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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, 2015

 

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 or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting 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)

 

 

 

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, 2015, the number of shares outstanding of the registrant’s Common Stock was 43,190,481.

 

 

 

 

 

 


 

 

 

Table of Contents

 

 

 

 

 

 

 

 

Page

 

 

 

 

Part I - Financial Information 

 

 

 

 

 

Item 1. 

Financial Statements

 

 

 

 

 

 

Condensed Consolidated Statements of Earnings and Comprehensive Earnings For the Three-Month Periods Ended March 31, 2015 and 2014 (unaudited)

 

 

 

 

 

 

Condensed Consolidated Balance Sheets as of March 31, 2015 (unaudited) and December 31, 2014

 

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows For the Three-Month Periods Ended March 31, 2015 and 2014 (unaudited)

 

 

 

 

 

 

Notes to unaudited condensed consolidated interim financial statements

 

 

 

 

 

Item 2.

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

18 

 

 

 

 

 

Item 3. 

Quantitative and qualitative disclosures about market risk

28 

 

 

 

 

 

Item 4. 

Controls and procedures

28 

 

 

 

 

Part II - Other Information 

28 

 

 

 

 

 

Item 1.

Legal proceedings

28 

 

 

 

 

 

Item 1a.

Risk factors

29 

 

 

 

 

 

Item 2.

Unregistered sales of equity securities and use of proceeds

29 

 

 

 

 

 

Item 3.

Defaults upon senior securities

29 

 

 

 

 

 

Item 4.

Mine safety disclosures

29 

 

 

 

 

 

Item 5.

Other information

29 

 

 

 

 

 

Item 6.

Exhibits

29 

 

 

 

 

Signatures 

 

 

30 

 

 

 

 

2


 

 

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)

 

2015

 

2014

 

 

 

 

 

 

 

Net premiums earned

   

$

169,003 

    

$

161,132 

Net investment income

 

 

13,495 

 

 

13,582 

Net realized investment gains

 

 

13,286 

 

 

6,501 

Consolidated revenue

 

$

195,784 

 

$

181,215 

Losses and settlement expenses

 

 

80,861 

 

 

71,016 

Policy acquisition costs

 

 

58,973 

 

 

55,051 

Insurance operating expenses

 

 

11,531 

 

 

12,533 

Interest expense on debt

 

 

1,856 

 

 

1,851 

General corporate expenses

 

 

2,244 

 

 

2,198 

Total expenses

 

$

155,465 

 

$

142,649 

Equity in earnings of unconsolidated investees

 

 

4,194 

 

 

3,425 

Earnings before income taxes

 

$

44,513 

 

$

41,991 

Income tax expense

 

 

13,915 

 

 

13,022 

Net earnings

 

$

30,598 

 

$

28,969 

 

 

 

 

 

 

 

Other comprehensive earnings (loss), net of tax

 

 

(7,595)

 

 

17,737 

Comprehensive earnings

 

$

23,003 

 

$

46,706 

 

 

 

 

 

 

 

Earnings per share:

 

 

 

 

 

 

Basic:

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic net earnings per share

 

$

0.71 

 

$

0.67 

Basic comprehensive earnings per share

 

$

0.53 

 

$

1.09 

 

 

 

 

 

 

 

Diluted:

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted net earnings per share

 

$

0.70 

 

$

0.66 

Diluted comprehensive earnings per share

 

$

0.52 

 

$

1.07 

 

 

 

 

 

 

 

Weighted average number of common shares outstanding

 

 

 

 

 

 

Basic

 

 

43,141 

 

 

42,985 

Diluted

 

 

43,992 

 

 

43,674 

 

 

 

 

 

 

 

Cash dividends paid per common share

 

$

0.18 

 

$

0.17 

 

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

 

 

 

3


 

RLI Corp. and Subsidiaries

Condensed Consolidated Balance Sheets

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31,

 

December 31,

(in thousands, except share data)

    

2015

    

2014

 

 

 

 

 

 

 

ASSETS

   

 

 

   

 

 

Investments

 

 

 

 

 

 

Fixed income

 

 

 

 

 

 

Available-for-sale, at fair value

 

$

1,529,559 

 

$

1,495,087 

Equity securities, at fair value

 

 

391,663 

 

 

410,642 

Short-term investments, at cost

 

 

16,008 

 

 

16,339 

Other invested assets

 

 

11,402 

 

 

11,597 

Cash

 

 

31,514 

 

 

30,620 

Total investments and cash

 

$

1,980,146 

 

$

1,964,285 

Accrued investment income

 

 

12,411 

 

 

14,629 

Premiums and reinsurance balances receivable

 

 

145,948 

 

 

154,573 

Ceded unearned premium

 

 

49,011 

 

 

53,961 

Reinsurance balances recoverable on unpaid losses

 

 

336,747 

 

 

335,106 

Deferred policy acquisition costs

 

 

65,247 

 

 

65,123 

Property and equipment

 

 

42,458 

 

 

42,549 

Investment in unconsolidated investees

 

 

65,089 

 

 

60,046 

Goodwill and intangibles

 

 

72,472 

 

 

72,695 

Other assets

 

 

11,035 

 

 

12,575 

TOTAL ASSETS

 

$

2,780,564 

 

$

2,775,542 

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

Unpaid losses and settlement expenses

 

$

1,150,795 

 

$

1,121,040 

Unearned premiums

 

 

388,776 

 

 

401,412 

Reinsurance balances payable

 

 

33,083 

 

 

38,013 

Funds held

 

 

53,713 

 

 

51,481 

Income taxes-deferred

 

 

79,356 

 

 

82,285 

Bonds payable, long-term debt

 

 

149,636 

 

 

149,625 

Accrued expenses

 

 

33,902 

 

 

63,148 

Other liabilities

 

 

29,308 

 

 

23,476 

TOTAL LIABILITIES

 

$

1,918,569 

 

$

1,930,480 

 

 

 

 

 

 

 

Shareholders’ Equity

 

 

 

 

 

 

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

 

 

 

 

 

 

(66,120,695 shares issued, 43,190,481 shares outstanding at 3/31/15)

 

 

 

 

 

 

(66,032,929 shares issued, 43,102,715 shares outstanding at 12/31/14)

 

$

66,121 

 

$

66,033 

Paid-in capital

 

 

215,345 

 

 

213,737 

Accumulated other comprehensive earnings

 

 

163,788 

 

 

171,383 

Retained earnings

 

 

809,740 

 

 

786,908 

Deferred compensation

 

 

13,946 

 

 

13,769 

Less: Treasury shares at cost

 

 

 

 

 

 

(22,930,214 shares at 3/31/15 and 12/31/14)

 

 

(406,945)

 

 

(406,768)

TOTAL SHAREHOLDERS’ EQUITY

 

$

861,995 

 

$

845,062 

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY

 

$

2,780,564 

 

$

2,775,542 

 

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

 

 

4


 

 

RLI Corp. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Three-Month Periods

 

 

Ended March 31,

(in thousands)

 

2015

 

2014

 

 

 

 

 

 

 

Net cash provided by (used in) operating activities

    

$

23,407 

    

$

(2,007)

Cash Flows from Investing Activities

 

 

 

 

 

 

Investments purchased

 

$

(196,468)

 

$

(129,559)

Investments sold

 

 

140,445 

 

 

92,989 

Investments called or matured

 

 

39,781 

 

 

31,770 

Net change in short-term investments

 

 

2,572 

 

 

2,286 

Net property and equipment purchased

 

 

(1,062)

 

 

(2,933)

Investment in equity method investee

 

 

(1,711)

 

 

(5,301)

Net cash used in investing activities

 

$

(16,443)

 

$

(10,748)

 

 

 

 

 

 

 

Cash Flows from Financing Activities

 

 

 

 

 

 

Cash dividends paid

 

$

(7,766)

 

$

(7,305)

Stock plan share issuance

 

 

330 

 

 

1,123 

Excess tax benefit from exercise of stock options

 

 

1,366 

 

 

86 

Net cash used in financing activities

 

$

(6,070)

 

$

(6,096)

 

 

 

 

 

 

 

Net increase (decrease) in cash

 

$

894 

 

$

(18,851)

Cash at the beginning of the period

 

$

30,620 

 

$

39,469 

Cash at March 31

 

$

31,514 

 

$

20,618 

 

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

5


 

 

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 2014 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, 2015 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.

 

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

 

No new accounting standards have been adopted as no issued updates would impact our financial statements.

 

C.  PROSPECTIVE ACCOUNTING STANDARDS

 

ASU 2015-03, Interest-Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs

 

This ASU was issued to simplify the presentation of debt issuance costs by requiring them to be presented in the balance sheet as a direct deduction from the carrying amount of the related recognized debt liability, consistent with debt discounts. This ASU is effective for annual and interim reporting periods beginning after December 15, 2015. Early adoption is permitted. We have not early-adopted this ASU and do not believe adoption will have a material effect on our financial statements.

 

D.  INTANGIBLE ASSETS

 

In accordance with GAAP guidelines, the amortization of goodwill and indefinite-lived intangible assets is not permitted. Goodwill and indefinite-lived intangible assets remain on the balance sheet and are tested for impairment on an annual basis, or earlier if there is reason to suspect that their values may have been diminished or impaired. Goodwill and intangible assets  totaled $72.5 million at March 31, 2015.

 

Goodwill and intangible assets resulting from acquisitions completed prior to 2011 totaled $26.2 million and is attributable to our surety segment. Of this $26.2 million, $25.6 million relates to goodwill and $0.6 million relates to an indefinite-lived intangible asset. Goodwill and intangible assets resulting from the Contractors Bonding and Insurance Company (CBIC) acquisition in April 2011 totaled $30.5 million. The CBIC-related assets include goodwill attributable to our casualty and surety segments of $5.3 million and $15.1 million, respectively, and an indefinite-lived intangible asset in the amount of $7.5 million, which relates to state insurance licenses. Impairment testing is performed on each of these goodwill and indefinite-lived intangible assets during the second quarter of each year. There were no triggering events that occurred during the first quarter of 2015 that would suggest an updated review was necessary. Definite-lived intangible assets related to the CBIC acquisition totaled $2.6 million, net of amortization, as of March 31, 2015.

 

The remaining $15.8 million of goodwill and intangibles relates to our purchase of Rockbridge Underwriting Agency (Rockbridge) in November 2012. Of this amount, $12.4 million is recorded as goodwill attributable to our casualty segment. The remaining $3.4 million relates to definite-lived intangible assets, net of amortization, as of March 31, 2015. Impairment testing is performed on this goodwill asset in the fourth quarter of each year.  There were no triggering events that occurred during the first quarter of 2015 that would suggest an updated review was necessary.

 

6


 

The aforementioned definite-lived intangible assets are amortized against future operating results based on their estimated useful lives. Amortization of intangible assets resulting from the acquisitions of CBIC and Rockbridge was $0.2 million for the first quarter of 2015.

 

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,  2015

 

Ended March 31,  2014

 

 

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

   

$

30,598 

    

43,141 

    

$

0.71 

    

$

28,969 

    

42,985 

    

$

0.67 

Effect of Dilutive Securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock options

 

 

 -

 

851 

 

 

 

 

 

 -

 

689 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted EPS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income available to common shareholders

 

$

30,598 

 

43,992 

 

$

0.70 

 

$

28,969 

 

43,674 

 

$

0.66 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

F.  COMPREHENSIVE EARNINGS

 

Our comprehensive earnings include net earnings plus unrealized gains/losses on our available-for-sale investment securities, net of tax. In reporting comprehensive earnings on a net basis in the statement of earnings, we used the federal statutory tax rate of 35 percent. 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.

 

 

 

 

 

 

 

 

 

 

(in thousands)

 

For the Three-Month Periods

 

 

 

Ended March 31,

 

Unrealized Gains/Losses on Available-for-Sale Securities

    

2015

    

2014

    

 

 

 

 

 

 

 

 

Beginning balance

 

$

171,383 

 

$

136,027 

 

Other comprehensive earnings before reclassifications

 

 

996 

 

 

21,960 

 

Amounts reclassified from accumulated other comprehensive earnings

 

 

(8,591)

 

 

(4,223)

 

Net current-period other comprehensive earnings

 

$

(7,595)

 

$

17,737 

 

Ending balance

 

$

163,788 

 

$

153,764 

 

 

7


 

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.

 

 

 

 

 

 

 

 

 

 

 

 

 

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

    

2015

    

2014

    

Statement of Earnings

 

 

 

 

 

 

 

 

 

Unrealized gains and losses on available-for-sale securities

 

$

13,217 

 

$

6,497 

 

Net realized investment gains

 

 

 

 -

 

 

 -

 

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

 

 

$

13,217 

 

$

6,497 

 

Earnings before income taxes

 

 

 

(4,626)

 

 

(2,274)

 

Income tax expense

 

 

$

8,591 

 

$

4,223 

 

Net earnings

 

 

 

 

 

 

 

2.    INVESTMENTS

 

Our investments include fixed income debt securities and common stock equity securities. As disclosed in our 2014 Annual Report on Form 10-K, we present all of our investments as available-for-sale, which are carried at fair value. During the fourth quarter of 2014, we sold our last remaining fixed income security that was classified as held-to-maturity. 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.”

 

The following tables show the amortized cost, unrealized gains/losses, fair value and contractual maturities for our available-for-sale securities.

 

8


 

Available-for-Sale Securities

 

The amortized cost and fair value of available-for-sale securities at March 31, 2015 and December 31, 2014 were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Available-for-sale

 

 

 

 

 

 

 

 

 

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

3/31/2015

 

    

Cost or

    

Gross

    

Gross

    

    

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

Fair

Asset Class

    

Cost

    

Gains

    

Losses

    

Value

U.S. government

 

$

33,313 

 

$

279 

 

$

 -

 

$

33,592 

U.S. agency

 

 

13,498 

 

 

554 

 

 

 -

 

 

14,052 

Non-U.S. govt. & agency

 

 

1,892 

 

 

125 

 

 

 -

 

 

2,017 

Agency MBS

 

 

244,344 

 

 

10,480 

 

 

(510)

 

 

254,314 

ABS/CMBS*

 

 

125,847 

 

 

2,298 

 

 

(223)

 

 

127,922 

Corporate

 

 

593,814 

 

 

25,378 

 

 

(3,130)

 

 

616,062 

Municipal

 

 

463,355 

 

 

18,517 

 

 

(272)

 

 

481,600 

Total Fixed Income

 

$

1,476,063 

 

$

57,631 

 

$

(4,135)

 

$

1,529,559 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity

 

$

191,993 

 

$

200,630 

 

$

(960)

 

$

391,663 

 

 

 

 

 

 

 

 

 

 

 

 

 

Available-for-sale

 

 

 

 

 

 

 

 

 

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

12/31/2014

 

    

Cost or

    

Gross

    

Gross

    

    

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

Fair

Asset Class

    

Cost

    

Gains

    

Losses

    

Value

U.S. government

 

$

33,668 

 

$

131 

 

$

(11)

 

$

33,788 

U.S. agency

 

 

6,385 

 

 

362 

 

 

 -

 

 

6,747 

Non-U.S. govt. & agency

 

 

9,862 

 

 

803 

 

 

 -

 

 

10,665 

Agency MBS

 

 

256,443 

 

 

9,401 

 

 

(1,376)

 

 

264,468 

ABS/CMBS*

 

 

133,894 

 

 

1,821 

 

 

(411)

 

 

135,304 

Corporate

 

 

543,183 

 

 

23,697 

 

 

(4,190)

 

 

562,690 

Municipal

 

 

464,769 

 

 

16,789 

 

 

(133)

 

 

481,425 

Total Fixed Income

 

$

1,448,204 

 

$

53,004 

 

$

(6,121)

 

$

1,495,087 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity

 

$

193,535 

 

$

218,105 

 

$

(998)

 

$

410,642 

*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, 2015:

 

 

 

 

 

 

 

 

 

 

 

3/31/2015

AFS

 

Amortized

 

Fair

(in thousands)

    

Cost

    

Value

Due in one year or less

 

$

15,466 

 

$

15,604 

Due after one year through five years

 

 

240,318 

 

 

249,737 

Due after five years through 10 years

 

 

571,095 

 

 

592,340 

Due after 10 years

 

 

278,993 

 

 

289,642 

Mtge/ABS/CMBS*

 

 

370,191 

 

 

382,236 

Total available-for-sale

 

$

1,476,063 

 

$

1,529,559 

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

 

9


 

Unrealized Losses

We conduct and document periodic reviews of all 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 securities that were in an unrealized loss position as of March 31, 2015 and December 31, 2014. 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 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, 2015 unrealized losses, as shown in the following tables, were 0.3 percent of total invested assets. Unrealized losses decreased in 2015, as interest rates declined during the first quarter of the year.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31,  2015

 

December 31,  2014

(in thousands)

    

< 12 Mos.

    

12 Mos. & 
Greater

    

Total

    

< 12 Mos.

    

12 Mos. & 
Greater

    

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Government

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair value

 

$

 —

 

$

 —

 

$

 —

 

$

4,416 

 

$

 —

 

$

4,416 

Cost or amortized cost

 

 

 —

 

 

 —

 

 

 —

 

 

4,427 

 

 

 —

 

 

4,427 

Unrealized Loss

 

$

 —

 

$

 —

 

$

 —

 

$

(11)

 

$

 —

 

$

(11)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Agency MBS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair value

 

$

15,867 

 

$

15,778 

 

$

31,645 

 

$

12,840 

 

$

61,534 

 

$

74,374 

Cost or amortized cost

 

 

15,976 

 

 

16,179 

 

 

32,155 

 

 

12,947 

 

 

62,803 

 

 

75,750 

Unrealized Loss

 

$

(109)

 

$

(401)

 

$

(510)

 

$

(107)

 

$

(1,269)

 

$

(1,376)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

ABS/CMBS*

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair value

 

$

33,838 

 

$

11,464 

 

$

45,302 

 

$

63,782 

 

$

11,616 

 

$

75,398 

Cost or amortized cost

 

 

34,014 

 

 

11,511 

 

 

45,525 

 

 

64,084 

 

 

11,725 

 

 

75,809 

Unrealized Loss

 

$

(176)

 

$

(47)

 

$

(223)

 

$

(302)

 

$

(109)

 

$

(411)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Corporate

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair value

 

$

69,222 

 

$

9,796 

 

$

79,018 

 

$

123,617 

 

$

14,488 

 

$

138,105 

Cost or amortized cost

 

 

72,219 

 

 

9,929 

 

 

82,148 

 

 

127,634 

 

 

14,661 

 

 

142,295 

Unrealized Loss

 

$

(2,997)

 

$

(133)

 

$

(3,130)

 

$

(4,017)

 

$

(173)

 

$

(4,190)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Municipal

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair value

 

$

22,189 

 

$

 —

 

$

22,189 

 

$

12,382 

 

$

19,019 

 

$

31,401 

Cost or amortized cost

 

 

22,461 

 

 

 —

 

 

22,461 

 

 

12,411 

 

 

19,123 

 

 

31,534 

Unrealized Loss

 

$

(272)

 

$

 —

 

$

(272)

 

$

(29)

 

$

(104)

 

$

(133)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Subtotal, fixed income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair value

 

$

141,116 

 

$

37,038 

 

$

178,154 

 

$

217,037 

 

$

106,657 

 

$

323,694 

Cost or amortized cost

 

 

144,670 

 

 

37,619 

 

 

182,289 

 

 

221,503 

 

 

108,312 

 

 

329,815 

Unrealized Loss

 

$

(3,554)

 

$

(581)

 

$

(4,135)

 

$

(4,466)

 

$

(1,655)

 

$

(6,121)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair value

 

$

13,135 

 

$

 —

 

$

13,135 

 

$

10,837 

 

$

 —

 

$

10,837 

Cost or amortized cost

 

 

14,095 

 

 

 —

 

 

14,095 

 

 

11,835 

 

 

 —

 

 

11,835 

Unrealized Loss

 

$

(960)

 

$

 —

 

$

(960)

 

$

(998)

 

$

 —

 

$

(998)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fair value

 

$

154,251 

 

$

37,038 

 

$

191,289 

 

$

227,874 

 

$

106,657 

 

$

334,531 

Cost or amortized cost

 

 

158,765 

 

 

37,619 

 

 

196,384 

 

 

233,338 

 

 

108,312 

 

 

341,650 

Unrealized Loss

 

$

(4,514)

 

$

(581)

 

$

(5,095)

 

$

(5,464)

 

$

(1,655)

 

$

(7,119)

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

 

10


 

The following table shows the composition of the fixed income securities in unrealized loss positions at March 31, 2015 by the National Association of Insurance Commissioners (NAIC) rating and the generally equivalent Standard & Poor’s (S&P) and Moody’s ratings. The vast majority of the securities are rated by S&P and/or Moody’s.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equivalent

 

Equivalent

 

(dollars in thousands)

 

NAIC

    

S&P

    

Moody’s

 

Amortized

    

    

 

    

Unrealized

 

Percent

 

Rating

    

Rating

    

Rating

    

Cost

    

Fair Value

    

Loss

    

to Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1

 

AAA/AA/A

 

Aaa/Aa/A

 

$

128,145 

 

$

126,749 

 

$

(1,396)

 

33.8 

%

2

 

BBB

 

Baa

 

 

17,721 

 

 

16,908 

 

 

(813)

 

19.7 

%

3

 

BB

 

Ba

 

 

21,179 

 

 

20,096 

 

 

(1,083)

 

26.2 

%

4

 

B

 

B

 

 

14,884 

 

 

14,072 

 

 

(812)

 

19.6 

%

5

 

CCC or lower

 

Caa or lower

 

 

360 

 

 

329 

 

 

(31)

 

0.7 

%

6

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

182,289 

 

$

178,154 

 

$

(4,135)

 

100.0 

%

 

Evaluating Investments for OTTI

 

The fixed income portfolio contained 154 securities in an unrealized loss position as of March 31, 2015. The $4.1 million in associated unrealized losses for these 154 securities represents 0.3 percent of the fixed income portfolio’s cost basis. Of these 154 securities, 33 have been in an unrealized loss position for 12 consecutive months or longer. All fixed income securities in the investment portfolio continue to pay the expected coupon payments under the contractual terms of the securities. Any credit-related impairment related to fixed income securities we do not plan to sell and for which we are not more likely than not to be required to sell is recognized in net earnings, with the non-credit related impairment recognized in comprehensive earnings. Based on our analysis, our fixed income portfolio is of high credit quality and we believe we will recover the amortized cost basis of our fixed income securities. We continually monitor the credit quality of our fixed income investments to assess if it is probable that we will receive our contractual or estimated cash flows in the form of principal and interest. There were no other-than-temporary impairment (OTTI) losses recognized in net earnings or other comprehensive earnings in the periods presented on the fixed income portfolio.

 

As of March 31, 2015, we held four common stock securities that were in an unrealized loss position. The unrealized loss on these securities was $1.0 million. Based on our analysis, we believe each security will recover in a reasonable period of time and we have the intent and ability to hold them until recovery. No equity securities have been in an unrealized loss position for 12 consecutive months or longer. There were no OTTI losses recognized in the periods presented on the equity portfolio.

 

Other Invested Assets

 

Other invested assets include an investment in a low income housing tax credit partnership, carried at amortized cost, and membership in the Federal Home Loan Bank Chicago (FHLBC), carried at cost.  Our interest in a low income housing tax credit partnership had a balance of $9.6 million at March 31, 2015 compared to $9.8 million at December 31, 2014 and recognized a total tax benefit of $0.3 million during the first quarter of 2015. Our investment in FHLBC stock totaled $1.8 million at March 31, 2015 and December 31, 2014.

 

Cash and Short-term Investments

 

Cash consists of uninvested balances in bank accounts. We had a cash balance of $31.5 million at the end of the first quarter of 2015, compared to $30.6 million at the end of 2014. Short-term investments are carried at cost, which approximates fair value. The balance at March 31, 2015 was $16.0 million compared to $16.3 million at December 31, 2014.

 

 

3.    FAIR VALUE MEASUREMENTS

 

Assets and Liabilities Recorded at Fair Value on a Recurring Basis

 

Fair value is defined as the price in the principal market that would be received for an asset to facilitate an orderly transaction between market participants on the measurement date.

 

11


 

We determined the fair value of certain financial instruments based on their underlying characteristics and relevant transactions in the marketplace. GAAP guidance requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The guidance also describes three levels of inputs that may be used to measure fair value.

 

Financial assets are classified based upon the lowest level of significant input that is used to determine fair value. The following are the levels of the fair value hierarchy and a brief description of the type of valuation inputs that are used to establish each level:

 

Pricing Level 1 is applied to valuations based on readily available, unadjusted quoted prices in active markets for identical assets.

 

Pricing Level 2 is applied to valuations based upon quoted prices for similar assets in active markets, quoted prices for identical or similar assets in inactive markets; or valuations based on models where the significant inputs are observable (e.g. interest rates, yield curves, prepayment speeds, default rates, loss severities) or can be corroborated by observable market data.

 

Pricing Level 3 is applied to valuations that are derived from techniques in which one or more of the significant inputs are unobservable.

 

As a part of management’s process to determine fair value, we utilize widely recognized, third-party pricing sources to determine our fair values. We have obtained an understanding of the third-party pricing sources’ valuation methodologies and inputs. The following is a description of the valuation techniques used for financial assets that are measured at fair value, including the general classification of such assets pursuant to the fair value hierarchy.

 

Corporate, Agencies, Government and Municipal Bonds: The pricing vendor employs a multi-dimensional model which uses standard inputs including (listed in order of priority for use) benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, market bids/offers and other reference data. The pricing vendor also monitors market indicators, as well as industry and economic events. All bonds valued using these techniques are classified as Level 2. All corporate, agency, government and municipal securities were deemed Level 2.

 

Mortgage-backed Securities (MBS)/Commercial Mortgage-backed Securities (CMBS) and Asset-backed Securities (ABS): The pricing vendor evaluation methodology includes principally interest rate movements and new issue data. Evaluation of the tranches (non-volatile, volatile or credit sensitivity) is based on the pricing vendors’ interpretation of accepted modeling and pricing conventions. This information is then used to determine the cash flows for each tranche, benchmark yields, prepayment assumptions and to incorporate collateral performance. To evaluate MBS and CMBS volatility, an option adjusted spread model is used in combination with models that simulate interest rate paths to determine market price information. This process allows the pricing vendor to obtain evaluations of a broad universe of securities in a way that reflects changes in yield curve, index rates, implied volatility, mortgage rates and recent trade activity. MBS/CMBS and ABS with corroborated, observable inputs are classified as Level 2. All of our MBS/CMBS and ABS are deemed Level 2.

 

Common Stock: Exchange traded equities have readily observable price levels and are classified as Level 1 (fair value based on quoted market prices). All of our common stock holdings are deemed Level 1.

 

For the Level 2 securities, as described above, we periodically conduct a review to assess the reasonableness of the fair values provided by our pricing services. Our review consists of a two pronged approach. First, we compare prices provided by our pricing services to those provided by an additional source. Second, we obtain prices from securities brokers and compare them to the prices provided by our pricing services. In both comparisons, when discrepancies are found, we compare our prices to actual reported trade data for like securities. Based on this assessment, we determined that the fair values of our Level 2 securities provided by our pricing services are reasonable.

 

For common stock, we receive prices from a nationally recognized pricing service. Prices are based on observable inputs in an active market and are therefore disclosed as Level 1. Based on this assessment, we determined that the fair values of our Level 1 securities provided by our pricing service are reasonable.

 

Due to the relatively short-term nature of cash, short-term investments, accounts receivable and accounts payable, their carrying amounts are reasonable estimates of fair value.

 

12


 

Assets measured at fair value in the accompanying unaudited condensed consolidated interim financial statements on a recurring basis are summarized below:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of March 31,  2015

 

 

Fair Value Measurements Using

 

    

Quoted Prices in

    

Significant Other

    

Significant

    

    

 

 

 

Active Markets for

 

Observable

 

Unobservable

 

 

 

 

Identical Assets

 

Inputs

 

Inputs

 

 

(in thousands)

    

(Level 1)

    

(Level 2)

    

(Level 3)

    

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

Available-for-sale securities

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government

 

$

 —

 

$

33,592 

 

$

 —

 

$

33,592 

U.S. agency

 

 

 —