EVEREST GROUP, LTD. - Quarter Report: 2020 June (Form 10-Q)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
_X_ Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended June 30, 2020
___ Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
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.) |
141 Front Street
PO Box HM 845
HamiltonHM 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 every Interactive Data File required to be submitted 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 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 |
|
|
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 |
Securities registered pursuant to Section 12(b) of the Act:
Class |
Trading Symbol | Name of Exchange where Registered | Number of Shares Outstanding At August 1, 2020 |
Common Shares, $0.01 par value |
RE |
New York Stock Exchange |
39,971,796 |
EVEREST RE GROUP, LTD
Table of Contents
Form 10-Q
Page
PART I
FINANCIAL INFORMATION
PART II
OTHER INFORMATION
Item 1. | 56 | |
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Item 1A. | 57 | |
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Item 2. | 58 | |
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Item 3. | 58 | |
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Item 4. | 58 | |
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Item 5. | 58 | |
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Item 6. | 59 | |
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EVEREST RE GROUP, LTD.
CONSOLIDATED BALANCE SHEETS
| June 30, |
| December 31, | ||
(Dollars and share amounts in thousands, except par value per share) | 2020 |
| 2019 | ||
| (unaudited) |
|
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| |
ASSETS: |
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|
Fixed maturities - available for sale, at market value | $ | 17,055,259 |
| $ | 16,824,944 |
(amortized cost: 2020, $16,392,238; 2019, $16,473,491, credit allowances: 2020, $25,837; 2019, $0) |
|
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|
|
|
Fixed maturities - available for sale, at fair value |
| 4,431 |
|
| 5,826 |
Equity securities, at fair value |
| 949,170 |
|
| 931,457 |
Short-term investments (cost: 2020, $854,248; 2019, $414,639) |
| 853,964 |
|
| 414,706 |
Other invested assets (cost: 2020, $1,816,373; 2019, $1,763,531) |
| 1,816,373 |
|
| 1,763,531 |
Cash |
| 922,479 |
|
| 808,036 |
Total investments and cash |
| 21,601,676 |
|
| 20,748,500 |
Accrued investment income |
| 120,387 |
|
| 116,804 |
Premiums receivable |
| 2,484,271 |
|
| 2,259,088 |
Reinsurance receivables |
| 1,852,887 |
|
| 1,763,471 |
Funds held by reinsureds |
| 513,123 |
|
| 489,901 |
Deferred acquisition costs |
| 578,210 |
|
| 581,863 |
Prepaid reinsurance premiums |
| 464,206 |
|
| 445,716 |
Income taxes |
| 294,333 |
|
| 305,711 |
Other assets |
| 675,700 |
|
| 612,997 |
TOTAL ASSETS | $ | 28,584,793 |
| $ | 27,324,051 |
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LIABILITIES: |
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Reserve for losses and loss adjustment expenses | $ | 14,276,641 |
| $ | 13,611,313 |
Future policy benefit reserve |
| 40,659 |
|
| 42,592 |
Unearned premium reserve |
| 3,190,174 |
|
| 3,056,735 |
Funds held under reinsurance treaties |
| 11,876 |
|
| 10,668 |
Other net payable to reinsurers |
| 369,761 |
|
| 291,660 |
Losses in course of payment |
| 199,157 |
|
| 51,950 |
Senior notes due |
| 397,134 |
|
| 397,074 |
Long term notes due |
| 223,625 |
|
| 236,758 |
Accrued interest on debt and borrowings |
| 2,368 |
|
| 2,878 |
Equity index put option liability |
| 9,088 |
|
| 5,584 |
Unsettled securities payable |
| 89,749 |
|
| 30,650 |
Other liabilities |
| 488,262 |
|
| 453,264 |
Total liabilities |
| 19,298,494 |
|
| 18,191,126 |
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Commitments and contingencies (Note 9) |
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SHAREHOLDERS' EQUITY: |
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Preferred shares, par value: $0.01; 50,000 shares authorized; |
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no shares issued and outstanding |
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Common shares, par value: $0.01; 200,000 shares authorized; (2020) 69,608 |
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and (2019) 69,464 outstanding before treasury shares |
| 696 |
|
| 694 |
Additional paid-in capital |
| 2,225,993 |
|
| 2,219,660 |
Accumulated other comprehensive income (loss), net of deferred income |
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tax expense (benefit) of $66,616 at 2020 and $30,996 at 2019 |
| 297,137 |
|
| 28,152 |
Treasury shares, at cost; 29,636 shares (2020) and 28,665 shares (2019) |
| (3,622,172) |
|
| (3,422,152) |
Retained earnings |
| 10,384,645 |
|
| 10,306,571 |
Total shareholders' equity |
| 9,286,299 |
|
| 9,132,925 |
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY | $ | 28,584,793 |
| $ | 27,324,051 |
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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 |
| Six Months Ended | ||||||||
| June 30, |
| June 30, | ||||||||
(Dollars in thousands, except per share amounts) | 2020 |
| 2019 |
| 2020 |
| 2019 | ||||
| (unaudited) |
| (unaudited) | ||||||||
REVENUES: |
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Premiums earned | $ | 2,042,405 |
| $ | 1,817,299 |
| $ | 4,079,219 |
| $ | 3,549,996 |
Net investment income |
| 38,083 |
|
| 179,028 |
|
| 185,883 |
|
| 320,004 |
Net realized capital gains (losses): |
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Credit allowances on fixed maturity securities |
| (4,063) |
|
|
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| (25,837) |
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Other-than-temporary impairments on fixed maturity securities |
|
|
| (5,157) |
|
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| (8,090) | ||
Other net realized capital gains (losses) |
| 188,711 |
|
| 35,429 |
|
| (103) |
|
| 130,594 |
Total net realized capital gains (losses) |
| 184,648 |
|
| 30,272 |
|
| (25,940) |
|
| 122,504 |
Net derivative gain (loss) |
| 11,869 |
|
| 353 |
|
| (3,504) |
|
| 3,584 |
Other income (expense) |
| (32,490) |
|
| (18,225) |
|
| (9,127) |
|
| (21,525) |
Total revenues |
| 2,244,515 |
|
| 2,008,727 |
|
| 4,226,531 |
|
| 3,974,563 |
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CLAIMS AND EXPENSES: |
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Incurred losses and loss adjustment expenses |
| 1,407,016 |
|
| 1,094,630 |
|
| 2,837,856 |
|
| 2,143,180 |
Commission, brokerage, taxes and fees |
| 466,316 |
|
| 420,950 |
|
| 914,838 |
|
| 810,424 |
Other underwriting expenses |
| 118,130 |
|
| 104,833 |
|
| 246,990 |
|
| 203,818 |
Corporate expenses |
| 8,733 |
|
| 7,535 |
|
| 18,566 |
|
| 14,187 |
Interest, fees and bond issue cost amortization expense |
| 7,253 |
|
| 8,434 |
|
| 14,836 |
|
| 16,065 |
Total claims and expenses |
| 2,007,448 |
|
| 1,636,382 |
|
| 4,033,086 |
|
| 3,187,674 |
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INCOME (LOSS) BEFORE TAXES |
| 237,067 |
|
| 372,345 |
|
| 193,445 |
|
| 786,889 |
Income tax expense (benefit) |
| 46,187 |
|
| 39,477 |
|
| (14,047) |
|
| 99,470 |
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NET INCOME (LOSS) | $ | 190,880 |
| $ | 332,868 |
| $ | 207,492 |
| $ | 687,419 |
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Other comprehensive income (loss), net of tax: |
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Unrealized appreciation (depreciation) ("URA(D)") on securities arising during the period |
| 551,753 |
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| 197,759 |
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| 272,354 |
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| 430,824 |
Reclassification adjustment for realized losses (gains) included in net income (loss) |
| (7,257) |
|
| (1,869) |
|
| 24,142 |
|
| (3,691) |
Total URA(D) on securities arising during the period |
| 544,496 |
|
| 195,890 |
|
| 296,496 |
|
| 427,133 |
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Foreign currency translation adjustments |
| 20,586 |
|
| (25,832) |
|
| (30,238) |
|
| (11,780) |
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Reclassification adjustment for amortization of net (gain) loss included in net income (loss) |
| 1,806 |
|
| 1,151 |
|
| 2,726 |
|
| 2,302 |
Total benefit plan net gain (loss) for the period |
| 1,806 |
|
| 1,151 |
|
| 2,726 |
|
| 2,302 |
Total other comprehensive income (loss), net of tax |
| 566,888 |
|
| 171,209 |
|
| 268,984 |
|
| 417,655 |
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COMPREHENSIVE INCOME (LOSS) | $ | 757,768 |
| $ | 504,077 |
| $ | 476,476 |
| $ | 1,105,074 |
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EARNINGS PER COMMON SHARE: |
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Basic | $ | 4.78 |
| $ | 8.17 |
| $ | 5.14 |
| $ | 16.88 |
Diluted |
| 4.77 |
|
| 8.15 |
|
| 5.13 |
|
| 16.82 |
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The accompanying notes are an integral part of the consolidated financial statements. |
2
EVEREST RE GROUP, LTD.
CONSOLIDATED STATEMENTS OF
CHANGES IN SHAREHOLDERS’ EQUITY
(Dollars in thousands, except share and dividends per share amounts) | 2020 |
| 2019 | ||
| (unaudited) | ||||
COMMON SHARES (shares outstanding): |
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Balance, January 1 |
| 40,798,963 |
|
| 40,651,148 |
Issued during the period, net |
| 159,423 |
|
| 194,584 |
Treasury shares acquired |
| (970,892) |
|
| (75,193) |
Balance, March 31 |
| 39,987,494 |
|
| 40,770,539 |
Issued during the period, net |
| (15,849) |
|
| 9,403 |
Treasury shares acquired |
|
|
| (39,440) | |
Balance, June 30 |
| 39,971,645 |
|
| 40,740,502 |
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COMMON SHARES (par value): |
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Balance, January 1 | $ | 694 |
| $ | 692 |
Issued during the period, net |
| 2 |
|
| 2 |
Balance, March 31 |
| 696 |
|
| 694 |
Issued during the period, net |
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Balance, June 30 |
| 696 |
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| 694 |
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ADDITIONAL PAID-IN CAPITAL: |
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Balance, January 1 |
| 2,219,660 |
|
| 2,188,777 |
Share-based compensation plans |
| (3,181) |
|
| 767 |
Balance, March 31 |
| 2,216,479 |
|
| 2,189,544 |
Share-based compensation plans |
| 9,514 |
|
| 8,917 |
Balance, June 30 |
| 2,225,993 |
|
| 2,198,461 |
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ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS), |
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NET OF DEFERRED INCOME TAXES: |
|
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Balance, January 1 |
| 28,152 |
|
| (462,557) |
Net increase (decrease) during the period |
| (297,903) |
|
| 246,446 |
Balance, March 31 |
| (269,751) |
|
| (216,111) |
Net increase (decrease) during the period |
| 566,888 |
|
| 171,209 |
Balance, June 30 |
| 297,137 |
|
| (44,902) |
|
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RETAINED EARNINGS: |
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Balance, January 1 |
| 10,306,571 |
|
| 9,531,433 |
Change to beginning balance due to adoption of Accounting Standards Update 2016-13 |
| (4,214) |
|
| |
Net income (loss) |
| 16,612 |
|
| 354,551 |
Dividends declared ($1.55 per share in 2020 and $1.40 per share in 2019) |
| (63,277) |
|
| (57,137) |
Balance, March 31 |
| 10,255,692 |
|
| 9,828,847 |
Net income (loss) |
| 190,880 |
|
| 332,868 |
Dividends declared ($1.55 per share 2020 and $1.40 per share 2019) |
| (61,927) |
|
| (56,999) |
Balance, June 30 |
| 10,384,645 |
|
| 10,104,716 |
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TREASURY SHARES AT COST: |
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Balance, January 1 |
| (3,422,152) |
|
| (3,397,548) |
Purchase of treasury shares |
| (200,020) |
|
| (16,153) |
Balance, March 31 |
| (3,622,172) |
|
| (3,413,701) |
Purchase of treasury shares |
|
|
| (8,451) | |
Balance, June 30 |
| (3,622,172) |
|
| (3,422,152) |
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TOTAL SHAREHOLDERS' EQUITY, June 30 | $ | 9,286,299 |
| $ | 8,836,817 |
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The accompanying notes are an integral part of the consolidated financial statements. | |||||
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3
EVEREST RE GROUP, LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
| Six Months Ended | ||||
| June 30, | ||||
(Dollars in thousands) | 2020 |
| 2019 | ||
| (unaudited) | ||||
CASH FLOWS FROM OPERATING ACTIVITIES: |
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Net income (loss) | $ | 207,492 |
| $ | 687,419 |
Adjustments to reconcile net income to net cash provided by operating activities: |
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Decrease (increase) in premiums receivable |
| (252,609) |
|
| (174,583) |
Decrease (increase) in funds held by reinsureds, net |
| (23,498) |
|
| (55,421) |
Decrease (increase) in reinsurance receivables |
| (147,515) |
|
| (19,319) |
Decrease (increase) in income taxes |
| (25,000) |
|
| 180,126 |
Decrease (increase) in prepaid reinsurance premiums |
| (29,699) |
|
| (137,092) |
Increase (decrease) in reserve for losses and loss adjustment expenses |
| 800,816 |
|
| 155,096 |
Increase (decrease) in future policy benefit reserve |
| (1,933) |
|
| (1,648) |
Increase (decrease) in unearned premiums |
| 159,744 |
|
| 219,263 |
Increase (decrease) in other net payable to reinsurers |
| 89,499 |
|
| 132,474 |
Increase (decrease) in losses in course of payment |
| 147,427 |
|
| 35,738 |
Change in equity adjustments in limited partnerships |
| 84,066 |
|
| (57,031) |
Distribution of limited partnership income |
| 40,447 |
|
| 41,321 |
Change in other assets and liabilities, net |
| (10,313) |
|
| (60,820) |
Non-cash compensation expense |
| 19,175 |
|
| 17,171 |
Amortization of bond premium (accrual of bond discount) |
| 20,547 |
|
| 13,321 |
Net realized capital (gains) losses |
| 25,940 |
|
| (122,504) |
Net cash provided by (used in) operating activities |
| 1,104,586 |
|
| 853,511 |
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CASH FLOWS FROM INVESTING ACTIVITIES: |
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Proceeds from fixed maturities matured/called - available for sale, at market value |
| 1,261,650 |
|
| 1,009,921 |
Proceeds from fixed maturities sold - available for sale, at market value |
| 990,273 |
|
| 2,318,207 |
Proceeds from fixed maturities sold - available for sale, at fair value |
|
|
| 2,706 | |
Proceeds from equity securities sold, at fair value |
| 213,185 |
|
| 149,233 |
Distributions from other invested assets |
| 164,975 |
|
| 143,752 |
Cost of fixed maturities acquired - available for sale, at market value |
| (2,301,701) |
|
| (3,466,331) |
Cost of equity securities acquired, at fair value |
| (224,086) |
|
| (229,070) |
Cost of other invested assets acquired |
| (343,332) |
|
| (207,323) |
Net change in short-term investments |
| (439,457) |
|
| (499,983) |
Net change in unsettled securities transactions |
| 49,504 |
|
| 88,531 |
Net cash provided by (used in) investing activities |
| (628,989) |
|
| (690,357) |
|
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CASH FLOWS FROM FINANCING ACTIVITIES: |
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Common shares issued during the period for share-based compensation, net of expense |
| (12,841) |
|
| (7,485) |
Purchase of treasury shares |
| (200,019) |
|
| (24,604) |
Dividends paid to shareholders |
| (125,205) |
|
| (114,136) |
Cost of debt repurchase |
| (10,647) |
|
| |
Cost of shares withheld on settlements of share-based compensation awards |
| (14,141) |
|
| (11,748) |
Net cash provided by (used in) financing activities |
| (362,853) |
|
| (157,973) |
|
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EFFECT OF EXCHANGE RATE CHANGES ON CASH |
| 1,699 |
|
| 91 |
|
|
|
|
|
|
Net increase (decrease) in cash |
| 114,443 |
|
| 5,272 |
Cash, beginning of period |
| 808,036 |
|
| 656,095 |
Cash, end of period |
| 922,479 |
|
| 661,367 |
|
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SUPPLEMENTAL CASH FLOW INFORMATION: |
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Income taxes paid (recovered) | $ | 10,895 |
| $ | (83,995) |
Interest paid |
| 14,992 |
|
| 15,984 |
|
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|
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The accompanying notes are an integral part of the consolidated financial statements. |
4
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS (UNAUDITED)
For the Three and Six Months Ended June 30, 2020 and 2019
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.
2. BASIS OF PRESENTATION
The unaudited interim consolidated financial statements of the Company as of June 30, 2020 and December 31, 2019 and for the three and six months ended June 30, 2020 and 2019 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, 2019 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, 2020 and 2019 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, 2019, 2018 and 2017 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 circumstance 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. This is particularly true given the fluid and continuing nature of the COVID-19 pandemic. This is an ongoing event and so is the Company’s evaluation and analysis. While the Company’s analysis considers all aspects of its operations, it does not take into account legal, regulatory or legislative intervention that could retroactively mandate or expand coverage provisions. Given the uncertainties in the current public health and economic environment, there could be an adverse impact on results for the Property & Casualty industry and the Company for the remainder of the year. The impact is dependent on the shape and length of the economic recovery.
With recent changes in executive management and organizational structure, the Company manages its reinsurance and insurance operations as autonomous units and key strategic decisions are based on the aggregate operating results and projections for these segments of business. Accordingly, effective January 1, 2020, the Company revised it reporting segments to Reinsurance Operations and Insurance Operations. This replaces the previous reported segments of U.S. Reinsurance, International (reinsurance), Bermuda (reinsurance) and Insurance. The prior year presented segment information has been reformatted to reflect this change.
All intercompany accounts and transactions have been eliminated.
5
Certain reclassifications and format changes have been made to prior years’ amounts to conform to the 2020 presentation.
Application of Recently Issued Accounting Standard Changes.
Accounting for Income Taxes. In December 2019, The Financial Accounting Standards Board (“FASB”) issued ASU 2019-12, which provides simplification of existing guidance for income taxes, including the removal of certain exceptions related to recognition of deferred tax liabilities on foreign subsidiaries. The guidance is effective for annual reporting periods beginning after December 15, 2020 and interim periods within that annual reporting period. The Company is currently evaluating the impact of the adoption of ASU 2019-12 on its financial statements.
Simplification of Disclosure Requirements. In August 2018, the Securities and Exchange Commission (“SEC”) issued Final Rule Release #33-10532 (“the Rule”) which addresses the simplification of the SEC’s disclosure requirements for quarterly and annual financial reports. The main changes addressed by the Rule that are applicable to the Company are 1) elimination of the requirement to disclose dividend per share information on the face of the Statements of Operations and Comprehensive Income (Loss) and 2) a new requirement to disclose changes in equity by line item with subtotals for each interim reporting period on the Statements of Changes in Shareholders’ Equity. The Rule became effective for all financial reports filed after November 5, 2018 (30 days after its publication in the Federal Register), except for the additional requirement for the Statements of Changes in Shareholders’ Equity which was to be implemented for first quarter 2019 reporting. The Company has adopted the portions of the Rule that became effective November 5, 2018. The portion of the Rule related to the new requirement for the Statements of Changes in Shareholders’ Equity was adopted by the Company in the first quarter of 2019.
Accounting for Cloud Computing Arrangement. In August 2018, FASB issued ASU 2018-15, which outlines accounting for implementation costs of a cloud computing arrangement that is a service contract. This guidance requires that implementation costs of a cloud computing arrangement that is a service contract must be capitalized and expensed in accordance with the existing provisions provided in Subtopic 350-40 regarding development of internal use software. In addition, any capitalized implementation costs should be amortized over the term of the hosting arrangement. The guidance is effective for annual reporting periods beginning after December 15, 2019 and interim periods within that annual reporting period. The Company adopted the guidance as of January 1, 2020. The adoption of ASU 2018-15 did not have a material impact on the Company’s financial statements.
Accounting for Long Duration Contracts. In August 2018, FASB issued ASU 2018-12, which discusses changes to the recognition, measurement and presentation of long duration contracts. The main provisions of this guidance address the following: 1) In determining liability for future policy benefits, companies must review cash flow assumptions at least annually and the discount rate assumption at each reporting period date 2) Amortization of deferred acquisition costs has been simplified to be in constant level proportion to either premiums, gross profits or gross margins 3) Disaggregated roll forwards of beginning and ending liabilities for future policy benefits are required. The guidance was originally effective for annual reporting periods beginning after December 15, 2020 and interim periods within that annual reporting period. However, FASB issued ASU 2019-09 in November 2019 which defers the effective date of ASU 2018-12 until annual reporting periods beginning after December 15, 2021. The Company is currently evaluating the impact of the adoption of ASU 2018-12 on its financial statements.
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. In 2018, the Company recorded adjustments to the amount of
6
tax expense it recorded in 2017 with respect to the TCJA as estimated amounts were finalized, which did not 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, 2018. The Company adopted the guidance effective January 1, 2019. The adoption of ASU 2017-08 did not have a material impact on the Company’s financial statements.
Valuation of Financial Instruments. In June 2016, FASB issued ASU 2016-13 (and has subsequently issued related guidance and amendments in ASU 2019-11 and ASU 2019-10 in November 2019) which outline 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 adopted the guidance effective January 1, 2020. The adoption resulted in a cumulative reduction of $4,214 thousand in retained earnings, which is disclosed separately within the Consolidated Statements of Shareholders’ Equity.
Leases. In February 2016, FASB issued ASU 2016-02 (and subsequently issued ASU 2018-11 in July, 2018) which outline 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 adopted ASU 2016-02 effective January 1, 2019 and elected to utilize a cumulative-effect adjustment to the opening balance of retained earnings for the year of adoption. Accordingly, the Company’s reporting for the comparative periods prior to adoption continue to be presented in the financial statements in accordance with previous lease accounting guidance. The Company also elected to apply the package of practical expedients applicable to the Company in the updated guidance for transition for leases in effect at adoption. The Company did not elect the hindsight practical expedient to determine the lease term of existing leases (e.g. The Company did not re-assess lease renewals, termination options nor purchase options in determining lease terms). The adoption of the updated guidance resulted in the Company recognizing a right-of-use asset of $69,869 thousand as part of and a lease liability of $77,270 thousand as part of in the consolidated balance sheet at the time of adoption, as well as de-recognizing the liability for deferred rent that was required under the previous guidance. The cumulative effect adjustment to the opening balance of retained earnings was zero. The adoption of the updated guidance did not have a material effect on the Company’s results of operations or liquidity.
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. REVISIONS TO FINANCIAL STATEMENTS
In preparing third quarter 2019 financial statements, the Company identified errors in the handling of foreign exchange related to premium funds held from reinsureds. Although management determined that the impact of the foreign exchange differences were not material to prior period financial statements, the impact of recording the cumulative difference would have significantly impacted results within the third quarter 2019. As a result, prior period balances have been revised in the applicable financial statements and corresponding footnotes to correct the foreign exchange adjustments.
7
Management assessed the materiality of this change within prior period financial statements based upon SEC Staff Accounting Bulletin Number 99, Materiality, which is since codified in Accounting Standards Codification ("ASC") 250, Accounting Changes and Error Corrections. The prior period comparative financial statements that are presented herein have been revised.
The following tables present line items for prior period financial statements that have been affected by the revision. For these line items, the tables detail the amounts as previously reported, the impact upon those line items due to the revision, and the amounts as currently revised within the financial statements.
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE |
|
| Three Months Ended June 30, 2019 |
|
| Six Months Ended June 30, 2019 | ||||||||||||
INCOME (LOSS): |
|
| As Previously |
|
| Impact of |
|
|
|
|
| As Previously |
|
| Impact of |
|
|
|
|
|
| Reported |
|
| Revisions |
|
| As Revised |
|
| Reported |
|
| Revisions |
|
| As Revised |
(Dollars in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense) |
| $ | (7,977) |
| $ | (10,248) |
| $ | (18,225) |
| $ | (17,030) |
| $ | (4,495) |
| $ | (21,525) |
Total revenues |
| $ | 2,018,975 |
| $ | (10,248) |
| $ | 2,008,727 |
| $ | 3,979,058 |
| $ | (4,495) |
| $ | 3,974,563 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME (LOSS) BEFORE TAXES |
| $ | 382,593 |
| $ | (10,248) |
| $ | 372,345 |
| $ | 791,384 |
| $ | (4,495) |
| $ | 786,889 |
Income tax expense (benefit) |
|
| 39,738 |
|
| (261) |
|
| 39,477 |
|
| 99,629 |
|
| (159) |
|
| 99,470 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME (LOSS) |
| $ | 342,855 |
| $ | (9,987) |
| $ | 332,868 |
| $ | 691,755 |
| $ | (4,336) |
| $ | 687,419 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COMPREHENSIVE INCOME (LOSS) |
| $ | 514,064 |
| $ | (9,987) |
| $ | 504,077 |
| $ | 1,109,410 |
| $ | (4,336) |
| $ | 1,105,074 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EARNINGS PER COMMON SHARE: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
| $ | 8.42 |
| $ | (0.25) |
| $ | 8.17 |
| $ | 16.98 |
| $ | (0.10) |
| $ | 16.88 |
Diluted |
| $ | 8.39 |
| $ | (0.24) |
| $ | 8.15 |
| $ | 16.93 |
| $ | (0.11) |
| $ | 16.82 |
CONSOLIDATED STATEMENTS OF |
| Six Months Ended June 30, 2019 | |||||||
CHANGES IN STOCKHOLDER'S EQUITY |
| As Previously |
| Impact of |
|
|
| ||
|
| Reported |
| Revisions |
| As Revised | |||
|
|
|
|
|
|
|
|
|
|
(Dollars in thousands) |
|
|
|
|
|
|
|
|
|
RETAINED EARNINGS: |
|
|
|
|
|
|
|
|
|
Balance, January 1 |
| $ | 9,574,440 |
| $ | (43,007) |
| $ | 9,531,433 |
Net income (loss) |
|
| 348,900 |
|
| 5,651 |
|
| 354,551 |
Balance, March 31 |
|
| 9,866,203 |
|
| (37,356) |
|
| 9,828,847 |
Net income (loss) |
|
| 342,855 |
|
| (9,987) |
|
| 332,868 |
Balance, June 30, |
|
| 10,152,059 |
|
| (47,343) |
|
| 10,104,716 |
TOTAL STOCKHOLDER'S EQUITY, June 30 |
| $ | 8,884,160 |
| $ | (47,343) |
| $ | 8,836,817 |
CONSOLIDATED STATEMENTS OF CASH FLOWS |
| Six Months Ended June 30, 2019 | |||||||
|
| As Previously |
| Impact of |
|
|
| ||
|
| Reported |
| Revisions |
| As Revised | |||
(Dollars in thousands) |
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM OPERATING ACTIVITIES: |
|
|
|
|
|
|
|
|
|
Net income (loss) |
| $ | 691,755 |
| $ | (4,336) |
| $ | 687,419 |
Decrease (increase) in premiums receivable |
|
| (178,319) |
|
| 3,736 |
|
| (174,583) |
Decrease (increase) in funds held by reinsureds, net |
|
| (56,180) |
|
| 759 |
|
| (55,421) |
Decrease (increase) in income taxes |
|
| 180,285 |
|
| (159) |
|
| 180,126 |
4. INVESTMENTS
Effective January 1, 2020, the Company adopted ASU 2016-13 which provides guidance on the accounting for fixed maturity securities. The guidance requires the Company to record allowances for credit losses for
8
securities that are deemed to have valuation deterioration due to credit risk issues. The initial table below presents the amortized cost, allowance for credit losses, gross unrealized appreciation/(depreciation) and market value of fixed maturity securities as of June 30, 2020 in accordance with ASU 2016-13 guidance. The second table presents the amortized cost, gross unrealized appreciation/(depreciation), market value and other-than-temporary impairments (“OTTI”) in AOCI as of December 31, 2019, in accordance with previously applicable guidance.
|
| At June 30, 2020 | |||||||||||||
|
| Amortized |
| Allowance for |
| Unrealized |
| Unrealized |
| Market | |||||
(Dollars in thousands) | Cost |
| Credit Losses |
| Appreciation |
| Depreciation |
| Value | ||||||
Fixed maturity securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
| U.S. Treasury securities and obligations of |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| U.S. government agencies and corporations | $ | 1,355,970 |
| $ |
| $ | 79,243 |
| $ | (282) |
| $ | 1,434,931 | |
| Obligations of U.S. states and political subdivisions |
| 508,478 |
|
|
|
| 27,597 |
|
| (3,794) |
|
| 532,281 | |
| Corporate securities |
| 6,349,631 |
|
| (22,253) |
|
| 356,702 |
|
| (66,292) |
|
| 6,617,788 |
| Asset-backed securities |
| 1,076,648 |
|
|
|
| 16,728 |
|
| (23,818) |
|
| 1,069,558 | |
| Mortgage-backed securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Commercial |
| 850,616 |
|
|
|
| 71,017 |
|
| (1,837) |
|
| 919,796 | |
| Agency residential |
| 2,016,481 |
|
|
|
| 74,813 |
|
| (2,043) |
|
| 2,089,251 | |
| Non-agency residential |
| 3,153 |
|
|
|
|
|
| (42) |
|
| 3,111 | ||
| Foreign government securities |
| 1,461,380 |
|
| (92) |
|
| 73,849 |
|
| (33,937) |
|
| 1,501,200 |
| Foreign corporate securities |
| 2,769,881 |
|
| (3,492) |
|
| 158,296 |
|
| (37,342) |
|
| 2,887,343 |
Total fixed maturity securities | $ | 16,392,238 |
|
| (25,837) |
| $ | 858,245 |
| $ | (169,387) |
| $ | 17,055,259 |
|
| At December 31, 2019 | |||||||||||||
|
| 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 | $ | 1,489,660 |
| $ | 28,357 |
| $ | (2,214) |
| $ | 1,515,803 |
| $ | |
| Obligations of U.S. states and political subdivisions |
| 507,353 |
|
| 29,651 |
|
| (89) |
|
| 536,915 |
|
| |
| Corporate securities |
| 6,227,661 |
|
| 185,052 |
|
| (37,767) |
|
| 6,374,946 |
|
| 469 |
| Asset-backed securities |
| 892,373 |
|
| 6,818 |
|
| (1,858) |
|
| 897,333 |
|
| |
| Mortgage-backed securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Commercial |
| 814,570 |
|
| 31,236 |
|
| (1,249) |
|
| 844,557 |
|
| |
| Agency residential |
| 2,173,099 |
|
| 36,361 |
|
| (10,879) |
|
| 2,198,581 |
|
| |
| Non-agency residential |
| 5,723 |
|
|
|
| (20) |
|
| 5,703 |
|
| ||
| Foreign government securities |
| 1,492,315 |
|
| 47,148 |
|
| (33,513) |
|
| 1,505,950 |
|
| 71 |
| Foreign corporate securities |
| 2,870,737 |
|
| 107,999 |
|
| (33,580) |
|
| 2,945,156 |
|
| 447 |
Total fixed maturity securities | $ | 16,473,491 |
| $ | 472,622 |
| $ | (121,169) |
| $ | 16,824,944 |
| $ | 987 |
(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.
9
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, 2020 |
| At December 31, 2019 | ||||||||
| Amortized |
| Market |
| Amortized |
| Market | ||||
(Dollars in thousands) | Cost |
| Value |
| Cost |
| Value | ||||
Fixed maturity securities – available for sale: |
|
|
|
|
|
|
|
|
|
|
|
Due in one year or less | $ | 1,401,446 |
| $ | 1,413,299 |
| $ | 1,456,960 |
| $ | 1,457,919 |
Due after one year through five years |
| 6,415,691 |
|
| 6,636,170 |
|
| 6,757,107 |
|
| 6,869,359 |
Due after five years through ten years |
| 3,712,330 |
|
| 3,987,207 |
|
| 3,471,370 |
|
| 3,609,816 |
Due after ten years |
| 915,873 |
|
| 936,867 |
|
| 902,289 |
|
| 941,676 |
Asset-backed securities |
| 1,076,648 |
|
| 1,069,558 |
|
| 892,373 |
|
| 897,333 |
Mortgage-backed securities: |
|
|
|
|
|
|
|
|
|
|
|
Commercial |
| 850,616 |
|
| 919,796 |
|
| 814,570 |
|
| 844,557 |
Agency residential |
| 2,016,481 |
|
| 2,089,251 |
|
| 2,173,099 |
|
| 2,198,581 |
Non-agency residential |
| 3,153 |
|
| 3,111 |
|
| 5,723 |
|
| 5,703 |
Total fixed maturity securities | $ | 16,392,238 |
| $ | 17,055,259 |
| $ | 16,473,491 |
| $ | 16,824,944 |
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) | 2020 |
| 2019 |
| 2020 |
| 2019 | ||||
Increase (decrease) during the period between the market value and cost |
|
|
|
|
|
|
|
|
|
|
|
of investments carried at market value, and deferred taxes thereon: |
|
|
|
|
|
|
|
|
|
|
|
Fixed maturity securities | $ | 614,077 |
| $ | 227,266 |
| $ | 337,053 |
| $ | 481,160 |
Fixed maturity securities, other-than-temporary impairment |
|
|
| (1,499) |
|
|
|
| (1,743) | ||
Change in unrealized appreciation (depreciation), pre-tax |
| 614,077 |
|
| 225,767 |
|
| 337,053 |
|
| 479,417 |
Deferred tax benefit (expense) |
| (69,581) |
|
| (29,954) |
|
| (40,557) |
|
| (52,431) |
Deferred tax benefit (expense), other-than-temporary impairment |
|
|
| 77 |
|
|
|
| 147 | ||
Change in unrealized appreciation (depreciation), |
|
|
|
|
|
|
|
|
|
|
|
net of deferred taxes, included in shareholders’ equity | $ | 544,496 |
| $ | 195,890 |
| $ | 296,496 |
| $ | 427,133 |
The Company reviews all of its fixed maturity, available for sale securities whose fair value has fallen below their amortized cost at the time of review. The Company then assesses whether the decline in value is temporary or credit related. 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 a credit 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 intends to sell the security or is more likely than not to sell the security, the Company records the entire fair value adjustment in net realized capital gains (losses) in the Company’s consolidated statements of operations and comprehensive income (loss). If the Company determines that the decline is credit related 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 Company establishes a credit allowance equal to the estimated credit loss and is recorded in net realized capital gains (losses) in the Company’s consolidated statements of operations and comprehensive income (loss). The amount of the allowance for a given security will generally be the difference between a discounted cash flow model and the Company’s carrying value. 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. We will adjust the credit allowance account for future changes in credit loss estimates for a security and record this adjustment through net realized capital gains (losses) in the Company’s consolidated statements of operations and comprehensive income (loss).
10
The Company does not create an allowance for uncollectible interest. If interest is not received when due, the interest receivable is immediately reversed and no additional interest is accrued. If future interest is received that has not been accrued, it is recorded as income at that time.
Prior to the adoption of ASU 2016-13 effective January 1, 2020, estimated credit losses were recorded as adjustments to the carrying value of the security and any subsequent improvement in market value were recorded through other comprehensive income.
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.
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 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, 2020 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 | $ | 28,192 |
| $ | (282) |
| $ |
| $ |
| $ | 28,192 |
| $ | (282) | ||
Obligations of U.S. states and political subdivisions |
| 71,054 |
|
| (3,569) |
|
| 3,331 |
|
| (225) |
|
| 74,385 |
|
| (3,794) |
Corporate securities |
| 712,066 |
|
| (28,954) |
|
| 170,908 |
|
| (37,338) |
|
| 882,974 |
|
| (66,292) |
Asset-backed securities |
| 457,430 |
|
| (16,504) |
|
| 138,272 |
|
| (7,314) |
|
| 595,702 |
|
| (23,818) |
Mortgage-backed securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial |
| 47,046 |
|
| (1,196) |
|
| 6,017 |
|
| (641) |
|
| 53,063 |
|
| (1,837) |
Agency residential |
| 137,030 |
|
| (1,067) |
|
| 90,425 |
|
| (976) |
|
| 227,455 |
|
| (2,043) |
Non-agency residential |
| 213 |
|
| (3) |
|
| 2,898 |
|
| (39) |
|
| 3,111 |
|
| (42) |
Foreign government securities |
| 112,183 |
|
| (6,363) |
|
| 201,603 |
|
| (27,574) |
|
| 313,786 |
|
| (33,937) |
Foreign corporate securities |
| 401,754 |
|
| (10,593) |
|
| 217,672 |
|
| (26,749) |
|
| 619,426 |
|
| (37,342) |
Total fixed maturity securities | $ | 1,966,968 |
| $ | (68,531) |
| $ | 831,126 |
| $ | (100,856) |
| $ | 2,798,094 |
| $ | (169,387) |
11
|
| Duration of Unrealized Loss at June 30, 2020 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 | $ | 74,911 |
| $ | (897) |
| $ | 154,772 |
| $ | (24,782) |
| $ | 229,683 |
| $ | (25,679) |
Due in one year through five years |
| 738,690 |
|
| (23,176) |
|
| 325,533 |
|
| (32,475) |
|
| 1,064,223 |
|
| (55,651) |
Due in five years through ten years |
| 368,721 |
|
| (16,989) |
|
| 51,998 |
|
| (8,556) |
|
| 420,719 |
|
| (25,545) |
Due after ten years |
| 142,927 |
|
| (8,699) |
|
| 61,211 |
|
| (26,073) |
|
| 204,138 |
|
| (34,772) |
Asset-backed securities |
| 457,430 |
|
| (16,504) |
|
| 138,272 |
|
| (7,314) |
|
| 595,702 |
|
| (23,818) |
Mortgage-backed securities |
| 184,289 |
|
| (2,266) |
|
| 99,340 |
|
| (1,656) |
|
| 283,629 |
|
| (3,922) |
Total fixed maturity securities | $ | 1,966,968 |
| $ | (68,531) |
| $ |