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Investments

9 Months Ended

Sep. 30, 2019

Investments [Abstract]

4. INVESTMENTS

The amortized cost, market value and gross unrealized appreciation and depreciation of available for sale, fixed maturity, equity security investments, carried at market value and other-than-temporary impairments (“OTTI”) in accumulated other comprehensive income (“AOCI”) are as follows for the periods indicated:

		At September 30, 2019
		Amortized			Unrealized			Unrealized			Market			OTTI in AOCI
(Dollars in thousands)		Cost			Appreciation			Depreciation			Value			(a)
Fixed maturity securities
	U.S. Treasury securities and obligations of
	U.S. government agencies and corporations	$	1,202,171		$	39,053		$	(1,824)		$	1,239,400		$	-
	Obligations of U.S. states and political subdivisions		506,860			30,609			(98)			537,371			-
	Corporate securities		6,315,184			199,078			(38,925)			6,475,337			409
	Asset-backed securities		864,311			3,293			(2,718)			864,886			-
	Mortgage-backed securities
	Commercial		728,348			39,643			(699)			767,292			-
	Agency residential		2,367,704			40,888			(6,976)			2,401,616			-
	Non-agency residential		8,047			38			(18)			8,067			-
	Foreign government securities		1,325,153			54,419			(36,009)			1,343,563			-
	Foreign corporate securities		2,847,063			129,449			(47,911)			2,928,601			465
Total fixed maturity securities		$	16,164,841		$	536,470		$	(135,178)		$	16,566,133		$	874

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

(a) Represents the amount of OTTI recognized in AOCI. Amount includes unrealized gains and losses on impaired securities relating to changes in the value of such securities subsequent to the impairment measurement date.

Effective January 1, 2018, the Company adopted ASU 2016-01, which requires equity investments in unconsolidated entities to be measured at fair value, with any change in value being recorded within net realized capital gains/(losses) as part of the consolidated statements of operations and comprehensive income (loss). Previously, changes in the market value had been recorded within AOCI as part of the consolidated

balance sheets. Therefore, effective January 1, 2018, equity security investments no longer have an impact upon the AOCI balance.

The amortized cost and market value of fixed maturity securities are shown in the following table by contractual maturity. Mortgage-backed securities are generally more likely to be prepaid than other fixed maturity securities. As the stated maturity of such securities may not be indicative of actual maturities, the totals for mortgage-backed and asset-backed securities are shown separately.

	At September 30, 2019						At December 31, 2018
	Amortized			Market			Amortized			Market
(Dollars in thousands)	Cost			Value			Cost			Value
Fixed maturity securities – available for sale:
Due in one year or less	$	1,430,361		$	1,444,393		$	1,328,571		$	1,330,534
Due after one year through five years		6,639,678			6,750,145			8,114,247			8,016,490
Due after five years through ten years		3,117,529			3,274,937			2,455,911			2,413,846
Due after ten years		1,008,863			1,054,797			789,575			791,113
Asset-backed securities		864,311			864,886			545,427			540,097
Mortgage-backed securities:
Commercial		728,348			767,292			329,883			326,710
Agency residential		2,367,704			2,401,616			1,832,760			1,796,264
Non-agency residential		8,047			8,067			10,198			10,209
Total fixed maturity securities	$.	16,164,841		$.	16,566,133		$.	15,406,572		$.	15,225,263

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

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
(Dollars in thousands)	2019			2018			2019			2018
Increase (decrease) during the period between the market value and cost
of investments carried at market value, and deferred taxes thereon:
Fixed maturity securities	$	103,173		$	(22,073)		$	584,333		$	(282,479)
Fixed maturity securities, other-than-temporary impairment		72			72			(1,671)			339
Change in unrealized appreciation (depreciation), pre-tax		103,245			(22,001)			582,662			(282,140)
Deferred tax benefit (expense)		(9,984)			1,205			(62,415)			20,497
Deferred tax benefit (expense), other-than-temporary impairment		(25)			(69)			122			(145)
Change in unrealized appreciation (depreciation),
net of deferred taxes, included in shareholders’ equity	$	93,236		$	(20,865)		$	520,369		$	(261,788)

The Company frequently reviews all of its fixed maturity, available for sale securities for declines in market value and focuses its attention on securities whose fair value has fallen below 80% of their amortized cost at the time of review. The Company then assesses whether the decline in value is temporary or other-than-temporary. In making its assessment, the Company evaluates the current market and interest rate environment as well as specific issuer information. Generally, a change in a security’s value caused by a change in the market, interest rate or foreign exchange environment does not constitute an other-than-temporary impairment, but rather a temporary decline in market value. Temporary declines in market value are recorded as unrealized losses in accumulated other comprehensive income (loss). If the Company determines that the decline is other-than-temporary and the Company does not have the intent to sell the security; and it is more likely than not that the Company will not have to sell the security before recovery of its cost basis, the carrying value of the investment is written down to fair value. The fair value adjustment that is credit or foreign exchange related is recorded in net realized capital gains (losses) in the Company’s consolidated statements of operations and comprehensive income (loss). The fair value adjustment that is non-credit related is recorded as a component of other comprehensive income (loss), net of tax, and is included in accumulated other comprehensive income (loss) in the Company’s consolidated balance sheets.

The Company’s assessments are based on the issuers’ current and expected future financial position, timeliness with respect to interest and/or principal payments, speed of repayments and any applicable credit

enhancements or breakeven constant default rates on mortgage-backed and asset-backed securities, as well as relevant information provided by rating agencies, investment advisors and analysts.

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

Retrospective adjustments are employed to recalculate the values of asset-backed securities. All of the Company’s asset-backed and mortgage-backed securities have a pass-through structure. Each acquisition lot is reviewed to recalculate the effective yield. The recalculated effective yield is used to derive a book value as if the new yield were applied at the time of acquisition. Outstanding principal factors from the time of acquisition to the adjustment date are used to calculate the prepayment history for all applicable securities. Conditional prepayment rates, computed with life to date factor histories and weighted average maturities, are used in the calculation of projected prepayments for pass-through security types.

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

		Duration of Unrealized Loss at September 30, 2019 By Security Type
	Less than 12 months						Greater than 12 months						Total
				Gross						Gross						Gross
				Unrealized						Unrealized						Unrealized
(Dollars in thousands)	Market Value			Depreciation			Market Value			Depreciation			Market Value			Depreciation
Fixed maturity securities - available for sale
U.S. Treasury securities and obligations of
U.S. government agencies and corporations	$	23,964		$	(20)		$	316,601		$	(1,804)		$	340,565		$	(1,824)
Obligations of U.S. states and political subdivisions		6,672			(52)			3,518			(46)			10,190			(98)
Corporate securities		524,855			(11,045)			526,975			(27,880)			1,051,830			(38,925)
Asset-backed securities		337,232			(2,029)			175,138			(689)			512,370			(2,718)
Mortgage-backed securities
Commercial		4,944			-			47,201			(699)			52,145			(699)
Agency residential		32,779			(95)			617,460			(6,881)			650,239			(6,976)
Non-agency residential		3,200			(16)			2,381			(2)			5,581			(18)
Foreign government securities		163,595			(4,794)			304,079			(31,215)			467,674			(36,009)
Foreign corporate securities		235,652			(5,728)			491,150			(42,183)			726,802			(47,911)
Total fixed maturity securities	$	1,332,893		$	(23,779)		$	2,484,503		$	(111,399)		$	3,817,396		$	(135,178)

		Duration of Unrealized Loss at September 30, 2019 By Maturity
	Less than 12 months						Greater than 12 months						Total
				Gross						Gross						Gross
				Unrealized						Unrealized						Unrealized
(Dollars in thousands)	Market Value			Depreciation			Market Value			Depreciation			Market Value			Depreciation
Fixed maturity securities
Due in one year or less	$	76,571		$	(1,341)		$	446,039		$	(22,077)		$	522,610		$	(23,418)
Due in one year through five years		354,417			(6,986)			982,505			(55,581)			1,336,922			(62,567)
Due in five years through ten years		330,090			(10,236)			118,854			(14,860)			448,944			(25,096)
Due after ten years		193,660			(3,076)			94,925			(10,610)			288,585			(13,686)
Asset-backed securities		337,232			(2,029)			175,138			(689)			512,370			(2,718)
Mortgage-backed securities		40,923			(111)			667,042			(7,582)			707,965			(7,693)
Total fixed maturity securities	$	1,332,893		$	(23,779)		$	2,484,503		$	(111,399)		$	3,817,396		$	(135,178)

The aggregate market value and gross unrealized losses related to investments in an unrealized loss position at September 30, 2019 were $3,817,396 thousand and $135,178 thousand, respectively. The market value of securities for the single issuer whose securities comprised the largest unrealized loss position at September 30, 2019, did not exceed 0.9% of the overall market value of the Company’s fixed maturity securities. In addition, as indicated on the above table, there was no significant concentration of unrealized losses in any one market sector. The $23,779 thousand of unrealized losses related to fixed maturity securities that have been in an unrealized loss position for less than one year were generally comprised of domestic and foreign corporate securities, foreign government securities and asset-backed securities. Of these unrealized losses, $15,284 thousand were related to securities that were rated investment grade by at least one nationally recognized statistical rating agency. The $111,399 thousand of unrealized losses related to fixed maturity securities in an unrealized loss position for more than one year related primarily to foreign and domestic corporate securities, foreign government securities, agency residential mortgage-backed securities and U.S. government agencies and corporations. Of these unrealized losses, $89,726 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 Company, given the size of its investment portfolio and capital position, does not have the intent to sell these securities; and it is more likely than not that the Company will not have to sell the security before recovery of its cost basis. In addition, all securities currently in an unrealized loss position are current with respect to principal and interest payments.

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

		Duration of Unrealized Loss at December 31, 2018 By Security Type
	Less than 12 months						Greater than 12 months						Total
				Gross						Gross						Gross
				Unrealized						Unrealized						Unrealized
(Dollars in thousands)	Market Value			Depreciation			Market Value			Depreciation			Market Value			Depreciation
Fixed maturity securities - available for sale
U.S. Treasury securities and obligations of
U.S. government agencies and corporations	$	76,226		$	(158)		$	777,409		$	(14,943)		$	853,635		$	(15,101)
Obligations of U.S. states and political subdivisions		71,559			(1,444)			38,105			(1,395)			109,664			(2,839)
Corporate securities		2,513,463			(69,619)			1,683,729			(71,896)			4,197,192			(141,515)
Asset-backed securities		230,285			(2,746)			245,300			(2,746)			475,585			(5,492)
Mortgage-backed securities
Commercial		71,167			(1,128)			154,201			(4,212)			225,368			(5,340)
Agency residential		156,930			(975)			1,373,629			(42,846)			1,530,559			(43,821)
Non-agency residential		10,174			(26)			-			-			10,174			(26)
Foreign government securities		196,303			(9,719)			494,156			(46,187)			690,459			(55,906)
Foreign corporate securities		939,808			(35,023)			782,405			(62,835)			1,722,213			(97,858)
Total fixed maturity securities	$	4,265,915		$	(120,838)		$	5,548,934		$	(247,060)		$	9,814,849		$	(367,898)

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

The aggregate market value and gross unrealized losses related to investments in an unrealized loss position at December 31, 2018 were $9,814,849 thousand and $367,898 thousand, respectively. The market value of securities for the single issuer (the United States government) whose securities comprised the largest unrealized loss position at December 31, 2018, did not exceed 5.7% of the overall market value of the Company’s fixed maturity securities. The market value of the securities for the issuer with the second largest unrealized loss comprised less than 1.0% of the Company’s fixed maturity securities. In addition, as indicated on the above table, there was no significant concentration of unrealized losses in any one market sector. The $120,838 thousand of unrealized losses related to fixed maturity securities that have been in an unrealized loss position for less than one year were generally comprised of domestic and foreign corporate securities, foreign government securities and asset-backed securities. Of these unrealized losses, $74,729 thousand were related to securities that were rated investment grade by at least one nationally recognized statistical rating agency. The $247,060 thousand of unrealized losses related to fixed maturity securities in an unrealized loss position for more than one year related primarily to domestic and foreign corporate securities, foreign government securities, agency residential mortgage-backed securities and U.S. government agencies and corporations. Of these unrealized losses, $230,560 thousand were related to securities that were rated investment grade by at least one nationally recognized statistical rating agency. There was no gross unrealized depreciation for mortgage-backed securities related to sub-prime and alt-A loans. In all instances, there were no projected cash flow shortfalls to recover the full book value of the investments and the related interest obligations. The mortgage-backed securities still have excess credit coverage and are current on interest and principal payments.

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

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
(Dollars in thousands)	2019			2018				2019			2018
Fixed maturities	$	130,139		$	119,513		$	383,440		$	343,019
Equity securities		4,147			5,380			12,250			18,879
Short-term investments and cash		3,899			5,005			13,497			8,829
Other invested assets
Limited partnerships		43,758			38,342			100,298			83,719
Other		7,286			2,980			13,565			9,964
Gross investment income before adjustments		189,229			171,220			523,050			464,410
Funds held interest income (expense)		2,325			1,003			9,715			6,572
Future policy benefit reserve income (expense)		(372)			(431)			(965)			(999)
Gross investment income		191,182			171,792			531,800			469,983
Investment expenses		(10,124)			(10,429)			(30,738)			(29,004)
Net investment income	$	181,058		$	161,363		$	501,062		$	440,979

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 $934,290 thousand in limited partnerships and private placement loans at September 30, 2019. These commitments will be funded when called in accordance with the partnership and loan agreements, which have investment periods that expire, unless extended, through 2026.

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

Starting in the third quarter of 2018, the Company has consolidated its participation in the facility. As a result of the consolidation of the underlying investments of the facility, effective July 1, 2018, the Company has reclassified $143,656 thousand from other invested assets to fixed maturity securities, available for sale, at market value and has reclassified $243,864 thousand from other invested assets to short-term investments. As of September 30, 2019, the market value of investments in the facility consolidated within the Company’s balance sheets was $441,567 thousand.

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

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
(Dollars in thousands)	2019				2018		2019			2018
Fixed maturity securities, market value:
Other-than-temporary impairments	$	(7,314)		$	(3,825)		$	(15,404)		$	(4,783)
Gains (losses) from sales		5,290			738			16,660			11,087
Fixed maturity securities, fair value:
Gains (losses) from sales		-			(717)			356			(1,799)
Gains (losses) from fair value adjustments		-			584			13			1,542
Equity securities, fair value:
Gains (losses) from sales		(1,192)			9,507			2,541			7,984
Gains (losses) from fair value adjustments		(12,008)			47,653			102,795			30,200
Other invested assets		2,098			913			2,341			1,497
Short-term investments gain (loss)		183			(49)			259			(49)
Total net realized capital gains (losses)	$	(12,943)		$	54,804		$	109,561		$	45,679

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						Nine Months Ended
	September 30,						September 30,
(Dollars in thousands)	2019			2018			2019			2018
Proceeds from sales of fixed maturity securities	$	271,025		$	531,452		$	2,591,938		$	1,757,890
Gross gains from sales		14,270			5,653			42,316			25,479
Gross losses from sales		(8,980)			(5,632)			(25,300)			(16,191)

Proceeds from sales of equity securities	$	35,924		$	209,437		$	185,157		$	785,819
Gross gains from sales		1,035			14,182			9,286			28,228
Gross losses from sales		(2,227)			(4,675)			(6,745)			(20,244)