MKL 03.31.2013 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 March 31, 2013
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 April 23, 2013: 9,630,095

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
(dollars in thousands)
 
 
March 31,
2013
 
December 31,
2012
 
(unaudited)
 
 
ASSETS
 
 
 
Investments, available-for-sale, at estimated fair value:
 
 
 
Fixed maturities (amortized cost of $4,424,168 in 2013 and $4,562,278 in 2012)
$
4,809,825

 
$
4,979,283

Equity securities (cost of $1,407,908 in 2013 and $1,387,305 in 2012)
2,708,449

 
2,406,951

Short-term investments (estimated fair value approximates cost)
1,380,318

 
973,330

Total Investments
8,898,592

 
8,359,564

Cash and cash equivalents
899,075

 
973,181

Receivables
511,073

 
413,883

Reinsurance recoverable on unpaid losses
721,813

 
778,774

Reinsurance recoverable on paid losses
52,679

 
51,145

Deferred policy acquisition costs
178,682

 
157,465

Prepaid reinsurance premiums
114,175

 
110,332

Goodwill and intangible assets
1,074,925

 
1,049,225

Other assets
666,977

 
663,019

Total Assets
$
13,117,991

 
$
12,556,588

LIABILITIES AND EQUITY
 
 
 
Unpaid losses and loss adjustment expenses
$
5,286,068

 
$
5,371,426

Unearned premiums
1,094,312

 
1,000,261

Payables to insurance companies
134,405

 
103,212

Senior long-term debt and other debt (estimated fair value of $1,968,000 in 2013 and $1,688,000 in 2012)
1,732,250

 
1,492,550

Other liabilities
640,034

 
613,897

Total Liabilities
8,887,069

 
8,581,346

Redeemable noncontrolling interests
74,501

 
86,225

Commitments and contingencies

 

Shareholders’ equity:
 
 
 
Common stock
911,330

 
908,980

Retained earnings
2,160,060

 
2,068,340

Accumulated other comprehensive income
1,080,119

 
911,337

Total Shareholders’ Equity
4,151,509

 
3,888,657

Noncontrolling interests
4,912

 
360

Total Equity
4,156,421

 
3,889,017

Total Liabilities and Equity
$
13,117,991

 
$
12,556,588

See accompanying notes to consolidated financial statements.

3
Table of Contents

MARKEL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Income and Comprehensive Income
(Unaudited)

 
Three Months Ended March 31,
 
2013
 
2012
 
(dollars in thousands,
except per share data)
OPERATING REVENUES
 
 
 
Earned premiums
$
564,587

 
$
529,596

Net investment income
64,617

 
79,794

Net realized investment gains
17,917

 
11,909

Other revenues
172,743

 
111,836

Total Operating Revenues
819,864

 
733,135

OPERATING EXPENSES
 
 
 
Losses and loss adjustment expenses
287,896

 
288,521

Underwriting, acquisition and insurance expenses
228,673

 
238,697

Amortization of intangible assets
9,615

 
8,804

Other expenses
152,317

 
100,404

Total Operating Expenses
678,501

 
636,426

Operating Income
141,363

 
96,709

Interest expense
23,574

 
22,167

Income Before Income Taxes
117,789

 
74,542

Income tax expense
28,526

 
16,829

Net Income
89,263

 
57,713

Net income attributable to noncontrolling interests
361

 
460

Net Income to Shareholders
$
88,902

 
$
57,253

 
 
 
 
OTHER COMPREHENSIVE INCOME
 
 
 
Change in net unrealized gains on investments, net of taxes:
 
 
 
Net holding gains arising during the period
$
181,599

 
$
153,455

Change in unrealized other-than-temporary impairment losses on fixed maturities arising during the period
249

 
(138
)
Reclassification adjustments for net gains included in net income
(12,255
)
 
(7,931
)
Change in net unrealized gains on investments, net of taxes
169,593

 
145,386

Change in foreign currency translation adjustments, net of taxes
(1,181
)
 
2,823

Change in net actuarial pension loss, net of taxes
370

 
483

Total Other Comprehensive Income
168,782

 
148,692

Comprehensive Income
258,045

 
206,405

Comprehensive income attributable to noncontrolling interests
361

 
460

Comprehensive Income to Shareholders
$
257,684

 
$
205,945

 
 
 
 
NET INCOME PER SHARE
 
 
 
Basic
$
9.53

 
$
5.94

Diluted
$
9.50

 
$
5.92

See accompanying notes to consolidated financial statements.

4
Table of Contents

MARKEL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Changes in Equity
(Unaudited)
 
(dollars in thousands)
Common
Stock
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Income
 
Total
Shareholders’
Equity
 
Noncontrolling
Interests
 
Total Equity
 
Redeemable
Noncontrolling
Interests
December 31, 2011
$
891,507

 
$
1,835,086

 
$
660,920

 
$
3,387,513

 
$
602

 
$
3,388,115

 
$
74,231

Net income (loss)
 
 
57,253

 
—

 
57,253

 
(321
)
 
56,932

 
781

Other comprehensive income
 
 
—

 
148,692

 
148,692

 
—

 
148,692

 
—

Comprehensive Income (Loss)
 
 
 
 
 
 
205,945

 
(321
)
 
205,624

 
781

Issuance of common stock
8,274

 
—

 
—

 
8,274

 
—

 
8,274

 
—

Repurchase of common stock
—

 
(2,299
)
 
—

 
(2,299
)
 
—

 
(2,299
)
 
—

Restricted stock units expensed
2,366

 
—

 
—

 
2,366

 
—

 
2,366

 
—

Other
294

 
—

 
—

 
294

 
—

 
294

 
(1,418
)
March 31, 2012
$
902,441

 
$
1,890,040

 
$
809,612

 
$
3,602,093

 
$
281

 
$
3,602,374

 
$
73,594

 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2012
$
908,980

 
$
2,068,340

 
$
911,337

 
$
3,888,657

 
$
360

 
$
3,889,017

 
$
86,225

Net income (loss)
 
 
88,902

 
—

 
88,902

 
(448
)
 
88,454

 
809

Other comprehensive income
 
 
—

 
168,782

 
168,782

 
—

 
168,782

 
—

Comprehensive Income (Loss)
 
 
 
 
 
 
257,684

 
(448
)
 
257,236

 
809

Issuance of common stock
19

 
—

 
—

 
19

 
—

 
19

 
—

Restricted stock units expensed
2,583

 
—

 
—

 
2,583

 
—

 
2,583

 
—

Adjustment of redeemable noncontrolling interests
—

 
2,886

 
—

 
2,886

 
—

 
2,886

 
(2,886
)
Purchase of noncontrolling interest
(283
)
 
—

 
—

 
(283
)
 
—

 
(283
)
 
(8,157
)
Other
31

 
(68
)
 
—

 
(37
)
 
5,000

 
4,963

 
(1,490
)
March 31, 2013
$
911,330

 
$
2,160,060

 
$
1,080,119

 
$
4,151,509

 
$
4,912

 
$
4,156,421

 
$
74,501

See accompanying notes to consolidated financial statements.

5
Table of Contents

MARKEL CORPORATION AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Unaudited)
 
 
Three Months Ended March 31,
 
2013
 
2012
 
(dollars in thousands)
OPERATING ACTIVITIES
 
 
 
Net income
$
89,263

 
$
57,713

Adjustments to reconcile net income to net cash provided (used) by operating activities
(33,709
)
 
(122,105
)
Net Cash Provided (Used) By Operating Activities
55,554

 
(64,392
)
INVESTING ACTIVITIES
 
 
 
Proceeds from sales of fixed maturities and equity securities
52,834

 
69,063

Proceeds from maturities, calls and prepayments of fixed maturities
120,711

 
119,291

Cost of fixed maturities and equity securities purchased
(62,775
)
 
(205,926
)
Net change in short-term investments
(410,662
)
 
79,233

Acquisitions, net of cash acquired
(36,531
)
 
(80,870
)
Additions to property and equipment
(14,442
)
 
(12,917
)
Other
(2,438
)
 
1,476

Net Cash Used By Investing Activities
(353,303
)
 
(30,650
)
FINANCING ACTIVITIES
 
 
 
Additions to senior long-term debt and other debt
507,969

 
32,317

Repayments of senior long-term debt and other debt
(268,522
)
 
(27,868
)
Repurchases of common stock
(169
)
 
(2,299
)
Distributions to noncontrolling interests
(2,032
)
 
(1,615
)
Purchase of redeemable noncontrolling interests
(8,440
)
 
—

Other
2,383

 
8,568

Net Cash Provided By Financing Activities
231,189

 
9,103

Effect of foreign currency rate changes on cash and cash equivalents
(7,546
)
 
2,704

Decrease in cash and cash equivalents
(74,106
)
 
(83,235
)
Cash and cash equivalents at beginning of period
973,181

 
775,032

CASH AND CASH EQUIVALENTS AT END OF PERIOD
$
899,075

 
$
691,797

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 March 31, 2013 and the related consolidated statements of income and comprehensive income, changes in equity and cash flows for the three months ended March 31, 2013 and 2012 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, 2012 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 its 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 2012 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. 

 
Three Months Ended March 31,
(in thousands, except per share amounts)
2013
 
2012
Net income to shareholders
$
88,902

 
$
57,253

Adjustment of redeemable noncontrolling interests
2,886

 
—

Adjusted net income to shareholders
$
91,788

 
$
57,253

 
 
 
 
Basic common shares outstanding
9,636

 
9,642

Dilutive potential common shares
30

 
29

Diluted shares outstanding
9,666

 
9,671

Basic net income per share
$
9.53

 
$
5.94

Diluted net income per share
$
9.50

 
$
5.92




7
Table of Contents

3. Reinsurance

The following table summarizes the effect of reinsurance on premiums written and earned.
 
 
 
 
 
 
 
 
 
Three Months Ended March 31,
 
2013
 
2012
(dollars in thousands)
Written
 
Earned
 
Written
 
Earned
Direct
$
597,419

 
$
538,142

 
$
518,540

 
$
509,589

Assumed
145,881

 
102,127

 
130,078

 
83,842

Ceded
(80,312
)
 
(75,682
)
 
(67,452
)
 
(63,835
)
Net premiums
$
662,988

 
$
564,587

 
$
581,166

 
$
529,596


Incurred losses and loss adjustment expenses for the three months ended March 31, 2012 were net of reinsurance recoverables (ceded incurred losses and loss adjustment expenses) of $40.1 million.

4. Investments

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

 
March 31, 2013
(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
$
302,194

 
$
17,591

 
$
(1
)
 
$
—

 
$
319,784

Obligations of states, municipalities and political subdivisions
2,540,488

 
228,229

 
(378
)
 
—

 
2,768,339

Foreign governments
484,674

 
48,925

 
—

 
—

 
533,599

Residential mortgage-backed securities
174,678

 
13,054

 
(2
)
 
(2,258
)
 
185,472

Asset-backed securities
12,916

 
413

 
—

 
—

 
13,329

Corporate bonds
909,218

 
86,583

 
—

 
(6,499
)
 
989,302

Total fixed maturities
4,424,168

 
394,795

 
(381
)
 
(8,757
)
 
4,809,825

Equity securities:
 
 
 
 
 
 
 
 
 
Insurance companies, banks and trusts
410,482

 
497,053

 
—

 
—

 
907,535

Industrial, consumer and all other
997,426

 
805,230

 
(1,742
)
 
—

 
1,800,914

Total equity securities
1,407,908

 
1,302,283

 
(1,742
)
 
—

 
2,708,449

Short-term investments
1,380,301

 
23

 
(6
)
 
—

 
1,380,318

Investments, available-for-sale
$
7,212,377

 
$
1,697,101

 
$
(2,129
)
 
$
(8,757
)
 
$
8,898,592


8
Table of Contents

 
December 31, 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
$
297,663

 
$
19,844

 
$
—

 
$
—

 
$
317,507

Obligations of states, municipalities and political subdivisions
2,586,867

 
245,057

 
(362
)
 
—

 
2,831,562

Foreign governments
503,844

 
52,764

 
—

 
—

 
556,608

Residential mortgage-backed securities
202,644

 
14,996

 
(5
)
 
(2,258
)
 
215,377

Asset-backed securities
13,828

 
517

 
—

 
—

 
14,345

Corporate bonds
957,432

 
93,395

 
(121
)
 
(6,822
)
 
1,043,884

Total fixed maturities
4,562,278

 
426,573

 
(488
)
 
(9,080
)
 
4,979,283

Equity securities:
 
 
 
 
 
 
 
 
 
Insurance companies, banks and trusts
508,771

 
389,434

 
(138
)
 
—

 
898,067

Industrial, consumer and all other
878,534

 
637,783

 
(7,433
)
 
—

 
1,508,884

Total equity securities
1,387,305

 
1,027,217

 
(7,571
)
 
—

 
2,406,951

Short-term investments
973,318

 
26

 
(14
)
 
—

 
973,330

Investments, available-for-sale
$
6,922,901

 
$
1,453,816

 
$
(8,073
)
 
$
(9,080
)
 
$
8,359,564


b)
The following tables summarize gross unrealized investment losses by the length of time that securities have continuously been in an unrealized loss position.

 
March 31, 2013
 
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
$
4,930

 
$
(1
)
 
$
—

 
$
—

 
$
4,930

 
$
(1
)
Obligations of states, municipalities and political subdivisions
1,279

 
(10
)
 
5,526

 
(368
)
 
6,805

 
(378
)
Residential mortgage-backed securities
—

 
(2,258
)
 
194

 
(2
)
 
194

 
(2,260
)
Corporate bonds
—

 
(6,499
)
 
—

 
—

 
—

 
(6,499
)
Total fixed maturities
6,209

 
(8,768
)
 
5,720

 
(370
)
 
11,929

 
(9,138
)
Equity securities:
 
 
 
 
 
 
 
 
 
 
 
Industrial, consumer and all other
42,833

 
(1,718
)
 
74

 
(24
)
 
42,907

 
(1,742
)
Total equity securities
42,833

 
(1,718
)
 
74

 
(24
)
 
42,907

 
(1,742
)
Short-term investments
116,865

 
(6
)
 
—

 
—

 
116,865

 
(6
)
Total
$
165,907

 
$
(10,492
)
 
$
5,794

 
$
(394
)
 
$
171,701

 
$
(10,886
)


9
Table of Contents

At March 31, 2013, the Company held 32 securities with a total estimated fair value of $171.7 million and gross unrealized losses of $10.9 million. Of these 32 securities, 12 securities had been in a continuous unrealized loss position for one year or longer and had a total estimated fair value of $5.8 million and gross unrealized losses of $0.4 million. Of these securities, 11 securities were fixed maturities and one was an equity security. The Company does not intend to sell or believe it will be required to sell these fixed maturities before recovery of their amortized cost. The Company has the ability and intent to hold the equity security for a period of time sufficient to allow for the anticipated recovery of its fair value.

 
December 31, 2012
 
Less than 12 months
 
12 months or longer
 
Total
(dollars in thousands)
Estimated
Fair
Value
 
Gross
Unrealized
Holding and
Other-Than-
Temporary
Impairment
Losses
 
Estimated
Fair
Value
 
Gross
Unrealized
Holding and
Other-Than-
Temporary
Impairment
Losses
 
Estimated
Fair
Value
 
Gross
Unrealized
Holding and
Other-Than-
Temporary
Impairment
Losses
Fixed maturities:
 
 
 
 
 
 
 
 
 
 
 
Obligations of states, municipalities and political subdivisions
$
2,833

 
$
(46
)
 
$
3,616

 
$
(316
)
 
$
6,449

 
$
(362
)
Residential mortgage-backed securities
364

 
(2,260
)
 
201

 
(3
)
 
565

 
(2,263
)
Corporate bonds
—

 
(6,822
)
 
3,860

 
(121
)
 
3,860

 
(6,943
)
Total fixed maturities
3,197

 
(9,128
)
 
7,677

 
(440
)
 
10,874

 
(9,568
)
Equity securities:
 
 
 
 
 
 
 
 
 
 
 
Insurance companies, banks and trusts
2,431

 
(138
)
 
—

 
—

 
2,431

 
(138
)
Industrial, consumer and all other
82,109

 
(7,310
)
 
1,983

 
(123
)
 
84,092

 
(7,433
)
Total equity securities
84,540

 
(7,448
)
 
1,983

 
(123
)
 
86,523

 
(7,571
)
Short-term investments
228,820

 
(14
)
 
—

 
—

 
228,820

 
(14
)
Total
$
316,557

 
$
(16,590
)
 
$
9,660

 
$
(563
)
 
$
326,217

 
$
(17,153
)

At December 31, 2012, the Company held 35 securities with a total estimated fair value of $326.2 million and gross unrealized losses of $17.2 million. Of these 35 securities, 10 securities had been in a continuous unrealized loss position for one year or longer and had a total estimated fair value of $9.7 million and gross unrealized losses of $0.6 million. Of these securities, eight securities were fixed maturities and two were equity securities.

The Company completes a detailed analysis each quarter to assess whether the decline in the fair value of any investment below its cost basis is deemed other-than-temporary. All securities with unrealized losses are reviewed. The Company considers many factors in completing its quarterly review of securities with unrealized losses for other-than-temporary impairment, including the length of time and the extent to which fair value has been below cost and the financial condition and near-term prospects of the issuer. For equity securities, the ability and intent to hold the security for a period of time sufficient to allow for anticipated recovery is considered. For fixed maturities, the Company considers whether it intends to sell the security or if it is more likely than not that it will be required to sell the security before recovery, the implied yield-to-maturity, the credit quality of the issuer and the ability to recover all amounts outstanding when contractually due.

For equity securities, a decline in fair value that is considered to be other-than-temporary is recognized in net income based on the fair value of the security at the time of assessment, resulting in a new cost basis for the security. For fixed maturities where the Company intends to sell the security or it is more likely than not that the Company will be required to sell the security before recovery of its amortized cost, a decline in fair value is considered to be other-than-temporary and is recognized in net income based on the fair value of the security at the time of assessment, resulting in a new cost basis for the security. If the decline in fair value of a fixed maturity below its amortized cost is considered to be other-than-temporary based upon other considerations, the Company compares the estimated present value of the cash flows expected to be collected to the amortized cost of the security. The extent to which the estimated present value of the cash flows expected to be collected is less than the amortized cost of the security represents the credit-related portion of the other-than-temporary impairment, which is recognized in net income, resulting in a new cost basis for the security. Any remaining decline in fair value represents the non-credit portion of the other-than-temporary impairment, which is recognized in other comprehensive income. 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.


10
Table of Contents

When assessing whether it intends to sell a fixed maturity or if it is likely to be required to sell a fixed maturity before recovery of its amortized cost, the Company evaluates facts and circumstances including, but not limited to, decisions to reposition the investment portfolio, potential sales of investments to meet cash flow needs and potential sales of investments to capitalize on favorable pricing. Additional information on the methodology and significant inputs, by security type, that the Company used to determine the amount of credit loss recognized on fixed maturities with declines in fair value below amortized cost that were considered to be other-than-temporary is provided below.

Residential mortgage-backed securities. For mortgage-backed securities, credit impairment is assessed by estimating future cash flows from the underlying mortgage loans and interest payments. The cash flow estimate incorporates actual cash flows from the mortgage-backed securities through the current period and then projects the remaining cash flows using a number of assumptions, including prepayment rates, default rates, recovery rates on foreclosed properties and loss severity assumptions. Management develops specific assumptions using market data and internal estimates, as well as estimates from rating agencies and other third party sources. Default rates are estimated by considering current underlying mortgage loan performance and expectations of future performance. Estimates of future cash flows are discounted to present value. If the present value of expected cash flows is less than the amortized cost, the Company recognizes the estimated credit loss in net income.

Corporate bonds. For corporate bonds, credit impairment is assessed by evaluating the underlying issuer. As part of this assessment, the Company analyzes various factors, including the following:

•
fundamentals of the issuer, including current and projected earnings, current liquidity position and ability to raise capital;
•
fundamentals of the industry in which the issuer operates;
•
expectations of defaults and recovery rates;
•
changes in ratings by rating agencies;
•
other relevant market considerations; and
•
receipt of interest payments.

Default probabilities and recovery rates from rating agencies are key factors used in calculating the credit loss. Additional research of the industry and issuer is completed to determine if there is any current information that may affect the fixed maturity or its issuer in a negative manner and require an adjustment to the cash flow assumptions.

c)
The amortized cost and estimated fair value of fixed maturities at March 31, 2013 are shown below by contractual maturity.

(dollars in thousands)
Amortized
Cost
 
Estimated
Fair Value
Due in one year or less
$
323,583

 
$
328,259

Due after one year through five years
1,188,860

 
1,293,172

Due after five years through ten years
1,506,235

 
1,647,735

Due after ten years
1,217,896

 
1,341,858

 
4,236,574

 
4,611,024

Residential mortgage-backed securities
174,678

 
185,472

Asset-backed securities
12,916

 
13,329

Total fixed maturities
$
4,424,168

 
$
4,809,825


d)
At both March 31, 2013 and 2012, cumulative 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 was $21,370. There were no changes in cumulative credit losses for the three months ended March 31, 2013 or 2012.
 
 
 
 


11
Table of Contents

e)
The following table presents net realized investment gains and the change in net unrealized gains on investments. 

 
Three Months Ended March 31,
(dollars in thousands)
2013
 
2012
Realized gains:
 
 
 
Sales of fixed maturities
$
287

 
$
1,859

Sales of equity securities
17,921

 
9,694

Other
—

 
521

Total realized gains
18,208

 
12,074

Realized losses:
 
 
 
Sales of fixed maturities
(138
)
 
(165
)
Sales of equity securities
(153
)
 
—

Total realized losses
(291
)
 
(165
)
Net realized investment gains
$
17,917

 
$
11,909

Change in net unrealized gains on investments:
 
 
 
Fixed maturities
$
(31,348
)
 
$
16,669

Equity securities
280,895

 
196,994

Short-term investments
5

 
(3
)
Net increase
$
249,552

 
$
213,660


f)
There were no writedowns for other-than-temporary declines in the estimated fair value of investments for the three months ended March 31, 2013 and 2012.
 
 
 
 
5. Senior Long-Term Debt

On February 15, 2013, the Company repaid its 6.80% unsecured senior notes ($246.7 million principal amount outstanding at December 31, 2012).

On March 8, 2013, the Company issued $250 million of 3.625% unsecured senior notes due March 30, 2023 and $250 million of 5.0% unsecured senior notes due March 30, 2043. Net proceeds to the Company were approximately $491.2 million, which will be used for general corporate purposes.

6. 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 Insurance Market segments. 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.


12
Table of Contents

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.

a)
The following tables summarize the Company’s segment disclosures.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended March 31, 2013
(dollars in thousands)
Excess and
Surplus
Lines
 
Specialty
Admitted
 
London
Insurance
Market
 
Other
Insurance
(Discontinued
Lines)
 
Investing
 
Consolidated
Gross premium volume
$
244,306

 
$
203,276

 
$
295,697

 
$
21

 
$
—

 
$
743,300

Net written premiums
209,842

 
193,082

 
260,043

 
21

 
—

 
662,988

 
 
 
 
 
 
 
 
 
 
 
 
Earned premiums
201,405

 
158,469

 
204,692

 
21

 
—

 
564,587

Losses and loss adjustment expenses:
 
 
 
 
 
 
 
 
 
 
 
Current accident year
(126,138
)
 
(105,125
)
 
(134,736
)
 
—

 
—

 
(365,999
)
Prior accident years
53,908

 
1,655

 
22,123

 
417

 
—

 
78,103

Underwriting, acquisition and insurance expenses
(83,761
)
 
(68,527
)
 
(76,473
)
 
88

 
—

 
(228,673
)
Underwriting profit (loss)
45,414

 
(13,528
)
 
15,606

 
526

 
—

 
48,018

Net investment income
—

 
—

 
—

 
—

 
64,617

 
64,617

Net realized investment gains
—

 
—

 
—

 
—

 
17,917

 
17,917

Other revenues (insurance)
—

 
7,263

 
3,962

 
—

 
—

 
11,225

Other expenses (insurance)
—

 
(6,197
)
 
(1,358
)
 
—

 
—

 
(7,555
)
Segment profit (loss)
$
45,414

 
$
(12,462
)
 
$
18,210

 
$
526

 
$
82,534

 
$
134,222

Other revenues (non-insurance)
 
 
 
 
 
 
 
 
 
 
161,518

Other expenses (non-insurance)
 
 
 
 
 
 
 
 
 
 
(144,762
)
Amortization of intangible assets
 
 
 
 
 
 
 
 
 
 
(9,615
)
Interest expense
 
 
 
 
 
 
 
 
 
 
(23,574
)
Income before income taxes
 
 
 
 
 
 
 
 
 
 
$
117,789

U.S. GAAP combined ratio (1)
77
%
 
109
%
 
92
%
 
NM

(2) 
 
 
91
%
(1) 
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.
(2) 
NM – Ratio is not meaningful.


13
Table of Contents

 
Three Months Ended March 31, 2012
(dollars in thousands)
Excess and
Surplus
Lines
 
Specialty
Admitted
 
London
Insurance
Market
 
Other
Insurance
(Discontinued
Lines)
 
Investing
 
Consolidated
Gross premium volume
$
222,929

 
$
148,122

 
$
277,566

 
$
1

 
$
—

 
$
648,618

Net written premiums
192,913

 
140,552

 
247,700

 
1

 
—

 
581,166

 
 
 
 
 
 
 
 
 
 
 
 
Earned premiums
199,378

 
133,475

 
196,742

 
1

 
—

 
529,596

Losses and loss adjustment expenses:
 
 
 
 
 
 
 
 
 
 
 
Current accident year
(128,067
)
 
(92,693
)
 
(131,746
)
 
—

 
—

 
(352,506
)
Prior accident years
30,587

 
4,326

 
21,465

 
7,607

 
—

 
63,985

Underwriting, acquisition and insurance expenses:
 
 
 
 
 
 
 
 
 
 
 
Prospective adoption of ASU 2010-26 (1)
(8,487
)
 
(5,764
)
 
(6,037
)
 
—

 
—

 
(20,288
)
All other expenses
(85,857
)
 
(57,266
)
 
(75,003
)
 
(283
)
 
—

 
(218,409
)
Underwriting profit (loss)
7,554

 
(17,922
)
 
5,421

 
7,325

 
—

 
2,378

Net investment income
—

 
—

 
—

 
—

 
79,794

 
79,794

Net realized investment gains
—

 
—

 
—

 
—

 
11,909

 
11,909

Other revenues (insurance)
—

 
10,448

 
4,383

 
—

 
—

 
14,831

Other expenses (insurance)
—

 
(11,201
)
 
(974
)
 
—

 
—

 
(12,175
)
Segment profit (loss)
$
7,554

 
$
(18,675
)
 
$
8,830

 
$
7,325

 
$
91,703

 
$
96,737

Other revenues (non-insurance)
 
 
 
 
 
 
 
 
 
 
97,005

Other expenses (non-insurance)
 
 
 
 
 
 
 
 
 
 
(88,229
)
Amortization of intangible assets
 
 
 
 
 
 
 
 
 
 
(8,804
)
Interest expense
 
 
 
 
 
 
 
 
 
 
(22,167
)
Income before income taxes
 
 
 
 
 
 
 
 
 
 
$
74,542

U.S. GAAP combined ratio (2)
96
%
 
113
%
 
97
%
 
NM

(3) 
 
 
100
%
(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 $43.1 million of costs that no longer met the criteria for deferral as of January 1, 2012 and were recognized into income during 2012, consistent with policy terms.
(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.

b)
The following table reconciles segment assets to the Company’s consolidated balance sheets.

(dollars in thousands)
March 31, 2013
 
December 31, 2012
Segment assets:
 
 
 
Investing
$
9,749,682

 
$
9,277,697

Underwriting
2,500,635

 
2,387,305

Total segment assets
12,250,317

 
11,665,002

Non-insurance operations
867,674

 
891,586

Total assets
$
13,117,991

 
$
12,556,588


7. Derivatives

The Company is a party to a credit default swap agreement, under which third party credit risk is transferred from a counterparty to the Company. The Company entered into the credit default swap agreement for investment purposes. At both March 31, 2013 and December 31, 2012, the notional amount of the credit default swap was $33.1 million, which represented the Company’s aggregate exposure to losses if specified credit events involving third party reference entities occur. These third party reference entities are specified under the terms of the agreement and represent a portfolio of names upon which the Company has assumed credit risk from the counterparty. The Company’s exposure to loss from any one reference entity is limited to $20.0 million. The credit default swap has a scheduled termination date of December 2014.


14
Table of Contents

The credit default swap is accounted for as a derivative instrument and is recorded at fair value with any changes in fair value recorded in net investment income. At March 31, 2013 and December 31, 2012, the credit default swap had a fair value of $9.4 million and $12.7 million, respectively. The fair value of the credit default swap is included in other liabilities on the consolidated balance sheets. Net investment income for the three months ended March 31, 2013 and 2012 included favorable changes in the fair value of the credit default swap of $3.3 million and $11.1 million, respectively.

The fair value of the credit default swap is determined by the Company using a Gaussian copula valuation model, a market standard model for valuing credit default swaps. The fair value is dependent upon several inputs, including changes in interest rates, credit spreads, expected default rates, changes in credit quality, future expected recovery rates and other market factors. The significant unobservable inputs used in the fair value measurement of the credit default swap are expected default rates and future expected recovery rates. The Company determines these unobservable inputs based upon default rates and recovery rates used to price similar credit default swap indices. A significant increase in expected default rates in isolation results in a significantly higher fair value measurement, while a significant decrease in expected default rates results in a significantly lower fair value measurement. A significant increase in future expected recovery rates in isolation results in a significantly lower fair value measurement, while a significant decrease in future expected recovery rates results in a significantly higher fair value measurement. Generally, a change in the assumption used for expected default rates is accompanied by a directionally opposite change in future expected recovery rates. The fair value measurement of the credit default swap at March 31, 2013 included expected default rates ranging between less than 1% and 37%, with a weighted-average expected default rate of 2%, and future expected recovery rates ranging between 20% and 40%, with a weighted-average future expected recovery rate of 39%. The fair value measurement of the credit default swap at December 31, 2012 included expected default rates ranging between 1% and 43%, with a weighted-average expected default rate of 3%, and future expected recovery rates ranging between 20% and 40%, with a weighted-average future expected recovery rate of 39%.

The Company's valuation policies and procedures for the credit default swap are determined by an internal investment manager with oversight provided by the Company's Chief Financial Officer and Chief Investment Officer. Fair value measurements are analyzed quarterly to ensure the change in fair value from prior periods is reasonable relative to recent market trends. Additionally, the reported fair value of the credit default swap is compared to results from similar valuation models.

The Company had no other material derivative instruments at March 31, 2013.

8. Employee Benefit Plans

a)
Expenses relating to the Company’s defined contribution plans were $4.6 million and $4.7 million for the three months ended March 31, 2013 and 2012, respectively.

b)
The following table presents the components of net periodic benefit income for the Terra Nova Pension Plan, a defined benefit plan.

 
Three Months Ended March 31,
(dollars in thousands)
2013
 
2012
Service cost
$
—

 
$
90

Interest cost
1,623

 
1,693

Expected return on plan assets
(2,689
)
 
(2,432
)
Amortization of net actuarial pension loss
480

 
643

Net periodic benefit income
$
(586
)
 
$
(6
)

The Company contributed $5.3 million to the Terra Nova Pension Plan during the three months ended March 31, 2013 and does not expect to make any additional contributions in 2013.

9. Contingencies
   
Contingencies arise in the normal course of the Company’s operations and are not expected to have a material impact on the Company’s financial condition or results of operations.



15
Table of Contents

10. Fair Value Measurements

FASB Accounting Standards Codification (ASC) 820-10, Fair Value Measurements and Disclosures, establishes a three-level hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). If the inputs used to measure the assets or liabilities fall within different levels of the hierarchy, the classification is based on the lowest level input that is significant to the fair value measurement of the asset or liability.

Classification of assets and liabilities within the hierarchy considers the markets in which the assets and liabilities are traded and the reliability and transparency of the assumptions used to determine fair value. The hierarchy requires the use of observable market data when available. The levels of the hierarchy are defined as follows:

Level 1 – Inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities traded in active markets.

Level 2 – Inputs to the valuation methodology include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability and market-corroborated inputs.

Level 3 – Inputs to the valuation methodology are unobservable for the asset or liability and are significant to the fair value measurement.

In accordance with FASB ASC 820, the Company determines fair value based on the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. In determining fair value, the Company uses various methods, including the market, income and cost approaches. The Company uses valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. The following section describes the valuation methodologies used by the Company to measure assets and liabilities at fair value, including an indication of the level within the fair value hierarchy in which each asset or liability is generally classified.

Investments available-for-sale. Investments available-for-sale are recorded at fair value on a recurring basis and include fixed maturities, equity securities and short-term investments. Short-term investments include certificates of deposit, commercial paper, discount notes and treasury bills with original maturities of one year or less. Fair value for investments available-for-sale is determined by the Company after considering various sources of information, including information provided by a third party pricing service. The pricing service provides prices for substantially all of the Company’s fixed maturities and equity securities. In determining fair value, the Company generally does not adjust the prices obtained from the pricing service. The Company obtains an understanding of the pricing service’s valuation methodologies and related inputs, which include, but are not limited to, reported trades, benchmark yields, issuer spreads, bids, offers, duration, credit ratings, estimated cash flows and prepayment speeds. The Company validates prices provided by the pricing service by reviewing prices from other pricing sources and analyzing pricing data in certain instances.

The Company has evaluated the various types of securities in its investment portfolio to determine an appropriate fair value hierarchy level based upon trading activity and the observability of market inputs. Level 1 investments include those traded on an active exchange, such as the New York Stock Exchange. Level 2 investments include U.S. Treasury securities and obligations of U.S. government agencies, municipal bonds, foreign government bonds, residential mortgage-backed securities and corporate debt securities.

Fair value for investments available-for-sale is measured based upon quoted prices in active markets, if available. Due to variations in trading volumes and the lack of quoted market prices, fixed maturities are classified as Level 2 investments. The fair value of fixed maturities is normally derived through recent reported trades for identical or similar securities, making adjustments through the reporting date based upon available market observable data described above. If there are no recent reported trades, the fair value of fixed maturities may be derived through the use of matrix pricing or model processes, where future cash flow expectations are developed based upon collateral performance and discounted at an estimated market rate. Significant inputs used to determine the fair value of obligations of states, municipalities and political subdivisions, corporate bonds and obligations of foreign governments include reported trades, benchmark yields, issuer spreads, bids, offers, credit information and estimated cash flows. Significant inputs used to determine the fair value of residential mortgage-backed securities include the type of underlying mortgage loans, benchmark yields, prepayment speeds, collateral information, tranche type and volatility, estimated cash flows, credit information, default rates, recovery rates, issuer spreads and the year of issue.


16
Table of Contents

Derivatives. Derivatives are recorded at fair value on a recurring basis and include a credit default swap. The fair value of the credit default swap is measured by the Company using an external valuation model. See note 7 for a discussion of the valuation model for the credit default swap, including the key inputs and assumptions used in the model and a description of the valuation processes used by the Company. Due to the significance of unobservable inputs required in measuring the fair value of the credit default swap, the credit default swap has been classified as Level 3 within the fair value hierarchy.

Senior long-term debt and other debt. Senior long-term debt and other debt is carried at amortized cost with the estimated fair value disclosed on the consolidated balance sheets. Senior long-term debt and other debt is classified as Level 2 within the fair value hierarchy due to variations in trading volumes and the lack of quoted market prices. Fair value for senior long-term debt and other debt is generally derived through recent reported trades for identical securities, making adjustments through the reporting date, if necessary, based upon available market observable data including U.S. Treasury securities and implied credit spreads. Significant inputs used to determine the fair value of senior long-term debt and other debt include reported trades, benchmark yields, issuer spreads, bids and offers.

The following tables present the balances of assets and liabilities measured at fair value on a recurring basis by level within the fair value hierarchy.

 
March 31, 2013
(dollars in thousands)
Level 1
 
Level 2
 
Level 3
 
Total
Assets:
 
 
 
 
 
 
 
Investments available-for-sale:
 
 
 
 
 
 
 
Fixed maturities:
 
 
 
 
 
 
 
U.S. Treasury securities and obligations of U.S. government agencies
$
—

 
$
319,784

 
$
—

 
$
319,784

Obligations of states, municipalities and political subdivisions
—

 
2,768,339

 
—

 
2,768,339

Foreign governments
—

 
533,599

 
—

 
533,599

Residential mortgage-backed securities
—

 
185,472

 
—

 
185,472

Asset-backed securities
—

 
13,329

 
—

 
13,329

Corporate bonds
—

 
989,302

 
—

 
989,302

Total fixed maturities
—

 
4,809,825

 
—

 
4,809,825

Equity securities:
 
 
 
 
 
 
 
Insurance companies, banks and trusts
907,535

 
—

 
—

 
907,535

Industrial, consumer and all other
1,800,914

 
—

 
—

 
1,800,914

Total equity securities
2,708,449

 
—

 
—

 
2,708,449

Short-term investments
1,314,844

 
65,474

 
—

 
1,380,318

Total investments available-for-sale
$
4,023,293

 
$
4,875,299

 
$
—

 
$
8,898,592

Liabilities:
 
 
 
 
 
 
 
Derivative contracts
$
—

 
$
—

 
$
9,400

 
$
9,400



17
Table of Contents

 
December 31, 2012
(dollars in thousands)
Level 1
 
Level 2
 
Level 3
 
Total
Assets:
 
 
 
 
 
 
 
Investments available-for-sale:
 
 
 
 
 
 
 
Fixed maturities:
 
 
 
 
 
 
 
U.S. Treasury securities and obligations of U.S. government agencies
$
—

 
$
317,507

 
$
—

 
$
317,507

Obligations of states, municipalities and political subdivisions
—

 
2,831,562

 
—

 
2,831,562

Foreign governments
—

 
556,608

 
—

 
556,608

Residential mortgage-backed securities
—

 
215,377

 
—

 
215,377

Asset-backed securities
—

 
14,345

 
—

 
14,345

Corporate bonds
—

 
1,043,884

 
—

 
1,043,884

Total fixed maturities
—

 
4,979,283

 
—

 
4,979,283

Equity securities:
 
 
 
 
 
 
 
Insurance companies, banks and trusts
898,067

 
—

 
—

 
898,067

Industrial, consumer and all other
1,508,884

 
—

 
—

 
1,508,884

Total equity securities
2,406,951

 
—

 
—

 
2,406,951

Short-term investments
888,758

 
84,572

 
—

 
973,330

Total investments available-for-sale
$
3,295,709

 
$
5,063,855

 
$
—

 
$
8,359,564

Liabilities:
 
 
 
 
 
 
 
Derivative contracts
$
—

 
$
—

 
$
12,690

 
$
12,690


The following table summarizes changes in Level 3 liabilities measured at fair value on a recurring basis.

 
Three Months Ended March 31,
(dollars in thousands)
2013
 
2012
Derivatives, beginning of period
$
12,690

 
$
29,331

Total gains included in:
 
 
 
Net income
(3,290
)
 
(11,061
)
Other comprehensive income
—

 
—

Transfers into Level 3
—

 
—

Transfers out of Level 3
—

 
—

Derivatives, end of period
$
9,400

 
$
18,270

Net unrealized gains included in net income relating to liabilities held at March 31, 2013 and 2012 (1)
$
3,290

 
$
11,061

(1) 
Included in net investment income in the consolidated statements of income and comprehensive income.

There were no transfers into or out of Level 1 and Level 2 during the three months ended March 31, 2013 and 2012. The Company did not have any assets or liabilities measured at fair value on a non-recurring basis during the three months ended March 31, 2013 and 2012.

11. Other Comprehensive Income

Other comprehensive income includes net holding gains arising during the period, changes in unrealized other-than-temporary impairment losses on fixed maturities arising during the period and reclassification adjustments for net gains included in net income. Other comprehensive income also includes changes in foreign currency translation adjustments and changes in net actuarial pension loss.


18
Table of Contents

The following table presents the change in accumulated other comprehensive income by component, net of taxes, for the quarters ended March 31, 2013 and 2012.

(dollars in thousands)
Unrealized Holding Gains on Available-for-Sale Securities
 
Foreign Currency
 
Net Actuarial Pension Loss
 
Total
December 31, 2011
$
704,719

 
$
(2,614
)
 
$
(41,185
)
 
$
660,920

Other comprehensive income before reclassifications
153,317

 
2,823

 
—

 
156,140

Amounts reclassified from accumulated other comprehensive income
(7,931
)
 
—

 
483

 
(7,448
)
Total other comprehensive income
145,386

 
2,823

 
483

 
148,692

March 31, 2012
$
850,105

 
$
209

 
$
(40,702
)
 
$
809,612

 
 
 
 
 
 
 
 
December 31, 2012
$
946,933

 
$
(1,075
)
 
$
(34,521
)
 
$
911,337

Other comprehensive income before reclassifications
181,848

 
(1,181
)
 
—

 
180,667

Amounts reclassified from accumulated other comprehensive income
(12,255
)
 
—

 
370

 
(11,885
)
Total other comprehensive income
169,593

 
(1,181
)
 
370

 
168,782

March 31, 2013
$
1,116,526

 
$
(2,256
)
 
$
(34,151
)
 
$
1,080,119


The following table summarizes the deferred tax expense (benefit) associated with each component of other comprehensive income.

 
Three Months Ended March 31,
(dollars in thousands)
2013
 
2012
Change in net unrealized gains on investments:
 
 
 
Net holding gains arising during the period
$
85,546

 
$
71,777

Change in unrealized other-than-temporary impairment losses on fixed maturities arising during the period
75

 
(46
)
Reclassification adjustments for net gains included in net income
(5,662
)
 
(3,457
)
Change in net unrealized gains on investments
79,959

 
68,274

Change in foreign currency translation adjustments
38

 
(170
)
Change in net actuarial pension loss
110

 
160

Total
$
80,107

 
$
68,264


The following table presents the details of amounts reclassified from accumulated other comprehensive income into income, by component.

 
Three Months Ended March 31,
(dollars in thousands)
2013
 
2012
Unrealized holding gains on available-for-sale securities:
 
 
 
Net realized investment gains
$
17,917

 
$
11,388

Income taxes
(5,662
)
 
(3,457
)
Reclassification of unrealized holding gains, net of taxes
$
12,255

 
$
7,931

 
 
 
 
Net actuarial pension loss:

 

Underwriting, acquisition and insurance expenses
$
(480
)
 
$
(643
)
Income taxes
110

 
160

Reclassification of net actuarial pension loss, net of taxes
$
(370
)
 
$
(483
)


19
Table of Contents

12. Acquisitions

On January 1, 2013, the Company completed its acquisition of 100% of the outstanding shares of Essentia Insurance Company, a company that underwrites insurance exclusively for Hagerty Insurance Agency and Hagerty Classic Marine Insurance Agency (collectively, Hagerty) throughout the United States. Hagerty offers insurance for classic cars, vintage boats, motorcycles and related automotive collectibles.  The Company recognized intangible assets of $35.4 million associated with this acquisition, which includes $25.0 million of customer relationships to be amortized over a weighted average period of six years. Results attributable to this acquisition are included in the Specialty Admitted segment.

On December 18, 2012, the boards of directors of the Company and Alterra Capital Holdings Limited (Alterra) each approved an agreement providing for the merger of Alterra with one of the Company's subsidiaries. As a result of the transaction, Alterra will become a wholly-owned subsidiary of the Company and each issued and outstanding share of Alterra common stock (other than restricted shares that do not vest in connection with the transaction) will be converted into the right to receive (1) 0.04315 shares of the Company's common stock and (2) $10.00 in cash. Based on the Company's closing stock price on December 18, 2012 ($486.05 per share), the day the agreement was entered into, the aggregate consideration payable to Alterra shareholders would be approximately $3.1 billion. Following the transaction, the Company estimates that its current shareholders would own approximately 69% of the combined company and Alterra shareholders would own approximately 31%. The transaction has been approved by shareholders of both companies. Closing is expected to occur on May 1, 2013.

13. Recent Accounting Pronouncements

Effective January 1, 2013, the Company adopted FASB ASU No. 2013-02, Reporting Amounts Reclassified Out of Accumulated Other Comprehensive Income, which amends FASB ASC 220, Comprehensive Income, to improve the reporting of reclassifica