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

group10q1q2015.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:
March 31, 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 May 1, 2015
Common Shares, $0.01 par value
   44,430,804

 
 

 
EVEREST RE GROUP, LTD

Table of Contents
Form 10-Q


Page
PART I

FINANCIAL INFORMATION

Item 1.
Financial Statements
 
     
 
Consolidated Balance Sheets March 31, 2015 (unaudited)
 
 
and December 31, 2014
1
     
 
Consolidated Statements of Operations and Comprehensive Income (Loss) for the
 
 
three months ended March 31, 2015 and 2014 (unaudited)
2
     
 
Consolidated Statements of Changes in Shareholders’ Equity for the three months
 
 
ended March 31, 2015 and 2014 (unaudited)
3
     
 
Consolidated Statements of Cash Flows for the three months ended
 
 
March 31, 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
27
     
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
51
     
Item 4.
Controls and Procedures
51
     

PART II

OTHER INFORMATION

Item 1.
Legal Proceedings
51
     
Item 1A.
Risk Factors
51
     
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
52
     
Item 3.
Defaults Upon Senior Securities
52
     
Item 4.
Mine Safety Disclosures
52
     
Item 5.
Other Information
52
     
Item 6.
Exhibits
53
     

 
 

 
EVEREST RE GROUP, LTD.
CONSOLIDATED BALANCE SHEETS
 
   
March 31,
   
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
  $ 13,415,871     $ 13,101,067  
    (amortized cost: 2015, $13,010,017; 2014, $12,831,159)
               
Fixed maturities - available for sale, at fair value
    363       1,509  
Equity securities - available for sale, at market value (cost: 2015, $151,044; 2014, $148,326)
    141,478       140,210  
Equity securities - available for sale, at fair value
    1,504,694       1,447,820  
Short-term investments
    1,706,684       1,705,932  
Other invested assets (cost: 2015, $626,799; 2014, $601,925)
    626,799       601,925  
Cash
    398,575       437,474  
       Total investments and cash
    17,794,464       17,435,937  
Accrued investment income
    106,788       111,075  
Premiums receivable
    1,485,095       1,397,983  
Reinsurance receivables
    700,009       670,854  
Funds held by reinsureds
    236,846       228,192  
Deferred acquisition costs
    373,160       398,408  
Prepaid reinsurance premiums
    135,042       154,177  
Income taxes
    159,445       184,762  
Other assets
    276,438       236,436  
TOTAL ASSETS
  $ 21,267,287     $ 20,817,824  
                 
LIABILITIES:
               
Reserve for losses and loss adjustment expenses
  $ 9,633,982     $ 9,720,813  
Future policy benefit reserve
    59,693       59,820  
Unearned premium reserve
    1,675,413       1,728,745  
Funds held under reinsurance treaties
    78,423       3,932  
Commission reserves
    93,337       87,990  
Other net payable to reinsurers
    200,262       139,841  
Losses in course of payment
    228,079       157,527  
4.868% Senior notes due 6/1/2044
    400,000       400,000  
6.6% Long term notes due 5/1/2067
    238,365       238,364  
Accrued interest on debt and borrowings
    12,341       3,537  
Equity index put option liability
    47,264       47,022  
Unsettled securities payable
    76,074       41,092  
Other liabilities
    253,829       316,469  
       Total liabilities
    12,997,062       12,945,152  
                 
NONCONTROLLING INTERESTS:
               
Redeemable noncontrolling interests - Mt. Logan Re
    603,595       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) 68,496
               
    and (2014) 68,336 outstanding before treasury shares
    685       683  
Additional paid-in capital
    2,073,977       2,068,807  
Accumulated other comprehensive income (loss), net of deferred income tax expense
               
    (benefit) of $32,751 at 2015 and $20,715 at 2014
    52,969       48,317  
Treasury shares, at cost; 24,085 shares (2015) and 23,650 shares (2014)
    (2,560,937 )     (2,485,897 )
Retained earnings
    8,099,936       7,819,210  
       Total shareholders' equity attributable to Everest Re Group
    7,666,630       7,451,120  
TOTAL LIABILITIES, NONCONTROLLING INTERESTS AND SHAREHOLDERS' EQUITY
  $ 21,267,287     $ 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
 
   
March 31,
 
(Dollars in thousands, except per share amounts)
 
2015
   
2014
 
   
(unaudited)
 
REVENUES:
           
Premiums earned
  $ 1,307,077     $ 1,144,490  
Net investment income
    122,583       123,157  
Net realized capital gains (losses):
               
Other-than-temporary impairments on fixed maturity securities
    (26,018 )     -  
Other-than-temporary impairments on fixed maturity securities
               
transferred to other comprehensive income (loss)
    -       -  
Other net realized capital gains (losses)
    15,513       21,126  
Total net realized capital gains (losses)
    (10,505 )     21,126  
Net derivative gain (loss)
    (242 )     (1,661 )
Other income (expense)
    46,073       (3,296 )
Total revenues
    1,464,986       1,283,816  
                 
CLAIMS AND EXPENSES:
               
Incurred losses and loss adjustment expenses
    722,465       619,409  
Commission, brokerage, taxes and fees
    287,167       246,002  
Other underwriting expenses
    60,664       50,638  
Corporate expenses
    5,463       4,945  
Interest, fees and bond issue cost amortization expense
    8,990       7,568  
Total claims and expenses
    1,084,749       928,562  
                 
INCOME (LOSS) BEFORE TAXES
    380,237       355,254  
Income tax expense (benefit)
    41,167       53,232  
                 
NET INCOME (LOSS)
  $ 339,070     $ 302,022  
Net (income) loss attributable to noncontrolling interests
    (16,092 )     (8,089 )
NET INCOME (LOSS) ATTRIBUTABLE TO EVEREST RE GROUP
  $ 322,978     $ 293,933  
                 
Other comprehensive income (loss), net of tax:
               
Unrealized appreciation (depreciation) ("URA(D)") on securities arising during the period
    83,205       53,471  
Reclassification adjustment for realized losses (gains) included in net income (loss)
    22,183       1,874  
Total URA(D) on securities arising during the period
    105,388       55,345  
                 
Foreign currency translation adjustments
    (102,340 )     (2,637 )
                 
Benefit plan actuarial net gain (loss) for the period
    -       -  
Reclassification adjustment for amortization of net (gain) loss included in net income (loss)
    1,604       771  
Total benefit plan net gain (loss) for the period
    1,604       771  
Total other comprehensive income (loss), net of tax
    4,652       53,479  
Other comprehensive (income) loss attributable to noncontrolling interests
    -       -  
Total other comprehensive income (loss), net of tax attributable to Everest Re Group
    4,652       53,479  
                 
COMPREHENSIVE INCOME (LOSS)
  $ 327,630     $ 347,412  
                 
EARNINGS PER COMMON SHARE ATTRIBUTABLE TO EVEREST RE GROUP:
               
Basic
  $ 7.26     $ 6.26  
Diluted
    7.19       6.21  
Dividends declared
    0.95       0.75  
                 
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
 
   
March 31,
 
(Dollars in thousands, except share and dividends per share amounts)
 
2015
   
2014
 
   
(unaudited)
 
COMMON SHARES (shares outstanding):
           
Balance, beginning of period
    44,685,637       47,543,132  
Issued during the period, net
    159,661       206,071  
Treasury shares acquired
    (434,878 )     (1,692,164 )
Balance, end of period
    44,410,420       46,057,039  
                 
COMMON SHARES (par value):
               
Balance, beginning of period
  $ 683     $ 680  
Issued during the period, net
    2       2  
Balance, end of period
    685       682  
                 
ADDITIONAL PAID-IN CAPITAL:
               
Balance, beginning of period
    2,068,807       2,029,774  
Share-based compensation plans
    5,170       6,546  
Balance, end of period
    2,073,977       2,036,320  
                 
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS),
               
NET OF DEFERRED INCOME TAXES:
               
Balance, beginning of period
    48,317       157,728  
Net increase (decrease) during the period
    4,652       53,479  
Balance, end of period
    52,969       211,207  
                 
RETAINED EARNINGS:
               
Balance, beginning of period
    7,819,210       6,765,967  
Net income (loss) attributable to Everest Re Group
    322,978       293,933  
Dividends declared ($0.95 per share in 2015 and $0.75 per share in 2014)
    (42,252 )     (34,742 )
Balance, end of period
    8,099,936       7,025,158  
                 
TREASURY SHARES AT COST:
               
Balance, beginning of period
    (2,485,897 )     (1,985,873 )
Purchase of treasury shares
    (75,040 )     (249,983 )
Balance, end of period
    (2,560,937 )     (2,235,856 )
                 
TOTAL SHAREHOLDERS' EQUITY, END OF PERIOD
  $ 7,666,630     $ 7,037,511  
                 
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
 
   
March 31,
 
(Dollars in thousands)
 
2015
   
2014
 
   
(unaudited)
 
CASH FLOWS FROM OPERATING ACTIVITIES:
           
Net income (loss)
  $ 339,070     $ 302,022  
Adjustments to reconcile net income to net cash provided by operating activities:
               
Decrease (increase) in premiums receivable
    (98,195 )     25,533  
Decrease (increase) in funds held by reinsureds, net
    62,973       3,399  
Decrease (increase) in reinsurance receivables
    (84,665 )     (114,898 )
Decrease (increase) in income taxes
    14,214       34,417  
Decrease (increase) in prepaid reinsurance premiums
    12,144       2,359  
Increase (decrease) in reserve for losses and loss adjustment expenses
    55,334       (56,348 )
Increase (decrease) in future policy benefit reserve
    (127 )     (1,423 )
Increase (decrease) in unearned premiums
    (40,934 )     80,016  
Increase (decrease) in other net payable to reinsurers
    68,365       1,176  
Increase (decrease) in losses in course of payment
    71,568       107,003  
Change in equity adjustments in limited partnerships
    (6,762 )     2,313  
Distribution of limited partnership income
    8,600       8,600  
Change in other assets and liabilities, net
    24,542       (23,959 )
Non-cash compensation expense
    5,170       4,427  
Amortization of bond premium (accrual of bond discount)
    13,333       13,572  
Amortization of underwriting discount on senior notes
    1       14  
Net realized capital (gains) losses
    10,505       (21,126 )
Net cash provided by (used in) operating activities
    455,136       367,097  
                 
CASH FLOWS FROM INVESTING ACTIVITIES:
               
Proceeds from fixed maturities matured/called - available for sale, at market value
    594,807       490,745  
Proceeds from fixed maturities matured/called - available for sale, at fair value
    -       875  
Proceeds from fixed maturities sold - available for sale, at market value
    355,812       328,709  
Proceeds from fixed maturities sold - available for sale, at fair value
    1,236       20,763  
Proceeds from equity securities sold - available for sale, at market value
    83       534  
Proceeds from equity securities sold - available for sale, at fair value
    137,966       178,598  
Distributions from other invested assets
    10,797       17,077  
Cost of fixed maturities acquired - available for sale, at market value
    (1,370,458 )     (1,163,440 )
Cost of fixed maturities acquired - available for sale, at fair value
    -       (1,309 )
Cost of equity securities acquired - available for sale, at market value
    (4,464 )     (8,546 )
Cost of equity securities acquired - available for sale, at fair value
    (171,411 )     (92,329 )
Cost of other invested assets acquired
    (41,961 )     (4,961 )
Net change in short-term investments
    (7,567 )     (152,715 )
Net change in unsettled securities transactions
    (505 )     1,564  
Net cash provided by (used in) investing activities
    (495,665 )     (384,435 )
                 
CASH FLOWS FROM FINANCING ACTIVITIES:
               
Common shares issued during the period, net
    2       2,121  
Purchase of treasury shares
    (75,040 )     (249,983 )
Third party investment in redeemable noncontrolling interest
    156,848       70,700  
Dividends paid to shareholders
    (42,252 )     (34,742 )
Dividends paid on third party investment in redeemable noncontrolling interest
    (30,896 )     -  
Net cash provided by (used in) financing activities
    8,662       (211,904 )
                 
EFFECT OF EXCHANGE RATE CHANGES ON CASH
    (7,032 )     3,264  
                 
Net increase (decrease) in cash
    (38,899 )     (225,978 )
Cash, beginning of period
    437,474       611,382  
Cash, end of period
  $ 398,575     $ 385,404  
                 
SUPPLEMENTAL CASH FLOW INFORMATION:
               
Income taxes paid (recovered)
  $ 24,266     $ 16,260  
Interest paid
    132       174  
                 
The accompanying notes are an integral part of the consolidated financial statements.
               

 
4

 
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS (UNAUDITED)

For the Three Months Ended March 31, 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 months ended March 31, 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 months ended March 31, 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 March 31, 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
  $ 373,554     $ 19,474     $ (89 )   $ 392,939     $ -  
Obligations of U.S. states and political subdivisions
    750,671       39,085       (914 )     788,842       -  
Corporate securities
    4,763,380       187,765       (31,335 )     4,919,810       2,773  
Asset-backed securities
    414,435       2,992       (1,335 )     416,092       -  
Mortgage-backed securities
                                       
Commercial
    274,115       11,238       (424 )     284,929       -  
Agency residential
    2,196,325       48,489       (3,941 )     2,240,873       -  
Non-agency residential
    2,530       50       (57 )     2,523       -  
Foreign government securities
    1,357,620       82,506       (45,451 )     1,394,675       -  
Foreign corporate securities
    2,877,387       165,099       (67,298 )     2,975,188       -  
Total fixed maturity securities
  $ 13,010,017     $ 556,698     $ (150,844 )   $ 13,415,871     $ 2,773  
Equity securities
  $ 151,044     $ 3,822     $ (13,388 )   $ 141,478     $ -  

 
   
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 March 31, 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
  $ 1,083,697     $ 1,097,956     $ 1,183,247     $ 1,189,416  
    Due after one year through five years
    5,892,475       6,042,830       5,646,466       5,726,277  
    Due after five years through ten years
    2,221,028       2,303,349       2,270,073       2,313,672  
    Due after ten years
    925,412       1,027,319       999,257       1,102,900  
Asset-backed securities
    414,435       416,092       340,761       341,222  
Mortgage-backed securities:
                               
Commercial
    274,115       284,929       231,439       241,685  
Agency residential
    2,196,325       2,240,873       2,157,182       2,183,164  
Non-agency residential
    2,530       2,523       2,734       2,731  
Total fixed maturity securities
  $ 13,010,017     $ 13,415,871     $ 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
 
   
March 31,
 
(Dollars in thousands)
 
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
  $ 126,262     $ 64,466  
Fixed maturity securities, other-than-temporary impairment
    9,684       76  
Equity securities
    (1,450 )     2,083  
Change in unrealized appreciation (depreciation), pre-tax
    134,496       66,625  
Deferred tax benefit (expense)
    (25,700 )     (11,280 )
Deferred tax benefit (expense), other-than-temporary impairment
    (3,408 )     -  
Change in unrealized appreciation (depreciation),
               
net of deferred taxes, included in shareholders’ equity
  $ 105,388     $ 55,345  

 
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 March 31, 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
  $ 790     $ (7 )   $ 2,043     $ (82 )   $ 2,833     $ (89 )
Obligations of U.S. states and political subdivisions
    26,973       (579 )     18,171       (335 )     45,144       (914 )
Corporate securities
    488,670       (27,477 )     236,354       (3,858 )     725,024       (31,335 )
Asset-backed securities
    98,812       (1,330 )     608       (5 )     99,420       (1,335 )
Mortgage-backed securities
                                               
Commercial
    15,585       (259 )     9,911       (165 )     25,496       (424 )
Agency residential
    64,680       (503 )     440,500       (3,438 )     505,180       (3,941 )
Non-agency residential
    -       -       243       (57 )     243       (57 )
Foreign government securities
    259,268       (32,821 )     107,252       (12,630 )     366,520       (45,451 )
Foreign corporate securities
    424,380       (54,966 )     153,632       (12,332 )     578,012       (67,298 )
Total fixed maturity securities
  $ 1,379,158     $ (117,942 )   $ 968,714     $ (32,902 )   $ 2,347,872     $ (150,844 )
Equity securities
    50,526       (4,380 )     76,250       (9,008 )     126,776       (13,388 )
Total
  $ 1,429,684     $ (122,322 )   $ 1,044,964     $ (41,910 )   $ 2,474,648     $ (164,232 )

 
   
Duration of Unrealized Loss at March 31, 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
  $ 98,306     $ (13,754 )   $ 49,712     $ (8,753 )   $ 148,018     $ (22,507 )
Due in one year through five years
    626,834       (72,805 )     290,672       (10,553 )     917,506       (83,358 )
Due in five years through ten years
    424,515       (22,845 )     134,516       (7,421 )     559,031       (30,266 )
Due after ten years
    50,426       (6,446 )     42,552       (2,510 )     92,978       (8,956 )
Asset-backed securities
    98,812       (1,330 )     608       (5 )     99,420       (1,335 )
Mortgage-backed securities
    80,265       (762 )     450,654       (3,660 )     530,919       (4,422 )
Total fixed maturity securities
  $ 1,379,158     $ (117,942 )   $ 968,714     $ (32,902 )   $ 2,347,872     $ (150,844 )

 
8

 
The aggregate market value and gross unrealized losses related to investments in an unrealized loss position at March 31, 2015 were $2,474,648 thousand and $164,232 thousand, respectively.  The market value of securities for the single issuer whose securities comprised the largest unrealized loss position at March 31, 2015, did not exceed 0.2% 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 $117,942 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, $77,379 thousand, as the U.S. dollar has strengthened against other currencies and unrealized losses in the energy sector, $40,563 thousand, as falling oil prices have disrupted the market values for this sector, particularly for oil exploration, production and servicing companies.  The $32,902 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, $27,718 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 $15 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.

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     $ (157,065 )
Equity securities
    50,285       (4,068 )     73,994       (7,879 )     124,279       (11,947 )
Total
  $ 2,495,611     $ (113,584 )   $ 1,599,859     $ (55,428 )   $ 4,095,470     $ (169,012 )

 
9

 
 
   
Duration of Unrealized Loss at December 31, 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
  $ 98,021     $ (5,166 )   $ 80,002     $ (8,174 )   $ 178,023     $ (13,340 )
Due in one year through five years
    1,233,244       (68,124 )     518,613       (12,761 )     1,751,857       (80,885 )
Due in five years through ten years
    679,374       (28,529 )     187,717       (10,734 )     867,091       (39,263 )
Due after ten years
    72,436       (6,172 )     50,518       (4,116 )     122,954       (10,288 )
Asset-backed securities
    192,253       (1,230 )     -       -       192,253       (1,230 )
Mortgage-backed securities
    169,998       (295 )     689,015       (11,764 )     859,013       (12,059 )
Total fixed maturity securities
  $ 2,445,326     $ (109,516 )   $ 1,525,865     $ (47,549 )   $ 3,971,191     $ (157,065 )


The aggregate market value and gross unrealized losses related to investments in an unrealized loss position at December 31, 2014 were $4,095,470 thousand and $169,012 thousand, respectively.  The market value of securities for the single issuer whose securities comprised the largest unrealized loss position at December 31, 2014, did not exceed 0.2% 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 $109,516 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 unrealized losses in the energy sector, $58,891 thousand, as falling oil prices disrupted the market values for this sector, particularly for oil exploration, production and servicing companies during the fourth quarter of 2014 and unrealized foreign exchange losses, $34,687 thousand, as the U.S. dollar has strengthened against other currencies.  The $47,549 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, $42,884 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 $15 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 components of net investment income are presented in the table below for the periods indicated:
 
   
Three Months Ended
 
   
March 31,
 
(Dollars in thousands)
 
2015
   
2014
 
Fixed maturities
  $ 109,355     $ 116,253  
Equity securities
    11,678       11,459  
Short-term investments and cash
    247       330  
Other invested assets
               
Limited partnerships
    6,968       (2,258 )
Other
    625       2,021  
Gross investment income before adjustments
    128,873       127,805  
Funds held interest income (expense)
    2,876       3,017  
Future policy benefit reserve income (expense)
    (393 )     (303 )
Gross investment income
    131,356       130,519  
Investment expenses
    (8,773 )     (7,362 )
Net investment income
  $ 122,583     $ 123,157  


The Company records results from limited partnership investments on the equity method of accounting with changes in value reported through net investment income.  Due to the timing of receiving financial information from these partnerships, the results are generally reported on a one month or quarter lag.  If the Company determines there has been a significant decline in value of a limited partnership during this lag period, a loss will be recorded in the period in which the Company identifies the decline.

 
10

 
The Company had contractual commitments to invest up to an additional $364,068 thousand in limited partnerships at March 31, 2015.  These commitments will be funded when called in accordance with the partnership agreements, which have investment periods that expire, unless extended, through 2020.

The components of net realized capital gains (losses) are presented in the table below for the periods indicated:
 
   
Three Months Ended
 
   
March 31,
 
(Dollars in thousands)
 
2015
   
2014
 
Fixed maturity securities, market value:
           
Other-than-temporary impairments
  $ (26,018 )   $ -  
Gains (losses) from sales
    (8,024 )     (1,948 )
Fixed maturity securities, fair value:
               
Gains (losses) from sales
    28       940  
Gains (losses) from fair value adjustments
    62       -  
Equity securities, market value:
               
Gains (losses) from sales
    19       (488 )
Equity securities, fair value:
               
Gains (losses) from sales
    (150 )     (1,415 )
Gains (losses) from fair value adjustments
    23,578       24,035  
Short-term investments gain (loss)
    -       2  
Total net realized capital gains (losses)
  $ (10,505 )   $ 21,126  


The Company recorded as net realized capital gains (losses) in the consolidated statements of operations and comprehensive income (loss) both fair value re-measurements and write-downs in the value of securities deemed to be impaired on an other-than-temporary basis as displayed in the table above.  The Company had no other-than-temporary impaired securities where the impairment had both a credit and non-credit component.

The proceeds and split between gross gains and losses, from sales of fixed maturity and equity securities, are presented in the table below for the periods indicated:
 
   
Three Months Ended
 
   
March 31,
 
(Dollars in thousands)
 
2015
   
2014
 
Proceeds from sales of fixed maturity securities
  $ 357,048     $ 349,472  
Gross gains from sales
    8,835       7,936  
Gross losses from sales
    (16,831 )     (8,944 )
                 
Proceeds from sales of equity securities
  $ 138,049     $ 179,132  
Gross gains from sales
    5,206       6,620  
Gross losses from sales
    (5,337 )     (8,523 )


4.   DERIVATIVES

The Company sold seven equity index put option contracts, based on two indices, in 2001 and 2005, which remain outstanding.  The Company sold these equity index put options as insurance products with the intent of achieving a profit.  These equity index put option contracts meet the definition of a derivative under FASB guidance and the Company’s position in these equity index put option contracts is unhedged.  Accordingly, these equity index put option contracts are carried at fair value in the consolidated balance sheets with changes in fair value recorded in the consolidated statements of operations and comprehensive income (loss).

 
11

 
The Company sold six equity index put option contracts, based on the Standard & Poor’s 500 (“S&P 500”) index, for total consideration, net of commissions, of $22,530 thousand.  At March 31, 2015, fair value for these equity index put option contracts was $39,250 thousand.  Based on historical index volatilities and trends and the March 31, 2015 S&P 500 index value, the Company estimates the probability that each equity index put option contract of the S&P 500 index falling below the strike price on the exercise date to be less than 19%.  The theoretical maximum payouts under these six equity index put option contracts would occur if on each of the exercise dates the S&P 500 index value were zero.  At March 31, 2015, the present value of these theoretical maximum payouts using a 3% discount factor was $423,085 thousand.  Conversely, if the contracts had all expired on March 31, 2015, with the S&P index at $2,067.89, there would have been no settlement amount.

The Company sold one equity index put option contract based on the FTSE 100 index for total consideration, net of commissions, of $6,706 thousand.  At March 31, 2015, fair value for this equity index put option contract was $8,013 thousand.  Based on historical index volatilities and trends and the March 31, 2015 FTSE 100 index value, the Company estimates the probability that the equity index put option contract of the FTSE 100 index will fall below the strike price on the exercise date to be less than 39%.  The theoretical maximum payout under the equity index put option contract would occur if on the exercise date the FTSE 100 index value was zero.  At March 31, 2015, the present value of the theoretical maximum payout using a 3% discount factor and current exchange rate was $41,427 thousand.  Conversely, if the contract had expired on March 31, 2015, with the FTSE index at ₤6,773.00, there would have been no settlement amount.

The fair value of the equity index put options can be found in the Company’s consolidated balance sheets as follows:
 
(Dollars in thousands)
               
Derivatives not designated as
 
Location of fair value
 
At
   
At
hedging instruments
 
in balance sheets
 
March 31, 2015
   
December 31, 2014
                 
Equity index put option contracts
 
Equity index put option liability
  $ 47,264     $ 47,022  
Total
      $ 47,264     $ 47,022  


The change in fair value of the equity index put option contracts can be found in the Company’s statement of operations and comprehensive income (loss) as follows:
 
(Dollars in thousands)
     
For the Three Months Ended
Derivatives not designated as
 
Location of gain (loss) in statements of
 
March 31,
hedging instruments
 
operations and comprehensive income (loss)
 
2015
 
2014
                 
Equity index put option contracts
 
Net derivative gain (loss)
  $ (242 )   $ (1,661 )
Total
      $ (242 )   $ (1,661 )


5.   FAIR VALUE

The Company’s fixed maturity and equity securities are primarily managed by third party investment asset managers.  The investment asset managers obtain prices from nationally recognized pricing services.   These services seek to utilize market data and observations in their evaluation process.  They use pricing applications that vary by asset class and incorporate available market information and when fixed maturity securities do not trade on a daily basis the services will apply available information through processes such as benchmark curves, benchmarking of like securities, sector groupings and matrix pricing.  In addition, they use model processes, such as the Option Adjusted Spread model to develop prepayment and interest rate scenarios for securities that have prepayment features.

In limited instances where prices are not provided by pricing services or in rare instances when a manager may not agree with the pricing service, price quotes on a non-binding basis are obtained from investment brokers.  The investment asset managers do not make any changes to prices received from either the pricing services or the investment brokers.  In addition, the investment asset managers have procedures in place to review the reasonableness of the prices from the service providers and may request verification of the
 
 
12

 
prices.  In addition, the Company continually performs analytical reviews of price changes and tests the prices on a random basis to an independent pricing source.  No material variances were noted during these price validation procedures.  In limited situations, where financial markets are inactive or illiquid, the Company may use its own assumptions about future cash flows and risk-adjusted discount rates to determine fair value.  Due to the unavailability of prices for one private placement security, the Company valued the security at $6,125 thousand at March 31, 2015 and made no such adjustments at December 31, 2014.

The Company internally manages a small public equity portfolio which had a fair value at March 31, 2015 and December 31, 2014 of $208,846 thousand and $196,980 thousand, respectively, and all prices were obtained from publically published sources.

Equity securities in U.S. denominated currency are categorized as Level 1, Quoted Prices in Active Markets for Identical Assets, since the securities are actively traded on an exchange and prices are based on quoted prices from the exchange.  Equity securities traded on foreign exchanges are categorized as Level 2 due to potential foreign exchange adjustments to fair or market value.

Fixed maturity securities are generally categorized as Level 2, Significant Other Observable Inputs, since a particular security may not have traded but the pricing services are able to use valuation models with observable market inputs such as interest rate yield curves and prices for similar fixed maturity securities in terms of issuer, maturity and seniority.  Valuations that are derived from techniques in which one or more of the significant inputs are unobservable (including assumptions about risk) are categorized as Level 3, Significant Unobservable Inputs.  These securities include broker priced securities and the Company’s equity index put option contracts.

At March 31, 2015 and December 31, 2014, all Level 3 fixed maturity securities, except the one security priced by the Company, were priced using single non-binding broker quotes since prices for these securities were not provided by normal pricing service companies.  The single broker quotes are provided by market makers or broker-dealers who are recognized as market participants in the markets in which they are providing the quotes.  The prices received from brokers are reviewed for reasonableness by the third party asset managers and the Company.

The Company sold seven equity index put option contracts which meet the definition of a derivative.  The Company’s position in these contracts is unhedged.  The Company records the change in fair value of equity index put option contracts in its consolidated statements of operations and comprehensive income (loss).

The fair value of the equity put option contract is calculated using an industry accepted option pricing model, Black-Scholes.  The inputs and assumptions for the model are updated on a quarterly basis.

 
13

 
The following table presents the fair value measurement levels for all assets and liabilities, which the Company has recorded at fair value (fair and market value) as of the periods indicated:
 
         
Fair Value Measurement Using:
 
         
Quoted Prices
             
         
in Active
   
Significant
       
         
Markets for
   
Other
   
Significant
 
         
Identical
   
Observable
   
Unobservable
 
         
Assets
   
Inputs
   
Inputs
 
(Dollars in thousands)
 
March 31, 2015
   
(Level 1)
   
(Level 2)
   
(Level 3)
 
Assets:
                       
Fixed maturities, market value
                       
U.S. Treasury securities and obligations of
                       
U.S. government agencies and corporations
  $ 392,939     $ -     $ 392,939     $ -  
Obligations of U.S. States and political subdivisions
    788,842       -       788,842       -  
Corporate securities
    4,919,810       -       4,917,157       2,653  
Asset-backed securities
    416,092       -       416,092       -  
Mortgage-backed securities
                               
Commercial
    284,929       -       284,929          
Agency residential
    2,240,873       -       2,240,873       -  
Non-agency residential
    2,523       -       2,523       -  
Foreign government securities
    1,394,675       -       1,394,675       -  
Foreign corporate securities
    2,975,188       -       2,969,063       6,125  
Total fixed maturities, market value
    13,415,871       -       13,407,093       8,778  
                                 
Fixed maturities, fair value
    363       -       363       -  
Equity securities, market value
    141,478       126,792       14,686       -  
Equity securities, fair value
    1,504,694       1,391,189       113,505       -  
                                 
Liabilities:
                               
Equity index put option contracts
  $ 47,264     $ -     $ -     $ 47,264  

There were no transfers between Level 1 and Level 2 for the three months ended March 31, 2015.

 
14

 
The following table presents the fair value measurement levels for all assets and liabilities, which the Company has recorded at fair value (fair and market value) as of the periods indicated:


         
Fair Value Measurement Using:
 
         
Quoted Prices
             
         
in Active
   
Significant
       
         
Markets for
   
Other
   
Significant
 
         
Identical
   
Observable
   
Unobservable
 
         
Assets
   
Inputs
   
Inputs
 
(Dollars in thousands)
 
December 31, 2014
   
(Level 1)
   
(Level 2)
   
(Level 3)
 
Assets:
                       
Fixed maturities, market value
                       
U.S. Treasury securities and obligations of
                       
U.S. government agencies and corporations
  $ 231,038     $ -     $ 231,038     $ -  
Obligations of U.S. States and political subdivisions
    824,472       -       824,472       -  
Corporate securities
    4,706,985       -       4,706,985       -  
Asset-backed securities
    341,222       -       341,222       -  
Mortgage-backed securities
                               
Commercial
    241,685       -       233,088       8,597  
Agency residential
    2,183,164       -       2,183,164       -  
Non-agency residential
    2,731       -       2,731       -  
Foreign government securities