PART I
Item 1. BUSINESS
Protective Insurance Corporation (formerly Baldwin & Lyons, Inc.) (referred to herein as "Protective") 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")Protective 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, Protective offers workers' compensation coverage for a limited assumptionvariety of risks as a reinsurer of other companies.operations outside the transportation industry.
B&L's
Protective’s principal subsidiaries are:
| 1. | Protective Insurance Company (referred(referred to herein as "Protective""Protective Insurance Co."), 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"), 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 domiciledIndiana-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 Insurance Co., Protective Specialty, Sagamore and BLI are collectively referred to herein as the "Insurance Subsidiaries." The "Company", "we", "us" and "our", as used herein, refersrefer to Baldwin & Lyons, Inc.Protective and all of its subsidiaries unless the context clearly indicates otherwise.
Approximately 21% of premiums written by the Insurance Subsidiaries during 2015 was attributable to business produced directly by B&L. The remainder was produced through a network of broker and agent partners.
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's business.
In 2018, the Insurance Subsidiaries primarily served the commercial automobile market, although the Insurance Subsidiaries continue to support previously written policies in specialty markets for which the Company has discontinued writing business and these operations are in run-off. The Company expects targeted growth to occur in its core business of commercial automobile 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 its chief operating decision maker when making decisions about how resources are to be allocated to the segment and assessing its performance.
Fleet TransportationProduct Lines
Commercial Automobile
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.commercial automobile. Large fleet trucking products are marketed both by the B&L agency organization directly to fleet transportationcommercial automobile 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 commercial automobile policies are written on an "occurrence" basis. This means that the Company may be liable for claims that occurred when its policy was in place with an insured, regardless of when those claims are reported to the Company, and it may take months or even years for claims to be reported to the Company.
The principal types of fleet transportationcommercial automobile insurance marketed by the Insurance Subsidiaries are:
- | ● | Commercial motor vehicle liability, physical damage and general liability insurance.insurance; |
- | ● | Workers' compensation insurance.insurance; |
- | ● | Specialized accident (medical and indemnity) insurance for independent contractors ofin the trucking concerns.industry; |
- | ● | Non-trucking motor vehicle liability insurance for independent contractors.contractors; |
- | ● | Fidelity and surety bonds.bonds; and |
- | ● | 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'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. ExtensiveThe Company also provides claims handling services, are also provided, primarily to excess clients with self-insurance programs.
Reinsurance Assumptions
Workers' Compensation
The Insurance Subsidiaries provide workers' compensation insurance for the commercial automobile industry, primarily to employees of motor carriers or independent contractors providing services in the transportation industry. In 2017, the Company acceptsbegan marketing workers' compensation coverage beyond commercial automobile 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 insurance is marketed through relationships with non-affiliated brokers and specialized agents. In addition, the Company has 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. This means that the Company may be liable for claims that occurred when its policy was in place with an insured, regardless of when those claims are reported to the Company, and it may take months or even years for claims to be reported to the Company.
Discontinued Products
In the first quarter of 2016, the Company discontinued its reinsurance assumed professional liability line of products. These products are in run-off but continued earning premiums in 2017 and 2018. 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 fluctuatesfluctuated based on market conditions for these products. In recent years, unfavorable pricingThe Company's reinsurance assumed policies were written on both an "occurrence" basis and terms availablea "claims-made" basis. Under claims-made policies, the Company was generally only liable for claims when a policy was in reinsurance markets, particularly property markets, has resultedplace with its insured; however, the Company was potentially liable for claims reported to it, even if the claim event occurred before it had a policy in a significant decline in premium assumed byplace with the Company.insured.
Approximately 86% of net reinsurance premium earned during 2015 relates to professional liability coverages provided to domestic insurance companies and produced through a network of independent brokers.
Property reinsurance premium for 2015 was limited to the final runoff of 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 remained inforce.
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 on 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.
Professional Liability
The Company marketsmarketed a 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.
Private Passenger Automobile Insurance In most cases, the Company's professional liability policies were written on a "claims-made" basis.
In late 2015, the Company discontinued marketing private passenger automobile liability and physical damage coverages and all business for this product line will expire in 2016.
Property/Casualty Losses and Loss Adjustment Expenses
Losses and loss adjustment expenses incurred typicallyon average comprise nearlyapproximately two-thirds of the Company's operating expenses. A discussion of this expense category follows.
The Company's consolidated balance sheets as of December 31, 2018 and 2017 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'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'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" loss reserves which comprise approximately 66% of total gross reserves at December 31, 2015, 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" reserves , which comprise approximately 34% of total gross reserves at December 31, 2015 are established for (1) those losses which have occurred but have not yet been reported to the Company ("incurred but not 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's business and study of current economic trends affecting ultimate claims costs. Loss adjustment expenseLAE reserves include amounts ultimately allocable to individual claims as well as amounts required for the general overhead of the claims handling operation whichthat are not specifically allocable to individual claims. Historical analyses of the ratio of loss adjusting expensesLAE to losses paid on prior closed claims and study of current economic trends affecting loss settlement costs are used to estimate the loss adjustmentLAE reserve needs relatedrelative to the established loss reserves. Each of these reserve categories containcontains elements of uncertainty, which assureassures 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"Loss and Loss Expense Reserves" under the caption, "Critical"Critical Accounting Policies" beginning on page 28Policies" in Management'sPart II, Item 7, "Management'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 classOperations," 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.this Annual Report on Form 10-K.
Loss reserves related to certain permanent total disability (PTD) workers' compensation claims have been discounted to present value using tables provided by the National Council on Compensation Insurance which are based upon a pretax interest rate of 3.5% and adjusted for those portions of the losses retained by the insured. The loss and LAE reserves at December 31, 2015 have been reduced by approximately $2.1 million as a result of such discounting. Had the Company not discounted these loss reserves, pretax income would have been approximately $1.0 million higher for the year ended December 31, 2015.
For policies inforce at December 31, 2015, 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. with non-affiliated carriers or written by the Company but 100% reinsured with non-affiliated reinsurers. Certain coverages, such as workers' compensation, provide essentially unlimited exposure, although the Company protects itself to the extent believed prudent through the purchase of excess reinsurance for these coverages. After giving effect to treaty and facultative reinsurance arrangements, the Company'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 between July 3, 2016 and July 2, 2017, 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 as as:
| ● | $2.5 million for policies written between July 3, 2016 and July 2, 2017, 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 includeclaim occurrence remains relatively consistent year-over-year; however, under the current flat ceding premium provision, more of the economic exposure will flow through loss expense moving forward, whereas in prior periods, utilizing the sliding scale ceding premium provisions, for aggregate deductibles that must be exceeded beforemore of the economic exposure was reflected in lower net premiums earned. For both periods discussed above, the Company can recover under the terms of the treaties. The Company retains a higher percentage of the direct premium (and, therefore, cedes less premium to reinsurers)has limited economic exposure for losses occurring in consideration of these deductible provisions.treaty years that have loss and allocated LAE ratios greater than approximately 83.0%.
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. 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's products can experience delays in being reported and can take years to 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 2015, 20142018, 2017 and 2013. That2016. This table is presentedincludes reserves, net of reinsurance recoverable, to correspond with income statement presentation. However,the presentation in the Company's consolidated statements of operations, 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 Company's consolidated balance sheet, is also shown. The table on page 10 shows the development of the estimated liability,sheets. All amounts are shown net of reinsurance, recoverable, for the ten years prior to 2015. The table on page 11 is a summary of the re-estimated liability, before consideration of reinsurance, for the ten years prior to 2015 as well as the related re-estimated reinsurance ceded for the same periods.unless otherwise indicated.
| RECONCILIATION OF LIABILITY FOR LOSSES AND LOSS ADJUSTMENT | |
| EXPENSES (GAAP BASIS) | |
| | | | | | | | | | |
| | | Year Ended December 31 | |
| | | 2015 | | | 2014 | | | 2013 | |
NET OF REINSURANCE RECOVERABLE: | | (in thousands) | |
| Liability for losses and LAE at the | | | | | | | | | |
| Beginning of the year | | $ | 295,583 | | | $ | 288,088 | | | $ | 289,236 | |
| | | | | | | | | | | | | |
| Provision for losses and LAE: | | | | | | | | | | | | |
| Claims occurring during the current year | | | 165,812 | | | | 169,950 | | | | 156,264 | |
| Claims occurring during prior years | | | (10,062 | ) | | | (10,354 | ) | | | (5,563 | ) |
| | | | 155,750 | | | | 159,596 | | | | 150,701 | |
| Payments of losses and LAE: | | | | | | | | | | | | |
| Claims occurring during the current year | | | 56,710 | | | | 59,826 | | | | 47,908 | |
| Claims occurring during prior years | | | 92,870 | | | | 92,275 | | | | 103,941 | |
| | | | 149,580 | | | | 152,101 | | | | 151,849 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| Liability for losses and LAE at end of year | | | 301,753 | | | | 295,583 | | | | 288,088 | |
| | | | | | | | | | | | | |
| Reinsurance recoverable on unpaid losses | | | | | | | | | | | | |
| at end of the year | | | 211,843 | | | | 210,519 | | | | 186,382 | |
| | | | | | | | | | | | | |
| Liability for losses and LAE, gross of | | | | | | | | | | | | |
| reinsurance recoverable, at end of the year | | $ | 513,596 | | | $ | 506,102 | | | $ | 474,470 | |
| | | 2018 | | | 2017 | | | 2016 | |
| Reserves, gross of reinsurance recoverable, at the beginning of the year | | $ | 680,274 | | | $ | 576,330 | | | $ | 513,596 | |
| Reinsurance recoverable on unpaid losses at the beginning of the year | | | 308,143 | | | | 251,563 | | | | 211,843 | |
| Reserves at the beginning of the year | | | 372,131 | | | | 324,767 | | | | 301,753 | |
| | | | | | | | | | | | | |
| Provision for losses and loss expenses: | | | | | | | | | | | | |
| Claims occurring during the current year | | | 329,078 | | | | 228,303 | | | | 172,645 | |
| Claims occurring during prior years | | | 16,786 | | | | 19,215 | | | | 13,836 | |
| Total incurred losses and loss expenses | | | 345,864 | | | | 247,518 | | | | 186,481 | |
| | | | | | | | | | | | | |
| Loss and loss expense payments: | | | | | | | | | | | | |
| Claims occurring during the current year | | | 84,738 | | | | 67,234 | | | | 54,239 | |
| Claims occurring during prior years | | | 143,853 | | | | 132,920 | | | | 109,228 | |
| Total paid | | | 228,591 | | | | 200,154 | | | | 163,467 | |
| Reserves at the end of the year | | | 489,404 | | | | 372,131 | | | | 324,767 | |
| | | | | | | | | | | | | |
| Reinsurance recoverable on unpaid losses at the end of the year | | | 375,935 | | | | 308,143 | | | | 251,563 | |
| Reserves, gross of reinsurance recoverable, at the end of the year | | $ | 865,339 | | | $ | 680,274 | | | $ | 576,330 | |
The reconciliation above shows that the Company's estimate of net losses on 20142017 and prior accidentsaccident years is approximately $10.1$16.8 million lowerhigher at December 31, 20152018 than was provided in loss reserves at December 31, 20142017 (referred to as a "reserve savings"deficiency"), with comparative. This compares to a $19.2 million reserve savings for the two previous calendardeficiency on prior accident years in 2017 and a $13.8 million reserve deficiency reported in 2016 related to prior accident years.
The following table is a summary of the 20152018 calendar year reserve savingsdeficiency by accident year (dollars in thousands):
| Years in Which Losses Were Incurred | | Reserve at December 31, 2017 | | | (Savings) Deficiency Recorded During 2018 (1) | | | % (Savings) Deficiency | |
| 2017 | | $ | 161,069 | | | $ | (8,902 | ) | | | (5.5 | )% |
| 2016 | | | 66,652 | | | | 4,259 | | | | 6.4 | % |
| 2015 | | | 34,530 | | | | 9,707 | | | | 28.1 | % |
| 2014 | | | 30,129 | | | | 11,970 | | | | 39.7 | % |
| 2013 | | | 22,423 | | | | (1,382 | ) | | | (6.2 | )% |
| 2012 and prior | | | 57,328 | | | | 1,134 | | | | 2.0 | % |
| | | | | | | | | | | | | |
| | | $ | 372,131 | | | $ | 16,786 | | | | 4.5 | % |
| Years in Which Losses Were Incurred | | Reserve at December 31, 2014 | | | (Savings) Deficiency Recorded During 2015 | | | % (Savings) Deficiency | |
| | | | | | | |
| 2014 | | $ | 110,124 | | | $ | (1,085 | ) | | | (1.0 | %) |
| 2013 | | | 65,165 | | | | (6,281 | ) | | | (9.6 | %) |
| 2012 | | | 37,335 | | | | 5,530 | | | | 14.8 | % |
| 2011 | | | 28,343 | | | | (4,666 | ) | | | (16.5 | %) |
| 2010 | | | 10,285 | | | | 2,685 | | | | 26.1 | % |
| 2009 & prior | | | 44,331 | | | | (6,245 | ) | | | (14.1 | %) |
| | | | | | | | | | | | | |
| | | $ | 295,583 | | | $ | (10,062 | ) | | | (3.4 | %) |
| (1) | Consists of development on cases known at December 31, 2017, losses reported which were previously unknown at December 31, 2017 (incurred but not reported), unallocated loss expense paid related to accident years 2017 and prior changes in the reserves for incurred but not reported losses and loss expenses. |
The (savings) deficiency recordedsavings shown in accident year 2017 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 2014-2016 are largely the result of several severe transportation losses. The Company took action in all accident years to reflect new trends in loss development for commercial automobile products that have emerged over the above individual loss years was derived from varied sources,last three years. These actions included case reserving reviews, as follows (dollarswell as actuarial product reviews, and resulted in thousands):
the reserve strengthening noted during the last three years.
| | | 2009 & Prior | | | 2010 | | | 2011 | | | 2012 | | | 2013 | | | 2014 | |
| | | | | | | | | | | | | | | | | | | |
| Losses and allocated loss expenses developed on cases known to exist at December 31, 2014 | | $ | 1,240 | | | $ | (301 | ) | | $ | (4,529 | ) | | $ | 8,829 | | | $ | 14,858 | | | $ | 17,220 | |
| Losses and allocated loss expenses reported on cases unknown at December 31, 2014 | | | 432 | | | | 44 | | | | 1,147 | | | | 400 | | | | 1,348 | | | | 16,886 | |
| Unallocated loss expenses paid | | | 193 | | | | 57 | | | | 245 | | | | 832 | | | | 758 | | | | 1,363 | |
| Change in reserves for incurred but not reported losses and allocated and unallocated loss expenses | | | (7,892 | ) | | | (1,168 | ) | | | 1,167 | | | | (9,202 | ) | | | (21,650 | ) | | | (32,565 | ) |
| Net (savings) deficiency on losses from directly-produced business | | | (6,027 | ) | | | (1,368 | ) | | | (1,970 | ) | | | 859 | | | | (4,686 | ) | | | 2,904 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| (Savings) deficiency reported under voluntary reinsurance assumption agreements and residual markets | | | (218 | ) | | | 4,053 | | | | (2,696 | ) | | | 4,671 | | | | (1,595 | ) | | | (3,989 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Net (savings) deficiency | | $ | (6,245 | ) | | $ | 2,685 | | | $ | (4,666 | ) | | $ | 5,530 | | | $ | (6,281 | ) | | $ | (1,085 | ) |
Loss and loss expense development savings, presented separately by segment, were as follows for the years ended December 31 (dollars in thousands):
| | | 2015 | | | 2014 | | | 2013 | |
| Property and casualty insurance | | $ | (10,289 | ) | | $ | (5,423 | ) | | $ | (1,725 | ) |
| Reinsurance | | | 227 | | | | (4,931 | ) | | | (3,838 | ) |
| Totals | | $ | (10,062 | ) | | $ | (10,354 | ) | | $ | (5,563 | ) |
| | | | | | | | | | | | | |
| Development as a percent of beginning loss and loss adjustment expense reserves: | | 2015 | | | 2014 | | | 2013 | |
| Property and casualty insurance | | | 4.3 | % | | | 2.9 | % | | | 1.4 | % |
| Reinsurance | | | -.4 | % | | | 6.3 | % | | | 4.5 | % |
| Totals | | | 3.4 | % | | | 3.6 | % | | | 1.9 | % |
In the first table on page 6, the amounts identified as "Net (savings) deficiency on losses from directly-produced business" consist of development on cases known at December 31, 2014, losses reported which were previously unknown at December 31, 2014 (incurred but not reported), unallocated loss expense paid related to accident years 2014 and prior and changes in the reserves for incurred but not reported losses and loss expenses. 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 deficiencies on residual market business were $3.0 million, $0.7 million, and $1.6 million for the years ended December 31, 2015, 2014 and 2013, 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 $10.3 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 transportationcommercial automobile 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's basic assumptions have remained consistent, we continuethe Company continues 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 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.
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 2015 has been insignificant.
Management's goal is to produce an overall estimate of reserves which is sufficient and as close to expected ultimate losses as possible. The $10.1 million in net savings developed during 2015 represents approximately 30% of pre-tax net income before realized capital gains for 2015 but only 3.4% of December 31, 2014 net loss and LAE reserves, which is well within the acceptable range of variation for the Company's diverse and complex book of business. The Company has maintained a consistent, conservative posture in its reserving process which has proven to be fully adequate with no overall deficiencies developed since 1985. The Company constantly monitors changes in trends related to the numbersnumber of claims incurred relative to correlative variances with premium volume, average settlement amounts, numbersnumber 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.
Ten YearTen-Year Historical Development Tables:
The table on page 10below presents the development of GAAPU.S. generally accepted accounting principles ("GAAP") balance sheet insurance reserves for each year-end from 20052008 through 2014,2017, as of December 31, 2015,2018, net of all reinsurance credits. The top line of the table shows the estimated liability for unpaid losses and LAE recorded at the balance sheet date for each of the indicated years. This liability represents the estimated amount of losses and LAE for claims arising
ANALYSIS OF LOSS AND LOSS ADJUSTMENT EXPENSE DEVELOPMENT--GAAP BASIS
(Dollars in all prior years that were unpaid at the respective balance sheet date, including losses that had been incurred, but not yet reported, to the Company.thousands)
The upper portion of the table shows 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.
| | | Year Ended December 31 | |
| | | 2008 | | | 2009 | | | 2010 | | | 2011 | | | 2012 | | | 2013 | | | 2014 | | | 2015 | | | 2016 | | | 2017 | | | 2018 | |
Liability for Unpaid Losses and Loss Adjustment Expenses (1) | | $ | 231,633 | | | $ | 203,253 | | | $ | 218,629 | | | $ | 290,092 | | | $ | 289,236 | | | $ | 288,088 | | | $ | 295,583 | | | $ | 301,753 | | | $ | 324,767 | | | $ | 372,131 | | | $ | 489,404 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Liability Reestimated as of: (2) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| One Year Later | | | 222,049 | | | | 194,430 | | | | 208,933 | | | | 280,217 | | | | 283,673 | | | | 277,734 | | | | 285,521 | | | | 315,589 | | | | 343,982 | | | | 388,917 | | | | | |
| Two Years Later | | | 208,702 | | | | 198,220 | | | | 201,745 | | | | 272,285 | | | | 282,381 | | | | 268,757 | | | | 303,540 | | | | 340,361 | | | | 369,670 | | | | | | | | | |
| Three Years Later | | | 210,562 | | | | 188,110 | | | | 204,243 | | | | 276,525 | | | | 279,685 | | | | 288,862 | | | | 332,175 | | | | 361,791 | | | | | | | | | | | | | |
| Four Years Later | | | 205,519 | | | | 192,195 | | | | 202,078 | | | | 268,299 | | | | 291,332 | | | | 313,909 | | | | 343,898 | | | | | | | | | | | | | | | | | |
| Five Years Later | | | 208,398 | | | | 187,792 | | | | 198,518 | | | | 275,517 | | | | 298,861 | | | | 313,662 | | | | | | | | | | | | | | | | | | | | | |
| Six Years Later | | | 205,986 | | | | 181,547 | | | | 200,922 | | | | 276,812 | | | | 299,996 | | | | | | | | | | | | | | | | | | | | | | | | | |
| Seven Years Later | | | 200,460 | | | | 181,998 | | | | 203,692 | | | | 279,598 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Eight Years Later | | | 200,808 | | | | 184,122 | | | | 204,769 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Nine Years Later | | | 202,565 | | | | 183,693 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Ten Years Later | | | 201,673 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Cumulative Redundancy (Deficiency) (3) | | $ | 29,960 | | | $ | 19,560 | | | $ | 13,860 | | | $ | 10,494 | | | $ | (10,760 | ) | | $ | (25,574 | ) | | $ | (48,315 | ) | | $ | (60,038 | ) | | $ | (44,903 | ) | | $ | (16,786 | ) | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Cumulative Amount of Liability Paid Through: (4) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| One Year Later | | $ | 84,777 | | | $ | 74,182 | | | $ | 72,393 | | | $ | 94,003 | | | $ | 103,941 | | | $ | 92,275 | | | $ | 92,870 | | | $ | 109,228 | | | $ | 132,920 | | | $ | 143,853 | | | | | |
| Two Years Later | | | 120,628 | | | | 107,413 | | | | 109,382 | | | | 156,271 | | | | 162,087 | | | | 159,282 | | | | 166,642 | | | | 195,951 | | | | 217,376 | | | | | | | | | |
| Three Years Later | | | 142,731 | | | | 125,038 | | | | 133,507 | | | | 193,566 | | | | 205,452 | | | | 166,642 | | | | 222,295 | | | | 250,924 | | | | | | | | | | | | | |
| Four Years Later | | | 152,679 | | | | 137,460 | | | | 147,462 | | | | 214,873 | | | | 202,803 | | | | 234,158 | | | | 258,576 | | | | | | | | | | | | | | | | | |
| Five Years Later | | | 161,834 | | | | 143,461 | | | | 158,172 | | | | 227,359 | | | | 241,533 | | | | 251,696 | | | | | | | | | | | | | | | | | | | | | |
| Six Years Later | | | 166,290 | | | | 148,101 | | | | 166,112 | | | | 234,578 | | | | 252,648 | | | | | | | | | | | | | | | | | | | | | | | | | |
| Seven Years Later | | | 170,126 | | | | 152,375 | | | | 168,524 | | | | 241,383 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Eight Years Later | | | 173,867 | | | | 153,999 | | | | 173,015 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Nine Years Later | | | 174,902 | | | | 157,297 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Ten Years Later | | | 177,677 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
The "cumulative redundancy" represents the aggregate change in the estimates of each calendar year end reserve through December 31, 2015. For example, the 2005 liability has developed a $51.9 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.Historically, the Company's net loss developments have been favorable. | (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 incurred but not reported ("IBNR") losses, to the Company. |
| (2) | 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. |
| (3) | Represents the aggregate change in the estimates of each calendar year-end reserve through December 31, 2018. |
| (4) | Represents the cumulative amount paid with respect to the previously recorded calendar year-end liability as of the end of each succeeding year. The payment patterns shown in this table demonstrate the "long-tail" nature of much of the Company's business, whereby portions of claims, principally in workers' compensation coverages, do not fully pay out for more than ten years. |
Reserve developments for all years ended in the period 19861985 through 20142011 have produced redundancies as of December 31, 2015. In addition2018, with deficiencies developing for periods from 2012 forward. The $16.8 million deficiency developed through one year on the 2017 reserve position reflects action taken by management to a consistently conservative approachrespond to reserving methods, loss reserve developmentshigher than expected adverse case development, as previously noted. The deficiencies that have developed in recent yearsthe chart from 2012 through 2017 have been favorably affected by several other factors. Perhapslargely attributable to two main themes. First, the mostCompany engaged in new markets between 2008 and 2013, including professional liability and property coverages concentrated in the state of Florida. These products (now discontinued) experienced significant single factor has beenadverse loss development in calendar years 2016 and 2017 as more information emerged and was therefore considered in 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 byreserving process. Second, the Company has improved markedlyexperienced increased severity in losses related to its transportation offerings. The Company is currently addressing the past decade resultingrate adequacy and customer segmentation practices of this product 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 produceresponse to the most serious injuries. In addition, the expanded use of telematics to precisely measure driver behavior and provide focused training and remediation is positively impactingrecent adverse 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.trends.
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 2015 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 11, 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 10 shows the cumulative amount paid with respect to the previously recorded calendar year end liability as of the end of each succeeding year. For example, as of December 31, 2015, the Company had paid $168.3 million of losses and LAE that had been incurred, but not paid, as of December 31, 2005; thus, an estimated $22.0 million (12%) of losses incurred through 2005 remain unpaid as of the current financial statement date ($190.3 million incurred less $168.3 million paid). The payment patterns shown in this table demonstrate the "long-tail" nature of much of the Company's business whereby portions of claims, principally in workers compensation coverages, do not fully pay out for more than ten years.
Readers should note that the table on page 10above 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'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 2008,2011, but incurred in 2005,2008, will be included in the cumulative development amount for each of the years ending December 31, 2005, 2006,2008, 2009, and 2007.2010. 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 11below presents loss development data on a gross (before consideration of reinsurance) basis for the same ten year period December 31, 20052008 through December 31, 2014,2017, as of December 31, 2015,2018, with a reconciliation of the data to the net amounts shown in the table on page 10. above.
ANALYSIS OF LOSS AND LOSS ADJUSTMENT EXPENSE DEVELOPMENT--GAAP BASIS
(Dollars in thousands)
| | | Year Ended December 31 | |
| | | 2008 | | | 2009 | | | 2010 | | | 2011 | | | 2012 | | | 2013 | | | 2014 | | | 2015 | | | 2016 | | | 2017 | | | 2018 | |
| Direct and Assumed: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Liability for Unpaid Losses and Loss Adjustment Expenses | | $ | 389,558 | | | $ | 359,030 | | | $ | 344,520 | | | $ | 421,556 | | | $ | 455,454 | | | $ | 474,470 | | | $ | 506,102 | | | $ | 513,596 | | | $ | 576,330 | | | $ | 680,274 | | | $ | 865,339 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Liability Reestimated as of December 31, 2018 | | | 312,965 | | | | 289,679 | | | | 301,700 | | | | 395,271 | | | | 450,713 | | | | 519,189 | | | | 599,457 | | | | 633,660 | | | | 647,807 | | | | 709,523 | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Cumulative Redundancy (Deficiency) | | $ | 76,593 | | | $ | 69,351 | | | $ | 42,820 | | | $ | 26,285 | | | $ | 4,741 | | | $ | (44,719 | ) | | $ | (93,355 | ) | | $ | (120,064 | ) | | $ | (71,477 | ) | | $ | (29,249 | ) | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Ceded: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Liability for Unpaid Losses and Loss Adjustment Expenses | | $ | 157,925 | | | $ | 155,777 | | | $ | 125,891 | | | $ | 131,464 | | | $ | 166,218 | | | $ | 186,382 | | | $ | 210,519 | | | $ | 211,843 | | | $ | 251,563 | | | $ | 308,143 | | | $ | 375,935 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Liability Reestimated as of December 31, 2018 | | | 111,292 | | | | 105,986 | | | | 96,931 | | | | 115,673 | | | | 150,717 | | | | 205,527 | | | | 255,559 | | | | 271,869 | | | | 278,137 | | | | 320,606 | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Cumulative Redundancy (Deficiency) | | $ | 46,633 | | | $ | 49,791 | | | $ | 28,960 | | | $ | 15,791 | | | $ | 15,501 | | | $ | (19,145 | ) | | $ | (45,040 | ) | | $ | (60,026 | ) | | $ | (26,574 | ) | | $ | (12,463 | ) | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Net: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Liability for Unpaid Losses and Loss Adjustment Expenses | | $ | 231,633 | | | $ | 203,253 | | | $ | 218,629 | | | $ | 290,092 | | | $ | 289,236 | | | $ | 288,088 | | | $ | 295,583 | | | $ | 301,753 | | | $ | 324,767 | | | $ | 372,131 | | | $ | 489,404 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Liability Reestimated as of December 31, 2018 | | | 201,673 | | | | 183,693 | | | | 204,769 | | | | 279,598 | | | | 299,996 | | | | 313,662 | | | | 343,898 | | | | 361,791 | | | | 369,670 | | | | 388,917 | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Cumulative Redundancy (Deficiency) | | $ | 29,960 | | | $ | 19,560 | | | $ | 13,860 | | | $ | 10,494 | | | $ | (10,760 | ) | | $ | (25,574 | ) | | $ | (48,315 | ) | | $ | (60,038 | ) | | $ | (44,903 | ) | | $ | (16,786 | ) | | | | |
Readers are reminded that the gross data presented on page 11above 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 transportationcommercial automobile and workers' compensation customers, some of which has been covered by excess of loss and facultative reinsurance. This is particularly true of excess of loss treaties where in which 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 11, and thoseCompany's consolidated financial statements reflect its financial results net of reinsurance, as shown on page 10 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 transportationcommercial automobile 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 and 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, very
Very few environmental claims have historically been reported to the Company. In addition, a review of the businesses of ourthe Company's 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, 20152018 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, 2015.
| ANALYSIS OF LOSS AND LOSS ADJUSTMENT EXPENSE DEVELOPMENT--GAAP BASIS | |
| (Dollars in thousands) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31 | | 2005 | | | 2006 | | | 2007 | | | 2008 | | | 2009 | | | 2010 | | | 2011 | | | 2012 | | | 2013 | | | 2014 | | | 2015 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Liability for Unpaid Losses | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| and Loss Adjustment | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Expenses | | $ | 242,130 | | | $ | 249,495 | | | $ | 244,500 | | | $ | 231,633 | | | $ | 203,253 | | | $ | 218,629 | | | $ | 290,092 | | | $ | 289,236 | | | $ | 288,088 | | | $ | 295,583 | | | $ | 301,753 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Liability Reestimated | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| as of: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| One Year Later | | | 225,183 | | | | 228,211 | | | | 227,423 | | | | 222,049 | | | | 194,430 | | | | 208,933 | | | | 280,217 | | | | 283,673 | | | | 277,734 | | | | 285,521 | | | | | |
| Two Years Later | | | 209,774 | | | | 207,818 | | | | 216,730 | | | | 208,702 | | | | 198,220 | | | | 201,745 | | | | 272,285 | | | | 282,381 | | | | 268,757 | | | | | | | | | |
| Three Years Later | | | 200,955 | | | | 199,503 | | | | 206,445 | | | | 210,562 | | | | 188,110 | | | | 204,243 | | | | 276,525 | | | | 279,685 | | | | | | | | | | | | | |
| Four Years Later | | | 198,376 | | | | 192,678 | | | | 210,170 | | | | 205,519 | | | | 192,195 | | | | 202,078 | | | | 268,299 | | | | | | | | | | | | | | | | | |
| Five Years Later | | | 191,846 | | | | 198,023 | | | | 208,132 | | | | 208,398 | | | | 187,792 | | | | 198,518 | | | | | | | | | | | | | | | | | | | | | |
| Six Years Later | | | 195,348 | | | | 196,101 | | | | 210,446 | | | | 205,986 | | | | 181,547 | | | | | | | | | | | | | | | | | | | | | | | | | |
| Seven Years Later | | | 193,226 | | | | 197,898 | | | | 209,288 | | | | 200,460 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Eight Years Later | | | 194,188 | | | | 196,421 | | | | 205,179 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Nine Years Later | | | 192,585 | | | | 193,746 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Ten Years Later | | | 190,276 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Cumulative Redundancy | | $ | 51,854 | | | $ | 55,749 | | | $ | 39,321 | | | $ | 31,173 | | | $ | 21,706 | | | $ | 20,111 | | | $ | 21,793 | | | $ | 9,551 | | | $ | 19,331 | | | $ | 10,062 | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Cumulative Amount of | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Liability Paid | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Through: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| One Year Later | | $ | 59,581 | | | $ | 58,956 | | | $ | 76,970 | | | $ | 84,777 | | | $ | 74,182 | | | $ | 72,393 | | | $ | 94,003 | | | $ | 103,941 | | | $ | 92,275 | | | $ | 92,870 | | | | | |
| Two Years Later | | | 94,947 | | | | 100,990 | | | | 124,870 | | | | 120,628 | | | | 107,413 | | | | 109,382 | | | | 156,271 | | | | 162,087 | | | | 159,282 | | | | | | | | | |
| Three Years Later | | | 117,522 | | | | 127,011 | | | | 145,857 | | | | 142,731 | | | | 125,038 | | | | 133,507 | | | | 193,566 | | | | 205,452 | | | | | | | | | | | | | |
| Four Years Later | | | 136,652 | | | | 143,612 | | | | 157,724 | | | | 152,679 | | | | 137,460 | | | | 147,462 | | | | 214,873 | | | | | | | | | | | | | | | | | |
| Five Years Later | | | 148,039 | | | | 151,662 | | | | 164,877 | | | | 161,834 | | | | 143,461 | | | | 158,172 | | | | | | | | | | | | | | | | | | | | | |
| Six Years Later | | | 154,573 | | | | 157,223 | | | | 170,554 | | �� | | 166,290 | | | | 148,101 | | | | | | | | | | | | | | | | | | | | | | | | | |
| Seven Years Later | | | 159,428 | | | | 162,331 | | | | 174,190 | | | | 170,126 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Eight Years Later | | | 163,779 | | | | 165,372 | | | | 177,275 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Nine Years Later | | | 166,062 | | | | 168,157 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Ten Years Later | | | 168,303 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| ANALYSIS OF LOSS AND LOSS ADJUSTMENT EXPENSE DEVELOPMENT--GAAP BASIS | |
| (Dollars in thousands) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended December 31 | | 2005 | | | 2006 | | | 2007 | | | 2008 | | | 2009 | | | 2010 | | | 2011 | | | 2012 | | | 2013 | | | 2014 | | | 2015 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Direct and Assumed: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Liability for Unpaid Losses and Loss | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Adjustment Expenses | | $ | 430,273 | | | $ | 409,412 | | | $ | 378,616 | | | $ | 389,558 | | | $ | 359,030 | | | $ | 344,520 | | | $ | 421,556 | | | $ | 455,454 | | | $ | 474,470 | | | $ | 506,102 | | | $ | 513,596 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Liability Reestimated as of | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2014 | | | 324,746 | | | | 300,304 | | | | 305,844 | | | | 298,439 | | | | 289,678 | | | | 300,507 | | | | 382,745 | | | | 423,750 | | | | 438,189 | | | | 463,951 | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Cumulative Redundancy | | | 105,527 | | | | 109,108 | | | | 72,772 | | | | 91,119 | | | | 69,352 | | | | 44,013 | | | | 38,811 | | | | 31,704 | | | | 36,281 | | | | 42,151 | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Ceded: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Liability for Unpaid Losses and Loss | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Adjustment Expenses | | | 188,143 | | | | 159,917 | | | | 134,116 | | | | 157,925 | | | | 155,777 | | | | 125,891 | | | | 131,464 | | | | 166,218 | | | | 186,382 | | | | 210,519 | | | | 211,843 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Liability Reestimated as of | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2014 | | | 134,470 | | | | 106,558 | | | | 100,665 | | | | 97,979 | | | | 108,131 | | | | 101,989 | | | | 114,446 | | | | 144,065 | | | | 169,432 | | | | 178,430 | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Cumulative Redundancy | | | 53,673 | | | | 53,359 | | | | 33,451 | | | | 59,946 | | | | 47,646 | | | | 23,902 | | | | 17,018 | | | | 22,153 | | | | 16,950 | | | | 32,089 | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Liability for Unpaid Losses and Loss | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Adjustment Expenses | | | 242,130 | | | | 249,495 | | | | 244,500 | | | | 231,633 | | | | 203,253 | | | | 218,629 | | | | 290,092 | | | | 289,236 | | | | 288,088 | | | | 295,583 | | | | 301,753 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Liability Reestimated as of | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2014 | | | 190,276 | | | | 193,746 | | | | 205,179 | | | | 200,460 | | | | 181,547 | | | | 198,518 | | | | 268,299 | | | | 279,685 | | | | 268,757 | | | | 285,521 | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Cumulative Redundancy | | | 51,854 | | | | 55,749 | | | | 39,321 | | | | 31,173 | | | | 21,706 | | | | 20,111 | | | | 21,793 | | | | 9,551 | | | | 19,331 | | | | 10,062 | | | | | |
Marketing2018.
The Company's primary marketing areas are outlined on pages 2 and 3.Marketing
Historically, the Company hasInsurance Subsidiaries have primarily focused its fleet transportationtheir commercial automobile marketing efforts on large and medium trucking fleets, with itstheir biggest market share in the larger trucking fleets (over 150 power units). The 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 transportationcommercial automobile liability, including third partythird-party liability, property damage, physical damage and cargo, and workers' compensation,whether 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 small deductibles on each claim. The Company's fleet transportationcommercial automobile offerings also include public livery risks, principally large and medium sizedmedium-sized operators of bus fleets. The Company's fleet transportation offerings includefleets 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' compensation coverage to employees of independent contractor fleet owners. Large fleet trucking products are marketed both directly to commercial automobile 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 to 150 power units). Products for small and medium fleets, independent contractors, and non-trucking entities are marketed through relationships with non-affiliated brokers and specialized agents.
In 2015, fleet transportation products generated approximately 95% of direct premium written by the Property & Casualty Insurance Segment.
Beginning in 2010,some cases, the Company began underwriting miscellaneous professional liability coverageswill provide specific product offerings to specialized markets through wholesalepartnerships with brokers and retailprogram administrators. As the Company grows, its distribution strategy has moved toward utilization of non-affiliated agents and brokers on both an admittedto place new business for small and surplus lines basis.
Since 1992,intermediate commercial automobile (including independent contractor products) and non-transportation workers' compensation. In addition, the Company has accepted reinsurance cessionsdeveloped customized commercial automobile liability and retrocessions covering property and casualty risks fromworkers' compensation programs, which are marketed through non-affiliated agent partners. These customized programs can include a suite of products selected insurers and reinsurers. Participation in this market has varied over the years depending on the adequacy of pricing. Effective June 30, 2015, no property reinsurance risk remained inforce.
The Company terminated marketing offor its private passengertargeted customer base, including commercial automobile insurance products in late 2015 and all inforce business for this product line will expire in 2016.liability, general liability, non-trucking liability, cargo, occupational accident, or workers' compensation coverages.
Investments
The Company's investment portfolio is essentiallynotionally divided between (1) funds which are considered necessary to support insurance underwriting activities and (2) excess capital funds. Management believes the funds invested in fixed maturityincome 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, 20152018, the financial statementmarket value of the Company's consolidated investment portfolio was approximately $730$878.6 million, including $70consisting of fixed income securities, equity securities, investments in limited partnerships, commercial mortgage loans and short-term and other investments and includes $156.9 million of short-term funds classified as cash equivalents. The adjusted cost of the portfolio was $670 million with the $60 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:
| | | 2015 | | | 2014 | |
| | | | | | | |
| Corporate securities | | | 25.1 | % | | | 25.2 | % |
| State and municipal obligations | | | 16.4 | | | | 16.7 | |
| U.S. government obligations | | | 15.4 | | | | 14.9 | |
| Short-term and money markets | | | 10.7 | | | | 9.2 | |
| Commercial mortgage-backed securities | | | 4.6 | | | | 5.3 | |
| Foreign government obligations | | | 3.8 | | | | 4.2 | |
| Residential mortgage-backed securities | | | 0.7 | | | | 0.9 | |
| Total fixed maturities | | | 76.7 | | | | 76.4 | |
| Limited partnerships (equity basis) | | | 11.3 | | | | 12.0 | |
| Equity securities | | | 12.0 | | | | 11.6 | |
| | | | 100.0 | % | | | 100.0 | % |
| | | 2018 | | | 2017 | |
Fixed income securities
| | | 67.5 | % | | | 61.1 | % |
| Short-term | | | 0.1 | | | | 0.1 | |
| Cash equivalents | | | 17.8 | | | | 6.9 | |
| Total fixed income securities and short-term | | | 85.4 | | | | 68.1 | |
| | | | | | | | | |
| Limited partnerships (equity basis) | | | 6.3 | | | | 8.3 | |
| Commercial mortgage loans (amortized cost basis) | | | 0.8 | | | | 0.0 | |
| Equity securities | | | 7.5 | | | | 23.6 | |
| | | | 100.0 | % | | | 100.0 | % |
Fixed MaturityIncome and Short-Term Investments
Fixed maturityincome and short-term securities comprised 69.7%85.4% of the market value of the Company's total invested assetsconsolidated investment portfolio of $878.6 million at December 31, 2015. Excluding U.S. government obligations, the2018. The fixed maturityincome portfolio is widely diversified with no concentrations in any single industry, geographic location or municipality. The largest amount invested in any single issuer was $8.4$3.5 million (1.1%(0.4% 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's fixed maturityincome portfolio has a short duration compared to the duration of its insurance liabilities and, accordingly, the Company does not actively trade fixed maturityincome securities but typically holds such investments until maturity. Exceptions exist in 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 maturityincome 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, 2015, investment grade bonds and short-term instruments held by Insurance Subsidiaries equaled 136% 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 comparisonApproximately $54.2 million 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 2015. Note that the expected average maturityincome investments (6.2% of the portfolio is less than the contractual maturity average life shown below because the Company has, in some cases, the right to put obligationsCompany's consolidated investment portfolio) consisted of non-rated bonds and borrowers have, in some cases, the right to call or prepay obligations with or without call or prepayment penalties.
| | | 2015 | | | 2014 | |
| Less than one year | | | 28.4 | % | | | 37.3 | % |
| 1 to 5 years | | | 49.6 | | | | 37.7 | |
| 5 to 10 years | | | 8.8 | | | | 10.9 | |
| More than 10 years | | | 13.2 | | | | 14.1 | |
| | | | 100.0 | % | | | 100.0 | % |
| | | | | | | | | |
| Average contractual life of portfolio (years) | | | 4.6 | | | | 4.8 | |
Approximately $61.3 million of fixed maturity investments (8.4% of total invested assets) consists of bonds rated as less than investment grade by the National Association of Insurance Commissioners ("NAIC") at year end.year-end. These investments includeincluded a diversified portfolio of over 40 investments withissuers and had a cost basis of approximately $64.5 million.$5.2 million aggregate net unrealized loss position at December 31, 2018.
The market value of the consolidated fixed maturityincome portfolio was $5.4included $7.9 million lower than costof net unrealized losses at December 31, 2015, before income taxes, which compares2018 compared to a $3.6$0.8 million of net unrealized lossgains at December 31, 2014, with the change due primarily to the decline in oil prices and the strengthening of the U.S. Dollar.2017. The Company analyzes fixed maturityincome securities for other-than-temporary impairment ("OTTI") in accordance with the Financial Accounting Standards Board ("FASB") OTTI guidance. As has been the Company'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 six 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's 20% threshold. In 2015, the net effect of OTTI adjustments to fixed maturity securities was a charge against income of $4.7 million with securities owned at year end having only an insignificant credit related loss treated as unrealized.threshold. The current net unrealized gainloss on fixed maturityincome securities consists of $4.1$10.8 million of gross unrealized gainslosses and $9.5$2.9 million of gross unrealized losses.gains. The gross unrealized loss equalslosses equal approximately 2.2%1.8% of the cost of all bondsfixed income securities. See also "Critical Accounting Policies" in Part II, Item 7 of this category.Annual Report on Form 10-K for additional details of the Company's investment valuation.
Equity Securities
Because of the large amount of high qualityhigh-quality fixed maturityincome investments owned, relative to the Company'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 19.9%comprised 7.5% of the market value of the Company's consolidated investment portfolio of $878.6 million at December 31, 2015, but only 12.0% of the related adjusted cost basis, as long-term holdings have appreciated significantly.2018. The Company'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 equitysingle-equity issue owned hashad a market value of $6.2$3.2 million at December 31, 2015 (0.9%2018 (0.4% of total invested assets) although the average equity holding of an individual issuer is less than $150,000.Company's consolidated investment portfolio).
In general, 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, which accounts for the fact that the portfolio, in total, carries a $60.0 million pre-tax unrealized gain at the current year end using original cost and over $65.3 million in unrealized gains using cost adjusted for previous other-than-temporary impairment adjustments.
An individual equity security will be disposed of when it is determined by the Company's external investment managers or the Board of Directors' Investment Committee that there is little potential for future appreciation. Allappreciation or to reallocate from equity securities are considered to be available for sale although portfolio turnover has historically been very low.fixed income securities. 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,
As of January 1, 2018, the Company adopted Accounting Standards Update ("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 changed 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. Previously, the Company's equity securities may be sold when realignmentwere classified as available-for-sale and changes in fair value were recognized in accumulated other comprehensive income (loss) as a component of shareholders' equity.
During 2018, the Company's external investment managers and the Board of Directors' Investment Committee determined that reallocation of the Company's equity portfolio is consideredwould be beneficial or when valuations are considered excessive comparedand sold $149.2 million of its equity portfolio, resulting in a gain on sale of $51.9 million. The majority of these gains were included in unrealized gains within other comprehensive income (loss) at December 31, 2017 and, as a result of the adoption of ASU 2016-01, were reclassified to alternative investments. Salesretained earnings as of January 1, 2018 and were therefore not recognized in the consolidated statement of operations for the year ended December 31, 2018. These equity sales further solidified the conservative nature of its high quality, short-duration investment portfolio; opportunistically utilized the new lower corporate tax rate of 21%, which was beneficial given the low tax basis of many of these equity positions; and were accretive to income, given the increase in yields at the shorter end of the yield curve. Realized losses related to the sale of equity securities during 2015 generated both gains and losses but netted to a realized gain2018 recognized in the consolidated statement of $8.4operations for the year ended December 31, 2018 were $3.1 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 from Net unrealized losses on equity securities by $1.3 millionheld at December 31, 2018 included in the consolidated statement of operations for the year before taxes. The reclassification of unrealized losses to realized losses occurred on each individual issue where the current market value was at least 20% below original or adjusted cost, and the decline was ongoing for more than six 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 to the Company's 20% threshold. Net unrealized gains on the equity security portfolio were $65.3 million, before tax atended December 31, 2015 compared to $83.3 million at December 31, 2014. The current net unrealized gain consists of $70.4 million of gross unrealized gains and $5.1 million of gross unrealized losses.2018 were $9.7 million.
Limited Partnerships
The Company invests 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's excess capital strategy. At December 31, 2015, aggregate funds invested in limited partnerships was $31.0 million and2018, the aggregate carrying value was $75.5$55.0 million, comprising 10.3%6.3% of the market value of invested assets.the Company's consolidated investment portfolio.
As a group, these investments experienced decreasesdecreased in value during 2015,2018, with the aggregate of the Company's share of such losses reported by the limited partnerships totaling approximately $1.7$9.3 million. The decrease in value is composed of estimated realized gains of $6.5 million and decreases in estimated unrealized gains of $8.2 million. On an inception-to-date basis, active limited partnerships have produced estimated realized income of $38.8 million and estimated unrealized income of $5.1 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 unrealized gains or losses(losses) on equity securities and limited partnership investments. However, readersReaders are cautioned that to the extent that reported increases and decreases in equity value are unrealized, theyof the Company's limited partnerships can be reduced or eliminatedchange quickly byas a result of 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'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's fixed maturity investments are maintained, continued at historically low levels during 2015.
Pre-tax net investment income increased $3.4$3.9 million, or 38%22%, during 2018, reflecting higher interest rates for shorter duration securities, increased dividends and after tax income increased $2.2 million, or 32% during 2015 reflecting a larger concentration in high-yield bonds and higher average invested assets from continuing positive cash flow from operations.operations. A comparison of consolidated investment yields, before consideration of investment management expenses, is as follows:
| | | 2015 | | | 2014 | | | 2018 | | | 2017 | |
| Before federal tax: | | | | | | | | | | | | |
| Investment income | | | 2.5 | % | | | 2.0 | % | | | 3.0 | % | | | 3.2 | % |
| Investment income plus investment gains (losses) | | | 2.3 | | | | 4.3 | | | | (0.1 | ) | | | 6.2 | |
| | | | | | | | | | | | | | | | | |
| After federal tax: | | | | | | | | | | | | | | | | |
| Investment income | | | 1.8 | | | | 1.5 | | | | 2.7 | | | | 2.3 | |
| Investment income plus investment gains (losses) | | | 1.7 | | | | 2.9 | | | | (0.6 | ) | | | 5.4 | |
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 the Company's investment operations. 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, Protective 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's operations and performance. While it is currently expected that federal government regulation will 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 risks from changes to state and federal tax laws that may affect the treatment of insurance related deductions or income recognition.
Additionally, changes in laws and regulations governing the insurance industry could have an impact on the Company's ability to generate historical levels of income from its insurance operations. The Company is obligedobligated to comply with numerous complex and varied governmental regulations in order to maintain its authority to write insurance business. While the Company has continuously maintained each of its licenses without exception, failure to maintain compliance could result in governmental regulators temporarily preventing the Company from writing new business, thus having a detrimental effect on the Company. Also, the ability forof the Company's Insurance Subsidiaries to increasemodify certain insurance rates, specifically workers' compensation rates, is heavily regulated for significant portions of the Company's business and such rate increases are often denied or delayed for substantial periods by regulators.
- 15 -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 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, 2018, the minimum statutory capital and surplus requirements of the Insurance Subsidiaries was $117.4 million. Actual consolidated statutory capital and surplus at December 31, 2018 exceeded this requirement by $278.5 million.
Employees
As of December 31, 2015,2018, the Company had 438535 employees, an increase of 137 employees from the prior year end.year-end.
CompetitionRevenue Concentration
The Company derives a significant percentage of its direct premium volume from certain FedEx Corporation subsidiaries and operating companies ("FedEx"), and from insurance brokeragecoverage provided to FedEx's contracted service providers. FedEx represented approximately $16.2 million, $18.5 million and agency$18.3 million of the Company's consolidated gross premiums written in 2018, 2017 and 2016, respectively. An additional $174.7 million, $189.4 million and $202.2 million in 2018, 2017 and 2016, respectively, was placed with the Company by a non-affiliated broker on behalf of contracted service providers of FedEx, but this additional business is highly competitive. B&L competeswas not dependent upon the Company's direct business 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.FedEx.
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 management,skilled employees, its extensive proprietary data basesdatabases and the use of technology with respect to its insureds and independent agent force. However, the Company is not "top-line" oriented and will readily sacrifice premium volume during periods of unrealistic rate competition.insureds. Accordingly, should competitors determine to "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
This
The 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.protectiveinsurance.com. The Company has included its Internet website address throughout this Annual Report on Form 10-K as well asa textual reference only. The information contained on, or accessible through, the Company's Audit Committee CharterInternet 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 SEC. The Company also includes on its Internet website its Code of Business Conduct willand the charter of each permanent 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'sProtective Insurance Corporation, 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) and (vii), and (d) of Regulation S-K:
Reference is made to Note J to the consolidated financial statements which provide information concerning industry segments and is filed herewith under Item 8, Financial Statements and Supplementary Data.
Item 1A. RISK FACTORS
● | 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 following is a description of the risk factors that could cause our actual results to differ materially from those contained in forward-looking statements made in this Annual Report on Form 10-K and presented elsewhere by management from time to time. Such factors may have a material adverse effect on our business, financial condition and results of operations, and you should carefully consider them before deciding to invest in, or retain, shares of our common stock. These risk factors do not identify all risks that we face; our operations could also be affected by factors that are not presently known to us or that we currently consider to be immaterial to our operations. Due to risks and uncertainties, known and unknown, our past financial results may not be a reliable indicator of future performance, and historical trends should not be used to anticipate results or trends in future periods. ●
| The Company's main insurance subsidiary, Protective, currently has a financial strength rating of "A+" (Superior) by A.M. Best. A decline in the Company's rating below "A-" could adversely affect the Company's position in the insurance market, make it more difficult to market the Company's insurance products and cause a significant reduction in the Company's premiums and earnings. A downgrade could result in a loss of a number of insurance contracts the Company writes and in a substantial loss of business to other competitors. 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 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. |
● | 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 58% of the outstanding shares of voting Class A common stock and approximately 28% 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 and provisions for potential uncollectible balances from these reinsurers have been established. If the Company is unable to collect the amounts due to it from reinsurers, any unreserved credit losses could 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. |
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 seek to 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 of 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, which could have a material adverse effect on our results of operations and our financial condition.
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 Insurance Co., currently has a financial strength rating of “A” (Excellent) with a negative outlook by A.M. Best, which represents a downgrade from the “A+” (Superior) financial strength rating with a negative outlook Protective Insurance Co. had prior to November 20, 2018. 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 future downgrade by A.M. Best 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.
● | While much less significant in the past few years, a portion of the risk underwritten by the Insurance Subsidiaries prior to June 30, 2015 covered 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 can take many months, or even years, for the ultimate cost 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. |
We have two classes of common stock with unequal voting rights that are effectively controlled by our principal shareholders and management, which limits other shareholders’ ability to influence our operations.● | The Company derives a significant percentage of its direct premium volume from certain FedEx subsidiaries and related entities ("FedEx"), and from insurance coverage provided to FedEx's contracted service providers. While the loss of this major customer could severely impact the Company's revenue earnings potential and 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, could be viewed as separate entities. |
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.● | 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 utilizes 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, potentially, its financial position. Conversely, because of the inverse relationship between interest rates and the market value of bonds, a material increase in interest rates could have a significant temporary negative 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. |
We are subject to credit risk relating to our ability to recover amounts due from reinsurers.● | 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 ratings. |
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 in which the adjudication of claims can take many years and which have seen an increase in claim severity, 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 FedEx, 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.
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.
Given our significant interest-bearing investment portfolio, if interest rates materially drop or the fixed income markets are otherwise disrupted, 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.
● | Technological advances, including those specific to 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 ofOur investment portfolio is subject to market and credit risks, which could affect our financial results and ability to conduct 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. |
● | 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. |
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.● | 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 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 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. |
● | 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. |
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 if we fail to adjust to these changes in a timely manner, our business and results of operations could be materially adversely affected.
The failure of our information technology systems and other operational systems to operate properly or disruptions or breaches of our information systems could adversely affect our business, results of operations and financial condition.
We rely upon complex and expensive information technology systems and other operational systems and on the integrity and timeliness of our data to run our businesses, service our customers and interact 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. Our networking infrastructure and related assets may also be subject to employee errors or other unforeseen activities that could result in the disruption of business processes, network degradation and system downtime. To the extent that such disruptions occur, our business, results of operations and financial condition could be materially and adversely affected, resulting in a possible loss of business.
In addition, 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. Cybersecurity attacks and intrusion efforts are continuous and evolving. The scope and severity of risks that cyber threats present have increased dramatically, and include, but are not limited to, disruptions in systems, unauthorized release of confidential or otherwise protected information and corruption of data. Our information technology and other systems could be subject to physical or electronic break-ins; attempts to gain unauthorized access to data from our employees, vendors or third parties; unauthorized tampering; exploitation of weaknesses related to our vendors or other third parties; denials of service; computer viruses and other malicious software; or other cybersecurity attacks or breaches, resulting in a failure to maintain the security, confidentiality or privacy of sensitive data, including personal information relating to our customers and business partners, or in the theft of intellectual property or proprietary information.
In September 2018, we learned of suspicious activity occurring within two employee email accounts. In response, we launched an investigation and began working with third-party forensic experts to determine the full nature and scope of this incident. A review of the impacted email accounts determined that certain types of personal information may have been accessible for a small number of individuals, although no assurance can be given that we will not identify additional information that was accessed or obtained. We are working with the impacted clients and are in the process of notifying the individuals, and any implicated state regulators, pursuant to applicable law. We cannot ensure that we will be able to identify, prevent or contain the effects of any additional cyber attacks or other cybersecurity incidents in the future that bypass our security measures or disrupt our information technology systems or business. Any failure to maintain proper security, confidentiality or privacy of sensitive data residing on our information technology and other operational systems could delay or disrupt our ability to do business and service clients, harm our reputation, require us to incur significant remediation costs, subject us to litigation, regulatory fines, a loss of customers and revenues or otherwise have a material adverse effect on our business, results of operations and financial condition.
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 and successfully execute our Chief Executive Officer transition.
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.
Effective October 17, 2018, our Board of Directors appointed John D. “Jay” Nichols as our Interim Chief Executive Officer and Chairman of our Board of Directors and commenced a search process to identify a permanent chief executive officer as a result of the resignation of W. Randall Birchfield as our Chief Executive Officer, President and Chief Operating Officer and as a member of our Board of Directors. If we are unable to appoint a permanent chief executive officer with the desired level of experience and expertise in a timely manner, or if we encounter difficulties in this transition, our strategic planning and execution could be hindered or delayed, and our ability to attract and retain other key members of senior management could be adversely affected. Any such disruptions or uncertainties could have a material adverse effect on our results of operations, financial condition and the market price of our common stock.
Item 1B. UNRESOLVED STAFF COMMENTS
None.
Item 2. PROPERTIES
The Company owns its home office building and the adjacent real estate in Carmel, Indiana, approximately 14 miles from downtown Indianapolis.Indiana. The home office building contains a total of 181,000 usable square feet of usable space, and the Company currently occupies approximately 70%74% of this space, with the remainder being leased to non-affiliated entities on relatively short-term leases.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 upback-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 theirits business, the Company and its Insurance Subsidiaries areis 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. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERSMINE SAFETY DISCLOSURES
Nothing to report.
Not applicable.
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASE OF EQUITY SECURITIES
TheShares of the Company's Class A and Class B common stocksCommon Stock are traded on The NASDAQ Stock Market®Nasdaq under the symbols BWINAPTVCA and BWINB,PTVCB, 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, 2015,February 28, 2019 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 2015 and 2014, as reported by NASDAQ and published in the financial press. The quotations reflect interdealer prices without retail markup, markdown or commission and do not necessarily represent actual transactions.
| | | | | | | | | | | | | | | Cash | |
| | | Class A | | | Class B | | | Dividends | |
| | | High | | | Low | | | High | | | Low | | | Declared | |
| | | | | | | | | | | | | | | | |
| 2015: | | | | | | | | | | | | | | | |
| Fourth Quarter | | $ | 24.89 | | | $ | 22.43 | | | $ | 24.99 | | | $ | 21.27 | | | $ | .25 | |
| Third Quarter | | | 24.40 | | | | 21.04 | | | | 23.69 | | | | 21.85 | | | | .25 | |
| Second Quarter | | | 24.40 | | | | 22.50 | | | | 24.36 | | | | 22.02 | | | | .25 | |
| First Quarter | | | 27.63 | | | | 22.57 | | | | 25.80 | | | | 23.00 | | | | .25 | |
| | | | | | | | | | | | | | | | | | | | | |
| 2014: | | | | | | | | | | | | | | | | | | | | |
| Fourth Quarter | | | 24.80 | | | | 23.25 | | | | 27.44 | | | | 24.19 | | | | .25 | |
| Third Quarter | | | 24.50 | | | | 23.25 | | | | 26.68 | | | | 24.55 | | | | .25 | |
| Second Quarter | | | 25.20 | | | | 22.89 | | | | 26.94 | | | | 24.36 | | | | .25 | |
| First Quarter | | | 24.88 | | | | 22.06 | | | | 27.24 | | | | 23.40 | | | | .25 | |
The Company has paid quarterly cash dividends continuously since 1974. The current regularCompany paid a quarterly dividend rate has been increased to $.26of $.28 per share effective February 2016.during 2018. In the first quarter of 2019, the Company declared a dividend of $.10 per share. 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, 2018, $117.4 million, or 33.0% 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 Protective 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's earnings, returns on investments and its capital needs.
The following table presents information regarding the Company's repurchases of its Common Stock for the periods indicated:
Period | |
Total number of shares purchased | | |
Average price paid per share | | | Total number of shares purchased as part of publicly announced plans or programs (1) | | | Maximum number of shares that may yet be purchased under the plans or programs (1) | |
| October 1 - October 31, 2018 | | | 72,108 | | | $ | 22.64 | | | | 72,108 | | | | 2,194,666 | |
| November 1 - November 30, 2018 | | | 15,085 | | | | 22.79 | | | | 15,085 | | | | 2,179,581 | |
| December 1 - December 31, 2018 | | | - | | | | - | | | | - | | | | 2,179,581 | |
| Total | | | 87,193 | | | | | | | | 87,193 | | | | | |
(1) On August 31, 2017, the Company's Board of Directors authorized the reinstatement of the Company's share repurchase program for up to 2,464,209 shares of the Company's Class A or Class B Common Stock. On August 7, 2018, the Company's Board of Directors reaffirmed the Company's share repurchase program, but also provided that the aggregate dollar amount of shares of the Company's Common Stock that may be repurchased under the share repurchase program through August 8, 2019 may not exceed $25.0 million. 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. Pursuant to this share repurchase program, the Company entered into a Rule 10b5-1 plan on September 24, 2018, which authorized the repurchase of up to $12.0 million of the Company's outstanding common shares at various pricing thresholds, in accordance with guidelines specified under Rule 10b5-1 of the Exchange Act. The Rule 10b5-1 plan expired on November 8, 2018. No duration has been placed on the Company's share repurchase program, and the Company reserves the right to amend, suspend or discontinue it at any time. The share repurchase program 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 on hand.
Corporate Performance
The following graph shows a five yearfive-year comparison of cumulative total return for the Corporation'sCompany's Class B common shares,Common Stock, the NASDAQ Insurance StockRussell 2000 Index and the Russell 2000 Index.Company's peer group as determined by management (the "PTVCB Peer Group"). The basis of comparison is a $100 investment at December 31, 2010,2013, in each of (i) Baldwin & Lyons, Inc.,Protective, (ii) Nasdaq Insurance Stocks,the Russell 2000 Index and (iii) the Russell 2000 Index.PTVCB Peer Group. All dividends are assumed to be reinvested.
| | | Period Ending | |
| Index | | 12/31/10 | | | 12/31/11 | | | 12/31/12 | | | 12/31/13 | | | 12/31/14 | | | 12/31/15 | |
| Baldwin & Lyons, Inc. | | | 100.00 | | | | 96.80 | | | | 110.86 | | | | 132.22 | | | | 129.80 | | | | 126.28 | |
| NASDAQ Insurance Index | | | 100.00 | | | | 105.63 | | | | 123.41 | | | | 161.85 | | | | 178.92 | | | | 194.53 | |
| Russell 2000 | | | 100.00 | | | | 95.82 | | | | 111.49 | | | | 154.78 | | | | 162.35 | | | | 155.18 | |
| | | Year Ended December 31 | |
| Index | | 2013 | | | 2014 | | | 2015 | | | 2016 | | | 2017 | | | 2018 | |
| Protective Insurance Corporation | | $ | 100.00 | | | $ | 98.17 | | | $ | 95.51 | | | $ | 104.38 | | | $ | 103.91 | | | $ | 75.93 | |
| Russell 2000 Index | | | 100.00 | | | | 104.89 | | | | 100.26 | | | | 121.63 | | | | 139.44 | | | | 124.09 | |
| PTVCB Peer Group | | | 100.00 | | | | 104.36 | | | | 113.12 | | | | 136.57 | | | | 148.11 | | | | 154.20 | |
| PTVCB Peer Group |
| Amerisafe, Inc. | | HCI Group, Inc. |
| Atlas Financial Holdings, Inc. | | Heritage Insurance Holdings, Inc. |
| Donegal Group Inc. | | James River Group Holdings, Ltd. |
| EMC Insurance Group Inc. | | NMI Holdings, Inc. |
| Employers Holdings, Inc. | | Safety Insurance Group, Inc. |
| FedNat Holding Company | | United Insurance Holdings Corp. |
| Hallmark Financial Services, Inc. | | Universal Insurance Holdings, Inc. |
| | |
Item 6. SELECTED FINANCIAL DATA
The table below provides selected consolidated financial data of the Company. The information has been derived from our consolidated financial statements for each of the years in the five yearfive-year period ended December 31, 2015.2018. You should read this selected consolidated financial data in conjunction with the audited consolidated financial statements and notes as of and for the year ended December 31, 20152018 included in Part II, Item 8 "Financial"Financial Statements and Supplementary Data"Data", and Part II, Item 7 "Management's"Management's Discussion and Analysis of Financial Condition and Results of Operations"Operations" included in this Annual Report on Form 10-K.
| | | Year Ended December 31 | |
| | | 2015 | | | 2014 | | | 2013 | | | 2012 | | | 2011 | |
| | | (Dollars in thousands, except per share data) | |
| | | | | | | | | | | | | | | | |
| Direct and assumed premiums written | | $ | 383,553 | | | $ | 382,388 | | | $ | 369,476 | | | $ | 341,286 | | | $ | 334,526 | |
| | | | | | | | | | | | | | | | | | | | | |
| Net premiums earned | | | 263,335 | | | | 261,627 | | | | 252,743 | | | | 237,461 | | | | 244,570 | |
| | | | | | | | | | | | | | | | | | | | | |
| Net investment income | | | 12,498 | | | | 9,055 | | | | 8,770 | | | | 9,930 | | | | 10,729 | |
| | | | | | | | | | | | | | | | | | | | | |
| Net gains (losses) on investments | | | (1,261 | ) | | | 14,930 | | | | 23,515 | | | | 9,011 | | | | (17,803 | ) |
| | | | | | | | | | | | | | | | | | | | | |
| Losses and loss expenses incurred | | | 155,750 | | | | 159,596 | | | | 150,701 | | | | 138,088 | | | | 215,555 | |
| | | | | | | | | | | | | | | | | | | | | |
| Net income (loss) | | | 23,283 | | | | 29,717 | | | | 36,588 | | | | 31,919 | | | | (28,175 | ) |
| | | | | | | | | | | | | | | | | | | | | |
Earnings per share -- net income (loss) 1 | | | 1.55 | | | | 1.98 | | | | 2.45 | | | | 2.15 | | | | (1.90 | ) |
| | | | | | | | | | | | | | | | | | | | | |
| Cash dividends per share | | | 1.00 | | | | 1.00 | | | | 1.00 | | | | 1.00 | | | | 1.00 | |
| | | | | | | | | | | | | | | | | | | | | |
Investment portfolio 2 | | | 729,877 | | | | 757,421 | | | | 703,259 | | | | 681,856 | | | | 637,681 | |
| | | | | | | | | | | | | | | | | | | | | |
| Total assets | | | 1,085,771 | | | | 1,144,247 | | | | 1,072,270 | | | | 983,024 | | | | 905,294 | |
| | | | | | | | | | | | | | | | | | | | | |
| Shareholders' equity | | | 394,498 | | | | 399,496 | | | | 381,724 | | | | 346,712 | | | | 319,061 | |
| | | | | | | | | | | | | | | | | | | | | |
Book value per share 1 | | | 26.25 | | | | 26.67 | | | | 25.57 | | | | 23.25 | | | | 21.49 | |
| | | | | | | | | | | | | | | | | | | | | |
Underwriting ratios 3 | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | |
| Losses and loss expenses | | | 59.2 | % | | | 61.0 | % | | | 59.6 | % | | | 58.1 | % | | | 88.1 | % |
| | | | | | | | | | | | | | | | | | | | | |
| Underwriting expenses | | | 32.2 | % | | | 32.0 | % | | | 32.4 | % | | | 30.8 | % | | | 30.2 | % |
| | | | | | | | | | | | | | | | | | | | | |
| Combined | | | 91.4 | % | | | 93.0 | % | | | 92.0 | % | | | 88.9 | % | | | 118.3 | % |
| | | Year Ended December 31 | |
| | | 2018 | | | 2017 | | | 2016 | | | 2015 | | | 2014 | |
| | | (Dollars in thousands, except per share data) | |
| Gross premiums written | | $ | 582,500 | | | $ | 504,737 | | | $ | 403,004 | | | $ | 383,553 | | | $ | 382,388 | |
| | | | | | | | | | | | | | | | | | | | | |
| Net premiums earned | | | 432,880 | | | | 328,145 | | | | 276,011 | | | | 263,335 | | | | 261,627 | |
| | | | | | | | | | | | | | | | | | | | | |
| Net investment income | | | 22,048 | | | | 18,095 | | | | 14,483 | | | | 12,498 | | | | 9,055 | |
| | | | | | | | | | | | | | | | | | | | | |
| Net realized and unrealized gains (losses) on investments | | | (25,691 | ) | | | 19,686 | | | | 23,228 | | | | (1,261 | ) | | | 14,930 | |
| | | | | | | | | | | | | | | | | | | | | |
| Losses and loss expenses incurred | | | 345,864 | | | | 247,518 | | | | 186,481 | | | | 155,750 | | | | 159,596 | |
| | | | | | | | | | | | | | | | | | | | | |
| Net income (loss) | | | (34,075 | ) | | | 18,323 | | | | 28,945 | | | | 23,283 | | | | 29,717 | |
| | | | | | | | | | | | | | | | | | | | | |
Earnings (loss) per share -- net income (loss) (1) | | | (2.28 | ) | | | 1.21 | | | | 1.92 | | | | 1.55 | | | | 1.98 | |
| | | | | | | | | | | | | | | | | | | | | |
| Cash dividends per share | | | 1.12 | | | | 1.08 | | | | 1.04 | | | | 1.00 | | | | 1.00 | |
| | | | | | | | | | | | | | | | | | | | | |
Investment portfolio (2) | | | 878,638 | | | | 854,595 | | | | 749,501 | | | | 729,877 | | | | 757,421 | |
| | | | | | | | | | | | | | | | | | | | | |
| Total assets | | | 1,490,131 | | | | 1,357,016 | | | | 1,154,137 | | | | 1,085,771 | | | | 1,144,247 | |
| | | | | | | | | | | | | | | | | | | | | |
| Shareholders' equity | | | 356,082 | | | | 418,811 | | | | 404,345 | | | | 394,498 | | | | 399,496 | |
| | | | | | | | | | | | | | | | | | | | | |
| Book value per share | | | 23.95 | | | | 27.83 | | | | 26.81 | | | | 26.25 | | | | 26.67 | |
1 Earnings and book value per share are adjusted for the dilutive effect of stock options outstanding.
2 Includes money market instruments classified with cash in the Consolidated Balance Sheets.
3 Data is for all coverages combined, does not include fee income and is presented based upon U.S. generally accepted accounting principles.
| (1) | Earnings (loss) per share are adjusted for the dilutive effect of restricted stock outstanding for 2014-2017. |
| (2) | Includes money market instruments classified as cash equivalents in the consolidated balance sheets. |
Item 7.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Protective Insurance Corporation (formerly Baldwin & Lyons, Inc.) is a property-casualty insurer specializing 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. Additionally, we offer workers' compensation coverage for a variety of operations outside the transportation industry. We operate 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 term “Protective,” as used throughout this Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”), refers to Protective Insurance Corporation, the parent company. The terms the “Company,” “we,” “us” and our,” as used throughout this M&DA, refer to Protective and all of its subsidiaries unless the context clearly indicates otherwise. The term “Insurance Subsidiaries,” as used throughout this MD&A, refers to Protective Insurance Company, Protective Specialty Insurance Company, Sagamore Insurance Company and B&L Insurance, Ltd.
Effective January 1, 2017, we determined that our business constituted one reportable property and casualty insurance segment. During 2016, we had two reportable segments – property and casualty insurance and reinsurance. We moved to a single reportable segment based on how our operating results are regularly reviewed by our chief operating decision maker when making decisions about how resources are to be allocated and assessing performance.
Effective August 1, 2018, we changed our name to Protective Insurance Corporation to better align our holding company's and Insurance Subsidiaries' identities and to reflect our position within the insurance industry.
Effective January 1, 2018, we adopted Accounting Standards Update ("ASU") 2016-01, Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities, or ASU 2016-01, resulting in a cumulative-effect adjustment of $71.0 million ($46.2 million, net of tax). This adjustment moved our historical unrealized gains and losses, net of tax, on our equity portfolio from accumulated other comprehensive income (loss) to retained earnings, but had no impact on overall shareholders' equity. In addition, for 2018 and forward, the change in fair value for equity securities is required to be recognized in net earnings rather than in other comprehensive income (loss). The impact to our consolidated statements of operations will vary depending upon the level of volatility in the performance of the securities held in our equity portfolio and the overall market.
On December 22, 2017, the U.S. Tax Cut 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. As a result, we recorded a tax benefit of $9.6 million related to the remeasurement of our deferred tax assets and liabilities during the fourth quarter of 2017. As of December 31, 2017, the IRS had not yet published all of the detailed regulations resulting from the enactment of the U.S. Tax Act; therefore, while we had not completed our accounting for the tax effects, we made a reasonable estimate of the tax effects on our existing deferred tax balances at December 31, 2017. We finalized our accounting for the tax effects of the U.S. Tax Act during 2018. No material adjustments to income tax expense (benefit) were recorded during 2018.
On July 13, 2018, A.M. Best Company, Inc. ("A.M. Best") affirmed our financial strength rating of "A+" (Superior). At the same time, A.M. Best revised its outlook to negative based on their monitoring of our growth strategy and the potential for adverse loss development in certain lines of business.
On November 20, 2018, A.M. Best downgraded our financial strength rating to "A" (Excellent) from "A+" (Superior), citing three consecutive years of material adverse loss development. A.M. Best continues to categorize our balance sheet as "very strong" and our operating performance as "adequate," but its outlook remains negative.
Liquidity and Capital Resources
The primary sources of the Company'sour 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
We generally experiencesexperience positive cash flow from operations resulting from the fact that premiumsoperations. Premiums are collected on insurance policies in advance of the disbursement of funds infor payment of claims. Operating costs of theour property/casualty Insurance Subsidiaries, other than loss and loss expense payments generallyand commissions paid to related agency companies, 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 2015,Our cash flow relating to premiums is significantly affected by reinsurance programs in effect, whereby we cede 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 us from operations totaled $38.2our insureds.
On August 31, 2017, our Board of Directors authorized the reinstatement of our share repurchase program for up to 2,464,209 shares of our Class A or Class B Common Stock. On August 7, 2018, our Board of Directors reaffirmed our share repurchase program, but also provided that the aggregate dollar amount of shares of our common stock that may be repurchased under the share repurchase program through August 8, 2019 may not exceed $25.0 million. 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 24, 2018, we entered into a stock repurchase plan for the purpose of repurchasing up to $12.0 million comparedof shares of our common stock, at various pricing thresholds, in accordance with guidelines specified under Rule 10b5-1 of the Securities Exchange Act of 1934, as amended (the "Rule 10b5-1 Plan"). The Rule 10b5-1 Plan was established pursuant to, $30.2 million total for 2014.and as part of, our share repurchase program and permits 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 increase in operatingRule 10b5-1 plan expired on November 8, 2018. The share repurchase program may be amended, suspended or discontinued at any time and does not commit us to repurchase any shares of our common stock. We have funded, and intend to continue to fund, the share repurchase program from cash flow resulted mainly from decreased loss, LAEon hand. The actual number and value of the shares to be purchased will depend on the performance of our stock price, market volume and other operating expense payments in additionmarket conditions. During the year ended December 31, 2018, we paid $4.6 million to higher premium volume in 2015.repurchase 7,770 shares of Class A and 191,898 shares of Class B Common Stock under the share repurchase program.
For several years, the Company'sour investment philosophy has emphasized the purchase of short-term bonds with superiorhigh quality and liquidity. As flat yield curves have not provided incentiveOur fixed income investment portfolio continues to lengthen maturitiesemphasize shorter-duration instruments. If there was a hypothetical increase in recent years,interest rates of 100 basis points, the Company has continuedprice of our bonds at December 31, 2018 would be expected to maintain itsfall by approximately 2.8%. The credit quality of our fixed maturity portfolio at short-term levels.income securities remains high with a weighted average rating of AA-, including cash. The average contractual life of the Company's bondour fixed income and short-term investment portfolio decreased slightlyincreased to 4.65.5 years during 2015.at December 31, 2018 compared to 4.9 years at December 31, 2017. The average duration of the Company'sour fixed maturityincome portfolio remains much shorter than both the contractual maturity average and significantly shorter than the duration of the Company'sour liabilities. The CompanyWe also remainsremain an active participant in the equity securities market, usingallocating capital which is in excess of amounts considered necessary to fund our current operations. The long-term horizon for the Company'sour equity investments allows itus to invest in positions where ultimate value, and not short-term market fluctuation, is the primary focus. Investments made by the Company'sour domestic property/casualty Insurance Subsidiaries are regulated by guidelines promulgated by the National Association of Insurance Commissioners (the "NAIC"), which are designed to provide protection for both policyholders and shareholders.
Net cash flows from operations increased $3.0 million to $100.7 million for 2018 from $97.7 million in 2017. The Company'sincrease in operating cash flow was primarily related to higher premium volume in 2018 compared to 2017. Net cash flows from operations increased $65.3 million to $97.7 million for 2017 compared to $32.4 million in 2016. The 2017 increase in operating cash flows was related to higher premium volume in 2017 compared to 2016.
Net cash provided by investing activities was $23.7 million for 2018 compared to net cash used in investing activities of $74.3 million in 2017. The $98.0 million change was primarily related to higher proceeds from sales of fixed income and equity securities and lower purchases of equity securities and fixed income investments. These increases were partially offset by lower proceeds from maturities of our fixed income securities and lower distributions from limited partnerships during 2018, in addition to the purchase of $10.0 million of company-owned life insurance in the first quarter of 2018. Net cash used in investing activities was $74.3 million for 2017 compared to $27.4 million in 2016. The increase of $46.9 million in cash used in investing activities was primarily related to higher purchases of equity securities and fixed income investments and lower proceeds from sales of equity and fixed income securities. These increases were partially offset by higher distributions from limited partnership investments and higher proceeds from maturities of fixed income securities in 2017.
Net cash used in financing activities for 2018 consisted of regular cash dividend payments to shareholders of $16.8 million ($1.12 per share) and $4.6 million to repurchase 199,668 shares of our common stock. Financing activities for 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 our Class B Common Stock. Financing activities for 2016 consisted solely of the regular cash dividend payments to shareholders of $15.8 million ($1.04 per share).
Our assets at December 31, 2015 included $71.72018 included $156.9 million in short-termof investments included within cash and cash equivalent investments whichequivalents on the consolidated balance sheets that are readily convertible to cash without market penalty and an additional $73.9 million$45.9 million of fixed maturityincome investments (at par) maturing in less than one year. The Company believes thatWe believe these liquid investments, plus the expected cash flow from 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 chooseswe choose to further restrict volume, the liquidity of itsour investment portfolio would permit managementus to continue to paypaying 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'sour reinsurance program is structured to avoidmitigate significant cash outlays that accompany large losses.
We previously maintained a revolving line of credit with a $40.0 million limit that had an expiration date of September 23, 2018. Interest on this line of credit was referenced to the London Interbank Offered Rate ("LIBOR") and could be fixed for periods of up to one year at our option. Outstanding drawings on this line of credit were $20.0 million at December 31, 2017. On August 9, 2018, we entered into a credit agreement providing a revolving credit facility with a $40.0 million limit, with the option for up to an additional $35.0 million in incremental loans at the discretion of the lenders. This credit agreement, which has an expiration date of August 9, 2022, replaced our line of credit that was to expire on September 23, 2018. Interest on this credit facility is referenced to LIBOR and can be fixed for periods of up to one year at our option. Outstanding drawings on this revolving credit facility were $20.0 million as of December 31, 2018. At December 31, 2018, the effective interest rate was 3.61%, and we had $20.0 million remaining under the revolving credit facility. The current outstanding borrowings were used to repay the previous line of credit. Our revolving credit facility has two financial covenants, each of which were met as of December 31, 2018, requiring us to have a minimum U.S. Generally Accepted Accounting Principles ("GAAP") net worth and a maximum consolidated leverage ratio of 0.35 to 1.00.
Annualized net premiums written by the Company'sour Insurance Subsidiaries for 20152018 equaled approximately 65%112.3% of the combined statutory surplus of these subsidiaries,Insurance Subsidiaries, a level consistent with the past several years.higher premiums written. Premium writings of 100% and in some cases up to 200% of surplus are generally considered acceptable by regulatory authorities. Further, the statutory capital of each of theour Insurance Subsidiaries substantially exceedsexceeded minimum risk basedrisk-based capital requirements set by the National AssociationNAIC as of Insurance Commissioners.December 31, 2018. Accordingly, the Company haswe have the ability to significantly increase itsour business without seeking additional capital to meet regulatory guidelines.
Consolidated shareholders' equity is composed largely of GAAP shareholders' equity of our Insurance Subsidiaries. As such, there are statutory restrictions on the transfer of substantial portions of this equity to Protective. At December 31, 2015, $87.72018, $64.1 million may be transferred by dividend or 22%loan to Protective without approval by, or prior notification to, regulatory authorities. An additional $213.1 million of shareholders' equity represented net assets of the Company'sour Insurance Subsidiaries which, at that time, could be advanced or loaned to Protective with prior notification to, and approval from, regulatory authorities, although transfers of this size would not be transferred in the form of dividends, loans or advances to the parent company because of minimum statutory capital requirements. However, management believes thatpractical. We believe these restrictions pose no material liquidity concerns for us. We also believe the Company. The financial strength and stability of the subsidiariesour Insurance Subsidiaries would permit ready access by the parent companyProtective to short-term and long-term sources of credit. The Company maintains a $40credit when needed. Protective had cash and marketable securities valued at $15.2 million unsecured line of credit with $20 million of unused capacity at December 31, 2015.2018.
We believe investors’ understanding of our performance is enhanced by our disclosure of underwriting income (loss), which is a measure that is not calculated in accordance with GAAP. Underwriting income (loss) represents the pre-tax profitability of our insurance operations and is derived by subtracting net realized and unrealized gains (losses) on investments and net investment income from income (loss) before federal income tax expense (benefit). For 2018, we also had a goodwill impairment charge, which has also been excluded from the calculation of underwriting income (loss). We use underwriting income (loss) as an internal performance measure in the management of our operations because we believe it gives us and users of our financial information useful insight into our results of operations, our underlying business performance and our ongoing operating trends. Underwriting income (loss) should not be viewed as a substitute for income (loss) before federal income tax expense (benefit) calculated in accordance with GAAP, and other companies may define underwriting income (loss) differently. In addition, for 2018, the goodwill impairment charge has been excluded from other operating expenses when calculating our expense ratio and our combined ratio, as these ratios are intended to depict our underlying business performance and ongoing operating trends. We also believe that the exclusion of this goodwill impairment charge improves the comparability of our expense ratio and our combined ratio with our ratios in prior years.
| | | 2018 | | | 2017 | | | 2016 | |
| Income (loss) before federal income tax expense (benefit) | | $ | (43,872 | ) | | $ | 10,122 | | | $ | 43,054 | |
| Less: Net realized and unrealized gains (losses) on investments | | | (25,691 | ) | | | 19,686 | | | | 23,228 | |
| Less: Net investment income | | | 22,048 | | | | 18,095 | | | | 14,483 | |
| Less: Goodwill impairment charge included in other operating expenses (see below) | | | (3,152 | ) | | | – | | | | – | |
| Underwriting income (loss) | | $ | (37,077 | ) | | $ | (27,659 | ) | | $ | 5,343 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| Other operating expenses | | $ | 137,177 | | | $ | 113,594 | | | $ | 89,462 | |
| Less: Goodwill impairment charge | | | 3,152 | | | | – | | | | – | |
| Other operating expenses, excluding goodwill impairment charge | | $ | 134,025 | | | $ | 113,594 | | | $ | 89,462 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| Ratios | | | | | | | | | | | | |
| Losses and loss expenses incurred | | $ | 345,864 | | | $ | 247,518 | | | $ | 186,481 | |
| Net premiums earned | | | 432,880 | | | | 328,145 | | | | 276,011 | |
| Loss ratio | | | 79.9 | % | | | 75.4 | % | | | 67.6 | % |
| | | | | | | | | | | | | |
| Other operating expenses | | $ | 137,177 | | | $ | 113,594 | | | $ | 89,462 | |
| Less: Commissions and other income | | | 9,932 | | | | 5,308 | | | | 5,275 | |
| Other operating expenses, less commissions and other income | | | 127,245 | | | | 108,286 | | | | 84,187 | |
| Net premiums earned | | | 432,880 | | | | 328,145 | | | | 276,011 | |
| Expense ratio | | | 29.4 | % | | | 33.0 | % | | | 30.5 | % |
| | | | | | | | | | | | | |
| Impact of goodwill impairment charge | | | (0.7 | )% | | | – | | | | – | |
| Expense ratio, excluding goodwill impairment charge | | | 28.7 | % | | | 33.0 | % | | | 30.5 | % |
| | | | | | | | | | | | | |
| Combined ratio | | | 109.3 | % | | | 108.4 | % | | | 98.1 | % |
| Combined ratio, excluding goodwill impairment charge | | | 108.6 | % | | | 108.4 | % | | | 98.1 | % |
Results of Operations
20152018 Compared to 20142017
| | | 2018 | | | 2017 | | | Change | | | % Change | |
| Gross premiums written | | $ | 582,500 | | | $ | 504,737 | | | $ | 77,763 | | | | 15.4 | % |
| Ceded premiums written | | | (138,102 | ) | | | (151,348 | ) | | | 13,246 | | | | (8.8 | )% |
| Net premiums written | | $ | 444,398 | | | $ | 353,389 | | | $ | 91,009 | | | | 25.8 | % |
| | | | | | | | | | | | | | | | | |
| Net premiums earned | | $ | 432,880 | | | $ | 328,145 | | | $ | 104,735 | | | | 31.9 | % |
| Net investment income | | | 22,048 | | | | 18,095 | | | | 3,953 | | | | 21.8 | % |
| Commissions and other income | | | 9,932 | | | | 5,308 | | | | 4,624 | | | | 87.1 | % |
| Net realized and unrealized gains (losses) on investments | | | (25,691 | ) | | | 19,686 | | | | (45,377 | ) | | | (230.5 | )% |
| Total revenue | | | 439,169 | | | | 371,234 | | | | | | | | | |
| Losses and loss expenses incurred | | | 345,864 | | | | 247,518 | | | | 98,346 | | | | 39.7 | % |
| Other operating expenses | | | 137,177 | | | | 113,594 | | | | 23,583 | | | | 20.8 | % |
| Total expenses | | | 483,041 | | | | 361,112 | | | | | | | | | |
| Income (loss) before federal income tax benefit | | | (43,872 | ) | | | 10,122 | | | | (53,994 | ) | | | | |
| Federal income tax benefit | | | (9,797 | ) | | | (8,201 | ) | | | (1,596 | ) | | | | |
| Net income (loss) | | $ | (34,075 | ) | | $ | 18,323 | | | $ | (52,398 | ) | | | | |
| | | | | | | | | | | | | | | | | |
Gross premiums written for 2018 increased $77.8 million (15.4%), while net premiums earned increased $104.7 million (31.9%), as compared to 2017. The higher gross premiums written and net premiums earned were the result of continued growth in our commercial automobile and workers' compensation products in both our retail and program distribution channels. The difference in the percentage change for premiums written compared to earned was reflective of the normal differences in 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 written by the Property and Casualty Insurance segment for 2015 totaled $366.7 million, an increase of $23.5 million (7%) from 2014. This increase is attributable to a $30.1 million (10%) increase in premiums generated by fleet transportation products resulting from the addition of several new accounts during 2015, rate increases and increased revenue and miles driven by our insureds, which is immediately reflected in premium. This increase was partially offset by decreases of $4.7 million and $4.1 million in premiums generated by primary professional liability and personal automobile, respectively, reflecting the Company's strategic initiatives of reducing exposures in these products. Premiums ceded to reinsurers on Property and Casualty Insurance segmentour insurance business averaged 35.0%23.7% of gross premiums written premium for 20152018 compared to 34.7%30.0% for 2014, with2017. The percentage of premiums ceded to reinsurance decreased as a result of changes in our reinsurance structure. In the small variation attributablethird quarter of 2017, we lowered the quota share rate on our workers' compensation premiums to fluctuationreflect growing profitability and confidence in the mixthis book of business as wellbusiness. We also restructured our commercial automobile reinsurance treaty, placement changes.
Premiums written by the Reinsurance segment totaled $16.9 million during 2015,moving away from variable premium ceded rates (based on loss performance) to a decrease of $22.3 million (57%) from 2014. Premiums generated by property reinsurance products decreased $13.4 million (85%), reflective of management's decision to completely withdraw from the property catastrophe market. As of June 30, 2015, all exposure to catastrophic losses has expired. Further contributingflat ceding arrangement with no material changes to the Reinsurance segment premium writteneconomic risks taken for these products (i.e., ceded losses will decrease was an $8.9 million (38%) decline in the Company's book of professional liability reinsurance assumed, reflective of the Company's decision to non-renew certain business in response to deteriorating rates and treaty terms.
After giving effect to changes in unearned premiums, consolidated net premiums earned totaled $263.3 million for 2015 compared to $261.6 million for 2014, an increase of 0.7%by a similar amount as ceded premiums). The small net premium earned increase reflects a 10.3% increase in premium earned from the fleet transportation products mentioned above,impact of these changes to our reinsurance structure was partially offset by decreased premium written from primary professional liability and personal automobile products andreserve strengthening in the Reinsurance segment.
Pre-tax investment income of $12.5 million during 2015 was 38% higher than the 2014 reflecting2018 that resulted in ceding an increased allocation to high-yield bonds and increases in average invested assets. After tax investment income increased by 32% during 2015 compared to the prior year reflecting a mix in taxable compared to tax-exempt investment income.
Net pre-tax losses on investments, before taxes, totaled $1.3additional $17.3 million in 2015 comparedpremium from prior treaty years related to net pre-tax gains on investments of $14.9 million during 2014. The 2015 results were heavily influenced by direct trading results with gains of $4.5variable premium adjustment provisions in our historical reinsurance treaties. Our historical commercial automobile reinsurance treaties cause an adjustment to premiums ceded when the ultimate loss estimate changes for a reinsurance treaty year. Reserve strengthening in 2017 also resulted in ceding an additional $13.7 million in 2015 comparedpremium related to gains of $7.9 millionthese variable premium adjustment provisions in 2014. In addition, limited partnership results produced losses of $1.7 million in 2015 compared to gains of $7.1 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 and losses in these entities represented a 2% decrease in value for 2015 compared to a 10% appreciation in value for 2014. 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 2015, the limited partnership $1.7 million net loss was composed of $8.2 million attributable to a decrease in unrealized gains and $6.5 million attributable to realized gains. Other-than-temporary impairments of $7.7 million netted with losses of $4.4 million on previously impaired available-for-sale securities that were sold in 2015 are included in the net losses stated above.2017.
Losses and loss expenses incurred during 2015 decreased $3.82018 increased $98.3 million (2.4%(39.7%) from 2014 to $155.8$345.9 million compared to $247.5 million in 2017. The loss ratio also increased to 79.9% for 2018 compared to a decrease generally consistent withloss ratio of 75.4% for 2017. The loss ratio is calculated as the decreased reinsurance exposure described above. The 2015 consolidated losspercentage of losses and loss expense ratio was 59.2% comparedexpenses incurred to 61.0% for 2014.net premiums earned. The Company's lossincreased losses and loss expense ratios for major product lines are summarizedexpenses and loss ratio in 2018 reflected reserve adjustments of $16.8 million related to unfavorable prior accident year loss development in commercial automobile coverages. These unfavorable loss developments were the result of increased claim severity due to a more challenging litigation environment, as well as an unexpected increase in the following table:time to settle claims leading to an unfavorable change in claim settlement patterns. The 2018 loss ratio also reflected an increase in current accident year losses driven by severe commercial automobile losses, including continued emergence of severity. The 2017 loss ratio also reflected a $19.2 million reserve strengthening related to prior accident year deficiencies that developed as a result of unfavorable loss development from commercial automobile coverages, particularly from severe transportation loss events that occurred primarily during the first six months of 2017 and higher than expected loss development for discontinued lines of business.
| | | 2015 | | | 2014 | |
| Fleet transportation | | | 55.7 | % | | | 58.8 | % |
| All other | | | 96.4 | | | | 93.9 | |
| All lines | | | 59.2 | | | | 61.0 | |
Commercial automobile products covered by our reinsurance treaties are subject to an aggregate stop-loss provision. Once this aggregate stop-loss level is reached, for every $100 of additional loss, we are responsible only for our $25 retention. The lower loss ratiofollowing table illustrates the financial impact of a further 5% or 10% increase in ultimate losses for Fleet Transportation during 2015 was the result of more favorable frequency and severity relatedfive most recent reinsurance treaty years (2013-2017) covering these commercial automobile products:
| | | 5% Increase in Ultimate Loss Ratio | | | 10% Increase in Ultimate Loss Ratio | |
| Gross loss expense from further strengthening current reserve position | | $ | 34.3 | | | $ | 68.7 | |
| Net financial loss | | $ | 9.0 | | | $ | 17.6 | |
| $/share (after tax) | | $ | 0.48 | | | $ | 0.94 | |
Net investment income for 2018 increased 21.8% to current accident year losses. Prior year reserve savings lowered the 2015 calendar year Fleet Transportation loss ratio by 4.3 points$22.0 million compared to $18.1 million for 2017. The increase reflected an increase in average funds invested resulting from positive cash flow, as well as higher interest rates, which led to higher reinvestment yields for our short-duration fixed income portfolio. After-tax investment income increased by 39.4% to $17.7 million during 2018, compared to $12.7 million during 2017, reflecting the aforementioned higher interest rates and reinvestment yield environment.
Net realized and unrealized losses on investments of $25.7 million during 2018 were driven by $9.7 million in unrealized losses on equity securities during the period, which are now recorded in the consolidated statements of operations in conjunction with our adoption of ASU 2016-01, a 4.4 point$9.3 million decrease experienced in 2014.
the value of our limited partnership investments and net realized losses on sales of fixed income and equity securities of $6.6 million. During 2018, we sold $149.2 million in equity securities resulting in a gain on sale of $51.9 million. The Company produced an overall savings on the handlingmajority of prior year claims during 2015 of $10.1 million. This net savings isthis gain was included in the computation of loss ratios shown in the previous table, as is the $10.4 million savings produced during 2014 on prior year claims. Separated by segment, a $10.3 million net savings attributable to the property and casualty insurance segment during 2015 was primarily attributable to the Company's Fleet Transportation business, a described in the previous paragraph. A $0.2 million deficiency attributable to the reinsurance segment in 2015 related primarily to professional liability assumed losses. 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 developmentsunrealized gains within other comprehensive income (loss) at December 31, 2017 and, as a result lossof the adoption of ASU 2016-01, was reclassified to retained earnings as of January 1, 2018 and loss expense ratiosnot recognized in the consolidated statements of operations for 2018. These equity sales further solidified the conservative nature of our high quality, short-duration investment portfolio; opportunistically utilized the new lower corporate tax rate of 21%, which was beneficial given the low tax basis of many of these equity positions; and prior year reserve development maywere accretive to income, given the increase in yields at the shorter end of the yield curve. Comparative 2017 net realized investment gains were $19.7 million, consisting primarily of $12.5 million in gains reported from our investments in limited partnerships and $7.4 million in net realized gains from sales of securities. Realized investment gains and losses result from decisions regarding overall portfolio realignment as well as the sale of individual securities, including the change in aggregate value of limited partnerships and, as such, should not be expected to be consistent yearfrom period to year.period.
Other operating expenses for 2015, before credits for ceding allowances from reinsurers,2018 increased $7.7$23.6 million, (7%)or 20.8%, to $119.5$137.2 million generally in line with increases in Property and Casualty Insurance segment premium written. This increase is due primarilycompared to (1) an2017. The increase in other operating expenses was primarily due to increased commission expenses as a result of increased premiums written and higher salary and salary related expenses, reflectivebenefit expense and a non-cash impairment charge of the Company's growing workforce in response to the continued expansion of the Company's products and services, (2) a non-recurring recovery during 2014 of a substantial previously written off reinsurance recovery and (3) increased commissions related to business produced by non-affiliated agents and brokers. Reinsurance ceded credits were 22% higher in 2015, resulting primarily from favorable changes to the terms of certain reinsurance treaties. After consideration of these expense offsets, operating expenses increased $2.5$3.2 million or 3%, 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 incurredrecorded in the productionfourth quarter of the property and casualty insurance business.2018 to write off our entire goodwill balance. See Note M for further discussion. The ratio of netconsolidated other operating expenses of the Insurance Subsidiariesless commissions and other income to net premiums earned (the "expense ratio") was 32.2%29.4% during 2018, or 28.7% excluding the impact of the goodwill impairment charge, compared to 33.0% for 2017. The decrease in 2015 and 32.0%the expense ratio was primarily related to the leveraging effect of higher net premiums earned in 2014. Including the agency operations and corporate expenses, and after elimination of inter-company commissions, the ratio of operating expenses2018 compared to operating revenue (defined as total revenue less gains or losses on investments) was 32.2% for 2015 compared with 31.8% for 2014.2017.
Federal income tax benefit was $9.8 million for 2018 compared to income tax benefit of $8.2 million in 2017. The effective tax rate for 2018 was 22.3% compared to (81.0%) in 2017. The effective federal income tax rate on the consolidated pre-tax income for 2015 was 31.4%. The effective rate differsin 2018 differed only slightly from the normal statutory rate primarily as a result of tax-exempt investment income. In the fourth quarter of 2017, we recorded a benefit of $9.6 million related to the remeasurement of deferred tax assets and liabilities pursuant to the U.S. Tax Act, which impacted our effective federal income tax rate for 2017.
Net incomeAs a result of the factors discussed above, net loss for 2015 of $23.32018 was $34.1 million comparescompared to net income of $29.7$18.3 million during 2014 with the decline attributablein 2017, a change of $52.4 million.
2017 Compared to realized investment gains. Diluted earnings per share of $1.55 were recorded in 20152016
| | | 2017 | | | 2016 | | | Change | | | % Change | |
| Gross premiums written | | $ | 504,737 | | | $ | 403,004 | | | $ | 101,733 | | | | 25.2 | % |
| Ceded premiums written | | | (151,348 | ) | | | (131,252 | ) | | | (20,096 | ) | | | 15.3 | % |
| Net premiums written | | $ | 353,389 | | | $ | 271,752 | | | $ | 81,637 | | | | 30.0 | % |
| | | | | | | | | | | | | | | | | |
| Net premiums earned | | $ | 328,145 | | | $ | 276,011 | | | $ | 52,134 | | | | 18.9 | % |
| Net investment income | | | 18,095 | | | | 14,483 | | | | 3,612 | | | | 24.9 | % |
| Commissions and other income | | | 5,308 | | | | 5,275 | | | | 33 | | | | 0.6 | % |
| Net realized and unrealized gains (losses) on investments | | | 19,686 | | | | 23,228 | | | | (3,542 | ) | | | (15.2 | )% |
| Total revenue | | | 371,234 | | | | 318,997 | | | | | | | | | |
| Losses and loss expenses incurred | | | 247,518 | | | | 186,481 | | | | 61,037 | | | | 32.7 | % |
| Other operating expenses | | | 113,594 | | | | 89,462 | | | | 24,132 | | | | 27.0 | % |
| Total expenses | | | 361,112 | | | | 275,943 | | | | | | | | | |
| Income before federal income tax expense (benefit) | | | 10,122 | | | | 43,054 | | | | (32,932 | ) | | | | |
| Federal income tax expense (benefit) | | | (8,201 | ) | | | 14,109 | | | | (22,310 | ) | | | | |
| Net income | | $ | 18,323 | | | $ | 28,945 | | | $ | (10,622 | ) | | | | |
| | | | | | | | | | | | | | | | | |
Gross premiums written for 2017 increased $101.7 million (25.2%), while net premiums earned increased $52.1 million (18.9%), as compared to per share income of $1.982016. The increase in 2014.
2014 Comparednet premiums written and earned was primarily due to 2013
Premiums written by the Property and Casualty Insurance segment for 2014 totaled $343.2 million, an increase of $28.4$60.8 million (9%) from 2013. This increase is primarily attributablein net premiums earned related to a $32.0commercial automobile products and $3.7 million (11%) increase in higher net premiums earned related to workers' compensation products, which were consistent with our growth strategy. These increases were partially offset by $8.1 million of lower premiums generated by fleet transportationreinsurance products, resultingreflective of our decision to completely withdraw from the addition of several new accounts during 2014, rate increasesproperty catastrophe reinsurance and increased revenueprofessional liability reinsurance markets, 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 34.7%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 propertyour 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 in the Company's bookthird quarter of professional liability reinsurance assumed.
After giving effect to changes2017. The change in unearned premiums, consolidated net premiums earned, totaled $261.6compared to growth in gross premiums written, was a function of premium adjustment provisions in our historical commercial automobile reinsurance treaties. This historical reinsurance structure, which was revised in the July 2017 reinsurance renewal, causes an adjustment for ceded premiums when the ultimate loss estimate changes for a reinsurance treaty year. This resulted in ceding an additional $13.7 million in premium in connection with our reserve strengthening in 2017.
Losses and loss expenses incurred during 2017 increased $61.0 million (32.7%) from $186.5 million in 2016 to $247.5 million in 2017, due primarily to adverse prior accident year development and growth in net premiums earned. The 2017 loss ratio was 75.4%, compared to 67.6% for 2016. The higher loss ratio during 2017 was the result of adverse loss development in our commercial automobile related liability coverages from prior accident years. The prior year reserve deficiency in 2017 increased the loss ratio for 2017 by 5.9 percentage points compared to a 5.0 percentage point increase experienced in 2016 due to the prior year reserve deficiencies in 2016. We had an overall reserve deficiency on prior year claims during 2017 of $19.2 million and a $13.8 million deficiency on prior year claims during 2016.
Net investment income for 2017 increased 24.9% to $18.1 million compared to $14.5 million for 2014 compared2016, primarily due to $252.7 millionhigher interest rates leading to higher reinvestment yields for 2013,fixed income securities, increased dividends from equity securities and an increase of 3.5%. The premium earned increase also reflects the higher premium volume generated by the fleet transportation products mentioned above which was partially offset by decreased premium written in the primary professional liability products.
Pre-taxaverage funds invested resulting from positive cash flow. After-tax investment income of $9.1$12.7 million increased 23.0% during 2014 was 3% higher than the 2013 total as available pre-tax yields began to level and average invested assets continued to grow marginally. After tax investment income increased by 5% 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 million in 2014 compared to net gains on investments of $23.5 million during 2013. The 2014 results were once again heavily influenced by direct trading results 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 losseson investments totaled $19.7 million in their net income, the Company's proportionate share of net income will include the results as reported2017 compared to $23.2 million during 2016. Direct trading gains during 2017 were $8.2 million lower compared to the Company by the various general partners. During 2014, the $7.1prior year. Other-than-temporary impairment of $0.4 million, net gain was composednetted with gains 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.
Losses and loss expenses incurred during 2014 increased $8.9 Investments in limited partnerships produced gains of $12.5 million (5.9%) from 2013 to $159.6 million, an increase generally consistent with the increased premium volume described above and reflects higher property catastrophe losses occurring in 2014. The 2014 consolidated loss and loss expense ratio was 61.0%2017, compared to 59.6%gains of $2.5 million during 2016. Limited partnership investments utilized by us 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 our share of gains and losses in these entities represented a 16.3% appreciation in value for 2013. 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 | % |
| All other | | | 93.9 | | | | 84.8 | |
| All lines | | | 61.0 | | | | 59.6 | |
The lower loss ratio for Fleet Transportation was the result of more favorable frequency and severity experience during the year as well as prior year reserve savings. The2017, compared to a 3.3% increase in the All Other loss ratio in 2014 was attributable to unfavorable loss development on a single MGA produced program in Primary Professional Liability and a small number of catastrophic losses aggregating over $11 million.
The Company produced an overall savings on the handling of prior year claims during 2014 of $10.4 million. This net savings is included in the computation of loss ratios shown in the previous table, as is the $5.6 million savings produced during 2013 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 structurevalue 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.2016.
Other operating expenses for 2014, before credits for ceding allowances from reinsurers,2017 increased $5.7$24.1 million (5%(27.0%) to $111.8$113.6 million generallyfrom $89.5 million in line with increases in premium written.2016. This increase iswas due primarily to an increase in commission expense as a result of the increase in premiums written and higher salary and salary relatedsalary-related expenses, reflective of the Company's growingour increased workforce in response to the continued expansion of the Company'sour 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, included as an offset to other operating expenses, were 14% higher30.8% lower in 2014,2017, resulting primarily from favorable changesceding a lower percentage of workers' compensation premium to reinsurers in our most recent reinsurance treaty.
Income tax benefit was $8.2 million for 2017 compared to income tax expense of $14.1 million in 2016. We recorded a benefit of $9.6 million related to the termsremeasurement of certain reinsurance treaties as well as increased business ceded to other companies under quota share reinsurance treaties which provide commissionsdeferred tax assets and liabilities in the fourth quarter of 2017 pursuant to the Insurance Subsidiaries. After consideration of these expense offsets, operating expenses increased $2.7 million, or 3% 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.
TheU.S. Tax Act. Our effective federal tax rate on the consolidated pre-tax income for 20142017 was 33.1%.(81.0%) as compared to 32.8% in 2016. The effective tax rate differs fromfor 2017 was affected primarily by the normal statutory rate primarily asimpact of the U.S. Tax Act discussed above.
As a result of tax-exempt investment income.the factors discussed above, net income for 2017 decreased $10.6 million to $18.3 million compared to $28.9 million in 2016.
Net income for 2014 of $29.7 million compares to net income of $36.6 million during 2013. Diluted earnings per share of $1.98 were recorded in 2014 compared to per share income of $2.45 in 2013.
Critical Accounting Policies
The Company's significant accounting policies whichthat are material and/or subject to significant degrees of judgment are highlighted below.
Investment Valuation
All marketable securities are included in the Company's balance sheets at current fair market value.
Approximately 67%59% of the Company's assets are composed of investments at December 31, 2015.2018. Approximately 90%92% of these investments are publicly-traded, owned directly and have readily-ascertainable market values. The remaining 10%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.values themselves. Rather, the values recorded are those provided to the Company by the respective partnerships based on the underlying assets of the limited partnerships. While a substantial portion of the underlying assets are publicly-traded securities, those which are not publically tradedpublicly-traded have been valued by the respective limited partnerships using their experience and judgment.
Under FASBFinancial Accounting Standards Board ("FASB") guidance, if a fixed maturityincome 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 lossesgains (losses) on investments in the consolidated statements of operations. For impaired fixed maturityincome 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 lossesgains (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 (accumulatedwithin accumulated other comprehensive income)income (loss).
In determining if and when anconjunction with the adoption of ASU 2016-01, unrealized gains or losses on equity security'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, wesecurities 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 lossrecognized in the current period earnings as an investment loss. Declines whichconsolidated statements of operations and are considered to be temporary are recorded as a reduction in shareholders' equity, net of related federal income tax credits.no longer evaluated for other-than-temporary declines.
It is important to note that all available for saleavailable-for-sale securities included in the Company's consolidated 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 statementconsolidated statements of operations (other-than-temporary decline), as opposed to a charge to 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, 2015, unrealized gains include $14.7 million of appreciation on investments previously adjusted for other-than-temporary impairment, compared to a cumulative total of $10.5 million of impairment write-downs at that date. This evaluation process is subject to risks and uncertainties sincebecause it is not always clear what has caused a decline in value of an individual security or sincebecause 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, 2015,2018, 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, 2015,2018, the total gross unrealized loss included in the Company's investmentfixed income portfolio was approximately $14.6$10.8 million. No individual issue constituted a material amount of this total. Had this entire amount been considered other-than-temporary at December 31, 2015,2018, there would have been no impact on total shareholders' equity or book value since the decline in value of these securities was previously recognized as a reduction to shareholders' equity.
Reinsurance Recoverable
Reinsurance ceded transactions were as follows for the years ended December 31 (dollars in thousands):
| | | 2015 | | | 2014 | | | 2013 | | | 2018 | | | 2017 | | | 2016 | |
| Reinsurance recoverable | | $ | 215,888 | | | $ | 220,221 | | | $ | 195,568 | | | $ | 392,436 | | | $ | 318,331 | | | $ | 255,024 | |
| Premium ceded (reduction to premium earned) | | | 133,548 | | | | 119,248 | | | | 113,882 | | | | 131,080 | | | | 145,201 | | | | 130,012 | |
| Losses ceded (reduction to losses incurred) | | | 75,581 | | | | 105,891 | | | | 107,321 | | | | 148,285 | | | | 128,086 | | | | 108,656 | |
| Commissions from reinsurers (reduction to operating expenses) | | | 28,956 | | | | 23,797 | | | | 20,822 | | |
| Reinsurance ceded credits (reduction to operating expenses) | | | | 23,124 | | | | 23,187 | | | | 33,512 | |
A discussion of the Company's reinsurance strategies is presented in Part I, Item 1, "Business", of this Annual Report on page 3.Form 10-K.
Amounts recoverable under the terms of reinsurance contracts comprisecomprised approximately 20%26% of total Company assets as of December 31, 2015.2018. In order to be able to provide the high limits required by the Company's insureds, the 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 will be shared among the Company and its reinsurers on a predetermined pro-rata basis ("quota-share"), while other contracts provide that the Company will keep a fixed amount of the loss, similar to a deductible, with reinsurers taking all losses above this fixed amount ("excess of 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's insurance policies for fleet transportationcommercial automobile liability, 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'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'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, 2015 and 2014 (dollars in thousands).
| | | Gross | | | Net | |
| Line of Business (Segment) | | 2015 | | | 2014 | | | 2015 | | | 2014 | |
| | | | | | | | | | | | | |
| Property and casualty insurance | | $ | 464,305 | | | $ | 449,133 | | | $ | 254,299 | | | $ | 241,215 | |
| Reinsurance | | | 49,291 | | | | 56,969 | | | | 47,454 | | | | 54,369 | |
| | | | | | | | | | | | | | | | | |
| | | $ | 513,596 | | | $ | 506,102 | | | $ | 301,753 | | | $ | 295,584 | |
The Company's reserves for losses and loss expenses ("reserves") are determined based on complex estimation processes using historical experience, current economic information and when necessary, available industry statistics. The Company's claims range from the very routine private passenger automobile "fender bender"benders" to the highly complex and costly third partythird-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'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 loss and loss expense 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'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 thisa similar nature, and a "case" reserve appropriate for the individual loss occurrence is established. For very routine "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" 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 reported 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 reported ("IBNR") 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' compensation reserve projections. Significant emphasis is placed on the use of tail factors for the Company's long-tail lines of business.
For the Company's fleet transportationcommercial automobile risks, which are covered by regularly changing 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 with loss ratio reserving techniques developed from the Company'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'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 the Company'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's reserve selections are developed to be a "best estimate" of unpaid losslosses at a point in time and, due to the unique nature of ourits exposures, particularly in the large fleet transportationcommercial automobile 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 ourthe Company's valuations of current loss and loss expense reserve estimates include, but are not limited to, the following:
Consistency in the individual case reserving processes | ● | Consistency in the individual case reserving processes; |
The selection of loss development factors in the establishment of bulk reserves for incurred but reported losses and loss expenses
| ● | The selection of loss development factors in the establishment of bulk reserves for incurred but not reported losses and loss expenses; |
Projected future loss trend
| ● | Projected future loss trend; and |
Expected loss ratios for the current book of business, particularly the Company's fleet transportation products, where the number of accounts insured, selected self-insured retentions, policy limits and reinsurance structure may vary widely period to period
| ● | Expected loss ratios for the current book of business, particularly the Company's commercial automobile products, where the number of accounts insured, selected SIRs, policy limits and reinsurance structures may vary widely from period to period. |
Under reasonably possible scenarios, it is conceivable that the Company's selected loss reserve estimates could be 10%, or more redundant or deficient. The majority of the Company's reserves for losses and loss expenses, on either a gross or a net of reinsurance basis, relate to its fleet transportationcommercial automobile products. Perhaps the most significant example of sensitivity to variation in the key assumptions is the loss ratio selection for the Company's fleet transportationcommercial automobile products for policies subject to certain major reinsurance treaties (approximately $169.5 million, or approximately 37% of carried gross 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's reserve determination at December 31, 2015.2018 for the prior six treaty periods, which covers exposures earned on policies written between July 3, 2012 and December 31, 2018. The Company's selection of the range of values presented should not be construed as the Company'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 | $64.6 million | ($42.3) million | $129.1 million | ($76.7) million |
Net reserves | $26.2 million | ($18.9) million | $48.0 million | ($30.6) million |
The variation in impact from loss ratio increases and decreases is attributable to minimum and maximum premium rate factors included in the various reinsurance contracts. In between the minimum and maximum ceded premium provisions within the treaty terms, net premiums earned can be increased or decreased based on a change in loss expectation. The total impact to profitability in the same scenarios is shown below ($ in millions):
| | | 10% Loss Ratio Increase | | | 10% Loss Ratio Decrease | | | 20% Loss Ratio Increase | | | 20% Loss Ratio Decrease | |
| Gross Reserves | | $ | 72.0 | | | $ | (72.0 | ) | | $ | 144.1 | | | $ | (144.1 | ) |
| | | | | | | | | | | | | | | | | |
| Net Reserves | | $ | 18.0 | | | $ | (19.5 | ) | | $ | 36.0 | | | $ | (49.5 | ) |
| Net premiums earned | | $ | (0.4 | ) | | $ | 16.5 | | | $ | (0.4 | ) | | $ | 41.1 | |
| Cumulative Net Underwriting Income (Loss) | | $ | (18.4 | ) | | $ | 36.0 | | | $ | (36.4 | ) | | $ | 90.6 | |
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 consolidated 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 remeasurement of its deferred tax assets and liabilities during the fourth quarter of 2017. As of December 31, 2017, the IRS had not yet published all of the detailed regulations resulting from the enactment of the U.S. Tax Act; therefore, while the Company had not completed its accounting for the tax effects, it made a reasonable estimate of the tax effects on its existing deferred tax balances at December 31, 2017. The Company finalized its accounting for the tax effects of the U.S. Tax Act during 2018. No material adjustments to income tax expense (benefit) were recorded in 2018.
Net deferred tax liabilities reported at December 31 are as follows (dollars in thousands):
| | | 2015 | | | 2014 | | | 2018 | | | 2017 | |
| Total deferred tax liabilities | | $ | (27,833 | ) | | $ | (37,493 | ) | | $ | (12,906 | ) | | $ | (23,836 | ) |
| Total deferred tax assets | | | 16,635 | | | | 17,520 | | | | 19,168 | | | | 9,478 | |
| Net deferred tax liabilities | | $ | (11,198 | ) | | $ | (19,973 | ) | |
| Net deferred tax assets (liabilities) | | | $ | 6,262 | | | $ | (14,358 | ) |
Deferred tax assets at December 31, 2015, include2018 included approximately $9.3$10.0 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 of 1986, as amended, which are perpetual in nature and, in the absence of the termination of the Company's business, will not, in the aggregate, reverse to a material degree in the foreseeable future. $3.5 million of deferred tax assets are related to the results of the Company's limited partnership investments. Unearned premiums discount and deferred ceding commissions represent $2.3 million and $1.2 million of deferred tax assets, respectively. An additional $3.4$0.6 million relates to impairment adjustments made to investments, as required by accounting regulations. The sizable unrealized gains in the Company's investment portfolios would allow for the recovery of this deferred tax at any time. Unearned premiums discount and deferred ceding commissions represent $1.6 and $0.4 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, 2015.2018.
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 consolidated 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. expense (benefit).
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 transportationcommercial automobile business, a majority of the Company's accounts are charged as a percentage of an insured'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'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'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 (seeinvestment. For additional comments underinformation, see 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.
Market RiskContractual Obligations
The table below sets forth the amounts of the Company's contractual obligations at December 31, 2018.
| | | 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 | | $ | 865.3 | | | $ | 302.9 | | | $ | 285.6 | | | $ | 103.8 | | | $ | 173.0 | |
| | | | | | | | | | | | | | | | | | | | | |
| Investment commitment | | | 1.3 | | | | 1.3 | | | | – | | | | – | | | | – | |
| | | | | | | | | | | | | | | | | | | | | |
| Operating leases | | | 0.5 | | | | 0.4 | | | | 0.1 | | | | – | | | | – | |
| | | | | | | | | | | | | | | | | | | | | |
| Borrowings | | | 20.0 | | | | 20.0 | | | | – | | | | – | | | | – | |
| | | | | | | | | | | | | | | | | | | | | |
| Total | | $ | 887.1 | | | $ | 324.6 | | | $ | 285.7 | | | $ | 103.8 | | | $ | 173.0 | |
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 the Company might expect its 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 $392.4 million at December 31, 2018, or 45% 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, 2018. 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 lender, under certain circumstances, with short notice. The Company entered into a new line of credit on August 9, 2018 with an expiration date of August 9, 2022.
Off-Balance Sheet Arrangements
The Company has no off-balance sheet arrangements.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company operates within the property and casualty insurance industry and, accordingly, has significant invested assets whichthat 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 and equity securities, are classified as available for sale.available-for-sale.
Based on the structure of the Company's investment portfolio, one of 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 and limited partnerships, which are predominately invested in equities, have a high potential for short-term price fluctuation. The market value of the Company's equity and limited partnerships positions at December 31, 20152018 was $145.4$121.5 million, or approximately 20% of invested assets. This market valuation includes $65.3 million of appreciation over the adjusted cost basis of the equity security investments. approximately:
| ● | 14% of the Company's consolidated investment portfolio of $878.6 million; and |
| ● | 34% of the Company's shareholders' equity of $356.1 million. |
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 Accounting Policies" in Part II, Item 7 of this report.Annual Report on Form 10-K. All of the market risks attendant to equity securities also apply to the underlying assets in these limited partnerships, and to a greater degree because of the generally more aggressive investment philosophies utilized by the limited 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 limited 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'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 maturityincome portfolio totaled $437.2$592.6 million at December 31, 2015.2018. Approximately 49%35% of this portfolio is made up of U.S. Government and government agency obligations and state and municipal debt securities; 78% of the portfolio matures within 5 years;securities, and the average contractual maturity of the Company's fixed maturity investments is approximately 4.65.5 years with an average modified duration of approximately 2.32.6 years. Although the Company is exposed to interest rate risk on its fixed maturityincome 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 termshort-term investments and maturing bonds could be reinvested in the higher yielding securities very quickly.securities.
There is an inverse relationship between interest rate fluctuations and the fair value of the Company's fixed maturityincome 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 maturityincome 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, which2018 and 2017 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's financial instruments to selected changes in market rates and prices. The range of changerates chosen reflects the Company's view of changes that the Company believes are reasonably possible over a one-year period. The Company's selection of the range of values chosen to represent changes in interest rates should not be construed as the Company'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 indexIndex due to its correlation with the vast majority of the Company's current equity portfolio. The limited partnership portfolio was compared to the S&P 500 Index and Indian BSE 500 indicesIndex due to their significant correlation with the vast majority of ourthe Company's limited partnership portfolio. As previously indicated, several other factors can impact the fair values of fixed maturityincome investments and, therefore, significant variations in market interest rates could produce quite different results from the hypothetical estimates presented below.
The following tables present the estimated effects on the fair value of financial instruments at December 31, 2018 and 2017 due to an instantaneous changeincrease in yield rates of 100 basis points and a 10% decline in the S&P 500 Index and the Indian BSE 500 indicesIndex (dollars in thousands).
| | | | | | Increase (Decrease) | |
| | | Fair | | | Interest | | | Equity | |
| | | Value | | | Rate Risk | | | Risk | |
| 2015: | | | | | | | | | |
| Fixed maturities | | | | | | | | | |
| U.S. government obligations | | $ | 103,245 | | | $ | (1,430 | ) | | $ | - | |
| Residential mortgage-backed securities | | | 4,776 | | | | (103 | ) | | | - | |
| Commercial mortgage-backed securities | | | 30,595 | | | | (655 | ) | | | - | |
| State and municipal obligations | | | 110,578 | | | | (3,326 | ) | | | - | |
| Corporate securities | | | 164,025 | | | | (5,030 | ) | | | - | |
| Foreign government obligations | | | 23,965 | | | | (531 | ) | | | - | |
| Total fixed maturities | | | 437,184 | | | | (11,075 | ) | | | - | |
| Equity securities: | | | | | | | | | | | | |
| Financial institutions | | | 21,694 | | | | - | | | | (2,169 | ) |
| Industrial & miscellaneous | | | 123,804 | | | | - | | | | (12,380 | ) |
| Total equity securities | | | 145,498 | | | | - | | | | (14,549 | ) |
| Limited partnerships | | | 75,458 | | | | - | | | | (5,349 | ) |
| Short-term | | | 2,220 | | | | - | | | | - | |
| Total | | $ | 660,360 | | | $ | (11,075 | ) | | $ | (19,898 | ) |
| | | | | | | | | | | | | |
| 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 | ) |
| | | | | | Increase (Decrease) | |
| | | Fair Value | | | Interest Rate Risk | | | Equity Risk | |
| 2018 | | | | | | | | | |
Fixed income securities
| | | | | | | | | |
| Agency collateralized mortgage obligations | | $ | 10,687 | | | $ | (404 | ) | | $ | – | |
| Agency mortgage-backed securities | | | 37,385 | | | | (2,012 | ) | | | – | |
| Asset-backed securities | | | 64,422 | | | | (2,612 | ) | | | – | |
| Bank loans | | | 9,750 | | | | (49 | ) | | | – | |
| Certificates of deposit | | | 2,835 | | | | (48 | ) | | | – | |
| Collateralized mortgage obligations | | | 5,423 | | | | (176 | ) | | | – | |
| Corporate securities | | | 190,450 | | | | (5,417 | ) | | | – | |
| Mortgage-backed securities | | | 38,540 | | | | (1,270 | ) | | | – | |
| Municipal obligations | | | 29,155 | | | | (769 | ) | | | – | |
| Non-U.S. government obligations | | | 25,180 | | | | (549 | ) | | | – | |
| U.S. government obligations | | | 178,818 | | | | (5,864 | ) | | | – | |
Total fixed income securities
| | | 592,645 | | | | (19,170 | ) | | | – | |
| Equity securities: | | | | | | | | | | | | |
| Consumer | | | 17,945 | | | | – | | | | (1,795 | ) |
| Energy | | | 3,179 | | | | – | | | | (318 | ) |
| Financial | | | 25,253 | | | | – | | | | (2,525 | ) |
| Industrial | | | 6,920 | | | | – | | | | (692 | ) |
| Technology | | | 2,303 | | | | – | | | | (230 | ) |
| Funds (e.g. mutual funds, closed end funds, ETFs) | | | 5,489 | | | | – | | | | (549 | ) |
| Other | | | 5,333 | | | | – | | | | (533 | ) |
| Total equity securities | | | 66,422 | | | | – | | | | (6,642 | ) |
| Limited partnerships | | | 55,044 | | | | – | | | | (4,022 | ) |
| Short-term | | | 1,000 | | | | – | | | | – | |
| Total | | $ | 715,111 | | | $ | (19,170 | ) | | $ | (10,664 | ) |
| | | | | | | | | | | | | |
| 2017 | | | | | | | | | | | | |
Fixed income securities
| | | | | | | | | | | | |
| 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 income securities
| | | 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 | ) |
The following tables present the estimated effects on the fair value of financial instruments at December 31, 2018 and 2017 due to an instantaneous changeincrease in yield rates of 150 basis points and a 15% decline in the S&P 500 Index and the Indian BSE 500 indicesIndex (dollars in thousands).
| | | | | | Increase (Decrease) | |
| | | Fair | | | Interest | | | Equity | |
| | | Value | | | Rate Risk | | | Risk | |
| 2015: | | | | | | | | | |
| Fixed maturities | | | | | | | | | |
| U.S. government obligations | | $ | 103,245 | | | $ | (2,144 | ) | | $ | - | |
| Residential mortgage-backed securities | | | 4,776 | | | | (153 | ) | | | - | |
| Commercial mortgage-backed securities | | | 30,595 | | | | (983 | ) | | | - | |
| State and municipal obligations | | | 110,578 | | | | (4,988 | ) | | | - | |
| Corporate securities | | | 164,025 | | | | (7,547 | ) | | | - | |
| Foreign government obligations | | | 23,965 | | | | (797 | ) | | | - | |
| Total fixed maturities | | | 437,184 | | | | (16,612 | ) | | | - | |
| Equity securities: | | | | | | | | | | | | |
| Financial institutions | | | 21,694 | | | | - | | | | (3,254 | ) |
| Industrial & miscellaneous | | | 123,804 | | | | - | | | | (18,571 | ) |
| Total equity securities | | | 145,498 | | | | - | | | | (21,825 | ) |
| Limited partnerships | | | 75,458 | | | | - | | | | (8,023 | ) |
| Short-term | | | 2,220 | | | | - | | | | - | |
| Total | | $ | 660,360 | | | $ | (16,612 | ) | | $ | (29,848 | ) |
| | | | | | | | | | | | | |
| 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 | ) |
| | | | | | Increase (Decrease) | |
| | | Fair Value | | | Interest Rate Risk | | | Equity Risk | |
| 2018 | | | | | | | | | |
Fixed income securities
| | | | | | | | | |
| Agency collateralized mortgage obligations | | $ | 10,687 | | | $ | (607 | ) | | $ | – | |
| Agency mortgage-backed securities | | | 37,385 | | | | (3,021 | ) | | | – | |
| Asset-backed securities | | | 64,422 | | | | (3,917 | ) | | | – | |
| Bank loans | | | 9,750 | | | | (73 | ) | | | – | |
| Certificates of deposit | | | 2,835 | | | | (71 | ) | | | – | |
| Collateralized mortgage obligations | | | 5,423 | | | | (263 | ) | | | – | |
| Corporate securities | | | 190,450 | | | | (8,125 | ) | | | – | |
| Mortgage-backed securities | | | 38,540 | | | | (1,904 | ) | | | – | |
| Municipal obligations | | | 29,155 | | | | (1,154 | ) | | | – | |
| Non-U.S. government obligations | | | 25,180 | | | | (824 | ) | | | – | |
| U.S. government obligations | | | 178,818 | | | | (8,794 | ) | | | – | |
Total fixed income securities
| | | 592,645 | | | | (28,753 | ) | | | – | |
| Equity securities: | | | | | | | | | | | | |
| Consumer | | | 17,945 | | | | – | | | | (2,692 | ) |
| Energy | | | 3,179 | | | | – | | | | (477 | ) |
| Financial | | | 25,253 | | | | – | | | | (3,788 | ) |
| Industrial | | | 6,920 | | | | – | | | | (1,038 | ) |
| Technology | | | 2,303 | | | | – | | | | (345 | ) |
| Funds (e.g. mutual funds, closed end funds, ETFs) | | | 5,489 | | | | – | | | | (823 | ) |
| Other | | | 5,333 | | | | – | | | | (800 | ) |
| Total equity securities | | | 66,422 | | | | – | | | | (9,963 | ) |
| Limited partnerships | | | 55,044 | | | | – | | | | (6,034 | ) |
| Short-term | | | 1,000 | | | | – | | | | – | |
| Total | | $ | 715,111 | | | $ | (28,753 | ) | | $ | (15,997 | ) |
| | | | | | | | | | | | | |
| 2017 | | | | | | | | | | | | |
Fixed income securities
| | | | | | | | | | | | |
| 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 income securities
| | | 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 | ) |
Contractual Obligations
The table below sets forth the amounts of the Company's contractual obligations at December 31, 2015.
| | | 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 | | $ | 513.6 | | | $ | 174.6 | | | $ | 174.6 | | | $ | 63.7 | | | $ | 100.7 | |
| | | | | | | | | | | | | | | | | | | | | |
| Investment commitments | | | 17.5 | | | | 17.5 | | | | - | | | | - | | | | - | |
| | | | | | | | | | | | | | | | | | | | | |
| Operating leases | | | 0.3 | | | | 0.2 | | | | 0.1 | | | | - | | | | - | |
| | | | | | | | | | | | | | | | | | | | | |
| Borrowings | | | 20.0 | | | | 20.0 | | | | - | | | | - | | | | - | |
| | | | | | | | | | | | | | | | | | | | | |
| Total | | $ | 551.4 | | | $ | 212.3 | | | $ | 174.7 | | | $ | 63.7 | | | $ | 100.7 | |
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 $215.9 million at December 31, 2015, or 39% 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, 2015. 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--FINANCIAL8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
YEAR ENDED DECEMBER 31, 20152018
BALDWIN & LYONS, INC.PROTECTIVE INSURANCE CORPORATION
CARMEL, INDIANA
Report of Independent Registered Public Accounting Firm |
The Board of Directors and Shareholders of Baldwin & Lyons, Inc. |
We have audited the accompanying consolidated balance sheets of Baldwin & Lyons, Inc. and subsidiaries (the Company) as of December 31, 2015 and 2014, 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, 2015. 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
|
To the Shareholders and the Board of Directors of Protective Insurance Corporation
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Protective Insurance Corporation and subsidiaries (the Company) as of December 31, 2018 and 2017, the related consolidated statements of operations, comprehensive income (loss), shareholders' equity and cash flows for each of the three years in the period ended December 31, 2018, 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, 2018 and 2017, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2018, 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, 2018, 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 7, 2019 expressed an unqualified opinion thereon.
Adoption of ASU No. 2016-01
As discussed in Note A to the consolidated financial statements, the Company changed its method of accounting for the recognition and measurement of certain financial instruments in 2018 due to the adoption of ASU No. 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities.
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. 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, 2015 and 2014, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2015, 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, 2015, 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 4, 2016 expressed an unqualified opinion thereon.
/s/ Ernst & Young LLP
Indianapolis, IN
March 4, 2016
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- 40 -
/s/ ERNST & YOUNG LLPWe have served as the Company’s auditor since 1970.
| Consolidated Balance Sheets | | | | | | | |
| Baldwin & Lyons, Inc. and Subsidiaries | | | | | | | |
| | | | | | | |
| | | December 31 | |
| | | 2015 | | | 2014 | |
| | | (dollars in thousands) | |
| Assets | | | | | | | |
| Investments: | | | | | | | |
| Fixed maturities (Amortized cost: 2015, $442,578; 2014, $455,385) | | | $ | 437,184 | | | $ | 451,809 | |
| Equity securities (Cost: 2015, $80,221; 2014, $78,778) | | | | 145,498 | | | | 162,107 | |
| Limited partnerships (Affiliated: 2015, $45,009; 2014, $46,987) | | | | 75,458 | | | | 81,230 | |
| Short-term and other | | | | 2,220 | | | | 2,966 | |
| | | | 660,360 | | | | 698,112 | |
| | | | | | | | | |
| Cash and cash equivalents | | | | 73,538 | | | | 64,632 | |
| Accounts receivable--less allowance (2015, $600; 2014, $605) | | | | 66,522 | | | | 98,144 | |
| Accrued investment income | | | | 3,989 | | | | 3,682 | |
| Reinsurance recoverable | | | | 215,888 | | | | 220,221 | |
| Prepaid reinsurance premiums | | | | 3,176 | | | | 2,274 | |
| Deferred policy acquisition costs | | | | 1,443 | | | | 2,263 | |
| Property and equipment--less accumulated depreciation | | | | | | | | | |
(2015, $14,768; 2014, $13,777) | | | | 46,144 | | | | 43,815 | |
| Other assets | | | | 11,009 | | | | 9,413 | |
| Current federal income taxes recoverable | | | | 3,702 | | | | 1,691 | |
| | | | | $ | 1,085,771 | | | $ | 1,144,247 | |
| | | | | | | | | | | |
| Liabilities and Shareholders' Equity | | | | | | | | | |
| Reserves: | | | | | | | | | |
| Losses and loss expenses | | | $ | 513,596 | | | $ | 506,102 | |
| Unearned premiums | | | | 25,291 | | | | 35,019 | |
| | | | | | 538,887 | | | | 541,121 | |
| | | | | | | | | | | |
| Reinsurance payable | | | | 47,565 | | | | 46,338 | |
| Short-term borrowings | | | | 20,000 | | | | 20,000 | |
| Depository liabilities | | | | 16,847 | | | | 48,893 | |
| Accounts payable and other liabilities | | | | 56,776 | | | | 68,426 | |
| Deferred federal income taxes | | | | 11,198 | | | | 19,973 | |
| | | | | | 691,273 | | | | 744,751 | |
| Shareholders' equity: | | | | | | | | | |
| Common stock, no par value: | | | | | | | | | |
| Class A voting -- authorized 3,000,000 shares; | | | | | | | | | |
| outstanding -- 2015 - 2,623,109; 2014 - 2,623,109 shares | | | | 112 | | | | 112 | |
| Class B non-voting -- authorized 20,000,000 shares; | | | | | | | | | |
| outstanding -- 2015 - 12,402,941; 2014 - 12,356,389 shares | | | | 529 | | | | 527 | |
| Additional paid-in capital | | | | 52,946 | | | | 51,854 | |
| Unrealized net gains on investments | | | | 38,924 | | | | 51,840 | |
| Foreign exchange adjustment | | | | (1,066 | ) | | | 390 | |
| Retained earnings | | | | 303,053 | | | | 294,773 | |
| | | | | | 394,498 | | | | 399,496 | |
| | | | | $ | 1,085,771 | | | $ | 1,144,247 | |
Indianapolis, Indiana
March 7, 2019
| Consolidated Statements of Operations | | | | | | | | | |
| Baldwin & Lyons, Inc. and Subsidiaries | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | Year Ended December 31 | |
| | | 2015 | | | 2014 | | | 2013 | |
| | | (dollars in thousands, except per share data) | |
| Revenue: | | | | | | | | | |
| Net premiums earned | | $ | 263,335 | | | $ | 261,627 | | | $ | 252,743 | |
| Net investment income | | | 12,498 | | | | 9,055 | | | | 8,770 | |
| Commissions and other income | | | 5,703 | | | | 6,430 | | | | 5,944 | |
| Net realized gains on investments, excluding | | | | | | | | | | | | |
| impairment losses | | | 6,439 | | | | 15,619 | | | | 24,257 | |
| Total other-than-temporary impairment losses on investments | | | (7,700 | ) | | | (689 | ) | | | (744 | ) |
| Portion of other-than-temporary impairment losses | | | | | | | | | | | | |
| recognized in other comprehensive income | | | - | | | | - | | | | 2 | |
| Net realized gains (losses) on investments | | | (1,261 | ) | | | 14,930 | | | | 23,515 | |
| | | | 280,275 | | | | 292,042 | | | | 290,972 | |
| Expenses: | | | | | | | | | | | | |
| Losses and loss expenses incurred | | | 155,750 | | | | 159,596 | | | | 150,701 | |
| Other operating expenses | | | 90,573 | | | | 88,048 | | | | 85,361 | |
| | | | 246,323 | | | | 247,644 | | | | 236,062 | |
| Income before federal income taxes | | | 33,952 | | | | 44,398 | | | | 54,910 | |
| | | | | | | | | | | | | |
| Federal income taxes | | | 10,669 | | | | 14,681 | | | | 18,322 | |
| Net income | | $ | 23,283 | | | $ | 29,717 | | | $ | 36,588 | |
| | | | | | | | | | | | | |
| Per share data: | | | | | | | | | | | | |
| Basic and diluted earnings | | $ | 1.55 | | | $ | 1.98 | | | $ | 2.45 | |
Consolidated Balance Sheets
Protective Insurance Corporation and Subsidiaries (in thousands, except share data)
| | | December 31 | |
| | | 2018 | | | 2017 | |
| Assets | | | | | | |
| Investments: | | | | | | |
| Fixed income securities (Amortized cost: 2018, $600,504; 2017, $521,017) | | $ | 592,645 | | | $ | 521,853 | |
| Equity securities | | | 66,422 | | | | 201,763 | |
| Limited partnerships (Affiliated: 2018, $32,028; 2017, $43,586) | | | 55,044 | | | | 70,806 | |
| Commercial mortgage loans | | | 6,672 | | | | – | |
| Short-term and other | | | 1,000 | | | | 1,000 | |
| | | | 721,783 | | | | 795,422 | |
| | | | | | | | | |
| Cash and cash equivalents | | | 163,996 | | | | 64,680 | |
| Restricted cash and cash equivalents | | | 6,815 | | | | 4,033 | |
| Accounts receivable--less allowance (2018, $403; 2017, $484) | | | 102,972 | | | | 87,551 | |
| Accrued investment income | | | 4,358 | | | | 4,159 | |
| Reinsurance recoverable | | | 392,436 | | | | 318,331 | |
| Prepaid reinsurance premiums | | | 6,095 | | | | 4,578 | |
| Deferred policy acquisition costs | | | 6,568 | | | | 5,608 | |
| Property and equipment--less accumulated depreciation (2018, $19,531; 2017, $16,614) | | | 46,645 | | | | 47,317 | |
| Other assets | | | 24,760 | | | | 18,399 | |
| Current federal income taxes recoverable | | | 7,441 | | | | 6,938 | |
| Deferred federal income taxes | | | 6,262 | | | | – | |
| | | $ | 1,490,131 | | | $ | 1,357,016 | |
| | | | | | | | | |
| Liabilities and Shareholders' Equity | | | | | | | | |
| Reserves: | | | | | | | | |
| Losses and loss expenses | | $ | 865,339 | | | $ | 680,274 | |
| Unearned premiums | | | 71,625 | | | | 53,085 | |
| | | | 936,964 | | | | 733,359 | |
| | | | | | | | | |
| Reinsurance payable | | | 66,632 | | | | 62,308 | |
| Short-term borrowings | | | 20,000 | | | | 20,000 | |
| Depository liabilities | | | 173 | | | | 3,050 | |
| Accounts payable and other liabilities | | | 110,280 | | | | 105,130 | |
| Deferred federal income taxes | | | – | | | | 14,358 | |
| | | | 1,134,049 | | | | 938,205 | |
| Shareholders' equity: | | | | | | | | |
| Common stock: | | | | | | | | |
| Class A voting -- authorized 3,000,000 shares; outstanding -- 2018 - 2,615,339; 2017 - 2,623,109 shares | | | 112 | | | | 112 | |
| Class B non-voting -- authorized 20,000,000 shares; outstanding -- 2018 - 12,253,922; 2017 - 12,423,518 shares | | | 522 | | | | 530 | |
| Additional paid-in capital | | | 54,720 | | | | 55,078 | |
| Accumulated other comprehensive income (loss) | | | (7,347 | ) | | | 46,391 | |
| Retained earnings | | | 308,075 | | | | 316,700 | |
| | | | 356,082 | | | | 418,811 | |
| | | $ | 1,490,131 | | | $ | 1,357,016 | |
| Consolidated Statements of Comprehensive Income | | | | | | | | | |
| Baldwin & Lyons, Inc. and Subsidiaries | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | |
| | | | | | | |
| | | 2015 | | | 2014 | | | 2013 | |
| | | (dollars in thousands) | |
| | | | | | | | | | |
| Net income | | $ | 23,283 | | | $ | 29,717 | | | $ | 36,588 | |
| | | | | | | | | | | | | |
| Other comprehensive income (loss), net of tax: | | | | | | | | | | | | |
| Unrealized net gains (losses) on securities: | | | | | | | | | | | | |
| Unrealized holding net gains (losses) arising during the period | | | (12,639 | ) | | | 7,835 | | | | 23,711 | |
| Less: reclassification adjustment for net losses | | | | | | | | | | | | |
| included in net income | | | (277 | ) | | | (5,084 | ) | | | (10,089 | ) |
| | | | (12,916 | ) | | | 2,751 | | | | 13,622 | |
| | | | | | | | | | | | | |
| Foreign currency translation adjustments | | | (1,456 | ) | | | (1,011 | ) | | | (575 | ) |
| | | | | | | | | | | | | |
| Other comprehensive income (loss) | | | (14,372 | ) | | | 1,740 | | | | 13,047 | |
| | | | | | | | | | | | | |
| Comprehensive income | | $ | 8,911 | | | $ | 31,457 | | | $ | 49,635 | |
| Consolidated Statements of Shareholders' Equity | | | | | | | | | |
| Baldwin & Lyons, Inc. and Subsidiaries | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | | | | | | | | |
| | | 2015 | | | 2014 | | | 2013 | |
| | | (dollars in thousands) | |
| | | | | | | | | | |
| Shareholders' equity at beginning of year | | $ | 399,496 | | | $ | 381,724 | | | $ | 346,712 | |
| | | | | | | | | | | | | |
| Net income | | | 23,283 | | | | 29,717 | | | | 36,588 | |
| | | | | | | | | | | | | |
| Other comprehensive income (loss) | | | (14,372 | ) | | | 1,740 | | | | 13,047 | |
| | | | | | | | | | | | | |
| Cash dividends paid to shareholders | | | (15,003 | ) | | | (14,947 | ) | | | (14,943 | ) |
| | | | | | | | | | | | | |
| Issuance of common stock | | | 1,094 | | | | 1,262 | | | | 320 | |
| | | | | | | | | | | | | |
| Shareholders' equity at end of year: | | $ | 394,498 | | | $ | 399,496 | | | $ | 381,724 | |
See notes to consolidated financial statements.
Consolidated Statements of Operations
Protective Insurance Corporation and Subsidiaries
(in thousands, except per share data)
| Consolidated Statements of Cash Flows | | | | | | | | | |
| Baldwin & Lyons, Inc. and Subsidiaries | | | | | | | | | |
| | | | | | | | | | |
| | | 2015 | | | 2014 | | | 2013 | |
| | | (dollars in thousands) | |
| Operating activities | | | | | | | | | |
| Net income | | $ | 23,283 | | | $ | 29,717 | | | $ | 36,588 | |
| Adjustments to reconcile net income to net cash | | | | | | | | | | | | |
| provided by operating activities: | | | | | | | | | | | | |
| Change in accounts receivable and unearned premium | | | 22,939 | | | | 3,230 | | | | (16,488 | ) |
| Change in accrued investment income | | | (307 | ) | | | (234 | ) | | | 939 | |
| Change in reinsurance recoverable on paid losses | | | 4,458 | | | | (2,785 | ) | | | (1,618 | ) |
| Change in losses and loss expenses reserves net of reinsurance | | | 6,325 | | | | 7,545 | | | | (1,264 | ) |
| Change in other assets, other liabilities and current income taxes | | | (28,299 | ) | | | (4,847 | ) | | | 29,892 | |
| Amortization of net policy acquisition costs | | | 21,314 | | | | 25,075 | | | | 26,592 | |
| Net policy acquisition costs deferred | | | (20,495 | ) | | | (25,019 | ) | | | (25,819 | ) |
| Provision for deferred income taxes (benefits) | | | (1,819 | ) | | | 1,640 | | | | 939 | |
| Bond amortization | | | 3,388 | | | | 4,235 | | | | 5,068 | |
| (Gain) loss on sale of property | | | 18 | | | | 474 | | | | (27 | ) |
| Depreciation | | | 5,037 | | | | 4,797 | | | | 4,300 | |
| Net realized (gains) losses on investments | | | 1,261 | | | | (14,930 | ) | | | (23,515 | ) |
| Compensation expense related to restricted stock | | | 1,094 | | | | 1,262 | | | | 320 | |
| Net cash provided by operating activities | | | 38,197 | | | | 30,160 | | | | 35,907 | |
| | | | | | | | | | | | | |
| Investing activities | | | | | | | | | | | | |
| Purchases of fixed maturities and equity securities | | | (342,592 | ) | | | (288,283 | ) | | | (369,259 | ) |
| Purchases of limited partnership interests | | | (409 | ) | | | (6,886 | ) | | | (3,568 | ) |
| Distributions from limited partnerships | | | 4,494 | | | | 1,752 | | | | 2,528 | |
| Proceeds from maturities | | | 161,706 | | | | 98,714 | | | | 129,113 | |
| Proceeds from sales of fixed maturities | | | 117,338 | | | | 167,406 | | | | 207,723 | |
| Proceeds from sales of equity securities | | | 53,270 | | | | 19,263 | | | | 29,858 | |
| Net sales (purchases) of short-term investments | | | 746 | | | | 1,925 | | | | (690 | ) |
| Purchases of property and equipment | | | (7,662 | ) | | | (13,451 | ) | | | (28,607 | ) |
| Proceeds from disposals of property and equipment | | | 277 | | | | 693 | | | | 261 | |
| Net cash used in investing activities | | | (12,832 | ) | | | (18,867 | ) | | | (32,641 | ) |
| | | | | | | | | | | | | |
| Financing activities | | | | | | | | | | | | |
| Dividends paid to shareholders | | | (15,003 | ) | | | (14,947 | ) | | | (14,943 | ) |
| Drawings on line of credit | | | - | | | | 10,000 | | | | - | |
| Net cash used in financing activities | | | (15,003 | ) | | | (4,947 | ) | | | (14,943 | ) |
| | | | | | | | | | | | | |
| Effect of foreign exchange rates on cash and cash equivalents | | | (1,456 | ) | | | (1,011 | ) | | | (575 | ) |
| | | | | | | | | | | | | |
| Increase (decrease) in cash and cash equivalents | | | 8,906 | | | | 5,335 | | | | (12,252 | ) |
| Cash and cash equivalents at beginning of year | | | 64,632 | | | | 59,297 | | | | 71,549 | |
| Cash and cash equivalents at end of year | | $ | 73,538 | | | $ | 64,632 | | | $ | 59,297 | |
| | | Year Ended December 31 | |
| | | 2018 | | | 2017 | | | 2016 | |
| Revenue: | | | | | | | | | |
| Net premiums earned | | $ | 432,880 | | | $ | 328,145 | | | $ | 276,011 | |
| Net investment income | | | 22,048 | | | | 18,095 | | | | 14,483 | |
| Commissions and other income | | | 9,932 | | | | 5,308 | | | | 5,275 | |
| Net realized gains (losses) on investments, excluding impairment losses | | | (6,632 | ) | | | 7,366 | | | | 26,498 | |
| Other-than-temporary impairment losses on investments | | | (19 | ) | | | (149 | ) | | | (5,743 | ) |
| Net unrealized gains (losses) on equity securities and limited partnership investments | | | (19,040 | ) | | | 12,469 | | | | 2,473 | |
| Net realized and unrealized gains (losses) on investments | | | (25,691 | ) | | | 19,686 | | | | 23,228 | |
| | | | 439,169 | | | | 371,234 | | | | 318,997 | |
| Expenses: | | | | | | | | | | | | |
| Losses and loss expenses incurred | | | 345,864 | | | | 247,518 | | | | 186,481 | |
| Other operating expenses | | | 137,177 | | | | 113,594 | | | | 89,462 | |
| | | | 483,041 | | | | 361,112 | | | | 275,943 | |
| Income (loss) before federal income tax expense (benefit) | | | (43,872 | ) | | | 10,122 | | | | 43,054 | |
| | | | | | | | | | | | | |
| Federal income tax expense (benefit) | | | (9,797 | ) | | | (8,201 | ) | | | 14,109 | |
| Net income (loss) | | $ | (34,075 | ) | | $ | 18,323 | | | $ | 28,945 | |
| | | | | | | | | | | | | |
| Per share data: | | | | | | | | | | | | |
| Basic and diluted earnings (loss) | | $ | (2.28 | ) | | $ | 1.21 | | | $ | 1.92 | |
| | | | | | | | | | | | | |
| Dividends paid to shareholders | | $ | $ 1.12 | | | $ | $ 1.08 | | | $ | $ 1.04 | |
See notes to consolidated financial statements.
Consolidated Statements of Comprehensive Income (Loss)
Protective Insurance Corporation and Subsidiaries
(in thousands)
| | | Year Ended December 31 | |
| | | 2018 | | | 2017 | | | 2016 | |
| Net income (loss) | | $ | (34,075 | ) | | $ | 18,323 | | | $ | 28,945 | |
| | | | | | | | | | | | | |
| Other comprehensive income (loss), net of tax: | | | | | | | | | | | | |
| Unrealized net gains (losses) on fixed income securities: | | | | | | | | | | | | |
| Unrealized net gains (losses) arising during the period | | | (9,680 | ) | | | 17,340 | | | | 8,618 | |
| Less: reclassification adjustment for net gains (losses) included in net income (loss) | | | (2,812 | ) | | | 4,691 | | | | 13,491 | |
| | | | (6,868 | ) | | | 12,649 | | | | (4,873 | ) |
| | | | | | | | | | | | | |
| Foreign currency translation adjustments | | | (830 | ) | | | 522 | | | | 235 | |
| | | | | | | | | | | | | |
| Other comprehensive income (loss) | | | (7,698 | ) | | | 13,171 | | | | (4,638 | ) |
| | | | | | | | | | | | | |
| Comprehensive income (loss) | | $ | (41,773 | ) | | $ | 31,494 | | | $ | 24,307 | |
See notes to consolidated financial statements.
Consolidated Statements of Shareholders' Equity
Protective Insurance Corporation and Subsidiaries
(in thousands)
| | | Common Stock | | | Additional | | | Accumulated Other | | | | | | | |
| | | Class A | | | Class B | | | Paid-In | | | Comprehensive | | | Retained | | | Total | |
| | | Shares | | | Amount | | | Shares | | | Amount | | | Capital | | | Income (Loss) | | | Earnings | | | Equity | |
| Balance at January 1, 2016 | | | 2,623 | | | $ | 112 | | | | 12,403 | | | $ | 529 | | | $ | 52,946 | | | $ | 37,858 | | | $ | 303,053 | | | $ | 394,498 | |
| Net income | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | | | 28,945 | | | | 28,945 | |
| Foreign currency translation adjustment, net of tax | | | – | | | | – | | | | – | | | | – | | | | – | | | | 235 | | | | – | | | | 235 | |
| Change in unrealized gain (loss) on investments, net of tax | | | – | | | | – | | | | – | | | | – | | | | – | | | | (4,873 | ) | | | – | | | | (4,873 | ) |
| Common stock dividends | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | | | (15,803 | ) | | | (15,803 | ) |
| Repurchase of common stock | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | |
| Restricted stock grants | | | – | | | | – | | | | 58 | | | | 3 | | | | 1,340 | | | | – | | | | – | | | | 1,343 | |
| Balance at December 31, 2016 | | | 2,623 | | | | 112 | | | | 12,461 | | | | 532 | | | | 54,286 | | | | 33,220 | | | | 316,195 | | | | 404,345 | |
| Net income | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | | | 18,323 | | | | 18,323 | |
| Foreign currency translation adjustment, net of tax | | | – | | | | – | | | | – | | | | – | | | | – | | | | 522 | | | | – | | | | 522 | |
| Change in unrealized gain (loss) on investments, net of tax | | | – | | | | – | | | | – | | | | – | | | | – | | | | 12,649 | | | | – | | | | 12,649 | |
| Common stock dividends | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | | | (16,302 | ) | | | (16,302 | ) |
| Repurchase of common stock | | | – | | | | – | | | | (85 | ) | | | (4 | ) | | | (360 | ) | | | – | | | | (1,516 | ) | | | (1,880 | ) |
| Restricted stock grants | | | – | | | | – | | | | 48 | | | | 2 | | | | 1,152 | | | | – | | | | – | | | | 1,154 | |
| Balance at December 31, 2017 | | | 2,623 | | | | 112 | | | | 12,424 | | | | 530 | | | | 55,078 | | | | 46,391 | | | | 316,700 | | | | 418,811 | |
| Cumulative effect of adoption of ASU 2016-01, net of tax | | | – | | | | – | | | | – | | | | – | | | | – | | | | (46,157 | ) | | | 46,157 | | | | – | |
| Cumulative effect of adoption of ASU 2018-02 | | | – | | | | – | | | | – | | | | – | | | | – | | | | 117 | | | | (117 | ) | | | – | |
| Net loss | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | | | (34,075 | ) | | | (34,075 | ) |
| Foreign currency translation adjustment, net of tax | | | – | | | | – | | | | – | | | | – | | | | – | | | | (830 | ) | | | – | | | | (830 | ) |
| Change in unrealized gain (loss) on investments, net of tax | | | – | | | | – | | | | – | | | | – | | | | – | | | | (6,868 | ) | | | – | | | | (6,868 | ) |
| Common stock dividends | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | | | | (16,835 | ) | | | (16,835 | ) |
| Repurchase of common stock | | | (8 | ) | | | – | | | | (192 | ) | | | (9 | ) | | | (832 | ) | | | – | | | | (3,755 | ) | | | (4,596 | ) |
| Restricted stock grants | | | – | | | | – | | | | 22 | | | | 1 | | | | 474 | | | | – | | | | – | | | | 475 | |
| Balance at December 31, 2018 | | | 2,615 | | | $ | 112 | | | | 12,254 | | | $ | 522 | | | $ | 54,720 | | | $ | (7,347 | ) | | $ | 308,075 | | | $ | 356,082 | |
See notes to consolidated financial statements.
Consolidated Statements of Cash Flows
Protective Insurance Corporation and Subsidiaries
(in thousands)
| | | Year Ended December 31 | |
| | | 2018 | | | 2017 | | | 2016 | |
| Operating activities | | | | | | | | | |
| Net income (loss) | | $ | (34,075 | ) | | $ | 18,323 | | | $ | 28,945 | |
| Adjustments to reconcile net income (loss) to net cash provided by operating activities: | | | | | | | | | | | | |
| Change in accounts receivable and unearned premium | | | (3,904 | ) | | | 2,678 | | | | (2,721 | ) |
| Change in accrued investment income | | | (199 | ) | | | (278 | ) | | | 108 | |
| Change in reinsurance recoverable on paid losses | | | 956 | | | | (446 | ) | | | 692 | |
| Change in losses and loss expenses reserves, net of reinsurance | | | 117,027 | | | | 47,229 | | | | 23,568 | |
| Change in other assets, other liabilities and current income taxes | | | 8,204 | | | | 49,221 | | | | (8,063 | ) |
| Amortization of net policy acquisition costs | | | 54,981 | | | | 47,387 | | | | 18,085 | |
| Net policy acquisition costs deferred | | | (55,940 | ) | | | (51,824 | ) | | | (17,813 | ) |
| Provision for deferred income tax expense (benefit) | | | (18,794 | ) | | | (3,866 | ) | | | 2,838 | |
| Bond amortization | | | 184 | | | | 1,865 | | | | 3,030 | |
| Loss on sale of property and equipment | | | – | | | | 235 | | | | 63 | |
| Depreciation | | | 6,102 | | | | 5,752 | | | | 5,521 | |
| Net realized (gains) losses on investments | | | 25,691 | | | | (19,686 | ) | | | (23,228 | ) |
| Compensation expense related to restricted stock | | | 475 | | | | 1,154 | | | | 1,343 | |
| Net cash provided by operating activities | | | 100,708 | | | | 97,744 | | | | 32,368 | |
| | | | | | | | | | | | | |
| Investing activities | | | | | | | | | | | | |
| Purchases of fixed maturities and equity securities | | | (415,326 | ) | | | (436,932 | ) | | | (400,670 | ) |
| Purchases of limited partnership interests | | | (450 | ) | | | (1,097 | ) | | | – | |
| Distributions from limited partnerships | | | 6,869 | | | | 19,230 | | | | 1,462 | |
| Proceeds from maturities | | | 64,035 | | | | 131,623 | | | | 78,691 | |
| Proceeds from sales of fixed maturities | | | 241,429 | | | | 148,652 | | | | 199,790 | |
| Proceeds from sales of equity securities | | | 149,195 | | | | 69,756 | | | | 88,773 | |
| Net sales of short-term investments | | | – | | | | 500 | | | | 11,258 | |
| Purchase of insurance company-owned life insurance | | | (10,000 | ) | | | – | | | | – | |
| Purchase of commercial mortgage loans | | | (6,672 | ) | | | – | | | | – | |
| Purchases of property and equipment | | | (5,439 | ) | | | (6,661 | ) | | | (7,725 | ) |
| Proceeds from disposals of property and equipment | | | 10 | | | | 582 | | | | 1,059 | |
| Net cash provided by (used in) investing activities | | | 23,651 | | | | (74,347 | ) | | | (27,362 | ) |
| | | | | | | | | | | | | |
| Financing activities | | | | | | | | | | | | |
| Dividends paid to shareholders | | | (16,835 | ) | | | (16,302 | ) | | | (15,803 | ) |
| Repurchase of common shares | | | (4,596 | ) | | | (1,880 | ) | | | – | |
| Net cash used in financing activities | | | (21,431 | ) | | | (18,182 | ) | | | (15,803 | ) |
| | | | | | | | | | | | | |
| Effect of foreign exchange rates on cash and cash equivalents | | | (830 | ) | | | 522 | | | | 235 | |
| | | | | | | | | | | | | |
| Increase (decrease) in cash, cash equivalents and restricted cash and cash equivalents | | | 102,098 | | | | 5,737 | | | | (10,562 | ) |
| Cash, cash equivalents and restricted cash and cash equivalents at beginning of year | | | 68,713 | | | | 62,976 | | | | 73,538 | |
| Cash, cash equivalents and restricted cash and cash equivalents at end of year | | $ | 170,811 | | | $ | 68,713 | | | $ | 62,976 | |
| | | | | | | | | | | | | |
| Supplemental Disclosures of Cash Flow Information | | | | | | | | | | | | |
| Cash paid for income taxes, net of refunds | | $ | 9,500 | | | $ | – | | | $ | 10,173 | |
| Cash paid for interest | | $ | 504 | | | $ | 456 | | | $ | 309 | |
See notes to consolidated financial statements.
Notes to Consolidated Financial Statements
Baldwin & Lyons, Inc. Protective Insurance Corporation and Subsidiaries
(DollarsAll dollars amounts presented in these notes are in thousands, except share and per share data)
Note A - Summary of Significant Accounting Policies
Description of Business: Protective Insurance Corporation (formerly Baldwin & Lyons, Inc.,) (the "Company"), based in Carmel, Indiana, is a specialty property-casualty insurer providingspecializing in marketing and underwriting property, liability and workers' compensation coverage for large and medium-sized trucking and public transportation fleets, as well as coveragescoverage for trucking industry independent contractors. Additionally,In addition, the Company 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 term “Insurance Subsidiaries,” as used throughout these notes, refers to Protective Insurance Company, Protective Specialty Insurance Company, Sagamore Insurance Company and B&L Insurance, Ltd.
Effective August 1, 2018, the Company changed its name to Protective Insurance Corporation to better align its holding company's and Insurance Subsidiaries' identities and to reflect its position within the insurance industry.
Effective January 1, 2017, the Company determined that its business constituted one reportable property and casualty insurance segment. 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 product offerings include coverage for small fleet truckingchief operating decision maker when making decisions about how resources are allocated and professional liability as well as workers' compensation for small businesses and casualty reinsurance.assessing performance.
Basis of Presentation: The consolidated financial statements include the accounts of the Company and its wholly ownedwholly-owned subsidiaries. All significant inter-companyInter-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: Investments:Carrying amounts for fixed maturityincome securities represent fair value and are based on quoted market prices, where available, or broker/dealer quotes for specific securities where quoted market prices are not available. Equity securities are carried at quoted market prices (fair value). Commercial mortgage loans are carried primarily at amortized cost along with a valuation allowance for losses when necessary. These investments represent interests in commercial mortgage loans originated and serviced by a third party of which the Company shares, on a pro-rata basis, in all related cash flows of the underlying mortgage loans. There was no valuation allowance on the Company's commercial mortgage loans as of December 31, 2018.
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's net income. To the extent that the limited partnership investeespartnerships include both realized and unrealized investment gains or losses in the determination of net income or loss, then the Company would also recognize, through its consolidated statements of operations, its proportionate share of the investee's unrealized, as well as realized, investment gains or losses.losses within net unrealized gains (losses) on equity securities and limited partnership investments.
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 determined by specific identification of cost of investments sold and are included in income. All fixed maturity and equityFixed income securities are considered to be available for sale; theavailable-for-sale. The related unrealized net gains or losses (net of applicable tax effect)effects) on fixed income securities are reflected directly in shareholders' equity. Included within available for saleavailable-for-sale fixed maturityincome securities are insurance linked securities and convertible debt securities. The changes in fair values of insurance-linked securities and portionsA portion of the changes in the fair values of convertible debt securities areis reflected as a component of net realized gains (losses) on investments.investments, excluding impairment losses within the consolidated statements of operations. Realized gains and losses on disposals of fixed income securities are recorded on the trade date. Realized gains and losses on fixed income securities are determined by the specific identification of the cost of investments sold and are included in net realized gains (losses) on investments, excluding impairment losses.
Effective January 1, 2018, equity securities are recorded at fair value, with unrealized net gains or losses reflected as a component of net unrealized gains (losses) on equity securities and limited partnership investments within the consolidated statements of operations. Realized gains and losses on disposals of equity securities are recorded on the trade date and included in net realized gains (losses) on investments, excluding impairment losses. Prior to adoption of the new accounting guidance, unrealized gains and losses related to equity securities were reflected directly in shareholders’ equity unless a decline in value was determined to be other-than-temporary, in which case the loss was charged to income.
In accordance with the Financial Accounting StandardStandards Board's ("FASB") other-than-temporary impairment ("OTTI") guidance, if a fixed maturityincome security is in an unrealized loss position and the Company has the intent to sell the fixed maturityincome security, or it is more likely than not that the Company will have to sell the fixed maturityincome security before recovery of its amortized cost basis, the decline in value is deemed to be other-than-temporary and is recorded to net realizedother-than-temporary impairment losses on investments in the consolidated statements of operations. For impaired fixed maturityincome 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 realizedother-than-temporary impairment 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's equity (accumulated other comprehensive income).shareholders' equity.
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 maturityincome security. The net present value is calculated by discounting the Company'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' 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 a period of at least 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 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 to the Company's quantitative criteria defined above, as well as the Company'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. As a result of the impairment analysis conducted by the Company in the fourth quarter of 2018, the Company concluded the entire goodwill balance was impaired, resulting in an impairment loss of $3,152. See Note M for further discussion. This impairment charge is included within other operating expenses in the consolidated statements of operations. 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.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 whichthat 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. The Company had no material contract assets, contract liabilities, or deferred contract costs recorded on its consolidated balance sheet at December 31, 2018.
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's additional liability. Such charges, when incurred, are included in other operating expenses, rather than losses and loss expenses incurred, sincebecause the inability of the Company to collect from reinsurers is a credit risk rather than a deficiency associated with the loss reserving process.
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 eligibleretirement-eligible recipients in accordance with the non-substantive, post-grant date vesting clause of Accounting StandardStandards Codification ("ASC") Topic 715, Compensation-RetirementCompensation—Retirement Benefits. Restricted stock is valued based on the closing price of the stockCompany's Class B Common Stock on the day the award is granted. Non-vested shares of restricted sharesstock will be forfeited should an executive'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 (Loss) Per Share: Diluted earnings (loss) per share of common stock are based on the average number of shares of Class A and Class B common stockCommon Stock outstanding during the year, adjusted for the dilutive effect, if any, of restricted stock awards outstanding. Basic earnings (loss) per share are presented exclusive of the effect of share-based awards outstanding.
Comprehensive Income:Income (Loss): The Company records accumulated other comprehensive income (loss) from unrealized gains and losses on available-for-sale securities and from foreign exchange adjustments as a separate component of 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 (loss) is made for gains or losses during the period included in net income.income (loss).
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:Insurance Company-Owned Life Insurance: In January 2016,Included within other assets on the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2016-01, Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurementconsolidated balance sheet at December 31, 2018 is $10,000 of Financial Assets and Financial Liabilities, or ASU 2016-01.insurance company-owned life insurance. 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 are 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 faircarrying value of financial instruments; and modifies various presentation disclosure requirements for financial instruments. ASU 2016-01 is effective for interim and annual reporting periods beginning after December 15, 2017. The Company has not yet adopted the guidance andcompany-owned life insurance policies represents the adoption of this guidance is not expected to have a material impact on presentation of data incash surrender value as reported by the consolidated financial statements.respective insurer, which approximates fair value.
- 48 -
Recently Adopted Accounting Pronouncements
Note A - Significant Accounting Policies (continued)
In May 2015, the FASB issued ASU 2015-09, Disclosures about Short-Duration Contracts, and this new guidance will enhance disclosures about an entity's insurance liabilities. This guidance will provide additional information about unpaid claims and claim development, including supplemental disaggregated incurred and paid claim data. Under the guidance, enhanced disclosures on claim frequency and reserving methodologies are required. The guidance is effective for annual periods beginning after December 15, 2015 and for interim periods beginning after December 15, 2016, however early adoption is permitted. The Company has not yet adopted the guidance and the adoption of this guidance will not impact our consolidated financial position, results of operations or cash flows.
In May 2015, the FASB issued ASU 2015-07 – Fair Value Measurement – (Topic 820) Disclosures for Investments in Certain Entities that Calculate Net Asset Value per Share (or its equivalent) (a consensus of the Emerging Issues Task Force), which will be effective for fiscal years beginning after December 15, 2015. The new pronouncement was issued to ensure that all investments categorized in the fair value hierarchy are classified using a consistent approach. The Company has not yet adopted the guidance and the adoption of this guidance is not expected to have a material impact on presentation of data in the consolidated financial statements.
In May 2014, the FASB issued ASUAccounting 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 servicecommission and fee income, could beother 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 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 first quarter ending Marchof 2018. The Company adopted the new guidance as of January 1, 2018. The adoption of the new guidance did not have a material impact on the Company's consolidated financial statements. The Company had no material contract assets, contract liabilities, or deferred contract costs recorded on its consolidated balance sheet at December 31, 2018.
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 changed 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. Previously, the Company's equity securities were classified as available-for-sale and changes in fair value were recognized in accumulated other comprehensive income (loss) as a component of shareholders' equity. The Company adopted ASU 2016-01 as of January 1, 2018 using the modified retrospective approach and recorded a cumulative-effect adjustment to reclassify unrealized gains on equity securities of $71,012 ($46,157, net of tax) from other comprehensive income (loss) to retained earnings within the consolidated balance sheet as of December 31, 2018. Going forward, unrealized gains or losses on equity securities will be recognized in the consolidated statements of operations within net unrealized gains (losses) on equity securities and limited partnership investments.
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments, or ASU 2016-15. 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. The Company adopted ASU 2016-15 as of January 1, 2018. The adoption of the new guidance did not have a material impact on the Company's consolidated financial statements.
In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash. This update amends ASC Topic 230 to add and clarify guidance on the classification and presentation of restricted cash in the statement of cash flows. The guidance requires entities to show the changes in the total of cash, cash equivalents, restricted cash and restricted cash equivalents in the statement of cash flows. The guidance was applied retrospectively. The Company adopted the new guidance as of January 1, 2018 and made an adjustment within net cash provided by operating activities on the consolidated statement of cash flows for the year ended December 31, 2017 to reflect $4,000 of restricted cash, which was classified within restricted cash and short-term investments on the December 31, 2017 consolidated balance sheet. The Company also changed the presentation of restricted cash and cash equivalents on its consolidated balance sheets to reflect this amount on a separate line. The adoption of the new guidance did not have an impact on the Company's consolidated statements of operations.
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 (loss) to retained earnings, stranded tax effects resulting from the newly enacted federal corporate income tax rate in the U.S. 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 was the difference between the historical corporate income tax rate and the newly enacted 21 percent corporate income tax rate. The Company adopted the new guidance in the first quarter of 2018 and recorded a cumulative-effect adjustment to reclassify the tax effects on fixed income investments of $117 from other comprehensive income (loss) to retained earnings within the consolidated balance sheet as of December 31, 2018.
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, not to exceed the carrying amount of goodwill. ASU 2017-04 is effective for interim and annual reporting periods beginning after December 15, 2020, with early adoption permitted. The Company adopted the new guidance in the fourth quarter of 2018 and recognized an impairment charge of $3,152 related to the impairment of goodwill. See Note M for further discussion.
Recently Issued Accounting Pronouncements
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), or ASU 2016-02. ASU 2016-02 superseded the current lease guidance in ASC Topic 840, Leases. Under the new guidance, lessees are 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 are 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. The guidance provides for 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. In July 2018, the FASB issued ASU 2018-11, Leases (Topic 842): Targeted Improvements, which provided adopters an additional transition method by allowing entities to initially apply ASU 2016-02, and subsequent related standards, at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. The Company adopted the new guidance on January 1, 2019 utilizing the transition method allowed per ASU 2018-11, and accordingly, comparative period financial information will not be adjusted for the effects of the new guidance. No cumulative-effect adjustment was required to the opening balance of retained earnings on the adoption date. The Company has substantially completed an assessment of the new standard’s impact and determined the new standard will not have a material impact on the Company's consolidated statements of operations or cash flows; however, the estimated impact of adopting the new guidance will result in a right-of-use asset and lease liability being recorded on the consolidated balance sheets subsequent to December 31, 2018 of approximately $400 based on the lease portfolio existing as of the date of this Annual Report on Form 10-K.
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 impact this guidanceeffects the adoption of ASU 2016-13 will have on its resultsconsolidated financial statements.
In July 2018, the FASB issued ASU No. 2018-09, Codification Improvements. This update provides clarification, corrects errors in and makes minor improvements to various ASC topics. Many of operations, financial position or liquidity.the amendments in this update have transition guidance with effective dates for annual periods beginning after December 15, 2018 and some amendments in this update do not require transition guidance and were effective upon issuance of this update. The Company doeswill adopt amendments as they become applicable. The Company has determined that the impact of these improvements will not expectbe material to its consolidated financial statements.
In August 2018, the guidanceFASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement, or ASU 2018-13. This update removes the disclosure requirements for the amounts of and the reasons for transfers between Level 1 and Level 2 and disclosure of the policy for timing of transfers between levels. This update also removes disclosure requirements for the valuation processes for Level 3 fair value measurements. Additionally, this update adds disclosure requirements for the changes in unrealized gains and losses for recurring Level 3 fair value measurements and quantitative information for certain unobservable inputs in Level 3 fair value measurements. ASU 2018-13 is effective for interim and annual reporting periods beginning after December 15, 2019. The Company is currently evaluating the effects the adoption of ASU 2018-13 will have a material impact on its resultsconsolidated financial statements.
Note B - Investments
The following is a summary of operations, financial position or liquidity.available-for-sale securities at December 31:
| | | Fair Value | | | Cost or Amortized Cost | | | Gross Unrealized Gains | | | Gross Unrealized Losses | | | Net Unrealized Gains (Losses) | |
December 31, 2018 (1) | | | | | | | | | | | | | | | |
| Fixed income securities | | | | | | | | | | | | | | | |
| Agency collateralized mortgage obligations | | $ | 10,687 | | | $ | 10,636 | | | $ | 145 | | | $ | (94 | ) | | $ | 51 | |
| Agency mortgage-backed securities | | | 37,385 | | | | 37,168 | | | | 371 | | | | (154 | ) | | | 217 | |
| Asset-backed securities | | | 64,422 | | | | 66,241 | | | | 14 | | | | (1,833 | ) | | | (1,819 | ) |
| Bank loans | | | 9,750 | | | | 10,208 | | | | 27 | | | | (485 | ) | | | (458 | ) |
| Certificates of deposit | | | 2,835 | | | | 2,835 | | | | – | | | | – | | | | – | |
| Collateralized mortgage obligations | | | 5,423 | | | | 5,095 | | | | 376 | | | | (48 | ) | | | 328 | |
| Corporate securities | | | 190,450 | | | | 196,925 | | | | 127 | | | | (6,602 | ) | | | (6,475 | ) |
| Mortgage-backed securities | | | 38,540 | | | | 38,586 | | | | 377 | | | | (423 | ) | | | (46 | ) |
| Municipal obligations | | | 29,155 | | | | 29,102 | | | | 239 | | | | (186 | ) | | | 53 | |
| Non-U.S. government obligations | | | 25,180 | | | | 25,339 | | | | 6 | | | | (165 | ) | | | (159 | ) |
| U.S. government obligations | | | 178,818 | | | | 178,369 | | | | 1,252 | | | | (803 | ) | | | 449 | |
| Total fixed income securities | | $ | 592,645 | | | $ | 600,504 | | | $ | 2,934 | | | $ | (10,793 | ) | | $ | (7,859 | ) |
| | | Fair Value | | | Cost or Amortized Cost | | | Gross Unrealized Gains | | | Gross Unrealized Losses | | | Net Unrealized Gains (Losses) | |
| December 31, 2017 | | | | | | | | | | | | | | | |
| Fixed income securities | | | | | | | | | | | | | | | |
| 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 income securities | | | 521,853 | | | | 521,017 | | | | 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 | |
| (1) | Effective January 1, 2018, the Company adopted ASU 2016-01 and equity securities are no longer classified as available-for-sale. Prior periods have not been restated to conform to the current presentation. See Note A – Summary of Significant Accounting Policies — Recently Adopted Accounting Pronouncements for further discussion. |
| 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) | |
| 2015: | | | | | | | | | | | | | | | |
| Fixed maturities: | | | | | | | | | | | | | | | |
| U.S. government obligations | | $ | 103,245 | | | $ | 103,448 | | | $ | 56 | | | $ | (259 | ) | | $ | (203 | ) |
| Residential mortgage-backed securities | | | 4,776 | | | | 4,668 | | | | 162 | | | | (54 | ) | | | 108 | |
| Commercial mortgage-backed securities | | | 30,595 | | | | 30,977 | | | | 247 | | | | (629 | ) | | | (382 | ) |
| State and municipal obligations | | | 110,578 | | | | 109,932 | | | | 806 | | | | (160 | ) | | | 646 | |
| Corporate securities | | | 164,025 | | | | 168,137 | | | | 2,445 | | | | (6,557 | ) | | | (4,112 | ) |
| Foreign government obligations | | | 23,965 | | | | 25,416 | | | | 404 | | | | (1,855 | ) | | | (1,451 | ) |
| Total fixed maturities | | | 437,184 | | | | 442,578 | | | | 4,120 | | | | (9,514 | ) | | | (5,394 | ) |
| Equity securities: | | | | | | | | | | | | | | | | | | | | |
| Financial institutions | | | 21,694 | | | | 10,836 | | | | 11,069 | | | | (211 | ) | | | 10,858 | |
| Industrial & miscellaneous | | | 123,804 | | | | 69,385 | | | | 59,338 | | | | (4,919 | ) | | | 54,419 | |
| Total equity securities | | | 145,498 | | | | 80,221 | | | | 70,407 | | | | (5,130 | ) | | | 65,277 | |
| Total | | $ | 582,682 | | | $ | 522,799 | | | $ | 74,527 | | | $ | (14,644 | ) | | | 59,883 | |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | Applicable federal income taxes | | | | (20,959 | ) |
| | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | Net unrealized gains - net of tax | | | $ | 38,924 | |
| | | | | | | | | | | | | | | | | | | | | |
| 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 | |
Note B – Investments (continued)
The following table summarizes, for available-for-sale fixed maturity and equity security investmentsmaturities in an unrealized loss position at December 31, 2018 and available-for-sale fixed maturities and equity securities in an unrealized loss position at December 31, 2017, respectively, the aggregate fair value and gross unrealized loss categorized by the duration thoseindividual securities have been continuously in an unrealized loss position.
| | | 2018 | | | 2017 | |
| | | Number of Securities | | | Fair Value | | | Gross Unrealized Loss | | | Number of Securities | | | Fair Value | | | Gross Unrealized Loss | |
| Fixed income securities: | | | | | | | | | | | | | | | | | | |
| 12 months or less | | | 275 | | | $ | 282,646 | | | $ | (7,296 | ) | | | 459 | | | $ | 313,421 | | | $ | (2,683 | ) |
| Greater than 12 months | | | 217 | | | | 131,001 | | | | (3,497 | ) | | | 112 | | | | 75,638 | | | | (2,155 | ) |
| Total fixed income securities | | | 492 | | | | 413,647 | | | | (10,793 | ) | | | 571 | | | | 389,059 | | | | (4,838 | ) |
Equity securities (1): | | | | | | | | | | | | | | | | | | | | | | | | |
| 12 months or less | | | – | | | | – | | | | – | | | | 65 | | | | 46,654 | | | | (2,218 | ) |
| Greater than 12 months | | | – | | | | – | | | | – | | | | – | | | | – | | | | – | |
| Total equity securities | | | – | | | | – | | | | – | | | | 65 | | | | 46,654 | | | | (2,218 | ) |
| Total | | | 492 | | | $ | 413,647 | | | $ | (10,793 | ) | | | 636 | | | $ | 435,713 | | | $ | (7,056 | ) |
| | | 2015 | | | 2014 | |
| | | Number of Securities | | | Fair Value | | | Gross Unrealized Loss | | | Number of Securities | | | Fair Value | | | Gross Unrealized Loss | |
| Fixed maturity securities: | | | | | | | | | | | | | | | | | | |
| 12 months or less | | | 328 | | | $ | 205,475 | | | $ | (5,070 | ) | | | 591 | | | $ | 176,756 | | | $ | (6,083 | ) |
| Greater than 12 months | | | 168 | | | | 108,043 | | | | (4,444 | ) | | | 140 | | | | 27,667 | | | | (1,407 | ) |
| Total fixed maturities | | | 496 | | | | 313,518 | | | | (9,514 | ) | | | 731 | | | | 204,423 | | | | (7,490 | ) |
| Equity securities: | | | | | | | | | | | | | | | | | | | | | | | | |
| 12 months or less | | | 73 | | | | 26,517 | | | | (5,130 | ) | | | 33 | | | | 13,538 | | | | (2,170 | ) |
| Greater than 12 months | | | - | | | | - | | | | - | | | | 3 | | | | 686 | | | | (64 | ) |
| Total equity securities | | | 73 | | | | 26,517 | | | | (5,130 | ) | | | 36 | | | | 14,224 | | | | (2,234 | ) |
| Total | | | 569 | | | $ | 340,035 | | | $ | (14,644 | ) | | | 767 | | | $ | 218,647 | | | $ | (9,724 | ) |
| (1) | Effective January 1, 2018, the Company adopted ASU 2016-01 and equity securities are no longer classified as available-for-sale. Prior periods have not been restated to conform to the current presentation. See Note A – Summary of Significant Accounting Policies — Recently Adopted Accounting Pronouncements for further discussion. |
Unrealized losses in the Company's fixed maturityincome 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. The average unrealized loss for all fixed maturity securities in a loss position at December 31, 2015 is approximately 3% of original or adjusted cost.fluctuations. The Company does not intend to sell any fixed maturityincome securities which are in an unrealized loss position at December 31, 20152018, and it is not more likely than not that the Company will have to sell any such fixed maturityincome 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 fair value. Accordingly, the Company does not believe theany unrealized losses represent an other-than-temporary impairmentimpairments as of December 31, 2015.2018.
The fair value and the cost or amortized cost of fixed maturityincome investments at December 31, 2015,2018, organized by contractual maturity, isare 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 | |
| | | | | | | | | | | | | |
| One year or less | | $ | 74,187 | | | | 17.0 | % | | $ | 75,854 | | | | 17.1 | % |
| Excess of one year to five years | | | 242,713 | | | | 55.5 | | | | 244,033 | | | | 55.1 | |
| Excess of five years to ten years | | | 36,452 | | | | 8.3 | | | | 37,269 | | | | 8.4 | |
| Excess of ten years | | | 3,218 | | | | 0.8 | | | | 2,901 | | | | 0.7 | |
| Total maturities | | | 356,570 | | | | 81.6 | | | | 360,057 | | | | 81.3 | |
| Asset-backed securities | | | 80,614 | | | | 18.4 | | | | 82,521 | | | | 18.7 | |
| | | $ | 437,184 | | | | 100.0 | % | | $ | 442,578 | | | | 100.0 | % |
Note B – Investments (continued)
| | | Fair Value | | | Cost or Amortized Cost | |
| One year or less | | $ | 45,858 | | | | 7.7 | % | | $ | 46,150 | | | | 7.7 | % |
| Excess of one year to five years | | | 287,506 | | | | 48.5 | | | | 290,743 | | | | 48.4 | |
| Excess of five years to ten years | | | 101,605 | | | | 17.1 | | | | 104,571 | | | | 17.4 | |
| Excess of ten years | | | 6,641 | | | | 1.2 | | | | 6,410 | | | | 1.1 | |
| Total contractual maturities | | | 441,610 | | | | 74.5 | | | | 447,874 | | | | 74.6 | |
| Asset-backed securities | | | 151,035 | | | | 25.5 | | | | 152,630 | | | | 25.4 | |
| Total | | $ | 592,645 | | | | 100.0 | % | | $ | 600,504 | | | | 100.0 | |
Major categories of investment income for the years ended December 31, are summarized as follows:
| | | 2018 | | | 2017 | | | 2016 | |
| Interest on fixed income securities | | $ | 19,092 | | | $ | 15,340 | | | $ | 13,254 | |
| Dividends on equity securities | | | 4,380 | | | | 4,611 | | | | 3,598 | |
| Money market funds, Short-term and other | | | 1,529 | | | | 471 | | | | 128 | |
| | | | 25,001 | | | | 20,422 | | | | 16,980 | |
| Investment expenses | | | (2,953 | ) | | | (2,327 | ) | | | (2,497 | ) |
| Net investment income | | $ | 22,048 | | | $ | 18,095 | | | $ | 14,483 | |
| | | 2015 | | | 2014 | | | 2013 | |
| Interest on fixed maturities | | $ | 11,663 | | | $ | 8,806 | | | $ | 9,023 | |
| Dividends on equity securities | | | 3,445 | | | | 2,693 | | | | 2,166 | |
| Money market funds, Short-term and other | | | 32 | | | | 37 | | | | 49 | |
| | | | 15,140 | | | | 11,536 | | | | 11,238 | |
| Investment expenses | | | (2,642 | ) | | | (2,481 | ) | | | (2,468 | ) |
| Net investment income | | $ | 12,498 | | | $ | 9,055 | | | $ | 8,770 | |
Gains and losses on investments, including equity method earnings from limited partnerships, for the years ended December 31 are summarized below:
| | | 2015 | | | 2014 | | | 2013 | |
| Fixed maturities: | | | | | | | | | |
| Gross gains | | $ | 6,633 | | | $ | 6,480 | | | $ | 7,235 | |
| Gross losses | | | (13,634 | ) | | | (4,596 | ) | | | (4,371 | ) |
| Net gains (losses) | | | (7,001 | ) | | | 1,884 | | | | 2,864 | |
| | | | | | | | | | | | | |
| Equity securities: | | | | | | | | | | | | |
| Gross gains | | | 21,070 | | | | 7,467 | | | | 15,374 | |
| Gross losses | | | (13,643 | ) | | | (1,529 | ) | | | (2,718 | ) |
| Net gains | | | 7,427 | | | | 5,938 | | | | 12,656 | |
| | | | | | | | | | | | | |
| Limited partnerships - net gain (loss) | | | (1,687 | ) | | | 7,108 | | | | 7,995 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| Total net gains (losses) | | $ | (1,261 | ) | | $ | 14,930 | | | $ | 23,515 | |
| | | 2018 | | | 2017 | | | 2016 | |
| Gross gains on available-for-sale investments sold during the period: | | | | | | | | | |
| Fixed income securities | | $ | 10,807 | | | $ | 9,135 | | | $ | 11,628 | |
Equity securities (1) | | | – | | | | 10,481 | | | | 28,742 | |
| Total gains | | | 10,807 | | | | 19,616 | | | | 40,370 | |
| | | | | | | | | | | | | |
| Gross losses on available-for-sale investments sold during the period: | | | | | | | | | | | | |
| Fixed income securities | | | (14,367 | ) | | | (9,882 | ) | | | (10,940 | ) |
Equity securities (1) | | | – | | | | (2,368 | ) | | | (2,932 | ) |
| Total losses | | | (14,367 | ) | | | (12,250 | ) | | | (13,872 | ) |
| | | | | | | | | | | | | |
| Other-than-temporary impairments | | | (19 | ) | | | (149 | ) | | | (5,743 | ) |
| | | | | | | | | | | | | |
| Change in value of limited partnership investments | | | (9,343 | ) | | | 12,469 | | | | 2,473 | |
| | | | | | | | | | | | | |
| Losses on equity securities: | | | | | | | | | | | | |
Realized losses on equity securities sold during the period (2) | | | (3,072 | ) | | | – | | | | – | |
| Unrealized losses on equity securities held at the end of the period | | | (9,697 | ) | | | – | | | | – | |
| Realized and unrealized losses on equity securities held at the end of the period | | | (12,769 | ) | | | – | | | | – | |
| | | | | | | | | | | | | |
| Net realized and unrealized gains (losses) on investments | | $ | (25,691 | ) | | $ | 19,686 | | | $ | 23,228 | |
Shareholders' equity includes approximately $26,521, net of deferred federal income taxes, of undistributed earnings from limited partnerships as of December 31, 2015.| (1) | Effective January 1, 2018, the Company adopted ASU 2016-01 and equity securities are no longer classified as available-for-sale. Prior periods have not been restated to conform to the current presentation. See Note A – Summary of Significant Accounting Policies — Recently Adopted Accounting Pronouncements for further discussion. |
| (2) | During 2018, the Company sold $149,195 in equity securities, resulting in a gain on sale of $51,900. The majority of these gains were included in unrealized gains within other comprehensive income (loss) at December 31, 2017 and, as a result of the adoption of ASU 2016-01, were reclassified to retained earnings as of January 1, 2018 and were therefore not recognized in the consolidated statements of operations for the year ended December 31, 2018. |
Gain and loss activity for fixed maturityincome 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:
| | | 2015 | | | 2014 | | | 2013 | |
| | | | | | | | | | |
| Cumulative charges to income at beginning of year | | $ | 7,168 | | | $ | 6,770 | | | $ | 7,773 | |
| | | | | | | | | | | | | |
| Writedowns based on objective and subjective criteria | | | 7,700 | | | | 689 | | | | 742 | |
| Recovery of prior writedowns upon sale or disposal | | | (4,355 | ) | | | (291 | ) | | | (1,745 | ) |
| Net pre-tax realized gain (loss) | | | (3,345 | ) | | | (398 | ) | | | 1,003 | |
| | | | | | | | | | | | | |
| Cumulative charges to income at end of year | | $ | 10,513 | | | $ | 7,168 | | | $ | 6,770 | |
| | | | | | | | | | | | | |
| Addition (reduction) to earnings per share from net | | | | | | | | | | | | |
| after-tax OTTI gain (loss) | | $ | (.14 | ) | | $ | (.02 | ) | | $ | .04 | |
| | | | | | | | | | | | | |
| Unrealized gain on investments previously | | | | | | | | | | | | |
| written down at end of the year - see note below | | $ | 14,710 | | | $ | 17,127 | | | $ | 13,129 | |
| | | 2018 | | | 2017 | | | 2016 | |
| Cumulative charges to income at beginning of year | | $ | 4,209 | | | $ | 5,650 | | | $ | 10,513 | |
| | | | | | | | | | | | | |
| Writedowns based on objective and subjective criteria | | | 19 | | | | 149 | | | | 5,743 | |
| Recovery of prior writedowns upon sale or disposal | | | (3,298 | ) | | | (1,590 | ) | | | (10,606 | ) |
| Net pre-tax realized gain | | | 3,279 | | | | 1,441 | | | | 4,863 | |
| | | | | | | | | | | | | |
| Cumulative charges to income at end of year | | $ | 930 | | | $ | 4,209 | | | $ | 5,650 | |
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'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 $2,459$1,317 to variousa limited partnershipspartnership as of December 31, 2015.2018.
The Company has invested a total of $23,000 in two limited partnerships, with an aggregate estimated value of $45,009 at December 31, 2015, that are managed by organizations in which four directors of the Company are executive officers, directors or owners. The Company's ownership interest in these limited partnerships ranges from 5% to 17%. These limited partnerships added ($1,978), $7,088 and $1,154, net of fees, to investment gains (losses) in 2015, 2014 and 2013, respectively. During 2015, 2014 and 2013, the Company has recorded management fees of $749, $697 and $640, respectively, and performance-based fees of $0, $0 and $18, respectively, to these organizations for management of these limited partnerships.
The Company utilizes the services of an investment firm of which two directors of the Company are employees or partial owners. This investment firm may serve as agent for purchases and sales of securities and manages equity securities and fixed maturity portfolios with an aggregate market value of approximately $62,156 at December 31, 2015. Total commissions and net fees earned by the investment firm and affiliates on these transactions and for advice and consulting were approximately $235, $212 and $239 during 2015, 2014 and 2013, respectively.- 51 -
The Company's limited partnerships include one significant investment which primarily invests in public and private equity markets in India. This limited partnership investment's value as of December 31, 20152018 and 20142017 was $28,270$26,344 and $29,868,$29,817, respectively. At December 31, 2015,2018, the Company's estimated ownership interest in this limited partnership investment was approximately 6%. The Company's share of income (losses), from both realized and unrealized appreciation (losses) from this limited partnership investment was ($3,473), $7,665 and ($1,117) in 2018, 2017 and 2016, respectively. The summarized financial information of this limited partnership investment as of and for the years ended December 31 is as follows:
| | | 2018 | | | 2017 | | | 2016 | |
| Investment income (loss) | | $ | 4,298 | | | $ | 623 | | | $ | (5 | ) |
| Partnership expenses | | | 6,874 | | | | 2,206 | | | | 2,426 | |
| Net investment loss | | | (2,576 | ) | | | (1,583 | ) | | | (2,431 | ) |
| | | | | | | | | | | | | |
| Realized gain on investments | | | 12,314 | | | | 8,723 | | | | 7,754 | |
| | | | | | | | | | | | | |
| Unrealized appreciation (depreciation) on investments | | | (65,250 | ) | | | 133,807 | | | | (21,002 | ) |
| | | | | | | | | | | | | |
| Net increase (decrease) in partners' capital resulting from operations | | $ | (55,512 | ) | | $ | 140,947 | | | $ | (15,679 | ) |
| | | | | | | | | | | | | |
| Total assets | | $ | 462,058 | | | $ | 566,629 | | | $ | 448,263 | |
| Total liabilities | | | 45,483 | | | | 30,976 | | | | 39,988 | |
| Total partners' capital | | | 416,575 | | | | 535,653 | | | | 408,275 | |
The Company's limited partnerships include an additional investment which primarily invests in public equity and fixed income markets. This limited partnership investment's value as of December 31, 2018 and 2017 was $14,975 and $19,380, respectively. At December 31, 2018, the Company'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 ($1,599)4,404), $7,176$1,452 and ($3,176)$2,662 in 2015, 20142018, 2017 and 2013,2016, respectively. The summarized financial information of the significantthis limited partnership investment as of and for the years ended December 31 is as follows:
| | | | 2018 | | | 2017 | | | 2016 | |
| Investment income | | | $ | 19,507 | | | $ | 14,524 | | | $ | 13,534 | |
| Partnership expenses | | | | 9,132 | | | | 12,861 | | | | 10,628 | |
| Net investment income | | | | 10,375 | | | | 1,663 | | | | 2,906 | |
| | | | | | | | | | | | | | |
| Realized gain (loss) on investments | | | | (37,143 | ) | | | (15,073 | ) | | | 830 | |
| | | | | | | | | | | | | | |
| Unrealized appreciation (depreciation) on investments | | | | (48,132 | ) | | | 49,847 | | | | 46,685 | |
| | | | | | | | | | | | | | |
| Net increase (decrease) in partners' capital resulting from operations | | | $ | (74,900 | ) | | $ | 36,437 | | | $ | 50,421 | |
| | | 2015 | | | 2014 | | | 2013 | | | | | | | | | | | | | |
| Total assets | | $ | 511,118 | | | $ | 565,500 | | | $ | 493,028 | | | $ | 241,174 | | | $ | 354,709 | | | $ | 464,184 | |
| Total liabilities | | | | 20,020 | | | | 2,000 | | | | 14,555 | |
| Total partners' capital | | | 470,783 | | | | 542,700 | | | | 444,337 | | | | 221,154 | | | | 352,709 | | | | 449,629 | |
| Net increase (decrease) in partners' capital resulting from operations | | | (19,603 | ) | | | 125,700 | | | | (64,550 | ) | |
The fair value of regulatory deposits with various insurance departments in the United States and Canada totaled $84,198$87,981 and $76,406$86,335 at December 31, 20152018 and 2014,2017, respectively.
Short-term investments at December 31, 2015 include $2,2202018 included $1,000 in time certificates of deposit issued by a Bermuda bank.
The Company's fixed maturitiesincome securities are over 85%90% invested in investment grade fixed maturityincome investments. The Company has a total of $2,969, representing three differentno fixed income investments of fixed maturity investments whichthat were originally issued with guarantees by three different third partya third-party insurance companies, withcompany nor does the largest exposure to a single investment being $1,997. The average S&P credit rating of such investments, with consideration of the guarantee, is AA. The average S&P underlying credit rating of such investments, without consideration of the guarantee, would remain AA. The Company does not have any direct exposure to any guarantor.guarantor at December 31, 2018.
Approximately $61,271$54,233 of fixed maturityincome investments (8.4%(6.2% of total invested assets)the Company's consolidated investment portfolio, which includes money market instruments classified as cash equivalents) consists of non-rated bonds and bonds rated as less than investment grade at year end.year-end. These investments include a diversified portfolio of over 40 investmentsissuers and have a $3,185$5,202 aggregate net unrealized loss position at December 31, 2015.2018.
As of December 31, 2015, the Company had committed funds totaling $5,000 related to one bridge loan agreement. The Company retains possession of these committed 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 for the years ended December 31 is summarized as follows. All amounts are shown net of reinsurance, unless otherwise indicated.
| | | 2015 | | | 2014 | | | 2013 | | | 2018 | | | 2017 | | | 2016 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | |
| Reserves, gross of reinsurance recoverable, at the beginning of the year | | | $ | 680,274 | | | $ | 576,330 | | | $ | 513,596 | |
| Reinsurance recoverable on unpaid losses at the beginning of the year | | | | 308,143 | | | | 251,563 | | | | 211,843 | |
| Reserves at the beginning of the year | | $ | 295,583 | | | $ | 288,088 | | | $ | 289,236 | | | | 372,131 | | | | 324,767 | | | | 301,753 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Provision for losses and loss expenses: | | | | | | | | | | | | | | | | | | | | | | | | |
| Claims occurring during the current year | | | 165,812 | | | | 169,950 | | | | 156,264 | | | | 329,078 | | | | 228,303 | | | | 172,645 | |
| Claims occurring during prior years | | | (10,062 | ) | | | (10,354 | ) | | | (5,563 | ) | | | 16,786 | | | | 19,215 | | | | 13,836 | |
| Total incurred | | | 155,750 | | | | 159,596 | | | | 150,701 | | |
| Total incurred losses and loss expenses | | | | 345,864 | | | | 247,518 | | | | 186,481 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Loss and loss expense payments: | | | | | | | | | | | | | | | | | | | | | | | | |
| Claims occurring during the current year | | | 56,710 | | | | 59,826 | | | | 47,908 | | | | 84,738 | | | | 67,234 | | | | 54,239 | |
| Claims occurring during prior years | | | 92,870 | | | | 92,275 | | | | 103,941 | | | | 143,853 | | | | 132,920 | | | | 109,228 | |
| Total paid | | | 149,580 | | | | 152,101 | | | | 151,849 | | | | 228,591 | | | | 200,154 | | | | 163,467 | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| Reserves at the end of the year | | | 301,753 | | | | 295,583 | | | | 288,088 | | | | 489,404 | | | | 372,131 | | | | 324,767 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Reinsurance recoverable on unpaid losses | | | | | | | | | | | | | |
| at the end of the year | | | 211,843 | | | | 210,519 | | | | 186,382 | | |
| Reinsurance recoverable on unpaid losses at the end of the year | | | | 375,935 | | | | 308,143 | | | | 251,563 | |
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Reserves, gross of reinsurance | | | | | | | | | | | | | |
| recoverable, at the end of the year | | $ | 513,596 | | | $ | 506,102 | | | $ | 474,470 | | |
| Reserves, gross of reinsurance recoverable, at the end of the year | | | $ | 865,339 | | | $ | 680,274 | | | $ | 576,330 | |
The table above shows that a savingsreserve deficiency of $10,062 was$16,786 developed during 20152018 in the settlement of claims occurring on or before December 31, 2014 with comparative2017, compared to reserve deficiencies of $19,215 in 2017 and $13,836 in 2016. 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: | | | | |
| | | | | | | | | | |
| | | 2015 | | | 2014 | | | 2013 | |
| | | | | | | | | | |
| Property and casualty insurance | | $ | (10,289 | ) | | $ | (5,423 | ) | | $ | (1,725 | ) |
| Reinsurance | | | 227 | | | | (4,931 | ) | | | (3,838 | ) |
| Totals | | $ | (10,062 | ) | | $ | (10,354 | ) | | $ | (5,563 | ) |
| | | | | | | | | | | | | |
FavorableThe $16,786 prior accident year deficiency that developed during 2018 primarily related to unfavorable loss development is influenced byin commercial automobile coverages. This unfavorable loss development was the Company's long-standing policyresult of reserving for losses realistically andincreased claim severity due to a willingnessmore challenging litigation environment, as well as an unexpected increase in the time to settle claims based uponleading to an unfavorable change in claim settlement patterns. This 2018 deficiency compares to a seasoned evaluationdeficiency 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. There is potential$19,215 for fluctuations in loss developments2017, also related to reinsurance assumed to be more pronouncedunfavorable loss development from commercial automobile coverages, particularly from severe transportation loss events that occurred primarily during the first six months of 2017 and higher than those experienced on directly produced business which is reserved entirelyexpected loss development for discontinued lines of business.
Losses and loss expenses for 2018 also reflected an increase in current accident year losses caused 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 establishmentsevere commercial automobile losses, including continued emergence of the Company's reserves at December 31, 2015 and 2014.severity.
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, 2015 and 2014, loss reserves have been reduced by estimated salvage and subrogation recoverable of approximately $2,110$7,545 and $3,129,$7,559 at December 31, 2018 and 2017, respectively. Discounting
The following is applied to theseinformation about incurred and paid claims sincedevelopment as of December 31, 2018, 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.net incurred claims amounts.
Workers' Compensation
| | | | | | As of December 31, 2018 | |
| | | Incurred Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance | | | Total of Incurred-but-Not- Reported Liabilities Plus Expected Development on Reported Claims | | | Number of Reported Claims Per Year | |
| Accident Year | | For the Years Ended December 31 (2009-2017 is Supplementary Information and Unaudited) | |
| | 2009 | | | 2010 | | | 2011 | | | 2012 | | | 2013 | | | 2014 | | | 2015 | | | 2016 | | | 2017 | | | 2018 | |
| 2009 | | $ | 17,270 | | | $ | 20,931 | | | $ | 21,447 | | | $ | 21,261 | | | $ | 21,268 | | | $ | 20,767 | | | $ | 20,641 | | | $ | 20,817 | | | $ | 20,946 | | | $ | 21,153 | | | $ | 985 | | | | 3,784 | |
| 2010 | | | | | | | 20,644 | | | | 20,111 | | | | 19,400 | | | | 19,300 | | | | 18,849 | | | | 18,344 | | | | 19,195 | | | | 19,541 | | | | 19,819 | | | | 1,098 | | | | 4,223 | |
| 2011 | | | | | | | | | | | 26,057 | | | | 26,628 | | | | 26,958 | | | | 26,767 | | | | 25,515 | | | | 27,293 | | | | 26,617 | | | | 26,631 | | | | 2,179 | | | | 4,546 | |
| 2012 | | | | | | | | | | | | | | | 23,965 | | | | 25,544 | | | | 24,887 | | | | 24,485 | | | | 25,616 | | | | 27,020 | | | | 26,775 | | | | 2,824 | | | | 4,481 | |
| 2013 | | | | | | | | | | | | | | | | | | | 27,619 | | | | 30,638 | | | | 29,913 | | | | 32,121 | | | | 32,553 | | | | 31,131 | | | | 3,780 | | | | 5,275 | |
| 2014 | | | | | | | | | | | | | | | | | | | | | | | 36,768 | | | | 36,968 | | | | 34,009 | | | | 33,427 | | | | 31,031 | | | | 4,482 | | | | 5,406 | |
| 2015 | | | | | | | | | | | | | | | | | | | | | | | | | | | 26,277 | | | | 23,115 | | | | 25,889 | | | | 24,948 | | | | 5,328 | | | | 6,308 | |
| 2016 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 35,240 | | | | 29,757 | | | | 29,317 | | | | 6,740 | | | | 6,059 | |
| 2017 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 42,387 | | | | 37,731 | | | | 13,918 | | | | 16,106 | |
| 2018 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 62,973 | | | | 36,250 | | | | 12,893 | |
| Total | | | $ | 311,509 | | | $ | 77,584 | | | | | |
| | | Cumulative Paid Claims and Allocated Claim Adjustment Expense, Net of Reinsurance | | | | |
| | | For the Years Ended December 31 (2009-2017 is Supplementary Information and Unaudited) | | | | |
| Accident Year | | 2009 | | | 2010 | | | 2011 | | | 2012 | | | 2013 | | | 2014 | | | 2015 | | | 2016 | | | 2017 | | | 2018 | |
| 2009 | | $ | 4,186 | | | $ | 10,073 | | | $ | 13,343 | | | $ | 15,576 | | | $ | 16,592 | | | $ | 17,448 | | | $ | 18,028 | | | $ | 18,514 | | | $ | 18,982 | | | $ | 19,261 | |
| 2010 | | | | | | | 3,974 | | | | 9,134 | | | | 11,963 | | | | 13,845 | | | | 14,966 | | | | 15,835 | | | | 16,590 | | | | 16,789 | | | | 17,062 | |
| 2011 | | | | | | | | | | | 4,916 | | | | 11,912 | | | | 15,973 | | | | 18,884 | | | | 20,617 | | | | 21,622 | | | | 22,569 | | | | 22,991 | |
| 2012 | | | | | | | | | | | | | | | 4,597 | | | | 11,004 | | | | 14,834 | | | | 17,415 | | | | 18,946 | | | | 20,276 | | | | 21,157 | |
| 2013 | | | | | | | | | | | | | | | | | | | 4,880 | | | | 12,792 | | | | 18,065 | | | | 21,655 | | | | 23,643 | | | | 24,968 | |
| 2014 | | | | | | | | | | | | | | | | | | | | | | | 5,328 | | | | 13,665 | | | | 19,075 | | | | 22,387 | | | | 23,968 | |
| 2015 | | | | | | | | | | | | | | | | | | | | | | | | | | | 2,918 | | | | 10,128 | | | | 15,020 | | | | 17,487 | |
| 2016 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 5,784 | | | | 13,377 | | | | 18,461 | |
| 2017 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 6,150 | | | | 15,811 | |
| 2018 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 10,987 | |
| Total | | | $ | 192,153 | |
| Outstanding liabilities prior to 2009 net of reinsurance | | | | 12,640 | |
| Liabilities for claims and claims adjustment expenses, net of reinsurance | | | $ | 131,996 | |
Commercial Liability
| | | | | | As of December 31, 2018 | |
| | | Incurred Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance | | | Total of Incurred-but-Not- Reported Liabilities Plus Expected Development on Reported Claims | | | Number of Reported Claims Per Year | |
| | | For the Years Ended December 31 (2009-2017 is Supplementary Information and Unaudited) | |
| Accident Year | | 2009 | | | 2010 | | | 2011 | | | 2012 | | | 2013 | | | 2014 | | | 2015 | | | 2016 | | | 2017 | | | 2018 | |
| 2009 | | $ | 29,707 | | | $ | 30,406 | | | $ | 30,203 | | | $ | 26,280 | | | $ | 27,259 | | | $ | 25,872 | | | $ | 25,373 | | | $ | 25,320 | | | $ | 25,485 | | | $ | 25,761 | | | $ | 190 | | | | 899 | |
| 2010 | | | | | | | 31,124 | | | | 22,161 | | | | 21,899 | | | | 19,139 | | | | 20,300 | | | | 19,764 | | | | 19,377 | | | | 19,081 | | | | 19,985 | | | | 112 | | | | 2,403 | |
| 2011 | | | | | | | | | | | 46,829 | | | | 43,832 | | | | 31,633 | | | | 36,894 | | | | 35,805 | | | | 37,122 | | | | 36,076 | | | | 37,852 | | | | 131 | | | | 2,901 | |
| 2012 | | | | | | | | | | | | | | | 49,743 | | | | 54,269 | | | | 49,743 | | | | 51,367 | | | | 48,708 | | | | 51,475 | | | | 51,648 | | | | 135 | | | | 3,130 | |
| 2013 | | | | | | | | | | | | | | | | | | | 53,817 | | | | 39,143 | | | | 37,701 | | | | 36,371 | | | | 46,690 | | | | 48,857 | | | | 663 | | | | 3,749 | |
| 2014 | | | | | | | | | | | | | | | | | | | | | | | 49,971 | | | | 52,254 | | | | 52,483 | | | | 52,964 | | | | 64,372 | | | | 307 | | | | 3,320 | |
| 2015 | | | | | | | | | | | | | | | | | | | | | | | | | | | 61,420 | | | | 70,174 | | | | 64,323 | | | | 71,088 | | | | 2,785 | | | | 3,185 | |
| 2016 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 61,638 | | | | 68,974 | | | | 77,362 | | | | 7,048 | | | | 3,707 | |
| 2017 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 103,126 | | | | 103,611 | | | | 25,527 | | | | 5,261 | |
| 2018 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 179,589 | | | | 70,070 | | | | 6,870 | |
| Total | | | $ | 680,125 | | | $ | 106,968 | | | | | |
| | | Cumulative Paid Claims and Allocated Claim Adjustment Expense, Net of Reinsurance | |
| | | For the Years Ended December 31 (2009-2017 is Supplementary Information and Unaudited) | |
| Accident Year | | 2009 | | | 2010 | | | 2011 | | | 2012 | | | 2013 | | | 2014 | | | 2015 | | | 2016 | | | 2017 | | | 2018 | |
| 2009 | | $ | 928 | | | $ | 17,880 | | | $ | 19,718 | | | $ | 23,521 | | | $ | 24,866 | | | $ | 25,066 | | | $ | 25,114 | | | $ | 25,125 | | | $ | 25,199 | | | $ | 25,391 | |
| 2010 | | | | | | | 1,649 | | | | 7,166 | | | | 11,635 | | | | 16,052 | | | | 18,627 | | | | 18,517 | | | | 18,866 | | | | 18,662 | | | | 18,791 | |
| 2011 | | | | | | | | | | | 1,809 | | | | 11,350 | | | | 23,615 | | | | 30,795 | | | | 33,255 | | | | 34,009 | | | | 35,561 | | | | 36,400 | |
| 2012 | | | | | | | | | | | | | | | 3,086 | | | | 23,252 | | | | 32,942 | | | | 45,303 | | | | 47,601 | | | | 50,036 | | | | 50,750 | |
| 2013 | | | | | | | | | | | | | | | | | | | 5,167 | | | | 15,772 | | | | 25,270 | | | | 34,481 | | | | 44,865 | | | | 46,084 | |
| 2014 | | | | | | | | | | | | | | | | | | | | | | | 4,023 | | | | 9,046 | | | | 28,393 | | | | 45,075 | | | | 57,692 | |
| 2015 | | | | | | | | | | | | | | | | | | | | | | | | | | | 10,923 | | | | 27,582 | | | | 49,267 | | | | 63,133 | |
| 2016 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 6,843 | | | | 30,377 | | | | 52,764 | |
| 2017 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 11,415 | | | | 46,529 | |
| 2018 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 18,689 | |
| Total | | | $ | 416,223 | |
| Outstanding liabilities prior to 2009 net of reinsurance | | | | 4,621 | |
| Liabilities for claims and claims adjustment expenses, net of reinsurance | | | $ | 268,523 | |
Professional Liability Reinsurance Assumed (in runoff)
| | | | | | As of December 31, 2018 | |
| | | Incurred Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance | | | Total of Incurred-but-Not- Reported Liabilities Plus Expected Development on Reported Claims | | | Number of Reported Claims Per Year | |
| Accident Year | | For the Years Ended December 31 (2009-2017 is Supplementary Information and Unaudited) | |
| | 2009 | | | 2010 | | | 2011 | | | 2012 | | | 2013 | | | 2014 | | | 2015 | | | 2016 | | | 2017 | | | 2018 | |
| 2009 | | $ | – | | | $ | – | | | $ | – | | | $ | – | | | $ | – | | | $ | – | | | $ | – | | | $ | – | | | $ | – | | | $ | – | | | $ | – | | | | N/A | |
| 2010 | | | | | | | 2,196 | | | | 4,277 | | | | 7,827 | | | | 7,946 | | | | 9,733 | | | | 10,740 | | | | 11,689 | | | | 11,893 | | | | 11,677 | | | | 24 | | | | N/A | |
| 2011 | | | | | | | | | | | 10,492 | | | | 8,314 | | | | 9,017 | | | | 9,859 | | | | 10,779 | | | | 12,735 | | | | 12,744 | | | | 12,725 | | | | 116 | | | | N/A | |
| 2012 | | | | | | | | | | | | | | | 10,041 | | | | 9,276 | | | | 5,569 | | | | 10,157 | | | | 14,605 | | | | 16,555 | | | | 14,949 | | | | 706 | | | | N/A | |
| 2013 | | | | | | | | | | | | | | | | | | | 14,370 | | | | 13,034 | | | | 11,618 | | | | 17,694 | | | | 23,256 | | | | 22,213 | | | | 1,847 | | | | N/A | |
| 2014 | | | | | | | | | | | | | | | | | | | | | | | 12,675 | | | | 8,825 | | | | 7,259 | | | | 9,837 | | | | 12,749 | | | | 2,297 | | | | N/A | |
| 2015 | | | | | | | | | | | | | | | | | | | | | | | | | | | 11,638 | | | | 7,859 | | | | 7,147 | | | | 10,422 | | | | 5,422 | | | | N/A | |
| 2016 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 6,368 | | | | 2,482 | | | | 1,522 | | | | 1,035 | | | | N/A | |
| 2017 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | – | | | | – | | | | – | | | | N/A | |
| 2018 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | – | | | | – | | | | N/A | |
| Total | | | $ | 86,257 | | | $ | 11,447 | | | | | |
| | | Cumulative Paid Claims and Allocated Claim Adjustment Expense, Net of Reinsurance | |
| | | For the Years Ended December 31 (2009-2017 is Supplementary Information and Unaudited) | |
| Accident Year | | 2009 | | | 2010 | | | 2011 | | | 2012 | | | 2013 | | | 2014 | | | 2015 | | | 2016 | | | 2017 | | | 2018 | |
| 2009 | | $ | – | | | $ | – | | | $ | – | | | $ | – | | | $ | – | | | $ | – | | | $ | – | | | $ | – | | | $ | – | | | $ | – | |
| 2010 | | | | | | | 41 | | | | 729 | | | | 3,505 | | | | 5,844 | | | | 7,758 | | | | 9,904 | | | | 11,132 | | | | 11,334 | | | | 11,334 | |
| 2011 | | | | | | | | | | | 50 | | | | 637 | | | | 2,061 | | | | 4,983 | | | | 8,104 | | | | 10,404 | | | | 11,679 | | | | 12,280 | |
| 2012 | | | | | | | | | | | | | | | 103 | | | | 992 | | | | 2,388 | | | | 5,077 | | | | 8,355 | | | | 11,239 | | | | 13,091 | |
| 2013 | | | | | | | | | | | | | | | | | | | 123 | | | | 1,135 | | | | 5,088 | | | | 10,988 | | | | 14,779 | | | | 18,229 | |
| 2014 | | | | | | | | | | | | | | | | | | | | | | | 723 | | | | 761 | | | | 2,241 | | | | 3,999 | | | | 6,627 | |
| 2015 | | | | | | | | | | | | | | | | | | | | | | | | | | | 10 | | | | 390 | | | | 1,899 | | | | 3,207 | |
| 2016 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | – | | | | 5 | | | | 99 | |
| 2017 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | – | | | | – | |
| 2018 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | – | |
| Total | | | $ | 64,867 | |
| Outstanding liabilities prior to 2009 net of reinsurance | | | | – | |
| Liabilities for claims and claims adjustment expenses, net of reinsurance | | | $ | 21,390 | |
Physical Damage (1)
Incurred Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance | | | As of December 31, 2018 | |
| For the Years Ended December 31 (2016-2017 is Supplementary Information and Unaudited) | | | Total of Incurred-but-Not-Reported Liabilities Plus Expected Development on Reported Claims | | | Number of Reported Claims Per Year | |
| Accident Year | | 2016 | | | 2017 | | | 2018 | | | | | | | |
| 2016 and prior | | $ | 40,651 | | | $ | 39,477 | | | $ | 39,658 | | | $ | 5 | | | | 9,619 | |
| 2017 | | | | | | | 48,440 | | | | 47,193 | | | | 512 | | | | 10,517 | |
| 2018 | | | | | | | | | | | 53,726 | | | | 4,221 | | | | 10,186 | |
| | | | | | | Total | | | $ | 140,577 | | | $ | 4,738 | | | | | |
| Cumulative Paid Claims and Allocated Claim Adjustment Expense, Net of Reinsurance | |
| For the Years Ended December 31 (2016-2017 is Supplementary Information and Unaudited) | |
| Accident Year | | 2016 | | | 2017 | | | 2018 | |
| 2016 and prior | | $ | 34,114 | | | $ | 39,354 | | | $ | 39,073 | |
| 2017 | | | | | | | 39,517 | | | | 46,554 | |
| 2018 | | | | | | | | | | | 41,631 | |
| | | | | | | Total | | | $ | 127,258 | |
| Outstanding liabilities prior to 2016 net of reinsurance | | | | 10 | |
| Liabilities for claims and claims adjustment expenses, net of reinsurance | | | $ | 13,329 | |
(1) The majority of physical damage claims settle within a two-year period. The triangles above have been abbreviated to reflect the short-tail nature of this business.
The reconciliation of the net incurred and paid claims development tables to the liability for claims and claim adjustment expenses in the consolidated balance sheet at December 31 is as follows.
| | | 2018 | | | 2017 | |
| Net outstanding liabilities | | | | | | |
| Commercial Liability | | $ | 268,523 | | | $ | 162,581 | |
| Workers' Compensation | | | 131,996 | | | | 113,751 | |
| Physical Damage | | | 13,329 | | | | 9,087 | |
| Professional Liability Assumed | | | 21,390 | | | | 28,980 | |
| Other short-duration insurance lines | | | 33,716 | | | | 39,883 | |
| Liabilities for unpaid claims and claim adjustment expenses, net of reinsurance | | | 468,954 | | | | 354,282 | |
| | | | | | | | | |
| Reinsurance recoverable on unpaid claims | | | | | | | | |
| Commercial Liability | | | 194,483 | | | | 124,695 | |
| Workers' Compensation | | | 172,869 | | | | 170,394 | |
| Physical Damage | | | 1,851 | | | | 51 | |
| Other short-duration insurance lines | | | 6,732 | | | | 13,002 | |
| Reinsurance recoverable on unpaid losses at the end of the year | | | 375,935 | | | | 308,142 | |
| | | | | | | | | |
| Unallocated claims adjustment expenses | | | 20,450 | | | | 17,850 | |
| | | | | | | | | |
| Total gross liability for unpaid claims and claims adjustment expense | | $ | 865,339 | | | $ | 680,274 | |
The following is supplementary information about average historical claims duration as of December 31, 2018:
| | | 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 | | | 8.5 | % | | | 30.5 | % | | | 23.7 | % | | | 20.6 | % | | | 9.9 | % | | | 1.9 | % | | | 1.9 | % | | | 0.5 | % | | | 0.5 | % | | | 0.7 | % |
| Workers' Compensation | | | 17.3 | % | | | 26.3 | % | | | 16.3 | % | | | 10.4 | % | | | 5.7 | % | | | 4.3 | % | | | 3.3 | % | | | 1.6 | % | | | 1.8 | % | | | 1.3 | % |
| Physical Damage | | | 80.6 | % | | | 14.1 | % | | | 2.0 | % | | | N/A | | | | N/A | | | | N/A | | | | N/A | | | | N/A | | | | N/A | | | | N/A | |
| Professional Liability Assumed | | | 1.1 | % | | | 3.6 | % | | | 13.5 | % | | | 19.0 | % | | | 18.3 | % | | | 17.8 | % | | | 11.0 | % | | | 1.7 | % | | | – | | | | N/A | |
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 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 commercial automobile 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 with loss ratio reserving techniques developed from the Company's 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.
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:
A summary of the difference between federal income tax expense computed at the statutory rate and that reported in the consolidated financial statements as of December 31 is as follows:
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, 20152018 or 2014.2017. As of December 31, 2018, calendar years 2017, 2016 and 2015 only the calendar year 2014 remainsremain subject to examination by the IRS.
