MKL 06.30.2012 10-Q
Table of Contents

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
___________________________________________
 FORM 10-Q
___________________________________________
x
Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended June 30, 2012
or
¨
Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from _______ to _______
Commission File Number: 001-15811
___________________________________________
MARKEL CORPORATION
(Exact name of registrant as specified in its charter)
___________________________________________
 
Virginia
 
54-1959284
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)

4521 Highwoods Parkway, Glen Allen, Virginia 23060-6148
(Address of principal executive offices)
(Zip Code)
(804) 747-0136
(Registrant’s telephone number, including area code)
 ___________________________________________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x   No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes x No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer  x
  
Accelerated filer  o
  
Non-accelerated filer  o
  
Smaller reporting company  o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x
Number of shares of the registrant’s common stock outstanding at August 1, 2012: 9,622,683

Table of Contents

Markel Corporation
Form 10-Q
Index
 
 
 
 
 
 
Page Number
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

2
Table of Contents

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

MARKEL CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheets
 
 
June 30,
2012
 
December 31,
2011
 
(dollars in thousands)
ASSETS
 
 
 
Investments, available-for-sale, at estimated fair value:
 
 
 
Fixed maturities (amortized cost of $4,916,699 in 2012 and $5,172,952 in 2011)
$
5,326,511

 
$
5,538,174

Equity securities (cost of $1,313,186 in 2012 and $1,156,294 in 2011)
2,180,069

 
1,873,927

Short-term investments (estimated fair value approximates cost)
465,734

 
541,014

Total Investments
7,972,314

 
7,953,115

Cash and cash equivalents
837,208

 
775,032

Receivables
476,462

 
350,237

Reinsurance recoverable on unpaid losses
765,043

 
791,102

Reinsurance recoverable on paid losses
43,406

 
38,208

Deferred policy acquisition costs
174,274

 
194,674

Prepaid reinsurance premiums
112,399

 
97,074

Goodwill and intangible assets
991,430

 
867,558

Other assets
592,697

 
465,103

Total Assets
$
11,965,233

 
$
11,532,103

LIABILITIES AND EQUITY
 
 
 
Unpaid losses and loss adjustment expenses
$
5,273,275

 
$
5,398,869

Unearned premiums
1,036,444

 
915,930

Payables to insurance companies
139,858

 
64,327

Senior long-term debt and other debt (estimated fair value of $1,446,000 in 2012 and $1,391,000 in 2011)
1,309,530

 
1,293,520

Other liabilities
463,222

 
397,111

Total Liabilities
8,222,329

 
8,069,757

Redeemable noncontrolling interests
87,613

 
74,231

Commitments and contingencies

 

Shareholders’ equity:
 
 
 
Common stock
904,047

 
891,507

Retained earnings
1,957,778

 
1,835,086

Accumulated other comprehensive income
793,341

 
660,920

Total Shareholders’ Equity
3,655,166

 
3,387,513

Noncontrolling interests
125

 
602

Total Equity
3,655,291

 
3,388,115

Total Liabilities and Equity
$
11,965,233

 
$
11,532,103

See accompanying notes to consolidated financial statements.

3
Table of Contents

MARKEL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Income and Comprehensive Income
 
Quarter Ended June 30,
 
Six Months Ended June 30,
 
2012
 
2011
 
2012
 
2011
 
(dollars in thousands, except per share data)
OPERATING REVENUES
 
 
 
 
 
 
 
Earned premiums
$
513,056

 
$
490,201

 
$
1,042,652

 
$
953,312

Net investment income
63,602

 
64,253

 
143,396

 
134,352

Net realized investment gains:
 
 
 
 
 
 
 
Other-than-temporary impairment losses
(992
)
 
(1,707
)
 
(992
)
 
(1,707
)
Other-than-temporary impairment losses recognized in other comprehensive income (loss)
—

 
(3,168
)
 
—

 
(3,168
)
Other-than-temporary impairment losses recognized in net income
(992
)
 
(4,875
)
 
(992
)
 
(4,875
)
Net realized investment gains, excluding other-than-temporary impairment losses
9,208

 
6,219

 
21,117

 
17,459

Net realized investment gains
8,216

 
1,344

 
20,125

 
12,584

Other revenues
108,373

 
91,370

 
220,209

 
168,514

Total Operating Revenues
693,247

 
647,168

 
1,426,382

 
1,268,762

OPERATING EXPENSES
 
 
 
 
 
 
 
Losses and loss adjustment expenses
221,094

 
306,683

 
509,615

 
621,011

Underwriting, acquisition and insurance expenses
224,784

 
196,845

 
463,481

 
399,195

Amortization of intangible assets
8,315

 
5,555

 
17,119

 
11,563

Other expenses
97,719

 
79,473

 
198,123

 
147,968

Total Operating Expenses
551,912

 
588,556

 
1,188,338

 
1,179,737

Operating Income
141,335

 
58,612

 
238,044

 
89,025

Interest expense
22,209

 
21,898

 
44,376

 
40,860

Income Before Income Taxes
119,126

 
36,714

 
193,668

 
48,165

Income tax expense
28,358

 
5,065

 
45,187

 
6,655

Net Income
$
90,768

 
$
31,649

 
$
148,481

 
$
41,510

Net income attributable to noncontrolling interests
1,081

 
1,335

 
1,541

 
2,924

Net Income to Shareholders
$
89,687

 
$
30,314

 
$
146,940

 
$
38,586

 
 
 
 
 
 
 
 
OTHER COMPREHENSIVE INCOME (LOSS)
 
 
 
 
 
 
 
Change in net unrealized gains on investments, net of taxes:
 
 
 
 
 
 
 
Net holding gains (losses) arising during the period
$
(8,029
)
 
$
64,403

 
$
145,426

 
$
84,724

Unrealized other-than-temporary impairment losses on fixed maturities arising during the period
130

 
1,644

 
(8
)
 
1,468

Reclassification adjustments for net gains included in net income
(5,739
)
 
(827
)
 
(13,670
)
 
(7,291
)
Change in net unrealized gains on investments, net of taxes
(13,638
)
 
65,220

 
131,748

 
78,901

Change in foreign currency translation adjustments, net of taxes
(3,162
)
 
156

 
(339
)
 
2,595

Change in net actuarial pension loss, net of taxes
482

 
355

 
965

 
701

Total Other Comprehensive Income (Loss)
(16,318
)
 
65,731

 
132,374

 
82,197

Comprehensive Income
$
74,450

 
$
97,380

 
$
280,855

 
$
123,707

Comprehensive income attributable to noncontrolling interests
1,034

 
1,335

 
1,494

 
2,924

Comprehensive Income to Shareholders
$
73,416

 
$
96,045

 
$
279,361

 
$
120,783

 
 
 
 
 
 
 
 
NET INCOME PER SHARE
 
 
 
 
 
 
 
Basic
$
8.44

 
$
3.12

 
$
14.38

 
$
3.97

Diluted
$
8.42

 
$
3.11

 
$
14.35

 
$
3.95

See accompanying notes to consolidated financial statements.

4
Table of Contents

MARKEL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Changes in Equity
 
 
Common
Stock
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Income
 
Total
Shareholders’
Equity
 
Noncontrolling
Interests
 
Total Equity
 
Redeemable
Noncontrolling
Interests
 
(dollars in thousands)
December 31, 2010
$
884,457

 
$
1,735,973

 
$
551,093

 
$
3,171,523

 
$
871

 
$
3,172,394

 
$
15,298

Net income
 
 
38,586

 
—

 
38,586

 
(136
)
 
38,450

 
3,060

Change in net unrealized gains on investments, net of taxes
 
 
—

 
78,901

 
78,901

 
—

 
78,901

 
—

Change in foreign currency translation adjustments, net of taxes
 
 
—

 
2,595

 
2,595

 
—

 
2,595

 
—

Change in net actuarial pension loss, net of taxes
 
 
—

 
701

 
701

 
—

 
701

 
—

Comprehensive Income
 
 
 
 
 
 
120,783

 
(136
)
 
120,647

 
3,060

Issuance of common stock
848

 
—

 
—

 
848

 
—

 
848

 
—

Repurchase of common stock
—

 
(13,492
)
 
—

 
(13,492
)
 
—

 
(13,492
)
 
—

Restricted stock units expensed
3,129

 
—

 
—

 
3,129

 
—

 
3,129

 
—

Acquisitions
—

 
—

 
—

 
—

 
—

 
—

 
47,292

Other
182

 
—

 
—

 
182

 
—

 
182

 
(1,279
)
June 30, 2011
$
888,616

 
$
1,761,067

 
$
633,290

 
$
3,282,973

 
$
735

 
$
3,283,708

 
$
64,371

 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2011
$
891,507

 
$
1,835,086

 
$
660,920

 
$
3,387,513

 
$
602

 
$
3,388,115

 
$
74,231

Net income
 
 
146,940

 
—

 
146,940

 
(477
)
 
146,463

 
2,018

Change in net unrealized gains on investments, net of taxes
 
 
—

 
131,748

 
131,748

 
—

 
131,748

 
—

Change in foreign currency translation adjustments, net of taxes
 
 
—

 
(292
)
 
(292
)
 
—

 
(292
)
 
(47
)
Change in net actuarial pension loss, net of taxes
 
 
—

 
965

 
965

 
—

 
965

 
—

Comprehensive Income
 
 
 
 
 
 
279,361

 
(477
)
 
278,884

 
1,971

Issuance of common stock
8,413

 
—

 
—

 
8,413

 
—

 
8,413

 
—

Repurchase of common stock
—

 
(16,062
)
 
—

 
(16,062
)
 
—

 
(16,062
)
 
—

Restricted stock units expensed
3,806

 
—

 
—

 
3,806

 
—

 
3,806

 
—

Acquisitions
—

 
—

 
—

 
—

 
—

 
—

 
7,896

Adjustment of redeemable noncontrolling interests
—

 
(8,186
)
 
—

 
(8,186
)
 
—

 
(8,186
)
 
8,186

Other
321

 
—

 
—

 
321

 
—

 
321

 
(4,671
)
June 30, 2012
$
904,047

 
$
1,957,778

 
$
793,341

 
$
3,655,166

 
$
125

 
$
3,655,291

 
$
87,613

See accompanying notes to consolidated financial statements.

5
Table of Contents

MARKEL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
 
 
Six Months Ended June 30,
 
2012
 
2011
 
(dollars in thousands)
OPERATING ACTIVITIES
 
 
 
Net income
$
148,481

 
$
41,510

Adjustments to reconcile net income to net cash provided by operating activities
(43,734
)
 
58,833

Net Cash Provided By Operating Activities
104,747

 
100,343

INVESTING ACTIVITIES
 
 
 
Proceeds from sales of fixed maturities and equity securities
143,429

 
107,131

Proceeds from maturities, calls and prepayments of fixed maturities
256,503

 
202,269

Cost of fixed maturities and equity securities purchased
(285,988
)
 
(312,173
)
Net change in short-term investments
75,539

 
(275,238
)
Acquisitions, net of cash acquired
(143,620
)
 
(5,841
)
Additions to property and equipment
(22,885
)
 
(27,158
)
Cost of equity method investments
(38,250
)
 
(10,600
)
Other
(1,509
)
 
10,970

Net Cash Used By Investing Activities
(16,781
)
 
(310,640
)
FINANCING ACTIVITIES
 
 
 
Additions to senior long-term debt and other debt
73,705

 
295,352

Repayments of senior long-term debt and other debt
(71,529
)
 
(53,038
)
Repurchases of common stock
(16,062
)
 
(13,492
)
Other
(11,245
)
 
(1,017
)
Net Cash Provided (Used) By Financing Activities
(25,131
)
 
227,805

Effect of foreign currency rate changes on cash and cash equivalents
(659
)
 
5,187

Increase in cash and cash equivalents
62,176

 
22,695

Cash and cash equivalents at beginning of period
775,032

 
745,259

CASH AND CASH EQUIVALENTS AT END OF PERIOD
$
837,208

 
$
767,954

See accompanying notes to consolidated financial statements.

6
Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Basis of Presentation

Markel Corporation is a diverse financial holding company serving a variety of niche markets. Markel Corporation’s principal business markets and underwrites specialty insurance products and programs. Markel Corporation also owns interests in various industrial and service businesses that operate outside of the specialty insurance marketplace.

The consolidated balance sheet as of June 30, 2012, the related consolidated statements of income and comprehensive income for the quarters and six months ended June 30, 2012 and 2011, and the consolidated statements of changes in equity and cash flows for the six months ended June 30, 2012 and 2011 are unaudited. In the opinion of management, all adjustments necessary for fair presentation of such consolidated financial statements have been included. Such adjustments consist only of normal, recurring items. Interim results are not necessarily indicative of results of operations for the entire year. The consolidated balance sheet as of December 31, 2011 was derived from Markel Corporation’s audited annual consolidated financial statements.

The accompanying consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (U.S. GAAP) and include the accounts of Markel Corporation and all subsidiaries (the Company). All significant intercompany balances and transactions have been eliminated in consolidation. The Company consolidates the results of its non-insurance subsidiaries on a one-month lag. Certain prior year amounts have been reclassified to conform to the current presentation.

The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses and the disclosure of contingent assets and liabilities. Actual results may differ materially from the estimates and assumptions used in preparing the consolidated financial statements.

The consolidated financial statements and notes are presented as permitted by Form 10-Q and do not contain certain information included in the Company’s annual consolidated financial statements and notes. Readers are urged to review the Company’s 2011 Annual Report on Form 10-K for a more complete description of the Company’s business and accounting policies.

ParkLand Ventures, Inc. (ParkLand), a subsidiary of the Company, has formed subsidiaries for the purpose of acquiring and financing real estate (the real estate subsidiaries). The assets of the real estate subsidiaries, which are not material to the Company, are consolidated in accordance with U.S. GAAP but are not available to satisfy the debt and other obligations of the Company or any affiliates other than the real estate subsidiaries.

2. Net Income per Share

Net income per share was determined by dividing adjusted net income to shareholders by the applicable weighted average shares outstanding. 

 
Quarter Ended June 30,
 
Six Months Ended June 30,
(in thousands, except per share amounts)
2012
 
2011
 
2012
 
2011
Net income to shareholders
$
89,687

 
$
30,314

 
$
146,940

 
$
38,586

Adjustment of redeemable noncontrolling interests
8,186

 
—

 
8,186

 
—

Adjusted net income to shareholders
$
81,501

 
$
30,314

 
$
138,754

 
$
38,586

 
 
 
 
 
 
 
 
Basic common shares outstanding
9,651

 
9,717

 
9,646

 
9,720

Dilutive potential common shares
25

 
40

 
26

 
40

Diluted shares outstanding
9,676

 
9,757

 
9,672

 
9,760

Basic net income per share
$
8.44

 
$
3.12

 
$
14.38

 
$
3.97

Diluted net income per share
$
8.42

 
$
3.11

 
$
14.35

 
$
3.95




7
Table of Contents

3. Reinsurance

The following tables summarize the effect of reinsurance on premiums written and earned.

 
Quarter Ended June 30,
(dollars in thousands)
2012
 
2011
 
Written
 
Earned
 
Written
 
Earned
Direct
$
530,144

 
$
490,607

 
$
508,006

 
$
461,962

Assumed
116,778

 
91,107

 
89,187

 
87,323

Ceded
(80,308
)
 
(68,658
)
 
(66,505
)
 
(59,084
)
Net premiums
$
566,614

 
$
513,056

 
$
530,688

 
$
490,201


 
Six Months Ended June 30,
(dollars in thousands)
2012
 
2011
 
Written
 
Earned
 
Written
 
Earned
Direct
$
1,048,684

 
$
1,000,196

 
$
981,216

 
$
908,100

Assumed
246,856

 
174,949

 
206,760

 
168,773

Ceded
(147,760
)
 
(132,493
)
 
(138,276
)
 
(123,561
)
Net premiums
$
1,147,780

 
$
1,042,652

 
$
1,049,700

 
$
953,312


Incurred losses and loss adjustment expenses were net of reinsurance recoverables (ceded incurred losses and loss adjustment expenses) of $24.2 million and $45.3 million, respectively, for the quarters ended June 30, 2012 and 2011 and $64.3 million and $93.8 million, respectively, for the six months ended June 30, 2012 and 2011.

4. Investments

a)
The following tables summarize the Company’s available-for-sale investments.

 
June 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
$
312,540

 
$
21,330

 
$
(38
)
 
$
—

 
$
333,832

Obligations of states, municipalities and political subdivisions
2,663,600

 
231,887

 
(409
)
 
—

 
2,895,078

Foreign governments
552,873

 
52,629

 
(32
)
 
—

 
605,470

Residential mortgage-backed securities
297,664

 
21,638

 
(3
)
 
(2,258
)
 
317,041

Asset-backed securities
15,069

 
629

 
—

 
—

 
15,698

Public utilities
64,132

 
5,093

 
—

 
—

 
69,225

All other corporate bonds
1,010,821

 
86,101

 
(130
)
 
(6,625
)
 
1,090,167

Total fixed maturities
4,916,699

 
419,307

 
(612
)
 
(8,883
)
 
5,326,511

Equity securities:
 
 
 
 
 
 
 
 
 
Insurance companies, banks and trusts
443,857

 
358,808

 
(488
)
 
—

 
802,177

Industrial, consumer and all other
869,329

 
515,267

 
(6,704
)
 
—

 
1,377,892

Total equity securities
1,313,186

 
874,075

 
(7,192
)
 
—

 
2,180,069

Short-term investments
465,739

 
1

 
(6
)
 
—

 
465,734

Investments, available-for-sale
$
6,695,624

 
$
1,293,383

 
$
(7,810
)
 
$
(8,883
)
 
$
7,972,314


8
Table of Contents

 
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.

 
June 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:
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury securities and obligations of U.S. government agencies
$
55,792

 
$
(35
)
 
$
3,483

 
$
(3
)
 
$
59,275

 
$
(38
)
Obligations of states, municipalities and political subdivisions
9,387

 
(95
)
 
6,284

 
(314
)
 
15,671

 
(409
)
Foreign governments
14,270

 
(32
)
 
—

 
—

 
14,270

 
(32
)
Residential mortgage-backed securities
856

 
(2,261
)
 
—

 
—

 
856

 
(2,261
)
All other corporate bonds
12,049

 
(6,698
)
 
3,920

 
(57
)
 
15,969

 
(6,755
)
Total fixed maturities
92,354

 
(9,121
)
 
13,687

 
(374
)
 
106,041

 
(9,495
)
Equity securities:
 
 
 
 
 
 
 
 
 
 
 
Insurance companies, banks and trusts
21,265

 
(488
)
 
—

 
—

 
21,265

 
(488
)
Industrial, consumer and all other
95,989

 
(6,574
)
 
17,499

 
(130
)
 
113,488

 
(6,704
)
Total equity securities
117,254

 
(7,062
)
 
17,499

 
(130
)
 
134,753

 
(7,192
)
Short-term investments
154,995

 
(6
)
 
—

 
—

 
154,995

 
(6
)
Total
$
364,603

 
$
(16,189
)
 
$
31,186

 
$
(504
)
 
$
395,789

 
$
(16,693
)

9
Table of Contents

At June 30, 2012, the Company held 55 securities with a total estimated fair value of $395.8 million and gross unrealized losses of $16.7 million. Of these 55 securities, 12 securities had been in a continuous unrealized loss position for greater than one year and had a total estimated fair value of $31.2 million and gross unrealized losses of $0.5 million. Of these securities, 10 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.


10
Table of Contents

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.


11
Table of Contents

c)
The amortized cost and estimated fair value of fixed maturities at June 30, 2012 are shown below by contractual maturity.
(dollars in thousands)
Amortized
Cost
 
Estimated
Fair Value
Due in one year or less
$
308,649

 
$
314,640

Due after one year through five years
1,283,202

 
1,389,784

Due after five years through ten years
1,599,929

 
1,742,051

Due after ten years
1,412,186

 
1,547,297

 
4,603,966

 
4,993,772

Residential mortgage-backed securities
297,664

 
317,041

Asset-backed securities
15,069

 
15,698

Total fixed maturities
$
4,916,699

 
$
5,326,511

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 June 30,
 
Six Months Ended June 30,
(dollars in thousands)
2012
 
2011
 
2012
 
2011
Cumulative credit loss, beginning balance
$
21,370

 
$
10,307

 
$
21,370

 
$
10,307

Additions:
 
 
 
 
 
 
 
Increases related to other-than-temporary impairment losses previously recognized
—

 
4,875

 
—

 
4,875

Total additions
—

 
4,875

 
—

 
4,875

Reductions:
 
 
 
 
 
 
 
Sales of fixed maturities on which credit losses were recognized
—

 
(15
)
 
—

 
(15
)
Cumulative credit loss, ending balance
$
21,370

 
$
15,167

 
$
21,370

 
$
15,167

e)
The following table presents net realized investment gains and the change in net unrealized gains on investments. 
 
Quarter Ended June 30,
 
Six Months Ended June 30,
(dollars in thousands)
2012
 
2011
 
2012
 
2011
Realized gains:
 
 
 
 
 
 
 
Sales of fixed maturities
$
3,570

 
$
2,877

 
$
5,422

 
$
10,858

Sales of equity securities
5,820

 
3,747

 
15,514

 
5,818

Other
134

 
94

 
655

 
1,519

Total realized gains
9,524

 
6,718

 
21,591

 
18,195

Realized losses:
 
 
 
 
 
 
 
Sales of fixed maturities
(316
)
 
(499
)
 
(474
)
 
(736
)
Other-than-temporary impairments
(992
)
 
(4,875
)
 
(992
)
 
(4,875
)
Total realized losses
(1,308
)
 
(5,374
)
 
(1,466
)
 
(5,611
)
Net realized investment gains
$
8,216

 
$
1,344

 
$
20,125

 
$
12,584

Change in net unrealized gains on investments:
 
 
 
 
 
 
 
Fixed maturities
$
27,921

 
$
80,819

 
$
44,590

 
$
64,423

Equity securities
(47,744
)
 
16,061

 
149,250

 
52,918

Short-term investments
(2
)
 
18

 
(5
)
 
21

Net increase (decrease)
$
(19,825
)
 
$
96,898

 
$
193,835

 
$
117,362


12
Table of Contents

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 June 30,
 
Six Months Ended June 30,
(dollars in thousands)
2012
 
2011
 
2012
 
2011
Fixed maturities:
 
 
 
 
 
 
 
Residential mortgage-backed securities
$
—

 
$
(4,875
)
 
$
—

 
$
(4,875
)
Total fixed maturities
—

 
(4,875
)
 
—

 
(4,875
)
Equity securities:
 
 
 
 
 
 
 
Insurance companies, banks and trusts
(992
)
 
—

 
(992
)
 
—

Total equity securities
(992
)
 
—

 
(992
)
 
—

Total
$
(992
)
 
$
(4,875
)
 
$
(992
)
 
$
(4,875
)


5. Segment Reporting Disclosures

The Company operates in three segments of the specialty insurance marketplace: the Excess and Surplus Lines, the Specialty Admitted and the London markets. The Company considers many factors, including the nature of its insurance products, production sources, distribution strategies and regulatory environment in determining how to aggregate operating segments.

All investing activities related to our insurance operations are included in the Investing segment. For purposes of segment reporting, the Other Insurance (Discontinued Lines) segment includes lines of business that have been discontinued in conjunction with acquisitions. The Company’s non-insurance operations primarily consist of controlling interests in various industrial and service businesses. For purposes of segment reporting, the Company’s non-insurance operations are not considered to be a reportable operating segment.

Segment profit or loss for each of the Company’s operating segments is measured by underwriting profit or loss. The property and casualty insurance industry commonly defines underwriting profit or loss as earned premiums net of losses and loss adjustment expenses and underwriting, acquisition and insurance expenses. Underwriting profit or loss does not replace operating income or net income computed in accordance with U.S. GAAP as a measure of profitability. Underwriting profit or loss provides a basis for management to evaluate the Company’s underwriting performance. Segment profit for the Investing segment is measured by net investment income and net realized investment gains or losses.

For management reporting purposes, the Company allocates assets to its underwriting, investing and non-insurance operations. Underwriting assets are all assets not specifically allocated to the Investing segment or to the Company’s non-insurance operations. Underwriting assets are not allocated to the Excess and Surplus Lines, Specialty Admitted, London Insurance Market or Other Insurance (Discontinued Lines) segments since the Company does not manage its assets by operating segment. Invested assets related to our insurance operations are allocated to the Investing segment since these assets are available for payment of losses and expenses for all operating segments. The Company does not allocate capital expenditures for long-lived assets to any of its operating segments for management reporting purposes.


13
Table of Contents

a)
The following tables summarize the Company’s segment disclosures.
 
Quarter Ended June 30, 2012
(dollars in thousands)
Excess and
Surplus
Lines
 
Specialty
Admitted
 
London
Insurance
Market
 
Other
Insurance
(Discontinued
Lines)
 
Investing
 
Consolidated
Gross premium volume
$
229,906

 
$
180,150

 
$
236,874

 
$
(8
)
 
$
—

 
$
646,922

Net written premiums
193,291

 
169,276

 
204,054

 
(7
)
 
—

 
566,614

Earned premiums
189,668

 
144,695

 
178,699

 
(6
)
 
—

 
513,056

Losses and loss adjustment expenses:
 
 
 
 
 
 
 
 
 
 
 
Current accident year
(127,683
)
 
(101,378
)
 
(118,931
)
 
—

 
—

 
(347,992
)
Prior accident years
50,686

 
11,917

 
64,785

 
(490
)
 
—

 
126,898

Underwriting, acquisition and insurance expenses:
 
 
 
 
 
 
 
 
 
 


Prospective adoption of ASU 2010-26 (1)
(6,040
)
 
(4,499
)
 
(3,732
)
 
—

 
—

 
(14,271
)
All other expenses
(81,345
)
 
(53,837
)
 
(74,947
)
 
(384
)
 
—

 
(210,513
)
Underwriting profit (loss)
25,286

 
(3,102
)
 
45,874

 
(880
)
 
—

 
67,178

Net investment income
—

 
—

 
—

 
—

 
63,602

 
63,602

Net realized investment gains
—

 
—

 
—

 
—

 
8,216

 
8,216

Other revenues (insurance)
—

 
14,081

 
147

 
—

 
—

 
14,228

Other expenses (insurance)
—

 
(11,802
)
 
(778
)
 
—

 
—

 
(12,580
)
Segment profit (loss)
$
25,286

 
$
(823
)
 
$
45,243

 
$
(880
)
 
$
71,818

 
$
140,644

Other revenues (non-insurance)
 
 
 
 
 
 
 
 
 
 
94,145

Other expenses (non-insurance)
 
 
 
 
 
 
 
 
 
 
(85,139
)
Amortization of intangible assets
 
 
 
 
 
 
 
 
 
 
(8,315
)
Interest expense
 
 
 
 
 
 
 
 
 
 
(22,209
)
Income before income taxes
 
 
 
 
 
 
 
 
 
 
$
119,126

U.S. GAAP combined ratio (2)
87
%
 
102
%
 
74
%
 
NM

(3) 
 
 
87
%
 
Quarter Ended June 30, 2011
(dollars in thousands)
Excess and
Surplus
Lines
 
Specialty
Admitted
 
London
Insurance
Market
 
Other
Insurance
(Discontinued
Lines)
 
Investing
 
Consolidated
Gross premium volume
$
225,979

 
$
143,530

 
$
227,682

 
$
2

 
$
—

 
$
597,193

Net written premiums
194,048

 
136,292

 
200,472

 
(124
)
 
—

 
530,688

Earned premiums
187,206

 
131,364

 
171,754

 
(123
)
 
—

 
490,201

Losses and loss adjustment expenses:
 
 
 
 
 
 
 
 
 
 
 
Current accident year
(142,550
)
 
(94,324
)
 
(146,546
)
 
—

 
—

 
(383,420
)
Prior accident years
52,649

 
1,771

 
22,605

 
(288
)
 
—

 
76,737

Underwriting, acquisition and insurance expenses
(82,932
)
 
(47,789
)
 
(65,835
)
 
(289
)
 
—

 
(196,845
)
Underwriting profit (loss)
14,373

 
(8,978
)
 
(18,022
)
 
(700
)
 
—

 
(13,327
)
Net investment income
—

 
—

 
—

 
—

 
64,253

 
64,253

Net realized investment gains
—

 
—

 
—

 
—

 
1,344

 
1,344

Other revenues (insurance)
—

 
12,375

 
—

 
—

 
—

 
12,375

Other expenses (insurance)
—

 
(12,588
)
 
(39
)
 
—

 
—

 
(12,627
)
Segment profit (loss)
$
14,373

 
$
(9,191
)
 
$
(18,061
)
 
$
(700
)
 
$
65,597

 
$
52,018

Other revenues (non-insurance)
 
 
 
 
 
 
 
 
 
 
78,995

Other expenses (non-insurance)
 
 
 
 
 
 
 
 
 
 
(66,846
)
Amortization of intangible assets
 
 
 
 
 
 
 
 
 
 
(5,555
)
Interest expense
 
 
 
 
 
 
 
 
 
 
(21,898
)
Income before income taxes
 
 
 
 
 
 
 
 
 
 
$
36,714

U.S. GAAP combined ratio (2)
92
%
 
107
%
 
110
%
 
NM

(3) 
 
 
103
%
(1)
Effective January 1, 2012, the Company prospectively adopted Financial Accounting Standards Board (FASB) Accounting Standards Update (ASU) No. 2010-26, Accounting for Costs Associated with Acquiring or Renewing Insurance Contracts. At December 31, 2011, deferred policy acquisition costs included approximately $43 million of costs that no longer met the criteria for deferral as of January 1, 2012 and will be recognized into income primarily over the first nine months of 2012, consistent with policy terms. The quarter ended June 30, 2012 included $14.3 million of underwriting, acquisition and insurance expenses that were deferred as of December 31, 2011 and no longer met the criteria for deferral as of January 1, 2012.
(2)
The U.S. GAAP combined ratio is a measure of underwriting performance and represents the relationship of incurred losses, loss adjustment expenses and underwriting, acquisition and insurance expenses to earned premiums.
(3)
NM – Ratio is not meaningful.

14
Table of Contents

 
Six Months Ended June 30, 2012
(dollars in thousands)
Excess and
Surplus
Lines
 
Specialty
Admitted
 
London
Insurance
Market
 
Other
Insurance
(Discontinued
Lines)
 
Investing
 
Consolidated
Gross premium volume
$
452,835

 
$
328,272

 
$
514,440

 
$
(7
)
 
$
—

 
$
1,295,540

Net written premiums
386,204

 
309,828

 
451,754

 
(6
)
 
—

 
1,147,780

Earned premiums
389,046

 
278,170

 
375,441

 
(5
)
 
—

 
1,042,652

Losses and loss adjustment expenses:
 
 
 
 
 
 
 
 
 
 
 
Current accident year
(255,750
)
 
(194,071
)
 
(250,677
)
 
—

 
—

 
(700,498
)
Prior accident years
81,273

 
16,243

 
86,250

 
7,117

 
—

 
190,883

Underwriting, acquisition and insurance expenses:
 
 
 
 
 
 
 
 
 
 
 
Prospective adoption of ASU 2010-26 (1)
(14,527
)
 
(10,263
)
 
(9,769
)
 
—

 
—

 
(34,559
)
All other expenses
(167,202
)
 
(111,103
)
 
(149,950
)
 
(667
)
 
—

 
(428,922
)
Underwriting profit (loss)
32,840

 
(21,024
)
 
51,295

 
6,445

 
—

 
69,556

Net investment income
—

 
—

 
—

 
—