EVEREST REINSURANCE HOLDINGS, INC.
EVEREST REINSURANCE HOLDINGS, INC.
EVEREST REINSURANCE HOLDINGS, INC.
EVEREST REINSURANCE HOLDINGS, INC.
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS (UNAUDITED)
For the Three and SixNine Months Ended JuneSeptember 30, 2015 and 2014
1. GENERAL
As used in this document, "Holdings" means Everest Reinsurance Holdings, Inc., a Delaware company and direct subsidiary of Everest Underwriting Group (Ireland) Limited ("Holdings Ireland"); "Group" means Everest Re Group, Ltd. (Holdings Ireland's parent); "Bermuda Re" means Everest Reinsurance (Bermuda), Ltd., a subsidiary of Group; "Everest Re" means Everest Reinsurance Company and its subsidiaries, a subsidiary of Holdings (unless the context otherwise requires); "Mt. Logan Re" means Mt. Logan Re Ltd., a subsidiary of Group; and the "Company" means Holdings and its subsidiaries.
Effective July 13, 2015, the Company sold all of the outstanding shares of capital stock of a wholly-owned subsidiary entity, Mt. McKinley Insurance Company ("Mt. McKinley"), to Clearwater Insurance Company. The operating results of Mt. McKinley through July 13, 2015 are included within the Company's financial statements.
2. BASIS OF PRESENTATION
The unaudited consolidated financial statements of the Company for the three and sixnine months ended JuneSeptember 30, 2015 and 2014 include all adjustments, consisting of normal recurring accruals, which, in the opinion of management, are necessary for a fair statement of the results on an interim basis. Certain financial information, which is normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP"), has been omitted since it is not required for interim reporting purposes. The December 31, 2014 consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by GAAP. The results for the three and sixnine months ended JuneSeptember 30, 2015 and 2014 are not necessarily indicative of the results for a full year. These financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto for the years ended December 31, 2014, 2013 and 2012 included in the Company's most recent Form 10-K filing.
All intercompany accounts and transactions have been eliminated.
Application of Recently Issued Accounting Standard Changes
No accounting standards or guidance have been issued recently that would have a material impact on the Company's financial statements or financial reporting process.
3. INVESTMENTS
The amortized cost, market value and gross unrealized appreciation and depreciation of available for sale, fixed maturity, equity security investments, carried at market value and other-than-temporary impairments ("OTTI") in accumulated other comprehensive income ("AOCI") are as follows for the periods indicated:
| | At June 30, 2015 | | | At September 30, 2015 | |
| | Amortized | | | Unrealized | | | Unrealized | | | Market | | | OTTI in AOCI | | | Amortized | | | Unrealized | | | Unrealized | | | Market | | | OTTI in AOCI | |
(Dollars in thousands) | | Cost | | | Appreciation | | | Depreciation | | | Value | | | (a) | | | Cost | | | Appreciation | | | Depreciation | | | Value | | | (a) | |
Fixed maturity securities | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
U.S. Treasury securities and obligations of | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
U.S. government agencies and corporations | | $ | 178,425 | | | $ | 2,229 | | | $ | (260 | ) | | $ | 180,394 | | | $ | - | | | $ | 222,879 | | | $ | 4,634 | | | $ | (69 | ) | | $ | 227,444 | | | $ | - | |
Obligations of U.S. states and political subdivisions | | | 712,000 | | | | 29,604 | | | | (2,885 | ) | | | 738,719 | | | | - | | | | 683,715 | | | | 32,088 | | | | (1,524 | ) | | | 714,279 | | | | - | |
Corporate securities | | | 1,999,650 | | | | 38,041 | | | | (17,825 | ) | | | 2,019,866 | | | | - | | | | 2,012,649 | | | | 35,136 | | | | (48,623 | ) | | | 1,999,162 | | | | 6 | |
Asset-backed securities | | | 132,181 | | | | 582 | | | | (217 | ) | | | 132,546 | | | | - | | | | 132,004 | | | | 689 | | | | (232 | ) | | | 132,461 | | | | - | |
Mortgage-backed securities | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Commercial | | | 65,410 | | | | 2,091 | | | | (222 | ) | | | 67,279 | | | | - | | | | 62,616 | | | | 1,960 | | | | (55 | ) | | | 64,521 | | | | - | |
Agency residential | | | 592,096 | | | | 6,527 | | | | (3,765 | ) | | | 594,858 | | | | - | | | | 720,508 | | | | 7,833 | | | | (2,306 | ) | | | 726,035 | | | | - | |
Non-agency residential | | | 152 | | | | 29 | | | | - | | | | 181 | | | | - | | | | 141 | | | | 27 | | | | - | | | | 168 | | | | - | |
Foreign government securities | | | 443,543 | | | | 24,757 | | | | (8,286 | ) | | | 460,014 | | | | - | | | | 448,501 | | | | 25,864 | | | | (9,658 | ) | | | 464,707 | | | | - | |
Foreign corporate securities | | | 1,073,654 | | | | 30,668 | | | | (16,507 | ) | | | 1,087,815 | | | | - | | | | 1,044,867 | | | | 33,424 | | | | (22,706 | ) | | | 1,055,585 | | | | 16 | |
Total fixed maturity securities | | $ | 5,197,111 | | | $ | 134,528 | | | $ | (49,967 | ) | | $ | 5,281,672 | | | $ | - | | | $ | 5,327,880 | | | $ | 141,655 | | | $ | (85,173 | ) | | $ | 5,384,362 | | | $ | 22 | |
Equity securities | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | |
| | At December 31, 2014 | |
| | Amortized | | | Unrealized | | | Unrealized | | | Market | | | OTTI in AOCI | |
(Dollars in thousands) | | Cost | | | Appreciation | | | Depreciation | | | Value | | | (a) | |
Fixed maturity securities | | | | | | | | | | | | | | | |
U.S. Treasury securities and obligations of | | | | | | | | | | | | | | | |
U.S. government agencies and corporations | | $ | 135,724 | | | $ | 1,416 | | | $ | (304 | ) | | $ | 136,836 | | | $ | - | |
Obligations of U.S. states and political subdivisions | | | 783,129 | | | | 41,969 | | | | (626 | ) | | | 824,472 | | | | - | |
Corporate securities | | | 1,992,200 | | | | 39,954 | | | | (53,219 | ) | | | 1,978,935 | | | | (9,735 | ) |
Asset-backed securities | | | 94,470 | | | | 727 | | | | (374 | ) | | | 94,823 | | | | - | |
Mortgage-backed securities | | | | | | | | | | | | | | | | | | | | |
Commercial | | | 57,027 | | | | 2,292 | | | | (51 | ) | | | 59,268 | | | | - | |
Agency residential | | | 596,140 | | | | 6,697 | | | | (4,720 | ) | | | 598,117 | | | | - | |
Non-agency residential | | | 271 | | | | 44 | | | | - | | | | 315 | | | | - | |
Foreign government securities | | | 515,016 | | | | 27,415 | | | | (5,344 | ) | | | 537,087 | | | | - | |
Foreign corporate securities | | | 1,061,546 | | | | 27,832 | | | | (25,820 | ) | | | 1,063,558 | | | | - | |
Total fixed maturity securities | | $ | 5,235,523 | | | $ | 148,346 | | | $ | (90,458 | ) | | $ | 5,293,411 | | | $ | (9,735 | ) |
Equity securities | | $ | 15 | | | $ | 1 | | | $ | - | | | $ | 16 | | | $ | - | |
(a) Represents the amount of OTTI recognized in AOCI. Amount includes unrealized gains and losses on impaired securities relating to changes in the value of such securities subsequent to the impairment measurement date.
The amortized cost and market value of fixed maturity securities are shown in the following tables by contractual maturity. Mortgage-backed securities are generally more likely to be prepaid than other fixed maturity securities. As the stated maturity of such securities may not be indicative of actual maturities, the totals for mortgage-backed and asset-backed securities are shown separately.
| | At June 30, 2015 | | | At December 31, 2014 | | | At September 30, 2015 | | | At December 31, 2014 | |
| | Amortized | | | Market | | | Amortized | | | Market | | | Amortized | | Market | | Amortized | | Market |
(Dollars in thousands) | | Cost | | | Value | | | Cost | | | Value | | | Cost | | Value | | Cost | | Value |
Fixed maturity securities – available for sale | | | | | | | | | | | | | | | | | | | | | | | | |
Due in one year or less | | $ | 335,044 | | | $ | 333,993 | | | $ | 385,721 | | | $ | 384,022 | | | $ | 345,345 | | | $ | 345,322 | | | $ | 385,721 | | | $ | 384,022 | |
Due after one year through five years | | | 2,487,331 | | | | 2,513,000 | | | | 2,387,533 | | | | 2,369,917 | | | | 2,495,023 | | | | 2,506,790 | | | | 2,387,533 | | | | 2,369,917 | |
Due after five years through ten years | | | 964,946 | | | | 982,602 | | | | 1,025,221 | | | | 1,029,077 | | | | 970,585 | | | | 971,624 | | | | 1,025,221 | | | | 1,029,077 | |
Due after ten years | | | 619,951 | | | | 657,213 | | | | 689,140 | | | | 757,872 | | | | 601,658 | | | | 637,441 | | | | 689,140 | | | | 757,872 | |
Asset-backed securities | | | 132,181 | | | | 132,546 | | | | 94,470 | | | | 94,823 | | | | 132,004 | | | | 132,461 | | | | 94,470 | | | | 94,823 | |
Mortgage-backed securities | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Commercial | | | 65,410 | | | | 67,279 | | | | 57,027 | | | | 59,268 | | | | 62,616 | | | | 64,521 | | | | 57,027 | | | | 59,268 | |
Agency residential | | | 592,096 | | | | 594,858 | | | | 596,140 | | | | 598,117 | | | | 720,508 | | | | 726,035 | | | | 596,140 | | | | 598,117 | |
Non-agency residential | | | 152 | | | | 181 | | | | 271 | | | | 315 | | | | 141 | | | | 168 | | | | 271 | | | | 315 | |
Total fixed maturity securities | | $ | 5,197,111 | | | $ | 5,281,672 | | | $ | 5,235,523 | | | $ | 5,293,411 | | | $ | 5,327,880 | | | $ | 5,384,362 | | | $ | 5,235,523 | | | $ | 5,293,411 | |
The changes in net unrealized appreciation (depreciation) for the Company's investments are derived from the following sources for the periods as indicated:
| | Three Months Ended | | | Six Months Ended | | | Three Months Ended | | | Nine Months Ended | |
| | June 30, | | | June 30, | | | September 30, | | | September 30, | |
(Dollars in thousands) | | 2015 | | | 2014 | | | 2015 | | | 2014 | | | 2015 | | 2014 | | 2015 | | 2014 |
Increase (decrease) during the period between the market value and cost | | | | | | | | | | | | | | | | | | | | | | | | |
of investments carried at market value, and deferred taxes thereon: | | | | | | | | | | | | | | | | | | | | | | | | |
Fixed maturity securities | | $ | (34,272 | ) | | $ | 30,702 | | | $ | 16,939 | | | $ | 64,695 | | | $ | (28,103 | ) | | $ | (41,410 | ) | | $ | (11,164 | ) | | $ | 23,285 | |
Fixed maturity securities, other-than-temporary impairment | | | - | | | | - | | | | 9,735 | | | | - | | | | 22 | | | | - | | | | 9,757 | | | | - | |
Equity securities | | | (1 | ) | | | 2 | | | | (1 | ) | | | 2 | | | | - | | | | 1 | | | | (1 | ) | | | 3 | |
Change in unrealized appreciation (depreciation), pre-tax | | | (34,273 | ) | | | 30,704 | | | | 26,673 | | | | 64,697 | | | | (28,081 | ) | | | (41,409 | ) | | | (1,408 | ) | | | 23,288 | |
Deferred tax benefit (expense) | | | 11,996 | | | | (10,745 | ) | | | (5,928 | ) | | | (22,643 | ) | | | 9,835 | | | | 14,492 | | | | 3,907 | | | | (8,151 | ) |
Deferred tax benefit (expense), other-than-temporary impairment | | | - | | | | - | | | | (3,407 | ) | | | - | | | | (7 | ) | | | - | | | | (3,414 | ) | | | - | |
Change in unrealized appreciation (depreciation), | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
net of deferred taxes, included in stockholder's equity | | $ | (22,277 | ) | | $ | 19,959 | | | $ | 17,338 | | | $ | 42,054 | | | $ | (18,253 | ) | | $ | (26,917 | ) | | $ | (915 | ) | | $ | 15,137 | |
The Company frequently reviews all of its fixed maturity, available for sale securities for declines in market value and focuses its attention on securities whose fair value has fallen below 80% of their amortized cost at the time of review. The Company then assesses whether the decline in value is temporary or other-than-temporary. In making its assessment, the Company evaluates the current market and interest rate environment as well as specific issuer information. Generally, a change in a security's value caused by a change in the market, interest rate or foreign exchange environment does not constitute an other-than-temporary impairment, but rather a temporary decline in market value. Temporary declines in market value are recorded as unrealized losses in accumulated other comprehensive income (loss). If the Company determines that the decline is other-than-temporary and the Company does not have the intent to sell the security; and it is more likely than not that the Company will not have to sell the security before recovery of its cost basis, the carrying value of the investment is written down to fair value. The fair value adjustment that is credit or foreign exchange related is recorded in net realized capital gains (losses) in the Company's consolidated statements of operations and comprehensive income (loss). The fair value adjustment that is non-credit related is recorded as a component of other comprehensive income (loss), net of tax, and is included in accumulated other comprehensive income (loss) in the Company's consolidated balance sheets. The Company's assessments are based on the issuers current and expected future financial position, timeliness with respect to interest and/or principal payments, speed of repayments and any applicable credit enhancements or breakeven constant default rates on mortgage-backed and asset-backed securities, as well as relevant information provided by rating agencies, investment advisors and analysts.
The majority of the Company's equity securities available for sale at market value are primarily comprised of mutual fund investments whose underlying securities consist of fixed maturity securities. When a fund's value reflects an unrealized loss, the Company assesses whether the decline in value is temporary or other-than-temporary. In making its assessment, the Company considers the composition of its portfolios and their related markets, reports received from the portfolio managers and discussions with portfolio managers. If the Company determines that the declines are temporary and it has the ability and intent to continue to hold the investments, then the declines are recorded as unrealized losses in accumulated other comprehensive income (loss). If declines are deemed to be other-than-temporary, then the carrying value of the investment is written down to fair value and recorded in net realized capital gains (losses) in the Company's consolidated statements of operations and comprehensive income (loss).
Retrospective adjustments are employed to recalculate the values of asset-backed securities. All of the Company's asset-backed and mortgage-backed securities have a pass-through structure. Each acquisition lot is reviewed to recalculate the effective yield. The recalculated effective yield is used to derive a book value as if the new yield were applied at the time of acquisition. Outstanding principal factors from the time of acquisition to the adjustment date are used to calculate the prepayment history for all applicable securities. Conditional prepayment rates, computed with life to date factor histories and weighted average maturities, are used in the calculation of projected prepayments for pass-through security types.
The tables below display the aggregate market value and gross unrealized depreciation of fixed maturity and equity securities, by security type and contractual maturity, in each case subdivided according to length of time that individual securities had been in a continuous unrealized loss position for the periods indicated:
| | Duration of Unrealized Loss at June 30, 2015 By Security Type | | | Duration of Unrealized Loss at September 30, 2015 By Security Type | |
| | Less than 12 months | | | Greater than 12 months | | | Total | | | Less than 12 months | �� | | Greater than 12 months | | | Total | |
| | | | | Gross | | | | | | Gross | | | | | | Gross | | | | | Gross | | | | | | Gross | | | | | | Gross | |
| | | | | Unrealized | | | | | | Unrealized | | | | | | Unrealized | | | | | Unrealized | | | | | | Unrealized | | | | | | Unrealized | |
(Dollars in thousands) | | Market Value | | | Depreciation | | | Market Value | | | Depreciation | | | Market Value | | | Depreciation | | | Market Value | | | Depreciation | | | Market Value | | | Depreciation | | | Market Value | | | Depreciation | |
Fixed maturity securities - available for sale | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
U.S. Treasury securities and obligations of | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
U.S. government agencies and corporations | | $ | 9,059 | | | $ | (131 | ) | | $ | 1,969 | | | $ | (129 | ) | | $ | 11,028 | | | $ | (260 | ) | | $ | 201 | | $ | (1 | ) | | $ | 1,844 | | | $ | (68 | ) | | $ | 2,045 | | | $ | (69 | ) |
Obligations of U.S. states and political subdivisions | | | 97,850 | | | | (2,141 | ) | | | 17,686 | | | | (744 | ) | | | 115,536 | | | | (2,885 | ) | | | 20,162 | | | (316 | ) | | | 35,460 | | | | (1,208 | ) | | | 55,622 | | | | (1,524 | ) |
Corporate securities | | | 635,910 | | | | (13,064 | ) | | | 195,206 | | | | (4,761 | ) | | | 831,116 | | | | (17,825 | ) | | | 647,568 | | | (34,098 | ) | | | 291,894 | | | | (14,525 | ) | | | 939,462 | | | | (48,623 | ) |
Asset-backed securities | | | 69,783 | | | | (217 | ) | | | - | | | | - | | | | 69,783 | | | | (217 | ) | | | 49,224 | | | (203 | ) | | | 8,601 | | | | (29 | ) | | | 57,825 | | | | (232 | ) |
Mortgage-backed securities | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Commercial | | | 24,759 | | | | (222 | ) | | | - | | | | - | | | | 24,759 | | | | (222 | ) | | | 6,003 | | | | (55 | ) | | | - | | | | - | | | | 6,003 | | | | (55 | ) |
Agency residential | | | 84,776 | | | | (720 | ) | | | 182,409 | | | | (3,045 | ) | | | 267,185 | | | | (3,765 | ) | | | 97,964 | | | (762 | ) | | | 157,863 | | | | (1,544 | ) | | | 255,827 | | | | (2,306 | ) |
Non-agency residential | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | - | | | | - | | | | - | | | | - | | | | - | |
Foreign government securities | | | 101,412 | | | | (3,525 | ) | | | 39,870 | | | | (4,761 | ) | | | 141,282 | | | | (8,286 | ) | | | 115,876 | | | (3,827 | ) | | | 66,812 | | | | (5,831 | ) | | | 182,688 | | | | (9,658 | ) |
Foreign corporate securities | | | 263,156 | | | | (15,061 | ) | | | 47,075 | | | | (1,446 | ) | | | 310,231 | | | | (16,507 | ) | | | 286,978 | | | | (18,810 | ) | | | 72,392 | | | | (3,896 | ) | | | 359,370 | | | | (22,706 | ) |
Total fixed maturity securities | | $ | 1,286,705 | | | $ | (35,081 | ) | | $ | 484,215 | | | $ | (14,886 | ) | | $ | 1,770,920 | | | $ | (49,967 | ) | | $ | 1,223,976 | | | $ | (58,072 | ) | | $ | 634,866 | | | $ | (27,101 | ) | | $ | 1,858,842 | | | $ | (85,173 | ) |
Equity securities | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Total | | $ | 1,286,705 | | | $ | (35,081 | ) | | $ | 484,215 | | | $ | (14,886 | ) | | $ | 1,770,920 | | | $ | (49,967 | ) | | $ | 1,223,976 | | | $ | (58,072 | ) | | $ | 634,866 | | | $ | (27,101 | ) | | $ | 1,858,842 | | | $ | (85,173 | ) |
| | Duration of Unrealized Loss at June 30, 2015 By Maturity | | | Duration of Unrealized Loss at September 30, 2015 By Maturity | |
| | Less than 12 months | | | Greater than 12 months | | | Total | | | Less than 12 months | | | Greater than 12 months | | | Total | |
| | | | | Gross | | | | | | Gross | | | | | | Gross | | | | | | Gross | | | | | | Gross | | | | | | Gross | |
| | | | | Unrealized | | | | | | Unrealized | | | | | | Unrealized | | | | | | Unrealized | | | | | | Unrealized | | | | | | Unrealized | |
(Dollars in thousands) | | Market Value | | | Depreciation | | | Market Value | | | Depreciation | | | Market Value | | | Depreciation | | | Market Value | | | Depreciation | | | Market Value | | | Depreciation | | | Market Value | | | Depreciation | |
Fixed maturity securities | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Due in one year or less | | $ | 37,960 | | | $ | (1,428 | ) | | $ | 17,437 | | | $ | (2,982 | ) | | $ | 55,397 | | | $ | (4,410 | ) | | $ | 36,780 | | | $ | (1,633 | ) | | $ | 17,019 | | | $ | (1,710 | ) | | $ | 53,799 | | | $ | (3,343 | ) |
Due in one year through five years | | | 599,779 | | | | (18,162 | ) | | | 196,885 | | | | (5,617 | ) | | | 796,664 | | | | (23,779 | ) | | | 594,454 | | | | (29,341 | ) | | | 304,349 | | | | (15,213 | ) | | | 898,803 | | | | (44,554 | ) |
Due in five years through ten years | | | 337,189 | | | | (10,986 | ) | | | 68,131 | | | | (2,449 | ) | | | 405,320 | | | | (13,435 | ) | | | 382,520 | | | | (23,273 | ) | | | 109,012 | | | | (7,616 | ) | | | 491,532 | | | | (30,889 | ) |
Due after ten years | | | 132,459 | | | | (3,346 | ) | | | 19,353 | | | | (793 | ) | | | 151,812 | | | | (4,139 | ) | | | 57,031 | | | | (2,805 | ) | | | 38,022 | | | | (989 | ) | | | 95,053 | | | | (3,794 | ) |
Asset-backed securities | | | 69,783 | | | | (217 | ) | | | - | | | | - | | | | 69,783 | | | | (217 | ) | | | 49,224 | | | | (203 | ) | | | 8,601 | | | | (29 | ) | | | 57,825 | | | | (232 | ) |
Mortgage-backed securities | | | 109,535 | | | | (942 | ) | | | 182,409 | | | | (3,045 | ) | | | 291,944 | | | | (3,987 | ) | | | 103,967 | | | | (817 | ) | | | 157,863 | | | | (1,544 | ) | | | 261,830 | | | | (2,361 | ) |
Total fixed maturity securities | | $ | 1,286,705 | | | $ | (35,081 | ) | | $ | 484,215 | | | $ | (14,886 | ) | | $ | 1,770,920 | | | $ | (49,967 | ) | | $ | 1,223,976 | | | $ | (58,072 | ) | | $ | 634,866 | | | $ | (27,101 | ) | | $ | 1,858,842 | | | $ | (85,173 | ) |
The aggregate market value and gross unrealized losses related to investments in an unrealized loss position at JuneSeptember 30, 2015 were $1,770,920$1,858,842 thousand and $49,967$85,173 thousand, respectively. The market value of securities for the single issuer whose securities comprised the largest unrealized loss position at JuneSeptember 30, 2015, did not exceed 0.4%0.3% of the overall market value of the Company's fixed maturity securities. In addition, as indicated on the above table, there was no significant concentration of unrealized losses in any one market sector. The $35,081$58,072 thousand of unrealized losses related to fixed maturity securities that have been in an unrealized loss position for less than one year were primarily comprised of foreigndomestic and domesticforeign corporate securities and foreign government securities. The majority of these unrealized losses are attributable to unrealized losses in the energy sector, $15,413$36,358 thousand, as falling oil prices disrupted the market values for this sector, particularly for oil exploration, production and servicing companies and unrealized foreign exchange losses, $15,418$11,313 thousand, as the U.S. dollar has strengthened against other currencies. The $14,886$27,101 thousand of unrealized losses related to fixed maturity securities in an unrealized loss position for more than one year related primarily to foreign government securities, domestic and foreign corporate securities, foreign government securities and agency residential mortgage-backed securities. OfThe majority of these unrealized losses $11,648are attributable to unrealized foreign exchange losses, $13,322 thousand, were related to securities that were rated investment grade by at least one nationally recognized statistical rating organization.as the U.S. dollar has strengthened against other currencies and unrealized losses in the energy sector, $5,056 thousand, as falling oil prices disrupted the market values for this sector, particularly for oil exploration, production and servicing companies. The Company did not have any sub-prime or alt-A loans with gross unrealized depreciation at JuneSeptember 30, 2015. In all instances, there were no projected cash flow shortfalls to recover the full book value of the investments and the related interest obligations. The mortgage-backed securities still have excess credit coverage and are current on interest and principal payments.
The Company, given the size of its investment portfolio and capital position, does not have the intent to sell these securities; and it is more likely than not that the Company will not have to sell the security before recovery of its cost basis. In addition, all securities currently in an unrealized loss position are current with respect to principal and interest payments.
The tables below display the aggregate market value and gross unrealized depreciation of fixed maturity and equity securities, by security type and contractual maturity, in each case subdivided according to length of time that individual securities had been in a continuous unrealized loss position for the periods indicated:
| | Duration of Unrealized Loss at December 31, 2014 By Security Type | |
| | Less than 12 months | | | Greater than 12 months | | | Total | |
| | | | | Gross | | | | | | Gross | | | | | | Gross | |
| | | | | Unrealized | | | | | | Unrealized | | | | | | Unrealized | |
(Dollars in thousands) | | Market Value | | | Depreciation | | | Market Value | | | Depreciation | | | Market Value | | | Depreciation | |
Fixed maturity securities - available for sale | | | | | | | | | | | | | | | | | | |
U.S. Treasury securities and obligations of | | | | | | | | | | | | | | | | | | |
U.S. government agencies and corporations | | $ | 13,187 | | | $ | (20 | ) | | $ | 26,897 | | | $ | (284 | ) | | $ | 40,084 | | | $ | (304 | ) |
Obligations of U.S. states and political subdivisions | | | 20,428 | | | | (242 | ) | | | 18,199 | | | | (384 | ) | | | 38,627 | | | | (626 | ) |
Corporate securities | | | 830,928 | | | | (48,891 | ) | | | 171,207 | | | | (4,328 | ) | | | 1,002,135 | | | | (53,219 | ) |
Asset-backed securities | | | 62,451 | | | | (374 | ) | | | - | | | | - | | | | 62,451 | | | | (374 | ) |
Mortgage-backed securities | | | | | | | | | | | | | | | | | | | | | | | | |
Commercial | | | 11,742 | | | | (51 | ) | | | - | | | | - | | | | 11,742 | | | | (51 | ) |
Agency residential | | | 24,230 | | | | (59 | ) | | | 267,824 | | | | (4,661 | ) | | | 292,054 | | | | (4,720 | ) |
Non-agency residential | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Foreign government securities | | | 45,521 | | | | (913 | ) | | | 53,086 | | | | (4,431 | ) | | | 98,607 | | | | (5,344 | ) |
Foreign corporate securities | | | 228,733 | | | | (21,704 | ) | | | 117,713 | | | | (4,116 | ) | | | 346,446 | | | | (25,820 | ) |
Total fixed maturity securities | | $ | 1,237,220 | | | $ | (72,254 | ) | | $ | 654,926 | | | $ | (18,204 | ) | | $ | 1,892,146 | | | $ | (90,458 | ) |
Equity securities | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Total | | $ | 1,237,220 | | | $ | (72,254 | ) | | $ | 654,926 | | | $ | (18,204 | ) | | $ | 1,892,146 | | | $ | (90,458 | ) |
| | Duration of Unrealized Loss at December 31, 2014 By Maturity | |
| | Less than 12 months | | | Greater than 12 months | | | Total | |
| | | | | Gross | | | | | | Gross | | | | | | Gross | |
| | | | | Unrealized | | | | | | Unrealized | | | | | | Unrealized | |
(Dollars in thousands) | | Market Value | | | Depreciation | | | Market Value | | | Depreciation | | | Market Value | | | Depreciation | |
Fixed maturity securities | | | | | | | | | | | | | | | | | | |
Due in one year or less | | $ | 12,858 | | | $ | (550 | ) | | $ | 53,528 | | | $ | (4,224 | ) | | $ | 66,386 | | | $ | (4,774 | ) |
Due in one year through five years | | | 622,137 | | | | (51,262 | ) | | | 243,192 | | | | (6,306 | ) | | | 865,329 | | | | (57,568 | ) |
Due in five years through ten years | | | 467,187 | | | | (18,958 | ) | | | 66,630 | | | | (2,018 | ) | | | 533,817 | | | | (20,976 | ) |
Due after ten years | | | 36,615 | | | | (1,000 | ) | | | 23,752 | | | | (995 | ) | | | 60,367 | | | | (1,995 | ) |
Asset-backed securities | | | 62,451 | | | | (374 | ) | | | - | | | | - | | | | 62,451 | | | | (374 | ) |
Mortgage-backed securities | | | 35,972 | | | | (110 | ) | | | 267,824 | | | | (4,661 | ) | | | 303,796 | | | | (4,771 | ) |
Total fixed maturity securities | | $ | 1,237,220 | | | $ | (72,254 | ) | | $ | 654,926 | | | $ | (18,204 | ) | | $ | 1,892,146 | | | $ | (90,458 | ) |
The aggregate market value and gross unrealized losses related to investments in an unrealized loss position at December 31, 2014 were $1,892,146 thousand and $90,458 thousand, respectively. The market value of securities for the single issuer whose securities comprised the largest unrealized loss position at December 31, 2014, did not exceed 0.3% of the overall market value of the Company's fixed maturity securities. In addition, as indicated on the above table, there was no significant concentration of unrealized losses in any one market sector. The $72,254 thousand of unrealized losses related to fixed maturity securities that have been in an unrealized loss position for less than one year were primarily comprised of domestic and foreign corporate securities. The majority of these unrealized losses are attributable to unrealized losses in the energy sector, $53,772 thousand, as falling oil prices disrupted the market values for this sector, particularly for oil exploration, production and servicing companies during the fourth quarter of 2014 and unrealized foreign exchange losses, $7,298 thousand, as the U.S. dollar has strengthened against other currencies. The $18,204 thousand of unrealized losses related to fixed maturity securities in an unrealized loss position for more than one year related primarily to agency residential mortgage-backed securities, foreign and domestic corporate securities and foreign government securities. Of these unrealized losses, $16,680 thousand were related to securities that were rated investment grade by at least one nationally recognized statistical rating organization. The Company did not have any sub-prime or alt-A loans with gross unrealized depreciation at December 31, 2014. In all instances, there were no projected cash flow shortfalls to recover the full book value of the investments and the related interest obligations. The mortgage-backed securities still have excess credit coverage and are current on interest and principal payments.
Other invested assets, at fair value, are comprised of common shares of the Company's ultimate parent, Group. At JuneSeptember 30, 2015, the Company held 9,719,971 shares of Group representing 18% of the total outstanding shares.
The components of net investment income are presented in the tables below for the periods indicated:
| | Three Months Ended | | | Six Months Ended | | | Three Months Ended | | | Nine Months Ended | |
| | June 30, | | | June 30, | | | September 30, | | | September 30, | |
(Dollars in thousands) | | 2015 | | | 2014 | | | 2015 | | | 2014 | | | 2015 | | | 2014 | | | 2015 | | | 2014 | |
Fixed maturities | | $ | 46,443 | | | $ | 53,921 | | | $ | 94,415 | | | $ | 105,000 | | | $ | 46,414 | | | $ | 52,515 | | | $ | 140,829 | | | $ | 157,515 | |
Equity securities | | | 9,892 | | | | 9,180 | | | | 18,634 | | | | 18,117 | | | | 8,004 | | | | 7,966 | | | | 26,638 | | | | 26,083 | |
Short-term investments and cash | | | 321 | | | | 459 | | | | 485 | | | | 645 | | | | 220 | | | | 196 | | | | 705 | | | | 841 | |
Other invested assets | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Limited partnerships | | | 7,276 | | | | 2,695 | | | | 14,655 | | | | (392 | ) | | | 3,021 | | | | 19,254 | | | | 17,676 | | | | 18,862 | |
Dividends from Parent's shares | | | 9,234 | | | | 7,290 | | | | 18,468 | | | | 14,580 | | | | 9,234 | | | | 7,290 | | | | 27,702 | | | | 21,870 | |
Other | | | 983 | | | | 330 | | | | 1,608 | | | | 2,351 | | | | (242 | ) | | | 869 | | | | 1,366 | | | | 3,220 | |
Gross investment income before adjustments | | | 74,149 | | | | 73,875 | | | | 148,265 | | | | 140,301 | | | | 66,651 | | | | 88,090 | | | | 214,916 | | | | 228,391 | |
Funds held interest income (expense) | | | 865 | | | | 1,183 | | | | 3,386 | | | | 3,292 | | | | 940 | | | | 970 | | | | 4,326 | | | | 4,262 | |
Interest income from Parent | | | 1,075 | | | | - | | | | 2,150 | | | | - | | | | 1,075 | | | | - | | | | 3,225 | | | | - | |
Gross investment income | | | 76,089 | | | | 75,058 | | | | 153,801 | | | | 143,593 | | | | 68,666 | | | | 89,060 | | | | 222,467 | | | | 232,653 | |
Investment expenses | | | (5,164 | ) | | | (6,422 | ) | | | (10,295 | ) | | | (11,170 | ) | | | (5,303 | ) | | | (5,614 | ) | | | (15,598 | ) | | | (16,784 | ) |
Net investment income | | $ | 70,925 | | | $ | 68,636 | | | $ | 143,506 | | | $ | 132,423 | | | $ | 63,363 | | | $ | 83,446 | | | $ | 206,869 | | | $ | 215,869 | |
The Company records results from limited partnership investments on the equity method of accounting with changes in value reported through net investment income. Due to the timing of receiving financial information from these partnerships, the results are generally reported on a one month or quarter lag. If the Company determines there has been a significant decline in value of a limited partnership during this lag period, a loss will be recorded in the period in which the Company identifies the decline.
The Company had contractual commitments to invest up to an additional $234,311$245,663 thousand in limited partnerships at JuneSeptember 30, 2015. These commitments will be funded when called in accordance with the partnership agreements, which have investment periods that expire, unless extended, through 2020.2019.
The components of net realized capital gains (losses) are presented in the tables below for the periods indicated:
| | Three Months Ended | | | Six Months Ended | | | Three Months Ended | | | Nine Months Ended | |
| | June 30, | | | June 30, | | | September 30, | | | September 30, | |
(Dollars in thousands) | | 2015 | | | 2014 | | | 2015 | | | 2014 | | | 2015 | | | 2014 | | | 2015 | | | 2014 | |
Fixed maturity securities, market value: | | | | | | | | | | | | | | | | | | | | | | | | |
Other-than-temporary impairments | | $ | (8,810 | ) | | $ | (199 | ) | | $ | (32,931 | ) | | $ | (199 | ) | | $ | (10,502 | ) | | $ | - | | | $ | (43,433 | ) | | $ | (199 | ) |
Gains (losses) from sales | | | (12,208 | ) | | | (928 | ) | | | (23,726 | ) | | | (2,925 | ) | | | (6,636 | ) | | | 1,070 | | | | (30,362 | ) | | | (1,855 | ) |
Fixed maturity securities, fair value: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Gains (losses) from sales | | | 14 | | | | - | | | | 42 | | | | 940 | | | | (17 | ) | | | 82 | | | | 25 | | | | 1,022 | |
Gains (losses) from fair value adjustments | | | (6 | ) | | | - | | | | 56 | | | | - | | | | - | | | | (938 | ) | | | 56 | | | | (938 | ) |
Equity securities, market value: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Gains (losses) from sales | | | 1 | | | | - | | | | 1 | | | | - | | | | - | | | | - | | | | 1 | | | | - | |
Equity securities, fair value: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Gains (losses) from sales | | | (289 | ) | | | 1,721 | | | | (354 | ) | | | 385 | | | | (13,656 | ) | | | (2,589 | ) | | | (14,010 | ) | | | (2,204 | ) |
Gains (losses) from fair value adjustments | | | (5,334 | ) | | | 52,205 | | | | 15,612 | | | | 77,958 | | | | (101,322 | ) | | | (12,559 | ) | | | (85,710 | ) | | | 65,399 | |
Other invested assets, fair value: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Gains (losses) from fair value adjustments | | | 77,857 | | | | 72,316 | | | | 113,821 | | | | 44,906 | | | | (84,272 | ) | | | 14,775 | | | | 29,549 | | | | 59,681 | |
Gain on sale of subsidiary | | | | 94,704 | | | | - | | | | 94,704 | | | | - | |
Short-term investment gains (losses) | | | - | | | | (1 | ) | | | - | | | | (1 | ) | | | 6 | | | | (1 | ) | | | 6 | | | | (2 | ) |
Total net realized capital gains (losses) | | $ | 51,225 | | | $ | 125,114 | | | $ | 72,521 | | | $ | 121,064 | | | $ | (121,695 | ) | | $ | (160 | ) | | $ | (49,174 | ) | | $ | 120,904 | |
The Company recorded as net realized capital gains (losses) in the consolidated statements of operations and comprehensive income (loss) both fair value re-measurements and write-downs in the value of securities deemed to be impaired on an other-than-temporary basis as displayed in the table above. The Company had no other-than-temporary impaired securities where the impairment had both a credit and non-credit component.
On July 13, 2015, the Company sold Mt. McKinley, a Delaware domiciled insurance company and wholly-owned subsidiary of the Company to Clearwater Insurance Company, a Delaware domiciled insurance company. The purchase price of $20,156 thousand was based upon the statutory book value of Mt. McKinley as of the closing date. The Company recognized a pre-tax realized gain of $94,704 thousand on the sale of Mt. McKinley.
The proceeds and split between gross gains and losses, from sales of fixed maturity and equity securities, are presented in the tables below for the periods indicated:
| | Three Months Ended | | | Six Months Ended | | | Three Months Ended | | | Nine Months Ended | |
| | June 30, | | | June 30, | | | September 30, | | | September 30, | |
(Dollars in thousands) | | 2015 | | | 2014 | | | 2015 | | | 2014 | | | 2015 | | | 2014 | | | 2015 | | | 2014 | |
Proceeds from sales of fixed maturity securities | | $ | 175,742 | | | $ | 178,281 | | | $ | 289,824 | | | $ | 348,622 | | | $ | 130,284 | | | $ | 222,915 | | | $ | 420,108 | | | $ | 571,537 | |
Gross gains from sales | | | 5,096 | | | | 3,815 | | | | 7,638 | | | | 6,290 | | | | 1,401 | | | | 4,408 | | | | 9,039 | | | | 10,698 | |
Gross losses from sales | | | (17,290 | ) | | | (4,743 | ) | | | (31,322 | ) | | | (8,275 | ) | | | (8,054 | ) | | | (3,256 | ) | | | (39,376 | ) | | | (11,531 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Proceeds from sales of equity securities | | $ | 169,533 | | | $ | 116,827 | | | $ | 303,493 | | | $ | 292,943 | | | $ | 138,799 | | | $ | 111,684 | | | $ | 442,292 | | | $ | 404,627 | |
Gross gains from sales | | | 7,272 | | | | 3,734 | | | | 12,414 | | | | 10,322 | | | | 5,241 | | | | 1,697 | | | | 17,655 | | | | 12,019 | |
Gross losses from sales | | | (7,561 | ) | | | (2,013 | ) | | | (12,768 | ) | | | (9,937 | ) | | | (18,896 | ) | | | (4,286 | ) | | | (31,664 | ) | | | (14,223 | ) |
4. FAIR VALUE
GAAP guidance regarding fair value measurements address how companies should measure fair value when they are required to use fair value measures for recognition or disclosure purposes under GAAP and provides a common definition of fair value to be used throughout GAAP. It defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly fashion between market participants at the measurement date. In addition, it establishes a three-level valuation hierarchy for the disclosure of fair value measurements. The valuation hierarchy is based on the transparency of inputs to the valuation of an asset or liability. The level in the hierarchy within which a given fair value measurement falls is determined based on the lowest level input that is significant to the measurement, with Level 1 being the highest priority and Level 3 being the lowest priority.
The levels in the hierarchy are defined as follows:
Level 1: | Inputs to the valuation methodology are observable inputs that reflect unadjusted quoted prices for identical assets or liabilities in an active market; |
Level 2: | Inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument; |
Level 3: | Inputs to the valuation methodology are unobservable and significant to the fair value measurement. |
The Company's fixed maturity and equity securities are primarily managed by third party investment asset managers. The investment asset managers obtain prices from nationally recognized pricing services. These services seek to utilize market data and observations in their evaluation process. They use pricing applications that vary by asset class and incorporate available market information and when fixed maturity securities do not trade on a daily basis the services will apply available information through processes such as benchmark curves, benchmarking of like securities, sector groupings and matrix pricing. In addition, they use model processes, such as the Option Adjusted Spread model to develop prepayment and interest rate scenarios for securities that have prepayment features.
In limited instances where prices are not provided by pricing services or in rare instances when a manager may not agree with the pricing service, price quotes on a non-binding basis are obtained from investment brokers. The investment asset managers do not make any changes to prices received from either the pricing services or the investment brokers. In addition, the investment asset managers have procedures in place to review the reasonableness of the prices from the service providers and may request verification of the prices. In addition, the Company continually performs analytical reviews of price changes and tests the prices on a random basis to an independent pricing source. No material variances were noted during these price validation procedures. In limited situations, where financial markets are inactive or illiquid, the Company may use its own assumptions about future cash flows and risk-adjusted discount rates to determine fair value. Due to the unavailability of prices for one private placement security, the Company
valued the security at $7,350$6,125 thousand at JuneSeptember 30, 2015 and made no such adjustments at December 31, 2014.2014
The Company internally manages a small public equity portfolio which had a fair value at JuneSeptember 30, 2015 and December 31, 2014 of $117,838$114,519 thousand and $96,890 thousand, respectively, and all prices were obtained from publically published sources.
Equity securities denominated in U.S. currency with quoted prices in active markets for identical assets are categorized as level 1 since the quoted prices are directly observable. Equity securities traded on foreign exchanges are categorized as level 2 due to the added input of a foreign exchange conversion rate to determine fair or market value. The Company uses foreign currency exchange rates published by nationally recognized sources.
All categories of fixed maturity securities listed in the tables below are generally categorized as level 2, since a particular security may not have traded but the pricing services are able to use valuation models with observable market inputs such as interest rate yield curves and prices for similar fixed maturity securities in terms of issuer, maturity and seniority. For foreign government securities and foreign corporate securities, the fair values provided by the third party pricing services in local currencies, and where applicable, are converted to U.S. dollars using currency exchange rates from nationally recognized sources.
The fixed maturities with fair values categorized as level 3 result when prices are not available from the nationally recognized pricing services. The asset managers will then obtain non-binding price quotes for the securities from brokers. The single broker quotes are provided by market makers or broker-dealers who are recognized as market participants in the markets in which they are providing the quotes. The prices received from brokers are reviewed for reasonableness by the third party asset managers and the Company. If the broker quotes are for foreign denominated securities, the quotes are converted to U.S. dollars using currency exchange rates from nationally recognized sources. Historically, most of the level 3 fixed maturities have resulted from new issuances and the third party prices services have not yet included the issuance in their data base. Generally, in subsequent measurement periods, the issuances will be included in the data base and the fair value will transfer to level 2.
The composition and valuation inputs for the presented fixed maturities categories are as follows:
· | U.S. Treasury securities and obligations of U.S. government agencies and corporations are primarily comprised of U.S. Treasury bonds and the fair value is based on observable market inputs such as quoted prices, reported trades, quoted prices for similar issuances or benchmark yields; |
· | Obligations of U.S. states and political subdivisions are comprised of state and municipal bond issuances and the fair values are based on observable market inputs such as quoted market prices, quoted prices for similar securities, benchmark yields and credit spreads; |
· | Corporate securities are primarily comprised of U.S. corporate and public utility bond issuances and the fair values are based on observable market inputs such as quoted market prices, quoted prices for similar securities, benchmark yields and credit spreads; |
· | Asset-backed and mortgage-backed securities fair values are based on observable inputs such as quoted prices, reported trades, quoted prices for similar issuances or benchmark yields and cash flow models using observable inputs such as prepayment speeds, collateral performance and default spreads; |
· | Foreign government securities are comprised of global non-U.S. sovereign bond issuances and the fair values are based on observable market inputs such as quoted market prices, quoted prices for similar securities and models with observable inputs such as benchmark yields and credit spreads and then, where applicable, converted to U.S. dollars using an exchange rate from a nationally recognized source; |
· | Foreign corporate securities are comprised of global non-U.S. corporate bond issuances and the fair values are based on observable market inputs such as quoted market prices, quoted prices for similar securities and models with observable inputs such as benchmark yields and credit spreads and then, where applicable, converted to U.S. dollars using an exchange rate from a nationally recognized source. |
Other invested assets, at fair value, are categorized as Level 1, Quoted Prices in Active Markets for Identical Assets, since the securities are shares of the Company's parent, which are actively traded on an exchange and the price is based on a quoted price.
The following table presents the fair value measurement levels for all assets, which the Company has recorded at fair value (fair and market value) as of the period indicated:
| | | | | Fair Value Measurement Using: | | | | | | Fair Value Measurement Using: | |
| | | | | Quoted Prices | | | | | | | | | | | | Quoted Prices | | | | | | | |
| | | | | in Active | | | Significant | | | | | | | | | in Active | | | Significant | | | | |
| | | | | Markets for | | | Other | | | Significant | | | | | | Markets for | | | Other | | | Significant | |
| | | | | Identical | | | Observable | | | Unobservable | | | | | | Identical | | | Observable | | | Unobservable | |
| | | | | Assets | | | Inputs | | | Inputs | | | | | | Assets | | | Inputs | | | Inputs | |
(Dollars in thousands) | | June 30, 2015 | | (Level 1) | | | (Level 2) | | | (Level 3) | | | September 30, 2015 | | | (Level 1) | | | (Level 2) | | | (Level 3) | |
Assets: | | | | | | | | | | | | | | | | | | | | | | | | |
Fixed maturities, market value | | | | | | | | | | | | | | | | | | | | | | | | |
U.S. Treasury securities and obligations of | | | | | | | | | | | | | | | | | | | | | | | | |
U.S. government agencies and corporations | | $ | 180,394 | | | $ | - | | | $ | 180,394 | | | $ | - | | | $ | 227,444 | | | $ | - | | | $ | 227,444 | | | $ | - | |
Obligations of U.S. States and political subdivisions | | | 738,719 | | | | - | | | | 738,719 | | | | - | | | | 714,279 | | | | - | | | | 714,279 | | | | - | |
Corporate securities | | | 2,019,866 | | | | - | | | | 2,017,908 | | | | 1,958 | | | | 1,999,162 | | | | - | | | | 1,993,887 | | | | 5,275 | |
Asset-backed securities | | | 132,546 | | | | - | | | | 132,546 | | | | - | | | | 132,461 | | | | - | | | | 132,461 | | | | - | |
Mortgage-backed securities | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Commercial | | | 67,279 | | | | - | | | | 67,279 | | | | - | | | | 64,521 | | | | - | | | | 64,521 | | | | - | |
Agency residential | | | 594,858 | | | | - | | | | 594,858 | | | | - | | | | 726,035 | | | | - | | | | 726,035 | | | | - | |
Non-agency residential | | | 181 | | | | - | | | | 181 | | | | - | | | | 168 | | | | - | | | | 168 | | | | - | |
Foreign government securities | | | 460,014 | | | | - | | | | 460,014 | | | | - | | | | 464,707 | | | | - | | | | 464,707 | | | | - | |
Foreign corporate securities | | | 1,087,815 | | | | - | | | | 1,079,978 | | | | 7,837 | | | | 1,055,585 | | | | - | | | | 1,049,460 | | | | 6,125 | |
Total fixed maturities, market value | | | 5,281,672 | | | | - | | | | 5,271,877 | | | | 9,795 | | | | 5,384,362 | | | | - | | | | 5,372,962 | | | | 11,400 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Fixed maturities, fair value | | | 228 | | | | - | | | | 228 | | | | - | | | | - | | | | - | | | | - | | | | - | |
Equity securities, market value | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Equity securities, fair value | | | 1,317,420 | | | | 1,198,984 | | | | 118,436 | | | | - | | | | 1,199,347 | | | | 1,109,801 | | | | 89,546 | | | | - | |
Other invested assets, fair value | | | 1,769,132 | | | | 1,769,132 | | | | - | | | | - | | | | 1,684,860 | | | | 1,684,860 | | | | - | | | | - | |
There were no transfers between Level 1 and Level 2 for the sixnine months ended JuneSeptember 30, 2015.
The following table presents the fair value measurement levels for all assets, which the Company has recorded at fair value (fair and market value) as of the period indicated:
| | | | | Fair Value Measurement Using: | |
| | | | | Quoted Prices | | | | | | | |
| | | | | in Active | | | Significant | | | | |
| | | | | Markets for | | | Other | | | Significant | |
| | | | | Identical | | | Observable | | | Unobservable | |
| | | | | Assets | | | Inputs | | | Inputs | |
(Dollars in thousands) | | December 31, 2014 | | | (Level 1) | | | (Level 2) | | | (Level 3) | |
Assets: | | | | | | | | | | | | |
Fixed maturities, market value | | | | | | | | | | | | |
U.S. Treasury securities and obligations of | | | | | | | | | | | | |
U.S. government agencies and corporations | | $ | 136,836 | | | $ | - | | | $ | 136,836 | | | $ | - | |
Obligations of U.S. States and political subdivisions | | | 824,472 | | | | - | | | | 824,472 | | | | - | |
Corporate securities | | | 1,978,935 | | | | - | | | | 1,978,935 | | | | - | |
Asset-backed securities | | | 94,823 | | | | - | | | | 94,823 | | | | - | |
Mortgage-backed securities | | | | | | | | | | | | | | | | |
Commercial | | | 59,268 | | | | - | | | | 50,671 | | | | 8,597 | |
Agency residential | | | 598,117 | | | | - | | | | 598,117 | | | | - | |
Non-agency residential | | | 315 | | | | - | | | | 315 | | | | - | |
Foreign government securities | | | 537,087 | | | | - | | | | 537,087 | | | | - | |
Foreign corporate securities | | | 1,063,558 | | | | - | | | | 1,056,392 | | | | 7,166 | |
Total fixed maturities, market value | | | 5,293,411 | | | | - | | | | 5,277,648 | | | | 15,763 | |
| | | | | | | | | | | | | | | | |
Fixed maturities, fair value | | | 1,509 | | | | - | | | | 1,509 | | | | - | |
Equity securities, market value | | | 16 | | | | 16 | | | | - | | | | - | |
Equity securities, fair value | | | 1,299,037 | | | | 1,188,613 | | | | 110,424 | | | | - | |
Other invested assets, fair value | | | 1,655,311 | | | | 1,655,311 | | | | - | | | | - | |
The following tables present the activity under Level 3, fair value measurements using significant unobservable inputs by asset type, for the periods indicated:
| | Three Months Ended June 30, 2015 | | | Six Months Ended June 30, 2015 | |
| | Corporate | | | Foreign | | | | | | Corporate | | | | | | Foreign | | | | |
(Dollars in thousands) | | Securities | | | Corporate | | | Total | | | Securities | | | CMBS | | | Corporate | | | Total | |
Beginning balance | | $ | 2,653 | | | $ | 6,125 | | | $ | 8,778 | | | $ | - | | | $ | 8,597 | | | $ | 7,166 | | | $ | 15,763 | |
Total gains or (losses) (realized/unrealized) | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Included in earnings | | | 2 | | | | 58 | | | | 60 | | | | 4 | | | | - | | | | 115 | | | | 119 | |
Included in other comprehensive income (loss) | | | (3 | ) | | | 1,169 | | | | 1,166 | | | | (2 | ) | | | - | | | | 71 | | | | 69 | |
Purchases, issuances and settlements | | | (12 | ) | | | - | | | | (12 | ) | | | 1,928 | | | | - | | | | - | | | | 1,928 | |
Transfers in and/or (out) of Level 3 | | | (682 | ) | | | 485 | | | | (197 | ) | | | 28 | | | | (8,597 | ) | | | 485 | | | | (8,084 | ) |
Ending balance | | $ | 1,958 | | | $ | 7,837 | | | $ | 9,795 | | | $ | 1,958 | | | $ | - | | | $ | 7,837 | | | $ | 9,795 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
The amount of total gains or losses for the period | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
included in earnings (or changes in net assets) | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
attributable to the change in unrealized gains | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
or losses relating to assets still held at the | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
reporting date | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(Some amounts may not reconcile due to rounding.) | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, 2014 | | | Six Months Ended June 30, 2014 | | | Three Months Ended September 30, 2015 | | | Nine Months Ended September 30, 2015 | |
| | Asset-backed | | | Foreign | | | Non-agency | | | | | | Asset-backed | | | Foreign | | | Non-agency | | | | | | Corporate | | | Foreign | | | | | | Corporate | | | | | | Foreign | | | | |
(Dollars in thousands) | | Securities | | | Corporate | | | RMBS | | | Total | | | Securities | | | Corporate | | | RMBS | | | Total | | | Securities | | | Corporate | | | Total | | | Securities | | | CMBS | | | Corporate | | | Total | |
Beginning balance | | $ | 3,044 | | | $ | 473 | | | $ | 4 | | | $ | 3,521 | | | $ | 3,533 | | | $ | 481 | | | $ | 4 | | | $ | 4,018 | | | $ | 1,958 | | | $ | 7,837 | | | $ | 9,795 | | | $ | - | | | $ | 8,597 | | | $ | 7,166 | | | $ | 15,763 | |
Total gains or (losses) (realized/unrealized) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Included in earnings | | | 38 | | | | 17 | | | | - | | | | 55 | | | | 56 | | | | 18 | | | | 1 | | | | 75 | | | | (6 | ) | | | 62 | | | | 56 | | | | (2 | ) | | | - | | | | 177 | | | | 175 | |
Included in other comprehensive income (loss) | | | 28 | | | | (20 | ) | | | - | | | | 8 | | | | 93 | | | | (20 | ) | | | - | | | | 73 | | | | (93 | ) | | | (1,287 | ) | | | (1,380 | ) | | | (95 | ) | | | - | | | | (1,216 | ) | | | (1,311 | ) |
Purchases, issuances and settlements | | | (582 | ) | | | (470 | ) | | | - | | | | (1,052 | ) | | | (1,154 | ) | | | (479 | ) | | | (1 | ) | | | (1,634 | ) | | | 1,723 | | | | - | | | | 1,723 | | | | 3,651 | | | | - | | | | - | | | | 3,651 | |
Transfers in and/or (out) of Level 3 | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | 1,693 | | | | (487 | ) | | | 1,206 | | | | 1,721 | | | | (8,597 | ) | | | (2 | ) | | | (6,878 | ) |
Ending balance | | $ | 2,528 | | | $ | - | | | $ | 4 | | | $ | 2,532 | | | $ | 2,528 | | | $ | - | | | $ | 4 | | | $ | 2,532 | | | $ | 5,275 | | | $ | 6,125 | | | $ | 11,400 | | | $ | 5,275 | | | $ | - | | | $ | 6,125 | | | $ | 11,400 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
The amount of total gains or losses for the period | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
included in earnings (or changes in net assets) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
attributable to the change in unrealized gains | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
or losses relating to assets still held at the | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
reporting date | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(Some amounts may not reconcile due to rounding.) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended September 30, 2014 | | | Nine Months Ended September 30, 2014 | |
| | Corporate | | | Asset-backed | | | Foreign | | | Non-agency | | | | | | Corporate | | | Asset-backed | | | Foreign | | | Non-agency | | | | |
(Dollars in thousands) | | Securities | | | Securities | | | Corporate | | | RMBS | | | Total | | | Securities | | | Securities | | | Corporate | | | RMBS | | | Total | |
Beginning balance | | $ | - | | | $ | 2,528 | | | $ | - | | | $ | 4 | | | $ | 2,532 | | | $ | - | | | $ | 3,533 | | | $ | 481 | | | $ | 4 | | | $ | 4,018 | |
Total gains or (losses) (realized/unrealized) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Included in earnings | | | - | | | | 1,235 | | | | - | | | | 2 | | | | 1,237 | | | | - | | | | 1,291 | | | | 18 | | | | 3 | | | | 1,312 | |
Included in other comprehensive income (loss) | | | 42 | | | | (284 | ) | | | (50 | ) | | | (3 | ) | | | (295 | ) | | | 42 | | | | (191 | ) | | | (70 | ) | | | (3 | ) | | | (222 | ) |
Purchases, issuances and settlements | | | 1,274 | | | | 17,898 | | | | 3,614 | | | | (3 | ) | | | 22,783 | | | | 1,274 | | | | 16,744 | | | | 3,135 | | | | (4 | ) | | | 21,149 | |
Transfers in and/or (out) of Level 3 | | | - | | | | (1,101 | ) | | | - | | | | - | | | | (1,101 | ) | | | - | | | | (1,101 | ) | | | - | | | | - | | | | (1,101 | ) |
Ending balance | | $ | 1,316 | | | $ | 20,276 | | | $ | 3,564 | | | $ | - | | | $ | 25,156 | | | $ | 1,316 | | | $ | 20,276 | | | $ | 3,564 | | | $ | - | | | $ | 25,156 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
The amount of total gains or losses for the period | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
included in earnings (or changes in net assets) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
attributable to the change in unrealized gains | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
or losses relating to assets still held at the | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
reporting date | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | | | $ | - | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(Some amounts may not reconcile due to rounding.) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
The net transfers from level 3, fair value measurements using significant unobservable inputs, of $8,084$6,878 thousand and $1,101 thousand of investments for the sixnine months ended JuneSeptember 30, 2015 and September 30, 2014, respectively, primarily relate to securities that were priced using single non-binding broker quotes and were subsequently priced using a recognized pricing service and were then classified as level 2. There were no transfers from level 3, fair value measurements using significant unobservable inputs, for the six months ended June 30, 2014.
5. CAPITAL TRANSACTIONS
On July 9, 2014, the Company renewed its shelf registration statement on Form S-3ASR with the Securities and Exchange Commission (the "SEC"), as a Well Known Seasoned Issuer. This shelf registration statement can be used by Group to register common shares, preferred shares, debt securities, warrants, share purchase contracts and share purchase units; by Holdings to register debt securities and by Everest Re Capital Trust III ("Capital Trust III") to register trust preferred securities.
6. CONTINGENCIES
In the ordinary course of business, the Company is involved in lawsuits, arbitrations and other formal and informal dispute resolution procedures, the outcomes of which will determine the Company's rights and obligations under insurance and reinsurance agreements. In some disputes, the Company seeks to enforce its rights under an agreement or to collect funds owing to it. In other matters, the Company is resisting attempts by others to collect funds or enforce alleged rights. These disputes arise from time to time and are ultimately resolved through both informal and formal means, including negotiated resolution, arbitration and litigation. In all such matters, the Company believes that its positions are legally and commercially reasonable. The Company considers the statuses of these proceedings when determining its reserves for unpaid loss and loss adjustment expenses.
Aside from litigation and arbitrations related to these insurance and reinsurance agreements, the Company is not a party to any other material litigation or arbitration.
The Company has entered into separate annuity agreements with The Prudential Insurance of America ("The Prudential") and an additional unaffiliated life insurance company in which the Company has either purchased annuity contracts or become the assignee of annuity proceeds that are meant to settle claim payment obligations in the future. In both instances, the Company would become contingently liable if either The Prudential or the unaffiliated life insurance company were unable to make payments related to the respective annuity contact.
The table below presents the estimated cost to replace all such annuities for which the Company was contingently liable for the periods indicated:
| | At June 30, | | | At December 31, | | | At September 30, | | | At December 31, | |
(Dollars in thousands) | | 2015 | | | 2014 | | | 2015 | | | 2014 | |
The Prudential | | $ | 142,618 | | | $ | 142,653 | | | $ | 142,661 | | | $ | 142,653 | |
Unaffiliated life insurance company | | | 31,780 | | | | 31,964 | | | | 32,414 | | | | 31,964 | |
7. OTHER COMPREHENSIVE INCOME (LOSS)
The following tables present the components of comprehensive income (loss) in the consolidated statements of operations and comprehensive income (loss) for the periods indicated:
| | Three Months Ended June 30, 2015 | | | Six Months Ended June 30, 2015 | | | Three Months Ended September 30, 2015 | | | Nine Months Ended September 30, 2015 | |
(Dollars in thousands) | | Before Tax | | | Tax Effect | | | Net of Tax | | | Before Tax | | | Tax Effect | | | Net of Tax | | | Before Tax | | | Tax Effect | | | Net of Tax | | | Before Tax | | | Tax Effect | | | Net of Tax | |
Unrealized appreciation (depreciation) ("URA(D)") on securities - temporary | | $ | (55,290 | ) | | $ | 19,352 | | | $ | (35,938 | ) | | $ | (39,718 | ) | | $ | 13,402 | | | $ | (26,316 | ) | | $ | (45,240 | ) | | $ | 15,347 | | | $ | (29,893 | ) | | $ | (84,958 | ) | | $ | 28,749 | | | $ | (56,209 | ) |
URA(D) on securities - OTTI | | | - | | | | - | | | | - | | | | 9,735 | | | | (3,407 | ) | | | 6,328 | | | | 22 | | | | (7 | ) | | | 15 | | | | 9,757 | | | | (3,414 | ) | | | 6,343 | |
Reclassification of net realized losses (gains) included in net income (loss) | | | 21,017 | | | | (7,356 | ) | | | 13,661 | | | | 56,656 | | | | (19,330 | ) | | | 37,326 | | | | 17,137 | | | | (5,512 | ) | | | 11,625 | | | | 73,793 | | | | (24,842 | ) | | | 48,951 | |
Foreign currency translation adjustments | | | 24,839 | | | | (8,694 | ) | | | 16,145 | | | | (26,404 | ) | | | 9,241 | | | | (17,163 | ) | | | (42,266 | ) | | | 14,793 | | | | (27,473 | ) | | | (68,670 | ) | | | 24,034 | | | | (44,636 | ) |
Benefit plan actuarial net gain (loss) | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Reclassification of amortization of net gain (loss) included in net income (loss) | | | 2,476 | | | | (867 | ) | | | 1,609 | | | | 4,943 | | | | (1,730 | ) | | | 3,213 | | | | 2,393 | | | | (837 | ) | | | 1,556 | | | | 7,336 | | | | (2,567 | ) | | | 4,769 | |
Total other comprehensive income (loss) | | $ | (6,958 | ) | | $ | 2,435 | | | $ | (4,523 | ) | | $ | 5,212 | | | $ | (1,824 | ) | | $ | 3,388 | | | $ | (67,954 | ) | | $ | 23,784 | | | $ | (44,170 | ) | | $ | (62,742 | ) | | $ | 21,960 | | | $ | (40,782 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(Some amounts may not reconcile due to rounding) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, 2014 | | | Six Months Ended June 30, 2014 | | | Three Months Ended September 30, 2014 | | | Nine Months Ended September 30, 2014 | |
(Dollars in thousands) | | Before Tax | | | Tax Effect | | | Net of Tax | | | Before Tax | | | Tax Effect | | | Net of Tax | | | Before Tax | | | Tax Effect | | | Net of Tax | | | Before Tax | | | Tax Effect | | | Net of Tax | |
Unrealized appreciation (depreciation) ("URA(D)") on securities - temporary | | $ | 29,577 | | | $ | (10,475 | ) | | $ | 19,102 | | | $ | 61,573 | | | $ | (21,674 | ) | | $ | 39,899 | | | $ | (40,339 | ) | | $ | 14,118 | | | $ | (26,221 | ) | | $ | 21,234 | | | $ | (7,556 | ) | | $ | 13,678 | |
URA(D) on securities - OTTI | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Reclassification of net realized losses (gains) included in net income (loss) | | | 1,127 | | | | (270 | ) | | | 857 | | | | 3,124 | | | | (969 | ) | | | 2,155 | | | | (1,070 | ) | | | 374 | | | | (696 | ) | | | 2,054 | | | | (595 | ) | | | 1,459 | |
Foreign currency translation adjustments | | | 10,340 | | | | (3,619 | ) | | | 6,721 | | | | (1,715 | ) | | | 600 | | | | (1,115 | ) | | | (11,496 | ) | | | 4,024 | | | | (7,472 | ) | | | (13,211 | ) | | | 4,624 | | | | (8,587 | ) |
Benefit plan actuarial net gain (loss) | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | | | | - | |
Reclassification of amortization of net gain (loss) included in net income (loss) | | | 1,185 | | | | (415 | ) | | | 770 | | | | 2,371 | | | | (830 | ) | | | 1,541 | | | | 1,269 | | | | (444 | ) | | | 825 | | | | 3,640 | | | | (1,274 | ) | | | 2,366 | |
Total other comprehensive income (loss) | | $ | 42,229 | | | $ | (14,779 | ) | | $ | 27,450 | | | $ | 65,353 | | | $ | (22,873 | ) | | $ | 42,480 | | | $ | (51,636 | ) | | $ | 18,072 | | | $ | (33,564 | ) | | $ | 13,717 | | | $ | (4,801 | ) | | $ | 8,916 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(Some amounts may not reconcile due to rounding) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
The following table presents details of the amounts reclassified from AOCI for the periods indicated:
| | Three Months Ended | | | Six Months Ended | | | | | Three Months Ended | | | Nine Months Ended | | | |
| | June 30, | | | June 30, | | | Affected line item within the statements of | | September 30, | | | September 30, | | | Affected line item within the statements of |
AOCI component | | 2015 | | | 2014 | | | 2015 | | | 2014 | | | operations and comprehensive income (loss) | | 2015 | | | 2014 | | | 2015 | | | 2014 | | | operations and comprehensive income (loss) |
(Dollars in thousands) | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
URA(D) on securities | | $ | 21,017 | | | $ | 1,127 | | | $ | 56,656 | | | $ | 3,124 | | | Other net realized capital gains (losses) | | $ | 17,137 | | | $ | (1,070 | ) | | $ | 73,793 | | | $ | 2,054 | | | Other net realized capital gains (losses) |
| | | (7,356 | ) | | | (270 | ) | | | (19,330 | ) | | | (969 | ) | | Income tax expense (benefit) | | | (5,512 | ) | | | 374 | | | | (24,842 | ) | | | (595 | ) | | Income tax expense (benefit) |
| | $ | 13,661 | | | $ | 857 | | | $ | 37,326 | | | $ | 2,155 | | | Net income (loss) | | $ | 11,625 | | | $ | (696 | ) | | $ | 48,951 | | | $ | 1,459 | | | Net income (loss) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Benefit plan net gain (loss) | | $ | 2,476 | | | $ | 1,185 | | | $ | 4,943 | | | $ | 2,371 | | | Other underwriting expenses | | $ | 2,393 | | | $ | 1,269 | | | $ | 7,336 | | | $ | 3,640 | | | Other underwriting expenses |
| | | (867 | ) | | | (415 | ) | | | (1,730 | ) | | | (830 | ) | | Income tax expense (benefit) | | | (837 | ) | | | (444 | ) | | | (2,567 | ) | | | (1,274 | ) | | Income tax expense (benefit) |
| | $ | 1,609 | | | $ | 770 | | | $ | 3,213 | | | $ | 1,541 | | | Net income (loss) | | $ | 1,556 | | | $ | 825 | | | $ | 4,769 | | | $ | 2,366 | | | Net income (loss) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(Some amounts may not reconcile due to rounding) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
The following table presents the components of accumulated other comprehensive income (loss), net of tax, in the consolidated balance sheets for the periods indicated:
| | Six Months Ended | | | Twelve Months Ended | | | Nine Months Ended | | | Twelve Months Ended | |
| | June 30, | | | December 31, | | | September 30, | | | December 31, | |
(Dollars in thousands) | | 2015 | | | 2014 | | | 2015 | | | 2014 | |
| | | | | | | | | | | | |
Beginning balance of URA (D) on securities | | $ | 37,628 | | | $ | 55,457 | | | $ | 37,628 | | | $ | 55,457 | |
Current period change in URA (D) of investments - temporary | | | 11,009 | | | | (11,501 | ) | | | (7,258 | ) | | | (11,501 | ) |
Current period change in URA (D) of investments - non-credit OTTI | | | 6,328 | | | | (6,328 | ) | | | 6,343 | | | | (6,328 | ) |
Ending balance of URA (D) on securities | | | 54,965 | | | | 37,628 | | | | 36,713 | | | | 37,628 | |
| | | | | | | | | | | | | | | | |
Beginning balance of foreign currency translation adjustments | | | 41,877 | | | | 71,087 | | | | 41,877 | | | | 71,087 | |
Current period change in foreign currency translation adjustments | | | (17,163 | ) | | | (29,210 | ) | | | (44,636 | ) | | | (29,210 | ) |
Ending balance of foreign currency translation adjustments | | | 24,715 | | | | 41,877 | | | | (2,759 | ) | | | 41,877 | |
| | | | | | | | | | | | | | | | |
Beginning balance of benefit plan net gain (loss) | | | (74,986 | ) | | | (38,896 | ) | | | (74,986 | ) | | | (38,896 | ) |
Current period change in benefit plan net gain (loss) | | | 3,213 | | | | (36,090 | ) | | | 4,769 | | | | (36,090 | ) |
Ending balance of benefit plan net gain (loss) | | | (71,773 | ) | | | (74,986 | ) | | | (70,217 | ) | | | (74,986 | ) |
| | | | | | | | | | | | | | | | |
Ending balance of accumulated other comprehensive income (loss) | | $ | 7,907 | | | $ | 4,519 | | | $ | (36,263 | ) | | $ | 4,519 | |
8. CREDIT FACILITY - EXPIRED
Effective August 15, 2011, the Company entered into a three year, $150,000 thousand unsecured revolving credit facility, referred to as the "Holdings Credit Facility", which expired on August 15, 2014. The Company decided not to renew the Holdings Credit Facility at expiration.
9. REINSURANCE AND TRUST AGREEMENTS
A subsidiary of the Company, Everest Re, has established a trust agreement, which effectively uses Everest Re's investments as collateral, as security for assumed losses payable to a non-affiliated ceding company. At JuneSeptember 30, 2015, the total amount on deposit in the trust account was $270,095$306,214 thousand.
On April 24, 2014, the Company entered into two collateralized reinsurance agreements with Kilimanjaro Re Limited ("Kilimanjaro"), a Bermuda based special purpose reinsurer, to provide the Company with catastrophe reinsurance coverage. These agreements are multi-year reinsurance contracts which cover specified named storm and earthquake events. The first agreement provides up to $250,000 thousand of reinsurance coverage from named storms in specified states of the Southeastern United States. The second agreement provides up to $200,000 thousand of reinsurance coverage from named storms in specified states of the Southeast, Mid-Atlantic and Northeast regions of the United States and Puerto Rico as well as reinsurance coverage from earthquakes in specified states of the Southeast, Mid-Atlantic, Northeast and West regions of the United States, Puerto Rico and British Columbia.
On November 18, 2014, the Company entered into a collateralized reinsurance agreement with Kilimanjaro Re to provide the Company with catastrophe reinsurance coverage. This agreement is a multi-year reinsurance contract which covers specified earthquake events. The agreement provides up to $500,000 thousand of reinsurance coverage from earthquakes in the United States, Puerto Rico and Canada.
Kilimanjaro has financed the various property catastrophe reinsurance coverage by issuing catastrophe bonds to unrelated, external investors. On April, 24, 2014, Kilimanjaro issued $450,000 thousand of variable rate notes ("Series 2014-1 Notes"). On November 18, 2014, Kilimanjaro issued $500,000 thousand of variable rate notes ("Series 2014-2 Notes"). The proceeds from the issuance of the Series 2014-1 Notes and the Series 2014-2 Notes are held in reinsurance trust throughout the duration of the applicable reinsurance agreements and invested solely in US government money market funds with a rating of at least "AAAm" by Standard & Poor's.
10. SENIOR NOTES
The table below displays Holdings' outstanding senior notes. Market value is based on quoted market prices, but due to limited trading activity, these senior notes are considered Level 2 in the fair value hierarchy.
| | | | | | | | June 30, 2015 | | | December 31, 2014 | | | | | | | | | September 30, 2015 | | | December 31, 2014 | |
| | | | | | | | Consolidated Balance | | | | | | Consolidated Balance | | | | | | | | | | | | Consolidated Balance | | | | | | Consolidated Balance | | | | |
(Dollars in thousands) | Date Issued | | Date Due | | Principal Amounts | | | Sheet Amount | | | Market Value | | | Sheet Amount | | | Market Value | | Date Issued | | Date Due | | Principal Amounts | | | Sheet Amount | | | Market Value | | | Sheet Amount | | | Market Value | |
4.868% Senior notes | 06/05/2014 | | 06/01/2044 | | $ | 400,000 | | | $ | 400,000 | | | $ | 388,680 | | | $ | 400,000 | | | $ | 404,892 | | 06/05/2014 | | 06/01/2044 | | $ | 400,000 | | | $ | 400,000 | | | $ | 388,768 | | | $ | 400,000 | | | $ | 404,892 | |
5.40% Senior notes | 10/12/2004 | | 10/15/2014 | | | 250,000 | | | | - | | | | - | | | | - | | | | - | | 10/12/2004 | | 10/15/2014 | | | 250,000 | | | | - | | | | - | | | | - | | | | - | |
On June 5, 2014, Holdings issued $400,000 thousand of 30 year senior notes at 4.868%, which will mature on June 1, 2044. Interest will be paid semi-annually on June 1 and December 1 of each year. The proceeds from the issuance have been used in part to pay off the $250,000 thousand of 5.40% senior notes which matured on October 15, 2014.
Interest expense incurred in connection with these senior notes is as follows for the periods indicated:
| | Three Months Ended | | | Six Months Ended | | | Three Months Ended | | | Nine Months Ended | |
| | June 30, | | | June 30, | | | September 30, | | | September 30, | |
(Dollars in thousands) | | 2015 | | | 2014 | | | 2015 | | | 2014 | | | 2015 | | | 2014 | | | 2015 | | | 2014 | |
Interest expense incurred | | $ | 4,868 | | | $ | 4,741 | | | $ | 9,736 | | | $ | 8,129 | | | $ | 4,868 | | | $ | 8,256 | | | $ | 14,604 | | | $ | 16,385 | |
11. LONG TERM SUBORDINATED NOTES
The table below displays Holdings' outstanding fixed to floating rate long term subordinated notes. Market value is based on quoted market prices, but due to limited trading activity, these subordinated notes are considered Level 2 in the fair value hierarchy.
| | | | | | Maturity Date | | June 30, 2015 | | | December 31, 2014 | | | | | | | | | Maturity Date | | September 30, 2015 | | | December 31, 2014 | |
| | | Original | | | | | | | Consolidated Balance | | | | | | Consolidated Balance | | | | | | | | | Original | | | | | | | Consolidated Balance | | | | | | Consolidated Balance | | | | |
(Dollars in thousands) | Date Issued | | Principal Amount | | | Scheduled | | Final | | Sheet Amount | | | Market Value | | | Sheet Amount | | | Market Value | | Date Issued | | | | Principal Amount | | | Scheduled | | | | Final | | Sheet Amount | | | Market Value | | | Sheet Amount | | | Market Value | |
6.6% Long term subordinated notes | 04/26/2007 | | $ | 400,000 | | | 05/15/2037 | | 05/01/2067 | | $ | 238,366 | | | $ | 232,027 | | | $ | 238,364 | | | $ | 246,312 | | 04/26/2007 | | | | $ | 400,000 | | | 05/15/2037 | | 05/01/2067 | | $ | 238,367 | | | $ | 218,281 | | | $ | 238,364 | | | $ | 246,312 | |
During the fixed rate interest period from May 3, 2007 through May 14, 2017, interest will be at the annual rate of 6.6%, payable semi-annually in arrears on November 15 and May 15 of each year, commencing on November 15, 2007, subject to Holdings' right to defer interest on one or more occasions for up to ten consecutive years. During the floating rate interest period from May 15, 2017 through maturity, interest will be based on the 3 month LIBOR plus 238.5 basis points, reset quarterly, payable quarterly in arrears on February 15, May 15, August 15 and November 15 of each year, subject to Holdings' right to defer interest on one or more occasions for up to ten consecutive years. Deferred interest will accumulate interest at the applicable rate compounded semi-annually for periods prior to May 15, 2017, and compounded quarterly for periods from and including May 15, 2017.
Holdings can redeem the long term subordinated notes prior to May 15, 2017, in whole but not in part at the applicable redemption price, which will equal the greater of (a) 100% of the principal amount being redeemed and (b) the present value of the principal payment on May 15, 2017 and scheduled payments of interest that would have accrued from the redemption date to May 15, 2017 on the long term subordinated notes being redeemed, discounted to the redemption date on a semi-annual basis at a discount rate equal to the treasury rate plus an applicable spread of either 0.25% or 0.50%, in each case plus accrued and unpaid interest. Holdings may redeem the long term subordinated notes on or after May 15, 2017, in whole or in part at 100% of the principal amount plus accrued and unpaid interest; however, redemption on or after the scheduled maturity date and prior to May 1, 2047 is subject to a replacement capital covenant. This covenant is for the benefit of certain senior note holders and it mandates that Holdings receive proceeds from the sale of another subordinated debt issue, of at least similar size, before it may redeem the subordinated notes. Effective upon the maturity of the Company's 5.40% senior notes on October 15, 2014, the Company's 4.868% senior notes, due on June 1, 2044, have become the Company's long term indebtedness that ranks senior to the long term subordinated notes.
On March 19, 2009, Group announced the commencement of a cash tender offer for any and all of the 6.60% fixed to floating rate long term subordinated notes. Upon expiration of the tender offer, the Company had reduced its outstanding debt by $161,441 thousand.
Interest expense incurred in connection with these long term subordinated notes is as follows for the periods indicated:
| | Three Months Ended | | | Six Months Ended | | | Three Months Ended | | | Nine Months Ended | |
| | June 30, | | | June 30, | | | September 30, | | | September 30, | |
(Dollars in thousands) | | 2015 | | | 2014 | | | 2015 | | | 2014 | | | 2015 | | | 2014 | | | 2015 | | | 2014 | |
Interest expense incurred | | $ | 3,937 | | | $ | 3,937 | | | $ | 7,874 | | | $ | 7,874 | | | $ | 3,937 | | | $ | 3,937 | | | $ | 11,811 | | | $ | 11,811 | |
12. SEGMENT REPORTING
The U.S. Reinsurance operation writes property and casualty reinsurance and specialty lines of business, including Marine, Aviation, Surety and Accident and Health ("A&H") business, on both a treaty and facultative basis, through reinsurance brokers, as well as directly with ceding companies primarily within the U.S. The International operation writes non-U.S. property and casualty reinsurance through Everest Re's branches in Canada, Singapore and through offices in Brazil, Miami and New Jersey. The Insurance operation writes property and casualty insurance directly and through general agents, brokers and surplus lines brokers within the U.S.
These segments are managed independently, but conform with corporate guidelines with respect to pricing, risk management, control of aggregate catastrophe exposures, capital, investments and support operations. Management generally monitors and evaluates the financial performance of these operating segments based upon their underwriting results.
Underwriting results include earned premium less losses and LAE incurred, commission and brokerage expenses and other underwriting expenses. Underwriting results are measured using ratios, in particular loss, commission and brokerage and other underwriting expense ratios, which, respectively, divide incurred losses, commissions and brokerage and other underwriting expenses by premiums earned.
The Company does not maintain separate balance sheet data for its operating segments. Accordingly, the Company does not review and evaluate the financial results of its operating segments based upon balance sheet data.
The following tables present the underwriting results for the operating segments for the period indicated:
| | Three Months Ended | | | Six Months Ended | | | Three Months Ended | | | Nine Months Ended | |
U.S. Reinsurance | | June 30, | | | June 30, | | | September 30, | | | September 30, | |
(Dollars in thousands) | | 2015 | | | 2014 | | | 2015 | | | 2014 | | | 2015 | | | 2014 | | | 2015 | | | 2014 | |
Gross written premiums | | $ | 451,059 | | | $ | 453,115 | | | $ | 1,013,706 | | | $ | 983,416 | | | $ | 601,570 | | | $ | 679,904 | | | $ | 1,615,276 | | | $ | 1,663,320 | |
Net written premiums | | | 184,707 | | | | 215,091 | | | | 425,401 | | | | 466,612 | | | | 247,352 | | | | 304,442 | | | | 672,753 | | | | 771,054 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Premiums earned | | $ | 235,426 | | | $ | 246,265 | | | $ | 490,838 | | | $ | 464,456 | | | $ | 235,275 | | | $ | 275,521 | | | $ | 726,113 | | | $ | 739,977 | |
Incurred losses and LAE | | | 116,473 | | | | 129,676 | | | | 227,928 | | | | 245,660 | | | | 109,137 | | | | 125,475 | | | | 337,065 | | | | 371,135 | |
Commission and brokerage | | | 34,703 | | | | 53,380 | | | | 93,067 | | | | 93,516 | | | | 48,881 | | | | 51,231 | | | | 141,948 | | | | 144,747 | |
Other underwriting expenses | | | 11,807 | | | | 11,453 | | | | 23,336 | | | | 20,935 | | | | 13,718 | | | | 12,119 | | | | 37,054 | | | | 33,054 | |
Underwriting gain (loss) | | $ | 72,443 | | | $ | 51,756 | | | $ | 146,507 | | | $ | 104,345 | | | $ | 63,539 | | | $ | 86,696 | | | $ | 210,046 | | | $ | 191,041 | |
| | Three Months Ended | | | Six Months Ended | |
International | | June 30, | | | June 30, | |
(Dollars in thousands) | | 2015 | | | 2014 | | | 2015 | | | 2014 | |
Gross written premiums | | $ | 311,653 | | | $ | 466,008 | | | $ | 645,268 | | | $ | 794,886 | |
Net written premiums | | | 147,399 | | | | 147,210 | | | | 269,080 | | | | 288,667 | |
| | | | | | | | | | | | | | | | |
Premiums earned | | $ | 157,922 | | | $ | 147,728 | | | $ | 298,621 | | | $ | 292,732 | |
Incurred losses and LAE | | | 110,027 | | | | 88,888 | | | | 211,472 | | | | 172,463 | |
Commission and brokerage | | | 31,243 | | | | 27,412 | | | | 65,242 | | | | 56,581 | |
Other underwriting expenses | | | 8,049 | | | | 8,093 | | | | 16,164 | | | | 15,930 | |
Underwriting gain (loss) | | $ | 8,603 | | | $ | 23,335 | | | $ | 5,743 | | | $ | 47,758 | |
| | Three Months Ended | | | Six Months Ended | | | Three Months Ended | | | Nine Months Ended | |
Insurance | | June 30, | | | June 30, | | |
International | | | September 30, | | | September 30, | |
(Dollars in thousands) | | 2015 | | | 2014 | | | 2015 | | | 2014 | | | 2015 | | | 2014 | | | 2015 | | | 2014 | |
Gross written premiums | | $ | 326,729 | | | $ | 305,697 | | | $ | 657,230 | | | $ | 530,973 | | | $ | 374,138 | | | $ | 419,457 | | | $ | 1,019,406 | | | $ | 1,214,343 | |
Net written premiums | | | 140,358 | | | | 130,426 | | | | 286,410 | | | | 237,152 | | | | 147,991 | | | | 157,932 | | | | 417,071 | | | | 446,599 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Premiums earned | | $ | 128,076 | | | $ | 126,743 | | | $ | 253,027 | | | $ | 233,993 | | | $ | 135,130 | | | $ | 145,662 | | | $ | 433,751 | | | $ | 438,394 | |
Incurred losses and LAE | | | 96,379 | | | | 102,953 | | | | 192,359 | | | | 181,440 | | | | 128,454 | | | | 113,703 | | | | 339,926 | | | | 286,166 | |
Commission and brokerage | | | 7,007 | | | | 4,530 | | | | 11,175 | | | | 11,319 | | | | 27,936 | | | | 23,767 | | | | 93,178 | | | | 80,348 | |
Other underwriting expenses | | | 31,717 | | | | 27,612 | | | | 60,616 | | | | 49,544 | | | | 9,128 | | | | 8,759 | | | | 25,292 | | | | 24,689 | |
Underwriting gain (loss) | | $ | (7,027 | ) | | $ | (8,352 | ) | | $ | (11,123 | ) | | $ | (8,310 | ) | | $ | (30,388 | ) | | $ | (567 | ) | | $ | (24,645 | ) | | $ | 47,191 | |
| | Three Months Ended | | | Nine Months Ended | |
Insurance | | September 30, | | | September 30, | |
(Dollars in thousands) | | 2015 | | | 2014 | | | 2015 | | | 2014 | |
Gross written premiums | | $ | 473,003 | | | $ | 354,033 | | | $ | 1,130,233 | | | $ | 885,006 | |
Net written premiums | | | 203,730 | | | | 149,542 | | | | 490,140 | | | | 386,694 | |
| | | | | | | | | | | | | | | | |
Premiums earned | | $ | 175,645 | | | $ | 148,414 | | | $ | 428,672 | | | $ | 382,407 | |
Incurred losses and LAE | | | 133,163 | | | | 141,402 | | | | 325,522 | | | | 322,842 | |
Commission and brokerage | | | (4,666 | ) | | | 4,170 | | | | 6,509 | | | | 15,489 | |
Other underwriting expenses | | | 34,107 | | | | 29,745 | | | | 94,723 | | | | 79,289 | |
Underwriting gain (loss) | | $ | 13,041 | | | $ | (26,903 | ) | | $ | 1,918 | | | $ | (35,213 | ) |
The following table reconciles the underwriting results for the operating segments to income (loss) before taxes as reported in the consolidated statements of operations and comprehensive income (loss) for the periods indicated:
| | Three Months Ended | | | Six Months Ended | | | Three Months Ended | | | Nine Months Ended | |
| | June 30, | | | June 30, | | | September 30, | | | September 30, | |
(Dollars in thousands) | | 2015 | | | 2014 | | | 2015 | | | 2014 | | | 2015 | | | 2014 | | | 2015 | | | 2014 | |
Underwriting gain (loss) | | $ | 74,019 | | | $ | 66,739 | | | $ | 141,127 | | | $ | 143,793 | | | $ | 46,192 | | | $ | 59,226 | | | $ | 187,319 | | | $ | 203,019 | |
Net investment income | | | 70,925 | | | | 68,636 | | | | 143,506 | | | | 132,423 | | | | 63,363 | | | | 83,446 | | | | 206,869 | | | | 215,869 | |
Net realized capital gains (losses) | | | 51,225 | | | | 125,114 | | | | 72,521 | | | | 121,064 | | | | (121,695 | ) | | | (160 | ) | | | (49,174 | ) | | | 120,904 | |
Corporate expense | | | (1,785 | ) | | | 524 | | | | (3,394 | ) | | | (778 | ) | | | (1,637 | ) | | | (4,620 | ) | | | (5,031 | ) | | | (5,398 | ) |
Interest, fee and bond issue cost amortization expense | | | (8,858 | ) | | | (8,811 | ) | | | (17,717 | ) | | | (16,247 | ) | | | (8,859 | ) | | | (12,292 | ) | | | (26,576 | ) | | | (28,539 | ) |
Other income (expense) | | | 12,289 | | | | (8,782 | ) | | | 28,122 | | | | (11,837 | ) | | | 10,828 | | | | (3,739 | ) | | | 38,950 | | | | (15,576 | ) |
Income (loss) before taxes | | $ | 197,815 | | | $ | 243,420 | | | $ | 364,165 | | | $ | 368,418 | | | $ | (11,808 | ) | | $ | 121,861 | | | $ | 352,357 | | | $ | 490,279 | |
22
The Company produces business in the U.S. and internationally. The net income deriving from assets residing in the individual foreign countries in which the Company writes business are not identifiable in the Company's financial records. Based on gross written premium, the table below presents the largest country, other than the U.S., in which the Company writes business, for the periods indicated:
No other country represented more than 5% of the Company's revenues.
Group entered into a $250,000 thousand long term promissory note agreement with Holdings as of December 31, 2014. The note will mature on December 31, 2023 and has an interest rate of 1.72% that will be paid annually, on December 15th of each year. This transaction is presented as a Note Receivable – Affiliated in the Consolidated Balance Sheets of Holdings.
Group's Board of Directors approved an amended share repurchase program authorizing Group and/or its subsidiary Holdings to purchase Group's common shares through open market transactions, privately negotiated transactions or both. The table below represents the amendments to the share repurchase program for the common shares approved for repurchase.
Holdings reports these purchases as other invested assets, fair value, in the consolidated balance sheets with changes in fair value re-measurement recorded in net realized capital gains (losses) in the consolidated statements of operations and comprehensive income (loss). The following table presents the dividends received on these common shares that are reported as net investment income in the consolidated statements of operations and comprehensive income (loss) for the period indicated.
Everest Global Services, Inc. ("Global Services"), an affiliate of Holdings, provides centralized management and home office services, through a management agreement, to Holdings and other affiliated companies within Holdings' consolidated structure. Services provided by Everest Global include executive managerial services, legal services, actuarial services, accounting services, information technology services and others.
The following table presents the expenses incurred by Holdings from services provided by Everest Global for the periods indicated.