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EX-31.2 - EX-31.2 - RLI CORPrli-20170930ex312b149c6.htm
EX-31.1 - EX-31.1 - RLI CORPrli-20170930ex31189350f.htm

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 September 30, 2017

 

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 October 13, 2017, the number of shares outstanding of the registrant’s Common Stock was 44,059,831.

 

 

 

 

 

 


 

 

 

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 September 30, 2017 and 2016 (unaudited)

3

 

 

 

 

 

 

Condensed Consolidated Statements of Earnings and Comprehensive Earnings For the Nine-Month Periods Ended September 30, 2017 and 2016 (unaudited)

4

 

 

 

 

 

 

Condensed Consolidated Balance Sheets as of September 30, 2017 (unaudited) and December 31, 2016

5

 

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows For the Nine-Month Periods Ended September 30, 2017 and 2016 (unaudited)

6

 

 

 

 

 

 

Notes to unaudited condensed consolidated interim financial statements

7

 

 

 

 

 

Item 2.

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

23

 

 

 

 

 

Item 3. 

Quantitative and qualitative disclosures about market risk

39

 

 

 

 

 

Item 4. 

Controls and procedures

39

 

 

 

 

Part II - Other Information 

39

 

 

 

 

 

Item 1.

Legal proceedings

39

 

 

 

 

 

Item 1a.

Risk factors

39

 

 

 

 

 

Item 2.

Unregistered sales of equity securities and use of proceeds

39

 

 

 

 

 

Item 3.

Defaults upon senior securities

40

 

 

 

 

 

Item 4.

Mine safety disclosures

40

 

 

 

 

 

Item 5.

Other information

40

 

 

 

 

 

Item 6.

Exhibits

40

 

 

 

 

Signatures 

 

41

 

 

 

 

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 September 30,

(in thousands, except per share data)

 

2017

 

2016

 

 

 

 

 

 

 

Net premiums earned

   

$

182,025

    

$

183,595

Net investment income

 

 

14,187

 

 

13,504

Net realized gains

 

 

35

 

 

9,347

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

 

 

 -

 

 

(95)

Consolidated revenue

 

$

196,247

 

$

206,351

Losses and settlement expenses

 

 

123,190

 

 

97,892

Policy acquisition costs

 

 

62,066

 

 

61,761

Insurance operating expenses

 

 

11,701

 

 

13,338

Interest expense on debt

 

 

1,856

 

 

1,857

General corporate expenses

 

 

1,956

 

 

2,242

Total expenses

 

$

200,769

 

$

177,090

Equity in earnings of unconsolidated investees

 

 

3,660

 

 

1,881

Earnings (loss) before income taxes

 

$

(862)

 

$

31,142

Income tax expense (benefit)

 

 

(2,596)

 

 

8,879

Net earnings

 

$

1,734

 

$

22,263

 

 

 

 

 

 

 

Other comprehensive earnings (loss), net of tax

 

 

8,444

 

 

(6,931)

Comprehensive earnings

 

$

10,178

 

$

15,332

 

 

 

 

 

 

 

Earnings per share:

 

 

 

 

 

 

Basic:

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic net earnings per share

 

$

0.04

 

$

0.51

Basic comprehensive earnings per share

 

$

0.23

 

$

0.35

 

 

 

 

 

 

 

Diluted:

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted net earnings per share

 

$

0.04

 

$

0.50

Diluted comprehensive earnings per share

 

$

0.23

 

$

0.34

 

 

 

 

 

 

 

Weighted average number of common shares outstanding:

 

 

 

 

 

 

Basic

 

 

44,058

 

 

43,843

Diluted

 

 

44,515

 

 

44,492

 

 

 

 

 

 

 

Cash dividends paid per common share

 

$

0.21

 

$

0.20

 

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

3


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Nine-Month Periods

 

 

Ended September 30,

(in thousands, except per share data)

 

2017

 

2016

 

 

 

 

 

 

 

Net premiums earned

    

$

549,641

    

$

540,739

Net investment income

 

 

40,430

 

 

39,922

Net realized gains

 

 

1,390

 

 

23,457

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

 

 

(2,090)

 

 

(95)

Consolidated revenue

 

$

589,371

 

$

604,023

Losses and settlement expenses

 

 

306,927

 

 

259,340

Policy acquisition costs

 

 

186,264

 

 

184,525

Insurance operating expenses

 

 

38,582

 

 

38,950

Interest expense on debt

 

 

5,569

 

 

5,570

General corporate expenses

 

 

7,816

 

 

7,385

Total expenses

 

$

545,158

 

$

495,770

Equity in earnings of unconsolidated investees

 

 

15,404

 

 

10,823

Earnings before income taxes

 

$

59,617

 

$

119,076

Income tax expense

 

 

11,847

 

 

36,343

Net earnings

 

$

47,770

 

$

82,733

 

 

 

 

 

 

 

Other comprehensive earnings, net of tax

 

 

30,812

 

 

33,898

Comprehensive earnings

 

$

78,582

 

$

116,631

 

 

 

 

 

 

 

Earnings per share:

 

 

 

 

 

 

Basic:

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic net earnings per share

 

$

1.09

 

$

1.89

Basic comprehensive earnings per share

 

$

1.79

 

$

2.67

 

 

 

 

 

 

 

Diluted:

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted net earnings per share

 

$

1.07

 

$

1.86

Diluted comprehensive earnings per share

 

$

1.77

 

$

2.63

 

 

 

 

 

 

 

Weighted average number of common shares outstanding:

 

 

 

 

 

 

Basic

 

 

44,008

 

 

43,721

Diluted

 

 

44,517

 

 

44,416

 

 

 

 

 

 

 

Cash dividends paid per common share

 

$

0.62

 

$

0.59

 

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

 

4


 

RLI Corp. and Subsidiaries

Condensed Consolidated Balance Sheets

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30,

 

December 31,

(in thousands, except share data)

    

2017

    

2016

 

 

 

 

 

 

 

ASSETS

   

 

 

   

 

 

Investments and cash:

 

 

 

 

 

 

Fixed income:

 

 

 

 

 

 

Available-for-sale, at fair value (amortized cost - $1,680,321 at 9/30/17 and $1,596,227 at 12/31/16)

 

$

1,713,558

 

$

1,605,209

Equity securities available-for-sale, at fair value (cost - $189,212 at 9/30/17 and $187,573 at 12/31/16)

 

 

393,213

 

 

369,219

Short-term investments, at cost which approximates fair value

 

 

11,925

 

 

5,015

Other invested assets

 

 

25,998

 

 

24,115

Cash

 

 

26,877

 

 

18,269

Total investments and cash

 

$

2,171,571

 

$

2,021,827

Accrued investment income

 

 

15,161

 

 

14,593

Premiums and reinsurance balances receivable, net of allowances for uncollectible amounts of $16,543 at 9/30/17 and $15,981 at 12/31/16

 

 

127,388

 

 

126,387

Ceded unearned premium

 

 

54,186

 

 

52,173

Reinsurance balances recoverable on unpaid losses and settlement expenses, net of allowances for uncollectible amounts of $10,066 at 9/30/17 and $10,699 at 12/31/16

 

 

291,074

 

 

288,224

Deferred policy acquisition costs

 

 

77,782

 

 

73,147

Property and equipment, at cost, net of accumulated depreciation of $45,927 at 9/30/17 and $41,999 at 12/31/16

 

 

55,770

 

 

54,606

Investment in unconsolidated investees

 

 

88,374

 

 

72,240

Goodwill and intangibles

 

 

59,427

 

 

64,371

Other assets

 

 

15,787

 

 

10,065

TOTAL ASSETS

 

$

2,956,520

 

$

2,777,633

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

Unpaid losses and settlement expenses

 

$

1,253,729

 

$

1,139,337

Unearned premiums

 

 

443,110

 

 

433,777

Reinsurance balances payable

 

 

21,006

 

 

17,928

Funds held

 

 

75,294

 

 

72,742

Income taxes-deferred

 

 

84,982

 

 

64,494

Bonds payable, long-term debt

 

 

148,881

 

 

148,741

Accrued expenses

 

 

35,682

 

 

51,992

Other liabilities

 

 

14,680

 

 

25,050

TOTAL LIABILITIES

 

$

2,077,364

 

$

1,954,061

 

 

 

 

 

 

 

Shareholders’ Equity

 

 

 

 

 

 

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

 

 

 

 

 

 

(66,990,045 shares issued, 44,059,831 shares outstanding at 9/30/17)

 

 

 

 

 

 

(66,874,911 shares issued, 43,944,697 shares outstanding at 12/31/16)

 

$

66,990

 

$

66,875

Paid-in capital

 

 

233,954

 

 

229,779

Accumulated other comprehensive earnings

 

 

153,422

 

 

122,610

Retained earnings

 

 

817,789

 

 

797,307

Deferred compensation

 

 

7,666

 

 

11,496

Less: Treasury shares at cost

 

 

 

 

 

 

(22,930,214 shares at 9/30/17 and 12/31/16)

 

 

(400,665)

 

 

(404,495)

TOTAL SHAREHOLDERS’ EQUITY

 

$

879,156

 

$

823,572

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY

 

$

2,956,520

 

$

2,777,633

 

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

5


 

RLI Corp. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Nine-Month Periods

 

 

Ended September 30,

(in thousands)

 

2017

 

2016

 

 

 

 

 

 

 

Net cash provided by operating activities

    

$

145,933

    

$

123,000

Cash Flows from Investing Activities

 

 

 

 

 

 

Investments purchased

 

$

(335,361)

 

$

(434,505)

Investments sold

 

 

131,605

 

 

243,506

Investments called or matured

 

 

103,193

 

 

102,752

Net change in short-term investments

 

 

(6,910)

 

 

(1,476)

Net property and equipment purchased

 

 

(7,262)

 

 

(11,852)

Sale (acquisition) of agency

 

 

408

 

 

(850)

Net cash used in investing activities

 

$

(114,327)

 

$

(102,425)

 

 

 

 

 

 

 

Cash Flows from Financing Activities

 

 

 

 

 

 

Cash dividends paid

 

$

(27,288)

 

$

(25,811)

Stock plan share issuance

 

 

4,290

 

 

(357)

Excess tax benefit from exercise of stock options

 

 

 -

 

 

8,482

Net cash used in financing activities

 

$

(22,998)

 

$

(17,686)

 

 

 

 

 

 

 

Net increase in cash

 

$

8,608

 

$

2,889

 

 

 

 

 

 

 

Cash at the beginning of the period

 

$

18,269

 

$

11,081

Cash at September 30

 

$

26,877

 

$

13,970

 

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

 

 

6


 

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 2016 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 September 30, 2017 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 2016 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 2016-09, Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting

 

ASU 2016-09 was issued to simplify the accounting for share-based payment awards. The guidance requires that, prospectively, all tax effects related to share-based payments be made through the income statement at the time of settlement as opposed to excess tax benefits being recognized in additional paid-in-capital under the previous guidance. The ASU also removes the requirement to delay recognition of a tax benefit until it reduces current taxes payable. This change is required to be applied on a modified retrospective basis, with a cumulative-effect adjustment to opening retained earnings. Additionally, all tax related cash flows resulting from share-based payments are to be reported as operating activities on the statement of cash flows, a change from the previous requirement to present tax benefits as an inflow from financing activities and an outflow from operating activities. Finally, entities will be allowed to withhold an amount up to the employees’ maximum individual tax rate (as opposed to the minimum statutory tax rate) in the relevant jurisdiction without resulting in liability classification of the award. The change in withholding requirements will be applied on a modified retrospective approach.

 

We adopted ASU 2016-09 on January 1, 2017. The guidance’s primary impact on our financial statements relates to the provision concerning the recognition of tax effects through the income statement in 2017 and forward. Excess tax benefits of $3.7 million were recognized in the first nine months of 2017 as a reduction to income tax expense rather than as an increase to additional paid-in-capital. The future impact to our income statement will vary depending upon the level of intrinsic value associated with option exercises in a particular period. Additionally, the changes in cash flow presentation resulted in $3.7 million more operating cash flows and $3.7 million less financing cash flows for the nine month period ended September 30, 2017 than would have been recognized under the previous guidance. We have historically estimated the number of forfeitures as part of our option valuation process and will continue to do so under the new guidance. As no aspect of the guidance that requires retrospective adoption impacted the Company, no prior period adjustments were made.

 

ASU 2017-04, Intangibles-Goodwill and Other (Topic 350):  Simplifying the Test for Goodwill Impairment

 

ASU 2017-04 was issued to simplify the subsequent measurement of goodwill. This update changes the impairment test by requiring an entity to compare the fair value of a reporting unit with its carrying amount as opposed to comparing the carrying amount of goodwill with its implied fair value. We adopted ASU 2017-04 during the second quarter of 2017 to coincide with the annual testing of our energy surety, small commercial and miscellaneous and contract surety reporting units. As most of RLI’s assets and liabilities associated with a reporting unit are measured at fair value, the impact of measuring the impairment at the reporting unit level rather than at the goodwill asset level was believed to be minimal.

 

7


 

C.  PROSPECTIVE ACCOUNTING STANDARDS

 

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 income;

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;

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 income 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.

This ASU is effective for interim and annual reporting periods beginning after December 15, 2017. Early adoption is only permitted for provision (e) above. Upon adoption, a cumulative-effect adjustment to the balance sheet will be made as of the beginning of the fiscal year of adoption. The primary impact this guidance will have on our financial statements relates to the provision requiring the recognition of changes in the fair value of equity securities through the income statement rather than through other comprehensive income. The impact to our income statement will vary depending upon the level of volatility in the performance of the securities held in our equity portfolio and the overall market.

 

ASU 2016-02, 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.

 

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 currently have approximately $30 million of undiscounted future lease liabilities that would have to be added to the balance sheet with a corresponding right-of-use asset if the guidance were applicable on September 30, 2017. We do not expect that there will be a materially different annual rental expense upon adoption.

 

8


 

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 to be presented at the net amount expected to be collected by means of an allowance for credit losses that runs through net income. 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 update. Additionally, as our fixed income portfolio is weighted towards higher rated bonds (82.8 percent rated A or better at September 30, 2017), we do not expect that credit loss on our available-for-sale debt securities will be material.

 

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. This ASU is effective for annual and interim reporting periods beginning after December 15, 2017. Early adoption is permitted. Upon adoption, the update will be applied using the retrospective transition method. We do not expect a material impact on our statement of cash flows.

 

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 $59.4 million and $64.4 million at September 30, 2017 and December 31, 2016, respectively, as detailed in the following table.

 

9


 

 

 

 

 

 

 

 

 

Goodwill and Intangible Assets

 

 

 

 

 

 

(in thousands)

 

 

September 30,

 

 

December 31,

Reporting Unit

 

 

2017

 

 

2016

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

 

 

5,208

Total goodwill

 

$

49,657

 

$

51,270

 

 

 

 

 

 

 

 

Intangibles

 

 

 

 

 

 

 

State insurance licenses

 

$

7,500

 

$

7,500

 

Definite-lived intangibles, net of accumulated amortization of $4,061 at 9/30/17 and $5,546 at 12/31/16

 

 

2,270

 

 

5,601

Total intangibles

 

$

9,770

 

$

13,101

 

 

 

 

 

 

 

 

Total goodwill and intangibles

 

$

59,427

 

$

64,371


*   The medical professional liability goodwill balance reflects a cumulative non-cash impairment charge of $8.8 million and $7.2 million as of September 30, 2017 and December 31, 2016, respectively.

 

All definite-lived intangible assets are amortized against future operating results based on their estimated useful lives. Amortization of intangible assets was $0.2 million for the third quarter of 2017 and $0.6 million for the nine-month period ended September 30, 2017, compared to $0.2 million for the third quarter of 2016 and $0.7 million for the nine-month period ended September 30, 2016. Additionally, the asset sale of an agency in the third quarter of 2017 resulted in a $1.0 million reduction to definite-lived intangibles.

 

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 the second quarter of 2017. Based upon these reviews, none of the assets were impaired. In addition, as of September 30, 2017, there were no triggering events that would suggest an updated review was necessary on the above mentioned goodwill and intangible assets.

 

As previously disclosed for our medical professional liability reporting unit, rate and volume declines coupled with adverse loss experience resulted in a triggering event during the second quarter of 2016. A fair value was determined by using a weighted average of a market approach and income approach (or discounted cash flow method) valuation. It was determined that the carrying cost of our medical professional liability goodwill exceeded the fair value, resulting in a $7.2 million non-cash impairment charge. Further adverse loss experience triggered the need to test the medical professional liability reporting unit during the second quarter of 2017, resulting in an additional $3.4 million non-cash impairment charge. A 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 $1.8 million non-cash impairment charge. Similar to in 2016, a 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 carrying value exceeded the fair value, resulting in a $1.6 million non-cash impairment charge. All impairment charges were recorded as net realized losses in the respective period’s consolidated statement of earnings. There have been no additional triggering events subsequent to the second quarter 2017 impairment.

 

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.

 

10


 

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 September 30,  2017

 

Ended September 30,  2016

 

 

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

   

$

1,734

    

44,058

    

$

0.04

    

$

22,263

    

43,843

    

$

0.51

Effect of Dilutive Securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock options

 

 

 -

 

457

 

 

 

 

 

 -

 

649

 

 

 

Diluted EPS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income available to common shareholders

 

$

1,734

 

44,515

 

$

0.04

 

$

22,263

 

44,492

 

$

0.50

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Nine-Month Period

 

For the Nine-Month Period

 

 

Ended September 30,  2017

 

Ended September 30,  2016

 

 

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

   

$

47,770

    

44,008

    

$

1.09

    

$

82,733

    

43,721

    

$

1.89

Effect of Dilutive Securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock options

 

 

 -

 

509

 

 

 

 

 

 -

 

695

 

 

 

Diluted EPS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income available to common shareholders

 

$

47,770

 

44,517

 

$

1.07

 

$

82,733

 

44,416

 

$

1.86

 

F.  COMPREHENSIVE EARNINGS

 

Our comprehensive earnings include net earnings plus unrealized gains and 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.

 

Unrealized gains, net of tax, for the first nine months of 2017 were $30.8 million, compared to $33.9 million during the same period last year. Unrealized gains in the first nine months of 2017 were attributable to tightening credit spreads which increased the fair value of securities held in the fixed income portfolio, as well as positive equity market returns. In 2016, unrealized gains were primarily the result of declining 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.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(in thousands)

 

For the Three-Month Periods

 

For the Nine-Month Periods

 

 

Ended September 30,

 

Ended September 30,

Unrealized Gains/Losses on Available-for-Sale Securities

    

2017

    

2016

    

2017

    

2016

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance

 

$

144,978

 

$

164,603

 

$

122,610

 

$

123,774

Other comprehensive earnings before reclassifications

 

 

9,141

 

 

(572)

 

 

33,066

 

 

54,159

Amounts reclassified from accumulated other comprehensive earnings

 

 

(697)

 

 

(6,359)

 

 

(2,254)

 

 

(20,261)

Net current-period other comprehensive earnings

 

$

8,444

 

$

(6,931)

 

$

30,812

 

$

33,898

Ending balance

 

$

153,422

 

$

157,672

 

$

153,422

 

$

157,672

 

11


 

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

 

For the Nine-Month

 

 

Component of Accumulated 

 

Periods Ended September 30, 

 

Periods Ended September 30, 

 

Affected line item in the

Other Comprehensive Earnings

    

2017

    

2016

    

2017

    

2016

    

Statement of Earnings

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized gains and losses on available-for-sale securities

 

$

1,073

 

$

9,878

 

$

5,558

 

$

31,266

 

Net realized gains

 

 

 

 -

 

 

(95)

 

 

(2,090)

 

 

(95)

 

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

 

 

$

1,073

 

$

9,783

 

$

3,468

 

$

31,171

 

Earnings before income taxes

 

 

 

(376)

 

 

(3,424)

 

 

(1,214)

 

 

(10,910)

 

Income tax expense

 

 

$

697

 

$

6,359

 

$

2,254

 

$

20,261

 

Net earnings

 

 

 

2.    INVESTMENTS

 

Our investments are primarily composed of fixed income debt securities and common stock equity securities. As disclosed in our 2016 Annual Report on Form 10-K, we present all of our investments 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.”

 

Available-for-Sale Securities

 

The amortized cost and fair value of available-for-sale securities at September 30, 2017 and December 31, 2016 were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Available-for-sale

 

 

 

 

 

 

 

 

 

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30,  2017

 

    

Cost or

    

Gross

    

Gross

    

    

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

Fair

Asset Class

    

Cost

    

Gains

    

Losses

    

Value

U.S. government

 

$

88,660

 

$

159

 

$

(374)

 

$

88,445

U.S. agency

 

 

13,482

 

 

350

 

 

(86)

 

 

13,746

Non-U.S. govt. & agency

 

 

9,497

 

 

185

 

 

(46)

 

 

9,636

Agency MBS

 

 

330,257

 

 

4,254

 

 

(2,953)

 

 

331,558

ABS/CMBS*

 

 

74,589

 

 

616

 

 

(216)

 

 

74,989

Corporate

 

 

532,893

 

 

14,496

 

 

(2,034)

 

 

545,355

Municipal

 

 

630,943

 

 

20,238

 

 

(1,352)

 

 

649,829

Total Fixed Income

 

$

1,680,321

 

$

40,298

 

$

(7,061)

 

$

1,713,558

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity

 

$

189,212

 

$

205,693

 

$

(1,692)

 

$

393,213


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

 

12


 

 

 

 

 

 

 

 

 

 

 

 

 

 

Available-for-sale

 

 

 

 

 

 

 

 

 

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31,  2016

 

    

Cost or

    

Gross

    

Gross

    

    

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

Fair

Asset Class

    

Cost

    

Gains

    

Losses

    

Value

U.S. government

 

$

77,054

 

$

88

 

$

(579)

 

$

76,563

U.S. agency

 

 

5,473

 

 

340

 

 

 -

 

 

5,813

Non-U.S. govt. & agency

 

 

9,517

 

 

 2

 

 

(368)

 

 

9,151

Agency MBS

 

 

283,002

 

 

4,635

 

 

(3,568)

 

 

284,069

ABS/CMBS*

 

 

93,791

 

 

676

 

 

(557)

 

 

93,910

Corporate

 

 

503,041

 

 

10,996

 

 

(5,670)

 

 

508,367

Municipal

 

 

624,349

 

 

9,575

 

 

(6,588)

 

 

627,336

Total Fixed Income

 

$

1,596,227

 

$

26,312

 

$

(17,330)

 

$

1,605,209

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity

 

$

187,573

 

$

182,912

 

$

(1,266)

 

$

369,219


*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 September 30, 2017:

 

 

 

 

 

 

 

 

 

 

September 30,  2017

Available-for-sale

 

Amortized

 

Fair

(in thousands)

    

Cost

    

Value

Due in one year or less

 

$

21,240

 

$

20,984

Due after one year through five years

 

 

339,233

 

 

346,408

Due after five years through 10 years

 

 

571,384

 

 

586,385

Due after 10 years

 

 

343,618

 

 

353,234

Mtge/ABS/CMBS*

 

 

404,846

 

 

406,547

Total available-for-sale

 

$

1,680,321

 

$

1,713,558


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

 

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 September 30, 2017 and December 31, 2016. 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 September 30, 2017 unrealized losses, as shown in the following tables, were 0.4 percent of total invested assets. Unrealized losses decreased through the first nine months of 2017, as interest rates declined slightly from the end of 2016, which increased the fair value of securities held in the fixed income portfolio.

 

13