The changes in net unrealized appreciation (depreciation) for the Company's investments are derived from the following sources for the periods as indicated:
| | Three Months Eded | | | Six Months Eded | |
| | June 30, | | | June 30, | |
(Dollars in thousands) | | 2016 | | | 2015 | | | 2016 | | | 2015 | |
Increase (decrease) during the period between the market value and cost | | | | | | | | | | | | |
of investments carried at market value, and deferred taxes thereon: | | | | | | | | | | | | |
Fixed maturity securities | | $ | 53,863 | | | $ | (34,272 | ) | | $ | 123,689 | | | $ | 16,939 | |
Fixed maturity securities, other-than-temporary impairment | | | 6,446 | | | | - | | | | 6,643 | | | | 9,735 | |
Equity Securities | | | - | | | | (1 | ) | | | - | | | | (1 | ) |
Change in unrealized appreciation (depreciation), pre-tax | | | 60,309 | | | | (34,273 | ) | | | 130,332 | | | | 26,673 | |
Deferred tax benefit (expense) | | | (18,852 | ) | | | 11,996 | | | | (43,291 | ) | | | (5,928 | ) |
Deferred tax benefit (expense), other-than-temporary impairment | | | (2,256 | ) | | | - | | | | (2,325 | ) | | | (3,407 | ) |
Change in unrealized appreciation (depreciation), | | | | | | | | | | | | | | | | |
net of deferred taxes, included in stockholder's equity | | $ | 39,201 | | | $ | (22,277 | ) | | $ | 84,716 | | | $ | 17,338 | |
7
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.
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 March 31, 2017 By Security Type | |
| | Less than 12 months | | | Greater than 12 months | | | Total | |
| | | | | Gross | | | | | | Gross | | | | | | Gross | |
| | | | | Unrealized | | | | | | Unrealized | | | | | | Unrealized | |
(Dollars in thousands) | | Market Value | | | Depreciation | | | Market Value | | | Depreciation | | | Market Value | | | Depreciation | |
Fixed maturity securities - available for sale | | | | | | | | | | | | | | | | | | |
U.S. Treasury securities and obligations of | | | | | | | | | | | | | | | | | | |
U.S. government agencies and corporations | | $ | 331,049 | | | $ | (3,901 | ) | | $ | - | | | $ | - | | | $ | 331,049 | | | $ | (3,901 | ) |
Obligations of U.S. states and political subdivisions | | | 206,241 | | | | (10,966 | ) | | | 492 | | | | (560 | ) | | | 206,733 | | | | (11,526 | ) |
Corporate securities | | | 441,626 | | | | (7,815 | ) | | | 88,102 | | | | (4,039 | ) | | | 529,728 | | | | (11,854 | ) |
Asset-backed securities | | | 40,290 | | | | (73 | ) | | | 4,026 | | | | (2 | ) | | | 44,316 | | | | (75 | ) |
Mortgage-backed securities | | | | | | | | | | | | | | | | | | | | | | | | |
Commercial | | | 8,255 | | | | (297 | ) | | | 3,072 | | | | (27 | ) | | | 11,327 | | | | (324 | ) |
Agency residential | | | 465,110 | | | | (6,116 | ) | | | 86,304 | | | | (2,249 | ) | | | 551,414 | | | | (8,365 | ) |
Non-agency residential | | | 20 | | | | - | | | | - | | | | - | | | | 20 | | | | - | |
Foreign government securities | | | 140,028 | | | | (1,524 | ) | | | 56,147 | | | | (5,401 | ) | | | 196,175 | | | | (6,925 | ) |
Foreign corporate securities | | | 205,862 | | | | (3,054 | ) | | | 71,426 | | | | (8,987 | ) | | | 277,288 | | | | (12,041 | ) |
Total fixed maturity securities | | $ | 1,838,481 | | | $ | (33,746 | ) | | $ | 309,569 | | | $ | (21,265 | ) | | $ | 2,148,050 | | | $ | (55,011 | ) |
8
| | Duration of Unrealized Loss at June 30, 2016 By Security Type | |
| | Less than 12 months | | | Greater than 12 months | | | Total | |
| | | | | Gross | | | | | | Gross | | | | | | Gross | |
| | | | | Unrealized | | | | | | Unrealized | | | | | | Unrealized | |
(Dollars in thousands) | | Market Value | | | Depreciation | | | Market Value | | | Depreciation | | | Market Value | | | Depreciation | |
Fixed maturity securities - available for sale | | | | | | | | | | | | | | | | | | |
U.S. Treasury securities and obligations of | | | | | | | | | | | | | | | | | | |
U.S. government agencies and corporations | | $ | 4,759 | | | $ | (149 | ) | | $ | - | | | $ | - | | | $ | 4,759 | | | $ | (149 | ) |
Obligations of U.S. states and political subdivisions | | | - | | | | - | | | | 562 | | | | (478 | ) | | | 562 | | | | (478 | ) |
Corporate securities | | | 261,660 | | | | (4,945 | ) | | | 293,977 | | | | (15,294 | ) | | | 555,637 | | | | (20,239 | ) |
Asset-backed securities | | | 13,337 | | | | (71 | ) | | | 30,016 | | | | (86 | ) | | | 43,353 | | | | (157 | ) |
Mortgage-backed securities | | | | | | | | | | | | | | | | | | | | | | | | |
Commercial | | | 3,470 | | | | (20 | ) | | | 3,352 | | | | (45 | ) | | | 6,822 | | | | (65 | ) |
Agency residential | | | 32,558 | | | | (106 | ) | | | 107,907 | | | | (468 | ) | | | 140,465 | | | | (574 | ) |
Non-agency residential | | | 29 | | | | - | | | | - | | | | - | | | | 29 | | | | - | |
Foreign government securities | | | 9,456 | | | | (209 | ) | | | 66,601 | | | | (7,788 | ) | | | 76,057 | | | | (7,997 | ) |
Foreign corporate securities | | | 100,483 | | | | (3,051 | ) | | | 83,260 | | | | (7,312 | ) | | | 183,743 | | | | (10,363 | ) |
Total fixed maturity securities | | $ | 425,752 | | | $ | (8,551 | ) | | $ | 585,675 | | | $ | (31,471 | ) | | $ | 1,011,427 | | | $ | (40,022 | ) |
Equity securities | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Total | | $ | 425,752 | | | $ | (8,551 | ) | | $ | 585,675 | | | $ | (31,471 | ) | | $ | 1,011,427 | | | $ | (40,022 | ) |
| | Duration of Unrealized Loss at March 31, 2017 By Maturity | |
| | Less than 12 months | | | Greater than 12 months | | | Total | |
| | | | | Gross | | | | | | Gross | | | | | | Gross | |
| | | | | Unrealized | | | | | | Unrealized | | | | | | Unrealized | |
(Dollars in thousands) | | Market Value | | | Depreciation | | | Market Value | | | Depreciation | | | Market Value | | | Depreciation | |
Fixed maturity securities | | | | | | | | | | | | | | | | | | |
Due in one year or less | | $ | 196,751 | | | $ | (436 | ) | | $ | 18,642 | | | $ | (3,152 | ) | | $ | 215,393 | | | $ | (3,588 | ) |
Due in one year through five years | | | 703,649 | | | | (8,563 | ) | | | 155,494 | | | | (13,136 | ) | | | 859,143 | | | | (21,699 | ) |
Due in five years through ten years | | | 199,849 | | | | (6,607 | ) | | | 40,361 | | | | (2,676 | ) | | | 240,210 | | | | (9,283 | ) |
Due after ten years | | | 224,557 | | | | (11,654 | ) | | | 1,670 | | | | (23 | ) | | | 226,227 | | | | (11,677 | ) |
Asset-backed securities | | | 40,290 | | | | (73 | ) | | | 4,026 | | | | (2 | ) | | | 44,316 | | | | (75 | ) |
Mortgage-backed securities | | | 473,385 | | | | (6,413 | ) | | | 89,376 | | | | (2,276 | ) | | | 562,761 | | | | (8,689 | ) |
Total fixed maturity securities | | $ | 1,838,481 | | | $ | (33,746 | ) | | $ | 309,569 | | | $ | (21,265 | ) | | $ | 2,148,050 | | | $ | (55,011 | ) |
| | Duration of Unrealized Loss at June 30, 2016 By Maturity | |
| | Less than 12 months | | | Greater than 12 months | | | Total | |
| | | | | Gross | | | | | | Gross | | | | | | Gross | |
| | | | | Unrealized | | | | | | Unrealized | | | | | | Unrealized | |
(Dollars in thousands) | | Market Value | | | Depreciation | | | Market Value | | | Depreciation | | | Market Value | | | Depreciation | |
Fixed maturity securities | | | | | | | | | | | | | | | | | | |
Due in one year or less | | $ | 19,629 | | | $ | (664 | ) | | $ | 29,635 | | | $ | (3,386 | ) | | $ | 49,264 | | | $ | (4,050 | ) |
Due in one year through five years | | | 217,063 | | | | (4,758 | ) | | | 325,768 | | | | (22,222 | ) | | | 542,831 | | | | (26,980 | ) |
Due in five years through ten years | | | 136,768 | | | | (2,909 | ) | | | 87,271 | | | | (5,149 | ) | | | 224,039 | | | | (8,058 | ) |
Due after ten years | | | 2,898 | | | | (23 | ) | | | 1,726 | | | | (115 | ) | | | 4,624 | | | | (138 | ) |
Asset-backed securities | | | 13,337 | | | | (71 | ) | | | 30,016 | | | | (86 | ) | | | 43,353 | | | | (157 | ) |
Mortgage-backed securities | | | 36,057 | | | | (126 | ) | | | 111,259 | | | | (513 | ) | | | 147,316 | | | | (639 | ) |
Total fixed maturity securities | | $ | 425,752 | | | $ | (8,551 | ) | | $ | 585,675 | | | $ | (31,471 | ) | | $ | 1,011,427 | | | $ | (40,022 | ) |
The aggregate market value and gross unrealized losses related to investments in an unrealized loss position at June 30, 2016March 31, 2017 were $1,011,427$2,148,050 thousand and $40,022$55,011 thousand, respectively. The market value of securities for the single issuer whose securities comprised the largest unrealized loss position at June 30, 2016,March 31, 2017, (the U.S. Government) did not exceed 0.9%6.0% of the overall market value of the Company's fixed maturity securities. In addition, as indicated on the above table, there was no significant concentration of unrealized losses in any one market sector. The $8,551$33,746 thousand of unrealized losses related to fixed maturity securities that have been in an unrealized loss position for less than one year were primarilygenerally comprised of obligations of U.S. states and political subdivisions, domestic corporate securities and foreign corporateagency residential mortgage-backed securities. The majority ofOf these unrealized losses, are attributable$31,496 thousand were related to net unrealized foreign exchange losses, $6,030 thousand, as the U.S. dollar has strengthened against other currencies.securities that were rated investment grade by at least one nationally recognized statistical rating agency. The $31,471$21,265 thousand of unrealized losses related to fixed maturity securities in an unrealized loss position for more than one year related primarily to domestic and foreign corporate securities, andas well as foreign government securities. The majority ofOf these unrealized losses, are attributable$17,263 thousand were related to net unrealized foreign
exchange losses, $22,677 thousand, as the U.S. dollar has strengthened against other currencies. The Company did not have any sub-prime or alt-A loans withsecurities that were rated investment grade by at least one nationally recognized statistical rating agency. There was no gross unrealized depreciation at June 30, 2016.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.
The tables below display the aggregate market value and gross unrealized depreciation of fixed maturity and equity securities, by security type and contractual maturity, in each case subdivided according to length of time that individual securities had been in a continuous unrealized loss position for the periods indicated:
| | Duration of Unrealized Loss at December 31, 2016 By Security Type | |
| | Less than 12 months | | | Greater than 12 months | | | Total | |
| | | | | Gross | | | | | | Gross | | | | | | Gross | |
| | | | | Unrealized | | | | | | Unrealized | | | | | | Unrealized | |
(Dollars in thousands) | | Market Value | | | Depreciation | | | Market Value | | | Depreciation | | | Market Value | | | Depreciation | |
Fixed maturity securities - available for sale | | | | | | | | | | | | | | | | | | |
U.S. Treasury securities and obligations of | | | | | | | | | | | | | | | | | | |
U.S. government agencies and corporations | | $ | 469,571 | | | $ | (4,434 | ) | | $ | - | | | $ | - | | | $ | 469,571 | | | $ | (4,434 | ) |
Obligations of U.S. states and political subdivisions | | | 221,088 | | | | (11,486 | ) | | | 564 | | | | (484 | ) | | | 221,652 | | | | (11,970 | ) |
Corporate securities | | | 431,757 | | | | (10,121 | ) | | | 118,172 | | | | (5,665 | ) | | | 549,929 | | | | (15,786 | ) |
Asset-backed securities | | | 35,065 | | | | (122 | ) | | | 5,745 | | | | (7 | ) | | | 40,810 | | | | (129 | ) |
Mortgage-backed securities | | | | | | | | | | | | | | | | | | | | | | | | |
Commercial | | | 27,230 | | | | (391 | ) | | | 3,060 | | | | (61 | ) | | | 30,290 | | | | (452 | ) |
Agency residential | | | 487,000 | | | | (6,320 | ) | | | 90,740 | | | | (2,673 | ) | | | 577,740 | | | | (8,993 | ) |
Non-agency residential | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Foreign government securities | | | 218,171 | | | | (2,713 | ) | | | 61,542 | | | | (7,670 | ) | | | 279,713 | | | | (10,383 | ) |
Foreign corporate securities | | | 264,939 | | | | (4,950 | ) | | | 75,489 | | | | (9,411 | ) | | | 340,428 | | | | (14,361 | ) |
Total fixed maturity securities | | $ | 2,154,821 | | | $ | (40,537 | ) | | $ | 355,312 | | | $ | (25,971 | ) | | $ | 2,510,133 | | | $ | (66,508 | ) |
| | Duration of Unrealized Loss at December 31, 2016 By Maturity | |
| | Less than 12 months | | | Greater than 12 months | | | Total | |
| | | | | Gross | | | | | | Gross | | | | | | Gross | |
| | | | | Unrealized | | | | | | Unrealized | | | | | | Unrealized | |
(Dollars in thousands) | | Market Value | | | Depreciation | | | Market Value | | | Depreciation | | | Market Value | | | Depreciation | |
Fixed maturity securities | | | | | | | | | | | | | | | | | | |
Due in one year or less | | $ | 111,926 | | | $ | (322 | ) | | $ | 21,691 | | | $ | (3,625 | ) | | $ | 133,617 | | | $ | (3,947 | ) |
Due in one year through five years | | | 1,015,066 | | | | (10,567 | ) | | | 190,960 | | | | (16,511 | ) | | | 1,206,026 | | | | (27,078 | ) |
Due in five years through ten years | | | 243,082 | | | | (10,369 | ) | | | 41,371 | | | | (2,961 | ) | | | 284,453 | | | | (13,330 | ) |
Due after ten years | | | 235,452 | | | | (12,446 | ) | | | 1,745 | | | | (133 | ) | | | 237,197 | | | | (12,579 | ) |
Asset-backed securities | | | 35,065 | | | | (122 | ) | | | 5,745 | | | | (7 | ) | | | 40,810 | | | | (129 | ) |
Mortgage-backed securities | | | 514,230 | | | | (6,711 | ) | | | 93,800 | | | | (2,734 | ) | | | 608,030 | | | | (9,445 | ) |
Total fixed maturity securities | | $ | 2,154,821 | | | $ | (40,537 | ) | | $ | 355,312 | | | $ | (25,971 | ) | | $ | 2,510,133 | | | $ | (66,508 | ) |
| | Duration of Unrealized Loss at December 31, 2015 By Security Type | |
| | Less than 12 months | | | Greater than 12 months | | | Total | |
| | | | | Gross | | | | | | Gross | | | | | | Gross | |
| | | | | Unrealized | | | | | | Unrealized | | | | | | Unrealized | |
(Dollars in thousands) | | Market Value | | | Depreciation | | | Market Value | | | Depreciation | | | Market Value | | | Depreciation | |
Fixed maturity securities - available for sale | | | | | | | | | | | | | | | | | | |
U.S. Treasury securities and obligations of | | | | | | | | | | | | | | | | | | |
U.S. government agencies and corporations | | $ | 216,352 | | | $ | (712 | ) | | $ | 692 | | | $ | (6 | ) | | $ | 217,044 | | | $ | (718 | ) |
Obligations of U.S. states and political subdivisions | | | 6,434 | | | | (84 | ) | | | 4,917 | | | | (806 | ) | | | 11,351 | | | | (890 | ) |
Corporate securities | | | 866,715 | | | | (49,034 | ) | | | 307,215 | | | | (21,691 | ) | | | 1,173,930 | | | | (70,725 | ) |
Asset-backed securities | | | 102,506 | | | | (791 | ) | | | 28,048 | | | | (272 | ) | | | 130,554 | | | | (1,063 | ) |
Mortgage-backed securities | | | | | | | | | | | | | | | | | | | | | | | | |
Commercial | | | 26,483 | | | | (511 | ) | | | - | | | | - | | | | 26,483 | | | | (511 | ) |
Agency residential | | | 320,285 | | | | (3,094 | ) | | | 150,095 | | | | (3,509 | ) | | | 470,380 | | | | (6,603 | ) |
Non-agency residential | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Foreign government securities | | | 61,498 | | | | (2,182 | ) | | | 77,911 | | | | (6,243 | ) | | | 139,409 | | | | (8,425 | ) |
Foreign corporate securities | | | 324,904 | | | | (6,289 | ) | | | 76,951 | | | | (5,108 | ) | | | 401,855 | | | | (11,397 | ) |
Total fixed maturity securities | | $ | 1,925,177 | | | $ | (62,697 | ) | | $ | 645,829 | | | $ | (37,635 | ) | | $ | 2,571,006 | | | $ | (100,332 | ) |
| | Duration of Unrealized Loss at December 31, 2015 By Maturity | |
| | Less than 12 months | | | Greater than 12 months | | | Total | |
| | | | | Gross | | | | | | Gross | | | | | | Gross | |
| | | | | Unrealized | | | | | | Unrealized | | | | | | Unrealized | |
(Dollars in thousands) | | Market Value | | | Depreciation | | | Market Value | | | Depreciation | | | Market Value | | | Depreciation | |
Fixed maturity securities | | | | | | | | | | | | | | | | | | |
Due in one year or less | | $ | 21,780 | | | $ | (1,577 | ) | | $ | 12,212 | | | $ | (1,171 | ) | | $ | 33,992 | | | $ | (2,748 | ) |
Due in one year through five years | | | 1,023,437 | | | | (23,255 | ) | | | 347,203 | | | | (21,582 | ) | | | 1,370,640 | | | | (44,837 | ) |
Due in five years through ten years | | | 394,978 | | | | (31,423 | ) | | | 99,335 | | | | (10,131 | ) | | | 494,313 | | | | (41,554 | ) |
Due after ten years | | | 35,708 | | | | (2,046 | ) | | | 8,936 | | | | (970 | ) | | | 44,644 | | | | (3,016 | ) |
Asset-backed securities | | | 102,506 | | | | (791 | ) | | | 28,048 | | | | (272 | ) | | | 130,554 | | | | (1,063 | ) |
Mortgage-backed securities | | | 346,768 | | | | (3,605 | ) | | | 150,095 | | | | (3,509 | ) | | | 496,863 | | | | (7,114 | ) |
Total fixed maturity securities | | $ | 1,925,177 | | | $ | (62,697 | ) | | $ | 645,829 | | | $ | (37,635 | ) | | $ | 2,571,006 | | | $ | (100,332 | ) |
The aggregate market value and gross unrealized losses related to investments in an unrealized loss position at December 31, 20152016 were $2,571,006$2,510,133 thousand and $100,332$66,508 thousand, respectively. The market value of securities for the single issuer whose securities comprised the largest unrealized loss position at December 31, 2015,2016, did not exceed 0.07%1.0% of the overall market value of the Company's fixed maturity securities. In addition, as indicated on the above table, there was no significant concentration of unrealized losses in any one market sector. The $62,697$40,537 thousand of unrealized losses related to fixed maturity securities that have been in an unrealized loss position for less than one year were primarilygenerally comprised of obligations of U.S. states and political subdivisions, domestic and foreign corporate securities, agency residential mortgage-backed securities and foreign government securities. The majority ofOf these unrealized losses, are attributable$36,646 thousand were related to unrealized losses in the energy sector, $35,978 thousand, as falling oil prices disrupted the market values for this sector,
particularly for oil exploration, production and servicing companies and unrealized foreign exchange losses, $6,090 thousand, as the U.S. dollar has strengthened against other currencies.securities that were rated investment grade by at least one nationally recognized statistical rating agency. The $37,635$25,971 thousand of unrealized losses related to fixed maturity securities in an unrealized loss position for more than one year related primarily to domestic and foreign corporate securities, foreign government securities and agency residential mortgage-backed securities. The majority ofOf these unrealized losses are$22,882 thousand is attributable to net unrealized foreign exchange losses, $14,807 thousand, as the U.S. dollar has strengthened against other currencies and unrealized losses in the energy sector, $6,959 thousand, as falling oil prices disrupted the market values for this sector, particularly for oil exploration, production and servicing companies. The Company did not have any sub-prime or alt-A loans withcurrencies. There was no gross unrealized depreciation at December 31, 2015.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.
Other invested assets, at fair value, as of June 30, 2016, and December 31, 2015, were comprised of preferred shares held in Everest Preferred International Holdings ("Preferred Holdings"), an affiliated company.10
The components of net investment income are presented in the tabletables below for the periods indicated:
| | Three Months Ended | |
| | March 31, | |
(Dollars in thousands) | | 2017 | | | 2016 | |
Fixed maturities | | $ | 46,980 | | | $ | 45,326 | |
Equity securities | | | 6,748 | | | | 9,148 | |
Short-term investments and cash | | | 390 | | | | 304 | |
Other invested assets | | | | | | | | |
Limited partnerships | | | (224 | ) | | | (2,514 | ) |
Dividends from preferred shares of affiliate | | | 7,758 | | | | 7,758 | |
Other | | | 1,252 | | | | (912 | ) |
Gross investment income before adjustments | | | 62,904 | | | | 59,110 | |
Funds held interest income (expense) | | | 1,939 | | | | 2,654 | |
Interest income from Parent | | | 1,075 | | | | 1,075 | |
Gross investment income | | | 65,918 | | | | 62,839 | |
Investment expenses | | | (5,069 | ) | | | (4,394 | ) |
Net investment income | | $ | 60,849 | | | $ | 58,445 | |
| | | | | | | | |
(Some amounts may not reconcile due to rounding.) | | | | | | | | |
| | Three Months Ended | | | Six Months Ended | |
| | June 30, | | | June 30, | |
(Dollars in thousands) | | 2016 | | | 2015 | | | 2016 | | | 2015 | |
Fixed maturities | | $ | 44,795 | | | $ | 46,443 | | | $ | 90,121 | | | $ | 94,415 | |
Equity securities | | | 8,734 | | | | 9,892 | | | | 17,882 | | | | 18,634 | |
Short-term investments and cash | | | 251 | | | | 321 | | | | 555 | | | | 485 | |
Other invested assets | | | | | | | | | | | | | | | | |
Limited partnerships | | | 14,192 | | | | 7,276 | | | | 11,678 | | | | 14,655 | |
Dividends from Parent's shares | | | - | | | | 9,234 | | | | - | | | | 18,468 | |
Dividends from preferred shares of affiliate | | | 7,758 | | | | - | | | | 15,516 | | | | - | |
Other | | | 729 | | | | 983 | | | | (183 | ) | | | 1,608 | |
Gross investment income before adjustments | | | 76,459 | | | | 74,149 | | | | 135,569 | | | | 148,265 | |
Funds held interest income (expense) | | | 974 | | | | 865 | | | | 3,628 | | | | 3,386 | |
Interest income from Parent | | | 1,075 | | | | 1,075 | | | | 2,150 | | | | 2,150 | |
Gross investment income | | | 78,508 | | | | 76,089 | | | | 141,347 | | | | 153,801 | |
Investment expenses | | | (4,636 | ) | | | (5,164 | ) | | | (9,030 | ) | | | (10,295 | ) |
Net investment income | | $ | 73,872 | | | $ | 70,925 | | | $ | 132,317 | | | $ | 143,506 | |
| | | | | | | | | | | | | | | | |
(Some amounts may not reconcile due to rounding.) | | | | | | | | | | | | | | | | |
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 $290,398$320,344 thousand in limited partnerships at June 30, 2016.March 31, 2017. These commitments will be funded when called in accordance with the partnership agreements, which have investment periods that expire, unless extended, through 2020.2021.
The Company's other invested assets at March 31, 2017 and December 31, 2016 included $101,545 thousand and $57,126 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.
Other invested assets, at fair value, as of March 31, 2017 and December 31, 2016, were comprised of preferred shares held in Preferred Holdings, an affiliated company.
The components of net realized capital gains (losses) are presented in the table below for the periods indicated:
| | Three Months Ended | | | Six Months Ended | | | Three Months Ended | |
| | June 30, | | | June 30, | | | March 31, | |
(Dollars in thousands) | | 2016 | | | 2015 | | | 2016 | | | 2015 | | | 2017 | | | 2016 | |
Fixed maturity securities, market value: | | | | | | | | | | | | | | | | | | |
Other-than-temporary impairments | | $ | (1,391 | ) | | $ | (8,810 | ) | | $ | (24,406 | ) | | $ | (32,931 | ) | | $ | (1,132 | ) | | $ | (23,015 | ) |
Gains (losses) from sales | | | 2,244 | | | | (12,208 | ) | | | (14,611 | ) | | | (23,726 | ) | | | 6,465 | | | | (16,855 | ) |
Fixed maturity securities, fair value: | | | | | | | | | | | | | | | | | | | | | | | | |
Gain (losses) from sales | | | (1,854 | ) | | | 14 | | | | (1,854 | ) | | | 42 | | |
Gains (losses) from fair value adjustments | | | 1,571 | | | | (6 | ) | | | 1,339 | | | | 56 | | | | - | | | | (232 | ) |
Equity securities, market value: | | | | | | | | | | | | | | | | | |
Gains (losses) from sales | | | - | | | | 1 | | | | - | | | | 1 | | |
Equity securities, fair value: | | | | | | | | | | | | | | | | | | | | | | | | |
Gains (losses) from sales | | | (7,636 | ) | | | (289 | ) | | | (15,586 | ) | | | (354 | ) | | | 4,340 | | | | (7,950 | ) |
Gains (losses) from fair value adjustments | | | 36,987 | | | | (5,334 | ) | | | 18,662 | | | | 15,612 | | | | 37,418 | | | | (18,325 | ) |
Other invested assets | | | | 1 | | | | - | |
Other invested assets, fair value: | | | | | | | | | | | | | | | | | | | | | | | | |
Gains (losses) from fair value adjustments | | | (756 | ) | | | 77,857 | | | | (756 | ) | | | 113,821 | | | | 70,675 | | | | - | |
Short-term investment gains (losses) | | | | 1 | | | | - | |
Total net realized capital gains (losses) | | $ | 29,165 | | | $ | 51,225 | | | $ | (37,212 | ) | | $ | 72,521 | | | $ | 117,768 | | | $ | (66,377 | ) |
The Company recorded as net realized capital gains (losses) in the consolidated statements of operations and comprehensive income (loss) both fair value re-measurements and write-downs in the value of securities deemed to be impaired on an other-than-temporary basis as displayed in the table above. The Company had no other-than-temporary impaired securities where the impairment had both a credit and non-credit component.
The proceeds and split between gross gains and losses, from sales of fixed maturity and equity securities, are presented in the table below for the periods indicated:
| | Three Months Ended | |
| | March 31, | |
(Dollars in thousands) | | 2017 | | | 2016 | |
Proceeds from sales of fixed maturity securities | | $ | 292,994 | | | $ | 188,046 | |
Gross gains from sales | | | 7,995 | | | | 1,464 | |
Gross losses from sales | | | (1,530 | ) | | | (18,319 | ) |
| | | | | | | | |
Proceeds from sales of equity securities | | $ | 134,051 | | | $ | 86,149 | |
Gross gains from sales | | | 8,013 | | | | 1,782 | |
Gross losses from sales | | | (3,673 | ) | | | (9,732 | ) |
4. RESERVES FOR LOSSES AND LAE
| | Three Months Ended | | | Six Months Ended | |
| | June 30, | | | June 30, | |
(Dollars in thousands) | | 2016 | | | 2015 | | | 2016 | | | 2015 | |
Proceeds from sales of fixed maturity securities | | $ | 110,429 | | | $ | 175,742 | | | $ | 298,475 | | | $ | 289,824 | |
Gross gains from sales | | | 6,154 | | | | 5,096 | | | | 7,618 | | | | 7,638 | |
Gross losses from sales | | | (5,764 | ) | | | (17,290 | ) | | | (24,083 | ) | | | (31,322 | ) |
| | | | | | | | | | | | | | | | |
Proceeds from sales of equity securities | | $ | 335,831 | | | $ | 169,533 | | | $ | 421,980 | | | $ | 303,493 | |
Gross gains from sales | | | 4,853 | | | | 7,272 | | | | 6,635 | | | | 12,414 | |
Gross losses from sales | | | (12,489 | ) | | | (7,561 | ) | | | (22,221 | ) | | | (12,768 | ) |
Activity in the reserve for losses and LAE is summarized for the periods indicated: | | Three Months Ended | | | Twelve Months Ended | |
| | March 31, | | | At December 31, | |
(Dollars in thousands) | | 2017 | | | 2016 | |
Gross reserves at January 1 | | $ | 8,331,288 | | | $ | 7,940,720 | |
Less reinsurance recoverables | | | (4,199,791 | ) | | | (3,875,073 | ) |
Net reserves at January 1 | | | 4,131,497 | | | | 4,065,647 | |
| | | | | | | | |
Incurred related to: | | | | | | | | |
Current year | | | 286,204 | | | | 1,441,962 | |
Prior years | | | 3,518 | | | | (91,682 | ) |
Total incurred losses and LAE | | | 289,722 | | | | 1,350,280 | |
| | | | | | | | |
Paid related to: | | | | | | | | |
Current year | | | 46,284 | | | | 400,489 | |
Prior years | | | 269,625 | | | | 892,207 | |
Total paid losses and LAE | | | 315,909 | | | | 1,292,696 | |
| | | | | | | | |
Foreign exchange/translation adjustment | | | 1,159 | | | | 8,266 | |
| | | | | | | | |
Net reserves at December 31 | | | 4,106,469 | | | | 4,131,497 | |
Plus reinsurance recoverables | | | 4,262,693 | | | | 4,199,791 | |
Gross reserves at December 31 | | $ | 8,369,162 | | | $ | 8,331,288 | |
Incurred prior years' reserves increased by $3,518 thousand and decreased by $91,682 thousand for the three months ended March 31, 2017 and the year ended December 31, 2016, respectively. The increase for the three months ended March 31, 2017, was mainly due to unfavorable development in the insurance segment related to casualty business.
The decrease for the year ended December 31, 2016 was attributable to favorable development in the reinsurance segments of $187,909 thousand related primarily to property and short-tail business in the U.S., property business in Canada, Latin America, Middle East and Africa, as well as favorable development on prior year catastrophe losses, partially offset by $45,668 thousand of adverse development on A&E reserves. Part of the favorable development in the reinsurance segment related to the 2015 loss from the explosion at the Chinese port of Tianjin. In 2015, this loss was originally estimated to be $21,566 thousands. At December 31, 2016, this loss was projected to be $6,261 thousands resulting in $15,305 thousands of favorable development in 2016. The net favorable development in the reinsurance segments was partially offset by $96,227 thousand of unfavorable development in the insurance segment primarily related to run-off construction liability and umbrella program business.
4.5. FAIR VALUE
GAAP guidance regarding fair value measurements address how companies should measure fair value when they are required to use fair value measures for recognition or disclosure purposes under GAAP and provides a common definition of fair value to be used throughout GAAP. It defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly fashion between market participants at the measurement date. In addition, it establishes a three-level valuation hierarchy for the disclosure of fair value measurements. The valuation hierarchy is based on the transparency of inputs to the valuation of an asset or liability. The level in the hierarchy within which a given fair value measurement falls is determined based on the lowest level input that is significant to the measurement, with Level 1 being the highest priority and Level 3 being the lowest priority.
The levels in the hierarchy are defined as follows:
Level 1: | Inputs to the valuation methodology are observable inputs that reflect unadjusted quoted prices for identical assets or liabilities in an active market; |
Level 2: | Inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument; |
Level 3: | Inputs to the valuation methodology are unobservable and significant to the fair value measurement. |
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 fifteenforty-two private placement securities, the Companyinvestment manager's valuation committee valued the fifteenforty-two securities at $34,431$87,124 thousand at June 30, 2016.March 31, 2017.�� Due to the unavailability of prices for twoforty-two private placement securities, the Companyinvestment manager's valuation committee valued the twoforty-two securities at $3,593$86,536 thousand at December 31, 2015.2016.
The Company internally manages a small public equity portfolio which had a fair value at June 30, 2016March 31, 2017 and December 31, 20152016 of $124,776$154,123 thousand and $131,219$133,755 thousand, respectively, and all prices were obtained from publically published sources.
Equity securities denominated in U.S. currency with quoted prices in active markets for identical assets are categorized as level 1 since the quoted prices are directly observable. Equity securities traded on foreign exchanges are categorized as level 2 due to the added input of a foreign exchange conversion rate to determine fair or market value. The Company uses foreign currency exchange rates published by nationally recognized sources.
All categories of fixed maturity securities listed in the tables below are generally categorized as level 2, since a particular security may not have traded but the pricing services are able to use valuation models with observable market inputs such as interest rate yield curves and prices for similar fixed maturity securities in terms of issuer, maturity and seniority. For foreign government securities and foreign corporate securities, the fair values provided by the third party pricing services in local currencies, and where applicable, are converted to U.S. dollars using currency exchange rates from nationally recognized sources.
The fixed maturities with fair values categorized as level 3 result when prices are not available from the nationally recognized pricing services. The asset managers will then obtain non-binding price quotes for the securities from brokers. The single broker quotes are provided by market makers or broker-dealers who are recognized as market participants in the markets in which they are providing the quotes. The prices received from brokers are reviewed for reasonableness by the third party asset managers and the Company. If the
broker quotes are for foreign denominated securities, the quotes are converted to U.S. dollars using currency exchange rates from nationally recognized sources. In limited circumstances when broker prices are not available for private placements, the Company will value the securities using comparable market information.
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. |
Other invested assets, at fair value, was categorized as Level 3 at June 30, 2016March 31, 2017 and December 31, 2015,2016, since it represented a privately placed convertible preferred stock issued by an affiliate. The stock was received in exchange for shares of the Company's parent, which were valued on a public securities exchange on December 21, 2015.parent. The fair value of the preferred stock at June 30,March 31, 2017 and December 31, 2016 was determined using a pricing model and at December 31, 2015 represented the original exchange value.
model.The following table presents the fair value measurement levels for all assets, which the Company has recorded at fair value (fair and market value) as of the period indicated:
| | | | | Fair Value Measurement Using: | |
| | | | | Quoted Prices | | | | | | | |
| | | | | in Active | | | Significant | | | | |
| | | | | Markets for | | | Other | | | Significant | |
| | | | | Identical | | | Observable | | | Unobservable | |
| | | | | Assets | | | Inputs | | | Inputs | |
(Dollars in thousands) | | March 31, 2017 | | | (Level 1) | | | (Level 2) | | | (Level 3) | |
Assets: | | | | | | | | | | | | |
Fixed maturities, market value | | | | | | | | | | | | |
U.S. Treasury securities and obligations of | | | | | | | | | | | | |
U.S. government agencies and corporations | | $ | 771,220 | | | $ | - | | | $ | 771,220 | | | $ | - | |
Obligations of U.S. States and political subdivisions | | | 712,437 | | | | - | | | | 712,437 | | | | - | |
Corporate securities | | | 2,271,618 | | | | - | | | | 2,187,296 | | | | 84,322 | |
Asset-backed securities | | | 176,170 | | | | - | | | | 176,170 | | | | - | |
Mortgage-backed securities | | | | | | | | | | | | | | | | |
Commercial | | | 75,622 | | | | - | | | | 75,622 | | | | - | |
Agency residential | | | 698,466 | | | | - | | | | 698,466 | | | | - | |
Non-agency residential | | | 79 | | | | - | | | | 79 | | | | - | |
Foreign government securities | | | 489,095 | | | | - | | | | 489,095 | | | | - | |
Foreign corporate securities | | | 1,011,708 | | | | - | | | | 1,008,906 | | | | 2,802 | |
Total fixed maturities, market value | | | 6,206,415 | | | | - | | | | 6,119,291 | | | | 87,124 | |
| | | | | | | | | | | | | | | | |
Equity securities, fair value | | | 852,993 | | | | 835,536 | | | | 17,457 | | | | - | |
Other invested assets, fair value | | | 1,837,302 | | | | - | | | | - | | | | 1,837,302 | |
| | | | | Fair Value Measurement Using: | |
| | | | | Quoted Prices | | | | | | | |
| | | | | in Active | | | Significant | | | | |
| | | | | Markets for | | | Other | | | Significant | |
| | | | | Identical | | | Observable | | | Unobservable | |
| | | | | Assets | | | Inputs | | | Inputs | |
(Dollars in thousands) | | June 30, 2016 | | | (Level 1) | | | (Level 2) | | | (Level 3) | |
Assets: | | | | | | | | | | | | |
Fixed maturities, market value | | | | | | | | | | | | |
U.S. Treasury securities and obligations of | | | | | | | | | | | | |
U.S. government agencies and corporations | | $ | 391,944 | | | $ | - | | | $ | 391,944 | | | $ | - | |
Obligations of U.S. States and political subdivisions | | | 749,912 | | | | - | | | | 749,912 | | | | - | |
Corporate securities | | | 2,066,163 | | | | - | | | | 2,033,753 | | | | 32,410 | |
Asset-backed securities | | | 168,913 | | | | - | | | | 168,913 | | | | - | |
Mortgage-backed securities | | | | | | | | | | | | | | | | |
Commercial | | | 75,101 | | | | - | | | | 75,101 | | | | - | |
Agency residential | | | 767,696 | | | | - | | | | 767,696 | | | | - | |
Non-agency residential | | | 120 | | | | - | | | | 120 | | | | - | |
Foreign government securities | | | 533,403 | | | | - | | | | 533,403 | | | | - | |
Foreign corporate securities | | | 1,015,497 | | | | - | | | | 1,013,476 | | | | 2,021 | |
Total fixed maturities, market value | | | 5,768,749 | | | | - | | | | 5,734,318 | | | | 34,431 | |
| | | | | | | | | | | | | | | | |
Equity securities, fair value | | | 976,879 | | | | 915,003 | | | | 61,876 | | | | - | |
Other invested assets, fair value | | | 1,772,458 | | | | - | | | | - | | | | 1,772,458 | |
There were no transfers between Level 1 and Level 2 for the sixthree months ended June 30, 2016.March 31, 2017.
The following table presents the fair value measurement levels for all assets, which the Company has recorded at fair value (fair and market value) as of the period indicated:
| | | | | Fair Value Measurement Using: | |
| | | | | Quoted Prices | | | | | | | |
| | | | | in Active | | | Significant | | | | |
| | | | | Markets for | | | Other | | | Significant | |
| | | | | Identical | | | Observable | | | Unobservable | |
| | | | | Assets | | | Inputs | | | Inputs | |
(Dollars in thousands) | | December 31, 2016 | | | (Level 1) | | | (Level 2) | | | (Level 3) | |
Assets: | | | | | | | | | | | | |
Fixed maturities, market value | | | | | | | | | | | | |
U.S. Treasury securities and obligations of | | | | | | | | | | | | |
U.S. government agencies and corporations | | $ | 691,080 | | | $ | - | | | $ | 691,080 | | | $ | - | |
Obligations of U.S. States and political subdivisions | | | 729,984 | | | | - | | | | 729,984 | | | | - | |
Corporate securities | | | 2,154,203 | | | | - | | | | 2,089,006 | | | | 65,197 | |
Asset-backed securities | | | 137,027 | | | | - | | | | 137,027 | | | | - | |
Mortgage-backed securities | | | | | | | | | | | | | | | | |
Commercial | | | 75,493 | | | | - | | | | 75,493 | | | | - | |
Agency residential | | | 715,144 | | | | - | | | | 715,144 | | | | - | |
Non-agency residential | | | 88 | | | | - | | | | 88 | | | | - | |
Foreign government securities | | | 507,277 | | | | - | | | | 507,277 | | | | - | |
Foreign corporate securities | | | 960,200 | | | | - | | | | 957,662 | | | | 2,538 | |
Total fixed maturities, market value | | | 5,970,496 | | | | - | | | | 5,902,761 | | | | 67,735 | |
| | | | | | | | | | | | | | | | |
Equity securities, fair value | | | 887,800 | | | | 827,237 | | | | 60,563 | | | | - | |
Other invested assets, fair value | | | 1,766,626 | | | | - | | | | - | | | | 1,766,626 | |
| | | | | Fair Value Measurement Using: | |
| | | | | Quoted Prices | | | | | | | |
| | | | | in Active | | | Significant | | | | |
| | | | | Markets for | | | Other | | | Significant | |
| | | | | Identical | | | Observable | | | Unobservable | |
| | | | | Assets | | | Inputs | | | Inputs | |
(Dollars in thousands) | | December 31, 2015 | | | (Level 1) | | | (Level 2) | | | (Level 3) | |
Assets: | | | | | | | | | | | | |
Fixed maturities, market value | | | | | | | | | | | | |
U.S. Treasury securities and obligations of | | | | | | | | | | | | |
U.S. government agencies and corporations | | $ | 330,985 | | | $ | - | | | $ | 330,985 | | | $ | - | |
Obligations of U.S. States and political subdivisions | | | 703,075 | | | | - | | | | 703,075 | | | | - | |
Corporate securities | | | 1,968,558 | | | | - | | | | 1,964,625 | | | | 3,933 | |
Asset-backed securities | | | 144,982 | | | | - | | | | 144,982 | | | | - | |
Mortgage-backed securities | | | | | | | | | | | | | | | | |
Commercial | | | 62,446 | | | | - | | | | 62,446 | | | | - | |
Agency residential | | | 712,298 | | | | - | | | | 712,298 | | | | - | |
Non-agency residential | | | 150 | | | | - | | | | 150 | | | | - | |
Foreign government securities | | | 463,074 | | | | - | | | | 463,074 | | | | - | |
Foreign corporate securities | | | 970,909 | | | | - | | | | 969,316 | | | | 1,593 | |
Total fixed maturities, market value | | | 5,356,477 | | | | - | | | | 5,350,951 | | | | 5,526 | |
| | | | | | | | | | | | | | | | |
Fixed maturities, fair value | | | 2,102 | | | | - | | | | 2,102 | | | | - | |
Equity securities, fair value | | | 1,215,377 | | | | 1,153,310 | | | | 62,067 | | | | - | |
Other invested assets, fair value | | | 1,773,214 | | | | - | | | | - | | | | 1,773,214 | |
16
In addition $22,118 thousand and $18,801 thousand of investments within other invested assets on the consolidated balance sheets as of March 31, 2017 and December 31, 2016, respectively, are not included within the fair value hierarchy tables as the assets are valued using the NAV practical expedient guidance within ASU 2015-07.
The following table presents the activity under Level 3, fair value measurements using significant unobservable inputs by asset type, for the periods indicated:
| | Three Months Ended June 30, 2016 | | | Six Months Ended June 30, 2016 | | | Three Months Ended March 31, 2017 | | | Three Months Ended March 31, 2016 | |
| | Corporate | | | Foreign | | | | | | Corporate | | | Foreign | | | | | | Corporate | | | Foreign | | | | | | Corporate | | | Foreign | | | | |
(Dollars in thousands) | | Securities | | | Corporate | | | Total | | | Securities | | | Corporate | | | Total | | | Securities | | | Corporate | | | Total | | | Securities | | | Corporate | | | Total | |
Beginning balance | | $ | 15,706 | | | $ | 596 | | | $ | 16,302 | | | $ | 3,933 | | | $ | 1,593 | | | $ | 5,526 | | | $ | 65,197 | | | $ | 2,538 | | | $ | 67,735 | | | $ | 3,933 | | | $ | 1,593 | | | $ | 5,526 | |
Total gains or (losses) (realized/unrealized) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Included in earnings | | | (18 | ) | | | - | | | | (18 | ) | | | (10 | ) | | | (997 | ) | | | (1,007 | ) | | | 214 | | | | (24 | ) | | | 190 | | | | 8 | | | | (997 | ) | | | (989 | ) |
Included in other comprehensive income (loss) | | | (27 | ) | | | 1,425 | | | | 1,398 | | | | (33 | ) | | | 1,425 | | | | 1,392 | | | | (29 | ) | | | - | | | | (29 | ) | | | (6 | ) | | | - | | | | (6 | ) |
Purchases, issuances and settlements | | | 16,749 | | | | - | | | | 16,749 | | | | 28,520 | | | | - | | | | 28,520 | | | | 18,940 | | | | 288 | | | | 19,228 | | | | 11,771 | | | | - | | | | 11,771 | |
Transfers in and/or (out) of Level 3 | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Ending balance | | $ | 32,410 | | | $ | 2,021 | | | $ | 34,431 | | | $ | 32,410 | | | $ | 2,021 | | | $ | 34,431 | | | $ | 84,322 | | | $ | 2,802 | | | $ | 87,124 | | | $ | 15,706 | | | $ | 596 | | | $ | 16,302 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
The amount of total gains or losses for the period included | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
in earnings (or changes in net assets) attributable to the | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
change in unrealized gains or losses relating to assets | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
still held at the reporting date | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | (997 | ) | | $ | (997 | ) | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | (997 | ) | | $ | (997 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(Some amounts may not reconcile due to rounding.) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, 2015 | | | Six Months Ended June 30, 2015 | |
| | Corporate | | | Foreign | | | | | | Corporate | | | | | | Foreign | | | | |
(Dollars in thousands) | | Securities | | | Corporate | | | Total | | | Securities | | | CMBS | | | Corporate | | | Total | |
Beginning balance | | $ | 2,653 | | | $ | 6,125 | | | $ | 8,778 | | | $ | - | | | $ | 8,597 | | | $ | 7,166 | | | $ | 15,763 | |
Total gains or (losses) (realized/unrealized) | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Included in earnings | | | 2 | | | | 58 | | | | 60 | | | | 4 | | | | - | | | | 115 | | | | 119 | |
Included in other comprehensive income (loss) | | | (3 | ) | | | 1,169 | | | | 1,166 | | | | (2 | ) | | | - | | | | 71 | | | | 69 | |
Purchases, issuances and settlements | | | (12 | ) | | | - | | | | (12 | ) | | | 1,928 | | | | - | | | | - | | | | 1,928 | |
Transfers in and/or (out) of Level 3 | | | (682 | ) | | | 485 | | | | (197 | ) | | | 28 | | | | (8,597 | ) | | | 485 | | | | (8,084 | ) |
Ending balance | | $ | 1,958 | | | $ | 7,837 | | | $ | 9,795 | | | $ | 1,958 | | | $ | - | | | $ | 7,837 | | | $ | 9,795 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
The amount of total gains or losses for the period | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
included in earnings (or changes in net assets) | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
attributable to the change in unrealized gains | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
or losses relating to assets still held at the | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
reporting date | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(Some amounts may not reconcile due to rounding.) | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
The net transfers from level 3, fair value measurements using significant unobservable inputs, of $0 thousand and $8,084 thousand of investments for the six months ended June 30, 2016 and 2015, respectively, primarily relate to securities that were priced using single non-binding broker quotes as of December 31, 2014. The securities were subsequently priced using a recognized pricing service as of June 30, 2015, and were classified as level 2 as of that date.
The following table presents the activity under Level 3, fair value measurements using significant unobservable inputs by other invested assets, for the periods indicated:
| | Three Months Ended | |
| | March 31, | |
(Dollars in thousands) | | 2017 | | | 2016 | |
Other invested assets, fair value: | | | | | | |
Beginning balance | | $ | 1,766,626 | | | $ | 1,773,214 | |
Total gains or (losses) (realized/unrealized) | | | | | | | | |
Included in earnings | | | 70,675 | | | | - | |
Included in other comprehensive income (loss) | | | - | | | | - | |
Purchases, issuances and settlements | | | - | | | | - | |
Transfers in and/or (out) of Level 3 | | | - | | | | - | |
Ending balance | | $ | 1,837,302 | | | $ | 1,773,214 | |
| | | | | | | | |
The amount of total gains or losses for the period included in earnings | | | | | | | | |
(or changes in net assets) attributable to the change in unrealized | | | | | | | | |
gains or losses relating to assets still held at the reporting date | | $ | - | | | $ | - | |
| | | | | | | | |
(Some amounts may not reconcile due to rounding.) | | | | | | | | |
| | Three months ended | | | Six months ended | |
| | June 30, | | | June 30, | |
(Dollars in thousands) | | 2016 | | | 2015 | | | 2016 | | | 2015 | |
Other invested assets, fair value: | | | | | | | | | | | | |
Beginning balance | | $ | 1,773,214 | | | $ | - | | | $ | 1,773,214 | | | $ | - | |
Total gains or (losses) (realized/unrealized) | | | | | | | | | | | | | | | | |
Included in earnings | | | (756 | ) | | | - | | | | (756 | ) | | | - | |
Included in other comprehensive income (loss) | | | - | | | | - | | | | - | | | | - | |
Purchases, issuances and settlements | | | - | | | | - | | | | - | | | | - | |
Transfers in and/or (out) of Level 3 | | | - | | | | - | | | | - | | | | - | |
Ending balance | | $ | 1,772,458 | | | $ | - | | | $ | 1,772,458 | | | $ | - | |
| | | | | | | | | | | | | | | | |
The amount of total gains or losses for the period included in earnings | | | | | | | | | | | | | | | | |
(or changes in net assets) attributable to the change in unrealized | | | | | | | | | | | | | | | | |
gains or losses relating to assets still held at the reporting date | | $ | - | | | $ | - | | | $ | - | | | $ | - | |
| | | | | | | | | | | | | | | | |
(Some amounts may not reconcile due to rounding.) | | | | | | | | | | | | | | | | |
5.6. COMMITMENTS AND CONTINGENCIES
In the ordinary course of business, the Company is involved in lawsuits, arbitrations and other formal and informal dispute resolution procedures, the outcomes of which will determine the Company's rights and obligations under insurance and reinsurance agreements. In some disputes, the Company seeks to enforce its rights under an agreement or to collect funds owing to it. In other matters, the Company is resisting attempts by others to collect funds or enforce alleged rights. These disputes arise from time to time and are ultimately resolved through both informal and formal means, including negotiated resolution, arbitration and litigation. In all such matters, the Company believes that its positions are legally and commercially reasonable. The Company considers the statuses of these proceedings when determining its reserves for unpaid loss and loss adjustment expenses.
Aside from litigation and arbitrations related to these insurance and reinsurance agreements, the Company is not a party to any other material litigation or arbitration.
The Company has entered into separate annuity agreements with The Prudential Insurance of America ("The Prudential") and an additional unaffiliated life insurance company in which the Company has either purchased annuity contracts or become the assignee of annuity proceeds that are meant to settle claim payment obligations in the future. In both instances, the Company would become contingently liable if either
The Prudential or the unaffiliated life insurance company were unable to make payments related to the respective annuity contact.
The table below presents the estimated cost to replace all such annuities for which the Company was contingently liable for the periods indicated:
| | At March 31, | | | At December 31, | |
(Dollars in thousands) | | 2017 | | | 2016 | |
The Prudential | | $ | 146,620 | | | $ | 146,507 | |
Unaffiliated life insurance company | | | 32,458 | | | | 33,860 | |
| | At June 30, | | | At December 31, | |
(Dollars in thousands) | | 2016 | | | 2015 | |
The Prudential | | $ | 141,562 | | | $ | 142,427 | |
Unaffiliated life insurance company | | | 32,545 | | | | 33,062 | |
6. OTHER7. COMPREHENSIVE INCOME (LOSS)
The following table presents the components of comprehensive income (loss) in the consolidated statements of operations and comprehensive income (loss) for the periods indicated:
| | Three Months Ended March 31, 2017 | | | Three Months Ended March 31, 2016 | |
(Dollars in thousands) | | Before Tax | | | Tax Effect | | | Net of Tax | | | Before Tax | | | Tax Effect | | | Net of Tax | |
Unrealized appreciation (depreciation) ("URA(D)") on securities - temporary | | $ | 18,020 | | | $ | (6,307 | ) | | $ | 11,713 | | | $ | 29,956 | | | $ | (10,484 | ) | | $ | 19,472 | |
URA(D) on securities - OTTI | | | (3,499 | ) | | | 1,225 | | | | (2,274 | ) | | | 197 | | | | (69 | ) | | | 128 | |
Reclassification of net realized losses (gains) included in net income (loss) | | | (5,334 | ) | | | 1,867 | | | | (3,467 | ) | | | 39,870 | | | | (13,955 | ) | | | 25,915 | |
Foreign currency translation adjustments | | | 5,487 | | | | (1,920 | ) | | | 3,567 | | | | 22,977 | | | | (8,045 | ) | | | 14,932 | |
Benefit plan actuarial net gain (loss) | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Reclassification of amortization of net gain (loss) included in net income (loss) | | | 3,083 | | | | (1,079 | ) | | | 2,004 | | | | 2,062 | | | | (722 | ) | | | 1,340 | |
Total other comprehensive income (loss) | | $ | 17,757 | | | $ | (6,214 | ) | | $ | 11,543 | | | $ | 95,062 | | | $ | (33,275 | ) | | $ | 61,787 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
(Some amounts may not reconcile due to rounding) | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, 2016 | | | Six Months Ended June 30, 2016 | |
(Dollars in thousands) | | Before Tax | | | Tax Effect | | | Net of Tax | | | Before Tax | | | Tax Effect | | | Net of Tax | |
Unrealized appreciation (depreciation) ("URA(D)") on securities - temporary | | $ | 53,960 | | | $ | (18,886 | ) | | $ | 35,074 | | | $ | 83,916 | | | $ | (29,370 | ) | | $ | 54,546 | |
URA(D) on securities - OTTI | | | 6,446 | | | | (2,256 | ) | | | 4,190 | | | | 6,643 | | | | (2,325 | ) | | | 4,318 | |
Reclassification of net realized losses (gains) included in net income (loss) | | | (97 | ) | | | 34 | | | | (63 | ) | | | 39,773 | | | | (13,921 | ) | | | 25,852 | |
Foreign currency translation adjustments | | | 23,830 | | | | (8,341 | ) | | | 15,489 | | | | 46,807 | | | | (16,386 | ) | | | 30,421 | |
Benefit plan actuarial net gain (loss) | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Reclassification of amortization of net gain (loss) included in net income (loss) | | | 2,063 | | | | (722 | ) | | | 1,341 | | | | 4,125 | | | | (1,444 | ) | | | 2,681 | |
Total other comprehensive income (loss) | | $ | 86,202 | | | $ | (30,171 | ) | | $ | 56,031 | | | $ | 181,264 | | | $ | (63,446 | ) | | $ | 117,818 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
(Some amounts may not reconcile due to rounding) | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, 2015 | | | Six Months Ended June 30, 2015 | |
(Dollars in thousands) | | Before Tax | | | Tax Effect | | | Net of Tax | | | Before Tax | | | Tax Effect | | | Net of Tax | |
Unrealized appreciation (depreciation) ("URA(D)") on securities - temporary | | $ | (55,290 | ) | | $ | 19,352 | | | $ | (35,938 | ) | | $ | (39,718 | ) | | $ | 13,402 | | | $ | (26,316 | ) |
URA(D) on securities - OTTI | | | - | | | | - | | | | - | | | | 9,735 | | | | (3,407 | ) | | | 6,328 | |
Reclassification of net realized losses (gains) included in net income (loss) | | | 21,017 | | | | (7,356 | ) | | | 13,661 | | | | 56,656 | | | | (19,330 | ) | | | 37,326 | |
Foreign currency translation adjustments | | | 24,839 | | | | (8,694 | ) | | | 16,145 | | | | (26,404 | ) | | | 9,241 | | | | (17,163 | ) |
Benefit plan actuarial net gain (loss) | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Reclassification of amortization of net gain (loss) included in net income (loss) | | | 2,476 | | | | (867 | ) | | | 1,609 | | | | 4,943 | | | | (1,730 | ) | | | 3,213 | |
Total other comprehensive income (loss) | | $ | (6,958 | ) | | $ | 2,435 | | | $ | (4,523 | ) | | $ | 5,212 | | | $ | (1,824 | ) | | $ | 3,388 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
(Some amounts may not reconcile due to rounding) | | | | | | | | | | | | | | | | | | | | | | | | |
The following table presents details of the amounts reclassified from AOCI for the periods indicated:
| | Three Months Ended | | | |
| | March 31, | | | Affected line item within the statements of |
AOCI component | | 2017 | | | 2016 | | | operations and comprehensive income (loss) |
(Dollars in thousands) | | | | | | | | |
URA(D) on securities | | $ | (5,334 | ) | | $ | 39,870 | | | Other net realized capital gains (losses) |
| | | 1,867 | | | | (13,955 | ) | | Income tax expense (benefit) |
| | $ | (3,467 | ) | | $ | 25,915 | | | Net income (loss) |
| | | | | | | | | | |
Benefit plan net gain (loss) | | $ | 3,083 | | | $ | 2,062 | | | Other underwriting expenses |
| | | (1,079 | ) | | | (722 | ) | | Income tax expense (benefit) |
| | $ | 2,004 | | | $ | 1,340 | | | Net income (loss) |
| | | | | | | | | | |
(Some amounts may not reconcile due to rounding) | | | | | | | | | | |
| | Three Months Ended | | | Six Months Ended | | | |
| | June 30, | | | June 30, | | | Affected line item within the statements of |
AOCI component | | 2016 | | | 2015 | | | 2016 | | | 2015 | | | operations and comprehensive income (loss) |
(Dollars in thousands) | | | | | | | | | | | | | | |
URA(D) on securities | | $ | (97 | ) | | $ | 21,017 | | | $ | 39,773 | | | $ | 56,656 | | | Other net realized capital gains (losses) |
| | | 34 | | | | (7,356 | ) | | | (13,921 | ) | | | (19,330 | ) | | Income tax expense (benefit) |
| | $ | (63 | ) | | $ | 13,661 | | | $ | 25,852 | | | $ | 37,326 | | | Net income (loss) |
| | | | | | | | | | | | | | | | | | |
Benefit plan net gain (loss) | | $ | 2,063 | | | $ | 2,476 | | | $ | 4,125 | | | $ | 4,943 | | | Other underwriting expenses |
| | | (722 | ) | | | (867 | ) | | | (1,444 | ) | | | (1,730 | ) | | Income tax expense (benefit) |
| | $ | 1,341 | | | $ | 1,609 | | | $ | 2,681 | | | $ | 3,213 | | | Net income (loss) |
| | | | | | | | | | | | | | | | | | |
(Some amounts may not reconcile due to rounding) | | | | | | | | | | | | | | | | | | |
18
The following table presents the components of accumulated other comprehensive income (loss), net of tax, in the consolidated balance sheets for the periods indicated:
| | Three Months Ended | | | Twelve Months Ended | |
| | March 31, | | | December 31, | |
(Dollars in thousands) | | 2017 | | | 2016 | |
| | | | | | |
Beginning balance of URA (D) on securities | | $ | 39,041 | | | $ | 13,654 | |
Current period change in URA (D) of investments - temporary | | | 8,246 | | | | 22,063 | |
Current period change in URA (D) of investments - non-credit OTTI | | | (2,274 | ) | | | 3,324 | |
Ending balance of URA (D) on securities | | | 45,013 | | | | 39,041 | |
| | | | | | | | |
Beginning balance of foreign currency translation adjustments | | | (9,852 | ) | | | (12,701 | ) |
Current period change in foreign currency translation adjustments | | | 3,567 | | | | 2,849 | |
Ending balance of foreign currency translation adjustments | | | (6,285 | ) | | | (9,852 | ) |
| | | | | | | | |
Beginning balance of benefit plan net gain (loss) | | | (65,504 | ) | | | (63,089 | ) |
Current period change in benefit plan net gain (loss) | | | 2,004 | | | | (2,415 | ) |
Ending balance of benefit plan net gain (loss) | | | (63,500 | ) | | | (65,504 | ) |
| | | | | | | | |
Ending balance of accumulated other comprehensive income (loss) | | $ | (24,772 | ) | | $ | (36,315 | ) |
| | Six Months Ended | | | Twelve Months Ended | |
| | June 30, | | | December 31, | |
(Dollars in thousands) | | 2016 | | | 2015 | |
| | | | | | |
Beginning balance of URA (D) on securities | | $ | 13,654 | | | $ | 37,628 | |
Current period change in URA (D) of investments - temporary | | | 80,398 | | | | (30,257 | ) |
Current period change in URA (D) of investments - non-credit OTTI | | | 4,318 | | | | 6,283 | |
Ending balance of URA (D) on securities | | | 98,370 | | | | 13,654 | |
| | | | | | | | |
Beginning balance of foreign currency translation adjustments | | | (12,701 | ) | | | 41,877 | |
Current period change in foreign currency translation adjustments | | | 30,421 | | | | (54,578 | ) |
Ending balance of foreign currency translation adjustments | | | 17,720 | | | | (12,701 | ) |
| | | | | | | | |
Beginning balance of benefit plan net gain (loss) | | | (63,089 | ) | | | (74,986 | ) |
Current period change in benefit plan net gain (loss) | | | 2,681 | | | | 11,897 | |
Ending balance of benefit plan net gain (loss) | | | (60,408 | ) | | | (63,089 | ) |
| | | | | | | | |
Ending balance of accumulated other comprehensive income (loss) | | $ | 55,682 | | | $ | (62,136 | ) |
7.8. COLLATERALIZED REINSURANCE AND TRUST AGREEMENTS
A subsidiary of the Company, Everest Re, has established a trust agreement, which effectively uses Everest Re's investments as collateral, as security for assumed losses payable to a non-affiliated ceding company. At June 30, 2016,March 31, 2017, the total amount on deposit in the trust account was $297,465$617,060 thousand.
On April 24, 2014, the Company entered into two collateralized reinsurance agreements with Kilimanjaro Re Limited ("Kilimanjaro"), a Bermuda based special purpose reinsurer, to provide the Company with catastrophe reinsurance coverage. These agreements are multi-year reinsurance contracts which cover specified named storm and earthquake events. The first agreement provides up to $250,000 thousand of reinsurance coverage from named storms in specified states of the Southeastern United States. The second agreement provides up to $200,000 thousand of reinsurance coverage from named storms in specified states of the Southeast, Mid-Atlantic and Northeast regions of the United States and Puerto Rico as well as reinsurance coverage from earthquakes in specified states of the Southeast, Mid-Atlantic, Northeast and West regions of the United States, Puerto Rico and British Columbia.
On November 18, 2014, the Company entered into a collateralized reinsurance agreement with Kilimanjaro Re to provide the Company with catastrophe reinsurance coverage. This agreement is a multi-year reinsurance contract which covers specified earthquake events. The agreement provides up to $500,000 thousand of reinsurance coverage from earthquakes in the United States, Puerto Rico and Canada.
On December 1, 2015 the Company entered into two collateralized reinsurance agreements with Kilimanjaro Re to provide the Company with catastrophe reinsurance coverage. These agreements are multi-year reinsurance contracts which cover named storm and earthquake events. The first agreement provides up to $300,000 thousand of reinsurance coverage from named storms and earthquakes in the United States, Puerto Rico and Canada. The second agreement provides up to $325,000 thousand of reinsurance coverage from named storms and earthquakes in the United States, Puerto Rico and Canada.
On April 13, 2017 the Company entered into six collateralized reinsurance agreements with Kilimanjaro Re to provide the Company with annual aggregate catastrophe reinsurance coverage. The initial three agreements are four year reinsurance contracts which cover named storm and earthquake events. These agreements provide up to $225,000 thousand, $400,000 thousand and $325,000 thousand, respectively, of annual aggregate reinsurance coverage from named storms and earthquakes in the United States, Puerto Rico and Canada. The subsequent three agreements are five year reinsurance contracts which cover named
storm and earthquake events. These agreements provide up to $50,000 thousand, $75,000 thousand and $175,000 thousand, respectively, of annual aggregate reinsurance coverage from named storms and earthquakes in the United States, Puerto Rico and Canada.
Kilimanjaro has financed the various property catastrophe reinsurance coveragecoverages by issuing catastrophe bonds to unrelated, external investors. On April 24, 2014, Kilimanjaro issued $450,000 thousand of notes ("Series 2014-1 Notes"). On November 18, 2014, Kilimanjaro issued $500,000 thousand of notes ("Series 2014-2 Notes"). On December 1, 2015, Kilimanjaro issued $625,000 thousand of notes ("Series 2015-1 Notes). On April 13, 2017, Kilimanjaro issued $950,000 thousand of notes ("Series 2017-1 Notes) and $300,000 thousand of notes ("Series 2017-2 Notes). The proceeds from the issuance of the Series 2014-1 Notes the Series 2014-2 Notes and the Series 2015-1 Noteslisted above are held in reinsurance trust throughout the duration of the applicable reinsurance agreements and invested solely in US government money market funds with a rating of at least "AAAm" by Standard & Poor's.
8.9. SENIOR NOTES
The table below displays Holdings' outstanding senior notes. Market value is based on quoted market prices, but due to limited trading activity, these senior notes are considered Level 2 in the fair value hierarchy.
| | | | | | | | March 31, 2017 | | | December 31, 2016 | |
| | | | | | | | Consolidated Balance | | | | | | Consolidated Balance | | | | |
(Dollars in thousands) | Date Issued | | Date Due | | Principal Amounts | | | Sheet Amount | | | Market Value | | | Sheet Amount | | | Market Value | |
4.868% Senior notes | 06/05/2014 | | 06/01/2044 | | | 400,000 | | | $ | 396,744 | | | $ | 403,468 | | | $ | 396,714 | | | $ | 383,612 | |
| | | | | | | | June 30, 2016 | | | December 31, 2015 | |
| | | | | | | | Consolidated Balance | | | | | | Consolidated Balance | | | | |
(Dollars in thousands) | Date Issued | | Date Due | | Principal Amounts | | Sheet Amount | | | Market Value | | | Sheet Amount | | | Market Value | |
4.868% Senior notes | 06/05/2014 | | 06/01/2044 | | | 400,000 | | | $ | 396,654 | | | $ | 404,096 | | | $ | 396,594 | | | $ | 381,204 | |
On June 5, 2014, Holdings issued $400,000 thousand of 30 year senior notes at 4.868%, which will mature on June 1, 2044. Interest will be paid semi-annually on June 1 and December 1 of each year.
Interest expense incurred in connection with these senior notes is as follows for the periods indicated:
| | Three Months Ended | |
| | March 31, | |
(Dollars in thousands) | | 2017 | | | 2016 | |
Interest expense incurred | | $ | 4,868 | | | $ | 4,868 | |
| | Three Months Ended | | | Six Months Ended | |
| | June 30, | | | June 30, | |
(Dollars in thousands) | | 2016 | | | 2015 | | | 2016 | | | 2015 | |
Interest expense incurred | | $ | 4,868 | | | $ | 4,868 | | | $ | 9,736 | | | $ | 9,736 | |
9.10. LONG TERM SUBORDINATED NOTES
The table below displays Holdings' outstanding fixed to floating rate long term subordinated notes. Market value is based on quoted market prices, but due to limited trading activity, these subordinated notes are considered Level 2 in the fair value hierarchy.
| | | | | | Maturity Date | | June 30, 2016 | | | December 31, 2015 | | | | | | | Maturity Date | | March 31, 2017 | | | December 31, 2016 | |
| | | Original | | | | | | | Consolidated Balance | | | | | | Consolidated Balance | | | | | | | Original | | | | | | | Consolidated Balance | | | | | | Consolidated Balance | | | | |
(Dollars in thousands) | Date Issued | | Principal Amount | | | Scheduled | | Final | | Sheet Amount | | | Market Value | | | Sheet Amount | | | Market Value | | Date Issued | | Principal Amount | | | Scheduled | | Final | | Sheet Amount | | | Market Value | | | Sheet Amount | | | Market Value | |
6.6% Long term subordinated notes | 04/26/2007 | | $ | 400,000 | | | 05/15/2037 | | 05/01/2067 | | $ | 236,413 | | | $ | 189,893 | | | $ | 236,364 | | | $ | 208,978 | | 04/26/2007 | | $ | 400,000 | | | 05/15/2037 | | 05/01/2067 | | $ | 236,487 | | | $ | 222,456 | | | $ | 236,462 | | | $ | 204,636 | |
During the fixed rate interest period from May 3, 2007 through May 14, 2017, interest will be at the annual rate of 6.6%, payable semi-annually in arrears on November 15 and May 15 of each year, commencing on November 15, 2007, subject to Holdings' right to defer interest on one or more occasions for up to ten consecutive years. During the floating rate interest period from May 15, 2017 through maturity, interest will be based on the 3 month LIBOR plus 238.5 basis points, reset quarterly, payable quarterly in arrears on February 15, May 15, August 15 and November 15 of each year, subject to Holdings' right to defer interest on one or more occasions for up to ten consecutive years. Deferred interest will accumulate interest at the applicable rate compounded semi-annually for periods prior to May 15, 2017, and compounded quarterly for periods from and including May 15, 2017.
Holdings can redeem the long term subordinated notes prior to May 15, 2017, in whole but not in part at the applicable redemption price, which will equal the greater of (a) 100% of the principal amount being redeemed and (b) the present value of the principal payment on May 15, 2017 and scheduled payments of interest that would have accrued from the redemption date to May 15, 2017 on the long term subordinated notes being redeemed, discounted to the redemption date on a semi-annual basis at a discount rate equal to the treasury rate plus an applicable spread of either 0.25% or 0.50%, in each case plus accrued and unpaid interest. Holdings may redeem the long term subordinated notes on or after May 15, 2017, in whole or in part at 100% of the principal amount plus accrued and unpaid interest; however, redemption on or after the scheduled maturity date and prior to May 1, 2047 is subject to a replacement capital covenant. This covenant is for the benefit of certain senior note holders and it mandates that Holdings receive proceeds from the sale of another subordinated debt issue, of at least similar size, before it may redeem the subordinated notes. Effective upon the maturity of the Company's 5.40% senior notes on October 15, 2014, the Company's 4.868% senior notes, due on June 1, 2044, have become the Company's long term indebtedness that ranks senior to the long term subordinated notes.
On March 19, 2009, Group announced the commencement of a cash tender offer for any and all of the 6.60% fixed to floating rate long term subordinated notes. Upon expiration of the tender offer, the Company had reduced its outstanding debt by $161,441 thousand.
Interest expense incurred in connection with these long term subordinated notes is as follows for the periods indicated:
| | Three Months Ended | |
| | March 31, | |
(Dollars in thousands) | | 2017 | | | 2016 | |
Interest expense incurred | | $ | 3,937 | | | $ | 3,937 | |
| | Three Months Ended | | | Six Months Ended | |
| | June 30, | | | June 30, | |
(Dollars in thousands) | | 2016 | | | 2015 | | | 2016 | | | 2015 | |
Interest expense incurred | | $ | 3,937 | | | $ | 3,937 | | | $ | 7,874 | | | $ | 7,874 | |
10.11. SEGMENT REPORTING
The U.S. Reinsurance operation writes property and casualty reinsurance and specialty lines of business, including Marine, Aviation, Surety and Accident and Health ("A&H") business, on both a treaty and facultative basis, through reinsurance brokers, as well as directly with ceding companies primarily within the U.S. The International operation writes non-U.S. property and casualty reinsurance through Everest Re's branches in Canada, Singapore and through offices in Brazil, Miami and New Jersey. The Insurance operation writes property and casualty insurance directly and through general agents,brokers, surplus lines brokers and surplus lines brokersgeneral agents mainly within the U.S.
These segments are managed independently, but conform with corporate guidelines with respect to pricing, risk management, control of aggregate catastrophe exposures, capital, investments and support operations. Management generally monitors and evaluates the financial performance of these operating segments based upon their underwriting results.
Underwriting results include earned premium less losses and LAEloss adjustment expenses ("LAE") incurred, commission and brokerage expenses and other underwriting expenses. UnderwritingWe measure our underwriting results are measured using ratios, in particular loss, commission and brokerage and other underwriting expense ratios, which, respectively, divide incurred losses, commissions and brokerage and other underwriting expenses by premiums earned.
The Company does not maintain separate balance sheet data for its operating segments. Accordingly, the Company does not review and evaluate the financial results of its operating segments based upon balance sheet data.
The following tables present the underwriting results for the operating segments for the periods indicated:
| | Three Months Ended | | | Six Months Ended | |
U.S. Reinsurance | | June 30, | | | June 30, | |
(Dollars in thousands) | | 2016 | | | 2015 | | | 2016 | | | 2015 | |
Gross written premiums | | $ | 405,530 | | | $ | 451,059 | | | $ | 942,236 | | | $ | 1,013,706 | |
Net written premiums | | | 161,031 | | | | 184,707 | | | | 384,458 | | | | 425,401 | |
| | | | | | | | | | | | | | | | |
Premiums earned | | $ | 224,618 | | | $ | 235,426 | | | $ | 459,861 | | | $ | 490,838 | |
Incurred losses and LAE | | | 110,152 | | | | 116,473 | | | | 226,322 | | | | 227,928 | |
Commission and brokerage | | | 50,130 | | | | 34,703 | | | | 99,861 | | | | 93,067 | |
Other underwriting expenses | | | 12,133 | | | | 11,807 | | | | 25,591 | | | | 23,336 | |
Underwriting gain (loss) | | $ | 52,203 | | | $ | 72,443 | | | $ | 108,087 | | | $ | 146,507 | |
| | Three Months Ended | | | Six Months Ended | |
International | | June 30, | | | June 30, | |
(Dollars in thousands) | | 2016 | | | 2015 | | | 2016 | | | 2015 | |
Gross written premiums | | $ | 348,178 | | | $ | 311,653 | | | $ | 586,656 | | | $ | 645,268 | |
Net written premiums | | | 124,438 | | | | 147,399 | | | | 212,154 | | | | 269,080 | |
| | | | | | | | | | | | | | | | |
Premiums earned | | $ | 131,285 | | | $ | 157,922 | | | $ | 244,458 | | | $ | 298,621 | |
Incurred losses and LAE | | | 91,427 | | | | 110,027 | | | | 164,842 | | | | 211,472 | |
Commission and brokerage | | | 26,140 | | | | 31,243 | | | | 52,250 | | | | 65,242 | |
Other underwriting expenses | | | 7,969 | | | | 8,049 | | | | 15,792 | | | | 16,164 | |
Underwriting gain (loss) | | $ | 5,749 | | | $ | 8,603 | | | $ | 11,574 | | | $ | 5,743 | |
| | Three Months Ended | | | Six Months Ended | | | Three Months Ended | |
Insurance | | June 30, | | | June 30, | | |
U.S. Reinsurance | | | March 31, | |
(Dollars in thousands) | | 2016 | | | 2015 | | | 2016 | | | 2015 | | | 2017 | | | 2016 | |
Gross written premiums | | $ | 424,083 | | | $ | 326,729 | | | $ | 778,803 | | | $ | 657,230 | | | $ | 578,958 | | | $ | 536,706 | |
Net written premiums | | | 155,786 | | | | 140,358 | | | | 308,712 | | | | 286,410 | | | | 219,062 | | | | 223,428 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Premiums earned | | $ | 132,952 | | | $ | 128,076 | | | $ | 266,461 | | | $ | 253,027 | | | $ | 208,314 | | | $ | 235,243 | |
Incurred losses and LAE | | | 136,957 | | | | 96,379 | | | | 243,434 | | | | 192,359 | | | | 120,434 | | | | 116,170 | |
Commission and brokerage | | | (4,144 | ) | | | 7,007 | | | | (11,163 | ) | | | 11,175 | | | | 40,373 | | | | 49,731 | |
Other underwriting expenses | | | 38,228 | | | | 31,717 | | | | 76,174 | | | | 60,616 | | | | 14,251 | | | | 13,458 | |
Underwriting gain (loss) | | $ | (38,089 | ) | | $ | (7,027 | ) | | $ | (41,984 | ) | | $ | (11,123 | ) | | $ | 33,256 | | | $ | 55,884 | |
| | Three Months Ended | |
International | | March 31, | |
(Dollars in thousands) | | 2017 | | | 2016 | |
Gross written premiums | | $ | 278,575 | | | $ | 238,478 | |
Net written premiums | | | 103,246 | | | | 87,716 | |
| | | | | | | | |
Premiums earned | | $ | 118,151 | | | $ | 113,173 | |
Incurred losses and LAE | | | 68,414 | | | | 73,415 | |
Commission and brokerage | | | 23,535 | | | | 26,110 | |
Other underwriting expenses | | | 8,889 | | | | 7,823 | |
Underwriting gain (loss) | | $ | 17,313 | | | $ | 5,825 | |
| | Three Months Ended | |
Insurance | | March 31, | |
(Dollars in thousands) | | 2017 | | | 2016 | |
Gross written premiums | | $ | 394,851 | | | $ | 354,720 | |
Net written premiums | | | 126,528 | | | | 152,926 | |
| | | | | | | | |
Premiums earned | | $ | 144,590 | | | $ | 133,509 | |
Incurred losses and LAE | | | 100,874 | | | | 106,477 | |
Commission and brokerage | | | (14,438 | ) | | | (7,019 | ) |
Other underwriting expenses | | | 36,755 | | | | 37,946 | |
Underwriting gain (loss) | | $ | 21,399 | | | $ | (3,895 | ) |
21
The following table reconciles the underwriting results for the operating segments to income (loss) before taxes as reported in the consolidated statements of operations and comprehensive income (loss) for the periods indicated:
| | Three Months Ended | |
| | March 31, | |
(Dollars in thousands) | | 2017 | | | 2016 | |
Underwriting gain (loss) | | $ | 71,968 | | | $ | 57,814 | |
Net investment income | | | 60,849 | | | | 58,445 | |
Net realized capital gains (losses) | | | 117,768 | | | | (66,377 | ) |
Corporate expense | | | (3,597 | ) | | | (2,336 | ) |
Interest, fee and bond issue cost amortization expense | | | (8,859 | ) | | | (8,859 | ) |
Other income (expense) | | | 9,855 | | | | 13,102 | |
Income (loss) before taxes | | $ | 247,984 | | | $ | 51,789 | |
| | Three Months Ended | | | Six Months Ended | |
| | June 30, | | | June 30, | |
(Dollars in thousands) | | 2016 | | | 2015 | | | 2016 | | | 2015 | |
Underwriting gain (loss) | | $ | 19,863 | | | $ | 74,019 | | | $ | 77,677 | | | $ | 141,127 | |
Net investment income | | | 73,872 | | | | 70,925 | | | | 132,317 | | | | 143,506 | |
Net realized capital gains (losses) | | | 29,165 | | | | 51,225 | | | | (37,212 | ) | | | 72,521 | |
Corporate expense | | | (2,010 | ) | | | (1,785 | ) | | | (4,346 | ) | | | (3,394 | ) |
Interest, fee and bond issue cost amortization expense | | | (8,858 | ) | | | (8,858 | ) | | | (17,717 | ) | | | (17,717 | ) |
Other income (expense) | | | (10,700 | ) | | | 12,289 | | | | 2,402 | | | | 28,122 | |
Income (loss) before taxes | | $ | 101,332 | | | $ | 197,815 | | | $ | 153,121 | | | $ | 364,165 | |
22
The Company produces business in the U.S. and internationally. The net income deriving from assets residing in the individual foreign countries in which the Company writes business are not identifiable in the Company's financial records. Based on gross written premium, the table below presents the largest country, other than the U.S., in which the Company writes business, for the periods indicated:
| | Three Months Ended | |
| | March 31, | |
(Dollars in thousands) | | 2017 | | | 2016 | |
Canada gross written premiums | | $ | 27,957 | | | $ | 23,586 | |
| | Three Months Ended | | | Six Months Ended | |
| | June 30, | | | June 30, | |
(Dollars in thousands) | | 2016 | | | 2015 | | | 2016 | | | 2015 | |
Canada gross written premiums | | $ | 34,630 | | | $ | 30,160 | | | $ | 58,216 | | | $ | 53,672 | |
No other country represented more than 5% of the Company's revenues.
11.12. RELATED-PARTY TRANSACTIONS
Parent
Group entered into a $250,000 thousand long term promissory note agreement with Holdings as of December 31, 2014. The note will mature on December 31, 2023 and has an interest rate of 1.72% that will be paid annually, on December 15th of each year.is payable annually. This transaction is presented as a Note Receivable – Affiliated in the Consolidated Balance Sheets of Holdings. Interest income in the amount of $2,150$1,075 thousand was recorded by Holdings for the sixthree months ended June 30, 2016,March 31, 2017, and June 30, 2015, respectively.March 31, 2016.
Group's Board of Directors approved an amended share repurchase program authorizing Group and/or its subsidiary Holdings to purchase Group's common shares through open market transactions, privately negotiated transactions or both. The table below represents the amendments to the share repurchase program for the common shares approved for repurchase.
| | Common Shares |
| | Authorized for |
Amendment Date | | Repurchase |
(Dollars in thousands) | | |
| | |
09/21/2004 | | 5,000,000 |
07/21/2008 | | 5,000,000 |
02/24/2010 | | 5,000,000 |
02/22/2012 | | 5,000,000 |
05/15/2013 | | 5,000,000 |
11/19/2014 | | 5,000,000 |
| | 30,000,000 |
Through December, 2015, Holdings had purchased and held 9,719,971 Common Shares of Group, which were purchased in the open market between February 2007 and March 2011.
In December, 2015, Holdings transferred the 9,719,971 Common Shares of Group, which it held as other invested assets, at fair value, valued at $1,773,214 thousand, to Preferred Holdings, an affiliated entity and subsidiary of Group, in exchange for 1,773.214 preferred shares of Preferred Holdings with a $1,000 thousand par value and 1.75% annual dividend rate. After the exchange, Holdings no longer holds any shares or has any ownership interest in Group.
Holdings reported both its Parent Sharesshares and preferred shares in Preferred Holdings, as other invested assets, fair value, in the consolidated balance sheets with changes in fair value re-measurement recorded in net realized capital gains (losses) in the consolidated statements of operations and comprehensive income (loss). The following table presents the dividends received on the preferred shares of preferredPreferred Holdings and on the Parent shares that are reported as net investment income in the consolidated statements of operations and comprehensive income (loss) for the period indicated.
| | Three Months Ended | |
| | March 31, | |
(Dollars in thousands) | | 2017 | | | 2016 | |
Dividends received on preferred stock of affiliate | | $ | 7,758 | | | $ | 7,758 | |
| | Three Months Ended | | | Six Months Ended | |
| | June 30, | | | June 30, | |
(Dollars in thousands) | | 2016 | | | 2015 | | | 2016 | | | 2015 | |
Dividends received on Parent shares | | $ | - | | | $ | 9,234 | | | $ | - | | | $ | 18,468 | |
Dividends received on preferred stock of affiliate | | | 7,758 | | | | - | | | | 15,516 | | | | - | |
Affiliated Companies
Everest Global Services, Inc. ("Global Services"), an affiliate of Holdings, provides centralized management and home office services, through a management agreement, to Holdings and other affiliated companies within Holdings' consolidated structure. Services provided by Everest Global include executive managerial services, legal services, actuarial services, accounting services, information technology services and others.
The following table presents the expenses incurred by Holdings from services provided by Everest Global for the periods indicated.
| | Three Months Ended | | | Six Months Ended | | | Three Months Ended | |
| | June 30, | | | June 30, | | | March 31, | |
(Dollars in thousands) | | 2016 | | | 2015 | | | 2016 | | | 2015 | | | 2017 | | | 2016 | |
Expenses incurred | | $ | 20,289 | | | $ | 19,833 | | | $ | 41,459 | | | $ | 38,196 | | | $ | 23,183 | | | $ | 21,170 | |
Affiliates
The table below represents affiliated quota share reinsurance agreements ("whole account quota share") for all new and renewal business for the indicated coverage period:
(Dollars in thousands) | | | | | | | | | | | | | | | | | |
| | | | Percent | | | Assuming | | | | Single | | | | Aggregate | | |
Coverage Period | | Ceding Company | | Ceded | | | Company | | Type of Business | | Occurrence Limit | | | | Limit | | |
| | | | | | | | | | | | | | | | | |
01/01/2002-12/31/2002 | | Everest Re | | | 20.0 | % | | Bermuda Re | | property / casualty business | | $ | - | | | | $ | - | | |
| | | | | | | | | | | | | | | | | | | | |
01/01/2003-12/31/2003 | | Everest Re | | | 25.0 | % | | Bermuda Re | | property / casualty business | | | - | | | | | - | | |
| | | | | | | | | | | | | | | | | | | | |
01/01/2004-12/31/2005 | | Everest Re | | | 22.5 | % | | Bermuda Re | | property / casualty business | | | - | | | | | - | | |
| | Everest Re | | | 2.5 | % | | Everest International | | property / casualty business | | | - | | | | | - | | |
| | | | | | | | | | | | | | | | | | | | |
01/01/2006-12/31/2006 | | Everest Re | | | 18.0 | % | | Bermuda Re | | property business | | | 125,000 | | (1) | | | - | | |
| | Everest Re | | | 2.0 | % | | Everest International | | property business | | | - | | | | | - | | |
| | | | | | | | | | | | | | | | | | | | |
01/01/2006-12/31/2007 | | Everest Re | | | 31.5 | % | | Bermuda Re | | casualty business | | | - | | | | | - | | |
| | Everest Re | | | 3.5 | % | | Everest International | | casualty business | | | - | | | | | - | | |
| | | | | | | | | | | | | | | | | | | | |
01/01/2007-12/31/2007 | | Everest Re | | | 22.5 | % | | Bermuda Re | | property business | | | 130,000 | | (1) | | | - | | |
| | Everest Re | | | 2.5 | % | | Everest International | | property business | | | - | | | | | - | | |
| | | | | | | | | | | | | | | | | | | | |
01/01/2008-12/31/2008 | | Everest Re | | | 36.0 | % | | Bermuda Re | | property / casualty business | | | 130,000 | | (1) | | | 275,000 | | (2) |
| | Everest Re | | | 4.0 | % | | Everest International | | property / casualty business | | | - | | | | | - | | |
| | | | | | | | | | | | | | | | | | | | |
01/01/2009-12/31/2009 | | Everest Re | | | 36.0 | % | | Bermuda Re | | property / casualty business | | | 150,000 | | (1) | | | 325,000 | | (2) |
| | Everest Re | | | 8.0 | % | | Everest International | | property / casualty business | | | - | | | | | - | | |
| | | | | | | | | | | | | | | | | | | | |
01/01/2010-12/31/2010 | | Everest Re | | | 44.0 | % | | Bermuda Re | | property / casualty business | | | 150,000 | | | | | 325,000 | | |
| | | | | | | | | | | | | | | | | | | | |
01/01/2011-12/31/2011 | | Everest Re | | | 50.0 | % | | Bermuda Re | | property / casualty business | | | 150,000 | | | | | 300,000 | | |
| | | | | | | | | | | | | | | | | | | | |
01/01/2012-12/31/2014 | | Everest Re | | | 50.0 | % | | Bermuda Re | | property / casualty business | | | 100,000 | | | | | 200,000 | | |
| | | | | | | | | | | | | | | | | | | | |
01/01/2015 | | Everest Re | | | 50.0 | % | | Bermuda Re | | property / casualty business | | | 162,500 | | | | | 325,000 | | |
| | | | | | | | | | | | | | | | | | | | |
01/01/2003-12/31/2006 | | Everest Re- Canadian Branch | | | 50.0 | % | | Bermuda Re | | property business | | | - | | | | | - | | |
01/01/2007-12/31/2009 | | Everest Re- Canadian Branch | | | 60.0 | % | | Bermuda Re | | property business | | | - | | | | | - | | |
01/01/2010-12/31/2010 | | Everest Re- Canadian Branch | | | 60.0 | % | | Bermuda Re | | property business | | | 350,000 | | (3) | | | - | | |
01/01/2011-12/31/2011 | | Everest Re- Canadian Branch | | | 60.0 | % | | Bermuda Re | | property business | | | 350,000 | | (3) | | | - | | |
01/01/2012-12/31/2012 | | Everest Re- Canadian Branch | | | 75.0 | % | | Bermuda Re | | property / casualty business | | | 206,250 | | (3) | | | 412,500 | | (3) |
01/01/2013-12/31/2013 | | Everest Re- Canadian Branch | | | 75.0 | % | | Bermuda Re | | property / casualty business | | | 150,000 | | (3) | | | 412,500 | | (3) |
01/01/2014 | | Everest Re- Canadian Branch | | | 75.0 | % | | Bermuda Re | | property / casualty business | | | 262,500 | | (3) | | | 412,500 | | (3) |
|
01/01/2012 | | Everest Canada | | | 80.0 | % | | Everest Re- Canadian Branch | | property business | | | - | | | | | - | | |
(1) | The single occurance limit is applied before the loss cessions to either Bermuda Re or Everest International. | | | | | | | | | | | |
(2) | The aggregate limit is applied before the loss cessions to either Bermuda Re or Everest International. | | | | | | | | | | | |
(3) | Amounts shown are Canadian dollars. | |
(Dollars in thousands) | | | | | | | | | | | | | | |
| | | | | Percent | | Assuming | | | | Single | | | Aggregate | |
Coverage Period | | Ceding Company | | Ceded | | Company | | Type of Business | | Occurrence Limit | | | Limit | |
| | | | | | | | | | | | | | | |
01/01/2010-12/31/2010 | | Everest Re | | 44.0% | | Bermuda Re | | property / casualty business | | 150,000 | | | 325,000 | |
| | | | | | | | | | | | | | | |
01/01/2011-12/31/2011 | | Everest Re | | 50.0% | | Bermuda Re | | property / casualty business | | 150,000 | | | 300,000 | |
| | | | | | | | | | | | | | | |
01/01/2012-12/31/2014 | | Everest Re | | 50.0% | | Bermuda Re | | property / casualty business | | 100,000 | | | 200,000 | |
| | | | | | | | | | | | | | | |
01/01/2015-12/31/2016 | | Everest Re | | 50.0% | | Bermuda Re | | property / casualty business | | 162,500 | | | 325,000 | |
| | | | | | | | | | | | | | | |
01/01/2017 | | Everest Re | | 60.0% | | Bermuda Re | | property / casualty business | | 219,000 | | | 438,000 | |
| | | | | | | | | | | | | | | |
01/01/2010-12/31/2010 | | Everest Re- Canadian Branch | 60.0% | | Bermuda Re | | property business | | 350,000 | (1) | | - | |
01/01/2011-12/31/2011 | | Everest Re- Canadian Branch | 60.0% | | Bermuda Re | | property business | | 350,000 | (1) | | - | |
01/01/2012-12/31/2012 | | Everest Re- Canadian Branch | 75.0% | | Bermuda Re | | property / casualty business | | 206,250 | (1) | | 412,500 | (1) |
01/01/2013-12/31/2013 | | Everest Re- Canadian Branch | 75.0% | | Bermuda Re | | property / casualty business | | 150,000 | (1) | | 412,500 | (1) |
01/01/2014 | | Everest Re- Canadian Branch | 75.0% | | Bermuda Re | | property / casualty business | | 262,500 | (1) | | 412,500 | (1) |
| | | | | | | | | | | | | | | |
01/01/2012 | | Everest Canada | | 80.0% | | Everest Re- Canadian Branch | property business | | - | | | - | |
| | | | | | | | | | | | | | | |
(1) Amounts shown are Canadian dollars. | | | | | | | | | | | | | |
The table below represents loss portfolio transfer reinsurance agreements whereby net insurance exposures and reserves were transferred to an affiliate.
Effective | | Transferring | | Assuming | | % of Business or | | | Covered Period |
Date | | Company | | Company | | Amount of Transfer | | | of Transfer |
| | | | | | | | | |
09/19/2000 | | Mt. McKinley | | Bermuda Re | | | 100 | % | | All years |
10/01/2001 | | Everest Re (Belgium Branch) | | Bermuda Re | | | 100 | % | | All years |
10/01/2008 | | Everest Re | | Bermuda Re | | $ | 747,022 | | | 01/01/2002-12/31/2007 |
On July 13, 2015, the Company sold Mt. McKinley to Clearwater Insurance Company, a Delaware domiciled insurance company. As of that date, Mt. McKinley is no longer deemed an affiliated company or related party.
The following tables summarize the premiums and losses ceded by the Company to Bermuda Re and Everest International, respectively, and premiums and losses assumed by the Company from Everest Canada and Lloyd's syndicate 2786 for the periods indicated:
| | Three Months Ended | |
Bermuda Re | | March 31, | |
(Dollars in thousands) | | 2017 | | | 2016 | |
Ceded written premiums | | $ | 634,896 | | | $ | 516,683 | |
Ceded earned premiums | | | 588,874 | | | | 538,953 | |
Ceded losses and LAE (a) | | | 340,131 | | | | 290,476 | |
| | Three Months Ended | |
Everest International | | March 31, |
(Dollars in thousands) | | 2017 | | | 2016 | |
Ceded written premiums | | $ | (70 | ) | | $ | (31 | ) |
Ceded earned premiums | | | (71 | ) | | | (24 | ) |
Ceded losses and LAE | | | (443 | ) | | | 142 | |
| | Three Months Ended | | | Six Months Ended | |
Bermuda Re | | June 30, | | | June 30, | |
(Dollars in thousands) | | 2016 | | | 2015 | | | 2016 | | | 2015 | |
Ceded written premiums | | $ | 544,495 | | | $ | 528,468 | | | $ | 1,061,178 | | | $ | 1,067,501 | |
Ceded earned premiums | | | 593,349 | | | | 563,100 | | | | 1,132,302 | | | | 1,117,151 | |
Ceded losses and LAE (a) | | | 404,667 | | | | 345,580 | | | | 695,143 | | | | 640,711 | |
| | Three Months Ended | |
Everest Canada | | March 31, |
(Dollars in thousands) | | 2017 | | | 2016 | |
Assumed written premiums | | $ | 12,848 | | | $ | 10,199 | |
Assumed earned premiums | | | 12,853 | | | | 10,454 | |
Assumed losses and LAE | | | 6,651 | | | | 6,987 | |
| | Three Months Ended | |
Lloyd's Syndicate 2786 | | March 31, |
(Dollars in thousands) | | 2017 | | | 2016 | |
Assumed written premiums | | $ | 7,849 | | | $ | 696 | |
Assumed earned premiums | | | 6,927 | | | | 88 | |
Assumed losses and LAE | | | 3,433 | | | | - | |
| | Three Months Ended | | | Six Months Ended | |
Everest International | | June 30, | | | June 30, | |
(Dollars in thousands) | | 2016 | | | 2015 | | | 2016 | | | 2015 | |
Ceded written premiums | | $ | 62 | | | $ | 147 | | | $ | 31 | | | $ | 145 | |
Ceded earned premiums | | | 63 | | | | 192 | | | | 39 | | | | 233 | |
Ceded losses and LAE | | | 756 | | | | 1,702 | | | | 898 | | | | 880 | |
| | Three Months Ended | | | Six Months Ended | |
Everest Canada | | June 30, | | | June 30, | |
(Dollars in thousands) | | 2016 | | | 2015 | | | 2016 | | | 2015 | |
Assumed written premiums | | $ | 16,228 | | | $ | 11,823 | | | $ | 26,427 | | | $ | 18,487 | |
Assumed earned premiums | | | 12,675 | | | | 8,625 | | | | 23,129 | | | | 17,324 | |
Assumed losses and LAE | | | 14,440 | | | | 6,292 | | | | 21,427 | | | | 11,021 | |
| | Three Months Ended | | | Six Months Ended | |
Lloyd's Syndicate 2786 | | June 30, | | June 30, | |
(Dollars in thousands) | | 2016 | | | 2015 | | | 2016 | | | 2015 | |
Assumed written premiums | | $ | (157 | ) | | $ | - | | | $ | 539 | | | $ | - | |
Assumed earned premiums | | | 28 | | | | - | | | | 116 | | | | - | |
Assumed losses and LAE | | | - | | | | - | | | | - | | | | - | |
(a) Ceded losses and LAE include the Mt. McKinley loss portfolio transfer that constitutes losses ceded under retroactive reinsurance and therefore, in accordance with FASB guidance, amortization of deferred gain on retroactive reinsurance is reflected in other income on the consolidated statements of operations and comprehensive income (loss). Upon the sale of Mt. McKinley, the value of the remaining deferred gain on retroactive reinsurance was included in the calculation of the realized gain on sale of subsidiary.
Everest Re sold net assets of its UK branch to Bermuda Re and provided Bermuda Re with a reserve indemnity agreement allowing for indemnity payments of up to 90% of ₤25.0 million of the excess of 2002 and prior reserves, provided that any recognition of profit from the reserves for 2002 and prior underwriting years is taken into account.
Effective February 27, 2013, Group established a new subsidiary, Mt. Logan Re, which is a Class 3 insurer based in Bermuda. Effective July 1, 2013, Mt. Logan Re established separate segregated accounts for its business activity, which will invest in a diversified set of catastrophe exposures.
The following table summarizes the premiums and losses that are ceded by the Company to Mt. Logan Re segregated accounts and assumed by the Company from Mt. Logan Re segregated accounts.
| | Three Months Ended | |
Mt. Logan Re Segregated Accounts | | March 31, |
(Dollars in thousands) | | 2017 | | | 2016 | |
Ceded written premiums | | $ | 39,179 | | | $ | 40,931 | |
Ceded earned premiums | | | 33,957 | | | | 34,872 | |
Ceded losses and LAE | | | 19,759 | | | | 9,098 | |
| | | | | | | | |
Assumed written premiums | | | 2,732 | | | | 3,560 | |
Assumed earned premiums | | | 2,732 | | | | 3,560 | |
Assumed losses and LAE | | | - | | | | - | |
| | Three Months Ended | | | Six Months Ended | |
Mt. Logan Re Segregated Accounts | | June 30, | | June 30, |
(Dollars in thousands) | | 2016 | | | 2015 | | | 2016 | | | 2015 | |
Ceded written premiums | | $ | 29,450 | | | $ | 32,892 | | | $ | 70,381 | | | $ | 94,562 | |
Ceded earned premiums | | | 39,356 | | | | 47,751 | | | | 74,228 | | | | 86,434 | |
Ceded losses and LAE | | | 16,232 | | | | 13,157 | | | | 25,330 | | | | 21,471 | |
| | | | | | | | | | | | | | | | |
Assumed written premiums | | | 3,074 | | | | 3,412 | | | | 6,634 | | | | 7,396 | |
Assumed earned premiums | | | 3,074 | | | | 3,412 | | | | 6,634 | | | | 7,396 | |
Assumed losses and LAE | | | - | | | | - | | | | - | | | | - | |
12.13. RETIREMENT BENEFITS
The Company maintains both qualified and non-qualified defined benefit pension plans and a retiree health plan for its U.S. employees employed prior to April 1, 2010.
Net periodic benefit cost for U.S. employees included the following components for the periods indicated:
Pension Benefits | | Three Months Ended | |
| | March 31, | |
(Dollars in thousands) | | 2017 | | | 2016 | |
Service cost | | $ | 3,299 | | | $ | 2,897 | |
Interest cost | | | 2,276 | | | | 2,361 | |
Expected return on plan assets | | | (3,155 | ) | | | (2,484 | ) |
Amortization of net (income) loss | | | 3,040 | | | | 2,014 | |
Net periodic benefit cost | | $ | 5,460 | | | $ | 4,788 | |
Other Benefits | | Three Months Ended | |
| | March 31, | |
(Dollars in thousands) | | 2017 | | | 2016 | |
Service cost | | $ | 440 | | | $ | 438 | |
Interest cost | | | 249 | | | | 296 | |
Amortization of prior service costs | | | (33 | ) | | | - | |
Amortization of net (income) loss | | | 76 | | | | 48 | |
Net periodic benefit cost | | $ | 732 | | | $ | 782 | |
Pension Benefits | | Three Months Ended | | | Six Months Ended | |
| | June 30, | | | June 30, | |
(Dollars in thousands) | | 2016 | | | 2015 | | | 2016 | | | 2015 | |
Service cost | | $ | 2,896 | | | $ | 3,255 | | | $ | 5,793 | | | $ | 6,195 | |
Interest cost | | | 2,361 | | | | 2,711 | | | | 4,722 | | | | 5,168 | |
Expected return on plan assets | | | (2,484 | ) | | | (2,903 | ) | | | (4,968 | ) | | | (5,806 | ) |
Amortization of prior service cost | | | - | | | | 6 | | | | - | | | | 11 | |
Amortization of net (income) loss | | | 2,014 | | | | 2,261 | | | | 4,028 | | | | 4,512 | |
Net periodic benefit cost | | $ | 4,787 | | | $ | 5,330 | | | $ | 9,575 | | | $ | 10,080 | |
Other Benefits | | Three Months Ended | | | Six Months Ended | |
| | June 30, | | | June 30, | |
(Dollars in thousands) | | 2016 | | | 2015 | | | 2016 | | | 2015 | |
Service cost | | $ | 438 | | | $ | 599 | | | $ | 876 | | | $ | 1,000 | |
Interest cost | | | 296 | | | | 395 | | | | 592 | | | | 658 | |
Amortization of net (income) loss | | | 48 | | | | 210 | | | | 96 | | | | 421 | |
Net periodic benefit cost | | $ | 782 | | | $ | 1,204 | | | $ | 1,564 | | | $ | 2,079 | |
The Company did not make any contributions to the qualified pension benefit plan for the three and six months ended June 30, 2016March 31, 2017 and 2015.2016.
13.14. INCOME TAXES
The Company is domiciled in the United States and has subsidiaries domiciled within the United States with significant branches in Canada and Singapore. The Company's non-U.S. branches are subject to income taxation at varying rates in their respective domiciles.
For interim reporting periods, the company is generally required to use the annualized effective tax rate ("AETR") method, as prescribed by ASC 740-270, Interim Reporting, to calculate its income tax provision. Under this method, the AETR is applied to the interim year-to-date pre-tax income to determine the income tax expense or benefit for the year-to-date period. The income tax expense or benefit for a quarter represents the difference between the year-to-date income tax expense or benefit for the current year-to-date
period less such amount for the immediately preceding year-to-date period. Management considers the impact of all known events in its estimation of the Company's annual pre-tax income and AETR.
14. PENDING15. DISPOSITION
TheOn August 24, 2016 the Company has signed a letter of intent to sellsold Heartland, Crop Insurance, Inc., its crop Managing General Agent to CGB Diversified Services, Inc.for $49,000 thousand. The pendingsale agreement includes a provision for a long term strategic reinsurance relationship with CGB Diversified Services, Inc.CGB. The Company has recognized an after-tax loss on the sale of Heartland of $12,942 thousand. Under the terms of the letter of intent, there will not be a material gain or loss on the sale and with the proposed reinsurance arrangement, there will not be a material fluctuation in the level of crop business, although it will be reflected as reinsurance rather than insurance.
15.16. SUBSEQUENT EVENTS
TheOn April 13, 2017, the Company entered into six collateralized reinsurance agreements with Kilimanjaro Re to provide the Company with annual aggregate catastrophe reinsurance coverage. Kilimanjaro has evaluated known recognizedfinanced these coverages by issuing $950,000 thousand and non-recognized subsequent events. The Company does not have any subsequent events$300,000 thousand of catastrophe bonds to report.unrelated, external investors. See also Footnote 8, Collateralized Reinsurance and Trust Agreements.
27
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION
Industry Conditions.
The worldwide reinsurance and insurance businesses are highly competitive, as well as cyclical by product and market. As such, financial results tend to fluctuate with periods of constrained availability, highhigher rates and strongstronger profits followed by periods of abundant capacity, lowlower rates and constrained profitability. Competition in the types of reinsurance and insurance business that we underwrite is based on many factors, including the perceived overall financial strength of the reinsurer or insurer, ratings of the reinsurer or insurer by A.M. Best and/or Standard & Poor's, underwriting expertise, the jurisdictions where the reinsurer or insurer is licensed or otherwise authorized, capacity and coverages offered, premiums charged, other terms and conditions of the reinsurance and insurance business offered, services offered, speed of claims payment and reputation and experience in lines written. Furthermore, the market impact from these competitive factors related to reinsurance and insurance is generally not consistent across lines of business, domestic and international geographical areas and distribution channels.
We compete in the U.S. and international reinsurance and insurance markets with numerous global competitors. Our competitors include independent reinsurance and insurance companies, subsidiaries or affiliates of established worldwide insurance companies, reinsurance departments of certain insurance companies, domestic and international underwriting operations, including underwriting syndicates at Lloyd's of London and certain government sponsored risk transfer vehicles. Some of these competitors have greater financial resources than we do and have established long term and continuing business relationships, which can be a significant competitive advantage. In addition, the lack of strong barriers to entry into the reinsurance business and recently, the securitization of reinsurance and insurance risks through capital markets provide additional sources of potential reinsurance and insurance capacity and competition.
Worldwide insurance and reinsurance market conditions continued to be very competitive, particularly in the property catastrophe and casualty reinsurance lines of business. Generally, there was ample insurance and reinsurance capacity relative to demand, as well as, additional capital from the capital markets through insurance linked financial instruments. These financial instruments such as side cars, catastrophe bonds and collateralized reinsurance funds, provide capital markets with access to insurance and reinsurance risk exposure. The capital markets demand for these products is being primarily driven by the current low interest rate environment and the desire to achieve greater risk diversification and potentially higher returns on their investments. This increased competition is generally having a negative impact on rates, terms and conditions; however, the impact varies widely by market and coverage.
Rates tend to fluctuate by specific region and products, particularly areas recently impacted by large catastrophic events. Although there have beenwere flooding and wind storm events and earthquakes in parts of the world, the overall 2013, 2014 and 2015 catastrophe losses for the industry were considerably lower than average. During the first half of 2016, there has beenwas an increase in catastrophes, such ascatastrophes: the Fort McMurray Canadian wildfire, Hurricane Matthew which affected a large area of the Caribbean and southeastern United States, storms and an earthquake in Ecuador; however,Ecuador. There are industry reports that the aggregate ofcatastrophe losses for 2016 reached their highest level in four years and the United States experienced the most loss events since 1980 and the highest total losses since 2012. While the future impact on market conditions from these losses are below historical levels of catastrophe losses. This lower level of losses, combined with increased competition has resulted in downward pressurecatastrophes cannot be determined at this time, it is unlikely to have a significant impact on insurance and reinsurance rates in certain geographicalthe overall markets, but may impact loss affected areas.
DuringCommencing in 2015, we initiated a strategic build out of our insurance platform through the investment in key leadership hires which in turn has brought significant underwriting talent and stronger direction in achieving our insurance program strategic goals of increased premium volume and improved underwriting results. Recent growth is coming from highly diversified areas including newly launched lines of business, as well as, product and geographic expansion in existing lines of business. We are building a world-class insurance platform capable of offering products across lines and geographies, complementing our leading global reinsurance franchise.
Overall, we believe that given our size, strong ratings, distribution system, reputation, expertise and capital market vehicle activity the current marketplace conditions provide profit opportunities. We continue to
employ our strategy of targeting business that offers the greatest profit potential, while maintaining balance and diversification in our overall portfolio.
Financial Summary.
We monitor and evaluate our overall performance based upon financial results. The following table displays a summary of the consolidated net income (loss), ratios and stockholder's equity for the periods indicated:
| | Three Months Ended | | | Percentage | | | Six Months Ended | | | Percentage | | | Three Months Ended | | | Percentage | |
| | June 30, | | | Increase/ | | | June 30, | | | Increase/ | | | March 31, | | | Increase/ | |
(Dollars in millions) | | 2016 | | | 2015 | | | (Decrease) | | | 2016 | | | 2015 | | | (Decrease) | | | 2017 | | | 2016 | | | (Decrease) | |
Gross written premiums | | $ | 1,177.8 | | | $ | 1,089.4 | | | | 8.1 | % | | $ | 2,307.7 | | | $ | 2,316.2 | | | | -0.4 | % | | $ | 1,252.4 | | | $ | 1,129.9 | | | | 10.8 | % |
Net written premiums | | | 441.3 | | | | 472.5 | | | | -6.6 | % | | | 905.3 | | | | 980.9 | | | | -7.7 | % | | | 448.8 | | | | 464.1 | | | | -3.3 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
REVENUES: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Premiums earned | | $ | 488.9 | | | $ | 521.4 | | | | -6.2 | % | | $ | 970.8 | | | $ | 1,042.5 | | | | -6.9 | % | | $ | 471.1 | | | $ | 481.9 | | | | -2.3 | % |
Net investment income | | | 73.9 | | | | 70.9 | | | | 4.2 | % | | | 132.3 | | | | 143.5 | | | | -7.8 | % | | | 60.8 | | | | 58.4 | | | | 4.1 | % |
Net realized capital gains (losses) | | | 29.2 | | | | 51.2 | | | | -43.1 | % | | | (37.2 | ) | | | 72.5 | | | | -151.3 | % | | | 117.8 | | | | (66.4 | ) | | NM |
Other income (expense) | | | (10.7 | ) | | | 12.3 | | | | -187.1 | % | | | 2.4 | | | | 28.1 | | | | -91.5 | % | | | 9.9 | | | | 13.1 | | | | -24.8 | % |
Total revenues | | | 581.2 | | | | 655.9 | | | | -11.4 | % | | | 1,068.3 | | | | 1,286.6 | | | | -17.0 | % | | | 659.5 | | | | 487.1 | | | | 35.4 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
CLAIMS AND EXPENSES: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Incurred losses and loss adjustment expenses | | | 338.5 | | | | 322.9 | | | | 4.8 | % | | | 634.6 | | | | 631.8 | | | | 0.4 | % | | | 289.7 | | | | 296.1 | | | | -2.1 | % |
Commission, brokerage, taxes and fees | | | 72.1 | | | | 73.0 | | | | -1.1 | % | | | 140.9 | | | | 169.5 | | | | -16.8 | % | | | 49.5 | | | | 68.8 | | | | -28.1 | % |
Other underwriting expenses | | | 58.3 | | | | 51.6 | | | | 13.1 | % | | | 117.6 | | | | 100.1 | | | | 17.4 | % | | | 59.9 | | | | 59.2 | | | | 1.1 | % |
Corporate expense | | | 2.0 | | | | 1.8 | | | | 12.6 | % | | | 4.3 | | | | 3.4 | | | | 28.0 | % | | | 3.6 | | | | 2.3 | | | | 54.0 | % |
Interest, fee and bond issue cost amortization expense | | | 8.9 | | | | 8.9 | | | | 0.0 | % | | | 17.7 | | | | 17.7 | | | | 0.0 | % | | | 8.9 | | | | 8.9 | | | | 0.0 | % |
Total claims and expenses | | | 479.9 | | | | 458.0 | | | | 4.8 | % | | | 915.2 | | | | 922.5 | | | | -0.8 | % | | | 411.5 | | | | 435.3 | | | | -5.5 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
INCOME (LOSS) BEFORE TAXES | | | 101.3 | | | | 197.8 | | | | -48.8 | % | | | 153.1 | | | | 364.2 | | | | -58.0 | % | | | 248.0 | | | | 51.8 | | | NM |
Income tax expense (benefit) | | | 33.0 | | | | 64.0 | | | | -48.5 | % | | | 45.8 | | | | 114.5 | | | | -59.9 | % | | | 76.9 | | | | 12.9 | | | NM |
NET INCOME (LOSS) | | $ | 68.4 | | | $ | 133.8 | | | | -48.9 | % | | $ | 107.3 | | | $ | 249.7 | | | | -57.0 | % | | $ | 171.0 | | | $ | 38.9 | | | NM |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
RATIOS: | | | | | | | | | | Point Change | | | | | | | | | | | Point Change | | | | | | | | | | | Point Change | |
Loss ratio | | | 69.3 | % | | | 61.9 | % | | | 7.4 | | | | 65.4 | % | | | 60.6 | % | | | 4.8 | | | | 61.5 | % | | | 61.4 | % | | | 0.1 | |
Commission and brokerage ratio | | | 14.8 | % | | | 14.0 | % | | | 0.8 | | | | 14.5 | % | | | 16.3 | % | | | (1.8 | ) | | | 10.5 | % | | | 14.3 | % | | | (3.8 | ) |
Other underwriting expense ratio | | | 11.8 | % | | | 9.9 | % | | | 1.9 | | | | 12.1 | % | | | 9.6 | % | | | 2.5 | | | | 12.7 | % | | | 12.3 | % | | | 0.4 | |
Combined ratio | | | 95.9 | % | | | 85.8 | % | | | 10.1 | | | | 92.0 | % | | | 86.5 | % | | | 5.5 | | | | 84.7 | % | | | 88.0 | % | | | (3.3 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | At | | | At | | | Percentage | | | At | | | At | | | Percentage | |
| | | | | | | | | | | | | | June 30, | | | December 31, | | | Increase/ | | | March 31, | | | December 31, | | | Increase/ | |
(Dollars in millions) | | | | | | | | | | | | | | | 2016 | | | | 2015 | | | (Decrease) | | | | 2017 | | | | 2016 | | | (Decrease) | |
Balance sheet data: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total investments and cash | | | | | | | | | | | | | | $ | 9,740.2 | | | $ | 9,516.3 | | | | 2.4 | % | | $ | 10,128.1 | | | $ | 9,842.7 | | | | 2.9 | % |
Total assets | | | | | | | | | | | | | | | 16,924.7 | | | | 16,695.2 | | | | 1.4 | % | | | 17,587.8 | | | | 17,088.7 | | | | 2.9 | % |
Loss and loss adjustment expense reserves | | | | | | | | | | | | | | | 8,247.8 | | | | 7,940.7 | | | | 3.9 | % | | | 8,369.2 | | | | 8,331.3 | | | | 0.5 | % |
Total debt | | | | | | | | | | | | | | | 633.1 | | | | 633.0 | | | | 0.0 | % | | | 633.2 | | | | 633.2 | | | | 0.0 | % |
Total liabilities | | | | | | | | | | | | | | | 11,760.6 | | | | 11,764.0 | | | | 0.0 | % | | | 12,139.6 | | | | 11,823.2 | | | | 2.7 | % |
Stockholder's equity | | | | | | | | | | | | | | | 5,164.1 | | | | 4,931.2 | | | | 4.7 | % | | | 5,448.2 | | | | 5,265.6 | | | | 3.5 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(Some amounts may not reconcile due to rounding) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(NM, not meaningful) | | | | | | | | | | | | | |
Revenues.
Premiums. Gross written premiums increased by 8.1%10.8% to $1,177.8$1,252.4 million for the three months ended June 30, 2016,March 31, 2017, compared to $1,089.4$1,129.9 million for the three months ended June 30, 2015,March 31, 2016, reflecting, a $97.4$82.3 million, or 29.8%10.6%, increase in our reinsurance business and a $40.1 million, or 11.3%, increase in our insurance business, partially offset by a $9.0 million, or 1.2%, decreasebusiness. The increase in our reinsurance premiums was mainly due to the new crop reinsurance transactions and increases in treaty casualty and financial lines of business. The rise in insurance premiums was primarily due to increases in most lines of business, as we have focused on expanding the insurance operations. The decline in reinsurance premiums was due mainly to a negative impact of approximately $17.2 million from the year over year movement in foreign exchange rates. Gross written premiums decreased slightly to $2,307.7 million for the six months
ended June 30, 2016, compared to $2,316.2 million for the six months ended June 30, 2015, reflecting a $130.1 million, or 7.8%, decrease in our reinsurance business, partially offset by a $121.6 million, or 18.5%, increase in our insurance business. The decline in reinsurance premiums were due mainly to a decrease in treaty property business, a decrease in international premiums related to quota share agreements and a negative impact of approximately $32.4 million from the year over year movement in foreign exchange rates. The rise in insurance premiums was primarily due to increases in most lines of business, as we have focused on expanding the insurance operations.
Net written premiums decreased by 6.6%3.3% to $441.3$448.8 million for the three months ended June 30, 2016,March 31, 2017, compared to $472.5$464.1 million for the three months ended June 30, 2015, and decreased by 7.7% to $905.3 million for the six months ended June 30, 2016 compared to $980.9 million for the six months ended June 30, 2015.March 31, 2016. The difference between the change in gross written premiums compared to the change in net written premiums is primarily due to highervarying utilization of reinsurance mainly related to new insurance business and toaffiliated quota share agreements.contracts. Premiums earned decreased by 6.2%2.3% to $488.9$471.1 million for the three months ended June 30, 2016,March 31, 2017, compared to $521.4$481.9 million for the three months ended June 30, 2015, and decreased by 6.9% to $970.8 million for the six months ended June 30, 2016, compared to $1,042.5 million for the six months ended June 30, 2015.March 31, 2016. The change in premiums earned relative to net written premiums is the result of timing; premiums are earned ratably over the coverage period whereas written premiums are recorded at the initiation of the coverage period.
Net Investment Income. Net investment income increased by 4.2%4.1% to $73.9$60.8 million for the three months ended June 30, 2016,March 31, 2017 compared with net investment income of $70.9$58.4 million for the three months ended June 30, 2015, and decreased by 7.8% to $132.3 million for six months ended June 30, 2016, compared with net investment income of $143.5 million for the six months ended June 30, 2015.March 31, 2016. Net pre-tax investment income as a percentage of average invested assets was 3.2%2.5% for the three months ended June 30, 2016, compared to 3.4% for the three months ended June 30, 2015March 31, 2017 and was 2.8% for the six months ended June 30, 2016 compared to 3.5% for the six months ended June 30, 2015.2016. The increase in income for the three months ended June 30, 2016 compared to the prior period was primarily due to higher income from our limited partnerships, partially offset by lower reinvestment rates for the fixed income portfolios. The decline in income and yield for the six months ended June 30, 2016 compared to the prior period was primarily the result of higher income from other invested assets, including lower reinvestment rates for the fixed income portfoliosyear over year losses from our limited partnerships, and lowerhigher income from our limited partnerships.fixed income portfolio, partially offset by lower dividends from equity securities.
Net Realized Capital Gains (Losses). Net realized capital gains were $29.2 $117.8 million and $51.2net realized capital losses were $66.4 million for the three months ended June 30,March 31, 2017 and 2016, and 2015, respectively. The net realized capital gains of $29.2$117.8 million were comprised of $37.7 million of gains from fair value re-measurements on fixed maturity securities, equity securities and other invested assets, partially offset by $7.3 million of losses from sales on our fixed maturity and equity securities and $1.4 million of other-than-temporary impairments. The net realized capital gains of $51.2 million for the three months ended June 30, 2015 were the result of $72.5108.1 million of gains from fair value re-measurements on equity securities and other invested assets and $10.8 million of gains from sales on our fixed maturity and equity securities, partially offset by $12.4$1.1 million of other-than-temporary impairments. The net realized capital losses of $66.4 for the three months ended March 31, 2016 million were comprised of $24.8 million of net losses from sales on our fixed maturity and equity securities, and $8.8 million of other-than-temporary impairments.
Net realized capital losses were $37.2 million and net realized capital gains were $72.5 million for the six months ended June 30, 2016 and 2015, respectively. The net realized capital losses of $37.2 million were comprised of $32.1 million of losses from sales on our fixed maturity and equity securities and $24.4$23.0 million of other-than-temporary impairments partially offset by $19.2and $18.6 million of gainslosses from fair value re-measurements on fixed maturity securities, equity securities and other invested assets. The net realized capital gains of $72.5 million for the six months ended June 30, 2015 were the result of $129.5 million of gains from fair value re-measurements on fixed maturity securities, equity securities and other invested assets, partially offset by $32.9 million of other-than-temporary impairments and $24.0 million of losses from sales on our fixed maturity and equity securities.
Other Income (Expense). We recorded other expenseincome of $10.7$9.9 million and other income of $2.4$13.1 million for the three and six months ended June 30,March 31, 2017 and 2016, respectively. We recorded other income of $12.3 million and $28.1 million for the three and six months ended June 30, 2015, respectively. The changes were primarily the result of fluctuations in foreign currency exchange rates for the corresponding periods.
Claims and Expenses.
Incurred Losses and Loss Adjustment Expenses. The following tables presenttable presents our incurred losses and loss adjustment expenses ("LAE") for the periods indicated.
| | Three Months Ended March 31, |
| | Current | | | Ratio %/ | | Prior | | | Ratio %/ | | Total | | | Ratio %/ |
(Dollars in millions) | | Year | | | Pt Change | | Years | | | Pt Change | | Incurred | | | Pt Change |
2017 | | | | | | | | | | | | | | | | | | | | | |
Attritional | | $ | 279.0 | | | | 59.2 | % | | | $ | 4.1 | | | | 0.9 | % | | | $ | 283.1 | | | | 60.1 | % | |
Catastrophes | | | 7.2 | | | | 1.5 | % | | | | (0.6 | ) | | | -0.1 | % | | | | 6.6 | | | | 1.4 | % | |
Total segment | | $ | 286.2 | | | | 60.7 | % | | | $ | 3.5 | | | | 0.8 | % | | | $ | 289.7 | | | | 61.5 | % | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
2016 | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Attritional | | $ | 293.4 | | | | 60.8 | % | | | $ | (2.0 | ) | | | -0.4 | % | | | $ | 291.4 | | | | 60.4 | % | |
Catastrophes | | | 5.2 | | | | 1.1 | % | | | | (0.5 | ) | | | -0.1 | % | | | | 4.7 | | | | 1.0 | % | |
Total segment | | $ | 298.6 | | | | 61.9 | % | | | $ | (2.5 | ) | | | -0.5 | % | | | $ | 296.1 | | | | 61.4 | % | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
Variance 2017/2016 | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Attritional | | $ | (14.4 | ) | | | (1.6 | ) | pts | | $ | 6.1 | | | | 1.3 | | pts | | $ | (8.3 | ) | | | (0.3 | ) | pts |
Catastrophes | | | 2.0 | | | | 0.4 | | pts | | | (0.1 | ) | | | - | | pts | | | 1.9 | | | | 0.4 | | pts |
Total segment | | $ | (12.4 | ) | | | (1.2 | ) | pts | | $ | 6.0 | | | | 1.3 | | pts | | $ | (6.4 | ) | | | 0.1 | | pts |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
(Some amounts may not reconcile due to rounding.) | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, |
| | Current | | | Ratio %/ | | Prior | | | Ratio %/ | | Total | | | Ratio %/ |
(Dollars in millions) | | Year | | | Pt Change | | Years | | | Pt Change | | Incurred | | | Pt Change |
2016 | | | | | | | | | | | | | | | | | | | | | |
Attritional | | $ | 300.9 | | | | 61.6 | % | | | $ | 2.8 | | | | 0.6 | % | | | $ | 303.7 | | | | 62.2 | % | |
Catastrophes | | | 51.5 | | | | 10.5 | % | | | | (16.7 | ) | | | -3.4 | % | | | | 34.8 | | | | 7.1 | % | |
Total segment | | $ | 352.4 | | | | 72.1 | % | | | $ | (13.9 | ) | | | -2.8 | % | | | $ | 338.5 | | | | 69.3 | % | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
2015 | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Attritional | | $ | 309.3 | | | | 59.3 | % | | | $ | 0.4 | | | | 0.0 | % | | | $ | 309.7 | | | | 59.3 | % | |
Catastrophes | | | 18.1 | | | | 3.5 | % | | | | (4.9 | ) | | | -0.9 | % | | | | 13.2 | | | | 2.6 | % | |
Total segment | | $ | 327.4 | | | | 62.8 | % | | | $ | (4.5 | ) | | | -0.9 | % | | | $ | 322.9 | | | | 61.9 | % | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
Variance 2016/2015 | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Attritional | | $ | (8.4 | ) | | | 2.3 | | pts | | $ | 2.4 | | | | 0.6 | | pts | | $ | (6.0 | ) | | | 2.9 | | pts |
Catastrophes | | | 33.4 | | | | 7.0 | | pts | | | (11.8 | ) | | | (2.5 | ) | pts | | | 21.6 | | | | 4.5 | | pts |
Total segment | | $ | 25.0 | | | | 9.3 | | pts | | $ | (9.4 | ) | | | (1.9 | ) | pts | | $ | 15.6 | | | | 7.4 | | pts |
| | Six Months Ended June 30, |
| | Current | | | Ratio %/ | | Prior | | | Ratio %/ | | Total | | | Ratio %/ |
(Dollars in millions) | | Year | | | Pt Change | | Years | | | Pt Change | | Incurred | | | Pt Change |
2016 | | | | | | | | | | | | | | | | | | | | | |
Attritional | | $ | 594.2 | | | | 61.3 | % | | | $ | 0.8 | | | | 0.1 | % | | | $ | 595.0 | | | | 61.4 | % | |
Catastrophes | | | 56.7 | | | | 5.8 | % | | | | (17.2 | ) | | | -1.8 | % | | | | 39.6 | | | | 4.0 | % | |
Total segment | | $ | 651.0 | | | | 67.1 | % | | | $ | (16.4 | ) | | | -1.7 | % | | | $ | 634.6 | | | | 65.4 | % | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
2015 | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Attritional | | $ | 622.1 | | | | 59.7 | % | | | $ | (1.3 | ) | | | -0.1 | % | | | $ | 620.8 | | | | 59.6 | % | |
Catastrophes | | | 18.1 | | | | 1.7 | % | | | | (7.1 | ) | | | -0.7 | % | | | | 11.0 | | | | 1.0 | % | |
Total segment | | $ | 640.2 | | | | 61.4 | % | | | $ | (8.4 | ) | | | -0.8 | % | | | $ | 631.8 | | | | 60.6 | % | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
Variance 2016/2015 | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Attritional | | $ | (27.9 | ) | | | 1.6 | | pts | | $ | 2.1 | | | | 0.2 | | pts | | $ | (25.8 | ) | | | 1.8 | | pts |
Catastrophes | | | 38.6 | | | | 4.1 | | pts | | | (10.1 | ) | | | (1.1 | ) | pts | | | 28.6 | | | | 3.0 | | pts |
Total segment | | $ | 10.8 | | | | 5.7 | | pts | | $ | (8.0 | ) | | | (0.9 | ) | pts | | $ | 2.8 | | | | 4.8 | | pts |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
(Some amounts may not reconcile due to rounding.) | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Incurred losses and LAE increaseddecreased by 4.8%2.1% to $338.5$289.7 million for the three months ended June 30, 2016March 31, 2017 compared to $322.9$296.1 million for the three months ended June 30, 2015,March 31, 2016, primarily due to an increasea decrease of $14.4 million in current year catastropheyears' attritional losses, of $33.4 million,mainly due to the reduction in earned premiums, partially offset by a decrease in currentan increase of $6.1 million of prior year attritional lossesloss development. The $4.1 million of $8.4 million and a decrease inunfavorable prior years' catastrophe losses of $11.8 million,attritional loss development for the three months ended March 31, 2017 was mainly related to casualty business in the 2011 Japan earthquake. insurance segment. The current year catastrophe losses of $51.5$7.2 million for the three months ended March 31, 2017 related to Cyclone Debbie in Australia ($7.2 million). The current year catastrophe losses of $5.2 million for the three months ended June 30,March 31, 2016 wereprimarily related to the Fort McMurray Canada Wildfire ($21.9 million), U.S. Storms ($18.2 million) and the Ecuador earthquake ($11.4 million). Current year catastrophe losses were $18.1 million for the three months ended June 30, 2015 and related to the Northern Chile storms ($10.0 million) and the New South Wales storms ($8.1 million).
Incurred losses and LAE increased slightly to $634.6 million for the six months ended June 30, 2016 compared to $631.8 million for the six months ended June 30, 2015, primarily due to an increase in current year catastrophe losses of $38.6 million, partially offset by a decrease in current year attritional losses of $27.9 million and a decrease in prior years' catastrophe losses of $10.1 million, mainly related to the 2011 Japan earthquake. The current year catastrophe losses of $56.7 million for the six months ended June 30, 2016 were related to the Fort McMurray Canada Wildfire ($21.9 million), U.S. Storms ($18.2 million), the Ecuador earthquake ($11.4 million) and the Taiwan earthquake ($5.2 million). The current year catastrophe losses were $18.1 million for the six months ended June 30, 2015 and related to the Northern Chile storms ($10.0 million) and the New South Wales storms ($8.1 million).
Commission, Brokerage, Taxes and Fees. Commission, brokerage, taxes and fees dedecreasedcreased by 1.1%28.1% to $72.1$49.5 million for the three months ended March 31, 2017 compared to $68.8 million for the three months ended June 30, 2016 compared to $73.0 millionMarch 31, for the three months ended June 30, 2015. Commission, brokerage, taxes and fees decreased by 16.8% to $140.9 million for the six months ended June 30, 2016 compared to $169.5 million for the six months ended June 30, 2015. These changes were2016. This change was primarily due to the impact of the declinedecrease in premiums earned, the impact of affiliated quota share agreements and the changes in the mix of business.
Other Underwriting Expenses. Other underwriting expenses were $58.3relatively flat at $59.9 million and $51.6 $59.2 million for the three months ended June 30,March 31, 2017 and March 31, 2016, and 2015, respectively. Other underwriting expenses were $117.6 million and $100.1 million for the six months ended June 30, 2016 and 2015, respectively. The increases in other underwriting expenses were mainly due to costs incurred related to the expansion of the insurance operations.
Corporate Expenses. Corporate expenses, which are general operating expenses that are not allocated to segments, were $2.0$3.6 million and $1.8 million $2.3 for the three months ended June 30,March 31, 2017 and 2016, and 2015, respectively, and $4.3 million and $3.4 million for the six months ended June 30, 2016 and 2015, respectively. The increase in corporate expenses were primarily due to higher compensation costs.
Interest, Fees and Bond Issue Cost Amortization Expense. Interest, fees and other bond amortization expense remained the same at $8.9 million for the three months ended June 30, 2016March 31, 2017 and 2015. Interest, fees and other bond amortization remained the same at $17.7 million for the six months ended June 30, 2016 and 2015.2016.
Income Tax Expense (Benefit). Income tax expense was $33.0$76.9 million and $64.0$12.9 million for the three months ended June 30,March 31, 2017 and 2016, and 2015, respectively. Income tax expense was $45.8 million and $114.5 million for the six months ended June 30, 2016 and 2015, respectively. Income tax expense is primarily a function of the geographic location of the Company's pre-tax income and the statutory tax rates in those jurisdictions, as affected by tax-exempt investment income. Variations in the income tax expense generally result from changes in the relative levels of pre-tax income, including the impact of catastrophe losses and net capital gains (losses), among jurisdictions with different tax rates. The decreasesincrease in income tax expenses for the three and six months ended June 30, 2016March 31, 2017 compared to the three and six months ended June 30, 2015 wereMarch 31, 2016 was mainly due to the increaserealized capital gains for 2017 compared to realized capital losses in current year catastrophe losses.2016.
Net Income (Loss).
Our net income was $68.4$171.0 million and $133.8$38.9 million for the three months ended June 30,March 31, 2017 and 2016, and 2015, respectively. Our net income was $107.3 million and $249.7 million for the six months ended June 30, 2016 and 2015, respectively. The changes were primarily driven by the financial component fluctuations explained above.
Ratios.
Our combined ratio increaseddecreased by 10.13.3 points to 95.9% 84.7% for the three months ended June 30, 2016,March 31, 2017 compared to 85.8% 88.0% for the three months ended June 30, 2015, and increased by 5.5 points to 92.0% for the six months ended June 30, 2016, compared to 86.5% for the six months ended June 30, 2015.March 31, 2016. The loss ratio component increased by 7.4 points and 4.8 points for the three and six months ended June 30, 2016, respectively, over the same period last year mainly due to the increases of $33.4 million and $38.6 million in current year catastrophe losses. The commission and brokerage ratio components increased 0.8 points remained relatively flat at 61.5% for the three months ended June 30, 2016, over the same period last year and decreased 1.8 points
for the six months ended June 30, 20162017 compared to 61.4% for the same period last year. The variances are due tocommission and brokerage ratio component was 10.5% for the three months ended March 31, 2017 and 14.3% for the three months ended March 31, 2016 reflecting change in the mix of business and the impact of affiliated quota share agreements and changes in the mix of business.agreements. The other underwriting expense ratio components increased 1.9 points and 2.5 points was comparable at 12.7% for the three and six months ended June 30, 2016, respectively, overMarch 31, 2017 and 12.3% for the same period last year mainly due to the increased focus on the expansion of the insurance business.year.
Stockholder's Equity.
Stockholders' equity increased by $232.8$182.7 million to $5,164.1$5,448.2 million at June 30, 2016March 31, 2017 from $4,931.2$5,265.6 million at December 31, 2015,2016, principally as a result of $107.3$171.0 million of net income, $84.7$6.0 million of net unrealized appreciation on investments, net of tax, $30.4$3.6 million of net foreign currency translation adjustments, $7.7 million of share-based compensation transactions and $2.7$2.0 million of net benefit plan obligation adjustments.adjustments and $0.1 million of share-based compensation transactions.
Consolidated Investment Results
Net Investment Income.
Net investment income increased 4.2%by 4.1% to $73.9$60.8 million for the three months ended June 30, 2016March 31, 2017 compared to $70.9$58.4 million for the three months ended June 30, 2015,March 31, 2016, primarily due to an increase inhigher income from other invested assets, including lower year over year losses from our limited partnershippartnerships, and higher income from our fixed income portfolios, partially offset by lower reinvestment rates for the fixed income portfolios. Net investment income decreased by 7.8% to $132.3 million for the six months ended June 30, 2016 compared to $143.5 million for the six months ended June 30, 2015, primarily due to a decline in income from fixed maturities, reflective of lower reinvestment rates, and a decline in income from limited partnerships.dividends on equity securities.
The following table shows the components of net investment income for the periods indicated:
| | Three Months Ended | |
| | March 31, | |
(Dollars in millions) | | 2017 | | | 2016 | |
Fixed maturities | | $ | 47.0 | | | $ | 45.3 | |
Equity securities | | | 6.7 | | | | 9.1 | |
Short-term investments and cash | | | 0.4 | | | | 0.3 | |
Other invested assets | | | | | | | | |
Limited partnerships | | | (0.2 | ) | | | (2.5 | ) |
Dividends from preferred shares of affiliate | | | 7.8 | | | | 7.8 | |
Other | | | 1.3 | | | | (0.9 | ) |
Gross investment income before adjustments | | | 62.9 | | | | 59.1 | |
Funds held interest income (expense) | | | 1.9 | | | | 2.7 | |
Interest income from Parent | | | 1.1 | | | | 1.1 | |
Gross investment income | | | 65.9 | | | | 62.8 | |
Investment expenses | | | (5.1 | ) | | | (4.4 | ) |
Net investment income | | $ | 60.8 | | | $ | 58.4 | |
| | | | | | | | |
(Some amounts may not reconcile due to rounding.) | | | | | | | | |
| | Three Months Ended | | | Six Months Ended | |
| | June 30, | | | June 30, | |
(Dollars in millions) | | 2016 | | | 2015 | | | 2016 | | | 2015 | |
Fixed maturities | | $ | 44.8 | | | $ | 46.4 | | | $ | 90.1 | | | $ | 94.4 | |
Equity securities | | | 8.8 | | | | 9.9 | | | | 17.9 | | | | 18.6 | |
Short-term investments and cash | | | 0.3 | | | | 0.3 | | | | 0.6 | | | | 0.5 | |
Other invested assets | | | | | | | | | | | | | | | | |
Limited partnerships | | | 14.2 | | | | 7.3 | | | | 11.7 | | | | 14.7 | |
Dividends from Parent's shares | | | - | | | | 9.3 | | | | - | | | | 18.5 | |
Dividends from preferred shares of affiliate | | | 7.7 | | | | - | | | | 15.5 | | | | - | |
Other | | | 0.7 | | | | 1.0 | | | | (0.2 | ) | | | 1.6 | |
Gross investment income before adjustments | | | 76.5 | | | | 74.2 | | | | 135.6 | | | | 148.3 | |
Funds held interest income (expense) | | | 0.9 | | | | 0.9 | | | | 3.6 | | | | 3.4 | |
Interest income from Parent | | | 1.1 | | | | 1.1 | | | | 2.2 | | | | 2.2 | |
Gross investment income | | | 78.5 | | | | 76.1 | | | | 141.3 | | | | 153.8 | |
Investment expenses | | | (4.6 | ) | | | (5.2 | ) | | | (9.0 | ) | | | (10.3 | ) |
Net investment income | | $ | 73.9 | | | $ | 70.9 | | | $ | 132.3 | | | $ | 143.5 | |
| | | | | | | | | | | | | | | | |
(Some amounts may not reconcile due to rounding.) | | | | | | | | | | | | | | | | |
The following tables show a comparison of various investment yields for the periods indicated:
| | | | | At | | At | At | | At |
| | | | | June 30, | | December 31, | March 31, | | December 31, |
| | | | | 2016 | | 2015 | 2017 | | 2016 |
Imbedded pre-tax yield of cash and invested assets at December 31 | | | | | 2.8% | | 2.9% | 2.8% | | 2.9% |
Imbedded after-tax yield of cash and invested assets at December 31 | | | | | 2.0% | | 2.1% | 1.9% | | 2.0% |
| Three Months Ended |
| March 31, |
| 2017 | | 2016 |
Annualized pre-tax yield on average cash and invested assets | 2.5% | | 2.5% |
Annualized after-tax yield on average cash and invested assets | 1.8% | | 1.8% |
| Three Months Ended | | Six Months Ended |
| June 30, | | June 30, |
| 2016 | | 2015 | | 2016 | | 2015 |
Annualized pre-tax yield on average cash and invested assets | 3.2% | | 3.4% | | 2.8% | | 3.5% |
Annualized after-tax yield on average cash and invested assets | 2.2% | | 2.4% | | 2.0% | | 2.4% |
Net Realized Capital Gains (Losses).
The following table presents the composition of our net realized capital gains (losses) for the periods indicated:
| | Three Months Ended March 31, | |
(Dollars in millions) | | 2017 | | | 2016 | | | Variance | |
Gains (losses) from sales: | | | | | | | | | |
Fixed maturity securities, market value | | | | | | | | | |
Gains | | $ | 8.0 | | | $ | 1.5 | | | $ | 6.5 | |
Losses | | | (1.5 | ) | | | (18.3 | ) | | | 16.8 | |
Total | | | 6.5 | | | | (16.9 | ) | | | 23.3 | |
| | | | | | | | | | | | |
Equity securities, fair value | | | | | | | | | | | | |
Gains | | | 8.0 | | | | 1.8 | | | | 6.2 | |
Losses | | | (3.7 | ) | | | (9.7 | ) | | | 6.0 | |
Total | | | 4.3 | | | | (8.0 | ) | | | 12.2 | |
| | | | | | | | | | | | |
Total net realized gains (losses) from sales | | | | | | | | | | | | |
Gains | | | 16.0 | | | | 3.3 | | | | 12.7 | |
Losses | | | (5.2 | ) | | | (28.1 | ) | | | 22.9 | |
Total | | | 10.8 | | | | (24.8 | ) | | | 35.6 | |
| | | | | | | | | | | | |
Other than temporary impairments: | | | (1.1 | ) | | | (23.0 | ) | | | 21.9 | |
| | | | | | | | | | | | |
Gains (losses) from fair value adjustments: | | | | | | | | | | | | |
Fixed maturities, fair value | | | - | | | | (0.2 | ) | | | 0.2 | |
Equity securities, fair value | | | 37.4 | | | | (18.3 | ) | | | 55.7 | |
Other invested assets, fair value | | | 70.7 | | | | - | | | | 70.7 | |
Total | | | 108.1 | | | | (18.6 | ) | | | 126.6 | |
| | | | | | | | | | | | |
Total net realized gains (losses) | | $ | 117.8 | | | $ | (66.4 | ) | | $ | 184.2 | |
| | | | | | | | | | | | |
(Some amounts may not reconcile due to rounding.) | | | | | | | | | | | | |
| | Three Months Ended June 30, | | | Six Months Ended June 30, | |
(Dollars in millions) | | 2016 | | | 2015 | | | Variance | | | 2016 | | | 2015 | | | Variance | |
Gains (losses) from sales: | | | | | | | | | | | | | | | | | | |
Fixed maturity securities, market value | | | | | | | | | | | | | | | | | | |
Gains | | $ | 6.1 | | | $ | 5.1 | | | $ | 1.0 | | | $ | 7.6 | | | $ | 7.6 | | | $ | - | |
Losses | | | (3.9 | ) | | | (17.3 | ) | | | 13.4 | | | | (22.2 | ) | | | (31.3 | ) | | | 9.1 | |
Total | | | 2.2 | | | | (12.2 | ) | | | 14.4 | | | | (14.6 | ) | | | (23.7 | ) | | | 9.1 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
Fixed maturity securities, fair value | | | | | | | | | | | | | | | | | | | | | | | | |
Gains | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Losses | | | (1.9 | ) | | | - | | | | (1.9 | ) | | | (1.9 | ) | | | - | | | | (1.9 | ) |
Total | | | (1.9 | ) | | | - | | | | (1.9 | ) | | | (1.9 | ) | | | - | | | | (1.9 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
Equity securities, fair value | | | | | | | | | | | | | | | | | | | | | | | | |
Gains | | | 4.8 | | | | 7.3 | | | | (2.5 | ) | | | 6.6 | | | | 12.4 | | | | (5.8 | ) |
Losses | | | (12.5 | ) | | | (7.6 | ) | | | (4.9 | ) | | | (22.2 | ) | | | (12.8 | ) | | | (9.4 | ) |
Total | | | (7.7 | ) | | | (0.3 | ) | | | (7.4 | ) | | | (15.6 | ) | | | (0.4 | ) | | | (15.2 | ) |
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Total net realized gains (losses) from sales | | | | | | | | | | | | | | | | | | | | | | | | |
Gains | | | 10.9 | | | | 12.4 | | | | (1.5 | ) | | | 14.2 | | | | 20.1 | | | | (5.9 | ) |
Losses | | | (18.2 | ) | | | (24.9 | ) | | | 6.7 | | | | (46.3 | ) | | | (44.1 | ) | | | (2.2 | ) |
Total | | | (7.3 | ) | | | (12.4 | ) | | | 5.2 | | | | (32.1 | ) | | | (24.0 | ) | | | (8.1 | ) |
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Other than temporary impairments: | | | (1.4 | ) | | | (8.8 | ) | | | 7.4 | | | | (24.4 | ) | | | (32.9 | ) | | | 8.5 | |
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Gains (losses) from fair value adjustments: | | | | | | | | | | | | | | | | | | | | | | | | |
Fixed maturities, fair value | | | 1.5 | | | | - | | | | 1.5 | | | | 1.3 | | | | 0.1 | | | | 1.2 | |
Equity securities, fair value | | | 37.0 | | | | (5.3 | ) | | | 42.3 | | | | 18.7 | | | | 15.6 | | | | 3.1 | |
Other invested assets, fair value | | | (0.8 | ) | | | 77.8 | | | | (78.6 | ) | | | (0.8 | ) | | | 113.8 | | | | (114.6 | ) |
Total | | | 37.7 | | | | 72.5 | | | | (34.8 | ) | | | 19.2 | | | | 129.5 | | | | (110.3 | ) |
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Total net realized gains (losses) | | $ | 29.2 | | | $ | 51.2 | | | $ | (22.0 | ) | | $ | (37.2 | ) | | $ | 72.5 | | | $ | (109.7 | ) |
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(Some amounts may not reconcile due to rounding) | | | | | | | | | | | | | | | | | | | | | | | | |
Net realized capital gains were $29.2$117.8 million and $51.2net realized capital losses were $66.4 million for the three months ended June 30,March 31, 2017 and 2016, and 2015, respectively. For the three months ended June 30, 2016,March 31, 2017, we recorded $37.7 million of net realized capital gains due to fair value re-measurements on fixed maturity securities, equity securities and other invested assets, partially offset by $7.3 million of net realized capital losses from sales of fixed maturity and equity securities and $1.4 million of other-than-temporary impairments. For the three months ended June 30, 2015, we recorded $72.5$108.1 million of net realized capital gains due to fair value re-measurements on equity securities and other invested assets and $10.8 million of net realized capital gains from sales of fixed maturity and equity securities, partially offset by $12.4$1.1 million of other-than-temporary impairments. For the three months ended March 31, 2016, we recorded $24.8 million of net realized capital losses from sales of fixed maturity and equity securities, and $8.8$23.0 million of other-than-temporary impairments.impairments and $18.6 million of net realized capital losses due to fair value re-measurements on fixed maturities and equity securities. The fixed maturity and equity sales for the three months ended June 30,March 31, 2017 and 2016 and June 30, 2015, respectively, related primarily to adjusting the portfolios for overall market changes and individual credit shifts.