10-Q 1 erie10-q06302018.htm 10-Q Document

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended June 30, 2018
 
Commission file number 0-24000
 
 
ERIE INDEMNITY COMPANY
 
 
(Exact name of registrant as specified in its charter)
 
 
PENNSYLVANIA
 
25-0466020
 
 
(State or other jurisdiction of
 
(I.R.S. Employer
 
 
incorporation or organization)
 
Identification No.)
 
 
 
100 Erie Insurance Place, Erie, Pennsylvania
 
16530
 
 
(Address of principal executive offices)
 
(Zip Code)
 
 
 
 
 
 
 
(814) 870-2000
 
 
(Registrant’s telephone number, including area code)
 
 
Not applicable
 
 
(Former name, former address and former fiscal year, if changed since last report)
 
  
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 [X]   No [  ]
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes [X]   No [  ]
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company.  See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):
 
Large accelerated filer [X]            Accelerated filer [  ]        Non-accelerated filer [  ]
                                    (Do not check if a smaller reporting company)
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 [X]
 
The number of shares outstanding of the registrant’s Class A Common Stock as of the latest practicable date, with no par value and a stated value of $0.0292 per share, was 46,189,068 at July 13, 2018.
 
The number of shares outstanding of the registrant’s Class B Common Stock as of the latest practicable date, with no par value and a stated value of $70 per share, was 2,542 at July 13, 2018.



 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

2


PART I. FINANCIAL INFORMATION

ITEM 1.
FINANCIAL STATEMENTS

ERIE INDEMNITY COMPANY
STATEMENTS OF OPERATIONS (UNAUDITED)
(dollars in thousands, except per share data)

 
Three months ended
 
Six months ended
 
June 30,
 
June 30,
 
2018
 
2017
 
2018
 
2017
Operating revenue
 
 
 
 
 

 
 

Management fee revenue - policy issuance and renewal services, net
$
454,572

 
$
441,319

 
$
860,550

 
$
833,377

Management fee revenue - administrative services, net
13,299

 

 
26,373

 

Administrative services reimbursement revenue
146,507

 

 
292,470

 

Service agreement revenue
7,080

 
7,245

 
14,225

 
14,503

Total operating revenue
621,458

 
448,564

 
1,193,618

 
847,880

 
 
 
 
 
 
 
 
Operating expenses
 
 
 
 
 
 
 
Cost of operations - policy issuance and renewal services
379,628

 
365,116

 
728,258

 
697,492

Cost of operations - administrative services
146,507

 

 
292,470

 

Total operating expenses
526,135

 
365,116

 
1,020,728

 
697,492

Operating income
95,323

 
83,448

 
172,890

 
150,388

 
 
 
 
 
 
 
 
Investment income
 
 
 
 
 
 
 
Net investment income
7,104

 
6,239

 
13,924

 
12,220

Net realized investment (losses) gains
(32
)
 
124

 
(497
)
 
640

Net impairment losses recognized in earnings
(646
)
 
(61
)
 
(646
)
 
(182
)
Equity in (losses) earnings of limited partnerships
(219
)
 
149

 
(411
)
 
362

Total investment income
6,207

 
6,451

 
12,370

 
13,040

 
 
 
 
 
 
 
 
Interest expense, net
602

 
257

 
1,155

 
423

Other income (expense)
58

 
(407
)
 
102

 
(816
)
Income before income taxes
100,986

 
89,235

 
184,207

 
162,189

Income tax expense
21,280

 
30,708

 
38,743

 
55,786

Net income
$
79,706

 
$
58,527

 
$
145,464

 
$
106,403

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Net income per share
 
 
 
 
 

 
 

Class A common stock – basic
$
1.71

 
$
1.26

 
$
3.12

 
$
2.28

Class A common stock – diluted
$
1.52

 
$
1.12

 
$
2.78

 
$
2.03

Class B common stock – basic
$
257

 
$
189

 
$
469

 
$
343

Class B common stock – diluted
$
257

 
$
188

 
$
468

 
$
343

 
 
 
 
 
 
 
 
Weighted average shares outstanding – Basic
 
 
 
 
 

 
 

Class A common stock
46,188,705

 
46,180,852

 
46,188,309

 
46,184,666

Class B common stock
2,542

 
2,542

 
2,542

 
2,542

 
 
 
 
 
 
 
 
Weighted average shares outstanding – Diluted
 
 
 
 
 

 
 

Class A common stock
52,312,849

 
52,299,395

 
52,311,741

 
52,355,214

Class B common stock
2,542

 
2,542

 
2,542

 
2,542

 
 
 
 
 
 
 
 
Dividends declared per share
 
 
 
 
 

 
 

Class A common stock
$
0.8400

 
$
0.7825

 
$
1.6800

 
$
1.5650

Class B common stock
$
126.000

 
$
117.375

 
$
252.000

 
$
234.750

 
 
See accompanying notes to Financial Statements. See Note 11, "Accumulated Other Comprehensive Income (Loss)", for amounts reclassified out of accumulated other comprehensive income (loss) into the Statements of Operations. 

3


ERIE INDEMNITY COMPANY
STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
(in thousands)

 
 
Three months ended
 
Six months ended
 
 
June 30,
 
June 30,
 
 
2018
 
2017
 
2018
 
2017
Net income
 
$
79,706

 
$
58,527

 
$
145,464

 
$
106,403

 
 
 
 
 
 
 
 
 
Other comprehensive (loss) income, net of tax
 
 
 
 
 
 

 
 

Change in unrealized holding (losses) gains on available-for-sale securities
 
(551
)
 
1,092

 
(5,978
)
 
2,613

 
 
 
 
 
 
 
 
 
Comprehensive income
 
$
79,155

 
$
59,619

 
$
139,486

 
$
109,016

 
See accompanying notes to Financial Statements. See Note 11, "Accumulated Other Comprehensive Income (Loss)", for amounts reclassified out of accumulated other comprehensive income (loss) into the Statements of Operations.

4


ERIE INDEMNITY COMPANY
STATEMENTS OF FINANCIAL POSITION
(dollars in thousands, except per share data)

 
 
 
June 30,
 
December 31,
 
 
2018
 
2017
Assets
 
(Unaudited)
 
 
Current assets:
 
 
 
 
Cash and cash equivalents
 
$
198,412

 
$
215,721

Available-for-sale securities
 
107,369

 
71,190

Receivables from Erie Insurance Exchange and affiliates
 
445,211

 
418,328

Prepaid expenses and other current assets
 
45,426

 
34,890

Federal income taxes recoverable
 
0

 
29,900

Note receivable from Erie Family Life Insurance Company
 
25,000

 
25,000

Accrued investment income
 
6,647

 
6,853

Total current assets
 
828,065

 
801,882

 
 
 
 
 
Available-for-sale securities
 
598,059

 
687,523

Equity securities
 
12,488

 

Limited partnership investments
 
39,651

 
45,122

Fixed assets, net
 
94,651

 
83,149

Deferred income taxes, net
 
31,527

 
19,390

Other assets
 
47,834

 
28,793

Total assets
 
$
1,652,275

 
$
1,665,859

 
 
 
 
 
Liabilities and shareholders' equity
 
 
 
 
Current liabilities:
 
 
 
 
Commissions payable
 
$
253,328

 
$
228,124

Agent bonuses
 
56,482

 
122,528

Accounts payable and accrued liabilities
 
97,139

 
104,533

Dividends payable
 
39,119

 
39,116

Contract liability
 
33,137

 

Deferred executive compensation
 
8,801

 
15,605

Federal income taxes payable
 
8,933

 
0

Current portion of long-term borrowings
 
925

 
0

Total current liabilities
 
497,864

 
509,906

 
 
 
 
 
Defined benefit pension plans
 
145,667

 
207,530

Employee benefit obligations
 
194

 
423

Contract liability
 
17,452

 

Deferred executive compensation
 
11,688

 
14,452

Long-term borrowings
 
98,800

 
74,728

Other long-term liabilities
 
422

 
1,476

Total liabilities
 
772,087

 
808,515

 
 
 
 
 
Shareholders’ equity
 
 
 
 
Class A common stock, stated value $0.0292 per share; 74,996,930 shares authorized; 68,299,200 shares issued; 46,189,068 shares outstanding
 
1,992

 
1,992

Class B common stock, convertible at a rate of 2,400 Class A shares for one Class B share, stated value $70 per share; 3,070 shares authorized; 2,542 shares issued and outstanding
 
178

 
178

Additional paid-in-capital
 
16,459

 
16,470

Accumulated other comprehensive loss
 
(162,037
)
 
(156,059
)
Retained earnings
 
2,169,686

 
2,140,853

Total contributed capital and retained earnings
 
2,026,278

 
2,003,434

Treasury stock, at cost; 22,110,132 shares held
 
(1,156,999
)
 
(1,155,668
)
Deferred compensation
 
10,909

 
9,578

Total shareholders’ equity
 
880,188

 
857,344

Total liabilities and shareholders’ equity
 
$
1,652,275

 
$
1,665,859


See accompanying notes to Financial Statements. 

5


ERIE INDEMNITY COMPANY
STATEMENTS OF CASH FLOWS (UNAUDITED)
(in thousands)

 
 
Six months ended
 
 
June 30,
 
 
2018
 
2017
Cash flows from operating activities
 
 
 
 
Management fee received
 
$
859,694

 
$
806,129

Administrative services reimbursements received
 
298,056

 

Service agreement fee received
 
14,225

 
14,503

Net investment income received
 
17,279

 
15,022

Limited partnership distributions
 
3,037

 
1,339

Decrease in reimbursements collected from affiliates
 

 
(5,633
)
Commissions paid to agents
 
(413,880
)
 
(386,400
)
Agents bonuses paid
 
(126,594
)
 
(115,056
)
Salaries and wages paid
 
(102,601
)
 
(95,462
)
Pension contribution and employee benefits paid
 
(99,334
)
 
(33,737
)
General operating expenses paid
 
(111,381
)
 
(113,122
)
Administrative services expenses paid
 
(295,635
)
 

Income taxes paid
 
(208
)
 
(47,767
)
Interest paid
 
(1,065
)
 
(325
)
Net cash provided by operating activities
 
41,593

 
39,491

 
 
 
 
 
Cash flows from investing activities
 
 
 
 
Purchase of investments:
 
 
 
 
Available-for-sale securities
 
(114,848
)
 
(184,803
)
Equity securities
 
(1,035
)
 

Limited partnerships
 
(215
)
 
(325
)
Proceeds from investments:
 
 
 
 
Available-for-sale securities sales
 
76,387

 
57,851

Available-for-sale securities maturities/calls
 
69,674

 
100,042

Equity securities
 
1,157

 

Limited partnerships
 
2,682

 
4,344

Net purchase of fixed assets
 
(18,121
)
 
(9,972
)
Net distributions on agent loans
 
(21,334
)
 
(3,083
)
Net cash used in investing activities
 
(5,653
)
 
(35,946
)
 
 
 
 
 
Cash flows from financing activities
 
 
 
 
Dividends paid to shareholders
 
(78,235
)
 
(72,883
)
Net proceeds from long-term borrowings
 
24,986

 
24,975

Net cash used in financing activities
 
(53,249
)
 
(47,908
)
 
 
 
 
 
Net decrease in cash and cash equivalents
 
(17,309
)
 
(44,363
)
Cash and cash equivalents, beginning of period
 
215,721

 
189,072

Cash and cash equivalents, end of period
 
$
198,412

 
$
144,709

  
See accompanying notes to Financial Statements.

6


NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
 
Note 1.  Nature of Operations
 
Erie Indemnity Company ("Indemnity", "we", "us", "our") is a publicly held Pennsylvania business corporation that has since its incorporation in 1925 served as the attorney-in-fact for the subscribers (policyholders) at the Erie Insurance Exchange ("Exchange").  The Exchange, which also commenced business in 1925, is a Pennsylvania-domiciled reciprocal insurer that writes property and casualty insurance. We function solely as the management company and all insurance operations are performed by the Exchange.
 
Our primary function as attorney-in-fact is to perform policy issuance and renewal services on behalf of the subscribers at the Exchange. We also act as attorney-in-fact on behalf of the Exchange with respect to all claims handling and investment management services, as well as the service provider for all claims handling, life insurance, and investment management services for its insurance subsidiaries, collectively referred to as "administrative services". Acting as attorney-in-fact in these two capacities is done in accordance with a subscriber's agreement (a limited power of attorney) executed individually by each subscriber (policyholder), which appoints us as their common attorney-in-fact to transact certain business on their behalf.  Pursuant to the subscriber's agreement for acting as attorney-in-fact in these two capacities, we earn a management fee calculated as a percentage of the direct and assumed premiums written by the Exchange.

The policy issuance and renewal services we provide to the Exchange are related to the sales, underwriting and issuance of policies. The sales related services we provide include agent compensation and certain sales and advertising support services. Agent compensation includes scheduled commissions to agents based upon premiums written as well as additional commissions and bonuses to agents, which are earned by achieving targeted measures. The underwriting services we provide include underwriting and policy processing. The remaining services we provide include customer service and administrative support. We also provide information technology services that support all the functions listed above. Included in these expenses are allocations of costs for departments that support these policy issuance and renewal functions.

By virtue of its legal structure as a reciprocal insurer, the Exchange does not have any employees or officers. Therefore, it enters into contractual relationships by and through an attorney-in-fact. Indemnity serves as the attorney-in-fact on behalf of the Exchange with respect to its administrative services. The Exchange's insurance subsidiaries also utilize Indemnity for these services in accordance with the service agreements between each of the subsidiaries and Indemnity. Claims handling services include costs incurred in the claims process, including the adjustment, investigation, defense, recording and payment functions. Life insurance management services include costs incurred in the management and processing of life insurance business. Investment management services are related to investment trading activity, accounting and all other functions attributable to the investment of funds. Included in these expenses are allocations of costs for departments that support these administrative functions. The amounts incurred for these services are reimbursed to Indemnity at cost in accordance with the subscriber's agreement and the service agreements. State insurance regulations require that intercompany service agreements and any material amendments be approved in advance by the state insurance department.

Our results of operations are tied to the growth and financial condition of the Exchange. If any events occurred that impaired the Exchange’s ability to grow or sustain its financial condition, including but not limited to reduced financial strength ratings, disruption in the independent agency relationships, significant catastrophe losses, or products not meeting customer demands, the Exchange could find it more difficult to retain its existing business and attract new business. A decline in the business of the Exchange almost certainly would have as a consequence a decline in the total premiums paid and a correspondingly adverse effect on the amount of the management fees we receive. We also have an exposure to a concentration of credit risk related to the unsecured receivables due from the Exchange for its management fee. See Note 12, "Concentrations of Credit Risk".



7


Note 2.  Significant Accounting Policies

Basis of presentation
The accompanying unaudited financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") for interim financial information and the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the six months ended June 30, 2018 are not necessarily indicative of the results that may be expected for the year ending December 31, 2018. For further information, refer to the financial statements and footnotes included in our Form 10-K for the year ended December 31, 2017 as filed with the Securities and Exchange Commission on February 22, 2018.

Use of estimates
The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  Actual results could differ from those estimates.

Recently adopted accounting standards
We adopted Accounting Standards Codification 606, "Revenue from Contracts with Customers" ("ASC 606") on January 1, 2018, using the modified retrospective method applied to all contracts. We recognized the cumulative effect of initially adopting ASC 606 as an adjustment to the opening balance of retained earnings at January 1, 2018. The comparative information for periods preceding January 1, 2018 has not been restated and continues to be reported under the accounting standards in effect for those periods.
Under ASC 606, we determined that we have two performance obligations under the subscriber’s agreement. The first performance obligation is providing policy issuance and renewal services. The second performance obligation is acting as the attorney-in-fact on behalf of the Exchange, as well as the service provider for its insurance subsidiaries, with respect to all administrative services. Therefore, upon adoption of ASC 606 beginning January 1, 2018, the management fee earned per the subscriber’s agreement, currently 25% of all direct and assumed premiums written by the Exchange, will be allocated between the two performance obligations. Prior to the adoption of ASC 606, the entire management fee was allocated to the policy issuance and renewal services. Additionally, the expenses we incur and related reimbursements we receive related to the administrative services will be presented gross in our Statement of Operations effective January 1, 2018. There was no significant impact to service agreement revenue upon adoption of ASC 606.
Revenue allocated to the policy issuance and renewal services continues to be recognized at the time of policy issuance or renewal because it is at the time of policy issuance or renewal when the economic benefits of the service Indemnity provides (i.e. the substantially completed policy issuance or renewal service) and the control of the promised asset (i.e. the executed insurance policy) transfers to the customer. A significant portion of the management fee is currently allocated to this performance obligation and therefore, the related revenue recognition pattern for the vast majority of our revenues will remain unchanged.
The revenue allocated to the second performance obligation will be recognized over several years in correlation with the costs incurred because the economic benefit of the services provided (i.e. management of the administrative services) transfers to the customer over a period of time. The amounts incurred for these services are reimbursed to Indemnity at cost in accordance with the subscriber's agreement and the service agreements. On January 1, 2018, we established a contract liability of $48.5 million representing the portion of revenue not yet earned related to the administrative services to be provided in subsequent years. We recorded a related deferred tax asset of $10.2 million and a cumulative effect adjustment that reduced retained earnings by $38.3 million. The adoption of ASC 606 changed the presentation of our Statement of Cash Flows, but had no net impact to our cash flows.

8


The cumulative effect of the changes made to our Statement of Financial Position at January 1, 2018 were as follows:
(in thousands)
 
Balance at December 31, 2017
Adjustments due to ASC 606
Balance at January 1, 2018
Statement of Financial Position:
 
 
 
 
Assets
 
 
 
 
Deferred tax asset
 
$
19,390

$
10,188

$
29,578

Liabilities
 
 
 
 
Contract liability
 

48,514

48,514

Equity
 
 
 
 
Retained earnings
 
2,140,853

(38,326
)
2,102,527



The impact of adoption on our Statement of Financial Position at June 30, 2018 was as follows:
 
 
June 30, 2018
(in thousands)
 
As Reported
Balances without ASC 606
Impact of Change
Higher/(Lower)
 
 
(Unaudited)
Statement of Financial Position:
 
 
 
 
Assets
 
 
 
 
Deferred tax asset
 
$
31,527

$
20,903

$
10,624

Liabilities
 
 
 
 
Contract liability
 
50,589


50,589

Equity
 
 
 
 
Retained earnings
 
2,169,686

2,209,651

(39,965
)


The impact of adoption on our Statement of Operations at June 30, 2018 was as follows:
 
 
Three months ended
 
Six months ended
(in thousands)
 
As Reported
Balances without ASC 606
Impact of Change
Higher/(Lower)
 
As Reported
Balances without ASC 606
Impact of Change
Higher/(Lower)
 
 
(Unaudited)
 
(Unaudited)
Statement of Operations:
 
 
 
 
 
 
 
 
Management fee revenue allocated to policy issuance and renewal services, gross
 
$
456,896

$
471,999

$
(15,103
)
 
$
864,132

$
892,698

$
(28,566
)
Less: change in allowance for management fee returned on cancelled policies
 
(2,324
)
(2,400
)
76

 
(3,582
)
(3,700
)
118

Management fee revenue allocated to policy issuance and renewal services, net
 
$
454,572

$
469,599

$
(15,027
)
 
$
860,550

$
888,998

$
(28,448
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Management fee revenue allocated to administrative services, gross
 
$
13,313

$

$
13,313

 
$
26,401

$

$
26,401

Less: change in allowance for management fee returned on cancelled policies
 
(14
)

(14
)
 
(28
)

(28
)
Management fee revenue allocated to administrative services, net
 
13,299


13,299

 
26,373


26,373

Administrative services reimbursement revenue
 
146,507


146,507

 
292,470


292,470

Total revenue allocated to administrative services
 
$
159,806

$

$
159,806

 
$
318,843

$

$
318,843

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Administrative services expenses
 
$
146,507

$

$
146,507

 
$
292,470

$

$
292,470




9


In March 2017, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2017-07, "Compensation-Retirement Benefits", which requires the service cost component of net benefit costs to be reported with other compensation costs arising from services rendered by the pertinent employees during the period. The other components of net benefit costs are required to be presented separately from the service cost component and outside of income from operations on a retrospective basis. This amendment also allows only the service cost component to be eligible for capitalization, when applicable, prospectively after the effective date. ASU 2017-07 is effective for interim and annual periods beginning after December 15, 2017. We adopted this guidance effective January 1, 2018 and have included the other components of net benefit costs in "Other income (expense)" in the Statements of Operations and conformed the prior-period presentation. The adoption of this guidance did not have a material impact on the presentation of our financial statements or related disclosures.

In January 2016, the FASB issued ASU 2016-01, "Financial Instruments-Overall". ASU 2016-01 revises the accounting related to the classification and measurement of investments in equity securities and the presentation of certain fair value changes for financial liabilities measured at fair value. ASU 2016-01 is effective for interim and annual reporting periods beginning after December 15, 2017. We adopted this guidance on a prospective basis effective January 1, 2018. The adoption of this guidance resulted in reclassifying unrealized losses, net of tax, on equity securities from accumulated other comprehensive loss to retained earnings, which reduced retained earnings by $0.1 million at January 1, 2018. As of January 1, 2018, equity securities are presented separately in our Statement of Financial Position. Our disclosures were prepared in accordance with this guidance.

Recently issued accounting standards
In June 2016, the FASB issued ASU 2016-13, "Financial Instruments-Credit Losses", which requires financial assets measured at amortized cost to be presented at the net amount expected to be collected through the use of a new forward-looking expected loss model and credit losses relating to available-for-sale debt securities to be recognized through an allowance for credit losses. ASU 2016-13 is effective for interim and annual reporting periods beginning after December 15, 2019. Early adoption for interim and annual periods beginning after December 15, 2018 is permitted. We have evaluated the impact of this guidance on our invested assets. Our investments are not measured at amortized cost, and therefore do not require the use of a new expected loss model. Our available-for-sale debt securities will continue to be monitored for credit losses which would be reflected as an allowance for credit losses rather than a reduction of the carrying value of the asset. The other material financial assets subject to this guidance include our receivables from Erie Insurance Exchange and its subsidiaries. Given the financial strength of the Exchange, demonstrated by its strong surplus position and industry ratings, it is unlikely these receivables would have significant, if any, credit loss exposure. Accordingly, we do not expect a material impact on our financial statements or related disclosures as a result of this guidance.

In February 2016, the FASB issued ASU 2016-02, "Leases", which requires lessees to recognize assets and liabilities arising from operating leases on the statement of financial position and to disclose key information about leasing arrangements. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Currently ASU 2016-02 requires leases to be recognized and measured at the beginning of the earliest period presented using a modified retrospective approach. In January 2018, the FASB issued a proposed ASU that would allow entities to recognize the cumulative effect adjustment in the year of adoption rather than the earliest period presented. Under existing guidance, we recognize lease expense as a component of operating expenses in the Statements of Operations. We are evaluating our lease contracts to determine those that qualify for treatment as leases under the new guidance and the impact to our financial statements and disclosures.

Recognition of management fee revenue
We earn management fees from the Exchange under the subscriber’s agreement for services provided. Pursuant to the subscriber’s agreement, we may retain up to 25% of all direct and assumed premiums written by the Exchange. The management fee rate is set at least annually by our Board of Directors. The management fee revenue is calculated by multiplying the management fee rate by the direct and assumed premiums written by the Exchange. Upon adoption of ASC 606 beginning January 1, 2018, we determined we have two performance obligations under the subscriber’s agreement. The first performance obligation is to provide policy issuance and renewal services. The second performance obligation is acting as the attorney-in-fact with respect to the administrative services. Beginning January 1, 2018, our management fee revenue is allocated to these two performance obligations. Prior to the adoption of ASC 606, the entire management fee was allocated to the policy issuance and renewal services.

Management fee revenue allocated to the policy issuance and renewal services is recognized at the time of policy issuance or renewal, because it is at the time of policy issuance or renewal when the economic benefit of the service we provide (the substantially completed policy issuance or renewal service) and the control of the promised asset (the executed insurance policy) transfers to the customer.


10


Management fee revenue allocated to the second performance obligation relates to us acting as the attorney-in-fact on behalf of the Exchange, as well as the service provider for its insurance subsidiaries, with respect to the administrative services and is recognized over a four-year period representing the time over which the economic benefit of the services provided (i.e. management of the administrative services) transfers to the customer.

Administrative services
By virtue of its legal structure as a reciprocal insurer, the Exchange does not have any employees or officers. Therefore, it enters into contractual relationships by and through an attorney-in-fact. Indemnity serves as the attorney-in-fact on behalf of the Exchange with respect to its administrative services in accordance with the subscriber's agreement. The Exchange's insurance subsidiaries also utilize Indemnity for these services in accordance with the service agreements between each of the subsidiaries and Indemnity. Claims handling services include costs incurred in the claims process, including the adjustment, investigation, defense, recording and payment functions. Life insurance management services include costs incurred in the management and processing of life insurance business. Investment management services are related to investment trading activity, accounting and all other functions attributable to the investment of funds. Included in these expenses are allocations of costs for departments that support these administrative functions. Common overhead expenses and certain service department costs incurred by us on behalf of the Exchange and its insurance subsidiaries are reimbursed by the proper entity based upon appropriate utilization statistics (employee count, square footage, vehicle count, project hours, etc.) specifically measured to accomplish proportional allocations, which we believe are reasonable. Prior to the adoption of ASC 606, we recorded the reimbursements we receive for the administrative services expenses as receivables from the Exchange and its subsidiaries with a corresponding reduction to our expenses. Upon adoption of ASC 606 on January 1, 2018, the expenses we incur and related reimbursements we receive for administrative services are presented gross in our Statement of Operations. Reimbursements are settled on a monthly basis. The amounts incurred for these services are reimbursed to Indemnity at cost in accordance with the subscriber's agreement and the service agreements. State insurance regulations require that intercompany service agreements and any material amendments be approved in advance by the state insurance department.

Reclassifications
Certain amounts previously reported in the 2017 financial statements have been reclassified for comparative purposes to conform to the current period’s presentation.  Such reclassifications resulted from new accounting guidance and only affected the Statements of Operations.  Most notably, "Commissions", "Salaries and employee benefits", and "All other operating expenses" have been combined within "Cost of operations - policy issuance and renewal services" in the Statements of Operations (See Note 3, "Revenue").  These reclassifications had no effect on previously reported net income.



11


Note 3.  Revenue

The majority of our revenue is derived from the subscriber’s agreement between us and the subscribers (policyholders) at the Exchange. Pursuant to the subscriber’s agreement, we earn a management fee calculated as a percentage, not to exceed 25%, of all direct and assumed written premiums of the Exchange. We account for management fee revenue earned under the subscriber’s agreement in accordance with ASC 606, which we adopted on January 1, 2018, using the modified retrospective method. See Note 2, "Significant Accounting Policies" for further discussion of the adoption, including the impact on our financial statements.
We allocate a portion of our management fee revenue, currently 25% of the direct and assumed written premiums of the Exchange, between the two performance obligations we have under the subscriber’s agreement. The first performance obligation is to provide policy issuance and renewal services to the subscribers (policyholders) at the Exchange, and the second is to act as attorney-in-fact on behalf of the Exchange, as well as the service provider for its insurance subsidiaries, with respect to all administrative services. The transaction price, including management fee revenue and administrative service reimbursement revenue, is allocated based on the estimated standalone selling prices developed using industry information and other available information for similar services.

The first performance obligation is to provide policy issuance and renewal services that result in executed insurance policies between the Exchange or one of its insurance subsidiaries and the subscriber (policyholder). Our customer, the subscriber (policyholder), receives economic benefits when substantially all the policy issuance or renewal services are complete and an insurance policy is issued or renewed by the Exchange or one of its insurance subsidiaries. It is at the time of policy issuance or renewal that the allocated portion of revenue is recognized.

The Exchange, by virtue of its legal structure as a reciprocal insurer, does not have any employees or officers. Therefore, it enters into contractual relationships by and through an attorney-in-fact. Indemnity serves as the attorney-in-fact on behalf of the Exchange with respect to its administrative services in accordance with the subscriber's agreement. The Exchange's insurance subsidiaries also utilize Indemnity for these services in accordance with the service agreements between each of the subsidiaries and Indemnity. Collectively, these services represent a second performance obligation under the subscriber’s agreement and the service agreements. The revenue allocated to this performance obligation is recognized over time as these services are provided. The portion of revenue not yet earned is recorded as a contract liability in the Statement of Financial Position. We recorded a contract liability of $48.5 million at January 1, 2018, upon adoption of ASC 606. The management fee revenue recognized as earned for these services for the six months ended June 30, 2018 was $26.4 million. Beginning with the adoption of ASC 606 on January 1, 2018, the administrative services expenses we incur and the related reimbursements we receive are recorded gross in the Statement of Operations.

Indemnity records a receivable from the Exchange for management fee revenue when the premium is written or assumed by the Exchange. Indemnity collects the management fee from the Exchange when the Exchange collects the premiums from the subscribers (policyholders). As the Exchange issues policies with annual terms only, cash collections generally occur within one year.

A constraining estimate exists around the management fee received as consideration related to the potential for management fee to be returned if a policy were to be cancelled mid-term. Management fees are returned to the Exchange when policyholders cancel their insurance coverage mid-term and unearned premiums are refunded to them. We maintain an estimated allowance to reduce the management fee to its estimated net realizable value to account for the potential of mid-term policy cancellations based on historical cancellation rates. This estimated allowance has been allocated between the two performance obligations consistent with the revenue allocation proportions.

The following table disaggregates revenue by our two performance obligations:
 
Three months ended June 30,
 
Six months ended June 30,
(in thousands)
2018
2017
 
2018
2017
Management fee revenue - policy issuance and renewal services
$
454,572

$
441,319

 
$
860,550

$
833,377

 
 
 
 
 
 
Management fee revenue - administrative services
13,299


 
26,373


Administrative services reimbursement revenue
146,507


 
292,470


Total administrative services
$
159,806

$

 
$
318,843

$

 



12


Note 4.  Earnings Per Share
 
Class A and Class B basic earnings per share and Class B diluted earnings per share are calculated under the two-class method. The two-class method allocates earnings to each class of stock based upon its dividend rights.  Class B shares are convertible into Class A shares at a conversion ratio of 2,400 to 1. See Note 10, "Capital Stock".

Class A diluted earnings per share are calculated under the if-converted method, which reflects the conversion of Class B shares to Class A shares. Diluted earnings per share calculations include the dilutive effect of assumed issuance of stock-based awards under compensation plans that have the option to be paid in stock using the treasury stock method.

A reconciliation of the numerators and denominators used in the basic and diluted per-share computations is presented as follows for each class of common stock: 
 
 
Three months ended June 30,
 
 
2018
 
2017
(dollars in thousands, except per share data)
 
Allocated net income (numerator)
 
Weighted shares (denominator)
 
Per-share amount
 
Allocated net income (numerator)
 
Weighted shares (denominator)
 
Per-share amount
Class A – Basic EPS:
 
 
 
 
 
 
 
 
 
 
 
 
Income available to Class A stockholders
 
$
79,053

 
46,188,705

 
$
1.71

 
$
58,048

 
46,180,852

 
$
1.26

Dilutive effect of stock-based awards
 
0

 
23,344

 

 
0

 
17,743

 

Assumed conversion of Class B shares
 
653

 
6,100,800

 

 
479

 
6,100,800

 

Class A – Diluted EPS:
 
 
 
 
 
 
 
 
 
 
 
 
Income available to Class A stockholders on Class A equivalent shares
 
$
79,706

 
52,312,849

 
$
1.52

 
$
58,527

 
52,299,395

 
$
1.12

Class B – Basic EPS:
 
 
 
 
 
 
 
 
 
 
 
 
Income available to Class B stockholders
 
$
653

 
2,542

 
$
257

 
$
479

 
2,542

 
$
189

Class B – Diluted EPS:
 
 
 
 
 
 
 
 
 
 
 
 
Income available to Class B stockholders
 
$
653

 
2,542

 
$
257

 
$
479

 
2,542

 
$
188


 
 
Six months ended June 30,
 
 
2018
 
2017
(dollars in thousands, except per share data)
 
Allocated net income (numerator)
 
Weighted shares (denominator)
 
Per-share amount
 
Allocated net income (numerator)
 
Weighted shares (denominator)
 
Per-share amount
Class A – Basic EPS:
 
 

 
 

 
 

 
 

 
 

 
 

Income available to Class A stockholders
 
$
144,273

 
46,188,309

 
$
3.12

 
$
105,532

 
46,184,666

 
$
2.28

Dilutive effect of stock-based awards
 
0

 
22,632

 

 
0

 
69,748

 

Assumed conversion of Class B shares
 
1,191

 
6,100,800

 

 
871

 
6,100,800

 

Class A – Diluted EPS:
 
 

 
 

 
 

 
 

 
 

 
 

Income available to Class A stockholders on Class A equivalent shares
 
$
145,464

 
52,311,741

 
$
2.78

 
$
106,403

 
52,355,214

 
$
2.03

Class B – Basic EPS:
 
 

 
 

 
 

 
 

 
 

 
 

Income available to Class B stockholders
 
$
1,191

 
2,542

 
$
469

 
$
871

 
2,542

 
$
343

Class B – Diluted EPS:
 
 
 
 
 
 
 
 
 
 
 
 
Income available to Class B stockholders
 
$
1,191

 
2,542

 
$
468

 
$
871

 
2,542

 
$
343


13


Note 5. Fair Value
 
Our available-for-sale debt securities and equity securities are recorded at fair value, which is the price that would be received to sell the asset in an orderly transaction between willing market participants as of the measurement date.
 
Valuation techniques used to derive the fair value of our available-for-sale debt securities and equity securities are based upon observable and unobservable inputs.  Observable inputs reflect market data obtained from independent sources.  Unobservable inputs reflect our own assumptions regarding fair market value for these securities.  Although virtually all of our prices are obtained from third party sources, we also perform an internal pricing review on outliers, which include securities with price changes inconsistent with current market conditions. Financial instruments are categorized based upon the following characteristics or inputs to the valuation techniques:
 
Level 1 – Quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity can access at the measurement date.

Level 2 – Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly.

Level 3 – Unobservable inputs for the asset or liability.
 
Estimates of fair values for our investment portfolio are obtained primarily from a nationally recognized pricing service.  Our Level 1 category includes those securities valued using an exchange traded price provided by the pricing service.  The methodologies used by the pricing service that support a Level 2 classification of a financial instrument include multiple verifiable, observable inputs including benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers, and reference data.  Pricing service valuations for Level 3 securities are based upon proprietary models and are used when observable inputs are not available or in illiquid markets.
 
In limited circumstances we adjust the price received from the pricing service when, in our judgment, a better reflection of fair value is available based upon corroborating information and our knowledge and monitoring of market conditions such as a disparity in price of comparable securities and/or non-binding broker quotes.  In other circumstances, certain securities are internally priced because prices are not provided by the pricing service.
 
We perform continuous reviews of the prices obtained from the pricing service.  This includes evaluating the methodology and inputs used by the pricing service to ensure that we determine the proper classification level of the financial instrument.  Price variances, including large periodic changes, are investigated and corroborated by market data.  We have reviewed the pricing methodologies of our pricing service as well as other observable inputs, such as market data, and transaction volumes and believe that the prices adequately consider market activity in determining fair value. 
 
When a price from the pricing service is not available, values are determined by obtaining broker/dealer quotes and/or market comparables.  When available, we obtain multiple quotes for the same security.  The ultimate value for these securities is determined based upon our best estimate of fair value using corroborating market information.  Our evaluation includes the consideration of benchmark yields, reported trades, issuer spreads, two-sided markets, benchmark securities, bids, offers, and reference data.


14


The following tables present our fair value measurements on a recurring basis by asset class and level of input:
 
 
 
At June 30, 2018
 
 
Fair value measurements using:
(in thousands)
 
Total
 
Quoted prices in
active markets for identical assets
Level 1
 
Observable inputs
Level 2
 
Unobservable inputs
Level 3
Available-for-sale securities:
 
 
 
 
 
 
 
 
U.S. treasury
 
$
36,442

 
$
0

 
$
36,442

 
$
0

States & political subdivisions
 
258,491

 
0

 
258,491

 
0

Foreign government securities
 
499

 
0

 
499

 
0

Corporate debt securities
 
282,006

 
0

 
270,886

 
11,120

Residential mortgage-backed securities
 
21,869

 
0

 
21,869

 
0

Commercial mortgage-backed securities
 
32,276

 
0

 
32,276

 
0

Collateralized debt obligations
 
70,976

 
0

 
70,976

 
0

Other debt securities
 
2,869

 
0

 
2,869

 
0

Total available-for-sale securities
 
705,428

 
0

 
694,308

 
11,120

Equity securities:
 
 
 
 
 
 
 
 
Nonredeemable preferred stock - financial services sector
 
12,488

 
1,973

 
10,515

 
0

Total equity securities
 
12,488

 
1,973

 
10,515

 
0

Other investments (1)
 
3,752

 

 

 

Total
 
$
721,668

 
$
1,973

 
$
704,823

 
$
11,120


 
 
At December 31, 2017
 
 
Fair value measurements using:
(in thousands)
 
Total
 
Quoted prices in
active markets for identical assets
Level 1
 
Observable inputs
Level 2
 
Unobservable inputs
Level 3
Available-for-sale securities:
 
 
 
 
 
 
 
 
U.S. treasury
 
$
11,734

 
$
0

 
$
11,734

 
$
0

States & political subdivisions
 
259,264

 
0

 
259,264

 
0

Foreign government securities
 
503

 
0

 
503

 
0

Corporate debt securities
 
346,523

 
0

 
338,644

 
7,879

Residential mortgage-backed securities
 
25,571

 
0

 
25,571

 
0

Commercial mortgage-backed securities
 
32,804

 
0

 
32,804

 
0

Collateralized debt obligations
 
58,034

 
0

 
55,834

 
2,200

Other debt securities
 
11,528

 
0

 
11,528

 
0

Total fixed maturities
 
745,961

 
0

 
735,882

 
10,079

Nonredeemable preferred stock - financial services sector
 
11,659

 
2,015

 
9,644

 
0

Nonredeemable preferred stock - utilities sector
 
1,093

 
0

 
1,093

 
0

Total available-for-sale securities
 
758,713

 
2,015

 
746,619

 
10,079

Other investments (1)
 
4,816

 

 

 

Total
 
$
763,529

 
$
2,015

 
$
746,619

 
$
10,079


(1)          Other investments measured at fair value represent real estate funds included on the balance sheet as limited partnership investments that are reported under the fair value option using the net asset value practical expedient. These amounts are not required to be categorized in the fair value hierarchy. The investments can never be redeemed with the funds. Instead, distributions are received when liquidation of the underlying assets of the funds occur. It is estimated that the underlying assets will generally be liquidated between 5 and 10 years from the inception of the funds. The fair value of these investments is based on the net asset value (NAV) information provided by the general partner. Fair value is based on our proportionate share of the NAV based on the most recent partners' capital statements received from the general partners, which is generally one quarter prior to our balance sheet date. These values are then analyzed to determine if the NAV represents fair value at our balance sheet date, with adjustment being made where appropriate. We consider observable market data and perform a review validating the appropriateness of the NAV at each balance sheet date. It is likely that all of the investments will be redeemed at a future date for an amount different than the NAV of our ownership interest in partners' capital as of June 30, 2018 and December 31, 2017. During the six months ended June 30, 2018, no contributions were made and distributions totaling $0.7 million were received from these investments. During the year ended December 31, 2017, no contributions were made and distributions totaling $0.5 million were received from these investments. There were no unfunded commitments related to the investments as of June 30, 2018 and December 31, 2017.



15


We review the fair value hierarchy classifications each reporting period.  Transfers between hierarchy levels may occur due to changes in available market observable inputs. Transfers into and out of level classifications in 2017 are reported as having occurred at the beginning of the quarter in which the transfers occurred. Effective January 1, 2018, we changed our policy to recognize transfers as occurring at the end of the quarter in which the transfers occurred. This change is applied prospectively due to the immaterial impact on prior year disclosures.

There were no transfers between Level 1 and Level 2 for the three and six months ended June 30, 2018 and 2017.

Level 3 Assets – 2018 Quarterly Change:


(in thousands) 
 
Beginning balance at March 31, 2018
 
Included in earnings(1)
 
Included
in other
comprehensive
income
 
Purchases
 
Sales
 
Transfers into Level 3(2)
 
Transfers out of Level 3(2)
 
Ending balance at June 30, 2018
Available-for-sale securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Corporate debt securities
 
$
6,309

 
$
10

 
$
(53
)
 
$
3,047

 
$
(472
)
 
$
5,370

 
$
(3,091
)
 
$
11,120

Total Level 3 available-for-sale securities
 
$
6,309

 
$
10

 
$
(53
)
 
$
3,047

 
$
(472
)
 
$
5,370

 
$
(3,091
)
 
$
11,120



Level 3 Assets – 2018 Year-to-Date Change:

(in thousands)
 
Beginning balance at December 31, 2017
 
Included in earnings(1)
 
Included
in other comprehensive
income
 
Purchases
 
Sales
 
Transfers into Level 3(2)
 
Transfers out of Level 3(2)
 
Ending balance at June 30, 2018
Available-for-sale securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Corporate debt securities
 
$
7,879

 
$
1

 
$
(48
)
 
$
3,047

 
$
(965
)
 
$
7,782

 
$
(6,576
)
 
$
11,120

Collateralized debt obligations
 
2,200

 
0

 
7

 
0

 
0

 
0

 
(2,207
)
 
0

Total Level 3 available-for-sale securities
 
$
10,079

 
$
1

 
$
(41
)
 
$
3,047

 
$
(965
)
 
$
7,782

 
$
(8,783
)
 
$
11,120



Level 3 Assets – 2017 Quarterly Change:


(in thousands) 
 
Beginning balance at March 31, 2017
 
Included in earnings(1)
 
Included
in other
comprehensive
income
 
Purchases
 
Sales
 
Transfers into Level 3(2)
 
Transfers out of Level 3(2)
 
Ending balance at June 30, 2017
Available-for-sale securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Corporate debt securities
 
$
9,803

 
$
29

 
$
(23
)
 
$
2,110

 
$
(1,283
)
 
$
3,626

 
$
(4,967
)
 
$
9,295

Total Level 3 available-for-sale securities
 
$
9,803

 
$
29

 
$
(23
)
 
$
2,110

 
$
(1,283
)
 
$
3,626

 
$
(4,967
)
 
$
9,295



Level 3 Assets – 2017 Year-to-Date Change:

(in thousands)
 
Beginning balance at December 31, 2016
 
Included in earnings(1)
 
Included
in other
comprehensive
income
 
Purchases
 
Sales
 
Transfers into Level 3(2)
 
Transfers out of Level 3(2)
 
Ending balance at June 30, 2017
Available-for-sale securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Corporate debt securities
 
$
9,352

 
$
(21
)
 
$
(48
)
 
$
3,981

 
$
(3,132
)
 
$
5,811

 
$
(6,648
)
 
$
9,295

Total Level 3 available-for-sale securities
 
$
9,352

 
$
(21
)
 
$
(48
)
 
$
3,981

 
$
(3,132
)
 
$
5,811

 
$
(6,648
)
 
$
9,295

 
(1)
These amounts are reported in the Statements of Operations as net investment income and net realized investment gains (losses) for the each of the periods presented above.
(2)
Transfers into and/or (out) of Level 3 are primarily attributable to the availability of market observable information and the re-evaluation of the observability of pricing inputs.



16


Quantitative and Qualitative Disclosures about Unobservable Inputs

When a non-binding broker quote was the only input available, the security was classified within Level 3. Use of non-binding broker quotes totaled $11.1 million at June 30, 2018. The unobservable inputs are not reasonably available to us.

The following table presents our fair value measurements on a recurring basis by pricing source:

 
 
At June 30, 2018
(in thousands)
 
Total
 
Level 1
 
Level 2
 
Level 3
Available-for-sale securities priced via pricing services
 
$
705,428

 
$
0

 
$
694,308

 
$
11,120

Equity securities priced via pricing services
 
12,488

 
1,973

 
10,515

 
0

Other investments priced via unobservable inputs (1)
 
3,752

 

 

 

Total
 
$
721,668

 
$
1,973

 
$
704,823

 
$
11,120

 
(1)
Other investments measured at fair value represent real estate funds included on the balance sheet as limited partnership investments that are reported under the fair value option using the NAV practical expedient. These amounts are not required to be categorized in the fair value hierarchy. The fair value of these investments is based on the NAV information provided by the general partner.


There were no assets measured at fair value on a nonrecurring basis during the six months ended June 30, 2018.

17


Note 6.  Investments
 
Available-for-sale securities
The following tables summarize the cost and fair value of our available-for-sale securities. See also Note 5, "Fair Value" for additional fair value disclosures.
 
 
 
At June 30, 2018
 (in thousands)
 
Amortized
cost
 
Gross unrealized gains
 
Gross unrealized losses
 
Estimated fair value
Available-for-sale securities:
 
 
 
 
 
 
 
 
U.S. treasury
 
$
36,769

 
$
0

 
$
327

 
$
36,442

States & political subdivisions
 
257,498

 
3,443

 
2,450

 
258,491

Foreign government securities
 
500

 
0

 
1

 
499

Corporate debt securities
 
285,639

 
663

 
4,296

 
282,006

Residential mortgage-backed securities
 
21,739

 
374

 
244

 
21,869

Commercial mortgage-backed securities
 
32,878

 
5

 
607

 
32,276

Collateralized debt obligations
 
71,009

 
103

 
136

 
70,976

Other debt securities
 
2,863

 
6

 
0

 
2,869

Total available-for-sale securities
 
$
708,895

 
$
4,594

 
$
8,061

 
$
705,428

 

 
 
At December 31, 2017
(in thousands)
 
Amortized
cost
 
Gross unrealized gains
 
Gross unrealized losses
 
Estimated fair value
Available-for-sale securities:
 
 
 
 
 
 
 
 
U.S. treasury
 
$
11,873

 
$
0

 
$
139

 
$
11,734

States & political subdivisions
 
254,533

 
5,351

 
620

 
259,264

Foreign government securities
 
501

 
2

 
0

 
503

Corporate debt securities
 
346,759

 
1,688

 
1,924

 
346,523

Residential mortgage-backed securities
 
25,324

 
371

 
124

 
25,571

Commercial mortgage-backed securities
 
33,475

 
26

 
697

 
32,804

Collateralized debt obligations
 
57,838

 
237

 
41

 
58,034

Other debt securities
 
11,496

 
32

 
0

 
11,528

Total fixed maturities
 
741,799

 
7,707

 
3,545

 
745,961

Nonredeemable preferred stock - financial services sector
 
11,719

 
15

 
75

 
11,659

Nonredeemable preferred stock - utilities sector
 
1,118

 
0

 
25

 
1,093

Total available-for-sale securities
 
$
754,636

 
$
7,722

 
$
3,645

 
$
758,713

 
 
The amortized cost and estimated fair value of available-for-sale securities at June 30, 2018, are shown below by remaining contractual term to maturity.  Mortgage-backed securities are allocated based upon stated maturity dates.  Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
 
 
 
At June 30, 2018
 
 
Amortized
 
Estimated
(in thousands)
 
cost
 
fair value
Due in one year or less
 
$
94,467

 
$
94,408

Due after one year through five years
 
241,546

 
242,016

Due after five years through ten years
 
249,068

 
246,058

Due after ten years
 
123,814

 
122,946

Total available-for-sale securities
 
$
708,895

 
$
705,428




18


Available-for-sale securities in a gross unrealized loss position are as follows.  Data is provided by length of time for securities in a gross unrealized loss position.
 
 
 
At June 30, 2018
 
 
Less than 12 months
 
12 months or longer
 
Total
(dollars in thousands)
 
Fair
value
 
Unrealized losses
 
Fair
value
 
Unrealized losses
 
Fair
 value
 
Unrealized losses
 
No. of holdings
Available-for-sale securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. treasury
 
$
34,969

 
$
278

 
$
1,474

 
$
49

 
$
36,443

 
$
327

 
5

States & political subdivisions
 
99,153

 
1,763

 
13,871

 
687

 
113,024

 
2,450

 
57

Foreign government securities
 
499

 
1

 
0

 
0

 
499

 
1

 
1

Corporate debt securities
 
194,322

 
3,740

 
28,430

 
556

 
222,752

 
4,296

 
516

Residential mortgage-backed securities
 
4,526

 
98

 
5,416

 
146

 
9,942

 
244

 
12

Commercial mortgage-backed securities
 
15,500

 
301

 
8,930

 
306

 
24,430

 
607

 
22

Collateralized debt obligations
 
28,250

 
136

 
0

 
0

 
28,250

 
136

 
20

Other debt securities
 
210

 
0

 
0

 
0

 
210

 
0

 
1

Total available-for-sale securities
 
$
377,429

 
$
6,317

 
$
58,121

 
$
1,744

 
$
435,550

 
$
8,061

 
634

Quality breakdown of available-for-sale securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Investment grade
 
$
269,062

 
$
3,554

 
$
54,423

 
$
1,577

 
$
323,485

 
$
5,131

 
187

Non-investment grade
 
108,367

 
2,763

 
3,698

 
167

 
112,065

 
2,930

 
447

Total available-for-sale securities
 
$
377,429

 
$
6,317

 
$
58,121

 
$
1,744

 
$
435,550

 
$
8,061

 
634



 
 
At December 31, 2017
 
 
Less than 12 months
 
12 months or longer
 
Total
(dollars in thousands)
 
Fair
value
 
Unrealized
losses
 
Fair
value
 
Unrealized
losses
 
Fair
value
 
Unrealized
losses
 
No. of
holdings
Available-for-sale securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
U.S. treasury
 
$
10,237

 
$
110

 
$
1,497

 
$
29

 
$
11,734

 
$
139

 
4

States & political subdivisions
 
52,553

 
288

 
14,361

 
332

 
66,914

 
620

 
33

Corporate debt securities
 
171,154

 
1,585

 
31,113

 
339

 
202,267

 
1,924

 
331

Residential mortgage-backed securities
 
4,156

 
29

 
7,064

 
95

 
11,220

 
124

 
11

Commercial mortgage-backed securities
 
10,836

 
85

 
11,984

 
612

 
22,820

 
697

 
19

Collateralized debt obligations
 
21,598

 
41

 
0

 
0

 
21,598

 
41

 
12

Other debt securities
 
1,499

 
0

 
0

 
0

 
1,499

 
0

 
1

Total fixed maturities
 
272,033

 
2,138

 
66,019

 
1,407

 
338,052

 
3,545

 
411

Nonredeemable preferred stock - financial services sector
 
9,644

 
75

 
0

 
0

 
9,644

 
75

 
5

Nonredeemable preferred stock - utilities sector
 
1,093

 
25

 
0

 
0

 
1,093

 
25

 
1

Total available-for-sale securities
 
$
282,770

 
$
2,238

 
$
66,019

 
$
1,407

 
$
348,789

 
$
3,645

 
417

Quality breakdown of fixed maturities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Investment grade
 
$
214,586

 
$
1,064

 
$
62,193

 
$
985

 
$
276,779

 
$
2,049

 
158

Non-investment grade
 
57,447

 
1,074

 
3,826

 
422

 
61,273

 
1,496

 
253

Total fixed maturities