Company Quick10K Filing
Quick10K
RLI
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$82.97 45 $3,700
10-Q 2019-03-31 Quarter: 2019-03-31
10-K 2018-12-31 Annual: 2018-12-31
10-Q 2018-09-30 Quarter: 2018-09-30
10-Q 2018-06-30 Quarter: 2018-06-30
10-Q 2018-03-31 Quarter: 2018-03-31
10-K 2017-12-31 Annual: 2017-12-31
10-Q 2017-09-30 Quarter: 2017-09-30
10-Q 2017-06-30 Quarter: 2017-06-30
10-Q 2017-03-31 Quarter: 2017-03-31
10-K 2016-12-31 Annual: 2016-12-31
10-Q 2016-09-30 Quarter: 2016-09-30
10-Q 2016-06-30 Quarter: 2016-06-30
10-Q 2016-03-31 Quarter: 2016-03-31
10-K 2015-12-31 Annual: 2015-12-31
10-Q 2015-09-30 Quarter: 2015-09-30
10-Q 2015-06-30 Quarter: 2015-06-30
10-Q 2015-03-31 Quarter: 2015-03-31
10-K 2014-12-31 Annual: 2014-12-31
10-Q 2014-09-30 Quarter: 2014-09-30
10-Q 2014-06-30 Quarter: 2014-06-30
10-Q 2014-03-31 Quarter: 2014-03-31
10-K 2013-12-31 Annual: 2013-12-31
8-K 2019-07-18 Regulation FD, Exhibits
8-K 2019-07-17 Earnings, Exhibits
8-K 2019-06-10 Officers
8-K 2019-05-02 Shareholder Vote, Other Events, Exhibits
8-K 2019-05-02 Officers, Exhibits
8-K 2019-04-18 Regulation FD, Exhibits
8-K 2019-04-17 Earnings, Exhibits
8-K 2019-02-07 Other Events, Exhibits
8-K 2019-01-24 Regulation FD, Exhibits
8-K 2019-01-24 Regulation FD, Exhibits
8-K 2019-01-23 Earnings, Exhibits
8-K 2019-01-23 Earnings, Exhibits
8-K 2018-11-08 Code of Ethics
8-K 2018-10-18 Regulation FD, Exhibits
8-K 2018-10-17 Earnings, Exhibits
8-K 2018-08-15 Other Events, Exhibits
8-K 2018-08-15 Other Events, Exhibits
8-K 2018-08-14 Officers, Exhibits
8-K 2018-07-19 Regulation FD, Exhibits
8-K 2018-07-18 Earnings, Exhibits
8-K 2018-05-24 Enter Agreement, Off-BS Arrangement, Exhibits
8-K 2018-05-03 Shareholder Vote, Other Events, Exhibits
8-K 2018-04-19 Regulation FD, Exhibits
8-K 2018-04-18 Earnings, Exhibits
8-K 2018-02-08 Other Events, Exhibits
8-K 2018-01-25 Regulation FD, Exhibits
8-K 2018-01-24 Earnings, Exhibits
AMH American Homes 4 Rent 7,070
VSAT Viasat 5,390
FSCT Forescout Technologies 1,950
AVYA Avaya Holdings 1,700
AIMT Aimmune Therapeutics 1,280
KBAL Kimball 598
MJCO Majesco 345
RVIV Reviv3 Procare 0
MSCD Morgan Stanley Smith Barney Charter Aspect 0
ELRE Yinfu Gold 0
RLI 2019-03-31
Part I - Financial Information
Item 1. Financial Statements
Item 2. Management’S Discussion and Analysis of Financial Condition and Results of Operations.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part II - Other Information
Item 3. Defaults Upon Senior Securities - Not Applicable. Item 4. Mine Safety Disclosures - Not Applicable. Item 5. Other Information - Not Applicable.
EX-31.1 rli-20190331ex311e22df8.htm
EX-31.2 rli-20190331ex3120be020.htm
EX-32.1 rli-20190331ex321dee896.htm
EX-32.2 rli-20190331ex322b5efc3.htm

RLI Earnings 2019-03-31

RLI 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 rli-20190331x10q.htm 10-Q rli-Current Folio_10Q

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, 2019

 

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)

 

 

 

 

Delaware

 

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 every Interactive Data File required to be submitted 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 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 ☐

 

 

 

 

 

Emerging growth company ☐

 

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

 

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

 

APPLICABLE ONLY TO CORPORATE ISSUERS:

 

As of April 12, 2019, the number of shares outstanding of the registrant’s Common Stock was 44,554,256.

 

 

 

 

 

 


 

 

 

Table of Contents

 

 

 

 

 

 

 

 

 

 

Page

 

 

 

 

Part I - Financial Information 

3

 

 

 

 

 

Item 1. 

Financial Statements

3

 

 

 

 

 

 

Condensed Consolidated Statements of Earnings and Comprehensive Earnings For the Three-Month Periods Ended March  31, 2019 and 2018 (unaudited)

3

 

 

 

 

 

Condensed Consolidated Balance Sheets as of March  31, 2019 (unaudited) and December 31, 2018

4

 

 

 

 

 

 

Condensed Consolidated Statements of Shareholders’ Equity For the Three-Month Periods Ended March 31, 2019 and 2018 (unaudited)

5

 

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows For the Three-Month Periods Ended March  31, 2019 and 2018 (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

22

 

 

 

 

 

Item 3. 

Quantitative and qualitative disclosures about market risk

32

 

 

 

 

 

Item 4. 

Controls and procedures

32

 

 

 

 

Part II - Other Information 

33

 

 

 

 

 

Item 1.

Legal proceedings

33

 

 

 

 

 

Item 1a.

Risk factors

33

 

 

 

 

 

Item 2.

Unregistered sales of equity securities and use of proceeds

33

 

 

 

 

 

Item 3.

Defaults upon senior securities

33

 

 

 

 

 

Item 4.

Mine safety disclosures

33

 

 

 

 

 

Item 5.

Other information

33

 

 

 

 

 

Item 6.

Exhibits

33

 

 

 

 

Signatures 

 

34

 

 

 

 

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)

 

2019

 

2018

 

 

 

 

 

 

 

Net premiums earned

   

$

204,689

    

$

190,027

Net investment income

 

 

16,565

 

 

14,232

Net realized gains

 

 

9,068

 

 

8,460

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

 

 

 -

 

 

(56)

Net unrealized gains (losses) on equity securities

 

 

33,498

 

 

(26,772)

Consolidated revenue

 

$

263,820

 

$

185,891

Losses and settlement expenses

 

 

94,297

 

 

92,421

Policy acquisition costs

 

 

71,292

 

 

66,734

Insurance operating expenses

 

 

16,667

 

 

13,385

Interest expense on debt

 

 

1,861

 

 

1,856

General corporate expenses

 

 

3,276

 

 

2,283

Total expenses

 

$

187,393

 

$

176,679

Equity in earnings of unconsolidated investees

 

 

5,314

 

 

5,166

Earnings before income taxes

 

$

81,741

 

$

14,378

Income tax expense

 

 

16,268

 

 

2,162

Net earnings

 

$

65,473

 

$

12,216

 

 

 

 

 

 

 

Other comprehensive earnings (loss), net of tax

 

 

29,301

 

 

(26,398)

Comprehensive earnings (loss)

 

$

94,774

 

$

(14,182)

 

 

 

 

 

 

 

Earnings per share:

 

 

 

 

 

 

Basic:

 

 

 

 

 

 

Basic net earnings per share

 

$

1.47

 

$

0.28

Basic comprehensive earnings (loss) per share

 

$

2.13

 

$

(0.32)

 

 

 

 

 

 

 

Diluted:

 

 

 

 

 

 

Diluted net earnings per share

 

$

1.46

 

$

0.27

Diluted comprehensive earnings (loss) per share

 

$

2.11

 

$

(0.32)

 

 

 

 

 

 

 

Weighted average number of common shares outstanding:

 

 

 

 

 

 

Basic

 

 

44,536

 

 

44,221

Diluted

 

 

44,887

 

 

44,650

 

 

 

 

 

 

 

Cash dividends paid per common share

 

$

0.22

 

$

0.21

 

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)

    

2019

    

2018

 

 

 

 

 

 

 

ASSETS

   

 

 

   

 

 

Investments and cash:

 

 

 

 

 

 

Fixed income:

 

 

 

 

 

 

Available-for-sale, at fair value (amortized cost - $1,772,097 at 3/31/19 and $1,776,465 at 12/31/18)

 

$

1,793,343

 

$

1,760,515

Equity securities, at fair value (cost - $234,428 at 3/31/19 and $220,373 at 12/31/18)

 

 

388,281

 

 

340,483

Short-term investments, at cost which approximates fair value

 

 

44,087

 

 

11,550

Other invested assets

 

 

54,262

 

 

51,542

Cash

 

 

25,181

 

 

30,140

Total investments and cash

 

$

2,305,154

 

$

2,194,230

Accrued investment income

 

 

14,080

 

 

14,033

Premiums and reinsurance balances receivable, net of allowances for uncollectible amounts of $17,055 at 3/31/19 and $16,967 at 12/31/18

 

 

139,487

 

 

152,576

Ceded unearned premium

 

 

71,011

 

 

71,174

Reinsurance balances recoverable on unpaid losses and settlement expenses, net of allowances for uncollectible amounts of $9,808 at 3/31/19 and $9,793 at 12/31/18

 

 

364,374

 

 

364,999

Deferred policy acquisition costs

 

 

82,893

 

 

84,934

Property and equipment, at cost, net of accumulated depreciation of $56,322 at 3/31/19 and $54,275 at 12/31/18

 

 

54,121

 

 

54,692

Investment in unconsolidated investees

 

 

100,174

 

 

94,967

Goodwill and intangibles

 

 

54,432

 

 

54,534

Other assets

 

 

51,149

 

 

18,926

TOTAL ASSETS

 

$

3,236,875

 

$

3,105,065

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

Unpaid losses and settlement expenses

 

$

1,479,344

 

$

1,461,348

Unearned premiums

 

 

482,325

 

 

496,505

Reinsurance balances payable

 

 

14,286

 

 

22,591

Funds held

 

 

74,043

 

 

72,309

Income taxes-deferred

 

 

39,672

 

 

24,238

Bonds payable, long-term debt

 

 

149,162

 

 

149,115

Accrued expenses

 

 

28,896

 

 

45,124

Other liabilities

 

 

74,442

 

 

26,993

TOTAL LIABILITIES

 

$

2,342,170

 

$

2,298,223

 

 

 

 

 

 

 

Shareholders’ Equity

 

 

 

 

 

 

Common stock ($0.01 par value, 100,000,000 shares authorized)

 

 

 

 

 

 

(67,484,470 shares issued, 44,554,256 shares outstanding at 3/31/19)

 

 

 

 

 

 

(67,434,257 shares issued, 44,504,043 shares outstanding at 12/31/18)

 

$

675

 

$

674

Paid-in capital

 

 

308,551

 

 

305,660

Accumulated other comprehensive earnings

 

 

14,729

 

 

(14,572)

Retained earnings

 

 

963,749

 

 

908,079

Deferred compensation

 

 

7,315

 

 

8,354

Less: Treasury shares at cost

 

 

 

 

 

 

(22,930,214 shares at 3/31/19 and 12/31/18)

 

 

(400,314)

 

 

(401,353)

TOTAL SHAREHOLDERS’ EQUITY

 

$

894,705

 

$

806,842

TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY

 

$

3,236,875

 

$

3,105,065

 

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

 

4


 

RLI Corp. and Subsidiaries

Condensed Consolidated Statements of Shareholders’ Equity

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   

 

   

 

 

   

 

 

   

 

 

   

Accumulated

   

 

 

   

 

 

   

 

 

 

 

 

 

 

Total

 

 

 

 

 

 

 

Other

 

 

 

 

 

 

 

 

 

 

 

 

Common

 

Shareholders’

 

Common

 

Paid-in

 

Comprehensive

 

Retained

 

Deferred

 

Treasury Stock

 

(in thousands, except share and per share data)

 

Shares

 

Equity

 

Stock

 

Capital

 

Earnings (Loss)

 

Earnings

 

Compensation

 

at Cost

 

Balance, January 1, 2018

 

44,148,355

 

$

853,598

 

$

67,079

 

$

233,077

 

$

157,919

 

$

788,522

 

$

8,640

 

$

(401,639)

 

Cumulative-effect adjustment from ASU 2016-01 and 2018-02

 

 —

 

$

86

 

$

 —

 

$

 —

 

$

(138,494)

 

$

138,580

 

$

 —

 

$

 —

 

Net earnings

 

 —

 

 

12,216

 

 

 —

 

 

 —

 

 

 —

 

 

12,216

 

 

 —

 

 

 —

 

Other comprehensive earnings (loss), net of tax

 

 —

 

 

(26,398)

 

 

 —

 

 

 —

 

 

(26,398)

 

 

 —

 

 

 —

 

 

 —

 

Deferred compensation under Rabbi trust plans

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(584)

 

 

584

 

Share-based compensation

 

104,771

 

 

2,721

 

 

104

 

 

2,617

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Dividends and dividend equivalents ($0.21 per share)

 

 —

 

 

(9,290)

 

 

 —

 

 

 —

 

 

 —

 

 

(9,290)

 

 

 —

 

 

 —

 

Balance, March 31, 2018

 

44,253,126

 

$

832,933

 

$

67,183

 

$

235,694

 

$

(6,973)

 

$

930,028

 

$

8,056

 

$

(401,055)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   

 

   

 

 

   

 

 

   

 

 

   

Accumulated

   

 

 

   

 

 

   

 

 

 

 

 

 

 

Total

 

 

 

 

 

 

 

Other

 

 

 

 

 

 

 

 

 

 

 

 

Common

 

Shareholders’

 

Common

 

Paid-in

 

Comprehensive

 

Retained

 

Deferred

 

Treasury Stock

 

(in thousands, except share and per share data)

 

Shares

 

Equity

 

Stock

 

Capital

 

Earnings (Loss)

 

Earnings

 

Compensation

 

at Cost

 

Balance, January 1, 2019

 

44,504,043

 

$

806,842

 

$

674

 

$

305,660

 

$

(14,572)

 

$

908,079

 

$

8,354

 

$

(401,353)

 

Net earnings

 

 —

 

$

65,473

 

$

 —

 

$

 —

 

$

 —

 

$

65,473

 

$

 —

 

$

 —

 

Other comprehensive earnings (loss), net of tax

 

 —

 

 

29,301

 

 

 —

 

 

 —

 

 

29,301

 

 

 —

 

 

 —

 

 

 —

 

Deferred compensation under Rabbi trust plans

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(1,039)

 

 

1,039

 

Share-based compensation

 

50,213

 

 

2,892

 

 

 1

 

 

2,891

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

Dividends and dividend equivalents ($0.22 per share)

 

 —

 

 

(9,803)

 

 

 —

 

 

 —

 

 

 —

 

 

(9,803)

 

 

 —

 

 

 —

 

Balance, March 31, 2019

 

44,554,256

 

$

894,705

 

$

675

 

$

308,551

 

$

14,729

 

$

963,749

 

$

7,315

 

$

(400,314)

 

 

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 Three-Month Periods

 

 

Ended March 31,

(in thousands)

 

2019

 

2018

 

 

 

 

 

 

 

Net cash provided by operating activities

    

$

30,787

    

$

15,393

Cash Flows from Investing Activities

 

 

 

 

 

 

Investments purchased

 

$

(132,080)

 

$

(177,324)

Investments sold

 

 

112,538

 

 

123,869

Investments called or matured

 

 

24,745

 

 

41,337

Net change in short-term investments

 

 

(32,537)

 

 

9,980

Net property and equipment purchased

 

 

(1,510)

 

 

(2,065)

Other

 

 

 9

 

 

35

Net cash used in investing activities

 

$

(28,835)

 

$

(4,168)

 

 

 

 

 

 

 

Cash Flows from Financing Activities

 

 

 

 

 

 

Cash dividends paid

 

$

(9,797)

 

$

(9,290)

Stock plan share issuance

 

 

2,886

 

 

2,721

Net cash used in financing activities

 

$

(6,911)

 

$

(6,569)

 

 

 

 

 

 

 

Net increase in cash

 

$

(4,959)

 

$

4,656

 

 

 

 

 

 

 

Cash at the beginning of the period

 

$

30,140

 

$

24,271

Cash at March 31

 

$

25,181

 

$

28,927

 

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.  DESCRIPTION OF BUSINESS

 

RLI Corp. (the “Company”) is an insurance holding company that was organized in 1965. As reported in previous SEC filings, RLI Corp. changed its state of incorporation from the State of Illinois to the State of Delaware on May 4, 2018 (the “Reincorporation”). The Reincorporation was effected by merging RLI Corp., an Illinois corporation (“RLI Illinois”) into RLI Corp., a Delaware corporation (“RLI Delaware”). Each outstanding share of RLI Illinois common stock, which had a par value of $1.00 per share, was automatically converted into one outstanding share of RLI Delaware common stock, with a par value of $0.01 per share. In order to reflect the new par value of common stock on the balance sheet, a $66.4 million reclassification from common stock to paid-in-capital was made during the second quarter of 2018. For more information on the Reincorporation, see RLI Corp.’s Form 8-K filed on May 7, 2018.

 

B.  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 2018 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, 2019 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 2018 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.

 

C.  ADOPTED ACCOUNTING STANDARDS

 

ASU 2016-02, Leases (Topic 842)

 

ASU 2016-02 was issued to improve the financial reporting of leasing transactions. Under previous guidance for lessees, leases were only included on the balance sheet if certain criteria, classifying the agreement as a capital lease, were met. This update requires 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 are 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 is 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 is classified as a financing activity while the interest component is included in the operating section of the statement of cash flows.

 

We adopted ASU 2016-02, ASU 2018-10 Codification Improvements to Topic 842: Leases and ASU 2018-11 Leases (Topic 842): Targeted Improvements on January 1, 2019.  We applied the standards using the alternative transition method provided by ASU 2018-11 under which leases were recognized at the date of adoption and a cumulative-effective adjustment to the opening balance of retained earnings would have been recognized in the period of adoption. As the standard did not have an impact on our net earnings, no adjustment to the opening balance of retained earnings was required. As of March 31, 2019, $26.8 million of right-of-use assets and corresponding lease liabilities for operating leases were added to the other assets and other liabilities line items of the balance sheet, respectively, as a result of the adoption of this update. We implemented controls for the adoption of the standard and the ongoing monitoring of the right-of-use asset and lease liability, but they did not materially affect our internal control over financial reporting.

 

7


 

ASU 2017-08, Receivables-Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities

 

Under previous guidance, the amortization period for callable debt securities held at a premium was generally the contractual life of the instrument. However, if an entity had a large number of similar loans, it could consider estimates of future principal prepayments. For those who chose to not incorporate an estimate of future prepayments, ASU 2017-08 shortens the amortization period for premium on debt securities to the earliest call date, rather than the maturity date, to align the amortization method with how the securities are quoted, priced and traded. After the earliest call date, if the call option is not exercised, the entity shall reset the effective yield using the payment terms of the debt security. Any excess of the amortized cost basis over the amount payable will be amortized to the next call date or to maturity if there are no other call dates. The method of accounting for a discount does not change and will continue to be amortized over the life of the bond.

 

We adopted ASU 2017-08 on January 1, 2019 using a modified retrospective approach. As we had been incorporating estimates of future principal prepayments when calculating the effective yield for bonds carrying a premium under the old guidance, the adoption of this update did not have a material impact on our financial statements.

 

ASU 2018-07, Compensation-Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting

 

ASU 2018-07 was issued to simplify the accounting for share-based transactions by expanding the scope of Topic 718 from only being applicable to share-based payments to employees to also include share-based payment transactions for acquiring goods and services from nonemployees. As a result, nonemployee share-based transactions will be measured by estimating the fair value of the equity instruments at the grant date, taking into consideration the probability of satisfying performance conditions. We adopted ASU 2018-07 on January 1, 2019.  Our long term incentive plan limits the awards of share-based payments to employees and directors of the Company. As our share-based compensation expense to nonemployee directors was $0.1 million in the first three months of 2019, the standard did not have a material impact on our financial statements.

 

D.  PROSPECTIVE ACCOUNTING STANDARDS

 

ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments

 

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

 

This ASU is effective for annual and interim reporting periods beginning after December 15, 2019. Early adoption is permitted beginning after December 15, 2018. Upon adoption, the update will be applied using the modified-retrospective approach, by which a cumulative-effect adjustment will be made to retained earnings as of the beginning of the first reporting period in which the guidance is effective. This update will have the most impact on our available-for-sale fixed income portfolio and reinsurance balances recoverable. However, as our fixed income portfolio is weighted towards higher rated bonds (83.8 percent rated A or better at March 31, 2019) and we purchase reinsurance from financially strong reinsurers for which we already have an allowance for uncollectible reinsurance amounts, we do not expect that the effect of adoption will be material.

 

ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement

 

ASU 2018-13 modifies the disclosure requirements for assets and liabilities measured at fair value. The requirements to disclose the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, the policy for timing of transfers between levels and the valuation processes for Level 3 fair value measurements have all been removed. However, the changes in unrealized gains and losses included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period must be disclosed along with the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements (or other quantitative information if it is more

8


 

reasonable). Finally, for investments measured at net asset value, the requirements have been modified so that the timing of liquidation and the date when restrictions from redemption might lapse are only disclosed if the investee has communicated the timing to the entity or announced the timing publicly.

 

This ASU is effective for annual and interim reporting periods beginning after December 15, 2019. As the amendments are only disclosure related and we do not currently have any assets or liabilities that are measured based on Level 3 inputs, our financial statements will not be materially impacted by this update.

 

ASU 2018-15, Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract

 

ASU 2018-15 requires a customer in a cloud computing arrangement (i.e. hosting arrangement) that is a service contract to follow the internal-use software guidance to determine which implementation costs to capitalize as assets or expense as incurred. Relevant implementation costs in the development stage are capitalized, while costs incurred during the preliminary project and post-implementation stages are expensed as the activities are performed. Capitalized costs are expensed over the term of the hosting arrangement. This ASU is effective for annual and interim reporting periods beginning after December 15, 2019. Early adoption is permitted. This update can either be applied retrospectively or prospectively to all implementation costs incurred after the date of adoption. We are currently evaluating how the adoption of this ASU will affect our financial statements.

 

E.  INTANGIBLE ASSETS

 

Goodwill and intangible assets totaled $54.4 million and $54.5 million at March 31, 2019 and December 31, 2018, respectively, as detailed in the following table.

 

 

 

 

 

 

 

 

Goodwill and Intangible Assets

 

 

March 31,

 

 

December 31,

(in thousands)

 

 

2019

 

 

2018

Goodwill

 

 

 

 

 

 

Energy surety

 

$

25,706

 

$

25,706

Miscellaneous and contract surety

 

 

15,110

 

 

15,110

Small commercial

 

 

5,246

 

 

5,246

Total goodwill

 

$

46,062

 

$

46,062

 

 

 

 

 

 

 

Intangibles

 

 

 

 

 

 

State insurance licenses

 

$

7,500

 

$

7,500

Definite-lived intangibles, net of accumulated amortization of $3,164 at 3/31/19 and $3,062 at 12/31/18

 

 

870

 

 

972

Total intangibles

 

$

8,370

 

$

8,472

 

 

 

 

 

 

 

Total goodwill and intangibles

 

$

54,432

 

$

54,534

 

All definite-lived intangible assets are amortized against future operating results based on their estimated useful lives. Amortization of intangible assets was $0.1 million for the first quarter of 2019 and 2018.  

 

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 2018. Based upon these reviews, none of the assets were impaired. In addition, as of March 31, 2019, there were no triggering events that would suggest an updated review was necessary on the above mentioned goodwill and intangible assets.

 

As previously disclosed, adverse loss experience triggered the need to test the medical professional liability reporting unit during the first quarter of 2018, which resulted in a $4.4 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 $0.8 million non-cash impairment charge. 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

9


 

$3.6 million non-cash impairment charge. Subsequent to the first quarter 2018 impairment, the medical professional liability reporting unit had no remaining goodwill or intangible assets. All impairment charges were recorded as net realized losses in the consolidated statement of earnings.

 

F.  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, 2019

 

Ended March 31, 2018

 

 

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

   

$

65,473

    

44,536

    

$

1.47

    

$

12,216

    

44,221

    

$

0.28

Effect of Dilutive Securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock options

 

 

 -

 

351

 

 

 

 

 

 -

 

429

 

 

 

Diluted EPS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income available to common shareholders

 

$

65,473

 

44,887

 

$

1.46

 

$

12,216

 

44,650

 

$

0.27

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

G.  COMPREHENSIVE EARNINGS

 

Our comprehensive earnings include net earnings plus after-tax unrealized gains and losses on our fixed income portfolio. In reporting other comprehensive earnings on a net basis in the statement of earnings, we used the federal statutory tax rate of 21 percent.

 

Unrealized gains, net of tax, on the fixed income portfolio for the first three months of 2019 were $29.3 million, compared to $26.4 million of unrealized losses, net of tax, during the same period last year. Unrealized gains in the first three months of 2019 were attributable to declining interest rates, which increased the fair value of securities held in the fixed income portfolio. In contrast,  rising interest rates decreased the fair value of securities held in the fixed income portfolio in the first three months of 2018.

 

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

    

2019

    

2018

    

 

 

 

 

 

 

 

 

Beginning balance

 

$

(14,572)

 

$

157,919

 

Cumulative effect adjustment of ASU 2016-01

 

 

 -

 

 

(142,219)

 

Adjusted beginning balance

 

$

(14,572)

 

$

15,700

 

Other comprehensive earnings before reclassifications

 

 

29,795

 

 

(26,410)

 

Amounts reclassified from accumulated other comprehensive earnings

 

 

(494)

 

 

12

 

Net current-period other comprehensive earnings (loss)

 

$

29,301

 

$

(26,398)

 

Reclassification of stranded tax effect per ASU 2018-02

 

 

 -

 

 

3,725

 

Ending balance

 

$

14,729

 

$

(6,973)

 

 

In 2018, the adoption of accounting standards resulted in adjustments to accumulated other comprehensive earnings. ASU 2016-01 required equity investments to be measured at fair value with changes in fair value recognized in net earnings. A cumulative-effect adjustment was made as of the beginning of 2018, which moved $142.2 million of net unrealized gains and losses on equity securities from accumulated other comprehensive earnings to retained earnings. ASU 2018-02 addressed

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issues arising from the enactment of the Tax Cuts and Jobs Act of 2017. Accounting guidance required deferred tax items  to be revalued based on the new tax laws with the changes included in net earnings. Since other comprehensive earnings was not affected by the revaluation of the deferred tax items, the accumulated other comprehensive earnings balance was reflective of the historic tax rate instead of the newly enacted rate, which created a stranded tax effect. ASU 2018-02 allowed for the reclassification of our $3.7 million stranded tax effect out of accumulated other comprehensive earnings into retained earnings.

 

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

    

2019

    

2018

    

Statement of Earnings

 

 

 

 

 

 

 

 

 

Unrealized gains and losses on available-for-sale securities

 

$

625

 

$

41

 

Net realized gains (losses)

 

 

 

 -

 

 

(56)

 

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

 

 

$

625

 

$

(15)

 

Earnings before income taxes

 

 

 

(131)

 

 

 3

 

Income tax benefit (expense)

 

 

$

494

 

$

(12)

 

Net earnings (loss)

 

 

 

2.    INVESTMENTS

 

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

 

Fixed Income Securities - Available-for-Sale

 

The amortized cost and fair value of available-for-sale securities at March 31, 2019 and December 31, 2018 were as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Available-for-sale

 

 

 

 

 

 

 

 

 

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2019

 

    

Cost or

    

Gross

    

Gross

    

    

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

Fair

Asset Class

    

Cost

    

Gains

    

Losses

    

Value

U.S. government

 

$

192,148

 

$

2,964

 

$

(384)

 

$

194,728

U.S. agency

 

 

31,712

 

 

1,043

 

 

(17)

 

 

32,738

Non-U.S. govt. & agency

 

 

8,162

 

 

74

 

 

(293)

 

 

7,943

Agency MBS

 

 

396,248

 

 

3,211

 

 

(5,493)

 

 

393,966

ABS/CMBS*

 

 

146,164

 

 

983

 

 

(341)

 

 

146,806

Corporate

 

 

684,492

 

 

12,934

 

 

(3,910)

 

 

693,516

Municipal

 

 

313,171

 

 

10,664

 

 

(189)

 

 

323,646

Total Fixed Income

 

$

1,772,097

 

$

31,873

 

$

(10,627)

 

$

1,793,343


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

 

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Available-for-sale

 

 

 

 

 

 

 

 

 

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2018

 

    

Cost or

    

Gross

    

Gross

    

    

 

 

 

Amortized

 

Unrealized

 

Unrealized

 

Fair

Asset Class

    

Cost

    

Gains

    

Losses

    

Value

U.S. government

 

$

199,982

 

$

1,232

 

$

(985)

 

$

200,229

U.S. agency

 

 

31,716

 

 

403

 

 

(215)

 

 

31,904

Non-U.S. govt. & agency

 

 

8,170

 

 

 -

 

 

(531)

 

 

7,639

Agency MBS

 

 

402,992

 

 

1,709

 

 

(9,448)

 

 

395,253

ABS/CMBS*

 

 

137,224

 

 

375

 

 

(876)

 

 

136,723

Corporate

 

 

681,909

 

 

2,894

 

 

(16,124)

 

 

668,679

Municipal

 

 

314,472

 

 

6,926

 

 

(1,310)

 

 

320,088

Total Fixed Income

 

$

1,776,465

 

$

13,539

 

$

(29,489)

 

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