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EVEREST GROUP, LTD. - Quarter Report: 2016 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, 2016
  
 
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.)
Seon Place – 4th Floor
141 Front Street
PO Box HM 845
Hamilton HM 19, 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, 2016
Common Shares, $0.01 par value
  
42,339,036

 
EVEREST RE GROUP, LTD

Table of Contents
Form 10-Q


Page
PART I

FINANCIAL INFORMATION

Item 1.
Financial Statements
  
     
 
Consolidated Balance Sheets March 31, 2016 (unaudited)
  
 
and December 31, 2015 (unaudited)
1
     
 
Consolidated Statements of Operations and Comprehensive Income (Loss) for the
  
 
three months ended March 31, 2016 and 2015 (unaudited)
2
     
 
Consolidated Statements of Changes in Shareholders' Equity for the three
  
 
months ended March 31, 2016 and 2015 (unaudited)
3
     
 
Consolidated Statements of Cash Flows for the three months ended
  
 
March 31, 2016 and 2015 (unaudited)
4
     
 
Notes to Consolidated Interim Financial Statements (unaudited)
5
     
Item 2.
Management's Discussion and Analysis of Financial Condition and
  
 
Results of Operation
31
     
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
53
     
Item 4.
Controls and Procedures
53
     

PART II

OTHER INFORMATION

Item 1.
Legal Proceedings
54
     
Item 1A.
Risk Factors
54
     
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
54
     
Item 3.
Defaults Upon Senior Securities
54
     
Item 4.
Mine Safety Disclosures
55
     
Item 5.
Other Information
55
     
Item 6.
Exhibits
55
     

EVEREST RE GROUP, LTD.
CONSOLIDATED BALANCE SHEETS



   
March 31,
    
December 31,
  
(Dollars and share amounts in thousands, except par value per share)
  
2016
    
2015
  
   
(unaudited)
  
ASSETS:
        
Fixed maturities - available for sale, at market value
  
$
13,761,652
    
$
13,357,294
  
(amortized cost: 2016, $13,480,045; 2015, $13,276,206)
                
Fixed maturities - available for sale, at fair value
    
1,870
      
2,102
  
Equity securities - available for sale, at market value (cost: 2016, $123,354; 2015, $122,271)
    
114,388
      
108,940
  
Equity securities - available for sale, at fair value
    
1,313,404
      
1,337,733
  
Short-term investments
    
441,528
      
799,684
  
Other invested assets (cost: 2016, $1,109,186; 2015, $786,994)
    
1,109,186
      
786,994
  
Cash
    
328,943
      
283,658
  
Total investments and cash
    
17,070,971
      
16,676,405
  
Accrued investment income
    
101,789
      
100,942
  
Premiums receivable
    
1,475,155
      
1,483,090
  
Reinsurance receivables
    
920,039
      
894,037
  
Funds held by reinsureds
    
225,320
      
278,673
  
Deferred acquisition costs
    
357,335
      
372,351
  
Prepaid reinsurance premiums
    
176,741
      
164,971
  
Income taxes
    
223,507
      
258,541
  
Other assets
    
304,997
      
321,818
  
TOTAL ASSETS
  
$
20,855,854
    
$
20,550,828
  
                 
LIABILITIES:
                
Reserve for losses and loss adjustment expenses
  
$
9,985,979
    
$
9,951,798
  
Future policy benefit reserve
    
58,438
      
58,910
  
Unearned premium reserve
    
1,588,506
      
1,613,390
  
Funds held under reinsurance treaties
    
20,745
      
13,544
  
Commission reserves
    
55,960
      
60,098
  
Other net payable to reinsurers
    
179,072
      
173,087
  
Losses in course of payment
    
137,267
      
112,170
  
4.868% Senior notes due 6/1/2044
    
400,000
      
400,000
  
6.6% Long term notes due 5/1/2067
    
238,369
      
238,368
  
Accrued interest on debt and borrowings
    
12,341
      
3,537
  
Equity index put option liability
    
43,725
      
40,705
  
Unsettled securities payable
    
54,984
      
15,314
  
Other liabilities
    
240,169
      
261,322
  
Total liabilities
    
13,015,555
      
12,942,243
  
                 
Commitments and contingencies (Note 7)
                
                 
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; (2016) 68,776
                
and (2015) 68,606 outstanding before treasury shares
    
688
      
686
  
Additional paid-in capital
    
2,111,828
      
2,103,638
  
Accumulated other comprehensive income (loss), net of deferred income tax expense
                
(benefit) of $22,446 at 2016 and ($15,863) at 2015
    
(45,299
)
    
(231,755
)
Treasury shares, at cost; 26,377 shares (2016) and 25,912 shares (2015)
    
(2,971,870
)
    
(2,885,956
)
Retained earnings
    
8,744,952
      
8,621,972
  
Total shareholders' equity
    
7,840,299
      
7,608,585
  
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY
  
$
20,855,854
    
$
20,550,828
  
                 
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)
  
2016
    
2015
  
   
(unaudited)
  
REVENUES:
        
Premiums earned
  
$
1,218,867
    
$
1,272,488
  
Net investment income
    
102,524
      
122,566
  
Net realized capital gains (losses):
                
Other-than-temporary impairments on fixed maturity securities
    
(28,793
)
    
(26,018
)
Other-than-temporary impairments on fixed maturity securities
                
transferred to other comprehensive income (loss)
    
-
      
-
  
Other net realized capital gains (losses)
    
(45,466
)
    
15,513
  
Total net realized capital gains (losses)
    
(74,259
)
    
(10,505
)
Net derivative gain (loss)
    
(3,020
)
    
(242
)
Other income (expense)
    
(2,066
)
    
51,281
  
Total revenues
    
1,242,046
      
1,435,588
  
                 
CLAIMS AND EXPENSES:
                
Incurred losses and loss adjustment expenses
    
700,749
      
715,155
  
Commission, brokerage, taxes and fees
    
275,006
      
283,094
  
Other underwriting expenses
    
72,110
      
58,741
  
Corporate expenses
    
7,886
      
5,463
  
Interest, fees and bond issue cost amortization expense
    
9,228
      
8,990
  
Total claims and expenses
    
1,064,979
      
1,071,443
  
                 
INCOME (LOSS) BEFORE TAXES
    
177,067
      
364,145
  
Income tax expense (benefit)
    
5,381
      
41,167
  
                 
NET INCOME (LOSS)
  
$
171,686
    
$
322,978
  
                 
Other comprehensive income (loss), net of tax:
                
Unrealized appreciation (depreciation) ("URA(D)") on securities arising during the period
    
142,962
      
83,205
  
Reclassification adjustment for realized losses (gains) included in net income (loss)
    
32,381
      
22,183
  
Total URA(D) on securities arising during the period
    
175,343
      
105,388
  
                 
Foreign currency translation adjustments
    
9,773
      
(102,340
)
                 
Benefit plan actuarial net gain (loss) for the period
    
-
      
-
  
Reclassification adjustment for amortization of net (gain) loss included in net income (loss)
    
1,340
      
1,604
  
Total benefit plan net gain (loss) for the period
    
1,340
      
1,604
  
Total other comprehensive income (loss), net of tax
    
186,456
      
4,652
  
                 
COMPREHENSIVE INCOME (LOSS)
  
$
358,142
    
$
327,630
  
                 
EARNINGS PER COMMON SHARE
                
Basic
  
$
4.03
    
$
7.26
  
Diluted
    
4.00
      
7.19
  
Dividends declared
    
1.15
      
0.95
  
                 
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)
  
2016
    
2015
  
   
(unaudited)
  
COMMON SHARES (shares outstanding):
        
Balance, beginning of period
    
42,694,252
      
44,685,637
  
Issued during the period, net
    
169,774
      
159,661
  
Treasury shares acquired
    
(464,360
)
    
(434,878
)
Balance, end of period
    
42,399,666
      
44,410,420
  
                 
COMMON SHARES (par value):
                
Balance, beginning of period
  
$
686
    
$
683
  
Issued during the period, net
    
2
      
2
  
Balance, end of period
    
688
      
685
  
                 
ADDITIONAL PAID-IN CAPITAL:
                
Balance, beginning of period
    
2,103,638
      
2,068,807
  
Share-based compensation plans
    
8,190
      
5,170
  
Balance, end of period
    
2,111,828
      
2,073,977
  
                 
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS),
                
NET OF DEFERRED INCOME TAXES:
                
Balance, beginning of period
    
(231,755
)
    
48,317
  
Net increase (decrease) during the period
    
186,456
      
4,652
  
Balance, end of period
    
(45,299
)
    
52,969
  
                 
RETAINED EARNINGS:
                
Balance, beginning of period
    
8,621,972
      
7,819,210
  
Net income (loss)
    
171,686
      
322,978
  
Dividends declared ($1.15 per share in 2016 and $0.95 per share in 2015)
    
(48,706
)
    
(42,252
)
Balance, end of period
    
8,744,952
      
8,099,936
  
                 
TREASURY SHARES AT COST:
                
Balance, beginning of period
    
(2,885,956
)
    
(2,485,897
)
Purchase of treasury shares
    
(85,914
)
    
(75,040
)
Balance, end of period
    
(2,971,870
)
    
(2,560,937
)
                 
TOTAL SHAREHOLDERS' EQUITY, END OF PERIOD
  
$
7,840,299
    
$
7,666,630
  
                 
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)
  
2016
    
2015
  
   
(unaudited)
  
CASH FLOWS FROM OPERATING ACTIVITIES:
        
Net income (loss)
  
$
171,686
    
$
322,978
  
Adjustments to reconcile net income to net cash provided by operating activities:
                
Decrease (increase) in premiums receivable
    
7,604
      
(101,728
)
Decrease (increase) in funds held by reinsureds, net
    
60,592
      
(12,027
)
Decrease (increase) in reinsurance receivables
    
(32,865
)
    
(90,028
)
Decrease (increase) in income taxes
    
(3,883
)
    
14,214
  
Decrease (increase) in prepaid reinsurance premiums
    
(10,219
)
    
(12,868
)
Increase (decrease) in reserve for losses and loss adjustment expenses
    
50,497
      
55,334
  
Increase (decrease) in future policy benefit reserve
    
(473
)
    
(127
)
Increase (decrease) in unearned premiums
    
(26,116
)
    
(40,934
)
Increase (decrease) in other net payable to reinsurers
    
5,254
      
81,172
  
Increase (decrease) in losses in course of payment
    
24,473
      
71,568
  
Change in equity adjustments in limited partnerships
    
6,181
      
(6,762
)
Distribution of limited partnership income
    
15,915
      
8,600
  
Change in other assets and liabilities, net
    
3,844
      
32,168
  
Non-cash compensation expense
    
8,041
      
5,170
  
Amortization of bond premium (accrual of bond discount)
    
12,354
      
13,333
  
Amortization of underwriting discount on senior notes
    
1
      
1
  
Net realized capital (gains) losses
    
74,259
      
10,505
  
Net cash provided by (used in) operating activities
    
367,145
      
350,569
  
                 
CASH FLOWS FROM INVESTING ACTIVITIES:
                
Proceeds from fixed maturities matured/called - available for sale, at market value
    
503,428
      
594,807
  
Proceeds from fixed maturities sold - available for sale, at market value
    
324,118
      
355,812
  
Proceeds from fixed maturities sold - available for sale, at fair value
    
-
      
1,236
  
Proceeds from equity securities sold - available for sale, at market value
    
203
      
83
  
Proceeds from equity securities sold - available for sale, at fair value
    
92,245
      
137,966
  
Distributions from other invested assets
    
1,111,710
      
10,797
  
Cost of fixed maturities acquired - available for sale, at market value
    
(1,078,990
)
    
(1,370,458
)
Cost of equity securities acquired - available for sale, at market value
    
(1,105
)
    
(4,464
)
Cost of equity securities acquired - available for sale, at fair value
    
(96,297
)
    
(171,411
)
Cost of other invested assets acquired
    
(1,454,123
)
    
(41,961
)
Net change in short-term investments
    
360,238
      
222,952
  
Net change in unsettled securities transactions
    
30,390
      
(505
)
Net cash provided by (used in) investing activities
    
(208,183
)
    
(265,146
)
                 
CASH FLOWS FROM FINANCING ACTIVITIES:
                
Common shares issued during the period, net
    
151
      
2
  
Purchase of treasury shares
    
(85,914
)
    
(75,040
)
Dividends paid to shareholders
    
(48,706
)
    
(42,252
)
Net cash provided by (used in) financing activities
    
(134,469
)
    
(117,290
)
                 
EFFECT OF EXCHANGE RATE CHANGES ON CASH
    
20,792
      
(7,032
)
                 
Net increase (decrease) in cash
    
45,285
      
(38,899
)
Cash, beginning of period
    
283,658
      
437,474
  
Cash, end of period
  
$
328,943
    
$
398,575
  
                 
SUPPLEMENTAL CASH FLOW INFORMATION:
                
Income taxes paid (recovered)
  
$
5,000
    
$
24,266
  
Interest paid
    
370
      
132
  
                 
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, 2016 and 2015

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.

During the fourth quarter of 2015, the Company established new subsidiaries, Everest Preferred International Holdings, Ltd. ("Preferred International"), a Bermuda based company and Everest International Holdings (Bermuda), Ltd. ("International Holdings"), a Bermuda based company.  These new subsidiaries were part of a capital restructuring within the Company to support a planned increase in international business production, which includes directly supporting Group's new Lloyd's of London Syndicate corporate member.

Effective February 27, 2013, the Company established a new subsidiary, Mt. Logan Re Ltd. ("Mt. Logan Re"). Mt. Logan Re manages separate segregated accounts whose assets and capital relate mainly to third party external investors.

Effective July 13, 2015, the Company sold all of the outstanding shares of capital stock of a wholly-owned subsidiary entity, Mt. McKinley Insurance Company ("Mt. McKinley"), to Clearwater Insurance Company.  The operating results of Mt. McKinley for the three months ended March 31, 2015, are included within the Company's financial statements.

2.   BASIS OF PRESENTATION

The unaudited consolidated financial statements of the Company for the three months ended March 31, 2016 and 2015 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, 2015 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, 2016 and 2015 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, 2015, 2014 and 2013 included in the Company's most recent Form 10-K filing.

The Company consolidates the results of operations and financial position of all voting interest entities ("VOE") in which the Company has a controlling financial interest and all variable interest entities ("VIE") in which the Company is considered to be the primary beneficiary. The consolidation assessment, including the determination as to whether an entity qualifies as a VIE or VOE, depends on the facts and circumstances surrounding each entity.

Effective January 1, 2016, the Company adopted Accounting Standards Update 2015-02, "Consolidation (Topic 810) Amendments to the Consolidation Analysis"  issued by the United States Financial Accounting Standards Board ("FASB"), which changed the method in which the Company determines whether entities are consolidated by the Company. The adoption of this amended accounting guidance has been implemented utilizing a full retrospective application for all periods presented in the Company's unaudited interim consolidated financial statements.

5

The amended guidance includes changes in the identification of the primary beneficiary of companies considered to be VIEs. These changes resulted in the Company concluding that Mt. Logan Re is a VIE given it has insufficient equity at risk and that each underlying separate segregated account is likewise a VIE.  The Company has concluded that it is the primary beneficiary of Mt. Logan Re, but not of the underlying separate segregated accounts and therefore has deconsolidated these segregated accounts.  This change had no impact to the net income or retained earnings of the Company.

All significant intercompany accounts and transactions have been eliminated.

Application of Recently Issued Accounting Standard Changes.

Disclosures about Short-Duration Contracts. In May 2015, the FASB issued ASU 2015-09, authoritative guidance regarding required disclosures associated with short duration insurance contracts.  The new disclosure requirements focus on information about initial claim estimates and subsequent claim estimate adjustment, methodologies in estimating claims and the timing, frequency and severity of claims related to short duration insurance contracts. This guidance is effective for annual reporting periods beginning after December 15, 2015 and interim reporting periods beginning after December 15, 2016.  Therefore, the initial presentation of this guidance in the Company's financial statements and footnotes will be for its 10-K filing as of December 31, 2016. The Company does not anticipate that it will have a significant impact on its financial statements.

Debt Issuance Costs. In April 2015, The FASB issued ASU 2015–03, authoritative guidance on the presentation of debt issuance costs.  This guidance requires that debt issuance costs be presented within the balance sheet as a reduction of the carrying value of the debt liability, rather than as a separate asset.  This guidance is effective for annual reporting periods beginning after December 15, 2015 and related interim reporting periods.  The Company does not anticipate that the adoption of this guidance will have a material impact on its financial statements.

Consolidation. In February 2015, the FASB issued ASU 2015-02, authoritative guidance regarding consolidation of reporting entities.  The new guidance focuses on the required evaluation of whether certain legal entities should be consolidated.  This guidance is effective for annual and interim reporting periods beginning after December 15, 2015.  Based upon this guidance, the Company has determined that the separate segregated accounts associated with Mt. Logan Re, should not be consolidated. As a result, the Company has adjusted prior financial statements and footnotes to conform with this new consolidation presentation.
6

The following tables present certain financial statement line items as previously reported in 2015, the effect on those line items due to not consolidating the segregated accounts of Mt. Logan Re, in accordance with the newly adopted accounting policy and the line items as currently reported within the financial statements.


CONSOLIDATED BALANCE SHEET:
  
December 31, 2015
  
       
Effect of adoption
      
   
As previously
    
of new accounting
    
As Currently
  
   
reported
    
policy
    
Reported
  
(Dollars in thousands)
            
ASSETS:
            
Short-term investments
  
$
1,795,455
    
$
(995,771
)
  
$
799,684
  
Total investments and cash
     17,672,176       (995,771 )     16,676,405  
Premiums receivable
    
1,479,293
      
3,797
      
1,483,090
  
Reinsurance receivables
    
840,420
      
53,617
      
894,037
  
Deferred acquisition costs
    
373,072
      
(721
)
    
372,351
  
Prepaid reinsurance premiums
    
157,424
      
7,547
      
164,971
  
Other assets
    
265,634
      
56,184
      
321,818
  
TOTAL ASSETS
    
21,426,175
      
(875,347
)
    
20,550,828
  
                         
LIABILITIES:
                        
Funds held under reinsurance treaties
    
88,544
      
(75,000
)
    
13,544
  
Commission reserves
    
79,849
      
(19,751
)
    
60,098
  
Other net payable to reinsurers
    
166,822
      
6,265
      
173,087
  
Other liabilities
    
291,322
      
(30,000
)
    
261,322
  
Total liabilities
    
13,060,729
      
(118,486
)
    
12,942,243
  
                         
NONCONTROLLING INTERESTS:
                        
Redeemable noncontrolling interests - Mt. Logan Re
    
756,861
      
(756,861
)
    
-
  
                         
TOTAL LIABILITIES, NONCONTROLLING INTERESTS AND SHAREHOLDERS' EQUITY
    
21,426,175
      
(875,347
)
    
20,550,828
  



CONSOLIDATED STATEMENTS OF OPERATIONS
  
Three Months Ended March 31, 2015
  
AND COMPREHENSIVE INCOME (LOSS):
      
Effect of adoption
      
   
As previously
    
of new accounting
    
As Currently
  
   
reported
    
policy
    
Reported
  
(Dollars in thousands)
            
REVENUES:
            
Premiums earned
  
$
1,307,077
    
$
(34,589
)
  
$
1,272,488
  
Net investment income
    
122,583
      
(17
)
    
122,566
  
Other income (expense)
    
46,073
      
5,208
      
51,281
  
Total revenues
    
1,464,986
      
(29,398
)
    
1,435,588
  
                         
CLAIMS AND EXPENSES:
                        
Incurred losses and loss adjustment expenses
    
722,465
      
(7,310
)
    
715,155
  
Commision, brokerage, taxes and fees
    
287,167
      
(4,073
)
    
283,094
  
Other underwriting expenses
    
60,664
      
(1,923
)
    
58,741
  
Total claims and expenses
    
1,084,749
      
(13,306
)
    
1,071,443
  
                         
NET INCOME (LOSS) BEFORE TAXES
    
380,237
      
(16,092
)
    
364,145
  
NET INCOME (LOSS)
    
339,070
      
(16,092
)
    
322,978
  
                         
Net income (loss) attributable to noncontrolling interests
    
(16,092
)
    
16,092
      
-
  
                         
NET INCOME (LOSS) ATTRIBUTABLE TO EVEREST RE GROUP
    
322,978
      
-
      
322,978
  


7


CONSOLIDATED STATEMENT OF CASH FLOWS:
  
Three Months Ended March 31, 2015
  
       
Effect of adoption
      
   
As previously
    
of new accounting
    
As Currently
  
(Dollars in thousands)
  
reported
    
policy
    
Reported
  
CASH FLOWS FROM OPERATING ACTIVITIES:
            
Net income (loss)
  
$
339,070
    
$
(16,092
)
  
$
322,978
  
Decrease (increase) in premiums receivable
    
(98,195
)
    
(3,533
)
    
(101,728
)
Decrease (increase) in funds held by reinsureds, net
    
62,973
      
(75,000
)
    
(12,027
)
Decrease (increase) in reinsurance receivables
    
(84,665
)
    
(5,363
)
    
(90,028
)
Decrease (increase) in prepaid reinsurance premiums
    
12,144
      
(25,012
)
    
(12,868
)
Increase (decrease) in other net payable to reinsurers
    
68,365
      
12,807
      
81,172
  
Change in other assets and liabilities, net
    
24,542
      
7,626
      
32,168
  
Net cash provided by (used in) operating activities
    
455,136
      
(104,567
)
    
350,569
  
                         
CASH FLOWS FROM INVESTING ACTIVITIES:
                        
Net change in short-term investments
    
(7,567
)
    
230,519
      
222,952
  
Net cash provided by (used in) investing activities
    
(495,665
)
    
230,519
      
(265,146
)
                         
CASH FLOWS FROM FINANCING ACTIVITIES:
                        
Third party investment in redeemable noncontrolling interest
    
156,848
      
(156,848
)
    
-
  
Dividends paid on third party investment in redeemable noncontrolling interest
    
(30,896
)
    
30,896
      
-
  
Net cash provided by (used in) financing activities
    
8,662
      
(125,952
)
    
(117,290
)


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, 2016
  
   
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
  
$
891,944
    
$
27,721
    
$
(153
)
  
$
919,512
    
$
-
  
Obligations of U.S. states and political subdivisions
    
664,481
      
38,439
      
(843
)
    
702,077
      
-
  
Corporate securities
    
4,733,277
      
137,455
      
(58,694
)
    
4,812,038
      
1,303
  
Asset-backed securities
    
514,550
      
2,623
      
(1,454
)
    
515,719
      
-
  
Mortgage-backed securities
                                        
Commercial
    
269,123
      
5,893
      
(1,998
)
    
273,018
      
-
  
Agency residential
    
2,435,511
      
41,982
      
(4,204
)
    
2,473,289
      
-
  
Non-agency residential
    
836
      
46
      
(46
)
    
836
      
-
  
Foreign government securities
    
1,301,579
      
65,835
      
(44,671
)
    
1,322,743
      
39
  
Foreign corporate securities
    
2,668,744
      
123,001
      
(49,325
)
    
2,742,420
      
368
  
Total fixed maturity securities
  
$
13,480,045
    
$
442,995
    
$
(161,388
)
  
$
13,761,652
    
$
1,710
  
Equity securities
  
$
123,354
    
$
4,008
    
$
(12,974
)
  
$
114,388
    
$
-
  

8


   
At December 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
  
$
805,273
    
$
13,465
    
$
(1,861
)
  
$
816,877
    
$
-
  
Obligations of U.S. states and political subdivisions
    
669,945
      
34,020
      
(890
)
    
703,075
      
-
  
Corporate securities
    
4,817,014
      
97,159
      
(109,310
)
    
4,804,863
      
1,412
  
Asset-backed securities
    
470,320
      
719
      
(3,813
)
    
467,226
      
-
  
Mortgage-backed securities
                                        
Commercial
    
264,924
      
4,750
      
(3,375
)
    
266,299
      
-
  
Agency residential
    
2,313,265
      
25,318
      
(18,059
)
    
2,320,524
      
-
  
Non-agency residential
    
893
      
51
      
(46
)
    
898
      
-
  
Foreign government securities
    
1,256,983
      
54,403
      
(52,205
)
    
1,259,181
      
53
  
Foreign corporate securities
    
2,677,589
      
107,163
      
(66,401
)
    
2,718,351
      
36
  
Total fixed maturity securities
  
$
13,276,206
    
$
337,048
    
$
(255,960
)
  
$
13,357,294
    
$
1,501
  
Equity securities
  
$
122,271
    
$
3,401
    
$
(16,732
)
  
$
108,940
    
$
-
  


(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.

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, 2016
    
At December 31, 2015
  
   
Amortized
    
Market
    
Amortized
    
Market
  
(Dollars in thousands)
  
Cost
    
Value
    
Cost
    
Value
  
Fixed maturity securities – available for sale:
                
    Due in one year or less
  
$
922,297
    
$
932,602
    
$
1,021,200
    
$
1,036,016
  
    Due after one year through five years
    
6,390,584
      
6,515,613
      
6,193,426
      
6,220,563
  
    Due after five years through ten years
    
2,108,976
      
2,149,123
      
2,217,075
      
2,203,932
  
    Due after ten years
    
838,168
      
901,452
      
795,103
      
841,836
  
Asset-backed securities
    
514,550
      
515,719
      
470,320
      
467,226
  
Mortgage-backed securities:
                                
Commercial
    
269,123
      
273,018
      
264,924
      
266,299
  
Agency residential
    
2,435,511
      
2,473,289
      
2,313,265
      
2,320,524
  
Non-agency residential
    
836
      
836
      
893
      
898
  
Total fixed maturity securities
  
$
13,480,045
    
$
13,761,652
    
$
13,276,206
    
$
13,357,294
  


9

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)
  
2016
    
2015
  
Increase (decrease) during the period between the market value and cost
        
of investments carried at market value, and deferred taxes thereon:
        
Fixed maturity securities
  
$
200,308
    
$
126,262
  
Fixed maturity securities, other-than-temporary impairment
    
210
      
9,684
  
Equity securities
    
4,366
      
(1,450
)
Change in unrealized appreciation (depreciation), pre-tax
    
204,884
      
134,496
  
Deferred tax benefit (expense)
    
(29,472
)
    
(25,700
)
Deferred tax benefit (expense), other-than-temporary impairment
    
(69
)
    
(3,408
)
Change in unrealized appreciation (depreciation),
                
net of deferred taxes, included in shareholders' equity
  
$
175,343
    
$
105,388
  


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.

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.
10

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, 2016 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
  
$
71,914
    
$
(153
)
  
$
698
    
$
-
    
$
72,612
    
$
(153
)
Obligations of U.S. states and political subdivisions
    
4,469
      
(16
)
    
7,014
      
(827
)
    
11,483
      
(843
)
Corporate securities
    
757,686
      
(29,211
)
    
340,682
      
(29,483
)
    
1,098,368
      
(58,694
)
Asset-backed securities
    
66,629
      
(257
)
    
68,896
      
(1,197
)
    
135,525
      
(1,454
)
Mortgage-backed securities
                                                
Commercial
    
33,955
      
(1,707
)
    
6,345
      
(291
)
    
40,300
      
(1,998
)
Agency residential
    
239,830
      
(1,726
)
    
290,778
      
(2,478
)
    
530,608
      
(4,204
)
Non-agency residential
    
137
      
(2
)
    
34
      
(44
)
    
171
      
(46
)
Foreign government securities
    
167,643
      
(18,658
)
    
196,372
      
(26,013
)
    
364,015
      
(44,671
)
Foreign corporate securities
    
414,232
      
(15,945
)
    
285,045
      
(33,380
)
    
699,277
      
(49,325
)
Total fixed maturity securities
  
$
1,756,495
    
$
(67,675
)
  
$
1,195,864
    
$
(93,713
)
  
$
2,952,359
    
$
(161,388
)
Equity securities
    
-
      
-
      
96,771
      
(12,974
)
    
96,771
      
(12,974
)
Total
  
$
1,756,495
    
$
(67,675
)
  
$
1,292,635
    
$
(106,687
)
  
$
3,049,130
    
$
(174,362
)



   
Duration of Unrealized Loss at March 31, 2016 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
  
$
50,743
    
$
(255
)
  
$
91,385
    
$
(14,690
)
  
$
142,128
    
$
(14,945
)
Due in one year through five years
    
843,152
      
(37,957
)
    
550,261
      
(46,326
)
    
1,393,413
      
(84,283
)
Due in five years through ten years
    
467,988
      
(21,816
)
    
162,567
      
(24,926
)
    
630,555
      
(46,742
)
Due after ten years
    
54,061
      
(3,955
)
    
25,598
      
(3,761
)
    
79,659
      
(7,716
)
Asset-backed securities
    
66,629
      
(257
)
    
68,896
      
(1,197
)
    
135,525
      
(1,454
)
Mortgage-backed securities
    
273,922
      
(3,435
)
    
297,157
      
(2,813
)
    
571,079
      
(6,248
)
Total fixed maturity securities
  
$
1,756,495
    
$
(67,675
)
  
$
1,195,864
    
$
(93,713
)
  
$
2,952,359
    
$
(161,388
)


The aggregate market value and gross unrealized losses related to investments in an unrealized loss position at March 31, 2016 were $3,049,130 thousand and $174,362 thousand, respectively.  The market value of securities for the single issuer whose securities comprised the largest unrealized loss position at March 31, 2016, did not exceed 0.6% 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 $67,675 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 corporate securities, foreign government securities and foreign corporate securities.  The majority of these unrealized losses are attributable to net unrealized foreign exchange losses, $36,994 thousand, as the U.S. dollar has strengthened against other currencies and unrealized losses in the energy sector, $16,509 thousand, as falling oil prices have disrupted the market values for this sector, particularly for oil exploration, production and servicing companies. The $93,713 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 and foreign government securities.  The majority of these unrealized losses are attributable to net unrealized foreign exchange losses, $67,220 thousand, as the U.S. dollar has strengthened against other currencies and to unrealized losses in the energy sector, $14,945 thousand, as falling oil prices have disrupted the market values for this sector, particularly for oil exploration as well as production and servicing companies.  There was no gross unrealized depreciation for mortgage-backed
11

securities related to sub-prime and alt-A loans.  In all instances, there were no projected cash flow shortfalls to recover the full book value of the investments and the related interest obligations.  The mortgage-backed securities still have excess credit coverage and are current on interest and principal payments.

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

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


   
Duration of Unrealized Loss at December 31, 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
  
$
539,177
    
$
(1,855
)
  
$
692
    
$
(6
)
  
$
539,869
    
$
(1,861
)
Obligations of U.S. states and political subdivisions
    
6,434
      
(84
)
    
4,917
      
(806
)
    
11,351
      
(890
)
Corporate securities
    
1,818,331
      
(74,161
)
    
440,682
      
(35,149
)
    
2,259,013
      
(109,310
)
Asset-backed securities
    
348,545
      
(2,510
)
    
67,230
      
(1,303
)
    
415,775
      
(3,813
)
Mortgage-backed securities
                                                
Commercial
    
145,490
      
(3,375
)
    
-
      
-
      
145,490
      
(3,375
)
Agency residential
    
1,021,390
      
(10,014
)
    
326,449
      
(8,045
)
    
1,347,839
      
(18,059
)
Non-agency residential
    
152
      
(2
)
    
38
      
(44
)
    
190
      
(46
)
Foreign government securities
    
227,384
      
(21,996
)
    
216,428
      
(30,209
)
    
443,812
      
(52,205
)
Foreign corporate securities
    
821,548
      
(25,627
)
    
295,389
      
(40,774
)
    
1,116,937
      
(66,401
)
Total fixed maturity securities
  
$
4,928,451
    
$
(139,624
)
  
$
1,351,825
    
$
(116,336
)
  
$
6,280,276
    
$
(255,960
)
Equity securities
    
-
      
-
      
91,907
      
(16,732
)
    
91,907
      
(16,732
)
Total
  
$
4,928,451
    
$
(139,624
)
  
$
1,443,732
    
$
(133,068
)
  
$
6,372,183
    
$
(272,692
)



   
Duration of Unrealized Loss at December 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
  
$
29,737
    
$
(1,840
)
  
$
74,615
    
$
(13,440
)
  
$
104,352
    
$
(15,280
)
Due in one year through five years
    
2,328,805
      
(62,329
)
    
651,228
      
(59,993
)
    
2,980,033
      
(122,322
)
Due in five years through ten years
    
969,139
      
(52,725
)
    
206,538
      
(28,018
)
    
1,175,677
      
(80,743
)
Due after ten years
    
85,193
      
(6,829
)
    
25,727
      
(5,493
)
    
110,920
      
(12,322
)
Asset-backed securities
    
348,545
      
(2,510
)
    
67,230
      
(1,303
)
    
415,775
      
(3,813
)
Mortgage-backed securities
    
1,167,032
      
(13,391
)
    
326,487
      
(8,089
)
    
1,493,519
      
(21,480
)
Total fixed maturity securities
  
$
4,928,451
    
$
(139,624
)
  
$
1,351,825
    
$
(116,336
)
  
$
6,280,276
    
$
(255,960
)


The aggregate market value and gross unrealized losses related to investments in an unrealized loss position at December 31, 2015 were $6,372,183 thousand and $272,692 thousand, respectively.  The market value of securities for the single issuer whose securities comprised the largest unrealized loss position at December 31, 2015, did not exceed 0.7% 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 $139,624 thousand of unrealized losses related to fixed maturity securities that have been in an unrealized loss position for less than one year were generally comprised of domestic and foreign corporate securities, foreign government securities and agency residential mortgage-backed securities.  The majority of these unrealized losses are attributable to unrealized losses in the energy sector, $46,793 thousand, as falling oil prices have disrupted the market values for this sector, particularly for oil exploration, production and servicing companies and net unrealized
12

foreign exchange losses, $39,037 thousand, as the U.S. dollar has strengthened against other currencies.  The $116,336 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.  The majority of these unrealized losses are attributable to net unrealized foreign exchange losses, $72,738 thousand, as the U.S. dollar has strengthened against other currencies and to unrealized losses in the energy sector, $18,447 thousand, as falling oil prices have disrupted the market values for this sector, particularly for oil exploration as well as production and servicing companies.  There was no gross unrealized depreciation for mortgage-backed securities related to sub-prime and alt-A loans.  In all instances, there were no projected cash flow shortfalls to recover the full book value of the investments and the related interest obligations.  The mortgage-backed securities still have excess credit coverage and are current on interest and principal payments.

The components of net investment income are presented in the table below for the periods indicated:


   
Three Months Ended
  
   
March 31,
  
(Dollars in thousands)
  
2016
    
2015
  
Fixed maturities
  
$
102,525
    
$
109,355
  
Equity securities
    
11,139
      
11,678
  
Short-term investments and cash
    
400
      
230
  
Other invested assets
                
Limited partnerships
    
(6,158
)
    
6,968
  
Other
    
(850
)
    
625
  
Gross investment income before adjustments
    
107,056
      
128,856
  
Funds held interest income (expense)
    
2,540
      
2,876
  
Future policy benefit reserve income (expense)
    
(301
)
    
(393
)
Gross investment income
    
109,295
      
131,339
  
Investment expenses
    
(6,771
)
    
(8,773
)
Net investment income
  
$
102,524
    
$
122,566
  


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.

The Company had contractual commitments to invest up to an additional $447,875 thousand in limited partnerships at March 31, 2016.  These commitments will be funded when called in accordance with the partnership agreements, which have investment periods that expire, unless extended, through 2020.

13

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)
  
2016
    
2015
  
Fixed maturity securities, market value:
        
Other-than-temporary impairments
  
$
(28,793
)
  
$
(26,018
)
Gains (losses) from sales
    
(16,911
)
    
(8,024
)
Fixed maturity securities, fair value:
                
Gains (losses) from sales
    
-
      
28
  
Gains (losses) from fair value adjustments
    
(232
)
    
62
  
Equity securities, market value:
                
Gains (losses) from sales
    
57
      
19
  
Equity securities, fair value:
                
Gains (losses) from sales
    
(8,426
)
    
(150
)
Gains (losses) from fair value adjustments
    
(19,955
)
    
23,578
  
Short-term investments gain (loss)
    
1
      
-
  
Total net realized capital gains (losses)
  
$
(74,259
)
  
$
(10,505
)


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)
  
2016
    
2015
  
Proceeds from sales of fixed maturity securities
  
$
324,118
    
$
357,048
  
Gross gains from sales
    
8,552
      
8,835
  
Gross losses from sales
    
(25,463
)
    
(16,831
)
                 
Proceeds from sales of equity securities
  
$
92,448
    
$
138,049
  
Gross gains from sales
    
1,839
      
5,206
  
Gross losses from sales
    
(10,208
)
    
(5,337
)


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).

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, 2016, fair value for these equity index put option contracts was $34,199 thousand.  Based on historical index volatilities and trends and the March 31, 2016 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 13%.  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, 2016, the present value of these theoretical maximum payouts using a 3% discount factor was $435,813 thousand.
14

Conversely, if the contracts had all expired on March 31, 2016, with the S&P index at $2,059.74, 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, 2016, fair value for this equity index put option contract was $9,526 thousand.  Based on historical index volatilities and trends and the March 31, 2016 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 45%.  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, 2016, the present value of the theoretical maximum payout using a 3% discount factor and current exchange rate was $41,168 thousand.  Conversely, if the contract had expired on March 31, 2016, with the FTSE index at ₤6,174.90, 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, 2016
    
December 31, 2015
  
Equity index put option contracts
  
Equity index put option liability
  
$
43,725
    
$
40,705
  
Total
      
$
43,725
    
$
40,705
  


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)
      
Three Months Ended
  
Derivatives not designated as
  
Location of gain (loss) in statements of
  
March 31,
  
hedging instruments
  
operations and comprehensive income (loss)
  
2016
    
2015
  
Equity index put option contracts
  
Net derivative gain (loss)
  
$
(3,020
)
  
$
(242
)
Total
      
$
(3,020
)
  
$
(242
)


5.     FAIR VALUE

GAAP guidance regarding fair value measurements address how companies should measure fair value when they are required to use fair value measures for recognition or disclosure purposes under GAAP and provides a common definition of fair value to be used throughout GAAP.  It defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly fashion between market participants at the measurement date.  In addition, it establishes a three-level valuation hierarchy for the disclosure of fair value measurements.  The valuation hierarchy is based on the transparency of inputs to the valuation of an asset or liability.  The level in the hierarchy within which a given fair value measurement falls is determined based on the lowest level input that is significant to the measurement, with Level 1 being the highest priority and Level 3 being the lowest priority.

The levels in the hierarchy are defined as follows:

Level 1: Inputs to the valuation methodology are observable inputs that reflect unadjusted quoted prices for identical assets or liabilities in an active market;

Level 2: Inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument;

Level 3: Inputs to the valuation methodology are unobservable and significant to the fair value measurement.

15

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 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 six private placement securities, the Company valued the six securities at $16,302 thousand at March 31, 2016. Due to the unavailability of prices for two private placement securities, the Company valued the two securities at $3,593 thousand at December 31, 2015.

The Company internally manages a public equity portfolio which had a fair value at March 31, 2016 and December 31, 2015 of $241,605 thousand and $253,575 thousand, respectively, and all prices were obtained from publically published sources.

Equity securities denominated in U.S. currency with quoted prices in active markets for identical assets are categorized as level 1 since the quoted prices are directly observable.  Equity securities traded on foreign exchanges are categorized as level 2 due to the added input of a foreign exchange conversion rate to determine fair or market value.  The Company uses foreign currency exchange rates published by nationally recognized sources.

All categories of fixed maturity securities listed in the tables below are generally categorized as level 2, 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.  For foreign government securities and foreign corporate securities, the fair values provided by the third party pricing services in local currencies, and where applicable, are converted to U.S. dollars using currency exchange rates from nationally recognized sources.

The fixed maturities with fair values categorized as level 3 result when prices are not available from the nationally recognized pricing services.  The asset managers will then obtain non-binding price quotes for the securities from brokers. 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.  If the broker quotes are for foreign denominated securities, the quotes are converted to U.S. dollars using currency exchange rates from nationally recognized sources.  In limited circumstances when broker prices are not available for private placements, the Company will value the securities using comparable market information.

16

The composition and valuation inputs for the presented fixed maturities categories are as follows:

·
U.S. Treasury securities and obligations of U.S. government agencies and corporations are primarily comprised of U.S. Treasury bonds and the fair value is based on observable market inputs such as quoted prices, reported trades, quoted prices for similar issuances or benchmark yields;

·
Obligations of U.S. states and political subdivisions are comprised of state and municipal bond issuances and the fair values are based on observable market inputs such as quoted market prices, quoted prices for similar securities, benchmark yields and credit spreads;

·
Corporate securities are primarily comprised of U.S. corporate and public utility bond issuances and the fair values are based on observable market inputs such as quoted market prices, quoted prices for similar securities, benchmark yields and credit spreads;

·
Asset-backed and mortgage-backed securities fair values are based on observable inputs such as quoted prices, reported trades, quoted prices for similar issuances or benchmark yields and cash flow models using observable inputs such as prepayment speeds, collateral performance and default spreads;

·
Foreign government securities are comprised of global non-U.S. sovereign bond issuances and the fair values are based on observable market inputs such as quoted market prices, quoted prices for similar securities and models with observable inputs such as benchmark yields and credit spreads and then, where applicable, converted to U.S. dollars using an exchange rate from a nationally recognized source;

·
Foreign corporate securities are comprised of global non-U.S. corporate bond issuances and the fair values are based on observable market inputs such as quoted market prices, quoted prices for similar securities and models with observable inputs such as benchmark yields and credit spreads and then, where applicable, converted to U.S. dollars using an exchange rate from a nationally recognized source.

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).

The Company's liability for equity index put options is categorized as level 3 since there is no active market for these seven long dated equity put options.  The fair values for these options are calculated by the Company using an industry accepted pricing model, Black-Scholes.  The model inputs and assumptions are: risk free interest rates, equity market indexes values, volatilities and dividend yields and duration.  The model results are then adjusted for the Company's credit default swap rate.  All of these inputs and assumptions are updated quarterly.  One of the option contacts is in British Pound Sterling so the fair value for this contract is converted to U.S. dollars using an exchange rate from a nationally recognized source.

17

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, 2016
    
(Level 1)
    
(Level 2)
    
(Level 3)
  
Assets:
                
Fixed maturities, market value
                
U.S. Treasury securities and obligations of
                
U.S. government agencies and corporations
  
$
919,512
    
$
-
    
$
919,512
    
$
-
  
Obligations of U.S. States and political subdivisions
    
702,077
      
-
      
702,077
      
-
  
Corporate securities
    
4,812,038
      
-
      
4,796,332
      
15,706
  
Asset-backed securities
    
515,719
      
-
      
515,719
      
-
  
Mortgage-backed securities
                                
Commercial
    
273,018
      
-
      
273,018
      
-
  
Agency residential
    
2,473,289
      
-
      
2,473,289
      
-
  
Non-agency residential
    
836
      
-
      
836
      
-
  
Foreign government securities
    
1,322,743
      
-
      
1,322,743
      
-
  
Foreign corporate securities
    
2,742,420
      
-
      
2,741,824
      
596
  
Total fixed maturities, market value
    
13,761,652
      
-
      
13,745,350
      
16,302
  
                                 
Fixed maturities, fair value
    
1,870
      
-
      
1,870
      
-
  
Equity securities, market value
    
114,388
      
96,771
      
17,617
      
-
  
Equity securities, fair value
    
1,313,404
      
1,253,346
      
60,058
      
-
  
                                 
Liabilities:
                                
Equity index put option contracts
  
$
43,725
    
$
-
    
$
-
    
$
43,725
  


There were no transfers between Level 1 and Level 2 for the three months ended March 31, 2016.

18

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, 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
  
$
816,877
    
$
-
    
$
816,877
    
$
-
  
Obligations of U.S. States and political subdivisions
    
703,075
      
-
      
703,075
      
-
  
Corporate securities
    
4,804,863
      
-
      
4,800,930
      
3,933
  
Asset-backed securities
    
467,226
      
-
      
467,226
      
-
  
Mortgage-backed securities
                                
Commercial
    
266,299
      
-
      
266,299
      
-
  
Agency residential
    
2,320,524
      
-
      
2,320,524
      
-
  
Non-agency residential
    
898
      
-
      
898
      
-
  
Foreign government securities
    
1,259,181
      
-
      
1,259,181
      
-
  
Foreign corporate securities
    
2,718,351
      
-
      
2,716,758
      
1,593
  
Total fixed maturities, market value
    
13,357,294
      
-
      
13,351,768
      
5,526
  
                                 
Fixed maturities, fair value
    
2,102
      
-
      
2,102
      
-
  
Equity securities, market value
    
108,940
      
91,907
      
17,033
      
-
  
Equity securities, fair value
    
1,337,733
      
1,275,666
      
62,067
      
-
  
                                 
Liabilities:
                                
Equity index put option contracts
  
$
40,705
    
$
-
    
$
-
    
$
40,705
  


19

The following tables present the activity under Level 3, fair value measurements using significant unobservable inputs by asset type, for the periods indicated:


   
Three Months Ended March 31, 2016
    
Three Months Ended March 31, 2015
  
   
Corporate
    
Foreign
        
Corporate
        
Foreign
      
(Dollars in thousands)
  
Securities
    
Corporate
    
Total
    
Securities
    
CMBS
    
Corporate
    
Total
  
Beginning balance
  
$
3,933
    
$
1,593
    
$
5,526
    
$
-
    
$
8,597
    
$
7,166
    
$
15,763
  
Total gains or (losses) (realized/unrealized)
                                                        
Included in earnings
    
8
      
(997
)
    
(989
)
    
2
      
-
      
57
      
59
  
Included in other comprehensive income (loss)
    
(6
)
    
-
      
(6
)
    
1
      
-
      
(1,098
)
    
(1,097
)
Purchases, issuances and settlements
    
11,771
      
-
      
11,771
      
1,940
      
-
      
-
      
1,940
  
Transfers in and/or (out) of Level 3
    
-
      
-
      
-
      
710
      
(8,597
)
    
-
      
(7,887
)
Ending balance
  
$
15,706
    
$
596
    
$
16,302
    
$
2,653