10-Q 1 holdings10q2q2018.htm HOLDINGS 10-Q 2Q 2018
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED:
June 30, 2018
 
Commission file number:
1-14527

EVEREST REINSURANCE HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
Delaware
 
22-3263609
(State or other jurisdiction of
incorporation or organization)
 
 
(I.R.S. Employer
Identification No.)
477 Martinsville Road
Post Office Box 830
Liberty Corner, New Jersey 07938-0830
(908) 604-3000

(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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post 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
   
Accelerated filer
 
Non-accelerated filer
X
 
Smaller reporting company
 
(Do not check if 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

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.

   
Number of Shares Outstanding
Class
 
At August 1, 2018
Common Shares, $0.01 par value
 
1,000

The Registrant meets the conditions set forth in General Instruction H (1)(a) and (b) of Form 10-Q and is therefore filing this form with the reduced disclosure format permitted by General Instruction H of Form 10-Q.

EVEREST REINSURANCE HOLDINGS, INC.

Table of Contents
Form 10-Q


Page
PART I

FINANCIAL INFORMATION

         
Item 1.
 
Financial Statements
 
         
   
Consolidated Balance Sheets at June 30, 2018 (unaudited) and
 
     
December 31, 2017
1
       
   
Consolidated Statements of Operations and Comprehensive Income (Loss) for the
 
     
three and six months ended June 30, 2018 and 2017 (unaudited)
2
         
   
Consolidated Statements of Changes in Stockholder's Equity for the three and
 
     
six months ended June 30, 2018 and 2017 (unaudited)
3
         
   
Consolidated Statements of Cash Flows for the six months ended
 
     
June 30, 2018 and 2017 (unaudited)
4
         
   
Notes to Consolidated Interim Financial Statements (unaudited)
5
         
Item 2.
 
Management's Discussion and Analysis of Financial Condition and
 
     
Results of Operation
31
       
Item 3.
 
Quantitative and Qualitative Disclosures About Market Risk
48
         
Item 4.
 
Controls and Procedures
48
         

PART II

OTHER INFORMATION

         
Item 1.
 
Legal Proceedings
48
         
Item 1A.
 
Risk Factors
49
       
Item 2.
 
Unregistered Sales of Equity Securities and Use of Proceeds
49
       
Item 3.
 
Defaults Upon Senior Securities
49
       
Item 4.
 
Mine Safety Disclosures
49
       
Item 5.
 
Other Information
49
       
Item 6.
 
Exhibits
49


EVEREST REINSURANCE HOLDINGS, INC.
CONSOLIDATED BALANCE SHEETS



   
June 30,
   
December 31,
 
(Dollars in thousands, except par value per share)
 
2018
   
2017
 
   
(unaudited)
     
ASSETS:
           
Fixed maturities - available for sale, at market value
 
$
5,031,141
   
$
4,971,921
 
     (amortized cost: 2018, $5,075,029; 2017, $4,927,622)
               
Fixed maturities - available for sale, at fair value
   
3,192
     
-
 
Equity securities - available for sale, at fair value
   
942,900
     
822,375
 
Short-term investments
   
192,287
     
241,506
 
Other invested assets (cost: 2018, $866,782; 2017, $835,597)
   
866,782
     
838,694
 
Other invested assets, at fair value
   
1,705,037
     
1,807,473
 
Cash
   
364,850
     
229,552
 
         Total investments and cash
   
9,106,189
     
8,911,521
 
Note receivable - affiliated
   
250,000
     
250,000
 
Accrued investment income
   
38,638
     
35,376
 
Premiums receivable
   
1,332,313
     
1,301,827
 
Reinsurance receivables - unaffiliated
   
1,247,968
     
1,180,648
 
Reinsurance receivables - affiliated
   
4,232,094
     
4,940,039
 
Income taxes
   
106,310
     
87,110
 
Funds held by reinsureds
   
227,546
     
210,939
 
Deferred acquisition costs
   
308,615
     
307,741
 
Prepaid reinsurance premiums
   
352,842
     
346,708
 
Other assets
   
324,322
     
316,603
 
TOTAL ASSETS
 
$
17,526,837
   
$
17,888,512
 
                 
LIABILITIES:
               
Reserve for losses and loss adjustment expenses
 
$
9,287,561
   
$
9,343,028
 
Unearned premium reserve
   
1,660,783
     
1,607,622
 
Funds held under reinsurance treaties
   
43,939
     
40,536
 
Other net payable to reinsurers
   
414,007
     
491,299
 
4.868% Senior notes due 6/1/2044
   
396,894
     
396,834
 
6.6% Long term notes due 5/1/2067
   
236,610
     
236,561
 
Accrued interest on debt and borrowings
   
3,010
     
2,727
 
Unsettled securities payable
   
49,274
     
25,338
 
Other liabilities
   
387,713
     
331,844
 
         Total liabilities
   
12,479,791
     
12,475,789
 
                 
Commitments and Contingencies (Note 6)
               
                 
STOCKHOLDER'S EQUITY:
               
Common stock, par value: $0.01; 3,000 shares authorized;
               
     1,000 shares issued and outstanding (2018 and 2017)
   
-
     
-
 
Additional paid-in capital
   
387,936
     
387,841
 
Accumulated other comprehensive income (loss), net of deferred income tax expense
               
     (benefit) of ($24,408) at 2018 and ($299) at 2017
   
(91,581
)
   
(942
)
Retained earnings
   
4,750,691
     
5,025,824
 
         Total stockholder's equity
   
5,047,046
     
5,412,723
 
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY
 
$
17,526,837
   
$
17,888,512
 
                 
The accompanying notes are an integral part of the consolidated financial statements.
               

1

EVEREST REINSURANCE HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME (LOSS)



   
Three Months Ended
   
Six Months Ended
 
   
June 30,
   
June 30,
 
(Dollars in thousands)
 
2018
   
2017
   
2018
   
2017
 
   
(unaudited)
   
(unaudited)
 
REVENUES:
                       
Premiums earned
 
$
1,179,836
   
$
468,197
   
$
2,295,846
   
$
939,252
 
Net investment income
   
72,070
     
71,900
     
141,979
     
132,749
 
Net realized capital gains (losses):
                               
Other-than-temporary impairments on fixed maturity securities
   
(872
)
   
(1,574
)
   
(907
)
   
(2,706
)
Other-than-temporary impairments on fixed maturity securities
                               
transferred to other comprehensive income (loss)
   
-
     
-
     
-
     
-
 
Other net realized capital gains (losses)
   
(41,399
)
   
(90,717
)
   
(101,565
)
   
28,183
 
Total net realized capital gains (losses)
   
(42,271
)
   
(92,291
)
   
(102,472
)
   
25,477
 
Other income (expense)
   
77,682
     
10,655
     
2,805
     
20,510
 
Total revenues
   
1,287,317
     
458,461
     
2,338,158
     
1,117,988
 
                                 
CLAIMS AND EXPENSES:
                               
Incurred losses and loss adjustment expenses
   
1,228,760
     
297,228
     
1,942,015
     
586,950
 
Commission, brokerage, taxes and fees
   
288,002
     
60,513
     
544,459
     
113,020
 
Other underwriting expenses
   
74,226
     
64,197
     
151,577
     
124,092
 
Corporate expenses
   
1,513
     
1,512
     
5,109
     
5,109
 
Interest, fee and bond issue cost amortization expense
   
7,623
     
7,954
     
14,936
     
16,813
 
Total claims and expenses
   
1,600,124
     
431,404
     
2,658,096
     
845,984
 
                                 
INCOME (LOSS) BEFORE TAXES
   
(312,807
)
   
27,057
     
(319,938
)
   
272,004
 
Income tax expense (benefit)
   
(47,399
)
   
(8,601
)
   
(42,358
)
   
67,168
 
                                 
NET INCOME (LOSS)
 
$
(265,408
)
 
$
35,658
   
$
(277,580
)
 
$
204,836
 
                                 
Other comprehensive income (loss), net of tax:
                               
Unrealized appreciation (depreciation) ("URA(D)") on securities arising during the period
   
(18,165
)
   
3,825
     
(64,987
)
   
13,264
 
Less: reclassification adjustment for realized losses (gains) included in net income (loss)
   
154
     
(3,477
)
   
(4,681
)
   
(6,944
)
Total URA(D) on securities arising during the period
   
(18,011
)
   
348
     
(69,668
)
   
6,320
 
                                 
Foreign currency translation adjustments
   
(20,812
)
   
5,372
     
(22,154
)
   
8,939
 
                                 
Reclassification adjustment for amortization of net (gain) loss included in net income (loss)
   
1,815
     
2,004
     
3,630
     
4,008
 
Total benefit plan net gain (loss) for the period
   
1,815
     
2,004
     
3,630
     
4,008
 
Total other comprehensive income (loss), net of tax
   
(37,008
)
   
7,724
     
(88,192
)
   
19,267
 
                                 
COMPREHENSIVE INCOME (LOSS)
 
$
(302,416
)
 
$
43,382
   
$
(365,772
)
 
$
224,103
 
                                 
The accompanying notes are an integral part of the consolidated financial statements.
                               

2

EVEREST REINSURANCE HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF
CHANGES IN STOCKHOLDER'S EQUITY



   
Three Months Ended
   
Six Months Ended
 
   
June 30,
   
June 30,
 
(Dollars in thousands, except share amounts)
 
2018
   
2017
   
2018
   
2017
 
   
(unaudited)
   
(unaudited)
 
COMMON STOCK (shares outstanding):
                       
Balance, beginning of period
   
1,000
     
1,000
     
1,000
     
1,000
 
Balance, end of period
   
1,000
     
1,000
     
1,000
     
1,000
 
                                 
ADDITIONAL PAID-IN CAPITAL:
                               
Balance, beginning of period
 
$
387,889
   
$
387,637
   
$
387,841
   
$
387,567
 
Share-based compensation plans
   
47
     
68
     
95
     
138
 
Balance, end of period
   
387,936
     
387,705
     
387,936
     
387,705
 
                                 
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS),
                               
NET OF DEFERRED INCOME TAXES:
                               
Balance, beginning of period
   
(54,573
)
   
(24,772
)
   
(942
)
   
(36,315
)
Net increase (decrease) during the period
   
(37,008
)
   
7,724
     
(88,192
)
   
19,267
 
Cumulative change due to adoption of Accounting Standards Update 2016-01
   
-
     
-
     
(2,447
)
   
-
 
Balance, end of period
   
(91,581
)
   
(17,048
)
   
(91,581
)
   
(17,048
)
                                 
RETAINED EARNINGS:
                               
Balance, beginning of period
   
5,016,099
     
5,116,479
     
5,025,824
     
4,947,301
 
Net income (loss)
   
(265,408
)
   
35,658
     
(277,580
)
   
204,836
 
Cumulative change due to adoption of Accounting Standards Update 2016-01
   
-
     
-
     
2,447
     
-
 
Balance, end of period
   
4,750,691
     
5,152,137
     
4,750,691
     
5,152,137
 
                                 
TOTAL STOCKHOLDER'S EQUITY, END OF PERIOD
 
$
5,047,046
   
$
5,522,794
   
$
5,047,046
   
$
5,522,794
 
                                 
The accompanying notes are an integral part of the consolidated financial statements.
                               

3


EVEREST REINSURANCE HOLDINGS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS



   
Six Months Ended
 
   
June 30,
 
(Dollars in thousands)
 
2018
   
2017
 
   
(unaudited)
 
CASH FLOWS FROM OPERATING ACTIVITIES:
           
Net income (loss)
 
$
(277,580
)
 
$
204,836
 
Adjustments to reconcile net income to net cash provided by operating activities:
               
Decrease (increase) in premiums receivable
   
(31,486
)
   
(213,530
)
Decrease (increase) in funds held by reinsureds, net
   
(13,233
)
   
2,353
 
Decrease (increase) in reinsurance receivables
   
627,965
     
(115,273
)
Decrease (increase) in income taxes
   
4,652
     
14,411
 
Decrease (increase) in prepaid reinsurance premiums
   
(6,626
)
   
(184,385
)
Increase (decrease) in reserve for losses and loss adjustment expenses
   
(34,332
)
   
(55,590
)
Increase (decrease) in unearned premiums
   
54,516
     
111,848
 
Increase (decrease) in other net payable to reinsurers
   
(76,825
)
   
89,702
 
Increase (decrease) in losses in course of payment
   
78,740
     
250,153
 
Change in equity adjustments in limited partnerships
   
(29,160
)
   
(8,728
)
Distribution of limited partnership income
   
28,278
     
12,483
 
Change in other assets and liabilities, net
   
14,713
     
(10,029
)
Non-cash compensation expense
   
5,903
     
5,186
 
Amortization of bond premium (accrual of bond discount)
   
3,478
     
9,107
 
Net realized capital (gains) losses
   
102,472
     
(25,477
)
Net cash provided by (used in) operating activities
   
451,475
     
87,067
 
                 
CASH FLOWS FROM INVESTING ACTIVITIES:
               
Proceeds from fixed maturities matured/called - available for sale, at market value
   
416,065
     
555,649
 
Proceeds from fixed maturities sold - available for sale, at market value
   
368,858
     
652,490
 
Proceeds from fixed maturities sold - available for sale, at fair value
   
1,065
     
-
 
Proceeds from equity securities sold - available for sale, at fair value
   
429,927
     
249,653
 
Distributions from other invested assets
   
941,415
     
1,018,997
 
Cost of fixed maturities acquired - available for sale, at market value
   
(971,395
)
   
(1,348,415
)
Cost of fixed maturities acquired - available for sale, at fair value
   
(4,381
)
   
-
 
Cost of equity securities acquired - available for sale, at fair value
   
(555,998
)
   
(237,894
)
Cost of other invested assets acquired
   
(964,209
)
   
(1,182,157
)
Net change in short-term investments
   
47,613
     
130,362
 
Net change in unsettled securities transactions
   
(16,558
)
   
6,648
 
Net cash provided by (used in) investing activities
   
(307,598
)
   
(154,667
)
                 
CASH FLOWS FROM FINANCING ACTIVITIES:
               
Tax benefit from share-based compensation, net of expense
   
(3,362
)
   
(5,048
)
Net cash provided by (used in) financing activities
   
(3,362
)
   
(5,048
)
                 
EFFECT OF EXCHANGE RATE CHANGES ON CASH
   
(5,217
)
   
17,419
 
                 
Net increase (decrease) in cash
   
135,298
     
(55,229
)
Cash, beginning of period
   
229,552
     
297,794
 
Cash, end of period
 
$
364,850
   
$
242,565
 
                 
SUPPLEMENTAL CASH FLOW INFORMATION:
               
Income taxes paid (recovered)
 
$
(46,386
)
 
$
52,641
 
Interest paid
   
14,544
     
17,608
 
                 
The accompanying notes are an integral part of the consolidated financial statements.
               

4

NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS (UNAUDITED)

For the Three and Six Months Ended June 30, 2018 and 2017

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) and the "Company" means Holdings and its subsidiaries.

During the third quarter of 2016, the Company established domestic subsidiaries, Everest Premier Insurance Company ("Everest Premier") and Everest Denali Insurance Company ("Everest Denali"), which will be used in the continued expansion of the Insurance operations.

2. BASIS OF PRESENTATION

The unaudited consolidated financial statements of the Company for the three and six months ended June 30, 2018 and 2017 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, 2017 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 six months ended June 30, 2018 and 2017 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, 2017, 2016 and 2015 included in the Company's most recent Form 10-K filing.

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 2018 presentation.

Application of Recently Issued Accounting Standard Changes.

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 reclassed 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 has decided to early adopt the guidance as of December 31, 2017.  The adoption resulted in a reclass of $325 thousand between AOCI and retained earnings during the fourth quarter of 2017.
5


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. Because of uncertainty in how the Internal Revenue Service ("IRS") intends to implement the modifications and the necessary transition calculation, the Company has determined that a reasonable estimate cannot be determined and has followed the provisions of the tax laws that were in effect prior to the modifications. In 2018, the Company expects to record adjustments to the amount of tax expense it recorded in 2017 with respect to the TCJA as estimated amounts are finalized.  Further adjustments are not expected to 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, 2019. The Company does not expect the adoption of ASU 2017-08 to have a material impact on its financial statements.

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 outlines 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 outline 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.
6


Leases.  In February 2016, FASB issued ASU 2016-02 which outlines 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 is currently evaluating the impact of the adoption of ASU 2016-02 on its financial statements.

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 $2,447 thousand between AOCI and retained earnings, which is disclosed separately within the consolidated statement of changes in shareholders equity.

Disclosures about Short-Duration Contracts. In May 2015, the FASB issued ASU 2015-09, authoritative guidance regarding required disclosures associated with short duration insurance contracts.  The new disclosure requirements focus on information about initial claim estimates and subsequent claim estimate adjustment, methodologies in estimating claims and the timing, frequency and severity of claims related to short duration insurance contracts. This guidance is effective for annual reporting periods beginning after December 15, 2015 and interim reporting periods beginning after December 15, 2016.  The Company implemented this guidance effective in the fourth quarter of 2016.

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.
7


3.  INVESTMENTS

The amortized cost, market value and gross unrealized appreciation and depreciation of available for sale, fixed maturity, 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, 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
 
$
728,275
   
$
1,066
   
$
(16,216
)
 
$
713,125
   
$
-
 
Obligations of U.S. states and political subdivisions
   
525,088
     
14,730
     
(1,934
)
   
537,884
     
420
 
Corporate securities
   
2,130,519
     
14,265
     
(41,705
)
   
2,103,079
     
175
 
Asset-backed securities
   
127,848
     
44
     
(1,435
)
   
126,457
     
-
 
Mortgage-backed securities
                                       
Commercial
   
50,092
     
-
     
(873
)
   
49,219
     
-
 
Agency residential
   
129,801
     
477
     
(3,458
)
   
126,820
     
-
 
Non-agency residential
   
23
     
4
     
-
     
27
     
-
 
Foreign government securities
   
501,389
     
13,697
     
(10,788
)
   
504,298
     
-
 
Foreign corporate securities
   
881,994
     
13,383
     
(25,145
)
   
870,232
     
276
 
Total fixed maturity securities
 
$
5,075,029
   
$
57,666
   
$
(101,554
)
 
$
5,031,141
   
$
871
 



   
At December 31, 2017
 
   
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
 
$
671,449
   
$
658
   
$
(7,594
)
 
$
664,513
   
$
-
 
Obligations of U.S. states and political subdivisions
   
563,789
     
22,124
     
(444
)
   
585,469
     
-
 
Corporate securities
   
2,009,665
     
28,003
     
(13,459
)
   
2,024,209
     
129
 
Asset-backed securities
   
138,203
     
207
     
(386
)
   
138,024
     
-
 
Mortgage-backed securities
                                       
Commercial
   
52,121
     
115
     
(485
)
   
51,751
     
-
 
Agency residential
   
114,435
     
511
     
(1,658
)
   
113,288
     
-
 
Non-agency residential
   
51
     
7
     
-
     
58
     
-
 
Foreign government securities
   
514,048
     
17,065
     
(7,493
)
   
523,620
     
-
 
Foreign corporate securities
   
863,861
     
20,121
     
(12,993
)
   
870,989
     
377
 
Total fixed maturity securities
 
$
4,927,622
   
$
88,811
   
$
(44,512
)
 
$
4,971,921
   
$
506
 


(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.
8


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, 2018
   
At December 31, 2017
 
   
Amortized
   
Market
   
Amortized
   
Market
 
(Dollars in thousands)
 
Cost
   
Value
   
Cost
   
Value
 
Fixed maturity securities – available for sale
                       
    Due in one year or less
 
$
409,551
   
$
408,261
   
$
319,858
   
$
320,746
 
    Due after one year through five years
   
2,642,246
     
2,599,253
     
2,601,898
     
2,595,237
 
    Due after five years through ten years
   
1,123,408
     
1,120,995
     
1,051,431
     
1,069,617
 
    Due after ten years
   
592,060
     
600,110
     
649,625
     
683,200
 
Asset-backed securities
   
127,848
     
126,457
     
138,203
     
138,024
 
Mortgage-backed securities
                               
Commercial
   
50,092
     
49,219
     
52,121
     
51,751
 
Agency residential
   
129,801
     
126,819
     
114,435
     
113,288
 
Non-agency residential
   
23
     
27
     
51
     
58
 
Total fixed maturity securities
 
$
5,075,029
   
$
5,031,141
   
$
4,927,622
   
$
4,971,921
 


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
 
   
June 30,
   
June 30,
 
(Dollars in thousands)
 
2018
   
2017
   
2018
   
2017
 
Increase (decrease) during the period between the market value and cost
                       
of investments carried at market value, and deferred taxes thereon:
                       
Fixed maturity securities
 
$
(23,064
)
 
$
32
   
$
(88,552
)
 
$
12,274
 
Fixed maturity securities, other-than-temporary impairment
   
266
     
(317
)
   
365
     
(3,816
)
Other invested assets
   
-
     
821
     
-
     
1,265
 
Change in unrealized  appreciation (depreciation), pre-tax
   
(22,798
)
   
536
     
(88,187
)
   
9,723
 
Deferred tax benefit (expense)
   
4,843
     
(299
)
   
18,596
     
(4,739
)
Deferred tax benefit (expense), other-than-temporary impairment
   
(56
)
   
111
     
(77
)
   
1,336
 
Change in unrealized appreciation (depreciation),
                               
net of deferred taxes, included in stockholder's equity
 
$
(18,011
)
 
$
348
   
$
(69,668
)
 
$
6,320
 


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.
9


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 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, 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
 
$
440,894
   
$
(8,405
)
 
$
220,276
   
$
(7,811
)
 
$
661,170
   
$
(16,216
)
Obligations of U.S. states and political subdivisions
   
45,254
     
(651
)
   
36,939
     
(1,283
)
   
82,193
     
(1,934
)
Corporate securities
   
1,196,780
     
(29,005
)
   
210,326
     
(12,700
)
   
1,407,106
     
(41,705
)
Asset-backed securities
   
80,247
     
(1,286
)
   
12,959
     
(149
)
   
93,206
     
(1,435
)
Mortgage-backed securities
                                               
Commercial
   
38,395
     
(497
)
   
10,825
     
(376
)
   
49,220
     
(873
)
Agency residential
   
40,493
     
(935
)
   
59,936
     
(2,523
)
   
100,429
     
(3,458
)
Foreign government securities
   
172,660
     
(2,290
)
   
144,064
     
(8,498
)
   
316,724
     
(10,788
)
Foreign corporate securities
   
389,435
     
(11,683
)
   
162,554
     
(13,462
)
   
551,989
     
(25,145
)
Total fixed maturity securities
 
$
2,404,158
   
$
(54,752
)
 
$
857,879
   
$
(46,802
)
 
$
3,262,037
   
$
(101,554
)



   
Duration of Unrealized Loss at June 30, 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
 
$
163,878
   
$
(1,028
)
 
$
36,644
   
$
(3,527
)
 
$
200,522
   
$
(4,555
)
Due in one year through five years
   
1,386,748
     
(27,598
)
   
575,246
     
(29,483
)
   
1,961,994
     
(57,081
)
Due in five years through ten years
   
519,971
     
(12,892
)
   
125,330
     
(9,461
)
   
645,301
     
(22,353
)
Due after ten years
   
174,426
     
(10,516
)
   
36,939
     
(1,283
)
   
211,365
     
(11,799
)
Asset-backed securities
   
80,247
     
(1,286
)
   
12,959
     
(149
)
   
93,206
     
(1,435
)
Mortgage-backed securities
   
78,888
     
(1,432
)
   
70,761
     
(2,899
)
   
149,649
     
(4,331
)
Total fixed maturity securities
 
$
2,404,158
   
$
(54,752
)
 
$
857,879
   
$
(46,802
)
 
$
3,262,037
   
$
(101,554
)


The aggregate market value and gross unrealized losses related to investments in an unrealized loss position at June 30, 2018 were $3,262,037 thousand and $101,554 thousand, respectively.  The market value of securities for the single issuer (the United States government) whose securities comprised the largest unrealized loss position at June 30, 2018, did not exceed 13.2% of the overall market value of the Company's fixed maturity securities. The market value of 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 $54,752 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, U.S. government agencies and corporations and foreign government securities.  Of these unrealized losses, $39,887 thousand were related to securities that were rated investment grade by at least one nationally recognized statistical rating agency.  The $46,802 thousand of unrealized losses related to fixed maturity securities in an unrealized loss position for more than one year related primarily due to foreign and domestic corporate securities, foreign government securities, U.S. government agencies and corporations and agency residential mortgage-backed securities.  Of these unrealized losses $45,389 thousand were related to securities that were rated investment grade by at least one nationally recognized
10


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.

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 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, 2017 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
 
$
446,963
   
$
(2,921
)
 
$
198,684
   
$
(4,673
)
 
$
645,647
   
$
(7,594
)
Obligations of U.S. states and political subdivisions
   
4,400
     
(27
)
   
37,886
     
(417
)
   
42,286
     
(444
)
Corporate securities
   
455,431
     
(6,674
)
   
216,715
     
(6,785
)
   
672,146
     
(13,459
)
Asset-backed securities
   
75,196
     
(328
)
   
7,991
     
(58
)
   
83,187
     
(386
)
Mortgage-backed securities
                                               
Commercial
   
26,650
     
(264
)
   
5,972
     
(221
)
   
32,622
     
(485
)
Agency residential
   
46,234
     
(322
)
   
58,135
     
(1,336
)
   
104,369
     
(1,658
)
Foreign government securities
   
159,852
     
(1,567
)
   
121,018
     
(5,926
)
   
280,870
     
(7,493
)
Foreign corporate securities
   
263,547
     
(4,590
)
   
109,727
     
(8,403
)
   
373,274
     
(12,993
)
Total fixed maturity securities
 
$
1,478,273
   
$
(16,693
)
 
$
756,128
   
$
(27,819
)
 
$
2,234,401
   
$
(44,512
)



   
Duration of Unrealized Loss at December 31, 2017 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
 
$
102,939
   
$
(498
)
 
$
40,006
   
$
(1,627
)
 
$
142,945
   
$
(2,125
)
Due in one year through five years
   
973,217
     
(10,291
)
   
488,945
     
(18,917
)
   
1,462,162
     
(29,208
)
Due in five years through ten years
   
189,103
     
(3,713
)
   
116,136
     
(5,216
)
   
305,239
     
(8,929
)
Due after ten years
   
64,934
     
(1,277
)
   
38,943
     
(444
)
   
103,877
     
(1,721
)
Asset-backed securities
   
75,196
     
(328
)
   
7,991
     
(58
)
   
83,187
     
(386
)
Mortgage-backed securities
   
72,884
     
(586
)
   
64,107
     
(1,557
)
   
136,991
     
(2,143
)
Total fixed maturity securities
 
$
1,478,273
   
$
(16,693
)
 
$
756,128
   
$
(27,819
)
 
$
2,234,401
   
$
(44,512
)


The aggregate market value and gross unrealized losses related to investments in an unrealized loss position at December 31, 2017 were $2,234,401 thousand and $44,512 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, 2017, did not exceed 13.0% of the overall market value of the Company's fixed maturity securities. The market value of securities for the issuer with the second largest unrealized loss comprised less than 0.9% 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 $16,693 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, U.S. government agencies and corporations and foreign government securities.  Of these unrealized losses, $13,043 thousand were related to securities that were rated investment grade by at least one nationally recognized statistical rating agency.  The $27,819 thousand of unrealized losses
11


related to fixed maturity securities in an unrealized loss position for more than one year related primarily due to foreign and domestic corporate securities, foreign government securities, U.S. government agencies and corporations and agency residential mortgage-backed securities.  Of these unrealized losses $26,463 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.

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


   
Three Months Ended
   
Six Months Ended
 
   
June 30,
   
June 30,
 
(Dollars in thousands)
 
2018
   
2017
   
2018
   
2017
 
Fixed maturities
 
$
48,523
   
$
49,601
   
$
90,942
   
$
96,581
 
Equity securities
   
3,627
     
6,370
     
8,030
     
13,118
 
Short-term investments and cash
   
1,302
     
590
     
2,230
     
980
 
Other invested assets
                               
Limited partnerships
   
14,168
     
8,978
     
28,640
     
8,754
 
Dividends from preferred shares of affiliate
   
7,758
     
7,758
     
15,516
     
15,516
 
Other
   
1,460
     
1,496
     
4,655
     
2,748
 
Gross investment income before adjustments
   
76,838
     
74,793
     
150,013
     
137,697
 
Funds held interest income (expense)
   
731
     
978
     
3,599
     
2,917
 
Interest income from Parent
   
1,075
     
1,075
     
2,150
     
2,150
 
Gross investment income
   
78,644
     
76,846
     
155,762
     
142,764
 
Investment expenses
   
(6,574
)
   
(4,946
)
   
(13,783
)
   
(10,015
)
Net investment income
 
$
72,070
   
$
71,900
   
$
141,979
   
$
132,749
 
                                 
(Some amounts may not reconcile due to rounding.)
                               


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 $363,824 thousand in limited partnerships at June 30, 2018.  These commitments will be funded when called in accordance with the partnership agreements, which have investment periods that expire, unless extended, through 2023.

The Company's other invested assets at June 30, 2018 and December 31, 2017 included $85,910 thousand and $131,998 thousand, respectively, related to a private placement liquidity sweep facility. The primary purpose of the facility is to enhance the Company's return on its short-term investments and cash positions. The facility invests in high quality, short-duration securities and permits daily liquidity.

Other invested assets, at fair value, as of June 30, 2018 and December 31, 2017, were comprised of preferred shares held in Preferred Holdings, an affiliated company.
12


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


   
Three Months Ended
   
Six Months Ended
 
   
June 30,
   
June 30,
 
(Dollars in thousands)
 
2018
   
2017
   
2018
   
2017
 
Fixed maturity securities, market value:
                       
Other-than-temporary impairments
 
$
(872
)
 
$
(1,574
)
 
$
(907
)
 
$
(2,706
)
Gains (losses) from sales
   
(172
)
   
6,507
     
5,958
     
12,972
 
Fixed maturity securities, fair value:
                               
Gains (losses) from sales
   
(1,068
)
   
-
     
(1,082
)
   
-
 
Gains (losses) from fair value adjustments
   
958
     
-
     
958
     
-
 
Equity securities, fair value:
                               
Gains (losses) from sales
   
(1,601
)
   
604
     
(4,082
)
   
4,944
 
Gains (losses) from fair value adjustments
   
25,550
     
14,943
     
(1,464
)
   
52,361
 
Other invested assets
   
581
     
(2
)
   
584
     
(1
)
Other invested assets, fair value:
                               
Gains (losses) from fair value adjustments
   
(65,647
)
   
(112,769
)
   
(102,436
)
   
(42,094
)
Short-term investment gains (losses)
   
-
     
-
     
(1
)
   
1
 
Total net realized capital gains (losses)
 
$
(42,271
)
 
$
(92,291
)
 
$
(102,472
)
 
$
25,477
 


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

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


   
Three Months Ended
   
Six Months Ended
 
   
June 30,
   
June 30,
 
(Dollars in thousands)
 
2018
   
2017
   
2018
   
2017
 
Proceeds from sales of fixed maturity securities
 
$
214,942
   
$
359,496
   
$
369,923
   
$
652,490
 
Gross gains from sales
   
2,066
     
7,748
     
8,993
     
15,743
 
Gross losses from sales
   
(3,306
)
   
(1,241
)
   
(4,117
)
   
(2,771
)
                                 
Proceeds from sales of equity securities
 
$
301,448
   
$
115,602
   
$
429,927
   
$
249,653
 
Gross gains from sales
   
4,678
     
3,562
     
7,906
     
11,575
 
Gross losses from sales
   
(6,279
)
   
(2,958
)
   
(11,988
)
   
(6,631
)
13

4.  RESERVES FOR LOSSES AND LAE

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


   
Six Months Ended
   
Twelve Months Ended
 
   
June 30,
   
December 31,
 
(Dollars in thousands)
 
2018
   
2017
 
Gross reserves at January 1
 
$
9,343,028
   
$
8,331,288
 
Less reinsurance recoverables
   
(5,727,268
)
   
(4,199,791
)
Net reserves at January 1
   
3,615,760
     
4,131,497
 
                 
Incurred related to:
               
Current year
   
1,451,011
     
2,157,498
 
Prior years
   
491,004
     
(117,747
)
Total incurred losses and LAE
   
1,942,015
     
2,039,751
 
                 
Paid related to:
               
Current year
   
378,985
     
1,607,601
 
Prior years
   
912,199
     
957,933
 
Total paid losses and LAE
   
1,291,184
     
2,565,534
 
                 
Foreign exchange/translation adjustment
   
(16,509
)
   
10,046
 
                 
Net reserves at December 31
   
4,250,082
     
3,615,760
 
Plus reinsurance recoverables
   
5,037,479
     
5,727,268
 
Gross reserves at December 31
 
$
9,287,561
   
$
9,343,028
 


Incurred prior years' reserves increased by $491,004 thousand for the six months ended June 30, 2018 and decreased by $117,747 thousand for the year ended December 31, 2017. The increase for the six months ended June 30, 2018, resulted from unfavorable development on prior years catastrophe losses 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 reported in the second quarter of 2018 and loss inflation from higher than expected loss adjustment expenses and in particular, their impact on aggregate covers.  The decrease for 2017 was attributable to favorable development in the reinsurance segments of $84,809 thousand related primarily to property and short-tail business in the U.S., as well as favorable development on prior year catastrophe losses, partially offset by $25,194 thousand of adverse development on A&E reserves. The insurance segment also experienced favorable development on prior year reserves of $32,938 thousand mainly on its workers compensation business, which is largely written in California.

5.  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;
14

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 ninety private placement securities at June 30, 2018, an investment manager's valuation committee valued eighty-five of these private placement securities at $247,863 thousand. A majority of the fair values determined by the valuation committee are substantiated by valuations from independent third parties. Four of the private placement securities totaling $95,444 thousand are valued by the investment manager at amortized cost. In addition, the Company valued one private placement security at $1,750 thousand, representing par value.  Due to the unavailability of prices for sixty-five private placement securities at December 31, 2017, an investment manager's valuation committee valued the sixty-five securities at $165,173 thousand.

The Company internally manages a public equity portfolio which had a fair value at June 30, 2018 and December 31, 2017 of $365,986 thousand and $245,043 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 available for private placements, the Company will value the securities using comparable market information or receive fair values from investment managers.
15

The composition and valuation inputs for the presented fixed maturities categories are as follows:

·
U.S. Treasury securities and obligations of U.S. government agencies and corporations are primarily comprised of U.S. Treasury bonds and the fair value is based on observable market inputs such as quoted prices, reported trades, quoted prices for similar issuances or benchmark yields;

·
Obligations of U.S. states and political subdivisions are comprised of state and municipal bond issuances and the fair values are based on observable market inputs such as quoted market prices, quoted prices for similar securities, benchmark yields and credit spreads;

·
Corporate securities are primarily comprised of U.S. corporate and public utility bond issuances and the fair values are based on observable market inputs such as quoted market prices, quoted prices for similar securities, benchmark yields and credit spreads;

·
Asset-backed and mortgage-backed securities fair values are based on observable inputs such as quoted prices, reported trades, quoted prices for similar issuances or benchmark yields and cash flow models using observable inputs such as prepayment speeds, collateral performance and default spreads;

·
Foreign government securities are comprised of global non-U.S. sovereign bond issuances and the fair values are based on observable market inputs such as quoted market prices, quoted prices for similar securities and models with observable inputs such as benchmark yields and credit spreads and then, where applicable, converted to U.S. dollars using an exchange rate from a nationally recognized source;

·
Foreign corporate securities are comprised of global non-U.S. corporate bond issuances and the fair values are based on observable market inputs such as quoted market prices, quoted prices for similar securities and models with observable inputs such as benchmark yields and credit spreads and then, where applicable, converted to U.S. dollars using an exchange rate from a nationally recognized source.

Other invested assets, at fair value, was categorized as Level 3 at June 30, 2018 and December 31, 2017, since it represented a privately placed convertible preferred stock issued by an affiliate.  The stock was received in exchange for shares of the Company's parent.  The 25 year redeemable, convertible preferred stock with a 1.75% coupon is valued using a pricing model. The pricing model includes observable inputs such as the U.S. Treasury yield curve rate T note constant maturity 20 year and the swap rate on the Company's June 1, 2044, 4.868% senior notes, with adjustments to reflect the Company's own assumptions about the inputs that market participants would use in pricing the asset.
16

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)
 
June 30, 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
 
$
713,125
   
$
-
   
$
713,125
   
$
-
 
Obligations of U.S. States and political subdivisions
   
537,884
     
-
     
537,884
     
-
 
Corporate securities
   
2,103,079
     
-
     
1,773,830
     
329,249
 
Asset-backed securities
   
126,457
     
-
     
126,457
     
-
 
Mortgage-backed securities
                               
Commercial
   
49,219
     
-
     
49,219
     
-
 
Agency residential
   
126,820
     
-
     
126,820
     
-
 
Non-agency residential
   
27
     
-
     
27
     
-
 
Foreign government securities
   
504,298
     
-
     
504,298
     
-
 
Foreign corporate securities
   
870,232
     
-
     
857,617
     
12,615
 
Total fixed maturities, market value
   
5,031,141
     
-
     
4,689,277
     
341,864
 
                                 
Fixed maturities, fair value
   
3,192
     
-
     
-
     
3,192
 
Equity securities, fair value
   
942,900
     
919,566
     
23,334
     
-
 
Other invested assets, fair value
   
1,705,037
     
-
     
-
     
1,705,037
 


There were no transfers between Level 1 and Level 2 for the six months ended June 30, 2018.

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, 2017
   
(Level 1)
   
(Level 2)
   
(Level 3)
 
Assets:
                       
Fixed maturities, market value
                       
U.S. Treasury securities and obligations of
                       
U.S. government agencies and corporations
 
$
664,513
   
$
-
   
$
664,513
   
$
-
 
Obligations of U.S. States and political subdivisions
   
585,469
     
-
     
585,469
     
-
 
Corporate securities
   
2,024,209
     
-
     
1,865,988
     
158,221
 
Asset-backed securities
   
138,024
     
-
     
138,024
     
-
 
Mortgage-backed securities
                               
Commercial
   
51,751
     
-
     
51,751
     
-
 
Agency residential
   
113,288
     
-
     
113,288
     
-
 
Non-agency residential
   
58
     
-
     
58
     
-
 
Foreign government securities
   
523,620
     
-
     
523,620
     
-
 
Foreign corporate securities
   
870,989
     
-
     
864,037
     
6,952
 
Total fixed maturities, market value
   
4,971,921
     
-
     
4,806,748
     
165,173
 
                                 
Equity securities, fair value
   
822,375
     
800,542
     
21,833
     
-
 
Other invested assets, fair value
   
1,807,473
     
-
     
-
     
1,807,473
 

17

In addition $96,162 thousand and $79,505 thousand of investments within other invested assets on the consolidated balance sheets as of June 30, 2018 and December 31, 2017, respectively, are not included within the fair value hierarchy tables as the assets are measured at NAV as a practical expedient to determine fair value.

The following tables present the activity under Level 3, fair value measurements using significant unobservable inputs by asset type, for the periods indicated:


   
Total Fixed Maturities, Market Value
 
   
Three Months Ended June 30, 2018
   
Six Months Ended June 30, 2018
 
   
Corporate
   
Foreign
         
Corporate
   
Foreign
       
(Dollars in thousands)
 
Securities
   
Corporate
   
Total
   
Securities
   
Corporate
   
Total
 
Beginning balance
 
$
168,590
   
$
11,368
   
$
179,958
   
$
158,221
   
$
6,952
   
$
165,173
 
Total gains or (losses) (realized/unrealized)
                                               
Included in earnings
   
623
     
(504
)
   
119
     
1,345
     
(410
)
   
935
 
Included in other comprehensive income (loss)
   
190
     
-
     
190
     
425
     
-
     
425
 
Purchases, issuances and settlements
   
159,846
     
1
     
159,847
     
169,258
     
4,323
     
173,581
 
Transfers in and/or (out) of Level 3
   
-
     
1,750
     
1,750
     
-
     
1,750
     
1,750
 
Ending balance
 
$
329,249
   
$
12,615
   
$
341,864
   
$
329,249
   
$
12,615
   
$
341,864
 
                                                 
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.)
                                               



   
Total Fixed Maturities, Market Value
 
   
Three Months Ended June 30, 2017
   
Six Months Ended June 30, 2017
 
   
Corporate
   
Foreign
         
Corporate
   
Foreign
       
(Dollars in thousands)
 
Securities
   
Corporate
   
Total
   
Securities
   
Corporate
   
Total
 
Beginning balance
 
$
84,322
   
$
2,802
   
$
87,124
   
$
65,197
   
$
2,538
   
$
67,735
 
Total gains or (losses) (realized/unrealized)
                                               
Included in earnings
   
711
     
128
     
839
     
925
     
104
     
1,029
 
Included in other comprehensive income (loss)
   
172