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EVEREST GROUP, LTD. - Quarter Report: 2015 June (Form 10-Q)

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, 2015
 
 
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 August 1, 2015
Common Shares, $0.01 par value
 
44,188,487
 


 

EVEREST RE GROUP, LTD

Table of Contents
Form 10-Q


Page
PART I

FINANCIAL INFORMATION

Item 1.
Financial Statements
 
     
 
Consolidated Balance Sheets June 30, 2015 (unaudited)
 
 
and December 31, 2014
1
     
 
Consolidated Statements of Operations and Comprehensive Income (Loss) for the
 
 
three and six months ended June 30, 2015 and 2014 (unaudited)
2
     
 
Consolidated Statements of Changes in Shareholders' Equity for the three and
 
 
six months ended June 30, 2015 and 2014 (unaudited)
3
     
 
Consolidated Statements of Cash Flows for the six months ended
 
 
June 30, 2015 and 2014 (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
56
     
Item 4.
Controls and Procedures
56
     

PART II

OTHER INFORMATION

Item 1.
Legal Proceedings
57
     
Item 1A.
Risk Factors
57
     
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
57
     
Item 3.
Defaults Upon Senior Securities
57
     
Item 4.
Mine Safety Disclosures
58
     
Item 5.
Other Information
58
     
Item 6.
Exhibits
58
     

EVEREST RE  GROUP, LTD.
CONSOLIDATED BALANCE SHEETS



   
June 30,
   
December 31,
 
(Dollars and share amounts in thousands, except par value per share)
 
2015
   
2014
 
   
(unaudited)
   
 
ASSETS:
       
Fixed maturities - available for sale, at market value
 
$
13,474,801
   
$
13,101,067
 
    (amortized cost: 2015, $13,213,596; 2014, $12,831,159)
               
Fixed maturities - available for sale, at fair value
   
228
     
1,509
 
Equity securities - available for sale, at market value (cost: 2015, $147,512; 2014, $148,326)
   
137,516
     
140,210
 
Equity securities - available for sale, at fair value
   
1,483,803
     
1,447,820
 
Short-term investments
   
1,901,807
     
1,705,932
 
Other invested assets (cost: 2015, $665,153; 2014, $601,925)
   
665,153
     
601,925
 
Cash
   
338,901
     
437,474
 
       Total investments and cash
   
18,002,209
     
17,435,937
 
Accrued investment income
   
108,829
     
111,075
 
Premiums receivable
   
1,445,180
     
1,397,983
 
Reinsurance receivables
   
682,878
     
670,854
 
Funds held by reinsureds
   
233,447
     
228,192
 
Deferred acquisition costs
   
350,551
     
398,408
 
Prepaid reinsurance premiums
   
179,448
     
154,177
 
Income taxes
   
206,400
     
184,762
 
Other assets
   
273,954
     
236,436
 
TOTAL ASSETS
 
$
21,482,896
   
$
20,817,824
 
                 
LIABILITIES:
               
Reserve for losses and loss adjustment expenses
 
$
9,783,570
   
$
9,720,813
 
Future policy benefit reserve
   
59,456
     
59,820
 
Unearned premium reserve
   
1,562,078
     
1,728,745
 
Funds held under reinsurance treaties
   
78,553
     
3,932
 
Commission reserves
   
88,008
     
87,990
 
Other net payable to reinsurers
   
160,248
     
139,841
 
Losses in course of payment
   
251,980
     
157,527
 
4.868% Senior notes due 6/1/2044
   
400,000
     
400,000
 
6.6% Long term notes due 5/1/2067
   
238,366
     
238,364
 
Accrued interest on debt and borrowings
   
3,537
     
3,537
 
Equity index put option liability
   
40,819
     
47,022
 
Unsettled securities payable
   
72,834
     
41,092
 
Other liabilities
   
257,056
     
316,469
 
       Total liabilities
   
12,996,505
     
12,945,152
 
                 
NONCONTROLLING INTERESTS:
               
Redeemable noncontrolling interests - Mt. Logan Re
   
759,729
     
421,552
 
                 
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; (2015) 68,555
               
    and (2014) 68,336 outstanding before treasury shares
   
685
     
683
 
Additional paid-in capital
   
2,084,636
     
2,068,807
 
Accumulated other comprehensive income (loss), net of deferred income tax expense
               
    (benefit) of $20,968 at 2015 and $20,715 at 2014
   
(14,819
)
   
48,317
 
Treasury shares, at cost; 24,363 shares (2015) and 23,650 shares (2014)
   
(2,610,878
)
   
(2,485,897
)
Retained earnings
   
8,267,038
     
7,819,210
 
       Total shareholders' equity attributable to Everest Re Group
   
7,726,662
     
7,451,120
 
TOTAL LIABILITIES, NONCONTROLLING INTERESTS AND SHAREHOLDERS' EQUITY
 
$
21,482,896
   
$
20,817,824
 
                 
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
   
Six Months Ended
 
   
June 30,
   
June 30,
 
(Dollars in thousands, except per share amounts)
 
2015
   
2014
   
2015
   
2014
 
   
(unaudited) 
 
(unaudited) 
REVENUES:
               
Premiums earned
 
$
1,332,398
   
$
1,272,317
   
$
2,639,475
   
$
2,416,807
 
Net investment income
   
125,046
     
131,224
     
247,629
     
254,381
 
Net realized capital gains (losses):
                               
Other-than-temporary impairments on fixed maturity securities
   
(16,238
)
   
(389
)
   
(42,256
)
   
(389
)
Other-than-temporary impairments on fixed maturity securities
                               
transferred to other comprehensive income (loss)
   
-
     
-
     
-
     
-
 
Other net realized capital gains (losses)
   
(7,940
)
   
59,405
     
7,573
     
80,531
 
Total net realized capital gains (losses)
   
(24,178
)
   
59,016
     
(34,683
)
   
80,142
 
Net derivative gain (loss)
   
6,445
     
3,774
     
6,203
     
2,113
 
Other income (expense)
   
(3,925
)
   
(13,871
)
   
42,148
     
(17,167
)
Total revenues
   
1,435,786
     
1,452,460
     
2,900,772
     
2,736,276
 
                                 
CLAIMS AND EXPENSES:
                               
Incurred losses and loss adjustment expenses
   
790,661
     
735,697
     
1,513,126
     
1,355,106
 
Commission, brokerage, taxes and fees
   
294,917
     
283,687
     
582,084
     
529,689
 
Other underwriting expenses
   
63,951
     
58,414
     
124,615
     
109,052
 
Corporate expenses
   
5,925
     
3,899
     
11,388
     
8,844
 
Interest, fees and bond issue cost amortization expense
   
9,026
     
8,978
     
18,016
     
16,546
 
Total claims and expenses
   
1,164,480
     
1,090,675
     
2,249,229
     
2,019,237
 
                                 
INCOME (LOSS) BEFORE TAXES
   
271,306
     
361,785
     
651,543
     
717,039
 
Income tax expense (benefit)
   
35,834
     
63,860
     
77,001
     
117,092
 
                                 
NET INCOME (LOSS)
 
$
235,472
   
$
297,925
   
$
574,542
   
$
599,947
 
Net (income) loss attributable to noncontrolling interests
   
(26,415
)
   
(7,741
)
   
(42,507
)
   
(15,830
)
NET INCOME (LOSS) ATTRIBUTABLE TO EVEREST RE GROUP
 
$
209,057
   
$
290,184
   
$
532,035
   
$
584,117
 
                                 
Other comprehensive income (loss), net of tax:
                               
Unrealized appreciation (depreciation) ("URA(D)") on securities arising during the period
   
(136,481
)
   
85,921
     
(53,276
)
   
139,392
 
Reclassification adjustment for realized losses (gains) included in net income (loss)
   
12,747
     
2,169
     
34,930
     
4,043
 
Total URA(D) on securities arising during the period
   
(123,734
)
   
88,090
     
(18,346
)
   
143,435
 
                                 
Foreign currency translation adjustments
   
54,337
     
(763
)
   
(48,003
)
   
(3,400
)
                                 
Benefit plan actuarial net gain (loss) for the period
   
-
     
-
     
-
     
-
 
Reclassification adjustment for amortization of net (gain) loss included in net income (loss)
   
1,609
     
770
     
3,213
     
1,541
 
Total benefit plan net gain (loss) for the period
   
1,609
     
770
     
3,213
     
1,541
 
Total other comprehensive income (loss), net of tax
   
(67,788
)
   
88,097
     
(63,136
)
   
141,576
 
Other comprehensive (income) loss attributable to noncontrolling interests
   
-
     
-
     
-
     
-
 
Total other comprehensive income (loss), net of tax attributable to Everest Re Group
   
(67,788
)
   
88,097
     
(63,136
)
   
141,576
 
                                 
COMPREHENSIVE INCOME (LOSS)
 
$
141,269
   
$
378,281
   
$
468,899
   
$
725,693
 
                                 
EARNINGS PER COMMON SHARE ATTRIBUTABLE TO EVEREST RE GROUP:
                               
Basic
 
$
4.72
   
$
6.32
   
$
11.99
   
$
12.58
 
Diluted
   
4.68
     
6.26
     
11.88
     
12.46
 
Dividends declared
   
0.95
     
0.75
     
1.90
     
1.50
 
                                 
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
   
Six Months Ended
 
   
June 30,
   
June 30,
 
(Dollars in thousands, except share and dividends per share amounts)
 
2015
   
2014
   
2015
   
2014
 
   
(unaudited)  
 
(unaudited) 
COMMON SHARES (shares outstanding):
               
Balance, beginning of period
   
44,410,420
     
46,057,039
     
44,685,637
     
47,543,132
 
Issued during the period, net
   
59,606
     
109,068
     
219,267
     
315,139
 
Treasury shares acquired
   
(277,500
)
   
(475,092
)
   
(712,378
)
   
(2,167,256
)
Balance, end of period
   
44,192,526
     
45,691,015
     
44,192,526
     
45,691,015
 
                                 
COMMON SHARES (par value):
                               
Balance, beginning of period
 
$
685
   
$
682
   
$
683
   
$
680
 
Issued during the period, net
   
-
     
1
     
2
     
3
 
Balance, end of period
   
685
     
683
     
685
     
683
 
                                 
ADDITIONAL PAID-IN CAPITAL:
                               
Balance, beginning of period
   
2,073,977
     
2,036,320
     
2,068,807
     
2,029,774
 
Share-based compensation plans
   
10,659
     
16,362
     
15,829
     
22,908
 
Balance, end of period
   
2,084,636
     
2,052,682
     
2,084,636
     
2,052,682
 
                                 
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS),
                               
NET OF DEFERRED INCOME TAXES:
                               
Balance, beginning of period
   
52,969
     
211,207
     
48,317
     
157,728
 
Net increase (decrease) during the period
   
(67,788
)
   
88,097
     
(63,136
)
   
141,576
 
Balance, end of period
   
(14,819
)
   
299,304
     
(14,819
)
   
299,304
 
                                 
RETAINED EARNINGS:
                               
Balance, beginning of period
   
8,099,936
     
7,025,158
     
7,819,210
     
6,765,967
 
Net income (loss) attributable to Everest Re Group
   
209,057
     
290,184
     
532,035
     
584,117
 
Dividends declared ($0.95 per share in second quarter 2015 and $1.90 year-to-date
                               
per share in 2015 and $0.75 per share in second quarter 2014 and $1.50
                               
year-to-date per share in 2014)
   
(41,955
)
   
(34,319
)
   
(84,207
)
   
(69,061
)
Balance, end of period
   
8,267,038
     
7,281,023
     
8,267,038
     
7,281,023
 
                                 
TREASURY SHARES AT COST:
                               
Balance, beginning of period
   
(2,560,937
)
   
(2,235,856
)
   
(2,485,897
)
   
(1,985,873
)
Purchase of treasury shares
   
(49,941
)
   
(74,968
)
   
(124,981
)
   
(324,951
)
Balance, end of period
   
(2,610,878
)
   
(2,310,824
)
   
(2,610,878
)
   
(2,310,824
)
                                 
TOTAL SHAREHOLDERS' EQUITY, END OF PERIOD
 
$
7,726,662
   
$
7,322,868
   
$
7,726,662
   
$
7,322,868
 
                                 
The accompanying notes are an integral part of the consolidated financial statements.
                               



3

EVEREST RE GROUP, LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS



   
Six Months Ended
 
   
June 30,
 
(Dollars in thousands)
 
2015
   
2014
 
   
(unaudited)
 
CASH FLOWS FROM OPERATING ACTIVITIES:
       
Net income (loss)
 
$
574,542
   
$
599,947
 
Adjustments to reconcile net income to net cash provided by operating activities:
               
Decrease (increase) in premiums receivable
   
(51,422
)
   
(97,827
)
Decrease (increase) in funds held by reinsureds, net
   
68,245
     
2,148
 
Decrease (increase) in reinsurance receivables
   
(32,526
)
   
(137,077
)
Decrease (increase) in income taxes
   
(20,898
)
   
15,257
 
Decrease (increase) in prepaid reinsurance premiums
   
(28,916
)
   
(68,346
)
Increase (decrease) in reserve for losses and loss adjustment expenses
   
113,567
     
8,055
 
Increase (decrease) in future policy benefit reserve
   
(364
)
   
(1,144
)
Increase (decrease) in unearned premiums
   
(160,849
)
   
96,803
 
Increase (decrease) in other net payable to reinsurers
   
23,867
     
100,546
 
Increase (decrease) in losses in course of payment
   
95,003
     
161,990
 
Change in equity adjustments in limited partnerships
   
(12,840
)
   
(3,200
)
Distribution of limited partnership income
   
18,332
     
13,430
 
Change in other assets and liabilities, net
   
26,768
     
(56,872
)
Non-cash compensation expense
   
10,364
     
9,768
 
Amortization of bond premium (accrual of bond discount)
   
25,514
     
27,068
 
Amortization of underwriting discount on senior notes
   
2
     
28
 
Net realized capital (gains) losses
   
34,683
     
(80,142
)
Net cash provided by (used in) operating activities
   
683,072
     
590,432
 
                 
CASH FLOWS FROM INVESTING ACTIVITIES:
               
Proceeds from fixed maturities matured/called - available for sale, at market value
   
1,172,211
     
1,047,509
 
Proceeds from fixed maturities matured/called - available for sale, at fair value
   
-
     
875
 
Proceeds from fixed maturities sold - available for sale, at market value
   
731,673
     
606,476
 
Proceeds from fixed maturities sold - available for sale, at fair value
   
1,613
     
20,763
 
Proceeds from equity securities sold - available for sale, at market value
   
4,599
     
8,672
 
Proceeds from equity securities sold - available for sale, at fair value
   
300,620
     
304,892
 
Distributions from other invested assets
   
27,705
     
22,520
 
Cost of fixed maturities acquired - available for sale, at market value
   
(2,448,121
)
   
(2,458,723
)
Cost of fixed maturities acquired - available for sale, at fair value
   
(234
)
   
(1,309
)
Cost of equity securities acquired - available for sale, at market value
   
(5,541
)
   
(10,619
)
Cost of equity securities acquired - available for sale, at fair value
   
(317,650
)
   
(183,314
)
Cost of other invested assets acquired
   
(98,890
)
   
(34,388
)
Net change in short-term investments
   
(199,226
)
   
(423,677
)
Net change in unsettled securities transactions
   
4,475
     
20,633
 
Net cash provided by (used in) investing activities
   
(826,766
)
   
(1,079,690
)
                 
CASH FLOWS FROM FINANCING ACTIVITIES:
               
Common shares issued during the period, net
   
5,468
     
13,143
 
Purchase of treasury shares
   
(124,981
)
   
(324,951
)
Net proceeds from issuance of senior notes
   
-
     
400,000
 
Third party investment in redeemable noncontrolling interest
   
296,848
     
123,700
 
Subscription advances for third party redeemable noncontrolling interest
   
-
     
77,500
 
Dividends paid to shareholders
   
(84,207
)
   
(69,061
)
Dividends paid on third party investment in redeemable noncontrolling interest
   
(41,178
)
   
-
 
Net cash provided by (used in) financing activities
   
51,950
     
220,331
 
                 
EFFECT OF EXCHANGE RATE CHANGES ON CASH
   
(6,829
)
   
(885
)
                 
Net increase (decrease) in cash
   
(98,573
)
   
(269,812
)
Cash, beginning of period
   
437,474
     
611,382
 
Cash, end of period
 
$
338,901
   
$
341,570
 
                 
SUPPLEMENTAL CASH FLOW INFORMATION:
               
Income taxes paid (recovered)
 
$
93,352
   
$
97,241
 
Interest paid
   
17,907
     
15,018
 
                 
The accompanying notes are an integral part of the consolidated financial statements.
               


4

NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS (UNAUDITED)

For the Three and Six Months Ended June 30, 2015 and 2014

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 six months ended June 30, 2015 and 2014 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, 2014 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 six months ended June 30, 2015 and 2014 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, 2014, 2013 and 2012 included in the Company's most recent Form 10-K filing.

All intercompany accounts and transactions have been eliminated.

Application of Recently Issued Accounting Standard Changes.

No accounting standards or guidance have been issued recently that would have a material impact on the Company's financial statements or financial reporting process.
 
5

3.   INVESTMENTS
 
The amortized cost, market value and gross unrealized appreciation and depreciation of available for sale, fixed maturity, equity security investments, carried at market value and other-than-temporary impairments ("OTTI") in accumulated other comprehensive income ("AOCI") are as follows for the periods indicated:


   
At June 30, 2015
 
   
Amortized
   
Unrealized
   
Unrealized
   
Market
   
OTTI in AOCI
 
(Dollars in thousands)
 
Cost
   
Appreciation
   
Depreciation
   
Value
   
(a)
 
Fixed maturity securities
                   
U.S. Treasury securities and obligations of
                   
U.S. government agencies and corporations
 
$
336,763
   
$
11,953
   
$
(464
)
 
$
348,252
   
$
-
 
Obligations of U.S. states and political subdivisions
   
712,000
     
29,604
     
(2,885
)
   
738,719
     
-
 
Corporate securities
   
4,942,119
     
127,488
     
(32,992
)
   
5,036,615
     
2,297
 
Asset-backed securities
   
451,680
     
1,981
     
(1,579
)
   
452,082
     
-
 
Mortgage-backed securities
                                       
Commercial
   
298,660
     
8,598
     
(1,798
)
   
305,460
     
-
 
Agency residential
   
2,181,733
     
37,251
     
(10,026
)
   
2,208,958
     
-
 
Non-agency residential
   
1,347
     
47
     
(45
)
   
1,349
     
-
 
Foreign government securities
   
1,321,212
     
59,975
     
(33,148
)
   
1,348,039
     
-
 
Foreign corporate securities
   
2,968,082
     
117,506
     
(50,261
)
   
3,035,327
     
-
 
Total fixed maturity securities
 
$
13,213,596
   
$
394,403
   
$
(133,198
)
 
$
13,474,801
   
$
2,297
 
Equity securities
 
$
147,512
   
$
3,322
   
$
(13,318
)
 
$
137,516
   
$
-
 



   
At December 31, 2014
 
   
Amortized
   
Unrealized
   
Unrealized
   
Market
   
OTTI in AOCI
 
(Dollars in thousands)
 
Cost
   
Appreciation
   
Depreciation
   
Value
   
(a)
 
Fixed maturity securities
                   
U.S. Treasury securities and obligations of
                   
U.S. government agencies and corporations
 
$
221,052
   
$
10,290
   
$
(304
)
 
$
231,038
   
$
-
 
Obligations of U.S. states and political subdivisions
   
783,129
     
41,969
     
(626
)
   
824,472
     
-
 
Corporate securities
   
4,626,002
     
143,889
     
(62,906
)
   
4,706,985
     
(6,910
)
Asset-backed securities
   
340,761
     
1,691
     
(1,230
)
   
341,222
     
-
 
Mortgage-backed securities
                                       
Commercial
   
231,439
     
10,675
     
(429
)
   
241,685
     
-
 
Agency residential
   
2,157,182
     
37,555
     
(11,573
)
   
2,183,164
     
-
 
Non-agency residential
   
2,734
     
54
     
(57
)
   
2,731
     
-
 
Foreign government securities
   
1,488,144
     
71,177
     
(26,866
)
   
1,532,455
     
-
 
Foreign corporate securities
   
2,980,716
     
109,673
     
(53,074
)
   
3,037,315
     
-
 
Total fixed maturity securities
 
$
12,831,159
   
$
426,973
   
$
(157,065
)
 
$
13,101,067
   
$
(6,910
)
Equity securities
 
$
148,326
   
$
3,831
   
$
(11,947
)
 
$
140,210
   
$
-
 
 
(a)  Represents the amount of OTTI recognized in AOCI.  Amount includes unrealized gains and losses on impaired securities relating to changes in the value of such securities subsequent to the impairment measurement date.


6


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 June 30, 2015
   
At December 31, 2014
 
   
Amortized
   
Market
   
Amortized
   
Market
 
(Dollars in thousands)
 
Cost
   
Value
   
Cost
   
Value
 
Fixed maturity securities – available for sale:
               
    Due in one year or less
 
$
1,052,896
   
$
1,062,418
   
$
1,183,247
   
$
1,189,416
 
    Due after one year through five years
   
5,996,029
     
6,112,557
     
5,646,466
     
5,726,277
 
    Due after five years through ten years
   
2,376,397
     
2,419,621
     
2,270,073
     
2,313,672
 
    Due after ten years
   
854,854
     
912,356
     
999,257
     
1,102,900
 
Asset-backed securities
   
451,680
     
452,082
     
340,761
     
341,222
 
Mortgage-backed securities:
                               
Commercial
   
298,660
     
305,460
     
231,439
     
241,685
 
Agency residential
   
2,181,733
     
2,208,958
     
2,157,182
     
2,183,164
 
Non-agency residential
   
1,347
     
1,349
     
2,734
     
2,731
 
Total fixed maturity securities
 
$
13,213,596
   
$
13,474,801
   
$
12,831,159
   
$
13,101,067
 


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
   
Six Months Ended
 
   
June 30,
   
June 30,
 
(Dollars in thousands)
 
2015
   
2014
   
2015
   
2014
 
Increase (decrease) during the period between the market value and cost
               
of investments carried at market value, and deferred taxes thereon:
               
Fixed maturity securities
 
$
(144,172
)
 
$
93,403
   
$
(17,910
)
 
$
157,869
 
Fixed maturity securities, other-than-temporary impairment
   
(477
)
   
5
     
9,207
     
81
 
Equity securities
   
(430
)
   
4,531
     
(1,880
)
   
6,614
 
Change in unrealized appreciation (depreciation), pre-tax
   
(145,079
)
   
97,939
     
(10,583
)
   
164,564
 
Deferred tax benefit (expense)
   
21,344
     
(9,849
)
   
(4,356
)
   
(21,129
)
Deferred tax benefit (expense), other-than-temporary impairment
   
1
     
-
     
(3,407
)
   
-
 
Change in unrealized appreciation (depreciation),
                               
net of deferred taxes, included in shareholders' equity
 
$
(123,734
)
 
$
88,090
   
$
(18,346
)
 
$
143,435
 

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.

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.

7


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 June 30, 2015 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
 
$
25,004
   
$
(335
)
 
$
1,969
   
$
(129
)
 
$
26,973
   
$
(464
)
Obligations of U.S. states and political subdivisions
   
97,850
     
(2,141
)
   
17,686
     
(744
)
   
115,536
     
(2,885
)
Corporate securities
   
1,407,353
     
(24,960
)
   
282,817
     
(8,032
)
   
1,690,170
     
(32,992
)
Asset-backed securities
   
160,736
     
(1,565
)
   
4,299
     
(14
)
   
165,035
     
(1,579
)
Mortgage-backed securities
                                               
Commercial
   
133,162
     
(1,798
)
   
-
     
-
     
133,162
     
(1,798
)
Agency residential
   
419,093
     
(2,812
)
   
417,728
     
(7,214
)
   
836,821
     
(10,026
)
Non-agency residential
   
204
     
(2
)
   
51
     
(43
)
   
255
     
(45
)
Foreign government securities
   
337,577
     
(20,816
)
   
98,995
     
(12,332
)
   
436,572
     
(33,148
)
Foreign corporate securities
   
756,739
     
(38,986
)
   
157,352
     
(11,275
)
   
914,091
     
(50,261
)
Total fixed maturity securities
 
$
3,337,718
   
$
(93,415
)
 
$
980,897
   
$
(39,783
)
 
$
4,318,615
   
$
(133,198
)
Equity securities
   
55,275
     
(5,071
)
   
72,090
     
(8,247
)
   
127,365
     
(13,318
)
Total
 
$
3,392,993
   
$
(98,486
)
 
$
1,052,987
   
$
(48,030
)
 
$
4,445,980
   
$
(146,516
)

 
   
Duration of Unrealized Loss at June 30, 2015 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
 
$
87,985
   
$
(7,088
)
 
$
49,702
   
$
(9,253
)
 
$
137,687
   
$
(16,341
)
Due in one year through five years
   
1,476,198
     
(45,857
)
   
332,321
     
(11,722
)
   
1,808,519
     
(57,579
)
Due in five years through ten years
   
887,119
     
(28,977
)
   
136,078
     
(7,596
)
   
1,023,197
     
(36,573
)
Due after ten years
   
173,221
     
(5,316
)
   
40,718
     
(3,941
)
   
213,939
     
(9,257
)
Asset-backed securities
   
160,736
     
(1,565
)
   
4,299
     
(14
)
   
165,035
     
(1,579
)
Mortgage-backed securities
   
552,459
     
(4,612
)
   
417,779
     
(7,257
)
   
970,238
     
(11,869
)
Total fixed maturity securities
 
$
3,337,718
   
$
(93,415
)
 
$
980,897
   
$
(39,783
)
 
$
4,318,615
   
$
(133,198
)



8


The aggregate market value and gross unrealized losses related to investments in an unrealized loss position at June 30, 2015 were $4,445,980 thousand and $146,516 thousand, respectively.  The market value of securities for the single issuer whose securities comprised the largest unrealized loss position at June 30, 2015, did not exceed 0.5% 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 $93,415 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, as well as foreign government securities.  The majority of these unrealized losses are attributable to net unrealized foreign exchange losses, $64,859 thousand, as the U.S. dollar has strengthened against other currencies and unrealized losses in the energy sector, $20,351 thousand, as falling oil prices have disrupted the market values for this sector, particularly for oil exploration, production and servicing companies.  The $39,783 thousand of unrealized losses related to fixed maturity securities in an unrealized loss position for more than one year related primarily to foreign and domestic corporate securities, foreign government securities and agency residential mortgage-backed securities.  Of these unrealized losses, $33,964 thousand related to securities that were rated investment grade by at least one nationally recognized statistical rating organization.  There was no gross unrealized depreciation for mortgage-backed securities 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.

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, 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
 
$
13,187
   
$
(20
)
 
$
26,897
   
$
(284
)
 
$
40,084
   
$
(304
)
Obligations of U.S. states and political subdivisions
   
20,428
     
(242
)
   
18,199
     
(384
)
   
38,627
     
(626
)
Corporate securities
   
1,245,830
     
(55,388
)
   
362,320
     
(7,518
)
   
1,608,150
     
(62,906
)
Asset-backed securities
   
192,253
     
(1,230
)
   
-
     
-
     
192,253
     
(1,230
)
Mortgage-backed securities
                                               
Commercial
   
28,191
     
(123
)
   
9,777
     
(306
)
   
37,968
     
(429
)
Agency residential
   
141,807
     
(172
)
   
678,972
     
(11,401
)
   
820,779
     
(11,573
)
Non-agency residential
   
-
     
-
     
266
     
(57
)
   
266
     
(57
)
Foreign government securities
   
235,725
     
(15,415
)
   
139,200
     
(11,451
)
   
374,925
     
(26,866
)
Foreign corporate securities
   
567,905
     
(36,926
)
   
290,234
     
(16,148
)
   
858,139
     
(53,074
)
Total fixed maturity securities
 
$
2,445,326
   
$
(109,516
)
 
$
1,525,865
   
$
(47,549
)
 
$
3,971,191