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Investment Information
9 Months Ended
Sep. 30, 2011
Disclosure Investment Information [Abstract] 
Investment Information

6.        Investment Information

 

Available For Sale Securities

 

The following table summarizes the fair value and cost or amortized cost of the Company's securities classified as available for sale:

  Estimated Gross Gross Cost or OTTI
  Fair Unrealized Unrealized Amortized Unrealized
  Value Gains Losses Cost Losses (2)
                
At September 30, 2011              
Fixed maturities and fixed maturities pledged              
under securities lending agreements (1):              
Corporate bonds$ 2,766,651 $ 93,418 $ (42,230) $ 2,715,463 $ (17,607)
Mortgage backed securities  1,545,321   32,503   (21,110)   1,533,928   (20,676)
Municipal bonds  1,422,943   66,880   (2,322)   1,358,385   (105)
Commercial mortgage backed securities  1,118,905   26,981   (4,230)   1,096,154   (3,259)
U.S. government and government agencies  1,263,665   39,866   (536)   1,224,335   (207)
Non-U.S. government securities  837,043   42,570   (15,610)   810,083   -
Asset backed securities  647,705   19,529   (8,572)   636,748   (3,876)
 Total  9,602,233   321,747   (94,610)   9,375,096   (45,730)
                
Equity securities  273,213   9,049   (36,171)   300,335   -
Other investments  229,974   10,530  (6,645)   226,089   -
Short-term investments  799,662   58   (8,268)   807,872   -
 Total$ 10,905,082 $ 341,384 $ (145,694) $ 10,709,392 $ (45,730)
                
At December 31, 2010              
Fixed maturities and fixed maturities pledged              
under securities lending agreements (1):              
Corporate bonds$ 2,714,375 $ 97,400 $ (18,343) $ 2,635,318 $ (18,047)
Mortgage backed securities  1,806,813   18,801   (26,893)   1,814,905   (21,147)
Municipal bonds  1,182,100   40,410   (6,958)   1,148,648   (125)
Commercial mortgage backed securities  1,167,299   31,743   (6,028)   1,141,584   (3,481)
U.S. government and government agencies  872,149   20,150   (5,696)   857,695   (207)
Non-U.S. government securities  732,666   39,539   (11,894)   705,021   (72)
Asset backed securities  558,032   20,672   (3,990)   541,350   (3,954)
 Total  9,033,434   268,715   (79,802)   8,844,521   (47,033)
                
Equity securities  310,194   20,660   (3,424)   292,958   -
Other investments  275,538   24,280  (1,332)   252,590   -
Short-term investments  915,841   2,845   (492)   913,488   -
 Total$ 10,535,007 $ 316,500 $ (85,050) $ 10,303,557 $ (47,033)

  • In securities lending transactions, the Company receives collateral in excess of the fair value of the fixed maturities and short-term investments pledged. For purposes of this table, the Company has excluded the collateral received and reinvested and included the fixed maturities and short-term investments pledged. See “—Securities Lending Agreements.”
  • Represents the total other-than-temporary impairments (“OTTI”) recognized in accumulated other comprehensive income (“AOCI”). It does not include the change in fair value subsequent to the impairment measurement date. At September 30, 2011, the net unrealized loss related to securities for which a non-credit OTTI was recognized in AOCI was $13.8 million, compared to a net unrealized loss of $7.1 million at December 31, 2010.

 

The following table summarizes, for all available for sale securities in an unrealized loss position, the fair value and gross unrealized loss by length of time the security has been in a continual unrealized loss position:

  Less than 12 Months 12 Months or More Total
  Estimated Gross Estimated Gross Estimated Gross
  Fair Unrealized Fair Unrealized Fair Unrealized
  Value Losses Value Losses Value Losses
                   
At September 30, 2011                 
Fixed maturities and fixed maturities                 
pledged under securities lending                 
agreements (1):                 
Corporate bonds$ 946,958 $ (38,638) $ 39,640 $ (3,592) $ 986,598 $ (42,230)
Mortgage backed securities  377,312   (11,221)   41,759   (9,889)   419,071   (21,110)
Municipal bonds  243,629   (2,197)   3,174   (125)   246,803   (2,322)
Commercial mortgage backed                 
 securities  193,318   (3,453)   8,408   (777)   201,726   (4,230)
U.S. government and                 
 government agencies  149,684   (536)   -   -   149,684   (536)
Non-U.S. government securities  351,494   (14,840)   11,890   (770)   363,384   (15,610)
Asset backed securities  200,706   (5,922)   10,716   (2,650)   211,422   (8,572)
 Total  2,463,101   (76,807)   115,587   (17,803)   2,578,688   (94,610)
Equity securities  193,356   (36,171)   -   -   193,356   (36,171)
Other investments  103,167  (6,229)   2,906   (416)   106,073   (6,645)
Short-term investments  150,061   (8,268)   -   -   150,061   (8,268)
 Total$ 2,909,685 $ (127,475) $ 118,493 $ (18,219) $ 3,028,178 $ (145,694)
                   
At December 31, 2010                 
Fixed maturities and fixed maturities                 
pledged under securities lending                 
agreements (1):                 
Corporate bonds$ 530,956 $ (16,580) $ 20,351 $ (1,763) $ 551,307 $ (18,343)
Mortgage backed securities  913,138   (20,331)   57,895   (6,562)   971,033   (26,893)
Municipal bonds  294,978   (6,440)   8,465   (518)   303,443   (6,958)
Commercial mortgage backed                 
 securities  311,703   (5,273)   22,030   (755)   333,733   (6,028)
U.S. government and                 
 government agencies  190,497   (5,696)   -   -   190,497   (5,696)
Non-U.S. government securities  271,446   (7,418)   45,884   (4,476)   317,330   (11,894)
Asset backed securities  75,655   (827)   8,126   (3,163)   83,781   (3,990)
 Total  2,588,373   (62,565)   162,751   (17,237)   2,751,124   (79,802)
Equity securities  68,629   (3,424)   -   -   68,629   (3,424)
Other investments  46,750  (916)   2,850  (416)   49,600  (1,332)
Short-term investments  42,030   (492)   -   -   42,030   (492)
 Total$ 2,745,782 $ (67,397) $ 165,601 $ (17,653) $ 2,911,383 $ (85,050)

  • In securities lending transactions, the Company receives collateral in excess of the fair value of the fixed maturities and short-term investments pledged. For purposes of this table, the Company has excluded the collateral received and reinvested and included the fixed maturities and short-term investments pledged. See “—Securities Lending Agreements.”

 

At September 30, 2011, on a lot level basis, approximately 1,830 security lots out of a total of approximately 4,800 security lots were in an unrealized loss position and the largest single unrealized loss from a single lot in the Company's fixed maturity portfolio was $5.3 million. At December 31, 2010, on a lot level basis, approximately 1,130 security lots out of a total of approximately 4,360 security lots were in an unrealized loss position and the largest single unrealized loss from a single lot in the Company's fixed maturity portfolio was $2.6 million.

 

The contractual maturities of the Company's fixed maturities and fixed maturities pledged under securities lending agreements are shown in the following table. Expected maturities, which are management's best estimates, will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

   September 30, 2011 December 31, 2010
   Estimated Amortized Estimated Amortized
Maturity Fair Value CostFair Value Cost
              
Due in one year or less $ 424,945 $ 413,387 $ 414,390 $ 398,795
Due after one year through five years   2,950,545   2,869,718   2,924,879   2,833,955
Due after five years through 10 years   2,446,160   2,376,760   1,719,446   1,671,306
Due after 10 years   468,652   448,401   442,575   442,626
    6,290,302   6,108,266   5,501,290   5,346,682
Mortgage backed securities   1,545,321   1,533,928   1,806,813   1,814,905
Commercial mortgage backed securities   1,118,905   1,096,154   1,167,299   1,141,584
Asset backed securities   647,705   636,748   558,032   541,350
 Total $ 9,602,233 $ 9,375,096 $ 9,033,434 $ 8,844,521

Securities Lending Agreements

 

The Company operates a securities lending program under which certain of its fixed income portfolio securities are loaned to third parties, primarily major brokerage firms, for short periods of time through a lending agent. The Company maintains legal control over the securities it lends, retains the earnings and cash flows associated with the loaned securities and receives a fee from the borrower for the temporary use of the securities. At September 30, 2011, the fair value and amortized cost of fixed maturities and short-term investments pledged under securities lending agreements were $72.4 million and $70.7 million, respectively, compared to $75.6 million and $72.5 million at December 31, 2010, respectively. At September 30, 2011, the portfolio of collateral backing the Company's securities lending program included approximately $8.5 million fair value of sub-prime securities with an average credit quality of “CCC” from Standard & Poor's and “Caa3” from Moody's, compared to $13.2 million with an average credit quality of “B-” from Standard & Poor's and “Caa2” from Moody's at December 31, 2010.

Fair Value Option

 

The Company elected to carry certain fixed maturity securities, equity securities and other investments at fair value under the fair value option afforded by accounting guidance regarding the fair value option for financial assets and liabilities. Changes in fair value of investments accounted for using the fair value option are included in “Net realized gains (losses).” The primary reasons for electing the fair value option were to reflect economic events in earnings on a timely basis and address simplification and cost-benefit considerations.

 

The Company also elected to carry the securities and related borrowings under the Federal Reserve Bank of New York's (“FRBNY”) Term Asset-Backed Securities Loan Facility (“TALF”) at fair value under the fair value option. The primary reason for electing the fair value option on the TALF investments and TALF borrowings was to mitigate volatility in equity from using different measurement attributes (i.e., TALF investments carried at fair value whereas the related TALF borrowings would be recorded on an accrual basis absent electing the fair value option). Changes in fair value for both the securities and borrowings are included in “Net realized gains (losses)” while interest income on the TALF investments is reflected in net investment income and interest expense on the TALF borrowings is reflected in interest expense.

 

The following table summarizes the Company's assets and liabilities which are accounted for using the fair value option:

  September 30, December 31,
  2011 2010
       
Fixed maturities$ 122,866 $ 124,969
Equity securities  100,719   94,204
Other investments (par: $100,250 and $0)  95,796   -
 Investments accounted for using the fair value option  319,381   219,173
Securities sold but not yet purchased (1)  (46,526)   (41,143)
TALF investments  392,455   402,449
TALF borrowings  (314,137)   (325,770)
 Net assets accounted for using the fair value option$ 351,173 $ 254,709

  • Represents the Company's obligation to deliver securities that it did not own at the time of sale. Such amounts are included in “other liabilities” on the Company's consolidated balance sheets.

 

Net Investment Income

 

The components of net investment income were derived from the following sources:

 

  Three Months Ended Nine Months Ended
  September 30, September 30,
  2011 2010 2011 2010
             
Fixed maturities $ 82,686 $ 94,209 $ 252,250 $ 286,051
Equity securities  1,796   120   5,187   410
Short-term investments   430   473   1,613   958
Other (1)   4,264   1,174   17,625   2,296
 Gross investment income   89,176   95,976   276,675   289,715
Investment expenses   (6,423)   (5,208)   (18,944)   (15,438)
 Net investment income $ 82,753 $ 90,768 $ 257,731 $ 274,277

  • Includes interest on term loan investments (included in “investments accounted for using the fair value option”), dividends on investment funds and other items.

 

Net Realized Gains (Losses)

 

Net realized gains (losses) were as follows, excluding the other-than-temporary impairment provisions discussed above:

 

  Three Months Ended Nine Months Ended
  September 30, September 30,
  2011 2010 2011 2010
             
Available for sale securities:           
 Gross gains on investment sales$ 61,008 $ 87,358 $ 204,303 $ 207,368
 Gross losses on investment sales  (21,503)   (29,819)   (85,170)   (71,282)
Change in fair value of assets and liabilities           
accounted for using the fair value option:           
 Fixed maturities  (4,366)   6,240   (12,759)   (2,457)
 Equity securities  (28,993)   5,660   (32,043)   369
 Other investments  (3,755)   -   (3,432)   -
 TALF investments  (2,130)   6,534   2,317   14,431
 TALF borrowings  79   (1,231)   (206)   (691)
Derivative instruments (1)  36,179   (7,030)   28,035   28,522
Other  (6,320)   1,116   (4,941)   2,464
 Net realized gains$ 30,199 $ 68,828 $ 96,104 $ 178,724

  • See Note 8 for information on the Company's derivative instruments.

Other-Than-Temporary Impairments

 

The Company performs quarterly reviews of its available for sale investments in order to determine whether declines in fair value below the amortized cost basis were considered other-than-temporary in accordance with applicable guidance. The following table details the OTTI recognized in earnings by asset class:

  Three Months Ended Nine Months Ended
  September 30, September 30,
  2011 2010 2011 2010
             
Fixed maturities:           
 Mortgage backed securities$ 1,192 $ 1,835 $ 3,620 $ 4,096
 Asset backed securities  -   103   10   2,077
 Corporate bonds  16   137   375   265
  Total  1,208   2,075   4,005   6,438
             
Investment of funds received under           
securities lending agreements  393   -   1,623   1,653
             
Equity securities  1,138   -   1,475   -
  Total OTTI recognized in earnings$ 2,739 $ 2,075 $ 7,103 $ 8,091

A description of the methodology and significant inputs used to measure the amount of OTTI in the 2011 periods is as follows:

 

  • Mortgage backed securities – the Company utilized underlying data provided by asset managers, cash flow projections and additional information from credit agencies in order to determine an expected recovery value for each security. The analysis includes expected cash flow projections under base case and stress case scenarios which modify the expected default expectations and loss severities and slow down prepayment assumptions. The significant inputs in the models include the expected default rates, delinquency rates and foreclosure costs. The expected recovery values were reduced on a number of mortgage backed securities, primarily as a result of increases in expected default expectations and foreclosure costs. The amortized cost basis of the mortgage backed securities were adjusted down, if required, to the expected recovery value calculated in the OTTI review process;
  • Investment of funds received under securities lending agreements – the Company utilized analysis from its securities lending program manager in order to determine an expected recovery value for certain collateral backing the Company's securities lending program which was invested in sub-prime securities. The analysis provided expected cash flow projections for the securities using similar criteria as described in the mortgage backed securities section above. The amortized cost basis of the investment of funds received under securities lending agreements was adjusted down, if required, to the expected recovery value calculated in the OTTI review process;
  • Corporate bonds – the Company reviewed the business prospects, credit ratings, estimated loss given default factors, foreign currency impacts and information received from asset managers and rating agencies for certain corporate bonds. The amortized cost basis of the corporate bonds were adjusted down, if required, to the expected recovery value calculated in the OTTI review process;
  • Equity securities – the Company utilized information received from asset managers on common stocks, including the business prospects, recent events, industry and market data and other factors. For certain equities which were in an unrealized loss position and where the Company determined that it did not have the intent or ability to hold such securities for a reasonable period of time by which the fair value of the securities would increase and the Company would recover its cost, the cost basis of such securities was adjusted down accordingly.

 

The Company believes that the $45.7 million of OTTI included in accumulated other comprehensive income at September 30, 2011 on the securities which were considered by the Company to be impaired was due to market and sector-related factors (i.e., not credit losses). At September 30, 2011, the Company did not intend to sell these securities, or any other securities which were in an unrealized loss position, and determined that it is more likely than not that the Company will not be required to sell such securities before recovery of their cost basis.

The following table provides a roll forward of the amount related to credit losses recognized in earnings for which a portion of an OTTI was recognized in accumulated other comprehensive income:

 

   Three Months Ended Nine Months Ended
   September 30, September 30,
   2011 2010 2011 2010
              
Balance at start of period$ 86,286 $ 89,189 $ 86,040 $ 84,147
 Credit loss impairments recognized on securities           
  not previously impaired  272   557   3,135   1,110
 Credit loss impairments recognized on securities           
  previously impaired  1,328   1,518   2,492   6,981
 Reductions for increases in cash flows expected to           
  be collected that are recognized over the remaining           
  life of the security  -   -   -   -
 Reductions for securities sold during the period  (530)   (558)   (4,311)   (1,532)
Balance at end of period$ 87,356 $ 90,706 $ 87,356 $ 90,706

Restricted Assets

 

The Company is required to maintain assets on deposit, which primarily consist of fixed maturities, with various regulatory authorities to support its insurance and reinsurance operations. The Company's insurance and reinsurance subsidiaries maintain assets in trust accounts as collateral for insurance and reinsurance transactions with affiliated companies and also have investments in segregated portfolios primarily to provide collateral or guarantees for letters of credit to third parties. See Note 4, “Commitments and Contingencies—Letter of Credit and Revolving Credit Facilities,” for further details. The following table details the value of the Company's restricted assets:

 

  September 30, December 31,
  2011 2010
       
Assets used for collateral or guarantees:     
 Affiliated transactions$4,384,970 $4,491,649
 Third party agreements 786,078  948,020
Deposits with U.S. regulatory authorities 290,169  263,077
Deposits with non-U.S. regulatory authorities 169,476  122,341
Trust funds 49,865  48,140
 Total restricted assets$5,680,558 $5,873,227