MKL 09.30.2014 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 September 30, 2014
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 October 29, 2014: 13,959,475

Table of Contents

Markel Corporation
Form 10-Q
Index
 
 
 
 
 
 
Page Number
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

2

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

MARKEL CORPORATION AND SUBSIDIARIES

Consolidated Balance Sheets
(dollars in thousands)
 
September 30,
2014
 
December 31,
2013
 
(unaudited)
 
 
ASSETS
 
 
 
Investments, available-for-sale, at estimated fair value:
 
 
 
Fixed maturities (amortized cost of $10,123,387 in 2014 and $10,129,141 in 2013)
$
10,474,647

 
$
10,142,536

Equity securities (cost of $1,860,782 in 2014 and $1,566,553 in 2013)
3,706,963

 
3,251,798

Short-term investments (estimated fair value approximates cost)
1,686,691

 
1,452,288

Total Investments
15,868,301

 
14,846,622

Cash and cash equivalents
1,765,591

 
1,978,526

Restricted cash and cash equivalents
583,291

 
786,926

Receivables
1,289,010

 
1,141,773

Reinsurance recoverable on unpaid losses
1,897,580

 
1,854,414

Reinsurance recoverable on paid losses
103,023

 
102,002

Deferred policy acquisition costs
375,618

 
260,967

Prepaid reinsurance premiums
404,710

 
383,559

Goodwill
1,067,457

 
967,717

Intangible assets
727,456

 
565,083

Other assets
994,398

 
1,067,922

Total Assets
$
25,076,435

 
$
23,955,511

LIABILITIES AND EQUITY
 
 
 
Unpaid losses and loss adjustment expenses
$
10,509,797

 
$
10,262,056

Life and annuity benefits
1,358,882

 
1,486,574

Unearned premiums
2,455,709

 
2,127,115

Payables to insurance and reinsurance companies
359,524

 
295,496

Senior long-term debt and other debt (estimated fair value of $2,490,000 in 2014 and $2,372,000 in 2013)
2,273,795

 
2,256,227

Other liabilities
878,110

 
777,850

Total Liabilities
17,835,817

 
17,205,318

Redeemable noncontrolling interests
57,249

 
72,183

Commitments and contingencies

 

Shareholders' equity:
 
 
 
Common stock
3,302,868

 
3,288,863

Retained earnings
2,468,744

 
2,294,909

Accumulated other comprehensive income
1,403,581

 
1,089,805

Total Shareholders' Equity
7,175,193

 
6,673,577

Noncontrolling interests
8,176

 
4,433

Total Equity
7,183,369

 
6,678,010

Total Liabilities and Equity
$
25,076,435

 
$
23,955,511

See accompanying notes to consolidated financial statements.

3
Table of Contents

MARKEL CORPORATION AND SUBSIDIARIES

Consolidated Statements of Income and Comprehensive Income
(Unaudited)
 
Quarter Ended September 30,
 
Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
 
(dollars in thousands, except per share data)
OPERATING REVENUES
 
 
 
 
 
 
 
Earned premiums
$
954,007

 
$
919,723

 
$
2,868,981

 
$
2,269,129

Net investment income
91,096

 
86,192

 
269,980

 
228,788

Net realized investment gains:
 
 
 
 
 
 
 
Other-than-temporary impairment losses
(2,851
)
 
—

 
(3,858
)
 
(4,589
)
Net realized investment gains, excluding other-than-temporary impairment losses
7,046

 
11,238

 
32,567

 
45,290

Net realized investment gains
4,195

 
11,238

 
28,709

 
40,701

Other revenues
249,988

 
174,512

 
630,242

 
504,680

Total Operating Revenues
1,299,286

 
1,191,665

 
3,797,912

 
3,043,298

OPERATING EXPENSES
 
 
 
 
 
 
 
Losses and loss adjustment expenses
570,966

 
533,372

 
1,723,675

 
1,263,674

Underwriting, acquisition and insurance expenses
350,493

 
352,126

 
1,071,985

 
943,894

Amortization of intangible assets
13,505

 
16,848

 
40,992

 
37,755

Other expenses
231,193

 
166,566

 
598,303

 
459,642

Total Operating Expenses
1,166,157

 
1,068,912

 
3,434,955

 
2,704,965

Operating Income
133,129

 
122,753

 
362,957

 
338,333

Interest expense
29,648

 
30,619

 
89,136

 
82,754

Income Before Income Taxes
103,481

 
92,134

 
273,821

 
255,579

Income tax expense
26,657

 
25,167

 
68,355

 
70,673

Net Income
76,824

 
66,967

 
205,466

 
184,906

Net income attributable to noncontrolling interests
1,021

 
1,368

 
1,879

 
2,649

Net Income to Shareholders
$
75,803

 
$
65,599

 
$
203,587

 
$
182,257

 
 
 
 
 
 
 
 
OTHER COMPREHENSIVE INCOME (LOSS)
 
 
 
 
 
 
 
Change in net unrealized gains on investments, net of taxes:
 
 
 
 
 
 
 
Net holding gains (losses) arising during the period
$
(7,532
)
 
$
84,564

 
$
348,096

 
$
107,473

Change in unrealized other-than-temporary impairment losses on fixed maturities arising during the period
123

 
(219
)
 
118

 
(40
)
Reclassification adjustments for net gains included in net income
(4,990
)
 
(7,654
)
 
(15,752
)
 
(27,866
)
Change in net unrealized gains on investments, net of taxes
(12,399
)
 
76,691

 
332,462

 
79,567

Change in foreign currency translation adjustments, net of taxes
(27,223
)
 
1,709

 
(19,639
)
 
(9,931
)
Change in net actuarial pension loss, net of taxes
320

 
410

 
964

 
1,146

Total Other Comprehensive Income (Loss)
(39,302
)
 
78,810

 
313,787

 
70,782

Comprehensive Income
37,522

 
145,777

 
519,253

 
255,688

Comprehensive income attributable to noncontrolling interests
1,020

 
1,368

 
1,890

 
2,649

Comprehensive Income to Shareholders
$
36,502

 
$
144,409

 
$
517,363

 
$
253,039

 
 
 
 
 
 
 
 
NET INCOME PER SHARE
 
 
 
 
 
 
 
Basic
$
5.33

 
$
4.69

 
$
14.28

 
$
15.38

Diluted
$
5.30

 
$
4.67

 
$
14.21

 
$
15.33


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, 2012
$
908,980

 
$
2,068,340

 
$
911,337

 
$
3,888,657

 
$
360

 
$
3,889,017

 
$
86,225

Net income (loss)
 
 
182,257

 
—

 
182,257

 
(443
)
 
181,814

 
3,092

Other comprehensive income
 
 
—

 
70,782

 
70,782

 
—

 
70,782

 
—

Comprehensive Income (Loss)
 
 
 
 
 
 
253,039

 
(443
)
 
252,596

 
3,092

Issuance of common stock
18,663

 
—

 
—

 
18,663

 
—

 
18,663

 
—

Repurchase of common stock
—

 
(56,862
)
 
—

 
(56,862
)
 
—

 
(56,862
)
 
—

Restricted stock units expensed
20,182

 
—

 
—

 
20,182

 
—

 
20,182

 
—

Acquisition of Alterra
2,330,199

 
—

 
—

 
2,330,199

 
—

 
2,330,199

 
—

Adjustment of redeemable noncontrolling interests
—

 
3,101

 
—

 
3,101

 
—

 
3,101

 
(3,101
)
Purchase of noncontrolling interest
(136
)
 
—

 
—

 
(136
)
 
—

 
(136
)
 
(11,716
)
Other
(400
)
 
980

 
—

 
580

 
5,000

 
5,580

 
(3,012
)
September 30, 2013
$
3,277,488

 
$
2,197,816

 
$
982,119

 
$
6,457,423

 
$
4,917

 
$
6,462,340

 
$
71,488

 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2013
$
3,288,863

 
$
2,294,909

 
$
1,089,805

 
$
6,673,577

 
$
4,433

 
$
6,678,010

 
$
72,183

Net income (loss)
 
 
203,587

 
—

 
203,587

 
(1,072
)
 
202,515

 
2,951

Other comprehensive income
 
 
—

 
313,776

 
313,776

 
—

 
313,776

 
11

Comprehensive Income (Loss)
 
 
 
 
 
 
517,363

 
(1,072
)
 
516,291

 
2,962

Issuance of common stock
4,960

 
—

 
—

 
4,960

 
—

 
4,960

 
—

Repurchase of common stock
—

 
(25,922
)
 
—

 
(25,922
)
 
—

 
(25,922
)
 
—

Restricted stock units expensed
18,421

 
—

 
—

 
18,421

 
—

 
18,421

 
—

Adjustment of redeemable noncontrolling interests
—

 
(3,843
)
 
—

 
(3,843
)
 
—

 
(3,843
)
 
3,843

Purchase of noncontrolling interest
(10,257
)
 
—

 
—

 
(10,257
)
 
905

 
(9,352
)
 
(18,566
)
Other
881

 
13

 
—

 
894

 
3,910

 
4,804

 
(3,173
)
September 30, 2014
$
3,302,868

 
$
2,468,744

 
$
1,403,581

 
$
7,175,193

 
$
8,176

 
$
7,183,369

 
$
57,249


See accompanying notes to consolidated financial statements.

5
Table of Contents

MARKEL CORPORATION AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows
(Unaudited)
 
Nine Months Ended September 30,
 
2014
 
2013
 
(dollars in thousands)
OPERATING ACTIVITIES
 
 
 
Net income
$
205,466

 
$
184,906

Adjustments to reconcile net income to net cash provided by operating activities
331,162

 
357,551

Net Cash Provided By Operating Activities
536,628

 
542,457

INVESTING ACTIVITIES
 
 
 
Proceeds from sales of fixed maturities and equity securities
1,183,237

 
497,364

Proceeds from maturities, calls and prepayments of fixed maturities
1,110,128

 
851,194

Cost of fixed maturities and equity securities purchased
(2,687,075
)
 
(737,515
)
Net change in short-term investments
(213,618
)
 
(177,311
)
Proceeds from sales of equity method investments
101,938

 
228,001

Cost of equity method investments
(9,441
)
 
(24,878
)
Change in restricted cash and cash equivalents
203,635

 
(76,259
)
Additions to property and equipment
(52,350
)
 
(36,677
)
Acquisitions, net of cash acquired
(316,307
)
 
(13,354
)
Other
(1,487
)
 
2,912

Net Cash Provided (Used) By Investing Activities
(681,340
)
 
513,477

FINANCING ACTIVITIES
 
 
 
Additions to senior long-term debt and other debt
64,075

 
563,913

Repayment of senior long-term debt and other debt
(40,397
)
 
(320,094
)
Repurchases of common stock
(25,922
)
 
(56,862
)
Issuance of common stock
4,960

 
18,663

Purchase of noncontrolling interests
(25,918
)
 
(11,852
)
Distributions to noncontrolling interests
(3,463
)
 
(3,983
)
Other
(20,074
)
 
(246
)
Net Cash Provided (Used) By Financing Activities
(46,739
)
 
189,539

Effect of foreign currency rate changes on cash and cash equivalents
(21,484
)
 
6,083

Increase (decrease) in cash and cash equivalents
(212,935
)
 
1,251,556

Cash and cash equivalents at beginning of period
1,978,526

 
863,766

CASH AND CASH EQUIVALENTS AT END OF PERIOD
$
1,765,591

 
$
2,115,322


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. Through its wholly-owned subsidiary, Markel Ventures, Inc. (Markel Ventures), Markel Corporation also owns interests in various industrial and service businesses that operate outside of the specialty insurance marketplace.

On May 1, 2013 (the Acquisition Date), Markel Corporation completed the acquisition of 100% of the issued and outstanding common stock of Alterra Capital Holdings Limited (Alterra) pursuant to an agreement dated December 18, 2012 (the Merger Agreement) which provided for the merger of Alterra with one of Markel Corporation's subsidiaries. Total purchase consideration was $3.3 billion. Alterra was a Bermuda-headquartered global enterprise providing diversified specialty insurance and reinsurance products to corporations, public entities and other property and casualty insurers.

The consolidated balance sheet as of September 30, 2014, the related consolidated statements of income and comprehensive income for the quarters and nine months ended September 30, 2014 and 2013, and the consolidated statements of changes in equity and cash flows for the nine months ended September 30, 2014 and 2013 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, 2013 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 consolidated financial statements include the results of operations and cash flows of Alterra from the Acquisition Date. The Company consolidates the results of its Markel Ventures 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 2013 Annual Report on Form 10-K for a more complete description of the Company's business and accounting policies.

2. Recent Accounting Pronouncements

Effective January 1, 2014, the Company adopted Financial Accounting Standards Board (FASB) Accounting Standards Update (ASU) No. 2013-11, Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists. ASU No. 2013-11 requires that a liability related to an unrecognized tax benefit be offset against a deferred tax asset for a net operating loss carryforward, a similar tax loss or a tax credit carryforward if such settlement is required or expected in the event the uncertain tax position is disallowed. In that case, the liability associated with the unrecognized tax benefit is presented in the financial statements as a reduction to the related deferred tax asset for a net operating loss carryforward, a similar tax loss or a tax credit carryforward. Otherwise, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets. The adoption of this guidance did not have an impact on the Company's financial position, results of operations or cash flows.


7
Table of Contents

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), which creates a new comprehensive revenue recognition standard that will serve as a single source of revenue guidance for all companies in all industries. The guidance applies to all companies that either enter into contracts with customers to transfer goods or services or enter into contracts for the transfer of nonfinancial assets, unless those contracts are within the scope of other standards, such as insurance contracts. ASU No. 2014-09's core principle is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. In doing so, companies will need to use more judgment and make more estimates than under the current guidance. These may include identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. ASU No. 2014-09 becomes effective for the Company during the first quarter of 2017 and may be applied retrospectively or under a modified retrospective method where the cumulative effect is recognized at the date of initial application. Early application is not permitted. The Company is currently evaluating ASU No. 2014-09 to determine the potential impact that adopting this standard will have on its consolidated financial statements.

3. Acquisitions

Acquisition of Alterra

On May 1, 2013, the Company completed the acquisition of 100% of the issued and outstanding common stock of Alterra. Results attributable to Alterra's property and casualty insurance and reinsurance business are included in each of the Company's underwriting segments, which were redefined during the first quarter of 2014. See note 6. Previously, Alterra also offered life and annuity reinsurance products. In 2010, Alterra ceased writing life and annuity reinsurance contracts and placed this business into run-off. Results attributable to the run-off of Alterra's life and annuity reinsurance business are included in the Company's Other Insurance (Discontinued Lines) segment. See note 6 for further discussion of the Company's reportable segments.

Pursuant to the terms of the Merger Agreement, on the Acquisition Date, equity holders of Alterra received, in exchange for each share of Alterra common stock held (other than restricted shares that did not vest in connection with the transaction), (1) 0.04315 shares of the Company's common stock and (2) $10.00 in cash. Equity holders of Alterra received total consideration of $3.3 billion, consisting of cash consideration of $964.3 million and stock consideration of 4.3 million shares of the Company's common stock.

The purchase price was allocated to the acquired assets and liabilities of Alterra based on estimated fair values at the Acquisition Date. The Company recognized goodwill of $295.7 million, of which $107.8 million is included in the U.S. Insurance segment, $89.8 million is included in the International Insurance segment and $98.1 million is included in the Reinsurance segment. None of the goodwill that was recorded is deductible for income tax purposes. The Company also recognized indefinite lived intangible assets of $37.5 million and other intangible assets of $170.0 million, which are being amortized over a weighted average period of 17 years.

Acquisition of Abbey Protection

On January 17, 2014, the Company completed its acquisition of 100% of the share capital of Abbey Protection plc (Abbey), an integrated specialty insurance and consultancy group headquartered in London. Abbey's business is focused on the underwriting and sale of insurance products to small and medium-sized enterprises and affinity groups in the United Kingdom providing protection against legal expenses and professional fees incurred as a result of legal actions or investigations by tax authorities, as well as providing a range of complementary legal and professional consulting services. Premiums associated with Abbey's insurance operations for 2013 were in excess of $60 million. Results attributable to Abbey's insurance operations are included in the International Insurance segment. Results attributable to Abbey's consultancy operations are reported with the Company's non-insurance operations, which are not included in a reportable segment.

Total consideration for this acquisition was $190.7 million, all of which was cash consideration. The purchase price was allocated to the acquired assets and liabilities based on estimated fair values on January 17, 2014. The Company recognized goodwill of $65.8 million, of which $43.0 million was allocated to the International Insurance segment and $22.8 million was allocated to the Company's non-insurance operations. None of the goodwill recognized is expected to be deductible for income tax purposes. The goodwill is primarily attributable to Abbey's assembled workforce and synergies that are expected to result upon integration of Abbey into the Company's insurance operations. The Company also recognized other intangible assets of $113.4 million, including $103.5 million of customer relationships and $9.9 million of trade names. These intangible assets are expected to be amortized over 20 years and 14 years, respectively.


8
Table of Contents

Markel Ventures Acquisitions

In July 2014, the Company acquired 100% of the outstanding shares of Cottrell, Inc. (Cottrell), a privately held company headquartered in Gainesville, Georgia. Cottrell is a leading manufacturer of over-the-road car hauler equipment and related car hauler parts. In June and August 2014, ParkLand Ventures also completed the acquisition of several manufactured housing communities. Total consideration for these non-insurance acquisitions was $187.0 million, which primarily consisted of cash consideration. This is inclusive of the estimated fair value of contingent consideration we may be required to pay based on Cottrell’s earnings, as defined in the stock purchase agreement, in 2014 and 2015. The Company has preliminarily recognized goodwill of $38.5 million, the majority of which we expect to amortize for income tax purposes. The Company has also preliminarily recognized other intangible assets of $80.7 million, including $51.7 million of customer relationships and $15.0 million of trade names, which are expected to be amortized over a weighted average period of 17 years and 11 years, respectively. Results attributable to these acquisitions are included with the Company’s non-insurance operations, which are not included in a reportable segment.

The Company has not completed the process of determining the fair value of the assets and liabilities acquired with Cottrell. These valuations will be completed within the measurement period, which cannot exceed 12 months from the acquisition date. As a result, the fair value amounts recorded for these items are provisional estimates subject to adjustment. Once completed, any adjustments resulting from the valuations may impact the individual amounts recorded for assets acquired and liabilities assumed, as well as the residual goodwill.

4. Investments

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

 
September 30, 2014
(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
$
706,634

 
$
9,856

 
$
(6,096
)
 
$
—

 
$
710,394

Obligations of states, municipalities and political subdivisions
3,938,561

 
208,579

 
(7,948
)
 
—

 
4,139,192

Foreign governments
1,520,595

 
101,261

 
(1,070
)
 
—

 
1,620,786

Commercial mortgage-backed securities
444,601

 
1,658

 
(3,697
)
 
—

 
442,562

Residential mortgage-backed securities
1,007,664

 
20,563

 
(7,663
)
 
(2,258
)
 
1,018,306

Asset-backed securities
132,064

 
166

 
(1,065
)
 
—

 
131,165

Corporate bonds
2,373,268

 
58,375

 
(17,512
)
 
(1,889
)
 
2,412,242

Total fixed maturities
10,123,387

 
400,458

 
(45,051
)
 
(4,147
)
 
10,474,647

Equity securities:
 
 
 
 
 
 
 
 
 
Insurance, banks and other financial institutions
494,374

 
667,060

 
(878
)
 
—

 
1,160,556

Industrial, consumer and all other
1,366,408

 
1,189,604

 
(9,605
)
 
—

 
2,546,407

Total equity securities
1,860,782

 
1,856,664

 
(10,483
)
 
—

 
3,706,963

Short-term investments
1,686,638

 
56

 
(3
)
 
—

 
1,686,691

Investments, available-for-sale
$
13,670,807

 
$
2,257,178

 
$
(55,537
)
 
$
(4,147
)
 
$
15,868,301


9
Table of Contents

 
December 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
$
1,215,522

 
$
9,051

 
$
(30,342
)
 
$
—

 
$
1,194,231

Obligations of states, municipalities and political subdivisions
2,986,758

 
116,341

 
(27,384
)
 
—

 
3,075,715

Foreign governments
1,484,818

 
30,647

 
(54,411
)
 
—

 
1,461,054

Commercial mortgage-backed securities
379,555

 
62

 
(11,796
)
 
—

 
367,821

Residential mortgage-backed securities
875,902

 
13,046

 
(16,442
)
 
(2,258
)
 
870,248

Asset-backed securities
189,646

 
257

 
(1,614
)
 
—

 
188,289

Corporate bonds
2,996,940

 
54,777

 
(61,650
)
 
(4,889
)
 
2,985,178

Total fixed maturities
10,129,141

 
224,181

 
(203,639
)
 
(7,147
)
 
10,142,536

Equity securities:
 
 
 
 
 
 
 
 
 
Insurance, banks and other financial institutions
422,975

 
592,112

 
(4
)
 
—

 
1,015,083

Industrial, consumer and all other
1,143,578

 
1,094,251

 
(1,114
)
 
—

 
2,236,715

Total equity securities
1,566,553

 
1,686,363

 
(1,118
)
 
—

 
3,251,798

Short-term investments
1,452,270

 
18

 
—

 
—

 
1,452,288

Investments, available-for-sale
$
13,147,964

 
$
1,910,562

 
$
(204,757
)
 
$
(7,147
)
 
$
14,846,622


10
Table of Contents

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

 
September 30, 2014
 
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
$
105,569

 
$
(93
)
 
$
228,223

 
$
(6,003
)
 
$
333,792

 
$
(6,096
)
Obligations of states, municipalities and political subdivisions
116,161

 
(1,303
)
 
141,701

 
(6,645
)
 
257,862

 
(7,948
)
Foreign governments
26,513

 
(25
)
 
96,844

 
(1,045
)
 
123,357

 
(1,070
)
Commercial mortgage-backed securities
95,185

 
(363
)
 
153,822

 
(3,334
)
 
249,007

 
(3,697
)
Residential mortgage-backed securities
142,282

 
(3,623
)
 
225,826

 
(6,298
)
 
368,108

 
(9,921
)
Asset-backed securities
10,649

 
(72
)
 
53,835

 
(993
)
 
64,484

 
(1,065
)
Corporate bonds
112,929

 
(2,374
)
 
726,388

 
(17,027
)
 
839,317

 
(19,401
)
Total fixed maturities
609,288

 
(7,853
)
 
1,626,639

 
(41,345
)
 
2,235,927

 
(49,198
)
Equity securities:
 
 
 
 
 
 
 
 
 
 
 
Insurance, banks and other financial institutions
9,502

 
(878
)
 
—

 
—

 
9,502

 
(878
)
Industrial, consumer and all other
157,152

 
(9,605
)
 
—

 
—

 
157,152

 
(9,605
)
Total equity securities
166,654

 
(10,483
)
 
—

 
—

 
166,654

 
(10,483
)
Short-term investments
199,993

 
(3
)
 
—

 
—

 
199,993

 
(3
)
Total
$
975,935

 
$
(18,339
)
 
$
1,626,639

 
$
(41,345
)
 
$
2,602,574

 
$
(59,684
)

At September 30, 2014, the Company held 676 securities with a total estimated fair value of $2.6 billion and gross unrealized losses of $59.7 million. Of these 676 securities, 483 securities had been in a continuous unrealized loss position for one year or longer and had a total estimated fair value of $1.6 billion and gross unrealized losses of $41.3 million. All 483 securities were fixed maturities, of which 474 are attributable to the investment portfolio acquired with the Alterra acquisition, for which a new amortized cost was established at fair value as of the Acquisition Date. The Company does not intend to sell or believe it will be required to sell these fixed maturities before recovery of their amortized cost.


11
Table of Contents

 
December 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
$
587,929

 
$
(30,342
)
 
$
—

 
$
—

 
$
587,929

 
$
(30,342
)
Obligations of states, municipalities and political subdivisions
513,608

 
(27,238
)
 
3,512

 
(146
)
 
517,120

 
(27,384
)
Foreign governments
950,040

 
(54,411
)
 
—

 
—

 
950,040

 
(54,411
)
Commercial mortgage-backed securities
357,737

 
(11,796
)
 
—

 
—

 
357,737

 
(11,796
)
Residential mortgage-backed securities
437,675

 
(18,700
)
 
—

 
—

 
437,675

 
(18,700
)
Asset-backed securities
142,011

 
(1,614
)
 
—

 
—

 
142,011

 
(1,614
)
Corporate bonds
1,817,737

 
(66,539
)
 
—

 
—

 
1,817,737

 
(66,539
)
Total fixed maturities
4,806,737

 
(210,640
)
 
3,512

 
(146
)
 
4,810,249

 
(210,786
)
Equity securities:
 
 
 
 
 
 
 
 
 
 
 
Insurance, banks and other financial institutions
144

 
(4
)
 
—

 
—

 
144

 
(4
)
Industrial, consumer and all other
20,943

 
(714
)
 
27,735

 
(400
)
 
48,678

 
(1,114
)
Total equity securities
21,087

 
(718
)
 
27,735

 
(400
)
 
48,822

 
(1,118
)
Total
$
4,827,824

 
$
(211,358
)
 
$
31,247

 
$
(546
)
 
$
4,859,071

 
$
(211,904
)

At December 31, 2013, the Company held 1,364 securities with a total estimated fair value of $4.9 billion and gross unrealized losses of $211.9 million. Of these 1,364 securities, nine securities had been in a continuous unrealized loss position for one year or longer and had a total estimated fair value of $31.2 million and gross unrealized losses of $0.5 million. Of these securities, eight 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.

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.


12
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 decisions to reposition the investment portfolio, potential sales of investments to meet cash flow needs and, ultimately, current market prices.

c)The amortized cost and estimated fair value of fixed maturities at September 30, 2014 are shown below by contractual maturity.

(dollars in thousands)
Amortized
Cost
 
Estimated
Fair Value
Due in one year or less
$
721,700

 
$
727,576

Due after one year through five years
2,064,769

 
2,112,267

Due after five years through ten years
2,170,179

 
2,273,949

Due after ten years
3,582,410

 
3,768,822

 
8,539,058

 
8,882,614

Commercial mortgage-backed securities
444,601

 
442,562

Residential mortgage-backed securities
1,007,664

 
1,018,306

Asset-backed securities
132,064

 
131,165

Total fixed maturities
$
10,123,387

 
$
10,474,647


d)The following table presents the components of net investment income.

 
Quarter Ended September 30,
 
Nine Months Ended September 30,
(dollars in thousands)
2014
 
2013
 
2014
 
2013
Interest:
 
 
 
 
 
 
 
Municipal bonds (tax-exempt)
$
24,505

 
$
20,646

 
$
72,796

 
$
63,156

Municipal bonds (taxable)
13,523

 
7,810

 
35,133

 
20,471

Other taxable bonds
38,741

 
37,554

 
114,594

 
91,712

Short-term investments, including overnight deposits
1,530

 
1,042

 
4,612

 
2,316

Dividends on equity securities
14,678

 
12,059

 
46,042

 
35,600

Change in fair value of credit default swap
200

 
1,660

 
1,810

 
8,860

Income from equity method investments
2,253

 
8,828

 
7,294

 
15,711

Other
(466
)
 
176

 
(374
)
 
325

 
94,964

 
89,775

 
281,907

 
238,151

Investment expenses
(3,868
)
 
(3,583
)
 
(11,927
)
 
(9,363
)
Net investment income
$
91,096

 
$
86,192

 
$
269,980

 
$
228,788


13
Table of Contents


e)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 September 30,
 
Nine Months Ended September 30,
(dollars in thousands)
2014
 
2013
 
2014
 
2013
Cumulative credit loss, beginning balance
$
12,735

 
$
21,370

 
$
12,748

 
$
21,370

Additions:
 
 
 
 
 
 
 
Other-than-temporary impairment losses not previously recognized
—

 
—

 
—

 
—

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

 
—

 
—

 
—

Total additions
—

 
—

 
—

 
—

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

 
—

 
(13
)
 
—

Cumulative credit loss, ending balance
$
12,735

 
$
21,370

 
$
12,735

 
$
21,370


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

 
Quarter Ended September 30,
 
Nine Months Ended September 30,
(dollars in thousands)
2014
 
2013
 
2014
 
2013
Realized gains:
 
 
 
 
 
 
 
Sales of fixed maturities
$
739

 
$
4,933

 
$
6,381

 
$
6,031

Sales of equity securities
10,793

 
24,648

 
36,942

 
58,563

Other
134

 
398

 
11,958

 
451

Total realized gains
11,666

 
29,979

 
55,281

 
65,045

Realized losses:
 
 
 
 
 
 
 
Sales of fixed maturities
(1,658
)
 
(18,741
)
 
(17,805
)
 
(19,585
)
Sales of equity securities
(175
)
 
—

 
(373
)
 
(170
)
Other-than-temporary impairments
(2,851
)
 
—

 
(3,858
)
 
(4,589
)
Other
(2,787
)
 
—

 
(4,536
)
 
—

Total realized losses
(7,471
)
 
(18,741
)
 
(26,572
)
 
(24,344
)
Net realized investment gains
$
4,195

 
$
11,238

 
$
28,709

 
$
40,701

Change in net unrealized gains on investments:
 
 
 
 
 
 
 
Fixed maturities
$
41,615

 
$
(8,679
)
 
$
337,865

 
$
(346,476
)
Equity securities
(57,773
)
 
117,899

 
160,936

 
457,505

Short-term investments
37

 
(13
)
 
35

 
(15
)
Net increase (decrease)
$
(16,121
)
 
$
109,207

 
$
498,836

 
$
111,014



14
Table of Contents

g)The following table presents other-than-temporary impairment losses recognized in net income and included in net realized gains by investment type.
 
Quarter Ended September 30,
 
Nine Months Ended September 30,
(dollars in thousands)
2014
 
2013
 
2014
 
2013
Fixed maturities:
 
 
 
 
 
 
 
Obligations of states, municipalities and political subdivisions
$
—

 
$
—

 
$
—

 
$
(1,242
)
Commercial mortgage-backed securities
(61
)
 
—

 
(61
)
 
—

Residential mortgage-backed securities
—

 
—

 
—

 
(523
)
Asset-backed securities
—

 
—

 
(197
)
 
—

Corporate bonds
(46
)
 
—

 
(46
)
 
—

Total fixed maturities
(107
)
 
—

 
(304
)
 
(1,765
)
Equity securities:
 
 
 
 
 
 
 
Insurance, banks and other financial institutions
(202
)
 
—

 
(202
)
 
—

Industrial, consumer and all other
(2,542
)
 
—

 
(3,352
)
 
(2,824
)
Total equity securities
(2,744
)
 
—

 
(3,554
)
 
(2,824
)
Total
$
(2,851
)
 
$
—

 
$
(3,858
)
 
$
(4,589
)

5. Fair Value Measurements

FASB 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

15
Table of Contents

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, commercial mortgage-backed securities, residential mortgage-backed securities, asset-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 commercial mortgage-backed securities, residential mortgage-backed securities and asset-backed securities include the type of underlying assets, 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.

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. At both September 30, 2014 and December 31, 2013, 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. The credit default swap has a scheduled termination date of December 2014.

The fair value of the credit default swap is measured by the Company on a recurring basis using an external valuation model. 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.


16
Table of Contents

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.

 
September 30, 2014
(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
$
—

 
$
710,394

 
$
—

 
$
710,394

Obligations of states, municipalities and political subdivisions
—

 
4,139,192

 
—

 
4,139,192

Foreign governments
—

 
1,620,786

 
—

 
1,620,786

Commercial mortgage-backed securities
—

 
442,562

 
—

 
442,562

Residential mortgage-backed securities
—

 
1,018,306

 
—

 
1,018,306

Asset-backed securities
—

 
131,165

 
—

 
131,165

Corporate bonds
—

 
2,412,242

 
—

 
2,412,242

Total fixed maturities
—

 
10,474,647

 
—

 
10,474,647

Equity securities:
 
 
 
 
 
 
 
Insurance, banks and other financial institutions
1,160,556

 
—

 
—

 
1,160,556

Industrial, consumer and all other
2,546,407

 
—

 
—

 
2,546,407

Total equity securities
3,706,963

 
—

 
—

 
3,706,963

Short-term investments
1,561,280

 
125,411

 
—

 
1,686,691

Total investments available-for-sale
$
5,268,243

 
$
10,600,058

 
$
—

 
$
15,868,301

Liabilities:
 
 
 
 
 
 
 
Derivative contracts
$
—

 
$
—

 
$
420

 
$
420


 
December 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
$
—

 
$
1,194,231

 
$
—

 
$
1,194,231

Obligations of states, municipalities and political subdivisions
—

 
3,075,715

 
—

 
3,075,715

Foreign governments
—

 
1,461,054

 
—

 
1,461,054

Commercial mortgage-backed securities
—

 
367,821

 
—

 
367,821

Residential mortgage-backed securities
—

 
870,248

 
—

 
870,248

Asset-backed securities
—

 
188,289

 
—

 
188,289

Corporate bonds
—

 
2,985,178

 
—

 
2,985,178

Total fixed maturities
—

 
10,142,536

 
—

 
10,142,536

Equity securities:
 
 
 
 
 
 
 
Insurance, banks and other financial institutions
1,015,083

 
—

 
—

 
1,015,083

Industrial, consumer and all other
2,236,715

 
—

 
—

 
2,236,715

Total equity securities
3,251,798

 
—

 
—

 
3,251,798

Short-term investments
1,312,561

 
139,727

 
—

 
1,452,288

Total investments available-for-sale
$
4,564,359

 
$
10,282,263

 
$
—

 
$
14,846,622

Liabilities:
 
 
 
 
 
 
 
Derivative contracts
$
—

 
$
—

 
$
2,230

 
$
2,230



17
Table of Contents

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

 
Quarter Ended September 30,
 
Nine Months Ended September 30,
(dollars in thousands)
2014
 
2013
 
2014
 
2013
Derivatives, beginning of period
$
620

 
$
5,490

 
$
2,230

 
$
12,690

Total gains included in:
 
 
 
 
 
 
 
Net income
(200
)
 
(1,660
)
 
(1,810
)
 
(8,860
)
Other comprehensive income (loss)
—

 
—

 
—

 
—

Transfers into Level 3
—

 
—

 
—

 
—

Transfers out of Level 3
—

 
—

 
—

 
—

Derivatives, end of period
$
420

 
$
3,830

 
$
420

 
$
3,830

Net unrealized gains included in net income relating to liabilities held at September 30, 2014 and 2013 (1)
$
200

 
$
1,660

 
$
1,810

 
$
8,860

(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 quarter and nine months ended September 30, 2014 and 2013. The Company did not have any assets or liabilities measured at fair value on a non-recurring basis during the nine months ended September 30, 2014 and 2013.

6. Segment Reporting Disclosures

In conjunction with the continued integration of Alterra into the Company's insurance operations, during the first quarter of 2014, the Company changed the way it aggregates and monitors its ongoing underwriting results. Effective January 1, 2014, the Company monitors and reports its ongoing underwriting operations in the following three segments: U.S. Insurance, International Insurance and Reinsurance. In determining how to aggregate and monitor its underwriting results, the Company considers many factors, including the geographic location and regulatory environment of the insurance entity underwriting the risk, the nature of the insurance product sold, the type of account written and the type of customer served. The U.S. Insurance segment includes all direct business and facultative placements written by the Company's insurance subsidiaries domiciled in the United States. The International Insurance segment includes all direct business and facultative placements written by the Company's insurance subsidiaries domiciled outside of the United States, including the Company's syndicate at Lloyd's of London. The Reinsurance segment includes all treaty reinsurance written across the Company. Results for lines of business discontinued prior to, or in conjunction with, acquisitions, including the results attributable to the run-off of life and annuity reinsurance business previously written by Alterra, will continue to be reported in the Other Insurance (Discontinued Lines) segment. All investing activities related to the Company's insurance operations are included in the Investing segment.

The Company's non-insurance operations include the Company's Markel Ventures operations, which primarily consist of controlling interests in various industrial and service businesses. The Company's non-insurance operations also include the results of the Company's legal and professional consulting services, which were acquired through the acquisition of Abbey in January 2014. For purposes of segment reporting, the Company's non-insurance operations are not considered to be a reportable segment.

Segment profit for the Investing segment is measured by net investment income and net realized investment gains or losses. Segment profit or loss for each of the Company's underwriting 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 or loss for the Company's underwriting segments also includes other revenues and other expenses, primarily related to the run-off of managing general agent operations that were discontinued in conjunction with acquisitions. Other revenues and other expenses in the Other Insurance (Discontinued Lines) segment are comprised of the results attributable to the run-off of life and annuity reinsurance business.


18
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 and investing assets are not allocated to the U.S. Insurance, International Insurance, Reinsurance or Other Insurance (Discontinued Lines) segments since the Company does not manage its assets by underwriting segment. The Company does not allocate capital expenditures for long-lived assets to any of its underwriting segments for management reporting purposes.

a)The following tables summarize the Company's segment disclosures. The segment disclosures for the prior period have been revised to be consistent with the new segment structure.
 
Quarter Ended September 30, 2014
(dollars in thousands)
U.S.
Insurance
 
International
Insurance
 
Reinsurance
 
Other
Insurance
(Discontinued
Lines)
 
Investing
 
Consolidated
Gross premium volume
$
619,510

 
$
271,045

 
$
206,125

 
$
(230
)
 
$
—

 
$
1,096,450

Net written premiums
520,511

 
194,639

 
166,848

 
(217
)
 
—

 
881,781

 
 
 
 
 
 
 
 
 
 
 
 
Earned premiums
516,753

 
216,764

 
220,513

 
(23
)
 
—

 
954,007

Losses and loss adjustment expenses:
 
 
 
 
 
 
 
 
 
 
 
Current accident year
(348,877
)
 
(160,132
)
 
(155,189
)
 
—

 
—

 
(664,198
)
Prior accident years
60,944

 
30,791

 
8,258

 
(6,761
)
 
—

 
93,232

Underwriting, acquisition and insurance expenses
(202,765
)
 
(81,706
)
 
(65,874
)
 
(148
)
 
—

 
(350,493
)
Underwriting profit (loss)
26,055

 
5,717

 
7,708

 
(6,932
)
 
—

 
32,548

Net investment income
—

 
—

 
—

 
—

 
91,096

 
91,096

Net realized investment gains
—

 
—

 
—

 
—

 
4,195

 
4,195

Other revenues (insurance)
563

 
3,478

 
(864