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Section 1: 8-K/A (8-K/A)

Document


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
Form 8-K/A
(Amendment No. 1) 
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): July 2, 2018 
Kemper Corporation
(Exact name of registrant as specified in its charter)
Commission File Number: 001-18298
 
 
 
DE
 
95-4255452
(State or other jurisdiction
of incorporation)
 
(IRS Employer
Identification No.)
One East Wacker Drive, Chicago, IL 60601
(Address of principal executive offices, including zip code)
312-661-4600
(Registrant’s telephone number, including area code)
(Former name or former address, if changed since last report)
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the Registrant under any of the following provisions (see General Instruction A.2.below):
¨
Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
¨
Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
¨
Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
¨
Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))
Indicate by check mark whether the registrant is an emerging growth company as defined in as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter).
 
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.    ¨





EXPLANATORY NOTE
This Current Report on Form 8-K/A (“Form 8-K/A”) amends the Current Report on Form 8-K filed July 2, 2018 (the “Original Report”) by Kemper Corporation (“Kemper”) reporting the completion of Kemper's previously announced acquisition of Infinity Property and Casualty Corporation (“Infinity”). This Form 8-K/A includes the historical audited and unaudited consolidated financial statements of Infinity required under Item 9.01(a) and the combined pro forma financial information of Kemper and Infinity required under Item 9.01(b). There are no additional changes to the Original Report, and this Form 8-K/A should be read in conjunction with the Original Report.
Section 9. – Financial Statements and Exhibits.
Item 9.01.
Financial Statements and Exhibits.
(a) Financial Statements of Businesses Acquired
The audited consolidated balance sheets of Infinity and subsidiaries as of December 31, 2017 and 2016, and the audited consolidated statements of income, comprehensive income (loss), cash flows and shareholders’ equity for the years ended December 31, 2017, 2016 and 2015, together with the notes thereto and the report of Ernst & Young LLP thereon, are filed as Exhibit 99.1 to this Form 8-K/A and incorporated herein by reference.
The unaudited condensed consolidated balance sheets of Infinity and subsidiaries as of June 30, 2018 and December 31, 2017, and the unaudited condensed consolidated statements of income, comprehensive income (loss), cash flows and shareholders’ equity for the six and three months ended June 30, 2018 and 2017, together with the notes thereto, are are filed as Exhibit 99.2 to this Form 8-K/A and incorporated herein by reference.
(b) Pro Forma Financial Information
The unaudited pro forma condensed combined balance sheet of Kemper and Infinity as of June 30, 2018 and the unaudited pro forma condensed combined statements of income of Kemper and Infinity for the year ended December 31, 2017 and six months ended June 30, 2018, together with notes thereto, are filed as Exhibit 99.3 to this Current Report on Form 8‑K/A and incorporated herein by reference.
(d) Exhibits
23.1    Consent of Independent Registered Public Accounting Firm
99.1    The audited consolidated balance sheets of Infinity and subsidiaries as of December 31, 2017 and 2016, and the audited consolidated statements of income, comprehensive income (loss), cash flows and shareholders’ equity for the years ended December 31, 2017, 2016 and 2015, together with the notes thereto and the report of Ernst & Young LLP thereon (incorporated by reference from Item 8 of Part II of Infinity's 2017 Annual Report on Form 10-K filed on February 15, 2018).
99.2    The unaudited condensed consolidated balance sheets of Infinity and subsidiaries as of June 30, 2018 and December 31, 2017, and the unaudited condensed consolidated statements of income, comprehensive income (loss), cash flows and shareholders’ equity for the six and three months ended June 30, 2018 and 2017, together with the notes thereto.
99.3    The unaudited pro forma condensed combined balance sheet of Kemper and Infinity as of June 30, 2018 and the unaudited pro forma condensed combined statements of income of Kemper and Infinity for the year ended December 31, 2017 and six months ended June 30, 2018, together with notes thereto.






SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
 
 
 
 
 
 
 
 
 
Kemper Corporation
 
 
 
Date:
September 18, 2018
 
 
/S/    RICHARD ROESKE
 
 
 
 
Richard Roeske
 
 
 
 
Vice President and Chief Accounting Officer (principal accounting officer)



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Section 2: EX-23.1 (EXHIBIT 23.1)

Exhibit


Exhibit 23.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in the following Registration Statements of Kemper Corporation of our reports dated February 15, 2018, with respect to the consolidated financial statements and schedules of Infinity Property and Casualty Corporation and its subsidiaries, and the operating effectiveness of internal control over financial reporting of Infinity Property and Casualty Corporation and subsidiaries included in the Annual Report (Form 10-K) of Infinity Property and Casualty Corporation and subsidiaries for the year ended December 31, 2017:
Form
 
Registration Number
 
Description
S-3
 
333-194032
 
Automatic shelf registration statement of securities of well-known seasoned issuers
S-3
 
333-217781
 
Automatic shelf registration statement of securities of well-known seasoned issuers
S-8
 
33-58300
 
Securities to be offered to employees in employee benefit plans (401K Plan)
S-8
 
333-4530
 
Securities to be offered to employees in employee benefit plans (1995 Director Plan)
S-8
 
333-86935
 
Securities to be offered to employees in employee benefit plans (401K Plan)
S-8
 
333-76076
 
Securities to be offered to employees in employee benefit plans (Non-Qualified Deferred Compensation Plan)
S-8
 
333-87898
 
Securities to be offered to employees in employee benefit plans (2002 Stock Option Plan)
S-8
 
333-173877
 
Securities to be offered to employees in employee benefit plans (2011 Omnibus Equity Plan)

/S/ ERNST & YOUNG LLP
Birmingham, Alabama
September 18, 2018



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Section 3: EX-99.2 (EXHIBIT 99.2)

Exhibit



Exhibit 99.2









INFINITY PROPERTY AND CASUALTY CORPORATION AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
AS OF JUNE 30, 2018 AND DECEMBER 31, 2017
AND
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2018 AND 2017
TOGETHER WITH CONDENSED NOTES THERETO
(UNAUDITED)







INFINITY PROPERTY AND CASUALTY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(in thousands, except per share data)
(unaudited)
 
Three months ended
 
Six months ended
 
June 30,
 
June 30,
 
2018
 
2017
 
2018
 
2017
 
 
 
(as adjusted)
 
 
 
(as adjusted)
Revenues:
 
 
 
 
 
 
 
Earned premium
$
374,254

 
$
339,147

 
$
728,241

 
$
680,516

Installment and other fee income
28,846

 
26,652

 
56,241

 
53,391

Net investment income
11,782

 
9,001

 
21,568

 
17,696

Net realized (losses) gains on investments (1)
(1,343
)
 
1,886

 
(4,175
)
 
2,396

Other income
515

 
391

 
944

 
666

Total revenues
414,054

 
377,077

 
802,820

 
754,664

Costs and Expenses:
 
 
 
 
 
 
 
Losses and loss adjustment expenses
275,217

 
273,621

 
539,769

 
544,296

Commissions and other underwriting expenses
95,280

 
90,241

 
185,801

 
176,180

Interest expense
3,508

 
3,511

 
7,017

 
7,023

Corporate general and administrative expenses
3,682

 
2,447

 
8,425

 
4,718

Other expenses
924

 
507

 
1,429

 
829

Total costs and expenses
378,612

 
370,327

 
742,441

 
733,046

Earnings before income taxes
35,442

 
6,750

 
60,378

 
21,618

Provision for income taxes
7,673

 
1,580

 
12,526

 
5,938

Net Earnings
$
27,769

 
$
5,170

 
$
47,852

 
$
15,680

Net Earnings per Common Share:
 
 
 
 
 
 
 
Basic
$
2.54

 
$
0.47

 
$
4.38

 
$
1.43

Diluted
2.52

 
0.47

 
4.34

 
1.41

Average Number of Common Shares:
 
 
 
 
 
 
 
Basic
10,920

 
11,006

 
10,917

 
11,002

Diluted
11,019

 
11,082

 
11,014

 
11,105

Cash Dividends per Common Share
$
0.58

 
$
0.58

 
$
1.16

 
$
1.16

(1) Net realized (losses) gains on sales
$
(605
)
 
$
1,886

 
$
758

 
$
2,406

Net holding period losses on equity securities
(283
)
 

 
(2,891
)
 

Total other-than-temporary impairment (OTTI) losses
(752
)
 

 
(2,220
)
 
(46
)
Non-credit portion in other comprehensive income
378

 

 
536

 
36

OTTI losses reclassified from other comprehensive income
(81
)
 

 
(358
)
 

Net impairment losses recognized in earnings
(455
)
 

 
(2,043
)
 
(10
)
Total net realized (losses) gains on investments
$
(1,343
)
 
$
1,886

 
$
(4,175
)
 
$
2,396

See Condensed Notes to Consolidated Financial Statements.


1




INFINITY PROPERTY AND CASUALTY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
($ in thousands)
(unaudited)
 
Three months ended June 30,
 
Six months ended June 30,
 
2018
 
2017
 
2018
 
2017
 
 
 
(as adjusted)
 
 
 
(as adjusted)
Net earnings
$
27,769

 
$
5,170

 
$
47,852

 
$
15,680

Other comprehensive income before tax:
 
 
 
 
 
 
 
Net change in post-retirement benefit liability
(2
)
 
(13
)
 
(3
)
 
(25
)
Unrealized gains on investments(1):
 
 
 
 
 
 
 
Unrealized holding (losses) gains arising during the period
(7,261
)
 
9,055

 
(25,605
)
 
19,720

Less: Reclassification adjustments for losses (gains) included in net earnings
1,063

 
(1,886
)
 
3,169

 
(2,396
)
Unrealized (losses) gains on investments, net
(6,198
)
 
7,169

 
(22,436
)
 
17,324

Other comprehensive (loss) income, before tax
(6,200
)
 
7,156

 
(22,439
)
 
17,299

Income tax benefit (expense) related to components of other comprehensive income
1,300

 
(2,505
)
 
4,710

 
(6,055
)
Other comprehensive (loss) income, net of tax
(4,900
)
 
4,652

 
(17,729
)
 
11,244

Comprehensive income
$
22,869

 
$
9,822

 
$
30,123

 
$
26,924

 
 
 
 
 
 
 
 
(1) The amounts for 2018 are for fixed maturities only.
 
 
 
 
 
 
 
See Condensed Notes to Consolidated Financial Statements

2




INFINITY PROPERTY AND CASUALTY CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts in line descriptions)
 
June 30, 2018
 
December 31, 2017
 
(unaudited)
 
(as adjusted)
Assets
 
 
 
Investments:
 
 
 
Fixed maturities – at fair value (amortized cost $1,500,714 and $1,439,878)
$
1,479,507

 
$
1,441,107

Equity securities – at fair value (cost $66,010 and $68,812)
90,311

 
96,004

Short-term investments – at fair value (amortized cost $0 and $2,541)

 
2,541

Total investments
1,569,819

 
1,539,653

Cash and cash equivalents
102,800

 
107,589

Accrued investment income
13,098

 
13,079

Agents’ balances and premium receivable, net of allowances for doubtful accounts of $14,226 and $15,262
584,169

 
507,963

Property and equipment, net of accumulated depreciation of $86,303 and $84,776
75,888

 
82,453

Prepaid reinsurance premium

 
1,032

Recoverables from reinsurers (includes $105 and $(1,269) on paid losses and LAE)
18,663

 
30,340

Deferred policy acquisition costs
102,883

 
88,300

Current and deferred income taxes
19,217

 
10,543

Receivable for securities sold
65

 
1,700

Other assets
20,287

 
16,557

Goodwill
75,275

 
75,275

Total assets
$
2,582,163

 
$
2,474,484

Liabilities and Shareholders’ Equity
 
 
 
Liabilities:
 
 
 
Unpaid losses and loss adjustment expenses
$
714,211

 
$
715,098

Unearned premium
716,453

 
627,575

Long-term debt (fair value $281,875 and $290,824)
273,922

 
273,809

Commissions payable
16,414

 
16,743

Payable for securities purchased
4,000

 
5,615

Other liabilities
121,327

 
119,831

Total liabilities
1,846,327

 
1,758,672

Commitments and contingencies (See Note 9)
 
 
 
Shareholders’ equity:
 
 
 
Common stock, no par value (50,000,000 shares authorized; 21,879,505 and 21,867,436 shares issued)
21,925

 
21,888

Additional paid-in capital
386,727

 
383,567

Retained earnings
846,354

 
793,077

Accumulated other comprehensive income, net of tax
(16,102
)
 
19,756

Treasury stock, at cost (10,937,569 and 10,932,539 shares)
(503,069
)
 
(502,475
)
Total shareholders’ equity
735,836

 
715,812

Total liabilities and shareholders’ equity
$
2,582,163

 
$
2,474,484

See Condensed Notes to Consolidated Financial Statements.


3




INFINITY PROPERTY AND CASUALTY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
($ in thousands)
(unaudited)
 
 
Common
Stock
 
Additional
Paid-in
Capital
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Income,
Net of Tax
 
Treasury
Stock
 
Total
Balance at December 31, 2016
$
21,829

 
$
378,745

 
$
777,695

 
$
7,907

 
$
(486,990
)
 
$
699,187

Cumulative effect of change in accounting principle

 

 
(3,808
)
 

 

 
(3,808
)
Net earnings

 

 
15,680

 

 

 
15,680

Net change in post-retirement benefit liability

 

 

 
(16
)
 

 
(16
)
Change in unrealized gain on investments

 

 

 
11,179

 

 
11,179

Change in non-credit component of impairment losses on fixed maturities

 

 

 
82

 

 
82

Comprehensive income
 
 
 
 
 
 
 
 
 
 
26,924

Dividends paid to common shareholders

 

 
(12,813
)
 

 

 
(12,813
)
Shares issued and share-based compensation expense
33

 
2,732

 

 

 

 
2,765

Acquisition of treasury stock

 

 

 

 
(3,951
)
 
(3,951
)
Balance at June 30, 2017, as adjusted
$
21,862

 
$
381,477

 
$
776,754

 
$
19,152

 
$
(490,941
)
 
$
708,304

Net earnings

 

 
29,043

 

 

 
29,043

Net change in post-retirement benefit liability

 

 

 
(116
)
 

 
(116
)
Change in unrealized gain on investments

 

 

 
475

 

 
475

Change in non-credit component of impairment losses on fixed maturities

 

 

 
246

 

 
246

Comprehensive income
 
 
 
 
 
 
 
 
 
 
29,647

Dividends paid to common shareholders

 

 
(12,720
)
 

 

 
(12,720
)
Shares issued and share-based compensation expense
25

 
2,090

 

 

 

 
2,115

Acquisition of treasury stock

 

 

 

 
(11,534
)
 
(11,534
)
Balance at December 31, 2017, as adjusted
$
21,888

 
$
383,567

 
$
793,077

 
$
19,756

 
$
(502,475
)
 
$
715,812

Cumulative effect of change in accounting principle
$

 
$

 
18,118

 
$
(18,128
)
 
$

 
(10
)
Net earnings

 

 
47,852

 

 

 
47,852

Net change in post-retirement benefit liability

 

 

 
(3
)
 

 
(3
)
Change in unrealized gain on fixed maturity investments

 

 

 
(17,971
)
 

 
(17,971
)
Change in non-credit component of impairment losses on fixed maturities

 

 

 
245

 

 
245

Comprehensive income
 
 
 
 
 
 
 
 
 
 
30,123

Dividends paid to common shareholders

 

 
(12,693
)
 

 

 
(12,693
)
Shares issued and share-based compensation expense
37

 
3,160

 

 

 

 
3,198

Acquisition of treasury stock

 

 

 

 
(594
)
 
(594
)
Balance at June 30, 2018
$
21,925

 
$
386,727

 
$
846,354

 
$
(16,102
)
 
$
(503,069
)
 
$
735,836

See Condensed Notes to Consolidated Financial Statements.


4




INFINITY PROPERTY AND CASUALTY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
($ in thousands, unaudited)
 
Three months ended
 
June 30,
 
2018
 
2017
 
 
 
(as adjusted)
Operating Activities:
 
 
 
Net earnings
$
27,769

 
$
5,170

Adjustments:
 
 
 
Depreciation
3,436

 
4,120

Amortization
3,662

 
5,695

Net realized losses (gains) on investments
1,343

 
(1,886
)
Loss (gain) on disposal of property and equipment
1

 
(5
)
Share-based compensation expense
1,397

 
1,238

Activity related to rabbi trust
28

 
59

Change in accrued investment income
(3,000
)
 
(1,233
)
Change in agents’ balances and premium receivable
(26,964
)
 
14,179

Change in reinsurance receivables
4,493

 
(1,307
)
Change in deferred policy acquisition costs
(4,211
)
 
3,690

Change in other assets
(7,760
)
 
(8,722
)
Change in unpaid losses and loss adjustment expenses
13,205

 
22,151

Change in unearned premium
24,989

 
(17,825
)
Change in other liabilities
10,914

 
4,816

Net cash provided by operating activities
49,302

 
30,141

Investing Activities:
 
 
 
Purchases of fixed maturities
(139,560
)
 
(155,009
)
Purchases of short-term investments

 
(425
)
Purchases of property and equipment
(592
)
 
(695
)
Maturities and redemptions of fixed maturities
32,881

 
65,159

Maturities and redemptions of short-term investments

 
500

Proceeds from sale of fixed maturities
78,460

 
81,487

Proceeds from sale of equity securities

 
5,000

Proceeds from sale of property and equipment

 
6

Net cash used in investing activities
(28,812
)
 
(3,978
)
Financing Activities:
 
 
 
Proceeds from stock options exercised and employee stock purchases

 
78

Principal payments under capital lease obligations
(137
)
 
(134
)
Acquisition of treasury stock

 
(1,450
)
Dividends paid to shareholders
(6,346
)
 
(6,411
)
Net cash used in financing activities
(6,483
)
 
(7,916
)
Net increase in cash and cash equivalents
14,007

 
18,247

Cash and cash equivalents at beginning of period
88,793

 
69,361

Cash and cash equivalents at end of period
$
102,800

 
$
87,608

See Condensed Notes to Consolidated Financial Statements

5




INFINITY PROPERTY AND CASUALTY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
($ in thousands, unaudited)
 
Six months ended
 
June 30,
 
2018
 
2017
 
 
 
(as adjusted)
Operating Activities:
 
 
 
Net earnings
$
47,852

 
$
15,680

Adjustments:
 
 
 
Depreciation
7,132

 
8,296

Amortization
8,502

 
11,023

Net realized losses (gains) on investments
4,175

 
(2,396
)
Loss (gain) on disposal of property and equipment
11

 
(8
)
Share-based compensation expense
3,128

 
2,622

Activity related to rabbi trust
15

 
128

Change in accrued investment income
(20
)
 
(986
)
Change in agents’ balances and premium receivable
(76,206
)
 
(2,939
)
Change in reinsurance receivables
12,709

 
(389
)
Change in deferred policy acquisition costs
(14,583
)
 
733

Change in other assets
(8,564
)
 
(13,227
)
Change in unpaid losses and loss adjustment expenses
(887
)
 
15,643

Change in unearned premium
88,878

 
9,118

Change in other liabilities
1,099

 
10,381

Net cash provided by operating activities
73,241

 
53,679

Investing Activities:
 
 
 
Purchases of fixed maturities
(543,076
)
 
(275,840
)
Purchases of equity securities

 
(1,900
)
Purchases of short-term investments

 
(425
)
Purchases of property and equipment
(905
)
 
(1,584
)
Maturities and redemptions of fixed maturities
65,378

 
108,478

Maturities and redemptions of short-term investments

 
500

Proceeds from sale of fixed maturities
406,524

 
119,158

Proceeds from sale of equity securities
5,013

 
7,002

Proceeds from sale of short-term investments
2,528

 
2,400

Proceeds from sale of property and equipment

 
25

Net cash used in investing activities
(64,539
)
 
(42,187
)
Financing Activities:
 
 
 
Proceeds from stock options exercised and employee stock purchases
70

 
143

Principal payments under capital lease obligations
(275
)
 
(269
)
Acquisition of treasury stock
(594
)
 
(3,746
)
Dividends paid to shareholders
(12,693
)
 
(12,813
)
Net cash used in financing activities
(13,492
)
 
(16,684
)
Net decrease in cash and cash equivalents
(4,789
)
 
(5,192
)
Cash and cash equivalents at beginning of period
107,589

 
92,800

Cash and cash equivalents at end of period
$
102,800

 
$
87,608

See Condensed Notes to Consolidated Financial Statements

6




INFINITY PROPERTY AND CASUALTY CORPORATION AND SUBSIDIARIES
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2018
INDEX TO NOTES
 
1.
7.
 
 
 
2.
8.
 
 
 
3.
9.
 
 
 
4.
10.
 
 
 
5.
11.
 
 
 
 
6.
12.

Note 1 Significant Reporting and Accounting Policies
Nature of Operations
Infinity Property and Casualty Corporation ("Infinity") is a holding company that provides insurance through its subsidiaries for personal auto with a concentration on nonstandard risks, commercial auto and classic collectors. Although licensed to write insurance in all 50 states and the District of Columbia, we focus on select states that we believe offer the greatest opportunity for premium growth and profitability.
Basis of Consolidation and Reporting
The accompanying consolidated financial statements are unaudited and should be read in conjunction with our Annual Report on Form 10-K (Form 10-K) for the year ended December 31, 2017.
These financial statements reflect certain adjustments necessary for a fair presentation of our results of operations and financial position. Such adjustments consist of normal, recurring accruals recorded to accurately match expenses with their related revenue streams and the elimination of all significant intercompany transactions and balances.
We have evaluated events that occurred after June 30, 2018 and through July 30, 2018 (the date on which Kemper Corporation ("Kemper") filed a Current Report on Form 8-K that included, as Exhibit 99.4, our Supplementary Financial Information for the quarter ended June 30, 2018), for recognition or disclosure in our financial statements and the notes to the financial statements.
Schedules may not foot due to rounding.
Estimates
We based certain accounts and balances within these financial statements upon our estimates and assumptions. The amount of reserves for claims not yet paid, for example, is an item that we can only record by estimation. Unrealized capital gains and losses on investments are subject to market fluctuations, and we use judgment in the determination of whether unrealized losses on certain securities are temporary or other-than-temporary. Should actual results differ significantly from these estimates, the effect on our results of operations could be material. The results of operations for the periods presented may not be indicative of our results for the entire year.
Recently Adopted Accounting Standards
In February 2018 the FASB issued an ASU allowing a reclassification from accumulated other comprehensive income to retained earnings and consequently eliminating the stranded tax effects resulting from the Tax Cuts and Jobs Act of 2017. We elected to early adopt the ASU and applied the amendment in the period of adoption, with a cumulative-effect adjustment of $0.4 million reclassified from accumulated other comprehensive income to retained earnings.
In October 2016 the FASB issued an ASU related to the recognition of income tax on intra-entity transfers of assets other than inventory. The guidance requires the income tax to be recognized when the transfer occurs rather than when the asset is sold to

7




an outside party. We adopted the change on a modified retrospective basis, with a cumulative-effect adjustment of less than $(0.1) million recorded to retained earnings as of January 1, 2018.

8




Note 1 Significant Reporting and Accounting Policies (continued)
In January 2016 the FASB issued an ASU amending the guidance on classifying and measuring financial instruments. The guidance requires equity securities to be measured at fair value and changes in that fair value to be recognized through net income. We adopted the change on a modified retrospective basis as of January 1, 2018, with a cumulative-effect adjustment of $17.7 million reclassified from accumulated other comprehensive income to retained earnings.
In May 2014 the FASB issued an ASU related to the accounting for revenue from contracts with customers. Insurance contracts were excluded from the scope of the guidance. As an insurance-entity, we are largely exempt from the provisions of this standard, with only fee income subject to this new standard. Processing and policy fees were generally earned at the inception of the policy under previous guidance but are earned over the life of the policy under current guidance. The guidance was adopted as of January 1, 2018, using a full retrospective approach with a cumulative-effect adjustment to the balance sheet, which reduced shareholders' equity by $4.5 million.
The following table illustrates the effect of adopting this standard on the Consolidated Balance Sheets ($ in millions):
 
December 31, 2017
 
As Reported
 
As Adjusted
 
Difference
Agents' balances and premium receivable
$
508.1

 
$
508.0

 
$
(0.1
)
Current and deferred income taxes
9.4

 
10.5

 
1.2

Total assets
2,473.4

 
2,474.5

 
1.1

Other liabilities
114.3

 
119.8

 
5.5

Shareholders' equity
720.3

 
715.8

 
(4.5
)
Total liabilities and shareholders' equity
2,473.4

 
2,474.5

 
1.1

The following table illustrates the effect of adopting this standard on the Consolidated Statements of Earnings (in millions, except per share amounts):
 
Three months ended June 30, 2017
 
As Reported
 
As Adjusted
 
Difference
Installment and other fee income
$
26.5

 
$
26.7

 
$
0.2

Total revenues
376.9

 
377.1

 
0.2

Earnings before income taxes
6.6

 
6.8

 
0.2

Provision for income taxes
1.5

 
1.6

 
0.1

Net earnings
5.0

 
5.2

 
0.2

Net earnings per common share:
 
 
 
 
 
Basic
$
0.46

 
$
0.47

 
$
0.01

Diluted
0.46

 
0.47

 
0.01

 
Six months ended June 30, 2017
 
As Reported
 
As Adjusted
 
Difference
Installment and other fee income
$
53.4

 
$
53.4

 
$

Total revenues
754.7

 
754.7

 

Earnings before income taxes
21.6

 
21.6

 

Provision for income taxes
5.9

 
5.9

 

Net earnings
15.7

 
15.7

 

Net earnings per common share:
 
 
 
 
 
Basic
$
1.43

 
$
1.43

 
$

Diluted
1.41

 
1.41

 

We also adjusted the Consolidated Statements of Changes in Shareholders' Equity for the six months ended June 30, 2017 and the Consolidated Statements of Cash Flows for the three and six months ended June 30, 2017 for these changes.

9




Note 1 Significant Reporting and Accounting Policies (continued)
Recently Issued Accounting Standards
In March 2017 the FASB issued an ASU related to the amortization of premium on purchased callable debt securities. The guidance amends the amortization period for certain purchased callable debt securities held at a premium. Securities that contain explicit, noncontingent call features that are callable at fixed prices and on preset dates should shorten the amortization period for the premium to the earliest call date (and if the call option is not exercised, the effective yield is reset using the payment terms of the debt security). The standard is effective for fiscal years, and interim period within those years, beginning after December 15, 2018, and is to be applied on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings. We do not expect the adoption of this standard to have a material impact on our financial condition or results of operations.
In June 2016 the FASB issued an ASU related to the accounting for credit losses. The guidance generally requires credit losses on available-for-sale debt securities to be recognized as an allowance rather than as a reduction to the amortized cost of a security. The standard is effective for fiscal periods beginning after December 15, 2019, and interim periods within the year of adoption, with prospective application of the ASU required for debt securities for which an other-than-temporary impairment has been recognized before the implementation date. We do not expect the adoption of this standard to have a material impact on our financial condition or results of operations.
In February 2016 the FASB issued an ASU related to the accounting for leases. The guidance requires lessees to recognize lease assets and liabilities on the balance sheet. The standard is effective for fiscal years beginning after December 15, 2018, and is to be applied retrospectively, with an option to use a modified retrospective approach for leases which commenced prior to the effective date of this ASU. We do not expect the adoption of this standard to have a material impact on our financial condition or results of operations.
Note 2 Computation of Net Earnings per Share
The following table illustrates our computations of basic and diluted net earnings per common share ($ in thousands, except per
share figures):
 
Three months ended
 
Six months ended
 
June 30,
 
June 30,
 
2018
 
2017
 
2018
 
2017
Net earnings
$
27,769

 
$
5,170

 
$
47,852

 
$
15,680

Average basic shares outstanding
10,920

 
11,006

 
10,917

 
11,002

Basic net earnings per share
$
2.54

 
$
0.47

 
$
4.38

 
$
1.43

 
 
 
 
 
 
 
 
Average basic shares outstanding
10,920

 
11,006

 
10,917

 
11,002

Restricted stock not vested
11

 
36

 
10

 
34

Dilutive effect of Performance Share Plan
88

 
41

 
87

 
68

Average diluted shares outstanding
11,019

 
11,082

 
11,014

 
11,105

Diluted net earnings per share
$
2.52

 
$
0.47

 
$
4.34

 
$
1.41



10




Note 3 Fair Value
Fair values of instruments are based on:
(i)
quoted prices in active markets for identical assets (Level 1);
(ii)
quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active and model-derived valuations in which all significant inputs are observable in active markets (Level 2); or
(iii)
valuations derived from valuation techniques in which one or more significant inputs are unobservable in the marketplace (Level 3).
The following tables present, for each of the fair value hierarchy levels, our assets and liabilities for which we report fair value on a recurring basis ($ in thousands):
 
Fair Value
 
Level 1
 
Level 2
 
Level 3
 
Total
June 30, 2018
 
 
 
 
 
 
 
Cash and cash equivalents
$
102,800

 
$

 
$

 
$
102,800

Fixed maturity securities:
 
 
 
 
 
 
 
U.S. government
130,641

 

 

 
130,641

Foreign governments

 
821

 

 
821

State and municipal

 
340,935

 
767

 
341,702

Mortgage-backed securities:

 
 
 
 
 
 
Residential

 
295,941

 
2,599

 
298,539

Commercial

 
68,378

 

 
68,378

Total mortgage-backed securities

 
364,318

 
2,599

 
366,917

Asset-backed securities

 
117,361

 
16,840

 
134,202

Corporates

 
505,224

 

 
505,224

Total fixed maturities
130,641

 
1,328,660

 
20,206

 
1,479,507

Equity securities
90,311

 

 

 
90,311

Total cash and investments
$
323,752

 
$
1,328,660

 
$
20,206

 
$
1,672,618

Percentage of total cash and investments
19.4
%
 
79.4
%
 
1.2
%
 
100.0
%
 
 
 
 
 
 
 
 
December 31, 2017
 
 
 
 
 
 
 
Cash and cash equivalents
$
107,589

 
$

 
$

 
$
107,589

Fixed maturity securities:
 
 
 
 
 
 
 
U.S. government
60,528

 

 

 
60,528

State and municipal

 
490,724

 
3,488

 
494,211

Mortgage-backed securities:
 
 
 
 
 
 
 
Residential

 
350,992

 

 
350,992

Commercial

 
30,569

 

 
30,569

Total mortgage-backed securities

 
381,561

 

 
381,561

Asset-backed securities

 
62,266

 
152

 
62,418

Corporates

 
442,281

 
108

 
442,390

Total fixed maturities
60,528

 
1,376,832

 
3,748

 
1,441,107

Equity securities
96,004

 

 

 
96,004

Short-term investments

 
2,541

 

 
2,541

Total cash and investments
$
264,121

 
$
1,379,373

 
$
3,748

 
$
1,647,242

Percentage of total cash and investments
16.0
%
 
83.7
%
 
0.2
%
 
100.0
%

11




Note 3 Fair Value (continued)
We do not report our long-term debt at fair value in the Consolidated Balance Sheets. The $281.9 million and $290.8 million fair value of our long-term debt at June 30, 2018, and December 31, 2017, respectively, would be included in Level 2 of the fair value hierarchy if it were reported at fair value.
Level 1 includes cash and cash equivalents, U.S. Treasury securities, an exchange-traded fund and equities held in a rabbi trust which funds our Supplemental Employee Retirement Plan (SERP). Level 2 includes securities whose fair value was determined using observable market inputs. Level 3 securities are comprised of (i) securities for which there is no active or inactive market for similar instruments; (ii) securities whose fair value is determined based on unobservable inputs; and (iii) securities, other than those backed by the U.S. Government, that are not rated by a nationally recognized statistical rating organization (NRSRO). We recognize transfers between levels at the beginning of the reporting period.
A third party nationally recognized pricing service provides the fair value of securities in Level 2. A summary of the significant valuation techniques and market inputs for each class of security follows:
U.S. Government: In determining the fair value for U.S. Government securities we use the market approach. The primary inputs to the valuation include reported trades, dealer quotes for identical or similar assets in markets that are not active, benchmark yields, credit spreads, reference data and industry and economic events.
Foreign governments: In determining the fair value for foreign government securities we use the market approach. The primary inputs to the valuation include benchmark yields, reported trades, dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers and reference data including market research publications.
State and municipal: In determining the fair value for state and municipal securities we use the market approach. The primary inputs to the valuation include reported trades, dealer quotes for identical or similar assets in markets that are not active, benchmark yields, credit spreads, reference data and industry and economic events.
Mortgage-backed securities: In determining the fair value for mortgage-backed securities we use the market approach and to a lesser extent the income approach. The primary inputs to the valuation include reported trades, dealer quotes for identical or similar assets in markets that are not active, benchmark yields, credit spreads, reference data, industry and economic events and monthly payment information.
Asset-backed securities: In determining the fair value for asset-backed securities we use the market approach and to a lesser extent the income approach. The primary inputs to the valuation include reported trades, dealer quotes for identical or similar assets in markets that are not active, benchmark yields, credit spreads, reference data, industry and economic events, monthly payment information and collateral performance.
Corporate: In determining the fair value for corporate securities we use the market approach. The primary inputs to the valuation include reported trades, dealer quotes for identical or similar assets in markets that are not active, benchmark yields, credit spreads (for investment grade securities), observations of equity and credit default swap curves (for high-yield corporates), reference data and industry and economic events.
We review the third party pricing methodologies quarterly and test for significant differences between the market price used to value the security and recent sales activity.

12




Note 3 Fair Value (continued)
The following tables present the progression in the Level 3 fair value category ($ in thousands): 
 
State and
Municipal
 
Mortgage-
Backed
Securities
 
Asset-Backed Securities
 
Corporates
 
Total
Three months ended June 30, 2018
 
 
 
 
 
 
 
 
 
Balance at beginning of period
$
766

 
$
2,857

 
$
17,647

 
$
109

 
$
21,379

Total (losses) gains, unrealized or realized:
 
 
 
 
 
 
 
 
 
Included in net earnings
(4
)
 
(80
)
 

 

 
(84
)
Included in other comprehensive income
(1
)
 
77

 
(77
)
 
(2
)
 
(3
)
Settlements

 

 
(232
)
 
(106
)
 
(338
)
Transfers in
5

 
2,599

 
16,884

 

 
19,488

Transfers out

 
(2,855
)
 
(17,382
)
 

 
(20,236
)
Balance at end of period
$
767

 
$
2,599

 
$
16,840

 
$

 
$
20,206

 
 
 
 
 
 
 
 
 
 
Three months ended June 30, 2017
 
 
 
 
 
 
 
 
 
Balance at beginning of period
$
3,479

 
$

 
$
4,584

 
$
2,553

 
$
10,616

Total (losses) gains, unrealized or realized:
 
 
 
 
 
 
 
 
 
Included in net earnings
(29
)
 

 

 

 
(29
)
Included in other comprehensive income
(3
)
 

 
1

 
(4
)
 
(6
)
Settlements

 

 
(76
)
 
(335
)
 
(411
)
Transfers out

 

 
(4,259
)
 
(2,000
)
 
(6,259
)
Balance at end of period
$
3,447

 
$

 
$
249

 
$
215

 
$
3,910


13




Note 3 Fair Value (continued)
 
State and
Municipal
 
Mortgage-
Backed
Securities
 
Asset-Backed Securities
 
Corporates
 
Total
Six months ended June 30, 2018
 
 
 
 
 
 
 
 
 
Balance at beginning of period
$
3,488

 
$

 
$
152

 
$
108

 
$
3,748

Total (losses) gains, unrealized or realized:
 
 
 
 
 
 
 
 
 
Included in net earnings
(14
)
 
(80
)
 

 

 
(94
)
Included in other comprehensive income
3

 
87

 
(50
)
 
(2
)
 
38

Purchases

 
2,847

 
17,729

 

 
20,576

Sales
(3,360
)
 

 

 

 
(3,360
)
Settlements

 

 
(493
)
 
(106
)
 
(599
)
Transfers in
651

 
2,599

 
16,884

 

 
20,133

Transfers out

 
(2,855
)
 
(17,382
)
 

 
(20,236
)
Balance at end of period
$
767

 
$
2,599

 
$
16,840

 
$

 
$
20,206

 
 
 
 
 
 
 
 
 
 
Six months ended June 30, 2017
 
 
 
 
 
 
 
 
 
Balance at beginning of period
$
3,860

 
$

 
$
412

 
$
666

 
$
4,938

Total losses, unrealized or realized:
 
 
 
 
 
 
 
 
 
Included in net earnings
(60
)
 

 

 
2

 
(59
)
Included in other comprehensive income
12

 

 
1

 
(26
)
 
(12
)
Purchases

 

 
4,259

 
2,000

 
6,259

Sales
(694
)
 

 

 

 
(694
)
Settlements

 

 
(165
)
 
(427
)
 
(591
)
Transfers in
329

 

 

 

 
329

Transfers out

 

 
(4,259
)
 
(2,000
)
 
(6,259
)
Balance at end of period
$
3,447

 
$

 
$
249

 
$
215

 
$
3,910

Of the $20.2 million fair value of securities in Level 3 at June 30, 2018, which consisted of nine securities, we priced three based on non-binding broker quotes, two were priced based on our unaffiliated money manager and four securities, which were included in Level 3 because they were not rated by a nationally recognized statistical rating organization, were priced by a nationally recognized pricing service.
During the six months ended June 30, 2018, seven securities were purchased and are new issues. One security, which was an exchange of a rated municipal bond for an unrated refunded bond, was transferred from Level 2 into Level 3. During the six months ended June 30, 2017, one security, which was an exchange of a rated municipal bond for an unrated refunded bond, was transferred from Level 2 into Level 3. There were no transfers of securities between Levels 1 and 2.
The gains or losses included in net earnings are included in the line item "Net realized (losses) gains on investments" in the Consolidated Statements of Earnings. We recognize the net gains or losses included in other comprehensive income in the line item "Unrealized (losses) gains on investments, net" in the Consolidated Statements of Comprehensive Income and the line item "Change in unrealized gain on investments" or the line item "Change in non-credit component of impairment losses on fixed maturities" in the Consolidated Statements of Changes in Shareholders’ Equity.

14




Note 3 Fair Value (continued)
The following table presents the carrying value and estimated fair value of our financial instruments ($ in thousands):
 
June 30, 2018
 
December 31, 2017
 
Carrying Value
 
Fair Value
 
Carrying Value
 
Fair Value
Assets:
 
 
 
 
 
 
 
Cash and cash equivalents
$
102,800

 
$
102,800

 
$
107,589

 
$
107,589

Available-for-sale securities:
 
 
 
 
 
 
 
Fixed maturities
1,479,507

 
1,479,507

 
1,441,107

 
1,441,107

Equity securities
90,311

 
90,311

 
96,004

 
96,004

Short-term investments

 

 
2,541

 
2,541

Total cash and investments
$
1,672,618

 
$
1,672,618

 
$
1,647,242

 
$
1,647,242

Liabilities:
 
 
 
 
 
 
 
Long-term debt
$
273,922

 
$
281,875

 
$
273,809

 
$
290,824

Refer to Note 4 – Investments to the Consolidated Financial Statements for additional information on investments and Note 5 – Long-Term Debt to the Consolidated Financial Statements for additional information on long-term debt.

Note 4 Investments
We consider all fixed maturity and equity securities to be available-for-sale and report them at fair value. Net unrealized gains or losses on equity securities prior to January 1, 2018, and on fixed maturities are reported after-tax (net of any valuation allowance) as a component of other comprehensive income. As of January 1, 2018, changes in fair value of equity securities are recognized through net income. The proceeds from sales of securities for the three and six months ended June 30, 2018, were $78.5 million and $414.1 million, respectively, while the proceeds from sales of securities for the three and six months ended June 30, 2017, were $86.5 million and $128.6 million, respectively. The proceeds for the six months ended June 30, 2018, were net of $0.1 million of receivable for securities sold as of June 30, 2018. There was no receivable for unsettled sales as of June 30, 2017.
Gross gains of $0.3 million and gross losses of $0.9 million were realized on sales of available-for-sale securities during the three months ended June 30, 2018, compared with gross gains of $2.3 million and gross losses of $0.4 million realized on sales during the three months ended June 30, 2017. Gross gains of $3.2 million and gross losses of $2.4 million were realized on sales of available-for-sale securities during the six months ended June 30, 2018, compared with gross gains of $3.0 million and gross losses of $0.6 million realized on sales during the six months ended June 30, 2017. Gains or losses on securities are determined on a specific identification basis.

15




Note 4 Investments (continued)
Summarized information for the major categories of our investment portfolio follows ($ in thousands):
 
Amortized
Cost or Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair Value
 
OTTI
Recognized in
Accumulated
OCI(1)
June 30, 2018
 
 
 
 
 
 
 
 
 
Fixed maturities:
 
 
 
 
 
 
 
 
 
U.S. government
$
132,297

 
$
8

 
$
(1,664
)
 
$
130,641

 
$

Foreign governments
818

 
3

 

 
821

 

State and municipal
342,574

 
1,118

 
(1,990
)
 
341,702

 
(5
)
Mortgage-backed securities:

 

 

 
 
 
 
Residential
307,231

 
301

 
(8,993
)
 
298,539

 
(450
)
Commercial
69,698

 
14

 
(1,335
)
 
68,378

 

Total mortgage-backed securities
376,930

 
315

 
(10,328
)
 
366,917

 
(450
)
Asset-backed securities
135,314

 
55

 
(1,167
)
 
134,202

 

Corporates
512,782

 
904

 
(8,461
)
 
505,224

 
(31
)
Total fixed maturities
1,500,714

 
2,403

 
(23,610
)
 
1,479,507

 
(487
)
Equity securities
66,010

 
24,302

 

 
90,311

 

Total
$
1,566,724

 
$
26,705

 
$
(23,610
)
 
$
1,569,819

 
$
(487
)
 
 
 
 
 
 
 
 
 
 
December 31, 2017
 
 
 
 
 
 
 
 
 
Fixed maturities:
 
 
 
 
 
 
 
 
 
U.S. government
$
61,196

 
$

 
$
(668
)
 
$
60,528

 
$

State and municipal
492,442

 
2,768

 
(999
)
 
494,211

 
(46
)
Mortgage-backed securities:
 
 
 
 
 
 
 
 
 
Residential
353,277

 
1,812

 
(4,097
)
 
350,992

 
(1,479
)
Commercial
31,204

 
18

 
(653
)
 
30,569

 

Total mortgage-backed securities
384,481

 
1,830

 
(4,750
)
 
381,561

 
(1,479
)
Asset-backed securities
62,552

 
62

 
(196
)
 
62,418

 
(8
)
Corporates
439,208

 
4,610

 
(1,429
)
 
442,390

 
(31
)
Total fixed maturities
1,439,878

 
9,271

 
(8,042
)
 
1,441,107

 
(1,564
)
Equity securities
68,812

 
27,192

 

 
96,004

 

Short-term investments
2,541

 

 

 
2,541

 

Total
$
1,511,232

 
$
36,463

 
$
(8,042
)
 
$
1,539,653

 
$
(1,564
)
 
 
 
 
 
 
 
 
 
 
(1) The total non-credit portion of OTTI recognized in Accumulated OCI reflecting the original non-credit loss at the time the credit impairment was determined.

16




Note 4 Investments (continued)
The following tables set forth the amount of unrealized loss by investment category and length of time that individual securities have been in a continuous unrealized loss position ($ in thousands):
 
Less than 12 Months
 
12 Months or More
 
Number of
Securities
with
Unrealized
Losses
 
Fair
Value
 
Gross
Unrealized
Losses
 
Unrealized
Losses as
% of Cost
 
Number of
Securities
with
Unrealized
Losses
 
Fair
Value
 
Gross
Unrealized
Losses
 
Unrealized
Losses as
% of Cost
June 30, 2018
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fixed maturities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. government
35

 
$
116,299

 
$
(1,342
)
 
1.1
%
 
15

 
$
12,356

 
$
(322
)
 
2.5
%
Foreign governments

 

 

 
%
 

 

 

 
%
State and municipal
109

 
191,650

 
(1,939
)
 
1.0
%
 
4

 
4,546

 
(51
)
 
1.1
%
Mortgage-backed securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Residential
240

 
154,588

 
(3,074
)
 
1.9
%
 
268

 
112,701

 
(5,919
)
 
5.0
%
Commercial
20

 
40,333

 
(369
)
 
0.9
%
 
8

 
22,986

 
(966
)
 
4.0
%
Total mortgage-backed securities
260

 
194,921

 
(3,443
)
 
1.7
%
 
276

 
135,687

 
(6,885
)
 
4.8
%
Asset-backed securities
61