Document
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, 2016
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 25, 2016: 13,991,499

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,
2016
 
December 31,
2015
 
(unaudited)
 
 
ASSETS
 
 
 
Investments, available-for-sale, at estimated fair value:
 
 
 
Fixed maturities (amortized cost of $9,563,157 in 2016 and $9,038,158 in 2015)
$
10,318,487

 
$
9,394,468

Equity securities (cost of $2,424,757 in 2016 and $2,208,834 in 2015)
4,510,427

 
4,074,475

Short-term investments (estimated fair value approximates cost)
1,989,305

 
1,642,261

Total Investments
16,818,219

 
15,111,204

Cash and cash equivalents
2,156,398

 
2,630,009

Restricted cash and cash equivalents
383,971

 
440,132

Receivables
1,312,685

 
1,113,703

Reinsurance recoverable on unpaid losses
2,041,928

 
2,016,665

Reinsurance recoverable on paid losses
62,254

 
50,123

Deferred policy acquisition costs
409,195

 
352,756

Prepaid reinsurance premiums
354,186

 
322,362

Goodwill
1,165,892

 
1,167,844

Intangible assets
733,415

 
792,372

Other assets
965,502

 
941,945

Total Assets
$
26,403,645

 
$
24,939,115

LIABILITIES AND EQUITY
 
 
 
Unpaid losses and loss adjustment expenses
$
10,258,290

 
$
10,251,953

Life and annuity benefits
1,155,672

 
1,123,275

Unearned premiums
2,474,277

 
2,166,105

Payables to insurance and reinsurance companies
256,793

 
224,921

Senior long-term debt and other debt (estimated fair value of $2,847,000 in 2016 and $2,403,000 in 2015)
2,589,350

 
2,239,271

Other liabilities
1,064,328

 
1,030,023

Total Liabilities
17,798,710

 
17,035,548

Redeemable noncontrolling interests
70,660

 
62,958

Commitments and contingencies

 

Shareholders' equity:
 
 
 
Common stock
3,365,750

 
3,342,357

Retained earnings
3,433,891

 
3,137,285

Accumulated other comprehensive income
1,727,642

 
1,354,508

Total Shareholders' Equity
8,527,283

 
7,834,150

Noncontrolling interests
6,992

 
6,459

Total Equity
8,534,275

 
7,840,609

Total Liabilities and Equity
$
26,403,645

 
$
24,939,115

See accompanying notes to consolidated financial statements.

3
Table of Contents

MARKEL CORPORATION AND SUBSIDIARIES

Consolidated Statements of Income and Comprehensive Income (Loss)
(Unaudited)
 
Quarter Ended September 30,
 
Nine Months Ended September 30,
 
2016
 
2015
 
2016
 
2015
 
(dollars in thousands, except per share data)
OPERATING REVENUES
 
 
 
 
 
 
 
Earned premiums
$
974,244

 
$
963,675

 
$
2,882,789

 
$
2,864,882

Net investment income
93,147

 
87,060

 
279,437

 
270,521

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

 
(18,281
)
 
(12,080
)
 
(23,373
)
Net realized investment gains, excluding other-than-temporary impairment losses
27,416

 
3,574

 
77,916

 
20,342

Net realized investment gains (losses)
27,416

 
(14,707
)
 
65,836

 
(3,031
)
Other revenues
336,475

 
306,736

 
955,339

 
817,151

Total Operating Revenues
1,431,282

 
1,342,764

 
4,183,401

 
3,949,523

OPERATING EXPENSES
 
 
 
 
 
 
 
Losses and loss adjustment expenses
579,405

 
484,737

 
1,564,925

 
1,467,926

Underwriting, acquisition and insurance expenses
372,521

 
365,619

 
1,112,789

 
1,085,956

Amortization of intangible assets
17,010

 
18,914

 
51,474

 
50,503

Other expenses
309,713

 
290,749

 
862,715

 
763,986

Total Operating Expenses
1,278,649

 
1,160,019

 
3,591,903

 
3,368,371

Operating Income
152,633

 
182,745

 
591,498

 
581,152

Interest expense
33,152

 
30,064

 
97,690

 
88,664

Loss on early extinguishment of debt
—

 
—

 
44,100

 
—

Income Before Income Taxes
119,481

 
152,681

 
449,708

 
492,488

Income tax expense
36,060

 
48,271

 
121,968

 
101,619

Net Income
83,421

 
104,410

 
327,740

 
390,869

Net income (loss) attributable to noncontrolling interests
(375
)
 
1,891

 
4,777

 
5,989

Net Income to Shareholders
$
83,796

 
$
102,519

 
$
322,963

 
$
384,880

 
 
 
 
 
 
 
 
OTHER COMPREHENSIVE INCOME (LOSS)
 
 
 
 
 
 
 
Change in net unrealized gains on investments, net of taxes:
 
 
 
 
 
 
 
Net holding gains (losses) arising during the period
$
23,098

 
$
(149,266
)
 
$
411,394

 
$
(258,386
)
Change in unrealized other-than-temporary impairment losses on fixed maturities arising during the period
(17
)
 
(8
)
 
(40
)
 
111

Reclassification adjustments for net gains (losses) included in net income
(9,758
)
 
6,000

 
(33,308
)
 
(8,037
)
Change in net unrealized gains on investments, net of taxes
13,323

 
(143,274
)
 
378,046

 
(266,312
)
Change in foreign currency translation adjustments, net of taxes
(8,349
)
 
(10,854
)
 
(6,141
)
 
(22,283
)
Change in net actuarial pension loss, net of taxes
390

 
475

 
1,247

 
1,407

Total Other Comprehensive Income (Loss)
5,364

 
(153,653
)
 
373,152

 
(287,188
)
Comprehensive Income (Loss)
88,785

 
(49,243
)
 
700,892

 
103,681

Comprehensive income (loss) attributable to noncontrolling interests
(376
)
 
1,900

 
4,795

 
5,942

Comprehensive Income (Loss) to Shareholders
$
89,161

 
$
(51,143
)
 
$
696,097

 
$
97,739

 
 
 
 
 
 
 
 
NET INCOME PER SHARE
 
 
 
 
 
 
 
Basic
$
5.62

 
$
7.43

 
$
22.27

 
$
27.76

Diluted
$
5.60

 
$
7.39

 
$
22.16

 
$
27.60


See accompanying notes to consolidated financial statements.

4
Table of Contents

MARKEL CORPORATION AND SUBSIDIARIES

Consolidated Statements of Changes in Equity
(Unaudited)
 
(in thousands)
Common Shares
 
Common
Stock
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Income
 
Total
Shareholders'
Equity
 
Noncontrolling
Interests
 
Total Equity
 
Redeemable
Noncontrolling
Interests
December 31, 2014
13,962

 
$
3,308,395

 
$
2,581,866

 
$
1,704,557

 
$
7,594,818

 
$
7,184

 
$
7,602,002

 
$
61,048

Net income
 
 
 
 
384,880

 
—

 
384,880

 
745

 
385,625

 
5,244

Other comprehensive loss
 
 
 
 
—

 
(287,141
)
 
(287,141
)
 
—

 
(287,141
)
 
(47
)
Comprehensive Income
 
 
 
 
 
 
 
 
97,739

 
745

 
98,484

 
5,197

Issuance of common stock
20

 
3,971

 
—

 
—

 
3,971

 
—

 
3,971

 
—

Repurchase of common stock
(32
)
 
—

 
(27,262
)
 
—

 
(27,262
)
 
—

 
(27,262
)
 
—

Restricted stock units expensed
—

 
19,983

 
—

 
—

 
19,983

 
—

 
19,983

 
—

Adjustment of redeemable noncontrolling interests
—

 
—

 
3,091

 
—

 
3,091

 
—

 
3,091

 
(3,091
)
Purchase of noncontrolling interest
—

 
(1,447
)
 
—

 
—

 
(1,447
)
 
—

 
(1,447
)
 
(8,224
)
Other
—

 
4,306

 
31

 
—

 
4,337

 
348

 
4,685

 
(4,346
)
September 30, 2015
13,950

 
$
3,335,208

 
$
2,942,606

 
$
1,417,416

 
$
7,695,230

 
$
8,277

 
$
7,703,507

 
$
50,584

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2015
13,959

 
$
3,342,357

 
$
3,137,285

 
$
1,354,508

 
$
7,834,150

 
$
6,459

 
$
7,840,609

 
$
62,958

Net income
 
 
 
 
322,963

 
—

 
322,963

 
605

 
323,568

 
4,172

Other comprehensive income
 
 
 
 
—

 
373,134

 
373,134

 
—

 
373,134

 
18

Comprehensive Income
 
 
 
 
 
 
 
 
696,097

 
605

 
696,702

 
4,190

Issuance of common stock
48

 
4,531

 
—

 
—

 
4,531

 
—

 
4,531

 
—

Repurchase of common stock
(16
)
 
—

 
(15,503
)
 
—

 
(15,503
)
 
—

 
(15,503
)
 
—

Restricted stock units expensed
—

 
18,512

 
—

 
—

 
18,512

 
—

 
18,512

 
—

Adjustment of redeemable noncontrolling interests
—

 
—

 
(10,909
)
 
—

 
(10,909
)
 
—

 
(10,909
)
 
10,909

Purchase of noncontrolling interest
—

 
350

 
—

 
—

 
350

 
—

 
350

 
(3,517
)
Other
—

 
—

 
55

 
—

 
55

 
(72
)
 
(17
)
 
(3,880
)
September 30, 2016
13,991

 
$
3,365,750

 
$
3,433,891

 
$
1,727,642

 
$
8,527,283

 
$
6,992

 
$
8,534,275

 
$
70,660


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,
 
2016
 
2015
 
(dollars in thousands)
OPERATING ACTIVITIES
 
 
 
Net income
$
327,740

 
$
390,869

Adjustments to reconcile net income to net cash provided by operating activities
(3,383
)
 
159,516

Net Cash Provided By Operating Activities
324,357

 
550,385

INVESTING ACTIVITIES
 
 
 
Proceeds from sales of fixed maturities and equity securities
330,110

 
211,479

Proceeds from maturities, calls and prepayments of fixed maturities
734,010

 
1,162,500

Cost of fixed maturities and equity securities purchased
(1,728,396
)
 
(928,601
)
Net change in short-term investments
(340,742
)
 
(687,673
)
Proceeds from sales of equity method investments
9,325

 
22,204

Cost of equity method investments
(4,226
)
 
(21,464
)
Change in restricted cash and cash equivalents
61,071

 
136,203

Additions to property and equipment
(49,565
)
 
(62,055
)
Acquisitions, net of cash acquired
(5,762
)
 
—

Other
(392
)
 
(761
)
Net Cash Used By Investing Activities
(994,567
)
 
(168,168
)
FINANCING ACTIVITIES
 
 
 
Additions to senior long-term debt and other debt
553,537

 
49,771

Repayment of senior long-term debt and other debt
(260,086
)
 
(55,743
)
Premiums and fees related to early extinguishment of debt
(43,691
)
 
—

Repurchases of common stock
(15,503
)
 
(27,262
)
Issuance of common stock
4,531

 
3,971

Payment of contingent consideration
(14,219
)
 
(9,263
)
Purchase of noncontrolling interests
(3,167
)
 
(12,474
)
Distributions to noncontrolling interests
(3,931
)
 
(3,724
)
Other
(14,478
)
 
(1,957
)
Net Cash Provided (Used) By Financing Activities
202,993

 
(56,681
)
Effect of foreign currency rate changes on cash and cash equivalents
(6,394
)
 
(24,504
)
Increase (decrease) in cash and cash equivalents
(473,611
)
 
301,032

Cash and cash equivalents at beginning of period
2,630,009

 
1,960,169

CASH AND CASH EQUIVALENTS AT END OF PERIOD
$
2,156,398

 
$
2,261,201


See accompanying notes to consolidated financial statements.

6
Table of Contents

MARKEL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Summary of Significant Accounting Policies

a) 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.

The consolidated balance sheet as of September 30, 2016, the related consolidated statements of income and comprehensive income (loss) for the quarters and nine months ended September 30, 2016 and 2015, and the consolidated statements of changes in equity and cash flows for the nine months ended September 30, 2016 and 2015 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, 2015 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 consolidated subsidiaries, as well as any variable interest entities (VIEs) that meet the requirements for consolidation (the Company). All significant intercompany balances and transactions have been eliminated in consolidation. 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. In addition to the policies set forth below, readers are urged to review the Company's 2015 Annual Report on Form 10-K for a more complete description of the Company's business and accounting policies.

b) Variable Interest Entities. The Company determines whether it has relationships with entities defined as VIEs in accordance with Accounting Standards Codification (ASC) Topic 810, Consolidation. Under this guidance, a VIE is consolidated by the variable interest holder that is determined to be the primary beneficiary.

An entity in which the Company holds a variable interest is a VIE if any of the following conditions exist: (a) the total equity investment at risk is not sufficient to permit the entity to finance its activities without additional subordinated financial support, (b) as a group, the holders of equity investment at risk lack either the direct or indirect ability through voting rights or similar rights to make decisions about an entity's activities that most significantly impact the entity’s economic performance or the obligation to absorb the expected losses or right to receive the expected residual returns, or (c) the voting rights of some investors are disproportionate to their obligation to absorb the expected losses of the entity, their rights to receive the expected residual returns of the entity, or both and substantially all of the entity's activities either involve or are conducted on behalf of an investor with disproportionately few voting rights.

The primary beneficiary is defined as the variable interest holder that is determined to have the controlling financial interest as a result of having both (a) the power to direct the activities of a VIE that most significantly impact the economic performance of the VIE and (b) the obligation to absorb losses or right to receive benefits from the VIE that could potentially be significant to the VIE.

The Company determines whether an entity is a VIE at the inception of our variable interest in the entity and upon the occurrence of certain reconsideration events. The Company continually reassesses whether it is the primary beneficiary of VIEs in which it holds a variable interest.

7
Table of Contents


c) Revenue Recognition.

Investment Management and Performance Fees

Investment management fee income is recognized over the period in which investment management services are provided and is calculated and billed monthly based on the net asset value of the accounts managed. Performance fee arrangements entitle the Company to participate, on a fixed-percentage basis, in any net income generated in excess of an agreed-upon threshold as established by the underlying investment management agreements. In general, net income is calculated at the end of each calendar year and performance fees are payable annually. Following the preferred method identified in the ASC Topic 605, Revenue Recognition, such performance fee income is recorded at the conclusion of the contractual performance period, when all contingencies are resolved.

2. Recent Accounting Pronouncements

Effective January 1, 2016, the Company adopted Financial Accounting Standards Board (FASB) Accounting Standards Update (ASU) No. 2015-02, Consolidation (Topic 810): Amendments to the Consolidation Analysis, which changes the way reporting enterprises evaluate whether (a) they should consolidate limited partnerships and similar entities, (b) fees paid to a decision maker or service provider are variable interests in a VIE, and (c) variable interests in a VIE held by related parties of the reporting enterprise require the reporting enterprise to consolidate the VIE. It also eliminates the VIE consolidation model based on majority exposure to variability that applied to certain investment companies and similar entities. The ASU also significantly changes how to evaluate voting rights for entities that are not similar to limited partnerships when determining whether the entity is a VIE, which may affect entities for which the decision making rights are conveyed through a contractual arrangement. The adoption of this guidance did not result in any changes to our previous consolidation conclusions.

Effective January 1, 2016, the Company adopted FASB ASU No. 2015-03, Interest-Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs. ASU No. 2015-03 requires that debt issuance costs related to a recognized debt liability be presented on the balance sheet as a direct deduction from the debt liability, similar to the presentation of debt discounts. The cost of issuing debt is no longer recorded as a separate asset on the balance sheet. The amortization of debt issuance costs continues to be included in interest expense. ASU No. 2015-03 was applied retrospectively to all periods presented. As a result, debt issuance costs totaling $2.2 million were reclassified from other assets to senior long-term debt and other debt as of December 31, 2015. The adoption of this ASU did not have an impact on the Company's results of operations or cash flows.
Effective January 1, 2016, the Company adopted FASB ASU No. 2015-05, Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customer's Accounting for Fees Paid in a Cloud Computing Arrangement, which clarifies that software licenses contained in a cloud computing arrangement should be capitalized if the customer has the right to take possession of the software and the ability to run the software outside of the cloud computing arrangement. The adoption of this ASU did not have an impact on the Company's financial position, results of operations or cash flows.

Effective January 1, 2016, the Company adopted FASB ASU No. 2015-16, Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments. ASU No. 2015-16 eliminates the requirement to retrospectively adjust the financial statements for measurement-period adjustments that occur in periods after a business combination is consummated. The adoption of this ASU did not have an impact on the Company's financial position, results of operations or cash flows and will be applied on a prospective basis, as applicable.

During the second quarter of 2016, the Company early adopted FASB ASU No. 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting, which changes several aspects of the accounting for share-based payment award transactions. Under the new guidance, all excess tax benefits or deficiencies associated with share-based payment award transactions are required to be recognized as an income tax benefit or expense in net income when the awards vest or are settled, with the corresponding cash flows recognized as an operating activity in the statement of cash flows. Excess tax benefits and deficiencies are no longer recognized in additional paid-in-capital. The new guidance also allows an employer to repurchase more of an employee's shares for tax witholding purposes without triggering liability accounting and to make a policy election to account for forfeitures as they occur, rather than estimating forfeitures upon issuance of the award. Upon adoption of ASU No. 2016-09, the Company elected to account for forfeitures as they occur, which had no impact on the consolidated financial statements. The provisions of ASU No. 2016-09 were adopted as of January 1, 2016 on a prospective basis and did not have a material impact on the Company's financial position, results of operations or cash flows.



8
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. In August 2015, the FASB issued ASU No. 2015-14, Revenue from Contracts with Customers (Topic 606), Deferral of the Effective Date, which deferred the original effective date of ASU No. 2014-09 by one year. As a result, ASU No. 2014-09 becomes effective for the Company during the first quarter of 2018 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 permitted, but not before the first quarter of 2017. ASU No. 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Consideration (Reporting Revenue Gross versus Net), ASU No. 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing and ASU No. 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients were issued in March, April and May 2016, respectively, as amendments to ASU No. 2014-09. These amendments will be evaluated and adopted in conjunction with ASU No. 2014-09. The Company is currently evaluating ASU No. 2014-09, and the related amendments, to determine the potential impact that adopting this standard will have on its consolidated financial statements. Adoption of this ASU is not expected to have a material impact on the Company's insurance operations, but may have a material impact on the Company's non-insurance operations.

In May 2015, the FASB issued ASU No. 2015-09, Financial Services-Insurance (Topic 944): Disclosures about Short-Duration Contracts. The ASU requires significant new disclosures for insurers relating to short-duration insurance contract claims and the unpaid claims liability rollforward for long and short-duration contracts. The guidance requires annual tabular disclosure, on a disaggregated basis, of undiscounted incurred and paid claim and allocated claim adjustment expense development by accident year, on a net basis after reinsurance, for up to 10 years. Tables must also include the total incurred but not reported claims liabilities, plus expected development on reported claims, and claims frequency for each accident year. A description of estimation methodologies and any significant changes in methodologies and assumptions used to calculate the liability and frequency is also required. Based on the disaggregated claims information in the tables, disclosure of historical average annual percentage payout of incurred claims is also required. Interim period disclosures must include a tabular rollforward and related qualitative information for the liability for unpaid losses and loss adjustment expenses. Annual disclosures required by ASU No. 2015-09 become effective for the Company during 2016, with interim disclosures required beginning in the first quarter of 2017. The ASU must be applied retrospectively by providing comparative disclosures for each period presented. Early application is permitted. The adoption of this ASU will not have an impact on the Company's financial position, results of operations or cash flows, but will expand the nature and extent of its insurance contract disclosures, as described above.

In July 2015, the FASB issued ASU No. 2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory. The ASU changes the measurement principle for inventory from the lower of cost or market to lower of cost and net realizable value and eliminates the requirement to consider replacement cost or net realizable value less an approximately normal profit margin when measuring inventory. ASU No. 2015-11 becomes effective for the Company during the first quarter of 2017 and will be applied prospectively. Adoption of this ASU is not expected to have a material impact on the Company's financial position, results of operations or cash flows.


9
Table of Contents

In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments (Topic 825): Recognition and Measurement of Financial Assets and Financial Liabilities. The ASU significantly changes the income statement impact of equity investments and the recognition of changes in fair value of financial liabilities attributable to an entity's own credit risk when the fair value option is elected. The ASU requires equity instruments that do not result in consolidation and are not accounted for under the equity method to be measured at fair value and to recognize any changes in fair value in net income rather than other comprehensive income (loss). ASU No. 2016-01 becomes effective for the Company during the first quarter of 2018 and will be applied using a cumulative-effect adjustment to retained earnings as of the beginning of the fiscal year of adoption. The provisions related to equity investments without a readily determinable fair value will be applied prospectively to equity investments as of the adoption date. Early adoption is permitted for certain provisions of the ASU. The Company is currently evaluating ASU No. 2016-01 to determine the potential impact that adopting this standard will have on the consolidated financial statements. Adoption of this ASU is not expected to have a material impact on the Company's financial position, cash flows, or total comprehensive income (loss), but will have a significant impact on the Company's results of operations as changes in fair value will be presented in net income rather than other comprehensive income (loss).

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). The ASU requires lessees to put most leases on their balance sheets as a lease liability with a corresponding right-of-use asset, but continue to recognize the related leasing expense within net income. The guidance also eliminates the real estate-specific provisions for all entities. For lessors, the guidance modifies the classification criteria and the accounting for sales-type and direct financing leases. ASU No. 2016-02 becomes effective for the Company during the first quarter of 2019 and will be applied under a modified retrospective approach for leases that exist or are entered into after the beginning of the earliest comparative period in the financial statements. Early adoption is permitted. The Company is currently evaluating ASU No. 2016-02 to determine the potential impact that adopting this standard will have on the consolidated financial statements.

In March 2016, the FASB issued ASU No. 2016-07, Investments - Equity Method and Joint Ventures (Topic 323): Simplifying the Transition to the Equity Method of Accounting. The ASU eliminates the requirement for an investor to retroactively apply the equity method when its increase in ownership interest or degree of influence in an investee triggers equity method accounting. ASU No. 2016-07 becomes effective for the Company during the first quarter of 2017 and will be applied prospectively. Early adoption is permitted. Adoption of this ASU is not expected to have an impact on the Company's financial position, results of operations or cash flows.

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The ASU replaces the current incurred loss model used to measure impairment losses with an expected loss model for trade, reinsurance, and other receivables as well as financial instruments measured at amortized cost. For available-for-sale debt securities, the ASU requires entities to record impairments as an allowance, rather than a reduction of the amortized cost, as is currently required under the other-than-temporary impairment model. ASU No. 2016-13 becomes effective for the Company during the first quarter of 2020 and will be applied using a modified-retrospective approach through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective. The Company is currently evaluating ASU No. 2016-13 to determine the potential impact that adopting this standard will have on the consolidated financial statements.

In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments, which is intended to reduce diversity in practice in how certain transactions are classified in the statement of cash flows. Some of the topics covered by the ASU include the classification of debt prepayment and extinguishment costs, contingent consideration payments made after a business combination and distributions from equity method investees. ASU No. 2016-15 becomes effective for the Company during the first quarter of 2018 and will be applied using a retrospective transition approach. Early adoption is permitted. The Company is currently evaluating ASU No. 2016-15 to determine the potential impact that adopting this standard will have on the consolidated statements of cash flows. Adoption of this ASU will not impact the Company's financial position or results of operations and is not expected to have a material impact on the Company's consolidated statements of cash flows.


10
Table of Contents

3. Acquisitions

In December 2015, the Company acquired 80% of the outstanding shares of CapTech Ventures, Inc. (CapTech), a privately held company headquartered in Richmond, Virginia. CapTech is a management and IT consulting firm, providing services and solutions to a wide array of customers. Total consideration for the CapTech acquisition was $60.6 million, which included the estimated fair value of contingent consideration the Company expected to pay based on CapTech's earnings, as defined in the stock purchase agreement, through 2018. As of December 31, 2015, the purchase price was preliminarily allocated to the acquired assets and liabilities based on the estimated fair values at the acquisition date. During the first quarter of 2016, the Company completed the process of determining the fair value of the assets and liabilities acquired with CapTech. There were no material adjustments to the provisional estimates recorded as of December 31, 2015. However, during the third quarter of 2016, the Company increased its estimate of the contingent consideration it expects to pay based on an increase in the estimate of CapTech's earnings beyond the initial projection, which resulted in a charge to other expenses of $10.3 million. Results attributable to this acquisition are included with the Company's non-insurance operations, which are not included in a reportable segment.

4. Investments

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

 
September 30, 2016
(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
$
659,539

 
$
24,943

 
$
(99
)
 
$
—

 
$
684,383

Obligations of states, municipalities and political subdivisions
4,259,553

 
318,183

 
(3,081
)
 
—

 
4,574,655

Foreign governments
1,334,364

 
237,498

 
(15
)
 
—

 
1,571,847

Commercial mortgage-backed securities
981,613

 
46,791

 
(396
)
 
—

 
1,028,008

Residential mortgage-backed securities
780,631

 
49,568

 
(586
)
 
(2,258
)
 
827,355

Asset-backed securities
27,911

 
83

 
(16
)
 
—

 
27,978

Corporate bonds
1,519,546

 
87,459

 
(1,071
)
 
(1,673
)
 
1,604,261

Total fixed maturities
9,563,157

 
764,525

 
(5,264
)
 
(3,931
)
 
10,318,487

Equity securities:
 
 
 
 
 
 
 
 
 
Insurance, banks and other financial institutions
841,416

 
807,430

 
(9,770
)
 
—

 
1,639,076

Industrial, consumer and all other
1,583,341

 
1,295,784

 
(7,774
)
 
—

 
2,871,351

Total equity securities
2,424,757

 
2,103,214

 
(17,544
)
 
—

 
4,510,427

Short-term investments
1,989,124

 
181

 
—

 
—

 
1,989,305

Investments, available-for-sale
$
13,977,038

 
$
2,867,920

 
$
(22,808
)
 
$
(3,931
)
 
$
16,818,219


11
Table of Contents

 
December 31, 2015
(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
$
695,652

 
$
9,836

 
$
(4,781
)
 
$
—

 
$
700,707

Obligations of states, municipalities and political subdivisions
3,817,136

 
204,302

 
(8,225
)
 
—

 
4,013,213

Foreign governments
1,302,329

 
115,809

 
(1,681
)
 
—

 
1,416,457

Commercial mortgage-backed securities
657,670

 
6,867

 
(4,999
)
 
—

 
659,538

Residential mortgage-backed securities
837,964

 
22,563

 
(4,022
)
 
(2,258
)
 
854,247

Asset-backed securities
36,462

 
15

 
(406
)
 
—

 
36,071

Corporate bonds
1,690,945

 
41,123

 
(16,209
)
 
(1,624
)
 
1,714,235

Total fixed maturities
9,038,158

 
400,515

 
(40,323
)
 
(3,882
)
 
9,394,468

Equity securities:
 
 
 
 
 
 
 
 
 
Insurance, banks and other financial institutions
651,002

 
690,271

 
(6,551
)
 
—

 
1,334,722

Industrial, consumer and all other
1,557,832

 
1,227,052

 
(45,131
)
 
—

 
2,739,753

Total equity securities
2,208,834

 
1,917,323

 
(51,682
)
 
—

 
4,074,475

Short-term investments
1,642,103

 
167

 
(9
)
 
—

 
1,642,261

Investments, available-for-sale
$
12,889,095

 
$
2,318,005

 
$
(92,014
)
 
$
(3,882
)
 
$
15,111,204


12
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, 2016
 
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
$
26,599

 
$
(96
)
 
$
7,700

 
$
(3
)
 
$
34,299

 
$
(99
)
Obligations of states, municipalities and political subdivisions
156,618

 
(1,404
)
 
42,834

 
(1,677
)
 
199,452

 
(3,081
)
Foreign governments
7,159

 
(10
)
 
5,015

 
(5
)
 
12,174

 
(15
)
Commercial mortgage-backed securities
14,318

 
(45
)
 
43,475

 
(351
)
 
57,793

 
(396
)
Residential mortgage-backed securities
7,473

 
(2,311
)
 
85,864

 
(533
)
 
93,337

 
(2,844
)
Asset-backed securities
6,312

 
(5
)
 
6,236

 
(11
)
 
12,548

 
(16
)
Corporate bonds
73,320

 
(1,736
)
 
95,302

 
(1,008
)
 
168,622

 
(2,744
)
Total fixed maturities
291,799

 
(5,607
)
 
286,426

 
(3,588
)
 
578,225

 
(9,195
)
Equity securities:
 
 
 
 
 
 
 
 
 
 
 
Insurance, banks and other financial institutions
22,769

 
(1,456
)
 
37,751

 
(8,314
)
 
60,520

 
(9,770
)
Industrial, consumer and all other
23,713

 
(2,315
)
 
138,245

 
(5,459
)
 
161,958

 
(7,774
)
Total equity securities
46,482

 
(3,771
)
 
175,996

 
(13,773
)
 
222,478

 
(17,544
)
Total
$
338,281

 
$
(9,378
)
 
$
462,422

 
$
(17,361
)
 
$
800,703

 
$
(26,739
)

At September 30, 2016, the Company held 220 securities with a total estimated fair value of $800.7 million and gross unrealized losses of $26.7 million. Of these 220 securities, 118 securities had been in a continuous unrealized loss position for one year or longer and had a total estimated fair value of $462.4 million and gross unrealized losses of $17.4 million. Of these securities, 101 securities were fixed maturities and 17 were equity securities. The Company does not intend to sell or believe it will be required to sell these fixed maturities before recovery of their amortized cost. The Company has the ability and intent to hold these equity securities for a period of time sufficient to allow for the anticipated recovery of their fair value.


13
Table of Contents

 
December 31, 2015
 
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
$
427,003

 
$
(3,648
)
 
$
92,552

 
$
(1,133
)
 
$
519,555

 
$
(4,781
)
Obligations of states, municipalities and political subdivisions
169,362

 
(4,864
)
 
70,101

 
(3,361
)
 
239,463

 
(8,225
)
Foreign governments
51,328

 
(249
)
 
40,345

 
(1,432
)
 
91,673

 
(1,681
)
Commercial mortgage-backed securities
289,058

 
(3,600
)
 
95,843

 
(1,399
)
 
384,901

 
(4,999
)
Residential mortgage-backed securities
78,814

 
(2,858
)
 
137,100

 
(3,422
)
 
215,914

 
(6,280
)
Asset-backed securities
6,228

 
(54
)
 
24,315

 
(352
)
 
30,543

 
(406
)
Corporate bonds
470,694

 
(9,509
)
 
343,737

 
(8,324
)
 
814,431

 
(17,833
)
Total fixed maturities
1,492,487

 
(24,782
)
 
803,993

 
(19,423
)
 
2,296,480

 
(44,205
)
Equity securities:
 
 
 
 
 
 
 
 
 
 
 
Insurance, banks and other financial institutions
63,873

 
(6,384
)
 
6,247

 
(167
)
 
70,120

 
(6,551
)
Industrial, consumer and all other
344,857

 
(44,879
)
 
2,907

 
(252
)
 
347,764

 
(45,131
)
Total equity securities
408,730

 
(51,263
)
 
9,154

 
(419
)
 
417,884

 
(51,682
)
Short-term investments
129,473

 
(9
)
 
—

 
—

 
129,473

 
(9
)
Total
$
2,030,690

 
$
(76,054
)
 
$
813,147

 
$
(19,842
)
 
$
2,843,837

 
$
(95,896
)

At December 31, 2015, the Company held 659 securities with a total estimated fair value of $2.8 billion and gross unrealized losses of $95.9 million. Of these 659 securities, 271 securities had been in a continuous unrealized loss position for one year or longer and had a total estimated fair value of $813.1 million and gross unrealized losses of $19.8 million. Of these securities, 264 securities were fixed maturities and seven 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 (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.


14
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, 2016 are shown below by contractual maturity.

(dollars in thousands)
Amortized
Cost
 
Estimated
Fair Value
Due in one year or less
$
798,670

 
$
803,039

Due after one year through five years
1,292,802

 
1,349,605

Due after five years through ten years
1,650,289

 
1,791,219

Due after ten years
4,031,241

 
4,491,283

 
7,773,002

 
8,435,146

Commercial mortgage-backed securities
981,613

 
1,028,008

Residential mortgage-backed securities
780,631

 
827,355

Asset-backed securities
27,911

 
27,978

Total fixed maturities
$
9,563,157

 
$
10,318,487


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

 
Quarter Ended September 30,
 
Nine Months Ended September 30,
(dollars in thousands)
2016
 
2015
 
2016
 
2015
Interest:
 
 
 
 
 
 
 
Municipal bonds (tax-exempt)
$
22,136

 
$
21,979

 
$
66,621

 
$
72,124

Municipal bonds (taxable)
16,710

 
14,667

 
48,820

 
42,917

Other taxable bonds
36,697

 
34,368

 
108,975

 
103,519

Short-term investments, including overnight deposits
2,878

 
1,287

 
7,823

 
3,654

Dividends on equity securities
17,308

 
17,887

 
51,718

 
55,544

Income (loss) from equity method investments
1,232

 
(4
)
 
4,900

 
3,052

Other
(60
)
 
37

 
2,614

 
577

 
96,901

 
90,221

 
291,471

 
281,387

Investment expenses
(3,754
)
 
(3,161
)
 
(12,034
)
 
(10,866
)
Net investment income
$
93,147

 
$
87,060

 
$
279,437

 
$
270,521



15
Table of Contents

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

 
Quarter Ended September 30,
 
Nine Months Ended September 30,
(dollars in thousands)
2016
 
2015
 
2016
 
2015
Realized gains:
 
 
 
 
 
 
 
Sales of fixed maturities
$
3,698

 
$
435

 
$
4,658

 
$
2,769

Sales of equity securities
18,418

 
11,329

 
63,931

 
34,285

Other
423

 
1,026

 
1,117

 
3,297

Total realized gains
22,539

 
12,790

 
69,706

 
40,351

Realized losses:
 
 
 
 
 
 
 
Sales of fixed maturities
(60
)
 
(3,730
)
 
(608
)
 
(3,947
)
Sales of equity securities
(4,187
)
 
(400
)
 
(6,672
)
 
(672
)
Other-than-temporary impairments
—

 
(18,281
)
 
(12,080
)
 
(23,373
)
Other
(55
)
 
(279
)
 
(2,972
)
 
(364
)
Total realized losses
(4,302
)
 
(22,690
)
 
(22,332
)
 
(28,356
)
Gains (losses) on securities measured at fair value through net income
9,179

 
(4,807
)
 
18,462

 
(15,026
)
Net realized investment gains (losses)
$
27,416

 
$
(14,707
)
 
$
65,836

 
$
(3,031
)
Change in net unrealized gains on investments included in other comprehensive income (loss):
 
 
 
 
 
 
 
Fixed maturities
$
(53,962
)
 
$
102,844

 
$
399,020

 
$
(77,369
)
Equity securities
80,285

 
(313,075
)
 
220,029

 
(319,522
)
Short-term investments
58

 
45

 
23

 
36

Net increase (decrease)
$
26,381

 
$
(210,186
)
 
$
619,072

 
$
(396,855
)

There were no write downs for other-than-temporary declines in the estimated fair value of investments for the quarter ended September 30, 2016. For the nine months ended September 30, 2016, other-than-temporary impairment losses recognized in net income and included in net realized investment gains totaled $12.1 million and were attributable to 21 equity securities. The write downs for the nine-month period included $10.8 million related to equities in industrial, consumer, or other types of businesses and $1.3 million related to equities in insurance, banks, and other financial institutions. For the quarter ended September 30, 2015, other-than-temporary impairment losses recognized in net income and included in net realized investment losses totaled $18.3 million and were attributable to eight equity securities. The write downs for the quarter included $14.3 million related to equities in industrial, consumer, or other types of businesses and $4.0 million related to equities in insurance, banks, and other financial institutions. For the nine months ended September 30, 2015, other-than-temporary impairment losses recognized in net income and included in net realized investment losses totaled $23.4 million and were attributable to 16 equity securities. The write downs for the nine-month period included $18.8 million related to equities in industrial, consumer, or other types of businesses and $4.6 million related to equities in insurance, banks, and other financial institutions.

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.


16
Table of Contents

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, commercial mortgage-backed securities, residential mortgage-backed securities, asset-backed securities and corporate debt securities. Level 3 investments include the Company's investments in insurance-linked securities funds (the ILS Funds), as further described in note 12, which are not traded on an active exchange and are valued using unobservable inputs.

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.

Due to the significance of unobservable inputs required in measuring the fair value of the Company's investments in the ILS Funds, these investments are classified as Level 3 within the fair value hierarchy. Changes in fair value of the ILS Funds are included in net realized gains (losses) in net income. The fair value of the securities are derived using their reported net asset value (NAV) as the primary input, as well as other observable and unobservable inputs as deemed necessary by management. Management has obtained an understanding of the inputs, assumptions, process, and controls used to determine NAV, which is calculated by an independent third party. Unobservable inputs to the NAV calculations include assumptions around premium earnings patterns and loss reserve estimates for the underlying securitized reinsurance contracts in which the ILS Funds invest. Significant unobservable inputs used in the valuation of these investments include an adjustment to include the fair value of the equity that was issued by one of the ILS Funds in exchange for notes receivable, rather than cash, which is excluded from NAV. The Company's investments in the ILS Funds are redeemable annually as of January 1st of each calendar year.

17
Table of Contents



The Company's valuation policies and procedures for Level 3 investments are determined by management. Fair value measurements are analyzed quarterly to ensure the change in fair value from prior periods is reasonable relative to management's understanding of the underlying investments, recent market trends and external market data, which includes the price of a comparable security and an insurance-linked security index.

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 measured at fair value on a recurring basis by level within the fair value hierarchy.

 
September 30, 2016
(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
$
—

 
$
684,383

 
$
—

 
$
684,383

Obligations of states, municipalities and political subdivisions
—

 
4,574,655

 
—

 
4,574,655

Foreign governments
—

 
1,571,847

 
—

 
1,571,847

Commercial mortgage-backed securities
—

 
1,028,008

 
—

 
1,028,008

Residential mortgage-backed securities
—

 
827,355

 
—

 
827,355

Asset-backed securities
—

 
27,978

 
—

 
27,978

Corporate bonds
—

 
1,604,261

 
—

 
1,604,261

Total fixed maturities
—

 
10,318,487

 
—

 
10,318,487

Equity securities:
 
 
 
 
 
 
 
Insurance, banks and other financial institutions
1,448,672

 
—

 
190,404

 
1,639,076

Industrial, consumer and all other
2,871,351

 
—

 
—

 
2,871,351

Total equity securities
4,320,023

 
—

 
190,404

 
4,510,427

Short-term investments
1,903,399

 
85,906

 
—

 
1,989,305

Total investments available-for-sale
$
6,223,422

 
$
10,404,393

 
$
190,404

 
$
16,818,219



18
Table of Contents

 
December 31, 2015
(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
$
—

 
$
700,707

 
$
—

 
$
700,707

Obligations of states, municipalities and political subdivisions
—

 
4,013,213

 
—

 
4,013,213

Foreign governments
—

 
1,416,457

 
—

 
1,416,457

Commercial mortgage-backed securities
—

 
659,538

 
—

 
659,538

Residential mortgage-backed securities
—

 
854,247

 
—

 
854,247

Asset-backed securities
—

 
36,071

 
—

 
36,071

Corporate bonds
—

 
1,714,235

 
—

 
1,714,235

Total fixed maturities
—

 
9,394,468

 
—

 
9,394,468

Equity securities:
 
 
 
 
 
 
 
Insurance, banks and other financial institutions
1,334,722

 
—

 
—

 
1,334,722

Industrial, consumer and all other
2,739,753

 
—

 
—

 
2,739,753

Total equity securities
4,074,475

 
—

 
—

 
4,074,475

Short-term investments
1,529,924

 
112,337

 
—

 
1,642,261

Total investments available-for-sale
$
5,604,399

 
$
9,506,805

 
$
—

 
$
15,111,204


The following table summarizes changes in Level 3 investments measured at fair value on a recurring basis.
 
Quarter Ended September 30,
 
Nine Months Ended September 30,
(dollars in thousands)
2016
 
2015
 
2016
 
2015
Equity securities, beginning of period
$
183,523

 
$
—

 
$
—

 
$
—

Purchases
—

 
—

 
195,250

 
—

Sales
—

 
—

 
(25,000
)
 
—

Total gains included in:
 
 
 
 
 
 
 
Net income
6,881

 
—

 
20,154

 
—

Other comprehensive income (loss)
—

 
—

 
—

 
—

Transfers into Level 3
—

 
—

 
—

 
—

Transfers out of Level 3
—

 
—

 
—

 
—

Equity securities, end of period
$
190,404

 
$
—

 
$
190,404

 
$
—

Net unrealized gains included in net income relating to assets held at September 30, 2016 and 2015 (1)
$
6,881

 
$
—

 
$
20,154

 
$
—

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

There were no transfers into or out of Level 1 and Level 2 during the quarter and nine months ended September 30, 2016 and 2015.

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, 2016 and 2015.


19
Table of Contents

6. Segment Reporting Disclosures

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, are 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, and, effective December 8, 2015, the results of the Company's investment management services attributable to Markel CATCo Investment Management Ltd. 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.

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.


20
Table of Contents

a)The following tables summarize the Company's segment disclosures.
 
Quarter Ended September 30, 2016
(dollars in thousands)
U.S.
Insurance
 
International
Insurance
 
Reinsurance
 
Other
Insurance
(Discontinued
Lines)
 
Investing
 
Consolidated
Gross premium volume
$
663,196

 
$
269,093

 
$
196,948

 
$
536

 
$
—

 
$
1,129,773

Net written premiums
562,215

 
209,656

 
157,043

 
469

 
—

 
929,383

 
 
 
 
 
 
 
 
 
 
 
 
Earned premiums
548,792

 
218,968

 
206,018

 
466

 
—

 
974,244

Losses and loss adjustment expenses:
 
 
 
 
 
 
 
 
 
 
 
Current accident year
(370,435
)
 
(159,812
)
 
(129,875
)
 
—

 
—

 
(660,122
)
Prior accident years
21,471

 
42,705

 
19,135

 
(2,594
)
 
—

 
80,717

Underwriting, acquisition and insurance expenses
(206,628
)
 
(82,791
)
 
(82,490
)
 
(612
)
 
—

 
(372,521
)
Underwriting profit (loss)
(6,800
)
 
19,070

 
12,788

 
(2,740
)
 
—

 
22,318

Net investment income
—

 
—

 
—

 
—

 
93,147

 
93,147

Net realized investment gains
—

 
—

 
—

 
—

 
27,416

 
27,416

Other revenues (insurance)
1,285

 
419

 
—

 
466

 
—

 
2,170

Other expenses (insurance)
(670
)
 
(677
)
 
—

 
(4,232
)
 
—

 
(5,579
)
Segment profit (loss)
$
(6,185
)
 
$
18,812

 
$
12,788

 
$
(6,506
)
 
$
120,563

 
$
139,472

Other revenues (non-insurance)
 
 
 
 
 
 
 
 
 
 
334,305

Other expenses (non-insurance)
 
 
 
 
 
 
 
 
 
 
(304,134
)
Amortization of intangible assets
 
 
 
 
 
 
 
 
 
 
(17,010
)
Interest expense
 
 
 
 
 
 
 
 
 
 
(33,152
)
Income before income taxes
 
 
 
 
 
 
 
 
 
 
$
119,481

U.S. GAAP combined ratio (1)
101
%
 
91
%
 
94
%
 
NM

(2) 
 
 
98
%
 
Quarter Ended September 30, 2015
(dollars in thousands)
U.S.
Insurance