| Investments |
Investments
| | a) | The following tables summarize the Company’s available-for-sale investments. |
| | | | | | | | | | | | | | | | | | | | | | September 30, 2012 | (dollars in thousands) | Amortized Cost | | Gross Unrealized Holding Gains | | Gross Unrealized Holding Losses | | Unrealized Other-Than- Temporary Impairment Losses | | Estimated Fair Value | Fixed maturities: | | | | | | | | | | U.S. Treasury securities and obligations of U.S. government agencies | $ | 300,491 |
| | $ | 21,462 |
| | $ | — |
| | $ | — |
| | $ | 321,953 |
| Obligations of states, municipalities and political subdivisions | 2,653,298 |
| | 257,461 |
| | (341 | ) | | — |
| | 2,910,418 |
| Foreign governments | 544,544 |
| | 57,673 |
| | (1 | ) | | — |
| | 602,216 |
| Residential mortgage-backed securities | 261,089 |
| | 19,515 |
| | (3 | ) | | (2,258 | ) | | 278,343 |
| Asset-backed securities | 14,332 |
| | 676 |
| | — |
| | — |
| | 15,008 |
| Public utilities | 56,432 |
| | 5,221 |
| | — |
| | — |
| | 61,653 |
| All other corporate bonds | 1,003,063 |
| | 94,765 |
| | (79 | ) | | (6,791 | ) | | 1,090,958 |
| Total fixed maturities | 4,833,249 |
| | 456,773 |
| | (424 | ) | | (9,049 | ) | | 5,280,549 |
| Equity securities: | | | | | | | | | | Insurance companies, banks and trusts | 442,119 |
| | 383,397 |
| | (1,798 | ) | | — |
| | 823,718 |
| Industrial, consumer and all other | 933,287 |
| | 590,506 |
| | (6,258 | ) | | — |
| | 1,517,535 |
| Total equity securities | 1,375,406 |
| | 973,903 |
| | (8,056 | ) | | — |
| | 2,341,253 |
| Short-term investments | 729,029 |
| | 15 |
| | (2 | ) | | — |
| | 729,042 |
| Investments, available-for-sale | $ | 6,937,684 |
| | $ | 1,430,691 |
| | $ | (8,482 | ) | | $ | (9,049 | ) | | $ | 8,350,844 |
|
| | | | | | | | | | | | | | | | | | | | | | December 31, 2011 | (dollars in thousands) | Amortized Cost | | Gross Unrealized Holding Gains | | Gross Unrealized Holding Losses | | Unrealized Other-Than- Temporary Impairment Losses | | Estimated Fair Value | Fixed maturities: | | | | | | | | | | U.S. Treasury securities and obligations of U.S. government agencies | $ | 299,413 |
| | $ | 22,789 |
| | $ | (9 | ) | | $ | — |
| | $ | 322,193 |
| Obligations of states, municipalities and political subdivisions | 2,729,838 |
| | 201,477 |
| | (794 | ) | | — |
| | 2,930,521 |
| Foreign governments | 572,253 |
| | 45,629 |
| | (1,068 | ) | | — |
| | 616,814 |
| Residential mortgage-backed securities | 366,859 |
| | 24,601 |
| | (18 | ) | | (2,258 | ) | | 389,184 |
| Asset-backed securities | 16,096 |
| | 731 |
| | (9 | ) | | — |
| | 16,818 |
| Public utilities | 63,965 |
| | 5,462 |
| | — |
| | — |
| | 69,427 |
| All other corporate bonds | 1,124,528 |
| | 78,053 |
| | (2,750 | ) | | (6,614 | ) | | 1,193,217 |
| Total fixed maturities | 5,172,952 |
| | 378,742 |
| | (4,648 | ) | | (8,872 | ) | | 5,538,174 |
| Equity securities: | | | | | | | | | | Insurance companies, banks and trusts | 389,421 |
| | 296,648 |
| | (1,366 | ) | | — |
| | 684,703 |
| Industrial, consumer and all other | 766,873 |
| | 425,131 |
| | (2,780 | ) | | — |
| | 1,189,224 |
| Total equity securities | 1,156,294 |
| | 721,779 |
| | (4,146 | ) | | — |
| | 1,873,927 |
| Short-term investments | 541,014 |
| | 4 |
| | (4 | ) | | — |
| | 541,014 |
| Investments, available-for-sale | $ | 6,870,260 |
| | $ | 1,100,525 |
| | $ | (8,798 | ) | | $ | (8,872 | ) | | $ | 7,953,115 |
|
| | b) | The following tables summarize gross unrealized investment losses by the length of time that securities have continuously been in an unrealized loss position. |
| | | | | | | | | | | | | | | | | | | | | | | | | | September 30, 2012 | | Less than 12 months | | 12 months or longer | | Total | (dollars in thousands) | Estimated Fair Value | | Gross Unrealized Holding and Other-Than- Temporary Impairment Losses | | Estimated Fair Value | | Gross Unrealized Holding and Other-Than- Temporary Impairment Losses | | Estimated Fair Value | | Gross Unrealized Holding and Other-Than- Temporary Impairment Losses | Fixed maturities: | | | | | | | | | | | | Obligations of states, municipalities and political subdivisions | $ | 2,114 |
| | $ | (50 | ) | | $ | 3,873 |
| | $ | (291 | ) | | $ | 5,987 |
| | $ | (341 | ) | Foreign governments | 14,530 |
| | (1 | ) | | — |
| | — |
| | 14,530 |
| | (1 | ) | Residential mortgage-backed securities | 560 |
| | (2,259 | ) | | 249 |
| | (2 | ) | | 809 |
| | (2,261 | ) | All other corporate bonds | — |
| | (6,791 | ) | | 3,900 |
| | (79 | ) | | 3,900 |
| | (6,870 | ) | Total fixed maturities | 17,204 |
| | (9,101 | ) | | 8,022 |
| | (372 | ) | | 25,226 |
| | (9,473 | ) | Equity securities: | | | | | | | | | | | | Insurance companies, banks and trusts | 18,449 |
| | (1,798 | ) | | — |
| | — |
| | 18,449 |
| | (1,798 | ) | Industrial, consumer and all other | 64,568 |
| | (6,123 | ) | | 1,971 |
| | (135 | ) | | 66,539 |
| | (6,258 | ) | Total equity securities | 83,017 |
| | (7,921 | ) | | 1,971 |
| | (135 | ) | | 84,988 |
| | (8,056 | ) | Short-term investments | 160,991 |
| | (2 | ) | | — |
| | — |
| | 160,991 |
| | (2 | ) | Total | $ | 261,212 |
| | $ | (17,024 | ) | | $ | 9,993 |
| | $ | (507 | ) | | $ | 271,205 |
| | $ | (17,531 | ) |
At September 30, 2012, the Company held 38 securities with a total estimated fair value of $271.2 million and gross unrealized losses of $17.5 million. Of these 38 securities, 10 securities had been in a continuous unrealized loss position for greater than one year and had a total estimated fair value of $10.0 million and gross unrealized losses of $0.5 million. Of these securities, eight were fixed maturities and two were equity securities. The Company does not intend to sell or believe it will be required to sell these fixed maturities before recovery of their amortized cost.
| | | | | | | | | | | | | | | | | | | | | | | | | | December 31, 2011 | | Less than 12 months | | 12 months or longer | | Total | (dollars in thousands) | Estimated Fair Value | | Gross Unrealized Holding and Other-Than- Temporary Impairment Losses | | Estimated Fair Value | | Gross Unrealized Holding and Other-Than- Temporary Impairment Losses | | Estimated Fair Value | | Gross Unrealized Holding and Other-Than- Temporary Impairment Losses | Fixed maturities: | | | | | | | | | | | | U.S. Treasury securities and obligations of U.S. government agencies | $ | 32,384 |
| | $ | (9 | ) | | $ | — |
| | $ | — |
| | $ | 32,384 |
| | $ | (9 | ) | Obligations of states, municipalities and political subdivisions | 1,016 |
| | (2 | ) | | 17,261 |
| | (792 | ) | | 18,277 |
| | (794 | ) | Foreign governments | 40,340 |
| | (1,068 | ) | | — |
| | — |
| | 40,340 |
| | (1,068 | ) | Residential mortgage-backed securities | 489 |
| | (2,263 | ) | | 2,045 |
| | (13 | ) | | 2,534 |
| | (2,276 | ) | Asset-backed securities | — |
| | — |
| | 32 |
| | (9 | ) | | 32 |
| | (9 | ) | All other corporate bonds | 74,812 |
| | (7,829 | ) | | 7,923 |
| | (1,535 | ) | | 82,735 |
| | (9,364 | ) | Total fixed maturities | 149,041 |
| | (11,171 | ) | | 27,261 |
| | (2,349 | ) | | 176,302 |
| | (13,520 | ) | Equity securities: | | | | | | | | | | | | Insurance companies, banks and trusts | 26,514 |
| | (1,366 | ) | | — |
| | — |
| | 26,514 |
| | (1,366 | ) | Industrial, consumer and all other | 70,555 |
| | (2,774 | ) | | 18,525 |
| | (6 | ) | | 89,080 |
| | (2,780 | ) | Total equity securities | 97,069 |
| | (4,140 | ) | | 18,525 |
| | (6 | ) | | 115,594 |
| | (4,146 | ) | Short-term investments | 295,991 |
| | (4 | ) | | — |
| | — |
| | 295,991 |
| | (4 | ) | Total | $ | 542,101 |
| | $ | (15,315 | ) | | $ | 45,786 |
| | $ | (2,355 | ) | | $ | 587,887 |
| | $ | (17,670 | ) |
At December 31, 2011, the Company held 76 securities with a total estimated fair value of $587.9 million and gross unrealized losses of $17.7 million. Of these 76 securities, 17 securities had been in a continuous unrealized loss position for greater than one year and had a total estimated fair value of $45.8 million and gross unrealized losses of $2.4 million. Of these securities, 16 securities were fixed maturities and one was an equity security.
The Company completes a detailed analysis each quarter to assess whether the decline in the fair value of any investment below its cost basis is deemed other-than-temporary. All securities with unrealized losses are reviewed. The Company considers many factors in completing its quarterly review of securities with unrealized losses for other-than-temporary impairment, including the length of time and the extent to which fair value has been below cost and the financial condition and near-term prospects of the issuer. For equity securities, the ability and intent to hold the security for a period of time sufficient to allow for anticipated recovery is considered. For fixed maturities, the Company considers whether it intends to sell the security or if it is more likely than not that it will be required to sell the security before recovery, the implied yield-to-maturity, the credit quality of the issuer and the ability to recover all amounts outstanding when contractually due.
For equity securities, a decline in fair value that is considered to be other-than-temporary is recognized in net income based on the fair value of the security at the time of assessment, resulting in a new cost basis for the security. For fixed maturities where the Company intends to sell the security or it is more likely than not that the Company will be required to sell the security before recovery of its amortized cost, a decline in fair value is considered to be other-than-temporary and is recognized in net income based on the fair value of the security at the time of assessment, resulting in a new cost basis for the security. If the decline in fair value of a fixed maturity below its amortized cost is considered to be other-than-temporary based upon other considerations, the Company compares the estimated present value of the cash flows expected to be collected to the amortized cost of the security. The extent to which the estimated present value of the cash flows expected to be collected is less than the amortized cost of the security represents the credit-related portion of the other-than-temporary impairment, which is recognized in net income, resulting in a new cost basis for the security. Any remaining decline in fair value represents the non-credit portion of the other-than-temporary impairment, which is recognized in other comprehensive income (loss). The discount rate used to calculate the estimated present value of the cash flows expected to be collected is the effective interest rate implicit for the security at the date of purchase.
When assessing whether it intends to sell a fixed maturity or if it is likely to be required to sell a fixed maturity before recovery of its amortized cost, the Company evaluates facts and circumstances including, but not limited to, decisions to reposition the investment portfolio, potential sales of investments to meet cash flow needs and potential sales of investments to capitalize on favorable pricing. Additional information on the methodology and significant inputs, by security type, that the Company used to determine the amount of credit loss recognized on fixed maturities with declines in fair value below amortized cost that were considered to be other-than-temporary is provided below.
Residential mortgage-backed securities. For mortgage-backed securities, credit impairment is assessed by estimating future cash flows from the underlying mortgage loans and interest payments. The cash flow estimate incorporates actual cash flows from the mortgage-backed securities through the current period and then projects the remaining cash flows using a number of assumptions, including prepayment rates, default rates, recovery rates on foreclosed properties and loss severity assumptions. Management develops specific assumptions using market data and internal estimates, as well as estimates from rating agencies and other third party sources. Default rates are estimated by considering current underlying mortgage loan performance and expectations of future performance. Estimates of future cash flows are discounted to present value. If the present value of expected cash flows is less than the amortized cost, the Company recognizes the estimated credit loss in net income.
Corporate bonds. For corporate bonds, credit impairment is assessed by evaluating the underlying issuer. As part of this assessment, the Company analyzes various factors, including the following: | | • | fundamentals of the issuer, including current and projected earnings, current liquidity position and ability to raise capital; |
| | • | fundamentals of the industry in which the issuer operates; |
| | • | expectations of defaults and recovery rates; |
| | • | changes in ratings by rating agencies; |
| | • | other relevant market considerations; and |
| | • | receipt of interest payments |
Default probabilities and recovery rates from rating agencies are key factors used in calculating the credit loss. Additional research of the industry and issuer is completed to determine if there is any current information that may affect the fixed maturity or its issuer in a negative manner and require an adjustment to the cash flow assumptions.
| | c) | The amortized cost and estimated fair value of fixed maturities at September 30, 2012 are shown below by contractual maturity. |
| | | | | | | | | (dollars in thousands) | Amortized Cost | | Estimated Fair Value | Due in one year or less | $ | 311,759 |
| | $ | 316,794 |
| Due after one year through five years | 1,282,826 |
| | 1,398,701 |
| Due after five years through ten years | 1,617,285 |
| | 1,773,272 |
| Due after ten years | 1,345,958 |
| | 1,498,431 |
| | 4,557,828 |
| | 4,987,198 |
| Residential mortgage-backed securities | 261,089 |
| | 278,343 |
| Asset-backed securities | 14,332 |
| | 15,008 |
| Total fixed maturities | $ | 4,833,249 |
| | $ | 5,280,549 |
|
| | d) | The following table summarizes the activity for credit losses recognized in net income on fixed maturities where other-than-temporary impairment was identified and a portion of the other-than-temporary impairment was included in other comprehensive income (loss). |
| | | | | | | | | | | | | | | | | | Quarter Ended September 30, | | Nine Months Ended September 30, | (dollars in thousands) | 2012 | | 2011 | | 2012 | | 2011 | Cumulative credit loss, beginning balance | $ | 21,370 |
| | $ | 15,167 |
| | $ | 21,370 |
| | $ | 10,307 |
| Additions: | | | | | | | | Other-than-temporary impairment losses not previously recognized | — |
| | 875 |
| | — |
| | 875 |
| Increases related to other-than-temporary impairment losses previously recognized | — |
| | 598 |
| | — |
| | 5,473 |
| Total additions | — |
| | 1,473 |
| | — |
| | 6,348 |
| Reductions: | | | | | | | | Sales of fixed maturities on which credit losses were recognized | — |
| | — |
| | — |
| | (15 | ) | Cumulative credit loss, ending balance | $ | 21,370 |
| | $ | 16,640 |
| | $ | 21,370 |
| | $ | 16,640 |
|
| | e) | The following table presents net realized investment gains and the change in net unrealized gains on investments. |
| | | | | | | | | | | | | | | | | | Quarter Ended September 30, | | Nine Months Ended September 30, | (dollars in thousands) | 2012 | | 2011 | | 2012 | | 2011 | Realized gains: | | | | | | | | Sales of fixed maturities | $ | 2,576 |
| | $ | 1,858 |
| | $ | 7,863 |
| | $ | 12,560 |
| Sales of equity securities | 10,403 |
| | 20,078 |
| | 25,865 |
| | 25,896 |
| Other | — |
| | 940 |
| | 655 |
| | 2,459 |
| Total realized gains | 12,979 |
| | 22,876 |
| | 34,383 |
| | 40,915 |
| Realized losses: | | | | | | | | Sales of fixed maturities | (118 | ) | | (53 | ) | | (457 | ) | | (633 | ) | Sales of equity securities | (383 | ) | | — |
| | (331 | ) | | — |
| Other-than-temporary impairments | (3,159 | ) | | (9,984 | ) | | (4,151 | ) | | (14,859 | ) | Other | (4,088 | ) | | — |
| | (4,088 | ) | | — |
| Total realized losses | (7,748 | ) | | (10,037 | ) | | (9,027 | ) | | (15,492 | ) | Net realized investment gains | $ | 5,231 |
| | $ | 12,839 |
| | $ | 25,356 |
| | $ | 25,423 |
| Change in net unrealized gains on investments: | | | | | | | | Fixed maturities | $ | 37,488 |
| | $ | 113,936 |
| | $ | 82,078 |
| | $ | 178,359 |
| Equity securities | 98,964 |
| | (262,264 | ) | | 248,214 |
| | (209,346 | ) | Short-term investments | 18 |
| | 1 |
| | 13 |
| | 22 |
| Net increase (decrease) | $ | 136,470 |
| | $ | (148,327 | ) | | $ | 330,305 |
| | $ | (30,965 | ) |
| | f) | The following table presents other-than-temporary impairment losses recognized in net income and included in net realized investment gains by investment type. |
| | | | | | | | | | | | | | | | | | Quarter Ended September 30, | | Nine Months Ended September 30, | (dollars in thousands) | 2012 | | 2011 | | 2012 | | 2011 | Fixed maturities: | | | | | | | | Residential mortgage-backed securities | $ | — |
| | $ | (1,473 | ) | | $ | — |
| | $ | (6,348 | ) | Total fixed maturities | — |
| | (1,473 | ) | | — |
| | (6,348 | ) | Equity securities: | | | | | | | | Insurance companies, banks and trusts | (1,615 | ) | | (4,048 | ) | | (2,441 | ) | | (4,048 | ) | Industrial, consumer and all other | (1,544 | ) | | (4,463 | ) | | (1,710 | ) | | (4,463 | ) | Total equity securities | (3,159 | ) | | (8,511 | ) | | (4,151 | ) | | (8,511 | ) | Total | $ | (3,159 | ) | | $ | (9,984 | ) | | $ | (4,151 | ) | | $ | (14,859 | ) |
|