Debt and Equity Securities | 9 Months Ended |
Sep. 30, 2013 |
Debt and Equity Securities | Note 3 – Debt and Equity Securities |
The amortized cost and estimated fair value of investments in debt securities, all of which are classified as available-for-sale, are as follows: |
|
(in thousands) | | Amortized | | | Gross unrealized | | | Estimated | | | Other-than- | | | | | | | | | | | | | | |
cost | fair value | temporary | | | | | | | | | | | | | |
| | impairments | | | | | | | | | | | | | |
| Gains | | | Losses | | | | in AOCI | | | | | | | | | | | | | |
30-Sep-13 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
U.S. Treasury bonds | $ | | 92,977 | | | $ | | 1,012 | | | $ | | (470 | ) | | $ | | 93,519 | | | $ | | — | | | | | | | | | | | | | | |
Municipal bonds | | 470,768 | | | | 5,482 | | | | (10,263 | ) | | | 465,987 | | | | — | | | | | | | | | | | | | | |
Foreign bonds | | 219,175 | | | | 1,495 | | | | (649 | ) | | | 220,021 | | | | — | | | | | | | | | | | | | | |
Governmental agency bonds | | 296,569 | | | | 416 | | | | (4,604 | ) | | | 292,381 | | | | — | | | | | | | | | | | | | | |
Governmental agency mortgage-backed securities | | 1,394,859 | | | | 3,325 | | | | (18,326 | ) | | | 1,379,858 | | | | — | | | | | | | | | | | | | | |
Non-agency mortgage-backed securities (1) | | 24,085 | | | | — | | | | (3,782 | ) | | | 20,303 | | | | 20,743 | | | | | | | | | | | | | | |
Corporate debt securities | | 367,099 | | | | 7,786 | | | | (3,195 | ) | | | 371,690 | | | | — | | | | | | | | | | | | | | |
| $ | | 2,865,532 | | | $ | | 19,516 | | | $ | | (41,289 | ) | | $ | | 2,843,759 | | | $ | | 20,743 | | | | | | | | | | | | | | |
31-Dec-12 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
U.S. Treasury bonds | $ | | 80,651 | | | $ | | 1,574 | | | $ | | (50 | ) | | $ | | 82,175 | | | $ | | — | | | | | | | | | | | | | | |
Municipal bonds | | 361,912 | | | | 14,516 | | | | (606 | ) | | | 375,822 | | | | — | | | | | | | | | | | | | | |
Foreign bonds | | 236,630 | | | | 2,312 | | | | (197 | ) | | | 238,745 | | | | — | | | | | | | | | | | | | | |
Governmental agency bonds | | 324,323 | | | | 1,445 | | | | (318 | ) | | | 325,450 | | | | — | | | | | | | | | | | | | | |
Governmental agency mortgage-backed securities | | 1,271,408 | | | | 11,259 | | | | (1,135 | ) | | | 1,281,532 | | | | — | | | | | | | | | | | | | | |
Non-agency mortgage-backed securities (1) | | 26,656 | | | | — | | | | (4,810 | ) | | | 21,846 | | | | 20,743 | | | | | | | | | | | | | | |
Corporate debt securities | | 311,695 | | | | 14,941 | | | | (325 | ) | | | 326,311 | | | | — | | | | | | | | | | | | | | |
| $ | | 2,613,275 | | | $ | | 46,047 | | | $ | | (7,441 | ) | | $ | | 2,651,881 | | | $ | | 20,743 | | | | | | | | | | | | | | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(1) At December 31, 2012, the $26.7 million amortized cost is net of $3.6 million in other-than-temporary impairments determined to be credit related which have been recognized in earnings for the year ended December 31, 2012. At September 30, 2013, the $3.8 million gross unrealized losses include $3.7 million of unrealized losses for securities determined to be other-than-temporarily impaired and $0.1 million of unrealized losses for securities for which an other-than-temporary impairment has not been recognized. At December 31, 2012, the $4.8 million gross unrealized losses include $4.4 million of unrealized losses for securities determined to be other-than-temporarily impaired and $0.4 million of unrealized losses for securities for which an other-than-temporary impairment has not been recognized. The $20.7 million other-than-temporary impairments recorded in accumulated other comprehensive income (“AOCI”) through September 30, 2013 and December 31, 2012 represent the amount of other-than-temporary impairment losses recognized in AOCI which were not included in earnings due to the fact that the losses were not considered to be credit related. Other-than-temporary impairments were recognized in AOCI for non-agency mortgage-backed securities only. |
The cost and estimated fair value of investments in equity securities, all of which are classified as available-for-sale, are as follows: |
|
| Cost | | | Gross unrealized | | | Estimated | | | | | | | | | | | | |
(in thousands) | | | | Gains | | | Losses | | | | fair value | | | | | | | | | | | | | |
September 30, 2013 | | | | | | | | | | | | | | | | | | | | | | | | | | |
Preferred stocks | $ | | 15,926 | | | $ | | 1,273 | | | $ | | (1,404 | ) | | $ | | 15,795 | | | | | | | | | | | | |
Common stocks | | 224,946 | | | | 12,706 | | | | (2,922 | ) | | | 234,730 | | | | | | | | | | | | |
| $ | | 240,872 | | | $ | | 13,979 | | | $ | | (4,326 | ) | | $ | | 250,525 | | | | | | | | | | | | |
December 31, 2012 | | | | | | | | | | | | | | | | | | | | | | | | | | |
Preferred stocks | $ | | 13,326 | | | $ | | 752 | | | $ | | (41 | ) | | $ | | 14,037 | | | | | | | | | | | | |
Common stocks | | 177,844 | | | | 6,447 | | | | (408 | ) | | | 183,883 | | | | | | | | | | | | |
| $ | | 191,170 | | | $ | | 7,199 | | | $ | | (449 | ) | | $ | | 197,920 | | | | | | | | | | | | |
The Company had the following net unrealized gains (losses) as of September 30, 2013 and December 31, 2012: |
|
(in thousands) | | As of | | | As of | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
September 30, | December 31, | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
2013 | 2012 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Debt securities for which an other-than-temporary impairment has been recognized | $ | | (3,735 | ) | | $ | | (4,435 | ) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Debt securities—all other | | (18,038 | ) | | | 43,041 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Equity securities | | 9,653 | | | | 6,750 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| $ | | (12,120 | ) | | $ | | 45,356 | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Sales of debt and equity securities resulted in realized gains of $3.4 million and $48.3 million and realized losses of $9.7 million and $32 thousand for the three months ended September 30, 2013 and 2012, respectively. Sales of debt and equity securities resulted in realized gains of $15.6 million and $63.9 million and realized losses of $11.7 million and $0.3 million for the nine months ended September 30, 2013 and 2012, respectively. |
The Company had the following gross unrealized losses as of September 30, 2013 and December 31, 2012: |
|
| Less than 12 months | | | 12 months or longer | | | Total | |
(in thousands) | | Estimated | | | Unrealized | | | Estimated | | | Unrealized | | | Estimated | | | Unrealized | |
fair value | losses | fair value | losses | fair value | losses |
September 30, 2013 | | | | | | | | | | | | | | | | | | | | | | | |
Debt securities: | | | | | | | | | | | | | | | | | | | | | | | |
U.S. Treasury bonds | $ | | 52,796 | | | $ | | (470 | ) | | $ | | — | | | $ | | — | | | $ | | 52,796 | | | $ | | (470 | ) |
Municipal bonds | | 238,119 | | | | (9,970 | ) | | | 9,925 | | | | (293 | ) | | | 248,044 | | | | (10,263 | ) |
Foreign bonds | | 76,103 | | | | (597 | ) | | | 4,577 | | | | (52 | ) | | | 80,680 | | | | (649 | ) |
Governmental agency bonds | | 221,531 | | | | (4,582 | ) | | | 135 | | | | (22 | ) | | | 221,666 | | | | (4,604 | ) |
Governmental agency mortgage-backed securities | | 727,202 | | | | (16,564 | ) | | | 66,365 | | | | (1,762 | ) | | | 793,567 | | | | (18,326 | ) |
Non-agency mortgage-backed securities | | — | | | | — | | | | 20,303 | | | | (3,782 | ) | | | 20,303 | | | | (3,782 | ) |
Corporate debt securities | | 137,150 | | | | (2,952 | ) | | | 8,163 | | | | (243 | ) | | | 145,313 | | | | (3,195 | ) |
Total debt securities | | 1,452,901 | | | | (35,135 | ) | | | 109,468 | | | | (6,154 | ) | | | 1,562,369 | | | | (41,289 | ) |
Equity securities | | 99,080 | | | | (4,050 | ) | | | 1,287 | | | | (276 | ) | | | 100,367 | | | | (4,326 | ) |
Total | $ | | 1,551,981 | | | $ | | (39,185 | ) | | $ | | 110,755 | | | $ | | (6,430 | ) | | $ | | 1,662,736 | | | $ | | (45,615 | ) |
December 31, 2012 | | | | | | | | | | | | | | | | | | | | | | | |
Debt securities: | | | | | | | | | | | | | | | | | | | | | | | |
U.S. Treasury bonds | $ | | 27,219 | | | $ | | (50 | ) | | $ | | — | | | $ | | — | | | $ | | 27,219 | | | $ | | (50 | ) |
Municipal bonds | | 60,229 | | | | (557 | ) | | | 451 | | | | (49 | ) | | | 60,680 | | | | (606 | ) |
Foreign bonds | | 58,262 | | | | (183 | ) | | | 1,031 | | | | (14 | ) | | | 59,293 | | | | (197 | ) |
Governmental agency bonds | | 60,882 | | | | (318 | ) | | | — | | | | — | | | | 60,882 | | | | (318 | ) |
Governmental agency mortgage-backed securities | | 135,354 | | | | (889 | ) | | | 22,112 | | | | (246 | ) | | | 157,466 | | | | (1,135 | ) |
Non-agency mortgage-backed securities | | 6,544 | | | | (1,498 | ) | | | 15,302 | | | | (3,312 | ) | | | 21,846 | | | | (4,810 | ) |
Corporate debt securities | | 35,537 | | | | (227 | ) | | | 996 | | | | (98 | ) | | | 36,533 | | | | (325 | ) |
Total debt securities | | 384,027 | | | | (3,722 | ) | | | 39,892 | | | | (3,719 | ) | | | 423,919 | | | | (7,441 | ) |
Equity securities | | 34,258 | | | | (447 | ) | | | 98 | | | | (2 | ) | | | 34,356 | | | | (449 | ) |
Total | $ | | 418,285 | | | $ | | (4,169 | ) | | $ | | 39,990 | | | $ | | (3,721 | ) | | $ | | 458,275 | | | $ | | (7,890 | ) |
All securities in the Company’s non-agency mortgage-backed portfolio are senior tranches and were investment grade at the time of purchase, however, all have been downgraded to below investment grade since initial purchase. The table below summarizes the composition of the Company’s non-agency mortgage-backed securities by collateral type, year of issuance and current credit ratings. Percentages are based on the amortized cost basis of the securities and credit ratings are based on Standard & Poor’s Ratings Services (“S&P”) and Moody’s Investor Service, Inc. (“Moody’s”) published ratings. |
If a security was rated differently by either rating agency, the lower of the two ratings was selected. All amounts and ratings are as of September 30, 2013. |
(in thousands, except percentages and number of securities) | | Number | | | Amortized | | | Estimated | | | Non-Investment | | | | | | | | | | | | | | | | | | | | |
of | Cost | Fair | Grade/ | | | | | | | | | | | | | | | | | | | |
Securities | | Value | Not Rated | | | | | | | | | | | | | | | | | | | |
Non-agency mortgage-backed securities: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Prime single family residential: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
2007 | | 1 | | | $ | | 4,010 | | | $ | | 3,005 | | | | 100.0 | | % | | | | | | | | | | | | | | | | | | | |
2006 | | 3 | | | | 10,629 | | | | 8,743 | | | | 100.0 | | % | | | | | | | | | | | | | | | | | | | |
2005 | | 1 | | | | 1,446 | | | | 1,399 | | | | 100.0 | | % | | | | | | | | | | | | | | | | | | | |
Alt-A single family residential: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
2007 | | 1 | | | | 8,000 | | | | 7,156 | | | | 100.0 | | % | | | | | | | | | | | | | | | | | | | |
| | 6 | | | $ | | 24,085 | | | $ | | 20,303 | | | | 100.0 | | % | | | | | | | | | | | | | | | | | | | |
The amortized cost and estimated fair value of debt securities at September 30, 2013, by contractual maturities, are as follows: |
|
(in thousands) | | Due in one | | | Due after | | | Due after | | | Due after | | | Total | | | | | | | | | | | | | | | | | | | | | | |
year or less | one | five | ten years | | | | | | | | | | | | | | | | | | | | | |
| through | through | | | | | | | | | | | | | | | | | | | | | | |
| five | ten | | | | | | | | | | | | | | | | | | | | | | |
| years | years | | | | | | | | | | | | | | | | | | | | | | |
U.S. Treasury bonds | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Amortized cost | $ | | 5,301 | | | $ | | 61,142 | | | $ | | 18,928 | | | $ | | 7,606 | | | $ | | 92,977 | | | | | | | | | | | | | | | | | | | | | | |
Estimated fair value | $ | | 5,362 | | | $ | | 61,578 | | | $ | | 18,956 | | | $ | | 7,623 | | | $ | | 93,519 | | | | | | | | | | | | | | | | | | | | | | |
Municipal bonds | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Amortized cost | $ | | 9,653 | | | $ | | 154,925 | | | $ | | 176,891 | | | $ | | 129,299 | | | $ | | 470,768 | | | | | | | | | | | | | | | | | | | | | | |
Estimated fair value | $ | | 9,684 | | | $ | | 155,684 | | | $ | | 176,098 | | | $ | | 124,521 | | | $ | | 465,987 | | | | | | | | | | | | | | | | | | | | | | |
Foreign bonds | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Amortized cost | $ | | 33,287 | | | $ | | 168,762 | | | $ | | 16,114 | | | $ | | 1,012 | | | $ | | 219,175 | | | | | | | | | | | | | | | | | | | | | | |
Estimated fair value | $ | | 33,405 | | | $ | | 169,779 | | | $ | | 15,810 | | | $ | | 1,027 | | | $ | | 220,021 | | | | | | | | | | | | | | | | | | | | | | |
Governmental agency bonds | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Amortized cost | $ | | 6,099 | | | $ | | 147,134 | | | $ | | 132,032 | | | $ | | 11,304 | | | $ | | 296,569 | | | | | | | | | | | | | | | | | | | | | | |
Estimated fair value | $ | | 6,108 | | | $ | | 146,756 | | | $ | | 128,320 | | | $ | | 11,197 | | | $ | | 292,381 | | | | | | | | | | | | | | | | | | | | | | |
Corporate debt securities | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Amortized cost | $ | | 14,560 | | | $ | | 230,120 | | | $ | | 111,715 | | | $ | | 10,704 | | | $ | | 367,099 | | | | | | | | | | | | | | | | | | | | | | |
Estimated fair value | $ | | 14,749 | | | $ | | 233,371 | | | $ | | 112,757 | | | $ | | 10,813 | | | $ | | 371,690 | | | | | | | | | | | | | | | | | | | | | | |
Total debt securities excluding mortgage-backed securities | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Amortized cost | $ | | 68,900 | | | $ | | 762,083 | | | $ | | 455,680 | | | $ | | 159,925 | | | $ | | 1,446,588 | | | | | | | | | | | | | | | | | | | | | | |
Estimated fair value | $ | | 69,308 | | | $ | | 767,168 | | | $ | | 451,941 | | | $ | | 155,181 | | | $ | | 1,443,598 | | | | | | | | | | | | | | | | | | | | | | |
Total mortgage-backed securities | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Amortized cost | | | | | | | | | | | | | | | | | $ | | 1,418,944 | | | | | | | | | | | | | | | | | | | | | | |
Estimated fair value | | | | | | | | | | | | | | | | | $ | | 1,400,161 | | | | | | | | | | | | | | | | | | | | | | |
Total debt securities | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Amortized cost | | | | | | | | | | | | | | | | | $ | | 2,865,532 | | | | | | | | | | | | | | | | | | | | | | |
Estimated fair value | | | | | | | | | | | | | | | | | $ | | 2,843,759 | | | | | | | | | | | | | | | | | | | | | | |
Other-than-temporary impairment — debt securities |
If the Company intends to sell a debt security in an unrealized loss position or determines that it is more likely than not that the Company will be required to sell a debt security before it recovers its amortized cost basis, the debt security is other-than-temporarily impaired and it is written down to fair value with all losses recognized in earnings. As of September 30, 2013, the Company did not intend to sell any debt securities in an unrealized loss position and it is not more likely than not that the Company will be required to sell debt securities before recovery of their amortized cost basis. |
If the Company does not expect to recover the amortized cost basis of a debt security with declines in fair value (even if the Company does not intend to sell the debt security and it is not more likely than not that the Company will be required to sell the debt security), the losses the Company considers to be the credit portion of the other-than-temporary impairment loss (“credit loss”) is recognized in earnings and the non-credit portion is recognized in other comprehensive income. The credit loss is the difference between the present value of the cash flows expected to be collected and the amortized cost basis of the debt security. The cash flows expected to be collected are discounted at the rate implicit in the security immediately prior to the recognition of the other-than-temporary impairment. |
Expected future cash flows for debt securities are based on qualitative and quantitative factors specific to each security, including the probability of default and the estimated timing and amount of recovery. The detailed inputs used to project expected future cash flows may be different depending on the nature of the individual debt security. |
The Company determines if a non-agency mortgage-backed security in a loss position is other-than-temporarily impaired by comparing the present value of the cash flows expected to be collected from the security to its amortized cost basis. If the present value of the cash flows expected to be collected exceed the amortized cost of the security, the Company concludes that the security is not other-than-temporarily impaired. The Company performs this analysis on all non-agency mortgage-backed securities in its portfolio that are in an unrealized loss position. For the securities that were determined not to be other-than-temporarily impaired at September 30, 2013, the present value of the cash flows expected to be collected exceeded the amortized cost of each security. |
Cash flows expected to be collected for each non-agency mortgage-backed security are estimated by analyzing loan-level detail to estimate future cash flows from the underlying assets, which are then applied to the security based on the underlying contractual provisions of the securitization trust that issued the security (e.g. subordination levels, remaining payment terms, etc.). The Company uses third-party software to determine how the underlying collateral cash flows will be distributed to each security issued from the securitization trust. The primary assumptions used in estimating future collateral cash flows are prepayment speeds, default rates and loss severity. In developing these assumptions, the Company considers the financial condition of the borrower, loan to value ratio, loan type and geographical location of the underlying property. The Company utilizes publicly available information related to specific assets, generally available market data such as forward interest rate curves and a third party’s securities, loans and property data and market analytics tools. |
The table below summarizes the primary assumptions used at September 30, 2013 in estimating the cash flows expected to be collected for these securities. |
|
| Weighted average | | | Range | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Prepayment speeds | | 9.6 | | % | | 8.6 | | % | – | 10.5 | | % | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Default rates | | 2.8 | | % | | 1.0 | | % | – | 4.5 | | % | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Loss severity | | 15.0 | | % | | 2.5 | | % | – | 29.7 | | % | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
As a result of the Company’s security-level review, it did not recognize any other-than-temporary impairments considered to be credit related for the three and nine months ended September 30, 2013. The Company did not recognize any other-than-temporary impairments considered to be credit related for the three months ended September 30, 2012, and recognized $3.6 million in earnings for the nine months ended September 30, 2012. It is possible that the Company could recognize additional other-than-temporary impairment losses on some securities it owns at September 30, 2013 if future events or information cause it to determine that a decline in value is other-than-temporary. |
The following table presents the change in the credit portion of the other-than-temporary impairments recognized in earnings on debt securities for which a portion of the other-than-temporary impairments related to other factors was recognized in other comprehensive income (loss) for the three and nine months ended September 30, 2013 and 2012. |
|
| For the Three | | | For the Nine | | | | | | | | | | | | | | | | | | | | | | | |
Months Ended September 30, | Months Ended September 30, | | | | | | | | | | | | | | | | | | | | | | |
(in thousands) | | 2013 | | | 2012 | | | 2013 | | | 2012 | | | | | | | | | | | | | | | | | | | | | | | |
Cumulative credit loss on debt securities held at beginning of period | $ | | 16,478 | | | $ | | 25,927 | | | $ | | 16,478 | | | $ | | 33,656 | | | | | | | | | | | | | | | | | | | | | | | |
Addition to credit loss for which an other-than-temporary impairment was previously recognized | | –– | | | | –– | | | | –– | | | | 3,564 | | | | | | | | | | | | | | | | | | | | | | | |
Accumulated losses on securities that matured or were sold during the period | | –– | | | | (1,932 | ) | | | –– | | | | (13,225 | ) | | | | | | | | | | | | | | | | | | | | | | |
Cumulative credit loss on debt securities held as of September 30 | $ | | 16,478 | | | $ | | 23,995 | | | $ | | 16,478 | | | $ | | 23,995 | | | | | | | | | | | | | | | | | | | | | | | |
Other-than-temporary impairment — equity securities |
When a decline in the fair value of an equity security, including common and preferred stock, is considered to be other-than-temporary, such equity security is written down to its fair value. When assessing if a decline in value is other-than-temporary, the factors considered include the length of time and extent to which fair value has been below cost, the probability that the Company will be unable to collect all amounts due under the contractual terms of the security, the seniority of the securities, issuer-specific news and other developments, the financial condition and prospects of the issuer (including credit ratings), macro-economic changes (including the outlook for industry sectors, which includes government policy initiatives) and the Company’s ability and intent to hold the investment for a period of time sufficient to allow for any anticipated recovery. |
When an equity security has been in an unrealized loss position for greater than twelve months, the Company’s review of the security includes the above noted factors as well as the evidence, if any exists, that supports the Company’s view that the security will recover its value in the foreseeable future, typically within the next twelve months. If objective, substantial evidence does not indicate a likely recovery during that timeframe, the Company’s policy is that such losses are considered other-than-temporary and therefore an impairment loss is recorded. The Company did not record any other-than-temporary impairment losses related to its equity securities for the three and nine months ended September 30, 2013 and 2012. |
Fair value measurement |
The Company classifies the fair value of its debt and equity securities using a three-level hierarchy for fair value measurements that distinguishes between market participant assumptions developed based on market data obtained from sources independent of the reporting entity (observable inputs) and the reporting entity’s own assumptions about market participant assumptions developed based on the best information available in the circumstances (unobservable inputs). The hierarchy level assigned to each security in the Company’s available-for-sale portfolio is based on management’s assessment of the transparency and reliability of the inputs used in the valuation of such instrument at the measurement date. The three hierarchy levels are defined as follows: |
Level 1 — Valuations based on unadjusted quoted market prices in active markets for identical securities. |
Level 2 — Valuations based on observable inputs (other than Level 1 prices), such as quoted prices for similar assets at the measurement date; quoted prices in markets that are not active; or other inputs that are observable, either directly or indirectly. |
Level 3 — Valuations based on inputs that are unobservable and significant to the overall fair value measurement, and involve management judgment. |
If the inputs used to measure fair value fall into different levels of the fair value hierarchy, a financial security’s hierarchy level is based upon the lowest level of input that is significant to the fair value measurement. The valuation techniques and inputs used to estimate the fair value of the Company’s debt and equity securities are summarized as follows: |
Debt Securities |
The fair value of debt securities was based on the market values obtained from independent pricing services that were evaluated using pricing models that vary by asset class and incorporate available trade, bid and other market information and price quotes from well-established independent broker-dealers. The independent pricing services monitor market indicators, industry and economic events, and for broker-quoted only securities, obtain quotes from market makers or broker-dealers that they recognize to be market participants. The pricing services utilize the market approach in determining the fair value of the debt securities held by the Company. The Company obtains an understanding of the valuation models and assumptions utilized by the services and has controls in place to determine that the values provided represent fair value. The Company’s validation procedures include comparing prices received from the pricing services to quotes received from other third party sources for certain securities with market prices that are readily verifiable. If the price comparison results in differences over a predefined threshold, the Company will assess the reasonableness of the changes relative to prior periods given the prevailing market conditions and assess changes in the issuers’ credit worthiness, performance of any underlying collateral and prices of the instrument relative to similar issuances. To date, the Company has not made any material adjustments to the fair value measurements provided by the pricing services. |
Typical inputs and assumptions to pricing models used to value the Company’s U.S. Treasury bonds, governmental agency bonds, governmental agency mortgage-backed securities, municipal bonds, foreign bonds and corporate debt securities include, but are not limited to, benchmark yields, reported trades, broker-dealer quotes, credit spreads, credit ratings, bond insurance (if applicable), benchmark securities, bids, offers, reference data and industry and economic events. For mortgage-backed securities, inputs and assumptions may also include the structure of issuance, characteristics of the issuer, collateral attributes and prepayment speeds. The fair value of non-agency mortgage-backed securities was obtained from the independent pricing services referenced above and subject to the Company’s validation procedures discussed above. However, due to the fact that these securities were not actively traded, there were fewer observable inputs available requiring the pricing services to use more judgment in determining the fair value of the securities, therefore the Company classified non-agency mortgage-backed securities as Level 3. |
The significant unobservable inputs used in the fair value measurement of the Company’s non-agency mortgage-backed securities are prepayment rates, default rates, and loss severity in the event of default. Significant increases (decreases) in any of those inputs in isolation would result in a significantly lower (higher) fair value measurement. Generally, a change in the assumption used for default rates is accompanied by a directionally similar change in the assumption used for the loss severity and a directionally opposite change in the assumption used for prepayment rates. |
Equity Securities |
The fair value of equity securities, including preferred and common stocks, were based on quoted market prices for identical assets that are readily and regularly available in an active market. |
The following table presents the Company’s available-for-sale investments measured at fair value on a recurring basis as of September 30, 2013 and December 31, 2012, classified using the three-level hierarchy for fair value measurements: |
|
(in thousands) | | Estimated fair value as | | | Level 1 | | | Level 2 | | | Level 3 | | | | | | | | | | | | |
of September 30, 2013 | | | | | | | | | | | |
Debt securities: | | | | | | | | | | | | | | | | | | | | | | | | | | |
U.S. Treasury bonds | $ | | | 93,519 | | | $ | | | –– | | | $ | | | 93,519 | | | $ | | | –– | | | | | | | | | | | | |
Municipal bonds | | 465,987 | | | | –– | | | | 465,987 | | | | –– | | | | | | | | | | | | |
Foreign bonds | | 220,021 | | | | –– | | | | 220,021 | | | | –– | | | | | | | | | | | | |
Governmental agency bonds | | 292,381 | | | | –– | | | | 292,381 | | | | –– | | | | | | | | | | | | |
Governmental agency mortgage-backed securities | | 1,379,858 | | | | –– | | | | 1,379,858 | | | | –– | | | | | | | | | | | | |
Non-agency mortgage-backed securities | | 20,303 | | | | –– | | | | –– | | | | 20,303 | | | | | | | | | | | | |
Corporate debt securities | | 371,690 | | | | –– | | | | 371,690 | | | | –– | | | | | | | | | | | | |
| | 2,843,759 | | | | –– | | | | 2,823,456 | | | | 20,303 | | | | | | | | | | | | |
Equity securities: | | | | | | | | | | | | | | | | | | | | | | | | | | |
Preferred stocks | | 15,795 | | | | 15,795 | | | | –– | | | | –– | | | | | | | | | | | | |
Common stocks | | 234,730 | | | | 234,730 | | | | –– | | | | –– | | | | | | | | | | | | |
| | 250,525 | | | | 250,525 | | | | –– | | | | –– | | | | | | | | | | | | |
| $ | | | 3,094,284 | | | $ | | | 250,525 | | | $ | | | 2,823,456 | | | $ | | | 20,303 | | | | | | | | | | | | |
|
(in thousands) | | Estimated fair value as | | | Level 1 | | | Level 2 | | | Level 3 | | | | | | | | | | | | |
of December 31, 2012 | | | | | | | | | | | |
Debt securities: | | | | | | | | | | | | | | | | | | | | | | | | | | |
U.S. Treasury bonds | $ | | | 82,175 | | | $ | | | — | | | $ | | | 82,175 | | | $ | | | — | | | | | | | | | | | | |
Municipal bonds | | 375,822 | | | | — | | | | 375,822 | | | | — | | | | | | | | | | | | |
Foreign bonds | | 238,745 | | | | — | | | | 238,745 | | | | — | | | | | | | | | | | | |
Governmental agency bonds | | 325,450 | | | | — | | | | 325,450 | | | | — | | | | | | | | | | | | |
Governmental agency mortgage-backed securities | | 1,281,532 | | | | — | | | | 1,281,532 | | | | — | | | | | | | | | | | | |
Non-agency mortgage-backed securities | | 21,846 | | | | — | | | | — | | | | 21,846 | | | | | | | | | | | | |
Corporate debt securities | | 326,311 | | | | — | | | | 326,311 | | | | — | | | | | | | | | | | | |
| | 2,651,881 | | | | — | | | | 2,630,035 | | | | 21,846 | | | | | | | | | | | | |
Equity securities: | | | | | | | | | | | | | | | | | | | | | | | | | | |
Preferred stocks | | 14,037 | | | | 14,037 | | | | — | | | | — | | | | | | | | | | | | |
Common stocks | | 183,883 | | | | 183,883 | | | | — | | | | — | | | | | | | | | | | | |
| | 197,920 | | | | 197,920 | | | | — | | | | — | | | | | | | | | | | | |
| $ | | | 2,849,801 | | | $ | | | 197,920 | | | $ | | | 2,630,035 | | | $ | | | 21,846 | | | | | | | | | | | | |
The Company did not have any transfers in and out of Level 1 and Level 2 measurements during the three and nine months ended September 30, 2013 and 2012. The Company’s policy is to recognize transfers between levels in the fair value hierarchy at the end of the reporting period. |
The following table presents a summary of the changes in fair value of Level 3 available-for-sale investments for the three and nine months ended September 30, 2013 and 2012: |
|
| For the Three | | | For the Nine | | | | | | | | | | | | | | | | |
Months Ended September 30, | Months Ended September 30, | | | | | | | | | | | | | | | |
(in thousands) | | 2013 | | | 2012 | | | 2013 | | | 2012 | | | | | | | | | | | | | | | | |
Fair value at beginning of period | $ | | 20,611 | | | $ | | 28,324 | | | $ | | 21,846 | | | $ | | 30,634 | | | | | | | | | | | | | | | | |
Total gains/(losses) (realized and unrealized): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Included in earnings: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Realized gains | | — | | | | 110 | | | | — | | | | 110 | | | | | | | | | | | | | | | | |
Net other-than-temporary impairment losses recognized in earnings | | — | | | | — | | | | — | | | | (3,564 | ) | | | | | | | | | | | | | | | |
Included in other comprehensive income | | 907 | | | | 3,190 | | | | 1,028 | | | | 9,157 | | | | | | | | | | | | | | | | |
Settlements | | (1,215 | ) | | | (1,707 | ) | | | (2,571 | ) | | | (6,420 | ) | | | | | | | | | | | | | | | |
Sales | | — | | | | (1,135 | ) | | | — | | | | (1,135 | ) | | | | | | | | | | | | | | | |
Transfers into Level 3 | | — | | | | — | | | | — | | | | — | | | | | | | | | | | | | | | | |
Transfers out of Level 3 | | — | | | | — | | | | — | | | | — | | | | | | | | | | | | | | | | |
Fair value as of September 30 | $ | | 20,303 | | | $ | | 28,782 | | | $ | | 20,303 | | | $ | | 28,782 | | | | | | | | | | | | | | | | |
Unrealized gains (losses) included in earnings for the period relating to Level 3 available-for-sale investments that were still held at the end of the period: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Net other-than-temporary impairment losses recognized in earnings | $ | | — | | | $ | | — | | | $ | | — | | | $ | | (3,564 | ) | | | | | | | | | | | | | | | |
The Company did not purchase any non-agency mortgage-backed securities during the three and nine months ended September 30, 2013 and 2012. |