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Fair Value | 3 Months Ended
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Mar. 31, 2019
Fair Value [Abstract] |
Fair Value | 6. FAIR VALUE GAAP guidance regarding fair value measurements address how companies should measure fair value when they are required to use fair value measures for recognition or disclosure purposes under GAAP and provides a common definition of fair value to be used throughout GAAP. It defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly fashion between market participants at the measurement date. In addition, it establishes a three-level valuation hierarchy for the disclosure of fair value measurements. The valuation hierarchy is based on the transparency of inputs to the valuation of an asset or liability. The level in the hierarchy within which a given fair value measurement falls is determined based on the lowest level input that is significant to the measurement, with Level 1 being the highest priority and Level 3 being the lowest priority. The levels in the hierarchy are defined as follows:
Level 1: | Inputs to the valuation methodology are observable inputs that reflect unadjusted quoted prices for identical assets or liabilities in an active market;
Level 2: | Inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument;
Level 3: | Inputs to the valuation methodology are unobservable and significant to the fair value measurement.
The Company's fixed maturity and equity securities are primarily managed by third party investment asset managers. The investment asset managers obtain prices from nationally recognized pricing services. These services seek to utilize market data and observations in their evaluation process. They use pricing applications that vary by asset class and incorporate available market information and when fixed maturity securities do not trade on a daily basis the services will apply available information through processes such as benchmark curves, benchmarking of like securities, sector groupings and matrix pricing. In addition, they use model processes, such as the Option Adjusted Spread model to develop prepayment and interest rate scenarios for securities that have prepayment features. In limited instances where prices are not provided by pricing services or in rare instances when a manager may not agree with the pricing service, price quotes on a non-binding basis are obtained from investment brokers. The investment asset managers do not make any changes to prices received from either the pricing services or the investment brokers. In addition, the investment asset managers have procedures in place to review the reasonableness of the prices from the service providers and may request verification of the prices. In addition, the Company continually performs analytical reviews of price changes and tests the prices on a random basis to an independent pricing source. No material variances were noted during these price validation procedures. In limited situations, where financial markets are inactive or illiquid, the Company may use its own assumptions about future cash flows and risk-adjusted discount rates to determine fair value. At March 31, 2019, $445,124 thousand of fixed maturities, market value and $2,350 thousand of fixed maturities, fair value were fair valued using unobservable inputs. The majority of the fixed maturities, market value, $360,518 thousand and all of the $2,350 thousand of fixed maturities, fair value were valued by investment managers' valuation committees and a majority of these fair values were substantiated by valuations from independent third parties. The Company has procedures in place to review and evaluate these independent third party valuations. The remaining Level 3 fixed maturities of $84,606 thousand were fair valued by the Company at either par or amortized cost. At December 31, 2018, $435,959 thousand of fixed maturities, market value and $2,337 thousand of fixed maturities, fair value were fair valued using unobservable inputs. The majority of the fixed maturities, market value, $354,143 thousand and all of the $2,337 thousand of fixed maturities, fair value were valued by investment managers' valuation committees and a majority of these fair values were substantiated by valuations from independent third parties. The remaining Level 3 fixed maturities of $80,663 thousand were fair valued by the Company at either par or amortized cost and $1,153 thousand were priced using a non-binding broker quote. The Company internally manages a public equity portfolio which had a fair value at March 31, 2019 and December 31, 2018 of $151,699 thousand and $124,228 thousand, respectively, and all prices were obtained from publicly published sources. Equity securities denominated in U.S. currency with quoted prices in active markets for identical assets are categorized as level 1 since the quoted prices are directly observable. Equity securities traded on foreign exchanges are categorized as level 2 due to the added input of a foreign exchange conversion rate to determine fair or market value. The Company uses foreign currency exchange rates published by nationally recognized sources. All categories of fixed maturity securities listed in the tables below are generally categorized as level 2, since a particular security may not have traded but the pricing services are able to use valuation models with observable market inputs such as interest rate yield curves and prices for similar fixed maturity securities in terms of issuer, maturity and seniority. For foreign government securities and foreign corporate securities, the fair values provided by the third party pricing services in local currencies, and where applicable, are converted to U.S. dollars using currency exchange rates from nationally recognized sources. The fixed maturities with fair values categorized as level 3 result when prices are not available from the nationally recognized pricing services. The asset managers will then obtain non-binding price quotes for the securities from brokers. The single broker quotes are provided by market makers or broker-dealers who are recognized as market participants in the markets in which they are providing the quotes. The prices received from brokers are reviewed for reasonableness by the third party asset managers and the Company. If the broker quotes are for foreign denominated securities, the quotes are converted to U.S. dollars using currency exchange rates from nationally recognized sources. In limited circumstances when broker prices are not available for private placements, the Company will value the securities using comparable market information or receive fair values from investment managers. The composition and valuation inputs for the presented fixed maturities categories are as follows:
· | U.S. Treasury securities and obligations of U.S. government agencies and corporations are primarily comprised of U.S. Treasury bonds and the fair value is based on observable market inputs such as quoted prices, reported trades, quoted prices for similar issuances or benchmark yields;
· | Obligations of U.S. states and political subdivisions are comprised of state and municipal bond issuances and the fair values are based on observable market inputs such as quoted market prices, quoted prices for similar securities, benchmark yields and credit spreads;
· | Corporate securities are primarily comprised of U.S. corporate and public utility bond issuances and the fair values are based on observable market inputs such as quoted market prices, quoted prices for similar securities, benchmark yields and credit spreads;
· | Asset-backed and mortgage-backed securities fair values are based on observable inputs such as quoted prices, reported trades, quoted prices for similar issuances or benchmark yields and cash flow models using observable inputs such as prepayment speeds, collateral performance and default spreads;
· | Foreign government securities are comprised of global non-U.S. sovereign bond issuances and the fair values are based on observable market inputs such as quoted market prices, quoted prices for similar securities and models with observable inputs such as benchmark yields and credit spreads and then, where applicable, converted to U.S. dollars using an exchange rate from a nationally recognized source;
· | Foreign corporate securities are comprised of global non-U.S. corporate bond issuances and the fair values are based on observable market inputs such as quoted market prices, quoted prices for similar securities and models with observable inputs such as benchmark yields and credit spreads and then, where applicable, converted to U.S. dollars using an exchange rate from a nationally recognized source.
The Company's liability for equity index put options is categorized as level 3 since there is no active market for these equity put options. The fair values for these options are calculated by the Company using an industry accepted pricing model, Black-Scholes. The model inputs and assumptions are: risk free interest rates, equity market indexes values, volatilities and dividend yields and duration. The model results are then adjusted for the Company's credit default swap rate. All of these inputs and assumptions are updated quarterly. One of the option contacts is in British Pound Sterling so the fair value for this contract is converted to U.S. dollars using an exchange rate from a nationally recognized source. The following table presents the fair value measurement levels for all assets and liabilities, which the Company has recorded at fair value (fair and market value) as of the periods indicated:
|  |  |  |  | Fair Value Measurement Using: |
|  |  |  |  | Quoted Prices |  |  |  |  |  |  |
|  |  |  |  | in Active |  |  | Significant |  |  |  |
|  |  |  |  | Markets for |  |  | Other |  |  | Significant |
|  |  |  |  | Identical |  |  | Observable |  |  | Unobservable |
|  |  |  |  | Assets |  |  | Inputs |  |  | Inputs |
(Dollars in thousands) |  | March 31, 2019 |  | (Level 1) |  |  | (Level 2) |  |  | (Level 3) |
Assets: |  |  |  |  |  |  |  |  |  |  |  |
Fixed maturities, market value |  |  |  |  |  |  |  |  |  |  |  |
U.S. Treasury securities and obligations of |  |  |  |  |  |  |  |  |  |  |  |
U.S. government agencies and corporations |  | $ | 1,297,113 |  |  | $ | - |  |  | $ | 1,297,113 |  |  | $ | - |
Obligations of U.S. States and political subdivisions |  |  | 504,858 |  |  |  | - |  |  |  | 504,858 |  |  |  | - |
Corporate securities |  |  | 6,016,532 |  |  |  | - |  |  |  | 5,578,706 |  |  |  | 437,826 |
Asset-backed securities |  |  | 717,165 |  |  |  | - |  |  |  | 717,165 |  |  |  | - |
Mortgage-backed securities |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Commercial |  |  | 531,508 |  |  |  | - |  |  |  | 531,508 |  |  |  | - |
Agency residential |  |  | 2,347,278 |  |  |  | - |  |  |  | 2,347,278 |  |  |  | - |
Non-agency residential |  |  | 9,766 |  |  |  | - |  |  |  | 9,766 |  |  |  | - |
Foreign government securities |  |  | 1,298,136 |  |  |  | - |  |  |  | 1,298,136 |  |  |  | - |
Foreign corporate securities |  |  | 2,790,931 |  |  |  | - |  |  |  | 2,783,633 |  |  |  | 7,298 |
Total fixed maturities, market value |  |  | 15,513,287 |  |  |  | - |  |  |  | 15,068,163 |  |  |  | 445,124 |
Fixed maturities, fair value |  |  | 2,350 |  |  |  | - |  |  |  | - |  |  |  | 2,350 |
Equity securities, fair value |  |  | 883,191 |  |  |  | 833,414 |  |  |  | 49,777 |  |  |  | - |
Liabilities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Equity index put option contracts |  | $ | 8,727 |  |  | $ | - |  |  | $ | - |  |  | $ | 8,727 |
There were no transfers between Level 1 and Level 2 for the three months ended March 31, 2019. The following table presents the fair value measurement levels for all assets and liabilities, which the Company has recorded at fair value (fair and market value) as of the periods indicated:
|  |  |  |  | Fair Value Measurement Using: |
|  |  |  |  | Quoted Prices |  |  |  |  |  |  |
|  |  |  |  | in Active |  |  | Significant |  |  |  |
|  |  |  |  | Markets for |  |  | Other |  |  | Significant |
|  |  |  |  | Identical |  |  | Observable |  |  | Unobservable |
|  |  |  |  | Assets |  |  | Inputs |  |  | Inputs |
(Dollars in thousands) |  | December 31, 2018 |  | (Level 1) |  |  | (Level 2) |  |  | (Level 3) |
Assets: |  |  |  |  |  |  |  |  |  |  |  |
Fixed maturities, market value |  |  |  |  |  |  |  |  |  |  |  |
U.S. Treasury securities and obligations of |  |  |  |  |  |  |  |  |  |  |  |
U.S. government agencies and corporations |  | $ | 2,631,134 |  |  | $ | - |  |  | $ | 2,631,134 |  |  | $ | - |
Obligations of U.S. States and political subdivisions |  |  | 500,094 |  |  |  | - |  |  |  | 500,094 |  |  |  | - |
Corporate securities |  |  | 5,445,532 |  |  |  | - |  |  |  | 5,017,317 |  |  |  | 428,215 |
Asset-backed securities |  |  | 540,097 |  |  |  | - |  |  |  | 540,097 |  |  |  | - |
Mortgage-backed securities |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Commercial |  |  | 326,710 |  |  |  | - |  |  |  | 326,710 |  |  |  | - |
Agency residential |  |  | 1,796,264 |  |  |  | - |  |  |  | 1,796,264 |  |  |  | - |
Non-agency residential |  |  | 10,209 |  |  |  | - |  |  |  | 10,209 |  |  |  | - |
Foreign government securities |  |  | 1,314,165 |  |  |  | - |  |  |  | 1,314,165 |  |  |  | - |
Foreign corporate securities |  |  | 2,661,058 |  |  |  | - |  |  |  | 2,653,314 |  |  |  | 7,744 |
Total fixed maturities, market value |  |  | 15,225,263 |  |  |  | - |  |  |  | 14,789,304 |  |  |  | 435,959 |
Equity securities, market value |  |  | 2,337 |  |  |  | - |  |  |  | - |  |  |  | 2,337 |
Equity securities, fair value |  |  | 716,639 |  |  |  | 674,433 |  |  |  | 42,206 |  |  |  | - |
Liabilities: |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Equity index put option contracts |  | $ | 11,958 |  |  | $ | - |  |  | $ | - |  |  | $ | 11,958 |
In addition, $146,522 thousand and $117,662 thousand of investments within other invested assets on the consolidated balance sheets as March 31, 2019 and December 31, 2018, 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 March 31, 2019 |  |  | Three Months Ended March 31, 2018 |
|  | Corporate |  |  | Foreign |  |  |  |  |  | Corporate |  |  | Foreign |  |  |  |
(Dollars in thousands) |  | Securities |  |  | Corporate |  |  | Total |  |  | Securities |  |  | Corporate |  |  | Total |
Beginning balance fixed maturities at market value |  | $ | 428,215 |  |  | $ | 7,744 |  |  | $ | 435,959 |  |  | $ | 210,186 |  |  | $ | 6,952 |  |  | $ | 217,138 |
Total gains or (losses) (realized/unrealized) |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Included in earnings |  |  | 4,858 |  |  |  | 119 |  |  |  | 4,977 |  |  |  | 722 |  |  |  | 94 |  |  |  | 816 |
Included in other comprehensive income (loss) |  |  | 573 |  |  |  | - |  |  |  | 573 |  |  |  | 235 |  |  |  | - |  |  |  | 235 |
Purchases, issuances and settlements |  |  | 6,638 |  |  |  | (565 | ) |  |  | 6,073 |  |  |  | 9,412 |  |  |  | 4,322 |  |  |  | 13,734 |
Transfers in and/or (out) of Level 3 |  |  | (2,458 | ) |  |  | - |  |  |  | (2,458 | ) |  |  | - |  |  |  | - |  |  |  | - |
Ending balance |  | $ | 437,826 |  |  | $ | 7,298 |  |  | $ | 445,124 |  |  | $ | 220,555 |  |  | $ | 11,368 |  |  | $ | 231,923 |
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, Fair Value |
|  | Three Months Ended March 31, 2019 |  |  | Three Months Ended March 31, 2018 |
|  | Foreign |  |  |  |  |  | Foreign |  |  |  |
(Dollars in thousands) |  | Corporate |  |  | Total |  |  | Corporate |  |  | Total |
Beginning balance fixed maturities at fair value |  | $ | 2,337 |  |  | $ | 2,337 |  |  | $ | - |  |  | $ | - |
Total gains or (losses) (realized/unrealized) |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Included in earnings |  |  | 13 |  |  |  | 13 |  |  |  | (14 | ) |  |  | (14 | )
Included in other comprehensive income (loss) |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |
Purchases, issuances and settlements |  |  | - |  |  |  | - |  |  |  | 1,835 |  |  |  | 1,835 |
Transfers in and/or (out) of Level 3 |  |  | - |  |  |  | - |  |  |  | - |  |  |  | - |
Ending balance |  | $ | 2,350 |  |  | $ | 2,350 |  |  | $ | 1,821 |  |  | $ | 1,821 |
The amount of total gains or losses for the period |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
included in earnings (or changes in net assets) |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
attributable to the change in unrealized gains |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
or losses relating to assets still held |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
at the reporting date |  | $ | - |  |  | $ | - |  |  | $ | - |  |  | $ | - |
(Some amounts may not reconcile due to rounding.) |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
The net transfers to/(from) level 3, fair value measurements using significant unobservable inputs for fixed maturities, market value were ($2,458) thousand for the three months ended March 31, 2019. The transfers during 2019 were related to securities that were priced using single non-binding broker quotes as of December 31, 2018. These securities were subsequently priced using a recognized pricing service as of March 31, 2019. The following table presents the activity under Level 3, fair value measurements using significant unobservable inputs for equity index put option contracts, for the periods indicated:
|  | Three Months Ended |
|  | March 31, |
(Dollars in thousands) |  | 2019 |  |  | 2018 |
Liabilities: |  |  |  |  |  |
Balance, beginning of period |  | $ | 11,958 |  |  | $ | 12,477 |
Total (gains) or losses (realized/unrealized) |  |  |  |  |  |  |  |
Included in earnings |  |  | (3,231 | ) |  |  | (273 | )
Included in other comprehensive income (loss) |  |  | - |  |  |  | - |
Purchases, issuances and settlements |  |  | - |  |  |  | - |
Transfers in and/or (out) of Level 3 |  |  | - |  |  |  | - |
Balance, end of period |  | $ | 8,727 |  |  | $ | 12,205 |
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 liabilities still held at the reporting date |  | $ | - |  |  | $ | - |
(Some amounts may not reconcile due to rounding.) |  |  |  |  |  |  |  |

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- Definition The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information. + References Reference 1: http://fasb.org/us-gaap/role/ref/legacyRef -Publisher FASB -Name Accounting Standards Codification -Topic 820 -URI http://asc.fasb.org/topic&trid=2155941 + Details
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