The Company's assets at December 31, 2015 included $71.7 million in short-term and cash equivalent investments which are readily convertible to cash without market penalty and an additional $73.9 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.
Net premiums written by the Company's Insurance Subsidiaries for 2015 equaled approximately 65% of the combined statutory surplus of these subsidiaries, a level consistent with the past several years. Premium writings of 100% to 200% of surplus are generally considered acceptable by regulatory authorities. Further, the statutory capital of each of the Insurance Subsidiaries substantially exceeds minimum risk based capital requirements set by the National Association of Insurance Commissioners. Accordingly, the Company has the ability to significantly increase its business without seeking additional capital to meet regulatory guidelines.
At December 31, 2015, $87.7 million, or 22% 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 pose no material liquidity concerns for the Company. The financial strength and stability of the subsidiaries permit ready access by the parent company to short-term and long-term sources of credit. The Company maintains a $40 million unsecured line of credit with $20 million of unused capacity at December 31, 2015.
Net pre-tax losses on investments, before taxes, totaled $1.3 million in 2015 compared to net pre-tax gains on investments of $14.9 million during 2014. The 2015 results were heavily influenced by direct trading results with gains of $4.5 million in 2015 compared to gains of $7.9 million in 2014. In addition, limited partnership results produced losses of $1.7 million in 2015 compared to gains of $7.1 million during the prior year. Limited partnership ventures utilized by the Company are primarily engaged in the trading of public and private securities, including foreign securities and, to a lesser extent, small venture capital activities and real estate development. The aggregate of the Company's share of gains and losses in these entities represented a 2% decrease in value for 2015 compared to a 10% appreciation in value for 2014. To the extent that accounting rules require the limited partnerships to include realized and unrealized gains or losses in their net income, the Company's proportionate share of net income will include the results as reported to the Company by the various general partners. During 2015, the limited partnership $1.7 million net loss was composed of $8.2 million attributable to a decrease in unrealized gains and $6.5 million attributable to realized gains. Other-than-temporary impairments of $7.7 million netted with losses of $4.4 million on previously impaired available-for-sale securities that were sold in 2015 are included in the net losses stated above.
Losses and loss expenses incurred during 2015 decreased $3.8 million (2.4%) from 2014 to $155.8 million, a decrease generally consistent with the decreased reinsurance exposure described above. The 2015 consolidated loss and loss expense ratio was 59.2% compared to 61.0% for 2014. The Company's loss and loss expense ratios for major product lines are summarized in the following table:
The lower loss ratio for Fleet Transportation during 2015 was the result of more favorable frequency and severity related to current accident year losses. Prior year reserve savings lowered the 2015 calendar year Fleet Transportation loss ratio by 4.3 points compared to a 4.4 point decrease experienced in 2014.
The Company produced an overall savings on the handling of prior year claims during 2015 of $10.1 million. This net savings is included in the computation of loss ratios shown in the previous table, as is the $10.4 million savings produced during 2014 on prior year claims. Separated by segment, a $10.3 million net savings attributable to the property and casualty insurance segment during 2015 was primarily attributable to the Company's Fleet Transportation business, a described in the previous paragraph. A $0.2 million deficiency attributable to the reinsurance segment in 2015 related primarily to professional liability assumed losses. Because of the high limits provided by the Company to its fleet transportation insureds, the length of time necessary to settle larger, more complex claims and the volatility of the fleet transportation liability insurance business, the Company believes it is important to take a conservative posture in its reserving process. As claims are settled in years subsequent to their occurrence, the Company's claim handling process has, historically, tended to produce savings from the reserves provided. Changes in both gross premium volumes and the Company's reinsurance structure for its fleet transportation business can have a significant impact on future loss developments and, as a result, loss and loss expense ratios and prior year reserve development may not be consistent year to year.
Other operating expenses for 2015, before credits for ceding allowances from reinsurers, increased $7.7 million (7%) to $119.5 million, generally in line with increases in Property and Casualty Insurance segment premium written. This increase is due primarily to (1) an increase in salary and salary related expenses, reflective of the Company's growing workforce in response to the continued expansion of the Company's products and services, (2) a non-recurring recovery during 2014 of a substantial previously written off reinsurance recovery and (3) increased commissions related to business produced by non-affiliated agents and brokers. Reinsurance ceded credits were 22% higher in 2015, resulting primarily from favorable changes to the terms of certain reinsurance treaties. After consideration of these expense offsets, operating expenses increased $2.5 million, or 3%, from the prior year.
A portion of the Company's fleet transportation business is produced by the direct sales efforts of Baldwin & Lyons, Inc. employees and, accordingly, this business does not incur commission expense on a consolidated basis. Rather, the expenses of the agency operations, including salaries and bonuses of salesmen, travel expenses, etc. is included in operating expenses. In general, commissions paid by the Insurance Subsidiaries to the parent company exceed related acquisition costs incurred in the production of the property and casualty insurance business. The ratio of net operating expenses of the Insurance Subsidiaries to net premiums earned was 32.2% in 2015 and 32.0% in 2014. 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 32.2% for 2015 compared with 31.8% for 2014.
The effective federal tax rate on the consolidated pre-tax income for 2015 was 31.4%. The effective rate differs from the normal statutory rate primarily as a result of tax-exempt investment income.
Net income for 2015 of $23.3 million compares to net income of $29.7 million during 2014 with the decline attributable to realized investment gains. Diluted earnings per share of $1.55 were recorded in 2015 compared to per share income of $1.98 in 2014.
Premiums written by the Property and Casualty Insurance segment for 2014 totaled $343.2 million, an increase of $28.4 million (9%) from 2013. This increase is primarily attributable to a $32.0 million (11%) increase in premiums generated by fleet transportation products resulting from the addition of several new accounts during 2014, rate increases and increased revenue and miles driven by our insureds, which is immediately reflected in premium. This increase was partially offset by a decrease of $10.0 million in premiums generated by primary professional liability reflecting the termination of products produced through a single managing general agency which had experienced unfavorable results in recent years. Premiums ceded to reinsurers on direct business averaged 34.7% of gross written premium for 2014 compared to 35.9% for 2013, with the decrease attributable to the above-described changes in mix of business.
Premiums written by the Reinsurance segment totaled $39.2 million during 2014, a decrease of $15.5 million (28%) from 2013. Premiums generated by property reinsurance products decreased $13.0 million (45%), reflective of management's decision to reduce exposures to property catastrophe losses. Further contributing to the Reinsurance segment decrease was a decrease in the Company's book of professional liability reinsurance assumed.
After giving effect to changes in unearned premiums, consolidated net premiums earned totaled $261.6 million for 2014 compared to $252.7 million for 2013, an increase of 3.5%. The premium earned increase also reflects the higher premium volume generated by the fleet transportation products mentioned above which was partially offset by decreased premium written in the primary professional liability products.
Pre-tax investment income of $9.1 million during 2014 was 3% higher than the 2013 total as available pre-tax yields began to level and average invested assets continued to grow marginally. After tax investment income increased by 5% during 2014 compared to the prior year reflecting a mix in taxable compared to tax-exempt investment income.
Losses and loss expenses incurred during 2014 increased $8.9 million (5.9%) from 2013 to $159.6 million, an increase generally consistent with the increased premium volume described above and reflects higher property catastrophe losses occurring in 2014. The 2014 consolidated loss and loss expense ratio was 61.0% compared to 59.6% for 2013. The Company's loss and loss expense ratios for major product lines are summarized in the following table:
The lower loss ratio for Fleet Transportation was the result of more favorable frequency and severity experience during the year as well as prior year reserve savings. The increase in the All Other loss ratio in 2014 was attributable to unfavorable loss development on a single MGA produced program in Primary Professional Liability and a small number of catastrophic losses aggregating over $11 million.
The Company produced an overall savings on the handling of prior year claims during 2014 of $10.4 million. This net savings is included in the computation of loss ratios shown in the previous table, as is the $5.6 million savings produced during 2013 on prior year claims. Separated by segment, a $5.4 million net savings attributable to the property and casualty insurance segment during 2014 was attributable to the Company's Fleet Transportation and Personal Automobile business with deficiencies in Primary Professional Liability and a discontinued line of Commercial Multi-Peril partially offsetting the savings. The $4.9 million savings attributable to the reinsurance segment in 2014 related largely to the casualty reinsurance business. Because of the high limits provided by the Company to its fleet transportation insureds, the length of time necessary to settle larger, more complex claims and the volatility of the fleet transportation liability insurance business, the Company believes it is important to take a conservative posture in its reserving process. As claims are settled in years subsequent to their occurrence, the Company's claim handling process has, historically, tended to produce savings from the reserves provided. Changes in both gross premium volumes and the Company's reinsurance structure for its fleet transportation business can have a significant impact on future loss developments and, as a result, loss and loss expense ratios and prior year reserve development may not be consistent year to year.
Other operating expenses for 2014, before credits for ceding allowances from reinsurers, increased $5.7 million (5%) to $111.8 million, generally in line with increases in premium written. This increase is due primarily to an increase in salary and salary related expenses, reflective of the Company's growing workforce in response to the continued expansion of the Company's products and services, and from higher expenses related to technological advances within the Company, both in the area of telematics and information technology. Reinsurance ceded credits were 14% higher in 2014, resulting from favorable changes to the terms of certain reinsurance treaties as well as increased business ceded to other companies under quota share reinsurance treaties which provide commissions to the Insurance Subsidiaries. After consideration of these expense offsets, operating expenses increased $2.7 million, or 3% from the prior year.
Approximately 67% of the Company's assets are composed of investments at December 31, 2015. Approximately 90% of these investments are publicly-traded, owned directly and have readily-ascertainable market values. The remaining 10% of investments are composed primarily of minority interests in several limited partnerships. These
Under FASB guidance, if a fixed maturity security is in an unrealized loss position and the Company has the intent to sell the security, or it is more likely than not that the Company will have to sell the security before recovery of its amortized cost basis, the decline in value is deemed to be other-than-temporary and is recorded to net realized losses on investments in the consolidated statements of operations. For impaired fixed maturity securities that the Company does not intend to sell or it is more likely than not that the Company will not have to sell such securities, but the Company expects that it will not fully recover the amortized cost basis, the credit component of the other-than-temporary impairment is recognized in net realized losses on investments in the consolidated statements of operations and the non-credit component of the other-than-temporary impairment is recognized directly in shareholder's equity (accumulated other comprehensive income).
Amounts recoverable under the terms of reinsurance contracts comprise approximately 20% of total Company assets as of December 31, 2015. 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 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 the superior credit ratings available are utilized. However, as noted above, reinsurers are often not called upon to satisfy their obligations for several years and changes in credit worthiness can occur in the interim period. Reviews of the current financial strength of each reinsurer are made frequently and, should impairment in the ability of a reinsurer be determined to exist, current year operations would be charged in amounts sufficient to provide for the Company's additional liability. Such charges are included in other operating expenses, rather than losses and loss expenses incurred, since the inability of the Company to collect from reinsurers is a credit loss rather than a deficiency associated with the loss reserving process.
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 private passenger physical damage, the Company records an initial reserve that is based upon historical loss settlements adjusted for current trends. As information regarding the loss occurrence is gathered in the claim handling process, the initial reserve is adjusted to reflect the anticipated ultimate cost to settle the claim. For more complex claims which can tend toward being "long-tail" in nature, an experienced claims adjuster will review the facts and circumstances surrounding the loss occurrence to make a determination of the reserve to be established. Many of the more complex claims involve litigation and necessitate an evaluation of potential jury awards in addition to the factual information to determine the value of each claim. Each claim is frequently monitored and the recorded reserve is increased or decreased relative to information gathered during the settlement life cycle.
The Company also uses the loss development factor approach for its long-tail lines of business. A minimum of 15 accident years is included in the loss development triangles used to calculate link ratios and the selected loss development factors used to determine the reserves for incurred but not reported losses. A minimum of 20 accident years is used for long-tail workers' compensation reserve projections. Significant emphasis is placed on the use of tail factors for the Company's long-tail lines of business.
The reserving process requires management to continuously monitor and evaluate the life cycle of claims based on the class of business and the nature of the individual losses. As previously noted, our claims vary widely in scope and complexity. Reserving for each class of claims requires a set of assumptions based upon historical experience, knowledge of current industry trends and seasoned judgment. The high limits provided in the Company's fleet transportation liability policies provide for greater volatility in the reserving process for more serious claims. Court rulings, legislative actions and trends in jury awards also play a significant role in the estimation process of larger claims. The Company continuously reviews and evaluates loss developments subsequent to each measurement date and adjusts its reserve estimations, as necessary, in an effort to achieve the best possible estimate of the ultimate remaining loss costs at any point in time.
Management is aware of the potential for variation from the reserves established at any particular point in time. Savings or deficiencies could develop in future valuations of the currently established loss and loss expense reserve estimates under a variety of reasonably possible scenarios. The Company's reserve selections are developed to be a "best estimate" of unpaid loss at a point in time and, due to the unique nature of our exposures, particularly in the large fleet transportation excess product where insured's policies of insurance combine large self-insured retentions with high policy limits, ranges of reserve estimates are not established during the reserving process. However, basic assumptions that could potentially impact future volatility of our valuations of current loss and loss expense reserve estimates include, but are not limited to, the following:
Inflation must also be considered by the Company in the creation and review of loss and loss adjustment expense reserves since portions of these reserves are expected to be paid over extended periods of time. The anticipated effect of inflation is implicitly considered when estimating liabilities for losses and loss adjustment expenses.
Based on the structure of the Company's investment portfolio, the most potentially significant of the three identified market risks relates to prices in the equity security market. Though not the largest category of the Company's invested assets, equity securities have a high potential for short-term price fluctuation. The market value of the Company's equity positions at December 31, 2015 was $145.4 million or approximately 20% of invested assets. This market valuation includes $65.3 million of appreciation over the adjusted cost basis of the equity security investments. Funds invested in the equities market are not considered to be assets necessary for the Company to conduct its daily operations and, therefore, can be committed for extended periods of time. The long-term nature of the Company's equity investments allows it to invest in positions where ultimate value, and not short-term market fluctuations, is the primary focus.
Reference is made to the discussion of limited partnership investments in Critical Accounting Policies in this report. All of the market risks, attendant to equity securities, apply to the underlying assets in these partnerships, and to a greater degree because of the generally more aggressive investment philosophies utilized by the partnerships. In addition, these investments are illiquid. There is no primary or secondary market on which these limited partnerships trade and, in most cases, the Company is prohibited from disposing of its limited partnership interests for some period of time and must seek approval from the general partner for any such disposal. Distributions of earnings from these partnerships are largely at the sole discretion of the general partners and distributions are generally not received by the Company for many years after the earnings have been reported. Finally, through the application of the equity method of accounting, the Company's share of net income reported by the limited partnerships often includes significant amounts of unrealized appreciation on the underlying investments. As such, the likelihood that reported income from limited partnership investments will be ultimately returned to the Company in the form of cash is markedly lower than the Company's other investments, where appreciation is recognized as income only when a security is actually sold.
The Company's fixed maturity portfolio totaled $437.2 million at December 31, 2015. Approximately 49% of this portfolio is made up of U.S. Government and government agency obligations and state and municipal debt securities; 78% of the portfolio matures within 5 years; and the average contractual maturity of the Company's fixed maturity investments is approximately 4.6 years with an average modified duration of approximately 2.3 years. Although the Company is exposed to interest rate risk on its fixed maturity investments, given the anticipated duration of the Company's liabilities (principally insurance loss and loss expense reserves) relative to investment maturities, even a 100 to 200 basis point increase in interest rates would not have even a moderate impact on the Company's ability to conduct daily operations or to meet its obligations and would, in fact, result in significantly higher investment income in a relatively short period of time as short term investments and maturing bonds could be reinvested in the higher yielding securities very quickly.
There is an inverse relationship between interest rate fluctuations and the fair value of the Company's fixed maturity investments. Additionally, the fair value of interest rate sensitive instruments may be affected by the financial strength of the issuer, prepayment options, relative values of alternative investments, liquidity of the investment, currency fluctuations for non-U.S. debt holdings and other general market conditions. The Company monitors its sensitivity to interest rate risk by measuring the change in fair value of its fixed maturity investments relative to hypothetical changes in interest rates.
The following tables present the estimated effects on the fair value of financial instruments at December 31 which would result from an instantaneous change in yield rates of varying magnitudes on a static balance sheet to determine the effect such a change in rates would have on current fair value. The analysis presents the sensitivity of the fair value of the Company's financial instruments to selected changes in market rates and prices. The range of change chosen reflects the Company's view of changes that the Company believes are reasonably possible over a one-year period. The Company's selection of the range of values chosen to represent changes in interest rates should not be construed as the Company's prediction of future market events, but rather an illustration of the impact of such events, should they occur. The equity portfolio was compared to the S&P 500 index due to its correlation with the vast majority of the Company's current equity portfolio. The limited partnership portfolio was compared to the S&P 500 and Indian BSE 500 indices due to their significant correlation with the vast majority of our limited partnership portfolio. As previously indicated, several other factors can impact the fair values of fixed maturity investments and, therefore, significant variations in market interest rates could produce quite different results from the hypothetical estimates presented below.
The following tables present the estimated effects on the fair value of financial instruments at December 31 due to an instantaneous change in yield rates of 100 basis points and a 10% decline in the S&P 500 and Indian BSE 500 indices (dollars in thousands).
The following tables present the estimated effects on the fair value of financial instruments at December 31 due to an instantaneous change in yield rates of 150 basis points and a 15% decline in the S&P 500 and Indian BSE 500 indices (dollars in thousands).
The table below sets forth the amounts of the Company's contractual obligations at December 31, 2015.
The investment commitments in the above table relate to maximum unfunded capital obligations for limited partnership investments and unfunded bridge loan obligations at December 31, 2015. The actual call dates for such funding could vary from that presented.
The Board of Directors and Shareholders of Baldwin & Lyons, Inc.
We have audited the accompanying consolidated balance sheets of Baldwin & Lyons, Inc. and subsidiaries (the Company) as of December 31, 2015 and 2014, and the related consolidated statements of operations, comprehensive income, shareholders' equity and cash flows for each of the three years in the period ended December 31, 2015. Our audits also included the financial statement schedules listed in the Index at Item 15(a). These financial statements and schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedules based on our audits.
Investments: Carrying amounts for fixed maturity securities represent fair value and are based on quoted market prices, where available, or broker/dealer quotes for specific securities where quoted market prices are not available. Equity securities are carried at quoted market prices (fair value). The Company accounts for investments in limited partnerships using the equity method of accounting, which requires an investor in a limited partnership to record its proportionate share of the limited partnership's net income. To the extent that the limited partnership investees include both realized and unrealized investment gains or losses in the determination of net income or loss, then the Company would also recognize, through its statements of operations, its proportionate share of the investee's unrealized as well as realized investment gains or losses.
In accordance with the Financial Accounting Standard Board's ("FASB") other-than-temporary impairment ("OTTI") guidance, if a fixed maturity security is in an unrealized loss position and the Company has the intent to sell the fixed maturity security, or it is more likely than not that the Company will have to sell the fixed maturity security before recovery of its amortized cost basis, the decline in value is deemed to be other-than-temporary and is recorded to net realized losses on investments in the consolidated statements of operations. For impaired fixed maturity securities that the Company does not intend to sell or in cases where it is more likely than not that the Company will not have to sell such securities, but the Company expects that it will not fully recover the amortized cost basis, the credit component of the other-than-temporary impairment is recognized in net realized losses on investments in the consolidated statements of operations and the non-credit component of the other-than-temporary impairment is recognized directly in shareholder's equity (accumulated other comprehensive income).
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. 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.
Restricted Stock: Restricted shares vest ratably over the vesting 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 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.
In May 2015, the FASB issued ASU 2015-09, Disclosures about Short-Duration Contracts, and this new guidance will enhance disclosures about an entity's insurance liabilities. This guidance will provide additional information about unpaid claims and claim development, including supplemental disaggregated incurred and paid claim data. Under the guidance, enhanced disclosures on claim frequency and reserving methodologies are required. The guidance is effective for annual periods beginning after December 15, 2015 and for interim periods beginning after December 15, 2016, however early adoption is permitted. The Company has not yet adopted the guidance and the adoption of this guidance will not impact our consolidated financial position, results of operations or cash flows.
Unrealized losses in the Company's fixed maturity portfolio are generally the result of interest rate or foreign currency fluctuations as well as the disruption of credit markets occasioned by financial market turmoil. The average unrealized loss for all fixed maturity securities in a loss position at December 31, 2015 is approximately 3% of original or adjusted cost. The Company does not intend to sell any fixed maturity securities which are in an unrealized loss position at December 31, 2015 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, 2015.
The fair value and the cost or amortized cost of fixed maturity investments at December 31, 2015, 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.
Note: Recovery in market value of an investment which has previously been adjusted for other-than-temporary impairment is treated as an unrealized gain until the investment matures or is sold.
The Company's limited partnerships include one significant investment which invests in public and private equity markets in India. This limited partnership investment's value as of December 31, 2015 and 2014 was $28,270 and $29,868, respectively. At December 31, 2015, the Company's estimated ownership interest in this limited partnership investment was approximately 5%. The Company's share of earnings (losses) from this limited partnership investment was ($1,599), $7,176 and ($3,176) in 2015, 2014 and 2013, respectively. The summarized financial information of the significant limited partnership investment as of and for the years ended December 31 is as follows:
Short-term investments at December 31, 2015 include $2,220 in time certificates of deposit issued by a Bermuda bank.
Approximately $61,271 of fixed maturity investments (8.4% of total invested assets) consists of bonds rated as less than investment grade at year end. These investments include a diversified portfolio of over 40 investments and have a $3,185 aggregate net unrealized loss position at December 31, 2015.
Favorable loss development is influenced by the Company's long-standing policy of reserving for losses realistically and a willingness to settle claims based upon a seasoned evaluation of its exposures. Loss reserves pertaining to the Company's property reinsurance business are established partially by the ceding reinsurers although the Company routinely adjusts such reserves if management determines that additional reserves could be necessary. There is potential for fluctuations in loss developments related to reinsurance assumed to be more pronounced than those experienced on directly produced business which is reserved entirely by Company personnel. In addition, changes in the Company's net retention under reinsurance treaties will impact developments as more or less business is retained. These trends were considered in the establishment of the Company's reserves at December 31, 2015 and 2014.
Loss reserves on certain permanent total disability workers' compensation reserves have been discounted to present value at pre-tax rates not exceeding 3.5%. At December 31, 2015 and 2014, loss reserves have been reduced by approximately $2,110 and $3,129, respectively. Discounting is applied to these claims since the amount of periodic payments to be made during the lifetime of claimants is fixed and determinable.
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 2015, 2014 and 2013 have been reduced by ceded reinsurance recoveries of approximately $75,581, $105,891 and $107,321, 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 2015, 2014 and 2013 include approximately $13,492, $20,288 and $17,696, respectively, relating to reinsurance assumed from non-affiliated insurance or reinsurance companies.
The Company has no uncertain tax positions as of December 31, 2015 or 2014. 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, 2015, 2014 and 2013.
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 $15,003, $14,947 and $14,943, or $1.00 per share, in dividends for the years 2015, 2014 and 2013, respectively.
The Company entered into a consulting contract with an insurance intermediary, capital advisor and insurance management firm of which a director of the Company is CEO and a Managing Director. The consulting contract provides for an annual fee of $300.
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 to the Plan for 2015, 2014 and 2013 were $2,090, $1,798 and $1,798, respectively.
Each year, beginning in 2009, the Company has issued shares of class B restricted stock to the Company's outside directors. The shares serve as the annual retainer compensation for the outside directors for the periods shown below. The shares are distributed on the vesting date and have a total value of $480, $440 and $440 for the annual periods ended 2015, 2014 and 2013, respectively. The table below provides detail of the stock issuances for 2015, 2014 and 2013:
The following table reconciles reportable segment profits to the Company's consolidated income before federal income taxes:
One customer of the property and casualty insurance segment, FedEx Ground Systems, Inc. and certain of its subsidiaries and related entities ("FedEx") represents approximately $17,773, $18,951 and $27,004 of the Company's consolidated direct and assumed premium written in 2015, 2014 and 2013, respectively.
An additional $209,434, $197,767 and $171,615 for 2015, 2014 and 2013, respectively, is placed with the Company by a non-affiliated broker on behalf of contracted service providers of this same customer but this business is not dependent upon the direct business with this customer.
The amount of collateral required of an insured is determined by the financial condition of the insured, the type of obligations guaranteed by the Company, estimated reserves for incurred losses within the SIR or deductible that have been reported to the insured or the Company, estimated incurred but not reported losses, and estimates 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 this customer to be as much as 47% of shareholders' equity at December 31, 2015.
Level inputs, as defined by the FASB guidance, are as follows:
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 2015.
Net income of the insurance subsidiaries, all of which are wholly owned, as determined in accordance with statutory accounting practices, was $25,627, $27,143 and $30,886 for 2015, 2014 and 2013, respectively. Consolidated statutory capital and surplus for these subsidiaries was $390,823 and $398,762 at December 31, 2015 and 2014, respectively, of which $62,539 may be transferred by dividend or loan to the parent company during calendar year 2016 with proper notification to, but without approval from, regulatory authorities. An additional $239,249 of shareholders' equity of such insurance subsidiaries could, under existing regulations, be advanced or loaned to the parent company with prior notification to and approval from regulatory authorities, although it is unlikely that transfers of this size would be practical.