RLI CORP 10-Q

Item 1. Financial Statements ​ RLI Corp. and Subsidiaries Condensed Consolidated Statements of Earnings and Comprehensive Earnings (Unaudited) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ For the Three-Month Periods ​ For the Six-Month Periods ​ ​ Ended June 30, ​ Ended June 30, (in thousands, except per share data) ​ 2020 ​ 2019 ​ 2020 ​ 2019 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Net premiums earned $ 208,734 $ 207,541 ​ $ 424,316 ​ $ 412,230 Net investment income ​ 16,917 ​ 16,998 ​ 34,695 ​ 33,563 Net realized gains (losses) ​ ( 2,109 ) ​ 4,764 ​ 13,043 ​ 13,832 Net unrealized gains (losses) on equity securities ​ ​ 74,705 ​ ​ 8,810 ​ ​ ( 55,690 ) ​ ​ 42,308 Consolidated revenue ​ $ 298,247 ​ $ 238,113 ​ $ 416,364 ​ $ 501,933 Losses and settlement expenses ​ 101,202 ​ 103,919 ​ 212,223 ​ 198,216 Policy acquisition costs ​ 69,463 ​ 71,742 ​ 142,404 ​ 143,034 Insurance operating expenses ​ 13,906 ​ 16,948 ​ 28,287 ​ 33,615 Interest expense on debt ​ 1,903 ​ 1,861 ​ 3,800 ​ 3,722 General corporate expenses ​ 1,994 ​ 3,283 ​ 3,749 ​ 6,559 Total expenses ​ $ 188,468 ​ $ 197,753 ​ $ 390,463 ​ $ 385,146 Equity in earnings of unconsolidated investees ​ 5,100 ​ 8,468 ​ 9,614 ​ 13,782 Earnings before income taxes ​ $ 114,879 ​ $ 48,828 ​ $ 35,515 ​ $ 130,569 Income tax expense ​ 22,713 ​ 8,361 ​ 4,616 ​ 24,629 Net earnings $ 92,166 $ 40,467 ​ $ 30,899 ​ $ 105,940 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Other comprehensive earnings, net of tax ​ 53,571 ​ 27,864 ​ 40,540 ​ 57,165 Comprehensive earnings $ 145,737 $ 68,331 ​ $ 71,439 ​ $ 163,105 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Earnings per share: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Basic: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Basic net earnings per share $ 2.05 $ 0.91 ​ $ 0.69 ​ $ 2.37 Basic comprehensive earnings per share $ 3.24 $ 1.53 ​ $ 1.59 ​ $ 3.66 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Diluted: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Diluted net earnings per share $ 2.04 $ 0.89 ​ $ 0.68 ​ $ 2.35 Diluted comprehensive earnings per share $ 3.22 $ 1.51 ​ $ 1.58 ​ $ 3.62 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Weighted average number of common shares outstanding: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Basic ​ 44,951 ​ 44,704 ​ 44,936 ​ 44,620 Diluted ​ 45,274 ​ 45,219 ​ 45,311 ​ 45,056 ​ See accompanying notes to the unaudited condensed consolidated interim financial statements. ​ ​ 3 Table of Contents RLI Corp. and Subsidiaries Condensed Consolidated Balance Sheets (Unaudited) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ June 30, ​ December 31, (in thousands, except share and per share data) 2020 2019 ​ ​ ​ ​ ​ ​ ​ ASSETS ​ ​ ​ ​ Investments and cash: ​ ​ ​ ​ ​ ​ Fixed income: ​ ​ ​ ​ ​ ​ Available-for-sale, at fair value $ 2,075,093 $ 1,983,086 (amortized cost of $ 1,956,137 and allowance for credit losses of $ 985 at 6/30/20) ​ ​ ​ ​ ​ ​ (amortized cost of $ 1,915,278 and allowance for credit losses of $ 0 at 12/31/19) ​ ​ ​ ​ Equity securities, at fair value (cost - $ 270,987 at 6/30/20 and $ 262,131 at 12/31/19) ​ 422,198 ​ 460,630 Other invested assets ​ ​ 63,440 ​ ​ 70,441 Cash ​ 84,797 ​ 46,203 Total investments and cash ​ $ 2,645,528 ​ $ 2,560,360 Accrued investment income ​ 15,142 ​ 14,587 Premiums and reinsurance balances receivable, net of allowances for uncollectible amounts of $ 17,139 at 6/30/20 and $ 16,682 at 12/31/19 ​ 154,941 ​ 160,369 Ceded unearned premium ​ 93,679 ​ 93,656 Reinsurance balances recoverable on unpaid losses and settlement expenses, net of allowances for uncollectible amounts of $ 8,035 at 6/30/20 and $ 9,402 at 12/31/19 ​ 364,756 ​ 384,517 Deferred policy acquisition costs ​ 87,560 ​ 85,044 Property and equipment, at cost, net of accumulated depreciation of $ 65,762 at 6/30/20 and $ 62,703 at 12/31/19 ​ 52,350 ​ 53,121 Investment in unconsolidated investees ​ 112,662 ​ 103,836 Goodwill and intangibles ​ 53,923 ​ 54,127 Other assets ​ 38,738 ​ 36,104 TOTAL ASSETS $ 3,619,279 $ 3,545,721 ​ ​ ​ ​ ​ ​ ​ LIABILITIES AND SHAREHOLDERS’ EQUITY ​ ​ ​ ​ ​ ​ Liabilities ​ ​ ​ ​ ​ ​ Unpaid losses and settlement expenses $ 1,590,996 $ 1,574,352 Unearned premiums ​ 543,113 ​ 540,213 Reinsurance balances payable ​ 24,777 ​ 25,691 Funds held ​ 84,430 ​ 83,358 Income taxes-deferred ​ 57,421 ​ 56,727 Bonds payable, long-term debt ​ 149,395 ​ 149,302 Accrued expenses ​ 35,998 ​ 66,626 Other liabilities ​ 81,691 ​ 54,064 TOTAL LIABILITIES $ 2,567,821 $ 2,550,333 ​ ​ ​ ​ ​ ​ ​ Shareholders’ Equity ​ ​ ​ ​ ​ ​ 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) ​ ​ ​ ​ ​ ​ ( 67,799,229 shares issued, 44,869,015 shares outstanding at 12/31/19) ​ $ 679 ​ $ 678 Paid-in capital ​ 325,862 ​ 321,190 Accumulated other comprehensive earnings ​ 93,035 ​ 52,473 Retained earnings ​ 1,024,881 ​ 1,014,046 Deferred compensation ​ 7,600 ​ 7,980 Less: Treasury shares at cost ​ ​ ​ ​ ​ ​ ( 22,930,214 shares at 6/30/20 and 12/31/19) ​ ( 400,599 ) ​ ( 400,979 ) TOTAL SHAREHOLDERS’ EQUITY ​ $ 1,051,458 ​ $ 995,388 TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY $ 3,619,279 $ 3,545,721 ​ See accompanying notes to the unaudited condensed consolidated interim financial statements. 4 Table of Contents ​ RLI Corp. and Subsidiaries Condensed Consolidated Statements of Shareholders’ Equity (Unaudited) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Accumulated ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Total ​ ​ ​ ​ ​ ​ ​ Other ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Common ​ Shareholders’ ​ Common ​ Paid-in ​ Comprehensive ​ Retained ​ Deferred ​ Treasury ​ (in thousands, except share and per share data) ​ Shares ​ Equity ​ Stock ​ Capital ​ Earnings (Loss) ​ Earnings ​ Compensation ​ Shares at Cost ​ Balance, January 1, 2019 44,504,043 ​ $ 806,842 ​ $ 674 ​ $ 305,660 ​ $ ( 14,572 ) ​ $ 908,079 ​ $ 8,354 ​ $ ( 401,353 ) ​ Net earnings (loss) — ​ ​ 65,473 ​ ​ — ​ ​ — ​ ​ — ​ ​ 65,473 ​ ​ — ​ ​ — ​ Other comprehensive earnings (loss), net of tax — ​ 29,301 ​ — ​ — ​ 29,301 ​ — ​ — ​ — ​ Deferred compensation — ​ — ​ — ​ — ​ — ​ — ​ ( 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 ) ​ Net earnings (loss) — ​ ​ 40,467 ​ ​ — ​ ​ — ​ ​ — ​ ​ 40,467 ​ ​ — ​ ​ — ​ Other comprehensive earnings (loss), net of tax — ​ 27,864 ​ — ​ — ​ 27,864 ​ — ​ — ​ — ​ Deferred compensation — ​ — ​ — ​ — ​ — ​ — ​ 215 ​ ( 215 ) ​ Share-based compensation 232,941 ​ 7,217 ​ 2 ​ 7,215 ​ — ​ — ​ — ​ — ​ Dividends and dividend equivalents ($ 0.23 per share) — ​ ( 10,305 ) ​ — ​ — ​ — ​ ( 10,305 ) ​ — ​ — ​ Balance, June 30, 2019 44,787,197 ​ $ 959,948 ​ $ 677 ​ $ 315,766 ​ $ 42,593 ​ $ 993,911 ​ $ 7,530 ​ $ ( 400,529 ) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Accumulated ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Total ​ ​ ​ ​ ​ ​ ​ Other ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Common ​ Shareholders’ ​ Common ​ Paid-in ​ Comprehensive ​ Retained ​ Deferred ​ Treasury (in thousands, except share and per share data) ​ Shares ​ Equity ​ Stock ​ Capital ​ Earnings (Loss) ​ Earnings ​ Compensation ​ Shares at Cost Balance, January 1, 2020 44,869,015 ​ $ 995,388 ​ $ 678 ​ $ 321,190 ​ $ 52,473 ​ $ 1,014,046 ​ $ 7,980 ​ $ ( 400,979 ) ​ Cumulative-effect adjustment from ASU 2016-13 ​ ​ ​ ​ 1,095 ​ ​ ​ ​ ​ ​ ​ ​ 22 ​ ​ 1,073 ​ ​ ​ ​ ​ ​ ​ Net earnings (loss) — ​ ​ ( 61,267 ) ​ ​ — ​ ​ — ​ ​ — ​ ​ ( 61,267 ) ​ ​ — ​ ​ — ​ Other comprehensive earnings (loss), net of tax — ​ ( 13,031 ) ​ — ​ — ​ ( 13,031 ) ​ — ​ — ​ — ​ Deferred compensation — ​ — ​ — ​ — ​ — ​ — ​ ( 1,010 ) ​ 1,010 ​ Share-based compensation 53,641 ​ 3,863 ​ 1 ​ 3,862 ​ — ​ — ​ — ​ — ​ Dividends and dividend equivalents ($ 0.23 per share) — ​ ( 10,343 ) ​ — ​ — ​ — ​ ( 10,343 ) ​ — ​ — ​ Balance, March 31, 2020 44,922,656 ​ $ 915,705 ​ $ 679 ​ $ 325,052 ​ $ 39,464 ​ $ 943,509 ​ $ 6,970 ​ $ ( 399,969 ) ​ Net earnings (loss) — ​ ​ 92,166 ​ ​ — ​ ​ — ​ ​ — ​ ​ 92,166 ​ ​ — ​ ​ — ​ Other comprehensive earnings (loss), net of tax — ​ 53,571 ​ — ​ — ​ 53,571 ​ — ​ — ​ — ​ Deferred compensation — ​ — ​ — ​ — ​ — ​ — ​ 630 ​ ( 630 ) ​ Share-based compensation 29,946 ​ 810 ​ — ​ 810 ​ — ​ — ​ — ​ — ​ Dividends and dividend equivalents ($ 0.24 per share) — ​ ( 10,794 ) ​ — ​ — ​ — ​ ( 10,794 ) ​ — ​ — ​ Balance, June 30, 2020 44,952,602 ​ $ 1,051,458 ​ $ 679 ​ $ 325,862 ​ $ 93,035 ​ $ 1,024,881 ​ $ 7,600 ​ $ ( 400,599 ) ​ ​ See accompanying notes to the unaudited condensed consolidated interim financial statements. ​ ​ 5 Table of Contents RLI Corp. and Subsidiaries Condensed Consolidated Statements of Cash Flows (Unaudited) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ For the Six-Month Periods ​ ​ Ended June 30, (in thousands) ​ 2020 ​ 2019 ​ ​ ​ ​ ​ ​ ​ Net cash provided by operating activities $ 83,773 $ 105,347 Cash Flows from Investing Activities ​ ​ ​ ​ ​ ​ Purchase of: ​ ​ ​ ​ ​ ​ Fixed income securities, available-for-sale ​ $ ( 185,502 ) ​ $ ( 214,332 ) Equity securities ​ ​ ( 48,473 ) ​ ​ ( 59,861 ) Property and equipment ​ ​ ( 3,413 ) ​ ​ ( 3,004 ) Other ​ ​ ( 6,651 ) ​ ​ ( 7,122 ) Proceeds from sale of: ​ ​ ​ ​ ​ ​ Fixed income securities, available-for-sale ​ ​ 40,333 ​ ​ 132,153 Equity securities ​ ​ 52,533 ​ ​ 33,360 Other ​ ​ 2,596 ​ ​ 1,842 Proceeds from call or maturity of: ​ ​ ​ ​ ​ ​ Fixed income securities, available-for-sale ​ ​ 121,911 ​ ​ 52,113 Net proceeds from sale (purchase) of short-term investments ​ - ​ ( 35,803 ) Net cash used in investing activities $ ( 26,666 ) $ ( 100,654 ) ​ ​ ​ ​ ​ ​ ​ Cash Flows from Financing Activities ​ ​ ​ ​ ​ ​ Cash dividends paid $ ( 21,119 ) $ ( 20,092 ) Proceeds from stock option exercises ​ 2,606 ​ 10,093 Net cash used in financing activities $ ( 18,513 ) $ ( 9,999 ) ​ ​ ​ ​ ​ ​ ​ Net increase (decrease) in cash ​ $ 38,594 ​ $ ( 5,306 ) ​ ​ ​ ​ ​ ​ ​ Cash at the beginning of the period ​ ​ 46,203 ​ ​ 30,140 Cash at June 30 $ 84,797 $ 24,834 ​ See accompanying notes to the unaudited condensed consolidated interim financial statements. ​ ​ 6 Table of Contents 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 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 June 30, 2020 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 2019 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 2016-13, 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. Previous guidance delayed the recognition of credit losses until it was probable a loss had been incurred. This update requires 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 is included in net earnings. Credit losses relating to available-for-sale debt securities are also required to be recorded through a reversible allowance for credit losses, but is limited to the amount by which fair value is less than amortized cost. ​ We adopted ASU 2016-13 on January 1, 2020 using the modified-retrospective approach. The standard applied to three of the Company’s balance sheet accounts: 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 ( 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. ​ C. REINSURANCE ​ Ceded unearned premiums and reinsurance balances recoverable on paid and unpaid losses and settlement expenses are reported separately as assets, instead of being netted with the related liabilities, since reinsurance does not relieve the Company of our legal liability to our policyholders. Such balances are subject to the credit risk associated with the individual reinsurer. We continuously monitor the financial condition of our reinsurers and actively follow up on any past due or disputed amounts. As part of our monitoring efforts, we review their annual financial statements, quarterly disclosures and Securities and Exchange Commission (SEC) filings for those reinsurers that are publicly traded. We also review insurance industry developments that may impact the financial condition of our reinsurers. We analyze the credit risk associated with our reinsurance balances recoverable by monitoring the AM Best and Standard & Poor’s (S&P) ratings of our reinsurers. Additionally, we perform an in depth reinsurer financial condition analysis prior to the renewal of our reinsurance placements. ​ 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 7 Table of Contents 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. ​ 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 six months of 2020. ​ D. INTANGIBLE ASSETS ​ 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 ​ ​ June 30, ​ ​ December 31, (in thousands) ​ ​ 2020 ​ ​ 2019 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 ​ ​ ​ ​ ​ ​ Indefinite-lived intangibles - state insurance licenses ​ ​ 7,500 ​ ​ 7,500 Definite-lived intangibles, net of accumulated amortization of $ 3,674 at 6/30/20 and $ 3,470 at 12/31/19 ​ ​ 361 ​ ​ 565 Total intangibles ​ $ 7,861 ​ $ 8,065 ​ ​ ​ ​ ​ ​ ​ Total goodwill and intangibles ​ $ 53,923 ​ $ 54,127 ​ All definite-lived intangible assets are amortized based on their estimated useful lives. 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 June 30, 2020 that would suggest an updated impairment test would be needed for our goodwill and intangible assets. ​ E. EARNINGS PER SHARE ​ Basic earnings per share (EPS) excludes dilution and is computed by dividing income available to common shareholders by the weighted-average number of common shares outstanding for the period. Diluted EPS reflects the dilution that could occur if securities or other contracts to issue common stock or common stock equivalents were exercised or converted into common stock. When inclusion of common stock equivalents increases the earnings per share or reduces the loss per share, the effect on earnings is anti-dilutive. Under these circumstances, the diluted net earnings or net loss per share is computed excluding the common stock equivalents. The following represents a reconciliation of the numerator and denominator of the basic and diluted EPS computations contained in the unaudited condensed consolidated interim financial statements: 8 Table of Contents ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ For the Three-Month Period ​ For the Three-Month Period ​ ​ Ended June 30, 2020 ​ Ended June 30, 2019 ​ ​ Income ​ Shares ​ Per Share ​ Income ​ Shares ​ Per Share (in thousands, except per share data) (Numerator) (Denominator) Amount (Numerator) (Denominator) Amount ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Basic EPS ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Earnings available to common shareholders $ 92,166 44,951 $ 2.05 $ 40,467 44,704 $ 0.91 Effect of Dilutive Securities ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Stock options and restricted stock units ​ - 323 ​ ​ ​ ​ - 515 ​ ​ ​ Diluted EPS ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Earnings available to common shareholders $ 92,166 45,274 $ 2.04 $ 40,467 45,219 $ 0.89 Anti-dilutive options excluded from diluted EPS ​ ​ ​ ​ 94 ​ ​ ​ ​ ​ ​ ​ - ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ For the Six-Month Period ​ For the Six-Month Period ​ ​ Ended June 30, 2020 ​ Ended June 30, 2019 ​ ​ Income ​ Shares ​ Per Share ​ Income ​ Shares ​ Per Share (in thousands, except per share data) (Numerator) (Denominator) Amount (Numerator) (Denominator) Amount ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Basic EPS ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Earnings available to common shareholders $ 30,899 44,936 $ 0.69 $ 105,940 44,620 $ 2.37 Effect of Dilutive Securities ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Stock options and restricted stock units ​ - 375 ​ ​ ​ ​ - 436 ​ ​ ​ Diluted EPS ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Earnings available to common shareholders $ 30,899 45,311 $ 0.68 $ 105,940 45,056 $ 2.35 Anti-dilutive options excluded from diluted EPS ​ ​ ​ ​ 335 ​ ​ ​ ​ ​ ​ ​ 254 ​ ​ ​ ​ F. 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. 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 ​ For the Six-Month Periods ​ ​ Ended June 30, ​ Ended June 30, Unrealized Gains/Losses on Available-for-Sale Securities 2020 2019 2020 2019 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Beginning balance $ 39,464 $ 14,729 $ 52,473 $ ( 14,572 ) Cumulative-effect adjustment of ASU 2016-13 (see note 1.B.) ​ ​ - ​ ​ - ​ ​ 22 ​ ​ - Adjusted beginning balance ​ $ 39,464 ​ $ 14,729 ​ $ 52,495 ​ $ ( 14,572 ) Other comprehensive earnings before reclassifications ​ 53,733 28,388 ​ 41,853 ​ 58,183 Amounts reclassified from accumulated other comprehensive earnings ​ ( 162 ) ( 524 ) ​ ( 1,313 ) ​ ( 1,018 ) Net current-period other comprehensive earnings (loss) $ 53,571 $ 27,864 $ 40,540 $ 57,165 Ending balance $ 93,035 $ 42,593 $ 93,035 $ 42,593 Balance of securities for which an allowance for credit losses has been recognized in net earnings ​ ​ ​ ​ ​ ​ ​ $ 1,752 $ - ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ 9 Table of Contents 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. 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: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Amount Reclassified from Accumulated Other ​ ​ (in thousands) ​ Comprehensive Earnings ​ ​ ​ ​ For the Three-Month ​ For the Six-Month ​ ​ Component of Accumulated ​ Periods Ended June 30, ​ Periods Ended June 30, ​ Affected line item in the Other Comprehensive Earnings 2020 2019 2020 2019 Statement of Earnings ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Unrealized gains and losses on available-for-sale securities ​ $ 312 ​ $ 664 ​ $ 2,618 ​ $ 1,289 ​ Net realized gains (losses) ​ ​ ​ ( 107 ) ​ ​ - ​ ​ ( 956 ) ​ ​ - ​ Credit losses presented within net realized gains ​ ​ $ 205 ​ $ 664 ​ $ 1,662 ​ $ 1,289 ​ Earnings before income taxes ​ ​ ​ ( 43 ) ​ ​ ( 140 ) ​ ​ ( 349 ) ​ ​ ( 271 ) ​ Income tax expense ​ ​ $ 162 ​ $ 524 ​ $ 1,313 ​ $ 1,018 ​ Net earnings ​ G. FAIR VALUE MEASUREMENTS ​ Fair value is defined as the price in the principal market that would be received for an asset to facilitate an orderly transaction between market participants on the measurement date. We determined the fair value of certain financial instruments based on their underlying characteristics and relevant transactions in the marketplace. We maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. ​ The following are the levels of the fair value hierarchy and a brief description of the type of valuation inputs that are used to establish each level. Financial assets are classified based upon the lowest level of significant input that is used to determine fair value. ​ Pricing Level 1 is applied to valuations based on readily available, unadjusted quoted prices in active markets for identical assets. ​ Pricing Level 2 is applied to valuations based upon quoted prices for similar assets in active markets, quoted prices for identical or similar assets in inactive markets; or valuations based on models where the significant inputs are observable (e.g. interest rates, yield curves, prepayment speeds, default rates, loss severities) or can be corroborated by observable market data. ​ Pricing Level 3 is applied to valuations that are derived from techniques in which one or more of the significant inputs are unobservable. ​ As a part of management’s process to determine fair value, we utilize widely recognized, third-party pricing sources to determine our fair values. We have obtained an understanding of the third-party pricing sources’ valuation methodologies and inputs. The following is a description of the valuation techniques used for financial assets that are measured at fair value, including the general classification of such assets pursuant to the fair value hierarchy. ​ Corporate, Agencies, Government and Municipal Bonds: The pricing vendor employs a multi-dimensional model which uses standard inputs including (listed in approximate order of priority for use) benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, market bids/offers and other reference data. The pricing vendor also monitors market indicators, as well as industry and economic events. All bonds valued using these techniques are classified as Level 2. All corporate, agency, government and municipal securities were deemed Level 2. ​ Mortgage-backed Securities (MBS)/Commercial Mortgage-backed Securities (CMBS) and Asset-backed Securities (ABS): The pricing vendor evaluation methodology includes principally interest rate movements and new issue data. Evaluations of the tranches (non-volatile, volatile or credit sensitivity) are based on the pricing vendors’ interpretation of accepted modeling and pricing conventions. 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 10 Table of Contents adjusted spread model is used in combination with models that simulate interest rate paths to determine market price information. This process allows the pricing vendor to obtain evaluations of a broad universe of securities in a way that reflects changes in yield curve, index rates, implied volatility, mortgage rates and recent trade activity. MBS/CMBS and ABS with corroborated, observable inputs are classified as Level 2. All of our MBS/CMBS and ABS are deemed Level 2. ​ Regulation D Private Placement Securities: All Regulation D privately placed bonds are classified as corporate securities and deemed Level 3. 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. Unobservable inputs include a liquidity spread premium calculated based on public corporate spread and private corporate spread matrices. The quantitative detail of the liquidity spread premium is neither provided nor reasonably available to the Company. An increase to the credit spread assumptions would result in a lower fair value measurement. ​ For all of our fixed income securities classified as Level 2, as described above, we periodically conduct a review to assess the reasonableness of the fair values provided by our pricing services. Our review consists of a two-pronged approach. First, we compare prices provided by our pricing services to those provided by an additional source. In some cases, we obtain prices from securities brokers and compare them to the prices provided by our pricing services. In both comparisons, if discrepancies are found, we compare our prices to actual reported trade data for like securities. No changes to the fair values supplied by our pricing services have occurred as a result of our reviews. Based on these assessments, we have determined that the fair values of our Level 2 securities provided by our pricing services are reasonable. ​ Common Stock: 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). ​ Due to the relatively short-term nature of cash, short-term investments, accounts receivable and accounts payable, their carrying amounts are reasonable estimates of fair value. Our investments in private funds, classified as other invested assets, are measured using the investments’ net asset value per share and are not categorized within the fair value hierarchy. ​ H. RISKS AND UNCERTAINTIES ​ Certain risks and uncertainties are inherent to our day-to-day operations. 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 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. ​ Catastrophe Exposures ​ Our catastrophe reinsurance treaty renewed on January 1, 2020. We purchased limits of $ 400 million in excess of $ 25 million first-dollar retention for earthquakes in California, $ 425 million in excess of $ 25 million first-dollar retention for earthquakes outside of California and $ 275 million in excess of $ 25 million first-dollar retention for all other perils. These amounts are subject to certain co-participations by the Company on losses in excess of the $ 25 million retentions. On March 1, 2020, we purchased $ 100 million of additional catastrophe reinsurance protection on top of the previously described coverage. This increases the limits to $ 500 million for earthquakes in California, $ 525 million for earthquakes outside of California and $ 375 for all other perils, all of which are still subject to $ 25 million first-dollar retentions and certain co-participations in excess of the retentions. ​ ​ ​ 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. ​ 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 six-month periods ended June 30, 2020 and 2019: ​ 11 Table of Contents ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ SALES ​ Proceeds ​ Gross Realized ​ Net Realized (in thousands) From Sales Gains Losses Gain (Loss) 2020 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Available-for-sale ​ $ 42,874 ​ $ 3,495 ​ $ ( 1,162 ) ​ $ 2,333 Equities ​ 52,533 ​ 19,569 ​ ( 6,732 ) ​ 12,837 2019 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Available-for-sale ​ $ 133,473 ​ $ 2,346 ​ $ ( 1,106 ) ​ $ 1,240 Equities ​ 33,360 ​ 13,016 ​ ( 711 ) ​ 12,305 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ CALLS/MATURITIES ​ ​ ​ ​ Gross Realized ​ Net Realized (in thousands) Proceeds Gains Losses Gain (Loss) 2020 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Available-for-sale ​ $ 121,911 ​ $ 294 ​ $ ( 9 ) ​ $ 285 2019 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Available-for-sale ​ $ 53,113 ​ $ 58 ​ $ ( 9 ) ​ $ 49 ​ FAIR VALUE MEASUREMENTS ​ 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 ​ Quoted Prices in Significant Other Significant ​ ​ ​ Active Markets for ​ Observable ​ Unobservable ​ ​ ​ ​ Identical Assets ​ Inputs ​ Inputs ​ ​ (in thousands) (Level 1) (Level 2) (Level 3) Total Fixed income securities - available-for-sale ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ U.S. government ​ $ — ​ $ 186,838 ​ $ — ​ $ 186,838 U.S. agency ​ ​ — ​ ​ 32,091 ​ ​ — ​ ​ 32,091 Non-U.S. govt. & agency ​ ​ — ​ ​ 7,692 ​ ​ — ​ ​ 7,692 Agency MBS ​ ​ — ​ ​ 409,167 ​ ​ — ​ ​ 409,167 ABS/CMBS* ​ ​ — ​ ​ 218,507 ​ ​ — ​ ​ 218,507 Corporate ​ ​ — ​ ​ 758,066 ​ ​ 7,059 ​ ​ 765,125 Municipal ​ ​ — ​ ​ 455,673 ​ ​ — ​ ​ 455,673 Total fixed income securities - available-for-sale ​ $ — ​ $ 2,068,034 ​ $ 7,059 ​ $ 2,075,093 Equity securities ​ ​ 422,198 ​ ​ — ​ ​ — ​ ​ 422,198 Other invested assets ​ ​ 15,792 ​ ​ — ​ ​ — ​ ​ 15,792 Total ​ $ 437,990 ​ $ 2,068,034 ​ $ 7,059 ​ $ 2,513,083 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ As of December 31, 2019 ​ ​ Fair Value Measurements Using ​ ​ Quoted Prices in Significant Other Significant ​ ​ ​ Active Markets for ​ Observable ​ Unobservable ​ ​ ​ ​ Identical Assets ​ Inputs ​ Inputs ​ ​ (in thousands) (Level 1) (Level 2) (Level 3) Total Fixed income securities - available-for-sale ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ U.S. government ​ $ — ​ $ 193,661 ​ $ — ​ $ 193,661 U.S. agency ​ ​ — ​ ​ 38,855 ​ ​ — ​ ​ 38,855 Non-U.S. govt. & agency ​ ​ — ​ ​ 7,628 ​ ​ — ​ ​ 7,628 Agency MBS ​ ​ — ​ ​ 420,165 ​ ​ — ​ ​ 420,165 ABS/CMBS* ​ ​ — ​ ​ 224,870 ​ ​ — ​ ​ 224,870 Corporate ​ ​ — ​ ​ 690,297 ​ ​ 1,770 ​ ​ 692,067 Municipal ​ ​ — ​ ​ 405,840 ​ ​ — ​ ​ 405,840 Total fixed income securities - available-for-sale ​ $ — ​ $ 1,981,316 ​ $ 1,770 ​ $ 1,983,086 Equity securities ​ ​ 460,630 ​ ​ — ​ ​ — ​ ​ 460,630 Total ​ $ 460,630 ​ $ 1,981,316 ​ $ 1,770 ​ $ 2,443,716 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ * Non-agency asset-backed and commercial mortgage-backed 12 Table of Contents ​ 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. ​ ​ ​ ​ ​ ​ ​ Level 3 (in thousands) ​ Securities Balance as of January 1, 2020 ​ $ 1,770 Net realized and unrealized gains (losses) ​ ​ Included in net earnings as a part of: ​ ​ ​ Net investment income ​ ​ ( 10 ) Net realized gains (losses) ​ ​ ( 96 ) Included in other comprehensive earnings ​ ( 282 ) Total net realized and unrealized gains (losses) ​ $ ( 388 ) Purchases ​ ​ 5,677 Balance as of June 30, 2020 ​ $ 7,059 ​ ​ ​ ​ Change in unrealized gains (losses) during the period for Level 3 assets held at period-end - included in net realized gains ​ $ ( 96 ) Change in unrealized gains (losses) during the period for Level 3 assets held at period-end - included in other comprehensive earnings (loss) ​ $ ( 282 ) ​ 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 ​ Amortized ​ Fair (in thousands) Cost Value Due in one year or less ​ $ 75,077 ​ $ 75,888 Due after one year through five years ​ ​ 472,458 ​ ​ 495,968 Due after five years through 10 years ​ ​ 526,480 ​ ​ 571,103 Due after 10 years ​ ​ 279,538 ​ ​ 304,460 Mtge/ABS/CMBS* ​ ​ 602,584 ​ ​ 627,674 Total available-for-sale ​ $ 1,956,137 ​ $ 2,075,093 *Mortgage-backed, asset-backed and commercial mortgage-backed ​ 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 ​ June 30, 2020 (in thousands) Cost or ​ Allowance Gross Gross ​ ​ ​ Amortized ​ for Credit ​ Unrealized ​ Unrealized ​ Fair Asset Class Cost ​ Losses ​ Gains Losses Value U.S. government ​ $ 171,174 ​ $ - ​ $ 15,664 ​ $ - ​ $ 186,838 U.S. agency ​ ​ 27,913 ​ ​ - ​ ​ 4,178 ​ ​ - ​ ​ 32,091 Non-U.S. govt. & agency ​ ​ 7,316 ​ ​ - ​ ​ 401 ​ ​ ( 25 ) ​ ​ 7,692 Agency MBS ​ ​ 388,036 ​ ​ - ​ ​ 21,208 ​ ​ ( 77 ) ​ ​ 409,167 ABS/CMBS* ​ ​ 214,548 ​ ​ ( 54 ) ​ ​ 5,218 ​ ​ ( 1,205 ) ​ ​ 218,507 Corporate ​ ​ 717,748 ​ ​ ( 931 ) ​ ​ 54,610 ​ ​ ( 6,302 ) ​ ​ 765,125 Municipal ​ ​ 429,402 ​ ​ - ​ ​ 26,341 ​ ​ ( 70 ) ​ ​ 455,673 Total Fixed Income ​ $ 1,956,137 ​ $ ( 985 ) ​ $ 127,620 ​ $ ( 7,679 ) ​ $ 2,075,093 *Non-agency asset-backed and commercial mortgage-backed ​ 13 Table of Contents ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Available-for-sale ​ December 31, 2019 (in thousands) Cost or ​ Allowance Gross Gross ​ ​ ​ Amortized ​ for Credit ​ Unrealized ​ Unrealized ​ Fair Asset Class Cost ​ Losses Gains Losses Value U.S. government ​ $ 186,699 ​ $ - ​ $ 6,994 ​ $ ( 32 ) ​ $ 193,661 U.S. agency ​ ​ 36,535 ​ ​ - ​ ​ 2,362 ​ ​ ( 42 ) ​ ​ 38,855 Non-U.S. govt. & agency ​ ​ 7,333 ​ ​ - ​ ​ 295 ​ ​ - ​ ​ 7,628 Agency MBS ​ ​ 411,808 ​ ​ - ​ ​ 8,920 ​ ​ ( 563 ) ​ ​ 420,165 ABS/CMBS* ​ ​ 222,832 ​ ​ - ​ ​ 2,514 ​ ​ ( 476 ) ​ ​ 224,870 Corporate ​ ​ 659,640 ​ ​ - ​ ​ 33,245 ​ ​ ( 818 ) ​ ​ 692,067 Municipal ​ ​ 390,431 ​ ​ - ​ ​ 16,131 ​ ​ ( 722 ) ​ ​ 405,840 Total Fixed Income ​ $ 1,915,278 ​ $ - ​ $ 70,461 ​ $ ( 2,653 ) ​ $ 1,983,086 *Non-agency asset-backed and commercial mortgage-backed ​ Allowance for Credit Losses and Unrealized Losses on Fixed Income Securities ​ We adopted ASU 2016-13, Financial Instruments – Credit Losses, on January 1, 2020, which required the recognition of a reversible allowance for credit losses on available-for-sale fixed income securities. See note 1. B. for more information on the adoption of the ASU. Available-for-sale securities in the fixed income portfolio are subjected to several criteria to determine if those securities should be included in the allowance for expected credit loss evaluation, including: ​ ● Changes in technology that may impair the earnings potential of the investment, ​ ● The discontinuance of a segment of business that may affect future earnings potential, ​ ● Reduction of or non-payment of interest and/or principal, ​ ● Specific concerns related to the issuer’s industry or geographic area of operation, ​ ● Significant or recurring operating losses, poor cash flows and/or deteriorating liquidity ratios and ​ ● Downgrades in credit quality by a major rating agency. ​ If changes in interest rates and credit spreads do not reasonably explain the unrealized loss for an available-for-sale security or if any of the criteria above indicate a potential credit loss, the security is subjected to a discounted cash flow analysis. Inputs into the discounted cash flow analysis include prepayment assumptions for structured securities, default rates and recoverability rates based on credit rating. The allowance for any security is limited to the amount that the securities fair value is below amortized cost. ​ 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. Based on our analysis, we believe we will recover the amortized cost basis on the available-for-sale securities not included in the allowance for credit losses. We do not intend to sell the available-for-sale securities in an unrealized loss position and it is not more likely than not that we will be required to sell the investments before recovery of the amortized cost basis. We continually monitor the credit quality of our fixed income investments to assess if it is probable that we will receive our contractual or estimated cash flows in the form of principal and interest. ​ Prior to the adoption of ASU 2016-13, we conducted reviews of fixed income securities with unrealized losses to evaluate whether an impairment was other-than-temporary. 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 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 . Isolated to these securities, u nrealized losses increased through the first six months of 2020, as increased credit 14 Table of Contents 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 June 30, 2020 , after factoring in the allowance for credit losses, and December 31, 2019. ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ June 30, 2020 ​ December 31, 2019 (in thousands) < 12 Mos. 12 Mos. & Greater Total < 12 Mos. 12 Mos. & Greater Total ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ U.S. government ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Fair value ​ $ — ​ $ — ​ $ — ​ $ 2,505 ​ $ 8,463 ​ $ 10,968 Amortized cost ​ ​ — ​ ​ — ​ ​ — ​ ​ 2,506 ​ ​ 8,494 ​ ​ 11,000 Unrealized Loss ​ $ — ​ $ — ​ $ — ​ $ ( 1 ) ​ $ ( 31 ) ​ $ ( 32 ) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ U.S. agency ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Fair value ​ $ — ​ $ — ​ $ — ​ $ 6,794 ​ $ — ​ $ 6,794 Amortized cost ​ ​ — ​ ​ — ​ ​ — ​ ​ 6,836 ​ ​ — ​ ​ 6,836 Unrealized Loss ​ $ — ​ $ — ​ $ — ​ $ ( 42 ) ​ $ — ​ $ ( 42 ) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Non-U.S. government ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Fair value ​ $ 1,995 ​ $ — ​ $ 1,995 ​ $ — ​ $ — ​ $ — Amortized cost ​ ​ 2,020 ​ ​ — ​ ​ 2,020 ​ ​ — ​ ​ — ​ ​ — Unrealized Loss ​ $ ( 25 ) ​ $ — ​ $ ( 25 ) ​ $ — ​ $ — ​ $ — ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Agency MBS ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Fair value ​ $ 22,294 ​ $ 468 ​ $ 22,762 ​ $ 21,548 ​ $ 41,718 ​ $ 63,266 Amortized cost ​ ​ 22,368 ​ ​ 471 ​ ​ 22,839 ​ ​ 21,664 ​ ​ 42,165 ​ ​ 63,829 Unrealized Loss ​ $ ( 74 ) ​ $ ( 3 ) ​ $ ( 77 ) ​ $ ( 116 ) ​ $ ( 447 ) ​ $ ( 563 ) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ABS/CMBS* ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Fair value ​ $ 34,445 ​ $ 15,578 ​ $ 50,023 ​ $ 74,968 ​ $ 18,036 ​ $ 93,004 Amortized cost ​ ​ 35,297 ​ ​ 15,931 ​ ​ 51,228 ​ ​ 75,332 ​ ​ 18,148 ​ ​ 93,480 Unrealized Loss ​ $ ( 852 ) ​ $ ( 353 ) ​ $ ( 1,205 ) ​ $ ( 364 ) ​ $ ( 112 ) ​ $ ( 476 ) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Corporate ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Fair value ​ $ 110,503 ​ $ 5,185 ​ $ 115,688 ​ $ 16,478 ​ $ 9,348 ​ $ 25,826 Amortized cost ​ ​ 116,140 ​ ​ 5,850 ​ ​ 121,990 ​ ​ 16,950 ​ ​ 9,694 ​ ​ 26,644 Unrealized Loss ​ $ ( 5,637 ) ​ $ ( 665 ) ​ $ ( 6,302 ) ​ $ ( 472 ) ​ $ ( 346 ) ​ $ ( 818 ) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Municipal ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Fair value ​ $ 12,038 ​ $ — ​ $ 12,038 ​ $ 47,018 ​ $ — ​ $ 47,018 Amortized cost ​ ​ 12,108 ​ ​ — ​ ​ 12,108 ​ ​ 47,740 ​ ​ — ​ ​ 47,740 Unrealized Loss ​ $ ( 70 ) ​ $ — ​ $ ( 70 ) ​ $ ( 722 ) ​ $ — ​ $ ( 722 ) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Total fixed income ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Fair value ​ $ 181,275 ​ $ 21,231 ​ $ 202,506 ​ $ 169,311 ​ $ 77,565 ​ $ 246,876 Amortized cost ​ ​ 187,933 ​ ​ 22,252 ​ ​ 210,185 ​ ​ 171,028 ​ ​ 78,501 ​ ​ 249,529 Unrealized Loss ​ $ ( 6,658 ) ​ $ ( 1,021 ) ​ $ ( 7,679 ) ​ $ ( 1,717 ) ​ $ ( 936 ) ​ $ ( 2,653 ) * 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 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. ​ 15 Table of Contents ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Equivalent ​ Equivalent ​ (dollars in thousands) ​ ​ ​ NAIC S&P Moody’s ​ Amortized ​ Unrealized ​ Percent ​ Rating Rating Rating Cost Fair Value Loss to Total ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ 1 ​ AAA/AA/A ​ Aaa/Aa/A ​ $ 100,257 ​ $ 98,089 ​ $ ( 2,168 ) ​ 28.2 % 2 ​ BBB ​ Baa ​ ​ 10,076 ​ ​ 9,860 ​ ​ ( 216 ) ​ 2.8 % 3 ​ BB ​ Ba ​ ​ 51,161 ​ ​ 49,264 ​ ​ ( 1,897 ) ​ 24.7 % 4 ​ B ​ B ​ ​ 42,541 ​ ​ 40,086 ​ ​ ( 2,455 ) ​ 32.0 % 5 ​ CCC ​ Caa ​ ​ 5,822 ​ ​ 5,019 ​ ​ ( 803 ) ​ 10.5 % 6 ​ CC or lower ​ Ca or lower ​ ​ 328 ​ ​ 188 ​ ​ ( 140 ) ​ 1.8 % ​ ​ ​ ​ Total ​ $ 210,185 ​ $ 202,506 ​ $ ( 7,679 ) ​ 100.0 % ​ Unrealized Gains and Losses on Equity Securities ​ 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 $ 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. Our LIHTC investments are carried at amortized cost and our investment in FHLBC stock is carried at cost. Due to the nature of the LIHTC and our membership in the FHLBC, their carrying amounts approximate fair value. The private funds are carried at fair value, using each investment’s net asset value. Restricted stock is carried at quoted market prices, as the restrictions expire within one year. ​ 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 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 ​ Cash consists of uninvested balances in bank accounts. We had a cash balance of $ 84.8 million at June 30, 2020, compared to $ 46.2 million at the end of 2019. ​ 16 Table of Contents ​ 3. HISTORICAL LOSS AND LAE DEVELOPMENT ​ 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) 2020 2019 Unpaid losses and LAE at beginning of year ​ ​ ​ ​ ​ ​ Gross ​ $ 1,574,352 ​ $ 1,461,348 Ceded ​ ( 384,517 ) ​ ( 364,999 ) Net ​ $ 1,189,835 ​ $ 1,096,349 ​ ​ ​ ​ ​ ​ ​ Adoption impact of ASU 2016-13 on reinsurance balances recoverable ​ $ ( 1,345 ) ​ $ — ​ ​ ​ ​ ​ ​ ​ Increase (decrease) in incurred losses and LAE ​ ​ ​ ​ ​ ​ Current accident year ​ $ 253,031 ​ $ 239,053 Prior accident years ​ ( 40,808 ) ​ ( 40,837 ) Total incurred ​ $ 212,223 ​ $ 198,216 ​ ​ ​ ​ ​ ​ ​ Loss and LAE payments for claims incurred ​ ​ ​ ​ ​ ​ Current accident year ​ $ ( 25,588 ) ​ $ ( 23,624 ) Prior accident years ​ ( 148,885 ) ​ ( 126,972 ) Total paid ​ $ ( 174,473 ) ​ $ ( 150,596 ) ​ ​ ​ ​ ​ ​ ​ Net unpaid losses and LAE at June 30 ​ $ 1,226,240 ​ $ 1,143,969 ​ ​ ​ ​ ​ ​ ​ Unpaid losses and LAE at June 30 ​ ​ ​ ​ ​ ​ Gross ​ $ 1,590,996 ​ $ 1,506,279 Ceded ​ ( 364,756 ) ​ ( 362,310 ) Net ​ $ 1,226,240 ​ $ 1,143,969 ​ 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 . We previously maintained an allowance for uncollectible reinsurance balances prior to the adoption of this update. However, in order to comply with the updated requirements, we released $ 1.3 million of the allowance on uncollectible reinsurance balances upon adoption. The implementation guidance required the cumulative-effect adjustment be made to the beginning balance of retained earnings, rather than through net earnings like historical changes have and ongoing modifications will continue to be recorded. See note 1. B. for more information on the adoption of the ASU. ​ 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 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. ​ 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. 17 Table of Contents ​ ​ 4. INCOME TAXES ​ 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 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 June 30, For the Six-Month Periods Ended June 30, ​ ​ 2020 ​ ​ 2019 ​ ​ 2020 ​ ​ 2019 ​ (in thousands) Amount % Amount % ​ Amount % ​ Amount % ​ Provision for income taxes at the statutory rate of 21% ​ $ 24,124 ​ 21.0 % ​ $ 10,254 ​ 21.0 % ​ $ 7,458 ​ 21.0 % ​ $ 27,419 ​ 21.0 % Increase (reduction) in taxes resulting from: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Excess tax benefit on share-based compensation ​ ​ ( 265 ) ​ ( 0.2 ) % ​ ​ ( 2,191 ) ​ ( 4.5 ) % ​ ​ ( 1,293 ) ​ ( 3.6 ) % ​ ​ ( 2,932 ) ​ ( 2.3 ) % Tax exempt interest income ​ ​ ( 323 ) ​ ( 0.3 ) % ​ ​ ( 309 ) ​ ( 0.6 ) % ​ ​ ( 636 ) ​ ( 1.8 ) % ​ ​ ( 654 ) ​ ( 0.5 ) % Dividends received deduction ​ ​ ( 212 ) ​ ( 0.2 ) % ​ ​ ( 214 ) ​ ( 0.4 ) % ​ ​ ( 484 ) ​ ( 1.4 ) % ​ ​ ( 417 ) ​ ( 0.3 ) % ESOP dividends paid deduction ​ ​ ( 137 ) ​ ( 0.1 ) % ​ ​ ( 140 ) ​ ( 0.3 ) % ​ ​ ( 269 ) ​ ( 0.8 ) % ​ ​ ( 277 ) ​ ( 0.2 ) % Nondeductible expenses ​ ​ 161 ​ 0.1 % ​ ​ 414 ​ 0.8 % ​ ​ 364 ​ 1.0 % ​ ​ 922 ​ 0.7 % Other items, net ​ ​ ( 635 ) ​ ( 0.5 ) % ​ ​ 547 ​ 1.1 % ​ ​ ( 524 ) ​ ( 1.4 ) % ​ ​ 568 ​ 0.5 % Total tax expense (benefit) ​ $ 22,713 ​ 19.8 % ​ $ 8,361 ​ 17.1 % ​ $ 4,616 ​ 13.0 % ​ $ 24,629 ​ 18.9 % ​ ​ 5. STOCK BASED COMPENSATION ​ Our RLI Corp. Long-Term Incentive Plan (2010 LTIP) was in place from 2010 to 2015. The 2010 LTIP provided for equity-based compensation, including stock options, up to a maximum of 4,000,000 shares of common stock (subject to adjustment for changes in our capitalization and other events). Between 2010 and 2015, we granted 2,878,000 stock options under the 2010 LTIP. The 2010 LTIP was replaced in 2015. ​ In 2015, our shareholders approved the 2015 RLI Corp. Long-Term Incentive Plan (2015 LTIP), which provides for equity-based compensation and replaced the 2010 LTIP. In conjunction with the adoption of the 2015 LTIP, effective May 7, 2015, options were no longer granted under the 2010 LTIP. Awards under the 2015 LTIP may be in the form of restricted stock, restricted stock units, stock options (non-qualified only), stock appreciation rights, performance units as well as other stock-based awards. Eligibility under the 2015 LTIP is limited to employees and directors of the Company or any affiliate. The granting of awards under the 2015 LTIP is solely at the discretion of the board of directors. 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. ​ Stock Options ​ Under the 2015 LTIP, as under the 2010 LTIP, we grant stock options for shares with an exercise price equal to the fair market value of the shares at the date of grant (subject to adjustments for changes in our capitalization, special dividends and other events as set forth in such plans). Options generally vest and become exercisable ratably over a five-year period and expire eight years after grant. ​ For most participants, the requisite service period and vesting period will be the same. For participants who are retirement eligible, defined by the plan as those individuals whose age and years of service equals 75 , the requisite service period is deemed to be met and options are immediately expensed on the date of grant. For participants who will become retirement eligible during the vesting period, the requisite service period over which expense is recognized is the period between the grant date and the attainment of retirement eligibility. Shares issued upon option exercise are newly issued shares. 18 Table of Contents ​ The following tables summarize option activity for the six-month periods ended June 30, 2020 and 2019: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Weighted ​ ​ ​ ​ ​ Weighted ​ Average ​ Aggregate ​ ​ Number of ​ Average ​ Remaining ​ Intrinsic ​ ​ Options ​ Exercise ​ Contractual ​ Value ​ Outstanding Price Life (in 000’s) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Outstanding options at January 1, 2020 ​ 1,667,290 ​ $ 62.52 ​ ​ ​ ​ ​ Options granted ​ 30,375 ​ ​ 94.62 ​ ​ ​ ​ ​ Options exercised ​ ( 72,180 ) ​ ​ 45.92 ​ ​ ​ $ 3,181 Options canceled/forfeited ​ ( 2,370 ) ​ ​ 66.57 ​ ​ ​ ​ ​ Outstanding options at June 30, 2020 ​ 1,623,115 ​ $ 63.86 ​ 4.82 ​ $ 30,819 Exercisable options at June 30, 2020 ​ 878,335 ​ $ 57.70 ​ 3.89 ​ $ 21,544 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Weighted ​ ​ ​ ​ ​ Weighted ​ Average ​ Aggregate ​ ​ Number of ​ Average ​ Remaining ​ Intrinsic ​ ​ Options ​ Exercise ​ Contractual ​ Value ​ Outstanding Price Life (in 000’s) ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Outstanding options at January 1, 2019 ​ 1,964,880 ​ $ 54.24 ​ ​ ​ ​ ​ Options granted ​ 292,150 ​ ​ 80.36 ​ ​ ​ ​ ​ Options exercised ​ ( 414,470 ) ​ ​ 44.70 ​ ​ ​ $ 14,941 Options canceled/forfeited ​ ( 33,600 ) ​ ​ 57.61 ​ ​ ​ ​ ​ Outstanding options at June 30, 2019 ​ 1,808,960 ​ $ 60.59 ​ 5.57 ​ $ 45,448 Exercisable options at June 30, 2019 ​ 672,110 ​ $ 52.17 ​ 4.21 ​ $ 22,544 ​ 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 $ 1.4 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: ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ 2020 ​ 2019 ​ ​ ​ ​ ​ ​ ​ ​ ​ Weighted-average fair value of grants ​ $ 14.48 ​ ​ $ 13.33 ​ Risk-free interest rates ​ ​ 1.54 % ​ ​ 2.42 % Dividend yield ​ ​ 2.69 % ​ ​ 2.69 % Expected volatility ​ ​ 22.68 % ​ ​ 22.71 % Expected option life ​ ​ 4.99 years ​ ​ 4.96 years ​ The risk-free rate was determined based on U.S. treasury yields that most closely approximated the option’s expected life. 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 19 Table of Contents 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. ​ Restricted Stock Units ​ In addition to stock options, restricted stock units (RSUs) are granted with a value equal to the closing stock price of the Company’s stock on the dates the units are granted. These units generally have a three-year cliff vesting, but have an accelerated vesting feature for participants who are retirement eligible, defined by the plan as those individuals whose age and years of service equals 75 . 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. 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. 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 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. ​ 6. OPERATING SEGMENT INFORMATION ​ Selected information by operating segment is presented in the table below. Additionally, the table reconciles segment totals to total earnings and total revenues. ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ For the Three-Month Periods ​ For the Six-Month Periods REVENUES ​ Ended June 30, ​ Ended June 30, (in thousands) 2020 2019 2020 2019 Casualty ​ $ 135,215 ​ $ 138,344 ​ $ 278,635 ​ $ 275,244 Property ​ ​ 45,387 ​ ​ 39,972 ​ ​ 89,735 ​ ​ 78,718 Surety ​ ​ 28,132 ​ ​ 29,225 ​ ​ 55,946 ​ ​ 58,268 Net premiums earned ​ $ 208,734 ​ $ 207,541 ​ $ 424,316 ​ $ 412,230 Net investment income ​ ​ 16,917 ​ ​ 16,998 ​ ​ 34,695 ​ ​ 33,563 Net realized gains (losses) ​ ​ ( 2,109 ) ​ ​ 4,764 ​ ​ 13,043 ​ ​ 13,832 Net unrealized gains (losses) on equity securities ​ ​ 74,705 ​ ​ 8,810 ​ ​ ( 55,690 ) ​ ​ 42,308 Total consolidated revenue ​ $ 298,247 ​ $ 238,113 ​ $ 416,364 ​ $ 501,933 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ NET EARNINGS (LOSS) ​ ​ ​ ​ (in thousands) 2020 2019 2020 2019 Casualty ​ $ 9,733 ​ $ 6,939 ​ $ 8,410 ​ $ 12,282 Property ​ ​ 6,167 ​ ​ ( 436 ) ​ ​ 16,075 ​ ​ 7,810 Surety ​ ​ 8,263 ​ ​ 8,429 ​ ​ 16,917 ​ ​ 17,273 Net underwriting income ​ $ 24,163 ​ $ 14,932 ​ $ 41,402 ​ $ 37,365 Net investment income ​ ​ 16,917 ​ ​ 16,998 ​ ​ 34,695 ​ ​ 33,563 Net realized gains (losses) ​ ​ ( 2,109 ) ​ ​ 4,764 ​ ​ 13,043 ​ ​ 13,832 Net unrealized gains (losses) on equity securities ​ ​ 74,705 ​ ​ 8,810 ​ ​ ( 55,690 ) ​ ​ 42,308 General corporate expense and interest on debt ​ ​ ( 3,897 ) ​ ​ ( 5,144 ) ​ ​ ( 7,549 ) ​ ​ ( 10,281 ) Equity in earnings of unconsolidated investees ​ ​ 5,100 ​ ​ 8,468 ​ ​ 9,614 ​ ​ 13,782 Earnings before income taxes ​ $ 114,879 ​ $ 48,828 ​ $ 35,515 ​ $ 130,569 Income tax expense ​ ​ 22,713 ​ ​ 8,361 ​ ​ 4,616 ​ ​ 24,629 Net earnings ​ $ 92,166 ​ $ 40,467 ​ $ 30,899 ​ $ 105,940 ​ 20 Table of Contents 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 June 30, ​ Ended June 30, (in thousands) 2020 2019 2020 2019 Casualty ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Commercial excess and personal umbrella ​ $ 42,321 ​ $ 34,340 ​ $ 82,409 ​ $ 66,621 General liability ​ ​ 22,651 ​ ​ 25,347 ​ ​ 46,649 ​ ​ 49,235 Professional services ​ ​ 21,384 ​ ​ 19,275 ​ ​ 42,079 ​ ​ 39,574 Commercial transportation ​ ​ 11,139 ​ ​ 20,508 ​ ​ 32,324 ​ ​ 40,912 Small commercial ​ ​ 15,791 ​ ​ 13,315 ​ ​ 31,424 ​ ​ 26,503 Executive products ​ ​ 6,975 ​ ​ 6,381 ​ ​ 14,306 ​ ​ 12,450 Other casualty ​ ​ 14,954 ​ ​ 19,178 ​ ​ 29,444 ​ ​ 39,949 Total ​ $ 135,215 ​ $ 138,344 ​ $ 278,635 ​ $ 275,244 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Property ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Marine ​ $ 20,712 ​ $ 18,579 ​ $ 40,289 ​ $ 35,600 Commercial property ​ ​ 19,048 ​ ​ 16,275 ​ ​ 38,203 ​ ​ 33,150 Specialty personal ​ ​ 4,936 ​ ​ 4,792 ​ ​ 9,936 ​ ​ 9,376 Other property ​ ​ 691 ​ ​ 326 ​ ​ 1,307 ​ ​ 592 Total ​ $ 45,387 ​ $ 39,972 ​ $ 89,735 ​ $ 78,718 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Surety ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Commercial ​ $ 10,806 ​ $ 10,975 ​ $ 21,744 ​ $ 21,787 Miscellaneous ​ ​ 10,499 ​ ​ 11,280 ​ ​ 21,015 ​ ​ 22,882 Contract ​ ​ 6,827 ​ ​ 6,970 ​ ​ 13,187 ​ ​ 13,599 Total ​ $ 28,132 ​ $ 29,225 ​ $ 55,946 ​ $ 58,268 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Grand Total ​ $ 208,734 ​ $ 207,541 ​ $ 424,316 ​ $ 412,230 ​ ​ 7. LEASES ​ 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. Lease agreements may include options to extend or terminate. The options are exercised at our discretion and are included in operating lease liabilities if it is reasonably certain the option will be exercised. Lease agreements have lease and non-lease components, which are accounted for as a single lease component. 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 and six-month periods ended June 30, 2020 and 2019 are as follows: ​ 21 Table of Contents ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ For the Three-Month Periods ​ For the Six-Month Periods ​ ​ Ended June 30, ​ Ended June 30, (in thousands) ​ 2020 2019 2020 2019 Operating lease cost ​ $ 1,370 ​ $ 1,445 ​ $ 2,776 ​ $ 2,927 Variable lease cost ​ ​ 320 ​ ​ 892 ​ ​ 675 ​ ​ 1,210 Sublease income ​ ​ ( 42 ) ​ ​ - ​ ​ ( 42 ) ​ ​ - Total lease cost ​ $ 1,648 ​ $ 2,337 ​ $ 3,409 ​ $ 4,137 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Cash paid for amounts included in measurement of lease liabilities ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Operating cash outflows from operating leases ​ $ 1,503 ​ $ 1,402 ​ $ 2,990 ​ $ 2,797 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ROU assets obtained in exchange for new operating lease liabilities ​ $ - ​ $ 231 ​ $ 15 ​ $ 951 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Reduction to ROU assets resulting from reduction to lease liabilities ​ $ - ​ $ 1,279 ​ $ - ​ $ 1,279 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Other non-cash reductions to ROU assets ​ $ - ​ $ - ​ $ 1,192 ​ $ - ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ (in thousands) ​ June 30, 2020 December 31, 2019 ​ Operating lease ROU assets ​ $ 18,648 ​ ​ $ 22,335 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Operating lease liabilities ​ $ 21,766 ​ ​ $ 24,475 ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Weighted-average remaining lease term - operating leases ​ ​ 4.26 years ​ ​ 4.69 years ​ ​ ​ ​ ​ ​ ​ ​ ​ Weighted-average discount rate - operating leases ​ ​ 2.34 % ​ ​ 2.33 % ​ Future minimum lease payments under non-cancellable leases as of June 30, 2020 were as follows: ​ ​ ​ ​ ​ (in thousands) ​ June 30, 2020 2020 ​ $ 3,002 2021 ​ ​ 5,976 2022 ​ ​ 5,904 2023 ​ ​ 4,386 2024 ​ ​ 2,334 Thereafter ​ ​ 1,365 Total future minimum lease payments ​ $ 22,967 ​ ​ ​ ​ Less imputed interest ​ ​ ( 1,201 ) Total operating lease liability ​ $ 21,766 ​ ​ ​ ​