UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q

_X_    Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended March 31, 2019

___  Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Commission file number 1-15731


EVEREST RE GROUP, LTD.
(Exact name of registrant as specified in its charter)
Bermuda
 
98-0365432
(State or other jurisdiction of
incorporation or organization)
 
 
(I.R.S. Employer
Identification No.)
Seon Place – 4th Floor
141 Front Street
PO Box HM 845
Hamilton HM 19, Bermuda
441-295-0006

(Address, including zip code, and telephone number, including area code,
of registrant’s principal executive office)

Indicate by check mark whether the registrant:  (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

YES
X
 
NO
 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

YES
X
 
NO
 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company.  See the definitions of “large accelerated filer,” “accelerated filer,”  “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer
X
 
Accelerated filer
 
 
Non-accelerated filer
   
 
Smaller reporting company
 
 
 
Emerging  growth company
 

Indicate by check mark if the registrant is an emerging growth company and has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange act.

YES
   
NO
X

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

YES
   
NO
X

Securities registered pursuant to Section 12(b) of the Act:

 
Class
 
Trading Symbol
Name of Exchange where
Registered
Number of Shares Outstanding
At May 1, 2019
 
Common Shares, $0.01 par value
 
RE
 
New York Stock Exchange
 
40,733,637


EVEREST RE GROUP, LTD

Table of Contents
Form 10-Q


Page
PART I

FINANCIAL INFORMATION

Item 1.
Financial Statements
 
     
 
Consolidated Balance Sheets March 31, 2019 (unaudited)
 
 
and December 31, 2018
1
     
 
Consolidated Statements of Operations and Comprehensive Income (Loss) for the
 
 
three months ended March 31, 2019  and 2018 (unaudited)
2
     
 
Consolidated Statements of Changes in Shareholders’ Equity for the three
 
 
months ended March 31, 2019  and 2018 (unaudited)
3
     
 
Consolidated Statements of Cash Flows for the three months ended
 
 
March 31, 2019  and 2018 (unaudited)
4
     
 
Notes to Consolidated Interim Financial Statements (unaudited)
5
     
Item 2.
Management’s Discussion and Analysis of Financial Condition and
 
 
Results of Operation
34
     
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
55
     
Item 4.
Controls and Procedures
55
     

PART II

OTHER INFORMATION

Item 1.
Legal Proceedings
56
     
Item 1A.
Risk Factors
56
     
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
56
     
Item 3.
Defaults Upon Senior Securities
56
     
Item 4.
Mine Safety Disclosures
56
     
Item 5.
Other Information
57
     
Item 6.
Exhibits
57
     

EVEREST RE GROUP, LTD.
CONSOLIDATED BALANCE SHEETS



   
March 31,
   
December 31,
 
(Dollars and share amounts in thousands, except par value per share)
 
2019
   
2018
 
   
(unaudited)
     
ASSETS:
           
Fixed maturities - available for sale, at market value
 
$
15,513,287
   
$
15,225,263
 
(amortized cost: 2019, $15,440,999; 2018, $15,406,572)
               
Fixed maturities - available for sale, at fair value
   
2,350
     
2,337
 
Equity securities, at fair value
   
883,191
     
716,639
 
Short-term investments (cost: 2019, $597,107; 2018, $241,010)
   
597,138
     
240,987
 
Other invested assets (cost: 2019, $1,644,004; 2018, $1,591,745)
   
1,644,004
     
1,591,745
 
Cash
   
583,974
     
656,095
 
Total investments and cash
   
19,223,944
     
18,433,066
 
Accrued investment income
   
105,859
     
104,619
 
Premiums receivable
   
2,392,094
     
2,218,283
 
Reinsurance receivables
   
1,785,052
     
1,787,648
 
Funds held by reinsureds
   
432,736
     
445,040
 
Deferred acquisition costs
   
528,491
     
511,573
 
Prepaid reinsurance premiums
   
360,136
     
343,343
 
Income taxes
   
475,851
     
592,385
 
Other assets
   
326,344
     
358,042
 
TOTAL ASSETS
 
$
25,630,507
   
$
24,793,999
 
                 
LIABILITIES:
               
Reserve for losses and loss adjustment expenses
 
$
13,247,102
   
$
13,119,090
 
Future policy benefit reserve
   
46,881
     
46,778
 
Unearned premium reserve
   
2,666,339
     
2,517,612
 
Funds held under reinsurance treaties
   
9,759
     
13,099
 
Other net payable to reinsurers
   
287,807
     
218,439
 
Senior notes due 6/1/2044
   
396,984
     
396,954
 
Long term notes due 5/1/2067
   
236,684
     
236,659
 
Accrued interest on debt and borrowings
   
7,515
     
3,093
 
Equity index put option liability
   
8,727
     
11,958
 
Unsettled securities payable
   
110,723
     
51,112
 
Other liabilities
   
185,357
     
275,401
 
Total liabilities
   
17,203,878
     
16,890,195
 
                 
Commitments and contingencies (Note 8)
               
                 
SHAREHOLDERS' EQUITY:
               
Preferred shares, par value: $0.01; 50,000 shares authorized;
               
no shares issued and outstanding
   
-
     
-
 
Common shares, par value: $0.01; 200,000 shares authorized; (2019) 69,396
               
and (2018) 69,202 outstanding before treasury shares
   
694
     
692
 
Additional paid-in capital
   
2,189,544
     
2,188,777
 
Accumulated other comprehensive income (loss), net of deferred income tax expense
               
(benefit) of $4,562 at 2019 and ($20,697) at 2018
   
(216,111
)
   
(462,557
)
Treasury shares, at cost; 28,626 shares (2019) and 28,551 shares (2018)
   
(3,413,701
)
   
(3,397,548
)
Retained earnings
   
9,866,203
     
9,574,440
 
Total shareholders' equity
   
8,426,629
     
7,903,804
 
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY
 
$
25,630,507
   
$
24,793,999
 
                 
The accompanying notes are an integral part of the consolidated financial statements.
               

1

EVEREST RE GROUP, LTD.
CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME (LOSS)



   
Three Months Ended
 
   
March 31,
 
(Dollars in thousands, except per share amounts)
 
2019
   
2018
 
   
(unaudited)
REVENUES:
           
Premiums earned
 
$
1,732,697
   
$
1,619,427
 
Net investment income
   
140,976
     
138,294
 
Net realized capital gains (losses):
               
Other-than-temporary impairments on fixed maturity securities
   
(2,933
)
   
(70
)
Other-than-temporary impairments on fixed maturity securities
               
transferred to other comprehensive income (loss)
   
-
     
-
 
Other net realized capital gains (losses)
   
95,165
     
(24,831
)
Total net realized capital gains (losses)
   
92,232
     
(24,901
)
Net derivative gain (loss)
   
3,231
     
273
 
Other income (expense)
   
(9,053
)
   
12,064
 
Total revenues
   
1,960,083
     
1,745,157
 
                 
CLAIMS AND EXPENSES:
               
Incurred losses and loss adjustment expenses
   
1,048,550
     
1,057,177
 
Commission, brokerage, taxes and fees
   
389,474
     
357,639
 
Other underwriting expenses
   
98,985
     
96,284
 
Corporate expenses
   
6,652
     
8,996
 
Interest, fees and bond issue cost amortization expense
   
7,631
     
7,418
 
Total claims and expenses
   
1,551,292
     
1,527,514
 
                 
INCOME (LOSS) BEFORE TAXES
   
408,791
     
217,643
 
Income tax expense (benefit)
   
59,891
     
7,325
 
                 
NET INCOME (LOSS)
 
$
348,900
   
$
210,318
 
                 
Other comprehensive income (loss), net of tax:
               
Unrealized appreciation (depreciation) ("URA(D)") on securities arising during the period
   
233,065
     
(190,624
)
Reclassification adjustment for realized losses (gains) included in net income (loss)
   
(1,822
)
   
(8,772
)
Total URA(D) on securities arising during the period
   
231,243
     
(199,396
)
                 
Foreign currency translation adjustments
   
14,052
     
17,699
 
                 
Reclassification adjustment for amortization of net (gain) loss included in net income (loss)
   
1,151
     
1,815
 
Total benefit plan net gain (loss) for the period
   
1,151
     
1,815
 
Total other comprehensive income (loss), net of tax
   
246,446
     
(179,882
)
                 
COMPREHENSIVE INCOME (LOSS)
 
$
595,346
   
$
30,436
 
                 
EARNINGS PER COMMON SHARE:
               
Basic
 
$
8.57
   
$
5.14
 
Diluted
   
8.54
     
5.11
 
                 
The accompanying notes are an integral part of the consolidated financial statements.
               

2

EVEREST RE GROUP, LTD.
CONSOLIDATED STATEMENTS OF
CHANGES IN SHAREHOLDERS’ EQUITY



   
Three Months Ended
 
   
March 31,
 
(Dollars in thousands, except share and dividends per share amounts)
 
2019
   
2018
 
   
(unaudited)
COMMON SHARES (shares outstanding):
           
Balance, beginning of period
   
40,651,148
     
40,835,272
 
Issued during the period, net
   
194,584
     
143,362
 
Treasury shares acquired
   
(75,193
)
   
-
 
Balance, end of period
   
40,770,539
     
40,978,634
 
                 
COMMON SHARES (par value):
               
Balance, beginning of period
 
$
692
   
$
691
 
Issued during the period, net
   
2
     
1
 
Balance, end of period
   
694
     
692
 
                 
ADDITIONAL PAID-IN CAPITAL:
               
Balance, beginning of period
   
2,188,777
     
2,165,768
 
Share-based compensation plans
   
767
     
(2,249
)
Balance, end of period
   
2,189,544
     
2,163,519
 
                 
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS),
               
NET OF DEFERRED INCOME TAXES:
               
Balance, beginning of period
   
(462,557
)
   
(160,891
)
Change to beginning balance due to adoption of Accounting Standards Update 2016-01
   
-
     
(1,201
)
Net increase (decrease) during the period
   
246,446
     
(179,882
)
Balance, end of period
   
(216,111
)
   
(341,974
)
                 
RETAINED EARNINGS:
               
Balance, beginning of period
   
9,574,440
     
9,685,908
 
Change to beginning balance due to adoption of Accounting Standards Update 2016-01
   
-
     
1,201
 
Net income (loss)
   
348,900
     
210,318
 
Dividends declared ($1.40 per share in 2019 and $1.30 per share in 2018)
   
(57,137
)
   
(53,240
)
Balance, end of period
   
9,866,203
     
9,844,187
 
                 
TREASURY SHARES AT COST:
               
Balance, beginning of period
   
(3,397,548
)
   
(3,322,244
)
Purchase of treasury shares
   
(16,153
)
   
-
 
Balance, end of period
   
(3,413,701
)
   
(3,322,244
)
                 
TOTAL SHAREHOLDERS' EQUITY, END OF PERIOD
 
$
8,426,629
   
$
8,344,180
 
                 
The accompanying notes are an integral part of the consolidated financial statements.
               


3

EVEREST RE GROUP, LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS



   
Three Months Ended
 
   
March 31,
 
(Dollars in thousands)
 
2019
   
2018
 
   
(unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
           
Net income (loss)
 
$
348,900
   
$
210,318
 
Adjustments to reconcile net income to net cash provided by operating activities:
               
Decrease (increase) in premiums receivable
   
(163,108
)
   
(56,826
)
Decrease (increase) in funds held by reinsureds, net
   
9,837
     
95,416
 
Decrease (increase) in reinsurance receivables
   
34,556
     
236
 
Decrease (increase) in income taxes
   
91,754
     
55,905
 
Decrease (increase) in prepaid reinsurance premiums
   
(11,677
)
   
(32,194
)
Increase (decrease) in reserve for losses and loss adjustment expenses
   
58,073
     
(121,415
)
Increase (decrease) in future policy benefit reserve
   
103
     
(1,907
)
Increase (decrease) in unearned premiums
   
135,157
     
85,598
 
Increase (decrease) in other net payable to reinsurers
   
63,326
     
24,410
 
Increase (decrease) in losses in course of payment
   
(66,714
)
   
45,919
 
Change in equity adjustments in limited partnerships
   
(8,079
)
   
(24,596
)
Distribution of limited partnership income
   
14,799
     
15,524
 
Change in other assets and liabilities, net
   
30,152
     
(142,935
)
Non-cash compensation expense
   
9,056
     
8,336
 
Amortization of bond premium (accrual of bond discount)
   
5,899
     
8,950
 
Net realized capital (gains) losses
   
(92,232
)
   
24,901
 
Net cash provided by (used in) operating activities
   
459,802
     
195,640
 
                 
CASH FLOWS FROM INVESTING ACTIVITIES:
               
Proceeds from fixed maturities matured/called - available for sale, at market value
   
460,537
     
512,384
 
Proceeds from fixed maturities sold - available for sale, at market value
   
1,798,226
     
364,288
 
Proceeds from equity securities sold, at fair value
   
69,500
     
199,875
 
Distributions from other invested assets
   
54,692
     
1,061,894
 
Cost of fixed maturities acquired - available for sale, at market value
   
(2,249,663
)
   
(1,150,718
)
Cost of fixed maturities acquired - available for sale, at fair value
   
-
     
(1,836
)
Cost of equity securities acquired, at fair value
   
(146,435
)
   
(310,426
)
Cost of other invested assets acquired
   
(115,028
)
   
(947,290
)
Net change in short-term investments
   
(354,388
)
   
169,705
 
Net change in unsettled securities transactions
   
49,809
     
46,708
 
Net cash provided by (used in) investing activities
   
(432,750
)
   
(55,416
)
                 
CASH FLOWS FROM FINANCING ACTIVITIES:
               
Common shares issued during the period for share-based compensation, net of expense
   
(8,288
)
   
(9,383
)
Purchase of treasury shares
   
(16,153
)
   
-
 
Dividends paid to shareholders
   
(57,137
)
   
(53,240
)
Cost of shares withheld on settlements of share-based compensation awards
   
(11,443
)
   
(14,245
)
Net cash provided by (used in) financing activities
   
(93,021
)
   
(76,868
)
                 
EFFECT OF EXCHANGE RATE CHANGES ON CASH
   
(6,152
)
   
2,163
 
                 
Net increase (decrease) in cash
   
(72,121
)
   
65,519
 
Cash, beginning of period
   
656,095
     
635,067
 
Cash, end of period
 
$
583,974
   
$
700,586
 
                 
SUPPLEMENTAL CASH FLOW INFORMATION:
               
Income taxes paid (recovered)
 
$
(90,846
)
 
$
(51,253
)
Interest paid
   
3,154
     
2,422
 
                 
The accompanying notes are an integral part of the consolidated financial statements.
               

4

NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS (UNAUDITED)

For the Three Months Ended March 31, 2019 and 2018

1.   GENERAL

Everest Re Group, Ltd. (“Group”), a Bermuda company, through its subsidiaries, principally provides reinsurance and insurance in the U.S., Bermuda and international markets.  As used in this document, “Company” means Group and its subsidiaries.

During the fourth quarter of 2017, the Company established a new Irish insurance subsidiary, Everest Insurance (Ireland), designated activity company (“Ireland Insurance”), which writes insurance business mainly in the European markets.

2.   BASIS OF PRESENTATION

The unaudited consolidated financial statements of the Company for the three months ended March 31, 2019 and 2018 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, 2018 consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by GAAP.  The results for the three months ended March 31, 2019 and 2018 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, 2018, 2017 and 2016 included in the Company’s most recent Form 10-K filing.

The Company consolidates the results of operations and financial position of all voting interest entities ("VOE") in which the Company has a controlling financial interest and all variable interest entities ("VIE") in which the Company is considered to be the primary beneficiary. The consolidation assessment, including the determination as to whether an entity qualifies as a VIE or VOE, depends on the facts and circumstances surrounding each entity.

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 disclosure of contingent assets and liabilities) at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  Ultimate actual results could differ, possibly materially, from those estimates.

All intercompany accounts and transactions have been eliminated.

Certain reclassifications and format changes have been made to prior years’ amounts to conform to the 2019 presentation.

Application of Recently Issued Accounting Standard Changes.

Simplification of Disclosure Requirements.  In March 2019, the Securities and Exchange Commission (SEC) issued Final Rule Release #33-10618 (“Rule #33-10618”) which addresses the modernization and simplification of certain disclosure requirements in Regulation S-K related to quarterly and annual financial reports.  The main changes addressed by Rule #33-10618 relate to certain prior year comparative disclosures within the management’s discussion and analysis which may now be excluded at the Company’s discretion and certain disclosures on the cover page of Company filings. Rule #33-10618 became effective for all financial reports filed after May 2, 2019 (30 days after its publication in the Federal Register). The Company has adopted Rule #33-10618 effective with its first quarter 2019 financial filings. The adoption of Rule #33-10618 did not have a material impact on the Company’s financial statements.
5


Simplification of Disclosure Requirements.  In August 2018, the SEC issued Final Rule Release #33-10532 (“Rule #33-10532”) which addresses the simplification of the SEC’s disclosure requirements for quarterly and annual financial reports.  The main changes addressed by Rule #33-10532 that are applicable to the Company are 1) elimination of the requirement to disclose dividend per share information on the face of the Statements of Operations and Comprehensive Income (Loss) and 2) a new requirement to disclose changes in equity by line item with subtotals for each interim reporting period on the Statements of Changes in Shareholders’ Equity.  Rule #33-10532 became effective for all financial reports filed after November 5, 2018 (30 days after its publication in the Federal Register), except for the additional requirement for the Statements of Changes in Shareholders’ Equity which became effective for first quarter 2019 reporting.  The Company has now adopted all portions of Rule #33-10532.  The adoption of Rule #33-10532 did not have a material impact on the Company’s financial statements.

Accounting for Cloud Computing Arrangement.  In August 2018, The Financial Accounting Standards Board (“FASB”) issued ASU 2018-15, which outlines accounting for implementation costs of a cloud computing arrangement that is a service contract.  This guidance requires that implementation costs of a cloud computing arrangement that is a service contract must be capitalized and expensed in accordance with the existing provisions provided in Subtopic 350-40 regarding development of internal use software. In addition, any capitalized implementation costs should be amortized over the term of the hosting arrangement.  The guidance is effective for annual reporting periods beginning after December 15, 2019 and interim periods within that annual reporting period. The Company is currently evaluating the impact of the adoption of ASU 2018-15 on its financial statements.

Accounting for Long Duration Contracts.  In August 2018, FASB issued ASU 2018-12, which discusses changes to the recognition, measurement and presentation of long duration contracts.  The main provisions of this guidance address the following:  1) In determining liability for future policy benefits, companies must review cash flow assumptions at least annually and the discount rate assumption at each reporting period date 2) Amortization of deferred acquisition costs has been simplified to be in constant level proportion to either premiums, gross profits or gross margins 3) Disaggregated roll forwards of beginning and ending liabilities for future policy benefits are required. The guidance is effective for annual reporting periods beginning after December 15, 2020 and interim periods within that annual reporting period. The Company is currently evaluating the impact of the adoption of ASU 2018-12 on its financial statements.

Accounting for Deferred Taxes in Accumulated Other Comprehensive Income (AOCI).  In February 2018, FASB issued ASU 2018-02 which outlines guidance on the treatment of trapped deferred taxes contained within AOCI on the consolidated balance sheets.  The new guidance allows the amount of trapped deferred taxes in AOCI, resulting from the change in the U.S. tax rate from 35% to 21% upon enactment of the Tax Cuts and Jobs Act (“TCJA”), to be reclassified as part of retained earnings in the consolidated balance sheets.  The guidance is effective for annual and interim reporting periods beginning after December 15, 2018, but early adoption is allowed.  The Company decided to early adopt the guidance as of December 31, 2017.  The adoption resulted in a reclass of $1,250 thousand between AOCI and retained earnings during the fourth quarter of 2017.  As an accounting policy, the Company has adopted the aggregate portfolio approach for releasing disproportionate income tax effects from AOCI.

Accounting for Impact on Income Taxes due to Tax Reform.  In December 2017, the SEC issued Staff Accounting Bulletin (“SAB”) 118 which provides guidance on the application of FASB Accounting Standards Codification (“ASC”) Topic 740, Income Taxes, due to the enactment of TCJA.  SAB 118 became effective upon release.  The Company has adopted the provisions of SAB 118 with respect to measuring the tax effects for the modifications to the determination of tax basis loss reserves.  In 2018, the Company recorded adjustments to the amount of tax expense it recorded in 2017 with respect to the TCJA as estimated amounts were finalized, which did not have a material impact on the Company’s financial statements.

Amortization of Bond Premium.  In March 2017, FASB issued ASU 2017-08 which outlines guidance on the amortization period for premium on callable debt securities.  The new guidance requires that the premium on callable debt securities be amortized through the earliest call date rather than through the maturity date of the callable security.  The guidance is effective for annual and interim reporting periods beginning after December 15, 2018.  The adoption of ASU 2017-08 did not have a material impact on the Company’s financial statements.
6


Presentation and Disclosure of Net Periodic Benefit Costs.  In March 2017, FASB issued ASU 2017-07 which outlines guidance on the presentation of net periodic costs of benefit plans.  The new guidance requires that the service cost component of net periodic benefit costs be reported within the same line item of the statements of operations as other compensation costs are reported.  Other components of net periodic benefit costs should be reported separately.  Footnote disclosure is required to state within which line items of the statements of operations the components are reported.  The guidance is effective for annual and interim reporting periods beginning after December 15, 2017.  The Company adopted the guidance effective January 1, 2018.  The adoption of ASU 2017-07 did not have a material impact on the Company’s financial statements.

Disclosure of Restricted Cash.  In November 2016, FASB issued ASU 2016-18 and in August 2016, FASB issued ASU 2016-15 which outline guidance on the presentation in the statements of cash flows of changes in restricted cash.  The new guidance requires that the statements of cash flows should reflect all changes in cash, cash equivalents and restricted cash in total and not segregated individually.  The guidance is effective for annual and interim reporting periods beginning after December 15, 2017.  The Company adopted the guidance effective January 1, 2018.  The adoption of ASU 2016-18 and ASU 2016-15 did not have a material impact on the Company’s financial statements.

Intra-Entity Asset Transfers.  In October 2016, FASB issued ASU 2016-16 which outlines guidance on the tax accounting for intra-entity asset sales and transfers, other than inventory.  The new guidance requires that reporting entities recognize tax expense from the intra-entity transfer of an asset in the seller’s tax jurisdiction at the time of transfer and recognize any deferred tax asset in the buyer’s tax jurisdiction at the time of transfer.  The guidance is effective for annual and interim reporting periods beginning after December 15, 2017.  The Company adopted the guidance effective January 1, 2018.  The adoption of ASU 2016-16 did not have a material impact on the Company’s financial statements.

Valuation of Financial Instruments.  In June 2016, FASB issued ASU 2016-13 which outlines guidance on the valuation of and accounting for assets measured at amortized cost and available for sale debt securities.  The carrying value of assets measured at amortized cost will now be presented as the amount expected to be collected on the financial asset (amortized cost less an allowance for credit losses valuation account).  Available for sale debt securities will now record credit losses through an allowance for credit losses, which will be limited to the amount by which fair value is below amortized cost.  The guidance is effective for annual and interim reporting periods beginning after December 15, 2019.  The Company is currently evaluating the impact of the adoption of ASU 2016-13 on its financial statements.

Accounting for Share-Based Compensation. In March 2016, the FASB issued ASU 2016-09, authoritative guidance regarding the accounting for share-based compensation.  This guidance requires that the income tax effects resulting from the change in the value of share-based compensation awards between grant and settlement will be recorded as part of the consolidated statements of operations and comprehensive income/(loss).  Previously, excess tax benefits have been recorded as part of the additional paid in capital within the consolidated balance sheets.  The guidance is effective for annual reporting periods beginning after December 15, 2016 and interim periods within that annual reporting period.  The Company has implemented this guidance prospectively as of January 1, 2017.  The guidance also requires that the cost of employee taxes paid via shares withheld upon settlement of share-based compensation awards must be shown as a financing activity within the Statements of Cash Flows.  The Company has implemented this guidance retrospectively as of January 1, 2017.

Leases.  In February 2016, FASB issued ASU 2016-02 (and subsequently issued ASU 2018-11 in July, 2018) which outline new guidance on the accounting for leases.  The new guidance requires the recognition of lease assets and lease liabilities on the balance sheets for most leases that were previously deemed operating leases and required only lease expense presentation in the statements of operations.  The guidance is effective for annual and interim reporting periods beginning after December 15, 2018.  The Company adopted ASU 2016-02 effective January 1, 2019 and elected to utilize a cumulative-effect adjustment to the opening balance of retained earnings for the year of adoption.  Accordingly, the Company’s reporting for the comparative periods prior to adoption continue to be presented in the financial statements in accordance with previous lease accounting guidance.  The Company also elected to apply the package of practical expedients applicable to the Company in the updated guidance for transition for leases in effect at
7


adoption.  The Company did not elect the hindsight practical expedient to determine the lease term of existing leases (e.g. The Company did not re-assess lease renewals, termination options nor purchase options in determining lease terms).  The adoption of the updated guidance resulted in the Company recognizing a right-of-use asset of $69,869 thousand as part of other assets and a lease liability of $77,270 thousand as part of other liabilities in the consolidated balance sheet, as well as de-recognizing the liability for deferred rent that was required under the previous guidance.  The cumulative effect adjustment to the opening balance of retained earnings was zero. The adoption of the updated guidance did not have a material effect on the Company’s results of operations or liquidity.

Recognition and Measurement of Financial Instruments.  In January 2016, the FASB issued ASU 2016-01 which outlines revised guidance on the accounting for equity investments.  The new guidance states that all equity investments in unconsolidated entities will be measured at fair value, with the change in value being recorded through the income statement rather than being recorded within other comprehensive income.  The updated guidance is effective for annual and interim reporting periods beginning after December 15, 2017.  The Company adopted the guidance effective January 1, 2018.  The adoption of ASU 2016-01 resulted in a cumulative change adjustment of $1,201 thousand between AOCI and retained earnings, which is disclosed separately within the consolidated statement of changes in shareholders’ equity.

Revenue Recognition.  In May 2014, the FASB issued ASU 2014-09 and in August 2015, FASB issued ASU 2015-14 which outline revised guidance on the recognition of revenue arising from contracts with customers.  The new guidance states that reporting entities should apply certain steps to determine when revenue should be recognized, based upon fulfillment of performance obligations to complete contracts.  The updated guidance is effective for annual and interim reporting periods beginning after December 15, 2017.  The Company adopted the guidance effective January 1, 2018.  The adoption of ASU 2014-09 and ASU 2015-14 did not have a material impact on the Company’s financial statements.

Any issued guidance and pronouncements, other than those directly referenced above, are deemed by the Company to be either not applicable or immaterial to its financial statements.

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 March 31, 2019
 
   
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
 
$
1,289,609
   
$
17,236
   
$
(9,732
)
 
$
1,297,113
   
$
-
 
Obligations of U.S. states and political subdivisions
   
485,643
     
20,068
     
(853
)
   
504,858
     
-
 
Corporate securities
   
5,990,410
     
83,444
     
(57,322
)
   
6,016,532
     
1,872
 
Asset-backed securities
   
719,151
     
1,098
     
(3,084
)
   
717,165
     
-
 
Mortgage-backed securities
                                       
Commercial
   
523,600
     
10,178
     
(2,270
)
   
531,508
     
-
 
Agency residential
   
2,359,677
     
16,919
     
(29,318
)
   
2,347,278
     
-
 
Non-agency residential
   
9,765
     
37
     
(36
)
   
9,766
     
-
 
Foreign government securities
   
1,295,808
     
41,059
     
(38,731
)
   
1,298,136
     
-
 
Foreign corporate securities
   
2,767,336
     
77,626
     
(54,031
)
   
2,790,931
     
430
 
Total fixed maturity securities
 
$
15,440,999
   
$
267,665
   
$
(195,377
)
 
$
15,513,287
   
$
2,302
 


8



   
At December 31, 2018
 
   
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
 
$
2,629,454
   
$
16,781
   
$
(15,101
)
 
$
2,631,134
   
$
-
 
Obligations of U.S. states and political subdivisions
   
490,018
     
12,915
     
(2,839
)
   
500,094
     
439
 
Corporate securities
   
5,538,582
     
48,465
     
(141,515
)
   
5,445,532
     
1,688
 
Asset-backed securities
   
545,427
     
162
     
(5,492
)
   
540,097
     
-
 
Mortgage-backed securities
                                       
Commercial
   
329,883
     
2,167
     
(5,340
)
   
326,710
     
-
 
Agency residential
   
1,832,760
     
7,325
     
(43,821
)
   
1,796,264
     
-
 
Non-agency residential
   
10,198
     
37
     
(26
)
   
10,209
     
-
 
Foreign government securities
   
1,335,328
     
34,743
     
(55,906
)
   
1,314,165
     
98
 
Foreign corporate securities
   
2,694,922
     
63,994
     
(97,858
)
   
2,661,058
     
320
 
Total fixed maturity securities
 
$
15,406,572
   
$
186,589
   
$
(367,898
)
 
$
15,225,263
   
$
2,545
 


(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.

Effective January 1, 2018, the Company adopted ASU 2016-01, which requires equity investments in unconsolidated entities to be measured at fair value, with any change in value being recorded within net realized capital gains/(losses) as part of the consolidated statements of operations and comprehensive income (loss).  Previously, changes in the market value had been recorded within AOCI as part of the consolidated balance sheets.  Therefore, effective January 1, 2018, equity security investments no longer have an impact upon the AOCI balance.

The amortized cost and market value of fixed maturity securities are shown in the following table 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 March 31, 2019
   
At December 31, 2018
 
   
Amortized
   
Market
   
Amortized
   
Market
 
(Dollars in thousands)
 
Cost
   
Value
   
Cost
   
Value
 
Fixed maturity securities – available for sale:
                       
    Due in one year or less
 
$
1,398,625
   
$
1,406,138
   
$
1,328,571
   
$
1,330,534
 
    Due after one year through five years
   
6,842,101
     
6,838,316
     
8,114,247
     
8,016,490
 
    Due after five years through ten years
   
2,702,189
     
2,743,530
     
2,455,911
     
2,413,846
 
    Due after ten years
   
885,891
     
919,586
     
789,575
     
791,113
 
Asset-backed securities
   
719,151
     
717,165
     
545,427
     
540,097
 
Mortgage-backed securities:
                               
Commercial
   
523,600
     
531,508
     
329,883
     
326,710
 
Agency residential
   
2,359,677
     
2,347,278
     
1,832,760
     
1,796,264
 
Non-agency residential
   
9,765
     
9,766
     
10,198
     
10,209
 
Total fixed maturity securities
 
$
15,440,999
   
$
15,513,287
   
$
15,406,572
   
$
15,225,263
 


9


The changes in net unrealized appreciation (depreciation) for the Company’s investments are derived from the following sources for the periods indicated:


   
Three Months Ended
 
   
March 31,
 
(Dollars in thousands)
 
2019
   
2018
 
Increase (decrease) during the period between the market value and cost
           
of investments carried at market value, and deferred taxes thereon:
           
Fixed maturity securities
 
$
253,894
   
$
(219,485
)
Fixed maturity securities, other-than-temporary impairment
   
(244
)
   
(189
)
Change in unrealized appreciation (depreciation), pre-tax
   
253,650
     
(219,674
)
Deferred tax benefit (expense)
   
(22,477
)
   
20,299
 
Deferred tax benefit (expense), other-than-temporary impairment
   
70
     
(21
)
Change in unrealized appreciation (depreciation),
               
net of deferred taxes, included in shareholders’ equity
 
$
231,243
   
$
(199,396
)


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.

Upon the adoption of ASU 2016-01 as of January 1, 2018, all equity investments in unconsolidated entities are recorded at fair value.  Prior to the adoption of ASU 2016-01, the Company presented certain equity securities at market value.  The majority of the Company’s equity securities presented at market value prior to January 1, 2018 were primarily comprised of mutual fund investments whose underlying securities consisted of fixed maturity securities.  When a fund’s value reflected an unrealized loss, the Company assessed whether the decline in value was temporary or other-than-temporary.  In making its assessment, the Company considered the composition of its portfolios and their related markets, reports received from the portfolio managers and discussions with portfolio managers.  If the Company determined that the declines were temporary and it had the ability and intent to continue to hold the investments, then the declines were recorded as unrealized losses in accumulated other comprehensive income (loss).  If declines were deemed to be other-than-temporary, then the carrying value of the investment was 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.
10


The tables below display the aggregate market value and gross unrealized depreciation of fixed maturity and equity securities, by security type and contractual maturity, in each case subdivided according to length of time that individual securities had been in a continuous unrealized loss position for the periods indicated:


   
Duration of Unrealized Loss at March 31, 2019 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
 
$
37,959
   
$
(7
)
 
$
744,365
   
$
(9,725
)
 
$
782,324
   
$
(9,732
)
Obligations of U.S. states and political subdivisions
   
11,115
     
(296
)
   
34,646
     
(557
)
   
45,761
     
(853
)
Corporate securities
   
662,132
     
(15,967
)
   
2,433,428
     
(41,355
)
   
3,095,560
     
(57,322
)
Asset-backed securities
   
227,072
     
(1,347
)
   
294,558
     
(1,737
)
   
521,630
     
(3,084
)
Mortgage-backed securities
                                               
Commercial
   
8,675
     
(56
)
   
142,509
     
(2,214
)
   
151,184
     
(2,270
)
Agency residential
   
27,212
     
(74
)
   
1,326,304
     
(29,244
)
   
1,353,516
     
(29,318
)
Non-agency residential
   
9,737
     
(36
)
   
-
     
-
     
9,737
     
(36
)
Foreign government securities
   
101,317
     
(5,008
)
   
420,137
     
(33,723
)
   
521,454
     
(38,731
)
Foreign corporate securities
   
197,714
     
(5,235
)
   
1,040,656
     
(48,796
)
   
1,238,370
     
(54,031
)
Total fixed maturity securities
 
$
1,282,933
   
$
(28,026
)
 
$
6,436,603
   
$
(167,351
)
 
$
7,719,536
   
$
(195,377
)



   
Duration of Unrealized Loss at March 31, 2019 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
 
$
78,062
   
$
(1,405
)
 
$
775,900
   
$
(18,903
)
 
$
853,962
   
$
(20,308
)
Due in one year through five years
   
538,856
     
(8,803
)
   
3,137,174
     
(85,652
)
   
3,676,030
     
(94,455
)
Due in five years through ten years
   
332,280
     
(14,243
)
   
607,381
     
(20,629
)
   
939,661
     
(34,872
)
Due after ten years
   
61,039
     
(2,062
)
   
152,777
     
(8,972
)
   
213,816
     
(11,034
)
Asset-backed securities
   
227,072
     
(1,347
)
   
294,558
     
(1,737
)
   
521,630
     
(3,084
)
Mortgage-backed securities
   
45,624
     
(166
)
   
1,468,813
     
(31,458
)
   
1,514,437
     
(31,624
)
Total fixed maturity securities
 
$
1,282,933
   
$
(28,026
)
 
$
6,436,603
   
$
(167,351
)
 
$
7,719,536
   
$
(195,377
)


The aggregate market value and gross unrealized losses related to investments in an unrealized loss position at March 31, 2019 were $7,719,536 thousand and $195,377 thousand, respectively.  The market value of securities for the single issuer whose securities comprised the largest unrealized loss position at March 31, 2019, did not exceed 0.9% 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 $28,026 thousand of unrealized losses related to fixed maturity securities that have been in an unrealized loss position for less than one year were generally comprised of domestic and foreign corporate securities, foreign government securities and asset-backed securities.  Of these unrealized losses, $13,333 thousand were related to securities that were rated investment grade by at least one nationally recognized statistical rating agency.  The $167,351 thousand of unrealized losses related to fixed maturity securities in an unrealized loss position for more than one year related primarily to foreign and domestic corporate securities, foreign government securities, agency residential mortgage-backed securities and U.S. government agencies and corporations.  Of these unrealized losses, $153,285 thousand were related to securities that were rated investment grade by at least one nationally recognized statistical rating agency.  There was no gross unrealized depreciation for mortgage-backed securities related to sub-prime and alt-A loans.  In all instances, there were no projected cash flow shortfalls to recover the full book value of the investments and the related interest obligations.  The mortgage-backed securities still have excess credit coverage and are current on interest and principal payments.

11


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, 2018 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
 
$
76,226
   
$
(158
)
 
$
777,409
   
$
(14,943
)
 
$
853,635
   
$
(15,101
)
Obligations of U.S. states and political subdivisions
   
71,559
     
(1,444
)
   
38,105
     
(1,395
)
   
109,664
     
(2,839
)
Corporate securities
   
2,513,463
     
(69,619
)
   
1,683,729
     
(71,896
)
   
4,197,192
     
(141,515
)
Asset-backed securities
   
230,285
     
(2,746
)
   
245,300
     
(2,746
)
   
475,585
     
(5,492
)
Mortgage-backed securities
                                               
Commercial
   
71,167
     
(1,128
)
   
154,201
     
(4,212
)
   
225,368
     
(5,340
)
Agency residential
   
156,930
     
(975
)
   
1,373,629
     
(42,846
)
   
1,530,559
     
(43,821
)
Non-agency residential
   
10,174
     
(26
)
   
-
     
-
     
10,174
     
(26
)
Foreign government securities
   
196,303
     
(9,719
)
   
494,156
     
(46,187
)
   
690,459
     
(55,906
)
Foreign corporate securities
   
939,808
     
(35,023
)
   
782,405
     
(62,835
)
   
1,722,213
     
(97,858
)
Total fixed maturity securities
 
$
4,265,915
   
$
(120,838
)
 
$
5,548,934
   
$
(247,060
)
 
$
9,814,849
   
$
(367,898
)



   
Duration of Unrealized Loss at December 31, 2018 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
 
$
454,239
   
$
(2,558
)
 
$
427,513
   
$
(20,675
)
 
$
881,752
   
$
(23,233
)
Due in one year through five years
   
2,014,704
     
(45,148
)
   
2,764,981
     
(129,940
)
   
4,779,685
     
(175,088
)
Due in five years through ten years
   
1,082,568
     
(51,300
)
   
492,216
     
(34,210
)
   
1,574,784
     
(85,510
)
Due after ten years
   
245,848
     
(16,957
)
   
91,094
     
(12,431
)
   
336,942
     
(29,388
)
Asset-backed securities
   
230,285
     
(2,746
)
   
245,300
     
(2,746
)
   
475,585
     
(5,492
)
Mortgage-backed securities
   
238,271
     
(2,129
)
   
1,527,830
     
(47,058
)
   
1,766,101
     
(49,187
)
Total fixed maturity securities
 
$
4,265,915
   
$
(120,838
)
 
$
5,548,934
   
$
(247,060
)
 
$
9,814,849
   
$
(367,898
)


The aggregate market value and gross unrealized losses related to investments in an unrealized loss position at December 31, 2018 were $9,814,849 thousand and $367,898 thousand, respectively.  The market value of securities for the single issuer (the United States government) whose securities comprised the largest unrealized loss position at December 31, 2018, did not exceed 5.7% of the overall market value of the Company’s fixed maturity securities.  The market value of the securities for the issuer with the second largest unrealized loss comprised less than 1.0% 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 $120,838 thousand of unrealized losses related to fixed maturity securities that have been in an unrealized loss position for less than one year were generally comprised of domestic and foreign corporate securities, foreign government securities and asset-backed securities.  Of these unrealized losses, $74,729 thousand were related to securities that were rated investment grade by at least one nationally recognized statistical rating agency.  The $247,060 thousand of unrealized losses related to fixed maturity securities in an unrealized loss position for more than one year related primarily to domestic and foreign corporate securities, foreign government securities, agency residential mortgage-backed securities and U.S. government agencies and corporations.  Of these unrealized losses, $230,560 thousand were related to securities that were rated investment grade by at least one nationally recognized statistical rating agency.  There was no gross unrealized depreciation for mortgage-backed securities related to sub-prime and alt-A
12


loans.  In all instances, there were no projected cash flow shortfalls to recover the full book value of the investments and the related interest obligations.  The mortgage-backed securities still have excess credit coverage and are current on interest and principal payments.

The components of net investment income are presented in the table below for the periods indicated:


   
Three Months Ended
 
   
March 31,
 
(Dollars in thousands)
 
2019
   
2018
 
Fixed maturities
 
$
126,708
   
$
108,682
 
Equity securities
   
3,507
     
6,827
 
Short-term investments and cash
   
4,205
     
1,732
 
Other invested assets
               
Limited partnerships
   
8,297
     
23,381
 
Other
   
2,980
     
4,325
 
Gross investment income before adjustments
   
145,697
     
144,947
 
Funds held interest income (expense)
   
5,968
     
3,630
 
Future policy benefit reserve income (expense)
   
(234
)
   
(209
)
Gross investment income
   
151,431
     
148,368
 
Investment expenses
   
(10,455
)
   
(10,074
)
Net investment income
 
$
140,976
   
$
138,294
 


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 $797,896 thousand in limited partnerships at March 31, 2019.  These commitments will be funded when called in accordance with the partnership agreements, which have investment periods that expire, unless extended, through 2023.

Beginning in the first quarter of 2016, the Company participated in a private placement liquidity sweep facility (“the facility”).  The primary purpose of the facility is to enhance the Company’s return on its short-term investments and cash positions.  The facility invests in high quality, short-duration securities and permits daily liquidity.  Through the second quarter of 2018, the Company’s participation in the facility was classified within other invested assets on the Company’s Balance Sheets.

Starting in the third quarter of 2018, the Company has consolidated its participation in the facility.  As a result of the consolidation of the underlying investments of the facility, effective July 1, 2018, the Company has reclassified $143,656 thousand from other invested assets to fixed maturity securities, available for sale, at market value and has reclassified $243,864 thousand from other invested assets to short-term investments.  As of March 31, 2019, the market value of investments in the facility consolidated within the Company’s balance sheets was $507,584 thousand.

13


The components of net realized capital gains (losses) are presented in the table below for the periods indicated:


   
Three Months Ended
 
   
March 31,
 
(Dollars in thousands)
 
2019
   
2018
 
Fixed maturity securities, market value:
           
Other-than-temporary impairments
 
$
(2,933
)
 
$
(70
)
Gains (losses) from sales
   
5,273
     
10,392
 
Fixed maturity securities, fair value:
               
Gains (losses) from sales
   
-
     
(14
)
Gains (losses) from fair value adjustments
   
13
     
-
 
Equity securities, fair value:
               
Gains (losses) from sales
   
5,048
     
40
 
Gains (losses) from fair value adjustments
   
84,441
     
(35,253
)
Other invested assets
   
396
     
3
 
Short-term investments gain (loss)
   
(6
)
   
1
 
Total net realized capital gains (losses)
 
$
92,232
   
$
(24,901
)


The Company recorded as net realized capital gains (losses) in the consolidated statements of operations and comprehensive income (loss) both fair value re-measurements and write-downs in the value of securities deemed to be impaired on an other-than-temporary basis as displayed in the table above.  The Company had no other-than-temporary impaired securities where the impairment had both a credit and non-credit component.

The proceeds and split between gross gains and losses, from sales of fixed maturity and equity securities, are presented in the table below for the periods indicated:


   
Three Months Ended
 
   
March 31,
 
(Dollars in thousands)
 
2019
   
2018
 
Proceeds from sales of fixed maturity securities
 
$
1,798,226
   
$
364,288
 
Gross gains from sales
   
16,138
     
13,002
 
Gross losses from sales
   
(10,865
)
   
(2,624
)
                 
Proceeds from sales of equity securities
 
$
69,500
   
$
199,875
 
Gross gains from sales
   
5,675
     
6,687
 
Gross losses from sales
   
(627
)
   
(6,647
)


14


4.      RESERVE FOR LOSSES, LAE AND FUTURE POLICY BENEFIT RESERVE

Activity in the reserve for losses and LAE is summarized for the periods indicated:


   
Three Months Ended
   
Twelve Months Ended
 
   
March 31,
   
December 31,
 
(Dollars in thousands)
 
2019
   
2018
 
Gross reserves at January 1
 
$
13,119,090
   
$
11,884,321
 
      Less reinsurance recoverables
   
(1,619,641
)
   
(1,212,649
)
           Net reserves at January 1
   
11,499,449
     
10,671,672
 
                 
Incurred related to:
               
      Current year
   
1,050,116
     
5,264,327
 
      Prior years
   
(1,566
)
   
387,076
 
           Total incurred losses and LAE
   
1,048,550
     
5,651,403
 
                 
Paid related to:
               
      Current year
   
103,688
     
1,700,765
 
      Prior years
   
817,006
     
3,011,175
 
           Total paid losses and LAE
   
920,694
     
4,711,940
 
                 
Foreign exchange/translation adjustment
   
(1,496
)
   
(111,686
)
                 
Net reserves at December 31
   
11,625,810
     
11,499,449
 
      Plus reinsurance recoverables
   
1,621,292
     
1,619,641
 
           Gross reserves at December 31
 
$
13,247,102
   
$
13,119,090
 
                 
(Some amounts may not reconcile due to rounding.)
               


Incurred prior years losses decreased slightly by $1,566 thousand for the three months ended March 31, 2019 and increased by $387,076 thousand for the twelve months ended December 31, 2018, respectively.  The increase for the twelve months ended December 31, 2018 was mainly due to $561,197 thousand of adverse development on prior years catastrophe losses, primarily related to Hurricanes Harvey, Irma and Maria, as well as the 2017 California wildfires.  The increase in loss estimates for Hurricanes Harvey, Irma and Maria was mostly driven by re-opened claims, loss inflation from higher than expected loss adjustment expenses and in particular, their impact on aggregate covers.  This reserve increase was partially offset by $174,121 thousand of favorable development on prior years attritional losses which mainly related to U.S. and international property and casualty reinsurance business, as well as favorable development in the Insurance segment which largely related to workers’ compensation business.

5.     DERIVATIVES

The Company sold seven equity index put option contracts, based on two indices, in 2001 and 2005.  The Company sold these equity index put options as insurance products with the intent of achieving a profit.  These equity index put option contracts meet the definition of a derivative under FASB guidance and the Company’s position in these equity index put option contracts is unhedged.  Accordingly, these equity index put option contracts are carried at fair value in the consolidated balance sheets with changes in fair value recorded in the consolidated statements of operations and comprehensive income (loss).  One of these contracts expired on June 9, 2017, with no liability due under the terms of the contract.

The Company had five remaining equity index put option contracts at March 31, 2019, based on the Standard & Poor’s 500 (“S&P 500”) index.  Based on historical index volatilities and trends and the March 31, 2019 S&P 500 index value, the Company estimates the probability that each equity index put option contract of the S&P 500 index falling below the strike price on the exercise date to be less than 1%.  The theoretical maximum payouts under these five equity index put option contracts would occur if on each of the exercise dates the S&P 500 index value were zero.  At March 31, 2019, the present value of these theoretical maximum payouts using a 3% discount factor was $415,568 thousand.  Conversely, if the contracts had all expired on March 31, 2019, with the S&P index at $2,834.40, there would have been no settlement amount.

15


The Company has one equity index put option contract based on the FTSE 100 index.  Based on historical index volatilities and trends and the March 31, 2019 FTSE 100 index value, the Company estimates the probability that the equity index put option contract of the FTSE 100 index will fall below the strike price on the exercise date to be less than 12%.  The theoretical maximum payout under the equity index put option contract would occur if on the exercise date the FTSE 100 index value was zero.  At March 31, 2019, the present value of the theoretical maximum payout using a 3% discount factor and current exchange rate was $42,035 thousand.  Conversely, if the contract had expired on March 31, 2019, with the FTSE index at ₤7,279.19, there would have been no settlement amount.

At March 31, 2019 and December 31, 2018, the fair value for these equity put options was $8,727 thousand and $11,958 thousand, respectively.

The fair value of the equity index put options can be found in the Company’s consolidated balance sheets as follows:


(Dollars in thousands)
               
Derivatives not designated as
 
Location of fair value
 
At
   
At
 
hedging instruments
 
in balance sheets
 
March 31, 2019
   
December 31, 2018
 
                 
Equity index put option contracts
 
Equity index put option liability
 
$
8,727
   
$
11,958
 
Total
     
$
8,727
   
$
11,958
 


The change in fair value of the equity index put option contracts can be found in the Company’s statement of operations and comprehensive income (loss) as follows:


(Dollars in thousands)
     
For the Three Months Ended
 
Derivatives not designated as
 
Location of gain (loss) in statements of
 
March 31,
 
hedging instruments
 
operations and comprehensive income (loss)
 
2019
   
2018
 
                 
Equity index put option contracts
 
Net derivative gain (loss)
 
$
3,231
   
$
273
 
Total
     
$
3,231
   
$
273
 


6.     FAIR VALUE

GAAP guidance regarding fair value measurements address how companies should measure fair value when they are required to use fair value measures for recognition or disclosure purposes under GAAP and provides a common definition of fair value to be used throughout GAAP.  It defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly fashion between market participants at the measurement date.  In addition, it establishes a three-level valuation hierarchy for the disclosure of fair value measurements.  The valuation hierarchy is based on the transparency of inputs to the valuation of an asset or liability.  The level in the hierarchy within which a given fair value measurement falls is determined based on the lowest level input that is significant to the measurement, with Level 1 being the highest priority and Level 3 being the lowest priority.

The levels in the hierarchy are defined as follows:

Level 1:
Inputs to the valuation methodology are observable inputs that reflect unadjusted quoted prices for identical assets or liabilities in an active market;

Level 2:
Inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument;

Level 3:
Inputs to the valuation methodology are unobservable and significant to the fair value measurement.

16


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.  At March 31, 2019, $445,124 thousand of fixed maturities, market value and $2,350 thousand of fixed maturities, fair value were fair valued using unobservable inputs.  The majority of the fixed maturities, market value, $360,518 thousand and all of the $2,350 thousand of fixed maturities, fair value were valued by investment managers’ valuation committees and a majority of these fair values were substantiated by valuations from independent third parties.  The Company has procedures in place to review and evaluate these independent third party valuations.  The remaining Level 3 fixed maturities of $84,606 thousand were fair valued by the Company at either par or amortized cost.  At December 31, 2018, $435,959 thousand of fixed maturities, market value and $2,337 thousand of fixed maturities, fair value were fair valued using unobservable inputs.  The majority of the fixed maturities, market value, $354,143 thousand and all of the $2,337 thousand of fixed maturities, fair value were valued by investment managers’ valuation committees and a majority of these fair values were substantiated by valuations from independent third parties.  The remaining Level 3 fixed maturities of $80,663 thousand were fair valued by the Company at either par or amortized cost and $1,153 thousand were priced using a non-binding broker quote.

The Company internally manages a public equity portfolio which had a fair value at March 31, 2019 and December 31, 2018 of $151,699 thousand and $124,228 thousand, respectively, and all prices were obtained from publicly published sources.

Equity securities denominated in U.S. currency with quoted prices in active markets for identical assets are categorized as level 1 since the quoted prices are directly observable.  Equity securities traded on foreign exchanges are categorized as level 2 due to the added input of a foreign exchange conversion rate to determine fair or market value.  The Company uses foreign currency exchange rates published by nationally recognized sources.

All categories of fixed maturity securities listed in the tables below are generally categorized as level 2, since a particular security may not have traded but the pricing services are able to use valuation models with observable market inputs such as interest rate yield curves and prices for similar fixed maturity securities in terms of issuer, maturity and seniority.  For foreign government securities and foreign corporate securities, the fair values provided by the third party pricing services in local currencies, and where applicable, are converted to U.S. dollars using currency exchange rates from nationally recognized sources.

The fixed maturities with fair values categorized as level 3 result when prices are not available from the nationally recognized pricing services.  The asset managers will then obtain non-binding price quotes for the securities from brokers.  The single broker quotes are provided by market makers or broker-dealers who are recognized as market participants in the markets in which they are providing the quotes.  The prices received from brokers are reviewed for reasonableness by the third party asset managers and the Company.  If the broker quotes are for foreign denominated securities, the quotes are converted to U.S. dollars using currency exchange rates from nationally recognized sources.  In limited circumstances when broker prices are not
17


available for private placements, the Company will value the securities using comparable market information or receive fair values from investment managers.

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.

The Company’s liability for equity index put options is categorized as level 3 since there is no active market for these equity put options.  The fair values for these options are calculated by the Company using an industry accepted pricing model, Black-Scholes.  The model inputs and assumptions are: risk free interest rates, equity market indexes values, volatilities and dividend yields and duration.  The model results are then adjusted for the Company’s credit default swap rate.  All of these inputs and assumptions are updated quarterly.  One of the option contacts is in British Pound Sterling so the fair value for this contract is converted to U.S. dollars using an exchange rate from a nationally recognized source.

18


The following table presents the fair value measurement levels for all assets and liabilities, which the Company has recorded at fair value (fair and market value) as of the periods indicated:


         
Fair Value Measurement Using:
 
         
Quoted Prices
             
         
in Active
   
Significant
       
         
Markets for
   
Other
   
Significant
 
         
Identical
   
Observable
   
Unobservable
 
         
Assets
   
Inputs
   
Inputs
 
(Dollars in thousands)
 
March 31, 2019
 
(Level 1)
   
(Level 2)
   
(Level 3)
 
Assets:
                       
Fixed maturities, market value
                       
U.S. Treasury securities and obligations of
                       
U.S. government agencies and corporations
 
$
1,297,113
   
$
-
   
$
1,297,113
   
$
-
 
Obligations of U.S. States and political subdivisions
   
504,858
     
-
     
504,858
     
-
 
Corporate securities
   
6,016,532
     
-
     
5,578,706
     
437,826
 
Asset-backed securities
   
717,165
     
-
     
717,165
     
-
 
Mortgage-backed securities
                               
Commercial
   
531,508
     
-
     
531,508
     
-
 
Agency residential
   
2,347,278
     
-
     
2,347,278
     
-
 
Non-agency residential
   
9,766
     
-
     
9,766
     
-
 
Foreign government securities
   
1,298,136
     
-
     
1,298,136
     
-
 
Foreign corporate securities
   
2,790,931
     
-
     
2,783,633
     
7,298
 
Total fixed maturities, market value
   
15,513,287
     
-
     
15,068,163
     
445,124
 
                                 
Fixed maturities, fair value
   
2,350
     
-
     
-
     
2,350
 
Equity securities, fair value
   
883,191
     
833,414
     
49,777
     
-
 
                                 
Liabilities:
                               
Equity index put option contracts
 
$
8,727
   
$
-
   
$
-
   
$
8,727
 


There were no transfers between Level 1 and Level 2 for the three months ended March 31, 2019.

19


The following table presents the fair value measurement levels for all assets and liabilities, which the Company has recorded at fair value (fair and market value) as of the periods 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, 2018
 
(Level 1)
   
(Level 2)
   
(Level 3)
 
Assets:
                       
Fixed maturities, market value
                       
U.S. Treasury securities and obligations of
                       
U.S. government agencies and corporations
 
$
2,631,134
   
$
-
   
$
2,631,134
   
$
-
 
Obligations of U.S. States and political subdivisions
   
500,094
     
-
     
500,094
     
-
 
Corporate securities
   
5,445,532
     
-
     
5,017,317
     
428,215
 
Asset-backed securities
   
540,097
     
-
     
540,097
     
-
 
Mortgage-backed securities
                               
Commercial
   
326,710
     
-
     
326,710
     
-
 
Agency residential
   
1,796,264