W. R. BERKLEY CORPORATION AND SUBSIDIARIES
See accompanying notes to interim consolidated financial statements.
See accompanying notes to interim consolidated financial statements.
W. R. BERKLEY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME (UNAUDITED)
(In thousands)
|
| | | | | | | | | | | | | | | |
| For the Three Months | | For the Nine Months |
| Ended September 30, | | Ended September 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
Net income before noncontrolling interests | $ | 162,818 |
| | $ | 220,663 |
| | $ | 397,065 |
| | $ | 449,816 |
|
Other comprehensive income (loss): | | | | | | | |
Change in unrealized currency translation adjustments | 28,592 |
| | (19,470 | ) | | 71,574 |
| | (77,389 | ) |
Change in unrealized investment gains (losses), net of taxes | (8,168 | ) | | (47,676 | ) | | 26,598 |
| | 134,213 |
|
Other comprehensive income (loss): | 20,424 |
| | (67,146 | ) | | 98,172 |
| | 56,824 |
|
Comprehensive income | 183,242 |
| | 153,517 |
| | 495,237 |
| | 506,640 |
|
Noncontrolling interests | (731 | ) | | 44 |
| | (2,541 | ) | | (623 | ) |
Comprehensive income to common stockholders | $ | 182,511 |
| | $ | 153,561 |
| | $ | 492,696 |
| | $ | 506,017 |
|
|
| | | | | | | |
| For the Three Months Ended March 31, |
|
| 2020 | | 2019 |
Net (loss) income before noncontrolling interests | $ | (3,526 | ) | | $ | 181,614 |
|
Other comprehensive (loss) income: | | | |
Change in unrealized currency translation adjustments | (98,194 | ) | | 19,760 |
|
Change in unrealized investment (losses) gains, net of taxes | (258,981 | ) | | 125,774 |
|
Other comprehensive (loss) income | (357,175 | ) | | 145,534 |
|
Comprehensive (loss) income | (360,701 | ) | | 327,148 |
|
Noncontrolling interests | (893 | ) | | (845 | ) |
Comprehensive (loss) income to common stockholders | $ | (361,594 | ) | | $ | 326,303 |
|
See accompanying notes to interim consolidated financial statements.
W. R. BERKLEY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (UNAUDITED)
(In thousands)
| | | For the Nine Months | For the Three Months Ended March 31, |
| Ended September 30, |
| 2017 |
| 2016 | 2020 | | 2019 |
COMMON STOCK: | | | | | | |
Beginning and end of period | $ | 47,024 |
| | $ | 47,024 |
| $ | 70,535 |
| | $ | 70,535 |
|
ADDITIONAL PAID-IN CAPITAL: | | | | | | |
Beginning of period | $ | 1,037,446 |
| | $ | 1,005,455 |
| $ | 1,056,042 |
| | $ | 1,039,633 |
|
Restricted stock units issued | (27,047 | ) | | (3,421 | ) | (4,590 | ) | | (455 | ) |
Restricted stock units expensed | 30,176 |
| | 25,431 |
| 11,632 |
| | 14,194 |
|
End of period | $ | 1,040,575 |
| | $ | 1,027,465 |
| $ | 1,063,084 |
| | $ | 1,053,372 |
|
RETAINED EARNINGS: | | | | | | |
Beginning of period | $ | 6,595,987 |
| | $ | 6,178,070 |
| $ | 7,932,372 |
| | $ | 7,558,619 |
|
Net income to common stockholders | 394,505 |
| | 449,127 |
| |
Dividends | (110,430 | ) | | (107,661 | ) | |
Cumulative effect adjustment resulting from changes in accounting principles | | (30,514 | ) | | — |
|
Net (loss) income to common stockholders | | (4,418 | ) | | 180,722 |
|
Dividends ($0.11 and $0.10 per share, respectively) | | (20,069 | ) | | (18,302 | ) |
End of period | $ | 6,880,062 |
| | $ | 6,519,536 |
| $ | 7,877,371 |
| | $ | 7,721,039 |
|
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) | | | | |
Unrealized investment gains: | | | | |
ACCUMULATED OTHER COMPREHENSIVE LOSS: | | | | |
Unrealized investment (losses) gains: | | | | |
Beginning of period | $ | 427,154 |
| | $ | 180,695 |
| $ | 124,514 |
| | $ | (91,491 | ) |
Unrealized gains on securities not other-than-temporarily impaired | 25,712 |
| | 133,866 |
| |
Unrealized gains on other-than-temporarily impaired securities | 905 |
| | 413 |
| |
Cumulative effect adjustment resulting from changes in accounting principles | | 24,952 |
| | — |
|
Change in unrealized (losses) gains on securities without an allowance for expected credit losses | | (260,521 | ) | | 125,796 |
|
Change in unrealized gains (losses) on securities with an allowance for expected credit losses | | 1,541 |
| | (69 | ) |
End of period | 453,771 |
| | 314,974 |
| (109,514 | ) | | 34,236 |
|
Currency translation adjustments: | | | | | | |
Beginning of period | (371,586 | ) | | (247,393 | ) | (381,813 | ) | | (418,979 | ) |
Net change in period | 71,574 |
| | (77,389 | ) | (98,194 | ) | | 19,760 |
|
End of period | (300,012 | ) | | (324,782 | ) | (480,007 | ) | | (399,219 | ) |
Total accumulated other comprehensive income (loss) | $ | 153,759 |
| | $ | (9,808 | ) | |
Total accumulated other comprehensive loss | | $ | (589,521 | ) | | $ | (364,983 | ) |
TREASURY STOCK: | | | | | | |
Beginning of period | $ | (2,688,817 | ) | | $ | (2,563,605 | ) | $ | (2,726,711 | ) | | $ | (2,720,466 | ) |
Stock exercised/vested | 25,584 |
| | 5,023 |
| 1,338 |
| | 455 |
|
Stock repurchased | (28,378 | ) | | (99,870 | ) | (202,621 | ) | | — |
|
Stock incentive plans expensed | 727 |
| | — |
| |
End of period | $ | (2,690,884 | ) | | $ | (2,658,452 | ) | $ | (2,927,994 | ) | | $ | (2,720,011 | ) |
NONCONTROLLING INTERESTS: | | | | | | |
Beginning of period | $ | 33,926 |
| | $ | 32,962 |
| $ | 43,403 |
| | $ | 41,947 |
|
Contributions | 3,646 |
| | 2,474 |
| |
(Distributions) contributions | | (227 | ) | | 52 |
|
Net income | 2,560 |
| | 689 |
| 892 |
| | 892 |
|
Other comprehensive loss, net of tax | (19 | ) | | (66 | ) | |
Other comprehensive income (loss), net of tax | | 1 |
| | (47 | ) |
End of period | $ | 40,113 |
| | $ | 36,059 |
| $ | 44,069 |
| | $ | 42,844 |
|
See accompanying notes to interim consolidated financial statements.
W. R. BERKLEY CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(In thousands)
| | | For the Nine Months | For the Three Months Ended March 31, |
| Ended September 30, |
| 2017 | | 2016 | 2020 | | 2019 |
CASH FROM OPERATING ACTIVITIES: | | | | | | |
Net income to common stockholders | $ | 394,505 |
| | $ | 449,127 |
| |
Adjustments to reconcile net income to net cash from operating activities: | | | | |
Net investment gains | (276,760 | ) | | (189,394 | ) | |
Net (loss) income to common stockholders | | $ | (4,418 | ) | | $ | 180,722 |
|
Adjustments to reconcile net (loss) income to net cash from (used in) operating activities: | | | | |
Net investment losses (gains) | | 177,174 |
| | (68,653 | ) |
Depreciation and amortization | 78,137 |
| | 69,153 |
| 25,063 |
| | 27,424 |
|
Noncontrolling interests | 2,560 |
| | 689 |
| 892 |
| | 892 |
|
Investment funds | (51,907 | ) | | (60,387 | ) | (40,576 | ) | | (11,411 | ) |
Stock incentive plans | 31,883 |
| | 27,033 |
| 11,683 |
| | 14,828 |
|
Change in: | | | | | | |
Arbitrage trading account | (2,835 | ) | | (4,777 | ) | 2,455 |
| | (7,753 | ) |
Premiums and fees receivable | (112,420 | ) | | (92,372 | ) | (97,169 | ) | | (156,450 | ) |
Reinsurance accounts | (42,319 | ) | | (154,939 | ) | (43,104 | ) | | (20,272 | ) |
Deferred policy acquisition costs | 4,483 |
| | (51,795 | ) | (26,139 | ) | | (17,732 | ) |
Income taxes | (15,451 | ) | | 89,007 |
| (12,500 | ) | | 36,180 |
|
Reserves for losses and loss expenses | 422,657 |
| | 440,486 |
| 200,294 |
| | 119,780 |
|
Unearned premiums | 121,583 |
| | 269,287 |
| 163,793 |
| | 135,184 |
|
Other | (32,258 | ) | | (64,608 | ) | (204,878 | ) | | (154,409 | ) |
Net cash from operating activities | 521,858 |
| | 726,510 |
| 152,570 |
| | 78,330 |
|
CASH USED IN INVESTING ACTIVITIES: | | | | |
CASH FROM INVESTING ACTIVITIES: | | | | |
Proceeds from sale of fixed maturity securities | 3,081,619 |
| | 1,074,630 |
| 1,574,232 |
| | 973,626 |
|
Proceeds from sale of equity securities | 137,062 |
| | 123,187 |
| 5,311 |
| | 37,762 |
|
Distributions from investment funds | 265,371 |
| | 5,630 |
| |
Distributions from (contributions to) investment funds | | 99,194 |
| | (13,874 | ) |
Proceeds from maturities and prepayments of fixed maturity securities | 2,860,678 |
| | 2,189,365 |
| 1,055,722 |
| | 686,795 |
|
Purchase of fixed maturity securities | (6,530,466 | ) | | (4,280,457 | ) | (2,598,076 | ) | | (1,528,267 | ) |
Purchase of equity securities | (17,049 | ) | | (127,303 | ) | (35,260 | ) | | (35,314 | ) |
Real estate purchased | (159,006 | ) | | (207,829 | ) | (24,249 | ) | | (52,901 | ) |
Change in loans receivable | 32,574 |
| | 159,128 |
| 2,877 |
| | (726 | ) |
Net additions to property, furniture and equipment | (74,268 | ) | | (37,895 | ) | |
Net purchases of property, furniture and equipment | | (14,637 | ) | | (3,299 | ) |
Change in balances due to security brokers | 39,978 |
| | 102,981 |
| (34,378 | ) | | (22,011 | ) |
Cash received in connection with business disposition | — |
| | 250,216 |
| |
Payment for business purchased net of cash aquired | (70,570 | ) | | (53,524 | ) | |
Net cash used in investing activities | (434,077 | ) | | (801,871 | ) | |
CASH (USED IN) FROM FINANCING ACTIVITIES: | | | | |
Repayment of senior notes and other debt | (1,788 | ) | | (70,567 | ) | |
Other | | 86 |
| | — |
|
Net cash from investing activities | | 30,822 |
| | 41,791 |
|
CASH USED IN FINANCING ACTIVITIES: | | | | |
Net payments for stock options exercised | | (3,321 | ) | | — |
|
Net proceeds from issuance of debt | — |
| | 386,848 |
| 4,259 |
| | — |
|
Cash dividends to common stockholders | (93,371 | ) | | (30,654 | ) | (20,069 | ) | | — |
|
Purchase of common treasury shares | (28,378 | ) | | (99,870 | ) | (202,621 | ) | | — |
|
Other, net | (3,835 | ) | | (1,376 | ) | (204 | ) | | (976 | ) |
Net cash (used in) from financing activities | (127,372 | ) | | 184,381 |
| |
Net cash used in financing activities | | (221,956 | ) | | (976 | ) |
Net impact on cash due to change in foreign exchange rates | 18,303 |
| | 413 |
| (20,134 | ) | | 681 |
|
Net change in cash and cash equivalents | (21,288 | ) | | 109,433 |
| (58,698 | ) | | 119,826 |
|
Cash and cash equivalents at beginning of year | 795,285 |
| | 763,631 |
| 1,023,710 |
| | 817,602 |
|
Cash and cash equivalents at end of period | $ | 773,997 |
| | $ | 873,064 |
| $ | 965,012 |
| | $ | 937,428 |
|
See accompanying notes to interim consolidated financial statements.
W. R. Berkley Corporation and Subsidiaries
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(1) General
The unaudited consolidated financial statements, which include the accounts of W. R. Berkley Corporation and its subsidiaries (the “Company”) have been prepared on the basis of U.S. generally accepted accounting principles (“GAAP”) for interim financial information. Accordingly, they do not include all the information and notes required by GAAP for annual financial statements. The unaudited consolidated financial statements reflect all adjustments, consisting only of normal recurring items, which are necessary to present fairly the Company’s financial position and results of operations on a basis consistent with the prior audited consolidated financial statements. Operating results for interim periods are not necessarily indicative of the results that may be expected for the year. All significant intercompany accounts and transactions have been eliminated. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the financial statements and the revenues and expenses reflected during the reporting period. For further information related to a description of areas of judgment and estimates and other information necessary to understand the Company’s financial position and results of operations, refer to the audited consolidated financial statements and notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016. Reclassifications have been made in the 2016 financial statements as originally reported to conform to the presentation of the 2017 financial statements.2019.
The income tax provision has been computed based on the Company’s estimated annual effective tax rate. The effective tax rate for the quarter differs from the U.S. federal income tax rate of 35%21% principally because of tax-exempt investment income, as well as the new requirement in 2017 to recognize tax benefits for stockrelated to equity-based compensation, inand tax on income from foreign jurisdictions with different tax expense.rates.
(2) Per Share Data
The Company presents both basic and diluted net (loss) income per share (“EPS”) amounts. Basic EPS is calculated by dividing net (loss) income by the weighted average number of common shares outstanding during the period (including 4,087,7317,575,168 and 7,389,781 common shares held in a grantor trust established inas of March 2017)31, 2020 and 2019, respectively). The common shares held in the grantor trust are for delivery upon settlement of vested but mandatorily deferred restricted stock units ("RSUs"). Shares held by the grantor trust do not affect diluted shares outstanding since the shares deliverable under vested RSUs were already included in diluted shares outstanding. Diluted EPS is based upon the weighted average number of basic and common equivalent shares outstanding during the period and is calculated using the treasury stock method for stock incentive plans. Common equivalent shares are excluded from the computation in periods in which they have an anti-dilutive effect. For the period ended March 31, 2020, diluted shares have been reduced by 2.0 million to reflect the anti-dilutive effect of common equivalent shares.
The weighted average number of common shares used in the computation of basic and diluted (losses) earnings per share was as follows:
|
| | | | | |
| For the Three Months Ended March 31, |
|
(In thousands) | 2020 | | 2019 |
Basic | 190,287 |
| | 190,400 |
|
Diluted | 190,287 |
| | 192,669 |
|
|
| | | | | | | | | | | |
| For the Three Months | | For the Nine Months |
| Ended September 30, | | Ended September 30, |
(In thousands) | 2017 | | 2016 | | 2017 | | 2016 |
Basic | 125,818 |
| | 122,562 |
| | 124,363 |
| | 122,652 |
|
Diluted | 128,944 |
| | 128,556 |
| | 129,289 |
| | 128,501 |
|
(3) Recent Accounting Pronouncements
and Accounting Policies
Recently adopted accounting pronouncements:
In May 2015,June 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2015-09, Disclosures about Short-Duration Contracts. ASU 2015-09 requires companies that issue short duration insurance contracts to disclose additional information, including: (i) incurred and paid claims development tables; (ii) frequency and severity of claims; and (iii) information about material changes in judgments made in calculating the liability for unpaid claim adjustment expenses, including reasons for the change and the effects on the financial statements. The Company adopted this updated guidance on January 1, 2016 with regard to the annual requirements and on January 1, 2017 with regard to the interim requirements. The amendments in ASU 2015-09 are applied retrospectively by providing comparative disclosures for each period presented, except for those requirements that apply only to the current period. As the requirements are disclosure only, the adoption of this guidance did not impact our financial condition or results of operations, but did result in additional disclosures.
In March 2016, the FASB issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting. ASU 2016-09 includes provisions intended to simplify various previous provisions related to how share-based payments are accounted for and presented in the financial statements. Under the new guidance, excess tax benefits (deductions for share based payment awards for tax purposes that exceed the compensation cost recognized for financial reporting purposes) are reported within the income tax expense financial statement line item. Previously, excess tax benefits were reported within additional paid in capital. The Company adopted this updated guidance on January 1, 2017 prospectively. The adoption of this guidance did not have a material impact on the Company's financial condition or results of operations.
All other accounting and reporting standards that became effective in 2017 were either not applicable to the Company or their adoption did not have a material impact on the Company.
Accounting and reporting standards that are not yet effective:
In May 2014, the FASB issued ASU 2014-09, Revenue from Customers. ASU 2014-09 clarifies the principles for recognizing revenue. While insurance contracts are not within the scope of this updated guidance, the Company’s insurance service fee revenue and non-insurance business revenue will be subject to this updated guidance. The updated guidance requires an entity to recognize revenue as performance obligations are met, in order to reflect the transfer of promised goods or services to customers in an amount that reflects the consideration the entity is entitled to receive for those goods or services. The updated guidance, as amended by ASU 2015-14, is effective for public business entities for annual and interim reporting periods beginning after December 15, 2017. The adoption of this guidance is not expected to have a material effect on the Company’s financial condition or results of operations.
In January 2016, the FASB issued ASU 2016-01, Financial Instruments. ASU 2016-01 amends the accounting guidance for financial instruments to require all equity investments to be measured at fair value with changes in the fair value recognized through net income (other than those accounted for under equity method of accounting or those that result in consolidation of the investee). The updated guidance is effective for public business entities for annual reporting periods beginning after December 15, 2017 and interim periods within those years. The adoption of this guidance is not expected to have a material effect on the Company’s financial condition upon adoption, but will impact results of operations after adoption of this guidance as unrealized gains and losses on equity securities will no longer be reported directly in accumulated other comprehensive income (AOCI), but will instead be reported in net income.
In February 2016, the FASB issued ASU 2016-02, Leases, which amends the accounting and disclosure guidance for leases. This guidance retains the two classifications of a lease, as either an operating or finance lease, both of which will require lessees to recognize a right-of-use asset and a lease liability for leases with terms of more than 12 months. The right-of-use asset and the lease liability will be determined based upon the present value of cash flows. Finance leases will reflect the financial arrangement by recognizing interest expense on the lease liability separately from the amortization expense of the right-of-use asset. Operating leases will recognize lease expense (with no separate recognition of interest expense) on a straight-line basis over the term of the lease. The accounting by lessors is not significantly changed by the updated guidance. The updated guidance is effective for reporting periods beginning after December 15, 2018, and will require that the earliest comparative period presented include the measurement and recognition of existing leases with an adjustment to equity as if the updated guidance had always been applied. The Company is currently evaluating the impact that the adoption of this guidance will have on its results of operations, financial position and liquidity.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses, which amendsamended the accounting guidance for credit losses on financial instruments. The updated guidance amendsamended the current other-than-temporary impairment model for available-for-saleavailable for sale debt securities by requiring the recognition of impairments relating to credit losses through an allowance account and limits the amount of credit loss to the difference between a security’s amortized cost basis and its fair value. This guidance also applies a new current expected credit loss model for determining credit-related impairments for financial instruments measured at amortized cost.cost, such as reinsurance recoverables. The updated guidance iswas effective for reporting periods beginning after December 15, 2019.
The Company will not be able to determine the impact the adoption of this guidance will have on its resultsJanuary 1, 2020 resulted in the recognition of operations, financial position or liquidity until the year the guidance becomes effective.an allowance for expected credit loss in connection with operating assets (premiums and fees receivable and due from reinsurers) of $5.7 million (net of tax) and a
corresponding cumulative effect adjustment that decreased common stockholders' equity. Certain investments (primarily fixed maturity securities available for sale) established an allowance for expected credit loss of $24.8 million (net of tax), with a cumulative effect adjustment decreasing retained earnings by $24.8 million (net of tax) and increasing accumulated other comprehensive (loss) income ("AOCI") by $25.0 million (net of tax), resulting in $0.2 million net impact to total common stockholders' equity.
All other accounting and reporting standards that have become effective in 2020 were either not applicable to the Company or their adoption did not have a material impact on the Company.
Accounting and reporting standards that are not yet effective:
All recently issued but not yet effective accounting and reporting standards are either not applicable to the Company or are not expected to have a material impact on the Company.
Accounting policies:
The following accounting policies have been updated to reflect the Company's adoption of Financial Instruments - Credit Losses as described above.
Revenue recognition (related to premiums and fees receivable)
Insurance premiums are recognized as written at the inception of the policy. Reinsurance premiums are estimated based upon information received from ceding companies, and subsequent differences from such estimates are recorded in the period they are determined. Insurance and reinsurance premiums are primarily earned on a pro rata basis over the policy term. Fees for services are earned over the period that the services are provided. Premiums and fees receivable are reported net of an allowance for expected credit losses with the allowance being estimated based on current and future expected conditions, historical loss data and specific identification of collectability concerns where applicable. Changes in the allowance are reported within other operating costs and expenses.
Reinsurance ceded (related to due from reinsurers)
The unearned portion of premiums ceded to reinsurers is reported as prepaid reinsurance premiums and earned ratably over the policy term. The estimated amounts of reinsurance recoverable on unpaid losses are reported as due from reinsurers. To the extent any reinsurer does not meet its obligations under reinsurance agreements, the Company must discharge its liability. Amounts due from reinsurers are reflected net of funds held where the right of offset is present. The Company has provided an allowance for expected credit losses for estimated uncollectible reinsurance. The allowance is estimated based on the composition of the recoverable balance, considering reinsurer credit ratings, collateral received from financial institutions and funds withheld arrangements, length of collection periods, probability of default methodology, and specific identification of collectability concerns. Changes in the allowance are reported within losses and loss expenses.
Investments
For available for sale securities in an unrealized loss position where the Company intends to sell, or it is more likely than not that it will be required to sell the security before recovery in value, the amortized cost basis is written down to fair value through net investment (losses) gains. For available for sale securities in an unrealized loss position where the Company does not intend to sell, or it is more likely than not that it will not be required to sell the security before recovery in value, the Company evaluates whether the decline in fair value has resulted from credit losses or all other factors (non-credit factors). In making this assessment, the Company considers the extent to which fair value is less than amortized cost, changes to the rating of the security by a rating agency, and adverse conditions specifically related to the security, among other factors. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis, an allowance for expected credit losses is recorded for the credit loss through net investment (losses) gains, limited by the amount that the fair value is less than the amortized cost basis. The allowance is adjusted for any change in expected credit losses and subsequent recoveries through net investment (losses) gains. The impairment related to non-credit factors is recognized in other comprehensive income.
For financial assets carried at amortized cost, which includes held to maturity securities and loans receivable, the Company estimates an allowance for expected credit losses based on relevant information about past events, including historical loss experience, current conditions and forecasts that affect the expected collectability of the amortized cost of the financial asset. The allowance for expected credit losses is presented as a reduction to amortized cost of the financial asset in the consolidated balance sheet and changes to the estimate for expected credit losses are recognized through net investment (losses) gains.
(4) Acquisitions/Disposition
In March 2017,The Company’s credit assessment of allowance for expected credit losses uses a third party model for available for sale and held to maturity securities, as well as loans receivable. The allowance for expected credit losses is generally based on the Company acquired an 89.5% ownership interest for $73.3 million in a company engaged in providing textile solutions world-wide. The fairperformance of the underlying collateral under various economic and default scenarios that involve subjective judgments and estimates by management. Modeling these securities involves various factors, such as projected default rates, the nature and realizable value of the assets acquiredcollateral, if any, the ability of the issuer to make scheduled payments, historical performance and liabilities assumed have been estimatedother relevant economic and performance factors. A discounted cash flow analysis is used to ascertain the amount of the allowance for expected credit losses, if any. In general, the model reverts to the rating-level long-term average marginal default rates based on a third party valuation.10 years of historical data, beyond the forecast period. For other inputs, the model in most cases reverts to the baseline long-term assumptions linearly over 5 years beyond the forecast period. The long-term assumptions are based on the historical averages.
The Company reports accrued investment income separately from fixed maturity securities, and has elected not to measure an allowance for expected credit losses for accrued investment income. Accrued investment income is written off through net investment income at the time the issuer of the bond defaults or is expected to default on payments.
The following table summarizes the estimated fair value of net assets acquired and liabilities assumed for the business combination completed in 2017:
|
| | | |
(In thousands) | 2017 |
| |
Cash and cash equivalents | $ | 2,721 |
|
Real estate, furniture and equipment | 7,042 |
|
Goodwill | 28,522 |
|
Intangible assets | 32,395 |
|
Other assets | 9,862 |
|
Total assets acquired | 80,542 |
|
| |
Other liabilities assumed | (2,251 | ) |
Noncontrolling interest | (5,000 | ) |
Net assets acquired | $ | 73,291 |
|
In February 2016, the Company acquired an 85% ownership interest for $42.3 million in a company engaged in the distribution of promotional merchandise.
(5)(4) Consolidated StatementStatements of Comprehensive (Loss) Income
The following table presents the components of the changes in accumulated other comprehensive (loss) income ("AOCI"): |
| | | | | | | | | | | |
(In thousands) | Unrealized Investment (Losses) Gains | | Currency Translation Adjustments | | Accumulated Other Comprehensive (Loss) Income |
As of and for the three months ended March 31, 2020 | | | | |
Changes in AOCI | | | | |
Beginning of period | $ | 124,514 |
| | $ | (381,813 | ) | | $ | (257,299 | ) |
Cumulative effect adjustment resulting from changes in accounting principles | 24,952 |
| | — |
| | 24,952 |
|
Restated beginning of period | 149,466 |
| | (381,813 | ) | | (232,347 | ) |
Other comprehensive loss before reclassifications | (298,531 | ) | | (98,194 | ) | | (396,725 | ) |
Amounts reclassified from AOCI | 39,550 |
| | — |
| | 39,550 |
|
Other comprehensive loss | (258,981 | ) | | (98,194 | ) | | (357,175 | ) |
Unrealized investment losses related to noncontrolling interest | 1 |
| | — |
| | 1 |
|
Ending balance | $ | (109,514 | ) | | $ | (480,007 | ) | | $ | (589,521 | ) |
Amounts reclassified from AOCI | | | | | |
Pre-tax | $ | 50,063 |
| (1) | $ | — |
| | $ | 50,063 |
|
Tax effect | (10,513 | ) | (2) | — |
| | (10,513 | ) |
After-tax amounts reclassified | $ | 39,550 |
| | $ | — |
| | $ | 39,550 |
|
Other comprehensive loss | | | | | |
Pre-tax | $ | (332,850 | ) | | $ | (98,194 | ) | | $ | (431,044 | ) |
Tax effect | 73,869 |
| | — |
| | 73,869 |
|
Other comprehensive loss | $ | (258,981 | ) | | $ | (98,194 | ) | | $ | (357,175 | ) |
| | (In thousands) | Unrealized Investment Gains (Losses) | | Currency Translation Adjustments | | Accumulated Other Comprehensive Income | |
As of and for the nine months ended September 30, 2017: | | | | | |
As of and for the three months ended March 31, 2019 | | As of and for the three months ended March 31, 2019 | | | | |
Changes in AOCI | Changes in AOCI | | | | | Changes in AOCI | | | |
|
|
Beginning of period | $ | 427,154 |
| | $ | (371,586 | ) | | $ | 55,568 |
| $ | (91,491 | ) | | $ | (418,979 | ) | | $ | (510,470 | ) |
Other comprehensive income before reclassifications | 109,277 |
| | 71,574 |
| | 180,851 |
| 127,139 |
| | 19,760 |
| | 146,899 |
|
Amounts reclassified from AOCI | (82,679 | ) | | — |
| | (82,679 | ) | (1,365 | ) | | — |
| | (1,365 | ) |
Other comprehensive income | 26,598 |
| | 71,574 |
| | 98,172 |
| 125,774 |
| | 19,760 |
| | 145,534 |
|
Unrealized investment loss related to non-controlling interest | 19 |
| | — |
| | 19 |
| |
End of period | $ | 453,771 |
| | $ | (300,012 | ) | | $ | 153,759 |
| |
Unrealized investment gain related to noncontrolling interest | | (47 | ) | | — |
| | (47 | ) |
Ending balance | | $ | 34,236 |
| | $ | (399,219 | ) | | $ | (364,983 | ) |
Amounts reclassified from AOCI | | | | | | | | | |
|
Pre-tax | $ | (127,198 | ) | (1) | $ | — |
| | $ | (127,198 | ) | $ | (1,728 | ) | (1) | $ | — |
| | $ | (1,728 | ) |
Tax effect | 44,519 |
| (2) | — |
| | 44,519 |
| 363 |
| (2) | — |
| | 363 |
|
After-tax amounts reclassified | $ | (82,679 | ) | | $ | — |
| | $ | (82,679 | ) | $ | (1,365 | ) | | $ | — |
| | $ | (1,365 | ) |
Other comprehensive income | | | | | | | | | |
|
Pre-tax | $ | 50,148 |
| | $ | 71,574 |
| | $ | 121,722 |
| $ | 169,260 |
| | $ | 19,760 |
| | $ | 189,020 |
|
Tax effect | (23,550 | ) | | — |
| | (23,550 | ) | (43,486 | ) | | — |
| | (43,486 | ) |
Other comprehensive income | $ | 26,598 |
| | $ | 71,574 |
| | $ | 98,172 |
| $ | 125,774 |
| | $ | 19,760 |
| | $ | 145,534 |
|
| | | | | | |
As of and for the three months ended September 30, 2017: | | | | | |
Changes in AOCI | | | | | |
Beginning of period | $ | 461,906 |
| | $ | (328,604 | ) | | $ | 133,302 |
| |
Other comprehensive income before reclassifications | 19,968 |
| | 28,592 |
| | 48,560 |
| |
Amounts reclassified from AOCI | (28,136 | ) | | — |
| | (28,136 | ) | |
Other comprehensive (loss) income | (8,168 | ) | | 28,592 |
| | 20,424 |
| |
Unrealized investment loss related to non-controlling interest | 33 |
| | — |
| | 33 |
| |
End of period | $ | 453,771 |
| | $ | (300,012 | ) | | $ | 153,759 |
| |
Amounts reclassified from AOCI | | | | | | |
Pre-tax | $ | (43,286 | ) | (1) | $ | — |
| | $ | (43,286 | ) | |
Tax effect | 15,150 |
| (2) | — |
| | 15,150 |
| |
After-tax amounts reclassified | $ | (28,136 | ) | | $ | — |
| | $ | (28,136 | ) | |
Other comprehensive (loss) income | | | | | | |
Pre-tax | $ | (8,563 | ) | | $ | 28,592 |
| | $ | 20,029 |
| |
Tax effect | 395 |
| | — |
| | 395 |
| |
Other comprehensive (loss) income | $ | (8,168 | ) | | $ | 28,592 |
| | $ | 20,424 |
| |
| | | | | | |
_________________________
(1) Net investment (losses) gains in the consolidated statements of income.
(2) Income tax expensebenefit (expense) in the consolidated statements of income.
|
| | | | | | | | | | | |
(In thousands) | Unrealized Investment Gains (Losses) | | Currency Translation Adjustments | | Accumulated Other Comprehensive Income (Loss) |
As of and for the nine months ended September 30, 2016: | | | | |
Changes in AOCI | | | | |
Beginning of period | $ | 180,695 |
| | $ | (247,393 | ) | | $ | (66,698 | ) |
Other comprehensive income (loss) before reclassifications | 170,824 |
| | (77,389 | ) | | 93,435 |
|
Amounts reclassified from AOCI | (36,611 | ) | | — |
| | (36,611 | ) |
Other comprehensive income (loss) | 134,213 |
| | (77,389 | ) | | 56,824 |
|
Unrealized investment loss related to non-controlling interest | 66 |
| | — |
| | 66 |
|
End of period | $ | 314,974 |
| | $ | (324,782 | ) | | $ | (9,808 | ) |
Amounts reclassified from AOCI | | | | | |
Pre-tax | $ | (56,325 | ) | (1) | $ | — |
| | $ | (56,325 | ) |
Tax effect | 19,714 |
| (2) | — |
| | 19,714 |
|
After-tax amounts reclassified | $ | (36,611 | ) | | $ | — |
| | $ | (36,611 | ) |
Other comprehensive income (loss) | | | | | |
Pre-tax | $ | 198,808 |
| | $ | (77,389 | ) | | $ | 121,419 |
|
Tax effect | (64,595 | ) | | — |
| | (64,595 | ) |
Other comprehensive income (loss) | $ | 134,213 |
| | $ | (77,389 | ) | | $ | 56,824 |
|
| | | | | |
As of and for the three months ended September 30, 2016: | | | | |
Changes in AOCI | | | | |
Beginning of period | $ | 362,593 |
| | $ | (305,312 | ) | | $ | 57,281 |
|
Other comprehensive loss before reclassifications | (20,968 | ) | | (19,470 | ) | | (40,438 | ) |
Amounts reclassified from AOCI | (26,708 | ) | | — |
| | (26,708 | ) |
Other comprehensive loss | (47,676 | ) | | (19,470 | ) | | (67,146 | ) |
Unrealized investment loss related to non-controlling interest | 57 |
| | — |
| | 57 |
|
End of period | $ | 314,974 |
| | $ | (324,782 | ) | | $ | (9,808 | ) |
Amounts reclassified from AOCI | | | | | |
Pre-tax | $ | (41,090 | ) | (1) | $ | — |
| | $ | (41,090 | ) |
Tax effect | 14,382 |
| (2) | — |
| | 14,382 |
|
After-tax amounts reclassified | $ | (26,708 | ) | | $ | — |
| | $ | (26,708 | ) |
Other comprehensive loss | | | | | |
Pre-tax | $ | (72,188 | ) | | $ | (19,470 | ) | | $ | (91,658 | ) |
Tax effect | 24,512 |
| | — |
| | 24,512 |
|
Other comprehensive loss | $ | (47,676 | ) | | $ | (19,470 | ) | | $ | (67,146 | ) |
| | | | | |
_______________
(1) Net investment gains in the consolidated statements of income.
(2) Income tax expense in the consolidated statements of income.
(6)(5) Statements of Cash FlowFlows
Interest payments were $134,291,000$54,582,000 and $124,791,000$62,981,000 for the three months ended March 31, 2020 and 2019, respectively. NaN income taxes were paid were $182,487,000 and $99,161,000 in the nine months ended September 30, 2017 and 2016, respectively.during such periods.
(7)(6) Investments in Fixed Maturity Securities
At September 30, 2017March 31, 2020 and December 31, 2016,2019, investments in fixed maturity securities were as follows:
| | (In thousands) | Amortized Cost | | Gross Unrealized | | Fair Value | | Carrying Value | Amortized Cost | | Allowance for Expected Credit Losses (1) | | Gross Unrealized | | Fair Value | | Carrying Value |
Gains | | Losses | | Gains | | Losses | |
September 30, 2017 | | | | | | | | | | |
March 31, 2020 | | | | | | | | | | | | |
Held to maturity: | | | | | | | | | | | | | | | | | | | | |
State and municipal | $ | 65,372 |
| | $ | 15,212 |
| | $ | — |
| | $ | 80,584 |
| | $ | 65,372 |
| $ | 70,971 |
| | $ | (107 | ) | | $ | 11,516 |
| | $ | — |
| | $ | 82,380 |
| | $ | 70,864 |
|
Residential mortgage-backed | 14,024 |
| | 1,452 |
| | — |
| | 15,476 |
| | 14,024 |
| 7,888 |
| | — |
| | 808 |
| | — |
| | 8,696 |
| | 7,888 |
|
Total held to maturity | 79,396 |
| | 16,664 |
| | — |
| | 96,060 |
| | 79,396 |
| 78,859 |
| | (107 | ) | | 12,324 |
| | — |
| | 91,076 |
| | 78,752 |
|
Available for sale: | | | | | | | | | | | | | | | | | | | | |
U.S. government and government agency | 402,901 |
| | 10,828 |
| | (2,124 | ) | | 411,605 |
| | 411,605 |
| 715,890 |
| | — |
| | 23,830 |
| | (58 | ) | | 739,662 |
| | 739,662 |
|
State and municipal: | | | | | | | | | | | | | | | | | | | | |
Special revenue | 2,730,653 |
| | 80,144 |
| | (5,469 | ) | | 2,805,328 |
| | 2,805,328 |
| 2,283,655 |
| | — |
| | 53,529 |
| | (9,043 | ) | | 2,328,141 |
| | 2,328,141 |
|
State general obligation | 481,070 |
| | 21,377 |
| | (565 | ) | | 501,882 |
| | 501,882 |
| 365,109 |
| | — |
| | 22,440 |
| | (1,592 | ) | | 385,957 |
| | 385,957 |
|
Pre-refunded | 282,488 |
| | 21,052 |
| | (173 | ) | | 303,367 |
| | 303,367 |
| 311,077 |
| | — |
| | 18,281 |
| | (128 | ) | | 329,230 |
| | 329,230 |
|
Corporate backed | 380,351 |
| | 11,775 |
| | (499 | ) | | 391,627 |
| | 391,627 |
| 254,887 |
| | — |
| | 4,880 |
| | (1,705 | ) | | 258,062 |
| | 258,062 |
|
Local general obligation | 384,930 |
| | 26,566 |
| | (531 | ) | | 410,965 |
| | 410,965 |
| 412,291 |
| | — |
| | 34,985 |
| | (511 | ) | | 446,765 |
| | 446,765 |
|
Total state and municipal | 4,259,492 |
| | 160,914 |
| | (7,237 | ) | | 4,413,169 |
| | 4,413,169 |
| 3,627,019 |
| | — |
| | 134,115 |
| | (12,979 | ) | | 3,748,155 |
| | 3,748,155 |
|
Mortgage-backed securities: | | | | | | | | | | | | | | | | | | | | |
Residential (1) | 1,064,705 |
| | 12,696 |
| | (8,860 | ) | | 1,068,541 |
| | 1,068,541 |
| 1,169,144 |
| | — |
| | 26,039 |
| | (15,480 | ) | | 1,179,703 |
| | 1,179,703 |
|
Commercial | 251,387 |
| | 1,641 |
| | (1,450 | ) | | 251,578 |
| | 251,578 |
| 284,584 |
| | — |
| | 841 |
| | (9,688 | ) | | 275,737 |
| | 275,737 |
|
Total mortgage-backed securities | 1,316,092 |
| | 14,337 |
| | (10,310 | ) | | 1,320,119 |
| | 1,320,119 |
| 1,453,728 |
| | — |
| | 26,880 |
| | (25,168 | ) | | 1,455,440 |
| | 1,455,440 |
|
Asset-backed | 2,389,187 |
| | 9,836 |
| | (10,405 | ) | | 2,388,618 |
| | 2,388,618 |
| 3,123,627 |
| | — |
| | 2,415 |
| | (187,990 | ) | | 2,938,052 |
| | 2,938,052 |
|
Corporate: | | | | | | | | | | | | | | | | | | | | |
Industrial | 2,569,673 |
| | 70,054 |
| | (2,842 | ) | | 2,636,885 |
| | 2,636,885 |
| 2,175,423 |
| | (3,513 | ) | | 42,215 |
| | (62,365 | ) | | 2,151,760 |
| | 2,151,760 |
|
Financial | 1,335,101 |
| | 43,636 |
| | (4,716 | ) | | 1,374,021 |
| | 1,374,021 |
| 1,482,371 |
| | (2,923 | ) | | 16,083 |
| | (28,128 | ) | | 1,467,403 |
| | 1,467,403 |
|
Utilities | 255,478 |
| | 12,760 |
| | (907 | ) | | 267,331 |
| | 267,331 |
| 327,101 |
| | — |
| | 9,315 |
| | (1,838 | ) | | 334,578 |
| | 334,578 |
|
Other | 42,183 |
| | 2 |
| | (48 | ) | | 42,137 |
| | 42,137 |
| 24,560 |
| | — |
| | 230 |
| | (14 | ) | | 24,776 |
| | 24,776 |
|
Total corporate | 4,202,435 |
| | 126,452 |
| | (8,513 | ) | | 4,320,374 |
| | 4,320,374 |
| 4,009,455 |
| | (6,436 | ) | | 67,843 |
| | (92,345 | ) | | 3,978,517 |
| | 3,978,517 |
|
Foreign | 909,608 |
| | 32,889 |
| | (2,088 | ) | | 940,409 |
| | 940,409 |
| |
Foreign government | | 809,869 |
| | (60,920 | ) | | 21,377 |
| | (42,837 | ) | | 727,489 |
| | 727,489 |
|
Total available for sale | 13,479,715 |
| | 355,256 |
| | (40,677 | ) | | 13,794,294 |
| | 13,794,294 |
| 13,739,588 |
| | (67,356 | ) | | 276,460 |
| | (361,377 | ) | | 13,587,315 |
| | 13,587,315 |
|
Total investments in fixed maturity securities | $ | 13,559,111 |
| | $ | 371,920 |
| | $ | (40,677 | ) | | $ | 13,890,354 |
| | $ | 13,873,690 |
| $ | 13,818,447 |
| | $ | (67,463 | ) | | $ | 288,784 |
| | $ | (361,377 | ) | | $ | 13,678,391 |
| | $ | 13,666,067 |
|
primary beneficiary of an entity subject to consolidation based on a qualitative assessment of the VIE's capital structure, contractual terms, nature of the VIE's operations and purpose, and the Company's relative exposure to the related risks of the VIE on the date it becomes initially involved in the VIE and on an ongoing basis. The Company is not the primary beneficiary in any of its investment funds, and accordingly, carries its interests in investment funds under the equity method of accounting.
The Company’s maximum exposure to loss with respect to these investments is limited to the carrying amount reported on the Company’s consolidated balance sheet and its unfunded commitments, which were $442$225 million as of September 30, 2017.March 31, 2020.
Investment funds consisted of the following: |
| | | | | | | | | | | | | | | |
| Carrying Value as of | | Income (Loss) from Investment Funds |
| March 31, | | December 31, | | For the Three Months Ended March 31, |
(In thousands) | 2020 | | 2019 | | 2020 | | 2019 |
Real estate | $ | 328,053 |
| | $ | 412,275 |
| | $ | 6,790 |
| | $ | 10,476 |
|
Financial services | 318,084 |
| | 280,705 |
| | 15,209 |
| | 1,528 |
|
Energy | 152,658 |
| | 156,869 |
| | 4,413 |
| | (11,793 | ) |
Transportation | 150,353 |
| | 147,034 |
| | 2,646 |
| | 8,602 |
|
Other funds | 229,710 |
| | 216,652 |
| | 11,519 |
| | 2,598 |
|
Total | $ | 1,178,858 |
| | $ | 1,213,535 |
| | $ | 40,577 |
|
| $ | 11,411 |
|
|
| | | | | | | | | | | | | | | |
| Carrying Value as of | | Income (Loss) from Investment Funds |
| September 30, | | December 31, | | For the Nine Months Ended September 30, |
(In thousands) | 2017 | | 2016 | | 2017 | | 2016 |
Real estate | $ | 614,508 |
| | $ | 641,783 |
| | $ | 30,661 |
| | $ | 33,028 |
|
Energy | 85,817 |
| | 91,448 |
| | (12,763 | ) | | 7,174 |
|
Hedge equity | — |
| | 73,913 |
| | (1,164 | ) | | 791 |
|
Other funds | 419,582 |
| | 391,002 |
| | 34,010 |
| | 19,392 |
|
Total | $ | 1,119,907 |
| | $ | 1,198,146 |
| | $ | 50,744 |
|
| $ | 60,385 |
|
The Company's share of the earnings or losses offrom investment funds is generally reported on a one-quarter lag in order to facilitate the timely completion of the Company's consolidated financial statements. Accordingly, income from investment funds for the first quarter of 2020 does not reflect the adverse impact from the recent disruption in global financial markets associated with COVID-19.
(12)(11) Real Estate
Investment in real estate represents directly owned property held for investment, as follows:
|
| | | | | | | |
| Carrying Value |
| March 31, | | December 31, |
(In thousands) | 2020 | | 2019 |
Properties in operation | $ | 1,637,162 |
| | $ | 1,351,249 |
|
Properties under development | 447,225 |
| | 754,701 |
|
Total | $ | 2,084,387 |
| | $ | 2,105,950 |
|
|
| | | | | | | |
| Carrying Value |
| September 30, | | December 31, |
(In thousands) | 2017 | | 2016 |
Properties in operation | $ | 451,669 |
| | $ | 457,237 |
|
Properties under development | 939,605 |
| | 727,744 |
|
Total | $ | 1,391,274 |
| | $ | 1,184,981 |
|
In 2017,2020, properties in operation included a long-term ground lease in Washington, D.C., a hotel in Memphis, Tennessee, antwo office complexcomplexes in New York City, and office buildings in West Palm Beach and Palm Beach, Florida.Florida, an office building in London, and the completed portion of a mixed-use project in Washington D.C.. Properties in operation are net of accumulated depreciation and amortization of $20,378,000$66,160,000 and $14,996,000$59,832,000 as of September 30, 2017March 31, 2020 and December 31, 2016,2019, respectively. Related depreciation expense was $5,382,000$6,620,000 and $4,117,000$3,427,000 for the ninethree months ended September 30, 2017March 31, 2020 and 2016,2019, respectively. Future minimum rental income expected on operating leases relating to properties in operation is $4,966,133 in 2017, $28,251,980 in 2018, $30,174,146 in 2019, $29,415,103$44,198,185 in 2020, $30,054,813$60,669,125 in 2021, $29,966,679$60,719,260 in 2022, $54,301,460 in 2023, $52,053,044 in 2024, $48,299,498 in 2025 and $467,192,215$522,531,742 thereafter.
Properties under development include anThe Company borrowed $101,750,000 through a non-recourse loan secured by the West Palm Beach office building in London2018. The loan matures in November 2028 and carries a fixed interest rate of 4.21%. The carrying value does not reflect the outstanding financing, which is reflected within senior notes and other debt on the Company's consolidated balance sheet.
A mixed-use project in Washington, D.C. has been under development in 2020 and 2019, with the completed portion reported in properties in operation as of March 31, 2020.
(13)
(12) Loans Receivable
LoansAt March 31, 2020 and December 31, 2019, loans receivable are as follows: |
| | | | | | | |
(In thousands) | March 31, 2020 | | December 31, 2019 |
Amortized cost (net of allowance for expected credit losses): | | | |
Real estate loans | $ | 52,890 |
| | $ | 58,541 |
|
Commercial loans | 34,168 |
| | 33,258 |
|
Total | $ | 87,058 |
| | $ | 91,799 |
|
| | | |
Fair value: | | | |
Real estate loans | $ | 56,906 |
| | $ | 59,853 |
|
Commercial loans | 34,168 |
| | 34,760 |
|
Total | $ | 91,074 |
| | $ | 94,613 |
|
|
| | | | | | | |
(In thousands) | September 30, 2017 | | December 31, 2016 |
Amortized cost (net of valuation allowance): | | | |
Real estate loans | $ | 59,487 |
| | $ | 92,415 |
|
Commercial loans | 14,742 |
| | 14,383 |
|
Total | $ | 74,229 |
| | $ | 106,798 |
|
| | | |
Fair value: | | | |
Real estate loans | $ | 60,372 |
| | $ | 92,415 |
|
Commercial loans | 16,243 |
| | 15,884 |
|
Total | $ | 76,615 |
| | $ | 108,299 |
|
| | | |
Valuation allowance: | | | |
Specific | $ | 1,200 |
| | $ | 1,200 |
|
General | 2,183 |
| | 2,197 |
|
Total | $ | 3,383 |
| | $ | 3,397 |
|
| | | |
| For the Three Months Ended September 30, |
|
| 2017 | | 2016 |
Increase in valuation allowance | $ | — |
| | $ | 467 |
|
| | | |
| For the Nine Months Ended September 30, |
|
| 2017 | | 2016 |
(Decrease) increase in valuation allowance | $ | (14 | ) | | $ | 1,128 |
|
The following table presents the rollforward of the allowance for expected credit losses for loans receivable for the period ended March 31, 2020:
|
| | | | | | | | | | | |
| Real Estate Loans | | Commercial Loans | | Total |
(In thousands) | | |
Allowance for expected credit losses at January 1, 2020 | $ | 1,502 |
| | $ | 644 |
| | $ | 2,146 |
|
Cumulative effect adjustment resulting from changes in accounting principles | (905 | ) | | 548 |
| | (357 | ) |
Provision for expected credit losses | 838 |
| | 1,301 |
| | 2,139 |
|
Allowance for expected credit losses at March 31, 2020 | $ | 1,435 |
| | $ | 2,493 |
| | $ | 3,928 |
|
Loans receivable in non-accrual status were $4.5 million and $5.4both $0.2 million as of September 30, 2017March 31, 2020 and December 31, 2016, respectively.2019.
The Company monitors the performance of its loans receivable and assesses the ability of the borrower to pay principal and interest based upon loan structure, underlying property values, cash flow and related financial and operating performance of the property and market conditions. Loans receivable with a potential for default are further assessed using discounted cash flow analysis and comparable cost and sales methodologies, if appropriate.
The real estate loans are secured by commercial real estate primarily located in New York. These loans generally earn interest at floating LIBOR-based interest rates and have maturities (inclusive of extension options) through August 2025. The commercial loans are with small business owners who have secured the related financing with the assets of the business. Commercial loans primarily earn interest on a fixed basis and have varying maturities generally not exceeding 10 years.
In evaluating the real estate loans, the Company considers their credit quality indicators, including loan to value ratios, which compare the outstanding loan amount to the estimated value of the property, the borrower’s financial condition and performance with respect to loan terms, the position in the capital structure, the overall leverage in the capital structure and other market conditions. Based on these considerations, none of the real estate loans were considered to be impaired at September 30, 2017, and accordingly, the Company determined that a specific valuation allowance was not required.
(14) Realized and Unrealized
(13) Net Investment (Losses) Gains (Losses)
Realized and unrealized Net investment (losses) gains (losses) are as follows:
|
| | | | | | | |
| For the Three Months Ended March 31, |
(In thousands) | 2020 | | 2019 |
Net investment (losses) gains: | | | |
Fixed maturity securities: | | | |
Gains | $ | 4,931 |
| | $ | 5,246 |
|
Losses | (4,847 | ) | | (3,518 | ) |
Equity securities (1): | | | |
Net realized gains on investment sales | — |
| | 23,345 |
|
Change in unrealized (losses) gains | (154,467 | ) | | 42,078 |
|
Investment funds | 30,183 |
| | 17 |
|
Real estate | (687 | ) | | 2,746 |
|
Loans receivable | — |
| | (970 | ) |
Other | (18,398 | ) | | (291 | ) |
Net realized and unrealized (losses) gains on investments in earnings before allowance for expected credit losses | (143,285 | ) | | 68,653 |
|
Change in allowance for expected credit losses on investments (2): | | | |
Fixed maturity securities | (31,750 | ) | | — |
|
Loans receivable | (2,139 | ) | | — |
|
Change in allowance for expected credit losses on investments | (33,889 | ) | | — |
|
Net investment (losses) gains | (177,174 | ) | | 68,653 |
|
Income tax benefit (expense) | 37,207 |
| | (14,417 | ) |
After-tax net investment (losses) gains | $ | (139,967 | ) | | $ | 54,236 |
|
|
| | | | | | | | | | | | | | | |
| For the Three Months Ended September 30, | | For the Nine Months Ended September 30, |
(In thousands) | 2017 | | 2016 | | 2017 | | 2016 |
Realized investment gains (losses): | | | | | |
| | |
|
Fixed maturity securities: | | | | | |
| | |
|
Gains | $ | 8,763 |
| | $ | 33,798 |
| | $ | 21,795 |
| | $ | 66,972 |
|
Losses | (197 | ) | | (1,150 | ) | | (4,162 | ) | | (5,570 | ) |
Equity securities available for sale | 34,720 |
| | 8,441 |
| | 109,566 |
| | 13,037 |
|
Investment funds (1) | 124,228 |
| | (3,788 | ) | | 125,383 |
| | (9,041 | ) |
Real estate | 1,956 |
| | 687 |
| | 4,892 |
| | 5,247 |
|
Other (2) | 14,489 |
| | 137,750 |
| | 19,286 |
| | 136,863 |
|
Net realized gains on investments sales | 183,959 |
| | 175,738 |
| | 276,760 |
| | 207,508 |
|
Other-than-temporary impairments (3) | — |
| | — |
| | — |
| | (18,114 | ) |
Net investment gains | 183,959 |
| | 175,738 |
| | 276,760 |
| | 189,394 |
|
Income tax expense | (64,386 | ) | | (61,508 | ) | | (96,866 | ) | | (66,288 | ) |
After-tax net realized investment gains | $ | 119,573 |
| | $ | 114,230 |
| | $ | 179,894 |
| | $ | 123,106 |
|
|
| | | | | | | |
Change in unrealized investment (losses) gains on available for sale securities: | | | |
Fixed maturity securities without allowance for expected credit losses | $ | (326,416 | ) | | $ | 174,494 |
|
Fixed maturity securities with allowance for expected credit losses | 1,541 |
| | (69 | ) |
Investment funds | (7,646 | ) | | 1,790 |
|
Other | (329 | ) | | (6,955 | ) |
Total change in unrealized investment (losses) gains | (332,850 | ) | | 169,260 |
|
Income tax benefit (expense) | 73,869 |
| | (43,486 | ) |
Noncontrolling interests | 1 |
| | (47 | ) |
After-tax change in unrealized investment (losses) gains of available for sale securities | $ | (258,980 | ) | | $ | 125,727 |
|
|
| | | | | | | | | | | | | | | |
Change in unrealized investment gains of available for sale securities: | | | | | |
| | |
|
Fixed maturity securities | $ | (10,627 | ) | | $ | (45,388 | ) | | $ | 84,214 |
| | $ | 169,933 |
|
Previously impaired fixed maturity securities | 61 |
| | (1,406 | ) | | 905 |
| | 413 |
|
Equity securities available for sale | (2,126 | ) | | (28,517 | ) | | (44,812 | ) | | 12,433 |
|
Investment funds | 4,129 |
| | 3,143 |
| | 9,841 |
| | 16,028 |
|
Total change in unrealized investment gains | (8,563 | ) | | (72,168 | ) | | 50,148 |
| | 198,807 |
|
Income tax benefit (expense) | 423 |
| | 24,493 |
| | (23,550 | ) | | (64,594 | ) |
Noncontrolling interests | 5 |
| | 57 |
| | 19 |
| | 66 |
|
After-tax change in unrealized investment gains of available for sale securities | $ | (8,135 | ) | | $ | (47,618 | ) | | $ | 26,617 |
| | $ | 134,279 |
|
______________________(1) Investment funds includes a gain of $124.3 millionThe net realized gains or losses on investment sales represent the total gains or losses from the salepurchase dates of an investmentthe equity securities. The change in an office building locatedunrealized gains consists of two components: (i) the reversal of the gain or loss recognized in Washington, D.C. forprevious periods on equity securities sold and (ii) the three and nine months ended September 30, 2017.
change in unrealized gain or loss resulting from mark-to-market adjustments on equity securities still held.
(2) Other includes a gainThe inclusion of $134.9 million from the saleallowance for expected credit losses on investments commenced January 1, 2020 due to the adoption of Aero Precision Industries and certain related aviation services businessASU 2016-13. See Note 3 for the three and nine months ended September 30, 2016.more details.
(3) There were no other than temporary impairments (OTTI) for the three and nine months ended September 30, 2017, or for the three months ended September 30, 2016. OTTI for the nine months ended September 30, 2016 of $18.1 million were related to common stock.
(15)(14) Fixed Maturity Securities in an Unrealized Loss Position
The following tables summarize all fixed maturity securities in an unrealized loss position at September 30, 2017March 31, 2020 and December 31, 20162019 by the length of time those securities have been continuously in an unrealized loss position: | | | Less Than 12 Months | | 12 Months or Greater | | Total | Less Than 12 Months | | 12 Months or Greater | | Total |
(In thousands) | Fair Value | | Gross Unrealized Losses | | Fair Value | | Gross Unrealized Losses | | Fair Value | | Gross Unrealized Losses | Fair Value | | Gross Unrealized Losses | | Fair Value | | Gross Unrealized Losses | | Fair Value | | Gross Unrealized Losses |
September 30, 2017 | | | | | | | | | | | | |
March 31, 2020 | | | | | | | | | | | | |
U.S. government and government agency | $ | 118,066 |
| | $ | 1,048 |
| | $ | 48,880 |
| | $ | 1,076 |
| | $ | 166,946 |
| | $ | 2,124 |
| $ | 13,308 |
| | $ | 13 |
| | $ | 7,145 |
| | $ | 45 |
| | $ | 20,453 |
| | $ | 58 |
|
State and municipal | 650,353 |
| | 5,797 |
| | 119,087 |
| | 1,440 |
| | 769,440 |
| | 7,237 |
| 640,570 |
| | 11,306 |
| | 74,998 |
| | 1,673 |
| | 715,568 |
| | 12,979 |
|
Mortgage-backed securities | 527,034 |
| | 5,000 |
| | 221,923 |
| | 5,310 |
| | 748,957 |
| | 10,310 |
| 609,582 |
| | 24,143 |
| | 86,569 |
| | 1,025 |
| | 696,151 |
| | 25,168 |
|
Asset-backed securities | 1,116,878 |
| | 8,033 |
| | 130,734 |
| | 2,372 |
| | 1,247,612 |
| | 10,405 |
| 2,014,456 |
| | 108,100 |
| | 614,876 |
| | 79,890 |
| | 2,629,332 |
| | 187,990 |
|
Corporate | 651,373 |
| | 5,395 |
| | 57,557 |
| | 3,118 |
| | 708,930 |
| | 8,513 |
| 1,886,894 |
| | 85,902 |
| | 54,226 |
| | 6,443 |
| | 1,941,120 |
| | 92,345 |
|
Foreign government | 220,860 |
| | 2,072 |
| | 1,599 |
| | 16 |
| | 222,459 |
| | 2,088 |
| 114,439 |
| | 7,257 |
| | 24,647 |
| | 35,580 |
| | 139,086 |
| | 42,837 |
|
Fixed maturity securities | 3,284,564 |
| | 27,345 |
| | 579,780 |
| | 13,332 |
| | 3,864,344 |
| | 40,677 |
| $ | 5,279,249 |
| | $ | 236,721 |
| | $ | 862,461 |
| | $ | 124,656 |
| | $ | 6,141,710 |
| | $ | 361,377 |
|
Common stocks | 4,678 |
| | 3,095 |
| | 9,387 |
| | 391 |
| | 14,065 |
| | 3,486 |
| |
Preferred stocks | — |
| | — |
| | 23,957 |
| | 1,718 |
| | 23,957 |
| | 1,718 |
| |
Equity securities available for sale | 4,678 |
| | 3,095 |
| | 33,344 |
| | 2,109 |
| | 38,022 |
| | 5,204 |
| |
Total | $ | 3,289,242 |
| | $ | 30,440 |
| | $ | 613,124 |
| | $ | 15,441 |
| | $ | 3,902,366 |
| | $ | 45,881 |
| |
| | | | | | | | | | | | | | | | | | | | | | |
December 31, 2016 | | | | | | | | | | | | |
December 31, 2019 | | | | | | | | | | | | |
U.S. government and government agency | $ | 112,709 |
| | $ | 1,252 |
| | $ | 35,450 |
| | $ | 1,341 |
| | $ | 148,159 |
| | $ | 2,593 |
| $ | 83,837 |
| | $ | 618 |
| | $ | 53,089 |
| | $ | 857 |
| | $ | 136,926 |
| | $ | 1,475 |
|
State and municipal | 1,562,614 |
| | 35,553 |
| | 133,034 |
| | 4,885 |
| | 1,695,648 |
| | 40,438 |
| 365,184 |
| | 4,245 |
| | 127,210 |
| | 1,682 |
| | 492,394 |
| | 5,927 |
|
Mortgage-backed securities | 625,903 |
| | 11,103 |
| | 109,066 |
| | 4,828 |
| | 734,969 |
| | 15,931 |
| 301,358 |
| | 2,281 |
| | 180,148 |
| | 3,220 |
| | 481,506 |
| | 5,501 |
|
Asset-backed securities | 1,010,836 |
| | 5,340 |
| | 201,693 |
| | 6,601 |
| | 1,212,529 |
| | 11,941 |
| 755,259 |
| | 2,307 |
| | 774,508 |
| | 19,183 |
| | 1,529,767 |
| | 21,490 |
|
Corporate | 1,035,245 |
| | 13,448 |
| | 65,147 |
| | 7,470 |
| | 1,100,392 |
| | 20,918 |
| 307,367 |
| | 3,148 |
| | 121,470 |
| | 5,172 |
| | 428,837 |
| | 8,320 |
|
Foreign government | 213,246 |
| | 1,985 |
| | 24,820 |
| | 777 |
| | 238,066 |
| | 2,762 |
| 164,536 |
| | 32,028 |
| | 107,266 |
| | 61,645 |
| | 271,802 |
| | 93,673 |
|
Fixed maturity securities | 4,560,553 |
| | 68,681 |
| | 569,210 |
| | 25,902 |
| | 5,129,763 |
| | 94,583 |
| $ | 1,977,541 |
| | $ | 44,627 |
| | $ | 1,363,691 |
| | $ | 91,759 |
| | $ | 3,341,232 |
| | $ | 136,386 |
|
Common stocks | 336 |
| | 22 |
| | 8,755 |
| | 1,024 |
| | 9,091 |
| | 1,046 |
| |
Preferred stocks | — |
| | — |
| | 22,034 |
| | 3,639 |
| | 22,034 |
| | 3,639 |
| |
Equity securities available for sale | 336 |
| | 22 |
| | 30,789 |
| | 4,663 |
| | 31,125 |
| | 4,685 |
| |
Total | $ | 4,560,889 |
| | $ | 68,703 |
| | $ | 599,999 |
| | $ | 30,565 |
| | $ | 5,160,888 |
| | $ | 99,268 |
| |
Substantially all of the securities in an unrealized loss position are rated investment grade, except for the securities in the foreign government classification. In general, fair value in all classifications were negatively affected by market disruptions caused by COVID-19. A significant amount of the unrealized loss on foreign government securities is the result of changes in currency exchange rates.
Fixed Maturity Securities – A summary of the Company’s non-investment grade fixed maturity securities that were in an unrealized loss position at September 30, 2017March 31, 2020 is presented in the table below:
|
| | | | | | | | | | |
($ in thousands) | Number of Securities | | Aggregate Fair Value | | Gross Unrealized Loss |
Foreign government | 17 |
|
| $ | 46,834 |
|
| $ | 38,867 |
|
Corporate | 15 |
|
| 55,989 |
|
| 7,293 |
|
Asset-backed securities | 4 |
|
| 361 |
|
| 67 |
|
Mortgage-backed securities | 13 |
|
| 14,213 |
|
| 1,484 |
|
Total | 49 |
| | $ | 117,397 |
| | $ | 47,711 |
|
|
| | | | | | | | | | |
($ in thousands) | Number of Securities | | Aggregate Fair Value | | Gross Unrealized Loss |
Foreign government | 9 |
| | $ | 55,292 |
| | $ | 462 |
|
Mortgage-backed securities | 6 |
| | 5,975 |
| | 150 |
|
Corporate | 3 |
| | 2,852 |
| | 211 |
|
Asset-backed securities | 3 |
| | 1,331 |
| | 115 |
|
Total | 21 |
| | $ | 65,450 |
| | $ | 938 |
|
For OTTI of fixed maturity securities that management does not intend to sell or to be required to sell, the portion of the decline in value that is considered to be due to credit factors is recognized in earnings, and the portion of the decline in value that is considered to be due to non-credit factors is recognized in other comprehensive (loss) income.
The Company has evaluated its fixed maturity securities in an unrealized loss position and believes the unrealized losses are due primarily to temporary market and sector-related factors rather than to issuer-specific factors. None of these securities are delinquent or in default under financial covenants. Based on its assessment of these issuers, the Company expects them to continue to meet their contractual payment obligations as they become due and does not consider any of these securities to be OTTI.due.
Preferred Stocks – At September 30, 2017, there was one preferred stock in an unrealized loss position, with a fair value of $24.0 million and a gross unrealized loss of $1.7 million. Based upon management’s view of the underlying value of the security, the Company does not consider the equity security to be OTTI. For the nine months ended September 30, 2017 and 2016, there was no OTTI for preferred stocks.
Common Stocks – At September 30, 2017, there were threecommon stocks in an unrealized loss position, with an aggregate fair value of $14.1 million and a gross unrealized loss of $3.5 million. Based upon management's view of the underlying value of these securities, the Company does not consider these equity securities to be OTTI. There was no OTTI of common stocks for the nine months ended September 30, 2017. For the nine months ended September 30, 2016, OTTI for common stocks was $18.1 million.
(15)Fair Value Measurements
The Company’s fixed maturity and equity securities classified as available for sale securities, equity securities and its arbitrage trading account securities are carried at fair value. Fair value is defined as “the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.” The Company utilizes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels, as follows:
Level 1 - Quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date.
Level 2 - Quoted prices for similar assets or valuations based on inputs that are observable.
Level 3 - Estimates of fair value based on internal pricing methodologies using unobservable inputs. Unobservable inputs are only used to measure fair value to the extent that observable inputs are not available.
Substantially all of the Company’s fixed maturity securities were priced by independent pricing services. The prices provided by the independent pricing services are estimated based on observable market data in active markets utilizing pricing models and processes, which may include benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers, sector groupings, matrix pricing and reference data. The pricing services may prioritize inputs differently on any given day for any security based on market conditions, and not all inputs are available for each security evaluation on any given day. The pricing services used by the Company have indicated that they will only produce an estimate of fair value if objectively verifiable information is available. The determination of whether markets are active or inactive is based upon the volume and level of activity for a particular asset class. The Company reviews the prices provided by pricing services for reasonableness and periodically performs independent price tests of a sample of securities to ensure proper valuation.
If prices from independent pricing services are not available for fixed maturity securities, the Company estimates the fair value. For Level 2 securities, the Company utilizes pricing models and processes which may include benchmark yields, sector groupings, matrix pricing, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, bids, offers and reference data. Where broker quotes are used, the Company generally requests two or more quotes and sets a price within the range of quotes received based on its assessment of the credibility of the quote and its own evaluation of the security. The Company generally does not adjust quotes received from brokers. For securities traded only in private negotiations, the Company determines fair value based primarily on the cost of such securities, which is adjusted to reflect prices of recent placements of securities of the same issuer, financial projections, credit quality and business developments of the issuer and other relevant information.
For Level 3 securities, the Company generally uses a discounted cash flow model to estimate the fair value of fixed maturity securities. The cash flow models are based upon assumptions as to prevailing credit spreads, interest rate and interest rate volatility, time to maturity and subordination levels. Projected cash flows are discounted at rates that are adjusted to reflect illiquidity, where appropriate.
The following tables present the assets and liabilities measured at fair value on a recurring basis as of September 30, 2017March 31, 2020 and December 31, 20162019 by level:
|
| | | | | | | | | | | | | | | |
(In thousands) | Total | | Level 1 | | Level 2 | | Level 3 |
March 31, 2020 | | | | | | | |
Assets: | | | | | | | |
Fixed maturity securities available for sale: | | | | | | | |
U.S. government and government agency | $ | 739,662 |
| | $ | — |
| | $ | 739,662 |
| | $ | — |
|
State and municipal | 3,748,155 |
| | — |
| | 3,748,155 |
| | — |
|
Mortgage-backed securities | 1,455,440 |
| | — |
| | 1,455,440 |
| | — |
|
Asset-backed securities | 2,938,052 |
| | — |
| | 2,938,052 |
| | — |
|
Corporate | 3,978,517 |
| | — |
| | 3,978,517 |
| | — |
|
Foreign government | 727,489 |
| | — |
| | 727,489 |
| | — |
|
Total fixed maturity securities available for sale | 13,587,315 |
| | — |
| | 13,587,315 |
| | — |
|
Equity securities: | | | | | | | |
Common stocks | 146,658 |
| | 137,791 |
| | — |
| | 8,867 |
|
Preferred stocks | 209,444 |
| | — |
| | 202,939 |
| | 6,505 |
|
Total equity securities | 356,102 |
| | 137,791 |
| | 202,939 |
| | 15,372 |
|
Arbitrage trading account | 666,829 |
| | 480,495 |
| | 186,334 |
| | — |
|
Total | $ | 14,610,246 |
| | $ | 618,286 |
| | $ | 13,976,588 |
| | $ | 15,372 |
|
Liabilities: | | | | | | | |
Trading account securities sold but not yet purchased | $ | 14,003 |
| | $ | 14,003 |
| | $ | — |
| | $ | — |
|
| | | | | | | |
| | | | | | | |
December 31, 2019 | | | | | | | |
Assets: | | | | | | | |
Fixed maturity securities available for sale: | | | | | | | |
U.S. government and government agency | $ | 786,931 |
| | $ | — |
| | $ | 786,931 |
| | $ | — |
|
State and municipal | 3,895,632 |
| | — |
| | 3,895,632 |
| | — |
|
Mortgage-backed securities | 1,625,594 |
| | — |
| | 1,625,594 |
| | — |
|
Asset-backed securities | 2,790,630 |
| | — |
| | 2,790,630 |
| | — |
|
Corporate | 4,156,415 |
| | — |
| | 4,156,415 |
| | — |
|
Foreign government | 847,076 |
| | — |
| | 847,076 |
| | — |
|
Total fixed maturity securities available for sale | 14,102,278 |
| | — |
| | 14,102,278 |
| | — |
|
Equity securities: | | | | | | | |
Common stocks | 166,805 |
| | 157,752 |
| | — |
| | 9,053 |
|
Preferred stocks | 313,815 |
| | — |
| | 307,310 |
| | 6,505 |
|
Total equity securities | 480,620 |
| | 157,752 |
| | 307,310 |
| | 15,558 |
|
Arbitrage trading account | 400,809 |
| | 381,061 |
| | 19,748 |
| | — |
|
Total | $ | 14,983,707 |
| | $ | 538,813 |
| | $ | 14,429,336 |
| | $ | 15,558 |
|
Liabilities: | | | | | | | |
Trading account securities sold but not yet purchased | $ | 36,143 |
| | $ | 36,143 |
| | $ | — |
| | $ | — |
|
|
| | | | | | | | | | | | | | | |
(In thousands) | Total | | Level 1 | | Level 2 | | Level 3 |
September 30, 2017 | | | | | | | |
Assets: | | | | | | | |
Fixed maturity securities available for sale: | | | | | | | |
U.S. government and government agency | $ | 411,605 |
| | $ | — |
| | $ | 411,605 |
| | $ | — |
|
State and municipal | 4,413,169 |
| | — |
| | 4,413,169 |
| | — |
|
Mortgage-backed securities | 1,320,119 |
| | — |
| | 1,320,119 |
| | — |
|
Asset-backed securities | 2,388,618 |
| | — |
| | 2,388,444 |
| | 174 |
|
Corporate | 4,320,374 |
| | — |
| | 4,320,374 |
| | — |
|
Foreign government | 940,409 |
| | — |
| | 940,409 |
| | — |
|
Total fixed maturity securities available for sale | 13,794,294 |
| | — |
| | 13,794,120 |
| | 174 |
|
Equity securities available for sale: | | | | | | | |
Common stocks | 419,520 |
| | 410,133 |
| | — |
| | 9,387 |
|
Preferred stocks | 194,505 |
| | — |
| | 190,649 |
| | 3,856 |
|
Total equity securities available for sale | 614,025 |
| | 410,133 |
| | 190,649 |
| | 13,243 |
|
Arbitrage trading account | 488,238 |
| | 275,818 |
| | 212,420 |
| | — |
|
Total | $ | 14,896,557 |
| | $ | 685,951 |
| | $ | 14,197,189 |
| | $ | 13,417 |
|
Liabilities: | | | | | | | |
Trading account securities sold but not yet purchased | $ | 44,937 |
| | $ | 44,851 |
| | $ | 86 |
| | $ | — |
|
| | | | | | | |
December 31, 2016 | | | | | | | |
Assets: | | | | | | | |
Fixed maturity securities available for sale: | | | | | | | |
U.S. government and government agency | $ | 513,802 |
| | $ | — |
| | $ | 513,802 |
| | $ | — |
|
State and municipal | 4,519,503 |
| | — |
| | 4,519,503 |
| | — |
|
Mortgage-backed securities | 1,189,645 |
| | — |
| | 1,189,645 |
| | — |
|
Asset-backed securities | 1,907,860 |
| | — |
| | 1,907,677 |
| | 183 |
|
Corporate | 4,068,527 |
| | — |
| | 4,068,527 |
| | — |
|
Foreign government | 902,805 |
| | — |
| | 902,805 |
| | — |
|
Total fixed maturity securities available for sale | 13,102,142 |
| | — |
| | 13,101,959 |
| | 183 |
|
Equity securities available for sale: | | | | | | | |
Common stocks | 445,858 |
| | 429,647 |
| | 7,457 |
| | 8,754 |
|
Preferred stocks | 223,342 |
| | — |
| | 219,680 |
| | 3,662 |
|
Total equity securities available for sale | 669,200 |
| | 429,647 |
| | 227,137 |
| | 12,416 |
|
Arbitrage trading account | 299,999 |
| | 224,623 |
| | 75,376 |
| | — |
|
Total | $ | 14,071,341 |
| | $ | 654,270 |
| | $ | 13,404,472 |
| | $ | 12,599 |
|
Liabilities: | | | | | | | |
Trading account securities sold but not yet purchased | $ | 51,179 |
| | $ | 51,089 |
| | $ | 90 |
| | $ | — |
|
There were no significant transfers between Levels 1 and 2 during the nine months ended September 30, 2017 or during the year ended December 31, 2016.
The following tables summarize changes in Level 3 assets and liabilities for the ninethree months ended September 30, 2017 and for the year ended DecemberMarch 31, 2016:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Gains (Losses) Included in: |
(In thousands) | Beginning Balance | | Earnings (Losses) | | Other Comprehensive Income (Loss) | | Impairments | | Purchases | | (Sales) | | Paydowns / Maturities | | Transfers | | Ending Balance |
In / (Out) |
Nine months ended September 30, 2017: | | | | | | | | | | | | | | | | | |
Assets: | | | | | | | | | | | | | | | | | |
Fixed maturities securities available for sale: | | | | | | | | | | | | | | | | | |
Asset-backed securities | $ | 183 |
| | $ | 2 |
| | $ | 32 |
| | $ | — |
| | $ | — |
| | $ | (43 | ) | | $ | — |
| | $ | — |
| | $ | 174 |
|
Corporate | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Total | 183 |
| | 2 |
| | 32 |
| | — |
| | — |
| | (43 | ) | | — |
| | — |
| | 174 |
|
Equity securities available for sale: | | | | | | | | | | | | | | | | | |
Common stocks | 8,754 |
| | — |
| | 633 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 9,387 |
|
Preferred stocks | 3,662 |
| | 19 |
| | — |
| | — |
| | 175 |
| | — |
| | — |
| | — |
| | 3,856 |
|
Total | 12,416 |
| | 19 |
| | 633 |
| | — |
| | 175 |
| | — |
| | — |
| | — |
| | 13,243 |
|
Arbitrage trading account | — |
| | 8 |
| | — |
| | — |
| | — |
| | (8 | ) | | — |
| | — |
| | — |
|
Total | $ | 12,599 |
| | $ | 29 |
| | $ | 665 |
| | $ | — |
| | $ | 175 |
| | $ | (51 | ) | | $ | — |
| | $ | — |
| | $ | 13,417 |
|
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Year ended December 31, 2016: | | | | | | | | | | | | | | | | | |
Assets: | | | | | | | | | | | | | | | | | |
Fixed maturities securities available for sale: | | | | | | | | | | | | | | | | | |
Asset-backed securities | $ | 199 |
| | $ | 3 |
| | $ | 16 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | (35 | ) | | $ | — |
| | $ | 183 |
|
Corporate | 154 |
| | 177 |
| | — |
| | — |
| | ��� |
| | (331 | ) | | — |
| | — |
| | — |
|
Total | 353 |
| | 180 |
| | 16 |
| | — |
| | — |
| | (331 | ) | | (35 | ) | | — |
| | 183 |
|
Equity securities available for sale: | | | | | | | | | | | | | | | | | |
Common stocks | 7,829 |
| | — |
| | 160 |
| | — |
| | 765 |
| | — |
| | — |
| | — |
| | 8,754 |
|
Preferred stocks | 3,624 |
| | 38 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 3,662 |
|
Total | 11,453 |
| | 38 |
| | 160 |
| | — |
| | 765 |
| | — |
| | — |
| | — |
| | 12,416 |
|
Arbitrage trading account | 176 |
| | (176 | ) | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Total | $ | 11,982 |
| | $ | 42 |
| | $ | 176 |
| | $ | — |
| | $ | 765 |
| | $ | (331 | ) | | $ | (35 | ) | | $ | — |
| | $ | 12,599 |
|
During the nine months ended September 30, 20172020 and for the year ended December 31, 2016,2019:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Gains (Losses) Included in: |
| (In thousands) | Beginning Balance | | Earnings (Losses) | | Other Comprehensive Income (Loss) | | Impairments | | Purchases | | (Sales) | | Paydowns / Maturities | | Transfers In / (Out) | | Ending Balance |
|
| Three Months Ended March 31, 2020 | | | | | | | | | | | | | | | | | |
| Assets: | | | | | | | | | | | | | | | | | |
| Equity securities: | | | | | | | | | | | | | | | | | |
| Common stocks | $ | 9,053 |
| | $ | 880 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | (1,066 | ) | | $ | — |
| | $ | — |
| | $ | 8,867 |
|
| Preferred stocks | 6,505 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 6,505 |
|
| Total | $ | 15,558 |
| | $ | 880 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | (1,066 | ) | | $ | — |
| | $ | — |
| | $ | 15,372 |
|
| | | | | | | | | | | | | | | | | | |
| Year Ended December 31, 2019 | | | | | | | | | | | | | | | | | |
| Assets: | | | | | | | | | | | | | | | | | |
| Fixed maturities securities available for sale: | | | | | | | | | | | | | | | | | |
| Asset-backed securities | $ | 99 |
| | $ | (26 | ) | | $ | 61 |
| | $ | — |
| | $ | — |
| | $ | (134 | ) | | $ | — |
| | $ | — |
| | $ | — |
|
| Total | 99 |
| | (26 | ) | | 61 |
| | — |
| | — |
| | (134 | ) | | — |
| | — |
| | — |
|
| Equity securities: | | | | | | | | | | | | | | | | | |
| Common stocks | 8,596 |
| | 2,005 |
| |
|
| | — |
| | — |
| | (1,548 | ) | | — |
| | — |
| | 9,053 |
|
| Preferred stocks | 3,945 |
| | (42 | ) | | — |
| | — |
| | 2,602 |
| | — |
| | — |
| | — |
| | 6,505 |
|
| Total | 12,541 |
| | 1,963 |
| | — |
| | — |
| | 2,602 |
| | (1,548 | ) | | — |
| | — |
| | 15,558 |
|
| Arbitrage trading account | 17,308 |
| | (8,731 | ) | | — |
| | — |
| | 14,767 |
| | (38,233 | ) | | — |
| | 14,889 |
| | — |
|
| Total | $ | 29,948 |
| | $ | (6,794 | ) | | $ | 61 |
| | $ | — |
| | $ | 17,369 |
| | $ | (39,915 | ) | | $ | — |
| | $ | 14,889 |
| | $ | 15,558 |
|
| Liabilities: | | | | | | | | | | | | | | | | | |
| Trading account securities sold but not yet purchased | $ | 793 |
| | $ | 133 |
| | $ | — |
| | $ | — |
| | $ | 7,609 |
| | $ | (8,535 | ) | | $ | — |
| | $ | — |
| | $ | — |
|
For the quarter ended March 31, 2020, there were no transferssecurities transferred into or out of Level 3. For the year ended December 31, 2019, there were two common stocks transferred into Level 3 in the arbitrage trading account where publicly traded prices were no longer available, and both were sold by year end.
(17)(16) Reserves for Loss and Loss Expenses
The Company's reserves for losses and loss expenses are comprised of case reserves and incurred but not reported liabilities (IBNR)("IBNR"). When a claim is reported, a case reserve is established for the estimated ultimate payment based upon known information about the claim. As more information about the claim becomes available over time, case reserves are adjusted up or down as appropriate. Reserves are also established on an aggregate basis to provide for IBNR liabilities and expected loss reserve development on reported claims.
Loss reserves included in the Company’s financial statements represent management’s best estimates based upon an actuarially derived point estimate and other considerations. The Company uses a variety of actuarial techniques and methods to derive an actuarial point estimate for each operating unit. These methods include paid loss development, incurred loss development, paid and incurred Bornhuetter-Ferguson methods and frequency and severity methods. In circumstances where one actuarial method is considered more credible than the others, that method is used to set the point estimate. The actuarial point estimate may also be based on a judgmental weighting of estimates produced from each of the methods considered. Industry loss experience is used to supplement the Company’s own data in selecting “tail factors” in areas where the Company’s own data is limited. The actuarial data is analyzed by line of business, coverage and accident or policy year, as appropriate, for each operating unit.
The establishment of the actuarially derived loss reserve point estimate also includes consideration of qualitative factors that may affect the ultimate losses. These qualitative considerations include, among others, the impact of re-underwriting initiatives, changes in the mix of business, changes in distribution sources and changes in policy terms and conditions.
The key assumptions used to arrive at the best estimate of loss reserves are the expected loss ratios, rate of loss cost inflation, and reported and paid loss emergence patterns. Expected loss ratios represent management’s expectation of losses at the time the business is priced and written, before any actual claims experience has emerged. This expectation is a significant determinant of the estimate of loss reserves for recently written business where there is little paid or incurred loss data to consider. Expected loss ratios are generally derived from historical loss ratios adjusted for the impact of rate changes, loss cost trends and known changes in the type of risks underwritten. Expected loss ratios are estimated for each key line of business within each operating unit. Expected loss cost inflation is particularly important for the long-tail lines, such as excess casualty, and claims with a high medical component, such as workers’ compensation. Reported and paid loss emergence patterns are used to project current reported or paid loss amounts to their ultimate settlement value. Loss development factors are based on the historical emergence patterns of paid and incurred losses, and are derived from the Company’s own experience and industry data. The paid loss emergence pattern is also significant to excess and assumed workers’ compensation reserves because those reserves are discounted to their estimated present value based upon such estimated payout patterns.
Loss frequency and severity are measures of loss activity that are considered in determining the key assumptions described in our discussion of loss and loss expense reserves, including expected loss ratios, rate of loss cost inflation and reported and paid loss emergence patterns. Loss frequency is a measure of the number of claims per unit of insured exposure, and loss severity is a measure of the average size of claims. Factors affecting loss frequency include the effectiveness of loss controls and safety programs and changes in economic activity or weather patterns. Factors affecting loss severity include changes in policy limits, retentions, rate of inflation and judicial interpretations.
Another factor affecting estimates of loss frequency and severity is the loss reporting lag, which is the period of time between the occurrence of a loss and the date the loss is reported to the Company. The length of the loss reporting lag affects our ability to accurately predict loss frequency (loss frequencies are more predictable for lines with short reporting lags) as well as the amount of reserves needed for incurred but not reported losses (less IBNR is required for lines with short reporting lags). As a result, loss reserves for lines with short reporting lags are likely to have less variation from initial loss estimates. For lines with short reporting lags, which include commercial automobile, primary workers’ compensation, other liability (claims-made) and property business, the key assumption is the loss emergence pattern used to project ultimate loss estimates from known losses paid or reported to date. For lines of business with long reporting lags, which include other liability (occurrence), products liability, excess workers’ compensation and liability reinsurance, the key assumption is the expected loss ratio since there is often little paid or incurred loss data to consider. Historically, the Company has experienced less variation from its initial loss estimates for lines of businesses with short reporting lags than for lines of business with long reporting lags.
The key assumptions used in calculating the most recent estimate of the loss reserves are reviewed each quarter and adjusted, to the extent necessary, to reflect the latest reported loss data, current trends and other factors observed.
The table below provides a reconciliation of the beginning and ending reserve balances:
| | | September 30, | March 31, |
(In thousands) | 2017 | | 2016 | 2020 | | 2019 |
Net reserves at beginning of year | $ | 9,590,265 |
| | $ | 9,244,872 |
| |
Net reserves at beginning of period | | $ | 10,697,998 |
| | $ | 10,248,883 |
|
Cumulative effect adjustment resulting from changes in accounting principles | | 5,927 |
| | — |
|
Restated net reserves at beginning of period | | 10,703,925 |
| | 10,248,883 |
|
Net provision for losses and loss expenses: | | | | | | |
Claims occurring during the current year (1) | 2,998,687 |
| | 2,838,777 |
| 1,097,523 |
| | 971,806 |
|
Decrease in estimates for claims occurring in prior years (2) (3) | (7,648 | ) | | (23,518 | ) | |
Increase in estimates for claims occurring in prior years (2) (3) | | 433 |
| | 6,481 |
|
Loss reserve discount accretion | 34,436 |
| | 37,080 |
| 9,297 |
| | 10,363 |
|
Total | 3,025,475 |
| | 2,852,339 |
| 1,107,253 |
| | 988,650 |
|
Net payments for claims: | |
| | |
| |
| | |
|
Current year | 628,078 |
| | 612,615 |
| 84,310 |
| | 295,873 |
|
Prior year | 1,996,977 |
| | 1,931,454 |
| |
Prior years | | 864,064 |
| | 567,756 |
|
Total | 2,625,055 |
| | 2,544,069 |
| 948,374 |
| | 863,629 |
|
Foreign currency translation | 57,789 |
| | (6,266 | ) | (77,167 | ) | | (163 | ) |
Net reserves at end of period | 10,048,474 |
| | 9,546,876 |
| 10,785,637 |
| | 10,373,741 |
|
Ceded reserve at end of period | 1,605,872 |
| | 1,550,954 |
| |
Ceded reserves at end of period | | 1,946,878 |
| | 1,719,369 |
|
Gross reserves at end of period | $ | 11,654,346 |
| | $ | 11,097,830 |
| $ | 12,732,515 |
| | $ | 12,093,110 |
|
| |
(1) | Claims occurring during the current year are net of loss reserve discounts of $16,787,000 and $12,085,000 for the nine months ended September 30, 2017 and 2016,(1) Claims occurring during the current year are net of loss reserve discounts of $3 million and $6 million for the three months ended March 31, 2020 and 2019, respectively. |
| |
(2) | The decrease in estimates for claims occurring in prior years is net of loss reserve discount. On an undiscounted basis, the estimates for claims occurring in prior years decreased by $30,609,000 and $45,813,000 for the nine months ended September 30, 2017 and 2016, respectively. |
| |
(3) | For certain retrospectively rated insurance policies and reinsurance agreements, reserve development is offset by additional or return premiums. Favorable development, net of additional and return premiums, was $31 million and $42 million for the nine months ended September 30, 2017 and 2016, respectively. |
(2) The change in estimates for claims occurring in prior years is net of loss reserve discount. On an undiscounted basis, the estimates for claims occurring in prior years decreased by $4 million and increased by $3 million for the three months ended March 31, 2020 and 2019, respectively.
(3) For certain retrospectively rated insurance policies and reinsurance agreements, reserve development is offset by additional or return premiums. Favorable development, net of additional and return premiums, was $4 million and $7 million for the three months ended March 31, 2020 and 2019, respectively.
One of the many ways in which the ongoing COVID-19 global pandemic may impact the Company’s results is through its impact on claim frequency and severity. Loss cost trends will be impacted directly by COVID-19 related claims filed in certain lines of business, as well as indirectly due to other impacts of COVID-19 associated with economic conditions, inflation, and social distancing and work from home rules, for example. These impacts could act to increase or decrease the overall loss cost trends and could have differing impacts on the Company's different lines of business. For certain lines of business, such as contingency and event cancellation, the Company has received reported claims related to COVID-19, and we expect additional claims to be reported in the future. Further, for workers’ compensation, several States have enacted rules, legislation or administrative orders creating the presumption that certain “essential” workers who contract COVID-19 did so through the course of their employment. Other States are considering similar actions, including with varying definitions of “essential” workers. The Company believes that such State actions will likely lead to increased workers’ compensation loss frequency and severity. As a result of these developments, the Company has estimated the potential COVID-19 impact to its workers’ compensation, contingency and event cancellation lines of business under a number of possible scenarios. Due to the rapidly evolving COVID-19 situation and the limited amount of available data, there is a high degree of uncertainty around these COVID-19 reserves. In 2017,addition, several States, through regulation, legislation and/or judicial action, are seeking to expand policy coverage terms beyond the policy’s intended coverage, including, for example, but not limited to, property coverages, where there are attempts to extend business interruption coverage where there is no physical damage or loss to property, and attempts to disregard policy exclusions for communicable disease. Policyholder losses arising from these State actions could exceed the reserves we have established for those related policies. For the three months ended March 31, 2020, the Company has recognized a best estimate preliminary reserve for COVID-19 related claims activity, net of reinsurance and inclusive of reinstatement premium, of approximately $67 million, of which $47 million relates to the Insurance segment and $20 million relates to the Reinsurance & Monoline Excess segment.
During the three months ended March 31, 2020, favorable prior year development (net of additional and return premiums) of $31$4.0 million included $62$7.0 million of favorable development for the Insurance segment, partially offset by $31$3.0 million of adverse development for the Reinsurance & Monoline Excess segment.
The overall favorable development for the Insurance segment was primarily attributable to workers'favorable development on workers’ compensation business, (including excess workers' compensation).partially offset by adverse development on professional liability business. The favorable workers'workers’ compensation development was spread across many accident years, including prior to 2008, but2010, and was mostespecially significant in accident years 20142018 and 2015.2019. The favorable workers'workers’ compensation development reflects a continuation of the benign loss cost trends experienced during recent years, particularly the favorable claim frequency trends (i.e., number of reported claims per unit of exposure). In addition, ongoing workers’ compensation claims management efforts, including active medical case management and use of networks and specialty vendors to control medical and pharmaceutical benefit costs, have added to the Company’s favorable workers’ compensation prior year development. The adverse professional liability development was mainly concentrated in accident years 2016 and 2017, but was also spread to a lesser degree across other accident years. The development mainly relates to directors and officers and lawyers professional liability lines of business, and was driven by a higher than expected number of large losses being reported in the period. The Company also experienced a small amount of adverse prior year development during the first quarter 2020 on general liability business stemming from large losses in its excess and surplus lines book of business, mainly in accident years 2016 and 2017.
The adverse development for the Reinsurance & Monoline Excess segment was mainly driven by non-proportional reinsurance assumed liability business written in the U.K., primarily from accident years 2015 through 2019. The development was driven by a higher than expected number of reported large losses.
During the three months ended March 31, 2019, favorable prior year development (net of additional and return premiums) of $6.7 million included $9.6 million of favorable development for the Insurance segment, offset by $2.9 million of adverse development for the Reinsurance & Monoline Excess segment. The overall favorable development for the Insurance segment was primarily attributable to favorable development on workers’ compensation business, partially offset by adverse development on other liability business and professional liability business. The favorable workers’ compensation development was spread across many accident years, including prior to 2009, but was most significant in accident years 2015 through 2017. The favorable workers’ compensation development reflects a continuation of the benign loss cost trends experienced during recent years, particularly the favorable claim frequency trends (i.e., number of reported claims per unit of exposure). The adverse other liability development was mainly related to accident years 2014 through 2018. It was driven by a higher than expected number of large losses being reported in the period, including both general liability and professional liability losses. The adverse development for the Reinsurance & Monoline Excess segment was due to reserve strengthening associated with claims impactedmainly driven by the change in the Ogden discount rate in the U.K., as well as adverse development in the U.S. casualty facultative casualty excess of loss business. The Ogden rate is the discount rate used to calculate lump-sum bodily injury payouts in the U.K., and was reduced by the U.K. Ministry of Justice from +2.5% to -0.75%; the adverse development mostly related to U.K. motor bodily injury claims which we reinsured on an excess of loss basis in accident years 2012 through 2016. The adverse development on U.S. facultative casualty business related to construction-related risks in accident years 2008 and prior.
In 2016, favorable prior year development (net of additional and return premiums) of $42 million included $38 million for the Insurance segment and $4 million for the Reinsurance segment. The favorable development for the Insurance segment was primarily attributable to workers' compensation business, partially offset by adverse development for commercial auto liability and medical and other professional liability. The favorable development for workers' compensation stems from accident years 2003 through 2015, but is concentrated in accident years 20142009 and 2015; it reflects claims frequency trends (i.e., number of reported claims per unit of exposure) that continueprior related to be better than we expected. The unfavorable development for commercial auto liability was driven by higher large loss activity than expected in accident years 2014 and 2015, and the
unfavorable development for medical professional liability was primarily in accident years prior to 2013 and stemmed from a class of medical professional liability business that we discontinued writing in 2013.
construction projects.
(18)(17) Fair Value of Financial Instruments
The following table presents the carrying amounts and estimated fair values of the Company’s financial instruments:
|
| | | | | | | | | | | | | | | |
| March 31, 2020 | | December 31, 2019 |
(In thousands) | Carrying Value | | Fair Value | | Carrying Value | | Fair Value |
Assets: | | | | | | | |
Fixed maturity securities | $ | 13,666,067 |
| | $ | 13,678,391 |
| | $ | 14,180,961 |
| | $ | 14,194,955 |
|
Equity securities | 356,102 |
| | 356,102 |
| | 480,620 |
| | 480,620 |
|
Arbitrage trading account | 666,829 |
| | 666,829 |
| | 400,809 |
| | 400,809 |
|
Loans receivable | 87,058 |
| | 91,074 |
| | 91,799 |
| | 94,613 |
|
Cash and cash equivalents | 965,012 |
| | 965,012 |
| | 1,023,710 |
| | 1,023,710 |
|
Trading account receivables from brokers and clearing organizations | 132,928 |
| | 132,928 |
| | 423,543 |
| | 423,543 |
|
Due from broker | 11,476 |
| | 11,476 |
| | — |
| | — |
|
Liabilities: | | | | | | | |
Due to broker | — |
| | — |
| | 27,116 |
| | 27,116 |
|
Trading account securities sold but not yet purchased | 14,003 |
| | 14,003 |
| | 36,143 |
| | 36,143 |
|
Subordinated debentures | 1,198,951 |
| | 1,092,780 |
| | 1,198,704 |
| | 1,274,088 |
|
Senior notes and other debt | 1,432,117 |
| | 1,454,081 |
| | 1,427,575 |
| | 1,582,290 |
|
|
| | | | | | | | | | | | | | | |
| September 30, 2017 | | December 31, 2016 |
(In thousands) | Carrying Value | | Fair Value | | Carrying Value | | Fair Value |
Assets: | | | | | | | |
Fixed maturity securities | $ | 13,873,690 |
| | $ | 13,890,354 |
| | $ | 13,190,668 |
| | $ | 13,204,814 |
|
Equity securities available for sale | 614,025 |
| | 614,025 |
| | 669,200 |
| | 669,200 |
|
Arbitrage trading account | 488,238 |
| | 488,238 |
| | 299,999 |
| | 299,999 |
|
Loans receivable | 74,229 |
| | 76,615 |
| | 106,798 |
| | 108,299 |
|
Cash and cash equivalents | 773,997 |
| | 773,997 |
| | 795,285 |
| | 795,285 |
|
Trading account receivables from brokers and clearing organizations | 297,208 |
| | 297,208 |
| | 484,593 |
| | 484,593 |
|
Liabilities: | | | | | | | |
Due to broker | 58,973 |
| | 58,973 |
| | 19,416 |
| | 19,416 |
|
Trading account securities sold but not yet purchased | 44,937 |
| | 44,937 |
| | 51,179 |
| | 51,179 |
|
Subordinated debentures | 728,071 |
| | 728,291 |
| | 727,630 |
| | 687,504 |
|
Senior notes and other debt | 1,759,929 |
| | 1,946,700 |
| | 1,760,595 |
| | 1,914,727 |
|
The estimated fair values of the Company’s fixed maturity securities, equity securities available for sale and arbitrage trading account securities are based on various valuation techniques that rely on fair value measurements as described in Note 16 above.15. The fair value of loans receivable are estimated by using current institutional purchaser yield requirements for loans with similar credit characteristics, which is considered a Level 2 input. The fair value of the senior notes and other debt and the subordinated debentures is based on spreads for similar securities, which is considered a Level 2 input.
(19) Reinsurance
(18) Premiums and Reinsurance Related Information
The following is a summary of insurance and reinsurance financial information: |
| | | | | | | |
| For the Three Months Ended March 31, |
|
(In thousands) | 2020 | | 2019 |
Written premiums: | | | |
Direct | $ | 1,964,490 |
| | $ | 1,829,815 |
|
Assumed | 266,882 |
| | 216,415 |
|
Ceded | (385,526 | ) | | (336,629 | ) |
Total net premiums written | $ | 1,845,846 |
| | $ | 1,709,601 |
|
| | | |
Earned premiums: | | | |
Direct | $ | 1,829,713 |
| | $ | 1,723,610 |
|
Assumed | 228,214 |
| | 188,191 |
|
Ceded | (366,509 | ) | | (318,945 | ) |
Total net premiums earned | $ | 1,691,418 |
| | $ | 1,592,856 |
|
| | | |
Ceded losses and loss expenses incurred | $ | 235,183 |
| | $ | 173,046 |
|
Ceded commissions earned | $ | 81,045 |
| | $ | 71,017 |
|
|
| | | | | | | | | | | | | | | |
| For the Three Months | | For the Nine Months |
| Ended September 30, | | Ended September 30, |
(In thousands) | 2017 | | 2016 | | 2017 | | 2016 |
Written premiums: | | | | | | | |
Direct | $ | 1,679,389 |
| | $ | 1,643,870 |
| | $ | 5,127,465 |
| | $ | 5,061,646 |
|
Assumed | 194,769 |
| | 224,979 |
| | 570,052 |
| | 702,265 |
|
Ceded | (302,975 | ) | | (261,484 | ) | | (915,245 | ) | | (850,255 | ) |
Total net premiums written | $ | 1,571,183 |
| | $ | 1,607,365 |
| | $ | 4,782,272 |
| | $ | 4,913,656 |
|
| | | | | | | |
Earned premiums: | | | | | | | |
Direct | $ | 1,692,453 |
| | $ | 1,647,033 |
| | $ | 4,972,755 |
| | $ | 4,824,768 |
|
Assumed | 202,972 |
| | 216,758 |
| | 605,281 |
| | 635,443 |
|
Ceded | (313,925 | ) | | (277,847 | ) | | (857,792 | ) | | (787,139 | ) |
Total net premiums earned | $ | 1,581,500 |
| | $ | 1,585,944 |
| | $ | 4,720,244 |
| | $ | 4,673,072 |
|
| | | | | | | |
Ceded losses and loss expenses incurred | $ | 247,104 |
| | $ | 213,065 |
| | $ | 424,905 |
| | $ | 507,258 |
|
Ceded commissions earned | $ | 63,222 |
| | $ | 47,315 |
| | $ | 177,524 |
| | $ | 143,809 |
|
The following table presents the rollforward of the allowance for expected credit losses for premiums and fees receivable for the period ended March 31, 2020: |
| | | |
(In thousands) | |
Allowance for expected credit losses at January 1, 2020 | $ | 19,823 |
|
Cumulative effect adjustment resulting from changes in accounting principles | 1,270 |
|
Provision for expected credit losses | 431 |
|
Allowance for expected credit losses at March 31, 2020 | $ | 21,524 |
|
The Company reinsures a portion of its insurance exposures in order to reduce its net liability on individual risks and catastrophe losses. The Company also cedes premiums to state assigned risk plans and captive insurance companies. Estimated
amounts due from reinsurers are reported net of reservesan allowance for uncollectible reinsuranceexpected credit losses. The following table presents the rollforward of $1 million as of September 30, 2017 and Decemberthe allowance for expected credit losses associated with due from reinsurers for the period ended March 31, 2016.2020:
|
| | | |
(In thousands) | |
Allowance for expected credit losses at January 1, 2020 | $ | 690 |
|
Cumulative effect adjustment resulting from changes in accounting principles | 5,927 |
|
Provision for expected credit losses | 183 |
|
Allowance for expected credit losses at March 31, 2020 | $ | 6,800 |
|
(19) Restricted Stock Units
Pursuant to its stock incentive plan, the Company may issue restricted stock units (RSUs)("RSUs") to employees of the Company and its subsidiaries. The RSUs generally vest three to five years from the award date and are subject to other vesting and forfeiture provisions contained in the award agreement. RSUs are expensed pro-ratably over the vesting period. RSU expenses were $30$12 million and $2515 million for the ninethree months ended September 30, 2017March 31, 2020 and 20162019, respectively. A summary of RSUs issued in the ninethree months ended September 30, 2017March 31, 2020 and 20162019 follows:
|
| | | | | | |
($ in thousands) | Units | | Fair Value |
2020 | 724 |
| | $ | 57 |
|
2019 | 1,106 |
| | $ | 60 |
|
|
| | | | | | |
($ in thousands) | Units | | Fair Value |
2017 | 855,051 |
| | $ | 58,712 |
|
2016 | 990,487 |
| | $ | 57,959 |
|
(21)(20) Litigation and Contingent Liabilities
In the ordinary course of business, the Company is subject to disputes, litigation and arbitration arising from its insurance and reinsurance businesses. These matters are generally related to insurance and reinsurance claims and are considered in the establishment of loss and loss expense reserves. In addition, the Company may also become involved in legal actions which seek extra-contractual damages, punitive damages or penalties, including claims alleging bad faith in handling of insurance claims. The Company expects its ultimate liability with respect to such matters will not be material to its financial condition. However, adverse outcomes on such matters are possible, from time to time, and could be material to the Company’s results of operations in any particular financial reporting period.
(21) Leases
Lessees are required to recognize a right-of-use asset and a lease liability for leases with terms of more than 12 months on the balance sheet. All leases disclosed within this footnote are classified as operating leases. Recognized right-of-use asset and lease liability are reported within other assets and other liabilities, respectively, in the consolidated balance sheet. Lease expense is reported in other operating costs and expenses in the consolidated statement of income and accounted for on a straight-line basis over the lease term.
To determine the discount rate used to calculate present value of future minimum lease payments, the Company uses its incremental borrowing rate during the lease commencement period in line with the respective lease duration. In certain cases, the Company has the option to renew the lease. Lease renewal future payments are included in the present value of the future minimum lease payments when the Company determines it is reasonably certain to renew.
The main leases entered into by the Company are for office space used by the Company’s operating units across the world. Additionally, the Company, to a lesser extent, has equipment leases mainly for office equipment. Further information relating to operating lease expense and other operating lease information are as follows:
|
| | | | | | | |
| For the Three Months Ended March 31, |
|
(In thousands) | 2020 | | 2019 |
Leases: | | | |
Lease cost | $ | 11,236 |
| | $ | 11,555 |
|
Cash paid for amounts included in the measurement of lease liabilities reported in operating cash flows | $ | 10,830 |
| | $ | 11,657 |
|
Right-of-use assets obtained in exchange for new lease liabilities | $ | 1,612 |
| | $ | 4,966 |
|
|
| | | | | | | |
| As of March 31, |
($ in thousands) | 2020 | | 2019 |
Right-of-use assets | $ | 184,544 |
| | $ | 185,012 |
|
Lease liabilities | $ | 224,189 |
| | $ | 215,008 |
|
Weighted-average remaining lease term | 6.95 years |
| | 6.8 years |
|
Weighted-average discount rate | 5.95 | % | | 5.95 | % |
Contractual maturities of the Company’s future minimum lease payments are as follows:
|
| | | |
(In thousands) | March 31, 2020 |
Contractual Maturities: | |
2020 | $ | 36,912 |
|
2021 | 45,262 |
|
2022 | 41,267 |
|
2023 | 37,602 |
|
2024 | 31,357 |
|
Thereafter | 78,532 |
|
Total undiscounted future minimum lease payments | 270,932 |
|
Less: Discount impact | (46,743 | ) |
Total lease liability | $ | 224,189 |
|
(22) Business Segments
The Company’s reportable segments include the following two2 business segments, plus a corporate segment:
Insurance - primarily commercial insurance business, including excess and surplus lines and admitted lines in the United States, United Kingdom, Continental Europe, South America, Canada, Mexico, Scandinavia, Asia and Australia; and
Reinsurance - reinsurance business on a facultative and treaty basis, primarily in the United States, United Kingdom, Continental Europe, Australia, the Asia-Pacific Region and South Africa.
Commencing with the first quarter of 2017, the Company reclassified two businesses from the Insurance Segment to the Reinsurance segment. Reclassifications have been made to the Company's 2016 financial information to conform with this presentation. | |
• | Insurance - predominantly commercial insurance business, including excess and surplus lines, admitted lines and specialty personal lines throughout the United States, as well as insurance business in the United Kingdom, Continental Europe, South America, Canada, Mexico, Scandinavia, Asia and Australia. |
| |
• | Reinsurance & Monoline Excess - reinsurance business on a facultative and treaty basis, primarily in the United States, the United Kingdom, Continental Europe, Australia, the Asia-Pacific Region and South Africa, as well as operations that solely retain risk on an excess basis. |
The accounting policies of the segments are the same as those described in the summary of significant accounting policies. Income tax expense and benefits are calculated based upon the Company's overall effective tax rate.
Summary financial information about the Company's reporting segments is presented in the following tables. Income (loss) before income taxes by segment includes allocated investment income. Identifiable assets by segment are those assets used in or allocated to the operation of each segment. |
| | | | | | | | | | | | | | | | | | | | | | | |
| Revenues | | | | |
(In thousands) | Earned Premiums | | Investment Income | | Other | | Total (1) | | Pre-Tax Income (Loss) | | Net Income (Loss) to Common Stockholders |
Three months ended September 30, 2017 | | | | | | | | | | |
Insurance | $ | 1,433,729 |
| | $ | 105,924 |
| | $ | — |
| | $ | 1,539,653 |
| | $ | 171,478 |
| | $ | 123,240 |
|
Reinsurance | 147,771 |
| | 21,528 |
| | — |
| | 169,299 |
| | (57,643 | ) | | (35,074 | ) |
Corporate, other and eliminations (2) | — |
| | 15,027 |
| | 123,404 |
| | 138,431 |
| | (71,681 | ) | | (45,685 | ) |
Net investment gains | — |
| | — |
| | 183,959 |
| | 183,959 |
| | 183,959 |
| | 119,573 |
|
Total | $ | 1,581,500 |
| | $ | 142,479 |
| | $ | 307,363 |
| | $ | 2,031,342 |
| | $ | 226,113 |
| | $ | 162,054 |
|
Three months ended September 30, 2016 | | | | | | | | | | |
Insurance | $ | 1,423,635 |
| | $ | 111,300 |
| | $ | — |
| | $ | 1,534,935 |
| | $ | 210,498 |
| | $ | 140,730 |
|
Reinsurance | 162,309 |
| | 27,567 |
| | — |
| | 189,876 |
| | 27,321 |
| | 18,725 |
|
Corporate, other and eliminations (2) | — |
| | 6,801 |
| | 112,377 |
| | 119,178 |
| | (81,942 | ) | | (53,035 | ) |
Net investment gains | — |
| | — |
| | 175,738 |
| | 175,738 |
| | 175,738 |
| | 114,230 |
|
Total | $ | 1,585,944 |
| | $ | 145,668 |
| | $ | 288,115 |
| | $ | 2,019,727 |
| | $ | 331,615 |
| | $ | 220,650 |
|
Nine months ended September 30, 2017: | | | | | | | | | | |
Insurance | $ | 4,262,485 |
| | 320,552 |
| | $ | — |
| | $ | 4,583,037 |
| | $ | 557,605 |
| | $ | 381,736 |
|
Reinsurance | 457,759 |
| | 67,798 |
| | — |
| | 525,557 |
| | (38,279 | ) | | (20,801 | ) |
Corporate, other and eliminations (2) | — |
| | 38,251 |
| | 326,203 |
| | 364,454 |
| | (224,716 | ) | | (146,324 | ) |
Net investment gains | — |
| | — |
| | 276,760 |
| | 276,760 |
| | 276,760 |
| | 179,894 |
|
Total | $ | 4,720,244 |
| | $ | 426,601 |
| | $ | 602,963 |
| | $ | 5,749,808 |
| | $ | 571,370 |
| | $ | 394,505 |
|
Nine months ended September 30, 2016: | | | | | | | | | | |
Insurance | $ | 4,180,985 |
| | $ | 304,904 |
| | $ | — |
| | $ | 4,485,889 |
| | $ | 586,651 |
| | $ | 394,746 |
|
Reinsurance | 492,087 |
| | 77,119 |
| | — |
| | 569,206 |
| | 79,215 |
| | 54,885 |
|
Corporate, other and eliminations (2) | — |
| | 22,827 |
| | 415,224 |
| | 438,051 |
| | (190,655 | ) | | (123,610 | ) |
Net investment gains | — |
| | — |
| | 189,394 |
| | 189,394 |
| | 189,394 |
| | 123,106 |
|
Total | $ | 4,673,072 |
| | $ | 404,850 |
| | $ | 604,618 |
| | $ | 5,682,540 |
| | $ | 664,605 |
| | $ | 449,127 |
|
_________________
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Revenues | | | | |
(In thousands) | Earned Premiums (1) | | Investment Income | | Other | | Total (2) | | Pre-Tax (Loss) Income | | Net (Loss) Income to Common Stockholders |
Three months ended March 31, 2020 | | | | | | | | | | |
Insurance | $ | 1,484,955 |
| | $ | 123,458 |
| | $ | 8,473 |
| | $ | 1,616,886 |
| | $ | 175,947 |
| | $ | 140,117 |
|
Reinsurance & Monoline Excess | 206,463 |
| | 37,710 |
| | — |
| | 244,173 |
| | 36,514 |
| | 29,187 |
|
Corporate, other and eliminations (3) | — |
| | 13,595 |
| | 113,130 |
| | 126,725 |
| | (41,755 | ) | | (33,755 | ) |
Net investment losses | — |
| | — |
| | (177,174 | ) | | (177,174 | ) | | (177,174 | ) | | (139,967 | ) |
Total | $ | 1,691,418 |
| | $ | 174,763 |
| | $ | (55,571 | ) | | $ | 1,810,610 |
| | $ | (6,468 | ) | | $ | (4,418 | ) |
Three months ended March 31, 2019 | | | | | | | | | | |
Insurance | $ | 1,427,034 |
| | $ | 100,041 |
| | $ | 13,244 |
| | $ | 1,540,319 |
| | $ | 184,516 |
| | $ | 145,993 |
|
Reinsurance & Monoline Excess | 165,822 |
| | 39,574 |
| | — |
| | 205,396 |
| | 44,855 |
| | 35,525 |
|
Corporate, other and eliminations (3) | — |
| | 18,639 |
| | 104,015 |
| | 122,654 |
| | (68,585 | ) | | (55,032 | ) |
Net investment gains | — |
| | — |
| | 68,653 |
| | 68,653 |
| | 68,653 |
| | 54,236 |
|
Total | $ | 1,592,856 |
| | $ | 158,254 |
| | $ | 185,912 |
| | $ | 1,937,022 |
| | $ | 229,439 |
| | $ | 180,722 |
|
_________________(1)Certain amounts included in earned premiums of each segment are related to inter-segment transactions.
(2)Revenues for Insurance from foreign countries for the three months ended September 30, 2017March 31, 2020 and 20162019 were $166$168 million and $187 million, respectively, and for the nine months ended September 30, 2017 and 2016 were $513 million and $546$170 million, respectively. Revenues for Reinsurance & Monoline Excess from foreign countries for the three months ended September 30, 2017March 31, 2020 and 20162019 were $49$69 million and $48$59 million, respectively, and for the nine months ended September 30, 2017 and 2016 were $150 million and $153 million, respectively.
| |
(3) | Corporate, other and eliminations represent corporate revenues and expenses that are not allocated to business segments. |
(2) Corporate, other and eliminations represent corporate revenues and expenses that are not allocated to business segments.
| | (In thousands) | September 30, 2017 | | December 31, 2016 | March 31, 2020 | | December 31, 2019 |
Insurance | $ | 19,136,776 |
| | $ | 19,137,758 |
| $ | 19,485,407 |
| | $ | 20,005,802 |
|
Reinsurance | 3,243,610 |
| | 2,524,338 |
| |
Reinsurance & Monoline Excess | | 4,405,637 |
| | 4,710,819 |
|
Corporate, other and eliminations | 1,955,690 |
| | 1,687,980 |
| 2,198,885 |
| | 1,913,409 |
|
Consolidated | $ | 24,336,076 |
| | $ | 23,350,076 |
| $ | 26,089,929 |
| | $ | 26,630,030 |
|
Net premiums earned by major line of business are as follows:
|
| | | | | | | |
| For the Three Months Ended March 31, |
|
(In thousands) | 2020 | | 2019 |
Insurance: | | | |
Other liability | $ | 547,129 |
| | $ | 490,661 |
|
Workers’ compensation | 301,600 |
| | 326,676 |
|
Short-tail lines (1) | 295,478 |
| | 289,091 |
|
Commercial automobile | 189,643 |
| | 180,925 |
|
Professional liability | 151,105 |
| | 139,681 |
|
Total Insurance | 1,484,955 |
| | 1,427,034 |
|
| | | |
Reinsurance & Monoline Excess: | | | |
Casualty reinsurance | 122,731 |
| | 90,830 |
|
Monoline excess (2) | 42,161 |
| | 38,981 |
|
Property reinsurance | 41,571 |
| | 36,011 |
|
Total Reinsurance & Monoline Excess | 206,463 |
| | 165,822 |
|
| | | |
Total | $ | 1,691,418 |
| | $ | 1,592,856 |
|
|
| | | | | | | | | | | | | | | |
| For the Three Months | | For the Nine Months |
| Ended September 30, | | Ended September 30, |
(In thousands) | 2017 | | 2016 | | 2017 | | 2016 |
Insurance: | | | | | | | |
Other liability | $ | 466,616 |
| | $ | 455,841 |
| | $ | 1,378,505 |
| | $ | 1,302,841 |
|
Workers’ compensation | 378,529 |
| | 354,185 |
| | 1,106,616 |
| | 1,042,503 |
|
Short-tail lines (1) | 287,860 |
| | 312,865 |
| | 887,791 |
| | 962,435 |
|
Commercial automobile | 163,277 |
| | 164,540 |
| | 482,929 |
| | 481,249 |
|
Professional liability | 137,447 |
| | 136,204 |
| | 406,644 |
| | 391,957 |
|
Total Insurance | 1,433,729 |
| | 1,423,635 |
| | 4,262,485 |
| | 4,180,985 |
|
| | | | | | | |
Reinsurance: | | | | | | | |
Casualty | 94,478 |
| | 97,153 |
| | 282,430 |
| | 301,571 |
|
Property | 53,293 |
| | 65,156 |
| | 175,329 |
| | 190,516 |
|
Total Reinsurance | 147,771 |
| | 162,309 |
| | 457,759 |
| | 492,087 |
|
| | | | | | | |
Total | $ | 1,581,500 |
| | $ | 1,585,944 |
| | $ | 4,720,244 |
| | $ | 4,673,072 |
|
______________
(1) Short-tail lines include commercial multi-peril (non-liability), inland marine, accident and health, fidelity and surety, boiler and machinery and other lines.
(2) Monoline excess includes operations that solely retain risk on an excess basis.
SAFE HARBOR STATEMENT
This is a “Safe Harbor” Statement under the Private Securities Litigation Reform Act of 1995. Any forward-looking statements contained herein, including statements related to our outlook for the industry and for our performance for the year 20172020 and beyond, are based upon the Company’s historical performance and on current plans, estimates and expectations. The inclusion of this forward-looking information should not be regarded as a representation by us or any other person that the future plans, estimates or expectations contemplated by us will be achieved. They are subject to various risks and uncertainties, including but not limited to: the ongoing COVID-19 pandemic, including the related impact on the U.S. and global economies; the cyclical nature of the property casualty industry; the impact of significant competition, including new alternative entrants to the industry; the long-tail and potentially volatile nature of the insurance and reinsurance business; product demand and pricing; claims development and the process of estimating reserves; investment risks, including those of our portfolio of fixed maturity securities and investments in equity securities, including investments in financial institutions, municipal bonds, mortgage-backed securities, loans receivable, investment funds, including real estate, merger arbitrage, energy related and private equity investments; the effects of emerging claim and coverage issues; the uncertain nature of damage theories and loss amounts; natural and man-made catastrophic losses, including as a result of terrorist activities;activities, epidemics or pandemics, such as COVID-19; the impact of climate change, which may increase the frequency and severity of catastrophe events; general economic and market activities, including inflation, interest rates, and volatility in the credit and capital markets; the impact of the conditions in the financial markets and the global economy, and the potential effect of legislative, regulatory, accounting or other initiatives taken in response, on our results and financial condition; foreign currency and political risks (including those associated with the United Kingdom's expected withdrawal from the European Union, or "Brexit") relating to our international operations; our ability to attract and retain key personnel and qualified employees; continued availability of capital and financing; the success of our new ventures or acquisitions and the availability of other opportunities; the availability of reinsurance; our retention under the Terrorism Risk Insurance Program Reauthorization Act of 2015; the ability or willingness of our reinsurers to pay reinsurance recoverables owed to us; other legislative and regulatory developments, including those related to business practices in the insurance industry; credit risk related to our policyholders, independent agents and brokers; changes in the ratings assigned to us or our insurance company subsidiaries by rating agencies; the availability of dividends from our insurance company subsidiaries; potential difficulties with technology and/or data security;cyber security issues; the effectiveness of our controls to ensure compliance with guidelines, policies and legal and regulatory standards; and other risks detailed from time to time in the Company’s filings with the Securities and Exchange Commission.
These risks and uncertainties could cause our actual results for the year 20172020 and beyond to differ materially from those expressed in any forward-looking statement we make. Any projections of growth in our revenues would not necessarily result in commensurate levels of earnings. Our future financial performance is dependent upon factors discussed in our Annual Report on Form 10-K, elsewhere in this Form 10-Q and our other SEC filings. Forward-looking statements speak only as of the date on which they are made. Except to the extent required by applicable laws, the Company does not undertake any obligation to update or revise any forward-looking statement, whether as a result of new information, future developments or otherwise.
| |
Item 2.
| Management’s Discussion and Analysis of Financial Condition and Results of Operations |
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Overview
W. R. Berkley Corporation is an insurance holding company that is among the largest commercial lines writers in the United States and operates worldwide in two business segments:segments of the property and casualty business: Insurance and Reinsurance.Reinsurance & Monoline Excess. Our decentralized structure provides us with the flexibility to respond quickly and efficiently to local or specific market conditions and to pursue specialty business niches. It also allows us to be closer to our customers in order to better understand their individual needs and risk characteristics. While providing our business units with certain operating autonomy, our structure allows us to capitalize on the benefits of economies of scale through centralized capital, investment, reinsurance, enterprise risk management, and actuarial, financial and corporate legal staff support. The Company’s primary sources of revenues and earnings are its insurance operations and its investments.
An important part of our strategy is to form new operating units to capitalize on various business opportunities. Over the years, the Company has formed numerous operating units that are focused on important parts of the economy in the U.S., including healthcare, cyber security, energy and agriculture, and on growing international markets, including the Asia-Pacific region, South America and Mexico.
The profitability of the Company’s insurance business is affected primarily by the adequacy of premium rates. The ultimate adequacy of premium rates is not known with certainty at the time an insurance policy is issued because premiums are determined before claims are reported. The ultimate adequacy of premium rates is affected mainly by the severity and frequency of claims, which are influenced by many factors, including natural and other disasters, regulatory measures and court decisions that define and change the extent of coverage and the effects of economic inflation on the amount of compensation for injuries or losses. General insurance prices are also influenced by available insurance capacity, i.e., the level of statutory capital and surplus employed in the industry, and the industry’s willingness to deploy that capital.
The Company’s profitability is also affected by its investment income and investment gains. The Company’s invested assets are invested principally in fixed maturity securities. The return on fixed maturity securities is affected primarily by general interest rates, as well as the credit quality and duration of the securities. Returns available on fixed maturity investments arehave been at historically low levels.levels for an extended period.
The Company also invests in equity securities, merger arbitrage securities, investment funds, (including energy related funds), private equity, loans and real estate related assets. The Company's investments in investment funds and its other alternative investments have experienced, and the Company expects to continue to experience, greater fluctuations in investment income.
During The Company's share of the third quarterearnings or losses from investment funds is generally reported on a one-quarter lag in order to facilitate the timely completion of 2017, catastrophe losses were $119 million, including $107 million related to Hurricanes Harvey, Irma, and Maria and two earthquakes in Mexico.
Commencing withthe Company's consolidated financial statements. Accordingly, income from investment funds for the first quarter of 2017,2020 does not reflect the adverse impact from the recent disruption in global financial markets associated with COVID-19.
Effective January 1, 2020, the Company reclassified two businesses fromadopted new accounting standard ASU 2016-13 Financial Instruments - Credit Losses. Refer to Note 3 in the Insurance segmentfinancial statements for further information on the accounting guidance and impact of its adoption on the Company's results and financial position.
The ongoing COVID-19 pandemic, including the related impact on the U.S. and global economies, has adversely affected our results of operations, financial position and liquidity. As of March 31, 2020, the Company established a preliminary reserve of approximately $67 million for COVID-19-related losses, net of reinsurance and reinstatement premiums. The full impact of COVID-19 on the economy and on the Company’s results of operations, financial position and liquidity are uncertain and not within the Company’s control. The scope, duration and magnitude of the direct and indirect effects of COVID-19 are rapidly evolving in ways that are difficult or impossible to anticipate. In addition, because COVID-19 did not begin to affect the Reinsurance segment. ReclassificationsCompany's operations and financial position until late in the first quarter of 2020, its impact on the Company’s first quarter of 2020 is not necessarily indicative of its potential impact for the remainder of 2020. The impact of the COVID-19 pandemic on our results of operations, financial position and liquidity is expected to include, among others:
Adverse Legislative and Regulatory Action. Legislative and regulatory initiatives taken or which may be taken in response to COVID-19, such as those that seek to retroactively mandate or provide a presumption of coverage for losses which our insurance policies would not otherwise cover and were not priced to cover, may adversely affect us, particularly in our workers’ compensation and property coverages businesses.
Claim Losses Related to COVID-19 May Exceed Reserves. Given the great uncertainties associated with COVID-19 and its impact and the limited information upon which our current assumptions and assessments have been made, our preliminary reserves and underlying estimated level of claim losses and costs arising from COVID-19 may materially change.
Claim Losses and Adjustment Expenses May Increase. As the effects of COVID-19 on industry practices and economic, legal, judicial, social and other environmental conditions occur, unexpected and unintended issues related to claims and coverages may emerge (including in the area of property coverages where physical damage requirements and communicable disease exclusions are currently being challenged).
Reinsurance. Reinsurers may dispute the applicability of reinsurance to COVID-19 related losses (including the application of reinsurance reinstatements) and, as a result, our reinsurers may refuse to pay reinsurance recoverables related thereto or they may not pay them on a timely basis. In addition, we may be unable to renew our current reinsurance coverages or purchase new coverages with respect to certain exposures under our policies, including COVID-19-related exposures.
Reduction in Premiums. Reduced economic activity relating to the Company's 2016COVID-19 pandemic will likely decrease demand for our insurance products and services. In addition, we may alter our view on the insurance coverages that are appropriate to offer in various jurisdictions which could further negatively impact our premium volumes.
Investments. Further disruptions in global financial markets due to the continuing impact of COVID-19 could cause us to incur additional unrealized and/or realized investment losses, including as a result of impairments in our fixed income portfolio.
Credit Risk. As credit risk is generally a function of the economy, we face greater credit risk from our policyholders, independent agents and brokers in connection with the payment and remittance of premiums as a result of the economic conditions caused by COVID-19. Similarly, our credit risk related to the reimbursement of deductibles from policyholders and in connection with reinsurance recoverables has increased.
Operational Disruptions and Costs. Our operations could be disrupted if key members of our senior management or a significant percentage of our workforce or the workforce of our agents, brokers, suppliers or other third party service providers are unable to continue to work because of illness, government directives or otherwise. In response to the COVID-19 pandemic, we have implemented remote working policies which have resulted in disruptions to our business routines, increased operational costs, heightened risk to cybersecurity attacks and data security incidents and a greater dependency on internet and telecommunication access and capabilities.
For additional information on the risks posed by COVID-19, see “The COVID-19 pandemic has adversely affected, and is expected to conform withcontinue and therefore may materially and adversely affect, our results of operations, financial position and liquidity” included in “Part II-Item 1A-Risk Factors” in this presentation.Quarterly Report on Form 10-Q.”
Critical Accounting Estimates
The following presents a discussion of accounting policies and estimates relating to reserves for losses and loss expenses, assumed premiums and other-than-temporary impairments of investments. Management believes these policies and estimates are the most critical to its operations and require the most difficult, subjective and complex judgments.
Reserves for Losses and Loss Expenses.To recognize liabilities for unpaid losses, either known or unknown, insurers establish reserves, which is a balance sheet account representing estimates of future amounts needed to pay claims and related expenses with respect to insured events which have occurred. Estimates and assumptions relating to reserves for losses and loss expenses are based on complex and subjective judgments, often including the interplay of specific uncertainties with related accounting and actuarial measurements. Such estimates are also susceptible to change as significant periods of time may elapse between the occurrence of an insured loss, the report of the loss to the insurer, the ultimate determination of the cost of the loss and the insurer’s payment of that loss.
In general, when a claim is reported, claims personnel establish a “case reserve” for the estimated amount of the ultimate payment based upon known information about the claim at that time. The estimate represents an informed judgment based on general reserving practices and reflects the experience and knowledge of the claims personnel regarding the nature and value of the specific type of claim. Reserves are also established on an aggregate basis to provide for losses incurred but not reported (“IBNR”) to the insurer, potential inadequacy of case reserves and the estimated expenses of settling claims, including legal and other fees and general expenses of administrating the claims adjustment process. Reserves are established based upon the then current legal interpretation of coverage provided.
In examining reserve adequacy, several factors are considered in estimating the ultimate economic value of losses. These factors include, among other things, historical data, legal developments, changes in social attitudes and economic conditions, including the effects of inflation. The actuarial process relies on the basic assumption that past experience, adjusted judgmentally for the effects of current developments and anticipated trends, is an appropriate basis for predicting future outcomes. Reserve amounts are based on management’s informed estimates and judgments using currently available data. As additional experience and other data become available and are reviewed, these estimates and judgments may be revised. This
may result in reserve increases or decreases that would be reflected in our results in periods in which such estimates and assumptions are changed.
Reserves do not represent an exact calculation of liability. Rather, reserves represent an estimate of what management expects the ultimate settlement and claim administration will cost. While the methods for establishing reserves are well tested over time, some of the major assumptions about anticipated loss emergence patterns are subject to uncertainty. These estimates, which generally involve actuarial projections, are based on management’s assessment of facts and circumstances then known, as well as estimates of trends in claims severity and frequency, judicial theories of liability and other factors, including the actions of third parties which are beyond the Company’s control. These variables are affected by external and internal events, such as inflation and economic volatility, judicial and litigation trends, reinsurance coverage, legislative changes and claim handling and reserving practices, which make it more difficult to accurately predict claim costs. The inherent uncertainties of estimating reserves are greater for certain types of liabilities where long periods of time elapse before a definitive determination of liability is made. Because setting reserves is inherently uncertain, the Company cannot provide assurance that its current reserves will prove adequate in light of subsequent events.
Loss reserves included in the Company’s financial statements represent management’s best estimates based upon an actuarially derived point estimate and other considerations. The Company uses a variety of actuarial techniques and methods to derive an actuarial point estimate for each operating unit. These methods include paid loss development, incurred loss development, paid and incurred Bornhuetter-Ferguson methods and frequency and severity methods. In circumstances where one actuarial method is considered more credible than the others, that method is used to set the point estimate. For example, the paid loss and incurred loss development methods rely on historical paid and incurred loss data. For new lines of business, where there is insufficient history of paid and incurred claims data, or in circumstances where there have been significant changes in claim practices, the paid and incurred loss development methods would be less credible than other actuarial methods. The actuarial point estimate may also be based on a judgmental weighting of estimates produced from each of the methods considered. Industry loss experience is used to supplement the Company’s own data in selecting “tail factors” and in areas where the Company’s own data is limited. The actuarial data is analyzed by line of business, coverage and accident or policy year, as appropriate, for each operating unit.
The establishment of the actuarially derived loss reserve point estimate also includes consideration of qualitative factors that may affect the ultimate losses. These qualitative considerations include, among others, the impact of re-underwriting initiatives, changes in the mix of business, changes in distribution sources and changes in policy terms and conditions. Examples of changes in terms and conditions that can have a significant impact on reserve levels are the use of aggregate policy limits, the expansion of coverage exclusions, whether or not defense costs are within policy limits, and changes in deductibles and attachment points.
The key assumptions used to arrive at the best estimate of loss reserves are the expected loss ratios, rate of loss cost inflation, and reported and paid loss emergence patterns. Expected loss ratios represent management’s expectation of losses at the time the business is written, before any actual claims experience has emerged. This expectation is a significant determinant of the estimate of loss reserves for recently written business where there is little paid or incurred loss data to consider. Expected loss ratios are generally derived from historical loss ratios adjusted for the impact of rate changes, loss cost trends and known changes in the type of risks underwritten. Expected loss ratios are estimated for each key line of business within each operating unit. Expected loss cost inflation is particularly important for the long-tail lines, such as excess casualty, and claims with a high medical component, such as workers’ compensation. Reported and paid loss emergence patterns are used to project current reported or paid loss amounts to their ultimate settlement value. Loss development factors are based on the historical emergence patterns of paid and incurred losses, and are derived from the Company’s own experience and industry data. The paid loss emergence pattern is also significant to excess and assumed workers’ compensation reserves because those reserves are discounted to their estimated present value based upon such estimated payout patterns. Management believes the estimates and assumptions it makes in the reserving process provide the best estimate of the ultimate cost of settling claims and related expenses with respect to insured events which have occurred; however, different assumptions and variables could lead to significantly different reserve estimates.
Loss frequency and severity are measures of loss activity that are considered in determining the key assumptions described in our discussion of loss and loss expense reserves, including expected loss ratios, rate of loss cost inflation and reported and paid loss emergence patterns. Loss frequency is a measure of the number of claims per unit of insured exposure, and loss severity is a measure of the average size of claims. Factors affecting loss frequency include the effectiveness of loss
controls and safety programs and changes in economic activity or weather patterns. Factors affecting loss severity include changes in policy limits, retentions, rate of inflation and judicial interpretations.
Another factor affecting estimates of loss frequency and severity is the loss reporting lag, which is the period of time between the occurrence of a loss and the date the loss is reported to the Company. The length of the loss reporting lag affects
our ability to accurately predict loss frequency (loss frequencies are more predictable for lines with short reporting lags) as well as the amount of reserves needed for incurred but not reported losses (less IBNR is required for lines with short reporting lags). As a result, loss reserves for lines with short reporting lags are likely to have less variation from initial loss estimates. For lines with short reporting lags, which include commercial automobile, primary workers’ compensation, other liability (claims-made) and property business, the key assumption is the loss emergence pattern used to project ultimate loss estimates from known losses paid or reported to date. For lines of business with long reporting lags, which include other liability (occurrence), products liability, excess workers’ compensation and liability reinsurance, the key assumption is the expected loss ratio since there is often little paid or incurred loss data to consider. Historically, the Company has experienced less variation from its initial loss estimates for lines of businesses with short reporting lags than for lines of business with long reporting lags.
The key assumptions used in calculating the most recent estimate of the loss reserves are reviewed each quarter and adjusted, to the extent necessary, to reflect the latest reported loss data, current trends and other factors observed. If the actual level of loss frequency and severity are higher or lower than expected, the ultimate losses will be different than management’s estimate. The following table reflects the impact of changes (which could be favorable or unfavorable) in frequency and severity, relative to our assumptions, on our loss estimate for claims occurring in 2016:2019:
| | (In thousands) | Frequency (+/-) | Frequency (+/-) |
Severity (+/-) | 1% | | 5% | | 10% | 1% | | 5% | | 10% |
1% | $ | 76,915 |
| | $ | 231,511 |
| | $ | 424,755 |
| $ | 81,566 |
| | $ | 245,508 |
| | $ | 450,437 |
|
5% | 231,511 |
| | 392,229 |
| | 593,126 |
| 245,508 |
| | 415,944 |
| | 628,988 |
|
10% | 424,755 |
| | 593,126 |
| | 803,590 |
| 450,437 |
| | 628,988 |
| | 852,178 |
|
Our net reserves for losses and loss expenses of approximately $10.0$10.8 billion as of September 30, 2017March 31, 2020 relate to multiple accident years. Therefore, the impact of changes in frequency or severity for more than one accident year could be higher or lower than the amounts reflected above. The impact of such changes would likely be manifested gradually over the course of many years, as the magnitude of the changes became evident.
Approximately $1.8$2.5 billion, or 17%23%, of the Company’s net loss reserves as of September 30, 2017March 31, 2020 relate to the Reinsurance & Monoline Excess segment. There is a higher degree of uncertainty and greater variability regarding estimates of excess workers' compensation and assumed reinsurance loss reserves because thosereserves. In the case of excess workers’ compensation, our policies generally attach at $1 million or higher. The claims which reach our layer therefore tend to involve the most serious injuries and many remain open for the lifetime of the claimant, which extends the claim settlement tail. These claims also occur less frequently but tend to be larger than primary claims, which increases claim variability. In the case of assumed reinsurance our loss reserve estimates are based, in part, upon information received from ceding companies. If information received from ceding companies is not timely or correct, the Company’s estimate of ultimate losses may not be accurate. Furthermore, due to delayed reporting of claim information by ceding companies, the claim settlement tail for assumed reinsurance is also extended. Management considers the impact of delayed reporting and the extended tail in its selection of assumed loss development factors.factors for these lines of business.
Information received from ceding companies is used to set initial expected loss ratios, to establish case reserves and to estimate reserves for incurred but not reported losses on assumed reinsurance business. This information, which is generally provided through reinsurance intermediaries, is gathered through the underwriting process and from periodic claim reports and other correspondence with ceding companies. The Company performs underwriting and claim audits of selected ceding companies to determine the accuracy and completeness of information provided to the Company. The information received from the ceding companies is supplemented by the Company’s own loss development experience with similar lines of business as well as industry loss trends and loss development benchmarks.
Following is a summary of the Company’s reserves for losses and loss expenses by business segment:
| | (In thousands) | September 30, 2017 | | December 31, 2016 | March 31, 2020 | | December 31, 2019 |
Insurance | $ | 8,291,708 |
| | $ | 7,913,074 |
| $ | 8,301,970 |
| | $ | 8,193,381 |
|
Reinsurance | 1,756,766 |
| | 1,677,191 |
| |
Reinsurance & Monoline Excess | | 2,483,667 |
| | 2,504,617 |
|
Net reserves for losses and loss expenses | 10,048,474 |
| | 9,590,265 |
| 10,785,637 |
| | 10,697,998 |
|
Ceded reserves for losses and loss expenses | 1,605,872 |
| | 1,606,930 |
| 1,946,878 |
| | 1,885,251 |
|
Gross reserves for losses and loss expenses | $ | 11,654,346 |
| | $ | 11,197,195 |
| $ | 12,732,515 |
| | $ | 12,583,249 |
|
Following is a summary of the Company’s net reserves for losses and loss expenses by major line of business:
|
| | | | | | | | | | | |
(In thousands) | Reported Case Reserves | | Incurred But Not Reported | | Total |
March 31, 2020 | | | | | |
Other liability | $ | 1,449,043 |
| | $ | 2,574,543 |
| | $ | 4,023,586 |
|
Workers’ compensation (1) | 930,823 |
| | 954,418 |
| | 1,885,241 |
|
Professional liability | 412,969 |
| | 727,029 |
| | 1,139,998 |
|
Commercial automobile | 409,680 |
| | 305,715 |
| | 715,395 |
|
Short-tail lines (2) | 258,040 |
| | 279,710 |
| | 537,750 |
|
Total Insurance | 3,460,555 |
| | 4,841,415 |
| | 8,301,970 |
|
Reinsurance & Monoline Excess (1) (3) | 1,438,138 |
| | 1,045,529 |
| | 2,483,667 |
|
Total | $ | 4,898,693 |
| | $ | 5,886,944 |
| | $ | 10,785,637 |
|
| | | | | |
December 31, 2019 | | | | | |
Other liability | $ | 1,421,378 |
| | $ | 2,522,957 |
| | $ | 3,944,335 |
|
Workers’ compensation (1) | 918,619 |
| | 964,102 |
| | 1,882,721 |
|
Professional liability | 399,411 |
| | 713,433 |
| | 1,112,844 |
|
Commercial automobile | 412,036 |
| | 300,339 |
| | 712,375 |
|
Short-tail lines (2) | 271,192 |
| | 269,914 |
| | 541,106 |
|
Total Insurance | 3,422,636 |
| | 4,770,745 |
| | 8,193,381 |
|
Reinsurance & Monoline Excess (1) (3) | 1,469,363 |
| | 1,035,254 |
| | 2,504,617 |
|
Total | $ | 4,891,999 |
| | $ | 5,805,999 |
| | $ | 10,697,998 |
|
|
| | | | | | | | | | | |
(In thousands) | Reported Case Reserves | | Incurred But Not Reported | | Total |
September 30, 2017 | | | | | |
Other liability | $ | 1,243,208 |
| | $ | 2,162,031 |
| | $ | 3,405,239 |
|
Workers’ compensation (1) | 1,530,194 |
| | 1,246,084 |
| | 2,776,278 |
|
Professional liability | 299,418 |
| | 584,606 |
| | 884,024 |
|
Commercial automobile | 341,998 |
| | 267,136 |
| | 609,134 |
|
Short-tail lines (2) | 309,692 |
| | 307,341 |
| | 617,033 |
|
Total Insurance | 3,724,510 |
| | 4,567,198 |
| | 8,291,708 |
|
Reinsurance (1) | 909,690 |
| | 847,076 |
| | 1,756,766 |
|
Total | $ | 4,634,200 |
| | $ | 5,414,274 |
| | $ | 10,048,474 |
|
| | | | | |
December 31, 2016 | | | | | |
Other liability | $ | 1,159,082 |
| | $ | 2,061,966 |
| | $ | 3,221,048 |
|
Workers’ compensation (1) | 1,453,318 |
| | 1,228,774 |
| | 2,682,092 |
|
Professional liability | 264,188 |
| | 542,539 |
| | 806,727 |
|
Commercial automobile | 344,143 |
| | 252,978 |
| | 597,121 |
|
Short-tail lines (2) | 322,872 |
| | 283,214 |
| | 606,086 |
|
Total Insurance | 3,543,603 |
| | 4,369,471 |
| | 7,913,074 |
|
Reinsurance (1) | 823,516 |
| | 853,675 |
| | 1,677,191 |
|
Total | $ | 4,367,119 |
| | $ | 5,223,146 |
| | $ | 9,590,265 |
|
___________
(1) Reserves for workers’ compensation and reinsuranceReinsurance & Monoline Excess are net of an aggregate net discount of $599$518 million and $640
$530 million as of September 30, 2017March 31, 2020 and December 31, 2016,2019, respectively.
(2) Short-tail lines include commercial multi-peril (non-liability), inland marine, accident and health, fidelity and surety, boiler and machinery and other lines.
(3) Reinsurance & Monoline Excess includes property and casualty reinsurance, as well as operations that solely retain risk on an excess basis.
The Company evaluates reserves for losses and loss adjustment expenses on a quarterly basis. Changes in estimates of prior year losses are reported when such changes are made. The changes in prior year loss reserve estimates are generally the result of ongoing analysis of recent loss development trends. Original estimates are increased or decreased as additional information becomes known regarding individual claims and aggregate claim trends.
Certain of the Company's insurance and reinsurance contracts are retrospectively rated, whereby the Company collects more or less premiums based on the level of loss activity. For those contracts, changes in loss and loss adjustment expenses for prior years may be fully or partially offset by additional or return premiums.
Net prior year development (i.e., the sum of prior year reserve changes and prior year earned premiums changes) for the ninethree months ended September 30, 2017March 31, 2020 and 20162019 are as follows:
| | (In thousands) | 2017 | | 2016 | 2020 | | 2019 |
Net decrease in prior year loss reserves | $ | 7,648 |
| | $ | 23,518 |
| |
Net increase in prior year loss reserves | | $ | (433 | ) | | $ | (6,481 | ) |
Increase in prior year earned premiums | 22,940 |
| | 18,039 |
| 4,448 |
| | 13,204 |
|
Net favorable prior year development | $ | 30,588 |
| | $ | 41,557 |
| $ | 4,015 |
| | $ | 6,723 |
|
One of the many ways in which the ongoing COVID-19 global pandemic may impact the Company’s results is through its impact on claim frequency and severity. Loss cost trends will be impacted directly by COVID-19 related claims filed in certain lines of business, as well as indirectly due to other impacts of COVID-19 associated with economic conditions, inflation, and social distancing and work from home rules, for example. These impacts could act to increase or decrease the overall loss cost trends and could have differing impacts on the Company's different lines of business. For certain lines of business, such as contingency and event cancellation, the Company has received reported claims related to COVID-19, and we expect additional claims to be reported in the future. Further, for workers’ compensation, several States have enacted rules, legislation or administrative orders creating the presumption that certain “essential” workers who contract COVID-19 did so
through the course of their employment. Other States are considering similar actions, including with varying definitions of “essential” workers. The Company believes that such State actions will likely lead to increased workers’ compensation loss frequency and severity. As a result of these developments, the Company has estimated the potential COVID-19 impact to its workers’ compensation, contingency and event cancellation lines of business under a number of possible scenarios. Due to the rapidly evolving COVID-19 situation and the limited amount of available data, there is a high degree of uncertainty around these COVID-19 reserves. In 2017,addition, several States, through regulation, legislation and/or judicial action, are seeking to expand policy coverage terms beyond the policy’s intended coverage, including, for example, but not limited to, property coverages, where there are attempts to extend business interruption coverage where there is no physical damage or loss to property, and attempts to disregard policy exclusions for communicable disease. Policyholder losses arising from these State actions could exceed the reserves we have established for those related policies. For the three months ended March 31, 2020, the Company has recognized a best estimate preliminary reserve for COVID-19 related claims activity, net of reinsurance and inclusive of reinstatement premium, of approximately $67 million, of which $47 million relates to the Insurance segment and $20 million relates to the Reinsurance & Monoline Excess segment.
During the three months ended March 31, 2020, favorable prior year development (net of additional and return premiums) of $31$4.0 million included $62$7.0 million of favorable development for the Insurance segment, partially offset by $31$3.0 million of adverse development for the Reinsurance & Monoline Excess segment.
The overall favorable development for the Insurance segment was primarily attributable to workers'favorable development on workers’ compensation business, (including excess workers' compensation).partially offset by adverse development on professional liability business. The favorable workers'workers’ compensation development was spread across many accident years, including prior to 2008, but2010, and was mostespecially significant in accident years 20142018 and 2015.2019. The favorable workers'workers’ compensation development reflects a continuation of the benign loss cost trends experienced during recent years, particularly the favorable claim frequency trends (i.e., number of reported claims per unit of exposure). In addition, ongoing workers’ compensation claims management efforts, including active medical case management and use of networks and specialty vendors to control medical and pharmaceutical benefit costs, have added to the Company’s favorable workers’ compensation prior year development. The adverse professional liability development was mainly concentrated in accident years 2016 and 2017, but was also spread to a lesser degree across other accident years. The development mainly relates to directors and officers and lawyers professional liability lines of business, and was driven by a higher than expected number of large losses being reported in the period. The Company also experienced a small amount of adverse prior year development during the first quarter 2020 on general liability business stemming from large losses in its excess and surplus lines book of business, mainly in accident years 2016 and 2017.
The adverse development for the Reinsurance & Monoline Excess segment was mainly driven by non-proportional reinsurance assumed liability business written in the U.K., primarily from accident years 2015 through 2019. The development was driven by a higher than expected number of reported large losses.
During the three months ended March 31, 2019, favorable prior year development (net of additional and return premiums) of $6.7 million included $9.6 million of favorable development for the Insurance segment, offset by $2.9 million of adverse development for the Reinsurance & Monoline Excess segment. The overall favorable development for the Insurance segment was primarily attributable to favorable development on workers’ compensation business, partially offset by adverse development on other liability business and professional liability business. The favorable workers’ compensation development was spread across many accident years, including prior to 2009, but was most significant in accident years 2015 through 2017. The favorable workers’ compensation development reflects a continuation of the benign loss cost trends experienced during recent years, particularly the favorable claim frequency trends (i.e., number of reported claims per unit of exposure). The adverse other liability development was mainly related to accident years 2014 through 2018. It was driven by a higher than expected number of large losses being reported in the period, including both general liability and professional liability losses. The adverse development for the Reinsurance & Monoline Excess segment was due to reserve strengthening associated with claims impactedmainly driven by the change in
the Ogden discount rate in the U.K., as well as adverse development on the U.S. casualty facultative casualty excess of loss business. The Ogden rate is the discount rate used to calculate lump-sum bodily injury payouts in the U.K., and was reduced by the U.K. Ministry of Justice from +2.5% to -0.75%; the adverse development mostly related to U.K. motor bodily injury claims which we reinsured on an excess of loss basis in accident years 2012 through 2016. The adverse development on U.S. facultative casualty business was due to construction-related risks in accident years 2008 and prior.
In 2016, favorable prior year development (net of additional and return premiums) of $42 million included $38 million for the Insurance segment and $4 million for the Reinsurance segment. The favorable development for the Insurance segment was primarily attributable to workers' compensation business, partially offset by adverse development for commercial auto liability and medical and other professional liability. The favorable development for workers' compensation stems from accident years 2003 through 2015, but is concentrated in accident years 20142009 and 2015; it reflects claims frequency trends (i.e., number of reported claims per unit of exposure) that continueprior related to be better than we expected. The unfavorable development for commercial auto liability was driven by higher large loss activity than expected in accident years 2014 and 2015, and the unfavorable development for medical professional liability was primarily in accident years prior to 2013 and stemmed from a class of medical professional liability business that we discontinued writing in 2013.construction projects.
Reserve Discount. The Company discounts its liabilities for certain workers’ compensation reserves. The amount of workers’ compensation reserves that were discounted was $1,849$1,717 million and $1,907$1,731 million at September 30, 2017March 31, 2020 and December 31, 2016,2019, respectively. The aggregate net discount for those reserves, after reflecting the effects of ceded reinsurance, was $599$518 million and $640$530 million at September 30, 2017March 31, 2020 and December 31, 2016,2019, respectively. At September 30, 2017,March 31, 2020, discount rates by year ranged from 2.0% to 6.5%, with a weighted average discount rate of 3.8%3.7%.
Substantially all of the workers’ compensation discount (97% of total discounted reserves at September 30, 2017)March 31, 2020) relates to excess workers’ compensation reserves. In order to properly match loss expenses with income earned on investment securities supporting the liabilities, reserves for excess workers’ compensation business are discounted using risk-free discount rates determined by reference to the U.S. Treasury yield curve. These rates are determined annually based on the weighted average rate for the period. Once established, no adjustments are made to the discount rate for that period, and any increases or
decreases in loss reserves in subsequent years are discounted at the same rate, without regard to when any such adjustments are recognized. The expected loss and loss expense payout patterns subject to discounting are derived from the Company’s loss payout experience.
The Company also discounts reserves for certain other long-duration workers’ compensation reserves (representing approximately 3% of total discounted reserves at September 30, 2017)March 31, 2020), including reserves for quota share reinsurance and reserves related to losses regarding occupational lung disease. These reserves are discounted at statutory rates permitted by the Department of Insurance of the State of Delaware.
Assumed Reinsurance Premiums. The Company estimates the amount of assumed reinsurance premiums that it will receive under treaty reinsurance agreements at the inception of the contracts. These premium estimates are revised as the actual amount of assumed premiums is reported to the Company by the ceding companies. As estimates of assumed premiums are made or revised, the related amount of earned premiums, commissions and incurred losses associated with those premiums are recorded. Estimated assumed premiums receivable were approximately $56$44 million at September 30, 2017March 31, 2020 and $68$43 million at December 31, 2016.2019. The assumed premium estimates are based upon terms set forth in reinsurance agreements, information received from ceding companies during the underwriting and negotiation of agreements, reports received from ceding companies and discussions and correspondence with reinsurance intermediaries. The Company also considers its own view of market conditions, economic trends and experience with similar lines of business. These premium estimates represent management’s best estimate of the ultimate amount of premiums to be received under its assumed reinsurance agreements.
Other-Than-Temporary Impairments (OTTI) ofAllowance for Expected Credit Losses on Investments. The cost of
Fixed Maturity Securities – For fixed maturity securities in an unrealized loss position where the Company intends to sell, or it is adjusted where appropriatemore likely than not that it will be required to include a provision for declinesell the security before recovery in value, whichthe amortized cost basis is consideredwritten down to be other-than-temporary. An other-than-temporary decline is considered to occur in investments where there has been a sustained reduction in fair value andthrough net investment (losses) gains. For fixed maturity securities in an unrealized loss position where the Company does not expectintend to sell, or it is more likely than not that it will not be required to sell the security before recovery in value, the Company evaluates whether the decline in fair value has resulted from credit losses or all other factors (non-credit factors). In making this assessment, the Company considers the extent to which fair value is less than amortized cost, changes to the rating of the security by a rating agency, and adverse conditions specifically related to the security, among other factors. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis, an allowance for expected credit losses is recorded for the credit loss through net investment (losses) gains, limited by the amount that the fair value is less than the amortized cost basis. Effective January 1, 2020, the allowance is adjusted for any change in expected credit losses and subsequent recoveries through net investment (losses) gains. The impairment related to recover priornon-credit factors is recognized in other comprehensive (loss) income.
The Company’s credit assessment of allowance for expected credit losses uses a third party model for available for sale and held to maturity securities, as well as loans receivable. The allowance for expected credit losses is generally based on the performance of the underlying collateral under various economic and default scenarios that involve subjective judgments and estimates by management. Modeling these securities involves various factors, such as projected default rates, the nature and realizable value of the collateral, if any, the ability of the issuer to make scheduled payments, historical performance and other relevant economic and performance factors. A discounted cash flow analysis is used to ascertain the amount of the allowance for expected credit losses, if any. In general, the model reverts to the timerating-level long-term average marginal default rates based on 10 years of sale or maturity. Since equity securities do not have a contractual cash flow or maturity,historical data, beyond the Company considers whetherforecast period. For other inputs, the price of an equity security is expectedmodel in most cases reverts to recover within a reasonable period of time.the baseline long-term assumptions linearly over 5 years beyond the forecast period. The long-term assumptions are based on the historical averages.
The Company classifies its fixed maturity securities and preferred stocks by credit rating, primarily based on ratings assigned by credit rating agencies. For purposes of classifying securities with different ratings, the Company uses the average of the credit ratings assigned, unless in limited situations the Company’s own analysis indicates an internal rating is more appropriate. Securities that are not rated by a rating agency are evaluated and classified by the Company on a case-by-case basis.
Fixed Maturity Securities – For securities that we intend to sell or, more likely than not, would be required to sell, a decline in value below amortized cost is considered to be OTTI. The amount of OTTI is equal to the difference between amortized cost and fair value at the balance sheet date. For securities that we do not intend to sell or expect to be required to sell, a decline in value below amortized cost is considered to be an OTTI if we do not expect to recover the entire amortized cost basis of a security (i.e., the present value of cash flows expected to be collected is less than the amortized cost basis of the security).
The portion of the decline in value considered to be a credit loss (i.e., the difference between the present value of cash flows expected to be collected and the amortized cost basis of the security) is recognized in earnings. The portion of the decline in value not considered to be a credit loss (i.e., the difference in the present value of cash flows expected to be collected and the fair value of the security) is recognized in other comprehensive income.
Impairment assessments for structured securities, including mortgage-backed securities and asset-backed securities, collateralized debt obligations and corporate debt, are generally evaluated based on the performance of the underlying collateral under various economic and default scenarios that may involve subjective judgments and estimates by management. Modeling these securities involves various factors, such as projected default rates, the nature and realizable value of the collateral, if any, the ability of the issuer to make scheduled payments, historical performance and other relevant economic and performance factors. If an OTTI determination is made, a discounted cash flow analysis is used to ascertain the amount of the credit impairment.
The following table provides a summary of fixed maturity securities in an unrealized loss position as of September 30, 2017:
|
| | | | | | | | | | |
($ in thousands) | Number of Securities | | Aggregate Fair Value | | Gross Unrealized Loss |
Unrealized loss less than 20% of amortized cost | 592 |
| | $ | 3,864,164 |
| | $ | 40,565 |
|
Unrealized loss of 20% or greater of amortized cost: | | | | | |
Twelve months and longer | 3 |
| | 180 |
| | 112 |
|
Total | 595 |
| | $ | 3,864,344 |
| | $ | 40,677 |
|
A summary of the Company’s non-investment grade fixed maturity securities that were in an unrealized loss position at September 30, 2017March 31, 2020 is presented in the table below: | | ($ in thousands) | Number of Securities | | Aggregate Fair Value | | Gross Unrealized Loss | Number of Securities | | Aggregate Fair Value | | Gross Unrealized Loss |
Foreign government | 9 |
| | $ | 55,292 |
| | $ | 462 |
| 17 |
| | $ | 46,834 |
| | $ | 38,867 |
|
Mortgage-backed securities | 6 |
| | 5,975 |
| | 150 |
| |
Corporate | 3 |
| | 2,852 |
| | 211 |
| 15 |
| | 55,989 |
| | 7,293 |
|
Asset-backed securities | 3 |
| | 1,331 |
| | 115 |
| 4 |
| | 361 |
| | 67 |
|
Mortgage-backed securities | | 13 |
| | 14,213 |
| | 1,484 |
|
Total | 21 |
| | $ | 65,450 |
| | $ | 938 |
| 49 |
| | $ | 117,397 |
| | $ | 47,711 |
|
In classifying particular financial securities in the fair value hierarchy, the Company uses its judgment to determine whether the market for a security is active and whether significant pricing inputs are observable. The Company determines the existence of an active market by assessing whether transactions occur with sufficient frequency and volume to provide reliable pricing information. The Company determines whether inputs are observable based on the use of such information by pricing services and external investment managers, the uninterrupted availability of such inputs, the need to make significant adjustments to such inputs and the volatility of such inputs over time. If the market for a security is determined to be inactive or if significant inputs used to price a security are determined to be unobservable, the security is categorized in Level 3 of the fair value hierarchy.
Because many fixed maturity securities do not trade on a daily basis, the Company utilizes pricing models and processes which may include benchmark curves, benchmarking of like securities, sector groupings and matrix pricing. Market inputs used to evaluate securities include benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers and reference data. Quoted prices are often unavailable for recently issued securities that are infrequently traded or securities that are only traded in private transactions. For publicly traded securities for which quoted prices are unavailable, the Company determines fair value based on independent broker quotations and other observable market data. For securities traded only in private negotiations, the Company determines fair value based primarily on the cost of such securities, which is adjusted to reflect prices of recent placements of securities of the same issuer, financial data, projections and business developments of the issuer and other relevant information.