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EVEREST GROUP, LTD. - Quarter Report: 2014 September (Form 10-Q)

group10q3q2014.htm
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:
September 30, 2014
 
 
Commission file number:
1-15731

EVEREST RE GROUP, LTD.
(Exact name of registrant as specified in its charter)
 
Bermuda
 
98-0365432
(State or other jurisdiction of
incorporation or organization)
 
 
(I.R.S. Employer
Identification No.)
Wessex House – 2nd Floor
45 Reid Street
PO Box HM 845
Hamilton HM DX, Bermuda
441-295-0006

(Address, including zip code, and telephone number, including area code,
of registrant’s principal executive office)

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, or a smaller reporting company.  See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer
X
 
Accelerated filer
 
 
Non-accelerated filer
   
 
Smaller reporting company
 
(Do not check if smaller reporting company)
   

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

YES
   
NO
X

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

   
Number of Shares Outstanding
Class
 
At November 1, 2014
Common Shares, $0.01 par value
   45,246,968

 
 

 

EVEREST RE GROUP, LTD

Table of Contents
Form 10-Q


Page
PART I

FINANCIAL INFORMATION

Item 1.
Financial Statements
 
     
 
Consolidated Balance Sheets September 30, 2014 (unaudited)
 
 
and December 31, 2013
1
     
 
Consolidated Statements of Operations and Comprehensive Income (Loss) for the
 
 
three and nine months ended September 30, 2014 and 2013 (unaudited)
2
     
 
Consolidated Statements of Changes in Shareholders’ Equity for the three and
 
 
nine months ended September 30, 2014 and 2013 (unaudited)
3
     
 
Consolidated Statements of Cash Flows for the three and nine months ended
 
 
September 30, 2014 and 2013 (unaudited)
4
     
 
Notes to Consolidated Interim Financial Statements (unaudited)
5
     
Item 2.
Management’s Discussion and Analysis of Financial Condition and
 
 
Results of Operation
30
     
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
57
     
Item 4.
Controls and Procedures
58
     

PART II

OTHER INFORMATION

Item 1.
Legal Proceedings
58
     
Item 1A.
Risk Factors
59
     
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
59
     
Item 3.
Defaults Upon Senior Securities
59
     
Item 4.
Mine Safety Disclosures
59
     
Item 5.
Other Information
59
     
Item 6.
Exhibits
60
     

 
 

 
PART I
 
ITEM 1.  FINANCIAL STATEMENTS
 
EVEREST RE GROUP, LTD.
CONSOLIDATED BALANCE SHEETS

 
   
September 30,
 
December 31,
(Dollars and share amounts in thousands, except par value per share)
 
2014
 
2013
   
(unaudited)
     
ASSETS:
           
Fixed maturities - available for sale, at market value
  $ 13,643,326     $ 12,636,907  
    (amortized cost: 2014, $13,327,754; 2013, $12,391,164)
               
Fixed maturities - available for sale, at fair value
    18,426       19,388  
Equity securities - available for sale, at market value (cost: 2014, $147,068; 2013, $148,342)
    146,135       144,081  
Equity securities - available for sale, at fair value
    1,341,111       1,462,079  
Short-term investments
    1,496,739       1,214,199  
Other invested assets (cost: 2014, $551,179; 2013, $508,447)
    551,179       508,447  
Cash
    401,803       611,382  
       Total investments and cash
    17,598,719       16,596,483  
Accrued investment income
    115,326       119,058  
Premiums receivable
    1,705,394       1,453,114  
Reinsurance receivables
    776,465       540,883  
Funds held by reinsureds
    234,825       228,000  
Deferred acquisition costs
    393,191       363,721  
Prepaid reinsurance premiums
    180,737       81,779  
Income taxes
    186,924       178,334  
Other assets
    295,632       246,664  
TOTAL ASSETS
  $ 21,487,213     $ 19,808,036  
                 
LIABILITIES:
               
Reserve for losses and loss adjustment expenses
  $ 9,795,429     $ 9,673,240  
Future policy benefit reserve
    57,633       59,512  
Unearned premium reserve
    1,831,831       1,579,945  
Funds held under reinsurance treaties
    3,506       2,692  
Commission reserves
    70,168       66,160  
Other net payable to reinsurers
    216,031       116,387  
Losses in course of payment
    497,727       332,631  
4.868% Senior notes due 6/1/2044
    400,000       -  
5.4% Senior notes due 10/15/2014
    249,998       249,958  
6.6% Long term notes due 5/1/2067
    238,363       238,361  
Accrued interest on debt and borrowings
    18,312       4,781  
Equity index put option liability
    31,455       35,423  
Unsettled securities payable
    97,059       53,867  
Other liabilities
    193,103       333,425  
       Total liabilities
    13,700,615       12,746,382  
                 
NONCONTROLLING INTERESTS:
               
Redeemable noncontrolling interests - Mt. Logan Re
    404,411       93,378  
                 
Commitments and contingencies (Note 9)
               
                 
SHAREHOLDERS' EQUITY:
               
Preferred shares, par value: $0.01; 50,000 shares authorized;
               
    no shares issued and outstanding
    -       -  
Common shares, par value: $0.01; 200,000 shares authorized; (2014) 68,309
               
    and (2013) 67,965 outstanding before treasury shares
    683       680  
Additional paid-in capital
    2,059,956       2,029,774  
Accumulated other comprehensive income (loss), net of deferred income tax expense
               
    (benefit) of $63,790 at 2014 and $57,661 at 2013
    185,397       157,728  
Treasury shares, at cost; 23,060 shares (2014) and 20,422 shares (2013)
    (2,385,815 )     (1,985,873 )
Retained earnings
    7,521,966       6,765,967  
       Total shareholders' equity attributable to Everest Re Group
    7,382,187       6,968,276  
TOTAL LIABILITIES, NONCONTROLLING INTERESTS  AND SHAREHOLDERS' EQUITY
  $ 21,487,213     $ 19,808,036  
                 
The accompanying notes are an integral part of the consolidated financial statements.
               

 
1

 
EVEREST RE GROUP, LTD.
CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME (LOSS)



   
Three Months Ended
 
Nine Months Ended
   
September 30,
 
September 30,
(Dollars in thousands, except per share amounts)
 
2014
 
2013
 
2014
 
2013
   
(unaudited)
 
(unaudited)
REVENUES:
                       
Premiums earned
  $ 1,389,998     $ 1,225,755     $ 3,806,805     $ 3,466,047  
Net investment income
    142,143       127,872       396,524       422,382  
Net realized capital gains (losses):
                               
Other-than-temporary impairments on fixed maturity securities
    (106 )     -       (495 )     (191 )
Other-than-temporary impairments on fixed maturity securities
                               
transferred to other comprehensive income (loss)
    -       -       -       -  
Other net realized capital gains (losses)
    (9,342 )     44,958       71,189       205,789  
Total net realized capital gains (losses)
    (9,448 )     44,958       70,694       205,598  
Net derivative gain (loss)
    1,855       5,639       3,968       33,005  
Other income (expense)
    11,332       (2,726 )     (5,835 )     (3,318 )
Total revenues
    1,535,880       1,401,498       4,272,156       4,123,714  
                                 
CLAIMS AND EXPENSES:
                               
Incurred losses and loss adjustment expenses
    837,757       770,102       2,192,863       2,074,336  
Commission, brokerage, taxes and fees
    290,519       248,587       820,208       723,700  
Other underwriting expenses
    63,113       59,860       172,165       167,707  
Corporate expenses
    9,958       4,758       18,802       16,643  
Interest, fees and bond issue cost amortization expense
    12,424       7,637       28,970       38,480  
Total claims and expenses
    1,213,771       1,090,944       3,233,008       3,020,866  
                                 
INCOME (LOSS) BEFORE TAXES
    322,109       310,554       1,039,148       1,102,848  
Income tax expense (benefit)
    20,856       72,027       137,948       204,336  
                                 
NET INCOME (LOSS)
  $ 301,253     $ 238,527     $ 901,200     $ 898,512  
Net (income) loss attributable to noncontrolling interests
    (26,337 )     (3,768 )     (42,167 )     (3,768 )
NET INCOME (LOSS) ATTRIBUTABLE TO EVEREST RE GROUP
  $ 274,916     $ 234,759     $ 859,033     $ 894,744  
                                 
Other comprehensive income (loss), net of tax:
                               
Unrealized appreciation (depreciation) ("URA(D)") on securities arising during the period
    (74,074 )     (20,925 )     65,318       (340,267 )
Reclassification adjustment for realized losses (gains) included in net income (loss)
    (5,684 )     (1,592 )     (1,641 )     (7,511 )
Total URA(D) on securities arising during the period
    (79,758 )     (22,517 )     63,677       (347,778 )
                                 
Foreign currency translation adjustments
    (34,974 )     (5,913 )     (38,374 )     (13,228 )
                                 
Benefit plan actuarial net gain (loss) for the period
    -       -       -       -  
Reclassification adjustment for amortization of net (gain) loss included in net income (loss)
    825       1,470       2,366       4,161  
Total benefit plan net gain (loss) for the period
    825       1,470       2,366       4,161  
Total other comprehensive income (loss), net of tax
    (113,907 )     (26,960 )     27,669       (356,845 )
Other comprehensive (income) loss attributable to noncontrolling interests
    -       -       -       -  
Total other comprehensive income (loss), net of tax attributable to Everest Re Group
    (113,907 )     (26,960 )     27,669       (356,845 )
                                 
COMPREHENSIVE INCOME (LOSS)
  $ 161,009     $ 207,799     $ 886,702     $ 537,899  
                                 
EARNINGS PER COMMON SHARE ATTRIBUTABLE TO EVEREST RE GROUP:
                               
Basic
  $ 6.05     $ 4.85     $ 18.64     $ 18.09  
Diluted
    6.00       4.81       18.47       17.94  
Dividends declared
    0.75       0.48       2.25       1.44  
                                 
The accompanying notes are an integral part of the consolidated financial statements.
                               

 
2

 
EVEREST RE GROUP, LTD.
CONSOLIDATED STATEMENTS OF
CHANGES IN SHAREHOLDERS’ EQUITY



   
Three Months Ended
 
Nine Months Ended
   
September 30,
 
September 30,
(Dollars in thousands, except share and dividends per share amounts)
 
2014
 
2013
 
2014
 
2013
   
(unaudited)
 
(unaudited)
COMMON SHARES (shares outstanding):
                       
Balance, beginning of period
    45,691,015       48,588,040       47,543,132       51,417,962  
Issued during the period, net
    29,622       51,018       344,761       758,110  
Treasury shares acquired
    (470,807 )     (724,654 )     (2,638,063 )     (4,261,668 )
Balance, end of period
    45,249,830       47,914,404       45,249,830       47,914,404  
                                 
COMMON SHARES (par value):
                               
Balance, beginning of period
  $ 683     $ 678     $ 680     $ 671  
Issued during the period, net
    -       1       3       8  
Balance, end of period
    683       679       683       679  
                                 
ADDITIONAL PAID-IN CAPITAL:
                               
Balance, beginning of period
    2,052,682       2,003,166       2,029,774       1,946,439  
Share-based compensation plans
    7,274       10,025       30,182       66,752  
Balance, end of period
    2,059,956       2,013,191       2,059,956       2,013,191  
                                 
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS),
                               
NET OF DEFERRED INCOME TAXES:
                               
Balance, beginning of period
    299,304       207,164       157,728       537,049  
Net increase (decrease) during the period
    (113,907 )     (26,960 )     27,669       (356,845 )
Balance, end of period
    185,397       180,204       185,397       180,204  
                                 
RETAINED EARNINGS:
                               
Balance, beginning of period
    7,281,023       6,225,705       6,765,967       5,613,266  
Net income (loss) attributable to Everest Re Group
    274,916       234,759       859,033       894,744  
Dividends declared ($0.75 per share in third quarter 2014 and $2.25 year-to-date
                               
 per share in 2014 and $0.48 per share in third quarter 2013 and $1.44
                               
year-to-date per share in 2013)
    (33,973 )     (23,174 )     (103,034 )     (70,720 )
Balance, end of period
    7,521,966       6,437,290       7,521,966       6,437,290  
                                 
TREASURY SHARES AT COST:
                               
Balance, beginning of period
    (2,310,824 )     (1,813,913 )     (1,985,873 )     (1,363,958 )
Purchase of treasury shares
    (74,991 )     (100,001 )     (399,942 )     (549,956 )
Balance, end of period
    (2,385,815 )     (1,913,914 )     (2,385,815 )     (1,913,914 )
                                 
TOTAL SHAREHOLDERS' EQUITY, END OF PERIOD
  $ 7,382,187     $ 6,717,450     $ 7,382,187     $ 6,717,450  
                                 
The accompanying notes are an integral part of the consolidated financial statements.
                               

 
3

 
EVEREST RE GROUP, LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS



   
Three Months Ended
 
Nine Months Ended
   
September 30,
 
September 30,
(Dollars in thousands)
 
2014
 
2013
 
2014
 
2013
   
(unaudited)
 
(unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
                       
Net income (loss)
  $ 301,253     $ 238,527     $ 901,200     $ 898,512  
Adjustments to reconcile net income to net cash provided by operating activities:
                               
Decrease (increase) in premiums receivable
    (157,818 )     (181,317 )     (255,645 )     (401,623 )
Decrease (increase) in funds held by reinsureds, net
    (9,077 )     12,729       (6,929 )     485  
Decrease (increase) in reinsurance receivables
    (119,381 )     (11,187 )     (256,458 )     (77,165 )
Decrease (increase) in income taxes
    (29,953 )     73,279       (14,696 )     130,008  
Decrease (increase) in prepaid reinsurance premiums
    (33,132 )     (14,605 )     (101,478 )     (21,513 )
Increase (decrease) in reserve for losses and loss adjustment expenses
    164,456       (100,751 )     172,511       (275,893 )
Increase (decrease) in future policy benefit reserve
    (735 )     (285 )     (1,879 )     (852 )
Increase (decrease) in unearned premiums
    158,734       178,193       255,537       304,728  
Increase (decrease) in other net payable to reinsurers
    1,438       33,937       101,984       63,702  
Increase (decrease) in losses in course of payment
    3,115       174,701       165,105       404,836  
Change in equity adjustments in limited partnerships
    (21,238 )     (4,343 )     (24,438 )     (40,693 )
Distribution of limited partnership income
    27,735       5,638       41,165       48,733  
Change in other assets and liabilities, net
    24,758       6,754       (32,114 )     (68,112 )
Non-cash compensation expense
    4,952       4,923       14,720       15,088  
Amortization of bond premium (accrual of bond discount)
    10,942       14,773       38,010       50,280  
Amortization of underwriting discount on senior notes
    15       14       43       41  
Net realized capital (gains) losses
    9,448       (44,958 )     (70,694 )     (205,598 )
Net cash provided by (used in) operating activities
    335,512       386,022       925,944       824,964  
                                 
CASH FLOWS FROM INVESTING ACTIVITIES:
                               
Proceeds from fixed maturities matured/called - available for sale, at market value
    590,769       594,260       1,638,278       1,912,978  
Proceeds from fixed maturities matured/called - available for sale, at fair value
    -       -       875       7,213  
Proceeds from fixed maturities sold - available for sale, at market value
    443,606       214,173       1,050,082       845,357  
Proceeds from fixed maturities sold - available for sale, at fair value
    3,093       1,056       23,856       18,398  
Proceeds from equity securities sold - available for sale, at market value
    2,502       326       11,174       45,749  
Proceeds from equity securities sold - available for sale, at fair value
    147,622       101,176       452,514       459,945  
Distributions from other invested assets
    36,744       5,236       59,264       79,689  
Cost of fixed maturities acquired - available for sale, at market value
    (1,270,700 )     (671,876 )     (3,729,423 )     (2,794,035 )
Cost of fixed maturities acquired - available for sale, at fair value
    (22,375 )     (2,092 )     (23,684 )     (4,798 )
Cost of equity securities acquired - available for sale, at market value
    (1,254 )     (1,097 )     (11,873 )     (54,584 )
Cost of equity securities acquired - available for sale, at fair value
    (79,557 )     (180,308 )     (262,871 )     (424,252 )
Cost of other invested assets acquired
    (86,523 )     (3,762 )     (120,911 )     (15,063 )
Net change in short-term investments
    138,855       (139,544 )     (284,822 )     (7,408 )
Net change in unsettled securities transactions
    (7,137 )     (70,186 )     13,496       (14,518 )
Net cash provided by (used in) investing activities
    (104,355 )     (152,638 )     (1,184,045 )     54,671  
                                 
CASH FLOWS FROM FINANCING ACTIVITIES:
                               
Common shares issued during the period, net
    2,322       5,103       15,465       51,672  
Purchase of treasury shares
    (74,991 )     (100,001 )     (399,942 )     (549,956 )
Revolving credit borrowings
    -       (40,000 )     -       -  
Net cost of junior subordinated debt securities redemption
    -       -       -       (329,897 )
Net proceeds from issuance of senior notes
    -       -       400,000       -  
Third party investment in redeemable noncontrolling interest
    (65,000 )     87,500       136,200       87,500  
Dividends paid to shareholders
    (33,973 )     (23,174 )     (103,034 )     (70,720 )
Dividends paid on third party investment in redeemable noncontrolling interest
    (10,334 )     -       (10,334 )     -  
Net cash provided by (used in) financing activities
    (181,976 )     (70,572 )     38,355       (811,401 )
                                 
EFFECT OF EXCHANGE RATE CHANGES ON CASH
    11,052       (12,414 )     10,167       (15,750 )
                                 
Net increase (decrease) in cash
    60,233       150,398       (209,579 )     52,484  
Cash, beginning of period
    341,570       439,136       611,382       537,050  
Cash, end of period
  $ 401,803     $ 589,534     $ 401,803     $ 589,534  
                                 
SUPPLEMENTAL CASH FLOW INFORMATION:
                               
Income taxes paid (recovered)
  $ 49,319     $ (1,820 )   $ 146,560     $ 64,918  
Interest paid
    132       243       15,150       23,524  
                                 
The accompanying notes are an integral part of the consolidated financial statements.
                               

 
4

 
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS (UNAUDITED)

For the Three and Nine Months Ended September 30, 2014 and 2013

1.   GENERAL

Everest Re Group, Ltd. (“Group”), a Bermuda company, through its subsidiaries, principally provides reinsurance and insurance in the U.S., Bermuda and international markets.  As used in this document, “Company” means Group and its subsidiaries.

Effective February 27, 2013, the Company established a new subsidiary, Mt. Logan Re Ltd. (“Mt. Logan Re”) and effective July 1, 2013, Mt. Logan Re established separate segregated accounts and issued non-voting redeemable preferred shares to capitalize the segregated accounts.  Accordingly, the financial position and operating results for Mt. Logan Re are consolidated with the Company and the non-controlling interests in Mt. Logan Re’s operating results and equity are presented as separate captions in the Company’s financial statements.

2.   BASIS OF PRESENTATION

The unaudited consolidated financial statements of the Company for the three and nine months ended September 30, 2014 and 2013 include all adjustments, consisting of normal recurring accruals, which, in the opinion of management, are necessary for a fair statement of the results on an interim basis.  Certain financial information, which is normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”), has been omitted since it is not required for interim reporting purposes.  The December 31, 2013 consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by GAAP.  The results for the three and nine months ended September 30, 2014 and 2013 are not necessarily indicative of the results for a full year.  These financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto for the years ended December 31, 2013, 2012 and 2011 included in the Company’s most recent Form 10-K filing.

All intercompany accounts and transactions have been eliminated.

Certain reclassifications and format changes have been made to prior years’ amounts to conform to the 2014 presentation.  One reclassification relates to a correction in the manner in which the Company reports distributions received from limited partnership investments in the consolidated Statements of Cash Flows.  Prior to the fourth quarter of 2013, the Company incorrectly reflected all distributions as cash flows from investing activities in its Consolidated Statements of Cash Flows.  Starting with the fourth quarter of 2013, cash distributions from the limited partnerships that represent net investment income are reflected as cash flows from operating activities and distributions that represent the return of capital contributions are reflected as cash flows from investing activities.  For the three and nine months ended September 30, 2013, $5,638 thousand and $48,733 thousand, respectively, have been reclassified from “Distributions from other invested assets” included in cash flows  from investing activities to “Distribution of limited partnership income” included in cash flows from operations.  The Company has determined that this error is not material to the financial statements of any prior period.

Application of Recently Issued Accounting Standard Changes.

Presentation of Comprehensive Income. In June 2011, FASB issued amendments to existing guidance to provide two alternatives for the presentation of comprehensive income. Components of net income and comprehensive income can either be presented within a single, continuous financial statement or be presented in two separate but consecutive financial statements.  The Company has chosen to present the components of net income and comprehensive income in a single, continuous financial statement.  The guidance is effective for reporting periods beginning after December 15, 2011.  The Company implemented this guidance as of January 1, 2012.  In February, 2013, the FASB issued an additional amendment for the presentation of amounts reclassified out of accumulated other comprehensive income by component.  The Company implemented the proposed guidance as of January 1, 2013.

 
5

 
Treatment of Insurance Contract Acquisition Costs. In October 2010, the FASB issued authoritative guidance for the accounting for costs associated with acquiring or renewing insurance contracts.  The guidance identifies the incremental direct costs of contract acquisition and costs directly related to acquisition activities that should be capitalized.  This guidance is effective for reporting periods beginning after December 15, 2011.  The Company implemented this guidance as of January 1, 2012 and determined that $13,492 thousand of previously deferrable acquisition costs would be expensed, including $10,876 thousand and $2,616 thousand expensed in the years ended December 31, 2012 and 2013, respectively.  No additional expense will be incurred related to this guidance implementation in future periods.

3.   INVESTMENTS

The amortized cost, market value and gross unrealized appreciation and depreciation of available for sale, fixed maturity and equity security investments, carried at market value, are as follows for the periods indicated:
 
   
At September 30, 2014
 
   
Amortized
   
Unrealized
   
Unrealized
   
Market
 
(Dollars in thousands)
 
Cost
   
Appreciation
   
Depreciation
   
Value
 
Fixed maturity securities
                       
U.S. Treasury securities and obligations of
                       
U.S. government agencies and corporations
  $ 716,191     $ 5,513     $ (830 )   $ 720,874  
Obligations of U.S. states and political subdivisions
    792,193       43,524       (994 )     834,723  
Corporate securities
    4,594,903       144,022       (30,854 )     4,708,071  
Asset-backed securities
    311,772       1,950       (519 )     313,203  
Mortgage-backed securities
                               
Commercial
    216,264       12,385       (686 )     227,963  
Agency residential
    2,156,374       37,989       (17,151 )     2,177,212  
Non-agency residential
    2,982       54       (69 )     2,967  
Foreign government securities
    1,532,505       63,180       (15,853 )     1,579,832  
Foreign corporate securities
    3,004,570       95,383       (21,472 )     3,078,481  
Total fixed maturity securities
  $ 13,327,754     $ 404,000     $ (88,428 )   $ 13,643,326  
Equity securities
  $ 147,068     $ 5,419     $ (6,352 )   $ 146,135  
 

   
At December 31, 2013
 
   
Amortized
   
Unrealized
   
Unrealized
   
Market
 
(Dollars in thousands)
 
Cost
   
Appreciation
   
Depreciation
   
Value
 
Fixed maturity securities
                       
U.S. Treasury securities and obligations of
                       
U.S. government agencies and corporations
  $ 160,013     $ 2,690     $ (1,678 )   $ 161,025  
Obligations of U.S. states and political subdivisions
    970,735       40,815       (9,022 )     1,002,528  
Corporate securities
    3,950,887       155,619       (27,090 )     4,079,416  
Asset-backed securities
    169,980       3,485       (422 )     173,043  
Mortgage-backed securities
                               
Commercial
    254,765       16,683       (1,007 )     270,441  
Agency residential
    2,294,719       34,509       (50,175 )     2,279,053  
Non-agency residential
    4,816       229       (226 )     4,819  
Foreign government securities
    1,740,337       69,779       (29,347 )     1,780,769  
Foreign corporate securities
    2,844,912       86,529       (45,628 )     2,885,813  
Total fixed maturity securities
  $ 12,391,164     $ 410,338     $ (164,595 )   $ 12,636,907  
Equity securities
  $ 148,342     $ 4,336     $ (8,597 )   $ 144,081  
 
The $1,579,832 thousand of foreign government securities at September 30, 2014 included $672,976 thousand of European sovereign securities.  Approximately 59.3%, 17.6% and 6.2% of European sovereign securities represented securities held in the governments of the United Kingdom, France and the Netherlands, respectively.  No other countries represented more than 5% of the European sovereign securities.  The Company held no sovereign securities of Portugal, Italy, Ireland, Greece or Spain at September 30, 2014.

 
6

 
In accordance with FASB guidance, the Company reclassified the non-credit portion of other-than-temporary impairments from retained earnings into accumulated other comprehensive income (loss), on April 1, 2009.  The table below presents the pre-tax cumulative unrealized appreciation (depreciation) on those corporate securities, for the periods indicated:
 
(Dollars in thousands)
 
At September 30, 2014
 
At December 31, 2013
Pre-tax cumulative unrealized appreciation (depreciation)
  $ 2,989     $ 3,169  


The amortized cost and market value of fixed maturity securities are shown in the following table by contractual maturity.  Mortgage-backed securities are generally more likely to be prepaid than other fixed maturity securities. As the stated maturity of such securities may not be indicative of actual maturities, the totals for mortgage-backed and asset-backed securities are shown separately.
 
   
At September 30, 2014
   
At December 31, 2013
 
   
Amortized
   
Market
   
Amortized
   
Market
 
(Dollars in thousands)
 
Cost
   
Value
   
Cost
   
Value
 
Fixed maturity securities – available for sale:
                       
    Due in one year or less
  $ 1,231,500     $ 1,238,990     $ 1,059,052     $ 1,067,799  
    Due after one year through five years
    6,155,821       6,283,753       5,565,112       5,740,662  
    Due after five years through ten years
    2,309,641       2,353,164       2,081,908       2,101,234  
    Due after ten years
    943,400       1,046,074       960,812       999,856  
Asset-backed securities
    311,772       313,203       169,980       173,043  
Mortgage-backed securities:
                               
Commercial
    216,264       227,963       254,765       270,441  
Agency residential
    2,156,374       2,177,212       2,294,719       2,279,053  
Non-agency residential
    2,982       2,967       4,816       4,819  
Total fixed maturity securities
  $ 13,327,754     $ 13,643,326     $ 12,391,164     $ 12,636,907  


The changes in net unrealized appreciation (depreciation) for the Company’s investments are derived from the following sources for the periods indicated:
 
   
Three Months Ended
   
Nine Months Ended
 
   
September 30,
   
September 30,
 
(Dollars in thousands)
 
2014
   
2013
   
2014
   
2013
 
Increase (decrease) during the period between the market value and cost
                   
of investments carried at market value, and deferred taxes thereon:
                       
Fixed maturity securities
  $ (87,859 )   $ (26,106 )   $ 70,010     $ (385,727 )
Fixed maturity securities, other-than-temporary impairment
    (261 )     (144 )     (180 )     (1,516 )
Equity securities
    (3,287 )     (1,447 )     3,327       (15,522 )
Change in unrealized appreciation (depreciation), pre-tax
    (91,407 )     (27,697 )     73,157       (402,765 )
Deferred tax benefit (expense)
    11,649       5,180       (9,480 )     54,847  
Deferred tax benefit (expense), other-than-temporary impairment
    -       -       -       140  
Change in unrealized appreciation (depreciation),
                               
net of deferred taxes, included in shareholders’ equity
  $ (79,758 )   $ (22,517 )   $ 63,677     $ (347,778 )

The Company frequently reviews all of its fixed maturity, available for sale securities for declines in market value and focuses its attention on securities whose fair value has fallen below 80% of their amortized cost at the time of review.  The Company then assesses whether the decline in value is temporary or other-than-temporary.  In making its assessment, the Company evaluates the current market and interest rate environment as well as specific issuer information.  Generally, a change in a security’s value caused by a change in the market, interest rate or foreign exchange environment does not constitute an other-than-temporary impairment, but rather a temporary decline in market value.  Temporary declines in market value are recorded as unrealized losses in accumulated other comprehensive income (loss).  If the Company determines that the decline is other-than-temporary and the Company does not have the intent to sell the security; and it is more likely than not that the Company will not have to sell the security before recovery of its cost basis, the carrying value of the investment is written down to fair value.  The fair value adjustment that is credit or foreign exchange related is recorded in net realized capital gains (losses) in the Company’s consolidated statements of operations and comprehensive income (loss).  The fair value adjustment that is non-credit related is recorded as a component of other comprehensive income (loss), net of tax, and is included in accumulated other comprehensive income (loss) in the Company’s consolidated balance sheets.

 
7

 
The Company’s assessments are based on the issuers current and expected future financial position, timeliness with respect to interest and/or principal payments, speed of repayments and any applicable credit enhancements or breakeven constant default rates on mortgage-backed and asset-backed securities, as well as relevant information provided by rating agencies, investment advisors and analysts.

The majority of the Company’s equity securities available for sale at market value are primarily comprised of mutual fund investments whose underlying securities consist of fixed maturity securities.  When a fund’s value reflects an unrealized loss, the Company assesses whether the decline in value is temporary or other-than-temporary.  In making its assessment, the Company considers the composition of its portfolios and their related markets, reports received from the portfolio managers and discussions with portfolio managers.  If the Company determines that the declines are temporary and it has the ability and intent to continue to hold the investments, then the declines are recorded as unrealized losses in accumulated other comprehensive income (loss).  If declines are deemed to be other-than-temporary, then the carrying value of the investment is written down to fair value and recorded in net realized capital gains (losses) in the Company’s consolidated statements of operations and comprehensive income (loss).

Retrospective adjustments are employed to recalculate the values of asset-backed securities. All of the Company’s asset-backed and mortgage-backed securities have a pass-through structure. Each acquisition lot is reviewed to recalculate the effective yield. The recalculated effective yield is used to derive a book value as if the new yield were applied at the time of acquisition. Outstanding principal factors from the time of acquisition to the adjustment date are used to calculate the prepayment history for all applicable securities. Conditional prepayment rates, computed with life to date factor histories and weighted average maturities, are used in the calculation of projected prepayments for pass-through security types.

The tables below display the aggregate market value and gross unrealized depreciation of fixed maturity and equity securities, by security type and contractual maturity, in each case subdivided according to length of time that individual securities had been in a continuous unrealized loss position for the periods indicated:
 
   
Duration of Unrealized Loss at September 30, 2014 By Security Type
 
   
Less than 12 months
   
Greater than 12 months
   
Total
 
         
Gross
         
Gross
         
Gross
 
         
Unrealized
         
Unrealized
         
Unrealized
 
(Dollars in thousands)
 
Market Value
   
Depreciation
   
Market Value
   
Depreciation
   
Market Value
   
Depreciation
 
Fixed maturity securities - available for sale
                                   
U.S. Treasury securities and obligations of
                                   
U.S. government agencies and corporations
  $ 35,516     $ (190 )   $ 25,462     $ (640 )   $ 60,978     $ (830 )
Obligations of U.S. states and political subdivisions
    18,198       (426 )     36,680       (568 )     54,878       (994 )
Corporate securities
    1,533,633       (21,194 )     371,829       (9,660 )     1,905,462       (30,854 )
Asset-backed securities
    159,751       (519 )     -       -       159,751       (519 )
Mortgage-backed securities
                                               
Commercial
    15,440       (27 )     10,962       (659 )     26,402       (686 )
Agency residential
    157,297       (563 )     829,667       (16,588 )     986,964       (17,151 )
Non-agency residential
    -       -       1,362       (69 )     1,362       (69 )
Foreign government securities
    284,210       (4,567 )     213,313       (11,286 )     497,523       (15,853 )
Foreign corporate securities
    478,718       (5,997 )     410,294       (15,475 )     889,012       (21,472 )
Total fixed maturity securities
  $ 2,682,763     $ (33,483 )   $ 1,899,569     $ (54,945 )   $ 4,582,332     $ (88,428 )
Equity securities
    41,908       (1,794 )     76,821       (4,558 )     118,729       (6,352 )
Total
  $ 2,724,671     $ (35,277 )   $ 1,976,390     $ (59,503 )   $ 4,701,061     $ (94,780 )

 
8

 
 
   
Duration of Unrealized Loss at September 30, 2014 By Maturity
 
   
Less than 12 months
   
Greater than 12 months
   
Total
 
         
Gross
         
Gross
         
Gross
 
         
Unrealized
         
Unrealized
         
Unrealized
 
(Dollars in thousands)
 
Market Value
   
Depreciation
   
Market Value
   
Depreciation
   
Market Value
   
Depreciation
 
Fixed maturity securities
                                   
Due in one year or less
  $ 84,658     $ (1,512 )   $ 107,000     $ (8,116 )   $ 191,658     $ (9,628 )
Due in one year through five years
    1,446,131       (17,614 )     617,461       (15,101 )     2,063,592       (32,715 )
Due in five years through ten years
    772,425       (11,162 )     244,999       (10,019 )     1,017,424       (21,181 )
Due after ten years
    47,061       (2,086 )     88,118       (4,393 )     135,179       (6,479 )
Asset-backed securities
    159,751       (519 )     -       -       159,751       (519 )
Mortgage-backed securities
    172,737       (590 )     841,991       (17,316 )     1,014,728       (17,906 )
Total fixed maturity securities
  $ 2,682,763     $ (33,483 )   $ 1,899,569     $ (54,945 )   $ 4,582,332     $ (88,428 )

The aggregate market value and gross unrealized losses related to investments in an unrealized loss position at September 30, 2014 were $4,701,061 thousand and $94,780 thousand, respectively.  The market value of securities for the single issuer whose securities comprised the largest unrealized loss position at September 30, 2014, did not exceed 1.1% of the overall market value of the Company’s fixed maturity securities.  In addition, as indicated on the above table, there was no significant concentration of unrealized losses in any one market sector.  The $33,483 thousand of unrealized losses related to fixed maturity securities that have been in an unrealized loss position for less than one year were generally comprised of foreign and domestic corporate securities, as well as foreign government securities.  Of these unrealized losses, $13,870 thousand were related to securities that were rated investment grade by at least one nationally recognized statistical rating organization. The $54,945 thousand of unrealized losses related to fixed maturity securities in an unrealized loss position for more than one year related primarily to agency residential mortgage-backed securities, domestic and foreign corporate securities and foreign government securities.  Of these unrealized losses, $51,746 thousand related to securities that were rated investment grade by at least one nationally recognized statistical rating organization.  The gross unrealized depreciation for mortgage-backed securities included $28 thousand related to sub-prime and alt-A loans.  In all instances, there were no projected cash flow shortfalls to recover the full book value of the investments and the related interest obligations.  The mortgage-backed securities still have excess credit coverage and are current on interest and principal payments.

The Company, given the size of its investment portfolio and capital position, does not have the intent to sell these securities; and it is more likely than not that the Company will not have to sell the security before recovery of its cost basis.  In addition, all securities currently in an unrealized loss position are current with respect to principal and interest payments.

 
9

 
The tables below display the aggregate market value and gross unrealized depreciation of fixed maturity and equity securities, by security type and contractual maturity, in each case subdivided according to length of time that individual securities had been in a continuous unrealized loss position for the periods indicated:


   
Duration of Unrealized Loss at December 31, 2013 By Security Type
 
   
Less than 12 months
   
Greater than 12 months
   
Total
 
         
Gross
         
Gross
         
Gross
 
         
Unrealized
         
Unrealized
         
Unrealized
 
(Dollars in thousands)
 
Market Value
   
Depreciation
   
Market Value
   
Depreciation
   
Market Value
   
Depreciation
 
Fixed maturity securities - available for sale
                                   
U.S. Treasury securities and obligations of
                                   
U.S. government agencies and corporations
  $ 74,847     $ (1,033 )   $ 8,751     $ (645 )   $ 83,598     $ (1,678 )
Obligations of U.S. states and political subdivisions
    92,760       (4,852 )     39,689       (4,170 )     132,449       (9,022 )
Corporate securities
    959,396       (22,331 )     75,946       (4,759 )     1,035,342       (27,090 )
Asset-backed securities
    5,494       (6 )     1,128       (416 )     6,622       (422 )
Mortgage-backed securities
                                               
Commercial
    51       -       11,353       (1,007 )     11,404       (1,007 )
Agency residential
    1,220,845       (40,420 )     264,640       (9,755 )     1,485,485       (50,175 )
Non-agency residential
    1,758       (22 )     1,541       (204 )     3,299       (226 )
Foreign government securities
    409,252       (20,350 )     85,029       (8,997 )     494,281       (29,347 )
Foreign corporate securities
    872,907       (34,819 )     151,748       (10,809 )     1,024,655       (45,628 )
Total fixed maturity securities
  $ 3,637,310     $ (123,833 )   $ 639,825     $ (40,762 )   $ 4,277,135     $ (164,595 )
Equity securities
    127,030       (8,597 )     -       -       127,030       (8,597 )
Total
  $ 3,764,340     $ (132,430 )   $ 639,825     $ (40,762 )   $ 4,404,165     $ (173,192 )

 
   
Duration of Unrealized Loss at December 31, 2013 By Maturity
 
   
Less than 12 months
   
Greater than 12 months
   
Total
 
         
Gross
         
Gross
         
Gross
 
         
Unrealized
         
Unrealized
         
Unrealized
 
(Dollars in thousands)
 
Market Value
   
Depreciation
   
Market Value
   
Depreciation
   
Market Value
   
Depreciation
 
Fixed maturity securities
                                   
Due in one year or less
  $ 143,098     $ (3,503 )   $ 46,691     $ (5,330 )   $ 189,789     $ (8,833 )
Due in one year through five years
    1,125,680       (25,365 )     204,779       (11,279 )     1,330,459       (36,644 )
Due in five years through ten years
    810,969       (35,169 )     48,064       (3,844 )     859,033       (39,013 )
Due after ten years
    329,415       (19,348 )     61,629       (8,927 )     391,044       (28,275 )
Asset-backed securities
    5,494       (6 )     1,128       (416 )     6,622       (422 )
Mortgage-backed securities
    1,222,654       (40,442 )     277,534       (10,966 )     1,500,188       (51,408 )
Total fixed maturity securities
  $ 3,637,310     $ (123,833 )   $ 639,825     $ (40,762 )   $ 4,277,135     $ (164,595 )


The aggregate market value and gross unrealized losses related to investments in an unrealized loss position at December 31, 2013 were $4,404,165 thousand and $173,192 thousand, respectively.  The market value of securities for the single issuer whose securities comprised the largest unrealized loss position at December 31, 2013, did not exceed 0.4% of the overall market value of the Company’s fixed maturity securities.  In addition, as indicated on the above table, there was no significant concentration of unrealized losses in any one market sector.  The $123,833 thousand of unrealized losses related to fixed maturity securities that have been in an unrealized loss position for less than one year were generally comprised of domestic and foreign corporate securities, foreign government securities and agency residential mortgage-backed securities.  Of these unrealized losses, $112,658 thousand were related to securities that were rated investment grade by at least one nationally recognized statistical rating organization. The $40,762 thousand of unrealized losses related to fixed maturity securities in an unrealized loss position for more than one year related primarily to domestic and foreign corporate securities, foreign government securities, municipal securities and agency residential mortgage-backed securities.  Of these unrealized losses, $38,964 thousand related to securities that were rated investment grade by at least one nationally recognized statistical rating organization.  The gross unrealized depreciation for mortgage-backed securities included $273 thousand related to sub-prime and alt-A loans.  In all instances, there were no projected cash flow shortfalls to recover the full book value of the investments and the related interest obligations.  The mortgage-backed securities still have excess credit coverage and are current on interest and principal payments.

 
10

 
The components of net investment income are presented in the table below for the periods indicated:
 
   
Three Months Ended
   
Nine Months Ended
 
   
September 30,
   
September 30,
 
(Dollars in thousands)
 
2014
   
2013
   
2014
   
2013
 
Fixed maturities
  $ 115,057     $ 117,814     $ 348,872     $ 358,824