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Section 1: 10-Q (10-Q)

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13

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the quarterly period ended March 31, 2018

 

or

 

Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the transition period from                 to                

 

Commission File Number:    001-09463

 

RLI Corp.

(Exact name of registrant as specified in its charter)

 

 

 

 

Illinois

 

37-0889946

(State or other jurisdiction of

 

(I.R.S. Employer

incorporation or organization)

 

Identification Number)

 

 

 

9025 North Lindbergh Drive, Peoria, IL

 

61615

(Address of principal executive offices)

 

(Zip Code)

 

(309) 692-1000

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.   Yes  ☒    No ☐

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).   Yes  ☒    No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company.  See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

 

 

 

Large accelerated filer ☒

 

Accelerated filer ☐

 

 

 

Non-accelerated filer ☐

 

Smaller reporting company ☐

(Do not check if a smaller reporting company)

 

 

 

 

Emerging growth company ☐

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes  ☐   No ☒

 

APPLICABLE ONLY TO CORPORATE ISSUERS:

 

As of April 13, 2018, the number of shares outstanding of the registrant’s Common Stock was 44,253,126.

 

 

 

 

 

 


 

Table of Contents

 

 

Table of Contents

 

 

 

 

 

 

 

 

 

 

Page

 

 

 

 

Part I - Financial Information 

3

 

 

 

 

 

Item 1. 

Financial Statements

3

 

 

 

 

 

 

Condensed Consolidated Statements of Earnings and Comprehensive Earnings For the Three-Month Periods Ended March 31, 2018 and 2017 (unaudited)

3

 

 

 

 

 

Condensed Consolidated Balance Sheets as of March 31, 2018 (unaudited) and December 31, 2017

4

 

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows For the Three-Month Periods Ended March 31, 2018 and 2017 (unaudited)

5

 

 

 

 

 

 

Notes to unaudited condensed consolidated interim financial statements

6

 

 

 

 

 

Item 2.

Management’s discussion and analysis of financial condition and results of operations

21

 

 

 

 

 

Item 3. 

Quantitative and qualitative disclosures about market risk

31

 

 

 

 

 

Item 4. 

Controls and procedures

32

 

 

 

 

Part II - Other Information 

32

 

 

 

 

 

Item 1.

Legal proceedings

32

 

 

 

 

 

Item 1a.

Risk factors

32

 

 

 

 

 

Item 2.

Unregistered sales of equity securities and use of proceeds

32

 

 

 

 

 

Item 3.

Defaults upon senior securities

32

 

 

 

 

 

Item 4.

Mine safety disclosures

32

 

 

 

 

 

Item 5.

Other information

32

 

 

 

 

 

Item 6.

Exhibits

32

 

 

 

 

Signatures 

 

33

 

 

 

 

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PART I - FINANCIAL INFORMATION

 

Item 1. Financial Statements

 

RLI Corp. and Subsidiaries

Condensed Consolidated Statements of Earnings and Comprehensive Earnings

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Three-Month Periods

 

 

Ended March 31,

(in thousands, except per share data)

 

2018

 

2017

 

 

 

 

 

 

 

Net premiums earned

   

$

190,027

    

$

183,285

Net investment income

 

 

14,232

 

 

13,005

Net realized gains

 

 

8,460

 

 

2,714

Other-than-temporary impairment (OTTI) losses on investments

 

 

(56)

 

 

(2,090)

Net unrealized losses on equity securities

 

 

(26,772)

 

 

 -

Consolidated revenue

 

$

185,891

 

$

196,914

Losses and settlement expenses

 

 

92,421

 

 

93,390

Policy acquisition costs

 

 

66,734

 

 

63,503

Insurance operating expenses

 

 

13,385

 

 

13,335

Interest expense on debt

 

 

1,856

 

 

1,856

General corporate expenses

 

 

2,283

 

 

3,325

Total expenses

 

$

176,679

 

$

175,409

Equity in earnings of unconsolidated investees

 

 

5,166

 

 

4,938

Earnings before income taxes

 

$

14,378

 

$

26,443

Income tax expense

 

 

2,162

 

 

6,615

Net earnings

 

$

12,216

 

$

19,828

 

 

 

 

 

 

 

Other comprehensive earnings (loss), net of tax

 

 

(26,398)

 

 

11,769

Comprehensive earnings (loss)

 

$

(14,182)

 

$

31,597

 

 

 

 

 

 

 

Earnings per share:

 

 

 

 

 

 

Basic:

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic net earnings per share

 

$

0.28

 

$

0.45

Basic comprehensive earnings (loss) per share

 

$

(0.32)

 

$

0.72

 

 

 

 

 

 

 

Diluted:

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted net earnings per share

 

$

0.27

 

$

0.45

Diluted comprehensive earnings (loss) per share

 

$

(0.32)

 

$

0.71

 

 

 

 

 

 

 

Weighted average number of common shares outstanding:

 

 

 

 

 

 

Basic

 

 

44,221

 

 

43,961

Diluted

 

 

44,650

 

 

44,502

 

 

 

 

 

 

 

Cash dividends paid per common share

 

$

0.21

 

$

0.20

 

See accompanying notes to the unaudited condensed consolidated interim financial statements.

 

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RLI Corp. and Subsidiaries

Condensed Consolidated Balance Sheets

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31,

 

December 31,

(in thousands, except share data)

    

2018

    

2017

 

 

 

 

 

 

 

ASSETS

   

 

 

   

 

 

Investments and cash:

 

 

 

 

 

 

Fixed income:

 

 

 

 

 

 

Available-for-sale, at fair value (amortized cost - $1,661,490 at 3/31/18 and $1,646,411 at 12/31/17)

 

$

1,653,674

 

$

1,672,239

Equity securities, at fair value (cost - $186,520 at 3/31/18 and $182,002 at 12/31/17)

 

 

378,253

 

 

400,492

Short-term investments, at cost which approximates fair value

 

 

 -

 

 

9,980

Other invested assets

 

 

35,065

 

 

33,808

Cash

 

 

28,927

 

 

24,271

Total investments and cash

 

$

2,095,919

 

$

2,140,790

Accrued investment income

 

 

14,079

 

 

15,166

Premiums and reinsurance balances receivable, net of allowances for uncollectible amounts of $16,984 at 3/31/18 and $16,935 at 12/31/17

 

 

132,682

 

 

134,351

Ceded unearned premium

 

 

57,356

 

 

57,928

Reinsurance balances recoverable on unpaid losses and settlement expenses, net of allowances for uncollectible amounts of $9,945 at 3/31/18 and $10,014 at 12/31/17

 

 

308,703

 

 

301,991

Deferred policy acquisition costs

 

 

77,622

 

 

77,716

Property and equipment, at cost, net of accumulated depreciation of $49,350 at 3/31/18 and $47,676 at 12/31/17

 

 

56,153

 

 

55,849

Investment in unconsolidated investees

 

 

85,564

 

 

90,067

Goodwill and intangibles

 

 

54,793

 

 

59,302

Other assets

 

 

11,321

 

 

14,084

TOTAL ASSETS

 

$

2,894,192

 

$

2,947,244

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

Unpaid losses and settlement expenses

 

$

1,303,131

 

$

1,271,503

Unearned premiums

 

 

444,296

 

 

451,449

Reinsurance balances payable

 

 

12,233

 

 

21,624

Funds held

 

 

67,415

 

 

74,560

Income taxes-deferred

 

 

40,234

 

 

53,768

Bonds payable, long-term debt

 

 

148,975

 

 

148,928

Accrued expenses

 

 

26,621

 

 

52,848

Other liabilities

 

 

18,354

 

 

18,966

TOTAL LIABILITIES

 

$

2,061,259

 

$

2,093,646

 

 

 

 

 

 

 

Shareholders’ Equity

 

 

 

 

 

 

Common stock ($1 par value, 100,000,000 shares authorized)

 

 

 

 

 

 

(67,183,340 shares issued, 44,253,126 shares outstanding at 3/31/18)

 

 

 

 

 

 

(67,078,569 shares issued, 44,148,355 shares outstanding at 12/31/17)

 

$

67,183

 

$

67,079

Paid-in capital

 

 

235,694

 

 

233,077

Accumulated other comprehensive earnings

 

 

(6,973)

 

 

157,919

Retained earnings

 

 

930,028

 

 

788,522

Deferred compensation

 

 

8,056

 

 

8,640

Less: Treasury shares at cost

 

 

 

 

 

 

(22,930,214 shares at 3/31/18 and 12/31/17)

 

 

(401,055)

 

 

(401,639)

TOTAL SHAREHOLDERS’ EQUITY

 

$

832,933

 

$

853,598

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY

 

$

2,894,192

 

$

2,947,244

 

See accompanying notes to the unaudited condensed consolidated interim financial statements.

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RLI Corp. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Three-Month Periods

 

 

Ended March 31,

(in thousands)

 

2018

 

2017

 

 

 

 

 

 

 

Net cash provided by operating activities

    

$

15,393

    

$

11,265

Cash Flows from Investing Activities

 

 

 

 

 

 

Investments purchased

 

$

(177,324)

 

$

(88,910)

Investments sold

 

 

123,869

 

 

67,667

Investments called or matured

 

 

41,337

 

 

33,880

Net change in short-term investments

 

 

9,980

 

 

(3,435)

Net property and equipment purchased

 

 

(2,065)

 

 

(3,298)

Other

 

 

35

 

 

 -

Net cash provided by (used in) investing activities

 

$

(4,168)

 

$

5,904

 

 

 

 

 

 

 

Cash Flows from Financing Activities

 

 

 

 

 

 

Cash dividends paid

 

$

(9,290)

 

$

(8,793)

Stock plan share issuance

 

 

2,721

 

 

1,499

Net cash used in financing activities

 

$

(6,569)

 

$

(7,294)

 

 

 

 

 

 

 

Net increase in cash

 

$

4,656

 

$

9,875

 

 

 

 

 

 

 

Cash at the beginning of the period

 

$

24,271

 

$

18,269

Cash at March 31

 

$

28,927

 

$

28,144

 

See accompanying notes to the unaudited condensed consolidated interim financial statements.

 

 

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

 

1.    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

A.  BASIS OF PRESENTATION

 

The unaudited condensed consolidated interim financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (GAAP) for interim financial reporting and with the instructions to Form 10-Q and Regulation S-X. Accordingly, they do not include all of the disclosures required by GAAP for complete financial statements. As such, these unaudited condensed consolidated interim financial statements should be read in conjunction with our 2017 Annual Report on Form 10-K. Management believes that the disclosures are adequate to make the information presented not misleading, and all normal and recurring adjustments necessary to present fairly the financial position at March 31, 2018 and the results of operations of RLI Corp. and subsidiaries for all periods presented have been made. The results of operations for any interim period are not necessarily indicative of the operating results for a full year. Certain reclassifications were made to 2017 to conform to the classifications used in the current year.

 

The preparation of the unaudited condensed consolidated interim financial statements requires management to make estimates and assumptions relating to the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the unaudited condensed consolidated interim financial statements and the reported amounts of revenue and expenses during the period. These estimates are inherently subject to change and actual results could differ significantly from these estimates.

 

B.  ADOPTED ACCOUNTING STANDARDS

 

ASU 2014-09, Revenue from Contracts with Customers (Topic 606)

 

ASU 2014-09 was issued to clarify and remove inconsistencies within revenue recognition requirements. The core principle of the update is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve that core principle, the transaction price for a contract is allocated among separately identifiable performance obligations and a portion of the transaction price is recognized as revenue when the associated performance obligation has been completed or transferred to the customer. All contracts and fulfillment activities within the scope of Topic 944, Financial Services – Insurance, investment income, investment related gains and losses and equity in earnings of unconsolidated investees are outside the scope of this ASU.

 

We adopted ASU 2014-09 on January 1, 2018. However, nearly all (over 99 percent) of our consolidated revenue is scoped out and therefore exempt from the guidance contained within this ASU. For the remaining portion, the revenue recognition policy we utilize aligns with the new guidance and there were no changes to the way we recognize revenue. Although the recognition of earnings from equity method investees is out of scope from the update, the recognition of revenue by our two equity method investees would be subject to the new guidance if the revenue streams are within this update’s scope. Any impact on revenues would affect the net income of each of the equity method investees, upon which we calculate our portion of earnings to recognize. Our equity method investees are private companies and this guidance becomes effective for private companies in periods beginning after December 15, 2018. As a result, their earnings and our portion of those earnings are not impacted in 2018. We expect that revenue generated by both of our equity method investees will either be outside the scope of this update or largely unaffected by the changes.

 

 ASU 2016-01, Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities

 

This ASU was issued to improve the recognition and measurement of financial instruments. The new guidance makes targeted improvements to GAAP as follows:

a.

Requires equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net earnings;

b.

Simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment;

c.

Eliminates the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet;

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d.

Requires public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes;

e.

Requires an entity to present separately in other comprehensive earnings the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments;

f.

Requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset on the balance sheet or the accompanying notes to the financial statements; and

g.

Clarifies that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity’s other deferred tax assets.

 

We adopted ASU 2016-01 on January 1, 2018. A cumulative-effect adjustment to the balance sheet was made as of the beginning of the year, which moved $142.2 million of net unrealized gains and losses on equity securities from accumulated other comprehensive earnings to retained earnings. During the first quarter of 2018, we recognized $26.8 million of unrealized losses on equity securities within net earnings and $5.6 million of income tax benefit. This compares to $6.5 million of unrealized gains on equity securities, net of tax, that was recognized through other comprehensive earnings in 2017. The future impact to our net earnings will vary depending upon the level of volatility in the performance of the securities held in our equity portfolio and the overall market.

 

ASU 2016-15, Statement of Cash Flows (Topic 230):  Classification of Certain Cash Receipts and Cash Payments

 

ASU 2016-15 was issued to reduce the diversity in practice of how certain cash receipts and payments, for which current guidance is silent, are classified in the statement of cash flows. The update addresses eight specific issues, including contingent consideration payments made after a business combination, distributions received from equity method investees and the classification of cash receipts and payments that have aspects of more than one class of cash flows. We adopted ASU 2016-15 on January 1, 2018. The adoption did not have a material impact on our statement of cash flows.

 

ASU 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income

 

ASU 2018-02 was issued as a result of the enactment of the Tax Cuts and Jobs Act of 2017 (TCJA) on December 22, 2017. Accounting guidance required deferred tax items to be revalued based on the new tax laws (the most significant of which reduced the corporate tax rate to 21 percent from 35 percent) with the change included in income from continuing operations. Since other comprehensive income was not affected by the revaluation of the deferred tax items, the net accumulated other comprehensive income (AOCI) balance was reflective of the historic 35 percent tax rate instead of the newly enacted rate, a difference that is referred to as a stranded tax effect. This ASU allows for the option to reclassify the stranded tax effects resulting from the implementation of the TCJA out of AOCI and into retained earnings. ASU 2018-02 does not replace the guidance requiring changes from the enactment of other tax laws or rates to be included within income from continuing operations and is applicable only to changes from the TCJA.

 

We adopted ASU 2018-02 during the first quarter of 2018. A current period adjustment was made to the balance sheet, which moved $3.7 million of stranded tax effects on the unrealized balances of our fixed income securities and equity method investees from accumulated other comprehensive earnings to retained earnings. The entire unrealized balance on equity securities was reclassified from AOCI into retained earnings from the adoption of ASU 2016-01 on January 1, 2018 and was therefore unaffected by this ASU. As there was no impact to net earnings and the balance sheet effect is limited to a reclassification within the equity section, there was not a material impact on our financial statements.

 

C.  PROSPECTIVE ACCOUNTING STANDARDS

 

 ASU 2016-02, Leases (Topic 842)

 

ASU 2016-02 was issued to improve the financial reporting of leasing transactions. Under current guidance for lessees, leases are only included on the balance sheet if certain criteria, classifying the agreement as a capital lease, are met. This update will require the recognition of a right-of-use asset and a corresponding lease liability, discounted to the present value, for all leases that extend beyond 12 months. For operating leases, the asset and liability will be expensed over the lease term on a straight-line basis, with all cash flows included in the operating section of the statement of cash flows. For finance leases, interest on the lease liability will be recognized separately from the amortization of the right-of-use asset in the statement of comprehensive income and the repayment of the principal portion of the lease liability will be classified as a financing activity while the interest component will be included in the operating section of the statement of cash flows.

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This ASU is effective for annual and interim reporting periods beginning after December 15, 2018. Early adoption is permitted. Upon adoption, leases will be recognized and measured at the beginning of the earliest period presented using a modified retrospective approach. We do not have any financing leases. Approximately $31 million of undiscounted future lease liabilities would have to be discounted to present value and added to our balance sheet with a corresponding right-of-use asset if the guidance were applicable on March 31, 2018. We have approximately $7 million of annual operating lease expenses and do not expect that there will be a materially different annual rental expense upon adoption.

 

ASU 2016-13, Financial Instruments – Credit Losses (Topic 326)

 

ASU 2016-13 was issued to provide more decision-useful information about the expected credit losses on financial instruments. Current GAAP delays the recognition of credit losses until it is probable a loss has been incurred. The update will require a financial asset measured at amortized cost, including reinsurance balances recoverable, to be presented at the net amount expected to be collected by means of an allowance for credit losses that runs through net earnings. Credit losses relating to available-for-sale debt securities will also be recorded through an allowance for credit losses. However, the amendments would limit the amount of the allowance to the amount by which fair value is below amortized cost. The measurement of credit losses on available-for-sale securities is similar under current GAAP, but the update requires the use of the allowance account through which amounts can be reversed, rather than through an irreversible write-down.

 

This ASU is effective for annual and interim reporting periods beginning after December 15, 2019. Early adoption is permitted beginning after December 15, 2018. Upon adoption, the update will be applied using the modified-retrospective approach, by which a cumulative-effect adjustment will be made to retained earnings as of the beginning of the first reporting period presented. We do not have any assets measured at amortized cost that would be impacted by this accounting standards update. Additionally, as our fixed income portfolio is weighted towards higher rated bonds (84 percent rated A or better at March 31, 2018) and we purchase reinsurance from financially strong reinsurers, we do not expect that credit loss will be material.

 

D.  INTANGIBLE ASSETS

 

Goodwill and intangible assets totaled $54.8 million and $59.3 million at March 31, 2018 and December 31, 2017, respectively, as detailed in the following table.

 

 

 

 

 

 

 

 

 

Goodwill and Intangible Assets

 

 

March 31,

 

 

December 31,

(in thousands)

 

 

2018

 

 

2017

Goodwill

 

 

 

 

 

 

 

Energy surety

 

$

25,706

 

$

25,706

 

Miscellaneous and contract surety

 

 

15,110

 

 

15,110

 

Small commercial

 

 

5,246

 

 

5,246

 

Medical professional liability *

 

 

 -

 

 

3,595

Total goodwill

 

$

46,062

 

$

49,657

 

 

 

 

 

 

 

 

Intangibles

 

 

 

 

 

 

 

State insurance licenses

 

$

7,500

 

$

7,500

 

Definite-lived intangibles, net of accumulated amortization of $2,763 at 3/31/18 and $5,678 at 12/31/17

 

 

1,231

 

 

2,145

Total intangibles

 

$

8,731

 

$

9,645

 

 

 

 

 

 

 

 

Total goodwill and intangibles

 

$

54,793

 

$

59,302


*   The medical professional liability goodwill balance reflects a cumulative non-cash impairment charge of $12.4 million and $8.8 million as of March 31, 2018 and December 31, 2017, respectively.

 

All definite-lived intangible assets are amortized against future operating results based on their estimated useful lives. Amortization of intangible assets was $0.1 million for the first quarter of 2018, compared to $0.2 million for the first quarter of 2017.

 

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Annual impairment testing was performed on our energy surety goodwill, miscellaneous and contract surety goodwill, small commercial goodwill and state insurance license indefinite-lived intangible asset during 2017. Based upon these reviews, none of the assets were impaired. In addition, as of March 31, 2018, there were no triggering events that would suggest an updated review was necessary on the above mentioned goodwill and intangible assets. In contrast, the medical professional liability reporting unit had adverse loss experience during the first quarter of 2018, which triggered the need to review the reporting unit for impairment. Testing of the reporting unit resulted in a $4.4 million non-cash impairment charge. The fair value for the medical professional liability reporting unit’s agency relationships, carried as a definite-lived intangible, was determined by using a discounted cash flow valuation. The carrying value exceeded the fair value, resulting in a $0.8 million non-cash impairment charge. The fair value for the medical professional liability reporting unit’s goodwill was determined by using a weighted average of a market approach and discounted cash flow valuation. The model implied the reporting unit had no value, resulting in a $3.6 million non-cash impairment charge. Subsequent to this impairment, the medical professional liability reporting unit had no remaining goodwill or intangible assets. All impairment charges were recorded as net realized losses in the consolidated statement of earnings.

 

E.  EARNINGS PER SHARE

 

Basic earnings per share (EPS) excludes dilution and is computed by dividing income available to common shareholders by the weighted-average number of common shares outstanding for the period. Diluted EPS reflects the dilution that could occur if securities or other contracts to issue common stock or common stock equivalents were exercised or converted into common stock. When inclusion of common stock equivalents increases the earnings per share or reduces the loss per share, the effect on earnings is anti-dilutive. Under these circumstances, the diluted net earnings or net loss per share is computed excluding the common stock equivalents.

 

The following represents a reconciliation of the numerator and denominator of the basic and diluted EPS computations contained in the unaudited condensed consolidated interim financial statements.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Three-Month Period

 

For the Three-Month Period

 

 

Ended March 31,  2018

 

Ended March 31,  2017

 

 

Income

 

Shares

 

Per Share

 

Income

 

Shares

 

Per Share

(in thousands, except per share data)

    

(Numerator)

    

(Denominator)

    

Amount

    

(Numerator)

    

(Denominator)

    

Amount

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic EPS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income available to common shareholders

   

$

12,216

    

44,221

    

$

0.28

    

$

19,828

    

43,961

    

$

0.45

Effect of Dilutive Securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock options

 

 

 -

 

429

 

 

 

 

 

 -

 

541

 

 

 

Diluted EPS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income available to common shareholders

 

$

12,216

 

44,650

 

$

0.27

 

$

19,828

 

44,502

 

$

0.45

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

F.  COMPREHENSIVE EARNINGS

 

Our comprehensive earnings include net earnings plus after-tax unrealized gains and losses on our fixed income portfolio in 2018. In 2017, after-tax unrealized gains and losses on our fixed income and equity portfolios were also included. With the adoption of ASU 2016-01 on January 1, 2018, we began recognizing unrealized gains and losses on the equity portfolio through net income. See note 1.B to the unaudited condensed consolidated interim financial statements for more information. In reporting comprehensive earnings on a net basis in the statement of earnings, we used the federal statutory tax rate of 21 percent in 2018 and 35 percent in 2017.

 

Unrealized losses, net of tax, on the fixed income portfolio for the first three months of 2018 were $26.4 million, compared to $11.8 million of unrealized gains, net of tax, on the fixed income and equity portfolios during the same period last year. Unrealized losses in the first three months of 2018 were mainly attributable to rising interest rates, which decreased the fair value of securities held in the fixed income portfolio. In 2017, unrealized gains were the result of strong equity market returns for the quarter and a slight decline in interest rates.

 

 

The following table illustrates the changes in the balance of each component of accumulated other comprehensive earnings for each period presented in the unaudited condensed consolidated interim financial statements. The 2017 activity and balances include the net unrealized gain and loss activity on both fixed income and equity securities, while the 2018 activity

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and ending balance reflect only the net unrealized gain and loss activity on fixed income securities due to the aforementioned adoption of ASU 2016-01.

 

 

 

 

 

 

 

 

 

(in thousands)

 

For the Three-Month Periods

 

 

 

Ended March 31,

 

Unrealized Gains/Losses on Available-for-Sale Securities

    

2018

    

2017

    

 

 

 

 

 

 

 

 

Beginning balance

 

$

157,919

 

$

122,610

 

Cumulative effect adjustment of ASU 2016-01

 

 

(142,219)

 

 

 -

 

Adjusted beginning balance

 

$

15,700

 

$

122,610

 

Other comprehensive earnings before reclassifications

 

 

(26,410)

 

 

12,172

 

Amounts reclassified from accumulated other comprehensive earnings

 

 

12

 

 

(403)

 

Net current-period other comprehensive earnings (loss)

 

$

(26,398)

 

$

11,769

 

Reclassification of stranded tax effect per ASU 2018-02

 

 

3,725

 

 

 -

 

Ending balance

 

$

(6,973)

 

$

134,379

 

 

The sale or other-than-temporary impairment of an available-for-sale security results in amounts being reclassified from accumulated other comprehensive earnings to current period net earnings. The effects of reclassifications out of accumulated other comprehensive earnings by the respective line items of net earnings are presented in the following table. As previously mentioned, 2018 activity is reflective of activity on fixed income securities classified as available-for-sale, while 2017 also includes activity from the equity portfolio.

 

 

 

 

 

 

 

 

 

 

 

 

Amount Reclassified from Accumulated Other

 

(in thousands)

 

Comprehensive Earnings

 

 

 

For the Three-Month

 

 

Component of Accumulated 

 

Periods Ended March 31, 

 

Affected line item in the

Other Comprehensive Earnings

    

2018

    

2017

    

Statement of Earnings

 

 

 

 

 

 

 

 

 

Unrealized gains and losses on available-for-sale securities

 

$

41

 

$

2,710

 

Net realized gains

 

 

 

(56)

 

 

(2,090)

 

Other-than-temporary impairment (OTTI) losses on investments

 

 

$

(15)

 

$

620

 

Earnings before income taxes

 

 

 

 3

 

 

(217)

 

Income tax expense

 

 

$

(12)

 

$

403

 

Net earnings

 

 

 

2.    INVESTMENTS

 

Our investments are primarily composed of fixed income debt securities and common stock equity securities. We carry our equity securities at fair value and categorize all of our debt securities as available-for-sale, which are carried at fair value. When available, we obtain quoted market prices to determine fair value for our investments. If a quoted market price is not available, fair value is estimated using a secondary pricing source or using quoted market prices of similar securities. We have no investment securities for which fair value is determined using Level 3 inputs as defined in note 3 to the unaudited condensed consolidated interim financial statements, “Fair Value Measurements.”

 

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Fixed Income Securities - Available-for-Sale

 

The amortized cost and fair value of available-for-sale securities at March 31, 2018 and December 31, 2017 were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Available-for-sale

 

 

 

 

 

 

 

 

 

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31,  2018

 

    

Cost or

    

Gross

    

Gross

    

    

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

Fair

Asset Class

    

Cost

    

Gains

    

Losses

    

Value

U.S. government

 

$

119,660

 

$

54

 

$

(2,179)

 

$

117,535

U.S. agency

 

 

18,541

 

 

208

 

 

(408)

 

 

18,341

Non-U.S. govt. & agency

 

 

8,193

 

 

35

 

 

(145)

 

 

8,083

Agency MBS

 

 

359,232

 

 

2,148

 

 

(9,896)

 

 

351,484

ABS/CMBS*

 

 

91,073

 

 

199

 

 

(774)

 

 

90,498

Corporate

 

 

527,845

 

 

5,331

 

 

(7,184)

 

 

525,992

Municipal

 

 

536,946

 

 

8,629

 

 

(3,834)

 

 

541,741

Total Fixed Income

 

$

1,661,490

 

$

16,604

 

$

(24,420)

 

$

1,653,674

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Available-for-sale

 

 

 

 

 

 

 

 

 

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31,  2017

 

    

Cost or

    

Gross

    

Gross

    

    

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

Fair

Asset Class

    

Cost

    

Gains

    

Losses

    

Value

U.S. government

 

$

92,561

 

$

23

 

$

(895)

 

$

91,689

U.S. agency

 

 

18,541

 

 

347

 

 

(110)

 

 

18,778

Non-U.S. govt. & agency

 

 

7,501

 

 

143

 

 

(56)

 

 

7,588

Agency MBS

 

 

329,129

 

 

3,420

 

 

(4,078)

 

 

328,471

ABS/CMBS*

 

 

70,405

 

 

436

 

 

(315)

 

 

70,526

Corporate

 

 

508,128

 

 

12,575

 

 

(1,681)

 

 

519,022

Municipal

 

 

620,146

 

 

17,272

 

 

(1,253)

 

 

636,165

Total Fixed Income

 

$

1,646,411

 

$

34,216

 

$

(8,388)

 

$

1,672,239


*Non-agency asset-backed and commercial mortgage-backed

 

The following table presents the amortized cost and fair value of available-for-sale debt securities by contractual maturity dates as of March 31, 2018:

 

 

 

 

 

 

 

 

 

 

March 31,  2018

Available-for-sale

 

Amortized

 

Fair

(in thousands)

    

Cost

    

Value

Due in one year or less

 

$

35,667

 

$

35,502

Due after one year through five years

 

 

328,700

 

 

330,089

Due after five years through 10 years

 

 

553,968

 

 

552,243

Due after 10 years

 

 

292,850

 

 

293,858

Mtge/ABS/CMBS*

 

 

450,305

 

 

441,982

Total available-for-sale

 

$

1,661,490

 

$

1,653,674


*Mortgage-backed, asset-backed and commercial mortgage-backed

 

Unrealized Losses on Fixed Income Securities

 

We conduct and document periodic reviews of all fixed income securities with unrealized losses to evaluate whether the impairment is other-than-temporary. The following tables are used as part of our impairment analysis and illustrate the total value of fixed income securities that were in an unrealized loss position as of March 31, 2018 and December 31, 2017. The tables segregate the securities based on type, noting the fair value, cost (or amortized cost) and unrealized loss on each category of investment as well

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as in total. The tables further classify the securities based on the length of time they have been in an unrealized loss position. As of March 31, 2018 unrealized losses on fixed income securities, as shown in the following tables, were 1.2 percent of total invested assets. Unrealized losses increased through the first three months of 2018, as interest rates increased from the end of 2017, which decreased the fair value of securities held in the fixed income portfolio.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31,  2018

 

December 31,  2017

(in thousands)

    

< 12 Mos.

    

12 Mos. & 
Greater

    

Total

    

< 12 Mos.

    

12 Mos. & 
Greater

    

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair value

 

$

64,861

 

$

31,191

 

$

96,052

 

$

58,009

 

$

30,888

 

$

88,897

Cost or amortized cost

 

 

66,407

 

 

31,824

 

 

98,231

 

 

58,443

 

 

31,349

 

 

89,792

Unrealized Loss

 

$

(1,546)

 

$

(633)

 

$

(2,179)

 

$

(434)

 

$

(461)

 

$

(895)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Agency

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair value

 

$

12,655

 

$

 —

 

$

12,655

 

$

10,917

 

$

 —

 

$

10,917

Cost or amortized cost

 

 

13,063

 

 

 —

 

 

13,063

 

 

11,027

 

 

 —

 

 

11,027

Unrealized Loss

 

$

(408)

 

$

 —

 

$

(408)

 

$

(110)

 

$

 —

 

$

(110)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-U.S. government

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair value

 

$

2,768

 

$

1,781

 

$

4,549

 

$

 —

 

$

1,840

 

$

1,840

Cost or amortized cost

 

 

2,797

 

 

1,897

 

 

4,694

 

 

 —

 

 

1,896

 

 

1,896

Unrealized Loss

 

$

(29)

 

$

(116)

 

$

(145)

 

$

 —

 

$

(56)

 

$

(56)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Agency MBS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair value

 

$

190,033

 

$

110,400

 

$

300,433

 

$

122,130

 

$

111,306

 

$

233,436

Cost or amortized cost

 

 

195,213

 

 

115,116

 

 

310,329

 

 

123,559

 

 

113,955

 

 

237,514

Unrealized Loss

 

$

(5,180)

 

$

(4,716)

 

$

(9,896)

 

$

(1,429)

 

$

(2,649)

 

$

(4,078)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

ABS/CMBS*

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair value

 

$

48,135

 

$

18,248

 

$

66,383

 

$

23,406

 

$

21,587

 

$

44,993

Cost or amortized cost

 

 

48,635

 

 

18,522

 

 

67,157

 

 

23,491

 

 

21,817

 

 

45,308

Unrealized Loss

 

$

(500)

 

$

(274)

 

$

(774)

 

$

(85)

 

$

(230)

 

$

(315)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair value

 

$

248,217

 

$

27,617

 

$

275,834