EVEREST GROUP, LTD. - Quarter Report: 2015 March (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:
March 31, 2015
|
Commission file number:
1-15731
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EVEREST RE GROUP, LTD.
(Exact name of registrant as specified in its charter)
Bermuda
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98-0365432
|
|
(State or other jurisdiction of
incorporation or organization)
|
(I.R.S. Employer
Identification No.)
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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
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X
|
NO
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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
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X
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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
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X
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Accelerated filer
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||
Non-accelerated filer
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Smaller reporting company
|
|||
(Do not check if smaller reporting company)
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
YES
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NO
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X
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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
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At May 1, 2015
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Common Shares, $0.01 par value
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44,430,804 |
Form 10-Q
Page
PART I
FINANCIAL INFORMATION
Item 1.
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Financial Statements
|
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Consolidated Balance Sheets March 31, 2015 (unaudited)
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||
and December 31, 2014
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1
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Consolidated Statements of Operations and Comprehensive Income (Loss) for the
|
||
three months ended March 31, 2015 and 2014 (unaudited)
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2
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Consolidated Statements of Changes in Shareholders’ Equity for the three months
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||
ended March 31, 2015 and 2014 (unaudited)
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3
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Consolidated Statements of Cash Flows for the three months ended
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||
March 31, 2015 and 2014 (unaudited)
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4
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Notes to Consolidated Interim Financial Statements (unaudited)
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5
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Item 2.
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Management’s Discussion and Analysis of Financial Condition and
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Results of Operation
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27
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Item 3.
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Quantitative and Qualitative Disclosures About Market Risk
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51
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Item 4.
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Controls and Procedures
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51
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PART II
OTHER INFORMATION
Item 1.
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Legal Proceedings
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51
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Item 1A.
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Risk Factors
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51
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Item 2.
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Unregistered Sales of Equity Securities and Use of Proceeds
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52
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Item 3.
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Defaults Upon Senior Securities
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52
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Item 4.
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Mine Safety Disclosures
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52
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Item 5.
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Other Information
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52
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Item 6.
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Exhibits
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53
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EVEREST RE GROUP, LTD.
March 31,
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December 31,
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|||||||
(Dollars and share amounts in thousands, except par value per share)
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2015
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2014
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||||||
(unaudited)
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||||||||
ASSETS:
|
||||||||
Fixed maturities - available for sale, at market value
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$ | 13,415,871 | $ | 13,101,067 | ||||
(amortized cost: 2015, $13,010,017; 2014, $12,831,159)
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||||||||
Fixed maturities - available for sale, at fair value
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363 | 1,509 | ||||||
Equity securities - available for sale, at market value (cost: 2015, $151,044; 2014, $148,326)
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141,478 | 140,210 | ||||||
Equity securities - available for sale, at fair value
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1,504,694 | 1,447,820 | ||||||
Short-term investments
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1,706,684 | 1,705,932 | ||||||
Other invested assets (cost: 2015, $626,799; 2014, $601,925)
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626,799 | 601,925 | ||||||
Cash
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398,575 | 437,474 | ||||||
Total investments and cash
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17,794,464 | 17,435,937 | ||||||
Accrued investment income
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106,788 | 111,075 | ||||||
Premiums receivable
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1,485,095 | 1,397,983 | ||||||
Reinsurance receivables
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700,009 | 670,854 | ||||||
Funds held by reinsureds
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236,846 | 228,192 | ||||||
Deferred acquisition costs
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373,160 | 398,408 | ||||||
Prepaid reinsurance premiums
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135,042 | 154,177 | ||||||
Income taxes
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159,445 | 184,762 | ||||||
Other assets
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276,438 | 236,436 | ||||||
TOTAL ASSETS
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$ | 21,267,287 | $ | 20,817,824 | ||||
LIABILITIES:
|
||||||||
Reserve for losses and loss adjustment expenses
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$ | 9,633,982 | $ | 9,720,813 | ||||
Future policy benefit reserve
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59,693 | 59,820 | ||||||
Unearned premium reserve
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1,675,413 | 1,728,745 | ||||||
Funds held under reinsurance treaties
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78,423 | 3,932 | ||||||
Commission reserves
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93,337 | 87,990 | ||||||
Other net payable to reinsurers
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200,262 | 139,841 | ||||||
Losses in course of payment
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228,079 | 157,527 | ||||||
4.868% Senior notes due 6/1/2044
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400,000 | 400,000 | ||||||
6.6% Long term notes due 5/1/2067
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238,365 | 238,364 | ||||||
Accrued interest on debt and borrowings
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12,341 | 3,537 | ||||||
Equity index put option liability
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47,264 | 47,022 | ||||||
Unsettled securities payable
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76,074 | 41,092 | ||||||
Other liabilities
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253,829 | 316,469 | ||||||
Total liabilities
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12,997,062 | 12,945,152 | ||||||
NONCONTROLLING INTERESTS:
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||||||||
Redeemable noncontrolling interests - Mt. Logan Re
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603,595 | 421,552 | ||||||
Commitments and contingencies (Note 9)
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||||||||
SHAREHOLDERS' EQUITY:
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||||||||
Preferred shares, par value: $0.01; 50,000 shares authorized;
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||||||||
no shares issued and outstanding
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- | - | ||||||
Common shares, par value: $0.01; 200,000 shares authorized; (2015) 68,496
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||||||||
and (2014) 68,336 outstanding before treasury shares
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685 | 683 | ||||||
Additional paid-in capital
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2,073,977 | 2,068,807 | ||||||
Accumulated other comprehensive income (loss), net of deferred income tax expense
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||||||||
(benefit) of $32,751 at 2015 and $20,715 at 2014
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52,969 | 48,317 | ||||||
Treasury shares, at cost; 24,085 shares (2015) and 23,650 shares (2014)
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(2,560,937 | ) | (2,485,897 | ) | ||||
Retained earnings
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8,099,936 | 7,819,210 | ||||||
Total shareholders' equity attributable to Everest Re Group
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7,666,630 | 7,451,120 | ||||||
TOTAL LIABILITIES, NONCONTROLLING INTERESTS AND SHAREHOLDERS' EQUITY
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$ | 21,267,287 | $ | 20,817,824 | ||||
The accompanying notes are an integral part of the consolidated financial statements.
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1
AND COMPREHENSIVE INCOME (LOSS)
Three Months Ended
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||||||||
March 31,
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||||||||
(Dollars in thousands, except per share amounts)
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2015
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2014
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||||||
(unaudited)
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||||||||
REVENUES:
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||||||||
Premiums earned
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$ | 1,307,077 | $ | 1,144,490 | ||||
Net investment income
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122,583 | 123,157 | ||||||
Net realized capital gains (losses):
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||||||||
Other-than-temporary impairments on fixed maturity securities
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(26,018 | ) | - | |||||
Other-than-temporary impairments on fixed maturity securities
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||||||||
transferred to other comprehensive income (loss)
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- | - | ||||||
Other net realized capital gains (losses)
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15,513 | 21,126 | ||||||
Total net realized capital gains (losses)
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(10,505 | ) | 21,126 | |||||
Net derivative gain (loss)
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(242 | ) | (1,661 | ) | ||||
Other income (expense)
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46,073 | (3,296 | ) | |||||
Total revenues
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1,464,986 | 1,283,816 | ||||||
CLAIMS AND EXPENSES:
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||||||||
Incurred losses and loss adjustment expenses
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722,465 | 619,409 | ||||||
Commission, brokerage, taxes and fees
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287,167 | 246,002 | ||||||
Other underwriting expenses
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60,664 | 50,638 | ||||||
Corporate expenses
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5,463 | 4,945 | ||||||
Interest, fees and bond issue cost amortization expense
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8,990 | 7,568 | ||||||
Total claims and expenses
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1,084,749 | 928,562 | ||||||
INCOME (LOSS) BEFORE TAXES
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380,237 | 355,254 | ||||||
Income tax expense (benefit)
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41,167 | 53,232 | ||||||
NET INCOME (LOSS)
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$ | 339,070 | $ | 302,022 | ||||
Net (income) loss attributable to noncontrolling interests
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(16,092 | ) | (8,089 | ) | ||||
NET INCOME (LOSS) ATTRIBUTABLE TO EVEREST RE GROUP
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$ | 322,978 | $ | 293,933 | ||||
Other comprehensive income (loss), net of tax:
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||||||||
Unrealized appreciation (depreciation) ("URA(D)") on securities arising during the period
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83,205 | 53,471 | ||||||
Reclassification adjustment for realized losses (gains) included in net income (loss)
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22,183 | 1,874 | ||||||
Total URA(D) on securities arising during the period
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105,388 | 55,345 | ||||||
Foreign currency translation adjustments
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(102,340 | ) | (2,637 | ) | ||||
Benefit plan actuarial net gain (loss) for the period
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- | - | ||||||
Reclassification adjustment for amortization of net (gain) loss included in net income (loss)
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1,604 | 771 | ||||||
Total benefit plan net gain (loss) for the period
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1,604 | 771 | ||||||
Total other comprehensive income (loss), net of tax
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4,652 | 53,479 | ||||||
Other comprehensive (income) loss attributable to noncontrolling interests
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- | - | ||||||
Total other comprehensive income (loss), net of tax attributable to Everest Re Group
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4,652 | 53,479 | ||||||
COMPREHENSIVE INCOME (LOSS)
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$ | 327,630 | $ | 347,412 | ||||
EARNINGS PER COMMON SHARE ATTRIBUTABLE TO EVEREST RE GROUP:
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||||||||
Basic
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$ | 7.26 | $ | 6.26 | ||||
Diluted
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7.19 | 6.21 | ||||||
Dividends declared
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0.95 | 0.75 | ||||||
The accompanying notes are an integral part of the consolidated financial statements.
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2
CHANGES IN SHAREHOLDERS’ EQUITY
Three Months Ended
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||||||||
March 31,
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||||||||
(Dollars in thousands, except share and dividends per share amounts)
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2015
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2014
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||||||
(unaudited)
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||||||||
COMMON SHARES (shares outstanding):
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||||||||
Balance, beginning of period
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44,685,637 | 47,543,132 | ||||||
Issued during the period, net
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159,661 | 206,071 | ||||||
Treasury shares acquired
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(434,878 | ) | (1,692,164 | ) | ||||
Balance, end of period
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44,410,420 | 46,057,039 | ||||||
COMMON SHARES (par value):
|
||||||||
Balance, beginning of period
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$ | 683 | $ | 680 | ||||
Issued during the period, net
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2 | 2 | ||||||
Balance, end of period
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685 | 682 | ||||||
ADDITIONAL PAID-IN CAPITAL:
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||||||||
Balance, beginning of period
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2,068,807 | 2,029,774 | ||||||
Share-based compensation plans
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5,170 | 6,546 | ||||||
Balance, end of period
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2,073,977 | 2,036,320 | ||||||
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS),
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||||||||
NET OF DEFERRED INCOME TAXES:
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||||||||
Balance, beginning of period
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48,317 | 157,728 | ||||||
Net increase (decrease) during the period
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4,652 | 53,479 | ||||||
Balance, end of period
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52,969 | 211,207 | ||||||
RETAINED EARNINGS:
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||||||||
Balance, beginning of period
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7,819,210 | 6,765,967 | ||||||
Net income (loss) attributable to Everest Re Group
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322,978 | 293,933 | ||||||
Dividends declared ($0.95 per share in 2015 and $0.75 per share in 2014)
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(42,252 | ) | (34,742 | ) | ||||
Balance, end of period
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8,099,936 | 7,025,158 | ||||||
TREASURY SHARES AT COST:
|
||||||||
Balance, beginning of period
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(2,485,897 | ) | (1,985,873 | ) | ||||
Purchase of treasury shares
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(75,040 | ) | (249,983 | ) | ||||
Balance, end of period
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(2,560,937 | ) | (2,235,856 | ) | ||||
TOTAL SHAREHOLDERS' EQUITY, END OF PERIOD
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$ | 7,666,630 | $ | 7,037,511 | ||||
The accompanying notes are an integral part of the consolidated financial statements.
|
3
Three Months Ended
|
||||||||
March 31,
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||||||||
(Dollars in thousands)
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2015
|
2014
|
||||||
(unaudited)
|
||||||||
CASH FLOWS FROM OPERATING ACTIVITIES:
|
||||||||
Net income (loss)
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$ | 339,070 | $ | 302,022 | ||||
Adjustments to reconcile net income to net cash provided by operating activities:
|
||||||||
Decrease (increase) in premiums receivable
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(98,195 | ) | 25,533 | |||||
Decrease (increase) in funds held by reinsureds, net
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62,973 | 3,399 | ||||||
Decrease (increase) in reinsurance receivables
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(84,665 | ) | (114,898 | ) | ||||
Decrease (increase) in income taxes
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14,214 | 34,417 | ||||||
Decrease (increase) in prepaid reinsurance premiums
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12,144 | 2,359 | ||||||
Increase (decrease) in reserve for losses and loss adjustment expenses
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55,334 | (56,348 | ) | |||||
Increase (decrease) in future policy benefit reserve
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(127 | ) | (1,423 | ) | ||||
Increase (decrease) in unearned premiums
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(40,934 | ) | 80,016 | |||||
Increase (decrease) in other net payable to reinsurers
|
68,365 | 1,176 | ||||||
Increase (decrease) in losses in course of payment
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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
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.
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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.
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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
|