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EVEREST GROUP, LTD. - Quarter Report: 2017 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, 2017
 
 
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, a smaller reporting company or an emerging growth company.  See the definitions of "large accelerated filer," "accelerated filer,"  "smaller reporting company" and "emerging growth 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)
Emerging  growth company
 
 
Indicate by check mark if the registrant is an emerging growth company and has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange act.

YES
   
NO
X

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, 2017
Common Shares, $0.01 par value
 
41,069,286


EVEREST RE GROUP, LTD

Table of Contents
Form 10-Q


Page
PART I

FINANCIAL INFORMATION

Item 1.
Financial Statements
 
     
 
Consolidated Balance Sheets March 31, 2017 (unaudited)
 
 
and December 31, 2016
1
     
 
Consolidated Statements of Operations and Comprehensive Income (Loss) for the
 
 
three months ended March 31, 2017 and 2016 (unaudited)
2
     
 
Consolidated Statements of Changes in Shareholders' Equity for the three
 
 
months ended March 31, 2017 and 2016 (unaudited)
3
     
 
Consolidated Statements of Cash Flows for the three months ended
 
 
March 31, 2017 and 2016 (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
52
     
Item 4.
Controls and Procedures
52
     

PART II

OTHER INFORMATION

Item 1.
Legal Proceedings
52
     
Item 1A.
Risk Factors
52
     
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
53
     
Item 3.
Defaults Upon Senior Securities
53
     
Item 4.
Mine Safety Disclosures
53
     
Item 5.
Other Information
53
     
Item 6.
Exhibits
54
     

EVEREST RE GROUP, LTD.
CONSOLIDATED BALANCE SHEETS



   
March 31,
   
December 31,
 
(Dollars and share amounts in thousands, except par value per share)
 
2017
   
2016
 
   
(unaudited)
       
ASSETS:
           
Fixed maturities - available for sale, at market value
 
$
14,730,995
   
$
14,107,408
 
(amortized cost: 2017, $14,542,645; 2016, $13,932,613)
               
Equity securities - available for sale, at market value (cost: 2017, $108,834; 2016, $129,553)
   
104,346
     
119,067
 
Equity securities - available for sale, at fair value
   
983,459
     
1,010,085
 
Short-term investments
   
477,177
     
431,478
 
Other invested assets (cost: 2017, $1,358,749; 2016, $1,333,069)
   
1,359,252
     
1,333,129
 
Cash
   
468,240
     
481,922
 
Total investments and cash
   
18,123,469
     
17,483,089
 
Accrued investment income
   
98,169
     
96,473
 
Premiums receivable
   
1,707,232
     
1,485,990
 
Reinsurance receivables
   
1,050,540
     
1,018,325
 
Funds held by reinsureds
   
262,111
     
260,644
 
Deferred acquisition costs
   
347,337
     
344,052
 
Prepaid reinsurance premiums
   
215,749
     
191,768
 
Income taxes
   
135,050
     
177,704
 
Other assets
   
253,296
     
263,459
 
TOTAL ASSETS
 
$
22,192,953
   
$
21,321,504
 
                 
LIABILITIES:
               
Reserve for losses and loss adjustment expenses
 
$
10,414,046
   
$
10,312,313
 
Future policy benefit reserve
   
55,158
     
55,074
 
Unearned premium reserve
   
1,704,734
     
1,577,546
 
Funds held under reinsurance treaties
   
23,201
     
21,278
 
Commission reserves
   
59,266
     
70,335
 
Other net payable to reinsurers
   
207,592
     
190,986
 
Losses in course of payment
   
181,331
     
67,107
 
4.868% Senior notes due 6/1/2044
   
396,744
     
396,714
 
6.6% Long term notes due 5/1/2067
   
236,487
     
236,462
 
Accrued interest on debt and borrowings
   
12,341
     
3,537
 
Equity index put option liability
   
19,429
     
22,059
 
Unsettled securities payable
   
272,470
     
27,927
 
Other liabilities
   
262,278
     
264,770
 
Total liabilities
   
13,845,077
     
13,246,108
 
                 
Commitments and contingencies (Note 8)
               
                 
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; (2017) 69,030
               
and (2016) 68,871 outstanding before treasury shares
   
691
     
689
 
Additional paid-in capital
   
2,141,653
     
2,140,783
 
Accumulated other comprehensive income (loss), net of deferred income tax expense
               
(benefit) of $13,886 at 2017 and $8,240 at 2016
   
(185,518
)
   
(216,764
)
Treasury shares, at cost; 27,972 shares 2017 and 2016
   
(3,272,244
)
   
(3,272,244
)
Retained earnings
   
9,663,294
     
9,422,932
 
Total shareholders' equity
   
8,347,876
     
8,075,396
 
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY
 
$
22,192,953
   
$
21,321,504
 
                 
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)
 
2017
   
2016
 
   
(unaudited)
 
REVENUES:
           
Premiums earned
 
$
1,312,097
   
$
1,218,867
 
Net investment income
   
122,289
     
102,524
 
Net realized capital gains (losses):
               
Other-than-temporary impairments on fixed maturity securities
   
(1,229
)
   
(28,793
)
Other-than-temporary impairments on fixed maturity securities
               
transferred to other comprehensive income (loss)
   
-
     
-
 
Other net realized capital gains (losses)
   
53,957
     
(45,466
)
Total net realized capital gains (losses)
   
52,728
     
(74,259
)
Net derivative gain (loss)
   
2,630
     
(3,020
)
Other income (expense)
   
(4,966
)
   
(2,066
)
Total revenues
   
1,484,778
     
1,242,046
 
                 
CLAIMS AND EXPENSES:
               
Incurred losses and loss adjustment expenses
   
770,788
     
700,749
 
Commission, brokerage, taxes and fees
   
282,269
     
275,006
 
Other underwriting expenses
   
75,887
     
72,110
 
Corporate expenses
   
8,457
     
7,886
 
Interest, fees and bond issue cost amortization expense
   
8,964
     
9,228
 
Total claims and expenses
   
1,146,365
     
1,064,979
 
                 
INCOME (LOSS) BEFORE TAXES
   
338,413
     
177,067
 
Income tax expense (benefit)
   
46,770
     
5,381
 
                 
NET INCOME (LOSS)
 
$
291,643
   
$
171,686
 
                 
Other comprehensive income (loss), net of tax:
               
Unrealized appreciation (depreciation) ("URA(D)") on securities arising during the period
   
19,548
     
142,962
 
Reclassification adjustment for realized losses (gains) included in net income (loss)
   
(2,199
)
   
32,381
 
Total URA(D) on securities arising during the period
   
17,349
     
175,343
 
                 
Foreign currency translation adjustments
   
11,893
     
9,773
 
                 
Benefit plan actuarial net gain (loss) for the period
   
-
     
-
 
Reclassification adjustment for amortization of net (gain) loss included in net income (loss)
   
2,004
     
1,340
 
Total benefit plan net gain (loss) for the period
   
2,004
     
1,340
 
Total other comprehensive income (loss), net of tax
   
31,246
     
186,456
 
                 
COMPREHENSIVE INCOME (LOSS)
 
$
322,889
   
$
358,142
 
                 
EARNINGS PER COMMON SHARE:
               
Basic
 
$
7.12
   
$
4.03
 
Diluted
   
7.07
     
4.00
 
Dividends declared
   
1.25
     
1.15
 
                 
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)
 
2017
   
2016
 
   
(unaudited)
 
COMMON SHARES (shares outstanding):
           
Balance, beginning of period
   
40,898,864
     
42,694,252
 
Issued during the period, net
   
159,127
     
169,774
 
Treasury shares acquired
   
-
     
(464,360
)
Balance, end of period
   
41,057,991
     
42,399,666
 
                 
COMMON SHARES (par value):
               
Balance, beginning of period
 
$
689
   
$
686
 
Issued during the period, net
   
2
     
2
 
Balance, end of period
   
691
     
688
 
                 
ADDITIONAL PAID-IN CAPITAL:
               
Balance, beginning of period
   
2,140,783
     
2,103,638
 
Share-based compensation plans
   
870
     
8,190
 
Balance, end of period
   
2,141,653
     
2,111,828
 
                 
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS),
               
NET OF DEFERRED INCOME TAXES:
               
Balance, beginning of period
   
(216,764
)
   
(231,755
)
Net increase (decrease) during the period
   
31,246
     
186,456
 
Balance, end of period
   
(185,518
)
   
(45,299
)
                 
RETAINED EARNINGS:
               
Balance, beginning of period
   
9,422,932
     
8,621,972
 
Net income (loss)
   
291,643
     
171,686
 
Dividends declared ($1.25 per share in 2017 and $1.15 per share in 2016)
   
(51,281
)
   
(48,706
)
Balance, end of period
   
9,663,294
     
8,744,952
 
                 
TREASURY SHARES AT COST:
               
Balance, beginning of period
   
(3,272,244
)
   
(2,885,956
)
Purchase of treasury shares
   
-
     
(85,914
)
Balance, end of period
   
(3,272,244
)
   
(2,971,870
)
                 
TOTAL SHAREHOLDERS' EQUITY, END OF PERIOD
 
$
8,347,876
   
$
7,840,299
 
                 
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)
 
2017
   
2016
 
   
(unaudited)
 
CASH FLOWS FROM OPERATING ACTIVITIES:
           
Net income (loss)
 
$
291,643
   
$
171,686
 
Adjustments to reconcile net income to net cash provided by operating activities:
               
Decrease (increase) in premiums receivable
   
(220,367
)
   
7,604
 
Decrease (increase) in funds held by reinsureds, net
   
1,211
     
60,592
 
Decrease (increase) in reinsurance receivables
   
(30,158
)
   
(32,865
)
Decrease (increase) in income taxes
   
37,010
     
(3,883
)
Decrease (increase) in prepaid reinsurance premiums
   
(23,704
)
   
(10,219
)
Increase (decrease) in reserve for losses and loss adjustment expenses
   
99,095
     
50,497
 
Increase (decrease) in future policy benefit reserve
   
83
     
(473
)
Increase (decrease) in unearned premiums
   
125,614
     
(26,116
)
Increase (decrease) in other net payable to reinsurers
   
13,666
     
5,254
 
Increase (decrease) in losses in course of payment
   
113,815
     
24,473
 
Change in equity adjustments in limited partnerships
   
(10,998
)
   
6,181
 
Distribution of limited partnership income
   
5,384
     
15,915
 
Change in other assets and liabilities, net
   
12,998
     
12,175
 
Non-cash compensation expense
   
7,501
     
8,041
 
Amortization of bond premium (accrual of bond discount)
   
11,746
     
12,354
 
Amortization of underwriting discount on senior notes
   
1
     
1
 
Net realized capital (gains) losses
   
(52,728
)
   
74,259
 
Net cash provided by (used in) operating activities
   
381,812
     
375,476
 
                 
CASH FLOWS FROM INVESTING ACTIVITIES:
               
Proceeds from fixed maturities matured/called - available for sale, at market value
   
525,873
     
503,428
 
Proceeds from fixed maturities sold - available for sale, at market value
   
428,491
     
324,118
 
Proceeds from equity securities sold - available for sale, at market value
   
18,802
     
203
 
Proceeds from equity securities sold - available for sale, at fair value
   
140,315
     
92,245
 
Distributions from other invested assets
   
1,165,905
     
1,111,710
 
Cost of fixed maturities acquired - available for sale, at market value
   
(1,552,743
)
   
(1,078,990
)
Cost of equity securities acquired - available for sale, at market value
   
(1,282
)
   
(1,105
)
Cost of equity securities acquired - available for sale, at fair value
   
(66,902
)
   
(96,297
)
Cost of other invested assets acquired
   
(1,184,270
)
   
(1,454,123
)
Net change in short-term investments
   
(45,178
)
   
360,238
 
Net change in unsettled securities transactions
   
236,702
     
30,390
 
Net cash provided by (used in) investing activities
   
(334,287
)
   
(208,183
)
                 
CASH FLOWS FROM FINANCING ACTIVITIES:
               
Common shares issued during the period, net
   
(6,629
)
   
151
 
Purchase of treasury shares
   
-
     
(85,914
)
Dividends paid to shareholders
   
(51,281
)
   
(48,706
)
Cost of shares withheld for taxes on settlements of share-based compensation awards
   
(11,517
)
   
(8,331
)
Net cash provided by (used in) financing activities
   
(69,427
)
   
(142,800
)
                 
EFFECT OF EXCHANGE RATE CHANGES ON CASH
   
8,220
     
20,792
 
                 
Net increase (decrease) in cash
   
(13,682
)
   
45,285
 
Cash, beginning of period
   
481,922
     
283,658
 
Cash, end of period
 
$
468,240
   
$
328,943
 
                 
SUPPLEMENTAL CASH FLOW INFORMATION:
               
Income taxes paid (recovered)
 
$
9,593
   
$
5,000
 
Interest paid
   
105
     
370
 
                 
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, 2017 and 2016

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 third quarter of 2016, the Company established domestic subsidiaries, Everest Premier Insurance Company ("Everest Premier") and Everest Denali Insurance Company ("Everest Denali"), which will be used in the continued expansion of the Insurance operations.

Effective August 24, 2016, the Company sold its wholly-owned subsidiary, Heartland Crop Insurance Company ("Heartland"), a managing agent for crop insurance, to CGB Diversified Services, Inc. ("CGB"). The operating results of Heartland through August 24, 2016, are included within the Company's financial statements.

Effective July 1, 2016, the Company established a new Irish holding company, Everest Dublin Insurance Holdings Limited (Ireland) ("Everest Dublin Holdings").

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 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 through July 13, 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, 2017 and 2016 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, 2016 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, 2017 and 2016 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, 2016, 2015 and 2014 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.

5


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 was implemented utilizing a full retrospective application for prior periods.

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.

Certain reclassifications and format changes have been made to prior years' amounts to conform to the 2017 presentation.

Application of Recently Issued Accounting Standard Changes.

Accounting for Share-Based Compensation. In March 2016, the FASB issued Accounting Standards Update ("ASU") 2016-09, authoritative guidance regarding the accounting for share-based compensation.  This guidance requires that the income tax effects resulting from the change in the value of share-based compensation awards between grant and settlement will be recorded as part of the Consolidated Statements of Operations and Comprehensive Income/(Loss).  Previously, excess tax benefits have been recorded as part of the additional paid in capital within the Consolidated Balance Sheets.  The guidance is effective for annual reporting periods beginning after December 15, 2016 and interim periods within that annual reporting period.  The Company has implemented this guidance prospectively as of January 1, 2017.  The guidance also requires that the cost of employee taxes paid via shares withheld upon settlement of share-based compensation awards must be shown as a financing activity within the Statements of Cash Flows.  The Company has implemented this guidance retrospectively as of January 1, 2017.

The following table presents certain financial statement line items as previously reported in 2016, the effect of those line items due to treating the cost of shares withheld upon settlement of share-based compensation awards as a financing activity with the Statements of Cash Flows and the line items as currently reported within the financial statements.


Consolidated Statements of Cash Flows:
 
Three Months Ended March 31, 2016
 
         
Effect of
       
         
adoption of
       
   
As previously
   
new accounting
       
   
reported
   
policy
   
As adopted
 
(Dollars in thousands)
                 
CASH FLOWS FROM OPERATING ACTIVITIES:
                 
Change in other assets and liabilities, net
 
$
3,844
   
$
8,331
   
$
12,175
 
Net cash provided by (used in) operating activities
   
367,145
     
8,331
     
375,476
 
                         
CASH FLOWS FROM FINANCING ACTIVITIES:
                       
Cost of shares withheld for taxes on settlements of
                       
share-based compensation awards
   
-
     
(8,331
)
   
(8,331
)
Net cash provided by (used in) financing activities
   
(134,469
)
   
(8,331
)
   
(142,800
)


6


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.  The Company implemented this guidance effective in the fourth quarter of 2016.

Disclosures for Investments in Certain Entities that Calculate Net Asset Value Per Share.  In May 2015, the FASB issued ASU 2015-07, which removes the requirement to categorize, within the fair value hierarchy, investments for which fair values are estimated using the net asset value practical expedient provided by Accounting Standards Codification 820, Fair Value Measurement.  The updated guidance is effective for annual reporting periods beginning after December 15, 2015.  The adoption did not have a material impact on the Company's 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 implemented this guidance effective in the second quarter of 2016.  The adoption did not have a material impact on the Company's 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.  The Company implemented the guidance effective January 1, 2016.

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, 2017
 
   
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
 
$
1,434,890
   
$
19,729
   
$
(4,550
)
 
$
1,450,069
   
$
-
 
Obligations of U.S. states and political subdivisions
   
705,145
     
18,818
     
(11,526
)
   
712,437
     
-
 
Corporate securities
   
5,307,357
     
124,365
     
(28,769
)
   
5,402,953
     
3,728
 
Asset-backed securities
   
556,928
     
1,225
     
(901
)
   
557,252
     
-
 
Mortgage-backed securities
                                       
Commercial
   
299,824
     
2,167
     
(3,057
)
   
298,934
     
-
 
Agency residential
   
2,399,912
     
16,437
     
(26,172
)
   
2,390,177
     
-
 
Non-agency residential
   
598
     
43
     
(45
)
   
596
     
-
 
Foreign government securities
   
1,237,190
     
58,713
     
(53,139
)
   
1,242,764
     
159
 
Foreign corporate securities
   
2,600,801
     
130,152
     
(55,140
)
   
2,675,813
     
847
 
Total fixed maturity securities
 
$
14,542,645
   
$
371,649
   
$
(183,299
)
 
$
14,730,995
   
$
4,734
 
Equity securities
 
$
108,834
   
$
2,038
   
$
(6,526
)
 
$
104,346
   
$
-
 


7



   
At December 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
 
$
1,115,208
   
$
20,410
   
$
(5,303
)
 
$
1,130,315
   
$
-
 
Obligations of U.S. states and political subdivisions
   
723,938
     
18,016
     
(11,970
)
   
729,984
     
-
 
Corporate securities
   
5,059,388
     
131,651
     
(35,758
)
   
5,155,281
     
7,936
 
Asset-backed securities
   
488,824
     
1,110
     
(1,286
)
   
488,648
     
-
 
Mortgage-backed securities
                                       
Commercial
   
308,827
     
1,983
     
(3,878
)
   
306,932
     
-
 
Agency residential
   
2,415,901
     
17,478
     
(27,910
)
   
2,405,469
     
-
 
Non-agency residential
   
642
     
44
     
(45
)
   
641
     
-
 
Foreign government securities
   
1,254,175
     
61,226
     
(57,241
)
   
1,258,160
     
115
 
Foreign corporate securities
   
2,565,710
     
130,714
     
(64,446
)
   
2,631,978
     
1,184
 
Total fixed maturity securities
 
$
13,932,613
   
$
382,632
   
$
(207,837
)
 
$
14,107,408
   
$
9,235
 
Equity securities
 
$
129,553
   
$
2,298
   
$
(12,784
)
 
$
119,067
   
$
-
 
 
(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, 2017
   
At December 31, 2016
 
   
Amortized
   
Market
   
Amortized
   
Market
 
(Dollars in thousands)
 
Cost
   
Value
   
Cost
   
Value
 
Fixed maturity securities – available for sale:
                       
    Due in one year or less
 
$
1,121,273
   
$
1,129,238
   
$
956,945
   
$
966,970
 
    Due after one year through five years
   
7,198,076
     
7,305,413
     
6,769,585
     
6,870,056
 
    Due after five years through ten years
   
1,996,817
     
2,028,852
     
2,020,215
     
2,052,733
 
    Due after ten years
   
969,217
     
1,020,533
     
971,674
     
1,015,959
 
Asset-backed securities
   
556,928
     
557,252
     
488,824
     
488,648
 
Mortgage-backed securities:
                               
Commercial
   
299,824
     
298,934
     
308,827
     
306,932
 
Agency residential
   
2,399,912
     
2,390,177
     
2,415,901
     
2,405,469
 
Non-agency residential
   
598
     
596
     
642
     
641
 
Total fixed maturity securities
 
$
14,542,645
   
$
14,730,995
   
$
13,932,613
   
$
14,107,408
 


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)
 
2017
   
2016
 
Increase (decrease) during the period between the market value and cost
           
of investments carried at market value, and deferred taxes thereon:
           
Fixed maturity securities
 
$
18,055
   
$
200,308
 
Fixed maturity securities, other-than-temporary impairment
   
(4,501
)
   
210
 
Equity securities
   
5,999
     
4,366
 
Other invested assets
   
444
     
-
 
Change in unrealized appreciation (depreciation), pre-tax
   
19,997
     
204,884
 
Deferred tax benefit (expense)
   
(3,873
)
   
(29,472
)
Deferred tax benefit (expense), other-than-temporary impairment
   
1,225
     
(69
)
Change in unrealized appreciation (depreciation),
               
net of deferred taxes, included in shareholders' equity
 
$
17,349
   
$
175,343
 


8


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.

9


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, 2017 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
 
$
403,943
   
$
(4,550
)
 
$
-
   
$
-
   
$
403,943
   
$
(4,550
)
Obligations of U.S. states and political subdivisions
   
206,241
     
(10,966
)
   
492
     
(560
)
   
206,733
     
(11,526
)
Corporate securities
   
1,293,796
     
(19,093
)
   
141,724
     
(9,676
)
   
1,435,520
     
(28,769
)
Asset-backed securities
   
157,135
     
(467
)
   
11,241
     
(434
)
   
168,376
     
(901
)
Mortgage-backed securities
                                               
Commercial
   
78,082
     
(1,899
)
   
21,512
     
(1,158
)
   
99,594
     
(3,057
)
Agency residential
   
1,611,271
     
(21,394
)
   
179,414
     
(4,778
)
   
1,790,685
     
(26,172
)
Non-agency residential
   
-
     
-
     
99
     
(45
)
   
99
     
(45
)
Foreign government securities
   
279,924
     
(12,692
)
   
247,576
     
(40,447
)
   
527,500
     
(53,139
)
Foreign corporate securities
   
542,953
     
(9,280
)
   
287,612
     
(45,860
)
   
830,565
     
(55,140
)
Total fixed maturity securities
 
$
4,573,345
   
$
(80,341
)
 
$
889,670
   
$
(102,958
)
 
$
5,463,015
   
$
(183,299
)
Equity securities
   
-
     
-
     
90,810
     
(6,526
)
   
90,810
     
(6,526
)
Total
 
$
4,573,345
   
$
(80,341
)
 
$
980,480
   
$
(109,484
)
 
$
5,553,825
   
$
(189,825
)



   
Duration of Unrealized Loss at March 31, 2017 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
 
$
338,289
   
$
(1,311
)
 
$
89,469
   
$
(21,621
)
 
$
427,758
   
$
(22,932
)
Due in one year through five years
   
1,599,496
     
(22,510
)
   
497,328
     
(67,024
)
   
2,096,824
     
(89,534
)
Due in five years through ten years
   
546,075
     
(20,007
)
   
84,641
     
(7,210
)
   
630,716
     
(27,217
)
Due after ten years
   
242,997
     
(12,753
)
   
5,966
     
(688
)
   
248,963
     
(13,441
)
Asset-backed securities
   
157,135
     
(467
)
   
11,241
     
(434
)
   
168,376
     
(901
)
Mortgage-backed securities
   
1,689,353
     
(23,293
)
   
201,025
     
(5,981
)
   
1,890,378
     
(29,274
)
Total fixed maturity securities
 
$
4,573,345
   
$
(80,341
)
 
$
889,670
   
$
(102,958
)
 
$
5,463,015
   
$
(183,299
)


The aggregate market value and gross unrealized losses related to investments in an unrealized loss position at March 31, 2017 were $5,553,825 thousand and $189,825 thousand, respectively.  The market value of securities for the single issuer whose securities comprised the largest unrealized loss position at March 31, 2017, did not exceed 1.0% 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 $80,341 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 agency residential mortgage-backed securities, domestic and foreign corporate securities, foreign government securities and obligations of U.S. states and political subdivisions.  Of these unrealized losses, $77,268 thousand were related to securities that were rated investment grade by at least one nationally recognized statistical rating agency.  The $102,958 thousand of unrealized losses related to fixed maturity securities in an unrealized loss position for more than one year related primarily to foreign corporate securities, foreign government securities, domestic corporate securities and agency residential mortgage-backed securities.  Nearly all of these unrealized losses are attributable to net unrealized foreign exchange losses, as the U.S. dollar has strengthened against other currencies.  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.
10


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 securities before recovery of 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, 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
 
$
638,740
   
$
(5,303
)
 
$
-
   
$
-
   
$
638,740
   
$
(5,303
)
Obligations of U.S. states and political subdivisions
   
221,088
     
(11,486
)
   
564
     
(484
)
   
221,652
     
(11,970
)
Corporate securities
   
1,360,743
     
(24,023
)
   
177,153
     
(11,735
)
   
1,537,896
     
(35,758
)
Asset-backed securities
   
150,023
     
(565
)
   
18,786
     
(721
)
   
168,809
     
(1,286
)
Mortgage-backed securities
                                               
Commercial
   
143,554
     
(3,223
)
   
7,184
     
(655
)
   
150,738
     
(3,878
)
Agency residential
   
1,618,372
     
(22,461
)
   
189,665
     
(5,449
)
   
1,808,037
     
(27,910
)
Non-agency residential
   
-
     
-
     
113
     
(45
)
   
113
     
(45
)
Foreign government securities
   
360,289
     
(12,041
)
   
236,820
     
(45,200
)
   
597,109
     
(57,241
)
Foreign corporate securities
   
687,599
     
(12,769
)
   
295,500
     
(51,677
)
   
983,099
     
(64,446
)
Total fixed maturity securities
 
$
5,180,408
   
$
(91,871
)
 
$
925,785
   
$
(115,966
)
 
$
6,106,193
   
$
(207,837
)
Equity securities
   
-
     
-
     
105,507
     
(12,784
)
   
105,507
     
(12,784
)
Total
 
$
5,180,408
   
$
(91,871
)
 
$
1,031,292
   
$
(128,750
)
 
$
6,211,700
   
$
(220,621
)



   
Duration of Unrealized Loss at December 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
 
$
178,281
   
$
(1,122
)
 
$
78,153
   
$
(14,318
)
 
$
256,434
   
$
(15,440
)
Due in one year through five years
   
2,123,113
     
(26,263
)
   
538,130
     
(84,803
)
   
2,661,243
     
(111,066
)
Due in five years through ten years
   
680,334
     
(22,555
)
   
86,631
     
(8,754
)
   
766,965
     
(31,309
)
Due after ten years
   
286,731
     
(15,682
)
   
7,123
     
(1,221
)
   
293,854
     
(16,903
)
Asset-backed securities
   
150,023
     
(565
)
   
18,786
     
(721
)
   
168,809
     
(1,286
)
Mortgage-backed securities
   
1,761,926
     
(25,684
)
   
196,962
     
(6,149
)
   
1,958,888
     
(31,833
)
Total fixed maturity securities
 
$
5,180,408
   
$
(91,871
)
 
$
925,785
   
$
(115,966
)
 
$
6,106,193
   
$
(207,837
)


The aggregate market value and gross unrealized losses related to investments in an unrealized loss position at December 31, 2016 were $6,211,700 thousand and $220,621 thousand, respectively.  The market value of securities for the single issuer whose securities comprised the largest unrealized loss position at December 31, 2016, did not exceed 1.1% 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 $91,871 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, agency residential mortgage-backed securities, foreign government securities and obligations of U.S. states and political subdivisions. Of these unrealized losses, $85,078 thousand were related to securities that were rated investment grade by at least one nationally recognized statistical rating agency. The $115,966 thousand of unrealized losses related to fixed maturity securities in an unrealized loss position for more than one year related primarily to foreign government securities, foreign corporate securities and domestic corporate securities.  Of these unrealized losses $112,132 thousand is attributable to net unrealized foreign exchange losses, as the U.S. dollar has strengthened against other currencies.  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 components of net investment income are presented in the table below for the periods indicated:


   
Three Months Ended
 
   
March 31,
 
(Dollars in thousands)
 
2017
   
2016
 
Fixed maturities
 
$
103,245
   
$
102,525
 
Equity securities
   
8,745
     
11,139
 
Short-term investments and cash
   
630
     
400
 
Other invested assets
               
Limited partnerships
   
10,998
     
(6,158
)
Other
   
2,272
     
(850
)
Gross investment income before adjustments
   
125,890
     
107,056
 
Funds held interest income (expense)
   
3,148
     
2,540
 
Future policy benefit reserve income (expense)
   
(319
)
   
(301
)
Gross investment income
   
128,719
     
109,295
 
Investment expenses
   
(6,430
)
   
(6,771
)
Net investment income
 
$
122,289
   
$
102,524
 


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 $535,550 thousand in limited partnerships at March 31, 2017.  These commitments will be funded when called in accordance with the partnership agreements, which have investment periods that expire, unless extended, through 2021.

The Company's other invested assets at March 31, 2017 and December 31, 2016 included $397,757 thousand and $378,862 thousand, respectively, related to a private placement liquidity sweep facility.  The primary purpose of the facility is to enhance the Company's return on its short-term investments and cash positions.  The facility invests in high quality, short-duration securities and permits daily liquidity.

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)
 
2017
   
2016
 
Fixed maturity securities, market value:
           
Other-than-temporary impairments
 
$
(1,229
)
 
$
(28,793
)
Gains (losses) from sales
   
11,373
     
(16,911
)
Fixed maturity securities, fair value:
               
Gains (losses) from fair value adjustments
   
-
     
(232
)
Equity securities, market value:
               
Gains (losses) from sales
   
(3,436
)
   
57
 
Equity securities, fair value:
               
Gains (losses) from sales
   
4,516
     
(8,426
)
Gains (losses) from fair value adjustments
   
41,507
     
(19,955
)
Other invested assets
   
1
     
-
 
Short-term investments gain (loss)
   
(4
)
   
1
 
Total net realized capital gains (losses)
 
$
52,728
   
$
(74,259
)

12


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)
 
2017
   
2016
 
Proceeds from sales of fixed maturity securities
 
$
428,491
   
$
324,118
 
Gross gains from sales
   
15,473
     
8,552
 
Gross losses from sales
   
(4,100
)
   
(25,463
)
                 
Proceeds from sales of equity securities
 
$
159,117
   
$
92,448
 
Gross gains from sales
   
8,208
     
1,839
 
Gross losses from sales
   
(7,128
)
   
(10,208
)


4.      RESERVE FOR LOSSES, LAE AND FUTURE POLICY BENEFIT RESERVE

Activity in the reserve for losses and LAE is summarized for the periods indicated:


   
Three Months Ended
 
Twelve Months Ended
   
March 31,
 
December 31,
(Dollars in thousands)
 
2017
 
2016
Gross reserves at January 1
 
$
10,312,313
   
$
9,951,798
 
      Less reinsurance recoverables
   
(990,862
)
   
(881,503
)
           Net reserves at January 1
   
9,321,451
     
9,070,295
 
                 
Incurred related to:
               
      Current year
   
770,660
     
3,434,964
 
      Prior years
   
128
     
(295,335
)
           Total incurred losses and LAE
   
770,788
     
3,139,629
 
                 
Paid related to:
               
      Current year
   
106,606
     
745,642
 
      Prior years
   
582,431
     
2,042,972
 
           Total paid losses and LAE
   
689,037
     
2,788,614
 
                 
Foreign exchange/translation adjustment
   
20,910
     
(99,859
)
                 
Net reserves at December 31
   
9,424,112
     
9,321,451
 
      Plus reinsurance recoverables
   
989,934
     
990,862
 
           Gross reserves at December 31
 
$
10,414,046
   
$
10,312,313
 


Incurred prior years' reserves increased by $128 thousand and decreased by $295,335 thousand for the three months ended March 31, 2017 and for the twelve months ended December 31, 2016, respectively.

The decrease for the twelve months ended December 31, 2016 was attributable to favorable development in the reinsurance segments of $468,749 thousand related primarily to property and short-tail business in the U.S., property business in Canada, Latin America, Middle East and Africa, as well as favorable development on prior year catastrophe losses, partially offset by $53,909 thousand of adverse development on asbestos and environmental ("A&E") reserves.  Part of the favorable development in the reinsurance segments related to the 2015 loss from the explosion at the Chinese port of Tianjin.  In 2015, this loss was originally estimated to be $60,000 thousand.  At December 31, 2016, this loss was projected to be $16,720
 
13

 
thousand resulting in $43,280 thousand of favorable development in 2016.  The net favorable development in the reinsurance segments was partially offset by $173,414 thousand of unfavorable development in the insurance segment primarily related to run-off construction liability and umbrella program business.

5.     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.  Based on historical index volatilities and trends and the March 31, 2017 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 4%.  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, 2017, the present value of these theoretical maximum payouts using a 3% discount factor was $448,887 thousand.  Conversely, if the contracts had all expired on March 31, 2017, with the S&P index at $2,362.72, 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.  Based on historical index volatilities and trends and the March 31, 2017 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 22%.  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, 2017, the present value of the theoretical maximum payout using a 3% discount factor and current exchange rate was $36,274 thousand.  Conversely, if the contract had expired on March 31, 2017, with the FTSE index at ₤7,322.92, there would have been no settlement amount.

At March 31, 2017 and December 31, 2016, the fair value for these equity put options was $19,429 thousand and $22,059 thousand, respectively.

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, 2017
   
December 31, 2016
 
                 
Equity index put option contracts
 
Equity index put option liability
 
$
19,429
   
$
22,059
 
Total
     
$
19,429
   
$
22,059