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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