Quarterly Report (10-q)

Date : 11/01/2019 @ 5:49PM
Source : Edgar (US Regulatory)
Stock : Old Republic International Corp (ORI)
Quote : 14.45  -0.1 (-0.69%) @ 11:00PM
After Hours
Last Trade
Last $ 14.45 ◊ 0.00 (0.00%)

Quarterly Report (10-q)

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
 
 
FORM
10-Q
Quarterly report pursuant to section 13 or 15(d) of the Security Exchange Act of 1934
 
for the quarterly period ended:
September 30, 2019
or
Transition report pursuant to section 13 or 15(d) of the Security Exchange Act of 1934
Commission File Number:
001-10607
 
OLD REPUBLIC INTERNATIONAL CORPORATION
(Exact name of registrant as specified in its charter)
Delaware
 
36-2678171
(State or other jurisdiction of
 
(IRS Employer Identification No.)
incorporation or organization)
 
 
307 North Michigan Avenue
Chicago
Illinois
 
60601
(Address of principal executive office)
 
(Zip Code)

Registrant's telephone number, including area code: 312-346-8100

Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Trading Symbol(s)
 
Name of each exchange on which registered
Common Stock / $1 par value
 
ORI
 
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 and post such files). Yes: No:

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See 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 Exchange Act Rule 12b-2).Yes:   No:

The number of shares of the Registrant's Common Stock outstanding at September 30, 2019 was 303,570,106.

There are 52 pages in this report





OLD REPUBLIC INTERNATIONAL CORPORATION
 
Report on Form 10-Q / September 30, 2019
 
INDEX
 
 
 
 
 
 
 
PAGE NO.
 
 
PART I
FINANCIAL INFORMATION:
 
 
 
 
 
CONSOLIDATED BALANCE SHEETS
3
 
 
 
 
CONSOLIDATED STATEMENTS OF INCOME
4
 
 
 
 
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
5
 
 
 
 
CONSOLIDATED STATEMENTS OF PREFERRED STOCK AND COMMON
 
 
SHAREHOLDERS' EQUITY
6
 
 
 
 
CONSOLIDATED STATEMENTS OF CASH FLOWS
7
 
 
 
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8 - 19
 
 
 
 
MANAGEMENT ANALYSIS OF FINANCIAL POSITION AND RESULTS OF OPERATIONS
20 - 48
 
 
 
 
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
49
 
 
 
 
CONTROLS AND PROCEDURES
49
 
 
 
PART II
OTHER INFORMATION:
 
 
 
 
 
ITEM 1 - LEGAL PROCEEDINGS
50
 
 
 
 
ITEM 1A - RISK FACTORS
50
 
 
 
 
ITEM 6 - EXHIBITS
50
 
 
SIGNATURE
51
 
 
EXHIBIT INDEX
52





2



Old Republic International Corporation and Subsidiaries
Consolidated Balance Sheets
($ in Millions, Except Share Data)
 
(Unaudited)
 
 
 
September 30,
 
December 31,
 
2019
 
2018
Assets
 
 
 
Investments:
 
 
 
Available for sale:
 
 
 
Fixed maturity securities (at fair value) (amortized cost: $8,394.0 and $8,285.0)
$
8,666.7

 
$
8,182.8

Short-term investments (at fair value which approximates cost)
487.4

 
354.9

Total
9,154.2

 
8,537.8

Held to maturity:
 
 
 
Fixed maturity securities (at amortized cost) (fair value: $1,060.2 and $1,034.5)
1,027.5

 
1,044.8

Equity securities (at fair value) (cost: $2,989.4 and $3,039.1)
3,770.6

 
3,380.9

Other investments
23.0

 
31.0

Total investments
13,975.4

 
12,994.6

Other Assets:
 
 
 
Cash
109.6

 
100.3

Accrued investment income
94.6

 
92.4

Accounts and notes receivable
1,687.5

 
1,499.4

Federal income tax recoverable: Current
.5

 
16.8

Prepaid federal income taxes
138.5

 
129.8

Reinsurance balances and funds held
176.1

 
166.2

Reinsurance recoverable: Paid losses
74.6

 
55.9

 Policy and claim reserves
3,849.1

 
3,428.6

Deferred policy acquisition costs
333.0

 
316.3

Sundry assets
742.4

 
526.3

Total Other Assets
7,206.3

 
6,332.4

Total Assets
$
21,181.8

 
$
19,327.1

Liabilities, Preferred Stock, and Common Shareholders' Equity
 
 
 
Liabilities:
 
 
 
Losses, claims, and settlement expenses
$
9,817.4

 
$
9,471.2

Unearned premiums
2,408.6

 
2,104.9

Other policyholders' benefits and funds
193.3

 
198.6

Total policy liabilities and accruals
12,419.4

 
11,774.8

Commissions, expenses, fees, and taxes
518.6

 
525.4

Reinsurance balances and funds
759.9

 
600.4

Federal income tax payable: Deferred
171.3

 
10.3

Debt
973.7

 
981.4

Sundry liabilities
544.6

 
288.3

Commitments and contingent liabilities

 

Total Liabilities
15,387.9

 
14,180.8

Preferred Stock (1)

 

Common Shareholders' Equity:
 
 
 
Common stock (1)
303.5

 
302.7

Additional paid-in capital
1,295.2

 
1,277.6

Retained earnings
4,170.1

 
3,849.8

Accumulated other comprehensive income (loss)
92.0

 
(210.0
)
Unallocated ESSOP shares (at cost)
(67.1
)
 
(73.9
)
Total Common Shareholders' Equity
5,793.9

 
5,146.2

Total Liabilities, Preferred Stock and Common Shareholders' Equity
$
21,181.8

 
$
19,327.1

________

(1)
At September 30, 2019 and December 31, 2018, there were 75,000,000 shares of $0.01 par value preferred stock authorized, of which no shares were outstanding. As of the same dates, there were 500,000,000 shares of common stock, $1.00 par value, authorized, of which 303,570,106 and 302,714,502 were issued as of September 30, 2019 and December 31, 2018, respectively. At September 30, 2019 and December 31, 2018, there were 100,000,000 shares of Class B Common Stock, $1.00 par value, authorized, of which no shares were issued.

See accompanying Notes to Consolidated Financial Statements.

3



Old Republic International Corporation and Subsidiaries
Consolidated Statements of Income (Unaudited)
($ in Millions, Except Share Data)
 
Quarters Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2019
 
2018
 
2019
 
2018
Revenues:
 
 
 
 
 
 
 
Net premiums earned
$
1,423.4

 
$
1,388.6

 
$
4,016.5

 
$
3,914.4

Title, escrow, and other fees
138.2

 
116.2

 
363.8

 
341.0

Total premiums and fees
1,561.7

 
1,504.8

 
4,380.4

 
4,255.5

Net investment income
112.7

 
108.7

 
337.8

 
321.5

Other income
32.9

 
30.4

 
97.4

 
91.1

Total operating revenues
1,707.3

 
1,644.0

 
4,815.7

 
4,668.2

Investment gains (losses):
 
 
 
 
 
 
 
Realized from actual transactions and impairments
6.3

 
7.3

 
29.3

 
54.8

Unrealized from changes in fair value of
 
 
 
 
 
 
 
equity securities
57.3

 
128.4

 
439.3

 
17.7

Total realized and unrealized investment
 
 
 
 
 
 
 
gains (losses)
63.6

 
135.7

 
468.7

 
72.6

Total revenues
1,771.0

 
1,779.7

 
5,284.4

 
4,740.9

 

 

 
 
 
 
Benefits, Claims and Expenses:

 

 
 
 
 
Benefits, claims and settlement expenses
659.5

 
615.1

 
1,887.9

 
1,806.3

Dividends to policyholders
4.2

 
4.2

 
17.2

 
14.4

Underwriting, acquisition, and other expenses
845.0

 
815.2

 
2,372.0

 
2,310.0

Interest and other charges
9.7

 
9.9

 
30.8

 
34.3

Total expenses
1,518.6

 
1,444.6

 
4,308.0

 
4,165.2

Income (loss) before income taxes (credits)
252.4

 
335.1

 
976.3

 
575.7

 

 

 
 
 
 
Income Taxes (Credits):

 

 
 
 
 
Current
38.9

 
34.2

 
113.2

 
95.7

Deferred
10.5

 
25.6

 
82.4

 
2.9

Total
49.5

 
59.8

 
195.6

 
98.6

 

 

 
 
 
 
Net Income (Loss)
$
202.8

 
$
275.2

 
$
780.6

 
$
477.0

 

 

 
 
 
 
Net Income (Loss) Per Share:

 

 
 
 
 
Basic
$
.68

 
$
.92

 
$
2.60

 
$
1.63

Diluted
$
.67

 
$
.92

 
$
2.59

 
$
1.59

 
 
 
 
 
 
 
 
Average shares outstanding: Basic
299,894,995

 
299,006,345

 
299,740,751

 
292,565,008

Diluted
301,384,364

 
300,374,004

 
301,034,156

 
301,125,090



See accompanying Notes to Consolidated Financial Statements.

4



Old Republic International Corporation and Subsidiaries
Consolidated Statements of Comprehensive Income (Unaudited)
($ in Millions)
 
Quarters Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2019
 
2018
 
2019
 
2018
Net Income (Loss) As Reported
$
202.8

 
$
275.2

 
$
780.6

 
$
477.0

 
 
 
 
 
 
 
 
Other comprehensive income (loss):
 
 
 
 
 
 
 
Unrealized gains (losses) on securities:
 
 
 
 
 
 
 
Unrealized gains (losses) before reclassifications,
 
 
 
 
 
 
 
not included in the statements of income
53.3

 
(24.6
)
 
366.6

 
(236.3
)
Amounts reclassified as realized investment (gains)
 
 
 
 
 
 
 
losses in the statements of income
7.3

 
1.2

 
10.7

 
(.4
)
Pretax unrealized gains (losses) on securities
60.7

 
(23.4
)
 
377.3

 
(236.8
)
Deferred income taxes (credits)
12.7

 
(4.9
)
 
79.5

 
(49.8
)
Net unrealized gains (losses) on securities, net of tax
48.0

 
(18.4
)
 
297.8

 
(186.9
)
Defined benefit pension plans:
 
 
 
 
 
 
 
Net pension adjustment before reclassifications

 

 
(2.6
)
 

Amounts reclassified as underwriting, acquisition,
 
 
 
 
 
 
 
and other expenses in the statements of income
1.0

 
.8

 
3.0

 
2.4

Pretax net adjustment related to defined benefit
 
 
 
 
 
 
 
pension plans
1.0

 
.8

 
.4

 
2.4

Deferred income taxes (credits)
.2

 
.1

 
.1

 
.5

Net adjustment related to defined benefit pension
 
 
 
 
 
 
 
plans, net of tax
.8

 
.6

 
.3

 
1.9

Foreign currency translation and other adjustments
(1.6
)
 
2.6

 
3.8

 
(4.7
)
Total other comprehensive income (loss)
47.2

 
(15.1
)
 
302.0

 
(189.7
)
Comprehensive Income (Loss)
$
250.1

 
$
260.0

 
$
1,082.7

 
$
287.3




See accompanying Notes to Consolidated Financial Statements.

5



Old Republic International Corporation and Subsidiaries
Consolidated Statements of Preferred Stock
and Common Shareholders' Equity (Unaudited)
($ in Millions)
 
Quarters Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2019
 
2018
 
2019
 
2018
Convertible Preferred Stock:
 
 
 
 
 
 
 
Balance, beginning and end of period
$

 
$

 
$

 
$

 
 
 
 
 
 
 
 
Common Stock:
 
 
 
 
 
 
 
Balance, beginning of period
$
303.2

 
$
302.4

 
$
302.7

 
$
269.2

Dividend reinvestment plan

 

 

 

Net issuance of shares under stock based compensation plans
.3

 
.1

 
.7

 
1.1

Conversion of senior debentures

 

 

 
32.2

Balance, end of period
$
303.5

 
$
302.6

 
$
303.5

 
$
302.6

 
 
 
 
 
 
 
 
Additional Paid-in Capital:
 
 
 
 
 
 
 
Balance, beginning of period
$
1,288.6

 
$
1,272.2

 
$
1,277.6

 
$
815.2

Dividend reinvestment plan
1.0

 
.2

 
1.4

 
1.4

Net issuance of shares under stock based compensation plans
4.3

 
2.0

 
10.3

 
15.1

Conversion of senior debentures

 

 

 
438.1

Stock based compensation
.4

 
.4

 
3.6

 
3.7

ESSOP shares released
.8

 
.6

 
2.1

 
1.9

Balance, end of period
$
1,295.2

 
$
1,275.6

 
$
1,295.2

 
$
1,275.6

 
 
 
 
 
 
 
 
Retained Earnings:
 
 
 
 
 
 
 
Balance, beginning of period
$
4,326.7

 
$
3,797.7

 
$
3,849.8

 
$
3,206.9

Change in accounting principle

 

 
18.4

 
502.1

Balance, beginning of period, as adjusted
4,326.7

 
3,797.7

 
3,868.3

 
3,708.9

Net income (loss)
202.8

 
275.2

 
780.6

 
477.0

Dividends on common shares ($1.20, $.195, $1.60 and $.585 per
 
 
 
 
 
 
 
common share)
(359.4
)
 
(58.2
)
 
(478.8
)
 
(171.3
)
Balance, end of period
$
4,170.1

 
$
4,014.6

 
$
4,170.1

 
$
4,014.6

 
 
 
 
 
 
 
 
Accumulated Other Comprehensive Income (Loss):
 
 
 
 
 
 
 
Balance, beginning of period
$
44.8

 
$
(202.6
)
 
$
(210.0
)
 
$
474.2

Change in accounting principle

 

 

 
(502.1
)
Balance, beginning of period, as adjusted
44.8

 
(202.6
)
 
(210.0
)
 
(27.9
)
Net unrealized gains (losses) on securities, net of tax
48.0

 
(18.4
)
 
297.8

 
(186.9
)
Net adjustment related to defined benefit pension plans,
 
 
 
 
 
 
 
net of tax
.8

 
.6

 
.3

 
1.9

Foreign currency translation and other adjustments
(1.6
)
 
2.6

 
3.8

 
(4.7
)
Balance, end of period
$
92.0

 
$
(217.7
)
 
$
92.0

 
$
(217.7
)
 
 
 
 
 
 
 
 
Unallocated ESSOP Shares:
 
 
 
 
 
 
 
Balance, beginning of period
$
(69.4
)
 
$
(66.4
)
 
$
(73.9
)
 
$
(32.4
)
ESSOP shares released
2.2

 
2.3

 
6.8

 
5.8

Purchase of unallocated ESSOP shares

 

 

 
(37.4
)
Balance, end of period
$
(67.1
)
 
$
(64.0
)
 
$
(67.1
)
 
$
(64.0
)


See accompanying Notes to Consolidated Financial Statements.

6



Old Republic International Corporation and Subsidiaries
Consolidated Statements of Cash Flows (Unaudited)
($ in Millions)
 
 
Nine Months Ended
 
 
September 30,
 
 
2019
 
2018
Cash flows from operating activities:
 
 
 
 
Net income (loss)
 
$
780.6

 
$
477.0

Adjustments to reconcile net income (loss) to
 
 
 
 
net cash provided by operating activities:
 
 
 
 
Deferred policy acquisition costs
 
(16.5
)
 
(18.7
)
Premiums and other receivables
 
(188.3
)
 
(173.2
)
Unpaid claims and related items
 
142.8

 
148.5

Unearned premiums and other policyholders' liabilities
 
81.0

 
103.8

Income taxes
 
97.1

 
.8

Prepaid federal income taxes
 
(8.6
)
 

Reinsurance balances and funds
 
130.5

 
110.4

Realized investment (gains) losses from actual transactions and impairments
 
(29.3
)
 
(54.8
)
Unrealized investment (gains) losses from changes in fair value
 
 
 
 
of equity securities
 
(439.3
)
 
(17.7
)
Accounts payable, accrued expenses and other
 
116.1

 
21.0

Total
 
666.2

 
597.1

 
 
 
 
 
Cash flows from investing activities:
 
 
 
 
Fixed maturity securities:
 
 
 
 
Available for sale:
 
 
 
 
Maturities and early calls
 
464.4

 
758.9

Sales
 
430.3

 
222.6

Sales of:
 
 
 
 
Equity securities
 
520.6

 
294.5

Other - net
 
28.2

 
13.3

Purchases of:
 
 
 
 
Fixed maturity securities:
 
 
 
 
Available for sale
 
(1,016.4
)
 
(1,027.6
)
Equity securities
 
(430.2
)
 
(432.0
)
Other - net
 
(42.4
)
 
(40.4
)
Net decrease (increase) in short-term investments
 
(132.0
)
 
88.7

Other - net
 
(1.2
)
 
(6.8
)
Total
 
(178.6
)
 
(128.7
)
 
 
 
 
 
Cash flows from financing activities:
 
 
 
 
Issuance of common shares
 
12.7

 
12.2

Redemption of debentures and notes
 
(8.4
)
 
(4.7
)
Purchase of unallocated common shares by ESSOP
 

 
(37.4
)
Dividends on common shares (including a special dividend paid in September
 
 
 
 
2019 of $303.4 and a special dividend declared in December 2017 and paid
 
 
 
 
in January 2018 of $269.2)
 
(478.8
)
 
(440.5
)
Other - net
 
(3.7
)
 
(8.6
)
Total
 
(478.3
)
 
(479.1
)
 
 
 
 
 
Increase (decrease) in cash
 
9.2

 
(10.7
)
Cash, beginning of period
 
100.3

 
125.9

Cash, end of period
 
$
109.6

 
$
115.2

 
 
 
 
 
Supplemental cash flow information:
 
 
 
 
Cash paid (received) during the period for: Interest
 
$
41.9

 
$
50.4

                                                                         Income taxes
 
$
99.0

 
$
97.9


See accompanying Notes to Consolidated Financial Statements.

7



OLD REPUBLIC INTERNATIONAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
($ in Millions, Except Share Data)

1. Accounting Policies and Basis of Presentation:

The accompanying consolidated financial statements have been prepared in conformity with the Financial Accounting Standards Board's ("FASB") Accounting Standards Codification ("ASC") of accounting principles generally accepted in the United States of America ("GAAP"). These interim financial statements should be read in conjunction with these notes and those included in the Company's 2018 Annual Report on Form 10-K incorporated herein by reference.

Pertinent accounting and disclosure pronouncements issued from time to time by the FASB are adopted by the Company as they become effective. Recent ones are discussed below.

a) Effective January 1, 2019, the Company adopted FASB guidance on lease accounting which requires balance sheet recognition of all leases with a term greater than 12 months. The Company's adoption of this guidance is discussed in Note 7.

b) Effective January 1, 2018, the Company adopted FASB guidance on the recognition and measurement of financial instruments. See Note 3.

c) Effective January 1, 2018, the Company adopted the FASB's comprehensive revenue recognition standard which applies to contracts with customers, except for those that fall within the scope of other standards, such as insurance contracts. The Company’s adoption of this standard did not have an effect on its insurance contract revenues, and based on its evaluation of certain less significant revenue streams generated from contracts with customers, did not have a material impact on the consolidated financial statements taken as a whole.

d) In June 2016, the FASB issued guidance on accounting for credit losses on financial instruments which will be effective in 2020. The guidance will require immediate recognition of expected credit losses for certain financial instruments including (1) reinsurance recoverables, (2) held to maturity securities and (3) accounts and notes receivable. Additionally, the guidance modifies the impairment model for available for sale fixed maturity securities. The Company is continuing to evaluate the guidance, however does not expect that its adoption will have a material impact on its consolidated financial statements.

The financial accounting and reporting process relies on estimates and on the exercise of judgment. In the opinion of management all adjustments consisting only of normal recurring accruals necessary for a fair presentation of interim periods' results and financial position have been recorded. Amounts shown in the consolidated financial statements and applicable notes are stated (except as otherwise indicated and as to share data) in millions, which amounts may not add to totals shown due to truncation. Necessary reclassifications are made in prior periods' financial statements whenever appropriate to conform to the most current presentation.

2. Common Share Data:

Earnings Per Share - Consolidated basic earnings per share excludes the dilutive effect of common stock equivalents and is computed by dividing income (loss) available to common stockholders by the weighted-average number of common shares actually outstanding for the quarterly and year-to-date periods. Diluted earnings per share are similarly calculated with the inclusion of dilutive common stock equivalents. The following table provides a reconciliation of net income (loss) and the number of shares used in basic and diluted earnings per share calculations.

8



 
Quarters Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2019
 
2018
 
2019
 
2018
Numerator:
 
 
 
 
 
 
 
Basic earnings per share -
 
 
 
 
 
 
 
income (loss) available to common stockholders
$
202.8

 
$
275.2

 
$
780.6

 
$
477.0

Adjustment for interest expense incurred on
 
 
 
 
 
 
 
assumed conversion of convertible notes

 

 

 
3.1

Diluted earnings per share -
 
 
 
 
 
 
 
income (loss) available to common stockholders
 
 
 
 
 
 
 
after assumed conversion of convertible notes
$
202.8

 
$
275.2

 
$
780.6

 
$
480.1

 
 
 
 
 
 
 
 
Denominator:
 
 
 
 
 
 
 
Basic earnings per share -
 
 
 
 
 
 
 
weighted-average shares (a)
299,894,995

 
299,006,345

 
299,740,751

 
292,565,008

Effect of dilutive securities - stock based
 
 
 
 
 
 
 
   compensation awards
1,489,369

 
1,367,659

 
1,293,405

 
1,381,914

Effect of dilutive securities - convertible notes

 

 

 
7,178,168

Diluted earnings per share -
 
 
 
 
 
 
 
adjusted weighted-average shares
 
 
 
 
 
 
 
and assumed conversion of convertible notes (a)
301,384,364

 
300,374,004

 
301,034,156

 
301,125,090

Earnings per share: Basic
$
.68

 
$
.92

 
$
2.60

 
$
1.63

Diluted
$
.67

 
$
.92

 
$
2.59

 
$
1.59

 
 
 
 
 
 
 
 
Anti-dilutive common stock equivalents
 
 
 
 
 
 
 
excluded from earnings per share computations:
 
 
 
 
 
 
 
Stock based compensation awards
40,000

 

 
2,238,055

 

Convertible senior notes

 

 

 

Total
40,000

 

 
2,238,055

 

__________

(a) In calculating earnings per share, pertinent accounting rules require that common shares owned by the Company's Employee Savings and Stock Ownership Plan that are not yet allocated to participants in the plan be excluded from the calculation. Such shares are issued and outstanding, and have the same voting and other rights applicable to all common shares.

3. Investments:

The Company classifies its fixed maturity securities as those it either (1) has the positive intent and ability to hold until maturity, (2) has available for sale or (3) has the intention of trading.

Fixed maturity securities classified as "available for sale" are reported at fair value with changes in such values, net of deferred income taxes, reflected directly in shareholders' equity. Fixed maturity securities classified as "held to maturity" are carried at amortized cost. Equity securities are reported at fair value with changes in such values reflected as unrealized investment gains (losses) in the consolidated statements of income. Fair values for fixed maturity securities and equity securities are based on quoted market prices or estimates using values obtained from recognized independent pricing services.

The status and fair value changes of each of the fixed maturity investments are reviewed at least once per quarter during the year, and estimates of other-than-temporary impairments ("OTTI") in the portfolio's value are evaluated and established at each quarterly balance sheet date. In reviewing investments for OTTI, the Company, in addition to a security's market price history, considers the totality of such factors as the issuer's operating results, financial condition and liquidity, its ability to access capital markets, credit rating trends, most current audited financial statements, industry and securities markets conditions, and analyst expectations to reach its conclusions. Sudden fair value declines caused by such adverse developments as newly emerged or imminent bankruptcy filings, issuer default on significant obligations, or reports of financial accounting developments that bring into question the validity of the issuer's previously reported earnings or financial condition, are recognized as realized losses as soon as credible publicly available information emerges to confirm such developments. In the event the Company's estimate of OTTI is insufficient at any point in time, future periods' net income (loss) would be adversely affected by the recognition of additional impairment losses, but its financial position would not necessarily be affected adversely inasmuch as such losses, or a portion of them, could have been recognized previously as unrealized losses directly in shareholders' equity. The Company recognized $- and $2.0

9



of OTTI adjustments for the quarter and nine months ended September 30, 2019, respectively, and no OTTI adjustments for the same periods of 2018.

The amortized cost and estimated fair values by type and contractual maturity of fixed maturity securities are shown in the following tables. Expected maturities will differ from contractual maturities since borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair
Value
Fixed Maturity Securities by Type:
 
 
 
 
 
 
 
September 30, 2019:
 
 
 
 
 
 
 
Available for sale:
 
 
 
 
 
 
 
U.S. & Canadian Governments
$
1,695.5

 
$
45.6

 
$
.3

 
$
1,740.8

Corporate
6,698.4

 
231.5

 
4.1

 
6,925.8

 
$
8,394.0

 
$
277.1

 
$
4.4

 
$
8,666.7

 
 
 
 
 
 
 
 
Held to maturity:
 
 
 
 
 
 
 
Tax-exempt
$
1,027.5

 
$
32.8

 
$
.1

 
$
1,060.2

 
 
 
 
 
 
 
 
December 31, 2018:
 
 
 
 
 
 
 
Available for sale:
 
 
 
 
 
 
 
U.S. & Canadian Governments
$
1,535.3

 
$
5.7

 
$
16.5

 
$
1,524.4

Corporate
6,749.6

 
31.4

 
122.7

 
6,658.3

 
$
8,285.0

 
$
37.1

 
$
139.2

 
$
8,182.8

 
 
 
 
 
 
 
 
Held to maturity:
 
 
 
 
 
 
 
Tax-exempt
$
1,044.8

 
$
3.5

 
$
13.7

 
$
1,034.5



 
Amortized
Cost
 
Estimated
Fair
Value
Fixed Maturity Securities Stratified by Contractual Maturity at September 30, 2019:
 
 
 
Available for sale:
 
 
 
Due in one year or less
$
860.3

 
$
863.4

Due after one year through five years
5,072.6

 
5,200.7

Due after five years through ten years
2,428.0

 
2,566.0

Due after ten years
32.9

 
36.4

 
$
8,394.0

 
$
8,666.7

 
 
 
 
Held to maturity:
 
 
 
Due in one year or less
$

 
$

Due after one year through five years
310.2

 
315.6

Due after five years through ten years
717.2

 
744.6

Due after ten years

 

 
$
1,027.5

 
$
1,060.2



The following tables reflect the Company's gross unrealized losses and fair value, aggregated by category and length of time that individual available for sale and held to maturity fixed maturity securities have been in an unrealized loss position.

10



 
Less than 12 Months
 
12 Months or Greater
 
Total
 
Fair
Value
 
Unrealized Losses
 
Fair
Value
 
Unrealized Losses
 
Fair
Value
 
Unrealized Losses
September 30, 2019:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fixed Maturity Securities:
 
 
 
 
 
 
 
 
 
 
 
Available for sale:
 
 
 
 
 
 
 
 
 
 
 
  U.S. & Canadian Governments
$
158.1

 
$

 
$
170.0

 
$
.3

 
$
328.1

 
$
.3

  Corporate
64.1

 
2.3

 
150.9

 
1.7

 
215.1

 
4.1

 
$
222.2

 
$
2.3

 
$
321.0

 
$
2.0

 
$
543.2

 
$
4.4

 
 
 
 
 
 
 
 
 
 
 
 
Number of available for sale
 
 
 
 
 
 
 
 
 
 
 
securities in unrealized
 
 
 
 
 
 
 
 
 
 
 
loss position
 
 
15

 
 
 
85

 
 
 
100

 
 
 
 
 
 
 
 
 
 
 
 
Held to maturity:
 
 
 
 
 
 
 
 
 
 
 
  Tax-exempt
$

 
$

 
$
48.4

 
$
.1

 
$
48.4

 
$
.1

 
 
 
 
 
 
 
 
 
 
 
 
Number of held to maturity
 
 
 
 
 
 
 
 
 
 
 
securities in unrealized
 
 
 
 
 
 
 
 
 
 
 
loss position
 
 

 
 
 
21

 
 
 
21

 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2018:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Fixed Maturity Securities:
 
 
 
 
 
 
 
 
 
 
 
Available for sale:
 
 
 
 
 
 
 
 
 
 
 
  U.S. & Canadian Governments
$
616.7

 
$
8.4

 
$
487.1

 
$
8.1

 
$
1,103.9

 
$
16.5

  Corporate
3,440.8

 
77.9

 
1,096.4

 
44.7

 
4,537.3

 
122.7

 
$
4,057.6

 
$
86.4

 
$
1,583.6

 
$
52.8

 
$
5,641.2

 
$
139.2

 
 
 
 
 
 
 
 
 
 
 
 
Number of available for sale
 
 
 
 
 
 
 
 
 
 
 
securities in unrealized
 
 
 
 
 
 
 
 
 
 
 
loss position
 
 
760

 
 
 
335

 
 
 
1,095

 
 
 
 
 
 
 
 
 
 
 
 
Held to maturity:
 
 
 
 
 
 
 
 
 
 
 
  Tax-exempt
$
271.9

 
$
2.3

 
$
407.7

 
$
11.4

 
$
679.7

 
$
13.7

 
 
 
 
 
 
 
 
 
 
 
 
Number of held to maturity
 
 
 
 
 
 
 
 
 
 
 
securities in unrealized
 
 
 
 
 
 
 
 
 
 
 
loss position
 
 
94

 
 
 
145

 
 
 
239



The unrealized losses on fixed income securities are primarily deemed to reflect changes in the interest rate environment. As part of its assessment of other-than-temporary impairments, the Company considers: a) intent to continue to hold the securities, b) the likelihood that it will not be required to sell investment securities in an unrealized loss position until cost recovery, and c) the benefits of its asset and liability matching objectives.

The following table shows cost and fair value information for equity securities:
 
Equity Securities
 

Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Estimated
Fair
Value
September 30, 2019
$
2,989.4

 
$
880.6

 
$
99.4

 
$
3,770.6

December 31, 2018
$
3,039.1

 
$
517.3

 
$
175.4

 
$
3,380.9



During the third quarter and first nine months of 2019 and 2018, the Company recognized pretax unrealized investment gains (losses) of $57.3 and $439.3, respectively for 2019, and $128.4 and $17.7, respectively for 2018, emanating from changes in the fair value of equity securities in the consolidated statements of income. Changes in the fair value of equity securities still held at September 30, 2019 and 2018 were $78.0 and $438.5 for the quarter and first nine months of 2019, respectively, and $137.1 and $67.4 for the quarter and first nine months of 2018, respectively.


11



Fair Value Measurements - Fair value is defined as the estimated price that is likely to be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants (an exit price) at the measurement date. A fair value hierarchy is established that prioritizes the sources ("inputs") used to measure fair value into three broad levels: Level 1 inputs are based on quoted market prices in active markets; Level 2 observable inputs are based on corroboration with available market data; and Level 3 unobservable inputs are based on uncorroborated market data or a reporting entity's own assumptions. Following is a description of the valuation methodologies and general classification used for financial instruments measured at fair value.

The Company uses quoted values and other data provided by a nationally recognized independent pricing source as inputs into its quarterly process for determining fair values of fixed maturity and equity securities. To validate the techniques or models used by pricing sources, the Company's review process includes, but is not limited to: (i) initial and ongoing evaluation of methodologies used by outside parties to calculate fair value; and (ii) comparisons with other sources including the fair value estimates based on current market quotations, and with independent fair value estimates provided by the independent investment custodian. The independent pricing source obtains market quotations and actual transaction prices for securities that have quoted prices in active markets and uses their own proprietary method for determining the fair value of securities that are not actively traded. In general, these methods involve the use of "matrix pricing" in which the independent pricing source uses observable market inputs including, but not limited to, investment yields, credit risks and spreads, benchmarking of like securities, broker-dealer quotes, reported trades and sector groupings to determine a reasonable fair value.

Level 1 securities include U.S. and Canadian Treasury notes, publicly traded common stocks, mutual funds, and short-term investments in highly liquid money market instruments. Level 2 securities generally include corporate bonds, municipal bonds, and certain U.S. and Canadian government agency securities. Securities classified within Level 3 include non-publicly traded bonds and equity securities. There were no significant changes in the fair value of Level 3 assets as of September 30, 2019 and December 31, 2018.

The following tables show a summary of the fair value of financial assets segregated among the various input levels described above:
 
 
Fair Value Measurements
As of September 30, 2019:
 
Level 1
 
Level 2
 
Level 3
 
Total
Available for sale:
 
 
 
 
 
 
 
 
Fixed maturity securities:
 
 
 
 
 
 
 
 
U.S. & Canadian Governments
 
$
943.5

 
$
797.2

 
$

 
$
1,740.8

Corporate
 

 
6,915.3

 
10.5

 
6,925.8

Short-term investments
 
487.4

 

 

 
487.4

Held to maturity:
 
 
 
 
 
 
 
 
Fixed maturity securities:
 
 
 
 
 
 
 
 
Tax-exempt
 

 
1,060.2

 

 
1,060.2

Equity securities
 
$
3,768.8

 
$

 
$
1.8

 
$
3,770.6

 
 
 
 
 
 
 
 
 
As of December 31, 2018:
 
 
 
 
 
 
 
 
Available for sale:
 
 
 
 
 
 
 
 
Fixed maturity securities:
 
 
 
 
 
 
 
 
U.S. & Canadian Governments
 
$
714.0

 
$
810.3

 
$

 
$
1,524.4

Corporate
 

 
6,647.8

 
10.5

 
6,658.3

Short-term investments
 
354.9

 

 

 
354.9

Held to maturity:
 
 
 
 
 
 
 
 
Fixed maturity securities:
 
 
 
 
 
 
 
 
Tax-exempt
 

 
1,034.5

 

 
1,034.5

Equity securities
 
$
3,379.2

 
$

 
$
1.7

 
$
3,380.9



There were no transfers between Levels 1, 2 or 3 during the quarter ended September 30, 2019.

Investment income is reported net of expenses and includes appropriate adjustments for amortization of premium and accretion of discount on fixed maturity securities acquired at other than par value. Dividends on equity securities are credited to income on the ex-dividend date. At September 30, 2019, the Company and its subsidiaries had no non-income producing fixed maturity or equity securities.

Realized investment gains and losses, which result from sales or impairments of securities, are reflected as revenues in the income statement and are determined on the basis of amortized value at date of sale for fixed maturity securities, and cost in regard to equity securities; such bases apply to the specific securities sold.

The following table reflects the composition of net investment income, net realized gains or losses, and the net change in unrealized investment gains or losses for each of the periods shown.

12



 
Quarters Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2019
 
2018
 
2019
 
2018
Investment income:
 
 
 
 
 
 
 
Fixed maturity securities
$
74.4

 
$
74.4

 
$
224.3

 
$
224.2

Equity securities
36.2

 
31.5

 
106.6

 
91.3

Short-term investments
2.7

 
2.7

 
7.6

 
6.9

Other sources
1.0

 
1.4

 
4.4

 
3.6

Gross investment income
114.4

 
110.2

 
343.1

 
326.2

Investment expenses (a)
1.7

 
1.4

 
5.2

 
4.6

Net investment income
$
112.7

 
$
108.7

 
$
337.8

 
$
321.5

 
 
 
 
 
 
 
 
Investment gains (losses):
 
 
 
 
 
 
 
From actual transactions:
 
 
 
 
 
 
 
Fixed maturity securities:
 
 
 
 
 
 
 
Gains
$
.8

 
$
.5

 
$
4.6

 
$
1.6

Losses
(6.0
)
 
(1.7
)
 
(11.1
)
 
(2.6
)
Net
(5.1
)
 
(1.2
)
 
(6.5
)
 
(1.0
)
Equity securities:
 
 
 
 
 
 
 
Gains
42.7

 
8.6

 
97.0

 
61.5

Losses
(29.0
)
 

 
(57.0
)
 
(7.1
)
Net
13.6

 
8.6

 
40.0

 
54.4

Other long-term investments, net
(2.2
)
 

 
(2.1
)
 
1.5

Total from actual transactions
6.3

 
7.3

 
31.3

 
54.8

From impairments

 

 
(2.0
)
 

From unrealized changes in fair value of equity securities
57.3

 
128.4

 
439.3

 
17.7

Total realized and unrealized investment gains (losses)
63.6

 
135.7

 
468.7

 
72.6

Current and deferred income taxes (credits)(b)
13.5

 
28.5

 
98.7

 
15.2

Net of tax realized and unrealized investment gains (losses)
$
50.1

 
$
107.2

 
$
369.9

 
$
57.4

 
 
 
 
 
 
 
 
Changes in unrealized investment gains (losses)