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
|
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.
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
|