The table below provides selected consolidated financial data of the Company. The information has been derived from our consolidated financial statements for each of the years in the five year period ended December 31, 2017. You should read this selected consolidated financial data in conjunction with the audited consolidated financial statements and notes as of and for the year ended December 31, 2017 included in Part II, Item 8 "Financial Statements and Supplementary Data", and Part II,
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 when making decisions about how resources are to be allocated to the segment and assessing its performance. The prior year segment information throughout this Annual Report on Form 10-K was updated to conform to the current year presentation.
The Company generally experiences positive cash flow from operations. Premiums are collected on insurance policies in advance of the disbursement of funds in payment of claims. Operating costs of the Company's Insurance Subsidiaries, other than loss and loss expense payments and commissions paid to related agency companies, generally average less than one-third of net premiums earned on a consolidated basis and the remaining amount is available for investment for varying periods of time depending on the type of insurance coverage provided and the timing of the claim payments. Because losses are often settled in periods subsequent to when they are incurred, operating cash flows may, at times, become negative as loss settlements on claim reserves established in prior years exceed current revenues. The Company's cash flow relating to premiums is significantly affected by reinsurance programs in effect from time-to-time, whereby the Company cedes both premium and risk to other insurance and reinsurance companies. These programs vary significantly among products and certain contracts call for reinsurance payment patterns, which do not coincide with the collection of premiums by the Company from its insureds.
Net cash flows from operations increased $61.3 million to $93.7 million for full year 2017 from $32.4 million in 2016. The increase in operating cash flow was primarily related to higher premium volume in 2017. Net cash flows from operations decreased $5.8 million to $32.4 million for full year 2016 compared to $38.2 million in 2015. The decrease in operating cash flow resulted mainly from increased loss and loss adjustment expenses in 2016.
Net cash used in investing activities increased $47.0 million to $74.3 million for full year 2017, as compared to 2016. The increase in cash used in investing activities was the result of the normal timing of purchases and sales and maturities in our investment portfolio, partially offset by higher distributions from limited partnership investments and proceeds from maturities in 2017. Net cash used in investing activities increased $14.5 million to $27.4 million for full year 2016 compared to $12.8 million in 2015. The increase in cash used in investing activities was also the result of the normal timing of purchases and sales and maturities in our investment portfolio.
The Company's assets at December 31, 2017 included $59.2 million of investments included within cash and cash equivalents on the consolidated balance sheet that are readily convertible to cash without market penalty and an additional $54.6 million of fixed maturity investments 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.
Pre-tax investment income of $18.1 million during 2017 was 24.9% higher than 2016 primarily due to higher interest rates leading to higher reinvestment yields for core fixed income securities, increased dividends from equity securities and an increase in average funds invested resulting from positive cash flow. After-tax investment income of $12.7 million increased 23.0% during 2017 compared to the prior year reflecting the above factors, as well as the mix between taxable and tax-exempt investment income.
Losses and loss expenses incurred during 2017 increased $61.0 million (32.7%) from 2016 to $247.5 million, due primarily to adverse prior accident year development and growth in net premiums earned. The 2017 consolidated loss and loss expense ratio was 75.4%, compared to 67.6% for 2016. The Company's loss and loss expense ratios for major product lines are summarized in the following table:
The Company had an overall reserve deficiency on prior year claims during 2017 of $19.2 million. This net deficiency is included in the computation of loss ratios shown in the previous table, as is the $13.8 million deficiency for 2016 on prior year claims. Because of the high limits provided by the Company to its fleet transportation insureds, the length of time necessary to settle larger, more complex claims and the volatility of the fleet transportation liability insurance business, the Company believes it is important to take a conservative posture in its reserving process. Changes in both gross premium volumes and the Company's reinsurance structure for its fleet transportation business can have a significant impact on future loss developments and, as a result, loss and loss expense ratios and prior year reserve development may not be consistent year to year.
Income tax benefit was $8.2 million for full year 2017 compared to income tax expense of $14.1 million in 2016. The Company recorded a benefit of $9.6 million related to the re-measurement of deferred tax assets and liabilities in the fourth quarter of 2017 pursuant to the U.S. Tax Act. The Company's effective federal tax rate for 2017 was (81.0%) as compared to 32.8% in 2016. The effective tax rate for 2017 was affected primarily by the impact of the U.S. Tax Act discussed above.
Net income for 2017 decreased $10.6 million to $18.3 million compared to $28.9 million in 2016, with the decrease primarily attributable to the reserve strengthening that occurred during 2017, partially offset by the income tax benefit described above. Diluted earnings per share of $1.21 were recorded in 2017 compared to diluted earnings per share of $1.92 in 2016.
Gross premiums written for 2016 totaled $403.0 million, an increase of $19.5 million (5.1%) from 2015. Net premiums earned totaled $276.0 million for 2016 compared to $263.3 million for 2015, an increase of $12.7 million (4.8%). The increase in premiums earned reflected higher premiums from fleet transportation products of $28.1 million as a result of the addition of several new accounts during 2016, rate increases and higher miles driven by our insureds, which was immediately reflected in premiums earned. These increases were partially offset by $9.7 million of lower premiums generated by property reinsurance products reflective of management's decision to completely withdraw from the property catastrophe reinsurance market and a decrease of $6.6 million in premiums earned by primary professional liability and personal automobile, which reflected the Company's strategic initiatives of reducing exposures in these products.
Premiums ceded to reinsurers averaged 32.6% of gross written premiums for 2016, compared to 33.6% for 2015, with the variation attributable to a fluctuation in the mix of business as well as reinsurance treaty changes.
Losses and loss expenses incurred during 2016 increased $30.7 million (19.7%) from 2015 to $186.5 million, due primarily to prior accident year development and growth in net premiums earned. The 2016 consolidated loss and loss expense ratio was 67.6%, compared to 59.2% for 2015. The Company's loss and loss expense ratios for major product lines are summarized in the following table:
The Company had an overall reserve deficiency on prior year claims during 2016 of $13.8 million. This net deficiency is included in the computation of loss ratios shown in the previous table, as is the $10.1 million savings for 2015 on prior year claims. Because of the high limits provided by the Company to its fleet transportation insureds, the length of time necessary to settle larger, more complex claims and the volatility of the fleet transportation liability insurance business, the Company believes it is important to take a conservative posture in its reserving process. Changes in both gross premium volumes and the Company's reinsurance structure for its fleet transportation business can have a significant impact on future loss developments and, as a result, loss and loss expense ratios and prior year reserve development may not be consistent from year to year.
In determining if and when an equity security's decline in market value below cost is other-than-temporary, we first make an objective analysis of each individual equity security where current market value is less than cost. For any equity security where the unrealized loss exceeds 20% of original or adjusted cost and, where that decline has existed for a period of at least six months, the decline is treated as an other-than-temporary impairment, without any subjective evaluation as to possible future recovery. For individual issues where the decline in value is less than 20% but the amount of the decline is considered significant, we will also evaluate the market conditions, trends of earnings, price multiples and other key measures for the securities to determine if it appears that the decline is other-than-temporary. In those instances, the Company also considers its intent and ability to hold equity investments until recovery can be reasonably expected. Additionally, for any equity security where the decline has existed for a period of at least one year, the decline is treated as an other-than-temporary impairment. For any decline which is considered to be other-than-temporary, we recognize an impairment loss in the current period earnings as an investment loss. Declines which are considered to be temporary are recorded as a reduction in shareholders' equity, net of related federal income tax benefits.
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). 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, 2017, it is possible that future earnings charges will result should the declines in value increase or persist or should the security actually be disposed of while market values are less than cost. At December 31, 2017, the total gross unrealized loss included in the Company's investment portfolio was approximately $7.1 million. No individual issue constituted a material amount of this total. Had this entire amount been considered other-than-temporary at December 31, 2017, 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.
The Company's methods for determining loss and loss expense reserves are essentially identical for interim and annual reporting periods.
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 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.
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 IBNR losses for its short-tail lines.
On December 22, 2017, the U.S. Tax Act was signed into law. The U.S. Tax Act lowered the U.S. corporate income tax rate from 35% to 21% effective January 1, 2018. GAAP requires the impact of tax legislation to be recognized in the period in which the law was enacted. As a result of the U.S. Tax Act, the Company recorded a tax benefit of $9.6 million related to the re-measurement of its deferred tax assets and liabilities during the fourth quarter of 2017.
Deferred tax assets at December 31, 2017 include approximately $6.8 million related to the timing of deductibility of loss and loss expense reserves, the majority of which relate to policy liability discounts required by the Internal Revenue Code, which are perpetual in nature and, in the absence of the termination of business, will not, in the aggregate, reverse to a material degree in the foreseeable future. An additional $0.8 million relates to impairment adjustments made to investments, as required by accounting regulations. The sizable unrealized gains in the Company's investment portfolios would allow for the recovery of this deferred tax at any time. Unearned premiums discount and deferred ceding commissions represent $1.8 million and $0.6 million of deferred tax assets, respectively. The balance of deferred tax assets consists of various normal operating expense accruals and is not considered to be material. As a result of its analysis, management has determined that no valuation allowance is necessary at December 31, 2017.
To the extent inflation influences yields on investments, the Company is also affected. The Company's short-term and fixed investment portfolios are structured in direct response to available interest rates over the yield curve. As available market interest rates fluctuate in response to the presence or absence of inflation, the yields on the Company's investments are impacted. Further, as inflation affects current market rates of return, previously committed investments might increase or decline in value depending on the type and maturity of investment (see additional comments in Part II, Item 7A, "Quantitative and Qualitative Disclosures about Market Risk", in this Annual Report on Form 10-K).
The Company's loss and loss expense reserves do not have contractual maturity dates and the exact timing of the payment of claims cannot be predicted with certainty. However, based upon historical payment patterns, the above table presents an estimate of when we might expect our direct loss and loss expense reserves (without the benefit of reinsurance recoveries) to be paid. Timing of the collection of the related reinsurance recoverable, estimated to be $318.3 million at December 31, 2017, or 47% of the amounts presented in the above table, would approximate that of the above projected direct reserve payout but could lag behind such payments by several months in some instances.
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
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.
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.
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.
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.
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 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.
In January 2017, the FASB issued ASU No. 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, or ASU 2017-04. This amendment removes Step 2 of the goodwill impairment test under current guidance. The new guidance requires an impairment charge to be recognized for the amount by which the carrying amount exceeds the reporting unit's fair value. 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.
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.
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.
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.
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.
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.
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
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:
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.
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.
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:
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.
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:
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.
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:
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:
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.
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.