |
| Property and casualty insurance | | $ | (5,423 | ) | | $ | (1,725 | ) | | $ | (7,111 | ) |
| Reinsurance | | | (4,931 | ) | | | (3,838 | ) | | | (2,764 | ) |
| Totals | | $ | (10,354 | ) | | $ | (5,563 | ) | | $ | (9,875 | ) |
| | | | | | | | | | | | | |
In the first table on page 6, the amounts identified as "Net (savings) deficiency on losses from directly-produced business" consist1 Consist of development on cases known at December 31, 2013,2016, losses reported which were previously unknown at December 31, 20132016 (incurred but not reported), unallocated loss expense paid related to accident years 20132016 and prior and changes in the reserves for incurred but not reported losses and loss expenses.
The savings shown in accident years 2015 and 2016 in the table above reflect favorable loss development in both short-tail lines of business, such as physical damage, and the Company's independent contractor products (including non-trucking liability, occupational accident and workers' compensation). The deficiencies in accident years 2014 and prior are largely the result of discontinued lines (professional liability and general property based in Florida) and several infrequent, but severe, transportation losses. The Company took action in all accident years to reflect new trends in loss development for commercial auto products that have emerged over the last two years. These actions included case reserving reviews, as well as actuarial product reviews, and resulted in the reserve strengthening noted during 2017.
Bulk loss reserves are established to provide for potential future adverse development on cases known to the Company and for cases unknown at the reserve date. Changes in the reserves for incurred but not reported losses and loss expenses occur based upon information received on known and newly reported cases during the current year and the effect of that development on the application of standard actuarial methods used by the Company.
Also shown in the table are amounts representing the "(savings) deficiency reported under reinsurance assumption agreements and residual markets". These amounts relate to the Company's participation in both voluntary reinsurance policies and treaties and government mandated pools. The Company records its share of losses from these policies, treaties and pools based on reports from the reinsured companies, retrocessionaires and residual market administrators and does not directly establish case reserves related to this portion of the Company's business. The Company does, however, establish additional reserves for reinsurance losses to supplement case reserves reported by the ceding companies, when considered necessary. Involuntary residual market premiums and losses are included in the property and casualty segment; however, claims are not administered by the Company but, rather, reserves on this business are established by the regulatory entities and, accordingly, development on these losses is largely dependent on the adequacy of loss reserving by these entities. Development on residual market business was $0.7 million, $1.6 million, and $1.5 million for the years ended December 31, 2014, 2013 and 2012, respectively.
The property and casualty insurance segment has historically constituted the largest portion of net reserve development savings as it has historically generated the majority of the Company’s premium revenue. As shown, the savings from this segment ranged from $1.7 million to a savings of $7.1 million during the past three years. This fluctuation reflects the variability associated with higher premium volumes and, hence, the larger claims covered by the Company, as well as fluctuations in the Company’s net retentions. The Company continues to incorporate more recent loss development data into its loss reserving formulae; however, the change from excess of loss to quota share treaties beginning in 2005, the use of facultative reinsurance on larger risks, and the dynamic nature of losses associated with the fleet transportation business, as well as the timing of settlement of large claims, increases the likelihood of variability in loss developments from period to period. As discussed elsewhere, the Company has historically experienced savings in its loss developments owing to, among other things, its long-standing policy of reserving for the ultimate value of losses quickly and realistically and a willingness to settle claims based upon a seasoned evaluation of its exposures. While the Company’sCompany's basic assumptions have remained consistent, we continue to update loss data to reflect changing trends which can be expected to result in fluctuations in loss developments over time.
The development for the reinsurance segment, with a $4.9 million savings during 2013 and comparable savings recorded during 2013 and 2012, is heavily dependent on the establishment of case basis and IBNR reserves by other insurance and reinsurance companies. However, the Company evaluates the sufficiency of such reserving and often adjusts reserves based on management’s independent analysis, considering the number of different entities involved and the fact that the Company must rely on external sources of information, reserve development from these products is potentially subject to fluctuation from year to year. The consistency of the savings developed during the past three years is reflective of management’s attention to reserving for this business.
Factors affecting the development of environmental claims are more fully discussed in the following paragraphs. The Company has very limited exposure to environmental losses and activity with respect to environmental losses during the three year period ending 2014 has been insignificant.
Management’sManagement's goal is to produce an overall estimate of reserves which is sufficient and as close to expected ultimate losses as possible. The $10.4$19.2 million in net savingsdeficiency developed during 20142017 represents approximately 35% of pre-tax net income before realized capital gains for 2014 but only 3.6% 5.9% of December 31, 20132016 net loss and LAE reserves, which is well within thean acceptable range of variation for the Company’sCompany's diverse and complex book of business. The Company has maintained a consistent, conservative posture2017 was the first calendar year in its reserving process which has proven to be fully adequate with no overallreserve deficiencies developedwere more than 5% of the prior year's loss position since 1985. The Company constantly monitors changes in trends related to the numbers of claims incurred relative to correlative variances with premium volume, average settlement amounts, numbers of claims outstanding at period ends and the average value per claim outstanding and adjusts actuarial assumptions as necessary to accommodate observed trends.
As described on page 4, changes have occurred in the Company's net per accident retained exposure under reinsurance agreements in place during the periods presented in the previous table. It is much more difficult to reserve for losses where policy limits are as high as $10 million per accident as opposed to those losses related to business which carries lower policy limits, such as private passenger automobile. This is because there are fewer policy limit losses in the Company's historical loss database on which to project future loss developments and the larger and more complex the loss, the greater the likelihood that litigation will become involved in the settlement process. Consequently, the level of uncertainty in the reserving process is much greater when dealing with larger losses and will routinely result in fluctuations among accident year developments.
The differences between the liability for losses and LAE reported in the accompanying 2014 consolidated financial statements prepared 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 (dollars in thousands):
Liability reported on a SAP basis - net of reinsurance recoverable $ 301,523
Add differences:
Reinsurance recoverable on unpaid losses and LAE 210,519
Additional reserve for residual market losses not
reported to the Company at the current year end 840
Deduct differences:
Estimated salvage and subrogation recoveries recorded on
a cash basis for SAP and on an accrual basis for GAAP (6,780)
Liability reported on a GAAP basis $ 506,102
Ten Year Historical Development Tables:
The table on page 11below presents the development of GAAPU.S. generally accepted accounting principles ("GAAP") balance sheet insurance reserves for each year-end from 20042007 through 2013,2016, as of December 31, 2014,2017, net of all reinsurance credits. The top line of the table shows
| ANALYSIS OF LOSS AND LOSS ADJUSTMENT EXPENSE DEVELOPMENT--GAAP BASIS | |
| (Dollars in thousands) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31 | | 2007 | | | 2008 | | | 2009 | | | 2010 | | | 2011 | | | 2012 | | | 2013 | | | 2014 | | | 2015 | | | 2016 | | | 2017 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Liability for Unpaid Losses | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| and Loss Adjustment | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Expenses 1 | | $ | 244,500 | | | $ | 231,633 | | | $ | 203,253 | | | $ | 218,629 | | | $ | 290,092 | | | $ | 289,236 | | | $ | 288,088 | | | $ | 295,583 | | | $ | 301,753 | | | $ | 324,767 | | | $ | 372,131 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Liability Reestimated | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
as of: 2 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| One Year Later | | | 227,423 | | | | 222,049 | | | | 194,430 | | | | 208,933 | | | | 280,217 | | | | 283,673 | | | | 277,734 | | | | 285,521 | | | | 315,589 | | | | 343,982 | | | | | |
| Two Years Later | | | 216,730 | | | | 208,702 | | | | 198,220 | | | | 201,745 | | | | 272,285 | | | | 282,381 | | | | 268,757 | | | | 303,540 | | | | 340,361 | | | | | | | | | |
| Three Years Later | | | 206,445 | | | | 210,562 | | | | 188,110 | | | | 204,243 | | | | 276,525 | | | | 279,685 | | | | 288,862 | | | | 332,175 | | | | | | | | | | | | | |
| Four Years Later | | | 210,170 | | | | 205,519 | | | | 192,195 | | | | 202,078 | | | | 268,299 | | | | 291,332 | | | | 313,909 | | | | | | | | | | | | | | | | | |
| Five Years Later | | | 208,132 | | | | 208,398 | | | | 187,792 | | | | 198,518 | | | | 275,517 | | | | 298,861 | | | | | | | | | | | | | | | | | | | | | |
| Six Years Later | | | 210,446 | | | | 205,986 | | | | 181,547 | | | | 200,922 | | | | 276,812 | | | | | | | | | | | | | | | | | | | | | | | | | |
| Seven Years Later | | | 209,288 | | | | 200,460 | | | | 181,998 | | | | 203,692 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Eight Years Later | | | 205,179 | | | | 200,808 | | | | 184,122 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Nine Years Later | | | 205,248 | | | | 202,565 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Ten Years Later | | | 205,784 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Cumulative Redundancy (Deficiency) 3 | | $ | 38,716 | | | $ | 29,068 | | | $ | 19,131 | | | $ | 14,937 | | | $ | 13,280 | | | $ | (9,625 | ) | | $ | (25,821 | ) | | $ | (36,592 | ) | | $ | (38,608 | ) | | $ | (19,215 | ) | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Cumulative Amount of | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Liability Paid | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Through: 4 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| One Year Later | | $ | 76,970 | | | $ | 84,777 | | | $ | 74,182 | | | $ | 72,393 | | | $ | 94,003 | | | $ | 103,941 | | | $ | 92,275 | | | $ | 92,870 | | | $ | 109,228 | | | $ | 132,920 | | | | | |
| Two Years Later | | | 124,870 | | | | 120,628 | | | | 107,413 | | | | 109,382 | | | | 156,271 | | | | 162,087 | | | | 159,282 | | | | 166,642 | | | | 195,951 | | | | | | | | | |
| Three Years Later | | | 145,857 | | | | 142,731 | | | | 125,038 | | | | 133,507 | | | | 193,566 | | | | 205,452 | | | | 166,642 | | | | 222,295 | | | | | | | | | | | | | |
| Four Years Later | | | 157,724 | | | | 152,679 | | | | 137,460 | | | | 147,462 | | | | 214,873 | | | | 202,803 | | | | 234,158 | | | | | | | | | | | | | | | | | |
| Five Years Later | | | 164,877 | | | | 161,834 | | | | 143,461 | | | | 158,172 | | | | 227,359 | | | | 241,533 | | | | | | | | | | | | | | | | | | | | | |
| Six Years Later | | | 170,554 | | | | 166,290 | | | | 148,101 | | | | 166,112 | | | | 234,578 | | | | | | | | | | | | | | | | | | | | | | | | | |
| Seven Years Later | | | 174,190 | | | | 170,126 | | | | 152,375 | | | | 168,524 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Eight Years Later | | | 177,275 | | | | 173,867 | | | | 153,999 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Nine Years Later | | | 180,569 | | | | 174,902 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Ten Years Later | | | 180,701 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
1 Represents the estimated liability for unpaid losses and LAE recorded at the balance sheet date for each of the indicated years. This liability represents the estimated amount of losses and LAE for claims arising in all prior years that were unpaid at the respective balance sheet date, including losses that had been incurred but not yet reported ("IBNR") losses, to the Company.
The upper portion of the table shows2 Represents the re-estimated amount of the previously recorded liability based on additional information available to the Company 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 individual claims and as claims are settled and paid.
The "cumulative redundancy" represents3 Represents the aggregate change in the estimates of each calendar year endyear-end reserve through December 31, 2014. For example, the 2004 liability has developed a $40.6 million redundancy over ten years. That amount has been reflected in income over those ten years, as shown on the table. The effect on calendar year income of changes in estimates of the liability for losses and LAE during each of the past three years is shown in the table on page 5.2017.
Historically, the Company’s net loss developments have been favorable. Reserve developments for all years ended in the period 1986 through 2013 have produced redundancies as of December 31, 2014. In addition to a consistently conservative approach to reserving methods, loss reserve developments in recent years have been favorably affected by several other factors. Perhaps the most significant single factor has been the improvement in safety programs by the fleet transportation industry in general and by the Company’s insureds specifically. Statistics produced by a variety of sources show that driver quality in general and specifically as relates to the type of transportation companies underwritten by the Company, has improved markedly in the past decade resulting in fewer fatalities and serious accidents. The Company’s experience also shows that improved safety and hiring programs have a dramatic impact on the frequency and severity of fleet transportation accidents and, more recently, the introduction of numerous safety devices using state-of-the-art technology has reduced rear end and cross over accidents which often produce the most serious injuries. In addition, the expanded use of telematics to precisely measure driver behavior and provide focused training and remediation is positively impacting loss experience. Significant trucking industry and regulatory initiatives, such as CSA 2010, have provided strong motivation to trucking companies to upgrade their driver roster, increase monitoring of driver behavior and improve equipment maintenance, all resulting in fewer accidents. Higher self-insured retentions also play a part in reduced insurance losses. Higher retentions not only raise the excess insurance entry point but also encourage fleet transportation company management to focus even more intensely on safety programs.
The establishment of bulk 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 for most lines of business. As previously mentioned, numerous factors must be considered in reviewing historical data including inflation, legislative actions, 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 2014 is different, both in terms of exposures provided and rates charged, from that which generated much of the ten-year historical loss data used to establish reserves in recent years. Management has noted trends toward significantly higher settlements and jury awards associated with the more serious fleet transportation liability claims over the past several years. The inflationary factors affecting these claims appear to be more subjective in nature and not in line with compensatory equity. In addition to the factors mentioned above, savings realized in recent years upon the closing of claims, as reflected in the tables on pages 5 and 12, are attributable to the Company’s experience in specializing in long-haul trucking business for over 50 years as well as its long-standing policy of reserving for losses realistically and a willingness to settle claims based upon a seasoned evaluation of the underlying exposures. The Company 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 11 shows4 Represents the cumulative amount paid with respect to the previously recorded calendar year endyear-end liability as of the end of each succeeding year. For example, as of December 31, 2014, the Company had paid $142.0 million of losses and LAE that had been incurred, but not paid, as of December 31, 2004; thus, an estimated $24.6 million (15%) of losses incurred through 2004 remain unpaid as of the current financial statement date ($166.6 million incurred less $142.0 million paid). The payment patterns shown in this table demonstrate the “long-tail”"long-tail" nature of much of the Company’sCompany's business, whereby portions of claims, principally in workers compensation coverages, do not fully pay out for more than ten years.
Historically, the Company's net loss developments have been favorable. Reserve developments for all years ended in the period 1985 through 2011 have produced redundancies as of December 31, 2017, with deficiencies developing for periods from 2012 forward. The $19.2 million deficiency developed through one year on the 2016 reserve position reflects action taken by management to respond to higher than expected adverse case development, as previously noted. The deficiencies that have developed in the chart from 2012 through 2017 have been largely attributable to two main themes: (1) The Company engaged in new markets between 2008-2013 including professional liability and property coverages concentrated in the state of Florida. These products (now discontinued) experienced significant adverse loss development in calendar years 2016 and 2017 as more information emerged and was therefore considered in the reserving process. (2) The Company has experienced some infrequent but severe loss developments in its transportation offerings, a market that was also entered into during the 2008-2013 strategic period. The Company is currently addressing the rate adequacy and customer segmentation practices of this product in response to the most recent adverse loss development.
Readers should note that the table on page 11above does not present accident or policy year development data, which they may be more accustomed to analyzing. Rather, this table is intended to present an evaluation of the Company’sCompany's ability to establish its liability for losses and loss expenses at a given balance sheet date. In reviewing this information, it is important to understand that this method of presentation causes some development experience to be duplicated. For example, the amount of any redundancy or deficiency related to losses settled in 2007,2010, but incurred in 2004,2007, will be included in the cumulative development amount for each of the years ending December 31, 2004, 2005,2007, 2008, and 2006.2009. It is also important to note that conditions and trends that have affected development of the liability in the past may not necessarily occur in the future. Accordingly, it would not be appropriate to extrapolate future redundancies or deficiencies based on this table.
The table presented on page 12below presents loss development data on a gross (before consideration of reinsurance) basis for the same ten year period December 31, 20042007 through December 31, 2013,2016, as of December 31, 2014,2017, with a reconciliation of the data to the net amounts shown in the table on page 11. above.
ANALYSIS OF LOSS AND LOSS ADJUSTMENT EXPENSE DEVELOPMENT--GAAP BASIS | |
| (Dollars in thousands) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31 | | 2007 | | | 2008 | | | 2009 | | | 2010 | | | 2011 | | | 2012 | | | 2013 | | | 2014 | | | 2015 | | | 2016 | | | 2017 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Direct and Assumed: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Liability for Unpaid Losses and Loss | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Adjustment Expenses | | $ | 378,616 | | | $ | 389,558 | | | $ | 359,030 | | | $ | 344,520 | | | $ | 421,556 | | | $ | 455,454 | | | $ | 474,470 | | | $ | 506,102 | | | $ | 513,596 | | | $ | 576,330 | | | $ | 680,274 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Liability Reestimated as of | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2017 | | | 316,914 | | | | 311,512 | | | | 303,058 | | | | 322,142 | | | | 414,550 | | | | 476,593 | | | | 532,456 | | | | 590,685 | | | | 608,357 | | | | 601,543 | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Cumulative Redundancy (Deficiency) | | $ | 61,702 | | | $ | 78,046 | | | $ | 55,972 | | | $ | 22,378 | | | $ | 7,006 | | | $ | (21,139 | ) | | $ | (57,986 | ) | | $ | (84,583 | ) | | $ | (94,761 | ) | | $ | (25,213 | ) | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Ceded: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Liability for Unpaid Losses and Loss | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Adjustment Expenses | | $ | 134,116 | | | $ | 157,925 | | | $ | 155,777 | | | $ | 125,891 | | | $ | 131,464 | | | $ | 166,218 | | | $ | 186,382 | | | $ | 210,519 | | | $ | 211,843 | | | $ | 251,563 | | | $ | 308,143 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Liability Reestimated as of | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2017 | | | 111,130 | | | | 108,947 | | | | 118,936 | | | | 118,450 | | | | 137,738 | | | | 177,732 | | | | 218,547 | | | | 258,510 | | | | 267,996 | | | | 257,561 | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Cumulative Redundancy (Deficiency) | | $ | 22,986 | | | $ | 48,978 | | | $ | 36,841 | | | $ | 7,441 | | | $ | (6,274 | ) | | $ | (11,514 | ) | | $ | (32,165 | ) | | $ | (47,991 | ) | | $ | (56,153 | ) | | $ | (5,998 | ) | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Liability for Unpaid Losses and Loss | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Adjustment Expenses | | $ | 244,500 | | | $ | 231,633 | | | $ | 203,253 | | | $ | 218,629 | | | $ | 290,092 | | | $ | 289,236 | | | $ | 288,088 | | | $ | 295,583 | | | $ | 301,753 | | | $ | 324,767 | | | $ | 372,131 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Liability Reestimated as of | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2017 | | | 205,784 | | | | 202,565 | | | | 184,122 | | | | 203,692 | | | | 276,812 | | | | 298,861 | | | | 313,909 | | | | 332,175 | | | | 340,361 | | | | 343,982 | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Cumulative Redundancy (Deficiency) | | $ | 38,716 | | | $ | 29,068 | | | $ | 19,131 | | | $ | 14,937 | | | $ | 13,280 | | | $ | (9,625 | ) | | $ | (25,821 | ) | | $ | (36,592 | ) | | $ | (38,608 | ) | | $ | (19,215 | ) | | | | |
Readers are reminded that the gross data presented on page 12above requires significantly more subjectivity in the estimation of incurred but not reportedIBNR and loss expense reserves because of the high limits provided by the Company to its fleet transportation and workers' compensation customers, muchsome of which has been covered by excess of loss and facultative reinsurance. This is particularly true of excess of loss treaties where the Company retains risk in only the lower, more predictable, layers of coverage. Accordingly, one would generally expect more variability in development on a gross basis than on a net basis. The difference between loss developments before consideration of reinsurance, as presented on page 12, and thoseCompany's consolidated financial statements reflect our financial results net of reinsurance, as shown on page 11 do not impact the Company’s operating results as all such differences are borne by reinsurers.
reinsurance.
Environmental Matters:
Given that one of the Company's principal businesscore businesses is insuring fleet transportation companies, on occasion claims involving a commercial automobile accident which has resulted in the spill of a pollutant are made. Certain of the Company's policies may cover these situations on the basis that they were caused by an accident that resulted in the immediate and isolated spill of a pollutant. These claims are typically reported, evaluated and fully resolved within a short period of time.
In general, establishing reserves for environmental claims, other than those associated with “sudden"sudden and accidental”accidental" losses, 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.
As previously noted, veryVery few environmental claims have historically been reported to the Company. In addition, a review of the businesses of our past and current insureds indicates that exposure to claims of an environmental nature is limited because the vast majority 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 since 1986 has, and is expected to, further limit exposure to such claims from that point forward.
The Company has never been presented with andoes not expect to have any significant environmental claimclaims relating to asbestos and, based on the types of business the Company has insured over the years, it is not expected that the Company could have any significant asbestos exposure.
The Company's reserves for unpaid losses and loss expenses at December 31, 20142017 did not include significant amounts for liability related to environmental damage claims. The Company does not foresee significant future exposure to environmental damage claims and accordingly has established no reserve for incurred but not reportedIBNR environmental losses at December 31, 2014.2017.
Marketing
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| ANALYSIS OF LOSS AND LOSS ADJUSTMENT EXPENSE DEVELOPMENT--GAAP BASIS | | | | | | | | | | | | | | | | |
| (Dollars in thousands) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31 | | 2004 | | | 2005 | | | 2006 | | | 2007 | | | 2008 | | | 2009 | | | 2010 | | | 2011 | | | 2012 | | | 2013 | | | 2014 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Liability for Unpaid Losses | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| and Loss Adjustment | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Expenses | | $ | 207,137 | | | $ | 242,130 | | | $ | 249,495 | | | $ | 244,500 | | | $ | 231,633 | | | $ | 203,253 | | | $ | 218,629 | | | $ | 290,092 | | | $ | 289,236 | | | $ | 288,088 | | | $ | 295,583 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Liability Reestimated | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| as of: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| One Year Later | | | 193,445 | | | | 225,183 | | | | 228,211 | | | | 227,423 | | | | 222,049 | | | | 194,430 | | | | 208,933 | | | | 280,217 | | | | 283,673 | | | | 277,734 | | | | | |
| Two Years Later | | | 180,455 | | | | 209,774 | | | | 207,818 | | | | 216,730 | | | | 208,702 | | | | 198,220 | | | | 201,745 | | | | 272,285 | | | | 282,381 | | | | | | | | | |
| Three Years Later | | | 171,332 | | | | 200,955 | | | | 199,503 | | | | 206,445 | | | | 210,562 | | | | 188,110 | | | | 204,243 | | | | 276,525 | | | | | | | | | | | | | |
| Four Years Later | | | 171,225 | | | | 198,376 | | | | 192,678 | | | | 210,170 | | | | 205,519 | | | | 192,195 | | | | 202,078 | | | | | | | | | | | | | | | | | |
| Five Years Later | | | 171,005 | | | | 191,846 | | | | 198,023 | | | | 208,132 | | | | 208,398 | | | | 187,792 | | | | | | | | | | | | | | | | | | | | | |
| Six Years Later | | | 167,590 | | | | 195,348 | | | | 196,101 | | | | 210,446 | | | | 205,986 | | | | | | | | | | | | | | | | | | | | | | | | | |
| Seven Years Later | | | 170,951 | | | | 193,226 | | | | 197,898 | | | | 209,288 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Eight Years Later | | | 167,613 | | | | 194,188 | | | | 196,421 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Nine Years Later | | | 168,249 | | | | 192,585 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Ten Years Later | | | 166,569 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Cumulative Redundancy | | $ | 40,568 | | | $ | 49,545 | | | $ | 53,074 | | | $ | 35,212 | | | $ | 25,647 | | | $ | 15,461 | | | $ | 16,551 | | | $ | 13,567 | | | $ | 6,855 | | | $ | 10,354 | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Cumulative Amount of | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Liability Paid | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Through: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| One Year Later | | $ | 60,343 | | | $ | 59,581 | | | $ | 58,956 | | | $ | 76,970 | | | $ | 84,777 | | | $ | 74,182 | | | $ | 72,393 | | | $ | 94,003 | | | $ | 103,941 | | | $ | 92,275 | | | | | |
| Two Years Later | | | 84,265 | | | | 94,947 | | | | 100,990 | | | | 124,870 | | | | 120,628 | | | | 107,413 | | | | 109,382 | | | | 156,271 | | | | 162,087 | | | | | | | | | |
| Three Years Later | | | 102,692 | | | | 117,522 | | | | 127,011 | | | | 145,857 | | | | 142,731 | | | | 125,038 | | | | 133,507 | | | | 193,566 | | | | | | | | | | | | | |
| Four Years Later | | | 116,198 | | | | 136,652 | | | | 143,612 | | | | 157,724 | | | | 152,679 | | | | 137,460 | | | | 147,462 | | | | | | | | | | | | | | | | | |
| Five Years Later | | | 124,176 | | | | 148,039 | | | | 151,662 | | | | 164,877 | | | | 161,834 | | | | 143,461 | | | | | | | | | | | | | | | | | | | | | |
| Six Years Later | | | 128,592 | | | | 154,573 | | | | 157,223 | | | | 170,554 | | | | 166,290 | | | | | | | | | | | | | | | | | | | | | | | | | |
| Seven Years Later | | | 132,775 | | | | 159,428 | | | | 162,331 | | | | 174,190 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Eight Years Later | | | 137,094 | | | | 163,779 | | | | 165,372 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Nine Years Later | | | 140,348 | | | | 166,062 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Ten Years Later | | | 142,047 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| ANALYSIS OF LOSS AND LOSS ADJUSTMENT EXPENSE DEVELOPMENT--GAAP BASIS | | | | | | | | | | | | | | | | | | | | | | |
| (Dollars in thousands) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31 | | 2004 | | | 2005 | | | 2006 | | | 2007 | | | 2008 | | | 2009 | | | 2010 | | | 2011 | | | 2012 | | | 2013 | | | 2014 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Direct and Assumed: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Liability for Unpaid Losses and Loss | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Adjustment Expenses | | $ | 440,172 | | | $ | 430,273 | | | $ | 409,412 | | | $ | 378,616 | | | $ | 389,558 | | | $ | 359,030 | | | $ | 344,520 | | | $ | 421,556 | | | $ | 455,454 | | | $ | 474,470 | | | $ | 506,102 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Liability Reestimated as of | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2014 | | | 362,547 | | | | 323,127 | | | | 300,393 | | | | 308,469 | | | | 304,436 | | | | 295,797 | | | | 310,758 | | | | 388,722 | | | | 441,930 | | | | 450,906 | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Cumulative Redundancy | | | 77,625 | | | | 107,146 | | | | 109,019 | | | | 70,147 | | | | 85,122 | | | | 63,233 | | | | 33,762 | | | | 32,834 | | | | 13,524 | | | | 23,564 | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Ceded: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Liability for Unpaid Losses and Loss | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Adjustment Expenses | | | 233,035 | | | | 188,143 | | | | 159,917 | | | | 134,116 | | | | 157,925 | | | | 155,777 | | | | 125,891 | | | | 131,464 | | | | 166,218 | | | | 186,382 | | | | 210,519 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Liability Reestimated as of | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2014 | | | 195,978 | | | | 130,542 | | | | 103,972 | | | | 99,181 | | | | 98,450 | | | | 108,005 | | | | 108,680 | | | | 112,197 | | | | 159,549 | | | | 173,172 | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Cumulative Redundancy | | | 37,057 | | | | 57,601 | | | | 55,945 | | | | 34,935 | | | | 59,475 | | | | 47,772 | | | | 17,211 | | | | 19,267 | | | | 6,669 | | | | 13,210 | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Liability for Unpaid Losses and Loss | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Adjustment Expenses | | | 207,137 | | | | 242,130 | | | | 249,495 | | | | 244,500 | | | | 231,633 | | | | 203,253 | | | | 218,629 | | | | 290,092 | | | | 289,236 | | | | 288,088 | | | | 295,583 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Liability Reestimated as of | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2014 | | | 166,569 | | | | 192,585 | | | | 196,421 | | | | 209,288 | | | | 205,986 | | | | 187,792 | | | | 202,078 | | | | 276,525 | | | | 282,381 | | | | 277,734 | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Cumulative Redundancy | | | 40,568 | | | | 49,545 | | | | 53,074 | | | | 35,212 | | | | 25,647 | | | | 15,461 | | | | 16,551 | | | | 13,567 | | | | 6,855 | | | | 10,354 | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Marketing
The Company's primary marketing areas are outlined on pages 2 and 3.
Historically, the Company hasInsurance Subsidiaries have primarily focused itstheir fleet transportation marketing efforts on large and medium trucking fleets, with itstheir biggest market share in the larger trucking fleets (over 150 power units). TheseThe largest of these fleets (over 250 power units) generally self-insure a significant portion of their risk, and self-insuranceself-insured retention plans are a specialty of the Company. The indemnity contract provided to self-insuredsuch customers is designed to cover all aspects of fleet transportation liability, including third party liability, property damage, physical damage cargo and workers' compensation,cargo, arising from vehicular accident or other casualty loss. The self-insured program is supplemented with large deductible workers' compensation policies in states which do not allow for self-insurance of this coverage. Fleets with fewer than 250 power units typically purchase full insurance coverage or retain deductibles on each claim. The CompanyCompany's fleet transportation offerings also offersinclude public livery risks, principally large and medium-sized operators of bus fleets and taxis, work-related accident insurance, on a group or individual basis, to independent contractors under contract to a fleet sponsor, as well as workers’workers' compensation coverage to employees of independent contractor fleet owners. Large fleet trucking products are marketed both directly to fleet transportation clients and also through relationships with non-affiliated brokers and specialized independent agents.
In addition, the Company offers a program of coverages for "small fleet" trucking concerns (owner-operators generally with one to six power units) and "medium fleet" trucking concerns (7-150 power units). This program is currently beingProducts for small and medium fleets, independent contractors, and non-trucking entities are marketed through independent agents utilizing much of the technology developed in conjunctionrelationships with marketing private passenger automobile insurance. The Company’s fleet transportation offerings also include certain public livery risks, principally largenon-affiliated brokers and medium sized operators of bus fleets. In 2014, fleet transportation products generated approximately 92% of direct premium written by the Property & Casualty Insurance Segment.specialized agents.
In some cases, the Company has accepted reinsurance cessions and retrocessions, principally property coverages for catastrophe exposures, from selected insurers and reinsurers. Participation in this market, which included business produced by large reinsurancewill provide specific product offerings to specialized markets through partnerships with brokers and a single exclusive managing general agency agreement,program administrators. As we grow, our distribution strategy has varied over the years depending on the adequacymoved toward utilization of pricing, which can fluctuate widely from time to time. In addition to property coverages, the Company accepts reinsurance cessions for a limited amount of professional liability coverages from small and medium sized insurance companies.
Since 1995, the Company has sold private passenger automobile insurance. This program is currently being marketed primarily in a limited number of states through independent agents. Sagamore utilizes technology extensively in marketing its private passenger automobile insurance products in order to provide superior service to its agents and insureds.
Beginning in 2010, the Company began underwriting miscellaneous professional liability coverages through wholesale and retailnon-affiliated agents and brokers on both an admittedto place new business for small and surplus lines basis.
Investmentsintermediate fleet transportation (including independent contractor products) and non-transportation workers' compensation. In addition, we have developed customized commercial auto liability and workers' compensation programs which are marketed through non-affiliated agent partners. These customized programs can include a suite of products selected for our targeted customer base, including commercial auto liability, general liability, non-trucking liability, cargo, occupational accident, or workers' compensation coverages.
Investments
The Company’sCompany's investment portfolio is essentiallynotionally divided between (1) funds which are considered necessary to support insurance underwriting activities and (2) excess capital funds. FundsManagement believes the funds invested in fixed maturity and short-term securities are more than sufficient to cover underwriting operations while equity securities and limited partnerships are utilized to invest excess capital funds to achieve higher long-term returns. The following discussion will concentrate on the different investment strategies for these two major categories.
At December 31, 20142017 the financial statementmarket value of the Company's consolidated investment portfolio was approximately $758$854.6 million, including $59consisting of fixed maturities, equity securities, limited partnership and short-term and other investments and includes $59.2 million of short-term funds classified as cash equivalents. The adjusted cost of the portfolio was $678 million with the $80 million difference representing pre-tax unrealized appreciation.
A comparison of the allocation of assets within the Company's consolidated investment portfolio, using adjusted costmarket value as a basis, is as follows as of December 31:
| | | 2014 | | | | 2013 | |
| | | | | | | | |
| Corporate securities | | | 25.2 | % | | | | 21.8 | % |
| State and municipal obligations | | | 16.7 | | | | | 18.4 | |
| U.S. government obligations | | | 14.9 | | | | | 18.1 | |
| Short-term and money markets | | | 9.2 | | | | | 9.1 | |
| Commercial mortgage-backed securities | | | 5.3 | | | | | 4.5 | |
| Foreign government obligations | | | 4.2 | | | | | 3.8 | |
| Residential mortgage-backed securities | | | 0.9 | | | | | 1.9 | |
| Total fixed maturities | | | 76.4 | | | | | 77.6 | |
| Limited partnerships (equity basis) | | | 12.0 | | | | | 11.0 | |
| Equity securities | | | 11.6 | | | | | 11.4 | |
| | | | 100.0 | % | | | | 100.0 | % |
| | | 2017 | | | 2016 | |
| | | | | | | |
| Fixed maturities: | | | | | | |
| Agency collateralized mortgage obligations | | | 1.9 | % | | | 0.8 | % |
| Agency mortgage-backed securities | | | 3.2 | | | | 0.6 | |
| Asset-backed securities | | | 5.1 | | | | 6.0 | |
| Bank loans | | | 2.3 | | | | 1.4 | |
| Certificates of deposit | | | 0.4 | | | | 0.4 | |
| Collateralized mortgage obligations | | | 0.8 | | | | 1.2 | |
| Corporate securities | | | 23.2 | | | | 19.0 | |
| Mortgage-backed securities | | | 2.8 | | | | 3.3 | |
| Municipal obligations | | | 11.3 | | | | 17.3 | |
| Non-U.S. government obligations | | | 4.4 | | | | 3.3 | |
| U.S. government obligations | | | 5.7 | | | | 12.3 | |
| Total fixed maturities | | | 61.1 | | | | 65.6 | |
| | | | | | | | | |
| Short-term | | | 0.1 | | | | 0.2 | |
| Cash equivalents | | | 6.9 | | | | 8.0 | |
| Total fixed maturities and short-term | | | 68.1 | | | | 73.8 | |
| | | | | | | | | |
| Limited partnerships (equity basis) | | | 8.3 | | | | 10.2 | |
| | | | | | | | | |
| Equity securities: | | | | | | | | |
| Consumer | | | 5.5 | | | | 4.3 | |
| Energy | | | 1.2 | | | | 1.7 | |
| Financial | | | 5.3 | | | | 4.2 | |
| Industrial | | | 3.0 | | | | 2.8 | |
| Technology | | | 1.5 | | | | 1.2 | |
| Funds (e.g. mutual funds, closed end funds, ETFs) | | | 5.9 | | | | 0.9 | |
| Other | | | 1.2 | | | | 0.9 | |
| Total equity securities | | | 23.6 | | | | 16.0 | |
| | | | 100.0 | % | | | 100.0 | % |
Fixed Maturity and Short-Term Investments
Fixed maturity and short-term securities comprised 67.9%68.1% of the market value of the Company’s total invested assetsCompany's consolidated investment portfolio of $854.6 million at December 31, 2014. Excluding U.S. government obligations, the2017. The fixed maturity portfolio is widely diversified with no concentrations in any single industry, geographic location or municipality. The largest amount invested in any single issuer was $15.8$7.5 million (2.1%(0.9% of total invested assets) although most individual investments, other than municipal bonds, are less than $750,000.the Company's consolidated investment portfolio). The Company’sCompany's fixed maturity portfolio has a very short duration compared to the duration of its insurance liabilities and, accordingly, the Company does not actively trade fixed maturity securities but typically holds such investments until maturity. Exceptions exist in the rare instances where the underlying credit for a specific issue is deemed to be diminished. In such cases, the security will be considered for disposal prior to maturity. In addition, fixed maturity securities may be sold when realignment of the portfolio is considered beneficial (i.e.(e.g., moving from taxable to non-taxable issues) or when valuations are considered excessive compared to alternative investments.
The Investment Committee has determined that the Company’s Insurance Subsidiaries will, at all times, hold high grade fixed maturity securities and short-term investments with a market value equal to at least 100% of reserves for losses and loss expenses and unearned premiums, net of applicable reinsurance credits. At December 31, 2014, investment grade bonds and short-term instruments held by Insurance Subsidiaries equaled 137% of designated underwriting liabilities, thus providing a substantial margin above this conservative guideline.
The Company's concentration of fixed maturity funds 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 following comparison of the Company's fixed maturity and short-term investment portfolios, using par value as a basis, shows the changes in contractual maturities in the portfolio during 2014.2017. Note that the expected average maturity of the portfolio is less than the contractual maturity average life shown below because the Company has, in some cases, the right to put obligations and borrowers have, in some cases, the right to call or prepay obligations with or without call or prepayment penalties.
| | | 2017 | | | 2016 | |
| Less than one year | | | 19.5 | % | | | 27.7 | % |
| 1 to 5 years | | | 53.4 | | | | 52.7 | |
| 5 to 10 years | | | 13.0 | | | | 9.7 | |
| More than 10 years | | | 14.1 | | | | 9.9 | |
| | | | 100.0 | % | | | 100.0 | % |
| | | | | | | | | |
| Average contractual life of portfolio (years) | | | 4.9 | | | | 4.5 | |
| | | 2014 | | | | 2013 | |
| Less than one year | | | 37.3 | % | | | | 32.5 | % |
| 1 to 5 years | | | 37.7 | | | | | 41.0 | |
| 5 to 10 years | | | 10.9 | | | | | 11.1 | |
| More than 10 years | | | 14.1 | | | | | 15.4 | |
| | | | 100.0 | % | | | | 100.0 | % |
| | | | | | | | | | |
| Average contractual life of portfolio (years) | | | 4.8 | | | | | 4.8 | |
Approximately $66.8$71.9 million of our fixed maturity investments (8.8%(8.4% of total invested assets) consiststhe Company's consolidated investment portfolio) consisted of non-rated bonds and bonds rated as less than investment grade by the National Association of Insurance Commissioners ("NAIC") at year end. These investments includeincluded a diversified portfolio of over 40 investments withissuances and had a cost basis of approximately $70.0 million.$1.6 million aggregate net unrealized gain position at December 31, 2017.
The market value of the consolidated fixed maturity portfolio was $3.6included $0.8 million lower than costof net unrealized gains at December 31, 2014, before income taxes, which compares2017 compared to a $1.8$2.7 million of net unrealized gainlosses at December 31, 2013 with the change due primarily to the recent decline in oil prices and the strengthening of the U.S. Dollar.2016. The Company analyzes fixed maturity securities for other-than-temporary impairment (“OTTI”("OTTI") in accordance with the Financial Accounting Standards Board (“FASB”("FASB") OTTI guidance. As has been the Company’sCompany's consistent policy, other-than-temporary impairmentOTTI is considered for any individual issue which has sustained a decline in current market value of at least 20% below original or adjusted cost, and the decline is ongoing for more than 6six months, regardless of the evaluation of the creditworthiness of the issuer or the specific issue. Additionally, the Company takes into account any known subjective information in evaluating for impairment without consideration toof the Company’sCompany's 20% threshold. In 2014, the net effect of OTTI adjustments to fixed maturity securities was a charge against income of $0.4 million with securities owned at year end having only an insignificant non-credit related loss treated as unrealized. The current net unrealized gain on fixed maturity securities consists of $3.9$5.7 million of gross unrealized gains and $7.5$4.8 million of gross unrealized losses. The gross unrealized loss equalslosses equal approximately 1.6%0.9% of the cost of all bondsfixed maturity securities. See also "Critical Accounting Policies" in Part II, Item 7 of this category.Annual Report on Form 10-K for additional details of our investment valuation.
Equity Securities
Because of the large amount of high quality fixed maturity investments owned, relative to the Company’sCompany's loss and loss expense reserves (net of reinsurance recoverables) and other liabilities, amounts invested in equity securities are not needed to fund current operations and, accordingly, can be committed for longlonger periods of time. Equity securities comprise 21.4%comprised 23.6% of the market value of the Company's consolidated investment portfolio of $854.6 million at December 31, 2014, but only 11.7% of the related adjusted cost basis, as long-term holdings have appreciated significantly.2017. The Company’sCompany's equity securities portfolio consists of over 200 separate issuesvarious securities with diversification from large to small capitalization issuers and among several industries. The largest single equity issue owned hashad a market value of $6.8 million at December 31, 2014 (0.9%2017 (0.8% of total invested assets) although the average equity holding of an individual issuer is less than $150,000.Company's consolidated investment portfolio).
The Company maintains a buy-and-hold philosophy with respect to equity securities. Many current holdings have been continuously owned for more than ten years, accounting for the fact that the portfolio, in total, carries a $76.7 million pre-tax unrealized gain at the current year end using original cost and over $83.3 million in unrealized gains using cost adjusted for other-than-temporary impairment.years. An individual equity security will be disposed of when it is determined by the Company's external investment managers or the Board of Director's Investment Committee that there is little potential for future appreciation. All equity securities are considered to be available for sale, although portfolio turnover has historically been very low. Securities are not sold to meet any quarterly or annual earnings quotas but, rather, are disposed of only when market conditions are deemed to dictate, regardless of the impact, positively or negatively, on current period earnings. In addition, equity securities may be sold when realignment of the portfolio is considered beneficial or when valuations are considered excessive compared to alternative investments. Sales of equity securities during 20142017 generated both gains and losses but netted to a realized gain of $7.1$8.1 million before taxes.
The net effect of other-than-temporary impairment adjustments, including recovery of prior year write downs upon sale or disposal, increased investment gains fromCompany's policy for OTTI is to impair equity securities by $0.03 million for the year before taxes. The reclassification of unrealized losses to realized losses occurred on each individual issue where the current market value wasis at least 20% below original or adjusted cost and the decline was ongoing for more than 6six months at the date of write-down, regardless of the evaluation of the issuer or the potential for recovery. Additionally, for any equity security where the decline has existed for a period of at least one year, the decline is treated as an other-than-temporary impairment, regardless of the percentage decline. Further, the Company takes into account any known subjective information in evaluating for impairment without consideration toof the Company’sCompany's 20% threshold. Net unrealized gains on the equity security portfolio were $83.3$71.0 million before taxtaxes at December 31, 20142017 compared to $73.7$55.0 million at December 31, 2013.2016. The current net unrealized gain consists of $85.6$73.2 million of gross unrealized gains and $2.2 million of gross unrealized losses.
Limited Partnerships
For several years, theThe Company has investedinvests in various limited partnerships engaged in securities trading activities,long-short equities, private equity, country focused funds and real estate development or small venture capital funding, as an alternative to direct equity investments. The funds used for these investments are part of the Company’sCompany's excess capital strategy. At December 31, 2014, the aggregate original investment, less distributions, in the limited partnerships was $35.1 million and2017, the aggregate carrying value was $81.2$70.8 million, comprising 10.7%8.3% of the market value of invested assets.
the Company's consolidated investment portfolio.
As a group, these investments experienced increasesincreased in value during 2014,2017, with the aggregate of the Company’sCompany's share of such gains reported by the limited partnerships totaling approximately $7.1$12.5 million. The increase in value is composed of estimated realized gains of $1.3 million and increases in estimated unrealized gains of $5.8 million. On an inception-to-date basis, active limited partnerships have produced estimated realized income of $32.3 million and estimated unrealized income of $13.2 million.
The Company follows the equity method of accounting for its limited partnership investments and, accordingly, records the total change in value as a component of net gains or losses on investments. However, readersReaders are cautioned that, to the extent that reported increases in equity value are unrealized, they can be subsequently reduced or eliminated quickly by volatile market conditions. Further, assets purchased with reinvested realized gains can also diminish in value. In addition, a significant minority of the investments included in the limited partnerships do not have readily ascertainable fair market values and, accordingly, values assigned by the general partners may not be realizable upon the sale or disposal of the related assets, which may not occur for several years. Limited partnerships also are highly illiquid investments, and the Company’sCompany's ability to withdraw funds is generally subject to significant restrictions.
Investment Yields
Interest rates, particularly those on the short end of the yield curve where the vast majority of the Company’sCompany's fixed maturity investments are maintained, continuedremained at historically low levels during 2014. As a result, pre-tax2017. Pre-tax net investment income increased only $0.3$3.6 million, or 3%25%, during 2017, reflecting higher interest rates for shorter duration securities, increased dividends and after tax income increased $0.3 million, or 5% during 2014.invested assets from continuing positive cash flow from operations. A comparison of consolidated investment yields, before consideration of investment management expenses, is as follows:
| | 2014 | | 2013 | | 2017 | | | 2016 | |
| Before federal tax: | | | | | | | | | | |
| Investment income | 2.0 | % | 1.9 | % | | | 3.2 | % | | | 2.9 | % |
| Investment income plus investment gains (losses) | 4.3 | | 5.7 | | |
| Investment income plus investment gains | | | | 6.2 | | | | 6.8 | |
| | | | | | | | | | | | | |
| After federal tax: | | | | | | | | | | | | |
| Investment income | 1.5 | | 1.4 | | | | 2.3 | | | | 2.2 | |
| Investment income plus investment gains (losses) | 2.9 | | 3.9 | | |
| Investment income plus investment gains | | | | 5.4 | | | | 6.1 | |
Readers areSee also directed to the "Results of OperationsOperations" in Part II, Item 7 of this documentAnnual Report on Form 10-K for additional details of our investment operations.
Regulatory Framework
The Company’s businessesInsurance Subsidiaries are currently subject to insurance industry regulation by each of the fifty statesjurisdictions in which the Company’s subsidiariesthey are licensed. In addition, minor portions of the Company’sInsurance Subsidiaries' business are subject to regulation by Bermudian and Canadian federal and provincial authorities. As an insurance holding company, B&L is also subject to oversight from the Indiana Department of Insurance. There can be no assurance that laws and regulations will not be changed by one or more of these regulatory bodies in ways that will require the Company to modify its business models and objectives. In particular, the United States federal government continues to undertake a substantial review and revision ofcontinuously reviews the regulation and supervision of financial institutions, including insurance companies, as well as tax laws and regulation, which could impact the Company’sCompany's operations and performance. While it is currently expected that federal government regulationThe Company will also be focused on the largest financial companies, additional regulations are likely to increase the cost of compliance to the Company. Further, while management is not aware of any significant pending changes, the Company is also subject to regulatory risksimpacted from changes to state and federal tax laws, that may affectincluding the treatmentU.S. Tax Cuts and Jobs Act of insurance related deductions or income recognition.2017 (the "U.S. Tax Act").
Additionally, changes in laws and regulations governing the insurance industry could have an impact on the Company’sCompany's ability to generate historical levels of income from its insurance operations. The Company is obligedWe are obligated to comply with numerous complex and varied governmental regulations in order to maintain its authority to write insurance business. While the Company has consistentlycontinuously maintained each of its licenses without exception, failure to maintain compliance could result in governmental regulators temporarily preventing the Company from writing new business, and thereforethus having a detrimental effect on the Company. Also, the ability forof the Company’s Insurance Subsidiaries to increasemodify insurance rates is heavily regulated for significant portions of the Company’sour business, and such rate increases are often denied or delayed for substantial periods by regulators.
Investments made by the Company's domestic Insurance Subsidiaries are regulated by guidelines promulgated by the NAIC, which are designed to provide protection for both policyholders and shareholders. The statutory capital of each of the Insurance Subsidiaries substantially exceeds the minimum risk- based capital requirements set by the NAIC. State regulatory authorities prescribe calculations of the minimum amount of statutory capital and surplus necessary for each insurance company to remain authorized. These computations are referred to as Risk Based Capital ("RBC") requirements and are based on a number of complex factors, taking into consideration the quality and nature of assets, the historical adequacy of recorded liabilities and the specific nature of business conducted. At December 31, 2017, the minimum statutory capital and surplus requirements of the Insurance Subsidiaries was $104,913. Actual consolidated statutory capital and surplus at December 31, 2017 exceeded this requirement by $316,750.
Employees
As of December 31, 2014,2017, the Company had 425528 employees, an increase of 4173 employees from the prior year end.
Revenue Concentration
CompetitionThe Company derives a significant percentage of its direct premium volume from certain FedEx subsidiaries and operating companies ("FedEx"), and from insurance coverage provided to FedEx's contracted service providers. FedEx represented approximately $18.5 million, $18.3 million and $17.8 million of the Company's consolidated gross premiums written in 2017, 2016 and 2015, respectively. An additional $189.4 million, $202.2 million and $209.4 million in 2017, 2016 and 2015, respectively, was placed with the Company by a non-affiliated broker on behalf of contracted service providers of FedEx, but this additional business was not dependent upon the Company's direct business with FedEx.
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.
Competition
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 significantly 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"Groups," which may write insurance coverages similar to those offered by the Company.
The Company believes it has a competitive advantage in its major lines of business as the result of the extensive experience of its long-tenured management and staff, its superior service and products, its willingness to custom build insurance programs for its customers, its centralized location with ready access to managementskilled employees, its extensive proprietary databases and the extensive use of technology with respect to its insureds and independent agent force. However, the Company is not “top-line”"top-line" oriented and will readily sacrifice premium volume during periods of unrealistic rate competition. Accordingly, should competitors determine to “buy”"buy" market share with unprofitable rates, the Company’s Insurance Subsidiaries will generally experience a decline in business until pricing returns to profitable levels.
Availability of Documents
ThisThe Company is an accelerated filer as defined in Rule 12b-2 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and is required, pursuant to Item 101 of Regulation S-K, to provide certain information regarding its website and the availability of certain documents filed with or furnished to the U.S. Securities and Exchange Commission (the "SEC"). The Company's Internet website is www.baldwinandlyons.com. The Company has included its Internet website address throughout this Annual Report on Form 10-K as wella textual reference only. The information contained on, or accessible through, the Company's Internet website is not incorporated by reference into this Annual Report on Form 10-K.
The Company makes available, free of charge, by mail or through its Internet website, its Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after it electronically files such material with or furnishes it to the Company’s Audit Committee Charter andSEC. The Company also includes on its Internet website its Code of Business Conduct willand the charter of each standing committee of its Board of Directors (the "Board"). In addition, the Company intends to disclose on its Internet website any amendments to, or waivers from, its Code of Business Conduct that are required to be sentpublicly disclosed pursuant to shareholdersrules of the SEC and the Nasdaq Stock Market, LLC ("Nasdaq").
Shareholders may obtain, without charge, a copy of this Annual Report on Form 10-K, including the consolidated financial statements and schedules thereto, without the accompanying exhibits, upon written request to the Company’sBaldwin & Lyons, Inc., 111 Congressional Boulevard, Carmel, Indiana 46032, Attention: Investor Contact at the corporate address. These documents, along with all other filings with the SecuritiesRelations. A list of exhibits is included in this Annual Report on Form 10-K, and Exchange Commissionexhibits are available for review, download or printing from the Company’s web site at www.baldwinandlyons.com.Company upon payment to the Company of the cost of furnishing the exhibits.
Item 101(b), (c)(1)(i)1A. RISK FACTORS
The following is a description of the risk factors that could cause the Company's actual results to differ materially from those contained in forward-looking statements made in this Annual Report on Form 10-K and (vii),presented elsewhere by management from time to time. Such factors may have a material adverse effect on the Company's business, financial condition and (d)results of Regulation S-K:
Reference is madeoperations, and you should carefully consider them before deciding to Note Jinvest in, or retain, shares of the Company's common stock. These risk factors do not identify all risks that the Company faces; its operations could also be affected by factors that are not presently known to the consolidatedCompany or that the Company currently considers to be immaterial to its operations. Due to risks and uncertainties, known and unknown, the Company's past financial statements which provide information concerning industry segmentsresults may not be a reliable indicator of future performance, and is filed herewith under Item 8, Financial Statements and Supplementary Data.
historical trends should not be used to anticipate results or trends in future periods.
We compete with a large number of companies in the insurance industry for underwriting revenues.
We compete with a large number of other companies in our selected lines of business. During periods of intense competition for premium, we are vulnerable to the actions of other companies who may seek to write business without what we believe to be an appropriate regard for ultimate profitability. During these times, it is very difficult to grow or maintain premium volume without sacrificing underwriting discipline and income.
Insurance underwriting is highly competitive. We 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 us. 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 significantly greater financial resources than us. In many cases, competitors are willing to provide coverage for rates lower than those charged by us. Many potential clients self-insure workers' compensation and other risks for which we offer coverage, and some 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 us.
We may incur increased costs in competing for underwriting revenues as we expand our business. Increased costs associated with attracting and writing new clients may negatively impact underwriting revenue. If we are unable to compete effectively, our underwriting revenues may decline, as well as our overall business results.
New competition could cause the supply and/or demand for insurance or reinsurance to change, which could affect our ability to price our coverages at attractive rates and thereby adversely affect our underwriting results.
Changes in laws and regulations governing the insurance industry could have a negative impact on our ability to generate income from our insurance operations.
One or more of our Insurance Subsidiaries are regulated and/or licensed in all 50 of the United States, the District of Columbia, all Canadian provinces, Puerto Rico and Bermuda. We are obligated to comply with numerous complex and varied governmental regulations in order to maintain our authority to write insurance business. Failure to maintain compliance could result in governmental regulators preventing us from writing new business, which would have a material adverse impact on us, our results of operations and our financial condition. Further, the ability for our Insurance Subsidiaries to adjust insurance rates and other product offerings is regulated for significant portions of our business and needed rate adjustments can be denied or delayed for substantial periods by regulators.
A material decline in our financial strength rating could adversely affect our position in the insurance market and cause a significant reduction in our premiums and earnings.
Our main insurance subsidiary, Protective, currently has a financial strength rating of "A+" (Superior) by A.M. Best. Financial ratings are an important factor influencing the competitive position of insurance companies. A.M. Best ratings, which are commonly used in the insurance industry, currently range from "A++" (Superior) to "F" (In Liquidation). The objective of A.M. Best's rating system is to provide potential policyholders and other interested parties with an expert independent opinion of an insurer's financial strength and ability to meet ongoing obligations, including paying claims. This rating is subject to periodic review and may be revised downward, upward or revoked at the sole discretion of A.M. Best. A downgrade in rating could result in the loss of a number of insurance contracts we write and in a substantial loss of business to other competitors, which would have a material adverse effect on our results of operations.
We have two classes of common stock with unequal voting rights and are effectively controlled by our principal shareholders and management, which limits other shareholders' ability to influence our operations.
Our principal shareholders, directors and executive officers and their affiliates control approximately 50% of the outstanding shares of voting Class A common stock and approximately 23% of the outstanding shares of non-voting Class B common stock. These parties effectively control us, direct our affairs, and exert significant influence in the election of directors and approval of significant corporate transactions. The interests of these shareholders may conflict with those of other shareholders, and this concentration of voting power may limit the marketability of our stock and has the potential to delay, defer or prevent a change in control that other shareholders may believe to be in their best interests.
We are subject to credit risk relating to our ability to recover amounts due from reinsurers.
We limit our risk of loss from policies of insurance issued by our Insurance Subsidiaries through the purchase of reinsurance coverage from other insurance companies. Such reinsurance does not relieve us of our responsibility to policyholders should the reinsurers be unable to meet their obligations to us under the terms of the underlying reinsurance agreements. While we have not experienced any significant reinsurance losses for over 25 years, in the past a small number of our less significant reinsurance carriers have experienced deteriorating financial conditions or have been downgraded by rating agencies, and provisions for potential uncollectible balances from these reinsurers have been established. If we are unable to collect the amounts due to us from reinsurers, any unreserved credit losses could adversely affect our results of operations, equity, business and insurer financial strength rating.
We may incur additional losses if our loss reserves are inadequate.
A large portion of our provision for losses recorded is composed of estimates of future loss payments to be made. Such estimates of future loss payments may prove to be inadequate. Loss and loss expense reserves represent our best estimate at a given point in time but are not an exact calculation of ultimate liability. Rather, they are complex estimates derived by utilizing a variety of reserve estimation techniques from numerous assumptions and expectations about future events, many of which are highly uncertain, such as estimates of claims severity, frequency of claims, inflation, claims handling, case reserving policies and procedures, underwriting and pricing policies, changes in the legal and regulatory environment and the lag time between the occurrence of an insured event and the time of its ultimate settlement. Many of these uncertainties are not precisely quantifiable and require significant judgment on our part. As trends in underlying claims develop, particularly in so-called "long tail" lines where the adjudication of claims can take many years, management is sometimes required to revise reserves. This results in a charge to our earnings in the amount of the adjusted reserves, recorded in the period the change in estimate is made. These charges can be substantial and can potentially have a material impact, either positively or negatively, on results of operations and shareholders' equity.
The loss of our major customer could severely impact our revenue and earnings potential and A.M. Best rating.
We derive a significant percentage of our direct premium volume from certain FedEx subsidiaries and related entities, and from insurance coverage provided to FedEx's contracted service providers. The loss of this major customer would likely materially adversely impact our revenue and earnings potential, as well as our A.M. Best rating. Insurance programs provided to FedEx and programs provided to the contracted service providers are not necessarily dependent upon one another, and therefore can be viewed as separate entities.
Our collateral held may prove to be insufficient.
We require collateral from our large insureds covering the insureds' obligations for self-insured retentions or deductibles related to policies of insurance provided. Should we, as surety, become responsible for such insured obligations, the collateral held may prove to be insufficient. In this regard, FedEx utilizes significant self-insured retentions and deductibles under policies of insurance provided by us. In the case of FedEx, we have determined that the financial strength of the customer is sufficient to allow for holding only partial collateral at this time. Should we become responsible for this customer's entire self-insured retention and deductible obligations, the collateral held would be insufficient, and we would sustain a significant operating loss.
A material drop in interest rates, or disruption in the fixed income markets, could have an adverse impact on our earnings and, potentially, our financial position.
Our income from these investments could be materially reduced, which would reduce our results of operations, equity, business and insurer financial strength rating. The functioning of the fixed income markets, the values of the investments we hold and our ability to liquidate them may be adversely affected if those markets are disrupted by a change in interest rates or otherwise affected by significant negative factors, including, without limitation: local, national, or international events, such as regulatory changes, wars, or terrorist attacks; a recession, depression, or other adverse developments in either the U.S. or other economies that adversely affects the value of securities held in our portfolio; financial weakness or failure of one or more financial institutions that play a prominent role in securities markets or act as a counterparty for various financial instruments, which could further disrupt the markets; inactive markets for specific kinds of securities, or for the securities of certain issuers or in certain sectors, which could result in decreased valuations and impact our ability to sell a specific security or a group of securities at a reasonable price when desired; a significant change in inflation expectations; or the onset of deflation or stagflation.
Our investment portfolio is subject to market and credit risks, which could affect our financial results and ability to conduct business.
We have a large portfolio of securities and limited partnership investments which can fluctuate in value with a wide variety of market conditions. A decline in the aggregate value of the securities and limited partnership investments would result in a commensurate decline in our shareholders' equity, either through the income statement or directly to equity. The resultant decline could, at least temporarily, materially adversely affect our results of operations, equity, business and insurer financial strength ratings.
Technological advances, including those specific to the transportation industry, could present us with added competitive risks.
An increase in accident prevention technologies and the growth of autonomous or partially autonomous vehicles could reduce the amount of accidents over time and shift the liability from the owner of the vehicle to the manufacturer, which would cause automobile insurance to become a smaller portion of our overall property and casualty insurance book of business. Innovations in telematics and the increase in usage-based information have become more important and will likely change the way premiums are determined in the future. These advances in technology could materially change the way products in the transportation industry are designed, priced and underwritten, and it will take time for us to adjust to these changes.
Our information technology systems and other operational systems may fail to operate properly or become disabled as a result of events or circumstances wholly or partly beyond our control.
We rely upon our information technology systems and other operational systems and on the integrity and timeliness of our data to run our businesses and service our customers. These information technology and other systems could be subject to physical or electronic break-ins, unauthorized tampering or other cyber security breaches, resulting in a failure to maintain the security, confidentiality or privacy of sensitive data, including personal information relating to customers, or in theft of intellectual property or proprietary information. A failure to maintain proper security, confidentiality or privacy of sensitive data residing on such systems could delay or disrupt our ability to do business and service customers, harm our reputation, subject us to litigation, regulatory fines, a loss of customers and revenues or otherwise adversely affect our business.
Our operations rely upon complex and expensive information technology systems for interacting with policyholders, brokers and employers. The pace at which information systems must be upgraded is continually increasing, requiring an ongoing commitment of significant resources to maintain or upgrade to current standards. Our success may be impacted if we are not able to develop and expand the effectiveness of existing systems and to continue to enhance information systems that support our operations in a cost effective manner.
Disruptions or breaches of our information systems could adversely affect us.
Despite our implementation of network security measures, which have focused on prevention, mitigation, resilience, and recovery, our network and products may be vulnerable to cybersecurity attacks, computer viruses, break-ins and similar disruptions. Cybersecurity attacks and intrusion efforts are continuous and evolving, and in certain cases they have been successful at the most robust institutions. The scope and severity of risks that cyber threats present have increased dramatically, and include, but are not limited to, malicious software, attempts to gain unauthorized access to data, exploiting weaknesses related to vendors or other third parties that could be exploited to attack our systems, denials of service, and other electronic security breaches that could lead to disruptions in systems, unauthorized release of confidential or otherwise protected information and corruption of data. Any such event could have a material adverse effect on our business, operating results and financial condition, as we face regulatory, reputational and litigation risks resulting from potential cyber incidents, as well as the potential of incurring significant remediation costs.
Our daily business operations require us to retain sensitive data such as proprietary business information and data related to customers, claimants and business partners within our network infrastructure. The loss or breach of such information could result in wide reaching negative impacts to our business, and as such, the ongoing maintenance and security of this information is pertinent to the success of our business operations and our strategic goals.
Our networking infrastructure and related assets may be subject to unauthorized access by hackers, employee errors, or other unforeseen activities that could result in the disruption of business processes, network degradation and system downtime, along with the potential that a third party will exploit our critical assets such as proprietary business information and data related to our customers and business partners. To the extent that such disruptions occur, our business operating results and financial condition could be materially and adversely affected resulting in a possible loss of business.
Changes in current accounting practices and future pronouncements may materially impact our reported financial results.
Developments in accounting practices may require us to incur considerable additional expenses to comply with such developments, particularly if we are required to prepare information relating to prior periods for comparative purposes or to apply the new requirements retroactively. The impact of changes in current accounting practices and future pronouncements cannot be predicted but may affect the calculation of net income, net equity and other historical financial statement line items that are important to users of our financial statements. Changes could also introduce significant volatility in our results of operations, equity, business and insurer financial strength rating.
We may be unable to attract and retain qualified employees.
We depend on our ability to attract and retain qualified executive officers, experienced underwriters, claims professionals and other skilled employees who are knowledgeable about our specialty lines of business. If we are unable to attract and retain such individuals, we may be unable to maintain our current competitive position in the specialty markets in which we operate and may be unable to achieve our growth strategy.
Future changes to U.S. tax laws, if adopted, could have an adverse effect on our business, financial condition, results of operations and cash flows.
The enactment of the U.S. Tax Act significantly reduced our income tax rate beginning in 2018. However, from time to time legislation is proposed that would, if enacted, make significant changes to U.S. tax laws, including changes to U.S. corporate tax rates. Such proposed changes in U.S. tax laws, if adopted, or other similar changes that reduce or eliminate deductions currently available to us, could adversely affect our business, financial condition, results of operations and cash flows. The IRS has not yet published all of the detailed regulations resulting from the enactment of the U.S. Tax Act; therefore, we have not completed our accounting for the tax effects, but we have made a reasonable estimate of the effects on our existing deferred tax balances at December 31, 2017. We re-measured deferred tax assets and liabilities based on the rates at which they are expected to be utilized in the future, which is generally 21%. However, we are still analyzing certain aspects of the U.S. Tax Act and refining our calculations, which could potentially affect the measurement of those balances or give rise to new deferred tax amounts.
Item 1A.1B. UNRESOLVED STAFF COMMENTS
None.
Item 2. RISK FACTORSPROPERTIES
| · | The Company operates in the Property and Casualty insurance industry where many of its competitors are larger with far greater resources. Further, this industry is heavily regulated. Changes in laws and regulations governing the insurance industry could have a significant impact on the Company’s ability to generate income from its insurance operations. The Company’s Insurance Subsidiaries, as a group, are regulated and licensed in all 50 of the United States, the District of Columbia, all Canadian provinces, Puerto Rico and Bermuda. The Company is obliged to comply with numerous complex and varied governmental regulations in order to maintain its authority to write insurance business. Failure to maintain compliance could result in various governmental regulators preventing the Company from writing new business and therefore having a material impact on the Company. Further, the ability for the Company’s Insurance Subsidiaries to adjust insurance rates is regulated for significant portions of the Company’s business and needed rate adjustments can be denied or delayed for substantial periods by regulators. |
| · | The Company has two classes of common stock with unequal voting rights. The Company is effectively controlled by its principal stockholders and management, which limits other stockholders’ ability to influence operations. The Company’s executive officers, directors and principal stockholders and their affiliates control approximately 64% of the outstanding shares of voting Class A common stock and nearly 32% of the outstanding shares of non-voting Class B common stock. These parties effectively control the Company, direct its affairs, and exert significant influence in the election of directors and approval of significant corporate transactions. The interests of these stockholders may conflict with those of other stockholders, limit marketability of the stock and this concentration of voting power has the potential to delay, defer or prevent a change in control. |
| · | The Company limits its risk of loss from policies of insurance issued by its Insurance Subsidiaries through the purchase of reinsurance coverage from other insurance companies. Such reinsurance does not relieve the Company from its responsibility to policyholders should the reinsurers be unable to meet their obligations to the Company under the terms of the underlying reinsurance agreements. As a result, the Company is subject to credit risk relating to our ability to recover amounts due from reinsurers. While the Company has not experienced any significant reinsurance losses for over twenty five years, a small number of our less significant historical reinsurance carriers have experienced deteriorating financial conditions or have been downgraded by rating agencies. If the Company is unable to collect the amounts due to it from reinsurers, the resultant credit losses would adversely affect its results of operations, equity, business and insurer financial strength. |
| · | Operating in the Property and Casualty insurance industry, the Company is exposed to loss from policies of insurance issued to its policyholders. A large portion of the provision for losses recorded by the Company is composed of estimates of future loss payments to be made. Such estimates of future loss payments may prove to be inadequate. Loss and loss expense reserves represent management’s best estimate at a given point in time but are not an exact calculation of ultimate liability. Rather, they are complex estimates derived by utilizing a variety of reserve estimation techniques from numerous assumptions and expectations about future events, many of which are highly uncertain, such as estimates of claims severity, frequency of claims, inflation, claims handling, case reserving policies and procedures, underwriting and pricing policies, changes in the legal and regulatory environment and the lag time between the occurrence of an insured event and the time of its ultimate settlement. Many of these uncertainties are not precisely quantifiable and require significant judgment on management’s part. As trends in underlying claims develop, particularly in so-called “long tail” lines where the adjudication of claims can take many years, management is sometimes required to revise reserves. This results in a charge to the Company’s earnings in the amount of the adjusted reserves, recorded in the period the change in estimate is made. These charges can be substantial and can potentially have a material impact, either positively or negatively, on calendar year results of operations and shareholders’ equity. |
| · | While much less significant in the past few years, a meaningful portion of the risk underwritten by the Insurance Subsidiaries covers property losses resulting from catastrophic events on a worldwide basis. The occurrence and valuation of loss events for this business is highly unpredictable and a single catastrophic event could result in a materially significant loss to the Company. Catastrophe losses are an inevitable part of our business. Various events can cause catastrophe losses, including hurricanes, windstorms, earthquakes, hail, explosions, severe winter weather, and fires, and their frequency and severity are inherently unpredictable. In addition, longer-term natural catastrophe trends may be changing and new types of catastrophe losses may be developing due to climate change, a phenomenon that has been associated with extreme weather events linked to rising temperatures, and includes effects on global weather patterns, greenhouse gases, sea, land and air temperatures, sea levels, rain, and snow. The extent of our losses from catastrophes is a function of both the total amount of our insured exposures in the affected areas and the severity of the events themselves. In addition, as in the case of catastrophic losses generally, it can take many months, or even years, for the ultimate cost to us to be finally determined. As our claim experience develops on a particular catastrophe, management may be required to adjust recorded reserves to reflect our revised estimates of the total cost of claims. While the eventual occurrence of catastrophic losses is expected, we are prohibited by U.S. generally accepted accounting principles from establishing reserves for the expected future occurrence of these losses (such as is done in the life insurance industry). Accordingly, upon the occurrence of such a loss, it will likely have a material adverse impact on the Company’s results of operations in the quarter in which it occurs. |
| · | The Company derives a significant percentage of its direct premium volume from FedEx Ground Systems, Inc. and certain of its subsidiaries and related entities (“FedEx”), and from insurance coverage provided to independent service providers under contract with FedEx. While the loss of this major customer could severely reduce the Company’s revenue and earnings potential, insurance programs provided to FedEx and programs provided to the independent service providers under contract with FedEx are not necessarily dependent upon one another and, therefore, could be viewed as separate entities. |
| · | The Company, through its Insurance Subsidiaries, requires collateral from its insureds covering the insureds’ obligations for self-insured retentions or deductibles related to policies of insurance provided. Should the Company, as surety, become responsible for such insured obligations, the collateral held may prove to be insufficient. In this regard, FedEx utilize significant self-insured retentions and deductibles under policies of insurance provided by the Company’s Insurance Subsidiaries. In the case of FedEx, the Company has determined that the financial strength of the customer is sufficient to allow for holding only partial collateral at this time. Should the Company become responsible for this entire customer’s self-insured retention and deductible obligations, the collateral held would be insufficient and the Company would sustain a significant operating loss. |
| · | Given the Company’s significant interest-bearing investment portfolio, a material drop in interest rates could have an adverse impact on the Company’s earnings and financial position. Conversely, a material increase in interest rates could have a significant temporary impact on the market value of the Company’s fixed maturity investment portfolio. The functioning of the fixed income markets, the values of the investments the Company holds and the Company’s ability to liquidate them may be adversely affected if those markets are disrupted by a change in interest rates or otherwise affected by significant negative factors, including, without limitation: local, national, or international events, such as regulatory changes, wars, or terrorist attacks; a recession, depression, or other adverse developments in either the U.S. or other economies that adversely affects the value of securities held in the Company’s portfolio; financial weakness or failure of one or more financial institutions that play a prominent role in securities markets or act as a counterparty for various financial instruments, which could further disrupt the markets; inactive markets for specific kinds of securities, or for the securities of certain issuers or in certain sectors, which could result in decreased valuations and impact the Company’s ability to sell a specific security or a group of securities at a reasonable price when desired; a significant change in inflation expectations, or the onset of deflation or stagflation. If the fixed-income portfolio were to suffer a decrease in value to a substantial degree, the Company’s liquidity, financial position, and financial results could be materially adversely affected. Under these circumstances, the Company’s income from these investments could be materially reduced, and declines in the value of certain securities could further reduce the Company’s results of operations, equity, business and insurer financial strength. |
| · | The Company has a large portfolio of equity securities and limited partnership investments which can fluctuate in value with a wide variety of market conditions. A decline in the aggregate value of the equity securities and limited partnership investments would result in a commensurate decline in the Company’s shareholders equity, either through the income statement or directly to equity. The resultant decline could, at least temporarily, materially adversely affect the Company’s results of operations, equity, business and insurer financial strength. |
| · | Technological advances in the transportation industry could present the Company with added competitive risks. An increase in accident prevention technologies and the growth of autonomous or partially autonomous vehicles could reduce the amount of accidents over time and shift the liability from the owner of the vehicle to the manufacturer, which would cause automobile insurance to become a smaller portion of the Company’s overall Property and Casualty insurance book of business. Innovations in telematics and the increase in usage-based information have become more important and will likely change the way premiums are determined in the future. These advances in technology could materially change the way products in the transportation industry are designed, priced and underwritten and it will take time for the Company to adjust to these changes. |
| · | Changes in current accounting practices and future pronouncements may materially impact the Company’s reported financial results. Developments in accounting practices may require the Company to incur considerable additional expenses to comply with such developments, particularly if the Company is required to prepare information relating to prior periods for comparative purposes or to apply the new requirements retroactively. The impact of changes in current accounting practices and future pronouncements cannot be predicted but may affect the calculation of net income, net equity and other historical financial statement line items that are important to users of the financial statements. Changes could also introduce significant volatility in the Company’s results of operations, equity, business and insurer financial strength. |
| · | The Company’s operations rely upon complex and expensive information technology systems for interacting with policyholders, brokers and employers. The Company’s success involves providing customers with easy-to-use products and ensuring the Company’s workforce has the technology to support the customer base. The pace at which information systems must be upgraded is continually increasing, requiring an ongoing commitment of significant resources to maintain or upgrade to current standards. The Company’s success is reliant on developing and expanding the effectiveness of existing systems and continuing to enhance information systems that support the Company’s operations in a cost effective manner. |
| · | The Company relies upon the information technology systems and other operational systems and on the integrity and timeliness of data to run the businesses and service the customers. These systems may fail to operate properly or become disabled as a result of events or circumstances wholly or partly beyond our control. Despite our implementation of a variety of security measures, the information technology and other systems could be subject to physical or electronic break-ins, unauthorized tampering or other security breaches, resulting in a failure to maintain the security, confidentiality or privacy of sensitive data, including personal information relating to customers, or in theft of intellectual property or proprietary information. A failure to maintain proper security, confidentiality or privacy of sensitive data residing on such systems could delay or disrupt the Company’s ability to do business and service customers, harm the Company’s reputation, subject the Company to litigation, regulatory fines, a loss of customers and revenues or otherwise adversely affect the business. |
Item 2. PROPERTIES
The Company owns its home office building and the adjacent real estate in Carmel, Indiana, approximately 14 miles from downtown Indianapolis. The home office building contains a total of
184,000181,000 usable square feet, and the Company currently occupies approximately
60%72% of this space, with the remainder being leased to non-affiliated entities on
relatively short- term leases.short-term leases expiring through 2023.
The Company also owns a building and the adjacent real estate in Indianapolis, approximately nine miles from its main office in Carmel. The building contains approximately 15,000 square feet of usable space, and is used primarily for off-site data storage and as a contingent back up and disaster recovery site.
The Company's entire operations are conducted from these two facilities. The current facilities are expected to be adequate for the Company's operations for the foreseeablenear 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.Company or outside the ordinary course of business.
Item 4. MINE SAFETY DISCLOSURES
Not applicable.
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS- 20 -
Nothing to report.PART II
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDERSHAREHOLDER MATTERS AND ISSUER PURCHASE OF EQUITY SECURITIES
The Company’sCompany's Class A and Class B common stocks are traded on The NASDAQ Stock Market®Nasdaq 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, 2014,February 28, 2018 there were approximately 400
record holders of Class A Common Stock and approximately 1,000
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 20142017 and 2013,2016, as reported by NASDAQNasdaq and published in the financial press. The quotations reflect interdealer prices without retail markup, markdown or commission and do not necessarily represent actual transactions.press, as well as the cash dividends paid by the Company.
| | | | | | | | | | | | | | | Cash | | | | | | | | | | | | | | | Cash | |
| | | Class A | | | Class B | | | Dividends | | | Class A | | | Class B | | | Dividends | |
| | | High | | | Low | | | High | | | Low | | | Declared | | | High | | | Low | | | High | | | Low | | | Declared | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2014: | | | | | | | | | | | | | | | | |
| 2017: | | | | | | | | | | | | | | | | |
| Fourth Quarter | | $ | 24.80 | | | $ | 23.25 | | | $ | 27.44 | | | $ | 24.19 | | | $ | .25 | | | $ | 24.36 | | | $ | 21.95 | | | $ | 24.70 | | | $ | 22.30 | | | $ | .27 | |
| Third Quarter | | | 24.50 | | | | 23.25 | | | | 26.68 | | | | 24.55 | | | | .25 | | | | 23.85 | | | | 21.41 | | | | 24.90 | | | | 21.20 | | | | .27 | |
| Second Quarter | | | 25.20 | | | | 22.89 | | | | 26.94 | | | | 24.36 | | | | .25 | | | | 26.95 | | | | 23.15 | | | | 25.40 | | | | 23.45 | | | | .27 | |
| First Quarter | | | 24.88 | | | | 22.06 | | | | 27.24 | | | | 23.40 | | | | .25 | | | | 26.04 | | | | 22.73 | | | | 25.45 | | | | 22.60 | | | | .27 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2013: | | | | | | | | | | | | | | | | | | | | | |
| 2016: | | | | | | | | | | | | | | | | | | | | | |
| Fourth Quarter | | | 26.64 | | | | 23.12 | | | | 28.38 | | | | 23.84 | | | | .25 | | | | 26.10 | | | | 23.21 | | | | 27.70 | | | | 23.45 | | | | .26 | |
| Third Quarter | | | 26.57 | | | | 23.00 | | | | 27.75 | | | | 23.23 | | | | .25 | | | | 26.50 | | | | 23.04 | | | | 27.25 | | | | 24.43 | | | | .26 | |
| Second Quarter | | | 24.74 | | | | 22.52 | | | | 24.92 | | | | 23.01 | | | | .25 | | | | 24.90 | | | | 22.50 | | | | 25.28 | | | | 23.33 | | | | .26 | |
| First Quarter | | | 26.70 | | | | 22.05 | | | | 25.06 | | | | 22.50 | | | | .25 | | | | 24.02 | | | | 22.00 | | | | 25.10 | | | | 22.11 | | | | .26 | |
The Company has paid quarterly cash dividends continuously since 1974. The current regular quarterly dividend rate is $.25of $.27 per share.share, effective February 2017, was increased to $.28 per share, effective February 2018. 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. At December 31, 2017, $104.9 million, or 25.1% of shareholders' equity, represented net assets of the Company's Insurance Subsidiaries which, at that time, could not be transferred in the form of dividends, loans or advances to the parent company because of minimum statutory capital requirements. However, management believes that these restrictions do not currently pose any material dividend payment concerns for the Company. The Board intends to address the subject of dividends at each of its future meetings consideringand will consider the Company’sCompany's earnings, returns on investments and its capital needs.
On August 31, 2017, the Company's Board of Directors authorized the reinstatement of its share repurchase program for up to 2,464,209 shares of the Company's Class A or Class B common stock. The Company may amend, suspend or discontinue the share repurchase program at any time.
Corporate Performance
The following graph shows a five year comparison of cumulative total return for the Corporation’sCompany's Class B common shares, the NASDAQ Insurance StockRussell 2000 Index and the Russell 2000 Index.Company's peer group as determined by management (the "BWINB Peer Group"). The basis of comparison is a $100 investment at December 31, 2009,2012, in each of (i) Baldwin & Lyons, Inc., (ii) Nasdaq Insurance Stocks,the Russell 2000 Index and (iii) the Russell 2000 Index.BWINB Peer Group. All dividends are assumed to be reinvested.
| | | | | | Period Ending | | | | |
| Index | | 12/31/12 | | | 12/31/13 | | | 12/31/14 | | | 12/31/15 | | | 12/31/16 | | | 12/31/17 | |
| Baldwin & Lyons, Inc. | | | 100.00 | | | | 119.26 | | | | 117.09 | | | | 113.91 | | | | 124.49 | | | | 123.93 | |
| Russell 2000 Index | | | 100.00 | | | | 138.82 | | | | 145.62 | | | | 139.19 | | | | 168.85 | | | | 193.58 | |
| Peer Group | | | 100.00 | | | | 160.92 | | | | 167.94 | | | | 182.04 | | | | 219.76 | | | | 238.34 | |
| | | Period Ending | |
| Index | | 12/31/09 | | | 12/31/10 | | | 12/31/11 | | | 12/31/12 | | | 12/31/13 | | | 12/31/14 | |
| Baldwin & Lyons, Inc. | | | 100.00 | | | | 104.70 | | | | 101.35 | | | | 116.08 | | | | 138.44 | | | | 135.91 | |
| NASDAQ Insurance Index | | | 100.00 | | | | 118.13 | | | | 124.78 | | | | 145.78 | | | | 191.19 | | | | 211.36 | |
| Russell 2000 | | | 100.00 | | | | 126.86 | | | | 121.56 | | | | 141.43 | | | | 196.34 | | | | 205.95 | |
| Baldwin & Lyons, Inc. Peer Group |
| | |
| Amerisafe, Inc. | | Heritage Insurance Holdings, Inc. |
| Atlas Financial Holdings, Inc. | | James River Group Holdings, Ltd. |
| Donegal Group Inc. | | NMI Holdings, Inc. |
| EMC Insurance Group Inc. | | Safety Insurance Group, Inc. |
| Employers Holdings, Inc. | | United Insurance Holdings Corp. |
| Federated National Holding Company | | Universal Insurance Holdings, Inc. |
| HCI Group, Inc. | | |
| Hallmark Financial Services, Inc. | | |
Item 6. SELECTED FINANCIAL DATA
| | | Year Ended December 31 | |
| | | 2014 | | | 2013 | | | 2012 | | | 2011 | | | 2010 | |
| | | (Dollars in thousands, except per share data) |
| | | | | | | | | | | | | | | | |
| Direct and assumed premiums written | | $ | 382,388 | | | $ | 369,476 | | | $ | 341,286 | | | $ | 334,526 | | | $ | 295,802 | |
| | | | | | | | | | | | | | | | | | | | | |
| Net premiums earned | | | 261,627 | | | | 252,743 | | | | 237,461 | | | | 244,570 | | | | 214,738 | |
| | | | | | | | | | | | | | | | | | | | | |
| Net investment income | | | 9,055 | | | | 8,770 | | | | 9,930 | | | | 10,729 | | | | 11,335 | |
| | | | | | | | | | | | | | | | | | | | | |
| Net gains (losses) on investments | | | 14,930 | | | | 23,515 | | | | 9,011 | | | | (17,803 | ) | | | 16,485 | |
| | | | | | | | | | | | | | | | | | | | | |
| Losses and loss expenses incurred | | | 159,596 | | | | 150,701 | | | | 138,088 | | | | 215,555 | | | | 145,952 | |
| | | | | | | | | | | | | | | | | | | | | |
| Net income (loss) | | | 29,717 | | | | 36,588 | | | | 31,919 | | | | (28,175 | ) | | | 25,015 | |
| | | | | | | | | | | | | | | | | | | | | |
Earnings per share -- net income (loss) 1 | | | 1.98 | | | | 2.45 | | | | 2.15 | | | | (1.90 | ) | | | 1.69 | |
| | | | | | | | | | | | | | | | | | | | | |
Cash dividends per share 2 | | | 1.00 | | | | 1.00 | | | | 1.00 | | | | 1.00 | | | | 2.25 | |
| | | | | | | | | | | | | | | | | | | | | |
Investment portfolio 3 | | | 757,421 | | | | 703,259 | | | | 681,856 | | | | 637,681 | | | | 635,174 | |
| | | | | | | | | | | | | | | | | | | | | |
| Total assets | | | 1,144,247 | | | | 1,072,270 | | | | 983,024 | | | | 905,294 | | | | 837,946 | |
| | | | | | | | | | | | | | | | | | | | | |
| Shareholders' equity | | | 399,496 | | | | 381,724 | | | | 346,712 | | | | 319,061 | | | | 368,735 | |
| | | | | | | | | | | | | | | | | | | | | |
Book value per share 1 | | | 26.67 | | | | 25.57 | | | | 23.25 | | | | 21.49 | | | | 24.90 | |
| | | | | | | | | | | | | | | | | | | | | |
Underwriting ratios 4 | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| Losses and loss expenses | | | 61.0 | % | | | 59.6 | % | | | 58.1 | % | | | 88.1 | % | | | 68.0 | % |
| | | | | | | | | | | | | | | | | | | | | |
| Underwriting expenses | | | 32.0 | % | | | 32.4 | % | | | 30.8 | % | | | 30.2 | % | | | 31.0 | % |
| | | | | | | | | | | | | | | | | | | | | |
| Combined | | | 93.0 | % | | | 92.0 | % | | | 88.9 | % | | | 118.3 | % | | | 99.0 | % |
| | | Year Ended December 31 | |
| | | 2017 | | | 2016 | | | 2015 | | | 2014 | | | 2013 | |
| | | (Dollars in thousands, except per share data) | |
| | | | | | | | | | | | | | | | |
| Gross premiums written | | $ | 504,737 | | | $ | 403,004 | | | $ | 383,553 | | | $ | 382,388 | | | $ | 369,476 | |
| | | | | | | | | | | | | | | | | | | | | |
| Net premiums earned | | | 328,145 | | | | 276,011 | | | | 263,335 | | | | 261,627 | | | | 252,743 | |
| | | | | | | | | | | | | | | | | | | | | |
| Net investment income | | | 18,095 | | | | 14,483 | | | | 12,498 | | | | 9,055 | | | | 8,770 | |
| | | | | | | | | | | | | | | | | | | | | |
| Net realized gains (losses) on investments | | | 19,686 | | | | 23,228 | | | | (1,261 | ) | | | 14,930 | | | | 23,515 | |
| | | | | | | | | | | | | | | | | | | | | |
| Losses and loss expenses incurred | | | 247,518 | | | | 186,481 | | | | 155,750 | | | | 159,596 | | | | 150,701 | |
| | | | | | | | | | | | | | | | | | | | | |
| Net income | | | 18,323 | | | | 28,945 | | | | 23,283 | | | | 29,717 | | | | 36,588 | |
| | | | | | | | | | | | | | | | | | | | | |
Earnings per share -- net income 1 | | | 1.21 | | | | 1.92 | | | | 1.55 | | | | 1.98 | | | | 2.45 | |
| | | | | | | | | | | | | | | | | | | | | |
| Cash dividends per share | | | 1.08 | | | | 1.04 | | | | 1.00 | | | | 1.00 | | | | 1.00 | |
| | | | | | | | | | | | | | | | | | | | | |
Investment portfolio 2 | | | 854,595 | | | | 749,501 | | | | 729,877 | | | | 757,421 | | | | 703,259 | |
| | | | | | | | | | | | | | | | | | | | | |
| Total assets | | | 1,357,016 | | | | 1,154,137 | | | | 1,085,771 | | | | 1,144,247 | | | | 1,072,270 | |
| | | | | | | | | | | | | | | | | | | | | |
| Shareholders' equity | | | 418,811 | | | | 404,345 | | | | 394,498 | | | | 399,496 | | | | 381,724 | |
| | | | | | | | | | | | | | | | | | | | | |
Book value per share 1 | | | 27.83 | | | | 26.81 | | | | 26.25 | | | | 26.67 | | | | 25.57 | |
1 Earnings and book value per share are adjusted for the dilutive effect of restricted stock options outstanding.
| 2 Includes extra dividend of $1.25 for 2010.
|
| 3 Includes money market instruments classified with2 Includes money market instruments classified as cash equivalents in the Consolidated Balance Sheets.
|
| 4 Data is for all coverages combined, does not include fee income and is presented based upon U.S. generally accepted accounting principles.
|
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The Company specializes in marketing and underwriting property, liability and workers compensation coverage for trucking and public transportation fleets, as well as coverage for trucking industry independent contractors. In addition, B&L offers workers' compensation coverage for a variety of operations outside the transportation industry. The Company operates as one reportable property and casualty insurance segment, offering a range of products and services, the most significant being commercial automobile and workers' compensation insurance products.
The Company determined that its business constituted one reportable property and casualty insurance segment as of January 1, 2017. During 2016 and prior years, the Company had two reportable segments – property and casualty insurance and reinsurance. The Company moved to a single reportable segment based on how its operating results are regularly reviewed by the Company's chief operating decision maker when making decisions about how resources are to be allocated to the segment and assessing its performance. The prior year segment information throughout this Annual Report on Form 10-K was updated to conform to the current year presentation.
On December 22, 2017, the U.S. Tax Cuts and Jobs Act of 2017 (the "U.S. Tax Act") was signed into law. The U.S. Tax Act lowered the U.S. corporate income rate from 35% to 21% effective January 1, 2018. GAAP requires the impact of tax legislation to be recognized in the period in which the law was enacted. As a result of the U.S. Tax Act, the Company recorded a tax benefit of $9.6 million related to the re-measurement of its deferred tax assets and liabilities during the fourth quarter of 2017.
Liquidity and Capital Resources
The primary sources of the Company’sCompany's liquidity are (1) funds generated from insurance operations, including net investment income, (2) proceeds from the sale of investments and (3) proceeds from maturing investments.
The Company generally experiences positive cash flow from operations resulting from the fact that premiumsoperations. Premiums are collected on insurance policies in advance of the disbursement of funds in payment of claims. Operating costs of the Company's Insurance Subsidiaries, other than loss and loss expense payments and commissions paid to related agency companies, generally average less than 33%one-third of net 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.provided and the timing of the claim payments. Because losses are often settled in periods subsequent to when they are incurred, operating cash flows may, at times, become negative as loss settlements on claim reserves established in prior years exceed current revenues. During 2014,The Company's cash flow relating to premiums is significantly affected by reinsurance programs in effect from operations totaled $30.2time-to-time, whereby the Company cedes both premium and risk to other insurance and reinsurance companies. These programs vary significantly among products and certain contracts call for reinsurance payment patterns, which do not coincide with the collection of premiums by the Company from its insureds.
On August 31, 2017, the Company's Board of Directors authorized the reinstatement of its share repurchase program for up to 2,464,209 shares of the Company's Class A or Class B common stock. The repurchases may be made in the open market or through privately negotiated transactions, from time-to-time, and in accordance with applicable laws, rules and regulations. On September 21, 2017, the Company entered into a stock repurchase plan for the purpose of repurchasing up to $17.5 million comparedof shares of its common stock, at various pricing thresholds, in accordance with guidelines specified under Rule 10b5-1 of the Exchange Act (the "Rule 10b5-1 Plan"). The Rule 10b5-1 Plan was established pursuant to, $35.9 million total for 2013.and as part of, the Company's share repurchase program and permitted shares to be repurchased in accordance with pre-determined criteria when repurchases would otherwise be prohibited, such as during self-imposed blackout periods, or under insider trading laws. The decrease in operatingRule 10b5-1 Plan expired on March 5, 2018. The Company's share repurchase program may be amended, suspended or discontinued at any time and does not commit the Company to repurchase any shares of its common stock. The Company has funded, and intends to continue to fund, the share repurchase program from cash flow resulted mainly from increased loss, LAEon hand. The actual number and value of the shares to be purchased will depend on the performance of the Company's stock price, market volume and other operating expense payments partially offset by higher premium volume in 2014.market conditions. For the year ended December 31, 2017, the Company paid $1.9 million to repurchase 84,960 shares of its Class B common stock under its share repurchase program.
For several years, the Company’sCompany's investment philosophy has emphasized the purchase of short-term bonds with superior quality and liquidity.shorter-duration bonds. As flat yield curves have not provided an incentive to lengthen maturities in recent years, the Company has continued to maintain its fixed maturity portfolio at short-term levels. The average contractual life of the Company’s bondCompany's fixed maturity and short-term investment portfolio remained level at 4.8increased slightly to 4.9 years during 2014.2017 from 4.5 years during 2016. The average duration of the Company’sCompany's fixed maturity portfolio remains much shorter than both the contractual maturity average and significantly shorter than the duration of the Company’sCompany's liabilities. The Company also remains an active participantOur investments in the equity securities market using capitalmarkets reflect a conservative, value driven approach, which is in excess of amounts considered necessary to fund current operations.has been implemented through partnerships, advisors and the Investment Committee. The long-term horizon for the Company’sCompany's equity investments allows it to invest in positions where ultimate value, and not short-term market fluctuation, is the primary focus. Investments made by the Company’sCompany's domestic Insurance Subsidiaries are regulated by guidelines promulgated by the National Association of Insurance CommissionersNAIC, which are designed to provide protection for both policyholders and shareholders.
Net cash flows from operations increased $61.3 million to $93.7 million for full year 2017 from $32.4 million in 2016. The Company’sincrease in operating cash flow was primarily related to higher premium volume in 2017. Net cash flows from operations decreased $5.8 million to $32.4 million for full year 2016 compared to $38.2 million in 2015. The decrease in operating cash flow resulted mainly from increased loss and loss adjustment expenses in 2016.
Net cash used in investing activities increased $47.0 million to $74.3 million for full year 2017, as compared to 2016. The increase in cash used in investing activities was the result of the normal timing of purchases and sales and maturities in our investment portfolio, partially offset by higher distributions from limited partnership investments and proceeds from maturities in 2017. Net cash used in investing activities increased $14.5 million to $27.4 million for full year 2016 compared to $12.8 million in 2015. The increase in cash used in investing activities was also the result of the normal timing of purchases and sales and maturities in our investment portfolio.
Net cash used in financing activities for full year 2017 consisted of regular cash dividend payments to shareholders of $16.3 million ($1.08 per share) and $1.9 million to repurchase 84,960 shares of the Company's Class B common stock. Financing activities for full year 2016 and 2015 consisted solely of the regular cash dividend payments to shareholders of $15.8 million ($1.04 per share) and $15.0 million ($1.00 per share), respectively.
The Company's assets at December 31, 20142017 included $59.2 million of investments included $62.3 million in short-termwithin cash and cash equivalent investments whichequivalents on the consolidated balance sheet that are readily convertible to cash without market penalty and an additional $129.6 million$54.6 million of fixed maturity investments (at par) maturing in less than one year. The Company believes that these liquid investments, plus the expected cash flow from current operations,premium collections, are more than sufficient to provide for projected claim payments and operating cost demands. In the event competitive conditions produce inadequate premium rates and the Company chooses to further restrict volume, the liquidity of its investment portfolio would permit management 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. In addition, the Company’sCompany's reinsurance program is structured to avoid significant cash outlays that accompany large losses.
The Company maintains a revolving line of credit with a $40.0 million limit and an expiration date of September 23, 2018. Interest on this line of credit is referenced to LIBOR and can be fixed for periods of up to one year at the Company's option. Outstanding drawings on this line of credit were $20.0 million as of December 31, 2017 and December 31, 2016. At December 31, 2017, the effective interest rate was 2.65%. The Company had $20.0 million remaining unused under the line of credit at December 31, 2017. The Company's revolving line of credit has three financial covenants, each of which were met as of December 31, 2017. The three financial covenants relate to a minimum GAAP net worth, a minimum statutory surplus and a minimum A.M. Best rating.
Net premiums written by the Company’sCompany's Insurance Subsidiaries for 20142017 equaled approximately 66%84% of the combined statutory surplus of these subsidiaries, a level consistent with the past several years.higher premiums written. Premium writings of up to 100% and in some cases up to 200% of surplus are generally considered acceptable by regulatory authorities. Further, the statutory capital of each of the Insurance Subsidiaries substantially exceedsexceeded minimum risk based capital requirements set by the National AssociationNAIC as of Insurance Commissioners.December 31, 2017. Accordingly, the Company has the ability to significantly increase its business without seeking additional capital to meet regulatory guidelines.
At December 31, 2014, $94.92017, $104.9 million, or 24%25.1% of shareholders’shareholders' equity, represented net assets of the Company’sCompany's Insurance Subsidiaries which, at that time, could not be transferred in the form of dividends, loans or advances to the parent company because of minimum statutory capital requirements. However, managementAt December 31, 2017, $59.1 million may be transferred by dividend or loan to the parent company without approval by, or prior notification to, regulatory authorities. An additional $256.4 million of shareholders' equity of the Insurance Subsidiaries could be advanced or loaned to the parent company with prior notification to, and approval from, regulatory authorities, although transfers of this size would not be practical. The Company believes that these restrictions do not currently pose noany material liquidity concerns forto the Company. TheWe expect financial strength and stability of the subsidiariesInsurance Subsidiaries to permit ready access by the parent company to short-term and long-term sources of credit. credit when needed. The Company maintains a $40parent company had cash and marketable securities valued at $26.5 million unsecured line of credit with $20 million of unused capacity at December 31, 2014.2017.
Results of Operations
20142017 Compared to 20132016
PremiumsGross premiums written by the Property and Casualty Insurance segment for 20142017 totaled $343.2$504.7 million, an increase of $28.4$101.7 million (9%(25.2%) from 2013. This2016. Net premiums earned totaled $328.1 million for 2017 compared to $276.0 million for 2016, an increase isof $52.1 million (18.9%). The increase in net premiums earned was primarily attributabledue to a $32.0an increase of $60.8 million (11%) increase in net premiums earned related to commercial automobile products and $3.7 million higher net premiums earned related to workers' compensation products, which were consistent with the Company's growth strategy. These increases were partially offset by $8.1 million of lower premiums generated by fleet transportationreinsurance products, resultingreflective of management's decision to completely withdraw from the addition of several new accounts during 2014, rate increasesproperty catastrophe reinsurance market, and increased revenue and miles driven by our insureds, which is immediately reflected in premium. This increase was partially offset by a decrease of $10.0$3.9 million in premiums generated by primary professional liability reflectingearned from personal automobile products. The difference in the terminationpercentage change for premiums written compared to earned is reflective of products produced through a single managing general agency which had experienced unfavorable resultsthe normal differences in recent years. the financial statement recognition of earned premiums compared to written, as well as differences in reinsurance ceding rates on the mix of business in-force.
Premiums ceded to reinsurers on direct business averaged 34.5%30.0% of gross premiums written premium for 20142017, compared to 35.9%32.6% for 2013, with the decrease attributable2016. The percentage of premiums ceded to the above-describedreinsurance decreased as a result of changes in mix of business.
Premiums written by the Reinsurance segment totaled $39.2 million during 2014, a decrease of $15.5 million (28%) from 2013. Premiums generated by propertyCompany's reinsurance products decreased $13.0 million (45%), reflective of management’s decision to reduce exposures to property catastrophe losses. Further contributing to the Reinsurance segment decrease was a decreasestructure. The change in the Company’s book of professional liability reinsurance assumed.
After giving effect to changes in unearned premiums, consolidated net premiums earned, totaled $261.6 million for 2014 compared to $252.7 million for 2013, an increasegrowth in gross premiums written, was a function of 3.5%. The premium earned increase also reflectsadjustment provisions in the higher premium volume generated by the fleet transportation products mentioned aboveCompany's historical commercial automobile reinsurance treaties. This historical reinsurance structure, which was partially offset by decreased premium writtenrevised in the primary professional liability products.latest reinsurance renewal, causes an adjustment for ceded premiums when the ultimate loss estimate changes for a reinsurance treaty year.
Pre-tax investment income of $9.1$18.1 million during 20142017 was 3%24.9% higher than the 2013 total as available pre-tax2016 primarily due to higher interest rates leading to higher reinvestment yields began to levelfor core fixed income securities, increased dividends from equity securities and an increase in average funds invested assets continued to grow marginally. After taxresulting from positive cash flow. After-tax investment income of $12.7 million increased by 5%23.0% during 20142017 compared to the prior year reflecting athe above factors, as well as the mix inbetween taxable compared toand tax-exempt investment income.
Net gains on investments, before taxes, totaled $14.9$19.7 million in 20142017 compared to net gains on investments of $23.5$23.2 million during 2013. The 2014 results2016. Direct trading gains during 2017 were once again heavily influenced by direct trading results$8.2 million lower compared to the prior year. Other-than-temporary impairments of $0.4 million, netted with gains of $7.9 million in 2014 compared to gains of $13.6 million in 2013. In addition, limited partnership results produced gains of $7.1 million in 2014 compared to gains of $8.0 million during the prior year. Limited partnership ventures utilized by the Company are primarily engaged in the trading of public and private securities, including foreign securities and, to a lesser extent, small venture capital activities and real estate development. The aggregate of the Company’s share of gains in these entities represented a 10% appreciation in value for 2014 compared to a 13% appreciation in value for 2013. To the extent that accounting rules require the limited partnerships to include realized and unrealized gains or losses in their net income, the Company’s proportionate share of net income will include the results as reported to the Company by the various general partners. During 2014, the $7.1 million net gain was composed of $5.8 million attributable to an increase in unrealized gains and $1.3 million attributable to realized gains. Recoveries of $0.3$1.6 million on previously impaired available-for-sale securities that were sold in 20142017, are included in the net gains stated above. Investments in limited partnerships produced gains of $12.5 million in 2017, compared to gains of $2.5 million during the prior year. Limited partnership investments utilized by the Company are primarily engaged in long-short equities, private equity, country focused funds and real estate development as an alternative to direct equity investments. The aggregate of the Company's share of gains and losses in these entities represented a 16.3% appreciation in value for 2017, compared to a 3.3% increase in value for 2016.
Losses and loss expenses incurred during 20142017 increased $8.9$61.0 million (5.9%(32.7%) from 20132016 to $159.6$247.5 million, an increase generally consistent with the increased premium volume described abovedue primarily to adverse prior accident year development and reflects higher property catastrophe losses occurringgrowth in 2014.net premiums earned. The 20142017 consolidated loss and loss expense ratio was 61.0%75.4%, compared to 59.6%67.6% for 2013.2016. The Company's loss and loss expense ratios for major product lines are summarized in the following table:
| | 2014 | | 2013 |
| Fleet transportation | 58.8 | % | 63.0 | % |
| Private passenger automobile | 75.1 | | | 62.1 | |
| Professional liability | 158.3 | | | 126.6 | |
| Property reinsurance | 68.6 | | | 12.0 | |
| Casualty reinsurance | 46.0 | | | 60.8 | |
| Residual market and all other | 86.6 | | | 76.4 | |
| All lines | 61.0 | | | 59.6 | |
| | | 2017 | | | 2016 | |
| Fleet transportation | | | 73.9 | % | | | 63.4 | % |
| All other | | | 94.0 | | | | 95.5 | |
| All lines | | | 75.4 | | | | 67.6 | |
The lowerhigher loss ratio for Fleet Transportationfleet transportation during 2017 was the result of more favorable frequency and severity experience duringadverse loss development in the year as well asCompany's commercial auto related liability coverages from prior accident years. The prior year reserve savings. The increasedeficiency in 2017 increased the Private Passenger Automobile2017 calendar loss ratio is reflective of adverse weather conditions earlyby 5.9 percentage points compared to a 5.0 percentage point increase experienced in 2016 due to the prior year and increasesreserve deficiencies in frequency throughout the year. Unfavorable loss development on a single MGA produced program in Primary Professional Liability resulted in the increase in loss ratios reported in 2014. This program was terminated late in 2013 with inforce policies running off during 2014. The property reinsurance loss ratio for 2014 was impacted by a small number of catastrophic losses aggregating over $11 million.
2016.
The Company producedhad an overall savingsreserve deficiency on the handling of prior year claims during 20142017 of $10.4$19.2 million. This net savingsdeficiency is included in the computation of loss ratios shown in the previous table, as is the $5.6$13.8 million savings produced during 2013deficiency for 2016 on prior year claims. Separated by segment, a $5.4 million net savings attributable to the property and casualty insurance segment during 2014 was attributable to the Company's Fleet Transportation and Personal Automobile business with deficiencies in Primary Professional Liability and a discontinued line of Commercial Multi-Peril partially offsetting the savings. The $4.9 million savings attributable to the reinsurance segment in 2014 related largely to the casualty reinsurance business. Because of the high limits provided by the Company to its fleet transportation insureds, the length of time necessary to settle larger, more complex claims and the volatility of the fleet transportation liability insurance business, the Company believes it is important to take a conservative posture 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. Changes in both gross premium volumes and the Company's reinsurance structure for its fleet transportation business can have a significant impact on future loss developments and, as a result, loss and loss expense ratios and prior year reserve development may not be consistent year to year.
Other operating expenses for 2014,2017 increased $24.1 million (27.0%) to $113.6 million from $89.5 million in 2016. This increase was due primarily to an increase in commission expense as a result of the increase in premiums written and higher salary and salary related expenses, reflective of the Company's increased workforce in response to the continued expansion of the Company's products and services. Reinsurance ceded credits, included as an offset to other operating expenses, were 30.8% lower in 2017, resulting primarily from ceding a lower percentage of workers' compensation premium to reinsurers in our most recent reinsurance treaty.
Income tax benefit was $8.2 million for full year 2017 compared to income tax expense of $14.1 million in 2016. The Company recorded a benefit of $9.6 million related to the re-measurement of deferred tax assets and liabilities in the fourth quarter of 2017 pursuant to the U.S. Tax Act. The Company's effective federal tax rate for 2017 was (81.0%) as compared to 32.8% in 2016. The effective tax rate for 2017 was affected primarily by the impact of the U.S. Tax Act discussed above.
Net income for 2017 decreased $10.6 million to $18.3 million compared to $28.9 million in 2016, with the decrease primarily attributable to the reserve strengthening that occurred during 2017, partially offset by the income tax benefit described above. Diluted earnings per share of $1.21 were recorded in 2017 compared to diluted earnings per share of $1.92 in 2016.
2016 Compared to 2015
Gross premiums written for 2016 totaled $403.0 million, an increase of $19.5 million (5.1%) from 2015. Net premiums earned totaled $276.0 million for 2016 compared to $263.3 million for 2015, an increase of $12.7 million (4.8%). The increase in premiums earned reflected higher premiums from fleet transportation products of $28.1 million as a result of the addition of several new accounts during 2016, rate increases and higher miles driven by our insureds, which was immediately reflected in premiums earned. These increases were partially offset by $9.7 million of lower premiums generated by property reinsurance products reflective of management's decision to completely withdraw from the property catastrophe reinsurance market and a decrease of $6.6 million in premiums earned by primary professional liability and personal automobile, which reflected the Company's strategic initiatives of reducing exposures in these products.
Premiums ceded to reinsurers averaged 32.6% of gross written premiums for 2016, compared to 33.6% for 2015, with the variation attributable to a fluctuation in the mix of business as well as reinsurance treaty changes.
Pre-tax investment income of $14.5 million during 2016 was 16% higher than 2015, reflecting an increased allocation to higher-yielding bonds and increases in average invested assets. After tax investment income increased by 15% during 2016 compared to the prior year reflecting the mix between taxable and tax-exempt investment income.
Net gains on investments, before taxes, totaled $23.2 million in 2016 compared to net pre-tax losses on investments of $1.3 million during 2015. The 2016 results were heavily influenced by direct trading results, with gains of $13.3 million in 2016 compared to direct trading gains of $4.5 million in 2015. In addition, our investments in limited partnerships produced gains (appreciation) of $2.5 million in 2016, compared to losses (depreciation) of $1.7 million during the prior year. Limited partnership investments utilized by the Company are primarily engaged in long-short equities, private equity, country focused funds and real estate development as an alternative to direct equity investments. The aggregate of the Company's share of gains and losses in these entities represented a 3.3% appreciation in value for 2016, compared to a 2% decrease in value for 2015. Other-than-temporary impairments of $5.7 million, netted with gains of $12.3 million on previously impaired available-for-sale securities that were sold in 2016, are included in the net gains stated above.
Losses and loss expenses incurred during 2016 increased $30.7 million (19.7%) from 2015 to $186.5 million, due primarily to prior accident year development and growth in net premiums earned. The 2016 consolidated loss and loss expense ratio was 67.6%, compared to 59.2% for 2015. The Company's loss and loss expense ratios for major product lines are summarized in the following table:
| | | 2016 | | | 2015 | |
| Fleet transportation | | | 63.4 | % | | | 55.7 | % |
| All other | | | 95.5 | | | | 96.4 | |
| All lines | | | 67.6 | | | | 59.2 | |
The higher loss ratio for fleet transportation during 2016 was the result of less favorable development related to prior accident year losses. The prior year reserve deficiency in 2016 increased the 2016 calendar year fleet transportation loss ratio by 5.0 percentage points compared to a 4.3 percentage point decrease experienced in 2015 due to the prior year reserve savings in 2015.
The Company had an overall reserve deficiency on prior year claims during 2016 of $13.8 million. This net deficiency is included in the computation of loss ratios shown in the previous table, as is the $10.1 million savings for 2015 on prior year claims. Because of the high limits provided by the Company to its fleet transportation insureds, the length of time necessary to settle larger, more complex claims and the volatility of the fleet transportation liability insurance business, the Company believes it is important to take a conservative posture in its reserving process. Changes in both gross premium volumes and the Company's reinsurance structure for its fleet transportation business can have a significant impact on future loss developments and, as a result, loss and loss expense ratios and prior year reserve development may not be consistent from year to year.
Other operating expenses for 2016, before credits for ceding allowances from reinsurers, increased $5.7$3.4 million (5%(3%) to $111.8$123.0 million, generally in line with increases in premium written. This increase iswas primarily due primarily to an increase in salary and salary related expenses, reflective of the Company’s growingCompany's increased workforce in response to the continued expansion of the Company’sCompany's products and services, and from higher expenses related to technological advances within the Company, both in the area of telematics and information technology.services. Reinsurance ceded credits were 14%16% higher in 2014,2016, resulting primarily from favorable changes to the terms of certain reinsurance treaties as well as increased business ceded to other companies under quota share reinsurance treaties which provide commissions to the Insurance Subsidiaries.treaties. After consideration of these expense offsets, operating expenses increased $2.7decreased $1.1 million, or 3%1%, from the prior year.
A portion of the Company’s fleet transportation business is produced by the direct sales efforts of Baldwin & Lyons, Inc. employees and, accordingly, this business does not incur commission expense on a consolidated basis. Rather, the expenses of the agency operations, including salaries and bonuses of salesmen, travel expenses, etc. is included in operating expenses. In general, commissions paid by the Insurance Subsidiaries to the parent company exceed related acquisition costs incurred in the production of the property and casualty insurance business. The ratio of net operating expenses of the Insurance Subsidiaries to net premiums earned was 32.0% in 2014 and 32.4% in 2013. Including the agency operations and corporate expenses, and after elimination of inter-company commissions, the ratio of operating expenses to operating revenue (defined as total revenue less gains or losses on investments) was 31.8% for 2014 compared with 31.9% for 2013.
The effective federal tax rate on the consolidated pre-tax income for 20142016 was 33.1%.32.8% as compared to 31.4% in 2015. The effective rate differs from the normal statutory rate primarily as a result of tax-exempt investment income.
Net income for 2014 of $29.72016 increased $5.6 million compares to net income of $36.6$28.9 million during 2013.with the increase primarily attributable to realized investment gains. Diluted earnings per share of $1.98$1.92 were recorded in 20142016 compared to per share income of $2.45 in 2013.
2013 Compared to 2012
Premiums written by the Property and Casualty Insurance segment for 2013 totaled $314.8 million, an increase of $30.6 million (11%) from 2012. This increase is primarily attributable to a $50.2 million (21%) increase in premiums generated by fleet transportation products resulting from increased revenue and miles driven by our insureds, which is immediately reflected in premium, rate increases and the addition of several new accounts during 2013. This increase was partially offset by a decrease of $21.1 million in premiums generated by commercial multi-peril business as the result of management’s decision to exit this business as part of its program to reduce property catastrophe exposures. Premiums ceded to reinsurers on direct business averaged 35.9% for 2013 compared to 37.1 % for 2012, with the decrease attributable to the above described changes in mix of business.
Premiums written by the Reinsurance segment totaled $54.7 million during 2013, a decrease of $2.4 million (4%) from 2012. Premiums generated by property reinsurance products decreased $5.5 million (16%), reflective of management’s decision to reduce exposures to property catastrophe losses. Partially offsetting the property decrease was an increase of $3.1 million (14%) in the Company’s growing book of professional liability reinsurance assumed.
After giving effect to changes in unearned premiums, consolidated net premiums earned totaled $252.7 million for 2013 compared to $237.5 million for 2012, an increase of 6.4%. This increase is in line with the greater premium volume generated by the fleet transportation products mentioned above which were partially offset by decreased premium written in the commercial multi-peril and personal automobile products.
Pre-tax investment income of $8.8 million during 2013 was 12% lower than the 2012 total as pre-tax yields were down nearly 11% on average, reflecting the impact of continuing depressed worldwide available rates on the reinvestment of maturing fixed maturity investments and the redeployment of a portion of invested assets into securities that emphasize capital gains over interest income. After tax investment income decreased by a similar 12% during 2013, compared to the prior year.
Net gains on investments, before taxes, totaled $23.5 million in 2013 compared to net gains on investments of $9.0 million during 2012. The 2013 results were heavily influenced by direct trading results with gains of $13.6 million in 2013 compared to gains of $1.5 million in 2012. In addition, limited partnership results produced gains of $8.0 million in 2013 compared to gains of $7.0 million during the prior year. Limited partnership ventures utilized by the Company are primarily engaged in the trading of public and private securities, including foreign securities and, to a lesser extent, small venture capital activities and real estate development. The aggregate of the Company’s share of gains in these entities represented a 13% appreciation in value for both 2013 and 2012. To the extent that accounting rules require the limited partnerships to include realized and unrealized gains or losses in their net income, the Company’s proportionate share of net income will include the results as reported to the Company by the various general partners. During 2013, the $8.0 million net gain was composed of $3.0 million attributable to an increase in unrealized gains and $5.0 million attributable to realized gains. Recoveries of $1.7 million on previously impaired available-for-sale securities that were sold in 2013 are included in the net gains stated above.
Losses and loss expenses incurred during 2013 increased $12.6 million (9%) from 2012 to $150.7 million, an increase generally consistent with the increased premium volume described above. The 2013 consolidated loss and loss expense ratio was 59.6% compared to 58.1% for 2012. The Company's loss and loss expense ratios for major product lines are summarized in the following table:
| | 2013 | | 2012 |
| Fleet transportation | 63.0 | % | 66.8 | % |
| Private passenger automobile | 62.1 | | | 65.2 | |
| Commercial multi-peril | 94.0 | | | 45.9 | |
| Professional liability | 126.6 | | | 67.5 | |
| Property reinsurance | 12.0 | | | 11.1 | |
| Casualty reinsurance | 60.8 | | | 61.4 | |
| Residual market and all other | 76.4 | | | 98.2 | |
| All lines | 59.6 | | | 58.1 | |
The lower loss ratios for Fleet Transportation and Private Passenger Automobile in 2013 were the result of more favorable frequency and severity experience during the year. The increase in the Commercial Multi-Peril loss ratio is associated with higher than expected liability losses on the runoff of this terminated business line. Unfavorable loss development on a single MGA produced program in Primary Professional Liability resulted in the increase in loss ratios reported in 2013. This program was terminated late in 2013 with inforce policies running off during 2014. The property reinsurance loss ratio for 2013 was consistent with the 2012 ratio due to the lack of any major catastrophic losses to the Company in either year.
The Company produced an overall savings on the handling of prior year claims during 2013 of $5.6 million. This net savings is included in the computation of loss ratios shown in the previous table, as is the $9.9 million savings produced during 2012 on prior year claims. The $1.7 million net savings attributable to the property and casualty insurance segment during 2013 was attributable to the Company's Fleet Transportation and Personal Automobile business with deficiencies in Primary Professional Liability and Commercial Multi-Peril offsetting much of the other savings. The $3.9 million savings attributable to the reinsurance segment in 2013 related solely to property catastrophe business.
Other operating expenses for 2013, before credits for ceding allowances from reinsurers, increased $13.6 million (15%) to $106.2 million. This increase is due primarily to an increase in salary and salary related expenses, reflective of the Company’s growing workforce in response to the continued expansion of the Company’s products and services and to an increase in commission expenses, representing an increase in average commission rates from 15.4% to 16.4% due to higher profit commissions on favorable property reinsurance results.
Reinsurance ceded credits were 37% higher in 2013, resulting from favorable changes to the terms of certain reinsurance treaties as well as increased business ceded to other companies under quota share reinsurance treaties which provide commissions to the Insurance Subsidiaries. After consideration of these expense offsets, operating expenses increased $7.9 million, or 10% from the prior year.
The ratio of net operating expenses of the Insurance Subsidiaries to net premiums earned was 32.4% in 2013 and 30.8% in 2012. Including the agency operations and corporate expenses, and after elimination of inter-company commissions, the ratio of operating expenses to operating revenue (defined as total revenue less gains (losses) on investments) was 31.9% for 2013 compared with 30.6% for 2012 with the current year increase being largely attributable to higher salary expense as noted above.
The effective federal tax rate on the consolidated pre-tax income for 2013 was 33.4%. The effective rate differs from the normal statutory rate primarily as a result of tax-exempt investment income.
Net income for 2013 of $36.6 million compares to net income of $31.9 million during 2012. Diluteddiluted earnings per share of $2.45 were recorded$1.55 in 2013 compared to per share income of $2.15 in 2012.2015.
Critical Accounting Policies
The Company’sCompany's significant accounting policies which are material and/or subject to significant degrees of judgment are highlighted below.
Investment Valuation
All marketable securities are included in the Company’sCompany's balance sheets at current fair market value.
Approximately 66%64% of the Company’sCompany's assets are composed of investments at December 31, 2014.2017. Approximately 89%92% of these investments are publicly-traded, owned directly and have readily-ascertainable market values. The remaining 11%8% of investments are composed primarily of minority interests in several limited partnerships. These
limited partnerships are engaged in the trading of publiclong-short equities, private equity, country focused funds and non-public equity securities and debt, hedging transactions, real estate development and venture capital investment.as an alternative to direct equity investments. These partnerships, themselves, do not have readily-determinable market values. Rather, the values recorded are those provided to the Company by the respective partnerships based on the underlying assets of the partnerships. While a substantial portion of the underlying assets are publicly-traded securities, those which are not publically tradedpublically-traded have been valued by the respective partnerships using their experience and judgment.
Under FASB guidance, if a fixed maturity security is in an unrealized loss position and the Company has the intent to sell the security, or it is more likely than not that the Company will have to sell the security before recovery of its amortized cost basis, the decline in value is deemed to be other-than-temporary and is recorded to net realized losses on investments in the consolidated statements of operations.income. For impaired fixed maturity securities that the Company does not intend to sell or it is more likely than not that the Company will not have to sell such securities, but the Company expects that it will not fully recover the amortized cost basis, the credit component of the other-than-temporary impairment is recognized in net realized losses on investments in the consolidated statements of operationsincome and the non-credit component of the other-than-temporary impairment is recognized directly in shareholder’sshareholders' equity (accumulated other comprehensive income).
In determining if and when an equity security’ssecurity's decline in market value below cost is other-than-temporary, we first make an objective analysis of each individual equity security where current market value is less than cost. For any equity security where the unrealized loss exceeds 20% of original or adjusted cost and, where that decline has existed for a period of at least six months, the decline is treated as an other-than-temporary impairment, without any subjective evaluation as to possible future recovery. For individual issues where the decline in value is less than 20% but the amount of the decline is considered significant, we will also evaluate the market conditions, trends of earnings, price multiples and other key measures for the securities to determine if it appears that the decline is other-than-temporary. In those instances, the Company also considers its intent and ability to hold equity investments until recovery can be reasonably expected. Additionally, for any equity security where the decline has existed for a period of at least one year, the decline is treated as an other-than-temporary impairment. For any decline which is considered to be other-than-temporary, we recognize an impairment loss in the current period earnings as an investment loss. Declines which are considered to be temporary are recorded as a reduction in shareholders’shareholders' equity, net of related federal income tax credits.benefits.
It is important to note that all available for sale securities included in the Company’sCompany's financial statements are valued at current fair market values. The evaluation process for determination of other-than-temporary decline in value of investments, as described above, does not change these valuations but, rather, determines when a decline in value will be recognized in the income statement (other-than-temporary decline) as opposed to a charge to shareholders’shareholders' equity (temporary decline). Another seemingly inconsistent aspect of this accounting policy which is important to understand is that any subsequent recoveries in value of investments which have incurred other-than-temporary impairment adjustments are accounted for as unrealized gains (with credits to equity but not reflected in the income statement) until the security is actually disposed of or sold. At December 31, 2014, unrealized gains include $17.1 million of appreciation on investments previously adjusted for other-than-temporary impairment, compared to a cumulative total of $7.2 million of impairment write-downs at that date. This evaluation process is subject to risks and uncertainties since it is not always clear what has caused a decline in value of an individual security or since some declines may be associated with general market conditions or economic factors, which relate to an industry in general, but not necessarily to an individual issue. The Company has attempted to minimize many of these uncertainties by adopting a largely objective evaluation process as described above. However, to the extent that certain declines in value are reported as unrealized at December 31, 2014,2017, it is possible that future earnings charges will result should the declines in value increase or persist or should the security actually be disposed of while market values are less than cost. At December 31, 2014,2017, the total gross unrealized loss included in the Company’sCompany's investment portfolio was approximately $9.7$7.1 million. No individual issue constituted a material amount of this total. Had this entire amount been considered other-than-temporary at December 31, 2014,2017, there would have been no impact on total shareholders’shareholders' equity or book value since the decline in value of these securities was previously recognized as a reduction to shareholders’shareholders' equity.
Reinsurance Recoverable
Reinsurance ceded transactions were as follows for the years ended December 31 (dollars in thousands):
| | | 2017 | | | 2016 | | | 2015 | |
| Reinsurance recoverable | | $ | 318,331 | | | $ | 255,024 | | | $ | 215,888 | |
| Premium ceded (reduction to premium earned) | | | 145,201 | | | | 130,012 | | | | 128,697 | |
| Losses ceded (reduction to losses incurred) | | | 128,086 | | | | 108,656 | | | | 75,581 | |
| Reinsurance ceded credits (reduction to operating expenses) | | | 23,187 | | | | 33,512 | | | | 28,956 | |
| | | 2014 | | | 2013 | | | 2012 | |
| Premium ceded (reduction to premium earned) | | $ | 119,248 | | | $ | 113,882 | | | $ | 103,712 | |
| Losses ceded (reduction to losses incurred) | | | 105,891 | | | | 107,321 | | | | 90,899 | |
| Commissions from reinsurers (reduction to operating expenses) | | | 23,797 | | | | 20,822 | | | | 15,185 | |
A discussion of the Company’sCompany's reinsurance strategies is presented in Part I, Item 1, Business,"Business", of this Annual Report on page 3.Form 10-K.
Amounts recoverable under the terms of reinsurance contracts comprisecomprised approximately 19%24% of total Company assets as of December 31, 2014.2017. In order to be able to provide the high limits required by the Company’sCompany's insureds, we sharethe Company shares a significant amount of the insurance risk of the underlying contracts with various insurance entities through the use of reinsurance contracts. Some reinsurance contracts provide that a loss be shared among the Company and its reinsurers on a predetermined pro-rata basis (“quota-share”("quota-share"), while other contracts provide that the Company keep a fixed amount of the loss, similar to a deductible, with reinsurers taking all losses above this fixed amount (“("excess of loss”loss"). Some risks are covered by a combination of quota-share and excess of loss contracts. The computation of amounts due from reinsurers is based upon the terms of the various contracts and follows the underlying estimation process for loss and loss expense reserves, as described below. Accordingly, the uncertainties inherent in the loss and loss expense reserving process also affect the amounts recorded as recoverable from reinsurers. Estimation uncertainties are greatest for claims which have occurred but which have not yet been reported to the Company. Further, the high limits provided by certain of the Company’sCompany's insurance policies for fleet transportation liability, workers’workers' compensation and professional liability risks provide more variability in the estimation process than lines of business with lower coverage limits.
It should be noted, however, that a change in the estimate of amounts due from reinsurers on unpaid claims will not, in itself, result in charges or credits to losses incurred. This is because any change in estimated recovery follows the estimate of the underlying loss. Thus, it is the computation of the gross underlying loss that is critical.
As with any receivable, credit risk exists in the recoverability of reinsurance. This may be even more pronounced than in normal receivable situations since recoverable amounts are not generally due until the loss is settled which, in some cases, may be many years after the contract was written. If a reinsurer is unable, in the future, to meet its financial commitments under the terms of the contracts, the Company would be responsible to satisfy the reinsurer's portion of the loss. The financial condition of each of the Company’sCompany's reinsurers is vetted upon the execution of a given treaty and only reinsurers with the superior credit ratings available are utilized. However, as noted above, reinsurers are often not called upon to satisfy their obligations for several years and changes in credit worthiness can occur in the interim period. Reviews of the current financial strength of each reinsurer are made frequently and, should impairment in the ability of a reinsurer be determined to exist, current year operations would be charged in amounts sufficient to provide for the Company’sCompany's additional liability. Such charges are included in other operating expenses, rather than losses and loss expenses incurred, since the inability of the Company to collect from reinsurers is a credit loss rather than a deficiency associated with the loss reserving process.
Loss and Loss Expense Reserves
The Company’s loss and loss expense reserves for each segment are shown in the following table on both a gross (before consideration of reinsurance) and on a net of reinsurance basis at December 31, 2014 and 2013 (dollars in thousands).
| | | Direct and Assumed | | | Net | |
| Line of Business (Segment) | | 2014 | | | 2013 | | | 2014 | | | 2013 | |
| | | | | | | | | | | | | |
| Property and casualty insurance | | $ | 449,133 | | | $ | 408,469 | | | $ | 241,215 | | | $ | 227,322 | |
| Reinsurance | | | 56,969 | | | | 66,001 | | | | 54,369 | | | | 60,766 | |
| | | | | | | | | | | | | | | | | |
| | | $ | 506,102 | | | $ | 474,470 | | | $ | 295,584 | | | $ | 288,088 | |
The Company’sCompany's reserves for losses and loss expenses (“reserves”("reserves") are determined based on complex estimation processes using historical experience, current economic information and when necessary, available industry statistics. The Company’sCompany's claims range from the very routine private passenger automobile “fender bender”"fender benders" to the highly complex and costly third party bodily injury claimclaims involving large tractor-trailer rigs. Reserving for each class of claims requires a set of assumptions based upon historical experience, knowledge of current industry trends and seasoned judgment. The high limits provided in many of the Company’sCompany's policies provide for greater volatility in the reserving process for more serious claims. Court rulings, legislative actions and trends in jury awards also play a significant role in the estimation process of larger claims. The Company continuously reviews and evaluates loss developments subsequent to each measurement date and adjusts its reserve estimation assumptions, as necessary, in an effort to achieve the best possible estimate of the ultimate remaining loss costs at any point in time. Changes to previously established reserve amounts are charged or credited to losses and loss expenses incurred in the accounting periods in which they are determined. See Note C to the consolidated financial statements includesfor additional information relating to loss and loss adjustment expense reserve development.
The Company’sCompany's methods for determining loss and loss expense reserves are essentially identical for interim and annual reporting periods.
A detailed analysis and discussion for each of the above basic reserve categories follows.follows:
Reserves for known losses (Case reserves)
Each known claim, regardless of complexity, is handled by a claims adjuster experienced with claims of this nature and a “case”"case" reserve, appropriate for the individual loss occurrence, is established. For very routine “short-tail”"short-tail" claims, such as private passenger physical damage, the Company records an initial reserve that is based upon historical loss settlements adjusted for current trends. As information regarding the loss occurrence is gathered in the claim handling process, the initial reserve is adjusted to reflect the anticipated ultimate cost to settle the claim. For more complex claims, which can tend toward being “long-tail”"long-tail" in nature, an experienced claims adjuster will review the facts and circumstances surrounding the loss occurrence to make a determination of the reserve to be established. Many of the more complex claims involve litigation and necessitate an evaluation of potential jury awards, in addition to the factual information, to determine the value of each claim. Each claim is frequently monitored and the recorded reserve is increased or decreased relative to information gathered during the settlement life cycle.
Reserves for incurred but not reportedIBNR losses
The Company uses both standard actuarial techniques common to most insurance companies as well as proprietary techniques developed by the Company in consideration ofconnection with its specialty business products. For its short-tail lines of business, the Company uses predominantly the incurred or paid loss development factor methods. The Company has found that the use of accident quarter loss development triangles, rather than those based upon accident year, are most responsive to claim settlement trends and fluctuations in premium exposuresexposure for its short-tail lines. A minimum of 12 running accident quarters is used to project the reserve necessary for incurred but not reportedIBNR losses for its short-tail lines.
The Company also uses the loss development factor approach for its long-tail lines of business. A minimum of 15 accident years is included in the loss development triangles used to calculate link ratios and the selected loss development factors used to determine the reserves for incurred but not reportedIBNR losses. A minimum of 20 accident years is used for long-tail workers’workers' compensation reserve projections. Significant emphasis is placed on the use of tail factors for the Company’sCompany's long-tail lines of business.
For the Company’sCompany's fleet transportation risks, which are covered by regularly changing reinsurance agreements and which contain wide-ranging self-insured retentions (“SIR”("SIR"), traditional actuarial methods are supplemented by other methods, as described below, in consideration of the Company’sCompany's exposures to loss. In situations where the Company’sCompany's reinsurance structure, the insured’sinsured's SIR selections, policy volume, and other factors are changing, current accident period loss exposures may not be homogenous enough with historical loss data to allow for reliable projection of future developed losses. Therefore, the Company supplements the above-described actuarial methods with loss ratio reserving techniques developed from the Company’sCompany's extensive, proprietary databases to arrive at the reserve for IBNR losses incurred but not reported for the calendar/accident period under review. As losses for a given calendar/accident period develop with the passage of time, management evaluates such development on a monthly and quarterly basis and adjusts reserve factors, as necessary, to reflect current judgment with regard to the anticipated ultimate incurred losses. This process continues until all losses are settled for each period subject to this method.
Reserves for loss adjustment expenses
While certain of the Company’sCompany's products involve case basis reserving for allocated loss adjustment expenses, the majority of such reserves are determined on a bulk basis. The Company uses historical analysis of the ratios of allocated loss adjustment expenses paid to losses paid on closed claims to arrive at the expected ultimate incurred loss adjustment expense factors applicable to each affected product. Once developed, the factors are applied to the expected ultimate incurred losses, including IBNR, on all open claims. The resulting ultimate incurred allocated loss adjustment expense is then reduced by amounts paid to date on all open claims to arrive at the reserve for allocated loss adjustment expenses to be incurred in the future for the handling of specific claims.
For those loss adjustment expenses not specific to individual claims (general claims handling expenses referred to as unallocated loss adjustment expenses) the Company uses a variation of the standard industry loss adjustment expenses paid to losses paid (net of reinsurance) ratio analysis that equally weighs paid and incurred losses to establish the necessary reserves. The selected factors are applied to 100% of IBNR reserves and to case reserves with consideration given for that portion of loss adjustment expense already paid at the reserve measurement date. Such factors are monitored and revised, as necessary, on a quarterly basis.
The reserving process requires management to continuously monitor and evaluate the life cycle of claims based on the class of business and the nature of the individual losses. As previously noted, our claims vary widely in scope and complexity. Reserving for each class of claims requires a set of assumptions based upon historical experience, knowledge of current industry trends and seasoned judgment. The high limits provided in certain of the Company’sCompany's fleet transportation liability policies provide for greater volatility in the reserving process for more serious claims. Court rulings, legislative actions and trends in jury awards also play a significant role in the estimation process of larger claims. The Company continuously reviews and evaluates loss developments subsequent to each measurement date and adjusts its reserve estimations, as necessary, in an effort to achieve the best possible estimate of the ultimate remaining loss costs at any point in time.
Sensitivity Analysis - Potential impact on reserve volatility from changes in key assumptions
Management is aware of the potential for variation from the reserves established at any particular point in time. Savings or deficiencies could develop in future valuations of the currently established loss and loss expense reserve estimates under a variety of reasonably possible scenarios. The Company’sCompany's reserve selections are developed to be a “best estimate”"best estimate" of unpaid losslosses at a point in time and, due to the unique nature of our exposures, particularly in the large fleet transportation excess product, where insured’s policies of insurance combine large self-insured retentions with high policy limits, ranges of reserve estimates are not established during the reserving process. However, basic assumptions that could potentially impact future volatility of our valuations of current loss and loss expense reserve estimates include, but are not limited to, the following:
Consistency in the individual case reserving processesprocesses;
The selection of loss development factors in the establishment of bulk reserves for incurred but not reported losses and loss expensesexpenses;
Projected future loss trendtrend; and
Expected loss ratios for the current book of business, particularly the Company’sCompany's fleet transportation products, where the number of accounts insured, selected self-insured retentions,SIRs, policy limits and reinsurance structurestructures may vary widely from period to periodperiod.
Under reasonably possible scenarios, it is conceivable that the Company’sCompany's selected loss reserve estimates could be 10%, or more redundant or deficient. The majority of the Company’sCompany's reserves for losses and loss expenses, on either a gross or a net of reinsurance basis, relatesrelate to its fleet transportation products. Perhaps the most significant example of sensitivity to variation in the key assumptions is the loss ratio selection for the Company’sCompany's fleet transportation products for policies subject to certain major reinsurance treaties (approximately $152.5 million, or approximately 34% of carried direct reserves for directly produced property and casualty business).treaties. The following table presents the approximate impacts on gross and net loss reserves of both a hypothetical 10 percentage point and a hypothetical 20 percentage point increase or decrease in the loss factors actually utilized in the Company’sCompany's reserve determination at December 31, 2014.2017 for the prior six treaty periods, which covers exposures earned on policies written between July 3, 2011 and December 31, 2017. The Company’sCompany's selection of the range of values presented should not be construed as the Company’sCompany's prediction of future events, but rather simply an illustration of the impact of such events, should they occur:
occur.
| 10 Point Increase | 10 Point Decrease | 20 Point Increase | 20 Point Decrease |
Gross reserves | $54.8 million | $46.2 million | $109.9 million | $69.4 million |
Net reserves | $23.3 million | $20.5 million | $63.7 million | $29.7 million |
The variation in impact from loss ratio increases and decreases is attributable to minimum and maximum premium rate factors included in the various reinsurance contracts.
In between the minimum and maximum ceded premium provisions within the treaty terms, net premiums earned can be increased or decreased based on a change in loss expectation. The total impact to profitability in the same scenarios is shown below ($ in millions):
| | | 10% Loss Ratio Increase | | | 10% Loss Ratio Decrease | | | 20% Loss Ratio Increase | | | 20% Loss Ratio Decrease | |
| Gross Reserves | | $ | 61.1 | | | $ | (48.4 | ) | | $ | 122.3 | | | $ | (82.0 | ) |
| | | | | | | | | | | | | | | | | |
| Net Reserves | | $ | 17.9 | | | $ | (14.0 | ) | | $ | 34.3 | | | $ | (24.2 | ) |
| Net premiums earned | | $ | (27.2 | ) | | $ | 31.0 | | | $ | (29.6 | ) | | $ | 62.0 | |
| Cumulative Net Underwriting Income (Loss) | | $ | (45.1 | ) | | $ | 45.0 | | | $ | (63.9 | ) | | $ | 86.2 | |
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 is based on items of income and expense whichthat are reported in different years in the financial statements and tax returns and are measured at the tax rate in effect in the year the difference originated.
On December 22, 2017, the U.S. Tax Act was signed into law. The U.S. Tax Act lowered the U.S. corporate income tax rate from 35% to 21% effective January 1, 2018. GAAP requires the impact of tax legislation to be recognized in the period in which the law was enacted. As a result of the U.S. Tax Act, the Company recorded a tax benefit of $9.6 million related to the re-measurement of its deferred tax assets and liabilities during the fourth quarter of 2017.
Net deferred tax liabilities reported at December 31 are as follows (dollars in thousands):
| | | 2014 | | | 2013 | | | 2017 | | | 2016 | |
| Total deferred tax liabilities | | $ | (37,493 | ) | | $ | (34,377 | ) | | $ | (23,836 | ) | | $ | (24,969 | ) |
| Total deferred tax assets | | | 17,520 | | | | 17,526 | | | | 9,478 | | | | 13,557 | |
| Net deferred tax liabilities | | $ | (19,973 | ) | | $ | (16,851 | ) | | $ | (14,358 | ) | | $ | (11,412 | ) |
Deferred tax assets at December 31, 2014,2017 include approximately $11.0$6.8 million related to the timing of deductibility of loss and loss expense reserves, the majority of which relatesrelate to policy liability discounts required by the Internal Revenue Code, which are perpetual in nature and, in the absence of the termination of business, will not, in the aggregate, reverse to a material degree in the foreseeable future. An additional $2.0$0.8 million relates to impairment adjustments made to investments, as required by accounting regulations. The sizable unrealized gains in the Company’sCompany's investment portfolios would allow for the recovery of this deferred tax at any time. Unearned premiums discount and deferred ceding commissions represent $2.2$1.8 million and $0.5$0.6 million of deferred tax assets, respectively. The balance of deferred tax assets consists of various normal operating expense accruals and is not considered to be material. As a result of its analysis, management has determined that no valuation allowance is necessary at December 31, 2014.
2017.
FASB provides guidance for recognizing and measuring uncertain tax positions and prescribes a threshold condition that a tax position must meet for any of the benefit of the uncertain tax position to be recognized in the financial statements. Based on this guidance, management regularly analyzes tax positions taken or expected to be taken in a tax return based on the threshold condition prescribed. Tax positions that do not meet or exceed this threshold condition are considered uncertain tax positions. Interest related to uncertain tax positions, if any, would be recognized in income tax expense. Penalties, if any, related to uncertain tax positions would be recorded in income tax expenses.
- 33 -
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.
Impact of Inflation
To the extent possible, the Company attempts to recover the impact of inflation toon loss costs and operating expenses by increasing the premiums it charges. Within the fleet transportation business, a majority of the Company’sCompany's accounts are charged as a percentage of an insured’sinsured's gross revenue, mileage or payroll. As these charging bases increase with inflation, premium revenues are immediately increased. 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’sCompany's short-term and fixed investment portfolios are structured in direct response to available interest rates over the yield curve. As available market interest rates fluctuate in response to the presence or absence of inflation, the yields on the Company’sCompany's investments are impacted. Further, as inflation affects current market rates of return, previously committed investments might increase or decline in value depending on the type and maturity of investment (see additional comments underin Part II, Item 7A, "Quantitative and Qualitative Disclosures about Market Risk, following)Risk", in this Annual Report on Form 10-K).
Inflation must also be considered by the Company in the creation and review of loss and loss adjustment expense reserves, sinceas 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.
Contractual Obligations
The table below sets forth the amounts of the Company's contractual obligations at December 31, 2017.
| | | Payments Due by Period | |
| | | Total | | | Less than 1 year | | | 1 - 3 Years | | | 3 - 5 Years | | | More Than 5 Years | |
| | | (dollars in millions) | |
| Loss and loss expense reserves | | $ | 680.3 | | | $ | 238.1 | | | $ | 224.5 | | | $ | 81.6 | | | $ | 136.1 | |
| | | | | | | | | | | | | | | | | | | | | |
| Investment commitment | | | 1.4 | | | | 1.4 | | | | - | | | | - | | | | - | |
| | | | | | | | | | | | | | | | | | | | | |
| Operating leases | | | 0.7 | | | | 0.3 | | | | 0.4 | | | | - | | | | - | |
| | | | | | | | | | | | | | | | | | | | | |
| Borrowings | | | 20.0 | | | | 20.0 | | | | - | | | | - | | | | - | |
| | | | | | | | | | | | | | | | | | | | | |
| Total | | $ | 702.4 | | | $ | 259.8 | | | $ | 224.9 | | | $ | 81.6 | | | $ | 136.1 | |
The Company's loss and loss expense reserves do not have contractual maturity dates and the exact timing of the payment of claims cannot be predicted with certainty. However, based upon historical payment patterns, the above table presents an estimate of when we might expect our direct loss and loss expense reserves (without the benefit of reinsurance recoveries) to be paid. Timing of the collection of the related reinsurance recoverable, estimated to be $318.3 million at December 31, 2017, or 47% of the amounts presented in the above table, would approximate that of the above projected direct reserve payout but could lag behind such payments by several months in some instances.
The investment commitment in the above table relates to a maximum unfunded capital obligation for a limited partnership investment at December 31, 2017. The actual call dates for such funding could vary from that presented.
Borrowings made under the Company's line of credit can be called by the bank, under certain circumstances, with short notice. The Company's line of credit has a current expiration date of September 23, 2018; however, management expects that this line of credit will be renewed for a multi-year period prior to maturity.
Off-Balance Sheet Arrangements
The Company has no off-balance sheet arrangements.
Item 7A.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Market Risk
The Company operates 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, credit risks, equity security market prices and, to a lesser extent, foreign currency rate fluctuations. All of the Company's invested assets, with the exception of investments in limited partnerships, are classified as available for sale.
Based on the structure of the Company’sCompany's investment portfolio, the most potentially significant of the threefour identified market risks relates to prices in the equity security market. ThoughAlthough not the largest category of the Company's invested assets, equity securities have a high potential for short-term price fluctuation. The market value of the Company's equity positions at December 31, 20142017 was $162.1$201.8 million, or approximately 21%approximately:
• 24% of invested assets. the Company's consolidated investment portfolio of $854.6 million, and
• 48% of the Company's shareholders' equity.
This market valuation includes $83.3$71.0 million of appreciation over the adjusted cost basis of the equity security investments. 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, is the primary focus.
Reference is made to the discussion of limited partnership investments in Critical"Critical Accounting PoliciesPolicies" in Part II, Item 7 of this report.Annual Report on Form 10-K. All of the market risks attendant to equity securities apply to the underlying assets in these partnerships, and to a greater degree because of the generally more aggressive investment philosophies utilized by the partnerships. In addition, these investments are illiquid. There is no primary or secondary market on which these limited partnerships trade and, in most cases, the Company is prohibited from disposing of its limited partnership interests for some period of time and must seek approval from the general partner for any such disposal. Distributions of earnings from these partnerships are largely at the sole discretion of the general partners and distributions are generally not received by the Company for many years after the earnings have been reported. Finally, through the application of the equity method of accounting, the Company’sCompany's share of net income reported by the limited partnerships often includes significant amounts of unrealized appreciation on the underlying investments. As such, the likelihood that reported income from limited partnership investments will be ultimately returned to the Company in the form of cash is markedly lower than the Company’s other investments, where appreciation is recognized as income only when a security is actually sold.
The Company's fixed maturity portfolio totaled $451.8$521.9 million at December 31, 2014.2017. Approximately 49%28% of this portfolio is made up of U.S. Government and government agency obligations and state and municipal debt securities; 75% of the portfolio matures within 5 years;securities, and the average contractual maturity of the Company's fixed maturity investments is approximately 4.84.9 years with an average modified duration of approximately 2.02.3 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 investment maturities, even a 100 to 200 basis point increase in interest rates would not have even a moderatematerial impact on the Company's ability to conduct daily operations or to meet its obligations and would, in fact, result in significantly higher investment income in a relatively short period of time, as short term investments and maturing bonds could be reinvested in the higher yielding securities very quickly.
There is an inverse relationship between interest rate fluctuations and the fair value of the Company's fixed maturity investments. Additionally, the fair value of interest rate sensitive instruments may be affected by the financial strength of the issuer, prepayment options, relative values of alternative investments, liquidity of the investment, currency fluctuations for non-U.S. debt holdings and other general market conditions. The Company monitors its sensitivity to interest rate risk by measuring the change in fair value of its fixed maturity investments relative to hypothetical changes in interest rates.
The following tables present the estimated effects on the fair value of financial instruments at December 31, which2017 and 2016 that would result from an instantaneous change in yield rates of varying magnitudes on a static balance sheet to determine the effect such a change in rates would have on current fair value. The analysis presents the sensitivity of the fair value of the Company’sCompany's financial instruments to selected changes in market rates and prices. The range of changerates chosen reflects the Company’sCompany's view of changes that the Company believes are reasonably possible over a one-year period. The Company’sCompany's selection of the range of values chosen to represent changes in interest rates should not be construed as the Company’sCompany's prediction of future market events, but rather, as an illustration of the impact of such events, should they occur. The equity portfolio was compared to the S&P 500 index due to its correlation with the vast majority of the Company’sCompany's current equity portfolio. The limited partnership portfolio was compared to the S&P 500 and Indian BSE 500 indices due to their significant correlation with the vast majority of our limited partnership portfolio. As previously indicated, several other factors can impact the fair values of fixed maturity investments and, therefore, significant variations in market interest rates could produce quite different results from the hypothetical estimates presented below.
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The following tables present the estimated effects on the fair value of financial instruments at December 31, 2017 and 2016 due to an instantaneous changeincrease in yield rates of 100 basis points and a 10% decline in the S&P 500 and Indian BSE 500 indices (dollars in thousands).
| | | | | | Increase (Decrease) | |
| | | Fair | | | Interest | | | Equity | |
| | | Value | | | Rate Risk | | | Risk | |
| 2017 | | | | | | | | | |
| Fixed maturities | | | | | | | | | |
| Agency collateralized mortgage obligations | | $ | 16,586 | | | $ | (820 | ) | | $ | - | |
| Agency mortgage-backed securities | | | 27,075 | | | | (1,103 | ) | | | - | |
| Asset-backed securities | | | 43,469 | | | | (1,381 | ) | | | - | |
| Bank loans | | | 19,488 | | | | (794 | ) | | | - | |
| Certificates of deposit | | | 3,135 | | | | (83 | ) | | | - | |
| Collateralized mortgage obligations | | | 6,492 | | | | (200 | ) | | | - | |
| Corporate securities | | | 198,349 | | | | (5,126 | ) | | | - | |
| Mortgage-backed securities | | | 24,204 | | | | (772 | ) | | | - | |
| Municipal obligations | | | 96,650 | | | | (1,861 | ) | | | - | |
| Non-U.S. government obligations | | | 37,394 | | | | (959 | ) | | | - | |
| U.S. government obligations | | | 49,011 | | | | (886 | ) | | | - | |
| Total fixed maturities | | | 521,853 | | | | (13,985 | ) | | | - | |
| Equity securities: | | | | | | | | | | | | |
| Consumer | | | 46,578 | | | | - | | | | (4,658 | ) |
| Energy | | | 10,278 | | | | - | | | | (1,028 | ) |
| Financial | | | 45,470 | | | | - | | | | (4,547 | ) |
| Industrial | | | 25,402 | | | | - | | | | (2,540 | ) |
| Technology | | | 13,061 | | | | - | | | | (1,306 | ) |
| Funds (e.g. mutual funds, closed end funds, ETFs) | | | 50,291 | | | | - | | | | (5,029 | ) |
| Other | | | 10,683 | | | | - | | | | (1,068 | ) |
| Total equity securities | | | 201,763 | | | | - | | | | (20,176 | ) |
| Limited partnerships | | | 70,806 | | | | - | | | | (5,278 | ) |
| Short-term | | | 1,000 | | | | - | | | | - | |
| Total | | $ | 795,422 | | | $ | (13,985 | ) | | $ | (25,454 | ) |
| | | | | | | | | | | | | |
| 2016: | | | | | | | | | | | | |
| Fixed maturities | | | | | | | | | | | | |
| Agency collateralized mortgage obligations | | $ | 6,171 | | | $ | - | | | $ | - | |
| Agency mortgage-backed securities | | | 4,770 | | | | (202 | ) | | | - | |
| Asset-backed securities | | | 45,183 | | | | (1,577 | ) | | | - | |
| Bank loans | | | 10,349 | | | | - | | | | - | |
| Certificates of deposit | | | 3,117 | | | | (111 | ) | | | - | |
| Collateralized mortgage obligations | | | 9,104 | | | | (302 | ) | | | - | |
| Corporate securities | | | 142,683 | | | | (4,026 | ) | | | - | |
| Mortgage-backed securities | | | 24,571 | | | | (780 | ) | | | - | |
| Municipal obligations | | | 129,335 | | | | (3,028 | ) | | | - | |
| Non-U.S. government obligations | | | 24,681 | | | | (458 | ) | | | - | |
| U.S. government obligations | | | 91,940 | | | | (1,249 | ) | | | - | |
| Total fixed maturities | | | 491,904 | | | | (11,733 | ) | | | - | |
| Equity securities: | | | | | | | | | | | | |
| Consumer | | | 32,576 | | | | - | | | | (3,258 | ) |
| Energy | | | 12,842 | | | | - | | | | (1,284 | ) |
| Financial | | | 31,186 | | | | - | | | | (3,119 | ) |
| Industrial | | | 21,145 | | | | - | | | | (2,115 | ) |
| Technology | | | 8,858 | | | | - | | | | (886 | ) |
| Funds (e.g. mutual funds, closed end funds, ETFs) | | | 6,995 | | | | - | | | | (700 | ) |
| Other | | | 6,343 | | | | - | | | | (634 | ) |
| Total equity securities | | | 119,945 | | | | - | | | | (11,996 | ) |
| Limited partnerships | | | 76,469 | | | | - | | | | (5,542 | ) |
| Short-term | | | 1,500 | | | | - | | | | - | |
| Total | | $ | 689,818 | | | $ | (11,733 | ) | | $ | (17,538 | ) |
| | | | | | Increase (Decrease) | |
| | | Fair | | | Interest | | | Equity | |
| | | Value | | | Rate Risk | | | Risk | |
| 2014: | | | | | | | | | |
| Fixed maturities | | | | | | | | | |
| U.S. government obligations | | $ | 101,094 | | | $ | (1,208 | ) | | $ | - | |
| Residential mortgage-backed securities | | | 6,066 | | | | (198 | ) | | | - | |
| Commercial mortgage-backed securities | | | 36,440 | | | | (1,183 | ) | | | - | |
| State and municipal obligations | | | 113,777 | | | | (3,224 | ) | | | - | |
| Corporate securities | | | 166,966 | | | | (5,646 | ) | | | - | |
| Foreign government obligations | | | 27,466 | | | | (922 | ) | | | - | |
| Total fixed maturities | | | 451,809 | | | | (12,381 | ) | | | - | |
| Equity securities: | | | | | | | | | | | | |
| Financial institutions | | | 25,343 | | | | - | | | | (2,534 | ) |
| Industrial & miscellaneous | | | 136,764 | | | | - | | | | (13,676 | ) |
| Total equity securities | | | 162,107 | | | | - | | | | (16,210 | ) |
| Limited partnerships | | | 81,230 | | | | - | | | | (5,450 | ) |
| Short-term | | | 2,966 | | | | - | | | | - | |
| Total | | $ | 698,112 | | | $ | (12,381 | ) | | $ | (21,660 | ) |
| | | | | | | | | | | | | |
| 2013: | | | | | | | | | | | | |
| Fixed maturities | | | | | | | | | | | | |
| U.S. government obligations | | $ | 113,389 | | | $ | (1,666 | ) | | $ | - | |
| Residential mortgage-backed securities | | | 13,252 | | | | (759 | ) | | | - | |
| Commercial mortgage-backed securities | | | 28,565 | | | | (1,635 | ) | | | - | |
| State and municipal obligations | | | 115,250 | | | | (2,512 | ) | | | - | |
| Corporate securities | | | 137,215 | | | | (5,519 | ) | | | - | |
| Foreign government obligations | | | 23,879 | | | | (792 | ) | | | - | |
| Total fixed maturities | | | 431,550 | | | | (12,883 | ) | | | - | |
| Equity securities: | | | | | | | | | | | | |
| Financial institutions | | | 18,850 | | | | - | | | | (1,885 | ) |
| Industrial & miscellaneous | | | 126,978 | | | | - | | | | (12,698 | ) |
| Total equity securities | | | 145,828 | | | | - | | | | (14,583 | ) |
| Limited partnerships | | | 68,988 | | | | - | | | | (4,609 | ) |
| Short-term | | | 4,891 | | | | - | | | | - | |
| Total | | $ | 651,257 | | | $ | (12,883 | ) | | $ | (19,192 | ) |
The following tables present the estimated effects on the fair value of financial instruments at December 31, 2017 and 2016 due to an instantaneous changeincrease in yield rates of 150 basis points and a 15% decline in the S&P 500 and Indian BSE 500 indices (dollars in thousands).
| | | | | | Increase (Decrease) | |
| | | Fair | | | Interest | | | Equity | |
| | | Value | | | Rate Risk | | | Risk | |
| 2017 | | | | | | | | | |
| Fixed maturities | | | | | | | | | |
| Agency collateralized mortgage obligations | | $ | 16,586 | | | $ | (1,229 | ) | | $ | - | |
| Agency mortgage-backed securities | | | 27,075 | | | | (1,657 | ) | | | - | |
| Asset-backed securities | | | 43,469 | | | | (2,072 | ) | | | - | |
| Bank loans | | | 19,488 | | | | (1,192 | ) | | | - | |
| Certificates of deposit | | | 3,135 | | | | (125 | ) | | | - | |
| Collateralized mortgage obligations | | | 6,492 | | | | (299 | ) | | | - | |
| Corporate securities | | | 198,349 | | | | (7,690 | ) | | | - | |
| Mortgage-backed securities | | | 24,204 | | | | (1,158 | ) | | | - | |
| Municipal obligations | | | 96,650 | | | | (2,791 | ) | | | - | |
| Non-U.S. government obligations | | | 37,394 | | | | (1,438 | ) | | | - | |
| U.S. government obligations | | | 49,011 | | | | (1,329 | ) | | | - | |
| Total fixed maturities | | | 521,853 | | | | (20,980 | ) | | | - | |
| Equity securities: | | | | | | | | | | | | |
| Consumer | | | 46,578 | | | | - | | | | (6,987 | ) |
| Energy | | | 10,278 | | | | - | | | | (1,542 | ) |
| Financial | | | 45,470 | | | | - | | | | (6,821 | ) |
| Industrial | | | 25,402 | | | | - | | | | (3,810 | ) |
| Technology | | | 13,061 | | | | - | | | | (1,959 | ) |
| Funds (e.g. mutual funds, closed end funds, ETFs) | | | 50,291 | | | | - | | | | (7,544 | ) |
| Other | | | 10,683 | | | | - | | | | (1,602 | ) |
| Total equity securities | | | 201,763 | | | | - | | | | (30,265 | ) |
| Limited partnerships | | | 70,806 | | | | - | | | | (7,916 | ) |
| Short-term | | | 1,000 | | | | - | | | | - | |
| Total | | $ | 795,422 | | | $ | (20,980 | ) | | $ | (38,181 | ) |
| | | | | | | | | | | | | |
| 2016: | | | | | | | | | | | | |
| Fixed maturities | | | | | | | | | | | | |
| Agency collateralized mortgage obligations | | $ | 6,171 | | | $ | - | | | $ | - | |
| Agency mortgage-backed securities | | | 4,770 | | | | (303 | ) | | | - | |
| Asset-backed securities | | | 45,183 | | | | (2,365 | ) | | | - | |
| Bank loans | | | 10,349 | | | | - | | | | - | |
| Certificates of deposit | | | 3,117 | | | | (167 | ) | | | - | |
| Collateralized mortgage obligations | �� | | 9,104 | | | | (453 | ) | | | - | |
| Corporate securities | | | 142,683 | | | | (6,039 | ) | | | - | |
| Mortgage-backed securities | | | 24,571 | | | | (1,170 | ) | | | - | |
| Municipal obligations | | | 129,335 | | | | (4,542 | ) | | | - | |
| Non-U.S. government obligations | | | 24,681 | | | | (689 | ) | | | - | |
| U.S. government obligations | | | 91,940 | | | | (1,872 | ) | | | - | |
| Total fixed maturities | | | 491,904 | | | | (17,600 | ) | | | - | |
| Equity securities: | | | | | | | | | | | | |
| Consumer | | | 32,576 | | | | - | | | | (4,886 | ) |
| Energy | | | 12,842 | | | | - | | | | (1,926 | ) |
| Financial | | | 31,186 | | | | - | | | | (4,678 | ) |
| Industrial | | | 21,145 | | | | - | | | | (3,172 | ) |
| Technology | | | 8,858 | | | | - | | | | (1,329 | ) |
| Funds (e.g. mutual funds, closed end funds, ETFs) | | | 6,995 | | | | - | | | | (1,049 | ) |
| Other | | | 6,343 | | | | - | | | | (951 | ) |
| Total equity securities | | | 119,945 | | | | - | | | | (17,991 | ) |
| Limited partnerships | | | 76,469 | | | | - | | | | (8,312 | ) |
| Short-term | | | 1,500 | | | | - | | | | - | |
| Total | | $ | 689,818 | | | $ | (17,600 | ) | | $ | (26,303 | ) |
| | | | | | Increase (Decrease) | |
| | | Fair | | | Interest | | | Equity | |
| | | Value | | | Rate Risk | | | Risk | |
| 2014: | | | | | | | | | |
| Fixed maturities | | | | | | | | | |
| U.S. government obligations | | $ | 101,094 | | | $ | (1,800 | ) | | $ | - | |
| Residential mortgage-backed securities | | | 6,066 | | | | (297 | ) | | | - | |
| Commercial mortgage-backed securities | | | 36,440 | | | | (1,787 | ) | | | - | |
| State and municipal obligations | | | 113,777 | | | | (4,724 | ) | | | - | |
| Corporate securities | | | 166,966 | | | | (8,333 | ) | | | - | |
| Foreign government obligations | | | 27,466 | | | | (1,366 | ) | | | - | |
| Total fixed maturities | | | 451,809 | | | | (18,307 | ) | | | - | |
| Equity securities: | | | | | | | | | | | | |
| Financial institutions | | | 25,343 | | | | - | | | | (3,801 | ) |
| Industrial & miscellaneous | | | 136,764 | | | | - | | | | (20,515 | ) |
| Total equity securities | | | 162,107 | | | | - | | | | (24,316 | ) |
| Limited partnerships | | | 81,230 | | | | - | | | | (8,175 | ) |
| Short-term | | | 2,966 | | | | - | | | | - | |
| Total | | $ | 698,112 | | | $ | (18,307 | ) | | $ | (32,491 | ) |
| | | | | | | | | | | | | |
| 2013: | | | | | | | | | | | | |
| Fixed maturities | | | | | | | | | | | | |
| U.S. government obligations | | $ | 113,389 | | | $ | (2,483 | ) | | $ | - | |
| Residential mortgage-backed securities | | | 13,252 | | | | (1,105 | ) | | | - | |
| Commercial mortgage-backed securities | | | 28,565 | | | | (2,382 | ) | | | - | |
| State and municipal obligations | | | 115,250 | | | | (3,720 | ) | | | - | |
| Corporate securities | | | 137,215 | | | | (8,125 | ) | | | - | |
| Foreign government obligations | | | 23,879 | | | | (1,171 | ) | | | - | |
| Total fixed maturities | | | 431,550 | | | | (18,986 | ) | | | - | |
| Equity securities: | | | | | | | | | | | | |
| Financial institutions | | | 18,850 | | | | - | | | | (2,828 | ) |
| Industrial & miscellaneous | | | 126,978 | | | | - | | | | (19,047 | ) |
| Total equity securities | | | 145,828 | | | | - | | | | (21,875 | ) |
| Limited partnerships | | | 68,988 | | | | - | | | | (6,914 | ) |
| Short-term | | | 4,891 | | | | - | | | | - | |
| Total | | $ | 651,257 | | | $ | (18,986 | ) | | $ | (28,789 | ) |
Contractual Obligations
The table below sets forth the amounts of the Company's contractual obligations at December 31, 2014.
| | | Payments Due by Period | |
| | | Total | | | Less than 1 year | | | 1 - 3 Years | | | 3 - 5 Years | | | More Than 5 Years | |
| | | (dollars in millions) | |
| Loss and loss expense reserves | | $ | 506.1 | | | $ | 175.6 | | | $ | 149.3 | | | $ | 60.2 | | | $ | 121.0 | |
| | | | | | | | | | | | | | | | | | | | | |
| Investment commitments | | | 17.9 | | | | 17.9 | | | | - | | | | - | | | | - | |
| | | | | | | | | | | | | | | | | | | | | |
| Operating leases | | | 0.4 | | | | 0.1 | | | | 0.3 | | | | - | | | | - | |
| | | | | | | | | | | | | | | | | | | | | |
| Borrowings | | | 20.0 | | | | 20.0 | | | | - | | | | - | | | | - | |
| | | | | | | | | | | | | | | | | | | | | |
| Total | | $ | 544.4 | | | $ | 213.6 | | | $ | 149.6 | | | $ | 60.2 | | | $ | 121.0 | |
The Company’s loss and loss expense reserves do not have contractual maturity dates and the exact timing of the payment of claims cannot be predicted with certainty. However, based upon historical payment patterns, the above table presents an estimate of when we might expect our direct loss and loss expense reserves (without the benefit of reinsurance recoveries) to be paid. Timing of the collection of the related reinsurance recoverable, estimated to be $220.2 million at December 31, 2014, or 40% of the amounts presented in the above table, would approximate that of the above projected direct reserve payout but could lag such payments by several months in some instances.
The investment commitments in the above table relate to maximum unfunded capital obligations for limited partnership investments and unfunded bridge loan obligations at December 31, 2014. The actual call dates for such funding could vary from that presented.
Borrowings made under a line of credit can be called by the bank, under certain circumstances, with short notice. The line of credit has a current expiration of September 23, 2018; however, it is expected that this line of credit will be renewed for a multiple year period prior to maturity.
ANNUAL REPORT ON FORM 10-K
ITEM 8--FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
YEAR ENDED DECEMBER 31, 20142017
BALDWIN & LYONS, INC.
CARMEL, INDIANA
Report of Independent Registered Public Accounting Firm |
To the Shareholders and the Board of Directors of Baldwin & Lyons, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Baldwin & Lyons, Inc. and subsidiaries (the Company) as of December 31, 2017 and 2016, the related consolidated statements of income, comprehensive income, shareholders' equity and cash flows for each of the three years in the period ended December 31, 2017, and the related notes and financial statement schedules listed in the Index at Item 15 (a) (collectively referred to as the "consolidated financial statements"). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2017 and 2016, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2017, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated March 13, 2018 expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
We have served as the Company's auditor since 1970.
/s/ Ernst & Young LLP
Indianapolis, Indiana
March 13, 2018
| Consolidated Balance Sheets | | | | | | | |
| Baldwin & Lyons, Inc. and Subsidiaries | | | | | | | |
| | | | | | | | |
| | | | December 31 | |
| | | | 2017 | | | 2016 | |
| | | | (dollars in thousands, except share data) | |
| Assets | | | | | | | |
| Investments: | | | | | | | |
| Fixed maturities (Amortized cost: 2017, $521,017; 2016, $494,561) | | | $ | 521,853 | | | $ | 491,904 | |
| Equity securities (Cost: 2017, $130,751; 2016, $64,902) | | | | 201,763 | | | | 119,945 | |
| Limited partnerships (Affiliated: 2017, $43,586; 2016, $44,038) | | | | 70,806 | | | | 76,469 | |
| Short-term and other | | | | 1,000 | | | | 1,500 | |
| | | | | 795,422 | | | | 689,818 | |
| | | | | | | | | | |
| Cash and cash equivalents | | | | 64,680 | | | | 62,976 | |
| Accounts receivable--less allowance (2017, $484; 2016, $542) | | | | 87,551 | | | | 64,984 | |
| Accrued investment income | | | | 4,159 | | | | 3,882 | |
| Reinsurance recoverable | | | | 318,331 | | | | 255,024 | |
| Prepaid reinsurance premiums | | | | 4,578 | | | | 2,674 | |
| Deferred policy acquisition costs | | | | 5,608 | | | | 1,172 | |
| Property and equipment--less accumulated depreciation | | | | | | | | | |
| $ | (2017, 16,614; 2016, $15,328) | | | | 47,317 | | | | 47,225 | |
| Restricted cash and short-term investments | | | | 11,402 | | | | - | |
| Other assets | | | | 11,030 | | | | 23,779 | |
| Current federal income taxes recoverable | | | | 6,938 | | | | 2,603 | |
| | | | | $ | 1,357,016 | | | $ | 1,154,137 | |
| | | | | | | | | | | |
| Liabilities and Shareholders' Equity | | | | | | | | | |
| Reserves: | | | | | | | | | |
| Losses and loss expenses | | | $ | 680,274 | | | $ | 576,330 | |
| Unearned premiums | | | | 53,085 | | | | 21,694 | |
| | | | | | 733,359 | | | | 598,024 | |
| | | | | | | | | | | |
| Reinsurance payable | | | | 62,308 | | | | 43,150 | |
| Short-term borrowings | | | | 20,000 | | | | 20,000 | |
| Depository liabilities | | | | 3,050 | | | | 9,910 | |
| Accounts payable and other liabilities | | | | 105,130 | | | | 67,296 | |
| Deferred federal income taxes | | | | 14,358 | | | | 11,412 | |
| | | | | | 938,205 | | | | 749,792 | |
| Shareholders' equity: | | | | | | | | | |
| Common stock: | | | | | | | | | |
| Class A voting -- authorized 3,000,000 shares; | | | | | | | | | |
| outstanding -- 2017 - 2,623,109; 2016 - 2,623,109 shares | | | | 112 | | | | 112 | |
| Class B non-voting -- authorized 20,000,000 shares; | | | | | | | | | |
| outstanding -- 2017 - 12,423,518; 2016 - 12,460,900 shares | | | | 530 | | | | 532 | |
| Additional paid-in capital | | | | 55,078 | | | | 54,286 | |
| Unrealized net gains on investments | | | | 46,700 | | | | 34,051 | |
| Foreign exchange adjustment | | | | (309 | ) | | | (831 | ) |
| Retained earnings | | | | 316,700 | | | | 316,195 | |
| | | | | | 418,811 | | | | 404,345 | |
| | | | | $ | 1,357,016 | | | $ | 1,154,137 | |
See notes to consolidated financial statements.
| Consolidated Statements of Income | | | | | | | | | |
| Baldwin & Lyons, Inc. and Subsidiaries | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | Year Ended December 31 | |
| | | 2017 | | | 2016 | | | 2015 | |
| | | (dollars in thousands, except per share data) | |
| Revenue: | | | | | | | | | |
| Net premiums earned | | $ | 328,145 | | | $ | 276,011 | | | $ | 263,335 | |
| Net investment income | | | 18,095 | | | | 14,483 | | | | 12,498 | |
| Commissions and other income | | | 5,308 | | | | 5,275 | | | | 5,703 | |
| Net realized gains on investments, excluding | | | | | | | | | | | | |
| impairment losses | | | 19,835 | | | | 28,971 | | | | 6,439 | |
| Total other-than-temporary impairment losses on investments | | | (149 | ) | | | (5,743 | ) | | | (7,700 | ) |
| Net realized gains (losses) on investments | | | 19,686 | | | | 23,228 | | | | (1,261 | ) |
| | | | 371,234 | | | | 318,997 | | | | 280,275 | |
| Expenses: | | | | | | | | | | | | |
| Losses and loss expenses incurred | | | 247,518 | | | | 186,481 | | | | 155,750 | |
| Other operating expenses | | | 113,594 | | | | 89,462 | | | | 90,573 | |
| | | | 361,112 | | | | 275,943 | | | | 246,323 | |
| Income before federal income taxes (benefits) | | | 10,122 | | | | 43,054 | | | | 33,952 | |
| | | | | | | | | | | | | |
| Federal income taxes (benefits) | | | (8,201 | ) | | | 14,109 | | | | 10,669 | |
| Net income | | $ | 18,323 | | | $ | 28,945 | | | $ | 23,283 | |
| | | | | | | | | | | | | |
| Per share data: | | | | | | | | | | | | |
| Basic and diluted earnings | | $ | 1.21 | | | $ | 1.92 | | | $ | 1.55 | |
See notes to consolidated financial statements.
| Consolidated Statements of Comprehensive Income | | | | | | | | | |
| Baldwin & Lyons, Inc. and Subsidiaries | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | |
| | | | | | | |
| | | 2017 | | | 2016 | | | 2015 | |
| | | (dollars in thousands) | |
| | | | | | | | | | |
| Net income | | $ | 18,323 | | | $ | 28,945 | | | $ | 23,283 | |
| | | | | | | | | | | | | |
| Other comprehensive income (loss), net of tax: | | | | | | | | | | | | |
| Unrealized net gains (losses) on securities: | | | | | | | | | | | | |
| Unrealized holding net gains (losses) arising during the period | | | 17,340 | | | | 8,618 | | | | (12,639 | ) |
| Less: reclassification adjustment for net gains (losses) | | | | | | | | | | | | |
| included in net income | | | (4,691 | ) | | | (13,491 | ) | | | (277 | ) |
| | | | 12,649 | | | | (4,873 | ) | | | (12,916 | ) |
| | | | | | | | | | | | | |
| Foreign currency translation adjustments | | | 522 | | | | 235 | | | | (1,456 | ) |
| | | | | | | | | | | | | |
| Other comprehensive income (loss) | | | 13,171 | | | | (4,638 | ) | | | (14,372 | ) |
| | | | | | | | | | | | | |
| Comprehensive income | | $ | 31,494 | | | $ | 24,307 | | | $ | 8,911 | |
See notes to consolidated financial statements.
| Consolidated Statements of Shareholders' Equity | | | | | | | | | |
| Baldwin & Lyons, Inc. and Subsidiaries | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | 2017 | | | 2016 | | | 2015 | |
| | | (dollars in thousands) | |
| | | | | | | | | | |
| Shareholders' equity at beginning of year: | | $ | 404,345 | | | $ | 394,498 | | | $ | 399,496 | |
| | | | | | | | | | | | | |
| Net income | | | 18,323 | | | | 28,945 | | | | 23,283 | |
| | | | | | | | | | | | | |
| Other comprehensive income (loss) | | | 13,171 | | | | (4,638 | ) | | | (14,372 | ) |
| | | | | | | | | | | | | |
| Cash dividends paid to shareholders | | | (16,302 | ) | | | (15,803 | ) | | | (15,003 | ) |
| | | | | | | | | | | | | |
| Issuance of common stock | | | 1,154 | | | | 1,343 | | | | 1,094 | |
| | | | | | | | | | | | | |
| Repurchase of common shares | | | (1,880 | ) | | | - | | | | - | |
| | | | | | | | | | | | | |
| Shareholders' equity at end of year: | | $ | 418,811 | | | $ | 404,345 | | | $ | 394,498 | |
Report of Independent Registered Public Accounting Firm |
The Board of Directors and Shareholders of Baldwin & Lyons, Inc. |
We have audited the accompanyingSee notes to consolidated balance sheets of Baldwin & Lyons, Inc. and subsidiaries (the Company) as of December 31, 2014 and 2013, and the related consolidated statements of operations, comprehensive income, shareholders' equity and cash flows for each of the three years in the period ended December 31, 2014. Our audits also included the financial statement schedules listed in the Index at Item 15(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 the standards of the Public Company Accounting Oversight Board (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 financial statements referred to above present fairly, in all material respects, the consolidated financial position of Baldwin & Lyons, Inc. and subsidiaries at December 31, 2014 and 2013, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2014, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedules, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein. |
|
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Baldwin & Lyons, Inc. and subsidiaries’ internal control over financial reporting as of December 31, 2014, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated March 6, 2015 expressed an unqualified opinion thereon./s/ ERNST & YOUNG LLP
Indianapolis, IN
March 6, 2015
|
| Consolidated Balance Sheets | | | | | | | |
| Baldwin & Lyons, Inc. and Subsidiaries | | | | | | | |
| | | | | | | | |
| | | | December 31 | |
| | | | 2014 | | | 2013 | |
| | | | (dollars in thousands) | |
| Assets | | | | | | | |
| Investments: | | | | | | | |
| Fixed maturities | | | $ | 451,809 | | | $ | 431,550 | |
| Equity securities | | | | 162,107 | | | | 145,828 | |
| Limited partnerships | | | | 81,230 | | | | 68,988 | |
| Short-term and other | | | | 2,966 | | | | 4,891 | |
| | | | | 698,112 | | | | 651,257 | |
| | | | | | | | | | |
| Cash and cash equivalents | | | | 64,632 | | | | 59,297 | |
| Accounts receivable--less allowance (2014, $605; 2013, $615) | | | | 98,144 | | | | 100,830 | |
| Accrued investment income | | | | 3,682 | | | | 3,448 | |
| Reinsurance recoverable | | | | 220,221 | | | | 195,568 | |
| Prepaid reinsurance premiums | | | | 2,274 | | | | 1,057 | |
| Deferred policy acquisition costs | | | | 2,263 | | | | 2,319 | |
| Property and equipment--less accumulated depreciation | | | | | | | | | |
| $(2014, 13,777; 2013, $15,835) | | 43,815 | | | | 36,329 | |
| Other assets | | | | 9,413 | | | | 19,051 | |
| Current federal income taxes recoverable | | | | 1,691 | | | | 3,114 | |
| | | | | $ | 1,144,247 | | | $ | 1,072,270 | |
| | | | | | | | | | | |
| Liabilities and Shareholders' Equity | | | | | | | | | |
| Reserves: | | | | | | | | | |
| Losses and loss expenses | | | $ | 506,102 | | | $ | 474,470 | |
| Unearned premiums | | | | 35,019 | | | | 36,693 | |
| | | | | | 541,121 | | | | 511,163 | |
| | | | | | | | | | | |
| Reinsurance payable | | | | 46,338 | | | | 39,122 | |
| Short-term borrowings | | | | 20,000 | | | | 10,000 | |
| Depository liabilities | | | | 48,893 | | | | 57,544 | |
| Accounts payable and other liabilities | | | | 68,426 | | | | 55,866 | |
| Deferred federal income taxes | | | | 19,973 | | | | 16,851 | |
| | | | | | 744,751 | | | | 690,546 | |
| Shareholders' equity: | | | | | | | | | |
| Common stock, no par value: | | | | | | | | | |
| Class A voting -- authorized 3,000,000 shares; | | | | | | | | | |
| outstanding -- 2014 - 2,623,109; 2013 - 2,623,109 shares | | | | 112 | | | | 112 | |
| Class B non-voting -- authorized 20,000,000 shares; | | | | | | | | | |
| outstanding -- 2014 - 12,356,389; 2013 - 12,304,191 shares | | | | 527 | | | | 525 | |
| Additional paid-in capital | | | | 51,854 | | | | 50,594 | |
| Unrealized net gains on investments | | | | 51,840 | | | | 49,089 | |
| Foreign exchange adjustment | | | | 390 | | | | 1,401 | |
| Retained earnings | | | | 294,773 | | | | 280,003 | |
| | | | | | 399,496 | | | | 381,724 | |
| | | | | $ | 1,144,247 | | | $ | 1,072,270 | |
| Consolidated Statements of Operations | | | | | | | | | |
| Baldwin & Lyons, Inc. and Subsidiaries | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | Year Ended December 31 | |
| | | 2014 | | | 2013 | | | 2012 | |
| | | (dollars in thousands, except per share data) | |
| Revenue: | | | | | | | | | |
| Net premiums earned | | $ | 261,627 | | | $ | 252,743 | | | $ | 237,461 | |
| Net investment income | | | 9,055 | | | | 8,770 | | | | 9,930 | |
| Commissions and other income | | | 6,430 | | | | 5,944 | | | | 5,722 | |
| Net realized gains on investments, excluding | | | | | | | | | | | | |
| impairment losses | | | 15,619 | | | | 24,257 | | | | 9,899 | |
| Total other-than-temporary impairment losses on investments | | | (689 | ) | | | (744 | ) | | | (894 | ) |
| Portion of other-than-temporary impairment losses | | | | | | | | | | | | |
| recognized in other comprehensive income | | | - | | | | 2 | | | | 6 | |
| Net realized gains on investments | | | 14,930 | | | | 23,515 | | | | 9,011 | |
| | | | 292,042 | | | | 290,972 | | | | 262,124 | |
| Expenses: | | | | | | | | | | | | |
| Losses and loss expenses incurred | | | 159,596 | | | | 150,701 | | | | 138,088 | |
| Other operating expenses | | | 88,048 | | | | 85,361 | | | | 77,430 | |
| | | | 247,644 | | | | 236,062 | | | | 215,518 | |
| Income before federal income taxes | | | 44,398 | | | | 54,910 | | | | 46,606 | |
| | | | | | | | | | | | | |
| Federal income taxes | | | 14,681 | | | | 18,322 | | | | 14,687 | |
| Net income | | $ | 29,717 | | | $ | 36,588 | | | $ | 31,919 | |
| | | | | | | | | | | | | |
| Per share data: | | | | | | | | | | | | |
| Basic and diluted earnings | | $ | 1.98 | | | $ | 2.45 | | | $ | 2.15 | |
| Consolidated Statements of Comprehensive Income | | | | | | | | | |
| Baldwin & Lyons, Inc. and Subsidiaries | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | |
| | | | | | | |
| | | 2014 | | | 2013 | | | 2012 | |
| | | (dollars in thousands) | |
| | | | | | | | | | |
| Net income | | $ | 29,717 | | | $ | 36,588 | | | $ | 31,919 | |
| | | | | | | | | | | | | |
| Other comprehensive income, net of tax: | | | | | | | | | | | | |
| Unrealized net gains on securities: | | | | | | | | | | | | |
| Unrealized holding net gains arising during the period | | | 7,835 | | | | 23,711 | | | | 10,148 | |
| Less: reclassification adjustment for net gains | | | | | | | | | | | | |
| included in net income | | | (5,084 | ) | | | (10,089 | ) | | | (1,273 | ) |
| | | | 2,751 | | | | 13,622 | | | | 8,875 | |
| | | | | | | | | | | | | |
| Foreign currency translation adjustments | | | (1,011 | ) | | | (575 | ) | | | 217 | |
| | | | | | | | | | | | | |
| Other comprehensive income | | | 1,740 | | | | 13,047 | | | | 9,092 | |
| | | | | | | | | | | | | |
| Comprehensive income | | $ | 31,457 | | | $ | 49,635 | | | $ | 41,011 | |
Consolidated Statements of Shareholders' Equity | | | | | | | | | |
| Baldwin & Lyons, Inc. and Subsidiaries | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | 2014 | | | 2013 | | | 2012 | |
| | | (dollars in thousands) | |
| | | | | | | | | | |
| Shareholders' equity at beginning of year | | $ | 381,724 | | | $ | 346,712 | | | $ | 319,061 | |
| | | | | | | | | | | | | |
| Net income | | | 29,717 | | | | 36,588 | | | | 31,919 | |
| | | | | | | | | | | | | |
| Other comprehensive income | | | 1,740 | | | | 13,047 | | | | 9,092 | |
| | | | | | | | | | | | | |
| Cash dividends paid to shareholders | | | (14,947 | ) | | | (14,943 | ) | | | (14,886 | ) |
| | | | | | | | | | | | | |
| Issuance of common stock | | | 1,262 | | | | 320 | | | | 1,526 | |
| | | | | | | | | | | | | |
| Shareholders' equity at end of year: | | $ | 399,496 | | | $ | 381,724 | | | $ | 346,712 | |
Consolidated Statements of Cash Flows | | | | | | | | | |
| Baldwin & Lyons, Inc. and Subsidiaries | | | | | | | | | |
| | | | | | | | | | |
| | | 2014 | | | 2013 | | | 2012 | |
| | | (dollars in thousands) | |
| Operating activities | | | | | | | | | |
| Net income | | $ | 29,717 | | | $ | 36,588 | | | $ | 31,919 | |
| Adjustments to reconcile net income to net cash | | | | | | | | | | | | |
| provided by operating activities: | | | | | | | | | | | | |
| Change in accounts receivable and unearned premium | | | 3,230 | | | | (16,488 | ) | | | (13,089 | ) |
| Change in accrued investment income | | | (234 | ) | | | 939 | | | | (50 | ) |
| Change in reinsurance recoverable on paid losses | | | (2,785 | ) | | | (1,618 | ) | | | 537 | |
| Change in losses and loss expenses reserves net of reinsurance | | | 7,545 | | | | (1,264 | ) | | | (2,289 | ) |
| Change in other assets, other liabilities and current income taxes | | | (4,847 | ) | | | 29,892 | | | | 29,850 | |
| Amortization of net policy acquisition costs | | | 25,075 | | | | 26,592 | | | | 26,772 | |
| Net policy acquisition costs deferred | | | (25,019 | ) | | | (25,819 | ) | | | (25,285 | ) |
| Provision for deferred income taxes | | | 1,640 | | | | 939 | | | | 3,868 | |
| Bond amortization | | | 4,235 | | | | 5,068 | | | | 6,055 | |
| (Gain) loss on sale of property | | | 474 | | | | (27 | ) | | | 10 | |
| Depreciation | | | 4,797 | | | | 4,300 | | | | 4,981 | |
| Net realized gains on investments | | | (14,930 | ) | | | (23,515 | ) | | | (9,011 | ) |
| Compensation expense related to restricted stock | | | 1,262 | | | | 320 | | | | 1,526 | |
| Net cash provided by operating activities | | | 30,160 | | | | 35,907 | | | | 55,794 | |
| | | | | | | | | | | | | |
| Investing activities | | | | | | | | | | | | |
| Purchases of fixed maturities and equity securities | | | (288,283 | ) | | | (369,259 | ) | | | (320,434 | ) |
| Purchases of limited partnership interests | | | (6,886 | ) | | | (3,568 | ) | | | (2,154 | ) |
| Distributions from limited partnerships | | | 1,752 | | | | 2,528 | | | | 3,957 | |
| Proceeds from maturities | | | 98,714 | | | | 129,113 | | | | 150,652 | |
| Proceeds from sales of fixed maturities | | | 167,406 | | | | 207,723 | | | | 103,106 | |
| Proceeds from sales of equity securities | | | 19,263 | | | | 29,858 | | | | 8,674 | |
| Net sales (purchases) of short-term investments | | | 1,925 | | | | (690 | ) | | | (529 | ) |
| Decrease in principal of notes receivable from employees | | | - | | | | - | | | | 1,252 | |
| Purchases of property and equipment | | | (13,451 | ) | | | (28,607 | ) | | | (4,054 | ) |
| Proceeds from disposals of property and equipment | | | 693 | | | | 261 | | | | 228 | |
| Net cash used in investing activities | | | (18,867 | ) | | | (32,641 | ) | | | (59,302 | ) |
| | | | | | | | | | | | | |
| Financing activities | | | | | | | | | | | | |
| Dividends paid to shareholders | | | (14,947 | ) | | | (14,943 | ) | | | (14,886 | ) |
| Drawings on line of credit | | | 10,000 | | | | - | | | | - | |
| Net cash used in financing activities | | | (4,947 | ) | | | (14,943 | ) | | | (14,886 | ) |
| | | | | | | | | | | | | |
| Effect of foreign exchange rates on cash and cash equivalents | | | (1,011 | ) | | | (575 | ) | | | 217 | |
| | | | | | | | | | | | | |
| Increase (decrease) in cash and cash equivalents | | | 5,335 | | | | (12,252 | ) | | | (18,177 | ) |
| Cash and cash equivalents at beginning of year | | | 59,297 | | | | 71,549 | | | | 89,726 | |
| Cash and cash equivalents at end of year | | $ | 64,632 | | | $ | 59,297 | | | $ | 71,549 | |
Consolidated Statements of Cash Flows | | | | | | | | | |
| Baldwin & Lyons, Inc. and Subsidiaries | | | | | | | | | |
| | | | | | | | | | |
| | | 2017 | | | 2016 | | | 2015 | |
| | | (dollars in thousands) | |
| Operating activities | | | | | | | | | |
| Net income | | $ | 18,323 | | | $ | 28,945 | | | $ | 23,283 | |
| Adjustments to reconcile net income to net cash | | | | | | | | | | | | |
| provided by operating activities: | | | | | | | | | | | | |
| Change in accounts receivable and unearned premium | | | 2,678 | | | | (2,721 | ) | | | 22,939 | |
| Change in accrued investment income | | | (278 | ) | | | 108 | | | | (307 | ) |
| Change in reinsurance recoverable on paid losses | | | (446 | ) | | | 692 | | | | 4,458 | |
| Change in losses and loss expenses reserves net of reinsurance | | | 47,229 | | | | 23,568 | | | | 6,325 | |
| Change in other assets, other liabilities and current income taxes | | | 45,188 | | | | (8,063 | ) | | | (28,299 | ) |
| Amortization of net policy acquisition costs | | | 47,387 | | | | 18,085 | | | | 21,314 | |
| Net policy acquisition costs deferred | | | (51,824 | ) | | | (17,813 | ) | | | (20,495 | ) |
| Provision for deferred income taxes (benefits) | | | (3,866 | ) | | | 2,838 | | | | (1,819 | ) |
| Bond amortization | | | 1,865 | | | | 3,030 | | | | 3,388 | |
| Loss on sale of property and equipment | | | 235 | | | | 63 | | | | 18 | |
| Depreciation | | | 5,752 | | | | 5,521 | | | | 5,037 | |
| Net realized (gains) losses on investments | | | (19,686 | ) | | | (23,228 | ) | | | 1,261 | |
| Compensation expense related to restricted stock | | | 1,154 | | | | 1,343 | | | | 1,094 | |
| Net cash provided by operating activities | | | 93,711 | | | | 32,368 | | | | 38,197 | |
| | | | | | | | | | | | | |
| Investing activities | | | | | | | | | | | | |
| Purchases of fixed maturities and equity securities | | | (436,932 | ) | | | (400,670 | ) | | | (342,592 | ) |
| Purchases of limited partnership interests | | | (1,097 | ) | | | - | | | | (409 | ) |
| Distributions from limited partnerships | | | 19,230 | | | | 1,462 | | | | 4,494 | |
| Proceeds from maturities | | | 131,623 | | | | 78,691 | | | | 161,706 | |
| Proceeds from sales of fixed maturities | | | 148,652 | | | | 199,790 | | | | 117,338 | |
| Proceeds from sales of equity securities | | | 69,756 | | | | 88,773 | | | | 53,270 | |
| Net sales of short-term investments | | | 500 | | | | 11,258 | | | | 746 | |
| Purchases of property and equipment | | | (6,661 | ) | | | (7,725 | ) | | | (7,662 | ) |
| Proceeds from disposals of property and equipment | | | 582 | | | | 1,059 | | | | 277 | |
| Net cash used in investing activities | | | (74,347 | ) | | | (27,362 | ) | | | (12,832 | ) |
| | | | | | | | | | | | | |
| Financing activities | | | | | | | | | | | | |
| Dividends paid to shareholders | | | (16,302 | ) | | | (15,803 | ) | | | (15,003 | ) |
| Repurchase of common shares | | | (1,880 | ) | | | - | | | | - | |
| Net cash used in financing activities | | | (18,182 | ) | | | (15,803 | ) | | | (15,003 | ) |
| | | | | | | | | | | | | |
| Effect of foreign exchange rates on cash and cash equivalents | | | 522 | | | | 235 | | | | (1,456 | ) |
| | | | | | | | | | | | | |
| Increase (decrease) in cash and cash equivalents | | | 1,704 | | | | (10,562 | ) | | | 8,906 | |
| Cash and cash equivalents at beginning of year | | | 62,976 | | | | 73,538 | | | | 64,632 | |
| Cash and cash equivalents at end of year | | $ | 64,680 | | | $ | 62,976 | | | $ | 73,538 | |
| | | | | | | | | | | | | |
| Supplemental Disclosures of Cash Flow Information | | | | | | | | | | | | |
| Cash paid for income taxes, net of refunds | | $ | - | | | $ | 10,173 | | | $ | 14,500 | |
| Cash paid for interest | | $ | 456 | | | $ | 309 | | | $ | 286 | |
See notes to consolidated financial statements.
Notes to Consolidated Financial Statements
Baldwin & Lyons, Inc. and Subsidiaries
(Dollars in thousands, except share and per share data)
Note A - Summary of Significant Accounting Policies
Description of Business: Baldwin & Lyons, Inc. (the "Company"), based in Carmel, Indiana, is a specialty property-casualty insurer providing property, liability and workers compensation coverage for trucking and public transportation fleets, as well as coverage for trucking industry independent contractors. In addition, B&L offers workers' compensation coverage for a variety of operations outside the transportation industry. The Company operates as one reportable property and casualty insurance segment, offering a range of products and services, the most significant being commercial automobile and workers' compensation insurance products.
The Company determined that its business constituted one reportable property and casualty insurance segment as of January 1, 2017. During 2016 and prior years, the Company had two reportable segments – property and casualty insurance and reinsurance. The Company moved to a single reportable segment based on how its operating results are regularly reviewed by the Company's chief operating decision maker to make decisions about resources to be allocated to the segment and to assess its performance. The prior year segment information throughout this
Annual Report on Form 10-K was updated to conform to the current year presentation.
Basis of Presentation: The consolidated financial statements include the accounts of Baldwin & Lyons, Inc.the Company and its whollywholly- owned subsidiaries (the “Company"). All significant inter-companysubsidiaries. Inter-company 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 will 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 represent fair value and are based on quoted market prices, wherewhen available, or broker/dealer quotes for specific securities wherewhen quoted market prices are not available. Equity securities are carried at quoted market prices (fair value). The Company accounts for investments in limited partnerships using the equity method of accounting, which requires an investor in a limited partnership to record its proportionate share of the limited partnership’spartnership's net income. To the extent that thea limited partnership investees includeincludes both realized and unrealized investment gains or losses in theits determination of net income or loss, then the Company would also recognize, through its statements of operations, its proportionate share of the investee’slimited partnership's unrealized as well as realized investment gains or losses.
Other investments, if any, are carried at either market value or cost, depending on the nature of the investment. Short-term and other investments are carried at cost, which approximates their fair values.
Realized gains and losses on disposals of investments are recorded on the trade date, are determined by specific identification of cost of investments sold and are included in income. 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’shareholders' equity. Included within available for sale fixed maturity securities are insurance linked securities and convertible debt securities. The changes in fair values of insurance-linked securities and portionsPortions of the changes in fair values of convertible debt securities are reflected as a component of net realized gains (losses) on investments.
In accordance with the Financial Accounting Standard Board’s (“FASB”Board's ("FASB") other-than-temporary impairment (“OTTI”) guidance, if a fixed maturity security is in an unrealized loss position and the Company has the intent to sell the fixed maturity security, or it is more likely than not that the Company will have to sell the fixed maturity security before recovery of its amortized cost basis, the decline in value is deemed to be other-than-temporary and is recorded to net realized losses on investments in the consolidated statements of operations. For impaired fixed maturity securities that the Company does not intend to sell or in cases where it is more likely than not that the Company will not have to sell such securities, but the Company expects that it will not fully recover the amortized cost basis, the credit component of the other-than-temporary impairment is recognized in net realized losses on investments in the consolidated statements of operations and the non-credit component of the other-than-temporary impairment is recognized directly in shareholder’sshareholders' equity (accumulated other comprehensive income).
Note A - Significant Accounting Policies (continued)
The credit component of an other-than-temporary impairment is determined by comparing the net present value of projected future cash flows with the amortized cost basis of the fixed maturity security. The net present value is calculated by discounting the Company’sCompany's best estimate of projected future cash flows at the appropriate effective interest rate.
Note A - Significant Accounting Policies (continued)
The unrealized net gains or losses (net of applicable tax effect) related to equity securities are reflected directly in shareholders’shareholders' equity, unless a decline in value is determined to be other-than-temporary, in which case the loss is charged to income. In determining if and when a decline in market value below cost is other-than-temporary, an objective analysis is made of each individual security where current market value is less than cost. For any equity security where the unrealized loss exceeds 20% of original or adjusted cost, and where that decline has existed for six months, the decline is treated as an other-than-temporary impairment. Additionally, for any equity security where the decline has existed for a period of at least six months,one year, the decline is treated as an other-than-temporary impairment. Additionally, the Company takes into account any known subjective information in evaluating for impairment, without consideration toof the Company’sCompany's quantitative criteria defined above, as well as the Company’sCompany's intent and ability to retain the equity security for a period of time sufficient to allow for such recovery in fair value.
Property and Equipment: Property and equipment are carried at cost, less accumulated depreciation. Depreciation is computed principally by the straight-line method.
Goodwill and Other Intangible Assets: Goodwill is not amortized. Rather, it is tested for impairment in accordance with FASB guidance, at the reporting-unit level. Goodwill is tested annually (during the fourth quarter) or more often if events or circumstances, such as adverse changes in the business climate, indicate there may be impairment. No impairment was noted as a result of the 2017 impairment evaluation. Intangible assets determined to have finite lives, such as customer relationships and employment agreements, are amortized over their estimated useful lives in a manner that best reflects the economic benefits of the intangible asset. In addition, impairment testing is performed on these amortizing intangible assets if impairment indicators are noted.
Reserves for Losses and Loss Expenses: The reserves for losses and loss expenses minor portions 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. While actual results will differ from 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 premium taxes applicable to unearned premiums are deferred and expensed as the related premiums are earned. The Company does not defer acquisition costs, which are not directly variable with the production of premium. If it is determined that expected losses and deferred expenses will likely exceed the related unearned premiums, the asset representing deferred policy acquisition costs is reduced and an expense is charged against current operations to reflect any such premium deficiency. In the event that the expected premium deficiency exceeds deferred policy acquisition costs, an additional liability would be recorded with a corresponding expense to current operations for the amount of the excess premium deficiency. Anticipated investment income is considered in determining recoverability of deferred acquisition costs.
Reinsurance: Reinsurance premiums, commissions, expense reimbursements and reserves related to the Company's 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 earned. 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. Estimates of reinstatement premiums on reinsurance contracts covering catastrophic events are, to the extent reasonably determinable, recorded concurrently with the related loss.
Note A - Significant Accounting Policies (continued)
Should impairment in the ability of a reinsurer to satisfy its obligations to the Company be determined to exist, current year operations would be charged in amounts sufficient to provide for the Company’sCompany's additional liability. Such charges, when incurred, are included in other operating expenses, rather than losses and loss expenses incurred, since the inability of the Company to collect from reinsurers is a credit risk rather than a deficiency associated with the loss reserving process.
Note A - Significant Accounting Policies (continued)
The Company accounts for foreign and domestic reinsurance using the periodic method. Under the periodic method, premiums are recognized as revenue ratably over the contract term, and claims, including an estimate of claims incurred but not reported, are recognized as they occur.
Deferred Taxes: Deferred income tax assets and liabilities are recognized for temporary differences between the financial statement and tax return bases of assets and liabilities based on enacted tax rates and laws. The deferred tax benefits of the deferred tax assets are recognized to the extent realization of such benefits is more likely than not. Deferred income tax expense or benefit generally represents the net change in deferred income tax assets and liabilities during the year. Current income tax expense represents the tax liability associated with revenues and expenses currently taxable or deductible on various income tax returns for the year reported.
Restricted Stock: Restricted sharesShares of restricted stock vest ratably over the vesting period from the date of grant and certain shares of restricted stock are accelerated for retirement eligible recipients in accordance with the non-substantive, post-grant date vesting clause of Accounting StandardStandards Codification (“ASC”("ASC") Topic 715, Compensation-Retirement Benefits. Restricted stock is valued based on the closing price of the stock on the day the award is granted. Non-vested shares of restricted sharesstock will be forfeited should an executive’sexecutive's employment terminate for any reason other than death, disability, or retirement as defined by the Compensation Committee.Committee (the "Compensation Committee") of the Board of Directors (the "Board") of the Company.
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 dilutive effect, if any, of restricted stock awards outstanding. Basic earnings per share are presented exclusive of the effect of share-based awards outstanding.
Comprehensive Income: The Company records accumulated other comprehensive income from unrealized gains and losses on available-for-sale securities and from foreign exchange adjustments as a separate component of shareholders’shareholders' equity. Foreign exchange adjustments are generally not material and the Company has no defined benefit pension plan. A reclassification adjustment to other comprehensive income is made for gains or losses during the period included in net income.
Fair Value Measurements: The Company provides disclosures related to recurring and non-recurring fair value measurements with separate disclosures for the amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements, along with an explanation for the transfers. Additionally, separate disclosures are provided for purchases, sales, issuances and settlements on a gross basis for Level 3 fair value measurements as well as additional clarification for both the level of disaggregation reported for each class of assets or liabilities and disclosures of inputs and valuation techniques used to measure fair value for both recurring and non-recurring fair value measurements for assets and liabilities categorized as Level 2 or Level 3.
Recent Accounting Pronouncements:
In May 2014, the FASB issued Accounting Standards Update ("ASU") 2014-09, Revenue from Contracts with Customers (Topic 606), or ASU 2014-09, as amended by subsequently issued ASUs, to clarify the principles for recognizing revenue. While insurance contracts are not within the scope of this updated guidance, the Company's commission and fee income, other than that directly associated with insurance contracts, is subject to this updated guidance. The updated guidance requires an entity to recognize revenue as performance obligations are met, in order to reflect the transfer of promised goods or services to customers in an amount that reflects the consideration the
Note A - Significant Accounting Policies (continued)
entity is entitled to receive for those goods or services. The following steps are applied in the updated guidance: (1) identify the contract(s) with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract; and (5) recognize revenue when, or as, the entity satisfies a performance obligation. In August 2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, which deferred the effective date of ASU 2014-09 to the quarter ending March 31, 2018. The Company will use the modified retrospective method upon adoption in 2018. The Company has completed its evaluation of the impact this guidance will have on its consolidated financial statements and has performed a technical assessment of material customer contracts and has concluded the adoption of ASU 2014-09 will not result in any material adjustments and it will not have a material impact on the Company's consolidated financial statements.
In January 2016, the FASB issued ASU 2016-01, Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities, or ASU 2016-01. The amendments in ASU 2016-01 change the accounting for non-consolidated equity investments that are not accounted for under the equity method of accounting by requiring changes in fair value to be recognized in income. Under current guidance, changes in fair value for investments of this nature were recognized in accumulated other comprehensive income as a component of shareholders' equity. Additionally, ASU 2016-01 simplifies the impairment assessment of equity investments without readily determinable fair values; requires entities to use the exit price when estimating the fair value of financial instruments; and modifies various presentation disclosure requirements for financial instruments. ASU 2016-01 became effective for interim and annual reporting periods beginning after December 15, 2017. The effect of this guidance will be dependent on the unrealized gains or losses associated with the Company's equity investments. Such unrealized gains or losses will be recognized upon adoption as a cumulative-effect adjustment to retained earnings with future unrealized gains or losses recognized in the statement of income. Refer to Note B for a discussion of unrealized gains and losses (before income taxes) on non-consolidated equity investments of $71,012 currently recognized in other comprehensive income (loss).
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), or ASU 2016-02. Upon the effective date, ASU 2016-02 will supersede the current lease guidance in ASC Topic 840, Leases. Under the new guidance, lessees will be required to recognize for all leases, with the exception of short-term leases, a lease liability, which is a lessee's obligation to make lease payments arising from a lease, measured on a discounted basis. Concurrently, lessees will be required to recognize a right-of-use asset, which is an asset that represents the lessee's right to use, or control the use of, a specified asset for the lease term. ASU 2016-02 is effective for interim and annual reporting periods beginning after December 15, 2018, with early adoption permitted. The guidance is required to be applied using a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative periods presented in the financial statements. The Company does not expect the adoption of ASU 2016-02 to have a material impact on the Company's consolidated financial statements.
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, or ASU 2016-13. This update introduces a current expected credit loss model for measuring expected credit losses for certain types of financial instruments held at the reporting date based on historical experience, current conditions and reasonable supportable forecasts. ASU 2016-13 replaces the current incurred loss model for measuring expected credit losses, requires expected losses on available-for-sale debt securities to be recognized through an allowance for credit losses rather than as reductions in the amortized cost of the securities, and provides for additional disclosure requirements. ASU 2016-13 is effective for interim and annual reporting periods beginning after December 15, 2019, with early adoption permitted for interim and annual reporting periods beginning after December 15, 2018. The Company is currently evaluating the effects the adoption of ASU 2016-13 will have on its consolidated financial statements.
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. This update addresses the presentation and classification on the statement of cash flows for eight specific items, with the objective of reducing existing diversity in practice in how certain cash receipts and cash payments are presented and classified. ASU 2016-15 is effective for interim and annual reporting periods beginning after December 15, 2017, with early adoption permitted. We are currently evaluating the effects the adoption of ASU 2016-15 will have on our consolidated statements of cash flows, if any. The Company does not expect ASU 2016-18 to impact our consolidated balance sheet or consolidated statement of income.
Note A - Significant Accounting Policies (continued)
| Note B - Investments | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| The following is a summary of available for sale securities at December 31: | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | Net | |
| | | | | | Cost or | | | Gross | | | Gross | | | Unrealized | |
| | | Fair | | | Amortized | | | Unrealized | | | Unrealized | | | Gains | |
| | | Value | | | Cost | | | Gains | | | Losses | | | (Losses) | |
| 2014: | | | | | | | | | | | | | | | |
| Fixed maturities: | | | | | | | | | | | | | | | |
| U.S. government obligations | | $ | 101,094 | | | $ | 101,058 | | | $ | 108 | | | $ | (72 | ) | | $ | 36 | |
| Residential mortgage-backed securities | | | 6,066 | | | | 5,830 | | | | 273 | | | | (37 | ) | | | 236 | |
| Commercial mortgage-backed securities | | | 36,440 | | | | 36,210 | | | | 630 | | | | (400 | ) | | | 230 | |
| State and municipal obligations | | | 113,777 | | | | 113,133 | | | | 784 | | | | (140 | ) | | | 644 | |
| Corporate securities | | | 166,966 | | | | 170,822 | | | | 2,005 | | | | (5,861 | ) | | | (3,856 | ) |
| Foreign government obligations | | | 27,466 | | | | 28,332 | | | | 114 | | | | (980 | ) | | | (866 | ) |
| Total fixed maturities | | | 451,809 | | | | 455,385 | | | | 3,914 | | | | (7,490 | ) | | | (3,576 | ) |
| Equity securities: | | | | | | | | | | | | | | | | | | | | |
| Financial institutions | | | 25,343 | | | | 10,100 | | | | 15,303 | | | | (60 | ) | | | 15,243 | |
| Industrial & miscellaneous | | | 136,764 | | | | 68,678 | | | | 70,260 | | | | (2,174 | ) | | | 68,086 | |
| Total equity securities | | | 162,107 | | | | 78,778 | | | | 85,563 | | | | (2,234 | ) | | | 83,329 | |
| Total | | $ | 613,916 | | | $ | 534,163 | | | $ | 89,477 | | | $ | (9,724 | ) | | | 79,753 | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | Applicable federal income taxes | | | | (27,913 | ) |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | Net unrealized gains - net of tax | | | $ | 51,840 | |
| | | | | | | | | | | | | | | | | | | | | |
| 2013: | | | | | | | | | | | | | | | | | | | | |
| Fixed maturities: | | | | | | | | | | | | | | | | | | | | |
| U.S. government obligations | | $ | 113,389 | | | $ | 113,348 | | | $ | 81 | | | $ | (40 | ) | | $ | 41 | |
| Residential mortgage-backed securities | | | 13,252 | | | | 12,058 | | | | 1,334 | | | | (140 | ) | | | 1,194 | |
| Commercial mortgage-backed securities | | | 28,565 | | | | 28,406 | | | | 308 | | | | (149 | ) | | | 159 | |
| State and municipal obligations | | | 115,250 | | | | 115,278 | | | | 407 | | | | (435 | ) | | | (28 | ) |
| Corporate securities | | | 137,215 | | | | 136,991 | | | | 3,207 | | | | (2,983 | ) | | | 224 | |
| Foreign government obligations | | | 23,879 | | | | 23,689 | | | | 588 | | | | (398 | ) | | | 190 | |
| Total fixed maturities | | | 431,550 | | | | 429,770 | | | | 5,925 | | | | (4,145 | ) | | | 1,780 | |
| Equity securities: | | | | | | | | | | | | | | | | | | | | |
| Financial institutions | | | 18,850 | | | | 7,780 | | | | 11,171 | | | | (101 | ) | | | 11,070 | |
| Industrial & miscellaneous | | | 126,978 | | | | 64,307 | | | | 63,009 | | | | (338 | ) | | | 62,671 | |
| Total equity securities | | | 145,828 | | | | 72,087 | | | | 74,180 | | | | (439 | ) | | | 73,741 | |
| Total | | $ | 577,378 | | | $ | 501,857 | | | $ | 80,105 | | | $ | (4,584 | ) | | | 75,521 | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | Applicable federal income taxes | | | | (26,432 | ) |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | Net unrealized gains - net of tax | | | $ | 49,089 | |
In January 2017, the FASB issued ASU No. 2017-04, Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, or ASU 2017-04. This amendment removes Step 2 of the goodwill impairment test under current guidance. The new guidance requires an impairment charge to be recognized for the amount by which the carrying amount exceeds the reporting unit's fair value. ASU 2017-04 is effective for interim and annual reporting periods beginning after December 15, 2020, with early adoption permitted. The Company does not expect the guidance to have a material impact on its consolidated financial statements.
In February 2018, the FASB issued ASU 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220). This ASU allows for the option to reclassify from accumulated other comprehensive income ("AOCI") to retained earnings for stranded tax effects resulting from the newly enacted federal corporate income tax rate in the Tax Cuts and Jobs Act of 2017 (the "U.S. Tax Act"), which was enacted on December 22, 2017. The legislation included a reduction to the corporate income tax rate from 35 percent to 21 percent effective January 1, 2018. The amount of the reclassification would be the difference between the historical corporate income tax rate and the newly enacted 21 percent corporate income tax rate. ASU 2018-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company is still evaluating the impacts of this standard on its consolidated financial statements but intends to make this reclassification.
| Note B - Investments | | | | | | | | | | | | | | | |
| The following is a summary of available for sale securities at December 31: | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | Net | |
| | | | | | Cost or | | | Gross | | | Gross | | | Unrealized | |
| | | Fair | | | Amortized | | | Unrealized | | | Unrealized | | | Gains | |
| | | Value | | | Cost | | | Gains | | | Losses | | | (Losses) | |
| December 31, 2017 | | | | | | | | | | | | | | | |
| Fixed maturities | | | | | | | | | | | | | | | |
| Agency collateralized mortgage obligations | | $ | 16,586 | | | $ | 15,839 | | | $ | 818 | | | $ | (71 | ) | | $ | 747 | |
| Agency mortgage-backed securities | | | 27,075 | | | | 27,180 | | | | 47 | | | | (152 | ) | | | (105 | ) |
| Asset-backed securities | | | 43,469 | | | | 42,861 | | | | 749 | | | | (141 | ) | | | 608 | |
| Bank loans | | | 19,488 | | | | 19,271 | | | | 266 | | | | (49 | ) | | | 217 | |
| Certificates of deposit | | | 3,135 | | | | 3,124 | | | | 11 | | | | - | | | | 11 | |
| Collateralized mortgage obligations | | | 6,492 | | | | 6,079 | | | | 451 | | | | (38 | ) | | | 413 | |
| Corporate securities | | | 198,349 | | | | 198,419 | | | | 1,602 | | | | (1,672 | ) | | | (70 | ) |
| Mortgage-backed securities | | | 24,204 | | | | 23,656 | | | | 933 | | | | (385 | ) | | | 548 | |
| Municipal obligations | | | 96,650 | | | | 97,059 | | | | 322 | | | | (731 | ) | | | (409 | ) |
| Non-U.S. government obligations | | | 37,394 | | | | 37,971 | | | | 475 | | | | (1,052 | ) | | | (577 | ) |
| U.S. government obligations | | | 49,011 | | | | 49,558 | | | | - | | | | (547 | ) | | | (547 | ) |
| Total fixed maturities | | | | | | | | | | | 5,674 | | | | (4,838 | ) | | | 836 | |
| Equity securities: | | | | | | | | | | | | | | | | | | | | |
| Consumer | | | 46,578 | | | | 23,565 | | | | 24,031 | | | | (1,018 | ) | | | 23,013 | |
| Energy | | | 10,278 | | | | 6,763 | | | | 3,602 | | | | (87 | ) | | | 3,515 | |
| Financial | | | 45,470 | | | | 31,859 | | | | 13,937 | | | | (326 | ) | | | 13,611 | |
| Industrial | | | 25,402 | | | | 8,949 | | | | 16,793 | | | | (340 | ) | | | 16,453 | |
| Technology | | | 13,061 | | | | 5,768 | | | | 7,401 | | | | (108 | ) | | | 7,293 | |
| Funds (e.g. mutual funds, closed end funds, ETFs) | | | 50,291 | | | | 46,177 | | | | 4,153 | | | | (39 | ) | | | 4,114 | |
| Other | | | 10,683 | | | | 7,670 | | | | 3,313 | | | | (300 | ) | | | 3,013 | |
| Total equity securities | | | 201,763 | | | | 130,751 | | | | 73,230 | | | | (2,218 | ) | | | 71,012 | |
| | | | | | | | | | | | | | | | | | | | | |
| Total | | $ | 723,616 | | | $ | 651,768 | | | $ | 78,904 | | | $ | (7,056 | ) | | | 71,848 | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | Applicable federal income taxes | | | | (25,148 | ) |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | Net unrealized gains - net of tax | | | $ | 46,700 | |
Note B – Investments (continued)
| | | | | | | | | | | | | | | Net | |
| | | | | | Cost or | | | Gross | | | Gross | | | Unrealized | |
| | | Fair | | | Amortized | | | Unrealized | | | Unrealized | | | Gains | |
| | | Value | | | Cost | | | Gains | | | Losses | | | (Losses) | |
| December 31, 2016 | | | | | | | | | | | | | | | |
| Fixed maturities | | | | | | | | | | | | | | | |
| Agency collateralized mortgage obligations | | $ | 6,171 | | | $ | 6,000 | | | $ | 171 | | | $ | - | | | $ | 171 | |
| Agency mortgage-backed securities | | | 4,770 | | | | 4,751 | | | | 57 | | | | (38 | ) | | | 19 | |
| Asset-backed securities | | | 45,183 | | | | 45,207 | | | | 458 | | | | (482 | ) | | | (24 | ) |
| Bank loans | | | 10,349 | | | | 10,222 | | | | 149 | | | | (22 | ) | | | 127 | |
| Certificates of deposit | | | 3,117 | | | | 3,126 | | | | - | | | | (9 | ) | | | (9 | ) |
| Collateralized mortgage obligations | | | 9,104 | | | | 9,096 | | | | 290 | | | | (282 | ) | | | 8 | |
| Corporate securities | | | 142,683 | | | | 143,356 | | | | 1,643 | | | | (2,316 | ) | | | (673 | ) |
| Mortgage-backed securities | | | 24,571 | | | | 23,904 | | | | 1,132 | | | | (465 | ) | | | 667 | |
| Municipal obligations | | | 129,335 | | | | 130,204 | | | | 391 | | | | (1,260 | ) | | | (869 | ) |
| Non-U.S. government obligations | | | 24,681 | | | | 26,461 | | | | 230 | | | | (2,010 | ) | | | (1,780 | ) |
| U.S. government obligations | | | 91,940 | | | | 92,234 | | | | 74 | | | | (368 | ) | | | (294 | ) |
| Total fixed maturities | | | 491,904 | | | | 494,561 | | | | 4,595 | | | | (7,252 | ) | | | (2,657 | ) |
| Equity securities: | | | | | | | | | | | | | | | | | | | | |
| Consumer | | | 32,576 | | | | 15,231 | | | | 17,656 | | | | (311 | ) | | | 17,345 | |
| Energy | | | 12,842 | | | | 5,641 | | | | 7,203 | | | | (2 | ) | | | 7,201 | |
| Financial | | | 31,186 | | | | 22,417 | | | | 8,998 | | | | (229 | ) | | | 8,769 | |
| Industrial | | | 21,145 | | | | 6,239 | | | | 15,098 | | | | (192 | ) | | | 14,906 | |
| Technology | | | 8,858 | | | | 4,117 | | | | 4,769 | | | | (28 | ) | | | 4,741 | |
| Funds (e.g. mutual funds, closed end funds, ETFs) | | | 6,995 | | | | 6,930 | | | | 121 | | | | (56 | ) | | | 65 | |
| Other | | | 6,343 | | | | 4,327 | | | | 2,181 | | | | (165 | ) | | | 2,016 | |
| Total equity securities | | | 119,945 | | | | 64,902 | | | | 56,026 | | | | (983 | ) | | | 55,043 | |
| | | | | | | | | | | | | | | | | | | | | |
| Total | | $ | 611,849 | | | $ | 559,463 | | | $ | 60,621 | | | $ | (8,235 | ) | | | 52,386 | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | Applicable federal income taxes | | | | (18,335 | ) |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | Net unrealized gains - net of tax | | | $ | 34,051 | |
The following table summarizes, for fixed maturity and equity security investments in an unrealized loss position at December 31, the aggregate fair value and gross unrealized loss categorized by the duration those securities have been continuously in an unrealized loss position.position:
| | | 2017 | | | 2016 | |
| | | Number of Securities | | | Fair Value | | | Gross Unrealized Loss | | | Number of Securities | | | Fair Value | | | Gross Unrealized Loss | |
| Fixed maturity securities: | | | | | | | | | | | | | | | | | | |
| 12 months or less | | | 459 | | | $ | 313,421 | | | $ | (2,683 | ) | | | 397 | | | $ | 291,048 | | | $ | (4,380 | ) |
| Greater than 12 months | | | 112 | | | | 75,638 | | | | (2,155 | ) | | | 54 | | | | 32,054 | | | | (2,872 | ) |
| Total fixed maturities | | | 571 | | | | 389,059 | | | | (4,838 | ) | | | 451 | | | | 323,102 | | | | (7,252 | ) |
| Equity securities: | | | | | | | | | | | | | | | | | | | | | | | | |
| 12 months or less | | | 65 | | | | 46,654 | | | | (2,218 | ) | | | 35 | | | | 20,698 | | | | (983 | ) |
| Greater than 12 months | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
| Total equity securities | | | 65 | | | | 46,654 | | | | (2,218 | ) | | | 35 | | | | 20,698 | | | | (983 | ) |
| Total | | | 636 | | | $ | 435,713 | | | $ | (7,056 | ) | | | 486 | | | $ | 343,800 | | | $ | (8,235 | ) |
| | | 2014 | | | 2013 | |
| | | Number of Securities | | | Fair Value | | | Gross Unrealized Loss | | | Number of Securities | | | Fair Value | | | Gross Unrealized Loss | |
| Fixed maturity securities: | | | | | | | | | | | | | | | | | | |
| 12 months or less | | | 591 | | | $ | 176,756 | | | $ | (6,083 | ) | | | 451 | | | $ | 123,145 | | | $ | (3,105 | ) |
| Greater than 12 months | | | 140 | | | | 27,667 | | | | (1,407 | ) | | | 53 | | | | 18,249 | | | | (1,040 | ) |
| Total fixed maturities | | | 731 | | | | 204,423 | | | | (7,490 | ) | | | 504 | | | | 141,394 | | | | (4,145 | ) |
| Equity securities: | | | | | | | | | | | | | | | | | | | | | | | | |
| 12 months or less | | | 33 | | | | 13,538 | | | | (2,170 | ) | | | 10 | | | | 1,682 | | | | (204 | ) |
| Greater than 12 months | | | 3 | | | | 686 | | | | (64 | ) | | | 2 | | | | 1,980 | | | | (235 | ) |
| Total equity securities | | | 36 | | | | 14,224 | | | | (2,234 | ) | | | 12 | | | | 3,662 | | | | (439 | ) |
| Total | | | 767 | | | $ | 218,647 | | | $ | (9,724 | ) | | | 516 | | | $ | 145,056 | | | $ | (4,584 | ) |
Note B – Investments (continued)
Unrealized losses in the Company’sCompany's fixed maturity portfolio are generally the result of interest rate or foreign currency fluctuations as well as the disruption of credit markets occasioned by financial market turmoil such as that associated with recent oil price declines. The average unrealized loss for all fixed maturity securities in a loss position at December 31, 2014 is approximately 4% of original or adjusted cost.fluctuations. The Company does not intend to sell any fixed maturity securities which are in an unrealized loss position at December 31, 2017 and it is not more likely than not that the Company will have to sell any fixed maturity security before recovery of its amortized cost basis. For equity securities, the Company has evaluated the near-term prospects of the investments in relation to the severity and duration of the impairment and, based on that evaluation, the Company has the ability and intent to hold these investments for a period sufficient to allow for recovery of their fair value. Therefore,Accordingly, the Company does not believe theany unrealized losses represent an other-than-temporary impairment as of December 31, 2014.2017.
The fair value and the cost or amortized cost of fixed maturity investments at December 31, 2014,2017, organized by contractual maturity, is 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. Pre-refunded municipal bonds are classified based on their pre-refunded call dates.
| | | Fair Value | | | | | | Cost or Amortized Cost | | | | | | Fair Value | | | Cost or Amortized Cost | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| One year or less | | $ | 130,407 | | | | 28.9 | % | | $ | 130,322 | | | | 28.6 | % | | $ | 54,567 | | | | 10.5 | % | | $ | 54,777 | | | | 10.5 | % |
| Excess of one year to five years | | | 189,182 | | | | 41.9 | | | | 192,990 | | | | 42.4 | | | | 292,755 | | | | 56.1 | | | | 294,698 | | | | 56.6 | |
| Excess of five years to ten years | | | 47,209 | | | | 10.4 | | | | 48,176 | | | | 10.6 | | | | 61,087 | | | | 11.7 | | | | 60,366 | | | | 11.6 | |
| Excess of ten years | | | 9,377 | | | | 2.1 | | | | 8,744 | | | | 1.9 | | | | 2,909 | | | | 0.5 | | | | 2,914 | | | | 0.5 | |
| Total maturities | | | 376,175 | | | | 83.3 | | | | 380,232 | | | | 83.5 | | | | 411,318 | | | | 78.8 | | | | 412,755 | | | | 79.2 | |
| Asset-backed securities | | | 75,634 | | | | 16.7 | | | | 75,153 | | | | 16.5 | | | | 110,535 | | | | 21.2 | | | | 108,262 | | | | 20.8 | |
| | | $ | 451,809 | | | | 100.0 | % | | $ | 455,385 | | | | 100.0 | % | | $ | 521,853 | | | | 100.0 | % | | $ | 521,017 | | | | 100.0 | % |
Note B – Investments (continued)
Major categories of investment income for the years ended December 31 are summarized as follows:
| | | 2017 | | | 2016 | | | 2015 | |
| Interest on fixed maturities | | $ | 15,340 | | | $ | 13,254 | | | $ | 11,663 | |
| Dividends on equity securities | | | 4,611 | | | | 3,598 | | | | 3,445 | |
| Money market funds, Short-term and other | | | 471 | | | | 128 | | | | 32 | |
| | | | 20,422 | | | | 16,980 | | | | 15,140 | |
| Investment expenses | | | (2,327 | ) | | | (2,497 | ) | | | (2,642 | ) |
| Net investment income | | $ | 18,095 | | | $ | 14,483 | | | $ | 12,498 | |
| | | | 2014 | | | 2013 | | | 2012 | |
| Interest on fixed maturities | | | $ | 8,806 | | | $ | 9,023 | | | $ | 10,052 | |
| Dividends on equity securities | | | | 2,693 | | | | 2,166 | | | | 2,121 | |
| Money market funds, Short-term and other | | | 37 | | | | 49 | | | | 43 | |
| | | | | 11,536 | | | | 11,238 | | | | 12,216 | |
| Investment expenses | | | | (2,481 | ) | | | (2,468 | ) | | | (2,286 | ) |
| | Net investment income | | $ | 9,055 | | | $ | 8,770 | | | $ | 9,930 | |
- 53 -
Note B – Investments (continued)
Gains and losses on investments, including equity method earnings from limited partnerships, for the years ended December 31 are summarized below:
| | | 2017 | | | 2016 | | | 2015 | |
| Fixed maturities: | | | | | | | | | |
| Gross gains | | $ | 9,135 | | | $ | 11,628 | | | $ | 6,633 | |
| Gross losses | | | (10,031 | ) | | | (14,020 | ) | | | (13,634 | ) |
| Net losses | | | (896 | ) | | | (2,392 | ) | | | (7,001 | ) |
| | | | | | | | | | | | | |
| Equity securities: | | | | | | | | | | | | |
| Gross gains | | | 10,481 | | | | 28,742 | | | | 21,070 | |
| Gross losses | | | (2,368 | ) | | | (5,595 | ) | | | (13,643 | ) |
| Net gains | | | 8,113 | | | | 23,147 | | | | 7,427 | |
| | | | | | | | | | | | | |
| Limited partnerships - net gain (loss) | | | 12,469 | | | | 2,473 | | | | (1,687 | ) |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| Total net gains (losses) | | $ | 19,686 | | | $ | 23,228 | | | $ | (1,261 | ) |
| | | 2014 | | | 2013 | | | 2012 | |
| Fixed maturities: | | | | | | | | | |
| Gross gains | | $ | 6,480 | | | $ | 7,235 | | | $ | 3,860 | |
| Gross losses | | | (4,596 | ) | | | (4,371 | ) | | | (3,961 | ) |
| Net gains (losses) | | | 1,884 | | | | 2,864 | | | | (101 | ) |
| | | | | | | | | | | | | |
| Equity securities: | | | | | | | | | | | | |
| Gross gains | | | 7,467 | | | | 15,374 | | | | 3,191 | |
| Gross losses | | | (1,529 | ) | | | (2,718 | ) | | | (1,131 | ) |
| Net gains | | | 5,938 | | | | 12,656 | | | | 2,060 | |
| | | | | | | | | | | | | |
| Limited partnerships - net gain | | | 7,108 | | | | 7,995 | | | | 7,052 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| Total net gains | | $ | 14,930 | | | $ | 23,515 | | | $ | 9,011 | |
Shareholders' equity includes approximately $28,596, net of deferred federal income taxes, of undistributed earnings from limited partnerships as of December 31, 2014.
Gain and loss activity for fixed maturity and equity security investments, as shown in the previous table, includeincludes adjustments for other-than-temporary impairment for the years ended December 31 summarized as follows:
| | | 2017 | | | 2016 | | | 2015 | |
| | | | | | | | | | |
| Cumulative charges to income at beginning of year | | $ | 5,060 | | | $ | 10,513 | | | $ | 7,168 | |
| | | | | | | | | | | | | |
| Writedowns based on objective and subjective criteria | | | 149 | | | | 5,743 | | | | 7,700 | |
| Recovery of prior writedowns upon sale or disposal | | | (1,590 | ) | | | (10,606 | ) | | | (4,355 | ) |
| Net pre-tax realized gain (loss) | | | 1,441 | | | | 4,863 | | | | (3,345 | ) |
| | | | | | | | | | | | | |
| Cumulative charges to income at end of year | | $ | 4,209 | | | $ | 5,060 | | | $ | 10,513 | |
| | | 2014 | | | 2013 | | | 2012 | |
| | | | | | | | | | |
| Cumulative charges to income at beginning of year | | $ | 6,770 | | | $ | 7,773 | | | $ | 8,178 | |
| | | | | | | | | | | | | |
| Writedowns based on objective and subjective criteria | | | 689 | | | | 742 | | | | 888 | |
| Recovery of prior writedowns upon sale or disposal | | | (291 | ) | | | (1,745 | ) | | | (1,293 | ) |
| Net pre-tax realized gain (loss) | | | (398 | ) | | | 1,003 | | | | 405 | |
| | | | | | | | | | | | | |
| Cumulative charges to income at end of year | | $ | 7,168 | | | $ | 6,770 | | | $ | 7,773 | |
| | | | | | | | | | | | | |
| Addition (reduction) to earnings per share from net | | | | | | | | | | | | |
| after-tax OTI gain (loss) | | $ | (.02 | ) | | $ | .04 | | | $ | .02 | |
| | | | | | | | | | | | | |
| Unrealized gain on investments previously | | | | | | | | | | | | |
| written down at end of the year - see note below | | $ | 17,127 | | | $ | 13,129 | | | $ | 8,158 | |
Note: Recovery in market value of an investment which has previously been adjusted for other-than-temporary impairment is treated as an unrealized gain until the investment matures or is sold.
Note B – Investments (continued)
There is no primary ormarket and only a limited secondary market for the Company’sCompany's investments in limited partnerships and, in most cases, the Company is prohibited from disposing of its limited partnership interests for some period of time and generally must seek approval from the applicable general partner for any such disposal. Distributions of earnings from these partnerships are largely at the sole discretion of the general partners and distributions are generally not received by the Company for many years after the earnings have been reported. The Company has commitmentsa commitment to contribute up to an additional $2,868$1,404 to variousa limited partnershipspartnership as of December 31, 2014.
2017.
The Company has invested a total of $23,000 in twothree limited partnerships with an aggregate estimated value of $46,987$43,586 at December 31, 2014,2017, that are managed by organizations in which fourtwo directors of the Company are executive officers, directors or owners. The Company’sCompany's ownership interest in these limited partnerships rangeswas 5% for New Vernon India Fund, 37% for New Vernon Global Opportunity Fund and 23% for New Vernon Global Opportunity Fund II. During 2017, the Company withdrew $5,000 from 5% to 16%.the New Vernon India Fund and $5,000 from the New Vernon Global Opportunity Fund II which reduced our investments. These limited partnerships added $7,088, $1,154contributed to or (reduced) $9,549, ($971) and $2,485,($1,978), net of fees, to investment gains in 2014, 20132017, 2016 and 2012,2015, respectively. During 2014, 20132017, 2016 and 2012,2015, the Company has recorded management fees of $697, $640$803, $777 and $650,$749, respectively, and performance-based fees of $0, $18 and $0, respectively, to these organizations for management of these limited partnerships. The Company has been informed that the fee rates applied to its investments in these limited partnerships are the same as, or lower than, the fee rates charged to unaffiliated customers for similar investments.
Note B – Investments (continued)
The Company utilizedutilizes the services of a broker-dealer firminvestment firms of which two directors of the Company are employees or partial owners. This broker-dealer serves as agent for purchases and sales of securities and manages anThese investment firms manage equity securities portfolio and fixed maturity portfolioportfolios with an aggregate market valuesvalue of approximately $3,334 and $19,822, respectively,$24,779 at December 31, 2014. The Company has been informed that commission and management rates charged by this broker-dealer to the Company are commensurate with rates charged to non-affiliated customers for similar investments.2017. Total commissions and net fees earned by the broker-dealerinvestment firms and affiliates on these transactionsportfolios and for advice and consulting were approximately $212, $239$97, $207 and $186$235 during 2014, 20132017, 2016 and 2012,2015, respectively.
The
Company’sCompany's limited partnerships include one
significant investment which
primarily invests in public and private equity markets in India. This limited partnership
investment’sinvestment's value as of December 31,
20142017 and
20132016 was
$29,868$29,817 and
$22,692,$27,153, respectively. At December 31,
2014,2017, the
Company’sCompany's estimated ownership interest in this limited partnership investment was approximately 5%. The Company's share of
earningsincome (losses), from both realized and unrealized appreciation (losses) from this limited partnership investment was
$7,176,$7,665, ($
3,176)1,117) and
$2,404($1,599) in
2014, 20132017, 2016 and
2012,2015, respectively. The summarized financial information of
the significantthis limited partnership investment as of and for the years ended December 31 is as follows:
| | | | 2017 | | | 2016 | | | 2015 | |
| | | | | | | | | | | |
| Investment income (loss) | | | $ | 623 | | | $ | (5 | ) | | $ | (188 | ) |
| Partnership expenses | | | | 2,206 | | | | 2,426 | | | | 3,024 | |
| Net investment loss | | | | (1,583 | ) | | | (2,431 | ) | | | (3,212 | ) |
| | | | | | | | | | | | | | |
| Realized gain (loss) on investments | | | | 8,723 | | | | 7,754 | | | | 21,091 | |
| | | | | | | | | | | | | | |
| Unrealized appreciation (depreciation) on investments | | | | 133,807 | | | | (21,002 | ) | | | (37,482 | ) |
| | | | | | | | | | | | | | |
| Net increase (decrease) in partners' capital resulting from operations | | | $ | 140,947 | | | $ | (15,679 | ) | | $ | (19,603 | ) |
| | | 2014 | | | 2013 | | | 2012 | | | | | | | | | | | | | |
| Total assets | | $ | 565,500 | | | $ | 493,028 | | | $ | 641,071 | | | | 566,629 | | | | 448,263 | | | | 511,118 | |
| Total liabilities | | | | 30,976 | | | | 39,988 | | | | 40,335 | |
| Total partners' capital | | | 542,700 | | | | 444,337 | | | | 559,745 | | | | 535,653 | | | | 408,275 | | | | 470,783 | |
| Net increase (decrease) in partners' capital resulting from operations | | | 125,700 | | | | (64,550 | ) | | | 60,734 | | |
The fair value of regulatory deposits with various insurance departments in the United States and Canada totaled $76,406$86,335 and $63,447$86,169 at December 31, 20142017 and 2013,2016, respectively.
Short-term investments at December 31, 2014 include $2,9662017 included $1,000 in time certificates of deposit issued by a Bermuda bank.
The Company’sCompany's fixed maturities are over 85%86% invested in investment grade fixed maturity investments. The Company has a total of $15,430,$693, representing five different investments,one investment, of fixed maturity investments which were originally issued with guarantees by two differenta third party insurance companies, with the largest exposure to a single investment being $5,150.company. The average S&P credit rating of such investments,investment, with consideration of the guarantee, is AA. The average S&P underlying credit rating of such investments,investment, without consideration of the guarantee, would remain AA. The Company does not have any direct exposure to any guarantor.
Approximately $66,817$71,907 of fixed maturity investments (8.8%(8.4% of total invested assets)the Company's consolidated investment portfolio) consists of non-rated bonds and bonds rated as less than investment grade at year end. These investments include a diversified portfolio of over 40 investments and have a $3,188$1,605 aggregate net unrealized lossgain position at December 31, 2014.2017.
As of December 31, 2014, the Company had committed funds totaling $7,850 related to two bridge loan agreements. The Company retains possession of these funds which will only be loaned in the unlikely event that long-term financing is unavailable to the counter party in the market.
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, unless otherwise indicated.
| | | 2014 | | | 2013 | | | 2012 | | | 2017 | | | 2016 | | | 2015 | |
| Reserves, gross of reinsurance | | | | | | | | | | |
| recoverable, at the beginning of the year | | | $ | 576,330 | | | $ | 513,596 | | | $ | 506,102 | |
| Reinsurance recoverable on unpaid losses at the beginning of the year | | | | 251,563 | | | | 211,843 | | | | 210,519 | |
| Reserves at the beginning of the year | | $ | 288,088 | | | $ | 289,236 | | | $ | 290,092 | | | | 324,767 | | | | 301,753 | | | | 295,583 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Provision for losses and loss expenses: | | | | | | | | | | | | | | | | | | | | | | | | |
| Claims occurring during the current year | | | 169,950 | | | | 156,264 | | | | 147,963 | | | | 228,303 | | | | 172,645 | | | | 165,812 | |
| Claims occurring during prior years | | | (10,354 | ) | | | (5,563 | ) | | | (9,875 | ) | | | 19,215 | | | | 13,836 | | | | (10,062 | ) |
| Total incurred | | | 159,596 | | | | 150,701 | | | | 138,088 | | |
| Total incurred losses and loss expenses | | | | 247,518 | | | | 186,481 | | | | 155,750 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Loss and loss expense payments: | | | | | | | | | | | | | | | | | | | | | | | | |
| Claims occurring during the current year | | | 59,826 | | | | 47,908 | | | | 44,941 | | | | 67,234 | | | | 54,239 | | | | 56,710 | |
| Claims occurring during prior years | | | 92,275 | | | | 103,941 | | | | 94,003 | | | | 132,920 | | | | 109,228 | | | | 92,870 | |
| Total paid | | | 152,101 | | | | 151,849 | | | | 138,944 | | | | 200,154 | | | | 163,467 | | | | 149,580 | |
| | �� | | | | | | | | | | | | |
| Reserves at the end of the year | | | 295,583 | | | | 288,088 | | | | 289,236 | | | | 372,131 | | | | 324,767 | | | | 301,753 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Reinsurance recoverable on unpaid losses at the end of the year | | | 210,519 | | | | 186,382 | | | | 166,218 | | | | 308,143 | | | | 251,563 | | | | 211,843 | |
| Reserves, gross of reinsurance | | | | | | | | | | | | | | | | | | | | | | | | |
| recoverable, at the end of the year | | $ | 506,102 | | | $ | 474,470 | | | $ | 455,454 | | | $ | 680,274 | | | $ | 576,330 | | | $ | 513,596 | |
| | | | | | | | | | | | | | |
The table above shows that a savingsreserve deficiency of $10,354 was$19,215 developed during 20142017 in the settlement of claims occurring on or before December 31, 2013 with comparative2016, compared to a reserve deficiency of $13,836 in 2016 and a reserve savings of $10,062 in 2015. The developments for the two previous calendar years. The net savings for each year are composed of individual claim savings and deficiencies which, in the aggregate have resulted from the settlement of claims at amounts higher or lower than previously reserved and from changes in estimates of losses incurred but not reported as part of the normal reserving process.
The major components of the developments shown above are as follows for the years ended December 31: | |
| | | | | | | | | | |
| | | 2014 | | | 2013 | | | 2012 | |
| | | | | | | | | | |
| Property and casualty insurance | | $ | (5,423 | ) | | $ | (1,725 | ) | | $ | (7,111 | ) |
| Reinsurance | | | (4,931 | ) | | | (3,838 | ) | | | (2,764 | ) |
| Totals | | $ | (10,354 | ) | | $ | (5,563 | ) | | $ | (9,875 | ) |
| | | | | | | | | | | | | |
FavorableThe $19,215 prior accident year deficiency that developed during 2017 primarily related to: (1) infrequent, but severe, transportation losses that experienced adverse development primarily during the first six months of 2017 and (2) higher than expected loss development is influencedfor discontinued lines of business. This 2017 deficiency compares to a deficiency of $13,836 for 2016, which was also impacted by the Company’s long-standing policydiscontinued lines of reserving for losses realistically and a willingness to settle claims based upon a seasoned evaluation of its exposures. Loss reserves pertaining to the Company’s property reinsurance business are established partially by the ceding reinsurers although the Company routinely adjusts such reserves if management determines that additional reserves could be necessary. Accordingly, there is potential for fluctuations in loss developments related to reinsurance assumed to be more pronounced than those experienced on directly produced business which is reserved entirely by Company personnel. In addition, changes in the Company’s net retention under reinsurance treaties will impact developments as more or less business is retained. These trends were considered in the establishment of the Company’s reserves at December 31, 2014 and 2013.business.
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, 2014 and 2013, loss reserves have been reduced by estimated salvage and subrogation recoverable of approximately $3,129$7,559 and $5,885,$4,151 at December 31, 2017 and 2016, respectively. Discounting
Note C - Loss and Loss Expense Reserves (continued)
The following is applied to theseinformation about incurred and paid claims sincedevelopment as of December 31, 2017, net of reinsurance, as well as cumulative claim frequency and the amounttotal of periodic payments to be made duringincurred‐but‐not‐reported liabilities plus expected development on reported claims included within the lifetime of claimants is fixed and determinable. Loss reserves have been reduced bynet incurred claims amounts.
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | As of December 31, 2017 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total of Incurred- | | | | |
| Workers' Compensation | | | | | | | | | | | | | | | | | | | | | | | | | | | but-Not-Reported | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Liabilities Plus | | | | |
| | | Incurred Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance | | | Expected | | | Number of | |
| Accident | | For the Years Ended December 31 (2008-2016 is Supplementary Information and Unaudited) | | | Development on | | | Reported Claims | |
| Year | | 2008 | | | 2009 | | | 2010 | | | 2011 | | | 2012 | | | 2013 | | | 2014 | | | 2015 | | | 2016 | | | 2017 | | | Reported Claims | | | Per Year | |
| 2008 | | $ | 19,833 | | | $ | 23,640 | | | $ | 24,715 | | | $ | 24,721 | | | $ | 24,855 | | | $ | 25,109 | | | $ | 23,916 | | | $ | 24,048 | | | $ | 24,352 | | | $ | 25,077 | | | $ | 661 | | | | 3,656 | |
| 2009 | | | | | | | 17,270 | | | | 20,931 | | | | 21,447 | | | | 21,261 | | | | 21,268 | | | | 20,767 | | | | 20,641 | | | | 20,817 | | | | 20,946 | | | | 877 | | | | 3,784 | |
| 2010 | | | | | | | | | | | 20,644 | | | | 20,111 | | | | 19,400 | | | | 19,300 | | | | 18,849 | | | | 18,344 | | | | 19,195 | | | | 19,541 | | | | 1,096 | | | | 4,222 | |
| 2011 | | | | | | | | | | | | | | | 26,057 | | | | 26,628 | | | | 26,958 | | | | 26,767 | | | | 25,515 | | | | 27,293 | | | | 26,617 | | | | 2,399 | | | | 4,545 | |
| 2012 | | | | | | | | | | | | | | | | | | | 23,965 | | | | 25,544 | | | | 24,887 | | | | 24,485 | | | | 25,616 | | | | 27,020 | | | | 3,151 | | | | 4,479 | |
| 2013 | | | | | | | | | | | | | | | | | | | | | | | 27,619 | | | | 30,638 | | | | 29,913 | | | | 32,121 | | | | 32,553 | | | | 5,344 | | | | 5,271 | |
| 2014 | | | | | | | | | | | | | | | | | | | | | | | | | | | 36,768 | | | | 36,968 | | | | 34,009 | | | | 33,427 | | | | 5,848 | | | | 5,394 | |
| 2015 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 26,277 | | | | 23,115 | | | | 25,889 | | | | 6,921 | | | | 6,284 | |
| 2016 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 35,240 | | | | 29,757 | | | | 9,795 | | | | 6,003 | |
| 2017 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 42,387 | | | | 25,679 | | | | 14,490 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total | | | $ | 283,214 | | | $ | 61,771 | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Cumulative Paid Claims and Allocated Claim Adjustment Expense, Net of Reinsurance | | | | | | | | | |
| Accident | | For the Years Ended December 31 (2008-2016 is Supplementary Information and Unaudited) | | | | | | | | | |
| Year | | | 2008 | | | | 2009 | | | | 2010 | | | | 2011 | | | | 2012 | | | | 2013 | | | | 2014 | | | | 2015 | | | | 2016 | | | | 2017 | | | | | | | | | |
| 2008 | | $ | 6,046 | | | $ | 13,919 | | | $ | 17,320 | | | $ | 18,943 | | | $ | 20,055 | | | $ | 20,839 | | | $ | 21,306 | | | $ | 21,883 | | | $ | 22,199 | | | | 22,910 | | | | | | | | | |
| 2009 | | | | | | | 4,186 | | | | 10,073 | | | | 13,343 | | | | 15,576 | | | | 16,592 | | | | 17,448 | | | | 18,028 | | | | 18,514 | | | | 18,982 | | | | | | | | | |
| 2010 | | | | | | | | | | | 3,974 | | | | 9,134 | | | | 11,963 | | | | 13,845 | | | | 14,966 | | | | 15,835 | | | | 16,590 | | | | 16,789 | | | | | | | | | |
| 2011 | | | | | | | | | | | | | | | 4,916 | | | | 11,912 | | | | 15,973 | | | | 18,884 | | | | 20,617 | | | | 21,622 | | | | 22,569 | | | | | | | | | |
| 2012 | | | | | | | | | | | | | | | | | | | 4,597 | | | | 11,004 | | | | 14,834 | | | | 17,415 | | | | 18,946 | | | | 20,276 | | | | | | | | | |
| 2013 | | | | | | | | | | | | | | | | | | | | | | | 4,880 | | | | 12,792 | | | | 18,065 | | | | 21,655 | | | | 23,643 | | | | | | | | | |
| 2014 | | | | | | | | | | | | | | | | | | | | | | | | | | | 5,328 | | | | 13,665 | | | | 19,075 | | | | 22,387 | | | | | | | | | |
| 2015 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 2,918 | | | | 10,128 | | | | 15,020 | | | | | | | | | |
| 2016 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 5,784 | | | | 13,377 | | | | | | | | | |
| 2017 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 6,150 | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total | | | $ | 182,103 | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Outstanding liabilities prior to 2008 net of reinsurance | | | | 12,640 | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Liabilities for claims and claims adjustment expenses, net of reinsurance | | | $ | 113,751 | | | | | | | | | |
Note C - Loss and Loss Expense Reserves (continued)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | As of December 31, 2017 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total of Incurred- | | | | |
| Commercial Liability | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | but-Not-Reported | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Liabilities Plus | | | | |
| | | Incurred Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance | | | Expected | | | Number of | |
| Accident | | For the Years Ended December 31 (2008-2016 is Supplementary Information and Unaudited) | | | Development on | | | Reported Claims | |
| Year | | 2008 | | | 2009 | | | 2010 | | | 2011 | | | 2012 | | | 2013 | | | 2014 | | | 2015 | | | 2016 | | | 2017 | | | Reported Claims | | | Per Year | |
| 2008 | | $ | 34,693 | | | $ | 28,591 | | | $ | 27,311 | | | $ | 25,511 | | | $ | 23,989 | | | $ | 24,892 | | | $ | 24,902 | | | $ | 23,480 | | | $ | 23,482 | | | $ | 23,733 | | | $ | 110 | | | | 1,280 | |
| 2009 | | | | | | | 29,707 | | | | 30,406 | | | | 30,203 | | | | 26,280 | | | | 27,259 | | | | 25,872 | | | | 25,373 | | | | 25,320 | | | | 25,485 | | | | 136 | | | | 1,161 | |
| 2010 | | | | | | | | | | | 31,124 | | | | 22,161 | | | | 21,899 | | | | 19,139 | | | | 20,300 | | | | 19,764 | | | | 19,377 | | | | 19,081 | | | | 96 | | | | 2,384 | |
| 2011 | | | | | | | | | | | | | | | 46,829 | | | | 43,832 | | | | 31,633 | | | | 36,894 | | | | 35,805 | | | | 37,122 | | | | 36,076 | | | | 271 | | | | 2,764 | |
| 2012 | | | | | | | | | | | | | | | | | | | 49,743 | | | | 54,269 | | | | 49,743 | | | | 51,367 | | | | 48,708 | | | | 51,475 | | | | 478 | | | | 3,211 | |
| 2013 | | | | | | | | | | | | | | | | | | | | | | | 53,817 | | | | 39,143 | | | | 37,701 | | | | 36,371 | | | | 46,690 | | | | 664 | | | | 3,611 | |
| 2014 | | | | | | | | | | | | | | | | | | | | | | | | | | | 49,971 | | | | 52,254 | | | | 52,483 | | | | 52,964 | | | | 1,451 | | | | 3,091 | |
| 2015 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 61,420 | | | | 70,174 | | | | 64,323 | | | | 2,278 | | | | 3,340 | |
| 2016 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 61,638 | | | | 68,974 | | | | 6,725 | | | | 3,581 | |
| 2017 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 103,126 | | | $ | 43,880 | | | | 4,387 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total | | | $ | 491,927 | | | $ | 56,089 | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Cumulative Paid Claims and Allocated Claim Adjustment Expense, Net of Reinsurance | | | | | | | | | |
| Accident | | For the Years Ended December 31 (2008-2016 is Supplementary Information and Unaudited) | | | | | | | | | |
| Year | | | 2008 | | | | 2009 | | | | 2010 | | | | 2011 | | | | 2012 | | | | 2013 | | | | 2014 | | | | 2015 | | | | 2016 | | | | 2017 | | | | | | | | | |
| 2008 | | $ | 2,612 | | | $ | 8,942 | | | $ | 15,733 | | | $ | 21,220 | | | $ | 21,396 | | | $ | 23,169 | | | $ | 23,354 | | | $ | 23,444 | | | $ | 23,500 | | | $ | 23,510 | | | | | | | | | |
| 2009 | | | | | | | 928 | | | | 17,880 | | | | 19,718 | | | | 23,521 | | | | 24,866 | | | | 25,066 | | | | 25,114 | | | | 25,125 | | | | 25,199 | | | | | | | | | |
| 2010 | | | | | | | | | | | 1,649 | | | | 7,166 | | | | 11,635 | | | | 16,052 | | | | 18,627 | | | | 18,517 | | | | 18,866 | | | | 18,662 | | | | | | | | | |
| 2011 | | | | | | | | | | | | | | | 1,809 | | | | 11,350 | | | | 23,615 | | | | 30,795 | | | | 33,255 | | | | 34,009 | | | | 35,561 | | | | | | | | | |
| 2012 | | | | | | | | | | | | | | | | | | | 3,086 | | | | 23,252 | | | | 32,942 | | | | 45,303 | | | | 47,601 | | | | 50,036 | | | | | | | | | |
| 2013 | | | | | | | | | | | | | | | | | | | | | | | 5,167 | | | | 15,772 | | | | 25,270 | | | | 34,481 | | | | 44,865 | | | | | | | | | |
| 2014 | | | | | | | | | | | | | | | | | | | | | | | | | | | 4,023 | | | | 9,046 | | | | 28,393 | | | | 45,075 | | | | | | | | | |
| 2015 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 10,923 | | | | 27,582 | | | | 49,267 | | | | | | | | | |
| 2016 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 6,843 | | | | 30,377 | | | | | | | | | |
| 2017 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 11,415 | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total | | | $ | 333,967 | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Outstanding liabilities prior to 2008 net of reinsurance | | | | 4,621 | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Liabilities for claims and claims adjustment expenses, net of reinsurance | | | $ | 162,581 | | | | | | | | | |
estimated salvage
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | As of December 31, 2017 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total of Incurred- | | | | |
| Professional Liability Reinsurance Assumed (in runoff) | | | | | | | | | | | | | | | | | | | | | but-Not-Reported | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | Liabilities Plus | | | | |
| | Incurred Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance | | | Expected | | | Number of | |
| Accident | For the Years Ended December 31 (2008-2016 is Supplementary Information and Unaudited) | | | Development on | | | Reported Claims | |
| Year | 2008 | 2009 | | 2010 | | | 2011 | | | 2012 | | | 2013 | | | 2014 | | | 2015 | | | 2016 | | | 2017 | | | Reported Claims | | | Per Year | |
| 2008 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2009 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2010 | | | | $ | 2,196 | | | $ | 4,277 | | | $ | 7,827 | | | $ | 7,946 | | | $ | 9,733 | | | $ | 10,740 | | | $ | 11,689 | | | $ | 11,893 | | | $ | 175 | | | | N/A | |
| 2011 | | | | | | | | | 10,492 | | | | 8,314 | | | | 9,017 | | | | 9,859 | | | | 10,779 | | | | 12,735 | | | | 12,744 | | | | 290 | | | | N/A | |
| 2012 | | | | | | | | | | | | | 10,041 | | | | 9,276 | | | | 5,569 | | | | 10,157 | | | | 14,605 | | | | 16,555 | | | | 3,049 | | | | N/A | |
| 2013 | | | | | | | | | | | | | | | | | 14,370 | | | | 13,034 | | | | 11,618 | | | | 17,694 | | | | 23,256 | | | | 4,653 | | | | N/A | |
| 2014 | | | | | | | | | | | | | | | | | | | | | 12,675 | | | | 8,825 | | | | 7,259 | | | | 9,837 | | | | 2,621 | | | | N/A | |
| 2015 | | | | | | | | | | | | | | | | | | | | | | | | | 11,638 | | | | 7,859 | | | | 7,147 | | | | 3,290 | | | | N/A | |
| 2016 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 6,368 | | | | 2,482 | | | | 2,273 | | | | N/A | |
| 2017 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | - | | | | - | | | | N/A | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total | | | $ | 83,914 | | | $ | 16,351 | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Cumulative Paid Claims and Allocated Claim Adjustment Expense, Net of Reinsurance | | | | | | | | | |
| Accident | For the Years Ended December 31 (2008-2016 is Supplementary Information and Unaudited) | | | | | | | | | |
| Year | 2008 | 2009 | | | 2010 | | | | 2011 | | | | 2012 | | | | 2013 | | | | 2014 | | | | 2015 | | | | 2016 | | | | 2017 | | | | | | | | | |
| 2008 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2009 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2010 | | | | $ | 41 | | | $ | 729 | | | $ | 3,505 | | | $ | 5,844 | | | $ | 7,758 | | | $ | 9,904 | | | $ | 11,132 | | | $ | 11,334 | | | | | | | | | |
| 2011 | | | | | | | | | 50 | | | | 637 | | | | 2,061 | | | | 4,983 | | | | 8,104 | | | | 10,404 | | | | 11,679 | | | | | | | | | |
| 2012 | | | | | | | | | | | | | 103 | | | | 992 | | | | 2,388 | | | | 5,077 | | | | 8,355 | | | | 11,239 | | | | | | | | | |
| 2013 | | | | | | | | | | | | | | | | | 123 | | | | 1,135 | | | | 5,088 | | | | 10,988 | | | | 14,779 | | | | | | | | | |
| 2014 | | | | | | | | | | | | | | | | | | | | | 723 | | | | 761 | | | | 2,241 | | | | 3,999 | | | | | | | | | |
| 2015 | | | | | | | | | | | | | | | | | | | | | | | | | 10 | | | | 390 | | | | 1,899 | | | | | | | | | |
| 2016 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | - | | | | 5 | | | | | | | | | |
| 2017 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | - | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total | | | $ | 54,934 | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | Outstanding liabilities prior to 2008 net of reinsurance | | | | - | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | Liabilities for claims and claims adjustment expenses, net of reinsurance | | | $ | 28,980 | | | | | | | | | |
Note C - Loss and subrogation recoverableLoss Expense Reserves (continued)
The reconciliation of approximately $7,158the net incurred and $8,115paid claims development tables to the liability for claims and claim adjustment expenses in the consolidated statement of financial position at December 31 2014is as follows.
| | | 2017 | | | 2016 | |
| Net outstanding liabilities | | | | | | |
| Commercial Liability | | $ | 162,581 | | | $ | 133,139 | |
| Workers' Compensation | | | 113,751 | | | | 101,883 | |
| Professional Liability Assumed | | | 28,980 | | | | 34,700 | |
| Other short-duration insurance lines | | | 48,970 | | | | 38,556 | |
| Liabilities for unpaid claims and claim adjustment | | | | | | | | |
| expenses, net of reinsurance | | | 354,282 | | | | 308,278 | |
| | | | | | | | | |
| Reinsurance recoverable on unpaid claims | | | | | | | | |
| Commercial Liability | | | 124,695 | | | | 85,549 | |
| Workers' Compensation | | | 170,394 | | | | 153,847 | |
| Other short-duration insurance lines | | | 13,053 | | | | 12,167 | |
| Reinsurance recoverable on unpaid losses at the | | | | | | | | |
| end of the year | | | 308,142 | | | | 251,563 | |
| | | | | | | | | |
| Unallocated claims adjustment expenses | | | 17,850 | | | | 16,489 | |
| | | | | | | | | |
| Total gross liability for unpaid claims and | | | | | | | | |
| claims adjustment expense | | $ | 680,274 | | | $ | 576,330 | |
The following is supplementary information about average historical claims duration as of December 31, 2017.
| | | Average Annual Percentage Payout of Incurred Claims by Age, Net of Reinsurance | |
| | | (Supplementary Information and Unaudited) | |
| Years | | | 1 | | | | 2 | | | | 3 | | | | 4 | | | | 5 | | | | 6 | | | | 7 | | | | 8 | | | | 9 | | | | 10 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Commercial Liability | | | 9.1 | % | | | 31.1 | % | | | 25.3 | % | | | 22.3 | % | | | 7.0 | % | | | 2.9 | % | | | 1.8 | % | | | 0.1 | % | | | 0.3 | % | | | 0.1 | % |
| Workers' Compensation | | | 17.6 | % | | | 26.5 | % | | | 15.5 | % | | | 9.7 | % | | | 5.6 | % | | | 4.1 | % | | | 3.0 | % | | | 1.9 | % | | | 1.7 | % | | | 2.8 | % |
| Professional Liability Assumed | | | 1.3 | % | | | 3.7 | % | | | 16.0 | % | | | 20.4 | % | | | 19.2 | % | | | 17.8 | % | | | 10.2 | % | | | 1.7 | % | | | | | | | | |
Reserve methodologies for incurred but not reported losses
The Company uses both standard actuarial techniques common to most insurance companies as well as proprietary techniques developed by the Company in connection with its specialty business products. For its short-tail lines of business, the Company uses predominantly the incurred or paid loss development factor methods. The Company has found that the use of accident quarter loss development triangles, rather than those based upon accident year, are most responsive to claim settlement trends and 2013, respectively.fluctuations in premium exposure for its short-tail lines. A minimum of 12 running accident quarters is used to project the reserve necessary for incurred but not reported losses for its short-tail lines.
The Company also uses the loss development factor approach for its long-tail lines of business, including workers' compensation. A minimum of 15 accident years is included in the loss development triangles used to calculate link ratios and the selected loss development factors used to determine the reserves for incurred but not reported losses. Significant emphasis is placed on the use of tail factors for the Company's long-tail lines of business.
For the Company's fleet transportation risks, which are covered by regularly updated reinsurance agreements and which contain wide-ranging self-insured retentions ("SIR"), traditional actuarial methods are supplemented by other methods, as described below, in consideration of the Company's exposures to loss. In situations where the Company's reinsurance structure, the insured's SIR selections, policy volume, and other factors are changing, current accident period loss exposures may not be homogenous enough with historical loss data to allow for reliable projection of future developed losses. Therefore, the Company supplements the above-described actuarial methods
Note C - Loss and Loss Expense Reserves (continued)
with loss ratio reserving techniques developed from the Company's extensive, proprietary databases to arrive at the reserve for incurred but not reported losses for the calendar/accident period under review. As losses for a given calendar/accident period develop with the passage of time, management evaluates such development on a monthly and quarterly basis and adjusts reserve factors, as necessary, to reflect current judgment with regard to the anticipated ultimate incurred losses. This process continues until all losses are settled for each period subject to this method.
Claim count methodology
The Company uses a claim event and coverage combination to estimate frequency. For example, a single claim event involving loss for physical damage of a vehicle and personal injury to a claimant would be considered two claims for purposes of the calculation of frequency. A single claim event causing personal injury to two claimants would be considered a single claim under the methodology. Due to the number of reinsurance assumed treaties entered into (and the varying structures: both quota share and excess of loss) the Company deems it impractical to collect claim frequency information related to this business and this information has not been made available to the Company.
Note D – Reinsurance
The insurance subsidiariesInsurance Subsidiaries cede portions of their gross premiums written to certain other insurers under excess of loss and quota share treaties and by facultative placements. Reinsurance treaties with other companies permit the recovery of a portion of related direct losses. Management determines the amount of net exposure it is willing to accept generally on a product line basis. Certain historical treaties covering fleet transportation risks include annual deductibles which must be exceeded before the Company can recover under the terms of the treaty. The Company retains a higher percentage of the direct premium in consideration of these deductible provisions. The Company remains liable to the extent the reinsuring companies are unable to meet their obligations under reinsurance contracts.
The Company also serves as an assuming reinsurer on treaties with direct writing insurance companies and, prior to January 1, 2014,June 30, 2015, under retrocessions from other reinsurers for catastrophic property coverages. Accordingly, for periods prior to that date, the occurrence of catastrophic events cancould have had a significant impact on the Company's operations. The Company also assumes reinsurance from direct writing insurance companies for casualty insurance coverages. In addition, the insurance subsidiariesInsurance Subsidiaries participate in certain mandatory residual market pools which require insurance companies to provide coverages on assigned risks. The assigned risk pools allocate participation to all insurers based upon each insurer’sinsurer's portion of premium writings on a state or national level. Historically, the operation of these assigned risk pools have resulted in net losses allocated to the Company, although such losses have not been material in relation to the Company’sCompany's operations.
The following table summarizes the impact of reinsurance ceded and assumed on the Company’sCompany's net premiumpremiums written and earned for the most recent three years:
| | | Premiums Written | | | Premiums Earned | |
| | | 2017 | | | 2016 | | | 2015 | | | 2017 | | | 2016 | | | 2015 | |
| Direct | | $ | 504,033 | | | $ | 395,625 | | | $ | 366,668 | | | $ | 470,158 | | | $ | 394,679 | | | $ | 370,499 | |
| Ceded on direct | | | (151,348 | ) | | | (131,166 | ) | | | (128,338 | ) | | | (145,201 | ) | | | (129,926 | ) | | | (128,135 | ) |
| Net direct | | | 352,685 | | | | 264,459 | | | | 238,330 | | | | 324,957 | | | | 264,753 | | | | 242,364 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Assumed | | | 704 | | | | 7,379 | | | | 16,885 | | | | 3,188 | | | | 11,344 | | | | 21,533 | |
| Ceded on assumed | | | - | | | | (86 | ) | | | (562 | ) | | | - | | | | (86 | ) | | | (562 | ) |
| Net assumed | | | 704 | | | | 7,293 | | | | 16,323 | | | | 3,188 | | | | 11,258 | | | | 20,971 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Net | | $ | 353,389 | | | $ | 271,752 | | | $ | 254,653 | | | $ | 328,145 | | | $ | 276,011 | | | $ | 263,335 | |
| | | Premiums Written | | | Premiums Earned | |
| | | 2014 | | | 2013 | | | 2012 | | | 2014 | | | 2013 | | | 2012 | |
| Direct | | $ | 343,200 | | | $ | 314,784 | | | $ | 284,200 | | | $ | 342,656 | | | $ | 313,842 | | | $ | 287,982 | |
| Ceded on direct | | | (118,942 | ) | | | (112,967 | ) | | | (105,292 | ) | | | (117,973 | ) | | | (111,057 | ) | | | (101,396 | ) |
| Net direct | | | 224,258 | | | | 201,817 | | | | 178,908 | | | | 224,683 | | | | 202,785 | | | | 186,586 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Assumed | | | 39,188 | | | | 54,692 | | | | 57,086 | | | | 38,219 | | | | 52,783 | | | | 53,191 | |
| Ceded on assumed | | | (1,275 | ) | | | (2,825 | ) | | | (2,316 | ) | | | (1,275 | ) | | | (2,825 | ) | | | (2,316 | ) |
| Net assumed | | | 37,913 | | | | 51,867 | | | | 54,770 | | | | 36,944 | | | | 49,958 | | | | 50,875 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Net | | $ | 262,171 | | | $ | 253,684 | | | $ | 233,678 | | | $ | 261,627 | | | $ | 252,743 | | | $ | 237,461 | |
Net losses and loss expenses incurred for 2014, 20132017, 2016 and 20122015 have been reduced by ceded reinsurance recoveries of approximately $105,891, $107,321$128,086, $108,656 and $90,899,$75,581, respectively. Ceded reinsurance premiums and loss recoveries for the purchase of catastrophe reinsurance coverage on the Company’sCompany's net direct business were not material.
Net losses and loss expenses incurred for 2014, 20132017, 2016 and 20122015 include approximately $23,163, $20,014$5,223, $14,746 and $16,486,$13,492, respectively, net of retrocessional recoveries of $20,000 during 2012, relating to reinsurance assumed from non-affiliated insurance or reinsurance companies.
Note D – Reinsurance (continued)
Components of reinsurance recoverable at December 31 are as follows:
| | | 2014 | | | 2013 | |
| Case unpaid losses, net of valuation allowance | | $ | 143,403 | | | $ | 133,484 | |
| Incurred but not reported unpaid losses and loss expenses | | | 66,325 | | | | 52,157 | |
| Paid losses and loss expenses | | | 6,910 | | | | 4,126 | |
| Unearned premiums | | | 3,583 | | | | 5,801 | |
| | | $ | 220,221 | | | $ | 195,568 | |
| | | 2017 | | | 2016 | |
| Case unpaid losses, net of valuation allowance | | $ | 119,615 | | | $ | 126,244 | |
| Incurred but not reported unpaid losses and loss expenses | | | 187,163 | | | | 123,819 | |
| Paid losses and loss expenses | | | 2,206 | | | | 1,760 | |
| Unearned premiums | | | 9,347 | | | | 3,201 | |
| | | $ | 318,331 | | | $ | 255,024 | |
Note E - Income Taxes
Deferred income taxes are calculated to account for 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:
| | | 2017 | | | 2016 | |
| Deferred tax liabilities: | | | | | | |
| Unrealized gain on fixed income and equity security investments | | $ | 15,086 | | | $ | 18,335 | |
| Deferred acquisition costs | | | 1,804 | | | | 874 | |
| Loss and loss expense reserves | | | 2,623 | | | | 1,198 | |
| Limited partnership investments | | | 3,826 | | | | 2,274 | |
| Accelerated depreciation | | | 492 | | | | 1,037 | |
| Other | | | 1,791 | | | | 1,251 | |
| Total deferred tax liabilities | | | 25,622 | | | | 24,969 | |
| | | | | | | | | |
| Deferred tax assets: | | | | | | | | |
| Loss and loss expense reserves | | | 6,761 | | | | 9,467 | |
| Unearned premiums discount | | | 1,837 | | | | 1,295 | |
| Other-than-temporary investment declines | | | 815 | | | | 858 | |
| Deferred compensation | | | 885 | | | | 1,097 | |
| Deferred ceding commission | | | 627 | | | | 464 | |
| Other | | | 339 | | | | 376 | |
| Total deferred tax assets | | | 11,264 | | | | 13,557 | |
| | | | | | | | | |
| Net deferred tax liabilities | | $ | 14,358 | | | $ | 11,412 | |
| | | 2014 | | | 2013 | |
| Deferred tax liabilities: | | | | | | |
| Unrealized gain on fixed income and equity security investments | | $ | 27,914 | | | $ | 26,432 | |
| Deferred acquisition costs | | | 1,341 | | | | 1,829 | |
| Salvage and subrogation | | | 2,373 | | | | 2,638 | |
| Limited partnership investments | | | 4,636 | | | | 2,612 | |
| Other | | | 1,229 | | | | 866 | |
| Total deferred tax liabilities | | | 37,493 | | | | 34,377 | |
| | | | | | | | | |
| Deferred tax assets: | | | | | | | | |
| Loss and loss expense reserves | | | 10,973 | | | | 11,071 | |
| Unearned premiums discount | | | 2,201 | | | | 2,162 | |
| Other-than-temporary investment declines | | | 2,049 | | | | 2,053 | |
| Deferred compensation | | | 1,565 | | | | 880 | |
| Deferred ceding commission | | | 549 | | | | 1,018 | |
| Other | | | 183 | | | | 342 | |
| Total deferred tax assets | | | 17,520 | | | | 17,526 | |
| | | | | | | | | |
| Net deferred tax liabilities | | $ | (19,973 | ) | | $ | (16,851 | ) |
On December 22, 2017, the U.S. Tax Act was signed into law, which lowered the U.S. corporate income tax rate from 35% to 21% effective January 1, 2018. As a result, the Company recorded a tax benefit of $9.6 million related to the re-measurement of its deferred tax assets and liabilities. The IRS has not yet published all of the detailed regulations resulting from the enactment of the U.S. Tax Act; therefore we have not completed our accounting for the tax effects, but we have made a reasonable estimate of the effects on our existing deferred tax balances at December 31, 2017. We re-measured deferred tax assets and liabilities based on the rates at which they are expected to be utilized in the future, which is generally 21%. However, we are still analyzing certain aspects of the U.S. Tax Act and refining our calculations, which could potentially affect the measurement of those balances or give rise to new deferred tax amounts.
Note E – Income Taxes (continued)
A summary of the difference between federal income tax expense computed at the statutory rate and that reported in the consolidated financial statements is as follows:
| | | 2017 | | | 2016 | | | 2015 | |
| | | | | | | | | | |
| Statutory federal income rate applied to pretax income | | $ | 3,543 | | | $ | 15,069 | | | $ | 11,883 | |
| Tax effect of (deduction): | | | | | | | | | | | | |
| Tax-exempt investment income | | | (968 | ) | | | (938 | ) | | | (919 | ) |
| Change in enacted tax rates | | | (9,572 | ) | | | - | | | | - | |
| Other | | | (1,204 | ) | | | (22 | ) | | | (295 | ) |
| Federal income tax expense (benefit) | | $ | (8,201 | ) | | $ | 14,109 | | | $ | 10,669 | |
| | | 2014 | | | 2013 | | | 2012 | |
| | | | | | | | | | |
| Statutory federal income rate applied to pretax income | | $ | 15,539 | | | $ | 19,218 | | | $ | 16,312 | |
| Tax effect of (deduction): | | | | | | | | | | | | |
| Tax-exempt investment income | | | (924 | ) | | | (811 | ) | | | (933 | ) |
| Net reduction of tax positions | | | (75 | ) | | | (116 | ) | | | (693 | ) |
| Other | | | 141 | | | | 31 | | | | 1 | |
| Federal income tax expense | | $ | 14,681 | | | $ | 18,322 | | | $ | 14,687 | |
| Federal income tax expense (benefit) consists of the following: | | | | |
| | | 2017 | | | 2016 | | | 2015 | |
| Taxes (benefit) on pre-tax income: | | | | | | | | | |
| Current | | $ | (4,335 | ) | | $ | 11,271 | | | $ | 12,488 | |
| Deferred | | | (3,866 | ) | | | 2,838 | | | | (1,819 | ) |
| | | $ | (8,201 | ) | | $ | 14,109 | | | $ | 10,669 | |
| Federal income tax expense consists of the following: | | | | | | | | | |
| | | 2014 | | | 2013 | | | 2012 | |
| Taxes on pre-tax income: | | | | | | | | | |
| Current | | $ | 13,041 | | | $ | 17,383 | | | $ | 10,819 | |
| Deferred | | | 1,640 | | | | 939 | | | | 3,868 | |
| | | $ | 14,681 | | | $ | 18,322 | | | $ | 14,687 | |
Note E – Income Taxes (continued)
| | | 2017 | | | 2016 | | | 2015 | |
| Limited partnerships | | $ | 4,099 | | | $ | 503 | | | $ | (2,865 | ) |
| Discounts of loss and loss expense reserves | | | 1,315 | | | | (114 | ) | | | 1,526 | |
| Reserves - salvage and subrogation and other | | | 56 | | | | (1,110 | ) | | | 29 | |
| Unearned premium discount | | | (1,767 | ) | | | 298 | | | | 608 | |
| Deferred compensation | | | (168 | ) | | | 595 | | | | (127 | ) |
| Other-than-temporary investment declines | | | (127 | ) | | | 2,320 | | | | (1,416 | ) |
| Deferred acquisitions costs and ceding commission | | | 1,553 | | | | (95 | ) | | | (287 | ) |
| Change in enacted tax rates | | | (9,572 | ) | | | - | | | | - | |
| Other | | | 745 | | | | 441 | | | | 713 | |
| Provision for deferred federal income tax | | $ | (3,866 | ) | | $ | 2,838 | | | $ | (1,819 | ) |
| The components of the provision for deferred federal income taxes are as follows: | | | | | | | |
| | | | | | | | | | | |
| | | | 2014 | | | 2013 | | | 2012 | |
| Limited partnerships | | | $ | 2,025 | | | $ | 1,058 | | | $ | 3,013 | |
| Discounts of loss and loss expense reserves | | | | 113 | | | | 313 | | | | (57 | ) |
| Unearned premium discount | | | | (38 | ) | | | (65 | ) | | | 265 | |
| Deferred compensation | | | | (685 | ) | | | (146 | ) | | | 112 | |
| Other-than-temporary investment declines | | | | (19 | ) | | | 680 | | | | 169 | |
| Deferred acquisitions costs and ceding commission | | | | (20 | ) | | | (271 | ) | | | (520 | ) |
| Other | | | | 264 | | | | (630 | ) | | | 886 | |
| | Provision for deferred federal income tax | | $ | 1,640 | | | $ | 939 | | | $ | 3,868 | |
Cash flows related to federal income taxes paid, net of refunds received, for 2014, 2013 and 2012 were $11,619, $17,250 and $3,661, respectively.
The Company is required to establish a valuation allowance for any portion of the gross deferred tax asset that management believes will not be realized. Management has determined that no such valuation allowance is necessary at December 31, 20142017 or 2013.2016. As of December 31, 2014, the2017, calendar years 2011 through2016, 2015 and 2014 remain subject to examination by the IRS.
The Company has no uncertain tax positions as of December 31, 20142017 or 2013.2016. The Company recognizes accrued interest and penalties, if any, related to unrecognized tax benefits in income tax expense and changes in such accruals would impact the Company’sCompany's effective tax rate. AmountsThere were no amounts accrued for the payment of interest at December 31, 2014, 20132017, 2016 and 2012 were not material.2015.
| Note F - 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, 2012 | | | 2,623,109 | | | | $ | 112 | | | | 12,225,348 | | | | $ | 522 | | | $ | 48,751 | |
| Restricted stock grants | | | - | | | | | - | | | | 64,687 | | | | | 2 | | | | 1,524 | |
| Balance at December 31, 2012 | | | 2,623,109 | | | | | 112 | | | | 12,290,035 | | | | | 524 | | | | 50,275 | |
| Restricted stock grants | | | - | | | | | - | | | | 14,156 | | | | | 1 | | | | 319 | |
| Balance at December 31, 2013 | | | 2,623,109 | | | | | 112 | | | | 12,304,191 | | | | | 525 | | | | 50,594 | |
| Restricted stock grants | | | - | | | | | - | | | | 52,198 | | | | | 2 | | | | 1,260 | |
| Balance at December 31, 2014 | | | 2,623,109 | | | | $ | 112 | | | | 12,356,389 | | | | $ | 527 | | | $ | 51,854 | |
- 62 -
| Note F - 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, 2015 | | | 2,623,109 | | | | $ | 112 | | | | 12,356,389 | | | | $ | 527 | | | $ | 51,854 | |
| Restricted stock grants | | | - | | | | | - | | | | 46,552 | | | | | 2 | | | | 1,092 | |
| Balance at December 31, 2015 | | | 2,623,109 | | | | | 112 | | | | 12,402,941 | | | | | 529 | | | | 52,946 | |
| Restricted stock grants | | | - | | | | | - | | | | 57,959 | | | | | 3 | | | | 1,340 | |
| Balance at December 31, 2016 | | | 2,623,109 | | | | | 112 | | | | 12,460,900 | | | | | 532 | | | | 54,286 | |
| Restricted stock grants | | | - | | | | | - | | | | 47,578 | | | | | 2 | | | | 1,152 | |
| Repurchase of common shares | | | - | | | | | - | | | | (84,960 | ) | | | | (4 | ) | | | (360 | ) |
| Balance at December 31, 2017 | | | 2,623,109 | | | | $ | 112 | | | | 12,423,518 | | | | $ | 530 | | | $ | 55,078 | |
The Company's Class A and Class B common stock has a stated value of approximately $.04 per share. The Company paid a total of $14,947, $14,943$16,302, or $1.08 per share, in dividends during 2017, $15,803, or $1.04 per share, during 2016 and $14,886,$15,003, or $1.00 per share, in dividendsduring 2015.
On August 31, 2017, the Company's Board of Directors authorized the reinstatement of its share repurchase program for up to 2,464,209 shares of the Company's Class A or Class B common stock. Pursuant to this share repurchase program, on September 21, 2017 the Company entered into a Rule 10b5-1 plan expiring on March 5, 2018, authorizing the repurchase of up to $17.5 million of the Company's outstanding common shares, at various pricing thresholds (the "Plan"). Because repurchases under the Plan will be subject to price, market volume and timing constraints, there is no assurance as to the exact number of shares that will be repurchased, if any. The Company may amend, suspend or discontinue the share repurchase program at any time.
For the year ended December 31, 2017, the Company paid $1,880 to repurchase 84,960 shares of Class B common stock at an average share price of $22.12 under the Plan.
| Note G - Other Operating Expenses | | | | | | | | | |
| | | | | | | | | | |
| Details of other operating expenses for the years ended December 31: | | | | | | | |
| | | | | | | | | | |
| | | 2017 | | | 2016 | | | 2015 | |
| Amortization of gross deferred policy acquisition costs | | $ | 70,574 | | | $ | 51,597 | | | $ | 50,270 | |
| Other underwriting expenses | | | 37,230 | | | | 41,692 | | | | 42,638 | |
| Reinsurance ceded credits | | | (23,187 | ) | | | (33,512 | ) | | | (28,956 | ) |
| Total underwriting expenses | | | 84,617 | | | | 59,777 | | | | 63,952 | |
| | | | | | | | | | | | | |
| Operating expenses of non-insurance companies | | | 28,977 | | | | 29,685 | | | | 26,621 | |
| Total other operating expenses | | $ | 113,594 | | | $ | 89,462 | | | $ | 90,573 | |
During 2015, the Company entered into a consulting contract with an insurance brokerage firm of which a director of the Company is CEO and a Managing Director. The consulting contract provides for an annual fee of $300. For the years 2014, 2013ended December 31, 2017 and 2012,2016, the Company incurred expenses of $300 and $300, respectively, related to this agreement. The Company also has a brokerage agreement with this entity. The Company incurred commission expense in connection with insurance policies written in 2017 and 2016 under this brokerage agreement. Total commission expense for 2017, 2016 and 2015 was $674, $419 and $0, respectively.
| Note G - Other Operating Expenses | | | | | | | | | | |
| | | | | | | | | | | |
| Details of other operating expenses for the years ended December 31: | | | | | | | |
| | | | | | | | | | | |
| | | | 2014 | | | 2013 | | | 2012 | |
| Amortization of gross deferred policy acquisition costs | | | $ | 48,872 | | | $ | 47,414 | | | $ | 41,957 | |
| Other underwriting expenses | | | | 37,830 | | | | 35,281 | | | | 27,242 | |
| Expense allowances from reinsurers | | | | (23,797 | ) | | | (20,822 | ) | | | (15,185 | ) |
| | Total underwriting expenses | | | 62,905 | | | | 61,873 | | | | 54,014 | |
| | | | | | | | | | | | | | |
| Operating expenses of non-insurance companies | | | | 25,143 | | | | 23,488 | | | | 23,416 | |
| | Total other operating expenses | | $ | 88,048 | | | $ | 85,361 | | | $ | 77,430 | |
Note H - Employee Benefit Plans
The Company maintains a defined contribution 401(k) Employee Savings and Profit Sharing Plan (the “Plan”"Plan") which covers nearly all employees who have completed one year of service. The Company's contributions are based on a set percentage and the contributions to the Plan for 2014, 20132017, 2016 and 20122015 were $1,798, $1,798$2,797, $2,449 and $1,539,$2,090, respectively.
Note I - Stock Purchase and Option PlansBased Compensation
In accordance with the terms of the 1981 Stock Purchase Plan (1981 Plan)(the "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.repurchase from one outside director. A limited number of shares have ever been repurchased under the 1981 Plan. At December 31, 2014,2017, there were 121,28646,875 shares (Class A) and 339,546187,500 shares (Class B) outstanding which remain eligible for repurchase by the Company.
Restricted Stock:
The Company maintains one restricted stock unit plan which is described below.
Restricted Stock:
Each year, beginning in 2009, the Company has issuedissues shares of classrestricted Class B restrictedcommon stock to the Company’sCompany's outside directors, which serve as a portion of the annual compensation for the outside directors. The shares serve as the annual retainer compensation forare distributed to the outside directors for the periods shown below. The shares are distributed on the vesting date, one year following the date of grant. On August 31, 2017, the Company granted shares of restricted Class B common stock to a new outside director, in lieu of cash, as such director's pro-rated annual retainer compensation, which shares will vest and have a total value of $440 for each of the annual periods.be distributed on May 9, 2018. The table below provides detail of the stock issuances for 2014, 20132017, 2016 and 2012:
2015:
| Effective | | Number of Shares | | Vesting | | | | Value |
| Date | | Issued | | Date | | Period | | Per Share |
| | | | | | | | | |
| 5/8/2012 | | 20,119 | | 5/8/2013 | | 7/1/2012 - 6/30/2013 | | $21.87 |
| | | | | | | | | |
| 5/7/2013 | | 18,106 | | 5/7/2014 | | 7/1/2013 - 6/30/2014 | | $24.30 |
| | | | | | | | | |
| 5/8/2014 | | 17,237 | | 5/8/2015 | | 7/1/2014 - 6/30/2015 | | $25.53 |
| | | | | | | | | Grant Date |
| Grant | | Number of Shares | | Vesting | | | | Fair Value |
| Date | | Issued | | Date | | Period | | Per Share |
| | | | | | | | | |
| 5/12/2015 | | 21,252 | | 5/12/2016 | | 7/1/2015 - 6/30/2016 | | $22.59 |
| | | | | | | | | |
| 5/10/2016 | | 17,677 | | 5/10/2017 | | 7/1/2016 - 6/30/2017 | | $24.89 |
| | | | | | | | | |
| 5/9/2017 | | 18,183 | | 5/9/2018 | | 7/1/2017 - 6/30/2018 | | $24.20 |
| | | | | | | | | |
| 8/31/2017 | | 1,257 | | 5/9/2018 | | 8/31/2017 - 6/30/2018 | | $21.90 |
Compensation expense related to the above stock grantgrants is recognized over the period in which the directors render the services.
Director compensation costexpense associated with these restricted stock grants of $440$454, $460 and $460 was charged against income for the restricted stock units for 2014, 2013awards granted in 2017, 2016 and 2012.2015, respectively.
EffectiveOn February 4, 2014,8, 2017, the Company issued 45,67820,181 shares of classrestricted Class B restrictedcommon stock to certain of the Company’s executives.Company's executives under the Company's Restricted Stock Compensation Plan. The shares of restricted shares will be paid solely in the Company’s class B stock. The restricted sharesstock represent a portion of the calendar year 20132016 compensation toearned by certain executives under the terms of the Company’sCompany's Executive Incentive Bonus Plan. The shares of restricted sharesstock will vest ratably over a three yearthree-year period from the date of grant and are accelerated for retirement eligible recipients in accordance with the non-substantive post-grant date vesting clausegrant. The shares of ASC 715, Compensation-Retirement Benefits. Restrictedrestricted stock waswere valued based on the closing price of the Company's Class B common stock on
Note I - Stock Purchase and Option Plans (continued)
February 8, 2017, the day the award wasshares of restricted stock were granted. Each share of restricted stock was valued at $23.81$23.80 per share, representing a total value of $1,088.$480. Non-vested shares of restricted sharesstock will be forfeited should an executive’sexecutive's employment terminate for any reason other than death, disability, or retirement as defined by the Compensation Committee.
Effective February 4, 2015,In May 2017, the Company issued 36,646Company's Compensation Committee granted equity-based awards pursuant to the Company's Long-Term Incentive Plan (the "Long-Term Incentive Plan"), which was approved by the Company's shareholders at the 2017 Annual Meeting of Shareholders. Certain participants under the Long-Term Incentive Plan were granted performance-based equity awards ("2017 LTIP Awards"), with the number of shares of classClass B restrictedcommon stock earned pursuant to certainsuch award determined by applying a performance matrix consisting of a measurement of the
Note I - Stock Based Compensation (continued)
combined results of the Company’s executives.Company's 2017 growth in net premiums earned and the Company's 2017 combined ratio. The restricted sharescombined ratio is calculated as a ratio of (A) losses and loss expenses incurred, plus other operating expenses, less commission and other income to (B) net premiums earned. Any 2017 LTIP Awards earned by the Company's named executive officers ("NEOs") will be paid solely in shares of restricted Class B common stock at the Company’s class B stock. The restricted shares represent a portionend of the calendar year 2014 compensation to certain executives under2017 annual performance period and will vest after a one-year period. Any 2017 LTIP Awards earned by non-NEOs will be paid in shares of restricted Class B common stock at the termsend of the Company’s Executive Incentive Bonus Plan. The restricted shares2017 annual performance period and will vest ratably over a three year period fromthree-year period. In addition to the date of grant and2017 LTIP Awards, in May 2017 the Company's Compensation Committee also granted Value Creation Incentive Plan awards ("VCIP Awards") to certain participants under the Long-Term Incentive Plan. The VCIP Awards are accelerated for retirement eligible recipients in accordance with the non-substantive post-grant date vesting clause of ASC 715, Compensation-Retirement Benefits. Restricted stock was valuedperformance-based equity awards that will be earned based on the closing price ofCompany's cumulative operating income over a three-year performance period from January 1, 2017 through December 31, 2019 relative to an operating income goal for the stock on the day the award was granted. Each share was valued at $23.29 per share representing a total value of $853. Non-vested restricted shares will be forfeited should an executive’s employment terminate for any reason other than death, disability, or retirement as definedperiod set by the Compensation Committee.Committee in March 2017. For the purpose of the VCIP Awards, cumulative operating income is equal to income before taxes excluding net realized gains (losses) on investments. Any VCIP Awards that are earned will be paid in unrestricted shares of the Company's Class B common stock at the end of the three-year performance period, but no later than March 15, 2020. No shares were issued as of December 31, 2017 with respect to either the 2017 LTIP Awards or the VCIP Awards.
Note J - Reportable Segments– Segment Information
TheAs previously disclosed, the Company operates within twodetermined that its business constituted one reportable business segments: property and casualty insurance segment as of January 1, 2017 based on how its operating results are regularly reviewed by the Company's chief operating decision maker to make decisions about resources to be allocated to the segment and reinsurance.to assess its performance. The property and casualty insurance segment provides multiple linelines of insurance coverage primarily to fleet transportation companies andas well as to independent contractors who contract with fleet transportation companies, as well as individual personal automobilecompanies. In addition, the Company provides workers' compensation coverage professional liability coverages and business owners’ and commercial property policies. The reinsurance segment accepts cessions from other insurance companies as well as retrocessions from selected reinsurance companies, providing property catastrophe and casualty reinsurance coverages.for a variety of operations outside the transportation industry.
The Company evaluates performance and allocates resources based on past or expected results from insurance underwriting operations before income taxes. Underwriting gain or loss does not include net investment income or 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 property and casualty insurance segment includes revenue and expense from the Company's agency operations since the agency operations serve as a primary direct marketing facility for this segment. 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.
The following table provides certain profit and loss information for each reportablesummarizes segment revenues for the years ended
December 31:
| | | | 2014 | | | 2013 | | | 2012 | |
| Direct and assumed premium written: | | | | | | | | | | |
| Property and casualty insurance | | | $ | 343,200 | | | $ | 314,784 | | | $ | 284,200 | |
| Reinsurance | | | | 39,188 | | | | 54,692 | | | | 57,086 | |
| | Totals | | $ | 382,388 | | | $ | 369,476 | | | $ | 341,286 | |
| | | | | | | | | | | | | | |
| Net premium earned: | | | | | | | | | | | | | |
| Property and casualty insurance | | | $ | 224,683 | | | $ | 202,785 | | | $ | 186,586 | |
| Reinsurance | | | | 36,944 | | | | 49,958 | | | | 50,875 | |
| | Totals | | $ | 261,627 | | | $ | 252,743 | | | $ | 237,461 | |
| | | | | | | | | | | | | | |
| Underwriting gain: | | | | | | | | | | | | | |
| Property and casualty insurance | | | $ | 32,663 | | | $ | 25,558 | | | $ | 23,491 | |
| Reinsurance | | | | 2,147 | | | | 12,278 | | | | 20,567 | |
| | Totals | | $ | 34,810 | | | $ | 37,836 | | | $ | 44,058 | |
Note J - Reportable Segments (continued)
The following table reconciles reportable segment profits to the Company’s consolidated income before federal income taxes:
| | | 2017 | | | 2016 | | | 2015 | |
| | | | |
| Revenues: | | | | | | | | | |
| Net premiums earned | | $ | 328,145 | | | $ | 276,011 | | | $ | 263,335 | |
| Net investment income | | | 18,095 | | | | 14,483 | | | | 12,498 | |
| Commissions and other income | | | 5,308 | | | | 5,275 | | | | 5,703 | |
| Net realized gains (losses) on investments | | | 19,686 | | | | 23,228 | | | | (1,261 | ) |
| Total revenues | | $ | 371,234 | | | $ | 318,997 | | | $ | 280,275 | |
| | | | 2014 | | | 2013 | | | 2012 | |
| Profit: | | | | | | | | | | |
| Underwriting gain | | | $ | 34,810 | | | $ | 37,836 | | | $ | 44,058 | |
| Net investment income | | | | 9,055 | | | | 8,770 | | | | 9,930 | |
| Net realized gains on investments | | | | 14,930 | | | | 23,515 | | | | 9,011 | |
| Corporate expenses | | | | (14,397 | ) | | | (15,211 | ) | | | (16,393 | ) |
| | Income before federal income taxes | | $ | 44,398 | | | $ | 54,910 | | | $ | 46,606 | |
One customer of the property and casualty insurance segment, FedEx Ground Systems, Inc. and certain of its subsidiaries and related entities (“FedEx”) represents approximately $8,191, $15,615 and $19,052 of the Company’s consolidated direct and assumed premium written in 2014, 2013 and 2012, respectively.
An additional $208,580, $177,389 and $146,447 for 2014, 2013 and 2012, respectively, is placed with the Company by a non-affiliated broker on behalf of independent contractors of this same customer but is not dependent upon the direct business with this customer.
Note K - Earnings Per Share
The following is a reconciliation of the denominators used in the calculation of basic and diluted earnings per share for the years ended December 31:
| | | 2017 | | | 2016 | | | 2015 | |
| | | | | | | | | | |
| Average shares outstanding for basic earnings per share | | | 15,065,216 | | | | 15,071,900 | | | | 15,010,454 | |
| | | | | | | | | | | | | |
| Dilutive effect of share equivalents | | | 42,220 | | | | 12,108 | | | | 11,308 | |
| | | | | | | | | | | | | |
| Average shares outstanding for diluted earnings per share | | | 15,107,436 | | | | 15,084,008 | | | | 15,021,762 | |
| | | 2014 | | | 2013 | | | 2012 | |
| | | | | | | | | | |
| Average share outstanding for basic earnings per share | | | 14,963,959 | | | | 14,906,416 | | | | 14,838,767 | |
| | | | | | | | | | | | | |
| Dilutive effect of share equivalents | | | 11,935 | | | | 17,345 | | | | 29,482 | |
| | | | | | | | | | | | | |
| Average shares outstanding for diluted earnings per share | | | 14,975,894 | | | | 14,923,761 | | | | 14,868,249 | |
Note L - Concentrations of Credit Risk
The Company writes policies of excess insurance attaching above self-insured retentions ("SIR")SIRs and also writes policies that contain per-claim deductibles. Those losses and claims that fall within the SIR limits are obligations of the insured; however, the Company writes surety bonds in favor of various regulatory agencies guaranteeing the insureds’insureds' payment of claims within the SIR. Further, specified portions of losses and claims incurred under large deductible policies, while obligations of the Company, are contractually reimbursable to the Company from the insureds. The Company requires collateral from its insureds to serve as a source of reimbursement if the Company is obligated to pay claims within the SIR by reason of an insured’sinsured's default or if the insured fails to reimburse the Company for deductible amounts paid by the Company.
Acceptable collateral may be provided in the form of letters of credit on Company approvedCompany-approved banks, CompanyCompany- approved marketable securities or cash. At December 31, 2014,2017, the Company held collateral in the aggregate amount of $234,312.
$300,069.
The amount of collateral required of an insured is determined by the financial condition of the insured, the type of obligations guaranteed by the Company, estimated reserves for incurred losses within the SIR or deductible that have been reported to the insured or the Company, estimated incurred but not reported losses, and estimates forestimated losses that are expected to occur within the SIR or deductible prior to the next collateral adjustment date. In general, the Company attempts to hold collateral equal to 100% of the ultimate losses that would be paid by or due the Company in the event of an insured’sinsured's default. Periodic audits are conducted by the Company to evaluate its exposure and the collateral required. If a deficiency in collateral is noted as the result of an audit, additional collateral is requested
Note L - Concentrations of Credit Risk (continued)
immediately. Because collateral amounts contain numerous estimates of the Company’sCompany's exposure, are adjusted only periodically and are sometimes reduced based on the superior financial condition of the insured, the amount of collateral held by the Company at a given point in time may not be sufficient to fully reimburse the Company for all of its guarantees or amounts due in the event of an insured’sinsured's default. In that regard, the Company is not fully collateralized for the guarantees made for, or the deductible amounts that may be due from, FedEx Ground and certain of its subsidiaries and related entities, and in the event of their default, such default may have a material adverse impact on the Company. The Company estimates its uncollateralized exposure related to this customerFedEx to be as much as 42%46% (after-tax) of shareholders' equity at December 31, 2014.2017.
In addition, theThe Company's balance sheet includes paid and estimated unpaid amounts recoverable from reinsurers under various
agreements totaling $269,114 at December 31, 2014.agreements. These recoverables are only partially collateralized.
The two largest amounts due from individual reinsurers, net of collateral and offsets, were
$36,273$35,801 and
$12,002$34,927 at December 31,
2014.2017.
Investments in limited partnerships include an aggregate of $46,987 invested in two limited partnerships, New Vernon India Fund and New Vernon Global Opportunity Fund which are managed by organizations in which four directors of the Company are executive officers, directors and owners.
Note M – Acquisition and related Goodwill and Intangibles
On October 31, 2008, the Company purchased a commercial lines specialty insurance agency primarily focusing on the needs of the transportation industry including trucking independent contractors as well as fleet trucking companies for a cash purchase price of $3,500. The acquisition is part of the Company’s property and casualty insurance segment. As part of the purchase, the Company recorded goodwill of $3,152 and intangible assets related to customer relationships and employment agreements of $179 which are included in Other Assets in the consolidated balance sheets and have recorded amortization of intangible assets of $4, $17 and $28 during 2014, 2013, and 2012, respectively.$179. Accumulated amortization of intangible assets was $179 and $175 as of both December 31, 20142017 and 2013, respectively.2016.
Note N – Debt
The Company maintains a revolving line of credit with a $40,000 limit and an expiration date of September 23, 2018. Interest on this line of credit is referenced to LIBOR and can be fixed for periods of up to one year at the Company’s option. Outstanding drawings on this line of credit were $20,000 and $10,000 as of December 31, 2014 and 2013, respectively. At December 31, 2014, the effective interest rate was 1.26%. The Company has $20,000 remaining unused under the line of credit at December 31, 2014. The current outstanding borrowings were used for general corporate purchases.
Assets and liabilities recorded at fair value in the consolidated balance sheets are categorized based upon the level of judgment associated with the inputs used to measure their fair value. The carrying amounts reported in the consolidated balance sheets for cash, accounts receivables, reinsurance recoverable, notes receivable, accounts payable and accrued expenses, income taxes payable, short termshort-term borrowings and unearned income approximate fair value because of the short termshort-term nature of these items. The following tables summarize fair value measurements by level for assets measured at fair value on a recurring basis:
As of December 31, 2014:2017:
| Description | | Total | | | Level 1 | | | Level 2 | | | Level 3 | |
| | | | | | | | | | | | | |
| Fixed maturities: | | | | | | | | | | | | |
| Agency collateralized mortgage obligations | | $ | 16,586 | | | $ | - | | | $ | 16,586 | | | $ | - | |
| Agency mortgage-backed securities | | | 27,075 | | | | - | | | | 27,075 | | | | - | |
| Asset-backed securities | | | 43,469 | | | | - | | | | 43,469 | | | | - | |
| Bank loans | | | 19,488 | | | | - | | | | 19,488 | | | | - | |
| Certificates of deposit | | | 3,135 | | | | 3,135 | | | | - | | | | - | |
| Collateralized mortgage obligations | | | 6,492 | | | | - | | | | 6,492 | | | | - | |
| Corporate securities | | | 193,058 | | | | - | | | | 193,058 | | | | - | |
| Options embedded in convertible securities | | | 5,291 | | | | - | | | | 5,291 | | | | - | |
| Mortgage-backed securities | | | 24,204 | | | | - | | | | 24,204 | | | | - | |
| Municipal obligations | | | 96,650 | | | | - | | | | 96,650 | | | | - | |
| Non-U.S. government obligations | | | 37,394 | | | | - | | | | 37,394 | | | | - | |
| U.S. government obligations | | | 49,011 | | | | - | | | | 49,011 | | | | - | |
| Total fixed maturities | | | 521,853 | | | | 3,135 | | | | 518,718 | | | | - | |
| Equity securities: | | | | | | | | | | | | | | | | |
| Consumer | | | 46,578 | | | | 46,578 | | | | - | | | | - | |
| Energy | | | 10,278 | | | | 10,278 | | | | - | | | | - | |
| Financial | | | 45,470 | | | | 45,470 | | | | - | | | | - | |
| Industrial | | | 25,402 | | | | 25,402 | | | | - | | | | - | |
| Technology | | | 13,061 | | | | 13,061 | | | | - | | | | - | |
| Funds (e.g. mutual funds, closed end funds, ETFs) | | | 50,291 | | | | 45,276 | | | | 5,015 | | | | - | |
| Other | | | 10,683 | | | | 10,683 | | | | - | | | | - | |
| Total equity securities | | | 201,763 | | | | 196,748 | | | | 5,015 | | | | - | |
| Short term | | | 1,000 | | | | 1,000 | | | | - | | | | - | |
| Cash equivalents | | | 59,173 | | | | - | | | | 59,173 | | | | - | |
| Total | | $ | 783,789 | | | $ | 200,883 | | | $ | 582,906 | | | $ | - | |
| Description | | Total | | | Level 1 | | | Level 2 | | | Level 3 | |
| | | | | | | | | | | | | |
| Fixed maturities: | | | | | | | | | | | | |
| U.S. government obligations | | $ | 101,094 | | | $ | - | | | $ | 101,094 | | | $ | - | |
| Residential mortgage-backed securities | | | 6,066 | | | | - | | | | 6,066 | | | | - | |
| Commercial mortgage-backed securities | | | 36,440 | | | | - | | | | 36,440 | | | | - | |
| State and municipal obligations | | | 113,777 | | | | - | | | | 113,777 | | | | - | |
| Corporate securities | | | 164,068 | | | | - | | | | 151,860 | | | | 12,208 | |
| Options embedded in convertible securities | | | 2,898 | | | | - | | | | 2,898 | | | | - | |
| Foreign government obligations | | | 27,466 | | | | - | | | | 27,466 | | | | - | |
| Total fixed maturities | | | 451,809 | | | | - | | | | 439,601 | | | | 12,208 | |
| Equity securities: | | | | | | | | | | | | | | | | |
| Financial institutions | | | 25,343 | | | | 25,343 | | | | - | | | | - | |
| Industrial & miscellaneous | | | 136,764 | | | | 136,764 | | | | - | | | | - | |
| Total equity securities | | | 162,107 | | | | 162,107 | | | | - | | | | - | |
| Short term | | | 2,966 | | | | 2,966 | | | | - | | | | - | |
| Cash equivalents | | | 59,309 | | | | - | | | | 59,309 | | | | - | |
| Total | | $ | 676,191 | | | $ | 165,073 | | | $ | 498,910 | | | $ | 12,208 | |
As of December 31, 2013:
| Description | | Total | | | Level 1 | | | Level 2 | | | Level 3 | |
| | | | | | | | | | | | | |
| Fixed maturities: | | | | | | | | | | | | |
| U.S. government obligations | | $ | 113,389 | | | $ | 113,389 | | | $ | - | | | $ | - | |
| Residential mortgage-backed securities | | | 13,252 | | | | - | | | | 13,252 | | | | - | |
| Commercial mortgage-backed securities | | | 28,565 | | | | - | | | | 28,565 | | | | - | |
| State and municipal obligations | | | 115,250 | | | | - | | | | 115,250 | | | | - | |
| Corporate securities | | | 134,635 | | | | - | | | | 134,635 | | | | - | |
| Options embedded in convertible securities | | | 2,580 | | | | - | | | | 2,580 | | | | - | |
| Foreign government obligations | | | 23,879 | | | | - | | | | 23,879 | | | | - | |
| Total fixed maturities | | | 431,550 | | | | 113,389 | | | | 318,161 | | | | - | |
| Equity securities: | | | | | | | | | | | | | | | | |
| Financial institutions | | | 18,850 | | | | 18,850 | | | | - | | | | - | |
| Industrial & miscellaneous | | | 126,978 | | | | 126,978 | | | | - | | | | - | |
| Total equity securities | | | 145,828 | | | | 145,828 | | | | - | | | | - | |
| Short term | | | 4,891 | | | | 4,891 | | | | - | | | | - | |
| Cash equivalents | | | 52,002 | | | | - | | | | 52,002 | | | | - | |
| Total | | $ | 634,271 | | | $ | 264,108 | | | $ | 370,163 | | | $ | - | |
Note ON – Fair Value (continued)
As of December 31, 2016:
| Description | | Total | | | Level 1 | | | Level 2 | | | Level 3 | |
| | | | | | | | | | | | | |
| Fixed maturities: | | | | | | | | | | | | |
| Agency collateralized mortgage obligations | | $ | 6,171 | | | $ | - | | | $ | 6,171 | | | $ | - | |
| Agency mortgage-backed securities | | | 4,770 | | | | - | | | | 4,770 | | | | - | |
| Asset-backed securities | | | 45,183 | | | | - | | | | 37,919 | | | | 7,264 | |
| Bank loans | | | 10,349 | | | | - | | | | - | | | | 10,349 | |
| Certificates of deposit | | | 3,117 | | | | 3,117 | | | | - | | | | - | |
| Collateralized mortgage obligations | | | 9,104 | | | | - | | | | 6,409 | | | | 2,695 | |
| Corporate securities | | | 137,932 | | | | - | | | | 135,794 | | | | 2,138 | |
| Options embedded in convertible securities | | | 4,751 | | | | - | | | | 4,751 | | | | - | |
| Mortgage-backed securities | | | 24,571 | | | | - | | | | 22,206 | | | | 2,365 | |
| Municipal obligations | | | 129,335 | | | | - | | | | 129,190 | | | | 145 | |
| Non-U.S. government obligations | | | 24,681 | | | | - | | | | 24,419 | | | | 262 | |
| U.S. government obligations | | | 91,940 | | | | - | | | | 91,940 | | | | - | |
| Total fixed maturities | | | 491,904 | | | | 3,117 | | | | 463,569 | | | | 25,218 | |
| Equity securities: | | | | | | | | | | | | | | | | |
| Consumer | | | 32,576 | | | | 32,576 | | | | - | | | | - | |
| Energy | | | 12,842 | | | | 12,842 | | | | - | | | | - | |
| Financial | | | 31,186 | | | | 30,943 | | | | 243 | | | | - | |
| Industrial | | | 21,145 | | | | 20,262 | | | | 883 | | | | - | |
| Technology | | | 8,858 | | | | 8,858 | | | | - | | | | - | |
| Funds (e.g. mutual funds, closed end funds, ETFs) | | | 6,995 | | | | - | | | | 6,995 | | | | - | |
| Other | | | 6,343 | | | | 6,343 | | | | - | | | | - | |
| Total equity securities | | | 119,945 | | | | 111,824 | | | | 8,121 | | | | - | |
| Short term | | | 1,500 | | | | 1,500 | | | | - | | | | - | |
| Cash equivalents | | | 59,683 | | | | - | | | | 59,683 | | | | - | |
| Total | | $ | 673,032 | | | $ | 116,441 | | | $ | 531,373 | | | $ | 25,218 | |
Level inputs, as defined by the FASB guidance, are as follows:
| Level Input: | | Input Definition: |
| Level 1 | | Inputs are unadjusted, quoted prices for identical assets or liabilities in active markets at the measurement date. |
| Level 2 | | Inputs other than quoted prices included in Level 1 that are observable for the asset or liability through corroboration with market data at the measurement date. |
| Level 3 | | Unobservable inputs that reflect management’smanagement's best estimate of what market participants would use in pricing the asset or liability at the measurement date. |
The Company does not have any Level 3 fair value assets consist of a portfolio of corporate convertible bonds. The corporate convertible bonds are valued using various unobservable inputs including extrapolated data, proprietary models and indicative quotes.at December 31, 2017. Transfers into Level 3 during 20142017 and 2016 relate to securities previously classified as Level 2. There were transfers into Level 3 during 2013. A reconciliation of the beginning and ending balances of assets measured at fair value on a recurring basis using Level 3 inputs is as follows for the years ended December 31:
- 68 -
| | | 2014 | | | 2013 | |
| Beginning of period balance | | $ | - | | | $ | 11,682 | |
| Total gains or losses (realized or unrealized) | | | | | | | | |
| included in income | | | - | | | | 1,017 | |
| Purchases | | | - | | | | 1,258 | |
| Settlements | | | - | | | | (6,698 | ) |
| Transfers into Level 3 | | | 12,208 | | | | (7,259 | ) |
| End of period balance | | $ | 12,208 | | | $ | - | |
Note N – Fair Value (continued)
| | | 2017 | | | 2016 | |
| Beginning of period balance | | $ | 25,218 | | | $ | 16,793 | |
| Total gains or losses (realized) | | | | | | | | |
| included in income | | | 406 | | | | 1,846 | |
| Purchases | | | 81 | | | | 5,540 | |
| Settlements | | | (9,123 | ) | | | (8,791 | ) |
| Transfers into Level 3 | | | 144 | | | | 10,202 | |
| Transfers out of Level 3 | | | (16,726 | ) | | | (372 | ) |
| End of period balance | | $ | - | | | $ | 25,218 | |
Quoted market prices are obtained whenever possible. Where quoted market prices are not available, fair values are estimated using present value or other valuation techniques.broker/dealer quotes for specific securities. These techniques are significantly affected by our assumptions, including discount rates and estimates of future cash flows. Potential taxes and other transaction costs have not been considered in estimating fair values.
Transfers between levels, if any, are recorded as of the beginning of the reporting period. The U.S. government obligations were transferred to Level 2 during 2014 based on market data as well as other factors including region, price type and provider on each asset. There were no significant transfers of assets between Level 1 and Level 2 during 20132017. The transfers out of Level 3 during 2017 consisted mainly of bank loans, asset-backed securities and 2012.
certain mortgage-backed securities and corporate securities, and were the result of changes in the availability of market observable inputs.
In addition to the preceding disclosures on assets recorded at fair value in the consolidated balance sheets, FASB guidance also requires the disclosure of fair values for certain other financial instruments for which it is practicable to estimate fair value, whether or not such values are recognized in the consolidated balance sheets.
Non-financial instruments such as real estate, property and equipment, other assets, deferred income taxes and intangible assets, and certain financial instruments such as policy reserve liabilities are excluded from the fair value disclosures. Therefore, the fair value amounts cannot be aggregated to determine the underlying economic value toof the Company.
Note O – Fair Value (continued)
The following methods, assumptions and inputs were used to estimate the fair value of each class of financial instrument:
Limited partnerships: The Company accounts for investments in limited partnerships using the equity method of accounting, which requires an investor in a limited partnership to carry the investment at its proportionate share of the limited partnership’spartnership's equity. The underlying assets of the Company’sCompany's investments in limited partnerships are carried primarily at fair value, and, therefore, the Company’sCompany's carrying value of limited partnerships approximates fair value. As these investments are not actively traded and the corresponding inputs are based on data provided by the investees, they are classified as Level 3.
Short-term borrowings: The fair value of our short-term borrowings is based on quoted market prices for the same or similar debt, or, if no quoted market prices are available, on the current market interest rates available to us for debt of similar terms and remaining maturities.
Note N – Fair Value (continued)
A summary of the carrying value and fair value by level of financial instruments not recorded at fair value on the Company’sCompany's consolidated balance sheet at December 31, 20142017 and 20132016 is as follows:
| 2017: | | Carrying | | | Fair Value | |
| | | Value | | | Level 1 | | | Level 2 | | | Level 3 | | | Total | |
| Assets: | | | | | | | | | | | | | | | |
| Limited partnerships | | $ | 70,806 | | | $ | - | | | $ | - | | | $ | 70,806 | | | $ | 70,806 | |
| | | | | | | | | | | | | | | | | | | | | |
| Liabilities: | | | | | | | | | | | | | | | | | | | | |
| Short-term borrowings | | | 20,000 | | | | - | | | | 20,000 | | | | - | | | | 20,000 | |
| | | | | | | | | | | | | | | | | | | | | |
| 2016: | | | | | | | |
| Assets: | | | | | | | | | | | | | | | | | | | | |
| Limited partnerships | | $ | 76,469 | | | $ | - | | | $ | - | | | $ | 76,469 | | | $ | 76,469 | |
| | | | | | | | | | | | | | | | | | | | | |
| Liabilities: | | | | | | | | | | | | | | | | | | | | |
| Short-term borrowings | | | 20,000 | | | | - | | | | 20,000 | | | | - | | | | 20,000 | |
| | | Carrying | | | Fair Value | |
| 2014: | | Value | | | Level 1 | | | Level 2 | | | Level 3 | | | Total | |
| Assets: | | | | | | | | | | | | | | | |
| Limited partnerships | | $ | 81,230 | | | $ | - | | | $ | - | | | $ | 81,230 | | | $ | 81,230 | |
| | | | | | | | | | | | | | | | | | | | | |
| Liabilities: | | | | | | | | | | | | | | | | | | | | |
| Short-term borrowings | | | 20,000 | | | | - | | | | 20,000 | | | | - | | | | 20,000 | |
| | | | | | | | | | | | | | | | | | | | | |
| 2013: | | | | | | | |
| Assets: | | | | | | | | | | | | | | | | | | | | |
| Limited partnerships | | $ | 68,988 | | | $ | - | | | $ | - | | | $ | 68,988 | | | $ | 68,988 | |
| | | | | | | | | | | | | | | | | | | | | |
| Liabilities: | | | | | | | | | | | | | | | | | | | | |
| Short-term borrowings | | | 10,000 | | | | - | | | | 10,000 | | | | - | | | | 10,000 | |
Note O - Quarterly Results of Operations (Unaudited) | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | |
| Quarterly results of operations are as follows: | | | | | | | | | | | | | | | | |
| | | | | | | | | | Results by Quarter | | | | | | | | |
| | 2017 | | | 2016 | |
| | 1st | | 2nd | | 3rd | | 4th | | | 1st | | 2nd | | 3rd | | 4th | |
| | | | | | | | | | | | | | | | | | |
| Net premiums earned | | $ | 73,974 | | | $ | 67,996 | | | $ | 89,100 | | | $ | 97,075 | | | | $ | 66,909 | | | $ | 68,726 | | | $ | 71,235 | | | $ | 69,141 | |
| Net investment income | | | 3,692 | | | | 4,716 | | | | 4,027 | | | | 5,661 | | | | | 3,440 | | | | 3,549 | | | | 3,513 | | | | 3,982 | |
| Net realized gains on investments | | | 6,294 | | | | 3,296 | | | | 5,944 | | | | 4,152 | | | | | 9,012 | | | | 280 | | | | 7,732 | | | | 6,204 | |
| Losses and loss expenses incurred | | | 48,599 | | | | 71,754 | | | | 60,673 | | | | 66,492 | | | | | 38,623 | | | | 42,666 | | | | 56,827 | | | | 48,366 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net income (loss) | | | 6,756 | | | | (12,343 | ) | | | 7,434 | | | | 16,476 | | | | | 14,112 | | | | 5,969 | | | | 4,001 | | | | 4,864 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net income (loss) per share - diluted | | $ | .45 | | | $ | (.82 | ) | | $ | .49 | | | $ | 1.10 | | | | $ | .94 | | | $ | .40 | | | $ | .27 | | | $ | .32 | |
Note P - Quarterly Results of Operations (Unaudited) | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Quarterly results of operations are as follows: | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | Results by Quarter | | | | | | | | | | | | |
| | | | | | 2014 | | | | | | | | | | 2013 | | | | |
| | | 1st | | | 2nd | | | 3rd | | | 4th | | | | 1st | | | 2nd | | | 3rd | | | 4th | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net premiums earned | | $ | 63,842 | | | $ | 62,905 | | | $ | 65,947 | | | $ | 68,933 | | | | $ | 61,098 | | | $ | 61,775 | | | $ | 64,448 | | | $ | 65,422 | |
| Net investment income | | | 2,294 | | | | 2,090 | | | | 2,073 | | | | 2,599 | | | | | 2,410 | | | | 1,985 | | | | 2,192 | | | | 2,183 | |
| Net gains on investments | | | 4,070 | | | | 8,089 | | | | 658 | | | | 2,113 | | | | | 14,347 | | | | 719 | | | | 1,430 | | | | 7,019 | |
| Losses and loss expenses incurred | | | 39,289 | | | | 40,282 | | | | 38,693 | | | | 41,332 | | | | | 34,533 | | | | 38,343 | | | | 36,967 | | | | 40,858 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net income | | | 6,361 | | | | 9,340 | | | | 5,770 | | | | 8,246 | | | | | 14,943 | | | | 4,907 | | | | 7,771 | | | | 8,967 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net income per share - diluted | | $ | .42 | | | $ | .62 | | | $ | .39 | | | $ | .55 | | | | $ | 1.00 | | | $ | .33 | | | $ | .52 | | | $ | .60 | |
Note QP - Statutory
Net income of the insurance subsidiaries,Insurance Subsidiaries, all of which are wholly owned,wholly-owned, as determined in accordance with statutory accounting practices, was $27,143, $30,886$22,000, $31,647 and $29,262$25,627 for 2014, 20132017, 2016 and 2012,2015, respectively. Consolidated statutory capital and surplus for these subsidiaries was $398,762$421,663 and $377,209$399,314 at December 31, 20142017 and 2013,2016, respectively, of which $64,400$59,106 may be transferred by dividend or loan to the parent company during calendar year 20152018 with proper notification to, but without approval from, regulatory authorities. An additional $238,096 of shareholders’ equity of such insurance subsidiaries could, under existing regulations, be advanced or loaned to the parent company with prior notification to and approval from regulatory authorities, although it is unlikely that transfers of this size would be practical.
State regulatory authorities prescribe calculations of the minimum amount of statutory capital and surplus necessary for each insurance company to remain authorized. These computations are referred to as Risk Based Capital (“RBC”("RBC") requirements and are based on a number of complex factors taking into consideration the quality and nature of assets, the historical adequacy of recorded liabilities and the specific nature of business conducted. At December 31, 20142017, the minimum statutory capital and surplus requirements of the insurance subsidiariesInsurance Subsidiaries was $94,892.$104,913. Actual consolidated statutory capital and surplus at December 31, 20142017 exceeded this requirement by $303,870, which equals to 320% of minimum RBC.$316,750.
Note RQ - Leases
The Company leases certain computer and related equipment using noncancelable operating leases. Lease expense for 2014, 20132017, 2016 and 20122015 was $330, $1,324$417, $157 and $1,506,$175, respectively. At December 31, 2014,2017, future lease payments for operating leases with initial or remaining noncancelable terms of one year or more consisted of the following:
| 2015 | | | 144 | |
| 2016 | | | 138 | |
| 2017 | | | 106 | |
| 2018 | | | - | |
| 2019 | | | - | |
| Thereafter | | | - | |
| Total minimum payments required | | $ | 388 | |
| 2018 | | $ | 297 | |
| 2019 | | | 297 | |
| 2020 | | | 80 | |
| 2021 and thereafter | | | 6 | |
| Total minimum payments required | | $ | 680 | |
Note SR – Accumulated Other Comprehensive Income
A reconciliation of the components of accumulated other comprehensive income at December 31 is as follows:
| | | 2014 | | | 2013 | | | 2017 | | | 2016 | |
| Investments: | | | | | | | | | | | | |
| Total unrealized gain before federal income taxes | | $ | 79,753 | | | $ | 75,521 | | | $ | 71,848 | | | $ | 52,386 | |
| Deferred tax liability | | | (27,913 | ) | | | (26,432 | ) | | | (25,148 | ) | | | (18,335 | ) |
| Net unrealized gains on investments | | | 51,840 | | | | 49,089 | | | | 46,700 | | | | 34,051 | |
| | | | | | | | | | | | | | | | | |
| Foreign exchange adjustment: | | | | | | | | | | | | | | | | |
| Total unrealized gains | | | 600 | | | | 2,155 | | |
| Deferred tax liability | | | (210 | ) | | | (754 | ) | |
| Net unrealized gains on foreign exchange adjustment | | | 390 | | | | 1,401 | | |
| Total unrealized losses | | | | (475 | ) | | | (1,278 | ) |
| Deferred tax benefit | | | | 166 | | | | 447 | |
| Net unrealized losses on foreign exchange adjustment | | | | (309 | ) | | | (831 | ) |
| | | | | | | | | | | | | | | | | |
| Accumulated other comprehensive income | | $ | 52,230 | | | $ | 50,490 | | | $ | 46,391 | | | $ | 33,220 | |
Note S – Accumulated Other Comprehensive Income (continued)
Other comprehensive income reclassification adjustmentsDetails of changes in net unrealized gains on investments for the years ended December 31 are as follows:
| | | 2014 | | | 2013 | | | 2012 | | | 2017 | | | 2016 | | | 2015 | |
| Investments: | | | | | | | | | | | | | | | | | | |
| Pre-tax holding gains on debt and equity | | | | | | | | | | |
| securities arising during period | | $ | 12,055 | | | $ | 36,477 | | | $ | 15,612 | | |
| Pre-tax holding gains (losses) on debt and | | | | | | | | | | |
| equity securities arising during period | | | $ | 26,677 | | | $ | 13,259 | | | $ | (19,445 | ) |
| Less: applicable federal income taxes | | | 4,220 | | | | 12,766 | | | | 5,464 | | | | 9,337 | | | | 4,641 | | | | (6,806 | ) |
| | | | 7,835 | | | | 23,711 | | | | 10,148 | | | | 17,340 | | | | 8,618 | | | | (12,639 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Pre-tax gains on debt and equity securities | | | | | | | | | | | | | | | | | | | | | | | | |
| included in net income during period | | | 7,823 | | | | 15,520 | | | | 1,959 | | | | 7,217 | | | | 20,755 | | | | 426 | |
| Less: applicable federal income taxes | | | 2,739 | | | | 5,431 | | | | 686 | | | | 2,526 | | | | 7,264 | | | | 149 | |
| | | | 5,084 | | | | 10,089 | | | | 1,273 | | | | 4,691 | | | | 13,491 | | | | 277 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Change in unrealized gains on investments | | $ | 2,751 | | | $ | 13,622 | | | $ | 8,875 | | | $ | 12,649 | | | $ | (4,873 | ) | | $ | (12,916 | ) |
Note R – Accumulated Other Comprehensive Income (continued)
Reconciliation of accumulated other comprehensive income and retained earnings for the years ended December 31 are as follows:
| | | 2014 | | | 2013 | | | 2012 | | | 2017 | | | 2016 | | | 2015 | |
| | | | | | | | | | | | | | | | | | | |
| Beginning accumulated other comprehensive income | | $ | 50,490 | | | $ | 37,443 | | | $ | 28,351 | | | $ | 33,220 | | | $ | 37,858 | | | $ | 52,230 | |
| Change in foreign exchange adjustment | | | (1,011 | ) | | | (575 | ) | | | 217 | | | | 522 | | | | 235 | | | | (1,456 | ) |
| Change in unrealized net gains on investments | | | 2,751 | | | | 13,622 | | | | 8,875 | | | | 12,649 | | | | (4,873 | ) | | | (12,916 | ) |
| Ending accumulated other comprehensive income | | $ | 52,230 | | | $ | 50,490 | | | $ | 37,443 | | | $ | 46,391 | | | $ | 33,220 | | | $ | 37,858 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | 2014 | | | | 2013 | | | | 2012 | | | | 2017 | | | | 2016 | | | | 2015 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Beginning retained earnings | | $ | 280,003 | | | $ | 258,358 | | | $ | 241,325 | | | $ | 316,195 | | | $ | 303,053 | | | $ | 294,773 | |
| Net income | | | 29,717 | | | | 36,588 | | | | 31,919 | | | | 18,323 | | | | 28,945 | | | | 23,283 | |
| Dividends | | | (14,947 | ) | | | (14,943 | ) | | | (14,886 | ) | | | (16,302 | ) | | | (15,803 | ) | | | (15,003 | ) |
| Repurchase of common shares | | | | (1,516 | ) | | | - | | | | - | |
| Ending retained earnings | | $ | 294,773 | | | $ | 280,003 | | | $ | 258,358 | | | $ | 316,700 | | | $ | 316,195 | | | $ | 303,053 | |
Note S – Debt
The Company maintains a revolving line of credit with a $40,000 limit and an expiration date of September 23, 2018. Interest on this line of credit is referenced to LIBOR and can be fixed for periods of up to one year at the Company's option. Outstanding drawings on this line of credit were $20,000 as of both December 31, 2017 and 2016. At December 31, 2017, the effective interest rate was 2.65%. The Company had $20,000 remaining unused under the line of credit at December 31, 2017. These outstanding borrowings were used for general corporate purposes.
Note T -– Subsequent Events
On February 9, 2018, the Board of Directors of Baldwin & Lyons, Inc. declared a regular quarterly dividend of $0.28 per share on the Company's Class A and Class B Common Stock. The dividend per share will be payable March 9, 2018 to shareholders of record on February 23, 2018.
We have evaluated subsequent events for recognition or disclosure in the consolidated financial statements filed on Form 10-K with the U.S. Securities and Exchange Commission and no events have occurred during this period which require recognition or disclosure in this document.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
No response to this item is required.
Item 9A. CONTROLS AND PROCEDURES
The Company carried out an evaluation as of December 31, 2014,2017, under the supervision and with the participation of management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures as defined in Rule 13a-15(e) ofadopted by the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended, or the Exchange Act."Exchange Act". Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures are effective in timely alerting the Company to material information required to be disclosed in reports under the Exchange Act. In addition, based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures were effective in ensuring that information required to be disclosed in reports that the Company files or submits under the Exchange Act is (a) recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms; and (b) accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosures. The Company noted no change in its internal control over financial reporting that occurred during the last fiscal quarterthree months ended December 31, 2017 that materially affected, or is reasonably likely to materially affect, theits internal control over financial reporting.
Management's Responsibility Forfor Financial Statements
Management is responsible for the preparation of the Company’sCompany's consolidated financial statements and related information appearing in this report. Management believes that the consolidated financial statements fairly reflect the form and substance of transactions and that the financial statements reasonably present the Company’sCompany's financial position and results of operations in conformity with U.S. generally accepted accounting principles. Management has included in the Company’sCompany's financial statements amounts that are based upon estimates and judgments which it believes are reasonable under the circumstances.
The Board of Directors of the Company has an Audit Committee composed of four non-management Directors. The committee meets periodically with financial management, the internal auditors and the independent registered public accounting firm to review accounting, control, auditing and financial reporting matters.
Management's Report on Internal Control Over Financial Reporting
The Company’sCompany's management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Under the supervision and with the participation of management, including the Chief Executive Officer and the Chief Financial Officer, the Company conducted an evaluation of the effectiveness of its internal control over financial reporting based on the framework in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.Commission (2013 Framework). Based on our evaluation under this framework, management concluded that the Company’sCompany's internal control over financial reporting was effective as of December 31, 2014.2017. The effectiveness of the Company's internal control over financial reporting as of December 31, 20142017 has been audited by Ernst & Young LLP, an independent registered public accounting firm, as stated in their report which is included herein.
Report of Independent Registered Public Accounting Firm
The Board of Directors and Shareholders of Baldwin & Lyons, Inc.
We have audited Baldwin & Lyons, Inc. and subsidiaries’ (the Company) internal control over financial reporting as of December 31, 2014, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). The Company’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Baldwin & Lyons, Inc. and subsidiaries maintained, in all material respects, effective internal control over financial reporting as of December 31, 2014, based on the COSO criteria.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Baldwin & Lyons, Inc. and subsidiaries as of December 31, 2014 and 2013, and the related consolidated statements of operations, comprehensive income, shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2014 and our report dated March 6, 2015 expressed an unqualified opinion thereon.
/s/ ERNST & YOUNG LLP
Indianapolis, IN
March 6, 2015
PART III
Report of Independent Registered Public Accounting Firm |
| To the Shareholders and the Board of Directors of Baldwin & Lyons, Inc. |
Opinion on Internal Control over Financial Reporting We have audited Baldwin & Lyons, Inc. and subsidiaries' internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, Baldwin & Lyons, Inc. and subsidiaries (the Company) maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017, based on the COSO criteria. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of Baldwin & Lyons, Inc. and subsidiaries as of December 31, 2017 and 2016, the related consolidated statements of income, comprehensive income, shareholders' equity and cash flows for each of the three years in the period ended December 31, 2017, and the related notes and financial statement schedules listed in the Index at Item 15 (a) (collectively referred to as the "consolidated financial statements") and our report dated March 13, 2018 expressed an unqualified opinion thereon. Basis for Opinion The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management's Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. |
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. |
Definition and Limitations of Internal Control over Financial Reporting A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements. |
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. |
|
/s/ Ernst & Young LLP Indianapolis, Indiana March 13, 2018 |
Item 10.9B. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANTOTHER INFORMATION
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.None.
PART III
Item 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information required by this Item 10concerning the Company's directors and nominees for director, Audit Committee members and financial expert(s) and concerning disclosure of this Report with respect to directorsdelinquent filers under Section 16(a) of the Exchange Act is incorporated herein by reference from the Company's definitive Proxy Statement for its 2018 Annual Meeting of Shareholders, which will appear inbe filed with the definitive proxy statement is incorporated by reference herein.SEC pursuant to Regulation 14A within 120 days after the end of the Company's fiscal year.
The executive officers of the Company are expected to serve until the next annual meeting of the Board of Directors or 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 as of December 31, 2014:February 28, 2018:
Name | Age | Title | Served in Such Capacity Since |
Joseph J. DeVitoSteven A. Shapiro | 6353 | CEO,Executive Chairman | 2015 (1) |
| W. Randall Birchfield | 53 | Chief Executive Officer, President and COOChief Operating Officer | 2010 (1) |
Gary W. Miller | 74 | Chairman | 20102016 (2) |
G. Patrick Corydon | 66 | Executive Vice President and CFO | 2008 (3) |
William R. BirchfieldC. Vens | 5146 | Chief Financial Officer | 2016 (3) |
| Matthew A. Thompson | 53 | Executive Vice President | 20142016 (4) |
Craig C. Morfas | 55 | Executive Vice President and Secretary | 2012 (5) |
| (1) Mr. DeVito was elected Chief Executive Officer in December, 2010. He previously served as President and Chief Operating Officer from 2007 until 2010 and has served in various capacities since 1981. |
(1) Mr. Shapiro was named Executive Chairman of the Company in October 2015 and became employed by the Company in June 2016. Mr. Shapiro has 10 years of service as a member of the Board of Directors of the Company, serving as Lead Director from 2010 to 2015. He has served as Vice President of SF Investments, a broker/dealer in securities since 1991 and has been a member of New Vernon Investment Management, LLC, the General Partner in a series of investment limited partnerships, including the New Vernon Insurance Fund, since 1999. Mr. Shapiro served on the Board of Directors of First Mercury Financial Corporation until its sale in February 2011. (2) Mr. Birchfield was elected director and appointed as the Company's Chief Executive Officer in May 2016, as President of the Company in August 2016 and as Chief Operating Officer of the Company in February 2018. Mr. Birchfield joined the Company in 2013 and served as the Company's Executive Vice President of Sales and Underwriting from April 2014 until May 2016. Prior to joining the Company, Mr. Birchfield served in a variety of capacities within the property and casualty insurance industry with Allstate Insurance Company, Farmers Insurance Company, American International Group and Progressive Insurance Company, most recently as Vice President – Auto Line Management at Allstate Insurance Company from 2011 until September 2013.
| (2) Mr. Miller was elected Chairman in December, 2010. He was previously Chairman and CEO from 1997 until 2010 and has served in various capacities since 1965. |
(3) Mr. Vens was elected Chief Financial Officer in August 2016. Mr. Vens joined the Company in June 2014 as Managing Director – Finance and after that served as Vice President of Strategy and Planning from June 2016 until August 2016. Prior to joining the Company, Mr. Vens served as Chief Financial Officer of HighWave Energy, Inc. from 2011 to May 2014. | (3) Mr. Corydon was elected Executive Vice President in 2008 and has served as CFO since 1979. |
| (4) Mr. Birchfield was elected Executive Vice President in April, 2014. He previously served as Vice President of the Company from 2013 until 2014. |
| (5) Mr. Morfas was elected Executive Vice President in February, 2012. He served as Vice President and Secretary of the Company from 2008 until 2012 and has served in various capacities since1986. |
(4) Mr. Thompson was elected Executive Vice President in November 2016. He previously served as Senior Vice President of the Company from 2015 to 2016 and as Vice President of Sales from 2011 to 2015.
Code of Conduct
The Board of Directors has adopted a Code of Business Conduct (the Code)"Code") as our code of ethics document, which is applicable to all directors, officers at the vice president level and above, as well as certain other employees with control over accounting data. The Code incorporates our guidelines designed to deter wrongdoing and to promote honest and ethical conduct and compliance with applicable laws and regulations. The Code also incorporates our expectations of our employees that enable us to comply with applicable laws, rules and regulations and to provide accurate and timely disclosure in our filings with the SEC and other public communications.
The Code is available on the Corporation’sour website at www.baldwinandlyons.com. The Board of Directors reviews the Code annually and approves any amendments necessary to update the Code. AnyWe intend to disclose on our website any amendments to, or waivers from, the Code that are properly posted.required to be publicly disclosed pursuant to the rules of the SEC and Nasdaq. Copies can also be obtained free of charge by contacting our investor relationsInvestor Relations department at pcorydon@baldwinandlyons.cominvestors@baldwinandlyons.com or by written request to Baldwin & Lyons, Inc., Attention: Investor Relations, 111 Congressional Blvd., Suite 500, Carmel, Indiana 46032.
Item 11. EXECUTIVE COMPENSATION *
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS *
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE *
Item 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES *
* The information required by Items 11, 12, 13 and 14 is incorporated herein by reference from the Company's definitive Proxy Statement for its 2018 Annual Meeting of Shareholders, which will be filed with the SEC pursuant to Regulation 14A within 120 days after the end of the Company's fiscal year.
PART IV
Item 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
| * The information to be provided under Items 11, 12, 13 and 14 is omitted from this Report because the Registrant will file with the Commission a definitive proxy statement pursuant to Regulation 14A involving the election of directors not later than 120 days after the close of its fiscal year. The information required by these items of this Report which will appear in the definitive proxy statement is incorporated by reference herein.
|
PART IV
Item 15. 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 Registered Public Accounting Firm) are submitted in Item 8 of this report.Annual Report on Form 10-K. |
Consolidated Balance Sheets - December 31, 20142017 and 20132016 |
Consolidated Statements of OperationsIncome - Years ended December 31, 2014, 20132017, 2016 and 20122015 Consolidated Statements of Comprehensive Income – Years ended December 31, 2014, 20132017, 2016 and 20122015 |
Consolidated Statements of Shareholders’Shareholders' Equity - Years ended December 31, 2014, 20132017, 2016 and 20122015 |
Consolidated Statements of Cash Flows - Years ended December 31, 2014, 20132017, 2016 and 20122015 |
| 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 15(d):this Annual Report on Form 10-K: |
| Pursuant to Article 7: |
| Schedule I -- Summary of Investments--Other than Investments in Related Parties |
| Schedule II -- Condensed Financial Information of the Registrant |
| Schedule III -- Supplementary Insurance Information |
| Schedule IV -- Reinsurance |
Schedule VI -- Supplemental Information Concerning Property/Casualty Insurance Operations |
All other schedules to the consolidated financial statements required by Article 7 and Article 5 of Regulation S-X are not required under the related instructions or are inapplicable and therefore have been omitted.
3. Listing ofIndex To Exhibits:
| Number &and Caption from Exhibit Table of Item 601 of Regulation S-K | Exhibit Number and Description |
| (3) (Articles of Incorporation &and By Laws) | EXHIBIT 3(i) – Articles of Incorporation of Baldwin & Lyons, Inc., as amended (Incorporated as an exhibit by reference to Exhibit 3(a)A to the Company's definitive Proxy Statement for its Annual Report on Form 10-K for the year ended December 31, 1986)Meeting held May 10, 2016) |
| | | EXHIBIT 3(ii)--
By-Laws of Baldwin & Lyons, Inc., as restatedamended May 10, 2016 (Incorporated as an exhibit by reference to Exhibit 3.2 to the Company's Current Report on Form 8-K filed May 13, 2016)
|
| (10) (Material Contracts) | EXHIBIT 10(a)-- 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) (SEC File No. 000-05534)* |
| | EXHIBIT 10(f)-- Baldwin & Lyons, Inc. Executive Incentive Bonus Plan (Incorporated as an exhibit by reference to the Company's definitive Proxy Statement for its Annual Meeting held May 4, 2010) (SEC File No. 000-05534)* |
| | EXHIBIT 10(g)-- Baldwin & Lyons, Inc. Managing General Agency Agreement with Paladin Catastrophe Management LLCRestricted Stock Compensation Plan (Incorporated as an exhibit by reference to the Company's definitive Proxy Statement for its Annual Meeting held May 4, 2010)(SEC File No. 000-05534)* EXHIBIT 10(h)-- Baldwin & Lyons, Inc. Annual Incentive Plan (Incorporated as an exhibit by reference to the Company's definitive Proxy Statement for its Annual Meeting held May 9, 2017)(SEC File No. 000-05534)* EXHIBIT 10(i)-- Baldwin & Lyons, Inc. Long-Term Incentive Plan (Incorporated as an exhibit by reference to the Company's definitive Proxy Statement for its Annual Meeting held May 9, 2017)(SEC File No. 000-05534)* |
(21)(21) (Subsidiaries of the registrant) |
Subsidiaries of Baldwin & Lyons, Inc.
|
| |
(23)(23) (Consents of experts and counsel) | EXHIBIT 23-- 23--
Consent of Ernst & Young LLP |
(24)(24) (Powers of Attorney) | Powers of Attorney for certain Officers and Directors |
(31) | Certification of CEO pursuant to Section 302 of the Sarbanes-Oxley Act |
| (31.2) (Certification) | Certification of CFO pursuant to Section 302 of the Sarbanes-Oxley Act |
Item 601 of Regulation S-K | Exhibit Number and Description |
(32) (Certification) | EXHIBIT 32-- |
| Certification of CEO and CFO pursuant to Section 906 of the |
| Sarbanes-Oxley Act and 18 U.S.C. 1350 |
(b)(101) | A reportThe following materials from Baldwin & Lyons, Inc.'s Annual Report on Form 8-K was filed by10-K for the Companyyear ended December 31, 2017, formatted in XBRL (eXtensible Business Reporting Language): (1) the fourth quarterConsolidated Balance Sheets, (2) the Consolidated Statements of 2014Income, (3) the Consolidated Statements of Comprehensive Income, (4) the Consolidated Statements of Shareholders' Equity, (5) the Consolidated Statements of Cash Flows, and (6) the Notes to announce its third quarter earnings press release.Consolidated Financial Statements. |
(c) | Exhibits. The response to this portion of Item 15 is submitted as a separate section of this report. |
* Indicates management contracts or compensating plans or arrangements.
(d) | Financial Statement Schedules. The response to this portion of Item 15 is submitted on pages 72 through 78 of this report. |
Item 16. FORM 10-K SUMMARY
None.
| SCHEDULE I -- SUMMARY OF INVESTMENTS- | |
| OTHER THAN INVESTMENTS IN RELATED PARTIES | |
| | | | | | | |
| Form 10-K - Year Ended December 31, 2017 | |
| | | | | | | |
| Baldwin & Lyons, Inc. and Subsidiaries | |
| | | | | | | |
| | | | | | | |
| Column A | Column B | | Column C | | Column D | |
| | | | | | | |
| | | | | | Amount At | |
| | | | | | Which Shown | |
| | | | Fair | | In The Balance | |
| Type of Investment | Cost | | Value | | Sheet (A) | |
| | (dollars in thousands) | |
| | | | | | | |
| Fixed Maturities: | | | | | | |
| Bonds: | | | | | | |
| Agency collateralized mortgage obligations | | $ | 15,839 | | | $ | 16,586 | | | $ | 16,586 | |
| Agency mortgage-backed securities | | | 27,180 | | | | 27,075 | | | | 27,075 | |
| Asset-backed securities | | | 42,861 | | | | 43,469 | | | | 43,469 | |
| Bank loans | | | 19,271 | | | | 19,488 | | | | 19,488 | |
| Certificates of deposit | | | 3,124 | | | | 3,135 | | | | 3,135 | |
| Collateralized mortgage obligations | | | 6,079 | | | | 6,492 | | | | 6,492 | |
| Corporate securities | | | 197,201 | | | | 197,130 | | | | 197,130 | |
| Mortgage-backed securities | | | 23,656 | | | | 24,204 | | | | 24,204 | |
| Municipal obligations | | | 97,059 | | | | 96,650 | | | | 96,650 | |
| Non-U.S. government obligations | | | 39,189 | | | | 38,613 | | | | 38,613 | |
| U.S. government obligations | | | 49,558 | | | | 49,011 | | | | 49,011 | |
| Total fixed maturities | | | 521,017 | | | | 521,853 | | | | 521,853 | |
| | | | | | | | | | | | | |
| Equity Securities: | | | | | | | | | | | | |
| Common Stocks: | | | | | | | | | | | | |
| Consumer | | | 23,565 | | | | 46,578 | | | | 46,578 | |
| Energy | | | 6,763 | | | | 10,278 | | | | 10,278 | |
| Financial | | | 31,859 | | | | 45,470 | | | | 45,470 | |
| Industrial | | | 8,949 | | | | 25,402 | | | | 25,402 | |
| Technology | | | 5,768 | | | | 13,061 | | | | 13,061 | |
| Funds (e.g. mutual funds, closed end funds, ETFs) | | | 46,177 | | | | 50,291 | | | | 50,291 | |
| Other | | | 7,670 | | | | 10,683 | | | | 10,683 | |
| Total equity securities | | | 130,751 | | | | 201,763 | | | | 201,763 | |
| | | | | | | | | | | | | |
| Short-term: | | | | | | | | | | | | |
| Certificates of deposit | | | 1,000 | | | | 1,000 | | | | 1,000 | |
| Total short-term and other | | | 1,000 | | | | 1,000 | | | | 1,000 | |
| | | | | | | | | | | | | |
| Total investments | | $ | 652,768 | | | $ | 724,616 | | | $ | 724,616 | |
| | | | | | | | | | | | | |
| (A) Amounts presented above do not include investments of $59,174 classified as cash and | | | | | | | | | | | | |
| cash equivalents in the balance sheet. | | | | | | | | | | | | |
| SCHEDULE II | |
| CONDENSED FINANCIAL INFORMATION OF REGISTRANT | |
| | | | | | | |
| Form 10-K | |
| | | | | | | |
| Baldwin & Lyons, Inc. | |
| | |
| Condensed Balance Sheets | | | | | | |
| | | December 31 | |
| | | 2017 | | | 2016 | |
| | | (dollars in thousands) | |
| Assets | | | | | | |
| Investment in subsidiaries | | $ | 436,879 | | | $ | 409,892 | |
| Due from affiliates | | | 1,191 | | | | 3,381 | |
| Investments other than subsidiaries: | | | | | | | | |
| Fixed maturities | | | 22,306 | | | | 10,166 | |
| Limited partnerships | | | 222 | | | | 205 | |
| | | | 22,528 | | | | 10,371 | |
| Cash and cash equivalents | | | 26,496 | | | | 14,995 | |
| Accounts receivable | | | 6,833 | | | | 7,602 | |
| Other assets | | | 24,772 | | | | 25,763 | |
| Total assets | | $ | 518,699 | | | $ | 472,004 | |
| Liabilities and shareholders' equity | | | | | | | | |
| | | | | | | | | |
| Liabilities: | | | | | | | | |
| Premiums payable | | $ | 14,046 | | | $ | 11,973 | |
| Deposits from insureds | | | 60,893 | | | | 30,087 | |
| Short-term borrownings | | | 20,000 | | | | 20,000 | |
| Other liabilities | | | 4,949 | | | | 5,599 | |
| | | | 99,888 | | | | 67,659 | |
| Shareholders' equity: | | | | | | | | |
| Common stock: | | | | | | | | |
| Class A | | | 112 | | | | 112 | |
| Class B | | | 530 | | | | 532 | |
| Additional paid-in capital | | | 55,078 | | | | 54,286 | |
| Unrealized net gains on investments | | | 46,700 | | | | 34,051 | |
| Foreign exchange adjustment | | | (309 | ) | | | (831 | ) |
| Retained earnings | | | 316,700 | | | | 316,195 | |
| | | | 418,811 | | | | 404,345 | |
| | | | | | | | | |
| Total liabilities and shareholders' equity | | $ | 518,699 | | | $ | 472,004 | |
| SCHEDULE II | |
| CONDENSED FINANCIAL INFORMATION OF REGISTRANT | |
| | | | | | | | | | |
| Form 10-K | |
| | | | | | | | | | |
| Baldwin & Lyons, Inc. | |
| | |
| Condensed Statements of Income | | | | | | | | | |
| | | Year Ended December 31 | |
| | | 2017 | | | 2016 | | | 2015 | |
| | | (dollars in thousands) | |
| Revenue: | | | | | | | | | |
| Commissions and service fees | | $ | 18,863 | | | $ | 27,736 | | | $ | 23,523 | |
| Cash dividends from subsidiaries | | | 10,000 | | | | 20,000 | | | | 20,000 | |
| Net investment income | | | 348 | | | | 134 | | | | 120 | |
| Net realized gains (losses) on investments | | | 308 | | | | (3 | ) | | | (22 | ) |
| Other | | | (106 | ) | | | (24 | ) | | | (17 | ) |
| | | | 29,413 | | | | 47,843 | | | | 43,604 | |
| Expenses: | | | | | | | | | | | | |
| Salary and related items | | | 18,140 | | | | 17,462 | | | | 17,616 | |
| Other | | | 9,686 | | | | 10,808 | | | | 7,297 | |
| | | | 27,826 | | | | 28,270 | | | | 24,913 | |
| Income before federal income taxes | | | | | | | | | | | | |
| and equity in undistributed | | | | | | | | | | | | |
| income of subsidiaries | | | 1,587 | | | | 19,573 | | | | 18,691 | |
| Federal income tax benefit | | | (2,971 | ) | | | (69 | ) | | | (350 | ) |
| | | | 4,558 | | | | 19,642 | | | | 19,041 | |
| Equity in undistributed income | | | | | | | | | | | | |
| of subsidiaries | | | 13,765 | | | | 9,303 | | | | 4,242 | |
| | | | | | | | | | | | | |
| Net income | | $ | 18,323 | | | $ | 28,945 | | | $ | 23,283 | |
| SCHEDULE II | |
| CONDENSED FINANCIAL INFORMATION OF REGISTRANT | |
| | | | | | | | | | |
| Form 10-K | |
| | | | | | | | | | |
| Baldwin & Lyons, Inc. | |
| | | | | |
| | | | | | | | | | |
| Condensed Statements of Comprehensive Income | | | | | | | | | |
| | | 2017 | | | 2016 | | | 2015 | |
| | | (dollars in thousands) | |
| | | | | | | | | | |
| Net income | | $ | 18,323 | | | $ | 28,945 | | | $ | 23,283 | |
| | | | | | | | | | | | | |
| Other comprehensive income (loss), net of tax: | | | | | | | | | | | | |
| Unrealized net losses on securities: | | | | | | | | | | | | |
| Unrealized holding net gains (losses) arising during the period | | | 17,340 | | | | 8,618 | | | | (12,639 | ) |
| Less: reclassification adjustment for net gains | | | | | | | | | | | | |
| included in net income | | | (4,691 | ) | | | (13,491 | ) | | | (277 | ) |
| Other comprehensive income (loss), net of tax | | | 12,649 | | | | (4,873 | ) | | | (12,916 | ) |
| | | | | | | | | | | | | |
| Foreign currency translation adjustments | | | 522 | | | | 235 | | | | (1,456 | ) |
| | | | | | | | | | | | | |
| Other comprehensive income (loss) | | | 13,171 | | | | (4,638 | ) | | | (14,372 | ) |
| | | | | | | | | | | | | |
| Comprehensive income | | $ | 31,494 | | | $ | 24,307 | | | $ | 8,911 | |
| SCHEDULE I -- SUMMARY OF INVESTMENTS- | |
| OTHER THAN INVESTMENTS IN RELATED PARTIES | |
| | | | | | | | | | |
| Form 10-K - Year Ended December 31, 2014 | |
| | | | | | | | | | |
| Baldwin & Lyons, Inc. and Subsidiaries | |
| (Dollars in thousands) | |
| | | | | | | | | | |
| | | | | | | | | | |
| Column A | | Column B | | | Column C | | | Column D | |
| | | | | | | | | | |
| | | | | | | | | Amount At | |
| | | | | | | | | Which Shown | |
| | | | | | Fair | | | In The Balance | |
| Type of Investment | | Cost | | | Value | | | Sheet (A) | |
| | | | | | | | | | |
| Fixed Maturities: | | | | | | | | | |
| Bonds: | | | | | | | | | |
| U.S. government obligations | | | 101,058 | | | | 101,094 | | | | 101,094 | |
| Mortgage-backed securities | | | 42,040 | | | | 42,506 | | | | 42,506 | |
| State and municipal obligations | | | 113,133 | | | | 113,777 | | | | 113,777 | |
| Foreign government obligations | | | 28,332 | | | | 27,466 | | | | 27,466 | |
| Corporate securities | | | 170,822 | | | | 166,966 | | | | 166,966 | |
| Total fixed maturities | | | 455,385 | | | | 451,809 | | | | 451,809 | |
| | | | | | | | | | | | | |
| Equity Securities: | | | | | | | | | | | | |
| Common Stocks: | | | | | | | | | | | | |
| Industrial, miscellaneous and all other | | | 78,778 | | | | 162,107 | | | | 162,107 | |
| Total equity securities | | | 78,778 | | | | 162,107 | | | | 162,107 | |
| | | | | | | | | | | | | |
| Limited partnerships | | | 81,230 | | | | 81,230 | | | | 81,230 | |
| | | | | | | | | | | | | |
| Short-term: | | | | | | | | | | | | |
| Certificates of deposit | | | 2,966 | | | | 2,966 | | | | 2,966 | |
| Total short-term and other | | | 2,966 | | | | 2,966 | | | | 2,966 | |
| | | | | | | | | | | | | |
| Total investments | | $ | 618,359 | | | $ | 698,112 | | | $ | 698,112 | |
| | | | | | | | | | | | | |
| (A) Investments presented above do not include $59,309 of money market funds classified with cash and | | | | | | | | | | | | |
| cash equivalents in the balance sheet. | | | | | | | | | | | | |
| SCHEDULE II | |
| CONDENSED FINANCIAL INFORMATION OF REGISTRANT | |
| | | | | | | | | | |
| Form 10-K | |
| | | | | | | | | | |
| Baldwin & Lyons, Inc. | |
| | |
| | | | | | | | | | |
| Condensed Statements of Cash Flows | | | | | | | | | |
| | | Year Ended December 31 | |
| | | 2017 | | | 2016 | | | 2015 | |
| | | (dollars in thousands) | |
| Net cash provided by operating activities | | $ | 44,998 | | | $ | 15,484 | | | $ | 21,841 | |
| | | | | | | | | | | | | |
| Investing activities: | | | | | | | | | | | | |
| Purchases of long-term investments | | | (21,365 | ) | | | (4,000 | ) | | | (4,792 | ) |
| Sales or maturities of long-term investments | | | 9,146 | | | | 3,493 | | | | 4,194 | |
| Net sales of short-term investments | | | - | | | | 2,165 | | | | - | |
| Distributions from limited partnerships | | | 298 | | | | - | | | | - | |
| Net purchases of property and equipment | | | (3,394 | ) | | | (4,278 | ) | | | (4,921 | ) |
| Net cash used in investing activities | | | (15,315 | ) | | | (2,620 | ) | | | (5,519 | ) |
| | | | | | | | | | | | | |
| Financing activities: | | | | | | | | | | | | |
| Dividends paid to shareholders | | | (16,302 | ) | | | (15,803 | ) | | | (15,003 | ) |
| Repurchase of common shares | | | (1,880 | ) | | | - | | | | - | |
| Net cash used in financing activities | | | (18,182 | ) | | | (15,803 | ) | | | (15,003 | ) |
| Increase (decrease) in cash and cash equivalents | | | 11,501 | | | | (2,939 | ) | | | 1,319 | |
| Cash and cash equivalents at beginning of year | | | 14,995 | | | | 17,934 | | | | 16,615 | |
| Cash and cash equivalents at end of year | | $ | 26,496 | | | $ | 14,995 | | | $ | 17,934 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | |
| SCHEDULE II | |
| CONDENSED FINANCIAL INFORMATION OF REGISTRANT | |
| | | | | | | |
| Form 10-K | |
| | | | | | | |
| Baldwin & Lyons, Inc. | |
| (Dollars in thousands) | |
| | | | | | | |
| Condensed Balance Sheets | | | | | | |
| | | December 31 | |
| | | 2014 | | | 2013 | |
| Assets | | | | | | |
| Investment in subsidiaries | | $ | 415,304 | | | $ | 398,008 | |
| Due from affiliates | | | 2,762 | | | | 2,465 | |
| Investments other than subsidiaries: | | | | | | | | |
| Fixed maturities | | | 11,924 | | | | 11,093 | |
| Limited partnerships | | | 233 | | | | 248 | |
| | | | 12,157 | | | | 11,341 | |
| Cash and cash equivalents | | | 16,615 | | | | 9,848 | |
| Accounts receivable | | | 5,157 | | | | 7,075 | |
| Other assets | | | 17,905 | | | | 13,453 | |
| Total assets | | $ | 469,900 | | | $ | 442,190 | |
| Liabilities and shareholders' equity | | | | | | | | |
| | | | | | | | | |
| Liabilities: | | | | | | | | |
| Premiums payable | | $ | 27,850 | | | $ | 30,004 | |
| Deposits from insureds | | | 18,303 | | | | 16,307 | |
| Notes payable to bank | | | 20,000 | | | | 10,000 | |
| Other liabilities | | | 4,251 | | | | 4,155 | |
| | | | 70,404 | | | | 60,466 | |
| Shareholders' equity: | | | | | | | | |
| Common stock: | | | | | | | | |
| Class A | | | 112 | | | | 112 | |
| Class B | | | 527 | | | | 525 | |
| Additional paid-in capital | | | 51,854 | | | | 50,594 | |
| Unrealized net gains on investments | | | 51,840 | | | | 49,089 | |
| Foreign exchange adjustment | | | 390 | | | | 1,401 | |
| Retained earnings | | | 294,773 | | | | 280,003 | |
| | | | 399,496 | | | | 381,724 | |
| | | | | | | | | |
| Total liabilities and shareholders' equity | | $ | 469,900 | | | $ | 442,190 | |
| SCHEDULE II | |
| CONDENSED FINANCIAL INFORMATION OF REGISTRANT | |
| | | | | | | | | | |
| Form 10-K | |
| | | | | | | | | | |
| Baldwin & Lyons, Inc. | |
| (Dollars in thousands) | |
| | | | | | | | | | |
| Condensed Statements of Operations | | | | | | | | | |
| | | Year Ended December 31 | |
| | | 2014 | | | 2013 | | | 2012 | |
| Revenue: | | | | | | | | | |
| Commissions and service fees | | $ | 22,153 | | | $ | 21,597 | | | $ | 20,753 | |
| Dividends from subsidiaries | | | 15,000 | | | | 15,000 | | | | 14,000 | |
| Net investment income | | | 102 | | | | 54 | | | | 48 | |
| Net realized losses on investments | | | (27 | ) | | | (11 | ) | | | (49 | ) |
| Other | | | 126 | | | | 41 | | | | 24 | |
| | | | 37,354 | | | | 36,681 | | | | 34,776 | |
| Expenses: | | | | | | | | | | | | |
| Salary and related items | | | 15,543 | | | | 15,965 | | | | 15,410 | |
| Other | | | 7,978 | | | | 6,633 | | | | 7,098 | |
| | | | 23,521 | | | | 22,598 | | | | 22,508 | |
| Income before federal income taxes | | | | | | | | | | | | |
| and equity in undistributed | | | | | | | | | | | | |
| income of subsidiaries | | | 13,833 | | | | 14,083 | | | | 12,268 | |
| Federal income tax benefit | | | (294 | ) | | | (348 | ) | | | (629 | ) |
| | | | 14,127 | | | | 14,431 | | | | 12,897 | |
| Equity in undistributed income | | | | | | | | | | | | |
| of subsidiaries | | | 15,590 | | | | 22,157 | | | | 19,022 | |
| | | | | | | | | | | | | |
| Net income | | $ | 29,717 | | | $ | 36,588 | | | $ | 31,919 | |
| SCHEDULE II | |
| CONDENSED FINANCIAL INFORMATION OF REGISTRANT | |
| | | | | | | | | | |
| Form 10-K | |
| | | | | | | | | | |
| Baldwin & Lyons, Inc. | |
| (Dollars in thousands) | |
| | | | | | | | | | |
| Condensed Statements of Cash Flows | | | | | | | | | |
| | | Year Ended December 31 | |
| | | 2014 | | | 2013 | | | 2012 | |
| | | | | | | | | | |
| Net cash provided by operating activities | | $ | 19,719 | | | $ | 15,125 | | | $ | 20,735 | |
| | | | | | | | | | | | | |
| Investing activities: | | | | | | | | | | | | |
| Purchases of long-term investments | | | (6,398 | ) | | | (10,322 | ) | | | (8,944 | ) |
| Sales or maturities of long-term investments | | | 5,253 | | | | 9,982 | | | | 8,902 | |
| Decrease in notes receivable from employees | | | - | | | | - | | | | 1,252 | |
| Distributions from limited partnerships | | | 13 | | | | - | | | | - | |
| Net purchases of property and equipment | | | (6,873 | ) | | | (1,775 | ) | | | (834 | ) |
| Other | | | - | | | | (362 | ) | | | 228 | |
| Net cash provided by (used in) investing activities | | | (8,005 | ) | | | (2,477 | ) | | | 604 | |
| | | | | | | | | | | | | |
| Financing activities: | | | | | | | | | | | | |
| Dividends paid to shareholders | | | (14,947 | ) | | | (14,943 | ) | | | (14,886 | ) |
| Drawings on line of credit | | | 10,000 | | | | - | | | | - | |
| Net cash used in financing activities | | | (4,947 | ) | | | (14,943 | ) | | | (14,886 | ) |
| Increase (decrease) in cash and cash equivalents | | | 6,767 | | | | (2,295 | ) | | | 6,453 | |
| Cash and cash equivalents at beginning of year | | | 9,848 | | | | 12,143 | | | | 5,690 | |
| Cash and cash equivalents at end of year | | $ | 16,615 | | | $ | 9,848 | | | $ | 12,143 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| |
| |
Note to Condensed Financial Statements--BasisStatements -- Basis of Presentation
The Company's investment in subsidiaries is stated at cost plus equity in the undistributed earnings of subsidiaries since the date of acquisition. The Company's share of net income of its subsidiaries is included in income using the equity method. These financial statements should be read in conjunction with the Company's consolidated financial statements.
| SCHEDULE III -- SUPPLEMENTARY INSURANCE INFORMATION |
| | | | | | | | | | | | |
| Form 10-K |
| | | | | | | | | | | | |
| 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 |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | Year Ended December 31 |
| | | Reserves | | | | | | | | | |
| | | for Unpaid | | Other | | | | Benefits, | Amortization | | |
| | Deferred | Claims | | Policy | | | | Claims, | of Deferred | | |
| | Policy | and Claim | | Claims and | | Net | Net | Losses and | Policy | Other | Net |
| | Acquisition | Adjustment | Unearned | Benefits | | Premium | Investment | Settlement | Acquisition | Operating | Premiums |
| Segment | Costs | Expenses | Premiums | Payable | | Earned | Income | Expenses | Costs | Expenses | Written |
| | | | | | | | (A) | (A) | | (A) (B) | |
| Property/Casualty | | | | | | | | | | | |
| Insurance | | | | | | | | | | | |
| | | | | | | | | | | | |
| 2017 | | $ 680,274 | $ 53,085 | --- | | $ 328,145 | $ 18,095 | $ 247,518 | $ 70,574 | $ 14,043 | $ 353,389 |
| | | | | | | | | | | | |
| 2016 | 1,172 | 576,330 | 21,694 | --- | | 276,011 | 14,483 | 186,481 | 51,597 | 8,180 | 271,752 |
| | | | | | | | | | | | |
| 2015 | 1,443 | 513,596 | 25,291 | --- | | 263,335 | 12,498 | 155,750 | 50,270 | 13,682 | 254,653 |
| SCHEDULE III -- SUPPLEMENTARY INSURANCE INFORMATION | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Form 10-K | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 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 | | | Acquisition | | | Unearned | | | Benefits | | | Premium | | | Investment | | | Settlement | | | Acquisition | | | Operating | | | Premiums | |
| Segment | | Costs | | | Expenses | | | Premiums | | | Payable | | | Earned | | | Income | | | Expenses | | | Costs | | | Expenses | | | Written | |
| | | | | | | | | | | | | | | | | | (A) (C) | | | (A) | | | | | | (A) (B) (C) | | | | |
| Property/Casualty | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Insurance | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2014 | | $ | 2,263 | | | $ | 449,133 | | | $ | 23,659 | | | | --- | | | $ | 224,683 | | | $ | 9,055 | | | $ | 139,308 | | | $ | 48,872 | | | $ | 14,033 | | | $ | 224,258 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2013 | | | 2,319 | | | | 408,469 | | | | 26,303 | | | | --- | | | | 202,785 | | | | 8,770 | | | | 133,005 | | | | 47,414 | | | | 14,459 | | | | 201,817 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2012 | | | 3,091 | | | | 373,667 | | | | 28,792 | | | | --- | | | | 186,586 | | | | 9,930 | | | | 122,924 | | | | 41,957 | | | | 12,057 | | | | 178,908 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Reinsurance | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2014 | | | --- | | | $ | 56,969 | | | $ | 11,360 | | | | --- | | | $ | 36,944 | | | $ | 9,055 | | | $ | 20,288 | | | | --- | | | $ | 14,033 | | | $ | 37,913 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2013 | | | --- | | | | 66,001 | | | | 10,390 | | | | --- | | | | 49,958 | | | | 8,770 | | | | 17,696 | | | | --- | | | | 14,459 | | | | 51,867 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2012 | | | --- | | | | 81,787 | | | | 8,481 | | | | --- | | | | 50,875 | | | | 9,930 | | | | 15,164 | | | | --- | | | | 12,057 | | | | 54,770 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
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| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(A) Allocations of certain expenses have been made to investmentinvesetment 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) Commission allowances relating to reinsurance ceded are offset against other operating expenses.
(C) Amounts are not broken down into separate segments; entire consilidated amount included in each segment.
| SCHEDULE IV -- REINSURANCE | SCHEDULE IV -- REINSURANCE | | SCHEDULE IV -- REINSURANCE | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Form 10-K | Form 10-K | | Form 10-K | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Baldwin & Lyons, Inc. and Subsidiaries | Baldwin & Lyons, Inc. and Subsidiaries | | Baldwin & Lyons, Inc. and Subsidiaries | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (Dollars in thousands) | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Column A | | Column B | | | Column C | | | Column D | | | Column E | | | Column F | | | Column B | | | Column C | | | Column D | | | Column E | | | Column F | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | % of | | | | | | | | | | | | | | | % of | |
| | | | | | Ceded | | | Assumed | | | | | | Amount | | | | | | Ceded | | | Assumed | | | | | | Amount | |
| | | Direct | | | to Other | | | from Other | | | Net | | | Assumed to | | | Direct | | | to Other | | | from Other | | | Net | | | Assumed to | |
| | | Premiums | | | Companies | | | Companies | | | Amount | | | Net | | | Premiums | | | Companies | | | Companies | | | Amount | | | Net | |
| | | | | | | | | | | | | | | | | | (dollars in thousands) | | | | |
| Premiums Earned - | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Property/casualty insurance: | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Years Ended December 31: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2014 | | $ | 342,656 | | | $ | 119,248 | | | $ | 38,219 | | | $ | 261,627 | | | | 14.1 | | |
| 2017 | | | $ | 470,158 | | | $ | 145,201 | | | $ | 3,188 | | | $ | 328,145 | | | | 1.0 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2013 | | | 313,842 | | | | 113,882 | | | | 52,783 | | | | 252,743 | | | | 19.8 | | |
| 2016 | | | | 394,679 | | | | 130,012 | | | | 11,344 | | | | 276,011 | | | | 4.1 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2012 | | | 287,982 | | | | 103,712 | | | | 53,191 | | | | 237,461 | | | | 21.4 | | |
| 2015 | | | | 370,499 | | | | 128,697 | | | | 21,533 | | | | 263,335 | | | | 8.0 | |
Note: Included in Ceded to Other Companies is $1,275, $2,825$0, $86 and $2,316$562 for 2014, 20132017, 2016 and 2012,2015, respectively, relating to retrocessions associated with premiums assumed from other companies. Percentage of Amount Assumed to Net percentage above considers the impact of this retrocession.
SCHEDULE VI--SUPPLEMENTAL INFORMATION |
| CONCERNING PROPERTY/CASUALTY INSURANCE OPERATIONS |
| | | | | | | | | | | | | | | | | | | | | | |
| Form 10-K |
| 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 | | | | | | | | | | Claims and Claim | | Amortiza- | | | | |
| | | | for Unpaid | | Discount, | | | | | | | | Adjustment Expenses | | tion of | | | | |
| | | Deferred | Claims | | if any | | | | | | | | Incurred Related to | | 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 |
| | | | | | | | | | | | | | | | | | | | | | |
| Consolidated Property/Casualty Subsidiaries: | | (A) | | | | | | | | | | | | | | | | |
| 2017 | | $5,608 | $680,274 | | $- | | $53,085 | | $328,145 | | $18,095 | | $228,303 | | $19,215 | | $70,574 | | $200,154 | | $353,389 |
| 2016 | | 1,172 | 576,330 | | - | | 21,694 | | 276,011 | | 14,483 | | 172,645 | | 13,836 | | 51,597 | | 163,467 | | 271,752 |
| 2015 | | 1,443 | 513,596 | | 2,110 | | 25,291 | | 263,335 | | 12,498 | | 165,812 | | (10,062) | | 50,270 | | 149,580 | | 254,653 |
| SCHEDULE VI--SUPPLEMENTAL INFORMATION | |
| CONCERNING PROPERTY/CASUALTY INSURANCE OPERATIONS | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Form 10-K | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 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 | | | | | | | | | | | | | | | Claims and Claim | | | Amortiza- | | | | | | | |
| | | | | | for Unpaid | | | Discount, | | | | | | | | | | | | Adjustment Expenses | | | tion of | | | | | | | |
| | | Deferred | | | Claims | | | if any | | | | | | | | | | | | Incurred Related to | | | 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 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Consolidated Property/Casualty Subsidiaries: | | (A) | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2014 | | $ | 2,263 | | | $ | 506,102 | | | $ | 3,129 | | | $ | 35,019 | | | $ | 261,627 | | | $ | 9,055 | | | $ | 169,950 | | | $ | (10,354 | ) | | $ | 48,872 | | | $ | 152,101 | | | $ | 262,171 | |
| 2013 | | | 2,319 | | | | 474,470 | | | | 5,885 | | | | 36,693 | | | | 252,743 | | | | 8,770 | | | | 156,264 | | | | (5,563 | ) | | | 47,414 | | | | 151,849 | | | | 253,684 | |
| 2012 | | | 3,091 | | | | 455,454 | | | | 6,118 | | | | 37,273 | | | | 237,461 | | | | 9,930 | | | | 147,963 | | | | (9,875 | ) | | | 41,957 | | | | 138,945 | | | | 233,678 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(A) Loss reserves on certain reinsurance assumed and permanent total disability worker'sworkers' compensation claims have been discounted to present value using pretax interest rates not exceeding 3.5%. through 2015.
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 6, 2015 | By /s/ Joseph J. DeVito
|
| Joseph J. DeVito,March 13, 2018
By /s/ W. Randall Birchfield W. Randall Birchfield, Director, President, Chief Executive Officer and Chief Operating Officer and President |
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 13, 2018
March 6, 2015 | By /s/ Gary W. Miller
|
| Gary W. Miller,
Director and Chairman
|
By /s/ Steven J. Bensinger
Steven J. Bensinger,
Director
March 6, 2015 | By /s/ G. Patrick Corydon
|
| G. Patrick Corydon,
Executive Vice President and CFO
(Principal Financial and Accounting Officer)
|
March 13, 2018
March 6, 2015 | By /s/ Joseph J. DeVito
|
| Joseph J. DeVito,
Director, Chief Executive Officer and President
|
By /s/ Stuart D. Bilton
Stuart D. Bilton,
Director
March 6, 2015 | By /s/ Stuart D. Bilton (*)
|
| Stuart D. Bilton,
Director
|
March 6, 2015 | By /s/ Otto N. Frenzel IV (*)
|
| Otto N. Frenzel IV,
Director
|
March 6, 2015 | By /s/ John M. O'Mara (*)
|
| John M. O'Mara,
Director
|
March 13, 2018
By /s/ W. Randall Birchfield
W. Randall Birchfield,
Director, President, Chief Executive Officer and Chief Operating Officer
(Principal Executive Officer)
March 13, 2018
By /s/ Otto N. Frenzel IV
Otto N. Frenzel IV,
Director
March 13, 2018
By /s/ LoriAnn Lowery-Biggers
LoriAnn Lowery-Biggers,
Director
March 13, 2018
By /s/ Philip V. Moyles Jr.
Philip V. Moyles Jr.,
Director
March 13, 2018
By /s/ John D. Nichols Jr.
John D. Nichols Jr.,
Director
By /s/ John A. Pigott
John A. Pigott,
SIGNATURES (CONTINUED)Director
March 13, 2018
March 6, 2015 | By /s/ Thomas H. Patrick (*)
|
| Thomas H. Patrick,
Director
|
By /s/ James A. Porcari III
James A. Porcari III,
Director
March 6, 2015 | By /s/ John Pigott (*)
|
| John Pigott,
Director
|
March 13, 2018
March 6, 2015 | By /s/ Kenneth D. Sacks (*)
|
| Kenneth D. Sacks,
Director
|
By /s/ Kenneth D. Sacks
Kenneth D. Sacks,
Director
March 6, 2015 | By /s/ Nathan Shapiro (*)
|
| Nathan Shapiro,
Director
|
March 13, 2018
By /s/ Nathan Shapiro
March 6, 2015 | By /s/ NortonNathan Shapiro, (*)
|
| Norton Shapiro,
Director
|
Director
March 6, 2015 | By /s/ Robert Shapiro (*)March 13, 2018
By /s/ Norton Shapiro Norton Shapiro, Director March 13, 2018 By /s/ Robert Shapiro |
| Robert Shapiro, Director |
March 6, 2015 | By /s/ Steven A. Shapiro (*)
|
| Steven A. Shapiro,
Director
|
March 6, 2015 | By /s/ John D. Weil (*)
|
| John D. Weil,
Director
|
March 6, 2015 | By /s/ Arshad Zakaria (*)
|
| Arshad Zakaria,
Director
|
(*) By Craig C. Morfas, Attorney-in-Fact
March 13, 2018
By /s/ Steven A. Shapiro
Steven A. Shapiro,
Executive Chairman
March 13, 2018
By /s/ William C. Vens
William C. Vens,
Chief Financial Officer
(Principal Financial Officer and Principal Accounting Officer)
- 8089 -
ANNUAL REPORT ON FORM 10-K
ITEM 15(c)--CERTAIN EXHIBITS
YEAR ENDED DECEMBER 31, 2014
BALDWIN & LYONS, INC.
CARMEL, INDIANA
BALDWIN & LYONS, INC.
Form 10-K for the Fiscal Year
Ended December 31, 2014
INDEX TO EXHIBITS
Exhibit No.
| Begins on sequential page 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
| 93 - 103
|
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(f)--
Baldwin & Lyons, Inc. Executive Incentive Bonus Plan (Incorporated as an exhibit by reference to the Company's definitive Proxy Statement for its Annual Meeting held May 4, 2010)
| N/A
|
EXHIBIT 10(g)--
Baldwin & Lyons, Inc. Managing General Agency Agreement with Paladin Catastrophe Management LLC
| N/A
|
EXHIBIT 21--
Subsidiaries of Baldwin & Lyons, Inc.
| 83
|
EXHIBIT 23--
Consent of Ernst & Young LLP
| 84
|
EXHIBIT 24--
Powers of Attorney for certain Officers and Directors
| 85 - 87
|
EXHIBIT 31.1--
Certification of CEO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
| 88 - 89
|
EXHIBIT 31.2--
Certification of CFO pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
| 90 - 91
|
EXHIBIT 32.1--
Certification of CEO and CFO pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
| 92
|
- 82 -
