EVEREST GROUP, LTD. - Quarter Report: 2018 June (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:

June 30, 2018

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 – 4^th 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

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

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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

YES

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 August 1, 2018
Common Shares, $0.01 par value		40,855,442

EVEREST RE GROUP, LTD

Table of Contents

Form 10-Q

Page

PART I

FINANCIAL INFORMATION

Item 1.	Financial Statements

	Consolidated Balance Sheets June 30, 2018 (unaudited)
	and December 31, 2017	1

	Consolidated Statements of Operations and Comprehensive Income (Loss) for the
	three and six months ended June 30, 2018 and 2017 (unaudited)	2

	Consolidated Statements of Changes in Shareholders' Equity for the three and
	six months ended June 30, 2018 and 2017 (unaudited)	3

	Consolidated Statements of Cash Flows for the six months ended
	June 30, 2018 and 2017 (unaudited)	4

	Notes to Consolidated Interim Financial Statements (unaudited)	5

Item 2.	Management's Discussion and Analysis of Financial Condition and
	Results of Operation	32

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	59

Item 4.	Controls and Procedures	59

PART II

OTHER INFORMATION

Item 1.	Legal Proceedings	59

Item 1A.	Risk Factors	59

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	60

Item 3.	Defaults Upon Senior Securities	60

Item 4.	Mine Safety Disclosures	60

Item 5.	Other Information	60

Item 6.	Exhibits	61

EVEREST RE GROUP, LTD.

CONSOLIDATED BALANCE SHEETS

	June 30,			December 31,
(Dollars and share amounts in thousands, except par value per share)	2018			2017
	(unaudited)
ASSETS:
Fixed maturities - available for sale, at market value	$	14,242,890		$	14,756,834
(amortized cost: 2018, $14,435,792; 2017, $14,689,598)
Fixed maturities - available for sale, at fair value		3,192			-
Equity securities - available for sale, at market value (cost: 2018, $0; 2017, $130,287)		-			129,530
Equity securities - available for sale, at fair value		1,220,770			963,572
Short-term investments		293,191			509,682
Other invested assets (cost: 2018, $1,826,148; 2017, $1,628,753)		1,826,148			1,631,850
Cash		619,493			635,067
Total investments and cash		18,205,684			18,626,535
Accrued investment income		98,585			97,704
Premiums receivable		1,961,388			1,844,881
Reinsurance receivables		1,779,581			1,348,226
Funds held by reinsureds		368,680			292,927
Deferred acquisition costs		418,167			411,587
Prepaid reinsurance premiums		368,665			288,211
Income taxes		280,696			299,438
Other assets		404,439			382,283
TOTAL ASSETS	$	23,885,885		$	23,591,792

LIABILITIES:
Reserve for losses and loss adjustment expenses	$	12,043,334		$	11,884,321
Future policy benefit reserve		48,845			51,014
Unearned premium reserve		2,141,399			2,000,556
Funds held under reinsurance treaties		17,087			18,030
Other net payable to reinsurers		312,474			218,017
4.868% Senior notes due 6/1/2044		396,894			396,834
6.6% Long term notes due 5/1/2067		236,610			236,561
Accrued interest on debt and borrowings		3,010			2,727
Equity index put option liability		9,218			12,477
Unsettled securities payable		54,563			38,743
Other liabilities		381,102			363,280
Total liabilities		15,644,536			15,222,560

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; (2018) 69,181
and (2017) 69,044 outstanding before treasury shares		692			691
Additional paid-in capital		2,172,701			2,165,768
Accumulated other comprehensive income (loss), net of deferred income tax expense
(benefit) of ($15,938) at 2018 and $9,356 at 2017		(445,338	)		(160,891	)
Treasury shares, at cost; 28,321 shares (2018) and 28,208 shares (2017)		(3,347,548	)		(3,322,244	)
Retained earnings		9,860,842			9,685,908
Total shareholders' equity		8,241,349			8,369,232
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY	$	23,885,885		$	23,591,792

The accompanying notes are an integral part of the consolidated financial statements.

EVEREST RE GROUP, LTD.

CONSOLIDATED STATEMENTS OF OPERATIONS

AND COMPREHENSIVE INCOME (LOSS)

	Three Months Ended						Six Months Ended
	June 30,						June 30,
(Dollars in thousands, except per share amounts)	2018			2017			2018			2017
	(unaudited)						(unaudited)
REVENUES:
Premiums earned	$	1,729,818		$	1,369,681		$	3,349,245		$	2,681,778
Net investment income		141,322			134,508			279,616			256,797
Net realized capital gains (losses):
Other-than-temporary impairments on fixed maturity securities		(888	)		(2,475	)		(958	)		(3,703	)
Other-than-temporary impairments on fixed maturity securities
transferred to other comprehensive income (loss)		-			-			-			-
Other net realized capital gains (losses)		16,664			27,743			(8,167	)		81,699
Total net realized capital gains (losses)		15,776			25,268			(9,125	)		77,996
Net derivative gain (loss)		2,987			766			3,260			3,396
Other income (expense)		3,036			388			15,100			(4,578	)
Total revenues		1,892,939			1,530,611			3,638,096			3,015,389

CLAIMS AND EXPENSES:
Incurred losses and loss adjustment expenses		1,341,314			861,275			2,398,491			1,632,063
Commission, brokerage, taxes and fees		383,402			299,956			741,041			582,225
Other underwriting expenses		93,099			78,869			189,383			154,756
Corporate expenses		6,633			6,919			15,629			15,376
Interest, fees and bond issue cost amortization expense		7,728			8,059			15,146			17,023
Total claims and expenses		1,832,176			1,255,078			3,359,690			2,401,443

INCOME (LOSS) BEFORE TAXES		60,763			275,533			278,406			613,946
Income tax expense (benefit)		(9,132	)		29,859			(1,807	)		76,629

NET INCOME (LOSS)	$	69,895		$	245,674		$	280,213		$	537,317

Other comprehensive income (loss), net of tax:
Unrealized appreciation (depreciation) ("URA(D)") on securities arising during the period		(41,776	)		4,868			(232,400	)		24,416
Reclassification adjustment for realized losses (gains) included in net income (loss)		249			(8,993	)		(8,523	)		(11,192	)
Total URA(D) on securities arising during the period		(41,527	)		(4,125	)		(240,923	)		13,224

Foreign currency translation adjustments		(63,652	)		35,667			(45,953	)		47,560

Reclassification adjustment for amortization of net (gain) loss included in net income (loss)		1,815			2,004			3,630			4,008
Total benefit plan net gain (loss) for the period		1,815			2,004			3,630			4,008
Total other comprehensive income (loss), net of tax		(103,364	)		33,546			(283,246	)		64,792

COMPREHENSIVE INCOME (LOSS)	$	(33,469	)	$	279,220		$	(3,033	)	$	602,109

EARNINGS PER COMMON SHARE:
Basic	$	1.71		$	5.98		$	6.85		$	13.10
Diluted		1.70			5.95			6.81			13.02
Dividends declared		1.30			1.25			2.60			2.50

The accompanying notes are an integral part of the consolidated financial statements.

EVEREST RE GROUP, LTD.

CONSOLIDATED STATEMENTS OF

CHANGES IN SHAREHOLDERS' EQUITY

	Three Months Ended						Six Months Ended
	June 30,						June 30,
(Dollars in thousands, except share and dividends per share amounts)	2018			2017			2018			2017
	(unaudited)						(unaudited)
COMMON SHARES (shares outstanding):
Balance, beginning of period		40,978,634			41,057,991			40,835,272			40,898,864
Issued during the period, net		(5,718	)		7,221			137,644			166,348
Treasury shares acquired		(112,747	)		-			(112,747	)		-
Balance, end of period		40,860,169			41,065,212			40,860,169			41,065,212

COMMON SHARES (par value):
Balance, beginning of period	$	692		$	691		$	691		$	689
Issued during the period, net		-			-			1			2
Balance, end of period		692			691			692			691

ADDITIONAL PAID-IN CAPITAL:
Balance, beginning of period		2,163,519			2,141,653			2,165,768			2,140,783
Share-based compensation plans		9,182			9,006			6,933			9,876
Balance, end of period		2,172,701			2,150,659			2,172,701			2,150,659

ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS),
NET OF DEFERRED INCOME TAXES:
Balance, beginning of period		(341,974	)		(185,518	)		(160,891	)		(216,764	)
Net increase (decrease) during the period		(103,364	)		33,546			(283,246	)		64,792
Cumulative change due to adoption of Accounting Standards Update 2016-01		-			-			(1,201	)		-
Balance, end of period		(445,338	)		(151,972	)		(445,338	)		(151,972	)

RETAINED EARNINGS:
Balance, beginning of period		9,844,187			9,663,294			9,685,908			9,422,932
Net income (loss)		69,895			245,674			280,213			537,317
Dividends declared ($1.30 per share in second quarter 2018 $2.60 year-to-date
per share in 2018 and $1.25 per share in second quarter 2017 and $2.50
year-to-date per share in 2017)		(53,240	)		(51,304	)		(106,480	)		(102,585	)
Cumulative change due to adoption of Accounting Standards Update 2016-01		-			-			1,201			-
Balance, end of period		9,860,842			9,857,664			9,860,842			9,857,664

TREASURY SHARES AT COST:
Balance, beginning of period		(3,322,244	)		(3,272,244	)		(3,322,244	)		(3,272,244	)
Purchase of treasury shares		(25,304	)		-			(25,304	)		-
Balance, end of period		(3,347,548	)		(3,272,244	)		(3,347,548	)		(3,272,244	)

TOTAL SHAREHOLDERS' EQUITY, END OF PERIOD	$	8,241,349		$	8,584,798		$	8,241,349		$	8,584,798

The accompanying notes are an integral part of the consolidated financial statements.

EVEREST RE GROUP, LTD.

CONSOLIDATED STATEMENTS OF CASH FLOWS

	Six Months Ended
	June 30,
(Dollars in thousands)	2018			2017
	(unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)	$	280,213		$	537,317
Adjustments to reconcile net income to net cash provided by operating activities:
Decrease (increase) in premiums receivable		(126,355	)		(337,069	)
Decrease (increase) in funds held by reinsureds, net		(77,794	)		(7,980	)
Decrease (increase) in reinsurance receivables		(467,011	)		8,270
Decrease (increase) in income taxes		43,516			18,362
Decrease (increase) in prepaid reinsurance premiums		(86,044	)		(87,091	)
Increase (decrease) in reserve for losses and loss adjustment expenses		223,202			97,493
Increase (decrease) in future policy benefit reserve		(2,169	)		(836	)
Increase (decrease) in unearned premiums		151,528			161,009
Increase (decrease) in other net payable to reinsurers		101,970			65,929
Increase (decrease) in losses in course of payment		162,073			288,557
Change in equity adjustments in limited partnerships		(45,898	)		(31,032	)
Distribution of limited partnership income		42,269			22,992
Change in other assets and liabilities, net		(111,220	)		(61,763	)
Non-cash compensation expense		17,566			15,725
Amortization of bond premium (accrual of bond discount)		17,677			22,475
Net realized capital (gains) losses		9,125			(77,996	)
Net cash provided by (used in) operating activities		132,648			634,362

CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from fixed maturities matured/called - available for sale, at market value		1,099,762			1,145,162
Proceeds from fixed maturities sold - available for sale, at market value		1,225,373			991,209
Proceeds from fixed maturities sold - available for sale, at fair value		1,065			-
Proceeds from equity securities sold - available for sale, at market value		-			18,802
Proceeds from equity securities sold - available for sale, at fair value		576,382			258,226
Distributions from other invested assets		2,978,865			2,476,399
Cost of fixed maturities acquired - available for sale, at market value		(2,163,331	)		(2,880,188	)
Cost of fixed maturities acquired - available for sale, at fair value		(4,381	)		-
Cost of equity securities acquired - available for sale, at market value		-			(2,610	)
Cost of equity securities acquired - available for sale, at fair value		(722,797	)		(258,543	)
Cost of other invested assets acquired		(3,168,655	)		(2,431,281	)
Net change in short-term investments		213,242			105,566
Net change in unsettled securities transactions		(33,351	)		47,800
Net cash provided by (used in) investing activities		2,174			(529,458	)

CASH FLOWS FROM FINANCING ACTIVITIES:
Common shares issued during the period for share-based compensation, net of expense		(9,431	)		(5,847	)
Purchase of treasury shares		(25,304	)		-
Dividends paid to shareholders		(106,480	)		(102,585	)
Cost of shares withheld for taxes on settlements of share-based compensation awards		(14,859	)		(12,407	)
Net cash provided by (used in) financing activities		(156,074	)		(120,839	)

EFFECT OF EXCHANGE RATE CHANGES ON CASH		5,678			3,218

Net increase (decrease) in cash		(15,574	)		(12,717	)
Cash, beginning of period		635,067			481,922
Cash, end of period	$	619,493		$	469,205

SUPPLEMENTAL CASH FLOW INFORMATION:
Income taxes paid (recovered)	$	(44,151	)	$	57,772
Interest paid		14,754			17,818

The accompanying notes are an integral part of the consolidated financial statements.

NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS (UNAUDITED)

For the Three and Six Months Ended June 30, 2018 and 2017

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 2017, the Company established a new Irish insurance subsidiary, Everest Insurance Ireland, designated activity company ("Ireland Insurance"), which will write insurance business mainly in the European markets.

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

2. BASIS OF PRESENTATION

The unaudited consolidated financial statements of the Company for the three and six months ended June 30, 2018 and 2017 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, 2017 consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by GAAP. The results for the three and six months ended June 30, 2018 and 2017 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, 2017, 2016 and 2015 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.

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities (and disclosure of contingent assets and liabilities) at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Ultimate actual results could differ, possibly materially, from those estimates.

All significant intercompany accounts and transactions have been eliminated.

Certain reclassifications and format changes have been made to prior year's amounts to conform to the 2018 presentation.

Application of Recently Issued Accounting Standard Changes.

Accounting for Deferred Taxes in Accumulated Other Comprehensive Income (AOCI). In February 2018, FASB issued ASU 2018-02 which outlines guidance on the treatment of trapped deferred taxes contained within AOCI on the consolidated balance sheets. The new guidance allows the amount of trapped deferred taxes in AOCI, resulting from the change in the U.S. tax rate from 35% to 21% upon enactment of the Tax Cuts and Jobs Act ("TCJA"), to be reclassed as part of retained earnings in the consolidated balance sheets. The guidance is effective for annual and interim reporting periods beginning after December 15, 2018, but early adoption is allowed. The Company decided to early adopt the guidance as of December 31, 2017. The adoption resulted in a reclass of $1,250 thousand between AOCI and retained earnings during the fourth quarter of 2017.

Accounting for Impact on Income Taxes due to Tax Reform. In December 2017, the SEC issued Staff Accounting Bulletin ("SAB") 118 which provides guidance on the application of FASB Accounting Standards Codification ("ASC") Topic 740, Income Taxes, due to the enactment of TCJA. SAB 118 became effective upon release. The Company has adopted the provisions of SAB 118 with respect to measuring the tax effects for the modifications to the determination of tax basis loss reserves. Because of uncertainty in how the Internal Revenue Service ("IRS") intends to implement the modifications and the necessary transition calculation, the Company has determined that a reasonable estimate cannot be determined and has followed the provisions of the tax laws that were in effect prior to the modifications. In 2018, the Company expects to record adjustments to the amount of tax expense it recorded in 2017 with respect to the TCJA as estimated amounts are finalized. Further adjustments are not expected to have a material impact on the Company's financial statements.

Amortization of Bond Premium. In March 2017, FASB issued ASU 2017-08 which outlines guidance on the amortization period for premium on callable debt securities. The new guidance requires that the premium on callable debt securities be amortized through the earliest call date rather than through the maturity date of the callable security. The guidance is effective for annual and interim reporting periods beginning after December 15, 2019. The Company does not expect the adoption of ASU 2017-08 to have a material impact on its financial statements.

Presentation and Disclosure of Net Periodic Benefit Costs. In March 2017, FASB issued ASU 2017-07 which outlines guidance on the presentation of net periodic costs of benefit plans. The new guidance requires that the service cost component of net periodic benefit costs be reported within the same line item of the statements of operations as other compensation costs are reported. Other components of net periodic benefit costs should be reported separately. Footnote disclosure is required to state within which line items of the statements of operations the components are reported. The guidance is effective for annual and interim reporting periods beginning after December 15, 2017. The Company adopted the guidance effective January 1, 2018. The adoption of ASU 2017-07 did not have a material impact on the Company's financial statements.

Disclosure of Restricted Cash. In November 2016, FASB issued ASU 2016-18 and in August 2016, FASB issued ASU 2016-15 which outline guidance on the presentation in the statements of cash flows of changes in restricted cash. The new guidance requires that the statements of cash flows should reflect all changes in cash, cash equivalents and restricted cash in total and not segregated individually. The guidance is effective for annual and interim reporting periods beginning after December 15, 2017. The Company adopted the guidance effective January 1, 2018. The adoption of ASU 2016-18 and ASU 2016-15 did not have a material impact on the Company's financial statements.

Intra-Entity Asset Transfers. In October 2016, FASB issued ASU 2016-16 which outlines guidance on the tax accounting for intra-entity asset sales and transfers, other than inventory. The new guidance requires that reporting entities recognize tax expense from the intra-entity transfer of an asset in the seller's tax jurisdiction at the time of transfer and recognize any deferred tax asset in the buyer's tax jurisdiction at the time of transfer. The guidance is effective for annual and interim reporting periods beginning after December 15, 2017. The Company adopted the guidance effective January 1, 2018. The adoption of ASU 2016-16 did not have a material impact on the Company's financial statements.

Valuation of Financial Instruments. In June 2016, FASB issued ASU 2016-13 which outlines guidance on the valuation of and accounting for assets measured at amortized cost and available for sale debt securities. The carrying value of assets measured at amortized cost will now be presented as the amount expected to be collected on the financial asset (amortized cost less an allowance for credit losses valuation account). Available for sale debt securities will now record credit losses through an allowance for credit losses, which will be limited to the amount by which fair value is below amortized cost. The guidance is effective for annual and interim reporting periods beginning after December 15, 2019. The Company is currently evaluating the impact of the adoption of ASU 2016-13 on its financial statements.

Accounting for Share-Based Compensation. In March 2016, the FASB issued 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.

Leases. In February 2016, FASB issued ASU 2016-02 which outlines new guidance on the accounting for leases. The new guidance requires the recognition of lease assets and lease liabilities on the balance sheets for most leases that were previously deemed operating leases and required only lease expense presentation in the statements of operations. The guidance is effective for annual and interim reporting periods beginning after December 15, 2018. The Company is currently evaluating the impact of the adoption of ASU 2016-02 on its financial statements.

Recognition and Measurement of Financial Instruments. In January 2016, the FASB issued ASU 2016-01 which outlines revised guidance on the accounting for equity investments. The new guidance states that all equity investments in unconsolidated entities will be measured at fair value, with the change in value being recorded through the income statement rather than being recorded within other comprehensive income. The updated guidance is effective for annual and interim reporting periods beginning after December 15, 2017. The Company adopted the guidance effective January 1, 2018. The adoption of ASU 2016-01 resulted in a cumulative change adjustment of $1,201 thousand between AOCI and retained earnings, which is disclosed separately within the consolidated statement of changes in shareholders' equity.

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.

Revenue Recognition. In May 2014, the FASB issued ASU 2014-09 and in August 2015, FASB issued ASU 2015-14 which outline revised guidance on the recognition of revenue arising from contracts with customers. The new guidance states that reporting entities should apply certain steps to determine when revenue should be recognized, based upon fulfillment of performance obligations to complete contracts. The updated guidance is effective for annual and interim reporting periods beginning after December 15, 2017. The Company adopted the guidance effective January 1, 2018. The adoption of ASU 2014-09 and ASU 2015-14 did not have a material impact on the Company's financial statements.

Any issued guidance and pronouncements, other than those directly referenced above, are deemed by the Company to be either not applicable or immaterial to its financial statements.

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 June 30, 2018
	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	$	1,158,844	$	10,522	$	(24,870	)	$	1,144,496	$	-
Obligations of U.S. states and political subdivisions		525,087		14,731		(1,934	)		537,884		420
Corporate securities		5,783,255		50,084		(122,678	)		5,710,661		2,740
Asset-backed securities		491,885		127		(6,056	)		485,956		-
Mortgage-backed securities
Commercial		229,450		-		(6,475	)		222,975		-
Agency residential		2,144,163		7,389		(66,926	)		2,084,626		-
Non-agency residential		22		38		-			60		-
Foreign government securities		1,256,344		33,478		(52,825	)		1,236,997		136
Foreign corporate securities		2,846,742		59,779		(87,286	)		2,819,235		588
Total fixed maturity securities	$	14,435,792	$	176,148	$	(369,050	)	$	14,242,890	$	3,884
Equity securities	$	-	$	-	$	-		$	-	$	-

	At December 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	$	1,540,952	$	9,816	$	(14,076	)	$	1,536,692	$	-
Obligations of U.S. states and political subdivisions		563,790		22,123		(444	)		585,469		-
Corporate securities		5,658,456		81,724		(41,175	)		5,699,005		2,488
Asset-backed securities		532,473		869		(1,982	)		531,360		-
Mortgage-backed securities
Commercial		235,794		616		(2,369	)		234,041		-
Agency residential		2,236,361		10,379		(35,838	)		2,210,902		-
Non-agency residential		497		41		(44	)		494		-
Foreign government securities		1,305,070		43,804		(34,847	)		1,314,027		178
Foreign corporate securities		2,616,205		77,045		(48,406	)		2,644,844		950
Total fixed maturity securities	$	14,689,598	$	246,417	$	(179,181	)	$	14,756,834	$	3,616
Equity securities	$	130,287	$	2,615	$	(3,372	)	$	129,530	$	-

^(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.

Effective January 1, 2018, the Company adopted ASU 2016-01, which requires equity investments in unconsolidated entities to be measured at fair value, with any change in value being recorded within net realized capital gains/(losses) as part of the consolidated statements of operations and comprehensive income (loss). Previously, changes in the market value had been recorded within AOCI as part of the consolidated balance sheets. Therefore, effective January 1, 2018, equity security investments no longer have an impact upon the AOCI balance.

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 June 30, 2018				At December 31, 2017
	Amortized		Market		Amortized		Market
(Dollars in thousands)	Cost		Value		Cost		Value
Fixed maturity securities – available for sale:
Due in one year or less	$	1,157,956	$	1,158,176	$	1,041,885	$	1,050,094
Due after one year through five years		7,151,383		7,045,835		7,545,731		7,554,248
Due after five years through ten years		2,435,785		2,395,193		2,214,473		2,231,456
Due after ten years		825,148		850,069		882,384		944,239
Asset-backed securities		491,885		485,956		532,473		531,360
Mortgage-backed securities:
Commercial		229,450		222,975		235,794		234,041
Agency residential		2,144,163		2,084,626		2,236,361		2,210,902
Non-agency residential		22		60		497		494
Total fixed maturity securities	$	14,435,792	$	14,242,890	$	14,689,598	$	14,756,834

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						Six Months Ended
	June 30,						June 30,
(Dollars in thousands)	2018			2017			2018			2017
Increase (decrease) during the period between the market value and cost
of investments carried at market value, and deferred taxes thereon:
Fixed maturity securities	$	(40,921	)	$	(22,246	)	$	(260,406	)	$	(4,191	)
Fixed maturity securities, other-than-temporary impairment		456			(994	)		267			(5,495	)
Equity securities		-			1,193			-			7,192
Other invested assets		-			821			-			1,265
Change in unrealized appreciation (depreciation), pre-tax		(40,465	)		(21,226	)		(260,139	)		(1,229	)
Deferred tax benefit (expense)		(1,007	)		16,990			19,292			13,117
Deferred tax benefit (expense), other-than-temporary impairment		(55	)		111			(76	)		1,336
Change in unrealized appreciation (depreciation),
net of deferred taxes, included in shareholders' equity	$	(41,527	)	$	(4,125	)	$	(240,923	)	$	13,224

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.

Upon the adoption of ASU 2016-01 as of January 1, 2018, all equity investments in unconsolidated entities are recorded at fair value. Prior to the adoption of ASU 2016-01, the Company classified certain equity securities as available for sale at market value. The majority of the Company's equity securities classified as available for sale at market value prior to January 1, 2018 were primarily comprised of mutual fund investments whose underlying securities consisted of fixed maturity securities. When a fund's value reflected an unrealized loss, the Company assessed whether the decline in value was temporary or other-than-temporary. In making its assessment, the Company considered the composition of its portfolios and their related markets, reports received from the portfolio managers and discussions with portfolio managers. If the Company determined that the declines were temporary and it had the ability and intent to continue to hold the investments, then the declines were recorded as unrealized losses in accumulated other comprehensive income (loss). If declines were deemed to be other-than-temporary, then the carrying value of the investment was written down to fair value and recorded in net realized capital gains (losses) in the Company's consolidated statements of operations and comprehensive income (loss).

Retrospective adjustments are employed to recalculate the values of asset-backed securities. All of the Company's asset-backed and mortgage-backed securities have a pass-through structure. Each acquisition lot is reviewed to recalculate the effective yield. The recalculated effective yield is used to derive a book value as if the new yield were applied at the time of acquisition. Outstanding principal factors from the time of acquisition to the adjustment date are used to calculate the prepayment history for all applicable securities. Conditional prepayment rates, computed with life to date factor histories and weighted average maturities, are used in the calculation of projected prepayments for pass-through security types.

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

	Duration of Unrealized Loss at June 30, 2018 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	$	740,474	$	(14,053	)	$	265,737	$	(10,817	)	$	1,006,211	$	(24,870	)
Obligations of U.S. states and political subdivisions		45,254		(651	)		36,939		(1,283	)		82,193		(1,934	)
Corporate securities		3,629,848		(78,597	)		807,050		(44,081	)		4,436,898		(122,678	)
Asset-backed securities		315,541		(4,760	)		92,906		(1,296	)		408,447		(6,056	)
Mortgage-backed securities
Commercial		156,895		(3,104	)		66,079		(3,371	)		222,974		(6,475	)
Agency residential		582,748		(11,118	)		1,321,462		(55,808	)		1,904,210		(66,926	)
Non-agency residential		-		-			-		-			-		-
Foreign government securities		302,046		(8,212	)		412,970		(44,613	)		715,016		(52,825	)
Foreign corporate securities		1,332,956		(35,840	)		584,790		(51,446	)		1,917,746		(87,286	)
Total fixed maturity securities	$	7,105,762	$	(156,335	)	$	3,587,933	$	(212,715	)	$	10,693,695	$	(369,050	)
Equity securities		-		-			-		-			-		-
Total	$	7,105,762	$	(156,335	)	$	3,587,933	$	(212,715	)	$	10,693,695	$	(369,050	)

	Duration of Unrealized Loss at June 30, 2018 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	$	628,144	$	(2,598	)	$	149,820	$	(13,881	)	$	777,964	$	(16,479	)
Due in one year through five years		3,911,655		(78,589	)		1,547,737		(106,257	)		5,459,392		(184,846	)
Due in five years through ten years		1,270,453		(42,618	)		367,885		(29,885	)		1,638,338		(72,503	)
Due after ten years		240,326		(13,548	)		42,044		(2,217	)		282,370		(15,765	)
Asset-backed securities		315,541		(4,760	)		92,906		(1,296	)		408,447		(6,056	)
Mortgage-backed securities		739,643		(14,222	)		1,387,541		(59,179	)		2,127,184		(73,401	)
Total fixed maturity securities	$	7,105,762	$	(156,335	)	$	3,587,933	$	(212,715	)	$	10,693,695	$	(369,050	)

The aggregate market value and gross unrealized losses related to investments in an unrealized loss position at June 30, 2018 were $10,693,695 thousand and $369,050 thousand, respectively. The market value of securities for the single issuer (the United States government) whose securities comprised the largest unrealized loss position at June 30, 2018, did not exceed 7.1% of the overall market value of the Company's fixed maturity securities. The market value of the securities for the issuer with the second largest unrealized loss comprised less than 1.1% 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 $156,335 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, U.S. government agencies and corporations, agency residential mortgage-backed securities and foreign government securities. Of these unrealized losses, $135,754 thousand were related to securities that were rated investment grade by at least one nationally recognized statistical rating agency. The $212,715 thousand of unrealized losses related to fixed maturity securities in an unrealized loss position for more than one year related primarily to agency residential mortgage-backed securities, foreign corporate securities, foreign government securities, domestic corporate securities and U.S. government agencies and corporations. Of these unrealized losses, $207,796 thousand were related to securities that were rated investment grade by at least one nationally recognized statistical rating agency. 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 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.

	Duration of Unrealized Loss at December 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	$	1,077,051	$	(8,380	)	$	224,189	$	(5,696	)	$	1,301,240	$	(14,076	)
Obligations of U.S. states and political subdivisions		4,400		(27	)		37,886		(417	)		42,286		(444	)
Corporate securities		1,779,292		(24,942	)		700,098		(16,233	)		2,479,390		(41,175	)
Asset-backed securities		301,316		(1,467	)		72,780		(515	)		374,096		(1,982	)
Mortgage-backed securities
Commercial		101,821		(572	)		64,272		(1,797	)		166,093		(2,369	)
Agency residential		610,941		(4,836	)		1,343,547		(31,002	)		1,954,488		(35,838	)
Non-agency residential		-		-			69		(44	)		69		(44	)
Foreign government securities		327,790		(12,811	)		331,432		(22,036	)		659,222		(34,847	)
Foreign corporate securities		691,865		(19,381	)		450,860		(29,025	)		1,142,725		(48,406	)
Total fixed maturity securities	$	4,894,476	$	(72,416	)	$	3,225,133	$	(106,765	)	$	8,119,609	$	(179,181	)
Equity securities		-		-			113,506		(3,372	)		113,506		(3,372	)
Total	$	4,894,476	$	(72,416	)	$	3,338,639	$	(110,137	)	$	8,233,115	$	(182,553	)

	Duration of Unrealized Loss at December 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	$	247,927	$	(962	)	$	206,113	$	(7,643	)	$	454,040	$	(8,605	)
Due in one year through five years		2,930,977		(42,480	)		1,200,414		(52,143	)		4,131,391		(94,623	)
Due in five years through ten years		612,702		(20,154	)		292,245		(12,680	)		904,947		(32,834	)
Due after ten years		88,792		(1,945	)		45,693		(941	)		134,485		(2,886	)
Asset-backed securities		301,316		(1,467	)		72,780		(515	)		374,096		(1,982	)
Mortgage-backed securities		712,762		(5,408	)		1,407,888		(32,843	)		2,120,650		(38,251	)
Total fixed maturity securities	$	4,894,476	$	(72,416	)	$	3,225,133	$	(106,765	)	$	8,119,609	$	(179,181	)

The aggregate market value and gross unrealized losses related to investments in an unrealized loss position at December 31, 2017 were $8,233,115 thousand and $182,553 thousand, respectively. The market value of securities for the single issuer (the United States government) whose securities comprised the largest unrealized loss position at December 31, 2017, did not exceed 8.9% of the overall market value of the Company's fixed maturity securities. The market value of the securities for the issuer with the second largest unrealized loss comprised less than 1.1% 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 $72,416 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, U.S. government agencies and corporations and agency residential mortgage-backed securities. Of these unrealized losses, $68,107 thousand were related to securities that were rated investment grade by at least one nationally recognized statistical rating agency. The $106,765 thousand of unrealized losses related to fixed maturity securities in an unrealized loss position for more than one year related primarily to agency residential mortgage-backed securities, foreign corporate securities, foreign government securities, domestic corporate securities and U.S. government agencies and corporations. Of these unrealized losses, $103,739 thousand were related to securities that were rated investment grade by at least one nationally recognized statistical rating agency. 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						Six Months Ended
	June 30,						June 30,
(Dollars in thousands)	2018			2017			2018			2017
Fixed maturities	$	114,824		$	108,122		$	223,506		$	211,367
Equity securities		6,672			8,366			13,499			17,111
Short-term investments and cash		2,092			835			3,824			1,465
Other invested assets
Limited partnerships		21,996			20,060			45,377			31,058
Other		2,659			2,285			6,984			4,557
Gross investment income before adjustments		148,243			139,668			293,190			265,558
Funds held interest income (expense)		1,939			1,724			5,569			4,872
Future policy benefit reserve income (expense)		(359	)		(416	)		(568	)		(735	)
Gross investment income		149,823			140,976			298,191			269,695
Investment expenses		(8,501	)		(6,468	)		(18,575	)		(12,898	)
Net investment income	$	141,322		$	134,508		$	279,616		$	256,797

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 $689,337 thousand in limited partnerships at June 30, 2018. These commitments will be funded when called in accordance with the partnership agreements, which have investment periods that expire, unless extended, through 2023.

The Company's other invested assets at June 30, 2018 and December 31, 2017 included $387,160 thousand and $447,915 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						Six Months Ended
	June 30,						June 30,
(Dollars in thousands)	2018			2017			2018			2017
Fixed maturity securities, market value:
Other-than-temporary impairments	$	(888	)	$	(2,475	)	$	(958	)	$	(3,703	)
Gains (losses) from sales		(43	)		13,543			10,349			24,915
Fixed maturity securities, fair value:
Gains (losses) from sales		(1,068	)		-			(1,082	)		-
Gains (losses) from fair value adjustments		958			-			958			-
Equity securities, market value:
Gains (losses) from sales		-			-			-			(3,436	)
Equity securities, fair value:
Gains (losses) from sales		(1,563	)		805			(1,523	)		5,321
Gains (losses) from fair value adjustments		17,800			13,397			(17,453	)		54,904
Other invested assets		581			(2	)		584			(1	)
Short-term investments gain (loss)		(1	)		-			-			(4	)
Total net realized capital gains (losses)	$	15,776		$	25,268		$	(9,125	)	$	77,996

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						Six Months Ended
	June 30,						June 30,
(Dollars in thousands)	2018			2017			2018			2017
Proceeds from sales of fixed maturity securities	$	862,150		$	562,718		$	1,226,438		$	991,209
Gross gains from sales		6,824			17,105			19,826			32,578
Gross losses from sales		(7,935	)		(3,563	)		(10,559	)		(7,663	)

Proceeds from sales of equity securities	$	376,507		$	117,911		$	576,382		$	277,028
Gross gains from sales		7,359			3,885			14,046			12,093
Gross losses from sales		(8,922	)		(3,080	)		(15,569	)		(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:

	Six Months Ended			Twelve Months Ended
	June 30,			December 31,
(Dollars in thousands)	2018			2017
Gross reserves at beginning of period	$	11,884,321		$	10,312,313
Less reinsurance recoverables		(1,212,649	)		(990,862	)
Net reserves at beginning of period		10,671,672			9,321,451

Incurred related to:
Current year		1,963,766			4,815,967
Prior years		434,725			(293,386	)
Total incurred losses and LAE		2,398,491			4,522,581

Paid related to:
Current year		490,884			1,280,605
Prior years		2,089,606			2,062,634
Total paid losses and LAE		2,580,490			3,343,239

Foreign exchange/translation adjustment		(67,978	)		170,879

Net reserves at end of period		10,421,695			10,671,672
Plus reinsurance recoverables		1,621,639			1,212,649
Gross reserves at end of period	$	12,043,334		$	11,884,321

Incurred prior years' reserves increased by $434,725 thousand for the six months ended June 30, 2018 and decreased by $293,386 thousand for the twelve months ended December 31, 2017. The increase for the six months ended June 30, 2018, was due to $532,155 thousand of adverse development on prior years catastrophe losses, primarily related to Hurricane Harvey, Irma and Maria as well as the California wildfires. The increase in loss estimates for Hurricanes Harvey, Irma and Maria was mostly driven by re-opened claims reported in the second quarter of 2018 and loss inflation from higher than expected loss adjustment expenses and in particular, their impact on aggregate covers. This reserve increase was partially offset by $97,430 thousand of favorable development on prior years attritional losses which mainly related to U.S. and international property and casualty reinsurance business. The favorable development was primarily identified through reserve studies completed in the second quarter of 2018. The decrease for 2017 was attributable to favorable development in the reinsurance segments of $238,378 thousand, related primarily to property and short-tail business in the U.S. and Bermuda as well as favorable development on prior year catastrophe losses, partially offset by $37,137 thousand of adverse development on A&E reserves. The insurance segment also experienced favorable development on prior year reserves of $55,007 thousand mainly on its workers compensation business, which is largely written in California.

The $408,990 thousand increase in reinsurance recoverables from December 31, 2017 to June 30, 2018 is primarily related to the additional catastrophe losses incurred in the second quarter of 2018 as well as a retroactive reinsurance transaction with a Mt. Logan Re segregated account effective in the second quarter of 2018.

5. DERIVATIVES

The Company sold seven equity index put option contracts, based on two indices, in 2001 and 2005. 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). One of these contracts expired on June 9, 2017, with no liability due under the terms of the contract.

The Company has five remaining equity index put option contracts, based on the Standard & Poor's 500 ("S&P 500") index. Based on historical index volatilities and trends and the June 30, 2018 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 2%. The theoretical maximum payouts under these five equity index put option contracts would occur if on each of the exercise dates the S&P 500 index value were zero. At June 30, 2018, the present value of these theoretical maximum payouts using a 3% discount factor was $406,448 thousand. Conversely, if the contracts had all expired on June 30, 2018, with the S&P index at $2,718.37, there would have been no settlement amount.

The Company has one equity index put option contract based on the FTSE 100 index. Based on historical index volatilities and trends and the June 30, 2018 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 10%. 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 June 30, 2018, the present value of the theoretical maximum payout using a 3% discount factor and current exchange rate was $41,076 thousand. Conversely, if the contract had expired on June 30, 2018, with the FTSE index at ₤7,636.93, there would have been no settlement amount.

At June 30, 2018 and December 31, 2017, the fair value for these equity put options was $9,218 thousand and $12,477 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	June 30, 2018		December 31, 2017

Equity index put option contracts	Equity index put option liability	$	9,218	$	12,477
Total		$	9,218	$	12,477

The change in fair value of the equity index put option contracts can be found in the Company's statement of operations and comprehensive income (loss) as follows:

(Dollars in thousands)		For the Three Months Ended				For the Six Months Ended
Derivatives not designated as	Location of gain (loss) in statements of	June 30,				June 30,
hedging instruments	operations and comprehensive income (loss)	2018		2017		2018		2017

Equity index put option contracts	Net derivative gain (loss)	$	2,987	$	766	$	3,260	$	3,396
Total		$	2,987	$	766	$	3,260	$	3,396

6. 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.

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 ninety-one private placement securities at June 30, 2018, an investment manager's valuation committee valued eighty-five of these private placement securities at $247,863 thousand. A majority of the fair values determined by the valuation committee are substantiated by valuations from independent third parties. Four of the private placement securities totaling $95,444 thousand are valued by the investment manager at amortized cost. In addition, the Company valued two private placement securities at $53,715 thousand, representing par value. Due to the unavailability of prices for sixty-six private placement securities at December 31, 2017, an investment manager's valuation committee valued sixty-five of these private placement securities at $165,173 thousand. In addition, the Company valued one private placement security at $51,965 thousand, representing par value.

The Company internally manages a public equity portfolio which had a fair value at June 30, 2018 and December 31, 2017 of $490,863 thousand and $386,241 thousand, respectively, and all prices were obtained from publicly 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 or receive fair values from investment managers.

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.

recorded in the consolidated statements of operations and comprehensive income (loss). One of these contracts expired on June 9, 2017, with no liability due under the terms of the contract.

The Company's liability for equity index put options is categorized as level 3 since there is no active market for these 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.

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)	June 30, 2018		(Level 1)		(Level 2)		(Level 3)
Assets:
Fixed maturities, market value
U.S. Treasury securities and obligations of
U.S. government agencies and corporations	$	1,144,496	$	-	$	1,144,496	$	-
Obligations of U.S. States and political subdivisions		537,884		-		537,884		-
Corporate securities		5,710,661		-		5,329,446		381,215
Asset-backed securities		485,956		-		485,956		-
Mortgage-backed securities
Commercial		222,975		-		222,975		-
Agency residential		2,084,626		-		2,084,626		-
Non-agency residential		60		-		60		-
Foreign government securities		1,236,997		-		1,236,997		-
Foreign corporate securities		2,819,235		-		2,806,620		12,615
Total fixed maturities, market value		14,242,890		-		13,849,060		393,830

Fixed maturities, fair value		3,192		-		-		3,192
Equity securities, fair value		1,220,770		1,180,851		39,919		-

Liabilities:
Equity index put option contracts	$	9,218	$	-	$	-	$	9,218

There were no transfers between Level 1 and Level 2 for the six mo