The Company owns its home office building and the adjacent real estate in Carmel, Indiana, approximately 14 miles from downtown Indianapolis. The home office building contains a total of 181,000 usable square feet, and the Company currently occupies approximately 72% of this space, with the remainder being leased to non-affiliated entities on short-term leases expiring in 2017 through 2023.
The primary sources of the Company's liquidity are (1) funds generated from insurance operations, including net investment income, (2) proceeds from the sale of investments and (3) proceeds from maturing investments. The Company generally experiences positive cash flow from operations resulting from the fact that premiums are collected on insurance policies in advance of the disbursement of funds in payment of claims. Operating costs of the Insurance Subsidiaries, other than loss and loss expense payments, generally average less than 33% of net premiums earned on a consolidated basis, and the remaining amount is available for investment for varying periods of time depending on the type of insurance coverage provided. Because losses are often settled in periods subsequent to when they are incurred, operating cash flows may, at times, become negative as loss settlements on claim reserves established in prior years exceed current revenues. During 2016, cash flow from operations totaled $32.4 million compared to the $38.2 million total for 2015. The decrease in operating cash flow resulted mainly from increased loss and loss adjustment expenses in 2016. During 2015, the $38.2 million cash flow from operations compared to $30.2 million during 2014, an increase that resulted from decreased loss, LAE and other operating expense payments as well as higher premium volume in 2015.
As a result of the cash flow from operations noted above, net cash used in investing activities totaled $27.4 million and $12.8 million for the years ended December 31, 2016 and 2015, respectively.
Financing activity for 2016 and 2015 consisted solely of regular cash dividend payments to shareholders of $15.8 million ($1.04 per share) and $15.0 million ($1.00 per share), respectively.
The Company's assets at December 31, 2016 included $61.2 million in short-term and cash equivalent investments that are readily convertible to cash without market penalty and an additional $98.6 million of fixed maturity investments (at par) maturing in less than one year. The Company believes that these liquid investments, plus the expected cash flow from premium collections, are more than sufficient to provide for projected claim payments and operating cost demands. In the event competitive conditions produce inadequate premium rates and the Company chooses to further restrict volume, the liquidity of its investment portfolio would permit management to continue to pay claims as settlements are reached without requiring the disposal of investments at a loss, regardless of interest rates in effect at the time. In addition, the Company's reinsurance program is structured to avoid significant cash outlays that accompany large losses.
At December 31, 2016, $85.8 million, or 21% of shareholders' equity, represented net assets of the Company's Insurance Subsidiaries which, at that time, could not be transferred in the form of dividends, loans or advances to the parent company because of minimum statutory capital requirements. However, management believes that these restrictions do not currently pose any material liquidity concerns for the Company. The financial strength and stability of the Insurance Subsidiaries permit access by the parent company to short-term and long-term sources of credit when needed.
After giving effect to changes in unearned premiums, consolidated net premiums earned totaled $276.0 million for 2016 compared to $263.3 million for 2015, an increase of 4.8%. The net premium earned increase reflected a 12.5% increase in premium earned from the fleet transportation products mentioned above, partially offset by decreased premium written from primary professional liability and personal automobile products and in the Reinsurance segment.
Losses and loss expenses incurred during 2016 increased $30.7 million (19.7%) from 2015 to $186.5 million, due primarily to prior accident year development and growth. The 2016 consolidated loss and loss expense ratio was 67.6%, compared to 59.2% for 2015. The Company's loss and loss expense ratios for major product lines are summarized in the following table:
The higher loss ratio for fleet transportation during 2016 was the result of less favorable developments related to prior accident year losses. The prior year reserve deficiency in 2016 increased the 2016 calendar year fleet transportation loss ratio by 5.0 percentage points compared to a 4.3 percentage point decrease experienced in 2015 due to the prior year reserve savings in 2015.
The Company produced an overall reserve deficiency on prior year claims during 2016 of $13.8 million. This net deficiency is included in the computation of loss ratios shown in the previous table, as is the $10.1 million savings produced during 2015 on prior year claims. Separated by segment, a $5.4 million net deficiency attributable to the property and casualty insurance segment during 2016 was primarily attributable to the Company's Fleet Transportation business, a described in the previous paragraph. An $8.4 million deficiency attributable to the reinsurance segment in 2016 was related primarily to professional liability assumed losses. Because of the high limits provided by the Company to its fleet transportation insureds, the length of time necessary to settle larger, more complex claims and the volatility of the fleet transportation liability insurance business, the Company believes it is important to take a conservative posture in its reserving process. Changes in both gross premium volumes and the Company's reinsurance structure for its fleet transportation business can have a significant impact on future loss developments and, as a result, loss and loss expense ratios and prior year reserve development may not be consistent year to year.
A portion of the Company's fleet transportation business is produced by the direct sales efforts of Baldwin & Lyons, Inc. employees and, accordingly, this business does not incur commission expense on a consolidated basis. Rather, the expenses of the agency operations, including salaries and bonuses of salesmen, travel expenses, etc. are included in operating expenses. The ratio of net operating expenses of the Insurance Subsidiaries to net premiums earned was 30.9% in 2016 and 32.2% in 2015. Including the agency operations and corporate expenses, and after elimination of inter-company commissions, the ratio of operating expenses to operating revenue (defined as total revenue less gains or losses on investments) was 30.2% for 2016 compared with 32.2% for 2015.
Net income for 2016 of $28.9 million compares to net income of $23.3 million during 2015 with the increase primarily attributable to realized investment gains. Diluted earnings per share of $1.92 were recorded in 2016 compared to diluted earnings per share of $1.55 in 2015.
Premiums written by the Property and Casualty Insurance segment for 2015 totaled $366.7 million, an increase of $23.5 million (7%) from 2014. This increase was attributable to a $30.1 million (10%) increase in premiums generated by fleet transportation products resulting from the addition of several new accounts during 2015, rate increases, and increased revenue and miles driven by our insureds, which is immediately reflected in premium. This increase was partially offset by decreases of $4.7 million and $4.1 million in premiums generated by primary professional liability and personal automobile, respectively, reflecting the Company's strategic initiatives of reducing exposures in these products. Premiums ceded to reinsurers on Property and Casualty Insurance segment business averaged 35.0% of gross written premium for 2015, compared to 34.7% for 2014, with the small variation attributable to a fluctuation in the mix of business as well reinsurance treaty placement changes.
After giving effect to changes in unearned premiums, consolidated net premiums earned totaled $263.3 million for 2015 compared to $261.6 million for 2014, an increase of 0.7%. The small net premium earned increase reflected a 10.3% increase in premium earned from the fleet transportation products mentioned above, partially offset by decreased premium written from primary professional liability and personal automobile products and in the Reinsurance segment.
Pre-tax investment income of $12.5 million during 2015 was 38% higher than 2014, reflecting an increased allocation to high-yield bonds and increases in average invested assets. After tax investment income increased by 32% during 2015 compared to the prior year, reflecting the mix between taxable and tax-exempt investment income.
The lower loss ratio for Fleet Transportation during 2015 was the result of more favorable frequency and severity related to then-current accident year losses. Prior year reserve savings lowered the 2015 calendar year Fleet Transportation loss ratio by 4.3 percentage points compared to a 4.4 percentage point decrease experienced in 2014.
The effective federal tax rate on the consolidated pre-tax income for 2015 was 31.4%, as compared to 33.1% in 2014. The effective rate differs from the normal statutory rate primarily as a result of tax-exempt investment income.
The Company's significant accounting policies which are material and/or subject to significant degrees of judgment are highlighted below.
It is important to note that all available for sale securities included in the Company's financial statements are valued at current fair market values. The evaluation process for determination of other-than-temporary decline in value of investments, as described above, does not change these valuations but, rather, determines when a decline in value will be recognized in the income statement (other-than-temporary decline) as opposed to a charge to shareholders' equity (temporary decline). Another seemingly inconsistent aspect of this accounting policy which is important to understand is that any subsequent recoveries in value of investments which have incurred other-than-temporary impairment adjustments are accounted for as unrealized gains (with credits to equity but not reflected in the income statement) until the security is actually disposed of or sold. At December 31, 2016, unrealized gains included $2.1 million of appreciation on investments previously adjusted for other-than-temporary impairment, compared to a cumulative total of $4.0 million of impairment write-downs at that date. This evaluation process is subject to risks and uncertainties since it is not always clear what has caused a decline in value of an individual security or since some declines may be associated with general market conditions or economic factors which relate to an industry, in general, but not necessarily to an individual issue. The Company has attempted to minimize many of these uncertainties by adopting a largely objective evaluation process as described above. However, to the extent that certain declines in value are reported as unrealized at December 31, 2016, it is possible that future earnings charges will result should the declines in value increase or persist or should the security actually be disposed of while market values are less than cost. At December 31, 2016, the total gross unrealized loss included in the Company's investment portfolio was approximately $8.2 million. No individual issue constituted a material amount of this total. Had this entire amount been considered other-than-temporary at December 31, 2016, there would have been no impact on total shareholders' equity or book value since the decline in value of these securities was previously recognized as a reduction to shareholders' equity.
Amounts recoverable under the terms of reinsurance contracts comprised approximately 22% of total Company assets as of December 31, 2016. In order to be able to provide the high limits required by the Company's insureds, the Company shares a significant amount of the insurance risk of the underlying contracts with various insurance entities through the use of reinsurance contracts. Some reinsurance contracts provide that a loss be shared among the Company and its reinsurers on a predetermined pro-rata basis ("quota-share"), while other contracts provide that the Company keep a fixed amount of the loss, similar to a deductible, with reinsurers taking all losses above this fixed amount ("excess of loss"). Some risks are covered by a combination of quota-share and excess of loss contracts. The computation of amounts due from reinsurers is based upon the terms of the various contracts and follows the underlying estimation process for loss and loss expense reserves, as described below. Accordingly, the uncertainties inherent in the loss and loss expense reserving process also affect the amounts recorded as recoverable from reinsurers. Estimation uncertainties are greatest for claims which have occurred but which have not yet been reported to the Company. Further, the high limits provided by certain of the Company's insurance policies for fleet transportation liability, workers' compensation and professional liability risks provide more variability in the estimation process than lines of business with lower coverage limits.
As with any receivable, credit risk exists in the recoverability of reinsurance. This may be even more pronounced than in normal receivable situations since recoverable amounts are not generally due until the loss is settled which, in some cases, may be many years after the contract was written. If a reinsurer is unable, in the future, to meet its financial commitments under the terms of the contracts, the Company would be responsible to satisfy the reinsurer's portion of the loss. The financial condition of each of the Company's reinsurers is vetted upon the execution of a given treaty and only reinsurers with superior credit ratings are utilized. However, as noted above, reinsurers are often not called upon to satisfy their obligations for several years and changes in credit worthiness can occur in the interim period. Reviews of the current financial strength of each reinsurer are made frequently and, should impairment in the ability of a reinsurer be determined to exist, current year operations would be charged in amounts sufficient to provide for the Company's additional liability. Such charges are included in other operating expenses, rather than losses and loss expenses incurred, since the inability of the Company to collect from reinsurers is a credit loss rather than a deficiency associated with the loss reserving process.
The Company's loss and loss expense reserves for each segment are shown in the following table on both a gross (before consideration of reinsurance) and on a net of reinsurance basis at December 31, 2016 and 2015 (dollars in thousands).
Each known claim, regardless of complexity, is handled by a claims adjuster experienced with claims of this nature and a "case" reserve, appropriate for the individual loss occurrence, is established. For very routine "short-tail" claims, such as physical damage, the Company records an initial reserve that is based upon historical loss settlements adjusted for current trends. As information regarding the loss occurrence is gathered in the claim handling process, the initial reserve is adjusted to reflect the anticipated ultimate cost to settle the claim. For more complex claims which can tend toward being "long-tail" in nature, an experienced claims adjuster will review the facts and circumstances surrounding the loss occurrence to make a determination of the reserve to be established. Many of the more complex claims involve litigation and necessitate an evaluation of potential jury awards, in addition to the factual information, to determine the value of each claim. Each claim is frequently monitored and the recorded reserve is increased or decreased relative to information gathered during the settlement life cycle.
For the Company's fleet transportation risks, which are covered by regularly changing reinsurance agreements and which contain wide-ranging self-insured retentions ("SIR"), traditional actuarial methods are supplemented by other methods, as described below, in consideration of the Company's exposures to loss. In situations where the Company's reinsurance structure, the insured's SIR selections, policy volume, and other factors are changing, current accident period loss exposures may not be homogenous enough with historical loss data to allow for reliable projection of future developed losses. Therefore, the Company supplements the above-described actuarial methods with loss ratio reserving techniques developed from the Company's extensive, proprietary databases to arrive at the reserve for losses IBNR 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.
The selection of loss development factors in the establishment of bulk reserves for incurred but not reported losses and loss expenses
Under reasonably possible scenarios, it is conceivable that the Company's selected loss estimates could be 10% or more redundant or deficient. The majority of the Company's reserves for losses and loss expenses, on a net of reinsurance basis, relate to its fleet transportation products. Perhaps the most significant example of sensitivity to variation in the key assumptions is the loss ratio selection for the Company's fleet transportation products for policies subject to certain major reinsurance treaties. The following table presents the approximate impacts on gross and net loss reserves of both a hypothetical 10 percentage point and a hypothetical 20 percentage point increase or decrease in the loss factors actually utilized in the Company's reserve determination at December 31, 2016 for the prior six treaty periods, covering exposures earned on policies written between July 3, 2011 and December 31, 2016. The Company's selection of the range of values presented should not be construed as the Company's prediction of future events, but rather simply an illustration of the impact of such events, should they occur.
FASB provides guidance for recognizing and measuring uncertain tax positions and prescribes a threshold condition that a tax position must meet for any of the benefit of the uncertain tax position to be recognized in the financial statements. Based on this guidance, management regularly analyzes tax positions taken or expected to be taken in a tax return based on the threshold condition prescribed. Tax positions that do not meet or exceed this threshold condition are considered uncertain tax positions. Interest related to uncertain tax positions, if any, would be recognized in income tax expense. Penalties, if any, related to uncertain tax positions would be recorded in income tax expenses.
We have audited the accompanying consolidated balance sheets of Baldwin & Lyons, Inc. and subsidiaries as of December 31, 2016 and 2015, and the related consolidated statements of income, comprehensive income, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 2016. Our audits also included the financial statement schedules listed in the Index at Item 15(a). These financial statements and schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedules based on our audits.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Baldwin & Lyons, Inc. and subsidiaries at December 31, 2016 and 2015, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2016, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedules referred to above, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Baldwin & Lyons, Inc. and subsidiaries' internal control over financial reporting as of December 31, 2016, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated March 6, 2017 expressed an unqualified opinion thereon.
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.
Realized gains and losses on disposals of investments are recorded on the trade date and 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. The changes in fair values of insurance-linked securities and portions of the changes in fair values of convertible debt securities are reflected as a component of net realized gains (losses) on investments.
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 a set percentage of original or adjusted cost, and where that decline has existed for a set period of time, 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.
Restricted Stock: Restricted shares vest over the vesting period from the date of grant and certain restricted shares are accelerated for retirement eligible recipients in accordance with the non-substantive post-grant date vesting clause of Accounting Standard Codification ("ASC") 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 restricted shares will be forfeited should an executive's employment terminate for any reason other than death, disability, or retirement as defined by the Compensation Committee of the Board of Directors (the "Board") of the Company (the "Compensation Committee").
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. The Company has no defined benefit pension plan. A reclassification adjustment to other comprehensive income is made for gains or losses during the period included in net income.
In May 2015, the FASB issued ASU 2015-09, Disclosures about Short-Duration Contracts, and this new guidance will enhance disclosures about an entity's insurance liabilities. This guidance will provide additional information about unpaid claims and claim development, including supplemental disaggregated incurred and paid claim data. Under the guidance, enhanced disclosures on claim frequency and reserving methodologies are required. The guidance became effective for annual periods beginning after December 15, 2015 and for interim periods beginning after December 15, 2016, however early adoption was permitted. The Company has adopted the guidance and the adoption of this guidance did not impact our consolidated financial position, results of operations or cash flows.
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606), 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 service and fee income could be subject to this updated guidance. The updated guidance requires an entity to recognize revenue as performance obligations are met, in order to reflect the transfer of promised goods or services to customers in an amount that reflects the consideration the entity is entitled to receive for those goods or services. The following steps are applied in the updated guidance: (1) identify the contract(s) with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract; and (5) recognize revenue when, or as, the entity satisfies a performance obligation. In August 2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, which deferred the effective date of ASU 2014-09 to the quarter ending March 31, 2018. The Company has performed an initial evaluation of the impact this guidance will have on its results of operations, financial position or liquidity. The Company does not expect the guidance to have a material impact on its results of operations, financial position or liquidity.
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:
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, 2016 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 fair value. Accordingly, the Company does not believe the unrealized losses represent an other-than-temporary impairment as of December 31, 2016.
The fair value and the cost or amortized cost of fixed maturity investments at December 31, 2016, 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.
Shareholders' equity includes approximately $28,110, net of deferred federal income taxes, of undistributed earnings from limited partnerships as of December 31, 2016.
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 commitments to contribute an additional $1,627 to various limited partnerships as of December 31, 2016.
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, 2016 and 2015 was $27,153 and $28,270, respectively. At December 31, 2016, the Company's estimated ownership interest in this limited partnership investment was approximately 6%. The Company's share of earnings (losses) from this limited partnership investment was ($1,117), ($1,599) and $7,176 in 2016, 2015 and 2014, respectively. The summarized financial information of this limited partnership investment as of and for the years ended December 31 is as follows:
Short-term investments at December 31, 2016 included $1,500 in time certificates of deposit issued by a Bermuda bank.
Approximately $69,112 of fixed maturity investments (9.2% of total invested assets) 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 $951 aggregate net unrealized gain position at December 31, 2016.
During 2016 the Company's bridge loan investment program was terminated and the Company had no remaining committed funds related to bridge loan agreements as of December 31, 2016. The Company historically retained possession of these funds which were only loaned in the unlikely event that long-term financing was unavailable to the counter party in the market.
Unfavorable loss development in the current year for property and casualty was influenced by severity in the Company's public transportation business. Loss reserves pertaining to the Company's reinsurance business were also strengthened during the year to reflect increased loss development. In addition to these developments, changes in the Company's net retention under reinsurance treaties will impact developments as more or less business is retained. These trends were considered in the establishment of the Company's reserves at December 31, 2016.
Loss reserves have been reduced by estimated salvage and subrogation recoverable of approximately $4,151 and $4,674 at December 31, 2016 and 2015, respectively.
The following is information about incurred claims development as of December 31, 2016, 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.
The Company also uses the loss development factor approach for its long-tail lines of business, including workers' compensation. A minimum of 15 accident years is included in the loss development triangles used to calculate link ratios and the selected loss development factors used to determine the reserves for incurred but not reported losses. Significant emphasis is placed on the use of tail factors for the Company's long-tail lines of business.
The Company 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. The Company also assumes reinsurance from direct writing insurance companies for casualty insurance coverages. 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.
Net losses and loss expenses incurred for 2016, 2015 and 2014 have been reduced by ceded reinsurance recoveries of approximately $108,656, $75,581 and $105,891, respectively. Ceded reinsurance premiums and loss recoveries for the purchase of catastrophe reinsurance coverage on the Company's net direct business were not material.
Cash flows related to federal income taxes paid, net of refunds received, for 2016, 2015 and 2014 were $10,173, $14,500 and $11,619, respectively.
The Company has no uncertain tax positions as of December 31, 2016 or 2015. 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, 2016, 2015 and 2014.
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 $15,803, or $1.04 per share, in dividends during 2016, and $15,003 and $14,947, or $1.00 per share, for the years 2015 and 2014, respectively.
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 2016, 2015 and 2014 were $2,449, $2,090 and $1,798, respectively.
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 two outside directors. A limited number of shares have ever been repurchased under the 1981 Plan. At December 31, 2016, there were 60,938 shares (Class A) and 240,938 shares (Class B) outstanding which remain eligible for repurchase by the Company.
Director compensation cost associated with restricted stock grants of $460, $460 and $440 was charged against income for the restricted stock granted in 2016, 2015 and 2014, respectively.
Effective February 5, 2016, the Company issued 47,333 shares of Class B restricted stock to certain of the Company's executives under the company's Restricted Stock Compensation Plan. The restricted shares will be paid solely in the Company's Class B common stock. The restricted shares represent a portion of the calendar year 2015 compensation to certain executives under the terms of the Company's Executive Incentive Bonus Plan. The restricted shares will vest ratably over a three-year period from the date of grant and are accelerated for retirement eligible recipients in accordance with the non-substantive post-grant date vesting clause of ASC Topic 715, Compensation-Retirement Benefits. The restricted shares were valued based on the closing price of the Company's Class B common stock on the day the award was granted. Each share was valued at $23.30 per share, representing a total value of $1,103. Non-vested restricted shares will be forfeited should an executive's employment terminate for any reason other than death, disability, or retirement as defined by the Compensation Committee.
Effective February 8, 2017, the Company issued 20,181 shares of Class B restricted stock to certain of the Company's executives under the company's Restricted Stock Compensation Plan. The restricted shares will be paid solely in the Company's Class B common stock. The restricted shares represent a portion of the calendar year 2016 compensation to certain executives under the terms of the Company's Executive Incentive Bonus Plan. The restricted shares will vest over a three-year period from the date of grant. The restricted shares were valued based on the closing price of the Company's Class B common stock on the day the award was granted. Each share was valued at $23.80 per share representing a total value of $480. Non-vested restricted shares 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 Company operates within two reportable business segments: property and casualty insurance and reinsurance. The property and casualty insurance segment provides multiple line 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 to small businesses. In 2016, the Company discontinued its professional liability line of products. Prior to that, the Company marketed a variety of professional liability products on a selective basis through wholesale and retail agents on both an admitted and surplus lines basis throughout the United States, specializing in smaller insureds. In late 2015, the Company discontinued marketing private passenger automobile liability and physical damage coverages and all business for this product line had expired by the end of 2016.
In 2016, the reinsurance segment discontinued accepting professional liability cessions from other insurance companies from current in-force business. From 1992 until July 1, 2014, the reinsurance segment accepted property cessions from other insurance companies and retrocessions from reinsurance companies, principally reinsuring against catastrophes. Final exposure to property catastrophe losses expired on June 30, 2015.
The Company evaluates performance and allocates resources based on past or expected results from insurance underwriting operations before income taxes. Underwriting gain or loss does not include net investment income or gains or losses on the Company's investment portfolio. All investment-related revenues are managed at the corporate level. Underwriting gain or loss for the property and casualty insurance segment excludes revenue and expense from the Company's agency operations. Management does not identify or allocate assets to reportable segments when evaluating segment performance and depreciation expense is not material for any of the reportable segments. The accounting policies of each reportable segment are the same as those described in the summary of significant accounting policies.
The 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 IBNR losses, and estimates for 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 37% (after-tax) of shareholders' equity at December 31, 2016.
The Level 3 assets consist of a portfolio of asset and mortgage-backed securities, bank loans, collateralized mortgage obligations, corporate securities and a limited amount of municipal and foreign government obligations. The assets are valued using various unobservable inputs including extrapolated data, proprietary models and indicative quotes. Transfers into Level 3 during 2016 and 2015 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:
Net income of the Insurance Subsidiaries, all of which are wholly-owned, as determined in accordance with statutory accounting practices, was $31,647, $25,627 and $27,143 for 2016, 2015 and 2014, respectively. Consolidated statutory capital and surplus for these subsidiaries was $399,314 and $390,823 at December 31, 2016 and 2015, respectively, of which $64,260 may be transferred by dividend or loan to the parent company during calendar year 2017 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, 2016, the minimum statutory capital and surplus requirements of the Insurance Subsidiaries was $85,842. Actual consolidated statutory capital and surplus at December 31, 2016 exceeded this requirement by $313,473.
The Company leases certain computer and related equipment using noncancelable operating leases. Lease expense for 2016, 2015 and 2014 was $157, $175 and $330, respectively. At December 31, 2016, future lease payments for operating leases with initial or remaining noncancelable terms of one year or more consisted of the following:
Details of changes in net unrealized gains on investments for the years ended December 31 are as follows:
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, 2016 and 2015. At December 31, 2016, the effective interest rate was 1.86%. The Company has $20,000 remaining unused under the line of credit at December 31, 2016. The current outstanding borrowings were used for general corporate purposes.