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Investments
 12 Months Ended
Dec. 31, 2019
Investments [Abstract]  
Investments

2. 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 December 31, 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

$

1,489,660

 

$

28,357

 

$

(2,214)

 

$

1,515,803

 

$

-

 

Obligations of U.S. states and political subdivisions

 

507,353

 

 

29,651

 

 

(89)

 

 

536,915

 

 

-

 

Corporate securities

 

6,227,661

 

 

185,052

 

 

(37,767)

 

 

6,374,946

 

 

469

 

Asset-backed securities

 

892,373

 

 

6,818

 

 

(1,858)

 

 

897,333

 

 

-

 

Mortgage-backed securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

814,570

 

 

31,236

 

 

(1,249)

 

 

844,557

 

 

-

 

Agency residential

 

2,173,099

 

 

36,361

 

 

(10,879)

 

 

2,198,581

 

 

-

 

Non-agency residential

 

5,723

 

 

-

 

 

(20)

 

 

5,703

 

 

-

 

Foreign government securities

 

1,492,315

 

 

47,148

 

 

(33,513)

 

 

1,505,950

 

 

71

 

Foreign corporate securities

 

2,870,737

 

 

107,999

 

 

(33,580)

 

 

2,945,156

 

 

447

Total fixed maturity securities

$

16,473,491

 

$

472,622

 

$

(121,169)

 

$

16,824,944

 

$

987

 

 

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.

 

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 December 31, 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

$

1,456,960

 

$

1,457,919

 

$

1,328,571

 

$

1,330,534

Due after one year through five years

 

6,757,107

 

 

6,869,359

 

 

8,114,247

 

 

8,016,490

Due after five years through ten years

 

3,471,370

 

 

3,609,816

 

 

2,455,911

 

 

2,413,846

Due after ten years

 

902,289

 

 

941,676

 

 

789,575

 

 

791,113

Asset-backed securities

 

892,373

 

 

897,333

 

 

545,427

 

 

540,097

Mortgage-backed securities:

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

814,570

 

 

844,557

 

 

329,883

 

 

326,710

Agency residential

 

2,173,099

 

 

2,198,581

 

 

1,832,760

 

 

1,796,264

Non-agency residential

 

5,723

 

 

5,703

 

 

10,198

 

 

10,209

Total fixed maturity securities

$

16,473,491

 

$

16,824,944

 

$

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:

 

 

 

Years Ended December 31,

(Dollars in thousands)

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

$

534,410

 

$

(247,497)

Fixed maturity securities, other-than-temporary impairment

 

(1,559)

 

 

(1,071)

Change in unrealized appreciation (depreciation), pre-tax

 

532,851

 

 

(248,568)

Deferred tax benefit (expense)

 

(49,149)

 

 

20,543

Deferred tax benefit (expense), other-than-temporary impairment

 

115

 

 

(135)

Change in unrealized appreciation (depreciation),

 

 

 

 

 

net of deferred taxes, included in shareholders’ equity

$

483,817

 

$

(228,160)

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.

 

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 December 31, 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

$

85,527

 

$

(1,005)

 

$

249,371

 

$

(1,209)

 

$

334,898

 

$

(2,214)

Obligations of U.S. states and political subdivisions

 

4,600

 

 

(38)

 

 

5,522

 

 

(51)

 

 

10,122

 

 

(89)

Corporate securities

 

547,120

 

 

(9,877)

 

 

395,369

 

 

(27,890)

 

 

942,489

 

 

(37,767)

Asset-backed securities

 

176,222

 

 

(1,027)

 

 

94,190

 

 

(831)

 

 

270,412

 

 

(1,858)

Mortgage-backed securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

83,127

 

 

(689)

 

 

23,063

 

 

(560)

 

 

106,190

 

 

(1,249)

Agency residential

 

344,267

 

 

(1,834)

 

 

488,680

 

 

(9,045)

 

 

832,947

 

 

(10,879)

Non-agency residential

 

332

 

 

-

 

 

3,976

 

 

(20)

 

 

4,308

 

 

(20)

Foreign government securities

 

210,766

 

 

(4,770)

 

 

283,648

 

 

(28,743)

 

 

494,414

 

 

(33,513)

Foreign corporate securities

 

278,403

 

 

(7,553)

 

 

365,808

 

 

(26,027)

 

 

644,211

 

 

(33,580)

Total fixed maturity securities

$

1,730,364

 

$

(26,793)

 

$

1,909,627

 

$

(94,376)

 

$

3,639,991

 

$

(121,169)

 

 

Duration of Unrealized Loss at December 31, 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

$

67,879

 

$

(1,237)

 

$

416,583

 

$

(23,004)

 

$

484,462

 

$

(24,241)

Due in one year through five years

 

464,753

 

 

(7,960)

 

 

689,195

 

 

(38,138)

 

 

1,153,948

 

 

(46,098)

Due in five years through ten years

 

495,741

 

 

(12,388)

 

 

103,612

 

 

(11,100)

 

 

599,353

 

 

(23,488)

Due after ten years

 

98,043

 

 

(1,658)

 

 

90,328

 

 

(11,678)

 

 

188,371

 

 

(13,336)

Asset-backed securities

 

176,222

 

 

(1,027)

 

 

94,190

 

 

(831)

 

 

270,412

 

 

(1,858)

Mortgage-backed securities

 

427,726

 

 

(2,523)

 

 

515,719

 

 

(9,625)

 

 

943,445

 

 

(12,148)

Total fixed maturity securities

$

1,730,364

 

$

(26,793)

 

$

1,909,627

 

$

(94,376)

 

$

3,639,991

 

$

(121,169)

The aggregate market value and gross unrealized losses related to investments in an unrealized loss position at December 31, 2019 were $3,639,991 thousand and $121,169 thousand, respectively. The market value of securities for the single issuer whose securities comprised the largest unrealized loss position at December 31, 2019, did not exceed 0.8% 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 $26,793 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 and foreign government securities. Of these unrealized losses, $23,104 thousand were related to securities that were rated investment grade by at least one nationally recognized statistical rating agency. The $94,376 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 and agency residential mortgage-backed securities. Of these unrealized losses, $73,144 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:

 

 

Years Ended December 31,

(Dollars in thousands)

2019

 

2018

 

 

2017

Fixed maturities

$

520,291

 

$

465,793

 

$

427,379

Equity securities

 

19,505

 

 

25,327

 

 

34,523

Short-term investments and cash

 

17,619

 

 

14,395

 

 

4,177

Other invested assets

 

 

 

 

 

 

 

 

Limited partnerships

 

105,815

 

 

93,327

 

 

83,569

Other

 

14,117

 

 

16,960

 

 

10,125

Gross investment income before adjustments

 

677,347

 

 

615,802

 

 

559,773

Funds held interest income (expense)

 

13,271

 

 

6,300

 

 

11,874

Future policy benefit reserve income (expense)

 

(1,380)

 

 

(1,419)

 

 

(1,282)

Gross investment income

 

689,238

 

 

620,683

 

 

570,365

Investment expenses

 

(42,099)

 

 

(39,500)

 

 

(27,467)

Net investment income

$

647,139

 

$

581,183

 

$

542,898

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 $1,016,811 thousand in limited partnerships and private placement loans at December 31, 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 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 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 reclassified $143,656 thousand from other invested assets to fixed maturity securities, available for sale, at market value and reclassified $243,864 thousand from other invested assets to short-term investments. As of December 31, 2019, the market value of investments in the facility consolidated within the Company’s balance sheets was $308,711 thousand.

 

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

 

Years Ended December 31,

(Dollars in thousands)

2019

 

 

2018

 

2017

Fixed maturity securities, market value:

 

 

 

 

 

 

 

 

Other-than-temporary impairments

$

(20,899)

 

$

(8,110)

 

$

(7,093)

Gains (losses) from sales

 

28,025

 

 

(21,719)

 

 

17,714

Fixed maturity securities, fair value:

 

 

 

 

 

 

 

 

Gains (losses) from sales

 

355

 

 

(1,799)

 

 

-

Gains (losses) from fair value adjustments

 

1,808

 

 

1,506

 

 

-

Equity securities, market value:

 

 

 

 

 

 

 

 

Gains (losses) from sales

 

-

 

 

-

 

 

(3,424)

Equity securities, fair value:

 

 

 

 

 

 

 

 

Gains (losses) from sales

 

4,148

 

 

(29,941)

 

 

6,969

Gains (losses) from fair value adjustments

 

165,200

 

 

(68,832)

 

 

138,973

Other invested assets

 

6,003

 

 

1,815

 

 

61

Short-term investments gain (loss)

 

364

 

 

(56)

 

 

(6)

Total net realized capital gains (losses)

$

185,004

 

$

(127,136)

 

$

153,194

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:

 

 

Years Ended December 31,

(Dollars in thousands)

2019

 

2018

 

2017

Proceeds from sales of fixed maturity securities

$

3,283,154

 

$

3,150,179

 

$

2,401,844

Gross gains from sales

 

63,721

 

 

33,996

 

 

58,589

Gross losses from sales

 

(35,341)

 

 

(57,514)

 

 

(40,875)

 

 

 

 

 

 

 

 

 

Proceeds from sales of equity securities

$

283,965

 

$

1,199,409

 

$

651,433

Gross gains from sales

 

14,274

 

 

31,718

 

 

24,809

Gross losses from sales

 

(10,126)

 

 

(61,659)

 

 

(21,264)