The aggregate market value and gross unrealized losses related to investments in an unrealized loss position at June 30, 20162017 were $1,011,427$2,129,518 thousand and $40,022$49,911 thousand, respectively. The market value of securities for the single issuer whose securities comprised the largest unrealized loss position at June 30, 2016,2017, (the U.S. Government) did not exceed 0.9%5% 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$29,271 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 domestic corporate securities, agency residential mortgage-backed securities and foreign corporate securities. The majority ofU.S. states and political subdivisions. Of these unrealized losses, are attributable$23,626 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$20,640 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$17,428 thousand were related to net unrealized foreign
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:
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,
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.
10
The Company's other invested assets at June 30, 2017 and December 31, 2016 included $142,964 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 June 30, 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 | | | Six Months Ended | |
| | June 30, | | | June 30, | | | June 30, | | | June 30, | |
(Dollars in thousands) | | 2016 | | | 2015 | | | 2016 | | | 2015 | | | 2017 | | | 2016 | | | 2017 | | | 2016 | |
Fixed maturity securities, market value: | | | | | | | | | | | | | | | | | | | | | | | | |
Other-than-temporary impairments | | $ | (1,391 | ) | | $ | (8,810 | ) | | $ | (24,406 | ) | | $ | (32,931 | ) | | $ | (1,574 | ) | | $ | (1,391 | ) | | $ | (2,706 | ) | | $ | (24,406 | ) |
Gains (losses) from sales | | | 2,244 | | | | (12,208 | ) | | | (14,611 | ) | | | (23,726 | ) | | | 6,507 | | | | 2,244 | | | | 12,972 | | | | (14,611 | ) |
Fixed maturity securities, fair value: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Gain (losses) from sales | | | (1,854 | ) | | | 14 | | | | (1,854 | ) | | | 42 | | | | - | | | | (1,854 | ) | | | - | | | | (1,854 | ) |
Gains (losses) from fair value adjustments | | | 1,571 | | | | (6 | ) | | | 1,339 | | | | 56 | | | | - | | | | 1,571 | | | | - | | | | 1,339 | |
Equity securities, market value: | | | | | | | | | | | | | | | | | |
Gains (losses) from sales | | | - | | | | 1 | | | | - | | | | 1 | | |
Equity securities, fair value: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Gains (losses) from sales | | | (7,636 | ) | | | (289 | ) | | | (15,586 | ) | | | (354 | ) | | | 604 | | | | (7,636 | ) | | | 4,944 | | | | (15,586 | ) |
Gains (losses) from fair value adjustments | | | 36,987 | | | | (5,334 | ) | | | 18,662 | | | | 15,612 | | | | 14,943 | | | | 36,987 | | | | 52,361 | | | | 18,662 | |
Other invested assets | | | | (2 | ) | | | - | | | | (1 | ) | | | - | |
Other invested assets, fair value: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Gains (losses) from fair value adjustments | | | (756 | ) | | | 77,857 | | | | (756 | ) | | | 113,821 | | | | (112,769 | ) | | | (756 | ) | | | (42,094 | ) | | | (756 | ) |
Short-term investment gains (losses) | | | | - | | | | - | | | | 1 | | | | - | |
Total net realized capital gains (losses) | | $ | 29,165 | | | $ | 51,225 | | | $ | (37,212 | ) | | $ | 72,521 | | | $ | (92,291 | ) | | $ | 29,165 | | | $ | 25,477 | | | $ | (37,212 | ) |
The Company recorded as net realized capital gains (losses) in the consolidated statements of operations and comprehensive income (loss) both fair value re-measurements and write-downs in the value of securities deemed to be impaired on an other-than-temporary basis as displayed in the table above. The Company had no other-than-temporary impaired securities where the impairment had both a credit and non-credit component.
The proceeds and split between gross gains and losses, from sales of fixed maturity and equity securities, are presented in the table below for the periods indicated:
| | Three Months Ended | | | Six Months Ended | |
| | June 30, | | | June 30, | |
(Dollars in thousands) | | 2017 | | | 2016 | | | 2017 | | | 2016 | |
Proceeds from sales of fixed maturity securities | | $ | 359,496 | | | $ | 110,429 | | | $ | 652,490 | | | $ | 298,475 | |
Gross gains from sales | | | 7,748 | | | | 6,154 | | | | 15,743 | | | | 7,618 | |
Gross losses from sales | | | (1,241 | ) | | | (5,764 | ) | | | (2,771 | ) | | | (24,083 | ) |
| | | | | | | | | | | | | | | | |
Proceeds from sales of equity securities | | $ | 115,602 | | | $ | 335,831 | | | $ | 249,653 | | | $ | 421,980 | |
Gross gains from sales | | | 3,562 | | | | 4,853 | | | | 11,575 | | | | 6,635 | |
Gross losses from sales | | | (2,958 | ) | | | (12,489 | ) | | | (6,631 | ) | | | (22,221 | ) |
| | 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 | ) |
5. RESERVES FOR LOSSES AND LAE
Activity in the reserve for losses and LAE is summarized for the periods indicated:
| | Six Months Ended | | | Twelve Months Ended | |
| | June 30, | | | At December 31, | |
(Dollars in thousands) | | 2017 | | | 2016 | |
Gross reserves at beginning of period | | $ | 8,331,288 | | | $ | 7,940,720 | |
Less reinsurance recoverables | | | (4,199,791 | ) | | | (3,875,073 | ) |
Net reserves at beginning of period | | | 4,131,497 | | | | 4,065,647 | |
| | | | | | | | |
Incurred related to: | | | | | | | | |
Current year | | | 584,656 | | | | 1,441,962 | |
Prior years | | | 2,294 | | | | (91,682 | ) |
Total incurred losses and LAE | | | 586,950 | | | | 1,350,280 | |
| | | | | | | | |
Paid related to: | | | | | | | | |
Current year | | | 165,100 | | | | 400,489 | |
Prior years | | | 493,405 | | | | 892,207 | |
Total paid losses and LAE | | | 658,505 | | | | 1,292,696 | |
| | | | | | | | |
Foreign exchange/translation adjustment | | | (6,122 | ) | | | 8,266 | |
| | | | | | | | |
Net reserves at end of period | | | 4,053,820 | | | | 4,131,497 | |
Plus reinsurance recoverables | | | 4,232,779 | | | | 4,199,791 | |
Gross reserves at end of period | | $ | 8,286,599 | | | $ | 8,331,288 | |
4.Incurred prior years' reserves increased by $2,294 thousand and decreased by $91,682 thousand for the six months ended June 30, 2017 and the year ended December 31, 2016, respectively.
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.
6. FAIR VALUE
GAAP guidance regarding fair value measurements address how companies should measure fair value when they are required to use fair value measures for recognition or disclosure purposes under GAAP and provides a common definition of fair value to be used throughout GAAP. It defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly fashion between market participants at the measurement date. In addition, it establishes a three-level valuation hierarchy for the disclosure of fair value measurements. The valuation hierarchy is based on the transparency of inputs to the valuation of an asset or liability. The level in the hierarchy within which a given fair value measurement falls is determined based on the lowest level input that is significant to the measurement, with Level 1 being the highest priority and Level 3 being the lowest priority.
The levels in the hierarchy are defined as follows:
Level 1: | Inputs to the valuation methodology are observable inputs that reflect unadjusted quoted prices for identical assets or liabilities in an active market; |
Level 2: | Inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument; |
Level 3: | Inputs to the valuation methodology are unobservable and significant to the fair value measurement. |
The Company's fixed maturity and equity securities are primarily managed by third party investment asset managers. The investment asset managers obtain prices from nationally recognized pricing services. These services seek to utilize market data and observations in their evaluation process. They use pricing applications that vary by asset class and incorporate available market information and when fixed maturity securities do not trade on a daily basis the services will apply available information through processes such as benchmark curves, benchmarking of like securities, sector groupings and matrix pricing. In addition, they use model processes, such as the Option Adjusted Spread model to develop prepayment and interest rate scenarios for securities that have prepayment features.
In limited instances where prices are not provided by pricing services or in rare instances when a manager may not agree with the pricing service, price quotes on a non-binding basis are obtained from investment brokers. The investment asset managers do not make any changes to prices received from either the pricing services or the investment brokers. In addition, the investment asset managers have procedures in place to review the reasonableness of the prices from the service providers and may request verification of the prices. In addition, the Company continually performs analytical reviews of price changes and tests the prices on a random basis to an independent pricing source. No material variances were noted during these price validation procedures. In limited situations, where financial markets are inactive or illiquid, the Company may use its own assumptions about future cash flows and risk-adjusted discount rates to determine fair value. Due to the unavailability of prices for fifteen46 private placement securities, the Companyinvestment manager's valuation committee valued the fifteen46 securities at $34,431$89,291 thousand at June 30, 2016.2017. 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, 20162017 and December 31, 20152016 of $124,776$169,165 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, 20162017 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, 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: | | | | | | Fair Value Measurement Using: | |
| | | | | Quoted Prices | | | | | | | | | | | | Quoted Prices | | | | | | | |
| | | | | in Active | | | Significant | | | | | | | | | in Active | | | Significant | | | | |
| | | | | Markets for | | | Other | | | Significant | | | | | | Markets for | | | Other | | | Significant | |
| | | | | Identical | | | Observable | | | Unobservable | | | | | | Identical | | | Observable | | | Unobservable | |
| | | | | Assets | | | Inputs | | | Inputs | | | | | | Assets | | | Inputs | | | Inputs | |
(Dollars in thousands) | | June 30, 2016 | | | (Level 1) | | | (Level 2) | | | (Level 3) | | | June 30, 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 | | $ | 391,944 | | | $ | - | | | $ | 391,944 | | | $ | - | | | $ | 666,777 | | | $ | - | | | $ | 666,777 | | | $ | - | |
Obligations of U.S. States and political subdivisions | | | 749,912 | | | | - | | | | 749,912 | | | | - | | | | 696,783 | | | | - | | | | 696,783 | | | | - | |
Corporate securities | | | 2,066,163 | | | | - | | | | 2,033,753 | | | | 32,410 | | | | 2,301,001 | | | | - | | | | 2,214,861 | | | | 86,140 | |
Asset-backed securities | | | 168,913 | | | | - | | | | 168,913 | | | | - | | | | 189,989 | | | | - | | | | 189,989 | | | | - | |
Mortgage-backed securities | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Commercial | | | 75,101 | | | | - | | | | 75,101 | | | | - | | | | 73,245 | | | | - | | | | 73,245 | | | | - | |
Agency residential | | | 767,696 | | | | - | | | | 767,696 | | | | - | | | | 683,681 | | | | - | | | | 683,681 | | | | - | |
Non-agency residential | | | 120 | | | | - | | | | 120 | | | | - | | | | 70 | | | | - | | | | 70 | | | | - | |
Foreign government securities | | | 533,403 | | | | - | | | | 533,403 | | | | - | | | | 501,387 | | | | - | | | | 501,387 | | | | - | |
Foreign corporate securities | | | 1,015,497 | | | | - | | | | 1,013,476 | | | | 2,021 | | | | 1,027,095 | | | | - | | | | 1,023,944 | | | | 3,151 | |
Total fixed maturities, market value | | | 5,768,749 | | | | - | | | | 5,734,318 | | | | 34,431 | | | | 6,140,028 | | | | - | | | | 6,050,737 | | | | 89,291 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Equity securities, fair value | | | 976,879 | | | | 915,003 | | | | 61,876 | | | | - | | | | 934,110 | | | | 893,660 | | | | 40,450 | | | | - | |
Other invested assets, fair value | | | 1,772,458 | | | | - | | | | - | | | | 1,772,458 | | | | 1,724,532 | | | | - | | | | - | | | | 1,724,532 | |
There were no transfers between Level 1 and Level 2 for the six months ended June 30, 2016.2017.
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 | |
In addition $52,139 thousand and $18,801 thousand of investments within other invested assets on the consolidated balance sheets as of June 30, 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, 2017 | | | Six Months Ended June 30, 2017 | |
| | Corporate | | | Foreign | | | | | | Corporate | | | Foreign | | | | |
(Dollars in thousands) | | Securities | | | Corporate | | | Total | | | Securities | | | Corporate | | | Total | |
Beginning balance | | $ | 84,322 | | | $ | 2,802 | | | $ | 87,124 | | | $ | 65,197 | | | $ | 2,538 | | | $ | 67,735 | |
Total gains or (losses) (realized/unrealized) | | | | | | | | | | | | | | | | | | | | | | | | |
Included in earnings | | | 711 | | | | 128 | | | | 839 | | | | 925 | | | | 104 | | | | 1,029 | |
Included in other comprehensive income (loss) | | | 172 | | | | - | | | | 172 | | | | 143 | | | | - | | | | 143 | |
Purchases, issuances and settlements | | | 935 | | | | 221 | | | | 1,156 | | | | 19,875 | | | | 509 | | | | 20,384 | |
Transfers in and/or (out) of Level 3 | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Ending balance | | $ | 86,140 | | | $ | 3,151 | | | $ | 89,291 | | | $ | 86,140 | | | $ | 3,151 | | | $ | 89,291 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
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 June 30, 2016 | | | Six Months Ended June 30, 2016 | |
| | Corporate | | | Foreign | | | | | | Corporate | | | Foreign | | | | |
(Dollars in thousands) | | Securities | | | Corporate | | | Total | | | Securities | | | Corporate | | | Total | |
Beginning balance | | $ | 15,706 | | | $ | 596 | | | $ | 16,302 | | | $ | 3,933 | | | $ | 1,593 | | | $ | 5,526 | |
Total gains or (losses) (realized/unrealized) | | | | | | | | | | | | | | | | | | | | | | | | |
Included in earnings | | | (18 | ) | | | - | | | | (18 | ) | | | (10 | ) | | | (997 | ) | | | (1,007 | ) |
Included in other comprehensive income (loss) | | | (27 | ) | | | 1,425 | | | | 1,398 | | | | (33 | ) | | | 1,425 | | | | 1,392 | |
Purchases, issuances and settlements | | | 16,749 | | | | - | | | | 16,749 | | | | 28,520 | | | | - | | | | 28,520 | |
Transfers in and/or (out) of Level 3 | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Ending balance | | $ | 32,410 | | | $ | 2,021 | | | $ | 34,431 | | | $ | 32,410 | | | $ | 2,021 | | | $ | 34,431 | |
| | | | | | | | | | | | | | | | | | | | | | | | |
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 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | |
(Some amounts may not reconcile due to rounding.) | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, 2015 | | | Six Months Ended June 30, 2015 | | | Three Months Ended June 30, 2016 | | | Six Months Ended June 30, 2016 | |
| | Corporate | | | Foreign | | | | | | Corporate | | | | | | Foreign | | | | | | Corporate | | | Foreign | | | | | | Corporate | | | Foreign | | | | |
(Dollars in thousands) | | Securities | | | Corporate | | | Total | | | Securities | | | CMBS | | | Corporate | | | Total | | | Securities | | | Corporate | | | Total | | | Securities | | | Corporate | | | Total | |
Beginning balance | | $ | 2,653 | | | $ | 6,125 | | | $ | 8,778 | | | $ | - | | | $ | 8,597 | | | $ | 7,166 | | | $ | 15,763 | | | $ | 15,706 | | | $ | 596 | | | $ | 16,302 | | | $ | 3,933 | | | $ | 1,593 | | | $ | 5,526 | |
Total gains or (losses) (realized/unrealized) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Included in earnings | | | 2 | | | | 58 | | | | 60 | | | | 4 | | | | - | | | | 115 | | | | 119 | | | | (18 | ) | | | - | | | | (18 | ) | | | (10 | ) | | | (997 | ) | | | (1,007 | ) |
Included in other comprehensive income (loss) | | | (3 | ) | | | 1,169 | | | | 1,166 | | | | (2 | ) | | | - | | | | 71 | | | | 69 | | | | (27 | ) | | | 1,425 | | | | 1,398 | | | | (33 | ) | | | 1,425 | | | | 1,392 | |
Purchases, issuances and settlements | | | (12 | ) | | | - | | | | (12 | ) | | | 1,928 | | | | - | | | | - | | | | 1,928 | | | | 16,749 | | | | - | | | | 16,749 | | | | 28,520 | | | | - | | | | 28,520 | |
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 | | | $ | 32,410 | | | $ | 2,021 | | | $ | 34,431 | | | $ | 32,410 | | | $ | 2,021 | | | $ | 34,431 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
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 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 | ) |
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 | | | Six Months Ended | |
| | June 30, | | | June 30, | |
(Dollars in thousands) | | 2017 | | | 2016 | | | 2017 | | | 2016 | |
Other invested assets, fair value: | | | | | | | | | | | | |
Beginning balance | | $ | 1,837,302 | | | $ | 1,773,214 | | | $ | 1,766,626 | | | $ | 1,773,214 | |
Total gains or (losses) (realized/unrealized) | | | | | | | | | | | | | | | | |
Included in earnings | | | (112,769 | ) | | | (756 | ) | | | (42,094 | ) | | | (756 | ) |
Included in other comprehensive income (loss) | | | - | | | | - | | | | - | | | | - | |
Purchases, issuances and settlements | | | - | | | | - | | | | - | | | | - | |
Transfers in and/or (out) of Level 3 | | | - | | | | - | | | | - | | | | - | |
Ending balance | | | 1,724,532 | | | $ | 1,772,458 | | | $ | 1,724,532 | | | $ | 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.) | | | | | | | | | | | | | | | | |
| | 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.) | | | | | | | | | | | | | | | | |
5.7. 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 June 30, | | | At December 31, | |
(Dollars in thousands) | | 2017 | | | 2016 | |
The Prudential | | $ | 146,923 | | | $ | 146,507 | |
Unaffiliated life insurance company | | | 33,107 | | | | 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. OTHER8. 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 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 | | | Three Months Ended June 30, 2017 | | | Six Months Ended June 30, 2017 | |
(Dollars in thousands) | | Before Tax | | | Tax Effect | | | Net of Tax | | | Before Tax | | | Tax Effect | | | Net of Tax | | | 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 | ) | | $ | 5,784 | | | $ | (1,753 | ) | | $ | 4,031 | | | $ | 23,804 | | | $ | (8,060 | ) | | $ | 15,744 | |
URA(D) on securities - OTTI | | | - | | | | - | | | | - | | | | 9,735 | | | | (3,407 | ) | | | 6,328 | | | | (317 | ) | | | 111 | | | | (206 | ) | | | (3,816 | ) | | | 1,336 | | | | (2,480 | ) |
Reclassification of net realized losses (gains) included in net income (loss) | | | 21,017 | | | | (7,356 | ) | | | 13,661 | | | | 56,656 | | | | (19,330 | ) | | | 37,326 | | | | (4,931 | ) | | | 1,454 | | | | (3,477 | ) | | | (10,265 | ) | | | 3,321 | | | | (6,944 | ) |
Foreign currency translation adjustments | | | 24,839 | | | | (8,694 | ) | | | 16,145 | | | | (26,404 | ) | | | 9,241 | | | | (17,163 | ) | | | 8,265 | | | | (2,893 | ) | | | 5,372 | | | | 13,752 | | | | (4,813 | ) | | | 8,939 | |
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 | | | | 3,083 | | | | (1,079 | ) | | | 2,004 | | | | 6,166 | | | | (2,158 | ) | | | 4,008 | |
Total other comprehensive income (loss) | | $ | (6,958 | ) | | $ | 2,435 | | | $ | (4,523 | ) | | $ | 5,212 | | | $ | (1,824 | ) | | $ | 3,388 | | | $ | 11,884 | | | $ | (4,160 | ) | | $ | 7,724 | | | $ | 29,641 | | | $ | (10,374 | ) | | $ | 19,267 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(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) | | | | | | | | | | | | | | | | | | | | | | | | |
The following table presents details of the amounts reclassified from AOCI for the periods indicated:
| | Three Months Ended | | | Six Months Ended | | | |
| | June 30, | | | June 30, | | | Affected line item within the statements of |
AOCI component | | 2017 | | | 2016 | | | 2017 | | | 2016 | | | operations and comprehensive income (loss) |
(Dollars in thousands) | | | | | | | | | | | | | | |
URA(D) on securities | | $ | (4,931 | ) | | $ | (97 | ) | | $ | (10,265 | ) | | $ | 39,773 | | | Other net realized capital gains (losses) |
| | | 1,454 | | | | 34 | | | | 3,321 | | | | (13,921 | ) | | Income tax expense (benefit) |
| | $ | (3,477 | ) | | $ | (63 | ) | | $ | (6,944 | ) | | $ | 25,852 | | | Net income (loss) |
| | | | | | | | | | | | | | | | | | |
Benefit plan net gain (loss) | | $ | 3,083 | | | $ | 2,063 | | | $ | 6,166 | | | $ | 4,125 | | | Other underwriting expenses |
| | | (1,079 | ) | | | (722 | ) | | | (2,158 | ) | | | (1,444 | ) | | Income tax expense (benefit) |
| | $ | 2,004 | | | $ | 1,341 | | | $ | 4,008 | | | $ | 2,681 | | | Net income (loss) |
| | | | | | | | | | | | | | | | | | |
(Some amounts may not reconcile due to rounding) | | | | | | | | | | | | | | | | | | |
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 | | | Six Months Ended | |
Bermuda Re | | June 30, | | | June 30, | |
(Dollars in thousands) | | 2017 | | | 2016 | | | 2017 | | | 2016 | |
Ceded written premiums | | $ | 681,776 | | | $ | 544,495 | | | $ | 1,316,672 | | | $ | 1,061,178 | |
Ceded earned premiums | | | 620,897 | | | | 593,349 | | | | 1,209,771 | | | | 1,132,302 | |
Ceded losses and LAE (a) | | | 388,573 | | | | 404,667 | | | | 728,704 | | | | 695,143 | |
| | Three Months Ended | | | Six Months Ended | | | Three Months Ended | | | Six Months Ended | |
Bermuda Re | | June 30, | | | June 30, | | |
Everest International | | | June 30, | | June 30, |
(Dollars in thousands) | | 2016 | | | 2015 | | | 2016 | | | 2015 | | | 2017 | | | 2016 | | | 2017 | | | 2016 | |
Ceded written premiums | | $ | 544,495 | | | $ | 528,468 | | | $ | 1,061,178 | | | $ | 1,067,501 | | | $ | 45 | | | $ | 62 | | | $ | (25 | ) | | $ | 31 | |
Ceded earned premiums | | | 593,349 | | | | 563,100 | | | | 1,132,302 | | | | 1,117,151 | | | | 46 | | | | 63 | | | | (25 | ) | | | 39 | |
Ceded losses and LAE (a) | | | 404,667 | | | | 345,580 | | | | 695,143 | | | | 640,711 | | | | (175 | ) | | | 756 | | | | (618 | ) | | | 898 | |
| | Three Months Ended | | | Six Months Ended | |
Everest Canada | | June 30, | | June 30, |
(Dollars in thousands) | | 2017 | | | 2016 | | | 2017 | | | 2016 | |
Assumed written premiums | | $ | 13,132 | | | $ | 16,228 | | | $ | 25,980 | | | $ | 26,427 | |
Assumed earned premiums | | | 11,884 | | | | 12,675 | | | | 24,737 | | | | 23,129 | |
Assumed losses and LAE | | | 7,319 | | | | 14,440 | | | | 13,970 | | | | 21,427 | |
| | 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.
| | Three Months Ended | | | Six Months Ended | |
Lloyd's Syndicate 2786 | | June 30, | | June 30, |
(Dollars in thousands) | | 2017 | | | 2016 | | | 2017 | | | 2016 | |
Assumed written premiums | | $ | 10,236 | | | $ | (157 | ) | | $ | 18,085 | | | $ | 539 | |
Assumed earned premiums | | | 9,797 | | | | 28 | | | | 16,724 | | | | 116 | |
Assumed losses and LAE | | | 4,831 | | | | - | | | | 8,264 | | | | - | |
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 | | | Six Months Ended | | | Three Months Ended | | | Six Months Ended | |
Mt. Logan Re Segregated Accounts | | June 30, | | June 30, | | June 30, | | June 30, |
(Dollars in thousands) | | 2016 | | | 2015 | | | 2016 | | | 2015 | | | 2017 | | | 2016 | | | 2017 | | | 2016 | |
Ceded written premiums | | $ | 29,450 | | | $ | 32,892 | | | $ | 70,381 | | | $ | 94,562 | | | $ | 38,703 | | | $ | 29,450 | | | $ | 77,882 | | | $ | 70,381 | |
Ceded earned premiums | | | 39,356 | | | | 47,751 | | | | 74,228 | | | | 86,434 | | | | 50,708 | | | | 39,356 | | | | 84,665 | | | | 74,228 | |
Ceded losses and LAE | | | 16,232 | | | | 13,157 | | | | 25,330 | | | | 21,471 | | | | 23,674 | | | | 16,232 | | | | 43,433 | | | | 25,330 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Assumed written premiums | | | 3,074 | | | | 3,412 | | | | 6,634 | | | | 7,396 | | | $ | 3,763 | | | | 3,074 | | | | 6,495 | | | | 6,634 | |
Assumed earned premiums | | | 3,074 | | | | 3,412 | | | | 6,634 | | | | 7,396 | | | | 3,763 | | | | 3,074 | | | | 6,495 | | | | 6,634 | |
Assumed losses and LAE | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
12.14. 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 | | | Six Months Ended | |
| | June 30, | | | June 30, | |
(Dollars in thousands) | | 2017 | | | 2016 | | | 2017 | | | 2016 | |
Service cost | | $ | 3,299 | | | $ | 2,896 | | | $ | 6,598 | | | $ | 5,793 | |
Interest cost | | | 2,276 | | | | 2,361 | | | | 4,552 | | | | 4,722 | |
Expected return on plan assets | | | (3,154 | ) | | | (2,484 | ) | | | (6,309 | ) | | | (4,968 | ) |
Amortization of net (income) loss | | | 3,041 | | | | 2,014 | | | | 6,081 | | | | 4,028 | |
Net periodic benefit cost | | $ | 5,461 | | | $ | 4,787 | | | $ | 10,921 | | | $ | 9,575 | |
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 | | | Three Months Ended | | | Six Months Ended | |
| | June 30, | | | June 30, | | | June 30, | | | June 30, | |
(Dollars in thousands) | | 2016 | | | 2015 | | | 2016 | | | 2015 | | | 2017 | | | 2016 | | | 2017 | | | 2016 | |
Service cost | | $ | 438 | | | $ | 599 | | | $ | 876 | | | $ | 1,000 | | | $ | 441 | | | $ | 438 | | | $ | 881 | | | $ | 876 | |
Interest cost | | | 296 | | | | 395 | | | | 592 | | | | 658 | | | | 249 | | | | 296 | | | | 498 | | | | 592 | |
Amortization of prior service cost | | | | (33 | ) | | | - | | | | (66 | ) | | | - | |
Amortization of net (income) loss | | | 48 | | | | 210 | | | | 96 | | | | 421 | | | | 75 | | | | 48 | | | | 151 | | | | 96 | |
Net periodic benefit cost | | $ | 782 | | | $ | 1,204 | | | $ | 1,564 | | | $ | 2,079 | | | $ | 732 | | | $ | 782 | | | $ | 1,464 | | | $ | 1,564 | |
| | | | | | | | | | | | | | | | | |
(Some amounts may not reconcile due to rounding.) | | | | | | | | | | | | | | | | | |
The Company did not make any contributions to the qualified pension benefit plan for the three and six months ended June 30, 20162017 and 2015.2016.
13.15. 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.
16. 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.
15.17. SUBSEQUENT EVENTS
The Company has evaluated known recognized and non-recognized subsequent events. The Company does not have any subsequent events to report.
Foreign ExchangeCurrency Risk. Foreign currency risk is the potential change in value, income and cash flow arising from adverse changes in foreign currency exchange rates. Each of our non-U.S. ("foreign") operations maintains capital in the currency of the country of its geographic location consistent with local regulatory guidelines. Each foreign operation may conduct business in its local currency, as well as the currency of other countries in which it operates. The primary foreign currency exposures for these foreign operations are the Singapore and Canadian Dollars. We mitigate foreign exchange exposure by generally matching the currency and duration of our assets to our corresponding operating liabilities. In accordance with FASB
guidance, the impact on the market value of available for sale fixed maturities due to changes in foreign currency exchange rates, in relation to functional currency, is reflected as part of other comprehensive income. Conversely, the impact of changes in foreign currency exchange rates, in relation to functional currency, on other assets and liabilities is reflected through net income as a component of other income (expense). In addition, we translate the assets, liabilities and income of non-U.S. dollar functional currency legal entities to the U.S. dollar. This translation amount is reported as a component of other comprehensive income.
SAFE HARBOR DISCLOSURE
This report contains forward-looking statements within the meaning of the U.S. federal securities laws. We intend these forward-looking statements to be covered by the safe harbor provisions for forward-looking statements in the federal securities laws. In some cases, these statements can be identified by the use of forward-looking words such as "may", "will", "should", "could", "anticipate", "estimate", "expect", "plan", "believe", "predict", "potential" and "intend". Forward-looking statements contained in this report include information regarding our reserves for losses and LAE, the adequacy of our provision for uncollectible balances, estimates of our catastrophe exposure, the effects of catastrophic events on our financial statements and the ability of our subsidiaries to pay dividends. Forward-looking statements only reflect our expectations and are not guarantees of performance. These statements involve risks, uncertainties and assumptions. Actual events or results may differ materially from our expectations. Important factors that could cause our actual events or results to be materially different from our expectations include those discussed under the caption ITEM 1A, "Risk Factors" in the Company's most recent 10-K filing. We undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market Risk Instruments. See "Market Sensitive Instruments" in PART I – ITEM 2.
ITEM 4. CONTROLS AND PROCEDURES
As of the end of the period covered by this report, our management carried out an evaluation, with the participation of the Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the "Exchange Act")). Based on their evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act are recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms. Our management, with the participation of the Chief Executive Officer and Chief Financial Officer, also conducted an evaluation of our internal control over financial reporting to determine whether any changes occurred during the quarter covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. Based on that evaluation, there has been no such change during the quarter covered by this report.
PART II
ITEM 1. LEGAL PROCEEDINGS
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.
ITEM 1A. RISK FACTORS
No material changes.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS
Exhibit Index: | | |
| | |
Exhibit No. | Description | |
| | |
31.1 | Section 302 Certification of Dominic J. Addesso | |
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31.2 | Section 302 Certification of Craig Howie | |
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32.1 | Section 906 Certification of Dominic J. Addesso and Craig Howie | |
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101.INS | XBRL Instance Document | |
| | |
101.SCH | XBRL Taxonomy Extension Schema | |
| | |
101.CAL | XBRL Taxonomy Extension Calculation Linkbase | |
| | |
101.DEF | XBRL Taxonomy Extension Definition Linkbase | |
| | |
101.LAB | XBRL Taxonomy Extension Labels Linkbase | |
| | |
101.PRE | XBRL Taxonomy Extension Presentation Linkbase | |
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Everest Reinsurance Holdings, Inc.
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| | | | |
| | Everest Reinsurance Holdings, Inc. | | |
| | (Registrant) | | |
| | | | |
| | | | |
| | /S/ CRAIG HOWIE | | |
| | Craig Howie | | |
| | Executive Vice President and | | |
| | Chief Financial Officer | | |
| | | | |
| | (Duly Authorized Officer and Principal Financial Officer) |
| | | | |
| | | | |
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Dated: August 15, 2016 | | | 14, 2017 | |