UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d) ofThe Securities Exchange Act of☒ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended Fiscal Year Ended December 31, 2018
OR
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from ______ to ______
Commission file number number: 0-5534
December 31, 2017
BALDWIN & LYONS, INC.PROTECTIVE INSURANCE CORPORATION
(Exact nameName of registrantRegistrant as specifiedSpecified in its charter)Its Charter)
Indiana | | 35-0160330 |
(State or other jurisdictionOther Jurisdiction ofIncorporation or organization) Organization) | 35-0160330
| (I.R.S. Employer Identification No.) |
| | |
111 Congressional Boulevard, Carmel, Indiana | | 46032 |
(Address of principal executive offices)Principal Executive Offices) | 46032
| (Zip Code) |
Registrant's telephone number, including area code: (317) 636-9800
Securities registered pursuant to Section 12(b) of the Act:
(Title(Title of class)Name of Each Exchange on which Registered Class A Common Stock, No Par Value The Nasdaq Stock Market, LLC
Class B Common Stock, No Par Value The Nasdaq Stock Market, LLC
| | Name of Each Exchange on which Registered |
Class A Common Stock, No Par Value | | The Nasdaq Stock Market LLC |
Class B Common Stock, No Par Value | | The Nasdaq Stock Market LLC |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes -☐___ No ☒✓
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes -☐___ No ☒✓
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes -✓☒ No ___☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ✓☒ No__No ☐
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☐-
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer", "accelerated filer", "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer ____
Large accelerated filer ☐ | Accelerated filer ☒ |
Non-accelerated filer ☐ | Smaller reporting company ☐ |
| Emerging growth company ☐ |
✓ Non-accelerated filer ____ Smaller reporting company____ Emerging growth company ____
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ______☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes -☐___ No ☒✓
The aggregate market value of Class A and Class B Common Stock held by non-affiliates of the Registrant as of June 30, 2017,29, 2018, based on the closing trade prices on that date, was approximately $266,182,000.$265,014,000.
The number of shares outstanding of each of the issuer's classes of common stock as of March 1, 2018:2019:
Common Stock, No Par Value: Class A (voting) 2,623,109
Common Stock, No Par Value: | Class A (voting) | 2,615,339 | |
| Class B (nonvoting) | 12,234,130 | |
| | 14,849,469 | |
Class B (nonvoting)12,387,703
15,010,812
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the Annual Meeting of Shareholders to be held on May 8, 20187, 2019 are incorporated by reference into Part III of this Annual Report on Form 10-K.
FORWARD-LOOKING STATEMENTS
The disclosures in this Form 10-K contain "forward-looking statements" (within the meaning of the Private Securities Litigation Reform Act of 1995). All statements, trend analyses and other information contained in this Form 10-K relative to markets for our products and trends in our operations or financial results, as well as other statements including words such as "may," "target," "anticipate," "believe," "plan," "estimate," "expect," "intend," "project," and other similar expressions, constitute forward-looking statements.
Investors are cautioned that such forward-looking statements are based on current expectations and assumptions that are subject to risks and uncertainties that could cause actual results to differ materially from such forward-looking statements,, many of which are difficult to predict and generally beyond our control. Investors are cautioned not to place undue reliance on these forward-looking statements that speak only as of the date hereof. Investors are also urged to carefully review and consider the various disclosures made by us, which attempt to advise interested parties of the factors that affect our business, including "Risk Factors""Risk Factors" set forth in Part I, Item 1A hereof and our reports filed with the U.S. Securities and Exchange Commission, or SEC, from time to time. Except to the extent otherwise required by federal securities laws, we do not undertake any obligation to republish revised forward-looking statements to reflect events or circumstances after the date hereof.
Factors that could contribute to these differences include, among other things:
· | ● | general economic conditions, including weakness of the financial markets, prevailing interest rate levels and stock and credit market performance, which may affect or continue to affect (among other things) our ability to sell our products and to collect amounts due to us, our ability to access capital resources and the costs associated with such access to capital and the market value of our investments; |
· | ● | our ability to obtain adequate premium rates and manage our growth strategy; |
· | ● | increasing competition in the sale of our insurance products and services resulting from the entrance of new competitors into, or the expansion of the operations of existing competitors in, our markets and our ability to retain existing customers; |
· | ● | other changes in the markets for our insurance products; |
· | ● | the impact of technological advances, including those specific to the transportation industry; |
| ● | changes in the legal or regulatory environment, which may affect the manner in which claims are adjusted or litigated, including loss and loss adjustment expense; |
· | ● | legal or regulatory changes or actions, including those relating to the regulation of the sale, underwriting and pricing of insurance products and services and capital requirements; |
· | ● | the impact of a downgrade in our financial strength rating; |
| ● | technology or network security disruptions;disruptions or breaches; |
· | ● | adequacy of insurance reserves; |
· | ● | availability of reinsurance and ability of reinsurers to pay their obligations; |
· | ● | our ability to attract and retain qualified employees;employees and to successfully complete our Chief Executive Officer transition; |
· | ● | tax law and accounting changes; and |
· | ● | legal actions brought against us. |
Some of the significant risks and uncertainties that could cause actual results to differ materially from our expectations and projections are described more fully in Part I, Item 1A, ""Risk Factors"Factors" of this report.Annual Report on Form 10-K. You should read that information in conjunction with ""Management's Discussion and Analysis of Financial Condition and Results of Operations" in Part II, Item 7 of this reportAnnual Report on Form 10-K and our Consolidated Financial Statementsconsolidated financial statements and related notes in Part II, Item 8 of this report.
Annual Report on Form 10-K.
PART I
Item 1. BUSINESS
Protective Insurance Corporation (formerly Baldwin & Lyons, Inc.) (referred to herein as "B&L""Protective") was incorporated under the laws of the State of Indiana in 1930. Through its subsidiaries, B&LProtective engages in marketing and underwriting property, liability and workers' compensation coverage for trucking and public transportation fleets, as well as coverage for trucking industry independent contractors. In addition, B&LProtective offers workers' compensation coverage for a variety of 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 B&LProtective and all of its subsidiaries unless the context clearly indicates otherwise.
As is a common practice in the property and casualty insurance industry, the Insurance Subsidiaries share 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 claims or groups of claims among several reinsurers and is an integral part of the Company's business.
In 2017,2018, the Insurance Subsidiaries primarily served the fleet transportationcommercial automobile market, although the Insurance Subsidiaries continue to support previously written policies in specialty markets for which the Company has discontinued operations. Continuingwriting business and these operations andare in run-off. The Company expects targeted growth are expected to occur in ourits core business of fleet transportationcommercial automobile and workers' compensation.
The Company determined that its business constituted one reportable property and casualty insurance segment as of January 1, 2017. During 2016 and prior years, the Company had two reportable segments – property and casualty insurance and reinsurance. The Company moved to a single reportable segment based on how its operating results are regularly reviewed by the Company'sits chief operating decision maker when making decisions about how resources are to be allocated to the segment and assessing its performance. The prior year segment information throughout this Annual Report on Form 10-K was updated to conform to the current year presentation.
Product Lines
Fleet Transportation
Commercial Automobile
The Insurance Subsidiaries provide coverage for larger companies in the motor carrier industry that 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 deductible basis, and for public livery concerns, principally covering fleets of commercial buses and taxis. This group of products is collectively referred to as fleet transportation.commercial automobile. Large fleet trucking products are marketed both 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 fleet transportationcommercial automobile policies are written on an "occurrence" basis (i.e. webasis. This means that the Company may be liable for claims that occurred when ourits policy was in place with an insured, regardless of when those claims are reported to us;the Company, and it may take months or even years for claims to be reported to us).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 in the trucking industry.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. |
The Insurance Subsidiaries also 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 systems to assist customers in monitoring their accident data. B<he Company also provides claims handling services, primarily to excess clients with self-insurance programs.
Workers' Compensation
The Insurance Subsidiaries provide workers' compensation insurance for the fleet transportationcommercial automobile industry, primarily to employees of motor carriers or independent contractors providing services in the transportation industry. In 2017, the Company began marketing workers' compensation coverage was marketed beyond fleet transportationcommercial 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, we havethe 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 (i.e. webasis. This means that the Company may be liable for claims that occurred when ourits policy was in place with an insured, regardless of when those claims are reported to us;the Company, and it may take months or even years for claims to be reported to us).the Company.
Discontinued Products
· | ● | Reinsurance Assumptions |
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 2017.2017 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 fluctuated based on market conditions for these products. The Company's reinsurance assumed policies were written on both an "occurrence" basis and a "claims-made" basis. Under claims-made policies, the Company was generally only liable for claims when a policy was in place 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 place with the insured.
In the fourth quarter of 2016, the Company discontinued its professional liability line of products. Prior to that, the Company marketed 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. Some professional liability policies renewed in 2017 as required by state regulations and existing policies remained inforce through 2017. In most cases, the Company's professional liability policies were written on a "claims-made" basis. Under claims-made policies, the Company was generally only liable for claims when a policy was in place with our insured, however we were potentially liable for claims reported to us, even if the claim event occurred before we had a policy in place with the insured.
Losses and Loss Adjustment Expenses
Losses and loss adjustment expenses incurred on average comprise approximately two-thirds of the Company's operating expenses.
The Company's consolidated balance sheets as of December 31, 20172018 and 20162017 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 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 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, 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 relative 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" notedPolicies" in Part II, Item 7, "Management's"Management's Discussion and Analysis of Financial Condition and Results of Operations," of this Annual Report on Form 10-K.
For policies inforce at December 31, 2017, the maximum amount for which the Company insures a fleet transportation risk is $10 million, less applicable self-insured retentions, although for the majority of policies written, the maximum limits provided by the Company are $5 million or less. Occasionally, limits above $10 million required by customers are placed directly by the Company with non-affiliated carriers or written by the Company but 100% reinsured with non-affiliated reinsurers. Certain coverages, such as workers' compensation, do not have policy limits, although the Company protects itself to the extent believed prudent through the purchase of excess reinsurance for these coverages.
After giving effect to treaty and facultative reinsurance arrangements, the Company's maximum exposure to loss from a single occurrence for the vast majority of risks insured (those with policy limits of $5 million or less) is approximately:
· | ● | $0.25 million to $1.3 million for policies written on or afterbetween 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 (those with policy limits up to $10 million) the maximum exposure could be as high as:
· | ● | $2.5 million for policies written on or afterbetween 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 claim occurrence remains relatively consistent year over year;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, more of the economic exposure was reflected in lower net premiums earned. For both periods discussed above, the Company'sCompany has limited economic exposure for losses occurring in treaty years that have loss and allocated loss adjustment expenseLAE ratios greater than approximately 86.5%83.0%.
The Company is a cedent under numerous reinsurance treaties covering its 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 below sets forth a reconciliation of beginning and ending loss and LAE liability balances for 2018, 2017 2016 and 2015.2016. This table includes reserves, net of reinsurance recoverable, to correspond with our income statementthe presentation in the Company's consolidated statements of operations, but also includes a reconciliation of beginning and ending loss and LAE liability, gross of reinsurance recoverable, as presented in the Company's consolidated balance sheet.sheets. All amounts are shown net of reinsurance, unless otherwise indicated.
| | 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 | |
| | 2017 | | | 2016 | | | 2015 | |
Reserves, gross of reinsurance | | | | | | | | | |
recoverable, at the beginning of the year | | $ | 576,330 | | | $ | 513,596 | | | $ | 506,102 | |
Reinsurance recoverable on unpaid losses at the beginning of the year | | | 251,563 | | | | 211,843 | | | | 210,519 | |
Reserves at the beginning of the year | | | 324,767 | | | | 301,753 | | | | 295,583 | |
| | | | | | | | | | | | |
Provision for losses and loss expenses: | | | | | | | | | | | | |
Claims occurring during the current year | | | 228,303 | | | | 172,645 | | | | 165,812 | |
Claims occurring during prior years | | | 19,215 | | | | 13,836 | | | | (10,062 | ) |
Total incurred losses and loss expenses | | | 247,518 | | | | 186,481 | | | | 155,750 | |
| | | | | | | | | | | | |
Loss and loss expense payments: | | | | | | | | | | | | |
Claims occurring during the current year | | | 67,234 | | | | 54,239 | | | | 56,710 | |
Claims occurring during prior years | | | 132,920 | | | | 109,228 | | | | 92,870 | |
Total paid | | | 200,154 | | | | 163,467 | | | | 149,580 | |
Reserves at the end of the year | | | 372,131 | | | | 324,767 | | | | 301,753 | |
| | | | | | | | | | | | |
Reinsurance recoverable on unpaid losses at the end of the year | | | 308,143 | | | | 251,563 | | | | 211,843 | |
Reserves, gross of reinsurance | | | | | | | | | | | | |
recoverable, at the end of the year | | $ | 680,274 | | | $ | 576,330 | | | $ | 513,596 | |
The reconciliation above shows the Company's estimate of net losses on 20162017 and prior accidentsaccident years is approximately $19.2$16.8 million higher at December 31, 20172018 than was provided in loss reserves at December 31, 20162017 (referred to as a "reserve deficiency"). This compares to a $13.8$19.2 million reserve deficiency on prior accident years in 20162017 and a $10.0$13.8 million reserve savingsdeficiency reported in 20152016 related to prior accident years.
The following table is a summary of the 20172018 calendar year reserve deficiency by accident year (dollars in thousands):
Years in Which Losses Were Incurred | | Reserve at December 31, 2016 | | | (Savings) Deficiency Recorded During 2017 1 | | | % (Savings) Deficiency | | | Reserve at December 31, 2017 | | | (Savings) Deficiency Recorded During 2018 (1) | | | % (Savings) Deficiency | |
| | | | | | | |
2017 | | | $ | 161,069 | | | $ | (8,902 | ) | | | (5.5 | )% |
2016 | | $ | 118,406 | | | $ | (8,561 | ) | | | (7.2 | %) | | | 66,652 | | | | 4,259 | | | | 6.4 | % |
2015 | | | 69,463 | | | | (3,863 | ) | | | (5.6 | %) | | | 34,530 | | | | 9,707 | | | | 28.1 | % |
2014 | | | 50,739 | | | | 3,688 | | | | 7.3 | % | | | 30,129 | | | | 11,970 | | | | 39.7 | % |
2013 | | | 22,186 | | | | 17,418 | | | | 78.5 | % | | | 22,423 | | | | (1,382 | ) | | | (6.2 | )% |
2012 | | | 16,414 | | | | 6,234 | | | | 38.0 | % | |
2011 & Prior | | | 47,559 | | | | 4,299 | | | | 9.0 | % | |
2012 and prior | | | | 57,328 | | | | 1,134 | | | | 2.0 | % |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | $ | 324,767 | | | $ | 19,215 | | | | 5.9 | % | | $ | 372,131 | | | $ | 16,786 | | | | 4.5 | % |
1 Consist of development on cases known at December 31, 2016, losses reported which were previously unknown at December 31, 2016 (incurred but not reported), unallocated loss expense paid related to accident years 2016(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 shown in accident years 2015 and 2016year 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 and prior2014-2016 are largely the result of discontinued lines (professional liability and general property based in Florida) and several infrequent, but severe transportation losses. The Company took action in all accident years to reflect new trends in loss development for commercial autoautomobile products that have emerged over the last twothree years. These actions included case reserving reviews, as well as actuarial product reviews, and resulted in the reserve strengthening noted during 2017.the last three years.
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.
The Company continues to incorporate more recent loss development data into its loss reserving formulae; however, 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.
Management's goal is to produce an overall estimate of reserves which is sufficient and as close to expected ultimate losses as possible. The $19.2 million in net deficiency developed during 2017 represents 5.9% of December 31, 2016 net loss and LAE reserves, which is within an acceptable range of variation for the Company's diverse and complex book of business. 2017 was the first calendar year in which reserve deficiencies were more than 5% of the prior year's loss position 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.
Ten YearTen-Year Historical Development Tables:
The table below presents the development of U.S. generally accepted accounting principles ("GAAP") balance sheet insurance reserves for each year-end from 20072008 through 2016,2017, as of December 31, 2017,2018, net of all reinsurance credits.
ANALYSIS OF LOSS AND LOSS ADJUSTMENT EXPENSE DEVELOPMENT--GAAP BASIS
(Dollars in thousands)
ANALYSIS OF LOSS AND LOSS ADJUSTMENT EXPENSE DEVELOPMENT--GAAP BASIS | | |
(Dollars in thousands) | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Year Ended December 31 | |
Year Ended December 31 | | 2007 | | | 2008 | | | 2009 | | | 2010 | | | 2011 | | | 2012 | | | 2013 | | | 2014 | | | 2015 | | | 2016 | | | 2017 | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 2008 | | | 2009 | | | 2010 | | | 2011 | | | 2012 | | | 2013 | | | 2014 | | | 2015 | | | 2016 | | | 2017 | | | 2018 | |
Liability for Unpaid Losses | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
and Loss Adjustment | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Expenses 1 | | $ | 244,500 | | | $ | 231,633 | | | $ | 203,253 | | | $ | 218,629 | | | $ | 290,092 | | | $ | 289,236 | | | $ | 288,088 | | | $ | 295,583 | | | $ | 301,753 | | | $ | 324,767 | | | $ | 372,131 | | |
Liability 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 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Liability Reestimated as of: (2) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
One Year Later | | | 227,423 | | | | 222,049 | | | | 194,430 | | | | 208,933 | | | | 280,217 | | | | 283,673 | | | | 277,734 | | | | 285,521 | | | | 315,589 | | | | 343,982 | | | | | | | | 222,049 | | | | 194,430 | | | | 208,933 | | | | 280,217 | | | | 283,673 | | | | 277,734 | | | | 285,521 | | | | 315,589 | | | | 343,982 | | | | 388,917 | | | | | |
Two Years Later | | | 216,730 | | | | 208,702 | | | | 198,220 | | | | 201,745 | | | | 272,285 | | | | 282,381 | | | | 268,757 | | | | 303,540 | | | | 340,361 | | | | | | | | | | | | 208,702 | | | | 198,220 | | | | 201,745 | | | | 272,285 | | | | 282,381 | | | | 268,757 | | | | 303,540 | | | | 340,361 | | | | 369,670 | | | | | | | | | |
Three Years Later | | | 206,445 | | | | 210,562 | | | | 188,110 | | | | 204,243 | | | | 276,525 | | | | 279,685 | | | | 288,862 | | | | 332,175 | | | | | | | | | | | | | | | | 210,562 | | | | 188,110 | | | | 204,243 | | | | 276,525 | | | | 279,685 | | | | 288,862 | | | | 332,175 | | | | 361,791 | | | | | | | | | | | | | |
Four Years Later | | | 210,170 | | | | 205,519 | | | | 192,195 | | | | 202,078 | | | | 268,299 | | | | 291,332 | | | | 313,909 | | | | | | | | | | | | | | | | | | | | 205,519 | | | | 192,195 | | | | 202,078 | | | | 268,299 | | | | 291,332 | | | | 313,909 | | | | 343,898 | | | | | | | | | | | | | | | | | |
Five Years Later | | | 208,132 | | | | 208,398 | | | | 187,792 | | | | 198,518 | | | | 275,517 | | | | 298,861 | | | | | | | | | | | | | | | | | | | | | | | | 208,398 | | | | 187,792 | | | | 198,518 | | | | 275,517 | | | | 298,861 | | | | 313,662 | | | | | | | | | | | | | | | | | | | | | |
Six Years Later | | | 210,446 | | | | 205,986 | | | | 181,547 | | | | 200,922 | | | | 276,812 | | | | | | | | | | | | | | | | | | | | | | | | | | | | 205,986 | | | | 181,547 | | | | 200,922 | | | | 276,812 | | | | 299,996 | | | | | | | | | | | | | | | | | | | | | | | | | |
Seven Years Later | | | 209,288 | | | | 200,460 | | | | 181,998 | | | | 203,692 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 200,460 | | | | 181,998 | | | | 203,692 | | | | 279,598 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Eight Years Later | | | 205,179 | | | | 200,808 | | | | 184,122 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 200,808 | | | | 184,122 | | | | 204,769 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Nine Years Later | | | 205,248 | | | | 202,565 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 202,565 | | | | 183,693 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Ten Years Later | | | 205,784 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 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 Redundancy (Deficiency) 3 | | $ | 38,716 | | | $ | 29,068 | | | $ | 19,131 | | | $ | 14,937 | | | $ | 13,280 | | | $ | (9,625 | ) | | $ | (25,821 | ) | | $ | (36,592 | ) | | $ | (38,608 | ) | | $ | (19,215 | ) | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Cumulative Amount of | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Liability Paid | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Through: 4 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Cumulative Amount of Liability Paid Through: (4) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
One Year Later | | $ | 76,970 | | | $ | 84,777 | | | $ | 74,182 | | | $ | 72,393 | | | $ | 94,003 | | | $ | 103,941 | | | $ | 92,275 | | | $ | 92,870 | | | $ | 109,228 | | | $ | 132,920 | | | | | | | $ | 84,777 | | | $ | 74,182 | | | $ | 72,393 | | | $ | 94,003 | | | $ | 103,941 | | | $ | 92,275 | | | $ | 92,870 | | | $ | 109,228 | | | $ | 132,920 | | | $ | 143,853 | | | | | |
Two Years Later | | | 124,870 | | | | 120,628 | | | | 107,413 | | | | 109,382 | | | | 156,271 | | | | 162,087 | | | | 159,282 | | | | 166,642 | | | | 195,951 | | | | | | | | | | | | 120,628 | | | | 107,413 | | | | 109,382 | | | | 156,271 | | | | 162,087 | | | | 159,282 | | | | 166,642 | | | | 195,951 | | | | 217,376 | | | | | | | | | |
Three Years Later | | | 145,857 | | | | 142,731 | | | | 125,038 | | | | 133,507 | | | | 193,566 | | | | 205,452 | | | | 166,642 | | | | 222,295 | | | | | | | | | | | | | | | | 142,731 | | | | 125,038 | | | | 133,507 | | | | 193,566 | | | | 205,452 | | | | 166,642 | | | | 222,295 | | | | 250,924 | | | | | | | | | | | | | |
Four Years Later | | | 157,724 | | | | 152,679 | | | | 137,460 | | | | 147,462 | | | | 214,873 | | | | 202,803 | | | | 234,158 | | | | | | | | | | | | | | | | | | | | 152,679 | | | | 137,460 | | | | 147,462 | | | | 214,873 | | | | 202,803 | | | | 234,158 | | | | 258,576 | | | | | | | | | | | | | | | | | |
Five Years Later | | | 164,877 | | | | 161,834 | | | | 143,461 | | | | 158,172 | | | | 227,359 | | | | 241,533 | | | | | | | | | | | | | | | | | | | | | | | | 161,834 | | | | 143,461 | | | | 158,172 | | | | 227,359 | | | | 241,533 | | | | 251,696 | | | | | | | | | | | | | | | | | | | | | |
Six Years Later | | | 170,554 | | | | 166,290 | | | | 148,101 | | | | 166,112 | | | | 234,578 | | | | | | | | | | | | | | | | | | | | | | | | | | | | 166,290 | | | | 148,101 | | | | 166,112 | | | | 234,578 | | | | 252,648 | | | | | | | | | | | | | | | | | | | | | | | | | |
Seven Years Later | | | 174,190 | | | | 170,126 | | | | 152,375 | | | | 168,524 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 170,126 | | | | 152,375 | | | | 168,524 | | | | 241,383 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Eight Years Later | | | 177,275 | | | | 173,867 | | | | 153,999 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 173,867 | | | | 153,999 | | | | 173,015 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Nine Years Later | | | 180,569 | | | | 174,902 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 174,902 | | | | 157,297 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Ten Years Later | | | 180,701 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 177,677 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(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. |
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, 2017.
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.
Historically, the Company's net loss developments have been favorable. Reserve developments for all years ended in the period 1985 through 2011 have produced redundancies as of December 31, 2017,2018, with deficiencies developing for periods from 2012 forward. The $19.2$16.8 million deficiency developed through one year on the 20162017 reserve position reflects action taken by management to respond to higher than expected adverse case development, as previously noted. The deficiencies that have developed in the chart from 2012 through 2017 have been largely attributable to two main themes: (1) Thethemes. First, the Company engaged in new markets between 2008-20132008 and 2013, including professional liability and property coverages concentrated in the state of Florida. These products (now discontinued) experienced significant adverse loss development in calendar years 2016 and 2017 as more information emerged and was therefore considered in the reserving process. (2) TheSecond, the Company has experienced some infrequent but severe loss developmentsincreased severity in losses related to its transportation offerings, a market that was also entered into during the 2008-2013 strategic period.offerings. The Company is currently addressing the rate adequacy and customer segmentation practices of this product in response to the most recent adverse loss development.trends.
Readers should note the table above 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 2010,2011, but incurred in 2007,2008, will be included in the cumulative development amount for each of the years ending December 31, 2007, 2008, 2009, and 2009.2010. 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 below presents loss development data on a gross (before consideration of reinsurance) basis for the same ten year period December 31, 20072008 through December 31, 2016,2017, as of December 31, 2017,2018, with a reconciliation of the data to the net amounts shown in the table above.
ANALYSIS OF LOSS AND LOSS ADJUSTMENT EXPENSE DEVELOPMENT--GAAP BASIS | |
(Dollars in thousands) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Year Ended December 31 | | 2007 | | | 2008 | | | 2009 | | | 2010 | | | 2011 | | | 2012 | | | 2013 | | | 2014 | | | 2015 | | | 2016 | | | 2017 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Direct and Assumed: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Liability for Unpaid Losses and Loss | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Adjustment Expenses | | $ | 378,616 | | | $ | 389,558 | | | $ | 359,030 | | | $ | 344,520 | | | $ | 421,556 | | | $ | 455,454 | | | $ | 474,470 | | | $ | 506,102 | | | $ | 513,596 | | | $ | 576,330 | | | $ | 680,274 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Liability Reestimated as of | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
December 31, 2017 | | | 316,914 | | | | 311,512 | | | | 303,058 | | | | 322,142 | | | | 414,550 | | | | 476,593 | | | | 532,456 | | | | 590,685 | | | | 608,357 | | | | 601,543 | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Cumulative Redundancy (Deficiency) | | $ | 61,702 | | | $ | 78,046 | | | $ | 55,972 | | | $ | 22,378 | | | $ | 7,006 | | | $ | (21,139 | ) | | $ | (57,986 | ) | | $ | (84,583 | ) | | $ | (94,761 | ) | | $ | (25,213 | ) | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Ceded: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Liability for Unpaid Losses and Loss | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Adjustment Expenses | | $ | 134,116 | | | $ | 157,925 | | | $ | 155,777 | | | $ | 125,891 | | | $ | 131,464 | | | $ | 166,218 | | | $ | 186,382 | | | $ | 210,519 | | | $ | 211,843 | | | $ | 251,563 | | | $ | 308,143 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Liability Reestimated as of | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
December 31, 2017 | | | 111,130 | | | | 108,947 | | | | 118,936 | | | | 118,450 | | | | 137,738 | | | | 177,732 | | | | 218,547 | | | | 258,510 | | | | 267,996 | | | | 257,561 | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Cumulative Redundancy (Deficiency) | | $ | 22,986 | | | $ | 48,978 | | | $ | 36,841 | | | $ | 7,441 | | | $ | (6,274 | ) | | $ | (11,514 | ) | | $ | (32,165 | ) | | $ | (47,991 | ) | | $ | (56,153 | ) | | $ | (5,998 | ) | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Liability for Unpaid Losses and Loss | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Adjustment Expenses | | $ | 244,500 | | | $ | 231,633 | | | $ | 203,253 | | | $ | 218,629 | | | $ | 290,092 | | | $ | 289,236 | | | $ | 288,088 | | | $ | 295,583 | | | $ | 301,753 | | | $ | 324,767 | | | $ | 372,131 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Liability Reestimated as of | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
December 31, 2017 | | | 205,784 | | | | 202,565 | | | | 184,122 | | | | 203,692 | | | | 276,812 | | | | 298,861 | | | | 313,909 | | | | 332,175 | | | | 340,361 | | | | 343,982 | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Cumulative Redundancy (Deficiency) | | $ | 38,716 | | | $ | 29,068 | | | $ | 19,131 | | | $ | 14,937 | | | $ | 13,280 | | | $ | (9,625 | ) | | $ | (25,821 | ) | | $ | (36,592 | ) | | $ | (38,608 | ) | | $ | (19,215 | ) | | | | |
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 the gross data presented above requires significantly more subjectivity in the estimation of IBNR 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 Company's consolidated financial statements reflect ourits financial results net of reinsurance.
Environmental Matters:
Given that one of the Company's core 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.
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 does not expect to have any significant environmental claims relating to asbestos exposure.
The Company's reserves for unpaid losses and loss expenses at December 31, 20172018 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 IBNR environmental losses at December 31, 2017.
Marketing2018.
Marketing
Historically, the Insurance Subsidiaries have primarily focused their fleet transportationcommercial automobile marketing efforts on large and medium trucking fleets, with their biggest market share in 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-insured retention plans are a specialty of the Company. The indemnity contract provided to such customers is designed to cover all aspects of fleet transportationcommercial automobile liability, including third partythird-party liability, property damage, physical damage and cargo, 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 deductibles on each claim. The Company's fleet transportationcommercial automobile offerings also include public livery risks, principally large and medium-sized operators of bus fleets and taxis, work-related accident insurance, on a group or individual basis, to independent contractors under contract to a fleet sponsor, as well as workers' compensation coverage to employees of independent contractor fleet owners. Large fleet trucking products are marketed both directly to fleet transportationcommercial 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 (7-150(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 some cases, the Company will provide specific product offerings to specialized markets through partnerships with brokers and program administrators. As we grow, ourthe Company grows, its distribution strategy has moved toward utilization of non-affiliated agents and brokers to place new business for small and intermediate fleet transportationcommercial automobile (including independent contractor products) and non-transportation workers' compensation. In addition, we havethe Company has developed customized commercial autoautomobile liability and workers' compensation programs, which are marketed through non-affiliated agent partners. These customized programs can include a suite of products selected for ourits targeted customer base, including commercial autoautomobile liability, general liability, non-trucking liability, cargo, occupational accident, or workers' compensation coverages.
Investments
The Company's investment portfolio is notionally 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, 20172018, the market value of the Company's consolidated investment portfolio was approximately $854.6$878.6 million, consisting of fixed maturities,income securities, equity securities, investments in limited partnershippartnerships, commercial mortgage loans and short-term and other investments and includes $59.2$156.9 million of short-term funds classified as cash equivalents.
A comparison of the allocation of assets within the Company's consolidated investment portfolio, using market value as a basis, is as follows as of December 31:
| | 2017 | | | 2016 | |
| | | | | | |
Fixed maturities: | | | | | | |
Agency collateralized mortgage obligations | | | 1.9 | % | | | 0.8 | % |
Agency mortgage-backed securities | | | 3.2 | | | | 0.6 | |
Asset-backed securities | | | 5.1 | | | | 6.0 | |
Bank loans | | | 2.3 | | | | 1.4 | |
Certificates of deposit | | | 0.4 | | | | 0.4 | |
Collateralized mortgage obligations | | | 0.8 | | | | 1.2 | |
Corporate securities | | | 23.2 | | | | 19.0 | |
Mortgage-backed securities | | | 2.8 | | | | 3.3 | |
Municipal obligations | | | 11.3 | | | | 17.3 | |
Non-U.S. government obligations | | | 4.4 | | | | 3.3 | |
U.S. government obligations | | | 5.7 | | | | 12.3 | |
Total fixed maturities | | | 61.1 | | | | 65.6 | |
| | | | | | | | |
Short-term | | | 0.1 | | | | 0.2 | |
Cash equivalents | | | 6.9 | | | | 8.0 | |
Total fixed maturities and short-term | | | 68.1 | | | | 73.8 | |
| | | | | | | | |
Limited partnerships (equity basis) | | | 8.3 | | | | 10.2 | |
| | | | | | | | |
Equity securities: | | | | | | | | |
Consumer | | | 5.5 | | | | 4.3 | |
Energy | | | 1.2 | | | | 1.7 | |
Financial | | | 5.3 | | | | 4.2 | |
Industrial | | | 3.0 | | | | 2.8 | |
Technology | | | 1.5 | | | | 1.2 | |
Funds (e.g. mutual funds, closed end funds, ETFs) | | | 5.9 | | | | 0.9 | |
Other | | | 1.2 | | | | 0.9 | |
Total equity securities | | | 23.6 | | | | 16.0 | |
| | | 100.0 | % | | | 100.0 | % |
| | 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 68.1%85.4% of the market value of the Company's consolidated investment portfolio of $854.6$878.6 million at December 31, 2017.2018. 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 $7.5$3.5 million (0.9%(0.4% of 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 (e.g., moving from taxable to non-taxable issues) or when valuations are considered excessive compared to alternative investments.
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 2017. Note that the expected average maturity of the portfolio is less than the contractual maturity average life shown below because the Company has, in some cases, the right to put obligations and borrowers have, in some cases, the right to call or prepay obligations with or without call or prepayment penalties.
| | 2017 | | | 2016 | |
Less than one year | | | 19.5 | % | | | 27.7 | % |
1 to 5 years | | | 53.4 | | | | 52.7 | |
5 to 10 years | | | 13.0 | | | | 9.7 | |
More than 10 years | | | 14.1 | | | | 9.9 | |
| | | 100.0 | % | | | 100.0 | % |
| | | | | | | | |
Average contractual life of portfolio (years) | | | 4.9 | | | | 4.5 | |
Approximately $71.9 million of our fixed maturityincome investments (8.4%(6.2% of the Company's consolidated investment portfolio) consisted of non-rated bonds and bonds rated as less than investment grade by the National Association of Insurance Commissioners ("NAIC") at year end.year-end. These investments included a diversified portfolio of over 40 issuancesissuers and had a $1.6$5.2 million aggregate net unrealized gainloss position at December 31, 2017.2018.
The market value of the consolidated fixed maturityincome portfolio included $7.9 million of net unrealized losses at December 31, 2018 compared to $0.8 million of net unrealized gains at December 31, 2017 compared to $2.7 million of net unrealized losses at December 31, 2016.2017. 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, OTTI 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 of the Company's 20% threshold. The current net unrealized gainloss on fixed maturityincome securities consists of $5.7$10.8 million of gross unrealized gainslosses and $4.8$2.9 million of gross unrealized losses.gains. The gross unrealized losses equal approximately 0.9%1.8% of the cost of all fixed maturityincome securities. See also ""Critical Accounting Policies" in Part II, Item 7 of this Annual Report on Form 10-K for additional details of ourthe Company's investment valuation. 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 longer periods of time. Equity securities comprised 23.6%7.5% of the market value of the Company's consolidated investment portfolio of $854.6$878.6 million at December 31, 2017.2018. The Company's equity securities portfolio consists of various securities with diversification from large to small capitalization issuers and among several industries. The largest single equitysingle-equity issue owned had a market value of $6.8$3.2 million at December 31, 2017 (0.8%2018 (0.4% of the Company's consolidated investment portfolio).
The Company maintains a buy-and-hold philosophy with respect to equity securities. Many current holdings have been continuously owned for more than ten years. An individual equity security will be disposed of when it is determined by the Company's external investment managers or the Board of Director'sDirectors' 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 disposed of only when market conditions 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 2017 generated both gains and losses but netted to a realized gain2018 recognized in the consolidated statement of $8.1operations for the year ended December 31, 2018 were $3.1 million before taxes.
The Company's policy for OTTI is to impair Net unrealized losses on equity securities where the current market value is 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 of the Company's 20% threshold. Net unrealized gains on the equity security portfolio were $71.0 million before taxesheld at December 31, 2017 compared to $55.0 million at2018 included in the consolidated statement of operations for the year ended December 31, 2016. The current net unrealized gain consists of $73.2 million of gross unrealized gains and $2.2 million of gross unrealized losses.2018 were $9.7 million.
Limited Partnerships
The Company invests in various limited partnerships engaged in long-short equities, private equity, country focusedcountry-focused funds and real estate development 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, 2017,2018, the aggregate carrying value was $70.8$55.0 million, comprising 8.3%6.3% of the market value of the Company's consolidated investment portfolio.
As a group, these investments increaseddecreased in value during 2017,2018, with the aggregate of the Company's share of such gainslosses reported by the limited partnerships totaling approximately $12.5$9.3 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. Readers are cautioned that reported increases and decreases in equity value of the Company's limited partnerships can be subsequently reduced or eliminatedchange quickly byas a result of volatile market conditions. 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, remained at historically low levels during 2017.
Pre-tax net investment income increased $3.6$3.9 million, or 25%22%, during 2017, 2018, reflecting higher interest rates for shorter duration securities, increased dividends and increased 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:
| | 2017 | | | 2016 | | | 2018 | | | 2017 | |
Before federal tax: | | | | | | | | | | | | |
Investment income | | | 3.2 | % | | | 2.9 | % | | | 3.0 | % | | | 3.2 | % |
Investment income plus investment gains | | | 6.2 | | | | 6.8 | | |
Investment income plus investment gains (losses) | | | | (0.1 | ) | | | 6.2 | |
| | | | | | | | | | | | | | | | |
After federal tax: | | | | | | | | | | | | | | | | |
Investment income | | | 2.3 | | | | 2.2 | | | | 2.7 | | | | 2.3 | |
Investment income plus investment gains | | | 5.4 | | | | 6.1 | | |
Investment income plus investment gains (losses) | | | | (0.6 | ) | | | 5.4 | |
See also "Results of Operations" in Part II, Item 7 of this Annual Report on Form 10-K for additional details of ourthe Company's investment operations. operations.
Regulatory Framework
The Insurance Subsidiaries are currently subject to insurance industry regulation by each of the jurisdictions in which they are licensed. In addition, minor portions of the Insurance Subsidiaries' business are subject to regulation by Bermudian and Canadian federal and provincial authorities. As an insurance holding company, B&LProtective 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 continuously 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. The Company will also be impacted from changes to state and federal tax laws, including the U.S. Tax Cuts and Jobs Act of 2017 (the "U.S. Tax Act").
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. We areThe Company is obligated 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 of the Insurance Subsidiaries to modify certain insurance rates, specifically workers' compensation rates, is heavily regulated for significant portions of our business, and such rate increases are often denied or delayed for substantial periods by regulators.
Investments made by the Company's domestic Insurance Subsidiaries are regulated by guidelines promulgated by the NAIC, which are designed to provide protection for both policyholders and shareholders. The statutory capital of each of the Insurance Subsidiaries substantially exceeds the minimum risk- basedrisk-based capital requirements set by the NAIC. State regulatory authorities prescribe calculations of the minimum amount of statutory capital and surplus necessary for each insurance company to remain authorized. These computations are referred to as Risk Based Capital ("RBC")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, 2017,2018, the minimum statutory capital and surplus requirements of the Insurance Subsidiaries was $104,913.$117.4 million. Actual consolidated statutory capital and surplus at December 31, 20172018 exceeded this requirement by $316,750.$278.5 million.
Employees
As of December 31, 2017,2018, the Company had 528535 employees, an increase of 737 employees from the prior year end.year-end.
Revenue Concentration
The Company derives a significant percentage of its direct premium volume from certain FedEx Corporation subsidiaries and operating companies ("FedEx"), and from insurance coverage provided to FedEx's contracted service providers. FedEx represented approximately $16.2 million, $18.5 million $18.3 million and $17.8$18.3 million of the Company's consolidated gross premiums written in 2018, 2017 2016 and 2015,2016, respectively. An additional $174.7 million, $189.4 million and $202.2 million in 2018, 2017 and $209.4 million in 2017, 2016, and 2015, respectively, was placed with the Company by a non-affiliated broker on behalf of contracted service providers of FedEx, but this additional business was not dependent upon the Company's direct business with FedEx.
Competition
Insurance underwriting is 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 have organized "captive" insurance companies as subsidiaries through which they insure their own operations. Some states have workers' compensation funds that preclude private companies from writing this business in those states. Federal law also authorizes the creation of "Risk Retention Groups," which may write insurance coverages similar to those offered by the Company.
The Company believes it has a competitive advantage in its major lines of business as the result of its management and staff, its service and products, its willingness to custom build insurance programs for its customers, its centralized location with ready access to skilled employees, its extensive proprietary databases 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 Insurance Subsidiaries will generally experience a decline in business until pricing returns to profitable levels.
Availability of Documents
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.baldwinandlyons.com.www.protectiveinsurance.com. The Company has included its Internet website address throughout this Annual Report on Form 10-K as a textual reference only. The information contained on, or accessible through, the Company's Internet website is not incorporated by reference into this Annual Report on Form 10-K.
The Company makes available, free of charge, by mail or through its Internet website, its Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after it electronically files such material with or furnishes it to the SEC. The Company also includes on its Internet website its Code of Business Conduct and the charter of each standingpermanent 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 publicly disclosed pursuant to rules 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 Baldwin & Lyons, Inc.,Protective Insurance Corporation, 111 Congressional Boulevard, Carmel, Indiana 46032, Attention: Investor Relations. A list of exhibits is included in this Annual Report on Form 10-K, and exhibits are available from the Company upon payment to the Company of the cost of furnishing the exhibits.
Item 1A. RISK FACTORS
The following is a description of the risk factors that could cause the Company'sour 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 the Company'sour business, financial condition and results of operations, and you should carefully consider them before deciding to invest in, or retain, shares of the Company'sour common stock. These risk factors do not identify all risks that the Company faces; itswe face; our operations could also be affected by factors that are not presently known to the Companyus or that the Companywe currently considersconsider to be immaterial to itsour operations. Due to risks and uncertainties, known and unknown, the Company'sour 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.
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 forof 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.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+" (Superior)“A” (Excellent) with a negative outlook by A.M. Best.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+“A++"” (Superior) to "F"“F” (In Liquidation). The objective of A.M. Best'sBest’s rating system is to provide potential policyholders and other interested parties with an expert independent opinion of an insurer'sinsurer’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 in ratingby 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.
We have two classes of common stock with unequal voting rights andthat are effectively controlled by our principal shareholders and management, which limits other shareholders'shareholders’ ability to influence our operations.
Our principal shareholders, directors and executive officers and their affiliates control approximately 50% of the outstanding shares of voting Class A common stockCommon Stock and approximately 23% of the outstanding shares of non-voting Class B common stock.Common Stock. These parties effectively control us, direct our affairs, and exert significant influence in the election of directors and approval of significant corporate transactions. The interests of these shareholders may conflict with those of other shareholders, and this concentration of voting power may limit the marketability of our stock and has the potential to delay, defer or prevent a change in control that other shareholders may believe to be in their best interests.
We are subject to credit risk relating to our ability to recover amounts due from reinsurers.
We limit our risk of loss from policies of insurance issued by our Insurance Subsidiaries through the purchase of reinsurance coverage from other insurance companies. Such reinsurance does not relieve us of our responsibility to policyholders should the reinsurers be unable to meet their obligations to us under the terms of the underlying reinsurance agreements. While we have not experienced any significant reinsurance losses for over 25 years, in the past, a small number of our less significant reinsurance carriers have experienced deteriorating financial conditions or have been downgraded by rating agencies, and provisions for potential uncollectible balances from these reinsurers have been established. If we are unable to collect the amounts due to us from reinsurers, any unreserved credit losses could adversely affect our results of operations, equity, business and insurer financial strength rating.
We may incur additional losses if our loss reserves are inadequate.
A large portion of our provision for losses recorded is composed of estimates of future loss payments to be made. Such estimates of future loss payments may prove to be inadequate. Loss and loss expense reserves represent our best estimate at a given point in time but are not an exact calculation of ultimate liability. Rather, they are complex estimates derived by utilizing a variety of reserve estimation techniques from numerous assumptions and expectations about future events, many of which are highly uncertain, such as estimates of claims severity, frequency of claims, inflation, claims handling, case reserving policies and procedures, underwriting and pricing policies, changes in the legal and regulatory environment and the lag time between the occurrence of an insured event and the time of its ultimate settlement. Many of these uncertainties are not precisely quantifiable and require significant judgment on our part. As trends in underlying claims develop, particularly in so-called "long tail"“long tail” lines wherein 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'shareholders’ equity.
The loss of our major customer could severely impact our revenue and earnings potential and A.M. Best rating.
We derive a significant percentage of our direct premium volume from certain FedEx, subsidiaries and related entities, and from insurance coverage provided to FedEx'sFedEx’s contracted service providers. The loss of this major customer would likely materially adversely impact our revenue and earnings potential, as well as our A.M. Best rating. Insurance programs provided to FedEx and programs provided to the contracted service providers are not necessarily dependent upon one another, and therefore can be viewed as separate entities.another.
Our collateral held may prove to be insufficient.
We require collateral from our large insureds covering the insureds'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'scustomer’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.
OurGiven 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.
Our investment portfolio is subject to market and credit risks, which could affect our financial results and ability to conduct business.
We have a large portfolio of securities and limited partnership investments which can fluctuate in value with a wide variety of market conditions. A decline in the aggregate value of the securities and limited partnership investments would result in a commensurate decline in our shareholders'shareholders’ equity, either through the income statement or directly to equity. The resultant decline could, at least temporarily, materially adversely affect our results of operations, equity, business and insurer financial strength ratings.
Technological advances, including those specific to the transportation industry, could present us with added competitive risks.
An increase in accident prevention technologies and the growth of autonomous or partially autonomous vehicles could reduce the amount of accidents over time and shift the liability from the owner of the vehicle to the manufacturer, which would cause automobile insurance to become a smaller portion of our overall property and casualty insurance book of business. Innovations in telematics and the increase in usage-based information have become more important and will likely change the way premiums are determined in the future. These advances in technology could materially change the way products in the transportation industry are designed, priced and underwritten, and it will take time for usif we fail to adjust to these changes.changes in a timely manner, our business and results of operations could be materially adversely affected.
OurThe failure of our information technology systems and other operational systems may fail to operate properly or become disabled as a resultdisruptions or breaches of events or circumstances wholly or partly beyond our control.information systems could adversely affect our business, results of operations and financial condition.
We rely upon ourcomplex and expensive information technology systems and other operational systems and on the integrity and timeliness of our data to run our businesses, and service our customers. These information technology and other systems could be subject to physical or electronic break-ins, unauthorized tampering or other cyber security breaches, resulting in a failure to maintain the security, confidentiality or privacy of sensitive data, including personal information relating to customers, or in theft of intellectual property or proprietary information. A failure to maintain proper security, confidentiality or privacy of sensitive data residing on such systems could delay or disrupt our ability to do business and service customers, harm our reputation, subject us to litigation, regulatory fines, a loss of customers and revenues or otherwise adversely affect our business.
Our operations rely upon complex and expensive information technology systems for interactinginteract 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 effectivecost-effective manner.
Disruptions or breaches of our information systems could adversely affect us.
Despite our implementation of network security measures, which have focused on prevention, mitigation, resilience, Our networking infrastructure and recovery, our network and productsrelated assets may also be vulnerablesubject to cybersecurity attacks, computer viruses, break-ins and similar disruptions. Cybersecurity attacks and intrusion efforts are continuous and evolving, and in certain cases they have been successful at the most robust institutions. The scope and severity of risks that cyber threats present have increased dramatically, and include, but are not limited to, malicious software, attempts to gain unauthorized access to data, exploiting weaknesses related to vendorsemployee errors or other third partiesunforeseen activities that could be exploited to attack our systems, denialsresult in the disruption of service,business processes, network degradation and other electronic security breachessystem downtime. To the extent that could lead tosuch disruptions in systems, unauthorized release of confidential or otherwise protected information and corruption of data. Any such event could have a material adverse effect onoccur, our business, operating results of operations and financial condition as we face regulatory, reputationalcould be materially and litigation risksadversely affected, resulting from potential cyber incidents, as well as the potentialin a possible loss of incurring significant remediation costs.business.
OurIn 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 lossscope 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 breachotherwise protected information and corruption of suchdata. Our information could result in wide reaching negative impacts to our business,technology and as such, the ongoing maintenance and security of this information is pertinent to the success of our business operations and our strategic goals.
Our networking infrastructure and related assets mayother systems could be subject to physical or electronic break-ins; attempts to gain unauthorized access by hackers, employee errors,to data from our employees, vendors or third parties; unauthorized tampering; exploitation of weaknesses related to our vendors or other unforeseen activities that could resultthird parties; denials of service; computer viruses and other malicious software; or other cybersecurity attacks or breaches, resulting in a failure to maintain the disruptionsecurity, confidentiality or privacy of business processes, network degradation and system downtime, along with the potential that a third party will exploit our critical assets such as proprietary businesssensitive data, including personal information and data relatedrelating to our customers and business partners. Topartners, or in the extenttheft 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 such disruptions occur,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, operating results of operations and financial condition could be materially and adversely affected resulting in a possible loss of business.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.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.
Future changesEffective 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 U.S. tax laws,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 adopted,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 ana material adverse effect on our business, financial condition, results of operations, and cash flows.
The enactment of the U.S. Tax Act significantly reduced our income tax rate beginning in 2018. However, from time to time legislation is proposed that would, if enacted, make significant changes to U.S. tax laws, including changes to U.S. corporate tax rates. Such proposed changes in U.S. tax laws, if adopted, or other similar changes that reduce or eliminate deductions currently available to us, could adversely affect our business, financial condition resultsand the market price of operations and cash flows. The IRS has not yet published all of the detailed regulations resulting from the enactment of the U.S. Tax Act; therefore, we have not completed our accounting for the tax effects, but we have made a reasonable estimate of the effects on our existing deferred tax balances at December 31, 2017. We re-measured deferred tax assets and liabilities based on the rates at which they are expected to be utilized in the future, which is generally 21%. However, we are still analyzing certain aspects of the U.S. Tax Act and refining our calculations, which could potentially affect the measurement of those balances or give rise to new deferred tax amounts.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
72%74% of this space, with the remainder being leased to non-affiliated entities on short-term leases expiring through 2023.
The Company also owns a building and the adjacent real estate in Indianapolis, approximately nine miles from its main office in Carmel. The building contains approximately 15,000 square feet of usable space, and is used primarily for off-site data storage and as a contingent back 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 near 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 or outside the ordinary course of business.
Item 4. MINE SAFETY DISCLOSURES
Not applicable.
PART II
Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDERSTOCKHOLDER MATTERS AND ISSUER PURCHASE OF EQUITY SECURITIES
TheShares of the Company's Class A and Class B common stocksCommon Stock are traded on 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 February 28, 20182019 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 2017 and 2016, as reported by Nasdaq and published in the financial press, as well as the cash dividends paid by the Company.
| | | | | | | | | | | | | | Cash | |
| | Class A | | | Class B | | | Dividends | |
| | High | | | Low | | | High | | | Low | | | Declared | |
| | | | | | | | | | | | | | | |
2017: | | | | | | | | | | | | | | | |
Fourth Quarter | | $ | 24.36 | | | $ | 21.95 | | | $ | 24.70 | | | $ | 22.30 | | | $ | .27 | |
Third Quarter | | | 23.85 | | | | 21.41 | | | | 24.90 | | | | 21.20 | | | | .27 | |
Second Quarter | | | 26.95 | | | | 23.15 | | | | 25.40 | | | | 23.45 | | | | .27 | |
First Quarter | | | 26.04 | | | | 22.73 | | | | 25.45 | | | | 22.60 | | | | .27 | |
| | | | | | | | | | | | | | | | | | | | |
2016: | | | | | | | | | | | | | | | | | | | | |
Fourth Quarter | | | 26.10 | | | | 23.21 | | | | 27.70 | | | | 23.45 | | | | .26 | |
Third Quarter | | | 26.50 | | | | 23.04 | | | | 27.25 | | | | 24.43 | | | | .26 | |
Second Quarter | | | 24.90 | | | | 22.50 | | | | 25.28 | | | | 23.33 | | | | .26 | |
First Quarter | | | 24.02 | | | | 22.00 | | | | 25.10 | | | | 22.11 | | | | .26 | |
The Company has paid quarterly cash dividends continuously since 1974. The
current regularCompany paid a quarterly dividend
rate of
$.27 per share, effective February 2017, was increased to $.28 per share
effective Februaryduring 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,
2017, $104.92018, $117.4 million, or
25.1%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
the parent companyProtective 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 and 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 itsthe 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 stock.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 mayreserves 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 at any time.from cash on hand.
Corporate Performance
The following graph shows a five yearfive-year comparison of cumulative total return for the Company's Class B common shares,Common Stock, the Russell 2000 Index and the Company's peer group as determined by management (the "BWINB"PTVCB Peer Group"). The basis of comparison is a $100 investment at December 31, 2012,2013, in each of (i) Baldwin & Lyons, Inc.,Protective, (ii) the Russell 2000 Index and (iii) the BWINBPTVCB Peer Group. All dividends are assumed to be reinvested.
| | | | | Period Ending | | | | | | Year Ended December 31 | |
Index | | 12/31/12 | | | 12/31/13 | | | 12/31/14 | | | 12/31/15 | | | 12/31/16 | | | 12/31/17 | | | 2013 | | | 2014 | | | 2015 | | | 2016 | | | 2017 | | | 2018 | |
Baldwin & Lyons, Inc. | | | 100.00 | | | | 119.26 | | | | 117.09 | | | | 113.91 | | | | 124.49 | | | | 123.93 | | |
Protective Insurance Corporation | | | $ | 100.00 | | | $ | 98.17 | | | $ | 95.51 | | | $ | 104.38 | | | $ | 103.91 | | | $ | 75.93 | |
Russell 2000 Index | | | 100.00 | | | | 138.82 | | | | 145.62 | | | | 139.19 | | | | 168.85 | | | | 193.58 | | | | 100.00 | | | | 104.89 | | | | 100.26 | | | | 121.63 | | | | 139.44 | | | | 124.09 | |
Peer Group | | | 100.00 | | | | 160.92 | | | | 167.94 | | | | 182.04 | | | | 219.76 | | | | 238.34 | | |
PTVCB Peer Group | | | | 100.00 | | | | 104.36 | | | | 113.12 | | | | 136.57 | | | | 148.11 | | | | 154.20 | |
Baldwin & Lyons, Inc.PTVCB Peer Group |
Amerisafe, Inc. | | HCI Group, Inc. |
Amerisafe,Atlas Financial Holdings, Inc. | | Heritage Insurance Holdings, Inc. |
Atlas Financial Holdings,Donegal Group Inc. | | James River Group Holdings, Ltd. |
DonegalEMC Insurance Group Inc. | | NMI Holdings, Inc. |
EMC Insurance GroupEmployers Holdings, Inc. | | Safety Insurance Group, Inc. |
Employers Holdings, Inc.FedNat Holding Company | | United Insurance Holdings Corp. |
Federated National Holding CompanyHallmark Financial Services, Inc. | | Universal Insurance Holdings, Inc. |
HCI Group, Inc. | | |
Hallmark Financial Services, 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, 2017.2018. 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, 20172018 included in Part II, Item 8 "Financial Statements and Supplementary Data", and Part II, Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in this Annual Report on Form 10-K.
| | 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 (loss) per share are adjusted for the dilutive effect of restricted stock outstanding for 2014-2017. |
| | Year Ended December 31 | |
| | 2017 | | | 2016 | | | 2015 | | | 2014 | | | 2013 | |
| | (Dollars in thousands, except per share data) | |
| | | | | | | | | | | | | | | |
Gross premiums written | | $ | 504,737 | | | $ | 403,004 | | | $ | 383,553 | | | $ | 382,388 | | | $ | 369,476 | |
| | | | | | | | | | | | | | | | | | | | |
Net premiums earned | | | 328,145 | | | | 276,011 | | | | 263,335 | | | | 261,627 | | | | 252,743 | |
| | | | | | | | | | | | | | | | | | | | |
Net investment income | | | 18,095 | | | | 14,483 | | | | 12,498 | | | | 9,055 | | | | 8,770 | |
| | | | | | | | | | | | | | | | | | | | |
Net realized gains (losses) on investments | | | 19,686 | | | | 23,228 | | | | (1,261 | ) | | | 14,930 | | | | 23,515 | |
| | | | | | | | | | | | | | | | | | | | |
Losses and loss expenses incurred | | | 247,518 | | | | 186,481 | | | | 155,750 | | | | 159,596 | | | | 150,701 | |
| | | | | | | | | | | | | | | | | | | | |
Net income | | | 18,323 | | | | 28,945 | | | | 23,283 | | | | 29,717 | | | | 36,588 | |
| | | | | | | | | | | | | | | | | | | | |
Earnings per share -- net income 1 | | | 1.21 | | | | 1.92 | | | | 1.55 | | | | 1.98 | | | | 2.45 | |
| | | | | | | | | | | | | | | | | | | | |
Cash dividends per share | | | 1.08 | | | | 1.04 | | | | 1.00 | | | | 1.00 | | | | 1.00 | |
| | | | | | | | | | | | | | | | | | | | |
Investment portfolio 2 | | | 854,595 | | | | 749,501 | | | | 729,877 | | | | 757,421 | | | | 703,259 | |
| | | | | | | | | | | | | | | | | | | | |
Total assets | | | 1,357,016 | | | | 1,154,137 | | | | 1,085,771 | | | | 1,144,247 | | | | 1,072,270 | |
| | | | | | | | | | | | | | | | | | | | |
Shareholders' equity | | | 418,811 | | | | 404,345 | | | | 394,498 | | | | 399,496 | | | | 381,724 | |
| | | | | | | | | | | | | | | | | | | | |
Book value per share 1 | | | 27.83 | | | | 26.81 | | | | 26.25 | | | | 26.67 | | | | 25.57 | |
1 Earnings and book value per share are adjusted for the dilutive effect of restricted stock outstanding.
2 Includes money market instruments classified as cash equivalents in the Consolidated Balance Sheets.
(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
The Company specializesProtective 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. In addition, B&L offersAdditionally, we offer workers' compensation coverage for a variety of operations outside the transportation industry. The Company operatesWe 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 itsour business constituted one reportable property and casualty insurance segment as of January 1, 2017.segment. During 2016, and prior years, the Companywe had two reportable segments – property and casualty insurance and reinsurance. The CompanyWe moved to a single reportable segment based on how itsour operating results are regularly reviewed by the Company'sour chief operating decision maker when making decisions about how resources are to be allocated to the segment and assessing its performance. The prior year segment information throughout this Annual Report on Form 10-K was updated to conform to the current year presentation.
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 CutsCut and Jobs Act of 2017 (the "U.S. Tax Act") was signed into law. The U.S. Tax Act lowered the U.S. corporate income rate from 35% to 21% effective January 1, 2018. GAAP requires the impact of tax legislation to be recognized in the period in which the law was enacted. As a result, of the U.S. Tax Act, the Companywe recorded a tax benefit of $9.6 million related to the re-measurementremeasurement of itsour 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 CompanyWe generally experiencesexperience positive cash flow from operations. Premiums are collected on insurance policies in advance of the disbursement of funds infor payment of claims. Operating costs of the Company'sour property/casualty Insurance Subsidiaries, other than loss and loss expense payments and commissions paid to related agency companies, generally average less than 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 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. The Company'sOur cash flow relating to premiums is significantly affected by reinsurance programs in effect, from time-to-time, whereby the Company cedeswe 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 the Companyus from itsour insureds.
On August 31, 2017, the Company'sour Board of Directors authorized the reinstatement of itsour share repurchase program for up to 2,464,209 shares of the Company'sour 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. 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 21, 2017, the Company24, 2018, we entered into a stock repurchase plan for the purpose of repurchasing up to $17.5$12.0 million of shares of itsour 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, and as part of, the Company'sour share repurchase program and permittedpermits 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 Rule 10b5-1 Planplan expired on March 5,November 8, 2018. The Company's share repurchase program may be amended, suspended or discontinued at any time and does not commit the Companyus to repurchase any shares of itsour common stock. The Company hasWe have funded, and intendsintend to continue to fund, the share repurchase program from cash on hand. The actual number and value of the shares to be purchased will depend on the performance of the Company'sour stock price, market volume and other market conditions. ForDuring the year ended December 31, 2017, the Company2018, we paid $1.9$4.6 million to repurchase 84,9607,770 shares of itsClass A and 191,898 shares of Class B common stockCommon Stock under itsthe share repurchase program.
For several years, the Company'sour investment philosophy has emphasized the purchase of short-term bonds with high quality and liquidity. Our fixed income investment portfolio continues to emphasize shorter-duration bonds. As flat yield curves have not provided an incentiveinstruments. If there was a hypothetical increase in interest rates of 100 basis points, the price of our bonds at December 31, 2018 would be expected to lengthen maturities in recent years, the Company has continued 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'sour fixed maturityincome and short-term investment portfolio increased slightlyto 5.5 years at December 31, 2018 compared to 4.9 years during 2017 from 4.5 years during 2016.at December 31, 2017. The average duration of the Company'sour fixed maturityincome portfolio remains much shorter than both the contractual maturity average and the duration of the Company'sour liabilities. Our investmentsWe also remain an active participant in the equity markets reflect a conservative, value driven approach, which has been implemented through partnerships, advisors and the Investment Committee.securities market, allocating capital 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 NAIC,National Association of Insurance Commissioners (the "NAIC"), which are designed to provide protection for both policyholders and shareholders.
Net cash flows from operations increased $61.3$3.0 million to $93.7$100.7 million for full year 20172018 from $32.4$97.7 million in 2016.2017. The increase in operating cash flow was primarily related to higher premium volume in 2018 compared to 2017. Net cash flows from operations decreased $5.8increased $65.3 million to $97.7 million for 2017 compared to $32.4 million for full year 2016 compared to $38.2 million in 2015.2016. The decrease2017 increase in operating cash flow resulted mainly from increased loss and loss adjustment expensesflows 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 increased $47.0 million towas $74.3 million for full year 2017 as compared to $27.4 million in 2016. The increase of $46.9 million in cash used in investing activities was the resultprimarily related to higher purchases of the normal timingequity securities and fixed income investments and lower proceeds from sales of purchasesequity and sales and maturities in our investment portfolio,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 investing activities increased $14.5 million to $27.4 million for full year 2016 compared to $12.8 million in 2015. The increase in cash used in investing activities was also the result of the normal timing of purchases and sales and maturities in our investment portfolio.
Net cash used in financing activities for full year2018 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 the Company'sour Class B common stock.Common Stock. Financing activities for full year 2016 and 2015 consisted solely of the regular cash dividend payments to shareholders of $15.8 million ($1.04 per share) and $15.0 million ($1.00 per share), respectively..
The Company'sOur assets at December 31, 2017 included $59.22018 included $156.9 million of investments included within cash and cash equivalents on the consolidated balance sheetsheets that are readily convertible to cash without market penalty and an additional $54.6 million$45.9 million of fixed maturityincome investments 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.
The Company maintains- 22 -
We previously maintained a revolving line of credit with a $40.0 million limit andthat 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 the Company'sour option. Outstanding drawings on this line ofrevolving credit facility were $20.0 million as of December 31, 2017 and December 31, 2016.2018. At December 31, 2017,2018, the effective interest rate was 2.65%. The Company3.61%, and we had $20.0 million remaining unused under the revolving credit facility. The current outstanding borrowings were used to repay the previous line of credit. Our revolving credit at December 31, 2017. The Company's revolving line of creditfacility has threetwo financial covenants, each of which were met as of December 31, 2017. The three financial covenants relate2018, requiring us to have a minimum GAAPU.S. Generally Accepted Accounting Principles ("GAAP") net worth a minimum statutory surplus and a minimum A.M. Best rating.maximum consolidated leverage ratio of 0.35 to 1.00.
NetAnnualized net premiums written by the Company'sour Insurance Subsidiaries for 20172018 equaled approximately 84%112.3% of the combined statutory surplus of these subsidiaries,Insurance Subsidiaries, a level consistent with higher premiums written. Premium writings of up to 100% and in some cases up to 200% of surplus are generally considered acceptable by regulatory authorities. Further, the statutory capital of each of theour Insurance Subsidiaries substantially exceeded minimum risk basedrisk-based capital requirements set by the NAIC as of December 31, 2017.2018. 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, 2017, $104.9 million, or 25.1% of shareholders' equity, represented net assets of the Company's Insurance Subsidiaries which, at that time, could not be transferred in the form of dividends, loans or advances to the parent company because of minimum statutory capital requirements. At December 31, 2017, $59.12018, $64.1 million may be transferred by dividend or loan to the parent companyProtective without approval by, or prior notification to, regulatory authorities. An additional $256.4$213.1 million of shareholders' equity of theour Insurance Subsidiaries could be advanced or loaned to the parent companyProtective with prior notification to, and approval from, regulatory authorities, although transfers of this size would not be practical. The Company believes that We believe these restrictions do not currently pose anyno material liquidity concerns tofor us. We also believe the Company. We expect financial strength and stability of theour Insurance Subsidiaries towould permit access by the parent companyProtective to short-term and long-term sources of credit when needed. The parent companyProtective had cash and marketable securities valued at $26.5$15.2 million at December 31, 2017.2018.
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 | |
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| | | | | | | | | | | | |
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 | |
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| | | | | | | | | | | | |
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 | % |
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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
2018 Compared to 2017
| | 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 ceded to reinsurers on our insurance business averaged 23.7% of gross premiums written for 2018 compared to 30.0% for 2017. The percentage of premiums ceded to reinsurance decreased as a result of changes in our reinsurance structure. In the third quarter of 2017, we lowered the quota share rate on our workers' compensation premiums to reflect growing profitability and confidence in this book of business. We also restructured our commercial automobile reinsurance treaty, moving away from variable premium ceded rates (based on loss performance) to a flat ceding arrangement with no material changes to the economic risks taken for these products (i.e., ceded losses will decrease by a similar amount as ceded premiums). The impact of these changes to our reinsurance structure was partially offset by reserve strengthening in 2018 that resulted in ceding an additional $17.3 million in premium from prior treaty years related to variable 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 premium related to these variable premium adjustment provisions in 2017.
Losses and loss expenses incurred during 2018 increased $98.3 million (39.7%) to $345.9 million compared to $247.5 million in 2017. The loss ratio also increased to 79.9% for 2018 compared to a loss ratio of 75.4% for 2017. The loss ratio is calculated as the percentage of losses and loss expenses incurred to net premiums earned. The increased losses and loss expenses 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 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.
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 following table illustrates the financial impact of a further 5% or 10% increase in ultimate losses for the five 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 $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 $9.3 million decrease in 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 majority of this gain was included in unrealized gains within other comprehensive income (loss) at December 31, 2017 and, as a result of the adoption of ASU 2016-01, was reclassified to retained earnings as of January 1, 2018 and not 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 were 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 from period to period.
Other operating expenses for 2018 increased $23.6 million, or 20.8%, to $137.2 million compared to 2017. The increase in other operating expenses was primarily due to increased commission expenses as a result of increased premiums written and higher salary and benefit expense and a non-cash impairment charge of $3.2 million recorded in the fourth quarter of 2018 to write off our entire goodwill balance. See Note M for further discussion. The ratio of consolidated other operating expenses less commissions and other income to net premiums earned (the "expense ratio") was 29.4% during 2018, or 28.7% excluding the impact of the goodwill impairment charge, compared to 33.0% for 2017. The decrease in the expense ratio was primarily related to the leveraging effect of higher net premiums earned in 2018 compared to 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 in 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.
As a result of the factors discussed above, net loss for 2018 was $34.1 million compared to net income of $18.3 million in 2017, a change of $52.4 million.
2017 Compared to 2016
| | 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 | ) | | | | |
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Gross premiums written for 2017 totaled $504.7 million, an increase ofincreased $101.7 million (25.2%) from 2016. Net, while net premiums earned totaled $328.1 million for 2017 compared to $276.0 million for 2016, an increase ofincreased $52.1 million (18.9%)., as compared to 2016. The increase in net premiums written and earned was primarily due to an increase of $60.8 million in net premiums earned related to commercial automobile products and $3.7 million in higher net premiums earned related to workers' compensation products, which were consistent with the Company'sour growth strategy. These increases were partially offset by $8.1 million of lower premiums generated by reinsurance products, reflective of management'sour decision to completely withdraw from the property catastrophe reinsurance market,and professional liability reinsurance markets, and a decrease of $3.9 million in premiums earned from personal automobile products. The difference in the percentage change for premiums written compared to earned is 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 ceded to reinsurers averaged 30.0% of gross premiums written for 2017, compared to 32.6% for 2016. The percentage of premiums ceded to reinsurance decreased as a result of changes in our reinsurance structure in the Company's reinsurance structure.third quarter of 2017. The change in net premiums earned, compared to growth in gross premiums written, was a function of premium adjustment provisions in the Company'sour historical commercial automobile reinsurance treaties. This historical reinsurance structure, which was revised in the latestJuly 2017 reinsurance renewal, causes an adjustment for ceded premiums when the ultimate loss estimate changes for a reinsurance treaty year.year. This resulted in ceding an additional $13.7 million in premium in connection with our reserve strengthening in 2017.
Pre-tax investment income of $18.1Losses 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% higher thanto $18.1 million compared to $14.5 million for 2016, primarily due to higher interest rates leading to higher reinvestment yields for core fixed income securities, increased dividends from equity securities and an increase in average funds invested resulting from positive cash flow. After-tax investment income of $12.7 million increased 23.0% during 2017 compared to the prior year reflecting the above factors, as well as the mix between taxable and tax-exempt investment income.
Net realized and unrealized gains on investments before taxes, totaled $19.7 million in 2017 compared to $23.2 million during 2016. Direct trading gains during 2017 were $8.2 million lower compared to the prior year. Other-than-temporary impairmentsimpairment of $0.4 million, netted with gains of $1.6 million on previously impaired available-for-sale securities that were sold in 2017, are included in the net gains stated above. Investments in limited partnerships produced gains of $12.5 million in 2017, compared to gains of $2.5 million during the prior year.2016. Limited partnership investments utilized by the Companyus are primarily engaged in long-short equities, private equity, country focusedcountry-focused funds and real estate development as an alternative to direct equity investments. The aggregate of the Company'sour share of gains and losses in these entities represented a 16.3% appreciation in value for 2017, compared to a 3.3% increase in value for 2016.
Losses and loss expenses incurred during 2017 increased $61.0 million (32.7%) from 2016 to $247.5 million, due primarily to adverse prior accident year development and growth in net premiums earned. The 2017 consolidated loss and loss expense ratio was 75.4%, compared to 67.6% for 2016. The Company's loss and loss expense ratios for major product lines are summarized in the following table:
| | 2017 | | | 2016 | |
Fleet transportation | | | 73.9 | % | | | 63.4 | % |
All other | | | 94.0 | | | | 95.5 | |
All lines | | | 75.4 | | | | 67.6 | |
The higher loss ratio for fleet transportation during 2017 was the result of adverse loss development in the Company's commercial auto related liability coverages from prior accident years. The prior year reserve deficiency in 2017 increased the 2017 calendar loss ratio 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.
The Company had an overall reserve deficiency on prior year claims during 2017 of $19.2 million. This net deficiency is included in the computation of loss ratios shown in the previous table, as is the $13.8 million deficiency for 2016 on prior year claims. Because of the high limits provided by the Company to its fleet transportation insureds, the length of time necessary to settle larger, more complex claims and the volatility of the fleet transportation liability insurance business, the Company believes it is important to take a conservative posture in its reserving process. Changes in both gross premium volumes and the Company's reinsurance structure for its fleet transportation business can have a significant impact on future loss developments and, as a result, loss and loss expense ratios and prior year reserve development may not be consistent year to year.
Other operating expenses for 2017 increased $24.1 million (27.0%) to $113.6 million from $89.5 million in 2016. This increase was due primarily to an increase in commission expense as a result of the increase in premiums written and higher salary and salary relatedsalary-related expenses, reflective of the Company'sour increased workforce in response to the continued expansion of the Company'sour products and services. Reinsurance ceded credits, included as an offset to other operating expenses, were 30.8% lower in 2017, resulting primarily from ceding a lower percentage of workers' compensation premium to reinsurers in our most recent reinsurance treaty.
Income tax benefit was $8.2 million for full year 2017 compared to income tax expense of $14.1 million in 2016. The CompanyWe recorded a benefit of $9.6 million related to the re-measurementremeasurement of deferred tax assets and liabilities in the fourth quarter of 2017 pursuant to the U.S. Tax Act. The Company'sOur effective federal tax rate for 2017 was (81.0%) as compared to 32.8% in 2016. The effective tax rate for 2017 was affected primarily by the impact of the U.S. Tax Act discussed above.
NetAs a result of the factors discussed above, net income for 2017 decreased $10.6 million to $18.3 million compared to $28.9 million in 2016, with the decrease primarily attributable to the reserve strengthening that occurred during 2017, partially offset by the income tax benefit described above. Diluted earnings per share of $1.21 were recorded in 2017 compared to diluted earnings per share of $1.92 in 2016.
2016 Compared to 2015
Gross premiums written for 2016 totaled $403.0 million, an increase of $19.5 million (5.1%) from 2015. Net premiums earned totaled $276.0 million for 2016 compared to $263.3 million for 2015, an increase of $12.7 million (4.8%). The increase in premiums earned reflected higher premiums from fleet transportation products of $28.1 million as a result of the addition of several new accounts during 2016, rate increases and higher miles driven by our insureds, which was immediately reflected in premiums earned. These increases were partially offset by $9.7 million of lower premiums generated by property reinsurance products reflective of management's decision to completely withdraw from the property catastrophe reinsurance market and a decrease of $6.6 million in premiums earned by primary professional liability and personal automobile, which reflected the Company's strategic initiatives of reducing exposures in these products.
Premiums ceded to reinsurers averaged 32.6% of gross written premiums for 2016, compared to 33.6% for 2015, with the variation attributable to a fluctuation in the mix of business as well as reinsurance treaty changes.
Pre-tax investment income of $14.5 million during 2016 was 16% higher than 2015, reflecting an increased allocation to higher-yielding bonds and increases in average invested assets. After tax investment income increased by 15% during 2016 compared to the prior year reflecting the mix between taxable and tax-exempt investment income.
Net gains on investments, before taxes, totaled $23.2 million in 2016 compared to net pre-tax losses on investments of $1.3 million during 2015. The 2016 results were heavily influenced by direct trading results, with gains of $13.3 million in 2016 compared to direct trading gains of $4.5 million in 2015. In addition, our investments in limited partnerships produced gains (appreciation) of $2.5 million in 2016, compared to losses (depreciation) of $1.7 million during the prior year. Limited partnership investments utilized by the Company are primarily engaged in long-short equities, private equity, country focused funds and real estate development as an alternative to direct equity investments. The aggregate of the Company's share of gains and losses in these entities represented a 3.3% appreciation in value for 2016, compared to a 2% decrease in value for 2015. Other-than-temporary impairments of $5.7 million, netted with gains of $12.3 million on previously impaired available-for-sale securities that were sold in 2016, are included in the net gains stated above.
Losses and loss expenses incurred during 2016 increased $30.7 million (19.7%) from 2015 to $186.5 million, due primarily to prior accident year development and growth in net premiums earned. The 2016 consolidated loss and loss expense ratio was 67.6%, compared to 59.2% for 2015. The Company's loss and loss expense ratios for major product lines are summarized in the following table:
| | 2016 | | | 2015 | |
Fleet transportation | | | 63.4 | % | | | 55.7 | % |
All other | | | 95.5 | | | | 96.4 | |
All lines | | | 67.6 | | | | 59.2 | |
The higher loss ratio for fleet transportation during 2016 was the result of less favorable development related to prior accident year losses. The prior year reserve deficiency in 2016 increased the 2016 calendar year fleet transportation loss ratio by 5.0 percentage points compared to a 4.3 percentage point decrease experienced in 2015 due to the prior year reserve savings in 2015.
The Company had an overall reserve deficiency on prior year claims during 2016 of $13.8 million. This net deficiency is included in the computation of loss ratios shown in the previous table, as is the $10.1 million savings for 2015 on prior year claims. Because of the high limits provided by the Company to its fleet transportation insureds, the length of time necessary to settle larger, more complex claims and the volatility of the fleet transportation liability insurance business, the Company believes it is important to take a conservative posture in its reserving process. Changes in both gross premium volumes and the Company's reinsurance structure for its fleet transportation business can have a significant impact on future loss developments and, as a result, loss and loss expense ratios and prior year reserve development may not be consistent from year to year.
Other operating expenses for 2016, before credits for ceding allowances from reinsurers, increased $3.4 million (3%) to $123.0 million, generally in line with increases in premium written. This increase was primarily due to an increase in salary and salary related expenses, reflective of the Company's increased workforce in response to the continued expansion of the Company's products and services. Reinsurance ceded credits were 16% higher in 2016, resulting primarily from favorable changes to the terms of certain reinsurance treaties. After consideration of these expense offsets, operating expenses decreased $1.1 million, or 1%, from the prior year.
The effective federal tax rate on the consolidated pre-tax income for 2016 was 32.8% as compared to 31.4% in 2015. The effective rate differs from the normal statutory rate primarily as a result of tax-exempt investment income.
Net income for 2016 increased $5.6 million to $28.9 million with the increase primarily attributable to realized investment gains. Diluted earnings per share of $1.92 were recorded in 2016 compared to diluted earnings per share of $1.55 in 2015.
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 64%59% of the Company's assets are composed of investments at December 31, 2017.2018. Approximately 92% of these investments are publicly-traded, owned directly and have readily-ascertainable market values. The remaining 8% of investments are composed primarily of minority interests in several limited partnerships. These limited partnerships are engaged in long-short equities, private equity, country focusedcountry-focused funds and real estate development 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 income.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 incomeoperations and the non-credit component of the other-than-temporary impairment is recognized directly in shareholders' 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 benefits.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). 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, 2017,2018, 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, 2017,2018, the total gross unrealized loss included in the Company's investmentfixed income portfolio was approximately $7.1$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, 2017,2018, 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):
| | 2017 | | | 2016 | | | 2015 | | | 2018 | | | 2017 | | | 2016 | |
Reinsurance recoverable | | $ | 318,331 | | | $ | 255,024 | | | $ | 215,888 | | | $ | 392,436 | | | $ | 318,331 | | | $ | 255,024 | |
Premium ceded (reduction to premium earned) | | | 145,201 | | | | 130,012 | | | | 128,697 | | | | 131,080 | | | | 145,201 | | | | 130,012 | |
Losses ceded (reduction to losses incurred) | | | 128,086 | | | | 108,656 | | | | 75,581 | | | | 148,285 | | | | 128,086 | | | | 108,656 | |
Reinsurance ceded credits (reduction to operating expenses) | | | 23,187 | | | | 33,512 | | | | 28,956 | | | | 23,124 | | | | 23,187 | | | | 33,512 | |
A discussion of the Company's reinsurance strategies is presented in Part I, Item 1, "Business"Business", of this Annual Report on Form 10-K.
Amounts recoverable under the terms of reinsurance contracts comprised approximately 24%26% of total Company assets as of December 31, 2017.2018. 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 superior credit ratings 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 reserves for losses and loss expenses ("reserves") are determined based on complex estimation processes using historical experience, current economic information and available industry statistics. The Company's claims range from routine "fender benders" to the highly complex and costly third partythird-party bodily injury claims 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 for additional information relating to loss and loss 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:
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 routine "short-tail" claims, such as 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 IBNRincurred 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 IBNRincurred 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 IBNR 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 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 certain of 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 losses at a point in time and, due to the unique nature of ourits exposures, particularly in the large fleet transportationcommercial automobile excess product, 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 not 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; and
| ● | 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 SIRs, policy limits and reinsurance structures may vary widely from 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 estimates could be 10% or more redundant or deficient. The majority of the Company's reserves for losses and loss expenses, on 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. 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, 20172018 for the prior six treaty periods, which covers exposures earned on policies written between July 3, 20112012 and December 31, 2017.2018. 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.
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 | | | 10% Loss Ratio Increase | | | 10% Loss Ratio Decrease | | | 20% Loss Ratio Increase | | | 20% Loss Ratio Decrease | |
Gross Reserves | | $ | 61.1 | | | $ | (48.4 | ) | | $ | 122.3 | | | $ | (82.0 | ) | | $ | 72.0 | | | $ | (72.0 | ) | | $ | 144.1 | | | $ | (144.1 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net Reserves | | $ | 17.9 | | | $ | (14.0 | ) | | $ | 34.3 | | | $ | (24.2 | ) | | $ | 18.0 | | | $ | (19.5 | ) | | $ | 36.0 | | | $ | (49.5 | ) |
Net premiums earned | | $ | (27.2 | ) | | $ | 31.0 | | | $ | (29.6 | ) | | $ | 62.0 | | | $ | (0.4 | ) | | $ | 16.5 | | | $ | (0.4 | ) | | $ | 41.1 | |
Cumulative Net Underwriting Income (Loss) | | $ | (45.1 | ) | | $ | 45.0 | | | $ | (63.9 | ) | | $ | 86.2 | | | $ | (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 that 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 re-measurementremeasurement 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):
| | 2017 | | | 2016 | | | 2018 | | | 2017 | |
Total deferred tax liabilities | | $ | (23,836 | ) | | $ | (24,969 | ) | | $ | (12,906 | ) | | $ | (23,836 | ) |
Total deferred tax assets | | | 9,478 | | | | 13,557 | | | | 19,168 | | | | 9,478 | |
Net deferred tax liabilities | | $ | (14,358 | ) | | $ | (11,412 | ) | |
Net deferred tax assets (liabilities) | | | $ | 6,262 | | | $ | (14,358 | ) |
Deferred tax assets at December 31, 2017 include2018 included approximately $6.8$10.0 million related to the timing of deductibility of loss and loss expense reserves, the majority of which relate 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 $0.8$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 $1.8 million and $0.6 million of deferred tax assets, respectively. The balance of deferred tax assets consists of various normal operating expense accruals and is not considered to be material. As a result of its analysis, management has determined that no valuation allowance is necessary at December 31, 2017.2018.
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).
Impact of Inflation
To the extent possible, the Company attempts to recover the impact of inflation on 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 ininformation, see Part II, Item 7A, "Quantitative and Qualitative Disclosures about Market Risk", in this Annual Report on Form 10-K).10-K.
Inflation must also be considered by the Company in the creation and review of loss and loss adjustment expense reserves, as portions of these reserves are expected to be paid over extended periods of time. The anticipated effect of inflation is implicitly considered when estimating liabilities for losses and loss adjustment expenses.
Contractual Obligations
The table below sets forth the amounts of the Company's contractual obligations at December 31, 2017.2018.
| | Payments Due by Period | | | Payments Due by Period | |
| | Total | | | Less than 1 year | | | 1 - 3 Years | | | 3 - 5 Years | | | More Than 5 Years | | | Total | | | Less than 1 year | | | 1 - 3 Years | | | 3 - 5 Years | | | More Than 5 Years | |
| | (dollars in millions) | | | (dollars in millions) | |
Loss and loss expense reserves | | $ | 680.3 | | | $ | 238.1 | | | $ | 224.5 | | | $ | 81.6 | | | $ | 136.1 | | | $ | 865.3 | | | $ | 302.9 | | | $ | 285.6 | | | $ | 103.8 | | | $ | 173.0 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Investment commitment | | | 1.4 | | | | 1.4 | | | | - | | | | - | | | | - | | | | 1.3 | | | | 1.3 | | | | – | | | | – | | | | – | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Operating leases | | | 0.7 | | | | 0.3 | | | | 0.4 | | | | - | | | | - | | | | 0.5 | | | | 0.4 | | | | 0.1 | | | | – | | | | – | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Borrowings | | | 20.0 | | | | 20.0 | | | | - | | | | - | | | | - | | | | 20.0 | | | | 20.0 | | | | – | | | | – | | | | – | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total | | $ | 702.4 | | | $ | 259.8 | | | $ | 224.9 | | | $ | 81.6 | | | $ | 136.1 | | | $ | 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 wethe Company might expect ourits direct loss and loss expense reserves (without the benefit of reinsurance recoveries) to be paid. Timing of the collection of the related reinsurance recoverable, estimated to be $318.3$392.4 million at December 31, 2017,2018, or 47%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, 2017.2018. 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 bank,lender, under certain circumstances, with short notice. The Company'sCompany entered into a new line of credit has a currenton August 9, 2018 with an expiration date of September 23, 2018; however, management expects that this line of credit will be renewed for a multi-year period prior to maturity.August 9, 2022.
Off-Balance Sheet Arrangements
The Company has no off-balance sheet arrangements.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company'sCompany’s internal control over financial reporting as of December 31, 2017,2018, 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 13, 20187, 2019 expressed an unqualified opinion thereon.
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company'sCompany’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
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 workersworkers' compensation coverage for trucking and public transportation fleets, as well as coverage for trucking industry independent contractors. In addition, B&Lthe 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 as of January 1, 2017.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 chief operating decision maker to makewhen making decisions about how resources to beare allocated to the segment and to assess itsassessing performance. The prior year segment information throughout this
Annual Report on Form 10-K was updated to conform to the current year presentation.
Basis of Presentation: The consolidated financial statements include the accounts of the Company and its wholly- ownedwholly-owned subsidiaries. Inter-company transactions and accounts have been eliminated in consolidation.
Use of Estimates: Preparation of the consolidated financial statements requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results will differ from those estimates.
Cash and Cash Equivalents: The Company considers investments in money market funds to be cash equivalents. Carrying amounts for these instruments approximate their fair values.
Investments: Investments:Carrying amounts for fixed maturityincome securities represent fair value and are based on quoted market prices, whenwhere available, or broker/dealer quotes for specific securities whenwhere 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 athe limited partnership includespartnerships include both realized and unrealized investment gains or losses in itsthe determination of net income or loss, then the Company would also recognize, through its consolidated statements of operations, its proportionate share of the limited partnership'sinvestee's unrealized, as well as realized, investment gains or losses.losses within net unrealized gains (losses) on equity securities and limited partnership investments.
Short-term and other investments are carried at cost, which approximates their fair values.
Realized gains and losses on disposals of investments are recorded on the trade date, are determined by specific identification of cost of investments sold and are included in income. All fixed maturity and 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 convertible debt securities. 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 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 shareholders' equity (accumulated other comprehensive income).equity.
Note A - Significant Accounting Policies (continued)
The credit component of an other-than-temporary impairment is determined by comparing the net present value of projected future cash flows with the amortized cost basis of the fixed 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.
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 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 of 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. No impairment was noted asAs a result of the 2017 impairment evaluation.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 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: Shares of restricted stock vest 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 Standards 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 stock will be forfeited should an executive's employment terminate for any reason other than death, disability, or retirement as defined by the Compensation 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. 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
Insurance Company-Owned Life Insurance: Included within other assets on the consolidated balance sheet at December 31, 2018 is $10,000 of insurance company-owned life insurance. The carrying value of the company-owned life insurance policies represents the cash surrender value as reported by the respective insurer, which approximates fair value.
Recently Adopted Accounting Pronouncements:Pronouncements
In May 2014, the FASB issued Accounting Standards Update ("ASU") 2014-09, Revenue from Contracts with Customers (Topic 606), or ASU 2014-09, as amended by subsequently issued ASUs, to clarify the principles for recognizing revenue. While insurance contracts are not within the scope of this updated guidance, the Company's commission and fee income, other than that directly associated with insurance contracts, is subject to this updated guidance. The updated guidance requires an entity to recognize revenue as performance obligations are met in order to reflect the transfer of promised goods or services to customers in an amount that reflects the consideration the
Note A - Significant Accounting Policies (continued)
entity is entitled to receive for those goods or services. The following steps are applied in the updated guidance: (1) identify the contract(s) with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract; and (5) recognize revenue when, or as, the entity satisfies a performance obligation. In August 2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, which deferred the effective date of ASU 2014-09 to the first quarter ending March 31,of 2018. The Company will useadopted the modified retrospective method upon adoption innew guidance as of January 1, 2018. The Company has completed its evaluationadoption of the impact thisnew guidance will have on its consolidated financial statements and has performed a technical assessment of material customer contracts and has concluded the adoption of ASU 2014-09 will not result in any material adjustments and it willdid 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 changechanged 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,Previously, the Company's equity securities were classified as available-for-sale and changes in fair value for investments of this nature were recognized in accumulated other comprehensive income (loss) as a component of shareholders' equity. Additionally,The Company adopted ASU 2016-01 simplifiesas of January 1, 2018 using the impairment assessmentmodified 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 investments without readily determinable fair values;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 useshow the exit price when estimatingchanges 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 financial instruments; and modifies various presentation disclosure requirements for financial instruments.goodwill. ASU 2016-01 became2017-04 is effective for interim and annual reporting periods beginning after December 15, 2017.2020, with early adoption permitted. The effect of thisCompany adopted the new guidance will be dependent on the unrealized gains or losses associated with the Company's equity investments. Such unrealized gains or losses will be recognized upon adoption as a cumulative-effect adjustment to retained earnings with future unrealized gains or losses recognized in the statementfourth quarter of income. Refer2018 and recognized an impairment charge of $3,152 related to the impairment of goodwill. See Note BM for a discussion of unrealized gains and losses (before income taxes) on non-consolidated equity investments of $71,012 currently recognized in other comprehensive income (loss).further discussion.
Recently Issued Accounting Pronouncements
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), or ASU 2016-02. Upon the effective date, ASU 2016-02 will supersedesuperseded the current lease guidance in ASC Topic 840, Leases. Under the new guidance, lessees will beare required to recognize for all leases, with the exception of short-term leases, a lease liability, which is a lessee's obligation to make lease payments arising from a lease, measured on a discounted basis. Concurrently, lessees will beare required to recognize a right-of-use asset, which is an asset that represents the lessee's right to use, or control the use of, a specified asset for the lease term. ASU 2016-02 is effective for interim and annual reporting periods beginning after December 15, 2018, with early adoption permitted. The guidance is required to be applied usingprovides 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 doesadopted the new guidance on January 1, 2019 utilizing the transition method allowed per ASU 2018-11, and accordingly, comparative period financial information will not expectbe 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 ASU 2016-02 tothe new standard’s impact and determined the new standard will not have a material impact on the Company's consolidated financial statements.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 effects the adoption of ASU 2016-13 will have on its consolidated financial statements.
In August 2016,July 2018, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments.No. 2018-09, Codification Improvements. This update addressesprovides clarification, corrects errors in and makes minor improvements to various ASC topics. Many of the presentationamendments in this update have transition guidance with effective dates for annual periods beginning after December 15, 2018 and classification onsome amendments in this update do not require transition guidance and were effective upon issuance of this update. The Company will adopt amendments as they become applicable. The Company has determined that the statementimpact of cash flowsthese improvements will not be material to its consolidated financial statements.
In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for eight specific items, withFair Value Measurement, or ASU 2018-13. This update removes the objectivedisclosure requirements for the amounts of reducing existing diversityand 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 practiceunrealized gains and losses for recurring Level 3 fair value measurements and quantitative information for certain unobservable inputs in how certain cash receipts and cash payments are presented and classified.Level 3 fair value measurements. ASU 2016-152018-13 is effective for interim and annual reporting periods beginning after December 15, 2017, with early adoption permitted. We are2019. The Company is currently evaluating the effects the adoption of ASU 2016-152018-13 will have on ourits consolidated statementsfinancial statements.
Loss reserves have been reduced by estimated salvage and subrogation recoverable of approximately $7,559$7,545 and $4,151$7,559 at December 31, 2018 and 2017, and 2016, respectively.
The reconciliation of the net incurred and paid claims development tables to the liability for claims and claim adjustment expenses in the consolidated statement of financial positionbalance sheet at December 31 is as follows.
The following is supplementary information about average historical claims duration as of December 31, 2017.2018:
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.
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.
Assets and liabilities recorded at fair value in the consolidated balance sheets are categorized based upon the level of judgment associated with the inputs used to measure their fair value. The carrying amounts reported in the consolidated balance sheets for cash, accounts receivables, reinsurance recoverable, notes receivable, accounts payable and accrued expenses, income taxes payable, short-term borrowings and unearned incomepremiums approximate fair value because of the short-term nature of these items. The following tables summarize fair value measurements by level for assets measured at fair value on a recurring basis:
Quoted market prices are obtained whenever possible. Where quoted market prices are not available, fair values are estimated using broker/dealer quotes for specific securities. These techniques are significantly affected by ourthe Company's assumptions, including discount rates and estimates of future cash flows. Potential taxes and other transaction costs have not been considered in estimating fair values.
Transfers between levels, if any, are recorded as of the beginning of the reporting period. There were no significant transfers of assets between Level 1 and Level 2 during 2017. The transfers out of Level 3 during 2017 consisted mainly of bank loans, asset-backed securities and certain mortgage-backed securities and corporate securities, and were the result of changes in the availability of market observable inputs.2018.
In addition to the preceding disclosures on assets recorded at fair value in the consolidated balance sheets, FASB guidance also requires the disclosure of fair values for certain other financial instruments for which it is practicable to estimate fair value, whether or not such values are recognized in the consolidated balance sheets.
Non-financial instruments such as real estate, property and equipment, other assets, deferred income taxes and intangible assets, and certain financial instruments such as policy reserve liabilities are excluded from the fair value disclosures. Therefore, the fair value amounts cannot be aggregated to determine the underlying economic value of the Company. The following methods, assumptions and inputs were used to estimate the fair value of each class of financial instrument:
Limited partnerships: The Company accounts for investments in limited partnerships using the equity method of accounting, which requires an investor in a limited partnership to carry the investment at its proportionate share of the limited partnership's equity. The underlying assets of the Company's investments in limited partnerships are carried primarily at fair value, and, therefore, the Company's carrying value of limited partnerships approximates fair value. As these investments are not actively traded and the corresponding inputs are based on data provided by the investees, they are classified as Level 3.
A summary of the carrying value and fair value by level of financial instruments not recorded at fair value on the Company's consolidated balance sheetsheets at December 31, 20172018 and 20162017 is as follows:
The Company leases certain computer and related equipment using noncancelable operating leases. Lease expense for 2018, 2017 and 2016 was $204, $417 and 2015 was $417, $157, and $175, respectively. At December 31, 2017,2018, future lease payments for operating leases with initial or remaining noncancelable terms of one year or more consisted of the following:
PART IV
Item 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a) 1. | 1. List of Financial Statements--The following consolidated financial statements of the registrant and its subsidiaries (including the Report of Independent Registered Public Accounting Firm) are submitted in Item 8 of this Annual Report on Form 10-K.
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Consolidated Balance Sheets - December 31, 2017 and 2016 |
Consolidated Statements of Income - Years ended December 31, 2017, 2016 and 2015
Consolidated Statements of Comprehensive Income – Years ended December 31, 2017, 2016 and 2015
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Consolidated Statements of Shareholders' Equity - Years ended December 31, 2017, 2016 and 2015 |
Consolidated Statements of Cash Flows - Years ended December 31, 2017, 2016 and 2015 |
Notes to Consolidated Financial Statements |
Consolidated Balance Sheets - December 31, 2018 and 2017
Consolidated Statements of Operations - Years ended December 31, 2018, 2017 and 2016
Consolidated Statements of Comprehensive Income (Loss) – Years ended December 31, 2018, 2017 and 2016
Consolidated Statements of Shareholders' Equity - Years ended December 31, 2018, 2017 and 2016
Consolidated Statements of Cash Flows - Years ended December 31, 2018, 2017 and 2016
Notes to Consolidated Financial Statements
2. | List of Financial Statement Schedules--The following consolidated financial statement schedules of Baldwin & Lyons, Inc.Protective Insurance Corporation and subsidiaries are included in this Annual Report on Form 10-K: |
Pursuant to Article 7: |
Schedule I -- Summary of Investments--Other than Investments in Related Parties |
Schedule II -- Condensed Financial Information of the Registrant |
Schedule III -- Supplementary Insurance Information |
Schedule IV -- Reinsurance |
Schedule VI -- Supplemental Information Concerning Property/Casualty Insurance Operations |
Pursuant to Article 7:
Schedule I Summary of Investments--Other than Investments in Related Parties
Schedule II Condensed Financial Information of Registrant
Schedule III Supplementary Insurance Information
Schedule IV Reinsurance
Schedule VI Supplemental Information Concerning Property/Casualty Insurance Operations
All other schedules to the consolidated financial statements required by Article 7 and Article 5 of Regulation S-X are not required under the related instructions or are inapplicable and therefore have been omitted.
3.Index Toto Exhibits:
INDEX TO EXHIBITS
Exhibit No. | | Description |
| | | Exhibit Number and Description
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| (3) (Articles of Incorporation and By Laws) | EXHIBIT 3(i) –
Restated Articles of Incorporation of Baldwin & Lyons, Inc., as amendedProtective Insurance Corporation (Incorporated as an exhibit by reference to Exhibit A3.1 to the Company's definitive Proxy Statement for its Annual Meeting held May 10, 2016) Company’s Quarterly Report on Form 10-Q filed on August 8, 2018) |
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| (10) (Material Contracts) | EXHIBIT 10(a)--
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10.1 | | 1981 Employee Stock Purchase Plan (Incorporated as an exhibit by reference to Exhibit A to the Company's definitive Proxy Statement for its Annual Meeting held May 5, 1981) (SEC File No. 000-05534)* |
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| | EXHIBIT 10(g)--
Baldwin & Lyons, Inc. Restricted Stock Compensation Plan (Incorporated as an exhibit by referenceExhibit A to the Company's definitive Proxy Statement filed on April 1, 2010 for its Annual Meeting held May 4, 2010)(SEC File No. 000-05534)*
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| | EXHIBIT 10(h)--
Baldwin & Lyons, Inc. Annual Incentive Plan (Incorporated as an exhibit by reference to Appendix A to the Company's definitive Proxy Statement filed on April 7, 2017 for its Annual Meeting held May 9, 2017)(SEC File No. 000-05534)* |
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| | EXHIBIT 10(i)--
Baldwin & Lyons, Inc. Long-Term Incentive Plan (Incorporated as an exhibit by reference to Appendix B to the Company's definitive Proxy Statement filed on April 7, 2017 for its Annual Meeting held May 9, 2017)(SEC File No. 000-05534)* |
(21) (Subsidiaries of the registrant) | EXHIBIT 21--
Subsidiaries of Baldwin & Lyons, Inc. |
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23) (Consents of experts and counsel) | | EXHIBIT 23-- Consent of Ernst & Young LLP |
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(24) (Powers of Attorney) | | Powers of Attorney for certain Officers and Directors |
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| | Certification of CEOthe Interim Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
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| | Certification of CFOthe Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
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| | Certification of CEOthe Interim Chief Executive Officer and CFOChief Financial Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act and 18 U.S.C. 1350of 2002 |
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101 | |
(101) | The following materials from Baldwin & Lyons, Inc.'sProtective Insurance Corporation's Annual Report on Form 10-K for the year ended December 31, 2017,2018, formatted in XBRL (eXtensible Business Reporting Language): (1) the Consolidated Balance Sheets, (2) the Consolidated Statements of Income,Operations, (3) the Consolidated Statements of Comprehensive Income (Loss), (4) the Consolidated Statements of Shareholders' Equity, (5) the Consolidated Statements of Cash Flows, and (6) the Notes to Consolidated Financial Statements. |
* Indicates management contracts or compensatingcompensatory plans or arrangements.
Item 16. FORM 10-K SUMMARY
None.
SCHEDULE I
PROTECTIVE INSURANCE CORPORATION AND SUBSIDIARIES SUMMARY OF INVESTMENTS OTHER THAN INVESTMENTS IN RELATED PARTIES (in thousands) As of December 31, 2018
Type of Investment | | Cost | | | Fair Value | | | Amount at Which Shown in the Consolidated Balance Sheet (1) | | Fixed Income Securities: | | | | | | | | | | Bonds: | | | | | | | | | | Agency collateralized mortgage obligations | | $ | 10,636 | | | $ | 10,687 | | | $ | 10,687 | | Agency mortgage-backed securities | | | 37,168 | | | | 37,385 | | | | 37,385 | | Asset-backed securities | | | 66,241 | | | | 64,422 | | | | 64,422 | | Bank loans | | | 10,208 | | | | 9,750 | | | | 9,750 | | Certificates of deposit | | | 2,835 | | | | 2,835 | | | | 2,835 | | Collateralized mortgage obligations | | | 5,095 | | | | 5,423 | | | | 5,423 | | Corporate securities | | | 196,925 | | | | 190,450 | | | | 190,450 | | Mortgage-backed securities | | | 38,586 | | | | 38,540 | | | | 38,540 | | Municipal obligations | | | 29,102 | | | | 29,155 | | | | 29,155 | | Non-U.S. government obligations | | | 25,339 | | | | 25,180 | | | | 25,180 | | U.S. government obligations | | | 178,369 | | | | 178,818 | | | | 178,818 | | Total fixed income securities
| | | 600,504 | | | | 592,645 | | | | 592,645 | | | | | | | | | | | | | | | Equity Securities: | | | | | | | | | | | | | Common Stocks: | | | | | | | | | | | | | Consumer | | | 15,963 | | | | 17,945 | | | | 17,945 | | Energy | | | 3,981 | | | | 3,179 | | | | 3,179 | | Financial | | | 23,111 | | | | 25,253 | | | | 25,253 | | Industrial | | | 3,287 | | | | 6,920 | | | | 6,920 | | Technology | | | 1,259 | | | | 2,303 | | | | 2,303 | | Funds (e.g. mutual funds, closed end funds, ETFs) | | | 6,797 | | | | 5,489 | | | | 5,489 | | Other | | | 5,032 | | | | 5,333 | | | | 5,333 | | Total equity securities | | | 59,430 | | | | 66,422 | | | | 66,422 | | | | | | | | | | | | | | | Commercial mortgage loans | | | 6,672 | | | | 6,672 | | | | 6,672 | | Short-term: | | | | | | | | | | | | | Certificates of deposit | | | 1,000 | | | | 1,000 | | | | 1,000 | | Total short-term and other | | | 1,000 | | | | 1,000 | | | | 1,000 | | | | | | | | | | | | | | | Total investments | | $ | 667,606 | | | $ | 666,739 | | | $ | 666,739 | |
(1) | Amounts presented above do not include investments of $156,855 classified as cash and cash equivalents in the consolidated balance sheet. |
SCHEDULE II
PROTECTIVE INSURANCE CORPORATION AND SUBSIDIARIES CONDENSED FINANCIAL INFORMATION OF REGISTRANT BALANCE SHEETS - PARENT COMPANY ONLY (in thousands)
| | December 31 | | | | 2018 | | | 2017 | | Assets | | | | | | | Investment in subsidiaries | | $ | 401,260 | | | $ | 436,879 | | Due from affiliates | | | 1,152 | | | | 1,191 | | Investments other than subsidiaries: | | | | | | | | | Fixed income securities | | | 22,302 | | | | 22,306 | | Limited partnerships | | | 215 | | | | 222 | | | | | 22,517 | | | | 22,528 | | Cash and cash equivalents | | | 15,185 | | | | 26,496 | | Accounts receivable | | | 2,276 | | | | 6,833 | | Other assets | | | 28,794 | | | | 24,772 | | Total assets | | $ | 471,184 | | | $ | 518,699 | | | | | | | | | | | Liabilities and shareholders' equity | | | | | | | | | | | | | | | | | | Liabilities: | | | | | | | | | Premiums payable | | $ | 22,964 | | | $ | 14,046 | | Deposits from insureds | | | 58,748 | | | | 60,893 | | Short-term borrowings | | | 20,000 | | | | 20,000 | | Other liabilities | | | 13,390 | | | | 4,949 | | | | | 115,102 | | | | 99,888 | | Shareholders' equity: | | | | | | | | | Common stock: | | | | | | | | | Class A | | | 112 | | | | 112 | | Class B | | | 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 | | | | | | | | | | | Total liabilities and shareholders' equity | | $ | 471,184 | | | $ | 518,699 | |
SCHEDULE II
PROTECTIVE INSURANCE CORPORATION AND SUBSIDIARIES CONDENSED FINANCIAL INFORMATION OF REGISTRANT STATEMENTS OF INCOME (LOSS) - PARENT COMPANY ONLY (in thousands)
| | Year Ended December 31 | | | | 2018 | | | 2017 | | | 2016 | | Revenue: | | | | | | | | | | Commissions and service fees | | $ | 17,456 | | | $ | 18,863 | | | $ | 27,736 | | Cash dividends from subsidiaries | | | 5,000 | | | | 10,000 | | | | 20,000 | | Net investment income | | | 569 | | | | 348 | | | | 134 | | Net realized gains (losses) on investments | | | (192 | ) | | | 308 | | | | (3 | ) | Other | | | 51 | | | | (106 | ) | | | (24 | ) | | | | 22,884 | | | | 29,413 | | | | 47,843 | | Expenses: | | | | | | | | | | | | | Salary and related items | | | 20,158 | | | | 18,140 | | | | 17,462 | | Other | | | 11,724 | | | | 9,686 | | | | 10,808 | | | | | 31,882 | | | | 27,826 | | | | 28,270 | | Income (loss) before federal income tax benefit and equity in undistributed income of subsidiaries | | | (8,998 | ) | | | 1,587 | | | | 19,573 | | Federal income tax benefit | | | (2,862 | ) | | | (2,971 | ) | | | (69 | ) | | | | (6,136 | ) | | | 4,558 | | | | 19,642 | | Equity in undistributed income of subsidiaries | | | (27,939 | ) | | | 13,765 | | | | 9,303 | | | | | | | | | | | | | | | Net income (loss) | | $ | (34,075 | ) | | $ | 18,323 | | | $ | 28,945 | |
SCHEDULE II
PROTECTIVE INSURANCE CORPORATION AND SUBSIDIARIES CONDENSED FINANCIAL INFORMATION OF REGISTRANT STATEMENTS OF COMPREHENSIVE INCOME (LOSS) - PARENT COMPANY ONLY (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 | |
SCHEDULE I -- SUMMARY OF INVESTMENTS- | | OTHER THAN INVESTMENTS IN RELATED PARTIES | | | | | | | | | Form 10-K - Year Ended December 31, 2017 | | | | | | | | | Baldwin & Lyons, Inc. and Subsidiaries | | | | | | | | | | | | | | | | Column A | Column B | | Column C | | Column D | | | | | | | | | | | | | | Amount At | | | | | | | Which Shown | | | | | Fair | | In The Balance | | Type of Investment | Cost | | Value | | Sheet (A) | | | (dollars in thousands) | | | | | | | | | Fixed Maturities: | | | | | | | Bonds: | | | | | | | Agency collateralized mortgage obligations | | $ | 15,839 | | | $ | 16,586 | | | $ | 16,586 | | Agency mortgage-backed securities | | | 27,180 | | | | 27,075 | | | | 27,075 | | Asset-backed securities | | | 42,861 | | | | 43,469 | | | | 43,469 | | Bank loans | | | 19,271 | | | | 19,488 | | | | 19,488 | | Certificates of deposit | | | 3,124 | | | | 3,135 | | | | 3,135 | | Collateralized mortgage obligations | | | 6,079 | | | | 6,492 | | | | 6,492 | | Corporate securities | | | 197,201 | | | | 197,130 | | | | 197,130 | | Mortgage-backed securities | | | 23,656 | | | | 24,204 | | | | 24,204 | | Municipal obligations | | | 97,059 | | | | 96,650 | | | | 96,650 | | Non-U.S. government obligations | | | 39,189 | | | | 38,613 | | | | 38,613 | | U.S. government obligations | | | 49,558 | | | | 49,011 | | | | 49,011 | | Total fixed maturities | | | 521,017 | | | | 521,853 | | | | 521,853 | | | | | | | | | | | | | | | Equity Securities: | | | | | | | | | | | | | Common Stocks: | | | | | | | | | | | | | Consumer | | | 23,565 | | | | 46,578 | | | | 46,578 | | Energy | | | 6,763 | | | | 10,278 | | | | 10,278 | | Financial | | | 31,859 | | | | 45,470 | | | | 45,470 | | Industrial | | | 8,949 | | | | 25,402 | | | | 25,402 | | Technology | | | 5,768 | | | | 13,061 | | | | 13,061 | | Funds (e.g. mutual funds, closed end funds, ETFs) | | | 46,177 | | | | 50,291 | | | | 50,291 | | Other | | | 7,670 | | | | 10,683 | | | | 10,683 | | Total equity securities | | | 130,751 | | | | 201,763 | | | | 201,763 | | | | | | | | | | | | | | | Short-term: | | | | | | | | | | | | | Certificates of deposit | | | 1,000 | | | | 1,000 | | | | 1,000 | | Total short-term and other | | | 1,000 | | | | 1,000 | | | | 1,000 | | | | | | | | | | | | | | | Total investments | | $ | 652,768 | | | $ | 724,616 | | | $ | 724,616 | | | | | | | | | | | | | | | (A) Amounts presented above do not include investments of $59,174 classified as cash and | | | | | | | | | | | | | cash equivalents in the balance sheet. | | | | | | | | | | | | |
SCHEDULE II PROTECTIVE INSURANCE CORPORATION AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT STATEMENTS OF CASH FLOWS - 80 -PARENT COMPANY ONLY
SCHEDULE II | | CONDENSED FINANCIAL INFORMATION OF REGISTRANT | | | | | | | | | Form 10-K | | | | | | | | | Baldwin & Lyons, Inc. | | | | Condensed Balance Sheets | | | | | | | | | December 31 | | | | 2017 | | | 2016 | | | | (dollars in thousands) | | Assets | | | | | | | Investment in subsidiaries | | $ | 436,879 | | | $ | 409,892 | | Due from affiliates | | | 1,191 | | | | 3,381 | | Investments other than subsidiaries: | | | | | | | | | Fixed maturities | | | 22,306 | | | | 10,166 | | Limited partnerships | | | 222 | | | | 205 | | | | | 22,528 | | | | 10,371 | | Cash and cash equivalents | | | 26,496 | | | | 14,995 | | Accounts receivable | | | 6,833 | | | | 7,602 | | Other assets | | | 24,772 | | | | 25,763 | | Total assets | | $ | 518,699 | | | $ | 472,004 | | Liabilities and shareholders' equity | | | | | | | | | | | | | | | | | | Liabilities: | | | | | | | | | Premiums payable | | $ | 14,046 | | | $ | 11,973 | | Deposits from insureds | | | 60,893 | | | | 30,087 | | Short-term borrownings | | | 20,000 | | | | 20,000 | | Other liabilities | | | 4,949 | | | | 5,599 | | | | | 99,888 | | | | 67,659 | | Shareholders' equity: | | | | | | | | | Common stock: | | | | | | | | | Class A | | | 112 | | | | 112 | | Class B | | | 530 | | | | 532 | | Additional paid-in capital | | | 55,078 | | | | 54,286 | | Unrealized net gains on investments | | | 46,700 | | | | 34,051 | | Foreign exchange adjustment | | | (309 | ) | | | (831 | ) | Retained earnings | | | 316,700 | | | | 316,195 | | | | | 418,811 | | | | 404,345 | | | | | | | | | | | Total liabilities and shareholders' equity | | $ | 518,699 | | | $ | 472,004 | |
SCHEDULE II | | CONDENSED FINANCIAL INFORMATION OF REGISTRANT | | | | | | | | | | | | Form 10-K | | | | | | | | | | | | Baldwin & Lyons, Inc. | | | | Condensed Statements of Income | | | | | | | | | | | | Year Ended December 31 | | | | 2017 | | | 2016 | | | 2015 | | | | (dollars in thousands) | | Revenue: | | | | | | | | | | Commissions and service fees | | $ | 18,863 | | | $ | 27,736 | | | $ | 23,523 | | Cash dividends from subsidiaries | | | 10,000 | | | | 20,000 | | | | 20,000 | | Net investment income | | | 348 | | | | 134 | | | | 120 | | Net realized gains (losses) on investments | | | 308 | | | | (3 | ) | | | (22 | ) | Other | | | (106 | ) | | | (24 | ) | | | (17 | ) | | | | 29,413 | | | | 47,843 | | | | 43,604 | | Expenses: | | | | | | | | | | | | | Salary and related items | | | 18,140 | | | | 17,462 | | | | 17,616 | | Other | | | 9,686 | | | | 10,808 | | | | 7,297 | | | | | 27,826 | | | | 28,270 | | | | 24,913 | | Income before federal income taxes | | | | | | | | | | | | | and equity in undistributed | | | | | | | | | | | | | income of subsidiaries | | | 1,587 | | | | 19,573 | | | | 18,691 | | Federal income tax benefit | | | (2,971 | ) | | | (69 | ) | | | (350 | ) | | | | 4,558 | | | | 19,642 | | | | 19,041 | | Equity in undistributed income | | | | | | | | | | | | | of subsidiaries | | | 13,765 | | | | 9,303 | | | | 4,242 | | | | | | | | | | | | | | | Net income | | $ | 18,323 | | | $ | 28,945 | | | $ | 23,283 | |
| | Year Ended December 31 | | | | 2018 | | | 2017 | | | 2016 | | Net cash provided by operating activities | | $ | 14,019 | | | $ | 44,998 | | | $ | 15,484 | | | | | | | | | | | | | | | Investing activities: | | | | | | | | | | | | | Purchases of investments | | | (11,435 | ) | | | (21,365 | ) | | | (4,000 | ) | Sales or maturities of investments | | | 11,213 | | | | 9,146 | | | | 3,493 | | Net sales of short-term investments | | | – | | | | – | | | | 2,165 | | Distributions from limited partnerships | | | – | | | | 298 | | | | – | | Net purchases of property and equipment | | | (3,677 | ) | | | (3,394 | ) | | | (4,278 | ) | Net cash used in investing activities | | | (3,899 | ) | | | (15,315 | ) | | | (2,620 | ) | | | | | | | | | | | | | | 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 | ) | | | | | | | | | | | | | | Increase (decrease) in cash, cash equivalents and restricted cash and cash equivalents | | | (11,311 | ) | | | 11,501 | | | | (2,939 | ) | Cash, cash equivalents and restricted cash and cash equivalents at beginning of year | | | 26,496 | | | | 14,995 | | | | 17,934 | | Cash, cash equivalents and restricted cash and cash equivalents at end of year | | $ | 15,185 | | | $ | 26,496 | | | $ | 14,995 | |
SCHEDULE II | | CONDENSED FINANCIAL INFORMATION OF REGISTRANT | | | | | | | | | | | | Form 10-K | | | | | | | | | | | | Baldwin & Lyons, Inc. | | | | | | | | | | | | | | | | | Condensed Statements of Comprehensive Income | | | | | | | | | | | | 2017 | | | 2016 | | | 2015 | | | | (dollars in thousands) | | | | | | | | | | | | Net income | | $ | 18,323 | | | $ | 28,945 | | | $ | 23,283 | | | | | | | | | | | | | | | Other comprehensive income (loss), net of tax: | | | | | | | | | | | | | Unrealized net losses on securities: | | | | | | | | | | | | | Unrealized holding net gains (losses) arising during the period | | | 17,340 | | | | 8,618 | | | | (12,639 | ) | Less: reclassification adjustment for net gains | | | | | | | | | | | | | included in net income | | | (4,691 | ) | | | (13,491 | ) | | | (277 | ) | Other comprehensive income (loss), net of tax | | | 12,649 | | | | (4,873 | ) | | | (12,916 | ) | | | | | | | | | | | | | | Foreign currency translation adjustments | | | 522 | | | | 235 | | | | (1,456 | ) | | | | | | | | | | | | | | Other comprehensive income (loss) | | | 13,171 | | | | (4,638 | ) | | | (14,372 | ) | | | | | | | | | | | | | | Comprehensive income | | $ | 31,494 | | | $ | 24,307 | | | $ | 8,911 | |
SCHEDULE II | | CONDENSED FINANCIAL INFORMATION OF REGISTRANT | | | | | | | | | | | | Form 10-K | | | | | | | | | | | | Baldwin & Lyons, Inc. | | | | | | | | | | | | | | Condensed Statements of Cash Flows | | | | | | | | | | | | Year Ended December 31 | | | | 2017 | | | 2016 | | | 2015 | | | | (dollars in thousands) | | Net cash provided by operating activities | | $ | 44,998 | | | $ | 15,484 | | | $ | 21,841 | | | | | | | | | | | | | | | Investing activities: | | | | | | | | | | | | | Purchases of long-term investments | | | (21,365 | ) | | | (4,000 | ) | | | (4,792 | ) | Sales or maturities of long-term investments | | | 9,146 | | | | 3,493 | | | | 4,194 | | Net sales of short-term investments | | | - | | | | 2,165 | | | | - | | Distributions from limited partnerships | | | 298 | | | | - | | | | - | | Net purchases of property and equipment | | | (3,394 | ) | | | (4,278 | ) | | | (4,921 | ) | Net cash used in investing activities | | | (15,315 | ) | | | (2,620 | ) | | | (5,519 | ) | | | | | | | | | | | | | | Financing activities: | | | | | | | | | | | | | Dividends paid to shareholders | | | (16,302 | ) | | | (15,803 | ) | | | (15,003 | ) | Repurchase of common shares | | | (1,880 | ) | | | - | | | | - | | Net cash used in financing activities | | | (18,182 | ) | | | (15,803 | ) | | | (15,003 | ) | Increase (decrease) in cash and cash equivalents | | | 11,501 | | | | (2,939 | ) | | | 1,319 | | Cash and cash equivalents at beginning of year | | | 14,995 | | | | 17,934 | | | | 16,615 | | Cash and cash equivalents at end of year | | $ | 26,496 | | | $ | 14,995 | | | $ | 17,934 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Note to Condensed Financial Statements -- Basis of Presentation
The Company's investment in subsidiaries is stated at cost plus equity in the undistributed earnings of subsidiaries since the date of acquisition. The Company's share of net income of its subsidiaries is included in income using the equity method. These financial statements should be read in conjunction with the Company's consolidated financial statements.
SCHEDULE III -- SUPPLEMENTARY INSURANCE INFORMATION | | | | | | | | | | | | | Form 10-K | | | | | | | | | | | | | Baldwin & Lyons, Inc. and Subsidiaries | | | | | | | | | | | | | (Dollars in thousands) | | | | | | | | | | | | | | | | | | | | | | | | | Column A | Column B | Column C | Column D | Column E | | Column F | Column G | Column H | Column I | Column J | Column K | | | | | | | | | | | | | | | | | | | | | | | | | | | | Year Ended December 31 | | | Reserves | | | | | | | | | | | | for Unpaid | | Other | | | | Benefits, | Amortization | | | | Deferred | Claims | | Policy | | | | Claims, | of Deferred | | | | Policy | and Claim | | Claims and | | Net | Net | Losses and | Policy | Other | Net | | Acquisition | Adjustment | Unearned | Benefits | | Premium | Investment | Settlement | Acquisition | Operating | Premiums | Segment | Costs | Expenses | Premiums | Payable | | Earned | Income | Expenses | Costs | Expenses | Written | | | | | | | | (A) | (A) | | (A) (B) | | Property/Casualty | | | | | | | | | | | | Insurance | | | | | | | | | | | | | | | | | | | | | | | | 2017 | | $ 680,274 | $ 53,085 | --- | | $ 328,145 | $ 18,095 | $ 247,518 | $ 70,574 | $ 14,043 | $ 353,389 | | | | | | | | | | | | | 2016 | 1,172 | 576,330 | 21,694 | --- | | 276,011 | 14,483 | 186,481 | 51,597 | 8,180 | 271,752 | | | | | | | | | | | | | 2015 | 1,443 | 513,596 | 25,291 | --- | | 263,335 | 12,498 | 155,750 | 50,270 | 13,682 | 254,653 |
SCHEDULE III
(A) Allocations of certain expenses have been made to invesetment income, settlement expenses and other operating expenses and are based on a number of assumptions and estimates. Results among these categories would change if different methods were applied.PROTECTIVE INSURANCE CORPORATION AND SUBSIDIARIES
SUPPLEMENTARY INSURANCE INFORMATION (B) (in thousands)
| | As of December 31 | | | Year Ended December 31 | | Segment | | Deferred Policy Acquisition Costs | | | Reserves for Unpaid Claims and Claim Adjustment Expenses | | | Unearned Premiums | | | Other Policy Claims and Benefits Payable | | | Net Premium Earned | | | Net Investment Income | | | Benefits, Claims, Losses and Settlement Expenses | | | Amortization of Deferred Policy Acquisition Costs | | | Other Operating Expenses | | | Net Premiums Written | | | | | | | | | | | | | | | | | | | (A) | | | (A) | | | | | | (A) (B) | | | | | Property/Casualty Insurance | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 2018 | | $ | 6,568 | | | $ | 865,339 | | | $ | 71,625 | | | | – | | | $ | 432,880 | | | $ | 22,048 | | | $ | 345,864 | | | $ | 78,105 | | | $ | 23,514 | | | $ | 444,398 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 2017 | | | 5,608 | | | | 680,274 | | | | 53,085 | | | | – | | | | 328,145 | | | | 18,095 | | | | 247,518 | | | | 70,574 | | | | 14,043 | | | | 353,389 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 2016 | | | 1,172 | | | | 576,330 | | | | 21,694 | | | | – | | | | 276,011 | | | | 14,483 | | | | 186,481 | | | | 51,597 | | | | 8,180 | | | | 271,752 | |
(A) | Allocations of certain expenses have been made to investment income, settlement expenses and other operating expenses and are based on a number of assumptions and estimates. Results among these categories would change if different methods were applied. |
(B) | Commission allowances relating to reinsurance ceded are offset against other operating expenses. |
SCHEDULE IV
PROTECTIVE INSURANCE CORPORATION AND SUBSIDIARIES REINSURANCE ((in thousands)
| | Direct Premiums | | | Ceded to Other Companies | | | Assumed from Other Companies | | | Net Amount | | | % of Amount Assumed to Net | | Premiums Earned - | | | | | | | | | | | | | | | | Years Ended December 31: | | | | | | | | | | | | | | | | 2018 | | $ | 562,364 | | | $ | 131,080 | | | $ | 1,596 | | | $ | 432,880 | | | | 0.4 | % | | | | | | | | | | | | | | | | | | | | | | 2017 | | | 470,158 | | | | 145,201 | | | | 3,188 | | | | 328,145 | | | | 1.0 | % | | | | | | | | | | | | | | | | | | | | | | 2016 | | | 394,679 | | | | 130,012 | | | | 11,344 | | | | 276,011 | | | | 4.1 | % |
Note: | Included in Ceded to Other Companies is $0, $0 and $86 for 2018, 2017 and 2016, respectively, relating to retrocessions associated with premiums assumed from other companies. Percentage of Amount Assumed to Net above considers the impact of this retrocession. |
SCHEDULE VI
PROTECTIVE INSURANCE CORPORATION AND SUBSIDIARIES SUPPLEMENTAL INFORMATION CONCERNING PROPERTY/CASUALTY INSURANCE OPERATIONS (in thousands)
| | As of December 31 | | | Year Ended December 31 | | | | Deferred Policy | | | Reserves for Unpaid Claims | | | Discount, if any Deducted | | | | | | | | | Net | | | Claims and Claim Adjustment Expenses Incurred Related to | | | Amortization of Deferred Policy | | | Paid Claims and Claims | | | Net | | Affiliation with Registrant | | Acquisition Costs | | | Adjustment Expenses | | | from Reserves | | | Unearned Premiums | | | Earned Premiums | | | Investment Income | | | Current Year | | | Prior Years | | | Acquisition Costs | | | Adjustment Expenses | | | Premiums Written | | Consolidated Property/Casualty Subsidiaries: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 2018 | | $ | 6,568 | | | $ | 865,339 | | | $ | – | | | $ | 71,625 | | | $ | 432,880 | | | $ | 22,048 | | | $ | 329,078 | | | $ | 16,786 | | | $ | 78,105 | | | $ | 228,591 | | | $ | 444,398 | | 2017 | | | 5,608 | | | | 680,274 | | | | – | | | | 53,085 | | | | 328,145 | | | | 18,095 | | | | 228,303 | | | | 19,215 | | | | 70,574 | | | | 200,154 | | | | 353,389 | | 2016 | | | 1,172 | | | | 576,330 | | | | – | | | | 21,694 | | | | 276,011 | | | | 14,483 | | | | 172,645 | | | | 13,836 | | | | 51,597 | | | | 163,467 | | | | 271,752 | |
SCHEDULE IV -- REINSURANCE | | | | | | | | | | | | | | | | | | Form 10-K | | | | | | | | | | | | | | | | | | Baldwin & Lyons, Inc. and Subsidiaries | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Column A | | Column B | | | Column C | | | Column D | | | Column E | | | Column F | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | % of | | | | | | | Ceded | | | Assumed | | | | | | Amount | | | | Direct | | | to Other | | | from Other | | | Net | | | Assumed to | | | | Premiums | | | Companies | | | Companies | | | Amount | | | Net | | | | (dollars in thousands) | | | | | Premiums Earned - | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Years Ended December 31: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | 2017 | | $ | 470,158 | | | $ | 145,201 | | | $ | 3,188 | | | $ | 328,145 | | | | 1.0 | | | | | | | | | | | | | | | | | | | | | | | 2016 | | | 394,679 | | | | 130,012 | | | | 11,344 | | | | 276,011 | | | | 4.1 | | | | | | | | | | | | | | | | | | | | | | | 2015 | | | 370,499 | | | | 128,697 | | | | 21,533 | | | | 263,335 | | | | 8.0 | |
Note: Included in Ceded to Other Companies is $0, $86 and $562 for 2017, 2016 and 2015, respectively, relating to retrocessions associated with premiums assumed from other companies. Percentage of Amount Assumed to Net above considers the impact of this retrocession.
SCHEDULE VI--SUPPLEMENTAL INFORMATION | CONCERNING PROPERTY/CASUALTY INSURANCE OPERATIONS | | | | | | | | | | | | | | | | | | | | | | | Form 10-K | Baldwin & Lyons, Inc. and Subsidiaries | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | (Dollars in thousands) | | | | | | | | | | | | | | | | | | | | | | | Column A | | Column B | Column C | | Column D | | Column E | | Column F | | Column G | | Column H | | | | Column I | | Column J | | Column K | | | | | | | | | | | | | | | | | | | | | | | | | As of December 31 | | | | | | | Year Ended December 31 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Reserves | | | | | | | | | | Claims and Claim | | Amortiza- | | | | | | | | for Unpaid | | Discount, | | | | | | | | Adjustment Expenses | | tion of | | | | | | | Deferred | Claims | | if any | | | | | | | | Incurred Related to | | Deferred | | Paid Claims | | | AFFILIATION | | Policy | and Claim | | Deducted | | | | | | Net | | (1) | | (2) | | Policy | | and Claim | | Net | WITH | | Acquisi- | Adjustment | | in | | Unearned | | Earned | | Investment | | Current | | Prior | | Acquisition | | Adjustment | | Premiums | REGISTRANT | | tion Costs | Expenses | | Column C | | Premiums | | Premiums | | Income | | Year | | Years | | Costs | | Expenses | | Written | | | | | | | | | | | | | | | | | | | | | | | Consolidated Property/Casualty Subsidiaries: | | (A) | | | | | | | | | | | | | | | | | 2017 | | $5,608 | $680,274 | | $- | | $53,085 | | $328,145 | | $18,095 | | $228,303 | | $19,215 | | $70,574 | | $200,154 | | $353,389 | 2016 | | 1,172 | 576,330 | | - | | 21,694 | | 276,011 | | 14,483 | | 172,645 | | 13,836 | | 51,597 | | 163,467 | | 271,752 | 2015 | | 1,443 | 513,596 | | 2,110 | | 25,291 | | 263,335 | | 12,498 | | 165,812 | | (10,062) | | 50,270 | | 149,580 | | 254,653 |
(A) Loss reserves on certain reinsurance assumed and permanent total disability workers' compensation claims have been discounted to present value using pretax interest rates not exceeding 3.5% through 2015.
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d)15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
BALDWIN & LYONS, INC.
| PROTECTIVE INSURANCE CORPORATION | | | | March 7, 2019 | By: | /s/ John D. Nichols, Jr. | | | John D. Nichols, Jr. | | | Interim Chief Executive Officer and Chairman of the Board of Directors |
March 13, 2018
By /s/ W. Randall Birchfield
W. Randall Birchfield,
Director, President, Chief Executive Officer and Chief Operating Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
Signatures | | Title | | Date | | | | | | /s/ John D. Nichols, Jr. | | Interim Chief Executive Officer and Chairman of the Board of Directors | | March 7, 2019 | John D. Nichols, Jr. | | (Principal Executive Officer) | | | | | | | | /s/ William C. Vens | | Chief Financial Officer | | March 7, 2019 | William C. Vens | | (Principal Financial Officer and Principal Accounting Officer) | | | | | | | | /s/ Steven J. Bensinger | | Director | | March 7, 2019 | Steven J. Bensinger | | | | | | | | | | /s/ Stuart D. Bilton | | Director | | March 7, 2019 | Stuart D. Bilton | | | | | | | | | | /s/ Otto N. Frenzel IV | | Director | | March 7, 2019 | Otto N. Frenzel IV | | | | | | | | | | /s/ LoriAnn Lowery-Biggers | | Director | | March 7, 2019 | LoriAnn Lowery-Biggers | | | | | | | | | | /s/ David W. Michelson | | Director | | March 7, 2019 | David W. Michelson | | | | | | | | | | /s/ James A. Porcari III | | Director | | March 7, 2019 | James A. Porcari III | | | | | | | | | | /s/ Nathan Shapiro | | Director | | March 7, 2019 | Nathan Shapiro | | | | | | | | | | /s/ Robert Shapiro | | Director | | March 7, 2019 | Robert Shapiro | | | | |
March 13, 2018
By /s/ Steven J. Bensinger
Steven J. Bensinger,
Director
March 13, 2018
By /s/ Stuart D. Bilton
Stuart D. Bilton,
Director
March 13, 2018
By /s/ W. Randall Birchfield
W. Randall Birchfield,
Director, President, Chief Executive Officer and Chief Operating Officer
(Principal Executive Officer)
March 13, 2018
By /s/ Otto N. Frenzel IV
Otto N. Frenzel IV,
Director
March 13, 2018
By /s/ LoriAnn Lowery-Biggers
LoriAnn Lowery-Biggers,
Director
March 13, 2018
By /s/ Philip V. Moyles Jr.
Philip V. Moyles Jr.,
Director
March 13, 2018
By /s/ John D. Nichols Jr.
John D. Nichols Jr.,
Director
March 13, 2018
By /s/ John A. Pigott
John A. Pigott,
Director
March 13, 2018
By /s/ James A. Porcari III
James A. Porcari III,
Director
March 13, 2018
By /s/ Kenneth D. Sacks
Kenneth D. Sacks,
Director
March 13, 2018
By /s/ Nathan Shapiro
Nathan Shapiro,
Director
March 13, 2018
By /s/ Norton Shapiro
Norton Shapiro,
Director
March 13, 2018
By /s/ Robert Shapiro
Robert Shapiro,
Director
March 13, 2018
By /s/ Steven A. Shapiro
Steven A. Shapiro,
Executive Chairman
March 13, 2018
By /s/ William C. Vens
William C. Vens,
Chief Financial Officer
(Principal Financial Officer and Principal Accounting Officer)
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