Notes to Consolidated Financial Statements
Baldwin & Lyons, Inc. and Subsidiaries
(Dollars in thousands, except share and per share data)
Note A - Summary of Significant Accounting Policies
Description of Business:
Baldwin & Lyons, Inc. (the "Company"), based in Carmel, Indiana, is a specialty property-casualty insurer providing property, liability and workers compensation coverage for trucking and public transportation fleets, as well as coverage for trucking industry independent contractors. In addition, B&L offers workers' compensation coverage for a variety of operations outside the transportation industry. The Company operates as one reportable property and casualty insurance segment, offering a range of products and services, the most significant being commercial automobile and workers' compensation insurance products.
The Company determined that its business constituted one reportable property and casualty insurance segment as of January 1, 2017. During 2016 and prior years, the Company had two reportable segments – property and casualty insurance and reinsurance. The Company moved to a single reportable segment based on how its operating results are regularly reviewed by the Company's chief operating decision maker to make decisions about resources to be allocated to the segment and to assess its performance. The prior year segment information throughout this
Annual Report on Form 10-K was updated to conform to the current year presentation.
Basis of Presentation:
The consolidated financial statements include the accounts of the Company and its wholly- 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:
Carrying amounts for fixed maturity securities represent fair value and are based on quoted market prices, when available, or broker/dealer quotes for specific securities when quoted market prices are not available. Equity securities are carried at quoted market prices (fair value). The Company accounts for investments in limited partnerships using the equity method of accounting, which requires an investor in a limited partnership to record its proportionate share of the limited partnership's net income. To the extent that a limited partnership includes both realized and unrealized investment gains or losses in its determination of net income or loss, then the Company would also recognize, through its statements of operations, its proportionate share of the limited partnership's unrealized as well as realized investment gains or losses.
Short-term and other investments are carried at cost, which approximates their fair values.
Realized gains and losses on disposals of investments are recorded on the trade date, are determined by specific identification of cost of investments sold and are included in income. All fixed maturity and equity securities are considered to be available for sale; the related unrealized net gains or losses (net of applicable tax effect) are reflected directly in shareholders' equity. Included within available for sale fixed maturity securities are convertible debt securities. Portions of the changes in fair values of convertible debt securities are reflected as a component of net realized gains (losses) on investments.
In accordance with the Financial Accounting Standard Board's ("FASB") other-than-temporary impairment guidance, if a fixed maturity security is in an unrealized loss position and the Company has the intent to sell the fixed maturity security, or it is more likely than not that the Company will have to sell the fixed maturity security before recovery of its amortized cost basis, the decline in value is deemed to be other-than-temporary and is recorded to net realized losses on investments in the consolidated statements of operations. For impaired fixed maturity securities that the Company does not intend to sell or in cases where it is more likely than not that the Company will not have to sell such securities, but the Company expects that it will not fully recover the amortized cost basis, the credit component of the other-than-temporary impairment is recognized in net realized losses on investments in the consolidated statements of operations and the non-credit component of the other-than-temporary impairment is recognized directly in shareholders' equity (accumulated other comprehensive income).
Note A - Significant Accounting Policies (continued)
The credit component of an other-than-temporary impairment is determined by comparing the net present value of projected future cash flows with the amortized cost basis of the fixed maturity security. The net present value is calculated by discounting the Company'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 as a result of the 2017 impairment evaluation. Intangible assets determined to have finite lives, such as customer relationships and employment agreements, are amortized over their estimated useful lives in a manner that best reflects the economic benefits of the intangible asset. In addition, impairment testing is performed on these amortizing intangible assets if impairment indicators are noted.
Reserves for Losses and Loss Expenses:
The reserves for losses and loss expenses are determined using case basis evaluations and statistical analyses and represent estimates of the ultimate cost of all reported and unreported losses which are unpaid at year end. These reserves include estimates of future trends in claim severity and frequency and other factors which could vary as the losses are ultimately settled. While actual results will differ from such estimates, management believes that the reserves for losses and loss expenses are adequate. The estimates are continually reviewed and as adjustments to these reserves become necessary, such adjustments are reflected in current operations.
Recognition of Revenue and Costs:
Premiums are earned over the period for which insurance protection is provided. A reserve for unearned premiums, computed by the daily pro-rata method, is established to reflect amounts applicable to subsequent accounting periods. Commissions to unaffiliated companies and premium taxes applicable to unearned premiums are deferred and expensed as the related premiums are earned. The Company does not defer acquisition costs, which are not directly variable with the production of premium. If it is determined that expected losses and deferred expenses will likely exceed the related unearned premiums, the asset representing deferred policy acquisition costs is reduced and an expense is charged against current operations to reflect any such premium deficiency. In the event that the expected premium deficiency exceeds deferred policy acquisition costs, an additional liability would be recorded with a corresponding expense to current operations for the amount of the excess premium deficiency. Anticipated investment income is considered in determining recoverability of deferred acquisition costs.
Reinsurance
: Reinsurance premiums, commissions, expense reimbursements and reserves related to the Company's reinsured business are accounted for on bases consistent with those used in accounting for the original policies issued and the terms of the reinsurance contracts. Premiums ceded to other insurers have been reported as a reduction of premium earned. Amounts applicable to reinsurance ceded for unearned premium and claim loss reserves have been reported as reinsurance recoverable assets. Certain reinsurance contracts provide for additional or return premiums and commissions based upon profits or losses to the reinsurer over prescribed periods. Estimates of additional or return premiums and commissions are adjusted quarterly to recognize actual loss experience to date, as well as projected loss experience applicable to the various contract periods. Estimates of reinstatement premiums on
reinsurance contracts covering catastrophic events are, to the extent reasonably determinable, recorded concurrently with the related loss.
Note A - Significant Accounting Policies (continued)
Should impairment in the ability of a reinsurer to satisfy its obligations to the Company be determined to exist, current year operations would be charged in amounts sufficient to provide for the Company's additional liability. Such charges, when incurred, are included in other operating expenses, rather than losses and loss expenses incurred, since the inability of the Company to collect from reinsurers is a credit risk rather than a deficiency associated with the loss reserving process.
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 eligible recipients in accordance with the non-substantive, post-grant date vesting clause of Accounting Standards Codification ("ASC") Topic 715, Compensation-Retirement Benefits. Restricted stock is valued based on the closing price of the stock on the day the award is granted. Non-vested shares of restricted 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 Per Share:
Diluted earnings per share of common stock are based on the average number of shares of Class A and Class B common stock outstanding during the year, adjusted for the dilutive effect, if any, of restricted stock awards outstanding. Basic earnings per share are presented exclusive of the effect of share-based awards outstanding.
Comprehensive Income:
The Company records accumulated other comprehensive income from unrealized gains and losses on available-for-sale securities and from foreign exchange adjustments as a separate component of shareholders' equity. A reclassification adjustment to other comprehensive income is made for gains or losses during the period included in net income.
Fair Value Measurements:
The Company provides disclosures related to recurring and non-recurring fair value measurements with separate disclosures for the amounts of significant transfers in and out of Level 1 and Level 2 fair value measurements, along with an explanation for the transfers. Additionally, separate disclosures are provided for purchases, sales, issuances and settlements on a gross basis for Level 3 fair value measurements as well as additional clarification for both the level of disaggregation reported for each class of assets or liabilities and disclosures of inputs and valuation techniques used to measure fair value for both recurring and non-recurring fair value measurements for assets and liabilities categorized as Level 2 or Level 3.
Recent Accounting Pronouncements:
In May 2014, the FASB issued Accounting Standards Update ("ASU") 2014-09, Revenue from Contracts with Customers (Topic 606), or ASU 2014-09, as amended by subsequently issued ASUs, to clarify the principles for recognizing revenue. While insurance contracts are not within the scope of this updated guidance, the Company's commission and fee income, other than that directly associated with insurance contracts, is subject to this updated guidance. The updated guidance requires an entity to recognize revenue as performance obligations are met, in order to reflect the transfer of promised goods or services to customers in an amount that reflects the consideration the
Note A - Significant Accounting Policies (continued)
entity is entitled to receive for those goods or services. The following steps are applied in the updated guidance: (1) identify the contract(s) with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract; and (5) recognize revenue when, or as, the entity satisfies a performance obligation. In August 2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, which deferred the effective date of ASU 2014-09 to the quarter ending March 31, 2018. The Company will use the modified retrospective method upon adoption in 2018. The Company has completed its evaluation of the impact this guidance will have on its consolidated financial statements and has performed a technical assessment of material customer contracts and has concluded the
adoption of ASU 2014-09 will not result in any material adjustments and it will not have a material impact on the Company's consolidated financial statements.
In January 2016, the FASB issued ASU 2016-01, Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities, or ASU 2016-01. The amendments in ASU 2016-01 change the accounting for non-consolidated equity investments that are not accounted for under the equity method of accounting by requiring changes in fair value to be recognized in income. Under current guidance, changes in fair value for investments of this nature were recognized in accumulated other comprehensive income as a component of shareholders' equity. Additionally, ASU 2016-01 simplifies the impairment assessment of equity investments without readily determinable fair values; requires entities to use the exit price when estimating the fair value of financial instruments; and modifies various presentation disclosure requirements for financial instruments. ASU 2016-01 became effective for interim and annual reporting periods beginning after December 15, 2017. The effect of this guidance will be dependent on the unrealized gains or losses associated with the Company's equity investments. Such unrealized gains or losses will be recognized upon adoption as a cumulative-effect adjustment to retained earnings with future unrealized gains or losses recognized in the statement of income. Refer to Note B for a discussion of unrealized gains and losses (before income taxes) on non-consolidated equity investments of $71,012 currently recognized in other comprehensive income (loss).
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), or ASU 2016-02. Upon the effective date, ASU 2016-02 will supersede the current lease guidance in ASC Topic 840, Leases. Under the new guidance, lessees will be required to recognize for all leases, with the exception of short-term leases, a lease liability, which is a lessee's obligation to make lease payments arising from a lease, measured on a discounted basis. Concurrently, lessees will be required to recognize a right-of-use asset, which is an asset that represents the lessee's right to use, or control the use of, a specified asset for the lease term. ASU 2016-02 is effective for interim and annual reporting periods beginning after December 15, 2018, with early adoption permitted. The guidance is required to be applied using a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative periods presented in the financial statements. The Company does not expect the adoption of ASU 2016-02 to have a material impact on the Company's consolidated financial statements.
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, or ASU 2016-13. This update introduces a current expected credit loss model for measuring expected credit losses for certain types of financial instruments held at the reporting date based on historical experience, current conditions and reasonable supportable forecasts. ASU 2016-13 replaces the current incurred loss model for measuring expected credit losses, requires expected losses on available-for-sale debt securities to be recognized through an allowance for credit losses rather than as reductions in the amortized cost of the securities, and provides for additional disclosure requirements. ASU 2016-13 is effective for interim and annual reporting periods beginning after December 15, 2019, with early adoption permitted for interim and annual reporting periods beginning after December 15, 2018. The Company is currently evaluating the effects the adoption of ASU 2016-13 will have on its consolidated financial statements.
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. This update addresses the presentation and classification on the statement of cash flows for eight specific items, with the objective of reducing existing diversity in practice in how certain cash receipts and cash payments are presented and classified. ASU 2016-15 is effective for interim and annual reporting periods beginning after December 15, 2017, with early adoption permitted. We are currently evaluating the effects the adoption of ASU 2016-15 will have on our consolidated statements of cash flows, if any. The Company does not expect ASU 2016-18 to impact our consolidated balance sheet or consolidated statement of income.
Note A - Significant Accounting Policies (continued)
In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash. This update amends ASC Topic 230 to add and clarify guidance on the classification and presentation of restricted cash in the statement of cash flows. The guidance requires entities to show the changes in the total of cash, cash equivalents, restricted cash and restricted cash equivalents in the statement of cash flows. The guidance will be applied retrospectively and is effective for annual periods beginning after December 15, 2017, and interim periods within those years, with early adoption permitted. We are currently evaluating the effects the adoption of ASU 2016-18 will have on our consolidated statements of cash flows. The Company does not expect ASU 2016-18 to impact our consolidated balance sheet or consolidated statement of income.
I
n January 2017, the FASB issued ASU No. 2017-04, Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, or ASU 2017-04. This amendment removes Step 2 of the goodwill impairment test under current guidance. The new guidance requires an impairment charge to be recognized for the amount by which the carrying amount exceeds the reporting unit's fair value. ASU 2017-04 is effective for interim and annual reporting periods beginning after December 15, 2020, with early adoption permitted. The Company does not expect the guidance to have a material impact on its consolidated financial statements.
In February 2018, the FASB issued ASU 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220). This ASU allows for the option to reclassify from accumulated other comprehensive income ("AOCI") to retained earnings for stranded tax effects resulting from the newly enacted federal corporate income tax rate in the Tax Cuts and Jobs Act of 2017 (the "U.S. Tax Act"), which was enacted on December 22, 2017. The legislation included a reduction to the corporate income tax rate from 35 percent to 21 percent effective January 1, 2018. The amount of the reclassification would be the difference between the historical corporate income tax rate and the newly enacted 21 percent corporate income tax rate. ASU 2018-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The Company is still evaluating the impacts of this standard on its consolidated financial statements but intends to make this reclassification.
Note B - Investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following is a summary of available for sale securities at December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
|
|
|
|
|
|
|
Cost or
|
|
|
Gross
|
|
|
Gross
|
|
|
Unrealized
|
|
|
|
Fair
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Gains
|
|
|
|
Value
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
(Losses)
|
|
December 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency collateralized mortgage obligations
|
|
$
|
16,586
|
|
|
$
|
15,839
|
|
|
$
|
818
|
|
|
$
|
(71
|
)
|
|
$
|
747
|
|
Agency mortgage-backed securities
|
|
|
27,075
|
|
|
|
27,180
|
|
|
|
47
|
|
|
|
(152
|
)
|
|
|
(105
|
)
|
Asset-backed securities
|
|
|
43,469
|
|
|
|
42,861
|
|
|
|
749
|
|
|
|
(141
|
)
|
|
|
608
|
|
Bank loans
|
|
|
19,488
|
|
|
|
19,271
|
|
|
|
266
|
|
|
|
(49
|
)
|
|
|
217
|
|
Certificates of deposit
|
|
|
3,135
|
|
|
|
3,124
|
|
|
|
11
|
|
|
|
-
|
|
|
|
11
|
|
Collateralized mortgage obligations
|
|
|
6,492
|
|
|
|
6,079
|
|
|
|
451
|
|
|
|
(38
|
)
|
|
|
413
|
|
Corporate securities
|
|
|
198,349
|
|
|
|
198,419
|
|
|
|
1,602
|
|
|
|
(1,672
|
)
|
|
|
(70
|
)
|
Mortgage-backed securities
|
|
|
24,204
|
|
|
|
23,656
|
|
|
|
933
|
|
|
|
(385
|
)
|
|
|
548
|
|
Municipal obligations
|
|
|
96,650
|
|
|
|
97,059
|
|
|
|
322
|
|
|
|
(731
|
)
|
|
|
(409
|
)
|
Non-U.S. government obligations
|
|
|
37,394
|
|
|
|
37,971
|
|
|
|
475
|
|
|
|
(1,052
|
)
|
|
|
(577
|
)
|
U.S. government obligations
|
|
|
49,011
|
|
|
|
49,558
|
|
|
|
-
|
|
|
|
(547
|
)
|
|
|
(547
|
)
|
Total fixed maturities
|
|
|
|
|
|
|
|
|
|
|
5,674
|
|
|
|
(4,838
|
)
|
|
|
836
|
|
Equity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer
|
|
|
46,578
|
|
|
|
23,565
|
|
|
|
24,031
|
|
|
|
(1,018
|
)
|
|
|
23,013
|
|
Energy
|
|
|
10,278
|
|
|
|
6,763
|
|
|
|
3,602
|
|
|
|
(87
|
)
|
|
|
3,515
|
|
Financial
|
|
|
45,470
|
|
|
|
31,859
|
|
|
|
13,937
|
|
|
|
(326
|
)
|
|
|
13,611
|
|
Industrial
|
|
|
25,402
|
|
|
|
8,949
|
|
|
|
16,793
|
|
|
|
(340
|
)
|
|
|
16,453
|
|
Technology
|
|
|
13,061
|
|
|
|
5,768
|
|
|
|
7,401
|
|
|
|
(108
|
)
|
|
|
7,293
|
|
Funds (e.g. mutual funds, closed end funds, ETFs)
|
|
|
50,291
|
|
|
|
46,177
|
|
|
|
4,153
|
|
|
|
(39
|
)
|
|
|
4,114
|
|
Other
|
|
|
10,683
|
|
|
|
7,670
|
|
|
|
3,313
|
|
|
|
(300
|
)
|
|
|
3,013
|
|
Total equity securities
|
|
|
201,763
|
|
|
|
130,751
|
|
|
|
73,230
|
|
|
|
(2,218
|
)
|
|
|
71,012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
723,616
|
|
|
$
|
651,768
|
|
|
$
|
78,904
|
|
|
$
|
(7,056
|
)
|
|
|
71,848
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Applicable federal income taxes
|
|
|
|
(25,148
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized gains - net of tax
|
|
|
$
|
46,700
|
|
Note B – Investments (continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
|
|
|
|
|
|
|
Cost or
|
|
|
Gross
|
|
|
Gross
|
|
|
Unrealized
|
|
|
|
Fair
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Gains
|
|
|
|
Value
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
(Losses)
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency collateralized mortgage obligations
|
|
$
|
6,171
|
|
|
$
|
6,000
|
|
|
$
|
171
|
|
|
$
|
-
|
|
|
$
|
171
|
|
Agency mortgage-backed securities
|
|
|
4,770
|
|
|
|
4,751
|
|
|
|
57
|
|
|
|
(38
|
)
|
|
|
19
|
|
Asset-backed securities
|
|
|
45,183
|
|
|
|
45,207
|
|
|
|
458
|
|
|
|
(482
|
)
|
|
|
(24
|
)
|
Bank loans
|
|
|
10,349
|
|
|
|
10,222
|
|
|
|
149
|
|
|
|
(22
|
)
|
|
|
127
|
|
Certificates of deposit
|
|
|
3,117
|
|
|
|
3,126
|
|
|
|
-
|
|
|
|
(9
|
)
|
|
|
(9
|
)
|
Collateralized mortgage obligations
|
|
|
9,104
|
|
|
|
9,096
|
|
|
|
290
|
|
|
|
(282
|
)
|
|
|
8
|
|
Corporate securities
|
|
|
142,683
|
|
|
|
143,356
|
|
|
|
1,643
|
|
|
|
(2,316
|
)
|
|
|
(673
|
)
|
Mortgage-backed securities
|
|
|
24,571
|
|
|
|
23,904
|
|
|
|
1,132
|
|
|
|
(465
|
)
|
|
|
667
|
|
Municipal obligations
|
|
|
129,335
|
|
|
|
130,204
|
|
|
|
391
|
|
|
|
(1,260
|
)
|
|
|
(869
|
)
|
Non-U.S. government obligations
|
|
|
24,681
|
|
|
|
26,461
|
|
|
|
230
|
|
|
|
(2,010
|
)
|
|
|
(1,780
|
)
|
U.S. government obligations
|
|
|
91,940
|
|
|
|
92,234
|
|
|
|
74
|
|
|
|
(368
|
)
|
|
|
(294
|
)
|
Total fixed maturities
|
|
|
491,904
|
|
|
|
494,561
|
|
|
|
4,595
|
|
|
|
(7,252
|
)
|
|
|
(2,657
|
)
|
Equity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer
|
|
|
32,576
|
|
|
|
15,231
|
|
|
|
17,656
|
|
|
|
(311
|
)
|
|
|
17,345
|
|
Energy
|
|
|
12,842
|
|
|
|
5,641
|
|
|
|
7,203
|
|
|
|
(2
|
)
|
|
|
7,201
|
|
Financial
|
|
|
31,186
|
|
|
|
22,417
|
|
|
|
8,998
|
|
|
|
(229
|
)
|
|
|
8,769
|
|
Industrial
|
|
|
21,145
|
|
|
|
6,239
|
|
|
|
15,098
|
|
|
|
(192
|
)
|
|
|
14,906
|
|
Technology
|
|
|
8,858
|
|
|
|
4,117
|
|
|
|
4,769
|
|
|
|
(28
|
)
|
|
|
4,741
|
|
Funds (e.g. mutual funds, closed end funds, ETFs)
|
|
|
6,995
|
|
|
|
6,930
|
|
|
|
121
|
|
|
|
(56
|
)
|
|
|
65
|
|
Other
|
|
|
6,343
|
|
|
|
4,327
|
|
|
|
2,181
|
|
|
|
(165
|
)
|
|
|
2,016
|
|
Total equity securities
|
|
|
119,945
|
|
|
|
64,902
|
|
|
|
56,026
|
|
|
|
(983
|
)
|
|
|
55,043
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
611,849
|
|
|
$
|
559,463
|
|
|
$
|
60,621
|
|
|
$
|
(8,235
|
)
|
|
|
52,386
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Applicable federal income taxes
|
|
|
|
(18,335
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized gains - net of tax
|
|
|
$
|
34,051
|
|
The following table summarizes, for fixed maturity and equity security investments in an unrealized loss position at December 31, the aggregate fair value and gross unrealized loss categorized by the duration those securities have been continuously in an unrealized loss position:
|
|
2017
|
|
|
2016
|
|
|
|
Number of Securities
|
|
|
Fair Value
|
|
|
Gross Unrealized Loss
|
|
|
Number of Securities
|
|
|
Fair Value
|
|
|
Gross Unrealized Loss
|
|
Fixed maturity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12 months or less
|
|
|
459
|
|
|
$
|
313,421
|
|
|
$
|
(2,683
|
)
|
|
|
397
|
|
|
$
|
291,048
|
|
|
$
|
(4,380
|
)
|
Greater than 12 months
|
|
|
112
|
|
|
|
75,638
|
|
|
|
(2,155
|
)
|
|
|
54
|
|
|
|
32,054
|
|
|
|
(2,872
|
)
|
Total fixed maturities
|
|
|
571
|
|
|
|
389,059
|
|
|
|
(4,838
|
)
|
|
|
451
|
|
|
|
323,102
|
|
|
|
(7,252
|
)
|
Equity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12 months or less
|
|
|
65
|
|
|
|
46,654
|
|
|
|
(2,218
|
)
|
|
|
35
|
|
|
|
20,698
|
|
|
|
(983
|
)
|
Greater than 12 months
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total equity securities
|
|
|
65
|
|
|
|
46,654
|
|
|
|
(2,218
|
)
|
|
|
35
|
|
|
|
20,698
|
|
|
|
(983
|
)
|
Total
|
|
|
636
|
|
|
$
|
435,713
|
|
|
$
|
(7,056
|
)
|
|
|
486
|
|
|
$
|
343,800
|
|
|
$
|
(8,235
|
)
|
Note B – Investments (continued)
Unrealized losses in the Company's fixed maturity portfolio are generally the result of interest rate or foreign currency fluctuations. The Company does not intend to sell any fixed maturity securities which are in an unrealized loss position at December 31, 2017 and it is not more likely than not that the Company will have to sell any fixed maturity security before recovery of its amortized cost basis. For equity securities, the Company has evaluated the near-term prospects of the investments in relation to the severity and duration of the impairment and, based on that evaluation, the Company has the ability and intent to hold these investments for a period sufficient to allow for recovery of their fair value. Accordingly, the Company does not believe any unrealized losses represent an other-than-temporary impairment as of December 31, 2017.
The fair value and the cost or amortized cost of fixed maturity investments at December 31, 2017, organized by contractual maturity, is shown below. Actual maturities may differ from contractual maturities because borrowers have, in some cases, the right to call or prepay obligations with or without call or prepayment penalties. Pre-refunded municipal bonds are classified based on their pre-refunded call dates.
|
|
Fair Value
|
|
|
Cost or Amortized Cost
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One year or less
|
|
$
|
54,567
|
|
|
|
10.5
|
%
|
|
$
|
54,777
|
|
|
|
10.5
|
%
|
Excess of one year to five years
|
|
|
292,755
|
|
|
|
56.1
|
|
|
|
294,698
|
|
|
|
56.6
|
|
Excess of five years to ten years
|
|
|
61,087
|
|
|
|
11.7
|
|
|
|
60,366
|
|
|
|
11.6
|
|
Excess of ten years
|
|
|
2,909
|
|
|
|
0.5
|
|
|
|
2,914
|
|
|
|
0.5
|
|
Total maturities
|
|
|
411,318
|
|
|
|
78.8
|
|
|
|
412,755
|
|
|
|
79.2
|
|
Asset-backed securities
|
|
|
110,535
|
|
|
|
21.2
|
|
|
|
108,262
|
|
|
|
20.8
|
|
|
|
$
|
521,853
|
|
|
|
100.0
|
%
|
|
$
|
521,017
|
|
|
|
100.0
|
%
|
Major categories of investment income for the years ended December 31 are summarized as follows:
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Interest on fixed maturities
|
|
$
|
15,340
|
|
|
$
|
13,254
|
|
|
$
|
11,663
|
|
Dividends on equity securities
|
|
|
4,611
|
|
|
|
3,598
|
|
|
|
3,445
|
|
Money market funds, Short-term and other
|
|
|
471
|
|
|
|
128
|
|
|
|
32
|
|
|
|
|
20,422
|
|
|
|
16,980
|
|
|
|
15,140
|
|
Investment expenses
|
|
|
(2,327
|
)
|
|
|
(2,497
|
)
|
|
|
(2,642
|
)
|
Net investment income
|
|
$
|
18,095
|
|
|
$
|
14,483
|
|
|
$
|
12,498
|
|
Note B – Investments (continued)
Gains and losses on investments, including equity method earnings from limited partnerships, for the years ended December 31 are summarized below:
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Fixed maturities:
|
|
|
|
|
|
|
|
|
|
Gross gains
|
|
$
|
9,135
|
|
|
$
|
11,628
|
|
|
$
|
6,633
|
|
Gross losses
|
|
|
(10,031
|
)
|
|
|
(14,020
|
)
|
|
|
(13,634
|
)
|
Net losses
|
|
|
(896
|
)
|
|
|
(2,392
|
)
|
|
|
(7,001
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross gains
|
|
|
10,481
|
|
|
|
28,742
|
|
|
|
21,070
|
|
Gross losses
|
|
|
(2,368
|
)
|
|
|
(5,595
|
)
|
|
|
(13,643
|
)
|
Net gains
|
|
|
8,113
|
|
|
|
23,147
|
|
|
|
7,427
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Limited partnerships - net gain (loss)
|
|
|
12,469
|
|
|
|
2,473
|
|
|
|
(1,687
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total net gains (losses)
|
|
$
|
19,686
|
|
|
$
|
23,228
|
|
|
$
|
(1,261
|
)
|
Gain and loss activity for fixed maturity and equity security investments, as shown in the previous table, includes adjustments for other-than-temporary impairment for the years ended December 31 summarized as follows:
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative charges to income at beginning of year
|
|
$
|
5,060
|
|
|
$
|
10,513
|
|
|
$
|
7,168
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Writedowns based on objective and subjective criteria
|
|
|
149
|
|
|
|
5,743
|
|
|
|
7,700
|
|
Recovery of prior writedowns upon sale or disposal
|
|
|
(1,590
|
)
|
|
|
(10,606
|
)
|
|
|
(4,355
|
)
|
Net pre-tax realized gain (loss)
|
|
|
1,441
|
|
|
|
4,863
|
|
|
|
(3,345
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative charges to income at end of year
|
|
$
|
4,209
|
|
|
$
|
5,060
|
|
|
$
|
10,513
|
|
There is no primary market and only a limited secondary market for the Company's investments in limited partnerships and, in most cases, the Company is prohibited from disposing of its limited partnership interests for some period of time and generally must seek approval from the applicable general partner for any such disposal. Distributions of earnings from these partnerships are largely at the sole discretion of the general partners and distributions are generally not received by the Company for many years after the earnings have been reported. The Company has a commitment to contribute up to an additional $1,404 to a limited partnership as of December 31, 2017.
The Company has invested in three limited partnerships with an aggregate estimated value of $43,586 at December 31, 2017, that are managed by organizations in which two directors of the Company are executive officers, directors or owners. The Company's ownership interest in these limited partnerships was 5% for New Vernon India Fund, 37% for New Vernon Global Opportunity Fund and 23% for New Vernon Global Opportunity Fund II. During 2017, the Company withdrew $5,000 from the New Vernon India Fund and $5,000 from the New Vernon Global Opportunity Fund II which reduced our investments. These limited partnerships contributed to or (reduced) $9,549, ($971) and ($1,978), net of fees, investment gains in 2017, 2016 and 2015, respectively. During 2017, 2016 and 2015, the Company recorded management fees of $803, $777 and $749, respectively, for management of these limited partnerships.
Note B – Investments (continued)
The Company utilizes the services of investment firms of which two directors of the Company are employees or partial owners. These investment firms manage equity securities and fixed maturity portfolios with an aggregate market value of approximately $24,779 at December 31, 2017. Total commissions and net fees earned by the investment firms and affiliates on these portfolios and for advice and consulting were approximately $97, $207 and $235 during 2017, 2016 and 2015, respectively.
The Company's limited partnerships include one investment which primarily invests in public and private equity markets in India. This limited partnership investment's value as of December 31, 2017 and 2016 was $29,817 and $27,153, respectively. At December 31, 2017, the Company's estimated ownership interest in this limited partnership investment was approximately 5%. The Company's share of income (losses), from both realized and unrealized appreciation (losses) from this limited partnership investment was $7,665, ($1,117) and ($1,599) in 2017, 2016 and 2015, respectively. The summarized financial information of this limited partnership investment as of and for the years ended December 31 is as follows:
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
Investment income (loss)
|
|
$
|
623
|
|
|
$
|
(5
|
)
|
|
$
|
(188
|
)
|
Partnership expenses
|
|
|
2,206
|
|
|
|
2,426
|
|
|
|
3,024
|
|
Net investment loss
|
|
|
(1,583
|
)
|
|
|
(2,431
|
)
|
|
|
(3,212
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized gain (loss) on investments
|
|
|
8,723
|
|
|
|
7,754
|
|
|
|
21,091
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized appreciation (depreciation) on investments
|
|
|
133,807
|
|
|
|
(21,002
|
)
|
|
|
(37,482
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in partners' capital resulting from operations
|
|
$
|
140,947
|
|
|
$
|
(15,679
|
)
|
|
$
|
(19,603
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
|
566,629
|
|
|
|
448,263
|
|
|
|
511,118
|
|
Total liabilities
|
|
|
30,976
|
|
|
|
39,988
|
|
|
|
40,335
|
|
Total partners' capital
|
|
|
535,653
|
|
|
|
408,275
|
|
|
|
470,783
|
|
The fair value of regulatory deposits with various insurance departments in the United States and Canada totaled $86,335 and $86,169 at December 31, 2017 and 2016, respectively.
Short-term investments at December 31, 2017 included $1,000 in certificates of deposit issued by a Bermuda bank.
The Company's fixed maturities are over 86% invested in investment grade fixed maturity investments. The Company has a total of $693, representing one investment, of fixed maturity investments which were originally issued with guarantees by a third party insurance company. The S&P credit rating of such investment, with consideration of the guarantee, is AA. The S&P underlying credit rating of such investment, without consideration of the guarantee, would remain AA. The Company does not have any direct exposure to any guarantor.
Approximately $71,907 of fixed maturity investments (8.4% of the Company's consolidated investment portfolio) consists of non-rated bonds and bonds rated as less than investment grade at year end. These investments include a diversified portfolio of over 40 investments and have a $1,605 aggregate net
unrealized gain position at December 31, 2017.
Note C - Loss and Loss Expense Reserves
Activity in the reserves for losses and loss expenses is summarized as follows. All amounts are shown net of reinsurance, unless otherwise indicated.
|
|
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 table above shows that a reserve deficiency of $19,215 developed during 2017 in the settlement of claims occurring on or before December 31, 2016, compared to a reserve deficiency of $13,836 in 2016 and a reserve savings of $10,062 in 2015. The developments for each year are composed of individual claim savings and deficiencies which, in the aggregate have resulted from the settlement of claims at amounts higher or lower than previously reserved and from changes in estimates of losses incurred but not reported as part of the normal reserving process.
The $19,215 prior accident year deficiency that developed during 2017 primarily related to: (1) infrequent, but severe, transportation losses that experienced adverse development primarily during the first six months of 2017 and (2) higher than expected loss development for discontinued lines of business. This 2017 deficiency compares to a deficiency of $13,836 for 2016, which was also impacted by discontinued lines of business.
Loss reserves have been reduced by estimated salvage and subrogation recoverable of approximately $7,559 and $4,151 at December 31, 2017 and 2016, respectively.
Note C - Loss and Loss Expense Reserves (continued)
The following is information about incurred and paid claims development as of December 31, 2017, net of reinsurance, as well as cumulative claim frequency and the total of incurred
‐
but
‐
not
‐
reported liabilities plus expected development on reported claims included within the net incurred claims amounts.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total of Incurred-
|
|
|
|
|
Workers' Compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
but-Not-Reported
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities Plus
|
|
|
|
|
|
|
Incurred Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance
|
|
|
Expected
|
|
|
Number of
|
|
Accident
|
|
For the Years Ended December 31 (2008-2016 is Supplementary Information and Unaudited)
|
|
|
Development on
|
|
|
Reported Claims
|
|
Year
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
2012
|
|
|
2013
|
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
|
2017
|
|
|
Reported Claims
|
|
|
Per Year
|
|
2008
|
|
$
|
19,833
|
|
|
$
|
23,640
|
|
|
$
|
24,715
|
|
|
$
|
24,721
|
|
|
$
|
24,855
|
|
|
$
|
25,109
|
|
|
$
|
23,916
|
|
|
$
|
24,048
|
|
|
$
|
24,352
|
|
|
$
|
25,077
|
|
|
$
|
661
|
|
|
|
3,656
|
|
2009
|
|
|
|
|
|
|
17,270
|
|
|
|
20,931
|
|
|
|
21,447
|
|
|
|
21,261
|
|
|
|
21,268
|
|
|
|
20,767
|
|
|
|
20,641
|
|
|
|
20,817
|
|
|
|
20,946
|
|
|
|
877
|
|
|
|
3,784
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
20,644
|
|
|
|
20,111
|
|
|
|
19,400
|
|
|
|
19,300
|
|
|
|
18,849
|
|
|
|
18,344
|
|
|
|
19,195
|
|
|
|
19,541
|
|
|
|
1,096
|
|
|
|
4,222
|
|
2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26,057
|
|
|
|
26,628
|
|
|
|
26,958
|
|
|
|
26,767
|
|
|
|
25,515
|
|
|
|
27,293
|
|
|
|
26,617
|
|
|
|
2,399
|
|
|
|
4,545
|
|
2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23,965
|
|
|
|
25,544
|
|
|
|
24,887
|
|
|
|
24,485
|
|
|
|
25,616
|
|
|
|
27,020
|
|
|
|
3,151
|
|
|
|
4,479
|
|
2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27,619
|
|
|
|
30,638
|
|
|
|
29,913
|
|
|
|
32,121
|
|
|
|
32,553
|
|
|
|
5,344
|
|
|
|
5,271
|
|
2014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
36,768
|
|
|
|
36,968
|
|
|
|
34,009
|
|
|
|
33,427
|
|
|
|
5,848
|
|
|
|
5,394
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26,277
|
|
|
|
23,115
|
|
|
|
25,889
|
|
|
|
6,921
|
|
|
|
6,284
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
35,240
|
|
|
|
29,757
|
|
|
|
9,795
|
|
|
|
6,003
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
42,387
|
|
|
|
25,679
|
|
|
|
14,490
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
$
|
283,214
|
|
|
$
|
61,771
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative Paid Claims and Allocated Claim Adjustment Expense, Net of Reinsurance
|
|
|
|
|
|
|
|
|
|
Accident
|
|
For the Years Ended December 31 (2008-2016 is Supplementary Information and Unaudited)
|
|
|
|
|
|
|
|
|
|
Year
|
|
|
2008
|
|
|
|
2009
|
|
|
|
2010
|
|
|
|
2011
|
|
|
|
2012
|
|
|
|
2013
|
|
|
|
2014
|
|
|
|
2015
|
|
|
|
2016
|
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
2008
|
|
$
|
6,046
|
|
|
$
|
13,919
|
|
|
$
|
17,320
|
|
|
$
|
18,943
|
|
|
$
|
20,055
|
|
|
$
|
20,839
|
|
|
$
|
21,306
|
|
|
$
|
21,883
|
|
|
$
|
22,199
|
|
|
|
22,910
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
|
|
|
|
4,186
|
|
|
|
10,073
|
|
|
|
13,343
|
|
|
|
15,576
|
|
|
|
16,592
|
|
|
|
17,448
|
|
|
|
18,028
|
|
|
|
18,514
|
|
|
|
18,982
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
3,974
|
|
|
|
9,134
|
|
|
|
11,963
|
|
|
|
13,845
|
|
|
|
14,966
|
|
|
|
15,835
|
|
|
|
16,590
|
|
|
|
16,789
|
|
|
|
|
|
|
|
|
|
2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,916
|
|
|
|
11,912
|
|
|
|
15,973
|
|
|
|
18,884
|
|
|
|
20,617
|
|
|
|
21,622
|
|
|
|
22,569
|
|
|
|
|
|
|
|
|
|
2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,597
|
|
|
|
11,004
|
|
|
|
14,834
|
|
|
|
17,415
|
|
|
|
18,946
|
|
|
|
20,276
|
|
|
|
|
|
|
|
|
|
2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,880
|
|
|
|
12,792
|
|
|
|
18,065
|
|
|
|
21,655
|
|
|
|
23,643
|
|
|
|
|
|
|
|
|
|
2014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,328
|
|
|
|
13,665
|
|
|
|
19,075
|
|
|
|
22,387
|
|
|
|
|
|
|
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,918
|
|
|
|
10,128
|
|
|
|
15,020
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,784
|
|
|
|
13,377
|
|
|
|
|
|
|
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,150
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
$
|
182,103
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding liabilities prior to 2008 net of reinsurance
|
|
|
|
12,640
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities for claims and claims adjustment expenses, net of reinsurance
|
|
|
$
|
113,751
|
|
|
|
|
|
|
|
|
|
Note C - Loss and Loss Expense Reserves (continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total of Incurred-
|
|
|
|
|
Commercial Liability
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
but-Not-Reported
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities Plus
|
|
|
|
|
|
|
Incurred Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance
|
|
|
Expected
|
|
|
Number of
|
|
Accident
|
|
For the Years Ended December 31 (2008-2016 is Supplementary Information and Unaudited)
|
|
|
Development on
|
|
|
Reported Claims
|
|
Year
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
2012
|
|
|
2013
|
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
|
2017
|
|
|
Reported Claims
|
|
|
Per Year
|
|
2008
|
|
$
|
34,693
|
|
|
$
|
28,591
|
|
|
$
|
27,311
|
|
|
$
|
25,511
|
|
|
$
|
23,989
|
|
|
$
|
24,892
|
|
|
$
|
24,902
|
|
|
$
|
23,480
|
|
|
$
|
23,482
|
|
|
$
|
23,733
|
|
|
$
|
110
|
|
|
|
1,280
|
|
2009
|
|
|
|
|
|
|
29,707
|
|
|
|
30,406
|
|
|
|
30,203
|
|
|
|
26,280
|
|
|
|
27,259
|
|
|
|
25,872
|
|
|
|
25,373
|
|
|
|
25,320
|
|
|
|
25,485
|
|
|
|
136
|
|
|
|
1,161
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
31,124
|
|
|
|
22,161
|
|
|
|
21,899
|
|
|
|
19,139
|
|
|
|
20,300
|
|
|
|
19,764
|
|
|
|
19,377
|
|
|
|
19,081
|
|
|
|
96
|
|
|
|
2,384
|
|
2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
46,829
|
|
|
|
43,832
|
|
|
|
31,633
|
|
|
|
36,894
|
|
|
|
35,805
|
|
|
|
37,122
|
|
|
|
36,076
|
|
|
|
271
|
|
|
|
2,764
|
|
2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
49,743
|
|
|
|
54,269
|
|
|
|
49,743
|
|
|
|
51,367
|
|
|
|
48,708
|
|
|
|
51,475
|
|
|
|
478
|
|
|
|
3,211
|
|
2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
53,817
|
|
|
|
39,143
|
|
|
|
37,701
|
|
|
|
36,371
|
|
|
|
46,690
|
|
|
|
664
|
|
|
|
3,611
|
|
2014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
49,971
|
|
|
|
52,254
|
|
|
|
52,483
|
|
|
|
52,964
|
|
|
|
1,451
|
|
|
|
3,091
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
61,420
|
|
|
|
70,174
|
|
|
|
64,323
|
|
|
|
2,278
|
|
|
|
3,340
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
61,638
|
|
|
|
68,974
|
|
|
|
6,725
|
|
|
|
3,581
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
103,126
|
|
|
$
|
43,880
|
|
|
|
4,387
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
$
|
491,927
|
|
|
$
|
56,089
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative Paid Claims and Allocated Claim Adjustment Expense, Net of Reinsurance
|
|
|
|
|
|
|
|
|
|
Accident
|
|
For the Years Ended December 31 (2008-2016 is Supplementary Information and Unaudited)
|
|
|
|
|
|
|
|
|
|
Year
|
|
|
2008
|
|
|
|
2009
|
|
|
|
2010
|
|
|
|
2011
|
|
|
|
2012
|
|
|
|
2013
|
|
|
|
2014
|
|
|
|
2015
|
|
|
|
2016
|
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
2008
|
|
$
|
2,612
|
|
|
$
|
8,942
|
|
|
$
|
15,733
|
|
|
$
|
21,220
|
|
|
$
|
21,396
|
|
|
$
|
23,169
|
|
|
$
|
23,354
|
|
|
$
|
23,444
|
|
|
$
|
23,500
|
|
|
$
|
23,510
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
|
|
|
|
928
|
|
|
|
17,880
|
|
|
|
19,718
|
|
|
|
23,521
|
|
|
|
24,866
|
|
|
|
25,066
|
|
|
|
25,114
|
|
|
|
25,125
|
|
|
|
25,199
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
|
|
|
|
|
|
|
|
1,649
|
|
|
|
7,166
|
|
|
|
11,635
|
|
|
|
16,052
|
|
|
|
18,627
|
|
|
|
18,517
|
|
|
|
18,866
|
|
|
|
18,662
|
|
|
|
|
|
|
|
|
|
2011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,809
|
|
|
|
11,350
|
|
|
|
23,615
|
|
|
|
30,795
|
|
|
|
33,255
|
|
|
|
34,009
|
|
|
|
35,561
|
|
|
|
|
|
|
|
|
|
2012
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,086
|
|
|
|
23,252
|
|
|
|
32,942
|
|
|
|
45,303
|
|
|
|
47,601
|
|
|
|
50,036
|
|
|
|
|
|
|
|
|
|
2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,167
|
|
|
|
15,772
|
|
|
|
25,270
|
|
|
|
34,481
|
|
|
|
44,865
|
|
|
|
|
|
|
|
|
|
2014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,023
|
|
|
|
9,046
|
|
|
|
28,393
|
|
|
|
45,075
|
|
|
|
|
|
|
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,923
|
|
|
|
27,582
|
|
|
|
49,267
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,843
|
|
|
|
30,377
|
|
|
|
|
|
|
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,415
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
$
|
333,967
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding liabilities prior to 2008 net of reinsurance
|
|
|
|
4,621
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities for claims and claims adjustment expenses, net of reinsurance
|
|
|
$
|
162,581
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total of Incurred-
|
|
|
|
|
Professional Liability Reinsurance Assumed (in runoff)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
but-Not-Reported
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities Plus
|
|
|
|
|
|
Incurred Claims and Allocated Claim Adjustment Expenses, Net of Reinsurance
|
|
|
Expected
|
|
|
Number of
|
|
Accident
|
For the Years Ended December 31 (2008-2016 is Supplementary Information and Unaudited)
|
|
|
Development on
|
|
|
Reported Claims
|
|
Year
|
2008
|
2009
|
|
2010
|
|
|
2011
|
|
|
2012
|
|
|
2013
|
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
|
2017
|
|
|
Reported Claims
|
|
|
Per Year
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
|
$
|
2,196
|
|
|
$
|
4,277
|
|
|
$
|
7,827
|
|
|
$
|
7,946
|
|
|
$
|
9,733
|
|
|
$
|
10,740
|
|
|
$
|
11,689
|
|
|
$
|
11,893
|
|
|
$
|
175
|
|
|
|
N/A
|
|
2011
|
|
|
|
|
|
|
|
|
10,492
|
|
|
|
8,314
|
|
|
|
9,017
|
|
|
|
9,859
|
|
|
|
10,779
|
|
|
|
12,735
|
|
|
|
12,744
|
|
|
|
290
|
|
|
|
N/A
|
|
2012
|
|
|
|
|
|
|
|
|
|
|
|
|
10,041
|
|
|
|
9,276
|
|
|
|
5,569
|
|
|
|
10,157
|
|
|
|
14,605
|
|
|
|
16,555
|
|
|
|
3,049
|
|
|
|
N/A
|
|
2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,370
|
|
|
|
13,034
|
|
|
|
11,618
|
|
|
|
17,694
|
|
|
|
23,256
|
|
|
|
4,653
|
|
|
|
N/A
|
|
2014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
12,675
|
|
|
|
8,825
|
|
|
|
7,259
|
|
|
|
9,837
|
|
|
|
2,621
|
|
|
|
N/A
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,638
|
|
|
|
7,859
|
|
|
|
7,147
|
|
|
|
3,290
|
|
|
|
N/A
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,368
|
|
|
|
2,482
|
|
|
|
2,273
|
|
|
|
N/A
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
-
|
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
$
|
83,914
|
|
|
$
|
16,351
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative Paid Claims and Allocated Claim Adjustment Expense, Net of Reinsurance
|
|
|
|
|
|
|
|
|
|
Accident
|
For the Years Ended December 31 (2008-2016 is Supplementary Information and Unaudited)
|
|
|
|
|
|
|
|
|
|
Year
|
2008
|
2009
|
|
|
2010
|
|
|
|
2011
|
|
|
|
2012
|
|
|
|
2013
|
|
|
|
2014
|
|
|
|
2015
|
|
|
|
2016
|
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010
|
|
|
|
$
|
41
|
|
|
$
|
729
|
|
|
$
|
3,505
|
|
|
$
|
5,844
|
|
|
$
|
7,758
|
|
|
$
|
9,904
|
|
|
$
|
11,132
|
|
|
$
|
11,334
|
|
|
|
|
|
|
|
|
|
2011
|
|
|
|
|
|
|
|
|
50
|
|
|
|
637
|
|
|
|
2,061
|
|
|
|
4,983
|
|
|
|
8,104
|
|
|
|
10,404
|
|
|
|
11,679
|
|
|
|
|
|
|
|
|
|
2012
|
|
|
|
|
|
|
|
|
|
|
|
|
103
|
|
|
|
992
|
|
|
|
2,388
|
|
|
|
5,077
|
|
|
|
8,355
|
|
|
|
11,239
|
|
|
|
|
|
|
|
|
|
2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
123
|
|
|
|
1,135
|
|
|
|
5,088
|
|
|
|
10,988
|
|
|
|
14,779
|
|
|
|
|
|
|
|
|
|
2014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
723
|
|
|
|
761
|
|
|
|
2,241
|
|
|
|
3,999
|
|
|
|
|
|
|
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10
|
|
|
|
390
|
|
|
|
1,899
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
5
|
|
|
|
|
|
|
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
$
|
54,934
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding liabilities prior to 2008 net of reinsurance
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities for claims and claims adjustment expenses, net of reinsurance
|
|
|
$
|
28,980
|
|
|
|
|
|
|
|
|
|
Note C - Loss and Loss Expense Reserves (continued)
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 position at December 31 is as follows.
|
|
2017
|
|
|
2016
|
|
Net outstanding liabilities
|
|
|
|
|
|
|
Commercial Liability
|
|
$
|
162,581
|
|
|
$
|
133,139
|
|
Workers' Compensation
|
|
|
113,751
|
|
|
|
101,883
|
|
Professional Liability Assumed
|
|
|
28,980
|
|
|
|
34,700
|
|
Other short-duration insurance lines
|
|
|
48,970
|
|
|
|
38,556
|
|
Liabilities for unpaid claims and claim adjustment
|
|
|
|
|
|
|
|
|
expenses, net of reinsurance
|
|
|
354,282
|
|
|
|
308,278
|
|
|
|
|
|
|
|
|
|
|
Reinsurance recoverable on unpaid claims
|
|
|
|
|
|
|
|
|
Commercial Liability
|
|
|
124,695
|
|
|
|
85,549
|
|
Workers' Compensation
|
|
|
170,394
|
|
|
|
153,847
|
|
Other short-duration insurance lines
|
|
|
13,053
|
|
|
|
12,167
|
|
Reinsurance recoverable on unpaid losses at the
|
|
|
|
|
|
|
|
|
end of the year
|
|
|
308,142
|
|
|
|
251,563
|
|
|
|
|
|
|
|
|
|
|
Unallocated claims adjustment expenses
|
|
|
17,850
|
|
|
|
16,489
|
|
|
|
|
|
|
|
|
|
|
Total gross liability for unpaid claims and
|
|
|
|
|
|
|
|
|
claims adjustment expense
|
|
$
|
680,274
|
|
|
$
|
576,330
|
|
The following is supplementary information about average historical claims duration as of December 31, 2017.
|
|
Average Annual Percentage Payout of Incurred Claims by Age, Net of Reinsurance
|
|
|
|
(Supplementary Information and Unaudited)
|
|
Years
|
|
|
1
|
|
|
|
2
|
|
|
|
3
|
|
|
|
4
|
|
|
|
5
|
|
|
|
6
|
|
|
|
7
|
|
|
|
8
|
|
|
|
9
|
|
|
|
10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial Liability
|
|
|
9.1
|
%
|
|
|
31.1
|
%
|
|
|
25.3
|
%
|
|
|
22.3
|
%
|
|
|
7.0
|
%
|
|
|
2.9
|
%
|
|
|
1.8
|
%
|
|
|
0.1
|
%
|
|
|
0.3
|
%
|
|
|
0.1
|
%
|
Workers' Compensation
|
|
|
17.6
|
%
|
|
|
26.5
|
%
|
|
|
15.5
|
%
|
|
|
9.7
|
%
|
|
|
5.6
|
%
|
|
|
4.1
|
%
|
|
|
3.0
|
%
|
|
|
1.9
|
%
|
|
|
1.7
|
%
|
|
|
2.8
|
%
|
Professional Liability Assumed
|
|
|
1.3
|
%
|
|
|
3.7
|
%
|
|
|
16.0
|
%
|
|
|
20.4
|
%
|
|
|
19.2
|
%
|
|
|
17.8
|
%
|
|
|
10.2
|
%
|
|
|
1.7
|
%
|
|
|
|
|
|
|
|
|
Reserve methodologies for incurred but not reported losses
The Company uses both standard actuarial techniques common to most insurance companies as well as proprietary techniques developed by the Company in connection with its specialty business products. For its short-tail lines of
business, the Company uses predominantly the incurred or paid loss development factor methods. The Company has found that the use of accident quarter loss development triangles, rather than those based upon accident year, are most responsive to claim settlement trends and fluctuations in premium exposure for its short-tail lines. A minimum of 12 running accident quarters is used to project the reserve necessary for incurred but not reported losses for its short-tail lines.
The Company also uses the loss development factor approach for its long-tail lines of business, including workers' compensation. A minimum of 15 accident years is included in the loss development triangles used to calculate link ratios and the selected loss development factors used to determine the reserves for incurred but not reported losses. Significant emphasis is placed on the use of tail factors for the Company's long-tail lines of business.
For the Company's fleet transportation risks, which are covered by regularly updated reinsurance agreements and which contain wide-ranging self-insured retentions ("SIR"), traditional actuarial methods are supplemented by other methods, as described below, in consideration of the Company's exposures to loss. In situations where the Company's reinsurance structure, the insured's SIR selections, policy volume, and other factors are changing, current accident period loss exposures may not be homogenous enough with historical loss data to allow for reliable projection of future developed losses. Therefore, the Company supplements the above-described actuarial methods
Note C - Loss and Loss Expense Reserves (continued)
with loss ratio reserving techniques developed from the Company's extensive, proprietary databases to arrive at the reserve for incurred but not reported losses for the calendar/accident period under review. As losses for a given calendar/accident period develop with the passage of time, management evaluates such development on a monthly and quarterly basis and adjusts reserve factors, as necessary, to reflect current judgment with regard to the anticipated ultimate incurred losses. This process continues until all losses are settled for each period subject to this method.
Claim count methodology
The Company uses a claim event and coverage combination to estimate frequency. For example, a single claim event involving loss for physical damage of a vehicle and personal injury to a claimant would be considered two claims for purposes of the calculation of frequency. A single claim event causing personal injury to two claimants would be considered a single claim under the methodology.
Due to the number of reinsurance assumed treaties entered into (and the varying structures: both quota share and excess of loss) the Company deems it impractical to collect claim frequency information related to this business and this information has not been made available to the Company.
Note D – Reinsurance
The Insurance Subsidiaries cede portions of their gross premiums written to certain other insurers under excess of loss and quota share treaties and by facultative placements. Reinsurance treaties with other companies permit the recovery of a portion of related direct losses. Management determines the amount of net exposure it is willing to accept generally on a product line basis. Certain historical treaties covering fleet transportation risks include annual deductibles which must be exceeded before the Company can recover under the terms of the treaty. The Company retains a higher percentage of the direct premium in consideration of these deductible provisions. The Company remains liable to the extent the reinsuring companies are unable to meet their obligations under reinsurance contracts.
The Company also serves as an assuming reinsurer on treaties with direct writing insurance companies and, prior to June 30, 2015, under retrocessions from other reinsurers for catastrophic property coverages. Accordingly, for periods prior to that date, the occurrence of catastrophic events could have had a significant impact on the Company's operations. In addition, the Insurance Subsidiaries participate in certain mandatory residual market pools which require insurance companies to provide coverages on assigned risks. The assigned risk pools allocate participation to all insurers based upon each insurer's portion of premium writings on a state or national level. Historically, the operation of these assigned risk pools have resulted in net losses allocated to the Company, although such losses have not been material in relation to the Company's operations.
The following table summarizes the impact of reinsurance ceded and assumed on the Company's net premiums written and earned for the most recent three years:
|
|
Premiums Written
|
|
|
Premiums Earned
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Direct
|
|
$
|
504,033
|
|
|
$
|
395,625
|
|
|
$
|
366,668
|
|
|
$
|
470,158
|
|
|
$
|
394,679
|
|
|
$
|
370,499
|
|
Ceded on direct
|
|
|
(151,348
|
)
|
|
|
(131,166
|
)
|
|
|
(128,338
|
)
|
|
|
(145,201
|
)
|
|
|
(129,926
|
)
|
|
|
(128,135
|
)
|
Net direct
|
|
|
352,685
|
|
|
|
264,459
|
|
|
|
238,330
|
|
|
|
324,957
|
|
|
|
264,753
|
|
|
|
242,364
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assumed
|
|
|
704
|
|
|
|
7,379
|
|
|
|
16,885
|
|
|
|
3,188
|
|
|
|
11,344
|
|
|
|
21,533
|
|
Ceded on assumed
|
|
|
-
|
|
|
|
(86
|
)
|
|
|
(562
|
)
|
|
|
-
|
|
|
|
(86
|
)
|
|
|
(562
|
)
|
Net assumed
|
|
|
704
|
|
|
|
7,293
|
|
|
|
16,323
|
|
|
|
3,188
|
|
|
|
11,258
|
|
|
|
20,971
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
|
|
$
|
353,389
|
|
|
$
|
271,752
|
|
|
$
|
254,653
|
|
|
$
|
328,145
|
|
|
$
|
276,011
|
|
|
$
|
263,335
|
|
Net losses and loss expenses incurred for 2017, 2016 and 2015 have been reduced by ceded reinsurance recoveries of approximately $128,086, $108,656 and $75,581, respectively. Ceded reinsurance premiums and loss recoveries for the purchase of catastrophe reinsurance coverage on the Company's net direct business were not material.
Net losses and loss expenses incurred for 2017, 2016 and 2015 include approximately $5,223, $14,746 and $13,492, respectively, relating to reinsurance assumed from non-affiliated insurance or reinsurance companies.
Note D – Reinsurance (continued)
Components of reinsurance recoverable at December 31 are as follows:
|
|
2017
|
|
|
2016
|
|
Case unpaid losses, net of valuation allowance
|
|
$
|
119,615
|
|
|
$
|
126,244
|
|
Incurred but not reported unpaid losses and loss expenses
|
|
|
187,163
|
|
|
|
123,819
|
|
Paid losses and loss expenses
|
|
|
2,206
|
|
|
|
1,760
|
|
Unearned premiums
|
|
|
9,347
|
|
|
|
3,201
|
|
|
|
$
|
318,331
|
|
|
$
|
255,024
|
|
Note E - Income Taxes
Deferred income taxes are calculated to account for the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's deferred tax assets and liabilities as of December 31 are as follows:
|
|
2017
|
|
|
2016
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
Unrealized gain on fixed income and equity security investments
|
|
$
|
15,086
|
|
|
$
|
18,335
|
|
Deferred acquisition costs
|
|
|
1,804
|
|
|
|
874
|
|
Loss and loss expense reserves
|
|
|
2,623
|
|
|
|
1,198
|
|
Limited partnership investments
|
|
|
3,826
|
|
|
|
2,274
|
|
Accelerated depreciation
|
|
|
492
|
|
|
|
1,037
|
|
Other
|
|
|
1,791
|
|
|
|
1,251
|
|
Total deferred tax liabilities
|
|
|
25,622
|
|
|
|
24,969
|
|
|
|
|
|
|
|
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Loss and loss expense reserves
|
|
|
6,761
|
|
|
|
9,467
|
|
Unearned premiums discount
|
|
|
1,837
|
|
|
|
1,295
|
|
Other-than-temporary investment declines
|
|
|
815
|
|
|
|
858
|
|
Deferred compensation
|
|
|
885
|
|
|
|
1,097
|
|
Deferred ceding commission
|
|
|
627
|
|
|
|
464
|
|
Other
|
|
|
339
|
|
|
|
376
|
|
Total deferred tax assets
|
|
|
11,264
|
|
|
|
13,557
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax liabilities
|
|
$
|
14,358
|
|
|
$
|
11,412
|
|
On December 22, 2017, the U.S. Tax Act was signed into law, which lowered the U.S. corporate income tax rate from 35% to 21% effective January 1, 2018. As a result, the Company recorded a tax benefit of $9.6 million related to the re-measurement of its deferred tax assets and liabilities. The IRS has not yet published all of the detailed regulations resulting from the enactment of the U.S. Tax Act; therefore we have not completed our accounting for the tax effects, but we have made a reasonable estimate of the effects on our existing deferred tax balances at December 31, 2017. We re-measured deferred tax assets and liabilities based on the rates at which they are expected to be utilized in the future, which is generally 21%. However, we are still analyzing certain aspects of the U.S. Tax Act and refining our calculations, which could potentially affect the measurement of those balances or give rise to new deferred tax amounts.
Note E – Income Taxes (continued)
A summary of the difference between federal income tax expense computed at the statutory rate and that reported in the consolidated financial statements is as follows:
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
Statutory federal income rate applied to pretax income
|
|
$
|
3,543
|
|
|
$
|
15,069
|
|
|
$
|
11,883
|
|
Tax effect of (deduction):
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax-exempt investment income
|
|
|
(968
|
)
|
|
|
(938
|
)
|
|
|
(919
|
)
|
Change in enacted tax rates
|
|
|
(9,572
|
)
|
|
|
-
|
|
|
|
-
|
|
Other
|
|
|
(1,204
|
)
|
|
|
(22
|
)
|
|
|
(295
|
)
|
Federal income tax expense (benefit)
|
|
$
|
(8,201
|
)
|
|
$
|
14,109
|
|
|
$
|
10,669
|
|
Federal income tax expense (benefit) consists of the following:
|
|
|
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Taxes (benefit) on pre-tax income:
|
|
|
|
|
|
|
|
|
|
Current
|
|
$
|
(4,335
|
)
|
|
$
|
11,271
|
|
|
$
|
12,488
|
|
Deferred
|
|
|
(3,866
|
)
|
|
|
2,838
|
|
|
|
(1,819
|
)
|
|
|
$
|
(8,201
|
)
|
|
$
|
14,109
|
|
|
$
|
10,669
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Limited partnerships
|
|
$
|
4,099
|
|
|
$
|
503
|
|
|
$
|
(2,865
|
)
|
Discounts of loss and loss expense reserves
|
|
|
1,315
|
|
|
|
(114
|
)
|
|
|
1,526
|
|
Reserves - salvage and subrogation and other
|
|
|
56
|
|
|
|
(1,110
|
)
|
|
|
29
|
|
Unearned premium discount
|
|
|
(1,767
|
)
|
|
|
298
|
|
|
|
608
|
|
Deferred compensation
|
|
|
(168
|
)
|
|
|
595
|
|
|
|
(127
|
)
|
Other-than-temporary investment declines
|
|
|
(127
|
)
|
|
|
2,320
|
|
|
|
(1,416
|
)
|
Deferred acquisitions costs and ceding commission
|
|
|
1,553
|
|
|
|
(95
|
)
|
|
|
(287
|
)
|
Change in enacted tax rates
|
|
|
(9,572
|
)
|
|
|
-
|
|
|
|
-
|
|
Other
|
|
|
745
|
|
|
|
441
|
|
|
|
713
|
|
Provision for deferred federal income tax
|
|
$
|
(3,866
|
)
|
|
$
|
2,838
|
|
|
$
|
(1,819
|
)
|
The Company is required to establish a valuation allowance for any portion of the gross deferred tax asset that management believes will not be realized. Management has determined that no such valuation allowance is necessary at December 31, 2017 or 2016. As of December 31, 2017, calendar years 2016, 2015 and 2014 remain subject to examination by the IRS.
The Company has no uncertain tax positions as of December 31, 2017 or 2016. The Company recognizes accrued interest and penalties, if any, related to unrecognized tax benefits in income tax expense and changes in such accruals would impact the Company's effective tax rate. There were no amounts accrued for the payment of interest at December 31, 2017, 2016 and 2015.
Note F - Shareholders' Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in common stock outstanding and additional paid-in capital are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
Class A
|
|
|
Class B
|
|
|
Paid-in
|
|
|
|
Shares
|
|
|
|
Amount
|
|
|
Shares
|
|
|
|
Amount
|
|
|
Capital
|
|
Balance at January 1, 2015
|
|
|
2,623,109
|
|
|
|
$
|
112
|
|
|
|
12,356,389
|
|
|
|
$
|
527
|
|
|
$
|
51,854
|
|
Restricted stock grants
|
|
|
-
|
|
|
|
|
-
|
|
|
|
46,552
|
|
|
|
|
2
|
|
|
|
1,092
|
|
Balance at December 31, 2015
|
|
|
2,623,109
|
|
|
|
|
112
|
|
|
|
12,402,941
|
|
|
|
|
529
|
|
|
|
52,946
|
|
Restricted stock grants
|
|
|
-
|
|
|
|
|
-
|
|
|
|
57,959
|
|
|
|
|
3
|
|
|
|
1,340
|
|
Balance at December 31, 2016
|
|
|
2,623,109
|
|
|
|
|
112
|
|
|
|
12,460,900
|
|
|
|
|
532
|
|
|
|
54,286
|
|
Restricted stock grants
|
|
|
-
|
|
|
|
|
-
|
|
|
|
47,578
|
|
|
|
|
2
|
|
|
|
1,152
|
|
Repurchase of common shares
|
|
|
-
|
|
|
|
|
-
|
|
|
|
(84,960
|
)
|
|
|
|
(4
|
)
|
|
|
(360
|
)
|
Balance at December 31, 2017
|
|
|
2,623,109
|
|
|
|
$
|
112
|
|
|
|
12,423,518
|
|
|
|
$
|
530
|
|
|
$
|
55,078
|
|
The Company's Class A and Class B common stock has a stated value of approximately $.04 per share. The Company paid a total of $16,302, or $1.08 per share, in dividends during 2017, $15,803, or $1.04 per share, during 2016 and $15,003, or $1.00 per share, during 2015.
On August 31, 2017, the Company's Board of Directors authorized the reinstatement of its share repurchase program for up to 2,464,209 shares of the Company's Class A or Class B common stock. Pursuant to this share repurchase program, on September 21, 2017 the Company entered into a Rule 10b5-1 plan expiring on March 5, 2018, authorizing the repurchase of up to $17.5 million of the Company's outstanding common shares, at various pricing thresholds (the "Plan"). Because repurchases under the Plan will be subject to price, market volume and timing constraints, there is no assurance as to the exact number of shares that will be repurchased, if any. The Company may amend, suspend or discontinue the share repurchase program at any time.
For the year ended December 31, 2017, the Company paid $1,880 to repurchase 84,960 shares of Class B common stock at an average share price of $22.12 under the Plan.
Note G - Other Operating Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Details of other operating expenses for the years ended December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Amortization of gross deferred policy acquisition costs
|
|
$
|
70,574
|
|
|
$
|
51,597
|
|
|
$
|
50,270
|
|
Other underwriting expenses
|
|
|
37,230
|
|
|
|
41,692
|
|
|
|
42,638
|
|
Reinsurance ceded credits
|
|
|
(23,187
|
)
|
|
|
(33,512
|
)
|
|
|
(28,956
|
)
|
Total underwriting expenses
|
|
|
84,617
|
|
|
|
59,777
|
|
|
|
63,952
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses of non-insurance companies
|
|
|
28,977
|
|
|
|
29,685
|
|
|
|
26,621
|
|
Total other operating expenses
|
|
$
|
113,594
|
|
|
$
|
89,462
|
|
|
$
|
90,573
|
|
During 2015, the Company entered into a consulting contract with an insurance brokerage firm of which a director of the Company is CEO and a Managing Director. The consulting contract provides for an annual fee of $300. For the years ended December 31, 2017 and 2016, the Company incurred expenses of $300 and $300, respectively, related to this agreement. The Company also has a brokerage agreement with this entity. The Company incurred commission expense in connection with insurance policies written in 2017 and 2016 under this brokerage agreement. Total commission expense for 2017, 2016 and 2015 was $674, $419 and $0, respectively.
Note H - Employee Benefit Plans
The Company maintains a defined contribution 401(k) Employee Savings and Profit Sharing Plan (the "Plan") which covers nearly all employees who have completed one year of service. The Company's contributions are based on a set percentage and the contributions to the Plan for 2017, 2016 and 2015 were $2,797, $2,449 and $2,090, respectively.
Note I - Stock Based Compensation
In accordance with the terms of the 1981 Stock Purchase Plan (the "1981 Plan"), the Company is obligated to repurchase shares issued under the 1981 Plan, at a price equal to 90% of the book value of the shares at the end of the quarter immediately preceding the date of repurchase from one outside director. A limited number of shares have ever been repurchased under the 1981 Plan. At December 31, 2017, there were 46,875 shares (Class A) and 187,500 shares (Class B) outstanding which remain eligible for repurchase by the Company.
Restricted Stock:
The Company issues shares of restricted Class B common stock to the Company's outside directors, which serve as a portion of the annual compensation for the outside directors. The shares are distributed to the outside directors on the vesting date, one year following the date of grant. On August 31, 2017, the Company granted shares of restricted Class B common stock to a new outside director, in lieu of cash, as such director's pro-rated annual retainer compensation, which shares will vest and be distributed on May 9, 2018. The table below provides detail of the stock issuances for 2017, 2016 and 2015:
|
|
|
|
|
|
|
|
Grant Date
|
Grant
|
|
Number of Shares
|
|
Vesting
|
|
|
|
Fair Value
|
Date
|
|
Issued
|
|
Date
|
|
Period
|
|
Per Share
|
|
|
|
|
|
|
|
|
|
5/12/2015
|
|
21,252
|
|
5/12/2016
|
|
7/1/2015 - 6/30/2016
|
|
$22.59
|
|
|
|
|
|
|
|
|
|
5/10/2016
|
|
17,677
|
|
5/10/2017
|
|
7/1/2016 - 6/30/2017
|
|
$24.89
|
|
|
|
|
|
|
|
|
|
5/9/2017
|
|
18,183
|
|
5/9/2018
|
|
7/1/2017 - 6/30/2018
|
|
$24.20
|
|
|
|
|
|
|
|
|
|
8/31/2017
|
|
1,257
|
|
5/9/2018
|
|
8/31/2017 - 6/30/2018
|
|
$21.90
|
Compensation expense related to the above stock grants is recognized over the period in which the directors render the services.
Director compensation expense associated with these restricted stock grants of $454, $460 and $460 was charged against income for the restricted stock awards granted in 2017, 2016 and 2015, respectively.
On February 8, 2017, the Company issued 20,181 shares of restricted Class B common stock to certain of the Company's executives under the Company's Restricted Stock Compensation Plan. The shares of restricted stock represent a portion of the calendar year 2016 compensation earned by certain executives under the terms of the Company's Executive Incentive Bonus Plan. The shares of restricted stock will vest over a three-year period from the date of grant. The shares of restricted stock were valued based on the closing price of the Company's Class B common stock on February 8, 2017, the day the shares of restricted stock were granted. Each share of restricted stock was valued at $23.80 per share, representing a total value of $480. 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.
In May 2017, the Company's Compensation Committee granted equity-based awards pursuant to the Company's Long-Term Incentive Plan (the "Long-Term Incentive Plan"), which was approved by the Company's shareholders at the 2017 Annual Meeting of Shareholders. Certain participants under the Long-Term Incentive Plan were granted performance-based equity awards ("2017 LTIP Awards"), with the number of shares of Class B common stock earned pursuant to such award determined by applying a performance matrix consisting of a measurement of the
Note I - Stock Based Compensation (continued)
combined results of the Company's 2017 growth in net premiums earned and the Company's 2017 combined ratio. The combined ratio is calculated as a ratio of (A) losses and loss expenses incurred, plus other operating expenses, less commission and other income to (B) net premiums earned. Any 2017 LTIP Awards earned by the Company's named executive officers ("NEOs") will be paid in shares of restricted Class B common stock at the end of the 2017 annual performance period and will vest after a one-year period. Any 2017 LTIP Awards earned by non-NEOs will be paid in shares of restricted Class B common stock at the end of the 2017 annual performance period and will vest ratably over a three-year period. In addition to the 2017 LTIP Awards, in May 2017 the Company's Compensation Committee also granted Value Creation Incentive Plan awards ("VCIP Awards") to certain participants under the Long-Term Incentive Plan. The VCIP Awards are performance-based equity awards that will be earned based on the Company's cumulative operating income over a three-year performance period from January 1, 2017 through December 31, 2019 relative to an operating income goal for the period set by the Compensation Committee in March 2017. For the purpose of the VCIP Awards, cumulative operating income is equal to income before taxes excluding net realized gains (losses) on investments. Any VCIP Awards that are earned will be paid in unrestricted shares of the Company's Class B common stock at the end of the three-year performance period, but no later than March 15, 2020. No shares were issued as of December 31, 2017 with respect to either the 2017 LTIP Awards or the VCIP Awards.
Note J – Segment Information
As previously disclosed, the Company determined that its business constituted one reportable property and casualty insurance segment as of January 1, 2017 based on how its operating results are regularly reviewed by the Company's chief operating decision maker to make decisions about resources to be allocated to the segment and to assess its performance. The property and casualty insurance segment provides multiple lines of insurance coverage primarily to fleet transportation companies as well as to independent contractors who contract with fleet transportation companies. In addition, the Company provides workers' compensation coverage for a variety of operations outside the transportation industry.
The following table summarizes segment revenues for the years ended December 31:
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
Net premiums earned
|
|
$
|
328,145
|
|
|
$
|
276,011
|
|
|
$
|
263,335
|
|
Net investment income
|
|
|
18,095
|
|
|
|
14,483
|
|
|
|
12,498
|
|
Commissions and other income
|
|
|
5,308
|
|
|
|
5,275
|
|
|
|
5,703
|
|
Net realized gains (losses) on investments
|
|
|
19,686
|
|
|
|
23,228
|
|
|
|
(1,261
|
)
|
Total revenues
|
|
$
|
371,234
|
|
|
$
|
318,997
|
|
|
$
|
280,275
|
|
Note K - Earnings Per Share
The following is a reconciliation of the denominators used in the calculation of basic and diluted earnings per share for the years ended December 31:
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
Average shares outstanding for basic earnings per share
|
|
|
15,065,216
|
|
|
|
15,071,900
|
|
|
|
15,010,454
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dilutive effect of share equivalents
|
|
|
42,220
|
|
|
|
12,108
|
|
|
|
11,308
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average shares outstanding for diluted earnings per share
|
|
|
15,107,436
|
|
|
|
15,084,008
|
|
|
|
15,021,762
|
|
Note L - Concentrations of Credit Risk
The Company writes policies of excess insurance attaching above SIRs and also writes policies that contain per-claim deductibles. Those losses and claims that fall within the SIR limits are obligations of the insured; however, the Company writes surety bonds in favor of various regulatory agencies guaranteeing the insureds' payment of claims within the SIR. Further, specified portions of losses and claims incurred under large deductible policies, while obligations of the Company, are contractually reimbursable to the Company from the insureds. The Company requires collateral from its insureds to serve as a source of reimbursement if the Company is obligated to pay claims within the SIR by reason of an insured's default or if the insured fails to reimburse the Company for deductible amounts paid by the Company.
Acceptable collateral may be provided in the form of letters of credit on Company-approved banks, Company- approved marketable securities or cash. At December 31, 2017, the Company held collateral in the aggregate amount of $300,069.
The amount of collateral required of an insured is determined by the financial condition of the insured, the type of obligations guaranteed by the Company, estimated reserves for incurred losses within the SIR or deductible that have been reported to the insured or the Company, estimated incurred but not reported losses, and estimated losses that are expected to occur within the SIR or deductible prior to the next collateral adjustment date. In general, the Company attempts to hold collateral equal to 100% of the ultimate losses that would be paid by or due the Company in the event of an insured's default. Periodic audits are conducted by the Company to evaluate its exposure and the collateral required. If a deficiency in collateral is noted as the result of an audit, additional collateral is requested immediately. Because collateral amounts contain numerous estimates of the Company's exposure, are adjusted only periodically and are sometimes reduced based on the superior financial condition of the insured, the amount of collateral held by the Company at a given point in time may not be sufficient to fully reimburse the Company for all of its guarantees or amounts due in the event of an insured's default. In that regard, the Company is not fully collateralized for the guarantees made for, or the deductible amounts that may be due from, FedEx Ground and certain of its subsidiaries and related entities, and in the event of their default, such default may have a material adverse impact on the Company. The Company estimates its uncollateralized exposure related to FedEx to be as much as 46% (after-tax) of shareholders' equity at December 31, 2017.
The Company's balance sheet includes paid and estimated unpaid amounts recoverable from reinsurers under various agreements. These recoverables are only partially collateralized.
The two largest amounts due from individual reinsurers, net of collateral and offsets, were $35,801 and $34,927 at December 31, 2017.
Note M – Acquisition and related Goodwill and Intangibles
On October 31, 2008, the Company purchased a commercial lines specialty insurance agency for a cash purchase price of $3,500. As part of the purchase, the Company recorded goodwill of $3,152 and intangible assets of $179. Accumulated amortization of intangible assets was $179 as of both December 31, 2017 and 2016.
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 income 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:
As of December 31, 2017:
Description
|
|
Total
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency collateralized mortgage obligations
|
|
$
|
16,586
|
|
|
$
|
-
|
|
|
$
|
16,586
|
|
|
$
|
-
|
|
Agency mortgage-backed securities
|
|
|
27,075
|
|
|
|
-
|
|
|
|
27,075
|
|
|
|
-
|
|
Asset-backed securities
|
|
|
43,469
|
|
|
|
-
|
|
|
|
43,469
|
|
|
|
-
|
|
Bank loans
|
|
|
19,488
|
|
|
|
-
|
|
|
|
19,488
|
|
|
|
-
|
|
Certificates of deposit
|
|
|
3,135
|
|
|
|
3,135
|
|
|
|
-
|
|
|
|
-
|
|
Collateralized mortgage obligations
|
|
|
6,492
|
|
|
|
-
|
|
|
|
6,492
|
|
|
|
-
|
|
Corporate securities
|
|
|
193,058
|
|
|
|
-
|
|
|
|
193,058
|
|
|
|
-
|
|
Options embedded in convertible securities
|
|
|
5,291
|
|
|
|
-
|
|
|
|
5,291
|
|
|
|
-
|
|
Mortgage-backed securities
|
|
|
24,204
|
|
|
|
-
|
|
|
|
24,204
|
|
|
|
-
|
|
Municipal obligations
|
|
|
96,650
|
|
|
|
-
|
|
|
|
96,650
|
|
|
|
-
|
|
Non-U.S. government obligations
|
|
|
37,394
|
|
|
|
-
|
|
|
|
37,394
|
|
|
|
-
|
|
U.S. government obligations
|
|
|
49,011
|
|
|
|
-
|
|
|
|
49,011
|
|
|
|
-
|
|
Total fixed maturities
|
|
|
521,853
|
|
|
|
3,135
|
|
|
|
518,718
|
|
|
|
-
|
|
Equity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer
|
|
|
46,578
|
|
|
|
46,578
|
|
|
|
-
|
|
|
|
-
|
|
Energy
|
|
|
10,278
|
|
|
|
10,278
|
|
|
|
-
|
|
|
|
-
|
|
Financial
|
|
|
45,470
|
|
|
|
45,470
|
|
|
|
-
|
|
|
|
-
|
|
Industrial
|
|
|
25,402
|
|
|
|
25,402
|
|
|
|
-
|
|
|
|
-
|
|
Technology
|
|
|
13,061
|
|
|
|
13,061
|
|
|
|
-
|
|
|
|
-
|
|
Funds (e.g. mutual funds, closed end funds, ETFs)
|
|
|
50,291
|
|
|
|
45,276
|
|
|
|
5,015
|
|
|
|
-
|
|
Other
|
|
|
10,683
|
|
|
|
10,683
|
|
|
|
-
|
|
|
|
-
|
|
Total equity securities
|
|
|
201,763
|
|
|
|
196,748
|
|
|
|
5,015
|
|
|
|
-
|
|
Short term
|
|
|
1,000
|
|
|
|
1,000
|
|
|
|
-
|
|
|
|
-
|
|
Cash equivalents
|
|
|
59,173
|
|
|
|
-
|
|
|
|
59,173
|
|
|
|
-
|
|
Total
|
|
$
|
783,789
|
|
|
$
|
200,883
|
|
|
$
|
582,906
|
|
|
$
|
-
|
|
Note N – Fair Value (continued)
As of December 31, 2016:
Description
|
|
Total
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency collateralized mortgage obligations
|
|
$
|
6,171
|
|
|
$
|
-
|
|
|
$
|
6,171
|
|
|
$
|
-
|
|
Agency mortgage-backed securities
|
|
|
4,770
|
|
|
|
-
|
|
|
|
4,770
|
|
|
|
-
|
|
Asset-backed securities
|
|
|
45,183
|
|
|
|
-
|
|
|
|
37,919
|
|
|
|
7,264
|
|
Bank loans
|
|
|
10,349
|
|
|
|
-
|
|
|
|
-
|
|
|
|
10,349
|
|
Certificates of deposit
|
|
|
3,117
|
|
|
|
3,117
|
|
|
|
-
|
|
|
|
-
|
|
Collateralized mortgage obligations
|
|
|
9,104
|
|
|
|
-
|
|
|
|
6,409
|
|
|
|
2,695
|
|
Corporate securities
|
|
|
137,932
|
|
|
|
-
|
|
|
|
135,794
|
|
|
|
2,138
|
|
Options embedded in convertible securities
|
|
|
4,751
|
|
|
|
-
|
|
|
|
4,751
|
|
|
|
-
|
|
Mortgage-backed securities
|
|
|
24,571
|
|
|
|
-
|
|
|
|
22,206
|
|
|
|
2,365
|
|
Municipal obligations
|
|
|
129,335
|
|
|
|
-
|
|
|
|
129,190
|
|
|
|
145
|
|
Non-U.S. government obligations
|
|
|
24,681
|
|
|
|
-
|
|
|
|
24,419
|
|
|
|
262
|
|
U.S. government obligations
|
|
|
91,940
|
|
|
|
-
|
|
|
|
91,940
|
|
|
|
-
|
|
Total fixed maturities
|
|
|
491,904
|
|
|
|
3,117
|
|
|
|
463,569
|
|
|
|
25,218
|
|
Equity securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consumer
|
|
|
32,576
|
|
|
|
32,576
|
|
|
|
-
|
|
|
|
-
|
|
Energy
|
|
|
12,842
|
|
|
|
12,842
|
|
|
|
-
|
|
|
|
-
|
|
Financial
|
|
|
31,186
|
|
|
|
30,943
|
|
|
|
243
|
|
|
|
-
|
|
Industrial
|
|
|
21,145
|
|
|
|
20,262
|
|
|
|
883
|
|
|
|
-
|
|
Technology
|
|
|
8,858
|
|
|
|
8,858
|
|
|
|
-
|
|
|
|
-
|
|
Funds (e.g. mutual funds, closed end funds, ETFs)
|
|
|
6,995
|
|
|
|
-
|
|
|
|
6,995
|
|
|
|
-
|
|
Other
|
|
|
6,343
|
|
|
|
6,343
|
|
|
|
-
|
|
|
|
-
|
|
Total equity securities
|
|
|
119,945
|
|
|
|
111,824
|
|
|
|
8,121
|
|
|
|
-
|
|
Short term
|
|
|
1,500
|
|
|
|
1,500
|
|
|
|
-
|
|
|
|
-
|
|
Cash equivalents
|
|
|
59,683
|
|
|
|
-
|
|
|
|
59,683
|
|
|
|
-
|
|
Total
|
|
$
|
673,032
|
|
|
$
|
116,441
|
|
|
$
|
531,373
|
|
|
$
|
25,218
|
|
Level inputs, as defined by the FASB guidance, are as follows:
Level Input:
|
|
Input Definition:
|
Level 1
|
|
Inputs are unadjusted, quoted prices for identical assets or liabilities in active markets at the measurement date.
|
Level 2
|
|
Inputs other than quoted prices included in Level 1 that are observable for the asset or liability through corroboration with market data at the measurement date.
|
Level 3
|
|
Unobservable inputs that reflect management's best estimate of what market participants would use in pricing the asset or liability at the measurement date.
|
The Company does not have any Level 3 fair value assets at December 31, 2017. Transfers into Level 3 during 2017 and 2016 relate to securities previously classified as Level 2. A reconciliation of the beginning and ending balances of assets measured at fair value on a recurring basis using Level 3 inputs is as follows for the years ended December 31:
Note N – Fair Value (continued)
|
|
2017
|
|
|
2016
|
|
Beginning of period balance
|
|
$
|
25,218
|
|
|
$
|
16,793
|
|
Total gains or losses (realized)
|
|
|
|
|
|
|
|
|
included in income
|
|
|
406
|
|
|
|
1,846
|
|
Purchases
|
|
|
81
|
|
|
|
5,540
|
|
Settlements
|
|
|
(9,123
|
)
|
|
|
(8,791
|
)
|
Transfers into Level 3
|
|
|
144
|
|
|
|
10,202
|
|
Transfers out of Level 3
|
|
|
(16,726
|
)
|
|
|
(372
|
)
|
End of period balance
|
|
$
|
-
|
|
|
$
|
25,218
|
|
Quoted market prices are obtained whenever possible. Where quoted market prices are not available, fair values are estimated using broker/dealer quotes for specific securities. These techniques are significantly affected by our assumptions, including discount rates and estimates of future cash flows. Potential taxes and other transaction costs have not been considered in estimating fair values.
Transfers between levels, if any, are recorded as of the beginning of the reporting period. 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.
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.
Short-term borrowings: The fair value of our short-term borrowings is based on quoted market prices for the same or similar debt, or, if no quoted market prices are available, on the current market interest rates available to us for debt of similar terms and remaining maturities.
Note N – Fair Value (continued)
A summary of the carrying value and fair value by level of financial instruments not recorded at fair value on the Company's consolidated balance sheet at December 31, 2017 and 2016 is as follows:
2017:
|
|
Carrying
|
|
|
Fair Value
|
|
|
|
Value
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Limited partnerships
|
|
$
|
70,806
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
70,806
|
|
|
$
|
70,806
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term borrowings
|
|
|
20,000
|
|
|
|
-
|
|
|
|
20,000
|
|
|
|
-
|
|
|
|
20,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016:
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Limited partnerships
|
|
$
|
76,469
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
76,469
|
|
|
$
|
76,469
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short-term borrowings
|
|
|
20,000
|
|
|
|
-
|
|
|
|
20,000
|
|
|
|
-
|
|
|
|
20,000
|
|
Note O - Quarterly Results of Operations (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarterly results of operations are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Results by Quarter
|
|
|
|
|
|
|
|
|
|
2017
|
|
|
2016
|
|
|
1st
|
|
2nd
|
|
3rd
|
|
4th
|
|
|
1st
|
|
2nd
|
|
3rd
|
|
4th
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net premiums earned
|
|
$
|
73,974
|
|
|
$
|
67,996
|
|
|
$
|
89,100
|
|
|
$
|
97,075
|
|
|
|
$
|
66,909
|
|
|
$
|
68,726
|
|
|
$
|
71,235
|
|
|
$
|
69,141
|
|
Net investment income
|
|
|
3,692
|
|
|
|
4,716
|
|
|
|
4,027
|
|
|
|
5,661
|
|
|
|
|
3,440
|
|
|
|
3,549
|
|
|
|
3,513
|
|
|
|
3,982
|
|
Net realized gains on investments
|
|
|
6,294
|
|
|
|
3,296
|
|
|
|
5,944
|
|
|
|
4,152
|
|
|
|
|
9,012
|
|
|
|
280
|
|
|
|
7,732
|
|
|
|
6,204
|
|
Losses and loss expenses incurred
|
|
|
48,599
|
|
|
|
71,754
|
|
|
|
60,673
|
|
|
|
66,492
|
|
|
|
|
38,623
|
|
|
|
42,666
|
|
|
|
56,827
|
|
|
|
48,366
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
6,756
|
|
|
|
(12,343
|
)
|
|
|
7,434
|
|
|
|
16,476
|
|
|
|
|
14,112
|
|
|
|
5,969
|
|
|
|
4,001
|
|
|
|
4,864
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share - diluted
|
|
$
|
.45
|
|
|
$
|
(.82
|
)
|
|
$
|
.49
|
|
|
$
|
1.10
|
|
|
|
$
|
.94
|
|
|
$
|
.40
|
|
|
$
|
.27
|
|
|
$
|
.32
|
|
Note P - Statutory
Net income of the Insurance Subsidiaries, all of which are wholly-owned, as determined in accordance with statutory accounting practices, was $22,000, $31,647 and $25,627 for 2017, 2016 and 2015, respectively. Consolidated statutory capital and surplus for these subsidiaries was $421,663 and $399,314 at December 31, 2017 and 2016, respectively, of which $59,106 may be transferred by dividend or loan to the parent company during calendar year 2018 with proper notification to, but without approval from, regulatory authorities.
State regulatory authorities prescribe calculations of the minimum amount of statutory capital and surplus necessary for each insurance company to remain authorized. These computations are referred to as Risk Based Capital ("RBC") requirements and are based on a number of complex factors taking into consideration the quality and nature of assets, the historical adequacy of recorded liabilities and the specific nature of business conducted. At December 31, 2017, the minimum statutory capital and surplus requirements of the Insurance Subsidiaries was $104,913. Actual consolidated statutory capital and surplus at December 31, 2017 exceeded this requirement by $316,750.
Note Q - Leases
The Company leases certain computer and related equipment using noncancelable operating leases. Lease expense for 2017, 2016 and 2015 was $417, $157 and $175, respectively. At December 31, 2017, future lease payments for operating leases with initial or remaining noncancelable terms of one year or more consisted of the following:
2018
|
|
$
|
297
|
|
2019
|
|
|
297
|
|
2020
|
|
|
80
|
|
2021 and thereafter
|
|
|
6
|
|
Total minimum payments required
|
|
$
|
680
|
|
Note R – Accumulated Other Comprehensive Income
A reconciliation of the components of accumulated other comprehensive income at December 31 is as follows:
|
|
2017
|
|
|
2016
|
|
Investments:
|
|
|
|
|
|
|
Total unrealized gain before federal income taxes
|
|
$
|
71,848
|
|
|
$
|
52,386
|
|
Deferred tax liability
|
|
|
(25,148
|
)
|
|
|
(18,335
|
)
|
Net unrealized gains on investments
|
|
|
46,700
|
|
|
|
34,051
|
|
|
|
|
|
|
|
|
|
|
Foreign exchange adjustment:
|
|
|
|
|
|
|
|
|
Total unrealized losses
|
|
|
(475
|
)
|
|
|
(1,278
|
)
|
Deferred tax benefit
|
|
|
166
|
|
|
|
447
|
|
Net unrealized losses on foreign exchange adjustment
|
|
|
(309
|
)
|
|
|
(831
|
)
|
|
|
|
|
|
|
|
|
|
Accumulated other comprehensive income
|
|
$
|
46,391
|
|
|
$
|
33,220
|
|
Details of changes in net unrealized gains on investments for the years ended December 31 are as follows:
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
Investments:
|
|
|
|
|
|
|
|
|
|
Pre-tax holding gains (losses) on debt and
|
|
|
|
|
|
|
|
|
|
equity securities arising during period
|
|
$
|
26,677
|
|
|
$
|
13,259
|
|
|
$
|
(19,445
|
)
|
Less: applicable federal income taxes
|
|
|
9,337
|
|
|
|
4,641
|
|
|
|
(6,806
|
)
|
|
|
|
17,340
|
|
|
|
8,618
|
|
|
|
(12,639
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pre-tax gains on debt and equity securities
|
|
|
|
|
|
|
|
|
|
|
|
|
included in net income during period
|
|
|
7,217
|
|
|
|
20,755
|
|
|
|
426
|
|
Less: applicable federal income taxes
|
|
|
2,526
|
|
|
|
7,264
|
|
|
|
149
|
|
|
|
|
4,691
|
|
|
|
13,491
|
|
|
|
277
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in unrealized gains on investments
|
|
$
|
12,649
|
|
|
$
|
(4,873
|
)
|
|
$
|
(12,916
|
)
|
Note R – Accumulated Other Comprehensive Income (continued)
Reconciliation of accumulated other comprehensive income and retained earnings for the years ended December 31 are as follows:
|
|
2017
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
Beginning accumulated other comprehensive income
|
|
$
|
33,220
|
|
|
$
|
37,858
|
|
|
$
|
52,230
|
|
Change in foreign exchange adjustment
|
|
|
522
|
|
|
|
235
|
|
|
|
(1,456
|
)
|
Change in unrealized net gains on investments
|
|
|
12,649
|
|
|
|
(4,873
|
)
|
|
|
(12,916
|
)
|
Ending accumulated other comprehensive income
|
|
$
|
46,391
|
|
|
$
|
33,220
|
|
|
$
|
37,858
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
|
|
2016
|
|
|
|
2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning retained earnings
|
|
$
|
316,195
|
|
|
$
|
303,053
|
|
|
$
|
294,773
|
|
Net income
|
|
|
18,323
|
|
|
|
28,945
|
|
|
|
23,283
|
|
Dividends
|
|
|
(16,302
|
)
|
|
|
(15,803
|
)
|
|
|
(15,003
|
)
|
Repurchase of common shares
|
|
|
(1,516
|
)
|
|
|
-
|
|
|
|
-
|
|
Ending retained earnings
|
|
$
|
316,700
|
|
|
$
|
316,195
|
|
|
$
|
303,053
|
|
Note S – Debt
The Company maintains a revolving line of credit with a $40,000 limit and an expiration date of September 23, 2018. Interest on this line of credit is referenced to LIBOR and can be fixed for periods of up to one year at the Company's option. Outstanding drawings on this line of credit were $20,000 as of both December 31, 2017 and 2016. At December 31, 2017, the effective interest rate was 2.65%. The Company had $20,000 remaining unused under the line of credit at December 31, 2017. These outstanding borrowings were used for general corporate purposes.
Note T – Subsequent Events
On February 9, 2018, the Board of Directors of Baldwin & Lyons, Inc. declared a regular quarterly dividend of $0.28 per share on the Company's Class A and Class B Common Stock. The dividend per share will be payable March 9, 2018 to shareholders of record on February 23, 2018.