UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

☒

Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended ~~September~~June 30, ~~2019~~2020

☐

Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from to

Commission File Number: 001-09463

RLI Corp.

(Exact name of registrant as specified in its charter)


Delaware		37-0889946
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification Number)

9025 North Lindbergh Drive, Peoria, IL		61615
(Address of principal executive offices)		(Zip Code)

(309) 692-1000

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading Symbol	Name of each exchange on which registered
Common Stock $0.01 par value	RLI	New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.


Large accelerated filer ☒	Accelerated filer ☐	Non-accelerated filer ☐	Smaller reporting company ☐
			Emerging growth company ☐

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

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

APPLICABLE ONLY TO CORPORATE ISSUERS:

As of ~~October 14, 2019,~~July 16, 2020, the number of shares outstanding of the registrant’s Common Stock was ~~44,836,488.~~44,952,602.

Table of Contents

Table of Contents


			Page

Part I - Financial Information			3

	Item 1.	Financial Statements	3

		Condensed Consolidated Statements of Earnings and Comprehensive Earnings For the Three and ~~Nine-Month~~Six-Month Periods Ended ~~September~~June 30, ~~2019~~2020 and ~~2018~~2019 (unaudited)	3

		Condensed Consolidated Balance Sheets as of ~~September~~June 30, ~~2019~~2020 and December 31, ~~2018~~2019 (unaudited)	4

		Condensed Consolidated Statements of Shareholders’ Equity For the Three and ~~Nine-Month~~Six-Month Periods Ended ~~September~~June 30, ~~2019~~2020 and ~~2018~~2019 (unaudited)	5

		Condensed Consolidated Statements of Cash Flows For the ~~Nine-Month~~Six-Month Periods Ended ~~September~~June 30, ~~2019~~2020 and ~~2018~~2019 (unaudited)	6

		Notes to ~~unaudited condensed consolidated interim financial statements~~Unaudited Condensed Consolidated Interim Financial Statements	7

	Item 2.	Management’s ~~discussion~~Discussion and ~~analysis~~Analysis of ~~financial condition~~Financial Condition and ~~results~~Results of ~~operations~~Operations	22

	Item 3.	Quantitative and ~~qualitative disclosures~~Qualitative Disclosures about ~~market risk~~Market Risk	3637

	Item 4.	Controls and ~~procedures~~Procedures	3637

Part II - Other Information			3638

	Item 1.	Legal ~~proceedings~~Proceedings	3638

	Item 1a.	Risk ~~factors~~Factors	3638

	Item 2.	Unregistered ~~sales~~Sales of ~~equity securities~~Equity Securities and ~~use~~Use of ~~proceeds~~Proceeds	3638

	Item 3.	Defaults upon ~~senior securities~~Senior Securities	3638

	Item 4.	Mine ~~safety disclosures~~Safety Disclosures	3638

	Item 5.	Other ~~information~~Information	3638

	Item 6.	Exhibits	3738

Signatures			3839

Table of Contents

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

RLI Corp. and Subsidiaries

Condensed Consolidated Statements of Earnings and Comprehensive Earnings

(Unaudited)



	For the Three-Month Periods				For the Nine-Month Periods				For the Three-Month Periods				For the Six-Month Periods
	Ended September 30,				Ended September 30,				Ended June 30,				Ended June 30,
(in thousands, except per share data)	2019		2018		2019		2018		2020		2019		2020		2019

Net premiums earned	$	211,255	$	200,815	$	623,485	$	587,364	$	208,734	$	207,541	$	424,316	$	412,230
Net investment income		17,532		16,314		51,095		45,123		16,917		16,998		34,695		33,563
Net realized gains		3,211		18,808		17,043		48,117
Other-than-temporary impairment (OTTI) losses on investments		-		(161)		-		(217)
Net realized gains (losses)										(2,109)		4,764		13,043		13,832
Net unrealized gains (losses) on equity securities		4,906		4,848		47,214		(34,535)		74,705		8,810		(55,690)		42,308
Consolidated revenue	$	236,904	$	240,624	$	738,837	$	645,852	$	298,247	$	238,113	$	416,364	$	501,933
Losses and settlement expenses		108,990		110,231		307,206		304,305		101,202		103,919		212,223		198,216
Policy acquisition costs		71,552		68,414		214,586		201,473		69,463		71,742		142,404		143,034
Insurance operating expenses		16,982		14,408		50,597		42,191		13,906		16,948		28,287		33,615
Interest expense on debt		1,861		1,862		5,583		5,576		1,903		1,861		3,800		3,722
General corporate expenses		2,583		2,947		9,142		7,871		1,994		3,283		3,749		6,559
Total expenses	$	201,968	$	197,862	$	587,114	$	561,416	$	188,468	$	197,753	$	390,463	$	385,146
Equity in earnings of unconsolidated investees		4,011		3,587		17,793		15,853		5,100		8,468		9,614		13,782
Earnings before income taxes	$	38,947	$	46,349	$	169,516	$	100,289	$	114,879	$	48,828	$	35,515	$	130,569
Income tax expense		6,623		6,977		31,252		15,450		22,713		8,361		4,616		24,629
Net earnings	$	32,324	$	39,372	$	138,264	$	84,839	$	92,166	$	40,467	$	30,899	$	105,940

Other comprehensive earnings (loss), net of tax		15,341		(7,696)		72,506		(41,769)
Other comprehensive earnings, net of tax										53,571		27,864		40,540		57,165
Comprehensive earnings	$	47,665	$	31,676	$	210,770	$	43,070	$	145,737	$	68,331	$	71,439	$	163,105

Earnings per share:
Basic:
Basic net earnings per share	$	0.72	$	0.89	$	3.09	$	1.91	$	2.05	$	0.91	$	0.69	$	2.37
Basic comprehensive earnings per share	$	1.06	$	0.71	$	4.72	$	0.97	$	3.24	$	1.53	$	1.59	$	3.66

Diluted:
Diluted net earnings per share	$	0.71	$	0.88	$	3.06	$	1.90	$	2.04	$	0.89	$	0.68	$	2.35
Diluted comprehensive earnings per share	$	1.05	$	0.70	$	4.66	$	0.96	$	3.22	$	1.51	$	1.58	$	3.62

Weighted average number of common shares outstanding:
Basic		44,823		44,400		44,689		44,311		44,951		44,704		44,936		44,620
Diluted		45,349		44,940		45,192		44,760		45,274		45,219		45,311		45,056

Cash dividends paid per common share	$	0.23	$	0.22	$	0.68	$	0.65

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

Table of Contents

RLI Corp. and Subsidiaries

Condensed Consolidated Balance Sheets

(Unaudited)

September 30,

December 31,
(in thousands, except share data)

2019

2018

ASSETS




Investments and cash:

Fixed income:

Available-for-sale, at fair value (amortized cost - $1,881,963 at 9/30/19 and $1,776,465 at 12/31/18)

$
1,957,025

$
1,760,515
Equity securities, at fair value (cost - $260,883 at 9/30/19 and $220,373 at 12/31/18)

428,297

340,483
Short-term investments, at cost which approximates fair value

5,534

11,550
Other invested assets

59,577

51,542
Cash

64,048

30,140
Total investments and cash

$
2,514,481

$
2,194,230
Accrued investment income

14,547

14,033
Premiums and reinsurance balances receivable, net of allowances for uncollectible amounts of $16,860 at 9/30/19 and $16,967 at 12/31/18

157,111

152,576
Ceded unearned premium

88,174

71,174
Reinsurance balances recoverable on unpaid losses and settlement expenses, net of allowances for uncollectible amounts of $9,764 at 9/30/19 and $9,793 at 12/31/18

382,030

364,999
Deferred policy acquisition costs

86,523

84,934
Property and equipment, at cost, net of accumulated depreciation of $60,299 at 9/30/19 and $54,275 at 12/31/18

52,626

54,692
Investment in unconsolidated investees

113,528

94,967
Goodwill and intangibles

54,228

54,534
Other assets

41,816

18,926
TOTAL ASSETS

$
3,505,064

$
3,105,065

LIABILITIES AND SHAREHOLDERS’ EQUITY

Liabilities

Unpaid losses and settlement expenses

$
1,557,358

$
1,461,348
Unearned premiums

532,493

496,505
Reinsurance balances payable

25,690

22,591
Funds held

78,161

72,309
Income taxes-deferred

55,910

24,238
Bonds payable, long-term debt

149,255

149,115
Accrued expenses

47,952

45,124
Other liabilities

58,625

26,993
TOTAL LIABILITIES

$
2,505,444

$
2,298,223

Shareholders’ Equity

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

(67,762,302 shares issued, 44,832,088 shares outstanding at 9/30/19)

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

$
678

$
674
Paid-in capital

318,092

305,660
Accumulated other comprehensive earnings (loss)

57,934

(14,572)
Retained earnings

1,015,915

908,079
Deferred compensation

7,788

8,354
Less: Treasury shares at cost

(22,930,214 shares at 9/30/19 and 12/31/18)

(400,787)

(401,353)
TOTAL SHAREHOLDERS’ EQUITY

$
999,620

$
806,842
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY

$
3,505,064

$
3,105,065



	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.

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, 2018	44,148,355	$	853,598	$	67,079	$	233,077	$	157,919	$	788,522	$	8,640	$	(401,639)
Cumulative-effect adjustment from ASU 2016-01 and 2018-02	—		86		—		—		(138,494)		138,580		—		—
Net earnings	—		12,216		—		—		—		12,216		—		—
Other comprehensive earnings (loss), net of tax	—		(26,398)		—		—		(26,398)		—		—		—
Deferred compensation	—		—		—		—		—		—		(584)		584
Share-based compensation	104,771		2,721		104		2,617		—		—		—		—
Dividends and dividend equivalents ($0.21 per share)	—		(9,290)		—		—		—		(9,290)		—		—
Balance, March 31, 2018	44,253,126	$	832,933	$	67,183	$	235,694	$	(6,973)	$	930,028	$	8,056	$	(401,055)
Par value conversion from $1.00 per share to $0.01 per share	—		—		(66,513)		66,513		—		—		—		—
Net earnings	—		33,251		—		—		—		33,251		—		—
Other comprehensive earnings (loss), net of tax	—		(7,675)		—		—		(7,675)		—		—		—
Deferred compensation	—		—		—		—		—		—		(120)		120
Share-based compensation	86,813		1,041		3		1,038		—		—		—		—
Dividends and dividend equivalents ($0.22 per share)	—		(9,753)		—		—		—		(9,753)		—		—
Balance, June 30, 2018	44,339,939	$	849,797	$	673	$	303,245	$	(14,648)	$	953,526	$	7,936	$	(400,935)
Net earnings	—		39,372		—		—		—		39,372		—		—
Other comprehensive earnings (loss), net of tax	—		(7,696)		—		—		(7,696)		—		—		—
Deferred compensation	—		—		—		—		—		—		(171)		171
Share-based compensation	144,715		155		1		154		—		—		—		—
Dividends and dividend equivalents ($0.22 per share)	—		(9,772)		—		—		—		(9,772)		—		—
Balance, September 30, 2018	44,484,654	$	871,856	$	674	$	303,399	$	(22,344)	$	983,126	$	7,765	$	(400,764)

								Accumulated															Accumulated
		Total						Other									Total						Other
	Common	Shareholders’		Common		Paid-in		Comprehensive		Retained		Deferred		Treasury		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		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)	44,504,043	$	806,842	$	674	$	305,660	$	(14,572)	$	908,079	$	8,354	$	(401,353)
Net earnings	—		65,473		—		—		—		65,473		—		—
Net earnings (loss)																—		65,473		—		—		—		65,473		—		—
Other comprehensive earnings (loss), net of tax	—		29,301		—		—		29,301		—		—		—	—		29,301		—		—		29,301		—		—		—
Deferred compensation	—		—		—		—		—		—		(1,039)		1,039	—		—		—		—		—		—		(1,039)		1,039
Share-based compensation	50,213		2,892		1		2,891		—		—		—		—	50,213		2,892		1		2,891		—		—		—		—
Dividends and dividend equivalents ($0.22 per share)	—		(9,803)		—		—		—		(9,803)		—		—	—		(9,803)		—		—		—		(9,803)		—		—
Balance, March 31, 2019	44,554,256	$	894,705	$	675	$	308,551	$	14,729	$	963,749	$	7,315	$	(400,314)	44,554,256	$	894,705	$	675	$	308,551	$	14,729	$	963,749	$	7,315	$	(400,314)
Net earnings	—		40,467		—		—		—		40,467		—		—
Net earnings (loss)																—		40,467		—		—		—		40,467		—		—
Other comprehensive earnings (loss), net of tax	—		27,864		—		—		27,864		—		—		—	—		27,864		—		—		27,864		—		—		—
Deferred compensation	—		—		—		—		—		—		215		(215)	—		—		—		—		—		—		215		(215)
Share-based compensation	232,941		7,217		2		7,215		—		—		—		—	232,941		7,217		2		7,215		—		—		—		—
Dividends and dividend equivalents ($0.23 per share)	—		(10,305)		—		—		—		(10,305)		—		—	—		(10,305)		—		—		—		(10,305)		—		—
Balance, June 30, 2019	44,787,197	$	959,948	$	677	$	315,766	$	42,593	$	993,911	$	7,530	$	(400,529)	44,787,197	$	959,948	$	677	$	315,766	$	42,593	$	993,911	$	7,530	$	(400,529)
Net earnings	—		32,324		—		—		—		32,324		—		—

																							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	—		15,341		—		—		15,341		—		—		—	—		(13,031)		—		—		(13,031)		—		—		—
Deferred compensation	—		—		—		—		—		—		258		(258)	—		—		—		—		—		—		(1,010)		1,010
Share-based compensation	44,891		2,327		1		2,326		—		—		—		—	53,641		3,863		1		3,862		—		—		—		—
Dividends and dividend equivalents ($0.23 per share)	—		(10,320)		—		—		—		(10,320)		—		—	—		(10,343)		—		—		—		(10,343)		—		—
Balance, September 30, 2019	44,832,088	$	999,620	$	678	$	318,092	$	57,934	$	1,015,915	$	7,788	$	(400,787)
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.

Table of Contents

RLI Corp. and Subsidiaries

Condensed Consolidated Statements of Cash Flows

(Unaudited)

For the Nine-Month Periods

Ended September 30,
(in thousands)

2019

2018

Net cash provided by operating activities

$
186,762

$
163,369
Cash Flows from Investing Activities

Investments purchased

$
(466,039)

$
(636,859)
Investments sold

222,893

444,637
Investments called or matured

106,241

102,244
Net change in short-term investments

6,016

(8,546)
Net property and equipment purchased

(4,056)

(4,838)
Other

83

89
Net cash used in investing activities

$
(134,862)

$
(103,273)

Cash Flows from Financing Activities

Cash dividends paid

$
(30,428)

$
(28,815)
Proceeds from stock option exercises

12,436

3,917
Net cash used in financing activities

$
(17,992)

$
(24,898)

Net increase in cash

$
33,908

$
35,198

Cash at the beginning of the period

$
30,140

$
24,271
Cash at September 30

$
64,048

$
59,469



	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.

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NOTES TO UNAUDITED CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

A. ~~DESCRIPTION OF BUSINESS~~

RLI Corp. (the Company) is an insurance holding company that was organized in 1965. As reported in previous SEC filings, RLI Corp. changed its state of incorporation from the State of Illinois to the State of Delaware on May 4, 2018 (the Reincorporation). The Reincorporation was effected by merging RLI Corp., an Illinois corporation (RLI Illinois) into RLI Corp., a Delaware corporation (RLI Delaware). Each outstanding share of RLI Illinois common stock, which had a par value of $1.00 per share, was automatically converted into one outstanding share of RLI Delaware common stock, with a par value of $0.01 per share. In order to reflect the new par value of common stock on the balance sheet, a $66.5 million reclassification from common stock to paid-in-capital was made during the second quarter of 2018. For more information on the Reincorporation, see RLI Corp.’s Form 8-K filed on May 7, 2018.

B. BASIS OF PRESENTATION

The unaudited condensed consolidated interim financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (GAAP) for interim financial reporting and with the instructions to Form 10-Q and Regulation S-X. Accordingly, they do not include all of the disclosures required by GAAP for complete financial statements. As such, these unaudited condensed consolidated interim financial statements should be read in conjunction with our ~~2018~~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 ~~September~~June 30, ~~2019~~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 ~~2018~~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.

C.B. ADOPTED ACCOUNTING STANDARDS

~~ASU 2016-02, Leases (Topic 842)~~

ASU 2016-02 was issued to improve the financial reporting of leasing transactions. Under previous guidance for lessees, leases were only included on the balance sheet if certain criteria, classifying the agreement as a capital lease, were met. This update requires the recognition of a right-of-use asset and a corresponding lease liability, discounted to the present value, for all leases that extend beyond 12 months. For operating leases, the asset and liability are expensed over the lease term on a straight-line basis, with all cash flows included in the operating section of the statement of cash flows. For finance leases, interest on the lease liability is recognized separately from the amortization of the right-of-use asset in the statement of earnings and the repayment of the principal portion of the lease liability is classified as a financing activity while the interest component is included in the operating section of the statement of cash flows.

~~We adopted ASU 2016-02, ASU 2018-10~~ ~~Codification Improvements to Topic 842: Leases~~ ~~and ASU 2018-11~~ ~~Leases (Topic 842): Targeted Improvements~~ on January 1, 2019. We applied the standards using the alternative transition method provided by ASU 2018-11 under which leases were recognized at the date of adoption and a cumulative-effect adjustment to the opening balance of retained earnings would have been recognized in the period of adoption. As the standard did not have an impact on our net earnings, no adjustment to the opening balance of retained earnings was required. As of September 30, 2019, $23.6 million of right-of-use assets and $25.8 million of lease liabilities were included in the other assets and other liabilities line items of the balance sheet, respectively, as a result of the adoption of this update. We implemented controls for the adoption of the standard and the ongoing monitoring of the right-of-use asset and lease liability, but they did not materially affect our internal control over financial reporting.

~~Table of Contents~~

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

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

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

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

ASU 2018-07 was issued to simplify the accounting for share-based transactions by expanding the scope of Topic 718 from only being applicable to share-based payments to employees to include share-based payment transactions for acquiring goods and services from nonemployees. As a result, nonemployee share-based transactions will be measured by estimating the fair value of the equity instruments at the grant date, taking into consideration the probability of satisfying performance conditions. We adopted ASU 2018-07 on January 1, 2019. Our long-term incentive plan limits the awards of share-based payments to employees and directors of the Company. As our share-based compensation expense to nonemployee directors was $0.5 million in the first nine months of 2019, the standard did not have a material impact on our financial statements.

~~D. PROSPECTIVE ACCOUNTING STANDARDS~~

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

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

~~This~~We adopted ASU ~~is effective for annual and interim reporting periods beginning after December 15, 2019. Early adoption is permitted beginning after December 15, 2018. Upon adoption, the update will be applied~~2016-13 on January 1, 2020 using the modified-retrospective ~~approach, by which a cumulative-effect adjustment will be made~~approach. The standard applied to ~~retained earnings as~~three of the ~~beginning of the first reporting period in which the guidance is effective. This update will have the most impact on our~~Company’s balance sheet accounts: available-for-sale fixed income ~~portfolio~~securities, premiums receivable and reinsurance balances recoverable. ~~However,~~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 ~~(84.5~~(84 percent rated A or better at ~~September~~June 30, 2020 and 85 percent at December 31, 2019) ~~and~~, we purchase reinsurance from financially strong reinsurers, ~~for which~~ we ~~already~~ have a long history of collecting premium receivables through various economic cycles and we had previously maintained an allowance for uncollectible premium and reinsurance ~~amounts, we do not expect that~~balances. In total, the ~~effect~~cumulative-effect adjustment made to the balance sheet as of ~~adoption will be material.~~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.

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

~~ASU 2018-13 modifies the disclosure requirements for~~Ceded unearned premiums and reinsurance balances recoverable on paid and unpaid losses and settlement expenses are reported separately as assets, ~~and liabilities measured at fair value. The requirements to disclose the amount~~instead of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, the policy for timing of transfers between levels and the valuation processes for Level 3 fair value measurements have all been removed. However, the changes in unrealized gains and losses included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period must be disclosed alongbeing netted with the ~~range~~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 ~~weighted~~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 ~~of significant unobservable inputs used to develop Level 3 fair value measurements (or other quantitative information if it is more~~default rating percentage by S&P rating, and

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~~reasonable). Finally,~~record an additional allowance for ~~investments measured at net asset value, the requirements have been modified so~~unrecoverable amounts from reinsurers. This credit allowance is reviewed on an ongoing basis to ensure that the ~~timing of liquidation and the date when restrictions from redemption might lapse are only disclosed if the investee has communicated the timing~~amount makes a reasonable provision for reinsurance balances that we may be unable to ~~the entity or announced the timing publicly.~~

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

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

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

E.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. NaN write-offs or recoveries were applied to the allowances in the first six months of 2020.

D. INTANGIBLE ASSETS

Goodwill and intangible assets totaled ~~$54.2~~$53.9 million and ~~$54.5~~$54.1 million at ~~September~~June 30, ~~2019~~2020 and December 31, ~~2018,~~2019, respectively, as detailed in the following table:


Goodwill and Intangible Assets		September 30,		December 31,		June 30,		December 31,
(in thousands)		2019		2018		2020		2019
Goodwill
Energy surety	$	25,706	$	25,706	$	25,706	$	25,706
Miscellaneous and contract surety		15,110		15,110		15,110		15,110
Small commercial		5,246		5,246		5,246		5,246
Total goodwill	$	46,062	$	46,062	$	46,062	$	46,062

Intangibles
State insurance licenses	$	7,500	$	7,500
Definite-lived intangibles, net of accumulated amortization of $3,368 at 9/30/19 and $3,062 at 12/31/18		666		972
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	$	8,166	$	8,472	$	7,861	$	8,065

Total goodwill and intangibles	$	54,228	$	54,534	$	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 ~~third~~second quarter of ~~2019~~2020 and ~~$0.3~~$0.2 million for the ~~nine-month~~six-month period ended ~~September~~June 30, ~~2019,~~2020, the same as for the comparable periods in ~~2018.~~2019.

Annual impairment ~~assessment was~~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 ~~2019.~~2020. Based upon these reviews, NaN of the assets were impaired. In addition, ~~as of September 30, 2019,~~ there were no triggering events as of June 30, 2020 that would suggest an updated ~~review was necessary on the above-mentioned~~impairment test would be needed for our goodwill and intangible assets.

Adverse loss experience triggered the need to test the medical professional liability reporting unit during the first quarter of 2018, which resulted in a $4.4 million non-cash impairment charge. A fair value for the medical professional liability reporting unit’s agency relationships, carried as a definite-lived intangible, was determined by using a discounted cash flow valuation. The carrying value exceeded the fair value, resulting in a $0.8 million non-cash impairment charge. A fair value for the medical professional liability reporting unit’s goodwill was determined by using a weighted average of a market approach

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and discounted cash flow valuation. The carrying value exceeded the fair value, resulting in a $3.6 million non-cash impairment charge. Subsequent to the first quarter 2018 impairment, the medical professional liability reporting unit had 0 remaining goodwill or intangible assets. All impairment charges were recorded as net realized losses in the consolidated statement of earnings.

F.E. EARNINGS PER SHARE

Basic earnings per share (EPS) excludes dilution and is computed by dividing income available to common shareholders by the weighted-average number of common shares outstanding for the period. Diluted EPS reflects the dilution that could occur if securities or other contracts to issue common stock or common stock equivalents were exercised or converted into common stock. When inclusion of common stock equivalents increases the earnings per share or reduces the loss per share, the effect on earnings is anti-dilutive. Under these circumstances, the diluted net earnings or net loss per share is computed excluding the common stock equivalents. The following represents a reconciliation of the numerator and denominator of the basic and diluted EPS computations contained in the unaudited condensed consolidated interim financial statements:

For the Three-Month Period

For the Three-Month Period

Ended September 30, 2019

Ended September 30, 2018

Income

Shares

Per Share

Income

Shares

Per Share
(in thousands, except per share data)

(Numerator)

(Denominator)

Amount

(Numerator)

(Denominator)

Amount

Basic EPS

Income available to common shareholders

$
32,324

44,823

$
0.72

$
39,372

44,400

$
0.89
Effect of Dilutive Securities

Stock options

-

526

-

540

Diluted EPS

Income available to common shareholders

$
32,324

45,349

$
0.71

$
39,372

44,940

$
0.88

For the Nine-Month Period

For the Nine-Month Period

Ended September 30, 2019

Ended September 30, 2018

Income

Shares

Per Share

Income

Shares

Per Share
(in thousands, except per share data)

(Numerator)

(Denominator)

Amount

(Numerator)

(Denominator)

Amount

Basic EPS

Income available to common shareholders

$
138,264

44,689

$
3.09

$
84,839

44,311

$
1.91
Effect of Dilutive Securities

Stock options

-

503

-

449

Diluted EPS

Income available to common shareholders

$
138,264

45,192

$
3.06

$
84,839

44,760

$
1.90

~~G. COMPREHENSIVE EARNINGS~~

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

Unrealized gains, net of tax, on the fixed income portfolio for the first nine months of 2019 were $72.5 million, compared to $41.8 million of unrealized losses, net of tax, during the same period last year. Unrealized gains in the first nine months of 2019 were attributable to declining interest rates, which increased the fair value of securities held in the fixed income portfolio. In contrast, rising interest rates decreased the fair value of securities held in the fixed income portfolio in the first nine months of 2018.

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

~~Table of Contents~~

(in thousands)

For the Three-Month Periods

For the Nine-Month Periods

Ended September 30,

Ended September 30,
Unrealized Gains/Losses on Available-for-Sale Securities

2019

2018

2019

2018

Beginning balance

$
42,593

$
(14,648)

$
(14,572)

$
157,919
Cumulative effect adjustment of ASU 2016-01

-

-

-

(142,219)
Adjusted beginning balance

$
42,593

$
(14,648)

$
(14,572)

$
15,700
Other comprehensive earnings before reclassifications

16,231

(7,034)

74,414

(41,829)
Amounts reclassified from accumulated other comprehensive earnings

(890)

(662)

(1,908)

60
Net current-period other comprehensive earnings (loss)

$
15,341

$
(7,696)

$
72,506

$
(41,769)
Reclassification of stranded tax effect per ASU 2018-02

-

-

-

3,725
Ending balance

$
57,934

$
(22,344)

$
57,934

$
(22,344)

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

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

The sale or other-than-temporary impairment of an available-for-sale security results in amounts being reclassified from accumulated other comprehensive earnings to current period net earnings. The effects of reclassifications out of accumulated other comprehensive earnings by the respective line items of net earnings are presented in the following table:

Amount Reclassified from Accumulated Other

(in thousands)

Comprehensive Earnings

For the Three-Month

For the Nine-Month

Component of Accumulated

Periods Ended September 30,

Periods Ended September 30,

Affected line item in the
Other Comprehensive Earnings

2019

2018

2019

2018

Statement of Earnings

Unrealized gains and losses on available-for-sale securities

$
1,126

$
999

$
2,415

$
141

Net realized gains (losses)

-

(161)

-

(217)

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

$
1,126

$
838

$
2,415

$
(76)

Earnings before income taxes

(236)

(176)

(507)

16

Income tax benefit (expense)

$
890

$
662

$
1,908

$
(60)

Net earnings (loss)

~~2. INVESTMENTS~~

Our investments are primarily composed of fixed income debt securities and common stock equity securities. We carry our equity securities at fair value and categorize all of our debt securities as available-for-sale, which are carried at fair value. When available, we obtain quoted market prices to determine fair value for our investments. If a quoted market price is not available, fair value is estimated using a secondary pricing source or using quoted market prices of similar securities. We have 0 investment securities for which fair value is determined using Level 3 inputs as defined in note 3 to the unaudited condensed consolidated interim financial statements, “Fair Value Measurements.”

118

Table of Contents

~~Fixed Income Securities - Available-for-Sale~~


	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

~~The amortized cost~~Our comprehensive earnings include net earnings plus after-tax unrealized gains and ~~fair value of available-for-sale securities at September 30, 2019 and December 31, 2018 were as follows:~~

Available-for-sale

September 30, 2019
(in thousands)

Cost or

Gross

Gross



Amortized

Unrealized

Unrealized

Fair
Asset Class

Cost

Gains

Losses

Value
U.S. government

$
232,269

$
8,705

$
(61)

$
240,913
U.S. agency

29,703

2,776

-

32,479
Non-U.S. govt. & agency

9,241

290

(189)

9,342
Agency MBS

421,448

10,632

(571)

431,509
ABS/CMBS*

173,469

3,230

(144)

176,555
Corporate

675,463

34,148

(1,509)

708,102
Municipal

340,370

17,781

(26)

358,125
Total Fixed Income

$
1,881,963

$
77,562

$
(2,500)

$
1,957,025

Available-for-sale

December 31, 2018
(in thousands)

Cost or

Gross

Gross



Amortized

Unrealized

Unrealized

Fair
Asset Class

Cost

Gains

Losses

Value
U.S. government

$
199,982

$
1,232

$
(985)

$
200,229
U.S. agency

31,716

403

(215)

31,904
Non-U.S. govt. & agency

8,170

-

(531)

7,639
Agency MBS

402,992

1,709

(9,448)

395,253
ABS/CMBS*

137,224

375

(876)

136,723
Corporate

681,909

2,894

(16,124)

668,679
Municipal

314,472

6,926

(1,310)

320,088
Total Fixed Income

$
1,776,465

$
13,539

$
(29,489)

$
1,760,515

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

~~The following table presents the amortized cost and fair value of available-for-sale debt securities by contractual maturity dates as of September 30, 2019:~~

September 30, 2019
Available-for-sale

Amortized

Fair
(in thousands)

Cost

Value
Due in one year or less

$
87,635

$
87,812
Due after one year through five years

397,448

408,691
Due after five years through 10 years

593,686

627,483
Due after 10 years

208,277

224,975
Mtge/ABS/CMBS*

594,917

608,064
Total available-for-sale

$
1,881,963

$
1,957,025

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

~~Unrealized Losses~~losses on ~~Fixed Income Securities~~

~~We conduct and document periodic reviews of all~~our fixed income ~~securities with unrealized losses to evaluate whether~~portfolio. In reporting other comprehensive earnings on a net basis in the ~~impairment is other-than-temporary. The following tables are~~statement of earnings, we used ~~as part~~the federal statutory tax rate of our impairment analysis and illustrate the total value of fixed income securities that were in an unrealized loss position as of September 30, 2019 and December 31, 2018. The tables segregate the securities based on type, noting the fair value, amortized cost and unrealized loss on each category of investment as well as in total. The tables further classify the securities based on the length of time they have been in an unrealized loss position. As of September 30, 2019, unrealized losses on fixed income securities,21 percent. Other comprehensive earnings, as shown in the ~~following tables,~~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 ~~0.1 percent of total invested assets. Unrealized losses decreased through~~$40.5 million for the first ~~nine~~six months of ~~2019, as~~2020, compared to $57.2 million during the same period last year. The unrealized gains were attributable to declining interest rates ~~decreased from the end of 2018, increasing~~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.


(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	$	-

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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. NaN 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

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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

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:

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September 30, 2019

December 31, 2018
(in thousands)

< 12 Mos.

12 Mos. &
Greater

Total

< 12 Mos.

12 Mos. &
Greater

Total

U.S. government

Fair value

$
998

$
15,717

$
16,715

$
7,249

$
76,073

$
83,322
Amortized cost

999

15,777

16,776

7,270

77,037

84,307
Unrealized Loss

$
(1)

$
(60)

$
(61)

$
(21)

$
(964)

$
(985)

U.S. agency

Fair value

$
—

$
—

$
—

$
—

$
8,843

$
8,843
Amortized cost

—

—

—

—

9,058

9,058
Unrealized Loss

$
—

$
—

$
—

$
—

$
(215)

$
(215)

Non-U.S. government

Fair value

$
—

$
1,710

$
1,710

$
5,432

$
2,207

$
7,639
Amortized cost

—

1,899

1,899

5,571

2,599

8,170
Unrealized Loss

$
—

$
(189)

$
(189)

$
(139)

$
(392)

$
(531)

Agency MBS

Fair value

$
6,209

$
49,352

$
55,561

$
25,345

$
261,325

$
286,670
Amortized cost

6,215

49,917

56,132

25,486

270,632

296,118
Unrealized Loss

$
(6)

$
(565)

$
(571)

$
(141)

$
(9,307)

$
(9,448)

ABS/CMBS*

Fair value

$
26,521

$
8,101

$
34,622

$
46,918

$
32,137

$
79,055
Amortized cost

26,600

8,166

34,766

47,146

32,785

79,931
Unrealized Loss

$
(79)

$
(65)

$
(144)

$
(228)

$
(648)

$
(876)

Corporate

Fair value

$
32,584

$
16,226

$
48,810

$
306,177

$
147,751

$
453,928
Amortized cost

33,341

16,978

50,319

315,428

154,624

470,052
Unrealized Loss

$
(757)

$
(752)

$
(1,509)

$
(9,251)

$
(6,873)

$
(16,124)

Municipal

Fair value

$
8,579

$
—

$
8,579

$
6,036

$
55,681

$
61,717
Amortized cost

8,605

—

8,605

6,052

56,975

63,027
Unrealized Loss

$
(26)

$
—

$
(26)

$
(16)

$
(1,294)

$
(1,310)

Total fixed income

Fair value

$
74,891

$
91,106

$
165,997

$
397,157

$
584,017

$
981,174
Amortized cost

75,760

92,737

168,497

406,953

603,710

1,010,663
Unrealized Loss

$
(869)

$
(1,631)

$
(2,500)

$
(9,796)

$
(19,693)

$
(29,489)


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

The following table shows the composition of the fixed income securities in unrealized loss positions at September 30, 2019 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.

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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

$
122,495

$
121,660

$
(835)

33.4
%
2

BBB

Baa

12,031

11,683

(348)

13.9
%
3

BB

Ba

12,481

11,981

(500)

20.0
%
4

B

B

20,977

20,245

(732)

29.3
%
5

CCC

Caa

513

428

(85)

3.4
%
6

CC or lower

Ca or lower

-

-

-

-
%

Total

$
168,497

$
165,997

$
(2,500)

100.0
%

~~Evaluating Fixed Income Securities for OTTI~~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

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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 ~~contained 171~~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.

As of June 30, 2020, the discounted cash flow analysis resulted in an ~~unrealized loss position as of September 30, 2019. The $2.5 million in associated unrealized~~allowance for credit losses ~~represents 0.1 percent of the fixed income portfolio’s cost basis. Of these 171~~on 36 securities ~~79 have been in an unrealized loss position for 12 consecutive months or longer.~~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. Any credit-related impairment on fixed income securities we do not plan to sell and for which we are not more likely than not to be required to sell is recognized in net earnings, with the non-credit related impairment recognized in comprehensive earnings. Based on our analysis, ~~our fixed income portfolio is of high credit quality and~~ we believe we will recover the amortized cost basis 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 ~~our fixed income securities.~~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 ~~(OTTI)~~ losses in earnings on the fixed income portfolio in the first ~~nine~~six months of 2019. ~~Comparatively, we recognized $0.2~~

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 ~~OTTI~~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, unrealized losses increased through the first six months of 2020, as increased credit

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spreads more than offset declines in ~~earnings on 2~~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 ~~we no longer had the intent to hold~~were in an unrealized loss position as of June 30, 2020, after factoring in the ~~same period in 2018. There were 0 OTTI~~allowance for credit losses, ~~recognized in other comprehensive earnings on~~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 ~~portfolio~~securities in unrealized loss positions, after factoring in the allowance for credit losses, at June 30, 2020 by the ~~periods presented.~~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.

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	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 ~~September~~June 30, ~~2019~~2020 were ~~$6.9~~$72.4 million during the ~~third~~second quarter, ~~and $61.7~~while unrealized losses were $42.9 million during the first ~~nine months~~half of ~~2019.~~2020. Comparatively, unrealized gains recognized on equity securities still held as of ~~September~~June 30, ~~2018~~2019 were ~~$22.8~~$12.9 million during the ~~third~~second quarter ~~while unrealized losses were $18.2~~and $54.8 million during the first ~~nine months~~half of ~~2018.~~2019.

Other Invested Assets

We had ~~$59.6~~$63.4 million of other invested assets at ~~September~~June 30, ~~2019,~~2020, compared to ~~$51.5~~$70.4 million at the end of ~~2018.~~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 ~~private funds.~~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 ~~$18.8~~$21.6 million at ~~September~~June 30, ~~2019,~~2020, compared to ~~$20.3~~$23.3 million at December 31, ~~2018~~2019 and recognized a total tax benefit of ~~$0.6~~$0.9 million during the ~~third~~second quarter of ~~2019, the same as~~2020, compared to $0.6 million the prior year. For the ~~nine-month~~six-month periods ended ~~September~~June 30, ~~2019~~2020 and ~~2018,~~2019, our LIHTC ~~interests~~interest recognized a total benefit of ~~$1.9~~$1.8 million and ~~$1.7~~$1.2 million, respectively. Our unfunded commitment for our LIHTC investments totaled ~~$7.1~~$7.4 million at ~~September~~June 30, ~~2019~~2020 and will be paid out in installments through 2035.

As of ~~September~~June 30, ~~2019, $16.2~~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 ~~nine-month~~six-month period ~~ending September~~ended June 30, ~~2019,~~2020, there were 0 outstanding borrowings with the FHLBC.

~~We had $7.4 million of unfunded commitments related to our~~Our investments in private funds totaled $24.4 million at ~~September~~June 30, ~~2019. Additionally, our~~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 ~~these investments~~private funds is generally restricted from being transferred or otherwise redeemed without prior consent by the respective entities. ~~An IPO would allow for~~During the ~~transfer~~first quarter of ~~interest~~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 ~~some situations, while~~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 ~~partnership~~partnerships would trigger ~~redemption in others.~~redemption.

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Cash ~~and Short-term Investments~~

Cash consists of uninvested balances in bank accounts. We had a cash balance of ~~$64.0~~$84.8 million at ~~September~~June 30, ~~2019,~~2020, compared to ~~$30.1~~$46.2 million at the end of ~~2018. As of September 30, 2019, we had $5.5 million of short-term investments that were carried at cost and approximated fair value, compared to $11.6 million at December 31, 2018.~~2019.

~~3. FAIR VALUE MEASUREMENTS~~

~~Assets and Liabilities Recorded at Fair Value on a Recurring Basis~~

~~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.~~

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

1516

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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.

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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 September 30, 2019, 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). Pricing for the equity security not traded on an exchange in 2018 was provided by a third-party pricing source and was classified as Level 2.

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 investment’s net asset value per share and are not categorized within the fair value hierarchy.

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

As of September 30, 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

$
—

$
240,913

$
—

$
240,913
U.S. agency

—

32,479

—

32,479
Non-U.S. govt. & agency

—

9,342

—

9,342
Agency MBS

—

431,509

—

431,509
ABS/CMBS*

—

176,555

—

176,555
Corporate

—

708,102

—

708,102
Municipal

—

358,125

—

358,125
Total fixed income securities - available-for-sale

$
—

$
1,957,025

$
—

$
1,957,025
Equity securities

428,297

—

—

428,297
Total

$
428,297

$
1,957,025

$
—

$
2,385,322

As of December 31, 2018

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

$
—

$
200,229

$
—

$
200,229
U.S. agency

—

31,904

—

31,904
Non-U.S. govt. & agency

—

7,639

—

7,639
Agency MBS

—

395,253

—

395,253
ABS/CMBS*

—

136,723

—

136,723
Corporate

—

668,679

—

668,679
Municipal

—

320,088

—

320,088
Total fixed income securities - available-for-sale

$
—

$
1,760,515

$
—

$
1,760,515
Equity securities

339,985

498

—

340,483
Total

$
339,985

$
1,761,013

$
—

$
2,100,998

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

As noted in the above table, we did not have any assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the period. Additionally, there were 0 securities transferred in or out of Levels 1 or 2 during the nine-month period ended September 30, 2019.

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4. ~~HISTORICAL LOSS AND LAE DEVELOPMENT~~

~~The following table is a reconciliation of our unpaid losses and settlement expenses (LAE) for the first nine months of 2019 and 2018:~~

For the Nine-Month Periods

Ended September 30,

(in thousands)

2019

2018

Unpaid losses and LAE at beginning of year

Gross

$
1,461,348

$
1,271,503

Ceded

(364,999)

(301,991)

Net

$
1,096,349

$
969,512

Increase (decrease) in incurred losses and LAE

Current accident year

$
362,395

$
342,807

Prior accident years

(55,189)

(38,502)

Total incurred

$
307,206

$
304,305

Loss and LAE payments for claims incurred

Current accident year

$
(51,270)

$
(45,008)

Prior accident years

(176,957)

(171,725)

Total paid

$
(228,227)

$
(216,733)

Net unpaid losses and LAE at September 30

$
1,175,328

$
1,057,084

Unpaid losses and LAE at September 30

Gross

$
1,557,358

$
1,377,111

Ceded

(382,030)

(320,027)

Net

$
1,175,328

$
1,057,084

For the first nine months of 2019, incurred losses and LAE included $55.2 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, general liability, commercial excess and personal umbrella, professional services, small commercial and surety. Executive products and medical professional liability were the exceptions and experienced adverse development.

For the first nine months of 2018, incurred losses and LAE included $38.5 million of favorable development on prior years’ loss reserves. Commercial excess and personal umbrella, general liability, marine and surety were drivers of the favorable development. Executive products, transportation and medical professional liability experienced adverse development.

5. INCOME TAXES

Our effective tax rate for the three and ~~nine-month~~six-month periods ended ~~September~~June 30, ~~2019~~2020 was ~~17.0~~19.8 percent and ~~18.4~~13.0 percent, respectively, compared to ~~15.1~~17.1 percent and ~~15.4~~18.9 percent, respectively, for the same periods in ~~2018.~~2019. Effective rates are dependent upon components of pretax earnings and the related tax effects. The effective rate was ~~reduced for the three and nine-month period in 2018 by an increased level of tax exempt securities and stock option exercises and the corresponding tax benefits. Additionally, the effective rate was~~ higher for the ~~first nine months of 2019~~three-month period in 2020 due to higher levels of pre-tax earnings ~~which~~and lower levels of tax-favored adjustments compared to 2019. For the six-month period, lower levels of pre-tax earnings caused ~~the~~ tax-favored adjustments to be ~~smaller~~larger on a percentage basis in ~~2019~~2020 compared to the prior year.

Income tax expense (benefit) attributable to income from operations for the three and ~~nine-month~~six-month periods ended ~~September~~June 30, ~~2019~~2020 and ~~2018~~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.

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	For the Three-Month Periods Ended September 30,								For the Nine-Month Periods Ended September 30,								For the Three-Month Periods Ended June 30,								For the Six-Month Periods Ended June 30,
	2019				2018				2019				2018				2020				2019				2020				2019
(in thousands)	Amount		%		Amount		%		Amount		%		Amount		%		Amount		%		Amount		%		Amount		%		Amount		%
Provision for income taxes at the statutory rate of 21%	$	8,179	21.0	%	$	9,733	21.0	%	$	35,598	21.0	%	$	21,061	21.0	%	$	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		(614)	(1.6)	%		(2,273)	(4.9)	%		(3,546)	(2.1)	%		(4,340)	(4.3)	%		(265)	(0.2)	%		(2,191)	(4.5)	%		(1,293)	(3.6)	%		(2,932)	(2.3)	%
Tax exempt interest income		(276)	(0.7)	%		(375)	(0.8)	%		(930)	(0.6)	%		(1,460)	(1.5)	%		(323)	(0.3)	%		(309)	(0.6)	%		(636)	(1.8)	%		(654)	(0.5)	%
Dividends received deduction		(218)	(0.6)	%		(150)	(0.3)	%		(635)	(0.4)	%		(516)	(0.5)	%		(212)	(0.2)	%		(214)	(0.4)	%		(484)	(1.4)	%		(417)	(0.3)	%
ESOP dividends paid deduction		(136)	(0.3)	%		(139)	(0.3)	%		(413)	(0.2)	%		(423)	(0.4)	%		(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		(312)	(0.8)	%		181	0.4	%		1,178	0.7	%		1,128	1.1	%		(635)	(0.5)	%		547	1.1	%		(524)	(1.4)	%		568	0.5	%
Total tax expense	$	6,623	17.0	%	$	6,977	15.1	%	$	31,252	18.4	%	$	15,450	15.4	%
Total tax expense (benefit)																	$	22,713	19.8	%	$	8,361	17.1	%	$	4,616	13.0	%	$	24,629	18.9	%

6.5. 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 ~~granted 2,250,085 awards~~awarded 2,312,835 stock options and restricted stock units under the 2015 ~~LTIP, including 346,455 thus far in 2019.~~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.

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The following tables summarize option activity for the ~~nine-month~~six-month periods ended ~~September~~June 30, ~~2019~~2020 and ~~2018:~~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
		Weighted		Average	Aggregate			Weighted		Average	Aggregate
	Number of	Average		Remaining	Intrinsic		Number of	Average		Remaining	Intrinsic
	Options	Exercise		Contractual	Value		Options	Exercise		Contractual	Value
	Outstanding	Price		Life	(in 000’s)		Outstanding	Price		Life	(in 000’s)

Outstanding options at January 1, 2019	1,964,880	$	54.24				1,964,880	$	54.24
Options granted	324,525	$	81.27				292,150		80.36
Options exercised	(493,615)	$	45.61		$	18,157	(414,470)		44.70		$	14,941
Options canceled/forfeited	(59,050)	$	60.92				(33,600)		57.61
Outstanding options at September 30, 2019	1,736,740	$	61.52	5.43	$	54,515
Exercisable options at September 30, 2019	622,290	$	52.78	4.03	$	24,975

				Weighted
		Weighted		Average	Aggregate
	Number of	Average		Remaining	Intrinsic
	Options	Exercise		Contractual	Value
	Outstanding	Price		Life	(in 000’s)

Outstanding options at January 1, 2018	2,257,015	$	46.80
Options granted	401,250	$	64.31
Options exercised	(685,810)	$	36.72		$	23,603
Options canceled/forfeited	(15,600)	$	61.44
Outstanding options at September 30, 2018	1,956,855	$	53.81	5.50	$	48,476
Exercisable options at September 30, 2018	678,905	$	45.60	4.03	$	22,388
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

~~The~~Through 2019, the majority of our annual stock ~~options are granted annually~~option grants were authorized at our regular board meeting in May. In addition, ~~options are approved at the May meeting for~~ quarterly grants to certain retirement eligible ~~employees.~~employees were historically authorized at the May meeting. Since stock option grants to retirement eligible employees are fully expensed when issued, the approach ~~allows~~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.

~~Thus far in 2019, 324,525~~In the first six months of 2020, 30,375 stock options were granted with a weighted average exercise price of ~~$81.27~~$94.62 and a weighted average fair value of ~~$13.47.~~$14.48. We recognized ~~$1.2~~$0.6 million of expense in the ~~third~~second quarter of ~~2019~~2020 and ~~$3.6~~$1.6 million in the first ~~nine~~six months of ~~2019~~2020 related to options vesting. Since options granted under our 2015 LTIP are non-qualified, we recorded a tax benefit of ~~$0.2~~$0.1 million in the ~~third~~second quarter of ~~2019~~2020 and ~~$0.7~~$0.3 million in the first ~~nine~~six months of ~~2019~~2020 related to this compensation expense. Total unrecognized compensation expense relating to outstanding and unvested options was ~~$5.8~~$3.6 million, which will be recognized over the remainder of the vesting period. Comparatively, we recognized ~~$1.2~~$1.4 million of compensation expense in the ~~third~~second quarter of ~~2018~~2019 and ~~$3.4~~$2.4 million in the first ~~nine~~six months of ~~2018.~~2019. We recorded a tax benefit of ~~$0.2~~$0.3 million in the ~~third~~second quarter of ~~2018~~2019 and ~~$0.7~~$0.5 million in the first ~~nine~~six months of ~~2018~~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 ~~September~~June 30:


	2019			2018			2020			2019

Weighted-average fair value of grants	$	13.47		$	10.38		$	14.48		$	13.33
Risk-free interest rates		2.41	%		2.69	%		1.54	%		2.42	%
Dividend yield		2.69	%		3.15	%		2.69	%		2.69	%
Expected volatility		22.71	%		22.88	%		22.68	%		22.71	%
Expected option life		4.95	years		5.06	years		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

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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.

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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 ~~September~~June 30, ~~2019,~~2020, 45,350 RSUs have been granted to employees under the 2015 LTIP ~~including 15,275 in 2019,~~ and ~~43,530~~28,946 remain outstanding. We recognized ~~$0.3~~$0.1 million of expense on these units in the ~~third~~second quarter of ~~2019~~2020 and ~~$0.6~~$0.3 million in the first ~~nine~~six months of ~~2019.~~2020. Total unrecognized compensation expense relating to outstanding and unvested RSUs was ~~$1.2~~$0.6 million, which will be recognized over the remainder of the vesting period. Comparatively, we recognized $0.2 million ~~of expense~~ in the ~~third~~second quarter of ~~2018~~2019 and ~~$0.4~~$0.3 million in the first ~~nine~~six months of ~~2018.~~2019.

In ~~2018 and~~ 2019, each outside director received RSUs with a fair market value ~~of $50,000~~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 ~~September~~June 30, ~~2019,~~2020, 15,085 restricted stock units have been granted to directors under the 2015 LTIP ~~including 6,655 in 2019,~~ and ~~6,081~~NaN remain outstanding. We recognized less than $0.1 million of compensation expense on these units in the ~~third~~second quarter of 2019 and $0.5 million in the first nine months of 2019. Total unrecognized compensation expense relating to outstanding and unvested director RSUs was $0.3 million, which will be recognized over the remainder of the vesting period. Comparatively, we recognized $0.1 million of compensation expense in the third quarter of 20182020 and $0.2 million in the first ~~nine~~six months of ~~2018.~~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.

7.6. 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 Nine-Month Periods				For the Three-Month Periods				For the Six-Month Periods
REVENUES	Ended September 30,				Ended September 30,				Ended June 30,				Ended June 30,
(in thousands)	2019		2018		2019		2018		2020		2019		2020		2019
Casualty	$	140,423	$	131,605	$	415,667	$	387,068	$	135,215	$	138,344	$	278,635	$	275,244
Property		41,476		39,067		120,194		111,439		45,387		39,972		89,735		78,718
Surety		29,356		30,143		87,624		88,857		28,132		29,225		55,946		58,268
Net premiums earned	$	211,255	$	200,815	$	623,485	$	587,364	$	208,734	$	207,541	$	424,316	$	412,230
Net investment income		17,532		16,314		51,095		45,123		16,917		16,998		34,695		33,563
Net realized gains		3,211		18,647		17,043		47,900
Net realized gains (losses)										(2,109)		4,764		13,043		13,832
Net unrealized gains (losses) on equity securities		4,906		4,848		47,214		(34,535)		74,705		8,810		(55,690)		42,308
Total consolidated revenue	$	236,904	$	240,624	$	738,837	$	645,852	$	298,247	$	238,113	$	416,364	$	501,933

NET EARNINGS
NET EARNINGS (LOSS)
(in thousands)	2019		2018		2019		2018		2020		2019		2020		2019
Casualty	$	2,370	$	(1,974)	$	14,652	$	2,441	$	9,733	$	6,939	$	8,410	$	12,282
Property		6,202		2,621		14,012		12,150		6,167		(436)		16,075		7,810
Surety		5,159		7,115		22,432		24,804		8,263		8,429		16,917		17,273
Net underwriting income	$	13,731	$	7,762	$	51,096	$	39,395	$	24,163	$	14,932	$	41,402	$	37,365
Net investment income		17,532		16,314		51,095		45,123		16,917		16,998		34,695		33,563
Net realized gains		3,211		18,647		17,043		47,900
Net realized gains (losses)										(2,109)		4,764		13,043		13,832
Net unrealized gains (losses) on equity securities		4,906		4,848		47,214		(34,535)		74,705		8,810		(55,690)		42,308
General corporate expense and interest on debt		(4,444)		(4,809)		(14,725)		(13,447)		(3,897)		(5,144)		(7,549)		(10,281)
Equity in earnings of unconsolidated investees		4,011		3,587		17,793		15,853		5,100		8,468		9,614		13,782
Total earnings before income taxes	$	38,947	$	46,349	$	169,516	$	100,289
Earnings before income taxes									$	114,879	$	48,828	$	35,515	$	130,569
Income tax expense		6,623		6,977		31,252		15,450		22,713		8,361		4,616		24,629
Total net earnings	$	32,324	$	39,372	$	138,264	$	84,839
Net earnings									$	92,166	$	40,467	$	30,899	$	105,940

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


	For the Three-Month Periods				For the Nine-Month Periods				For the Three-Month Periods				For the Six-Month Periods
NET PREMIUMS EARNED	Ended September 30,				Ended September 30,				Ended June 30,				Ended June 30,
(in thousands)	2019		2018		2019		2018		2020		2019		2020		2019
Casualty
Commercial excess and personal umbrella	$	35,959	$	31,244	$	102,580	$	91,845	$	42,321	$	34,340	$	82,409	$	66,621
General liability		25,005		22,485		74,240		68,988		22,651		25,347		46,649		49,235
Professional services										21,384		19,275		42,079		39,574
Commercial transportation		21,067		20,747		61,979		60,570		11,139		20,508		32,324		40,912
Professional services		20,816		19,890		60,390		59,559
Small commercial		13,927		12,883		40,430		38,674		15,791		13,315		31,424		26,503
Executive products		7,026		5,352		19,476		15,548		6,975		6,381		14,306		12,450
Other casualty		16,623		19,004		56,572		51,884		14,954		19,178		29,444		39,949
Total	$	140,423	$	131,605	$	415,667	$	387,068	$	135,215	$	138,344	$	278,635	$	275,244

Property
Marine	$	19,033	$	16,068	$	54,633	$	44,866	$	20,712	$	18,579	$	40,289	$	35,600
Commercial property		17,098		18,489		50,248		53,296		19,048		16,275		38,203		33,150
Specialty personal		4,948		4,228		14,324		12,499		4,936		4,792		9,936		9,376
Other property		397		282		989		778		691		326		1,307		592
Total	$	41,476	$	39,067	$	120,194	$	111,439	$	45,387	$	39,972	$	89,735	$	78,718

Surety
Commercial									$	10,806	$	10,975	$	21,744	$	21,787
Miscellaneous	$	10,998	$	11,822	$	33,880	$	35,183		10,499		11,280		21,015		22,882
Contract		7,507		7,474		21,106		20,832		6,827		6,970		13,187		13,599
Commercial		7,209		6,863		21,020		20,337
Energy		3,642		3,984		11,618		12,505
Total	$	29,356	$	30,143	$	87,624	$	88,857	$	28,132	$	29,225	$	55,946	$	58,268

Grand Total	$	211,255	$	200,815	$	623,485	$	587,364	$	208,734	$	207,541	$	424,316	$	412,230

8.7. LEASES

We adopted ASU 2016-02, Leases on January 1, 2019, which resulted in the recognition of operating leases on the balance sheet in 2019 and forward. See note 1c for more information on the adoption of the ASU. 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 ~~right-of-use~~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. ~~Lease expense~~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 1615 years. ~~Expenses associated with leases totaled $6.9 million in 2018, $6.8 million in 2017 and $6.4 million in 2016.~~ The components of lease expense and other lease information as of and during the three and ~~nine-month period~~six-month periods ended ~~September~~June 30, 2020 and 2019 are as follows:

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For the Three-Month Period

For the Nine-Month Period
(in thousands)

Ended September 30, 2019

Ended September 30, 2019
Operating lease cost

$
1,423

$
4,349

Cash paid for amounts included in measurement of lease liabilities

Operating cash flows from operating leases

$
1,438

$
4,234

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

$
427

$
1,378

Reduction to right-of-use assets resulting from reduction to lease liabilities

$
-

$
1,279


	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)	September 30, 2019			June 30, 2020			December 31, 2019
Operating lease right-of-use assets	$	23,604
Operating lease ROU assets				$	18,648		$	22,335

Operating lease liabilities	$	25,787		$	21,766		$	24,475

Weighted-average remaining lease term - operating leases		4.91	years		4.26	years		4.69	years

Weighted-average discount rate - operating leases		2.33	%		2.34	%		2.33	%

Future minimum lease payments under non-cancellable leases as of ~~September~~June 30, ~~2019 and December 31, 2018~~2020 were as follows:


(in thousands)	September 30, 2019		December 31, 2018		June 30, 2020
2019	$	1,477	$	5,911
2020		5,975		6,019	$	3,002
2021		5,967		5,924		5,976
2022		5,904		5,884		5,904
2023		4,386		4,459		4,386
2024						2,334
Thereafter		3,699		3,968		1,365
Total future minimum lease payments	$	27,408	$	32,165	$	22,967

Less imputed interest		(1,621)		N/A		(1,201)
Total operating lease liability	$	25,787		N/A	$	21,766

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

~~“SAFE HARBOR” STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995: This discussion and analysis may contain forward-looking~~Forward looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 ~~that~~appear throughout this report. These statements relate to our current expectations, beliefs, intentions, goals or strategies regarding the future and are ~~not historical facts,~~based on certain underlying assumptions by the Company. These forward looking statements generally include words such as “expect,” “predict,” “estimate,” “will,” “should,” “anticipate,” “believe” and ~~involve~~similar expressions. Such assumptions are, in turn, based on information available and internal estimates and analyses of general economic conditions, competitive factors, conditions specific to the property and casualty insurance and reinsurance industries, claims development and the impact thereof on our loss reserves, the adequacy and financial security of our reinsurance programs, developments in the securities market and the impact on our investment portfolio, regulatory changes and conditions and other factors and are subject to various risks, uncertainties and ~~uncertainties that could cause actual results to differ materially from~~other factors, including, without limitation those ~~expected and projected. Various risk factors that could affect future results are listed~~set forth in ~~our filings with the Securities and Exchange Commission, including~~“Item 1A. Risk Factors” within the Annual Report on Form 10-K for the year ended December 31, ~~2018.~~2019 and Part II within this report. Actual results could differ materially from those expressed in, or implied by, these forward looking statements. We assume no obligation to update any such statements. You should review the various risks, uncertainties and other factors listed from time to time in our Securities and Exchange Commission filings.

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OVERVIEW

RLI Corp. ~~(the Company) was founded in 1965. We underwrite~~is a U.S.-based, specialty insurance company that underwrites select property and casualty insurance through major subsidiaries collectively known as RLI Insurance Group ~~(the Group)~~(Group). ~~We conduct operations principally through three insurance companies. RLI Insurance Company (RLI Ins.), a subsidiary of RLI Corp.~~Our focus is on niche markets and our principal insurance subsidiary, writes multiple lines of insurance on an admitted basis in all 50 states, the District of Columbia, Puerto Rico, the Virgin Islands and Guam. Mt. Hawley Insurance Company (Mt. Hawley), a subsidiary of RLI Ins., writes excess and surplus lines insurance on a non-admitted basis in all 50 states, the District of Columbia, Puerto Rico, the Virgin Islands and Guam. Contractors Bonding and Insurance Company (CBIC), a subsidiary of RLI Ins., writes multiple lines of insurance on an admitted basis in all 50 states and the District of Columbia. Each of our insurance companies is domiciled in Illinois.

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As a specialty insurance company with a niche focus, we offer insurance coverages in the specialty admitted and excess and surplus markets. Coverages in the specialty admitted market such as our energy surety bonds, are for risksdeveloping unique products that are ~~unique or hard-to-place in the standard market, but must remain~~tailored to customers’ needs. We hire underwriters and claim examiners with an admitted insurance company for regulatory or marketing reasons. In addition, our coverages in the specialty admitted market may be designed to meet specific insurance needs of targeted insured groups, such as our professional liabilitydeep expertise and ~~package coverages for design professionals~~provide exceptional customer service and ~~our stand-alone personal umbrella policy. The specialty admitted market is subject to more state regulation than the excess~~support. We maintain a highly diverse product portfolio and surplus market, particularly with regard to rate and form filing requirements, restrictions on the ability to exit lines of business, premium tax payments and membership in various state associations, such as state guaranty funds and assigned risk plans. We also underwrite coverages in the excess and surplus market. The excess and surplus market, unlike the admitted market, is less regulated and more flexible in terms of policy forms and premium rates. This market provides an alternative for customers with risks or loss exposures that generally cannot be written in the standard market. This typically results in coverages that are more restrictive and more expensive than coverages in the admitted market. When we underwrite within the excess and surplus market, we are selective in the lines of business and type of risks we choose to write. Using our non-admitted status in this market allows us to tailor terms and conditions to manage these exposures effectively. Often, the development of these coverages is generated through proposals brought to us by an agent or broker seeking coverage for a specific group of clients or loss exposures. Once a proposal is submitted, our underwriters determine whether it would be a viable product based on our business objectives.

~~The foundation of our overall business strategy is to~~ underwrite for profit in all market ~~conditions and~~conditions. In 2019, we ~~have~~ achieved ~~this for 23~~our 24th consecutive ~~years, averaging~~year of underwriting profitability. Over the 24 year period, we averaged an ~~88.1~~88.3 combined ~~ratio over that period of time.~~ratio. This drives our ability to provide shareholder returns in three different ways: the underwriting income itself, net investment income from our investment portfolio and long-term appreciation in our equity portfolio. Our investment strategy is based on preservation of capital as the first priority, with a secondary focus on generating total return. The fixed income portfolio consists primarily of highly-rated, diversified, liquid, investment-grade securities. Consistent underwriting income allows a portion of our investment portfolio to be invested in equity securities and other risk asset classes. Our equity portfolio consists of a core stock portfolio weighted toward dividend-paying stocks, as well as exchange traded funds (ETFs). Our minority equity ownership interests in Maui Jim, Inc. (Maui Jim), a manufacturer of high-quality sunglasses, and Prime Holdings Insurance Services, Inc. (Prime), a specialty insurance company, have also enhanced financial results. We have a diversified investment portfolio and closely monitor our investment risks. Despite periodic fluctuations in market value, our equity portfolio is part of a long-term asset allocation strategy and has contributed significantly to our historic growth in book value.

We measure the results of our insurance operations by monitoring growth and profitability across three distinct business segments: casualty, property and surety. Growth is measured in terms of gross premiums written, and profitability is analyzed through combined ratios, which are further subdivided into their respective loss and expense components.

The property and casualty insurance business is cyclical and influenced by many factors, including price competition, economic conditions, natural or man-made disasters (for example, earthquakes, hurricanes, pandemics and terrorism), interest rates, state regulations, court decisions and changes in the law.

One of the unique and challenging features of the property and casualty insurance business is that coverages must be priced before costs have fully developed, because premiums are charged before claims are incurred. This requires that liabilities be estimated and recorded in recognition of future loss and settlement obligations. Due to the inherent uncertainty in estimating these liabilities, there can be no assurance that actual liabilities will not be more or less than recorded amounts; if actual liabilities differ from recorded amounts, there will be an adverse or favorable effect on net earnings. ~~In evaluating the objective performance measures previously mentioned, it is important to consider the following individual characteristics of each major insurance segment.~~

The casualty portion of our business consists largely of commercial excess, personal umbrella, general liability, transportation and executive products coverages, as well as package business and other specialty coverages, such as professional liability and workers’ compensation for office-based professionals. We also offer fidelity and crime coverage for commercial insureds and select financial institutions. We exited the medical professional liability business in 2019 as losses had exceeded our expectations and our assessmentassume a limited amount of ~~the competitive environment did not support~~hard-to-place risks through a ~~conclusion that an underwriting profit could be achieved in the near term.~~quota share reinsurance agreement. The casualty business is subject to the risk of estimating losses and related loss reserves because the ultimate settlement of a casualty claim may take several years to fully develop. The casualty segment is also subject to inflation risk and may be affected by evolving legislation and court decisions that define the extent of coverage and the amount of compensation due for injuries or losses.

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Our property segment is comprised primarily of commercial fire, earthquake, difference in conditions and marine coverages. We also offer select personal lines policies, including homeowners’ coverages. Property insurance results are subject to the variability introduced by perils such as earthquakes, fires, hurricanes and ~~hurricanes.~~other storms. Our major catastrophe exposure is to losses caused by earthquakes, primarily on the West Coast. Our second largest catastrophe exposure is to losses caused by wind storms to commercial properties throughout the Gulf and East Coast, as well as to homes we insure in Hawaii. We seek to limit our net aggregate exposure to a catastrophic event by minimizing the total policy limits written in a particular region, purchasing reinsurance and maintaining consistent policy terms and conditions throughout ~~market~~insurance cycles. We also use computer-assisted modeling techniques to provide estimates that help usthe Company carefully manage the concentration of risks exposed to catastrophic events.

The surety segment specializes in writing small to large-sized commercial and contract surety coverages, ~~as well as those for the energy, petrochemical~~including payment and ~~refining industries.~~performance bonds. We also offer miscellaneous bonds including license and permit, notary and court bonds. Often, our surety coverages involve a statutory requirement for bonds. While these bonds typically maintain a relatively low loss ratio, losses may fluctuate due to adverse economic conditions affecting the financial viability of our principals. The contract surety product guarantees the construction work of a commercial contractor for a specific project. Generally, losses occur due to the deterioration of a contractor’s financial condition. This line has historically produced marginally higher loss ratios than other surety lines during economic downturns.

The insurance marketplace is intensely competitive across all of our segments. ~~Despite challenges that exist in today’s marketplace,~~However, we believe that our business model is built to create underwriting income by focusing on sound risk selection and discipline. Our primary focus will continue to be on underwriting profitability, with a secondary focus on premium growth where we believe underwriting profit exists, as opposed to general premium growth or market share measurements.

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GAAP, non-GAAP and Performance Measures

Throughout this quarterly report, we include certain non-generally accepted accounting principles (non-GAAP) financial measures. Management believes that these non-GAAP measures ~~better~~further explain the Company’s results of operations and allow for a more complete understanding of the underlying trends in the Company’s business. These measures should not be viewed as a substitute for those determined in accordance with generally accepted accounting principles in the United States of America (GAAP). In addition, our definitions of these items may not be comparable to the definitions used by other companies.

~~Following~~The following is a list of non-GAAP measures found throughout this report with their definitions, relationships to GAAP measures and explanations of their importance to our operations.

Underwriting Income

Underwriting income or profit represents one measure of the pretax profitability of our insurance operations and is derived by subtracting losses and settlement expenses, policy acquisition costs and insurance operating expenses from net premiums earned, which are all GAAP financial measures. Each of these captions is presented in the statements of earnings but is not subtotaled. However, this information is available in total and by segment ~~on page 20 of~~in note 6 to the unaudited condensed consolidated interim financial statements in this quarterly report on Form 10-Q and in note 1112 to the consolidated financial statements in our ~~2018~~2019 Annual Report on Form 10-K, regarding operating segment information. The nearest comparable GAAP measure is earnings before income taxes which, in addition to underwriting income, includes net investment income, net realized gains or losses, net unrealized gain or losses on equity securities, general corporate expenses, debt costs and our portion of earnings from unconsolidated investees. A reconciliation of net earnings to underwriting income follows:


	For the Three-Month Periods				For the Six-Month Periods
	Ended June 30,				Ended June 30,
(in thousands)	2020		2019		2020		2019
Net earnings	$	92,166	$	40,467	$	30,899	$	105,940
Income tax expense		22,713		8,361		4,616		24,629
Earnings before income taxes	$	114,879	$	48,828	$	35,515	$	130,569
Equity in earnings of unconsolidated investees		(5,100)		(8,468)		(9,614)		(13,782)
General corporate expenses		1,994		3,283		3,749		6,559
Interest expense on debt		1,903		1,861		3,800		3,722
Net unrealized (gains) losses on equity securities		(74,705)		(8,810)		55,690		(42,308)
Net realized (gains) losses		2,109		(4,764)		(13,043)		(13,832)
Net investment income		(16,917)		(16,998)		(34,695)		(33,563)
Net underwriting income	$	24,163	$	14,932	$	41,402	$	37,365

Combined Ratio

The combined ratio, which is derived from components of underwriting income, is a common industry performance measure of profitability for underwriting operations and is calculated in two components. First, the loss ratio is losses and settlement expenses divided by net premiums earned. The second component, the expense ratio, reflects the sum of policy acquisition costs and insurance operating expenses divided by net premiums earned. All items included in these components of the combined ratio are presented in our GAAP consolidated financial statements. The sum of the loss and expense ratios is the combined ratio. The difference between the combined ratio and 100 reflects the per-dollar rate of underwriting income or loss.

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~~Net Unpaid Loss and Settlement Expenses~~

Unpaid losses and settlement expenses, as shown in the liabilities section of our balance sheets, represents the total obligations to claimants for both estimates of known claims and estimates for incurred but not reported (IBNR) claims. The related asset item, reinsurance balances recoverable on unpaid losses and settlement expense, is the estimate of known claims and estimates of IBNR that we expect to recover from reinsurers. The net of these two items is generally referred to as net unpaid loss and settlement expenses and is commonly used in our disclosures regarding the process of establishing these various estimated amounts.

Critical Accounting Policies

In preparing the unaudited condensed consolidated interim financial statements, we are required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosures of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenues and expenses for the reporting period. Actual results could differ significantly from those estimates.

The most critical accounting policies involve significant estimates and include those used in determining the liability for unpaid losses and settlement expenses, investment valuation, ~~and OTTI,~~ recoverability of reinsurance balances, deferred policy acquisition costs and deferred taxes. For a detailed discussion of each of these policies, refer to our ~~2018~~2019 Annual Report on Form 10-K.

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We adopted ASU 2016-13, Financial Instruments – Credit Losses, on January 1, 2020, which eliminated the concept of other-than-temporary impairment and 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. If we intend to sell a security or if we determine it is more likely than not that we will be required to sell a security before recovery of its amortized cost basis, any allowance for credit loss or unrealized loss would be written off and the amortized cost basis of the security would be written down to the security’s fair value.

There have been no other significant changes to critical accounting policies during the year.

IMPACT OF COVID-19

The coronavirus (COVID-19) pandemic continues to impact individuals, businesses and the economy. As an employee-owned company, the health and well-being of our customers, partners and associates is our highest priority. While a large percentage of our associates are still working from home, our processes and controls continue to operate effectively and we have been able to maintain the highest service and support levels possible for our customers.

It is difficult to predict how and to what extent the economic slowdown will have on our revenues in the coming months. To date, our most impacted product line has been public transportation. A large number of our passenger transportation customers have been unable to effectively operate under social-distancing protocols and stay-at-home orders. For the six-month period ended June 30, 2020, transportation gross written premium was down $33.3 million when compared to 2019. We would expect transportation premium to continue to be down from prior periods until the use of public transportation increases, which may not be until after there is a vaccine, effective treatment or significant reduction in cases. Additionally, slowdowns in the construction industry contributed to premium declines for our general liability and surety products in the second quarter. A number of our products support the construction industry and revenues may continue to be impacted to the extent this sector experiences disruption. However, we have many product lines that may see little to no impact on the amount of premium we write, including our personal lines products, management liability products and property businesses.

We have been fair and flexible with our customers in regards to modifying exposures and payment terms and we are in compliance with any applicable state regulatory directives on such changes. Insureds continue to make payments in accordance with the agreed upon schedules and we have not experienced a material increase in the amount of expense associated with uncollectible receivables.

The loss exposure arising out of the spread of COVID-19 and resulting shutdown will take time to resolve. We do not offer event cancellation, travel, trade credit or pandemic-related coverages which would be more directly impacted by the COVID-19 pandemic. The Company has received a number of claims, the majority of which relate to business interruption. We are reviewing the individual circumstances of each claim submitted and will fulfill our obligation to pay if coverage applies. The derivative implications that COVID-19 has on the economy may have negative implications on products that are correlated with the credit cycle, including, but not limited to, some of our executive products and surety offerings. In the second quarter of 2020, $5.8 million of net reserves were established to address the increased risk of loss and expense that emanated from the economic downturn brought on by the pandemic. Combined with the reserves established in the first quarter

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that addressed the expected increase in costs to investigate and defend business interruption claims, $10.8 million of COVID-19 related net losses have been recognized in the first six months of 2020.

Actuarial models base future emergence on historic experience, with adjustments for current trends, and the appropriateness of these assumptions involved greater 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. 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.

We continue to evaluate opportunities for expense savings and efficiencies and have taken targeted actions to reduce or defer expenses, including certain hiring freezes, position consolidations and executive merit increase suspensions. Travel was limited and any decision on granting share-based compensation, which normally takes place at our May board meeting, was deferred until a later date, resulting in a reduced level of compensation expense in the second quarter. Bonus and profit sharing expense is correlated with company performance and is responsible for the largest portion of the total expense decline for the six-month period ended June 30, when compared to 2019. The performance-related expenses recognized for the 2020 fiscal year will be dependent on the full year’s results and may increase or decrease in the second half of the year.

Although we have recovered a large portion of the market value declines recorded in the first quarter, equity securities have not fully returned to levels recorded at year end. Net after-tax realized and unrealized losses on equity securities were $33.9 million in the first half of 2020. Conversely, lower interest rates increased the fair value of the fixed income portfolio, which resulted in $40.5 million of after-tax other comprehensive earnings for the six-month period ended June 30, 2020. With the decline in yields, reinvestment rates are now lower than in previous years, which will cap the portfolio’s ability to generate higher levels of investment income, absent a larger invested asset base.

Maui Jim, Inc. (Maui Jim) and Prime Holdings Insurance Services, Inc. (Prime) continued to contribute towards positive net earnings. While earnings for Prime were modestly higher, Maui Jim results were negatively impacted by the shutdown much of the traditional retail sector experienced during the second quarter. The economic downturn may continue to impact the results of these investees, particularly if there is any lasting impact on the retail sector as it relates to Maui Jim.

We produced solid operating results in the first half of the year and believe our financial position has remained strong despite the impact of the COVID-19 pandemic. We generated $83.8 million of net operating cash inflows and believe we have adequate liquidity. Our revolving credit facility provides for a borrowing capacity of $60.0 million, which can be increased to $120.0 million under certain circumstances. Additionally, our membership in the Federal Home Loan Bank system provides a secured lending facility with an aggregate borrowing capacity of approximately $30.0 million. There were no amounts outstanding under any of these ~~policies during~~facilities as of June 30, 2020. In addition to the ~~current year.~~$160.7 million of cash and other investments maturing within one year as of June 30, 2020, we believe that cash generated from operations, the liquidity of our fixed income portfolio and our unused lines of credit provide sufficient sources of cash to meet our anticipated needs over the next 12 to 24 months.

Ultimately, the extent to which COVID-19 will impact our business will be influenced by how long it takes for the economy to recover. We continue to evaluate all aspects of our operations and are making necessary adjustments to manage our business. Our diversified portfolio of products and financial strength have allowed us to remain on solid footing. We believe we have a strong and sustainable underwriting approach that will allow us to weather the economic downturn and uncertainty we are currently experiencing.

RESULTS OF OPERATIONS

~~Nine~~Six Months Ended ~~September~~June 30, ~~2019~~2020 Compared to ~~Nine~~Six Months Ended ~~September~~June 30, ~~2018~~2019

Consolidated revenue for the first ~~nine months~~half of 2020 decreased $85.6 million from the first half of 2019 ~~increased $93.0~~as performance in the equity portfolio varied significantly between the periods. Overall market declines resulted in $55.7 million ~~or 14 percent, from~~of unrealized losses on equity securities in 2020, while positive returns generated $42.3 million of unrealized gains in our equity portfolio in the ~~same period in 2018.~~first half of 2019. Net premiums earned for the Group increased 63 percent, driven by growth from our casualty and property segments. Investment income increased 133 percent due to ~~an increased~~a larger asset base relative to the prior year. Realized gains during the first ~~nine months of 2019~~half were ~~$17.0~~$13.0 million and were comprised of ~~$14.4~~$12.8 million of realized gains on equity securities from rebalancing our portfolio, $2.6 million of realized gains on the fixed income portfolio and $2.4 million of other realized losses. This compares

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to $12.3 million of realized gains on the equity portfolio, $1.3 million of realized gains on the fixed income portfolio and $0.2 million of ~~miscellaneous~~other realized ~~gains. This compares to realized~~ gains of $52.5 million on equity securities from rebalancing the portfolio, which were partially offset by $0.1 million of realized losses on fixed income securities and $4.6 million in miscellaneous losses, primarily from a non-cash impairment charge on goodwill and definite-lived intangibles for the same period in 2018. Additionally, $47.2 million of net unrealized gains on equity securities were recognized in the first nine months of 2019 compared to $34.5 million of net unrealized losses in the same period in 2018.2019.


	For the Nine-Month Periods				For the Six-Month Periods
	Ended September 30,				Ended June 30,
	2019		2018		2020		2019
Consolidated revenues (in thousands)
Net premiums earned	$	623,485	$	587,364	$	424,316	$	412,230
Net investment income		51,095		45,123		34,695		33,563
Net realized gains		17,043		47,900
Net realized gains (losses)						13,043		13,832
Net unrealized gains (losses) on equity securities		47,214		(34,535)		(55,690)		42,308
Total consolidated revenue	$	738,837	$	645,852	$	416,364	$	501,933

Net ~~after-tax~~ earnings for the first ~~nine~~six months of ~~2019~~2020 totaled ~~$138.3~~$30.9 million, compared to ~~$84.8~~$105.9 million for the same period last year. The ~~increase~~decrease in earnings for ~~2019~~2020 was ~~influenced by $37.3~~primarily attributed to $44.0 million of ~~after-tax unrealized gains on equity securities compared to $27.3 million of~~net after-tax unrealized losses on equity securities, compared to $33.4 million of after-tax unrealized gains in ~~2018.~~2019. Underwriting results for both periods reflect profitable current accident year results and favorable development from prior years’ loss reserves. Favorable development on prior years’ loss reserves provided additional pretax earnings of ~~$55.2~~$40.8 million in the first ~~nine months~~half of ~~2019~~2020 and ~~$38.5~~2019. Pretax losses from storms and civil unrest were $6.5 million, ~~in 2018. Pretax storm losses were $8.0 million in the first nine months of 2019,~~ compared to ~~$17.5~~$5.0 million of ~~hurricane, other~~ storm ~~and volcanic activity~~ losses for the same period in ~~2018.~~2019. Pretax bonus and profit sharing-related expenses associated with the net impact of prior years’ reserve development and catastrophe losses totaled ~~$7.0~~$5.1 million in ~~2019,~~2020, compared to ~~$3.5~~$5.3 million in ~~2018.~~2019. These performance-related expenses affected policy acquisition, insurance operating and general corporate expenses. Bonus and profit-sharing amounts earned by executives, managers and associates are predominately influenced by corporate performance including operating earnings, combined ratio and return on capital. ~~These~~

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~~performance-related expenses were further increased in the first nine months of 2019 based on the overall growth in earnings and book value.~~

During the first ~~nine months~~half of ~~2019,~~2020, equity in earnings of unconsolidated investees totaled ~~$17.8~~$9.6 million. This amount includes ~~$12.9~~$5.2 million from Maui Jim and ~~$4.9~~$4.4 million from Prime. Comparatively, the first ~~nine months~~half of ~~2018~~2019 reflected ~~$15.9~~$13.8 million of earnings, including ~~$13.3~~$10.1 million from Maui Jim and ~~$2.6~~$3.7 million from Prime. The decline in earnings from Maui Jim is reflective of the shutdown much of the traditional retail sector experienced as a result of the pandemic during the second quarter.

Comprehensive earnings totaled ~~$210.8~~$71.4 million for the first ~~nine~~six months of ~~2019,~~2020, compared to ~~$43.1~~$163.1 million for the ~~same period in 2018.~~first half of 2019. Other comprehensive earnings primarily included net after-tax unrealized gains ~~and losses~~ from ~~the fixed income portfolio. In 2019, declining interest rates resulted in unrealized gains on~~ the fixed income portfolio and ~~$72.5~~totaled $40.5 million ~~of other comprehensive earnings~~ in the first ~~nine months. This compares~~half of 2020, compared to ~~$41.8~~$57.2 million ~~of other comprehensive loss for the same period~~ in ~~2018, primarily~~2019. The unrealized gains were attributable to ~~increasing~~declining interest rates ~~during~~in both periods, which increased the ~~period.~~fair value of securities held in the fixed income portfolio. However, wider credit spreads partially offset the impact of the lower treasury rates in 2020.

~~Premium~~Premiums

Gross premiums written for the Group increased ~~$65.4~~$18.8 million, or 94 percent, for the first ~~nine months~~half of ~~2019~~2020 when compared to ~~2018.~~the same period of 2019. Products in our ~~casualty~~property and ~~property~~casualty segments drove the growth. Net premiums earned increased ~~$36.1~~$12.1 million, or 63 percent, also driven by products in our ~~casualty~~property and ~~property~~casualty segments.

Gross Premiums Written

Net Premiums Earned

For the Nine-Month Periods Ended September 30,

For the Nine-Month Periods Ended September 30,

(in thousands)

2019

2018

% Change

2019

2018

% Change
Casualty

Commercial excess and personal umbrella

$
135,814

$
116,116

17.0

%

$
102,580

$
91,845

11.7

%
General liability

75,818

69,516

9.1

%

74,240

68,988

7.6

%
Commercial transportation

79,716

72,639

9.7

%

61,979

60,570

2.3

%
Professional services

68,076

66,265

2.7

%

60,390

59,559

1.4

%
Small commercial

46,904

41,197

13.9

%

40,430

38,674

4.5

%
Executive products

67,917

45,865

48.1

%

19,476

15,548

25.3

%
Other casualty

50,405

64,931

(22.4)

%

56,572

51,884

9.0

%
Total

$
524,650

$
476,529

10.1

%

$
415,667

$
387,068

7.4

%

Property

Marine

$
68,658

$
54,145

26.8

%

$
54,633

$
44,866

21.8

%
Commercial property

90,035

85,884

4.8

%

50,248

53,296

(5.7)

%
Specialty personal

16,460

14,024

17.4

%

14,324

12,499

14.6

%
Other property

1,634

1,042

56.8

%

989

778

27.1

%
Total

$
176,787

$
155,095

14.0

%

$
120,194

$
111,439

7.9

%

Surety

Miscellaneous

$
33,267

$
37,680

(11.7)

%

$
33,880

$
35,183

(3.7)

%
Contract

22,616

23,320

(3.0)

%

21,106

20,832

1.3

%
Commercial

22,211

20,956

6.0

%

21,020

20,337

3.4

%
Energy

11,641

12,233

(4.8)

%

11,618

12,505

(7.1)

%
Total

$
89,735

$
94,189

(4.7)

%

$
87,624

$
88,857

(1.4)

%

Grand Total

$
791,172

$
725,813

9.0

%

$
623,485

$
587,364

6.1

%

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	Gross Premiums Written						Net Premiums Earned
	For the Six-Month Periods Ended June 30,						For the Six-Month Periods Ended June 30,
(in thousands)	2020		2019		% Change		2020		2019		% Change
Casualty
Commercial excess and personal umbrella	$	115,533	$	90,422	28	%	$	82,409	$	66,621	24	%
General liability		51,357		54,773	(6)	%		46,649		49,235	(5)	%
Professional services		45,967		44,984	2	%		42,079		39,574	6	%
Commercial transportation		15,097		48,391	(69)	%		32,324		40,912	(21)	%
Small commercial		33,257		30,208	10	%		31,424		26,503	19	%
Executive products		47,959		37,649	27	%		14,306		12,450	15	%
Other casualty		40,113		34,803	15	%		29,444		39,949	(26)	%
Total	$	349,283	$	341,230	2	%	$	278,635	$	275,244	1	%

Property
Marine	$	46,925	$	44,150	6	%	$	40,289	$	35,600	13	%
Commercial property		67,090		57,450	17	%		38,203		33,150	15	%
Specialty personal		10,177		10,957	(7)	%		9,936		9,376	6	%
Other property		1,815		824	120	%		1,307		592	121	%
Total	$	126,007	$	113,381	11	%	$	89,735	$	78,718	14	%

Surety
Commercial	$	20,902	$	22,223	(6)	%	$	21,744	$	21,787	(0)	%
Miscellaneous		22,260		22,400	(1)	%		21,015		22,882	(8)	%
Contract		14,533		14,949	(3)	%		13,187		13,599	(3)	%
Total	$	57,695	$	59,572	(3)	%	$	55,946	$	58,268	(4)	%

Grand Total	$	532,985	$	514,183	4	%	$	424,316	$	412,230	3	%

Casualty

Gross premiums written for the casualty segment were up $8.1 million in the first ~~nine~~six months of ~~2019 were up 10 percent, or $48.1 million, as mid-single digit rate increases were experienced.~~2020. Premiums from commercial excess and personal umbrella increased ~~$19.7~~$25.1 million, due ~~in part~~ to an expanded distribution base in personal umbrella and ~~larger scale in the energy casualty space. Our~~rate increases. Small commercial continued to benefit from new production sources and geographic expansion. Substantial rate increases led to a 27 percent increase for our executive products ~~group grew $22.1~~group. Other casualty increased $5.3 million, as substantial rate increases were achieved and newer initiatives gained traction. General liability, transportation, small commercial and professional services also contributed to the growth during the first nine months of the year. As previously announced, we reduced our quota share reinsurance agreement with Prime from 25 percent

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to 6 percent at the beginning of 2019 and exited from our medical professional liability lines due to unfavorable market conditions and poor underwriting performance. The actions on these programs account for the decline in other casualty and offset continued growth in our general binding authority ~~and mortgage reinsurance lines.~~(GBA) business continued to grow.

Commercial transportation has been significantly affected by the stay at home orders associated with COVID-19, particularly our public lines. Public transportation focuses on charter, school and transit busses, which stopped running to a large degree in March. The reduced utilization led to a $33.3 million decline in gross premiums written in the first six months of 2020.

Property

Gross premiums written for the ~~Group’s~~ property segment ~~totaled $176.8~~were up $12.6 million ~~for~~in the first ~~nine months~~half of ~~2019,~~2020. Our commercial property business was up 14 percent from the same period last year. Market disruption has provided opportunity for our marine product and, along with rate increases, led to a 27 percent increase in premiums written over the first nine months of 2018. Hawaii homeowners, within the specialty personal group, benefited from continued investment in relationships and distribution with growth of 12 percent. Commercial property is up 5 percent$9.6 million, as ~~rates are up and~~ an improving market ~~has~~ allowed our underwriters to find more ~~opportunities.~~opportunities with acceptable rate levels. Additionally, rates on wind-prone and earthquake exposures continued to increase over the first half of the year. Rate increases and market disruption, which created new business opportunities, led to $2.8 million of growth for our marine product. Other property premium increased as a result of property exposed GBA business that continues to gain scale.

Surety

The surety segment recorded gross premiums written of ~~$89.7~~$57.7 million for the first ~~nine~~six months of ~~2019,~~2020, a decrease of ~~$4.5~~$1.9 million from the same period last year. ~~Competitive market conditions led to a reduction in miscellaneous, contract~~The economic slowdown and ~~energy~~decreased commodity pricing has reduced demand for surety ~~production, which was partially offset by growth within~~bonds. Additionally, we continually monitor our ~~commercial lines. Selectively reducing exposures on high~~portfolio for higher risk accounts ~~given the current stage in the credit cycle,~~ and ~~restructuring one program in the miscellaneous surety book also resulted in a decline in premium for the first nine months of the year.~~have selectively eliminated exposures that no longer met our underwriting standards.

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Underwriting Income

Underwriting income for the Group totaled ~~$51.1~~$41.4 million for the first ~~nine~~six months of ~~2019,~~2020, compared to ~~$39.4~~$37.4 million in the same period ~~last year.~~of 2019. Both periods reflect positive underwriting results for the current accident year and similar amounts of favorable reserve development on prior accident ~~years, with 2019 experiencing a larger benefit.~~years. The combined ratio for the Group totaled ~~91.8~~90.2 in ~~2019,~~the first half of 2020, compared to ~~93.3~~90.9 in ~~2018.~~the same period of 2019. The loss ratio ~~decreased~~increased to ~~49.3~~50.0 from ~~51.8,~~48.1, primarily due to the ~~increased level~~addition of ~~favorable development~~$10.8 million in current accident year reserves related to COVID-19 loss and ~~lower catastrophe losses in 2019.~~claim defense costs. The Group’s expense ratio ~~increased~~decreased to ~~42.5~~40.2 from ~~41.5~~42.8, as ~~strong~~2019 experienced stronger growth in ~~earnings and~~ book value, which led to ~~increased~~larger levels of bonus and profit-sharing expenses.


	For the Nine-Month Periods				For the Six-Month Periods
	Ended September 30,				Ended June 30,
	2019		2018		2020		2019
Underwriting income (in thousands)
Casualty	$	14,652	$	2,441	$	8,410	$	12,282
Property		14,012		12,150		16,075		7,810
Surety		22,432		24,804		16,917		17,273
Total	$	51,096	$	39,395	$	41,402	$	37,365

Combined ratio
Casualty		96.5		99.4		97.0		95.5
Property		88.3		89.1		82.1		90.1
Surety		74.4		72.1		69.8		70.4
Total		91.8		93.3		90.2		90.9

Casualty

The casualty segment recorded underwriting ~~income~~earnings of ~~$14.7~~$8.4 million in the first ~~nine months~~half of ~~2019,~~2020, compared to ~~$2.4~~$12.3 million of underwriting income for the same period last year. Reserve releases reduced loss and settlement expenses for the casualty segment by ~~$43.2~~$27.5 million, primarily on accident years ~~2015~~2016 through ~~2018.~~2019. Transportation, general liability, ~~professional services, commercial excess and personal umbrella~~executive products and small commercial ~~all contributed to~~were drivers of the favorable ~~development, while executive products and medical professional liability experienced adverse~~ development. In comparison, ~~$20.5~~$30.7 million of reserves were released in the first ~~nine months~~half of ~~2018, largely driven by~~2019. General liability, professional services, transportation, commercial excess, personal umbrella and general liability. A majority of the difference between the reserve releases in 2019 and 2018 can be attributed to the contrast between the favorable development in 2019 and adverse development in 2018 within our transportation business.small commercial developed favorably, while executive products developed adversely.

The combined ratio for the casualty segment was ~~96.5~~97.0 in ~~2019,~~2020, compared to ~~99.4~~95.5 in ~~2018.~~2019. The segment’s loss ratio was ~~59.5~~61.7 in ~~2019, down~~2020, up from ~~63.7~~58.3 in ~~2018.~~2019. The loss ratio ~~decreased~~increased in ~~2019~~2020 as a result of ~~more~~less favorable development on prior

~~Table~~ years’ reserves and the addition of ~~Contents~~

~~years’ reserves.~~$7.7 million in current year reserves related to COVID-19 loss and defense costs. The expense ratio for the casualty segment was ~~37.0, up~~35.3, down from ~~35.7~~37.2 for the same period last year, ~~due to investments in technology and a larger amount~~as reduced levels of bonus and profit-sharing ~~expenses.~~expenses were incurred.

Property

The property segment recorded underwriting income of ~~$14.0~~$16.1 million for the first ~~nine~~six months of ~~2019,~~2020, compared to ~~$12.2~~$7.8 million for the same period last year. ~~Loss and settlement expenses~~Underwriting results for ~~2019~~2020 included ~~$3.8 million of favorable development on prior years’ loss and catastrophe reserves and $7.6 million of storm losses. Comparatively, the 2018 underwriting results included $10.1~~$5.5 million of favorable development on prior years’ loss and catastrophe reserves, primarily from the marine business, ~~$7.2~~$5.3 million of ~~loss from Hurricane Florence, $6.5~~storm and civil unrest losses and $2.0 million of ~~losses from~~reserves related to COVID-19 investigative and defense costs. Comparatively, the ~~volcanic activity in Hawaii and $2.8~~2019 underwriting results included $2.1 million of ~~other~~favorable development on prior years’ loss and catastrophe reserves and $4.7 million of storm losses.

~~The~~Underwriting results for the first half of 2020 translated into a combined ratio ~~for the property segment was 88.3,~~of 82.1, compared to ~~89.1~~90.1 for the same period last year. The segment’s loss ratio was ~~44.0~~41.8 in ~~2019,~~2020, down from ~~45.2~~45.1 in ~~2018~~2019 due to lower ~~levels of catastrophe~~current accident year losses ~~than in the~~and more favorable development on prior ~~year.~~years’ reserves. The segment’s expense ratio ~~was 44.3~~decreased to 40.3 in ~~2019, up modestly~~2020 from ~~43.9~~45.0 in ~~2018,~~the prior year, as ~~strong growth in overall earnings and book value led~~increased levels of earned premium allowed the segment to ~~an increase in bonus and profit-sharing~~better leverage expenses.

Surety

The surety segment recorded underwriting income of ~~$22.4~~$16.9 million for the first ~~nine months~~half of ~~2019,~~2020, compared to ~~$24.8~~$17.3 million for the same period last year. Both periods reflected positive current accident year underwriting performance and benefited from favorable development on prior years’ loss reserves. Results for ~~2019~~2020 included favorable development on prior accident

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years’ reserves, ~~across most surety lines,~~ which decreased loss and settlement expenses for the segment by ~~$8.1 million.~~$7.8 million, and offset $1.1 million in current year reserves established for COVID-19 related losses. Comparatively, ~~2018~~2019 results included favorable development on prior accident years’ loss reserves, ~~across all products,~~ which decreased the segment’s loss and settlement expenses by $8.0 million.

The combined ratio for the surety segment totaled ~~74.4~~69.8 for the first ~~nine~~six months of ~~2019,~~2020, compared to ~~72.1~~70.4 for the same period in ~~2018.~~2019. The segment’s loss ratio was ~~8.1 for 2019, compared to 8.5 for 2018.~~5.0 in 2020, up from 3.6 in 2019. The expense ratio was ~~66.3, up~~64.8, down from ~~63.6~~66.8 in the prior ~~year, due to increased investments in technology and higher bonus and profit-sharing expenses on a slightly lower premium base.~~year.

Investment Income and Realized Capital Gains

Our investment portfolio generated net investment income of ~~$51.1~~$34.7 million during the first ~~nine months~~half of ~~2019,~~2020, an increase of ~~13.2~~3.4 percent from that reported for the same period in ~~2018.~~2019. The increase in investment income was largely due to ~~an increased~~a larger asset base relative to the prior year.

Yields on our fixed income investments for the first ~~nine months~~half of ~~2019~~2020 and ~~2018~~2019 were as follows:


	2019		2018		2020		2019
Pretax Yield
Taxable	3.42	%	3.27	%	3.22	%	3.44	%
Tax-Exempt	2.82	%	2.70	%	2.75	%	2.83	%
After-Tax Yield
Taxable	2.70	%	2.58	%	2.54	%	2.72	%
Tax-Exempt	2.67	%	2.56	%	2.61	%	2.68	%

We recognized ~~$17.0~~$13.0 million of realized gains in the first ~~nine months~~half of ~~2019,~~2020, which were comprised of ~~$14.4~~$12.8 million of realized gains on equity securities from rebalancing our portfolio, $2.6 million of realized gains on the fixed income portfolio and $2.4 million of other realized losses. This compares to realized gains of $13.8 million in the first half of 2019, which were comprised of $12.3 million of realized gains on the equity portfolio, $1.3 million of realized gains on the fixed income portfolio and $0.2 million of ~~miscellaneous~~other realized gains. This compares to realized gains of $52.5 million on equity securities from rebalancing the portfolio that were partially offset by $0.1 million of realized losses in the fixed income portfolio as well as realized losses related to a non-cash impairment charge on goodwill and definite-lived intangibles for the same period in 2018.

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The following table depicts the composition of our investment portfolio at ~~September~~June 30, ~~2019~~2020 as compared to December 31, ~~2018:~~2019:


	September 30, 2019				December 31, 2018				June 30, 2020				December 31, 2019
	Financial				Financial				Financial				Financial
(in thousands)	Stmt Value		%		Stmt Value		%		Stmt Value		%		Stmt Value		%
Fixed income	$	1,957,025	77.8	%	$	1,760,515	80.2	%	$	2,075,093	78.4	%	$	1,983,086	77.5	%
Equity securities		428,297	17.0	%		340,483	15.5	%		422,198	16.0	%		460,630	18.0	%
Other invested assets		59,577	2.4	%		51,542	2.4	%		63,440	2.4	%		70,441	2.7	%
Cash and short-term investments		69,582	2.8	%		41,690	1.9	%		84,797	3.2	%		46,203	1.8	%
Total	$	2,514,481	100.0	%	$	2,194,230	100.0	%	$	2,645,528	100.0	%	$	2,560,360	100.0	%

We believe our overall asset allocation best meets our strategy to preserve capital for policyholders, provide sufficient income to support insurance operations, and to effectively grow book value over a long-term investment horizon.

The fixed income portfolio increased by ~~$196.5~~$92.0 million in the first ~~nine~~six months of ~~2019.~~2020. The increase was due to ~~cash flows being allocated to the fixed income portfolio as well as the decline~~declines in interest rates during the first six months of the year, ~~increasing~~lifting the fair value of securities in the fixed income portfolio. Average fixed income duration was ~~4.8~~4.6 years at ~~September~~June 30, ~~2019,~~2020, reflecting our current liability structure and sound capital position. The equity portfolio ~~increased~~decreased by ~~$87.8~~$38.4 million during the first ~~nine~~six months of ~~2019 due largely to strong~~2020 as the equity market ~~returns.~~sold off sharply in the first quarter.

Income Taxes

Our effective tax rate for the first ~~nine~~six months of ~~2019~~2020 was ~~18.4~~13.0 percent, compared to ~~15.4~~18.9 percent for the same period in ~~2018.~~2019. Effective rates are dependent upon components of pretax earnings or losses and the related tax effects. The effective rate was ~~higher~~lower for the first ~~nine months~~half of ~~2019 due to higher~~2020 as lower levels of pre-tax earnings ~~which~~ caused ~~the~~ tax-favored adjustments to be ~~smaller~~larger on a percentage basis ~~in 2019~~when compared to the prior year. ~~Additionally, the effective rate was reduced in 2018 by an increased level~~

Table of ~~tax exempt securities and stock option exercises and the corresponding tax benefits.~~Contents

Three Months Ended ~~September~~June 30, ~~2019~~2020 Compared to Three Months Ended ~~September~~June 30, ~~2018~~2019

Consolidated revenue for the ~~third~~second quarter of ~~2019 decreased $3.7~~2020 increased $60.1 million ~~or 2 percent,~~ from the ~~same period~~second quarter of 2019. A partial recovery from the market declines experienced in ~~2018.~~the first quarter resulted in $74.7 million of unrealized gains on equity securities in the second quarter of 2020, compared to $8.8 million of unrealized gains in the second quarter of 2019. Net premiums earned for the Group increased 51 percent, driven by growth from our ~~casualty and~~ property ~~segments.~~segment, which offset declines in our surety segment. Investment income ~~increased 7~~decreased 1 percent due to ~~an increased asset base~~lower average yields relative to the prior year. Realized ~~gains~~losses during the quarter were ~~$3.2~~$2.1 million and were comprised of ~~$2.1~~$2.3 million of realized ~~gains~~losses on equity securities ~~and $1.1~~from rebalancing our portfolio, $0.3 million of realized gains on the fixed income ~~portfolio.~~portfolio and $0.1 million of other realized losses. This compares to ~~$18.0~~realized gains of $4.8 million in the second quarter of 2019, which were comprised of $3.9 million of realized gains on the equity portfolio, ~~from rebalancing and $0.8~~$0.7 million of realized ~~losses~~gains on the fixed income portfolio and $0.2 million of miscellaneous realized gains.


	For the Three-Month Periods
	Ended June 30,
	2020		2019
Consolidated revenues (in thousands)
Net premiums earned	$	208,734	$	207,541
Net investment income		16,917		16,998
Net realized gains (losses)		(2,109)		4,764
Net unrealized gains (losses) on equity securities		74,705		8,810
Total consolidated revenue	$	298,247	$	238,113

Net earnings for the second quarter of 2020 totaled $92.2 million, compared to $40.5 million for the same period in ~~2018. Additionally, $4.9~~2019. The increase in earnings for 2020 was primarily attributed to $59.0 million of net ~~unrealized gains on equity securities were recognized in the third quarter of 2019, compared to $4.8 million in the same period in 2018.~~

For the Three-Month Periods

Ended September 30,

2019

2018
Consolidated revenues (in thousands)

Net premiums earned

$
211,255

$
200,815
Net investment income

17,532

16,314
Net realized gains

3,211

18,647
Net unrealized gains (losses) on equity securities

4,906

4,848
Total consolidated revenue

$
236,904

$
240,624

~~Net~~ after-tax earnings for the third quarter of 2019 totaled $32.3 million, compared to $39.4 million for the same period last year. The decrease in earnings for 2019 was influenced by $5.5 million of net after-tax realized and unrealized gains on equity securities, compared to ~~$18.0~~$7.0 million in ~~2018.~~2019. Underwriting results for both periods reflect profitable current accident year results and favorable development from prior years’ loss reserves. Favorable development on prior years’ loss reserves provided additional pretax earnings of ~~$14.4~~$25.6 million in the ~~third~~second quarter of ~~2019~~2020, compared to ~~$10.5~~$21.2 million in ~~2018.~~2019. Catastrophe activity consisted of ~~$3.0~~$6.0 million of pretax storm and civil unrest losses in the ~~third~~second quarter of ~~2019,~~2020, compared to ~~$7.5~~$4.0 million of storm losses ~~from Hurricane Florence for the same period~~ in ~~the 2018.~~2019. Pretax bonus and profit sharing-related expenses associated

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with the net impact of prior years’ reserve development and catastrophe losses totaled ~~$1.7~~$2.9 million in ~~2019,~~2020, compared to ~~$0.6~~$2.5 million in ~~2018.~~2019. These performance-related expenses affected policy acquisition, insurance operating and general corporate expenses. Bonus and profit-sharing amounts earned by executives, managers and associates are predominately influenced by corporate performance including operating earnings, combined ratio and return on capital. ~~These performance-related expenses were further increased in the third quarter of 2019 based on the overall growth in earnings and book value.~~

During the ~~third~~second quarter of ~~2019,~~2020, equity in earnings of unconsolidated investees totaled ~~$4.0~~$5.1 million. This amount includes ~~$2.8 million from Maui Jim and $1.2 million from Prime. Comparatively, the third quarter of 2018 reflected $3.6 million of earnings, including~~ $2.6 million from Maui Jim and ~~$1.0~~$2.5 million from Prime. Comparatively, the second quarter of 2019 reflected $8.5 million of earnings, including $6.5 million from Maui Jim and $2.0 million from Prime. The decline in earnings from Maui Jim is reflective of the shutdown much of the traditional retail sector experienced as a result of the pandemic.

Comprehensive earnings totaled ~~$47.7~~$145.7 million for the ~~third~~second quarter of ~~2019,~~2020, compared to ~~$31.7~~$68.3 million of comprehensive earnings for the ~~third~~second quarter of ~~2018.~~2019. Other comprehensive earnings primarily included after-tax unrealized gains and losses from the fixed income portfolio. The ~~third~~second quarter’s ~~$15.3~~$53.6 million of other comprehensive earnings was due to ~~unrealized gains on the fixed income portfolio as~~declines in interest rates, ~~declined.~~which increased the market value of the portfolio. This compares to ~~$7.7~~$27.9 million of other comprehensive ~~loss~~earnings for the same period in ~~2018, primarily attributable to increasing interest rates during the period.~~2019.

~~Premium~~Premiums

Gross premiums written for the Group increased ~~$37.9~~$3.9 million ~~or 16 percent,~~ for the ~~third~~second quarter of ~~2019~~2020 when compared to ~~2018. Products in our~~the same period of 2019. Rate increases across the property and casualty ~~and property segments drove~~portfolios were the largest influence on growth. Net premiums earned increased ~~$10.4~~$1.2 million, ~~or 5 percent,~~ also driven by products in ~~our casualty and~~the property ~~segments.~~segment.

Gross Premiums Written

Net Premiums Earned

For the Three-Month Periods Ended September 30,

For the Three-Month Periods Ended September 30,

(in thousands)

2019

2018

% Change

2019

2018

% Change
Casualty

Commercial excess and personal umbrella

$
45,392

$
39,589

14.7

%

$
35,959

$
31,244

15.1

%
General liability

21,045

20,021

5.1

%

25,005

22,485

11.2

%
Commercial transportation

31,325

25,449

23.1

%

21,067

20,747

1.5

%
Professional services

23,092

21,754

6.2

%

20,816

19,890

4.7

%
Small commercial

16,696

13,178

26.7

%

13,927

12,883

8.1

%
Executive products

30,268

16,340

85.2

%

7,026

5,352

31.3

%
Other casualty

15,602

21,222

(26.5)

%

16,623

19,004

(12.5)

%
Total

$
183,420

$
157,553

16.4

%

$
140,423

$
131,605

6.7

%

Property

Marine

$
24,508

$
19,765

24.0

%

$
19,033

$
16,068

18.5

%
Commercial property

32,585

25,667

27.0

%

17,098

18,489

(7.5)

%
Specialty personal

5,503

5,066

8.6

%

4,948

4,228

17.0

%
Other property

810

435

86.2

%

397

282

40.8

%
Total

$
63,406

$
50,933

24.5

%

$
41,476

$
39,067

6.2

%

Surety

Miscellaneous

$
10,867

$
12,722

(14.6)

%

$
10,998

$
11,822

(7.0)

%
Contract

7,667

7,677

(0.1)

%

7,507

7,474

0.4

%
Commercial

8,114

7,031

15.4

%

7,209

6,863

5.0

%
Energy

3,515

3,218

9.2

%

3,642

3,984

(8.6)

%
Total

$
30,163

$
30,648

(1.6)

%

$
29,356

$
30,143

(2.6)

%

Grand Total

$
276,989

$
239,134

15.8

%

$
211,255

$
200,815

5.2

%

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	Gross Premiums Written						Net Premiums Earned
	For the Three-Month Periods Ended June 30,						For the Three-Month Periods Ended June 30,
(in thousands)	2020		2019		% Change		2020		2019		% Change
Casualty
Commercial excess and personal umbrella	$	59,943	$	49,427	21	%	$	42,321	$	34,340	23	%
General liability		26,666		32,030	(17)	%		22,651		25,347	(11)	%
Commercial transportation		18,874		30,712	(39)	%		11,139		20,508	(46)	%
Professional services		24,469		23,958	2	%		21,384		19,275	11	%
Small commercial		17,140		16,244	6	%		15,791		13,315	19	%
Executive products		27,012		22,100	22	%		6,975		6,381	9	%
Other casualty		15,943		14,652	9	%		14,954		19,178	(22)	%
Total	$	190,047	$	189,123	0	%	$	135,215	$	138,344	(2)	%

Property
Marine	$	25,814	$	24,070	7	%	$	20,712	$	18,579	11	%
Commercial property		37,311		33,900	10	%		19,048		16,275	17	%
Specialty personal		5,305		5,878	(10)	%		4,936		4,792	3	%
Other property		856		512	67	%		691		326	112	%
Total	$	69,286	$	64,360	8	%	$	45,387	$	39,972	14	%

Surety
Commercial	$	9,622	$	10,569	(9)	%	$	10,806	$	10,975	(2)	%
Miscellaneous		10,312		10,572	(2)	%		10,499		11,280	(7)	%
Contract		7,886		8,647	(9)	%		6,827		6,970	(2)	%
Total	$	27,820	$	29,788	(7)	%	$	28,132	$	29,225	(4)	%

Grand Total	$	287,153	$	283,271	1	%	$	208,734	$	207,541	1	%

Casualty

Gross premiums written for the casualty segment were up ~~16 percent, or $25.9~~$0.9 million in the ~~third~~second quarter of 2019. Our executive products group grew significantly during the quarter, as sizeable rate increases were achieved and exposure growth was experienced with both mature and newer product offerings. Transportation also experienced rate and exposure growth, leading to a $5.9 million increase over the third quarter of 2018.2020. Premiums from commercial excess and personal umbrella

~~Table of Contents~~

increased ~~$5.8~~$10.5 million, due ~~in part~~ to an expanded distribution base in personal umbrella, ~~and larger scale in the energy casualty space. Other casualty,~~ which ~~includes assumed premiums from Prime and~~supplemented rate increases. Substantial rate increases led to a 22 percent increase for our medical professional liability lines, decreased $5.6 million, despite growth from our general binding authority and mortgage reinsurance business. As previously announced, we reduced our quota share reinsurance agreement with Prime from 25 percent to 6 percent at the beginning of 2019 and exited from our medical professional liability lines due to unfavorable market conditions and poor underwriting performance.executive products group.

Transportation continues to be significantly affected by the stay at home orders associated with COVID-19. This is particularly impactful on our public transportation book that has a focus on charter or city buses, which stopped running to a large degree in March. A slowdown or suspension of construction activity in certain parts of the country also led to the decline in general liability.

Property

Gross premiums written for the property segment totaled ~~$63.4~~$69.3 million for the ~~third~~second quarter of ~~2019,~~2020, up ~~24 percent~~$4.9 million from the same period last year. Our commercial property business ~~accounted for a large portion of the increase,~~was up ~~$6.9~~$3.4 million, as ~~changes~~rates on wind-prone and earthquake exposures continued to ~~the market have allowed~~increase. Market disruption created new business opportunities and led to $1.7 million of growth for our ~~high underwriting standards~~marine product. Other property premium increased as a result of property exposed GBA business that continues to ~~become more competitive. Marine premiums written were up 24 percent as market disruption provided new opportunities.~~gain scale.

Surety

The surety segment recorded gross premiums written of ~~$30.2~~$27.8 million for the ~~third~~second quarter of ~~2019,~~2020, a decrease of ~~$0.5~~$2.0 million from the same period last year. ~~Restructuring of one program resulted in a decline of miscellaneous~~The surety ~~premium in~~market remains very competitive. Additionally, the ~~third quarter, which was partially offset by growth within our commercial~~economic downturn, decreased commodity pricing and ~~energy lines.~~less regulation has reduced demand for bonds.

Underwriting Income

Underwriting income for the Group totaled ~~$13.7~~$24.2 million for the ~~third~~second quarter of ~~2019,~~2020, compared to ~~$7.8~~$14.9 million in the same period last year. Both periods reflect positive underwriting results for the current accident year and favorable reserve

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development on prior accident years, with ~~2019~~2020 experiencing a larger benefit. The combined ratio for the Group totaled ~~93.5~~88.4 in ~~2019,~~the second quarter of 2020, compared to ~~96.1~~92.8 in ~~2018.~~the same period of 2019. The loss ratio decreased to ~~51.6~~48.5 from ~~54.9,~~50.1, due to the increased level of favorable development in ~~2019.~~2020. The Group’s expense ratio ~~increased~~decreased to ~~41.9~~39.9 from ~~41.2~~42.7, as ~~strong~~2019 experienced stronger earnings and growth in ~~earnings and~~ book value in the six-month period ended June 30, which led to ~~increased~~larger levels of bonus and profit-sharing expenses.


	For the Three-Month Periods				For the Three-Month Periods
	Ended September 30,				Ended June 30,
	2019		2018		2020		2019
Underwriting income (in thousands)
Underwriting income (loss) (in thousands)
Casualty	$	2,370	$	(1,974)	$	9,733	$	6,939
Property		6,202		2,621		6,167		(436)
Surety		5,159		7,115		8,263		8,429
Total	$	13,731	$	7,762	$	24,163	$	14,932

Combined ratio
Casualty		98.3		101.5		92.8		95.0
Property		85.0		93.3		86.4		101.1
Surety		82.4		76.4		70.6		71.2
Total		93.5		96.1		88.4		92.8

Casualty

The casualty segment recorded underwriting income of ~~$2.4~~$9.7 million in the ~~third~~second quarter of ~~2019,~~2020, compared to ~~$2.0~~$6.9 million ~~of underwriting loss~~ for the same period last year. Reserve releases reduced loss and settlement expenses for the casualty segment by ~~$12.4~~$21.1 million, primarily on accident years 2016 through 2018. Transportation, ~~professional services, commercial excess,~~executive products, general liability and ~~small commercial all contributed to~~professional services were drivers of the favorable ~~development, while executive products~~development. Partially offsetting these benefits, $4.7 million of current year reserves were established in the second quarter of 2020 for COVID-19 related loss and ~~medical professional liability experienced adverse development.~~defense costs. In comparison, ~~$6.0~~$17.5 million of reserves were released in the ~~third~~second quarter of ~~2018. Commercial excess, personal umbrella and professional services developed favorably, while small commercial and medical professional liability developed adversely.~~2019, with nearly every product contributing to the favorable development.

The combined ratio for the casualty segment was ~~98.3~~92.8 in ~~2019,~~2020, compared to ~~101.5~~95.0 in ~~2018.~~2019. The segment’s loss ratio was ~~61.7~~57.4 in ~~2019,~~2020, down from ~~65.3~~57.9 in ~~2018.~~2019. The loss ratio decreased in ~~2019~~2020 as a result of a shift in mix of business towards products with lower loss booking ratios and more favorable development on prior years’ reserves. The expense ratio for the casualty segment was ~~36.6, up~~35.4, down from ~~36.2~~37.1 for the same period last year, ~~due to higher~~as reduced levels of bonus and profit-sharing expenses ~~and investments in technology.~~were incurred.

~~Table of Contents~~Property

~~Property~~

The property segment recorded underwriting income of $6.2 million for the ~~third~~second quarter of ~~2019,~~2020, compared to ~~$2.6~~$0.4 million of underwriting loss for the same period last year. Underwriting results for ~~2019~~2020 included ~~$1.8~~$0.7 million of favorable development on prior years’ loss and catastrophe reserves and ~~$3.0~~$4.8 million of storm and civil unrest losses. Comparatively, the ~~2018~~2019 underwriting results included ~~$3.6~~$0.1 million of ~~favorable~~adverse development on prior years’ loss and catastrophe reserves and ~~$7.2~~$3.9 million of ~~losses from Hurricane Florence.~~storm losses.

Underwriting results for the ~~third~~second quarter of ~~2019~~2020 translated into a combined ratio of ~~85.0,~~86.4, compared to ~~93.3~~101.1 for the same period last year. The segment’s loss ratio was ~~42.0~~47.5 in 2020, down from 56.5 in 2019 ~~down from 51.6 in 2018~~ due to athe combination of a larger amount of favorable development and decreased current accident year ~~catastrophe and~~ non-catastrophe losses. The segment’s expense ratio ~~increased~~decreased to ~~43.0~~38.9 in ~~2019~~2020 from ~~41.7~~44.6 in the prior year, as ~~strong growth in overall earnings~~increased levels of earned premium allowed the segment to better leverage expenses and ~~book value led to an increase in~~reduced levels of bonus and profit-sharing ~~expenses.~~expenses were incurred.

Surety

The surety segment recorded underwriting income of ~~$5.2~~$8.3 million for the ~~third~~second quarter of ~~2019,~~2020, compared to ~~$7.1~~$8.4 million for the same period last year. Both periods reflected positive current accident year underwriting performance and benefited from favorable development on prior years’ loss reserves. Results for ~~2019 included favorable development on prior accident years’ reserves, which decreased loss~~2020 and ~~settlement expenses for the segment by $0.1 million. Comparatively, 2018 results~~2019 included favorable development on prior accident years’ loss reserves across ~~most~~all products, which decreased the segment’s loss and settlement expenses by ~~$1.0~~$3.8 million. Additionally, $1.1 million of reserves were established in 2020 for COVID-19 related losses.

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The combined ratio for the surety segment totaled ~~82.4~~70.6 for the ~~third~~second quarter of ~~2019,~~2020, compared to ~~76.4~~71.2 for the same period in ~~2018.~~2019. The segment’s loss ratio was ~~17.0~~7.1 in 2020, up from 4.1 in 2019 ~~up from 13.6 in 2018. The loss ratio increase was~~due to the ~~result~~recognition of ~~a lower amount of favorable development on prior accident years’ reserves.~~COVID-19 related losses. The expense ratio was ~~65.4, up~~63.5, down from ~~62.8~~67.1 in the prior year ~~due~~as stronger growth in book value led to increased ~~investments in technology and higher~~ bonus and profit-sharing expenses ~~on a slightly lower premium base.~~in 2019.

Investment Income and Realized Capital Gains

Our investment portfolio generated net investment income of ~~$17.5~~$16.9 million during the ~~third~~second quarter of ~~2019, an increase~~2020, a decrease of ~~7.5~~0.5 percent from that reported for the same period in ~~2018.~~2019. The ~~increase~~decrease in investment income was largely due to ~~an increased asset base~~a decline in yields relative to the prior year.

Yields on our fixed income investments for the ~~third~~second quarter of ~~2019~~2020 and ~~2018~~2019 were as follows:


	3Q 2019		3Q 2018		2Q 2020		2Q 2019
Pretax Yield
Taxable	3.38	%	3.28	%	3.17	%	3.43	%
Tax-Exempt	2.80	%	2.93	%	2.70	%	2.83	%
After-Tax Yield
Taxable	2.67	%	2.59	%	2.50	%	2.71	%
Tax-Exempt	2.65	%	2.77	%	2.56	%	2.68	%

We recognized ~~$3.2~~$2.1 million of realized ~~gains~~losses in the ~~third~~second quarter of ~~2019,~~2020, which were comprised of ~~$2.1~~$2.3 million of realized ~~gains~~losses on equity securities from rebalancing ~~the~~our portfolio, ~~and $1.1~~$0.3 million of realized gains on the fixed income ~~portfolio.~~portfolio and $0.1 million of other realized losses. This compares to realized gains of ~~$18.6~~$4.8 million in the ~~third~~second quarter of ~~2018,~~2019, which were comprised of ~~$18.0~~$3.9 million of realized gains on the equity portfolio, ~~and $0.8~~$0.7 million of realized gains on the fixed income ~~portfolio.~~portfolio and $0.2 million of other realized gains.

Income Taxes

Our effective tax rate for the ~~third~~second quarter of ~~2019~~2020 was ~~17.0~~19.8 percent, compared to ~~15.1~~17.1 percent for the same period in ~~2018.~~2019. Effective rates are dependent upon components of pretax earnings or losses and the related tax effects. The effective rate was higher for the ~~third~~second quarter of ~~2019~~2020 due to higher levels of pre-tax earnings and lower levels of ~~tax exempt interest income and tax benefits from stock option exercises.~~tax-favored adjustments compared to 2019.

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LIQUIDITY AND CAPITAL RESOURCES

We have three primary types of cash flows: (1) cash flows from operating activities, which consist mainly of cash generated by our underwriting operations and income earned on our investment portfolio, (2) cash flows from investing activities related to the purchase, sale and maturity of investments, and (3) cash flows from financing activities that impact our capital structure, such as shareholder dividend payments and changes in debt and shares outstanding.

The following table summarizes cash flows provided by (used in) our activities for the ~~nine-month~~six-month periods ended ~~September~~June 30, ~~2019~~2020 and ~~2018:~~2019:


(in thousands)	2019		2018		2020		2019
Operating cash flows	$	186,762	$	163,369	$	83,773	$	105,347
Investing cash flows		(134,862)		(103,273)		(26,666)		(100,654)
Financing cash flows		(17,992)		(24,898)		(18,513)		(9,999)
Total	$	33,908	$	35,198	$	38,594	$	(5,306)

~~Operating~~Our largest source of cash is premiums received from customers and our largest cash outflow is claim payments on insured losses. Cash flows from operating activities ~~generated positive~~can vary among periods due to the timing in which these payments are made or received. Operating cash flows ~~of $186.8 million~~ in the first ~~nine~~half of 2020 were impacted by increased levels of loss and settlement expense payments relative to the first six months of 2019. Additionally, improved financial performance in 2019 ~~compared to $163.4 million~~resulted in a higher level of bonus and profit-sharing contributions that were paid in the ~~same period last year. The increase in~~first quarter of 2020, which also reduced operating cash flows ~~was due to increased premium receipts and investment income, which were partially offset by a larger amount of paid loss and loss adjustment expense during the period.~~in 2020.

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We have ~~$149.3~~$149.4 million in debt outstanding. On October 2, 2013, we completed a public debt offering, issuing $150.0 million in senior notes maturing September 15, 2023 (a 10-year maturity), and paying interest semi-annually at the rate of 4.875 percent per annum. The notes were issued at a discount resulting in proceeds, net of discount and commission, of $148.6 million. The estimated fair value for the senior note at ~~September~~June 30, ~~2019~~2020 was ~~$162.5~~$162.7 million. The fair value of our debt is estimated based on the limited observable prices that reflect thinly traded securities.

As of ~~September~~June 30, ~~2019,~~2020, we had cash and other investments maturing within one year of approximately ~~$157.4~~$160.7 million and an additional ~~$408.7~~$496.0 million maturing between one to five years. Whereas our strategy is to be fully invested at all times, short-term investments in excess of demand deposit balances are considered a component of investment activities, and thus are classified as investments in our consolidated balance sheets.

We also maintain a revolving line of credit with ~~JP Morgan Chase~~ Bank ~~N.A.,~~of Montreal, Chicago Branch, which permits us to borrow up to an aggregate principal amount of ~~$50.0~~$60.0 million. This facility was entered into during the ~~second~~first quarter of ~~2018~~2020 and replaced the previous ~~$40.0~~$50.0 million facility with JP Morgan Chase Bank N.A., which ~~expired~~was set to expire on May ~~28, 2018.~~24, 2020. Under certain conditions, the line may be increased up to an aggregate principal amount of ~~$75.0~~$120.0 million. The facility has a ~~two-year~~three-year term that expires on ~~May 24, 2020.~~March 27, 2023. As of and during the ~~nine-month~~three-month period ended ~~September~~June 30, ~~2019,~~2020, no amounts were outstanding on ~~this~~either facility.

Additionally, two of our insurance companies, RLI Ins. and Mt. Hawley, are members of the Federal Home Loan Bank of Chicago (FHLBC). Membership in the Federal Home Loan Bank System provides both companies access to an additional source of liquidity via a secured lending facility. Our membership allows each insurance subsidiary to determine tenor and structure at the time of borrowing. As of and during the ~~nine-month~~six-month period ended ~~September~~June 30, ~~2019,~~2020, there were no outstanding borrowing amounts with the FHLBC.

We believe that cash generated by operations and investments will provide sufficient sources of liquidity to meet our anticipated needs over the next 12 to 24 months. In the event they are not sufficient, we believe cash available from financing activities and other sources will provide sufficient additional liquidity.

We have not had any liquidity issues affecting our operations as we have sufficient cash flow to support operations. In addition to our bank credit facility and FHLBC membership, our highly liquid investment portfolio provides an additional source of liquidity.

We maintain a diversified investment portfolio representing policyholder funds that have not yet been paid out as claims, as well as the capital we hold for our shareholders. ~~As of September 30, 2019, our investment portfolio had a balance sheet value of $2.5 billion.~~ Invested assets at ~~September~~June 30, ~~2019~~2020 have increased ~~$320.3~~$85.2 million from December 31, ~~2018.~~

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2019. As of ~~September~~June 30, ~~2019,~~2020, our investment portfolio had the following asset allocation breakdown:


Portfolio Allocation
(in thousands)
	Cost or		Fair		Unrealized		% of Total			Cost or		Fair		Unrealized		% of Total
Asset class	Amortized Cost		Value		Gain/(Loss)		Fair Value		Quality*	Amortized Cost		Value		Gain/(Loss)		Fair Value		Quality*
U.S. government	$	232,269	$	240,913	$	8,644	9.6	%	AAA	$	171,174	$	186,838	$	15,664	7.1	%	AAA
U.S. agency		29,703		32,479		2,776	1.3	%	AAA		27,913		32,091		4,178	1.2	%	AAA
Non-U.S. govt. & agency		9,241		9,342		101	0.4	%	BBB		7,316		7,692		376	0.3	%	BBB
Agency MBS		421,448		431,509		10,061	17.2	%	AAA		388,036		409,167		21,131	15.5	%	AAA
ABS/CMBS**		173,469		176,555		3,086	7.0	%	AAA		214,548		218,507		3,959	8.2	%	AA+
Corporate		675,463		708,102		32,639	28.1	%	BBB+		717,748		765,125		47,377	28.9	%	BBB+
Municipal		340,370		358,125		17,755	14.2	%	AA		429,402		455,673		26,271	17.2	%	AA
Total Fixed Income	$	1,881,963	$	1,957,025	$	75,062	77.8	%	AA-	$	1,956,137	$	2,075,093	$	118,956	78.4	%	AA-

Equity	$	260,883	$	428,297	$	167,414	17.0	%			270,987		422,198		151,211	16.0	%

Other Invested Assets	$	59,493	$	59,577	$	84	2.4	%			72,291		63,440		(8,851)	2.4	%

Cash and Short-Term Investments	$	69,582	$	69,582	$	—	2.8	%

Cash											84,797		84,797		—	3.2	%
Total Portfolio	$	2,271,921	$	2,514,481	$	242,560	100.0	%		$	2,384,212	$	2,645,528	$	261,316	100.0	%

*Quality ratings provided by Moody’s, S&P and Fitch

**Asset-backed and commercial mortgage-backed securities

Quality is an average of each bond’s credit rating, adjusted for its relative weighting in the portfolio. As of ~~September~~June 30, ~~2019,~~2020, our fixed income portfolio had the following rating distribution:

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AAA	~~50.6~~45.9	%
AA	~~14.7~~17.9	%
A	~~19.2~~20.4	%
BBB	~~9.5~~9.3	%
BB	~~3.5~~3.2	%
B	2.4	%
CCC	~~0.0~~0.3	%
NR	~~0.1~~0.6	%
Total	100.0	%

As of ~~September~~June 30, ~~2019,~~2020, the duration of the fixed income portfolio was ~~4.8~~4.6 years. Our fixed income portfolio remained well diversified, with ~~1,194~~1,288 individual issues.

Our investment portfolio has limited exposure to structured asset-backed ~~securities (ABS).~~securities. As of ~~September~~June 30, ~~2019,~~2020, we had ~~$114.4~~$137.9 million in ABS which are pools of assets collateralized by cash flows from several types of loans, including home equity, credit cards, autos and structured bank loans in the form of collateralized loan obligations (CLOs).

As of ~~September~~June 30, ~~2019,~~2020, we had ~~$62.2~~$80.6 million in commercial mortgage backed securities ~~(CMBS)~~ and ~~$431.5~~$409.2 million in mortgage backed securities backed by government sponsored enterprises (GSEs - Freddie Mac, Fannie Mae and Ginnie Mae). Excluding the GSE backed MBS, our exposure to ABS and CMBS was ~~7.0~~8.2 percent of our investment portfolio at quarter end.

We had ~~$708.1~~$765.1 million in corporate fixed income securities as of ~~September~~June 30, ~~2019,~~2020, which includes ~~$83.8~~$98.2 million invested in a high yield credit strategy. This high-yield portfolio consists of floating rate bank loans and bonds that are below investment grade in credit quality and offer incremental yield over our core fixed income portfolio.

We also maintain an allocation to municipal fixed income securities. As of ~~September~~June 30, ~~2019,~~2020, we had ~~$358.1~~$455.7 million in municipal securities. The municipal portfolio includes approximately 8073 percent tax-exempt securities and 2027 percent taxable

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securities. Approximately 8486 percent of our municipal bond portfolio maintains an ‘AA’ or better rating, while 99 percent of the municipal bond portfolio is rated ‘A’ or better.

Our equity portfolio had a fair value of ~~$428.3~~$422.2 million as of ~~September~~June 30, ~~2019~~2020 and is also a source of liquidity. The securities within the equity portfolio remain primarily invested in large-cap issues with a focus on dividend income. In the equity portfolio, the strategy remains one of value investing, with security selection taking precedence over market timing.

As of ~~September~~June 30, ~~2019,~~2020, our equity portfolio had a dividend yield of ~~2.4~~2.1 percent, compared to ~~2.0~~1.9 percent for the S&P 500 index. Because of the corporate dividend-received-deduction applicable to our dividend income, we pay an effective tax rate of 13.1 percent on dividends, compared to 21.0 percent on taxable interest and 5.3 percent on municipal bond interest income. The equity portfolio is managed in a diversified and granular manner, with ~~232~~221 individual securities and three ETF positions. No single stock exposure is greater than 2 percent of the equity portfolio.

We had ~~$59.6~~$63.4 million of other invested assets at ~~September~~June 30, ~~2019,~~2020, including investments in low income housing tax credit partnerships, membership in the ~~Federal Home Loan Bank of Chicago (FHLBC)~~FHLBC, investments in private funds and investments in ~~private funds.~~restricted stock. As of ~~September~~June 30, ~~2019, $16.2~~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 ~~nine-month~~six-month period ending ~~September~~June 30, ~~2019,~~2020, there were no outstanding borrowings with the FHLBC.

Our investment portfolio does not have any exposure to derivatives.

Our capital structure is comprised of equity and debt outstanding. As of ~~September~~June 30, ~~2019,~~2020, our capital structure consisted of ~~$149.3~~$149.4 million in 10-year maturity senior notes maturing in 2023 (debt) and ~~$999.6 million~~$1.1 billion of shareholders’ equity. Debt outstanding comprised ~~13.0~~12.4 percent of total capital as of ~~September~~June 30, ~~2019.~~2020. Interest and fees on debt obligations totaled ~~$5.6~~$3.8 million during the first ~~nine~~six months of ~~2019,~~2020, compared to $3.7 million during the same ~~amount as the previous year.~~period in 2019. We have incurred interest expense on debt at an average annual interest rate of 4.91 percent for the ~~nine-month~~three-month periods ended ~~September~~June 30, ~~2019~~2020 and ~~2018.~~2019.

We paid a regular quarterly cash dividend of ~~$0.23~~$0.24 per share on ~~September 20, 2019, the same as~~June 19, 2020, a $0.01 increase over the prior quarter. We have increased dividends in each of the last 4445 years.

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Our three insurance subsidiaries are subsidiaries of RLI Corp, with RLI Ins. as the first-level, or principal, insurance subsidiary. At the holding company (RLI Corp.) level, we rely largely on dividends from our insurance company subsidiaries to meet our obligations for paying principal and interest on outstanding debt, corporate expenses and dividends to RLI Corp. shareholders. As discussed further below, dividend payments to RLI Corp. from our principal insurance subsidiary are restricted by state insurance laws as to the amount that may be paid without prior approval of the insurance regulatory authorities of Illinois. As a result, we may not be able to receive dividends from such subsidiary at times and in amounts necessary to pay desired dividends to RLI Corp. shareholders. On a GAAP basis, as of ~~September~~June 30, ~~2019,~~2020, our holding company had ~~$999.6 million~~$1.1 billion in equity. This includes amounts related to the equity of our insurance subsidiaries, which is subject to regulatory restrictions under state insurance laws. The unrestricted portion of holding company net assets is comprised primarily of investments and cash, including ~~$46.5~~$43.4 million in liquid assets, which ~~approximates~~would cover the majority of our annual holding company expenditures. Unrestricted funds at the holding company are available to fund debt interest, general corporate obligations and dividend payments to our shareholders. If necessary, the holding company also has other potential sources of liquidity that could provide for additional funding to meet corporate obligations or pay shareholder dividends, which include a revolving line of credit, as well as access to capital markets.

Ordinary dividends, which may be paid by our principal insurance subsidiary without prior regulatory approval, are subject to certain limitations based upon statutory income, surplus and earned surplus. The maximum ordinary dividend distribution from our principal insurance subsidiary in a rolling 12-month period is limited by Illinois law to the greater of 10 percent of RLI Ins. policyholder surplus, as of December 31 of the preceding year, or the net income of RLI Ins. for the 12-month period ending December 31 of the preceding year. Ordinary dividends are further restricted by the requirement that they be paid from earned surplus. Any dividend distribution in excess of the ordinary dividend limits is deemed extraordinary and requires prior approval from the Illinois Department of Insurance (IDOI). In the first ~~nine~~six months of ~~2019,~~2020, RLI Ins. paid ~~$14.0~~$22.0 million in ordinary dividends to RLI Corp. In ~~2018,~~2019, our principal insurance subsidiary paid ordinary dividends totaling ~~$13.0~~$59.0 million. As of June 30, 2020, $43.3 million ~~and extraordinary dividends totaling $110.0 million. Given the amount~~ of ~~dividends paid during the prior rolling 12-month period,~~ the net assets of our principal insurance subsidiary ~~are~~were not restricted ~~until the middle of the fourth quarter of 2019~~ and ~~cannot~~could be distributed to RLI Corp. as ordinary dividends without prior approval from the IDOI. Because the limitations are based upon a rolling 12-month period, the amount and impact of these restrictions vary over time. In addition to restrictions from our principal subsidiary’s insurance regulator, we also consider internal models and how capital adequacy is defined by our rating agencies

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in determining amounts available for distribution. However, as discussed above, RLI Corp. had the necessary amount of unrestricted liquid net assets on hand at September 30, 2019 to cover normal annual holding company expenditures as they are incurred and become payable.

ITEM 3. Quantitative and Qualitative Disclosures about Market Risk

Market risk is the risk of economic losses due to adverse changes in the estimated fair value of a financial instrument as the result of changes in equity prices, interest rates, foreign currency exchange rates and commodity prices. Historically, our primary market risks have been equity price risk associated with investments in equity securities and interest rate risk associated with investments in fixed maturities. We have limited exposure to both foreign currency risk and commodity risk.

Credit risk is the potential loss resulting from adverse changes in an issuer’s ability to repay its debt obligations. We monitor our portfolio to ensure that credit risk does not exceed prudent levels. We have consistently invested in high credit quality, investment grade securities. Our fixed maturity portfolio has an average rating of ~~“AA-~~AA-,” with 8584 percent rated ~~“A”~~A or better by at least two nationally recognized rating organizations.

On an overall basis, our exposure to market risk has not significantly changed from that reported in our ~~December 31, 2018~~2019 Annual Report on Form 10-K. The COVID-19 pandemic does present new and emerging uncertainty to the financial markets. See further discussion in Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations, and Part II, Item 1A., Risk Factors, of this Quarterly Report on Form 10-Q.

ITEM 4. Controls and Procedures

We maintain a system of controls and procedures designed to provide reasonable assurance as to the reliability of the financial statements and other disclosures included in this report, as well as to safeguard assets from unauthorized use or disposition. An evaluation of the effectiveness of the design and operation of our disclosure controls and procedures was performed, under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer, as of the end of the period covered by this report. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that these disclosure controls and procedures are effective, as of the end of the period covered by this report.

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In designing and evaluating our disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurances of achieving the desired control objective, and management necessarily is required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. We believe that our disclosure controls and procedures provide such reasonable assurance.

No changes were made to our internal control over financial reporting during the last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II - OTHER INFORMATION


Item 1.	Legal Proceedings – There were no material changes to report.

~~Item~~Item 1A.	Risk Factors - ~~There were no material changes to report.~~

There have been no material changes from the risk factors previously disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019, as updated in the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2020.


Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds -

Items 2(a) and (b) are not applicable.

In 2010, our Board of Directors implemented a $100 million share repurchase program. We did not repurchase any shares during ~~2019.~~2020. We have $87.5 million of remaining capacity from the repurchase program. The repurchase program may be suspended or discontinued at any time without prior notice.


Item 3.	Defaults Upon Senior Securities - Not Applicable.

Item 4.	Mine Safety Disclosures - Not Applicable.

Item 5.	Other Information - Not Applicable.

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Item 6.	Exhibits

Exhibit No.		Description of Document
	Reference
3.1		Amended and Restated Certificate of Incorporation	Incorporated by reference to the Company’s Current Report on Form 8-K filed May 8, 2020.
10.1		RLI Corp. 2015 Long-Term Incentive Plan	Attached as Exhibit 10.1.
10.2		RLI Corp. Annual Incentive Compensation Plan	Attached as Exhibit 10.2.
31.1		Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
	Attached as Exhibit 31.1.
31.2
	~~Exhibit 31.2~~	Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
	Attached as Exhibit 31.2.
32.1
	~~Exhibit 32.1~~	Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
	Attached as Exhibit 32.1.
32.2
	~~Exhibit 32.2~~	Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
	Attached as Exhibit 32.2.
101		iXBRL-Related Documents
	Attached as Exhibit ~~101~~101.
104	~~iXBRL-Related Documents~~	Cover Page Interactive Data File	Embedded in Inline XBRL and contained in Exhibit 101.

3738

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


	RLI Corp.


	/s/ Todd W. Bryant
	Todd W. Bryant
	Vice President, Chief Financial Officer
	(Principal Financial and Chief Accounting Officer)

Date: ~~October~~July 24, ~~2019~~2020

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	September 30,		December 31,
(in thousands, except share data)	2019		2018

ASSETS
Investments and cash:
Fixed income:
Available-for-sale, at fair value (amortized cost - $1,881,963 at 9/30/19 and $1,776,465 at 12/31/18)	$	1,957,025	$	1,760,515
Equity securities, at fair value (cost - $260,883 at 9/30/19 and $220,373 at 12/31/18)		428,297		340,483
Short-term investments, at cost which approximates fair value		5,534		11,550
Other invested assets		59,577		51,542
Cash		64,048		30,140
Total investments and cash	$	2,514,481	$	2,194,230
Accrued investment income		14,547		14,033
Premiums and reinsurance balances receivable, net of allowances for uncollectible amounts of $16,860 at 9/30/19 and $16,967 at 12/31/18		157,111		152,576
Ceded unearned premium		88,174		71,174
Reinsurance balances recoverable on unpaid losses and settlement expenses, net of allowances for uncollectible amounts of $9,764 at 9/30/19 and $9,793 at 12/31/18		382,030		364,999
Deferred policy acquisition costs		86,523		84,934
Property and equipment, at cost, net of accumulated depreciation of $60,299 at 9/30/19 and $54,275 at 12/31/18		52,626		54,692
Investment in unconsolidated investees		113,528		94,967
Goodwill and intangibles		54,228		54,534
Other assets		41,816		18,926
TOTAL ASSETS	$	3,505,064	$	3,105,065

LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities
Unpaid losses and settlement expenses	$	1,557,358	$	1,461,348
Unearned premiums		532,493		496,505
Reinsurance balances payable		25,690		22,591
Funds held		78,161		72,309
Income taxes-deferred		55,910		24,238
Bonds payable, long-term debt		149,255		149,115
Accrued expenses		47,952		45,124
Other liabilities		58,625		26,993
TOTAL LIABILITIES	$	2,505,444	$	2,298,223

Shareholders’ Equity
Common stock ($0.01 par value, 100,000,000 shares authorized)
(67,762,302 shares issued, 44,832,088 shares outstanding at 9/30/19)
(67,434,257 shares issued, 44,504,043 shares outstanding at 12/31/18)	$	678	$	674
Paid-in capital		318,092		305,660
Accumulated other comprehensive earnings (loss)		57,934		(14,572)
Retained earnings		1,015,915		908,079
Deferred compensation		7,788		8,354
Less: Treasury shares at cost
(22,930,214 shares at 9/30/19 and 12/31/18)		(400,787)		(401,353)
TOTAL SHAREHOLDERS’ EQUITY	$	999,620	$	806,842
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY	$	3,505,064	$	3,105,065


	For the Three-Month Period					For the Three-Month Period
	Ended September 30, 2019					Ended September 30, 2018
	Income		Shares	Per Share		Income		Shares	Per Share
(in thousands, except per share data)	(Numerator)		(Denominator)	Amount		(Numerator)		(Denominator)	Amount

Basic EPS
Income available to common shareholders	$	32,324	44,823	$	0.72	$	39,372	44,400	$	0.89
Effect of Dilutive Securities
Stock options		-	526				-	540
Diluted EPS
Income available to common shareholders	$	32,324	45,349	$	0.71	$	39,372	44,940	$	0.88

	For the Nine-Month Period					For the Nine-Month Period
	Ended September 30, 2019					Ended September 30, 2018
	Income		Shares	Per Share		Income		Shares	Per Share
(in thousands, except per share data)	(Numerator)		(Denominator)	Amount		(Numerator)		(Denominator)	Amount

Basic EPS
Income available to common shareholders	$	138,264	44,689	$	3.09	$	84,839	44,311	$	1.91
Effect of Dilutive Securities
Stock options		-	503				-	449
Diluted EPS
Income available to common shareholders	$	138,264	45,192	$	3.06	$	84,839	44,760	$	1.90


	As of September 30, 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	$	—	$	240,913	$	—	$	240,913
U.S. agency		—		32,479		—		32,479
Non-U.S. govt. & agency		—		9,342		—		9,342
Agency MBS		—		431,509		—		431,509
ABS/CMBS*		—		176,555		—		176,555
Corporate		—		708,102		—		708,102
Municipal		—		358,125		—		358,125
Total fixed income securities - available-for-sale	$	—	$	1,957,025	$	—	$	1,957,025
Equity securities		428,297		—		—		428,297
Total	$	428,297	$	1,957,025	$	—	$	2,385,322


	As of December 31, 2018
	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	$	—	$	200,229	$	—	$	200,229
U.S. agency		—		31,904		—		31,904
Non-U.S. govt. & agency		—		7,639		—		7,639
Agency MBS		—		395,253		—		395,253
ABS/CMBS*		—		136,723		—		136,723
Corporate		—		668,679		—		668,679
Municipal		—		320,088		—		320,088
Total fixed income securities - available-for-sale	$	—	$	1,760,515	$	—	$	1,760,515
Equity securities		339,985		498		—		340,483
Total	$	339,985	$	1,761,013	$	—	$	2,100,998