What changed in this filing

/stocks — the workspaceLOADING

Item 1. Financial Statements

2020-07-24 compared with 2020-04-28 · 196 added, 147 removed, 480 unchanged (42% of the section changed)

3 unchanged sentences

For the Three-Month Periods

Ended March 31,

For the Six-Month Periods

Ended June 30,

(in thousands, except per share data)

1 unchanged sentence

Net investment income

Net realized gains

Net realized gains (losses)

Net unrealized gains (losses) on equity securities

7 unchanged sentences

Equity in earnings of unconsolidated investees

Earnings (loss) before income taxes

Income tax expense (benefit)

Net earnings (loss)

Other comprehensive earnings (loss), net of tax

Comprehensive earnings (loss)

Earnings before income taxes

Income tax expense

Other comprehensive earnings, net of tax

Comprehensive earnings

Earnings per share:

Basic net earnings (loss) per share

Basic comprehensive earnings (loss) per share

Diluted net earnings (loss) per share

Diluted comprehensive earnings (loss) per share

Basic net earnings per share

Basic comprehensive earnings per share

Diluted net earnings per share

Diluted comprehensive earnings per share

Weighted average number of common shares outstanding:

29 unchanged sentences

Shareholders’ Equity

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

Common stock ($ 0.01 par value)

(Shares authorized - 200,000,000 at 6/30/20 and 100,000,000 at 12/31/19)

( 67,882,816 shares issued, 44,952,602 shares outstanding at 6/30/20)

23 unchanged sentences

Balance, March 31, 2019

Net earnings (loss)

Other comprehensive earnings (loss), net of tax

Deferred compensation

Share-based compensation

Dividends and dividend equivalents ($ 0.23 per share)

Balance, June 30, 2019

Shareholders’

11 unchanged sentences

Balance, March 31, 2020

Net earnings (loss)

Other comprehensive earnings (loss), net of tax

Deferred compensation

Share-based compensation

Dividends and dividend equivalents ($ 0.24 per share)

Balance, June 30, 2020

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

1 unchanged sentence

Condensed Consolidated Statements of Cash Flows

For the Three-Month Periods

Ended March 31,

For the Six-Month Periods

Ended June 30,

(in thousands)

Net cash provided by (used in) operating activities

Net cash provided by operating activities

Cash Flows from Investing Activities

8 unchanged sentences

Net proceeds from sale (purchase) of short-term investments

Net cash provided by (used in) investing activities

Net cash used in investing activities

Cash Flows from Financing Activities

2 unchanged sentences

Net cash used in financing activities

Net decrease in cash

Net increase (decrease) in cash

Cash at the beginning of the period

Cash at March 31

Cash at June 30

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

5 unchanged sentences

As such, these unaudited condensed consolidated interim financial statements should be read in conjunction with our 2019 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, 2020 and the results of operations of RLI Corp.

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 June 30, 2020 and the results of operations of RLI Corp.

and subsidiaries for all periods presented have been made.

13 unchanged sentences

available-for-sale fixed income securities, premiums receivable and reinsurance balances recoverable.

The impact of this standard was and is expected to continue to be immaterial, as our fixed income portfolio is weighted towards higher rated bonds ( 85 percent rated A or better at March 31, 2020 and December 31, 2019), we purchase reinsurance from financially strong reinsurers, we have a long history of collecting premium receivables through various economic cycles and we had previously maintained an allowance for uncollectible premium and reinsurance balances.

The impact of this standard was and is expected to continue to be immaterial, as our fixed income portfolio is weighted towards higher rated bonds ( 84 percent rated A or better at June 30, 2020 and 85 percent at December 31, 2019), we purchase reinsurance from financially strong reinsurers, we have a long history of collecting premium receivables through various economic cycles and we had previously maintained an allowance for uncollectible premium and reinsurance balances.

In total, the cumulative-effect adjustment made to the balance sheet as of the beginning of the year resulted in a $ 1.1 million increase to retained earnings and an increase to accumulated other comprehensive earnings of less than $ 0.1 million.

6 unchanged sentences

Additionally, we perform an in depth reinsurer financial condition analysis prior to the renewal of our reinsurance placements.

We subject our reinsurance recoverables to detailed recoverable tests, including a segment-based analysis using the average default rating percentage by S&P rating.

Our policy is to charge to earnings, in the form of a credit allowance, an estimate of unrecoverable amounts from reinsurers.

Once regulatory action (such as receivership, finding of insolvency, order of conservation or order of liquidation) is taken against a reinsurer, the paid and unpaid balances recoverable from the reinsurer are specifically identified and charged to earnings in the form of an allowance for uncollectible amounts.

We subject our remaining reinsurance balances receivable to detailed recoverability tests, including a segment-based analysis using the average default rating percentage by S&P rating, and

record an additional allowance for unrecoverable amounts from reinsurers.

This credit allowance is reviewed on an ongoing basis to ensure that the amount makes a reasonable provision for reinsurance balances that we may be unable to recover.

Once regulatory action (such

as receivership, finding of insolvency, order of conservation or order of liquidation) is taken against a reinsurer, the paid and unpaid recoverable for the reinsurer are specifically identified and written off through the use of our allowance for estimated unrecoverable amounts from reinsurers.

When we write-off such a balance, it is done in full.

The allowances for uncollectible amounts on paid and unpaid reinsurance recoverables were $ 15.7 million and $ 8.5 million, respectively, at March 31, 2020.

The allowances for uncollectible amounts on paid and unpaid reinsurance recoverables were $ 15.9 million and $ 8.0 million, respectively, at June 30, 2020.

At December 31, 2019, the amounts were $ 15.7 million and $ 9.4 million, respectively.

Adoption of ASU 2016-03 resulted in a $ 1.3 million decrease to the allowance for uncollectible amounts on reinsurance recoverables in 2020, while other changes in the allowances were due to changes in the amount of reinsurance balances outstanding, the composition of reinsurers from whom the balances were recoverable and their associated S&P default ratings.

No write-offs or recoveries were applied to the allowances in the first quarter of 2020.

No write-offs or recoveries were applied to the allowances in the first six months of 2020.

INTANGIBLE ASSETS

Goodwill and intangible assets totaled $ 54.0 million and $ 54.1 million at March 31, 2020 and December 31, 2019, respectively, as detailed in the following table:

Goodwill and intangible assets totaled $ 53.9 million and $ 54.1 million at June 30, 2020 and December 31, 2019, respectively, as detailed in the following table:

Goodwill and Intangible Assets

9 unchanged sentences

All definite-lived intangible assets are amortized based on their estimated useful lives.

Amortization of intangible assets was $ 0.1 million for the first quarter of 2020 and 2019.

Annual impairment assessment was performed on our energy surety goodwill, miscellaneous and contract surety goodwill , small commercial goodwill and state insurance license indefinite-lived intangible asset during 2019.

Amortization of intangible assets was $ 0.1 million for the second quarter of 2020 and $ 0.2 million for the six-month period ended June 30, 2020, the same as for the comparable periods in 2019.

Annual impairment assessments were 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 2020.

Based upon these reviews, none of the assets were impaired.

In addition, there were no triggering events as of March 31, 2020 that would suggest our goodwill and intangible assets should be tested for impairment.

In addition, there were no triggering events as of June 30, 2020 that would suggest an updated impairment test would be needed for our goodwill and intangible assets.

EARNINGS PER SHARE

6 unchanged sentences

For the Three-Month Period

Ended March 31, 2020

Ended March 31, 2019

Ended June 30, 2020

Ended June 30, 2019

(in thousands, except per share data)

1 unchanged sentence

(Denominator)

Earnings (loss) available to common shareholders

Earnings available to common shareholders

Effect of Dilutive Securities

Stock options

Earnings (loss) available to common shareholders

Stock options and restricted stock units

Earnings available to common shareholders

Anti-dilutive options excluded from diluted EPS

For the Six-Month Period

Ended June 30, 2020

Ended June 30, 2019

(in thousands, except per share data)

(Denominator)

Earnings available to common shareholders

Effect of Dilutive Securities

Stock options and restricted stock units

Earnings available to common shareholders

Anti-dilutive options excluded from diluted EPS

COMPREHENSIVE EARNINGS

1 unchanged sentence

In reporting other comprehensive earnings on a net basis in the statement of earnings, we used the federal statutory tax rate of 21 percent.

Other comprehensive earnings (loss), as shown in the consolidated statements of earnings and comprehensive earnings, is net of tax expense (benefit) of $( 3.5 ) million and $ 7.8 million for the first quarter of 2020 and 2019, respectively.

Unrealized gains (losses), net of tax, on the fixed income portfolio were $( 13.0 ) million for the first three months of 2020, compared to $ 29.3 million during the same period last year.

Unrealized losses in the first three months of 2020 were attributable to widening credit spreads, which more than offset declines in interest rates and decreased the fair value of securities held in the fixed income portfolio.

In contrast, declining interest rates increased the fair value of securities held in the fixed income portfolio in the first three months of 2019.

The following table illustrates the changes in the balance of each component of accumulated other comprehensive earnings (loss) for each period presented in the unaudited condensed consolidated interim financial statements:

Other comprehensive earnings, as shown in the consolidated statements of earnings and comprehensive earnings, is net of tax expense of $ 14.2 million and $ 7.4 million for the second quarter of 2020 and 2019, respectively.

For the six-month period ended June 30, 2020 and 2019, other comprehensive earnings is net of tax expense of $ 10.8 million and $ 15.2 million, respectively.

Unrealized gains, net of tax, on the fixed income portfolio were $ 40.5 million for the first six months of 2020, compared to $ 57.2 million during the same period last year.

The unrealized gains were attributable to declining interest rates in both periods, which increased the fair value of securities held in the fixed income portfolio.

For the first half of 2020, widening credit spreads partially offset the impact of the 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

Ended March 31,

For the Six-Month Periods

Ended June 30,

Unrealized Gains/Losses on Available-for-Sale Securities

8 unchanged sentences

Credit losses on or the sale of an available-for-sale security results in amounts being reclassified from accumulated other comprehensive earnings to current period net earnings.

During the first quarter of 2020, $ 0.8 million of credit loss expense was recognized on available-for sale securities, increasing the allowance for credit losses on fixed income securities to $ 0.9 million.

No write-offs or recoveries were applied to the allowances in the first quarter of 2020.

We recognized $ 0.1 million of credit loss expense on available-for-sale securities in the second quarter of 2020 and $ 1.0 million in the first six months of 2020, increasing the allowance for credit losses on fixed income securities to $ 1.0 million.

No write-offs or recoveries were applied to the allowances in the first half of 2020.

The effects of reclassifications out of accumulated other comprehensive earnings by the respective line items of net earnings are presented in the following table:

3 unchanged sentences

For the Three-Month

For the Six-Month

Component of Accumulated

Periods Ended March 31,

Periods Ended June 30,

Affected line item in the

2 unchanged sentences

Unrealized gains and losses on available-for-sale securities

Net realized gains

Net realized gains (losses)

Credit losses presented within net realized gains

Earnings (loss) before income taxes

Income tax benefit (expense)

Net earnings (loss)

Earnings before income taxes

Income tax expense

FAIR VALUE MEASUREMENTS

21 unchanged sentences

This information is 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.

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.

4 unchanged sentences

The pricing vendor evaluation methodology for these securities includes a combination of observable and unobservable inputs.

Observable inputs include public corporate spread matrices classified by sector, rating and

average life, as well as investment and non-investment grade matrices created from fixed income indices.

Observable inputs include public corporate spread matrices classified by sector, rating and average life, as well as investment and non-investment grade matrices created from fixed income indices.

Unobservable inputs include a liquidity spread premium calculated based on public corporate spread and private corporate spread matrices.

9 unchanged sentences

Common Stock:

As of March 31, 2020, all of our common stock holdings are traded on an exchange.

As of June 30, 2020, all of our common stock holdings are traded on an exchange.

Exchange traded equities have readily observable price levels and are classified as Level 1 (fair value based on quoted market prices).

4 unchanged sentences

Adverse changes in the economy could lower demand for our insurance products or negatively impact our investment results, both of which could have an adverse effect on the revenue and profitability of our operations.

The global COVID-19 pandemic has resulted in and is expected to continue to result in significant disruptions in economic activity and financial markets.

The COVID-19 pandemic has resulted in and is expected to continue to result in significant disruptions in economic activity and financial markets.

The cumulative effects of COVID-19 on the Company, and the effect of any other public health outbreak, cannot be predicted at this time, but could reduce demand for our insurance policies, result in increased level of losses, settlement expenses or other operating costs, reduce the market value of invested assets held by the Company or negatively impact the fair value of our goodwill.

8 unchanged sentences

Realized gains and losses on disposition of investments are based on specific identification of the investments sold on the settlement date.

The following is a summary of the disposition of fixed income and equity securities for the three-month periods ended March 31, 2020 and 2019:

The following is a summary of the disposition of fixed income and equity securities for the six-month periods ended June 30, 2020 and 2019:

Gross Realized

8 unchanged sentences

FAIR VALUE MEASUREMENTS

Assets measured at fair value on a recurring basis as of March 31, 2020 and December 31, 2019 are summarized below:

As of March 31, 2020

Assets measured at fair value on a recurring basis as of June 30, 2020 and December 31, 2019 are summarized below:

As of June 30, 2020

Fair Value Measurements Using

19 unchanged sentences

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

As of March 31, 2020, we had $ 4.8 million of Regulation D private placement fixed income securities whose fair value was measured using significant unobservable inputs (Level 3).

As of June 30, 2020, we had $ 7.1 million of Regulation D private placement fixed income securities whose fair value was measured using significant unobservable inputs (Level 3).

The following table summarizes changes in the balance of these Level 3 securities.

2 unchanged sentences

Net realized and unrealized gains (losses)

Included in net earnings (loss) as a part of:

Included in net earnings as a part of:

Net investment income

Net realized gains

Included in other comprehensive earnings (loss)

Net realized gains (losses)

Included in other comprehensive earnings

Total net realized and unrealized gains (losses)

Balance as of March 31, 2020

Balance as of June 30, 2020

Change in unrealized gains (losses) during the period for Level 3 assets held at period-end -

2 unchanged sentences

included in other comprehensive earnings (loss)

The amortized cost and fair value of available-for-sale fixed income securities by contractual maturity as of March 31, 2020 were as follows:

March 31, 2020

The amortized cost and fair value of available-for-sale fixed income securities by contractual maturity as of June 30, 2020 were as follows:

June 30, 2020

Available-for-sale

7 unchanged sentences

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

The amortized cost and fair value of available-for-sale securities at March 31, 2020 and December 31, 2019 are presented in the tables below.

Amortized cost does not include the $ 13.9 million and $ 13.5 million of accrued interest receivable as of March 31, 2020 and December 31, 2019, respectively.

The amortized cost and fair value of available-for-sale securities at June 30, 2020 and December 31, 2019 are presented in the tables below.

Amortized cost does not include the $ 14.1 million and $ 13.5 million of accrued interest receivable as of June 30, 2020 and December 31, 2019, respectively.

Available-for-sale

March 31, 2020

June 30, 2020

(in thousands)

19 unchanged sentences

The allowance for any security is limited to the amount that the securities fair value is below amortized cost.

As of March 31, 2020, the discounted cash flow analysis resulted in an allowance for credit losses on 39 securities totaling $ 0.9 million.

As of June 30, 2020, the discounted cash flow analysis resulted in an allowance for credit losses on 36 securities totaling $ 1.0 million.

All fixed income securities in the investment portfolio continue to pay the expected coupon payments under the contractual terms of the securities.

4 unchanged sentences

Any credit-related impairment on fixed income securities we did not plan to sell and for which we were not more likely than not to be required to sell were recognized in net earnings, with the non-credit related impairment recognized in comprehensive earnings.

We did not recognize any other-than-temporary impairment losses in earnings on the fixed income portfolio in the first three months of 2019.

As of March 31, 2020, in addition to the securities included in the allowance for credit losses, the fixed income portfolio contained 381 securities with an unrealized loss position for which an allowance for credit losses had not been recorded.

We did not recognize any other-than-temporary impairment losses in earnings on the fixed income portfolio in the first six months of 2019.

As of June 30, 2020, in addition to the securities included in the allowance for credit losses, the fixed income portfolio contained 249 securities with an unrealized loss position for which an allowance for credit losses had not been recorded.

The $ 7.7 million in associated unrealized losses represents 0.4 percent of the fixed income portfolio’s cost basis and 0.3 percent of total invested assets .

Unrealized losses increased through the first three months of 2020, as increased credit spreads more than offset

declines in interest rates during the period.

Isolated to these securities, u nrealized losses increased through the first six months of 2020, as increased credit

spreads more than offset declines in interest rates during the period, primarily in the corporate portfolio.

Of the total 285 securities, 32 have been in an unrealized loss position for 12 consecutive months or longer.

The following table illustrates the total value of fixed income securities that were in an unrealized loss position as of March 31, 2020 , after factoring in the allowance for credit losses, and December 31, 2019.

March 31, 2020

The following table illustrates the total value of fixed income securities that were in an unrealized loss position as of June 30, 2020 , after factoring in the allowance for credit losses, and December 31, 2019.

June 30, 2020

December 31, 2019

18 unchanged sentences

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

The following table shows the composition of the fixed income securities in unrealized loss positions, after factoring in the allowance for credit losses, at March 31, 2020 by the National Association of Insurance Commissioners (NAIC) rating and the generally equivalent Standard & Poor’s (S&P) and Moody’s ratings.

The following table shows the composition of the fixed income securities in unrealized loss positions, after factoring in the allowance for credit losses, at June 30, 2020 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.

1 unchanged sentence

Unrealized Gains and Losses on Equity Securities

Unrealized losses recognized on equity securities still held as of March 31, 2020 were $ 115.2 million during the first quarter of 2020.

Comparatively, unrealized gains recognized on equity securities still held as of March 31, 2019 were $ 41.9 million during the first quarter of 2019.

Unrealized gains recognized on equity securities still held as of June 30, 2020 were $ 72.4 million during the second quarter, while unrealized losses were $ 42.9 million during the first half of 2020.

Comparatively, unrealized gains recognized on equity securities still held as of June 30, 2019 were $ 12.9 million during the second quarter and $ 54.8 million during the first half of 2019.

Other Invested Assets

We had $ 53.6 million of other invested assets at March 31, 2020, compared to $ 70.4 million at the end of 2019.

We had $ 63.4 million of other invested assets at June 30, 2020, compared to $ 70.4 million at the end of 2019.

Other invested assets include investments in low income housing tax credit partnerships (LIHTC), membership in the Federal Home Loan Bank of Chicago (FHLBC), investments in private funds and investments in restricted stock.

3 unchanged sentences

Restricted stock is carried at quoted market prices, as the restrictions expire within one year.

Our LIHTC interests had a balance of $ 22.4 million at March 31, 2020, compared to $ 23.3 million at December 31, 2019 and recognized a total tax benefit of $ 0.9 million during the first quarter of 2020, compared to $ 0.6 million the prior year.

Our unfunded commitment for our LIHTC investments totaled $ 8.0 million at March 31, 2020 and will be paid out in installments through 2035.

As of March 31, 2020, $ 15.1 million of investments were pledged as collateral with the FHLBC to ensure timely access to the secured lending facility that ownership of FHLBC stock provides.

As of and during the three-month period ended March 31, 2020, there were no outstanding borrowings with the FHLBC.

Our investments in private funds totaled $ 17.5 million at March 31, 2020, compared to $ 46.0 million at December 31, 2019, and we had $ 13.5 million of associated unfunded commitments at March 31, 2020.

Our LIHTC interests had a balance of $ 21.6 million at June 30, 2020, compared to $ 23.3 million at December 31, 2019 and recognized a total tax benefit of $ 0.9 million during the second quarter of 2020, compared to $ 0.6 million the prior year.

For the six-month periods ended June 30, 2020 and 2019, our LIHTC interest recognized a total benefit of $ 1.8 million and $ 1.2 million, respectively.

Our unfunded commitment for our LIHTC investments totaled $ 7.4 million at June 30, 2020 and will be paid out in installments through 2035.

As of June 30, 2020, $ 14.6 million of investments were pledged as collateral with the FHLBC to ensure timely access to the secured lending facility that ownership of FHLBC stock provides.

As of and during the six-month period ended June 30, 2020, there were no outstanding borrowings with the FHLBC.

Our investments in private funds totaled $ 24.4 million at June 30, 2020, compared to $ 46.0 million at December 31, 2019, and we had $ 10.4 million of associated unfunded commitments at June 30, 2020.

Our interest in private funds is generally restricted from being transferred or otherwise redeemed without prior consent by the respective entities.

During the first quarter of 2020, one of the private funds transitioned into a publically traded common stock, but short term restrictions were applied on our ability to sell without prior approval.

Our investment in restricted stock was $ 12.1 million as of March 31, 2020.

During the first quarter of 2020, one of the private funds transitioned into a publicly traded common stock.

Short term restrictions, limiting our ability to sell without prior approval, were established and remain in place.

Our investment in restricted stock was $ 15.8 million as of June 30, 2020.

For our remaining investments in private funds, the timed dissolution of the partnerships would trigger redemption.

Cash consists of uninvested balances in bank accounts.

We had a cash balance of $ 42.7 million at March 31, 2020, compared to $ 46.2 million at the end of 2019.

We had a cash balance of $ 84.8 million at June 30, 2020, compared to $ 46.2 million at the end of 2019.

HISTORICAL LOSS AND LAE DEVELOPMENT

The following table is a reconciliation of our unpaid losses and settlement expenses (LAE) for the first three months of 2020 and 2019:

For the Three-Month Periods

Ended March 31,

The following table is a reconciliation of our unpaid losses and settlement expenses (LAE) for the first six months of 2020 and 2019:

For the Six-Month Periods

Ended June 30,

(in thousands)

8 unchanged sentences

Prior accident years

Net unpaid losses and LAE at March 31

Unpaid losses and LAE at March 31

Net unpaid losses and LAE at June 30

Unpaid losses and LAE at June 30

We adopted ASU 2016-13, Financial Instruments – Credit Losses, on January 1, 2020, which required financial assets, including reinsurance balances recoverable, to be presented at the net amount expected to be collected .

3 unchanged sentences

for more information on the adoption of the ASU.

For the first three months of 2020, incurred losses and LAE included $ 15.2 million of favorable development on prior years’ loss reserves.

The majority of products experienced modest amounts of favorable development on prior accident years, with notable contributions from transportation, marine, small commercial and surety.

For the first six months of 2020, incurred losses and LAE included $ 40.8 million of favorable development on prior years’ loss reserves.

The majority of products experienced modest amounts of favorable development on prior accident years, with notable contributions from transportation, executive products, general liability, marine, small commercial and surety.

No products experienced significant adverse development.

For the first three months of 2019, incurred losses and LAE included $ 19.6 million of favorable development on prior years’ loss reserves.

General liability, commercial excess and personal umbrella, professional services and surety were drivers of the favorable development.

For the first six months of 2019, incurred losses and LAE included $ 40.8 million of favorable development on prior years’ loss reserves.

Transportation, general liability, commercial excess and personal umbrella, professional services and surety were drivers of the favorable development.

Executive products experienced adverse development.

The spread of COVID-19 and related economic shutdown has increased the uncertainty that is always present in our estimate of the ultimate cost of loss and settlement expense.

Actuarial models base future emergence on historic experience, with adjustments for current trends, and the appropriateness of these assumptions involved more uncertainty as of March 31, 2020.

We expect there will be impacts to the timing of loss emergence and ultimate loss ratios for certain coverages we underwrite.

The industry is experiencing new issues, including the temporary suspension of civil court cases in most states, the extension of certain statutes of limitations and a significant reduction in economic activity and insured exposure in some classes.

Our booked reserves include consideration of these factors, but legislative, regulatory or judicial actions could result in loss reserve deficiencies and reduce earnings in future periods.

Our effective tax rate for the three-month period ended March 31, 2020 was 22.8 percent, compared to 19.9 percent for the same period in 2019.

Actuarial models base future emergence on historic experience, with adjustments for current trends, and the appropriateness of these assumptions involved more uncertainty as of June 30, 2020.

We expect there will be impacts to the timing of loss emergence and ultimate loss ratios for certain coverages we underwrite as a result of the spread of COVID-19 and the related economic shutdown.

The industry is experiencing new issues, including the postponement of civil court cases, the extension of various statutes of limitations, changes in settlement trends and a significant reduction in economic activity and insured exposure in some classes.

Our booked reserves include consideration of these factors, but the duration and degree to which these issues persist, along with potential legislative, regulatory or judicial actions, could result in loss reserve deficiencies and reduce earnings in future periods.

Our effective tax rate for the three and six-month periods ended June 30, 2020 was 19.8 percent and 13.0 percent, respectively, compared to 17.1 percent and 18.9 percent, respectively, for the same periods in 2019.

Effective rates are dependent upon components of pretax earnings and the related tax effects.

The effective rate was higher for the three-month period in 2020 as tax-favored adjustments increased the tax benefit realized on pretax losses.

Income tax expense (benefit) attributable to income from operations for the three-month periods ended March 31, 2020 and 2019 differed from the amounts computed by applying the U.S.

The effective rate was higher for the three-month period in 2020 due to higher levels of pre-tax earnings and lower levels of tax-favored adjustments compared to 2019.

For the six-month period, lower levels of pre-tax earnings caused tax-favored adjustments to be larger on a percentage basis in 2020 compared to the prior year.

Income tax expense (benefit) attributable to income from operations for the three and six-month periods ended June 30, 2020 and 2019 differed from the amounts computed by applying the U.S.

federal tax rate of 21 percent to pretax income by the items detailed in the below table.

In interim periods, income taxes are adjusted to reflect the effective tax rate we anticipate for the year, with adjustments flowing through the other items, net line.

For the Three-Month Periods Ended March 31,

For the Three-Month Periods Ended June 30,

For the Six-Month Periods Ended June 30,

(in thousands)

21 unchanged sentences

The maximum number of shares of common stock available for distribution under the 2015 LTIP is 4,000,000 shares (subject to adjustment for changes in our capitalization and other events).

Since the plan’s approval in 2015, we have awarded 2,312,835 stock options and restricted stock units under the 2015 LTIP, including 30,375 stock options thus far in 2020.

Since the plan’s approval in 2015, we have awarded 2,312,835 stock options and restricted stock units under the 2015 LTIP.

Stock Options

5 unchanged sentences

Shares issued upon option exercise are newly issued shares.

The following tables summarize option activity for the three-month periods ended March 31, 2020 and 2019:

The following tables summarize option activity for the six-month periods ended June 30, 2020 and 2019:

Outstanding options at January 1, 2020

2 unchanged sentences

Options canceled/forfeited

Outstanding options at March 31, 2020

Exercisable options at March 31, 2020

Outstanding options at June 30, 2020

Exercisable options at June 30, 2020

Outstanding options at January 1, 2019

2 unchanged sentences

Options canceled/forfeited

Outstanding options at March 31, 2019

Exercisable options at March 31, 2019

The majority of our stock options are granted annually at our regular board meeting in May.

In addition, options are approved at the May meeting for quarterly grants to certain retirement eligible employees.

Since stock option grants to retirement eligible employees are fully expensed when issued, the approach allows for a more even expense distribution throughout the year.

In the first quarter of 2020, 30,375 stock options were granted with a weighted average exercise price of $ 94.62 and a weighted average fair value of $ 14.48 .

We recognized $ 1.0 million of expense in the first quarter of 2020.

Since options granted under our 2015 LTIP are non-qualified, we recorded a tax benefit of $ 0.2 million in the first quarter of 2020 related to this compensation expense.

Outstanding options at June 30, 2019

Exercisable options at June 30, 2019

Through 2019, the majority of our annual stock option grants were authorized at our regular board meeting in May.

In addition, quarterly grants to certain retirement eligible employees were historically authorized at the May meeting.

Since stock option grants to retirement eligible employees are fully expensed when issued, the approach allowed for a more even expense distribution throughout the year.

In 2020, the COVID-19 pandemic created economic uncertainty and the Company deemed it prudent to defer any decision on whether to grant stock options until a later date.

The options granted in the six-month period ended June 30, 2020 related to the quarterly grants authorized at the May 2019 board meeting.

In the first six months of 2020, 30,375 stock options were granted with a weighted average exercise price of $ 94.62 and a weighted average fair value of $ 14.48 .

We recognized $ 0.6 million of expense in the second quarter of 2020 and $ 1.6 million in the first six months of 2020 related to options vesting.

Since options granted under our 2015 LTIP are non-qualified, we recorded a tax benefit of $ 0.1 million in the second quarter of 2020 and $ 0.3 million in the first six months of 2020 related to this compensation expense.

Total unrecognized compensation expense relating to outstanding and unvested options was $ 3.6 million, which will be recognized over the remainder of the vesting period.

Comparatively, we recognized $ 1.0 million of compensation expense and a tax benefit of $ 0.2 million in the first quarter of 2019.

The fair value of options was estimated using a Black-Scholes based option pricing model with the following weighted average grant-date assumptions and weighted average fair values as of March 31:

Comparatively, we recognized $ 1.4 million of compensation expense in the second quarter of 2019 and $ 2.4 million in the first six months of 2019.

We recorded a tax benefit of $ 0.3 million in the second quarter of 2019 and $ 0.5 million in the first six months of 2019 related to this compensation expense.

The fair value of options was estimated using a Black-Scholes based option pricing model with the following weighted average grant-date assumptions and weighted average fair values as of June 30:

Weighted-average fair value of grants

6 unchanged sentences

The dividend yield was determined based on the average annualized quarterly dividends paid during the most recent five-year period and incorporated a consideration for special dividends paid in recent history.

The expected volatility was calculated based on the median of the rolling volatilities for the expected life of the options.

The expected volatility was calculated based

on the median of the rolling volatilities for the expected life of the options.

The expected option life was determined based on historical exercise behavior and the assumption that all outstanding options will be exercised at the midpoint of the current date and remaining contractual term, adjusted for the demographics of the current year’s grant.

3 unchanged sentences

In addition, the RSUs have dividend participation, which accrue as additional units and are settled with granted stock units at the end of the vesting period.

As of March 31, 2020, 45,350 RSUs have been granted to employees under the 2015 LTIP and 43,708 remain outstanding.

We recognized $ 0.2 million of expense on these units in the first quarter of 2020, compared to $ 0.1 million in the first quarter of 2019.

RSUs are generally granted at our regular board meeting in May.

However, in 2020, the COVID-19 pandemic created economic uncertainty and the Company deferred the decision on whether to grant RSUs to employees and outside directors until a later date.

As of June 30, 2020, 45,350 RSUs have been granted to employees under the 2015 LTIP and 28,946 remain outstanding.

We recognized $ 0.1 million of expense on these units in the second quarter of 2020 and $ 0.3 million in the first six months of 2020.

Total unrecognized compensation expense relating to outstanding and unvested RSUs was $ 0.6 million, which will be recognized over the remainder of the vesting period.

In 2019 and 2018, each outside director received RSUs with a fair market value that approximated $ 50 thousand on the date of grant as part of annual director compensation.

Comparatively, we recognized $ 0.2 million in the second quarter of 2019 and $ 0.3 million in the first six months of 2019.

In 2019, each outside director received RSUs with a fair market value that approximated $ 50 thousand on the date of grant as part of annual director compensation.

Director RSUs vest one year from the date of grant.

As of March 31, 2020, 15,085 restricted stock units have been granted to directors under the 2015 LTIP and 6,182 remain outstanding.

We recognized $ 0.1 million of compensation expense on these units in the first quarter of 2020, the same amount as in the first quarter of 2019.

Total unrecognized compensation expense relating to outstanding and unvested director RSUs was less than $ 0.1 million, which will be recognized over the remainder of the vesting period.

As of June 30, 2020, 15,085 restricted stock units have been granted to directors under the 2015 LTIP and none remain outstanding.

We recognized less than $ 0.1 million of compensation expense on these units in the second quarter of 2020 and $ 0.2 million in the first six months of 2020.

Comparatively, we recognized $ 0.2 million of compensation expense on these units in the second quarter of 2019 and $ 0.3 million in the first six months of 2019.

OPERATING SEGMENT INFORMATION

2 unchanged sentences

For the Three-Month Periods

Ended March 31,

For the Six-Month Periods

Ended June 30,

(in thousands)

1 unchanged sentence

Net investment income

Net realized gains

Net realized gains (losses)

Net unrealized gains (losses) on equity securities

4 unchanged sentences

Net investment income

Net realized gains

Net realized gains (losses)

Net unrealized gains (losses) on equity securities

1 unchanged sentence

Equity in earnings of unconsolidated investees

Earnings (loss) before income taxes

Income tax expense (benefit)

Net earnings (loss)

Earnings before income taxes

Income tax expense

The following table further summarizes revenues by major product type within each operating segment:

For the Three-Month Periods

For the Six-Month Periods

NET PREMIUMS EARNED

Ended March 31,

Ended June 30,

(in thousands)

1 unchanged sentence

General liability

Commercial transportation

Professional services

Commercial transportation

Small commercial

5 unchanged sentences

Miscellaneous

Right-of-use assets are included in the other assets line item and lease liabilities are included in the other liabilities line item of the consolidated balance sheet.

We determine if a contract contains a lease at inception and recognize operating lease right-of-use assets and operating lease liabilities based on the present value of the future minimum lease payments at the commencement date.

Right-of-use (ROU) assets are included in the other assets line item and lease liabilities are included in the other liabilities line item of the consolidated balance sheet.

We determine if a contract contains a lease at inception and recognize operating lease ROU assets and operating lease liabilities based on the present value of the future minimum lease payments at the commencement date.

As our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at the commencement date in determining the present value of future payments.

2 unchanged sentences

Lease agreements have lease and non-lease components, which are accounted for as a single lease component.

Lease expense is recognized on a straight-line basis over the lease term.

Operating lease cost for future minimum lease payments is recognized on a straight-line basis over the lease term.

Variable lease cost is expensed in the period in which the obligation is incurred.

Sublease income is recognized on a straight-line basis over the sublease term.

The Company’s operating lease obligations are for branch office facilities.

Our leases have remaining lease terms of 1 to 15 years .

The components of lease expense and other lease information as of and during the three-month periods ended March 31, 2020 and 2019 are as follows:

For the Three-Month Period Ended

The components of lease expense and other lease information as of and during the three and six-month periods ended June 30, 2020 and 2019 are as follows:

For the Three-Month Periods

For the Six-Month Periods

Ended June 30,

(in thousands)

March 31, 2020

March 31, 2019

Operating lease cost

Variable lease cost

Sublease income

Total lease cost

Cash paid for amounts included in measurement of lease liabilities

Operating cash flows from operating leases

Right-of-use assets obtained in exchange for new operating lease liabilities

Other non-cash reductions to right-of-use assets

Operating cash outflows from operating leases

ROU assets obtained in exchange for new operating lease liabilities

Reduction to ROU assets resulting from reduction to lease liabilities

Other non-cash reductions to ROU assets

(in thousands)

March 31, 2020

June 30, 2020

December 31, 2019

Operating lease right-of-use assets

Operating lease ROU assets

Operating lease liabilities

1 unchanged sentence

Weighted-average discount rate - operating leases

Future minimum lease payments under non-cancellable leases as of March 31, 2020 were as follows:

Future minimum lease payments under non-cancellable leases as of June 30, 2020 were as follows:

(in thousands)

March 31, 2020

June 30, 2020

Total future minimum lease payments

2 unchanged sentences

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 1. Financial Statements