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 June 30, 2017
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, smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer  x
 
Accelerated filer  o
 
Non-accelerated filer  o
Smaller reporting company o
 
Emerging growth company o
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
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 July 19, 2017: 13,911,416

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)
 
June 30,
2017
 
December 31,
2016
 
(unaudited)
 
 
ASSETS
 
 
 
Investments, available-for-sale, at estimated fair value:
 
 
 
Fixed maturities (amortized cost of $9,669,656 in 2017 and $9,591,734 in 2016)
$
10,053,492

 
$
9,891,510

Equity securities (cost of $2,653,010 in 2017 and $2,481,448 in 2016)
5,340,827

 
4,745,841

Short-term investments (estimated fair value approximates cost)
1,704,416

 
2,336,151

Total Investments
17,098,735

 
16,973,502

Cash and cash equivalents
2,315,212

 
1,738,747

Restricted cash and cash equivalents
271,031

 
346,417

Receivables
1,589,444

 
1,241,649

Reinsurance recoverable on unpaid losses
2,007,652

 
2,006,945

Reinsurance recoverable on paid losses
53,128

 
64,892

Deferred policy acquisition costs
489,836

 
392,410

Prepaid reinsurance premiums
344,639

 
299,923

Goodwill
1,216,403

 
1,142,248

Intangible assets
806,585

 
722,542

Other assets
1,010,676

 
946,024

Total Assets
$
27,203,341

 
$
25,875,299

LIABILITIES AND EQUITY
 
 
 
Unpaid losses and loss adjustment expenses
$
10,312,695

 
$
10,115,662

Life and annuity benefits
1,061,298

 
1,049,654

Unearned premiums
2,712,597

 
2,263,838

Payables to insurance and reinsurance companies
259,801

 
231,327

Senior long-term debt and other debt (estimated fair value of $2,712,000 in 2017 and $2,721,000 in 2016)
2,485,671

 
2,574,529

Other liabilities
1,332,072

 
1,099,200

Total Liabilities
18,164,134

 
17,334,210

Redeemable noncontrolling interests
86,691

 
73,678

Commitments and contingencies

 

Shareholders' equity:
 
 
 
Common stock
3,376,230

 
3,368,666

Retained earnings
3,666,246

 
3,526,395

Accumulated other comprehensive income
1,911,933

 
1,565,866

Total Shareholders' Equity
8,954,409

 
8,460,927

Noncontrolling interests
(1,893
)
 
6,484

Total Equity
8,952,516

 
8,467,411

Total Liabilities and Equity
$
27,203,341

 
$
25,875,299

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 June 30,
 
Six Months Ended June 30,
 
2017
 
2016
 
2017
 
2016
 
(dollars in thousands, except per share data)
OPERATING REVENUES
 
 
 
 
 
 
 
Earned premiums
$
1,033,574

 
$
950,859

 
$
2,016,176

 
$
1,908,545

Net investment income
99,299

 
94,996

 
199,667

 
186,290

Net realized investment gains:
 
 
 
 
 
 
 
Other-than-temporary impairment losses
(604
)
 
(3,675
)
 
(3,817
)
 
(12,080
)
Net realized investment gains, excluding other-than-temporary impairment losses
18,231

 
20,916

 
42,309

 
50,500

Net realized investment gains
17,627

 
17,241

 
38,492

 
38,420

Other revenues
330,993

 
312,841

 
638,909

 
618,864

Total Operating Revenues
1,481,493

 
1,375,937

 
2,893,244

 
2,752,119

OPERATING EXPENSES
 
 
 
 
 
 
 
Losses and loss adjustment expenses
522,978

 
511,556

 
1,134,697

 
985,520

Underwriting, acquisition and insurance expenses
400,035

 
375,580

 
773,266

 
740,268

Amortization of intangible assets
18,026

 
17,204

 
34,796

 
34,464

Other expenses
299,112

 
277,909

 
581,697

 
553,002

Total Operating Expenses
1,240,151

 
1,182,249

 
2,524,456

 
2,313,254

Operating Income
241,342

 
193,688

 
368,788

 
438,865

Interest expense
31,797

 
33,697

 
65,199

 
64,538

Loss on early extinguishment of debt
—

 
44,100

 
—

 
44,100

Income Before Income Taxes
209,545

 
115,891

 
303,589

 
330,227

Income tax expense
58,118

 
35,218

 
81,122

 
85,908

Net Income
151,427

 
80,673

 
222,467

 
244,319

Net income attributable to noncontrolling interests
1,767

 
1,876

 
2,938

 
5,152

Net Income to Shareholders
$
149,660

 
$
78,797

 
$
219,529

 
$
239,167

 
 
 
 
 
 
 
 
OTHER COMPREHENSIVE INCOME
 
 
 
 
 
 
 
Change in net unrealized gains on investments, net of taxes:
 
 
 
 
 
 
 
Net holding gains arising during the period
$
190,069

 
$
149,406

 
$
350,349

 
$
388,296

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

 
44

 
—

 
(23
)
Reclassification adjustments for net gains included in net income
(222
)
 
(10,567
)
 
(9,391
)
 
(23,550
)
Change in net unrealized gains on investments, net of taxes
189,847

 
138,883

 
340,958

 
364,723

Change in foreign currency translation adjustments, net of taxes
1,962

 
(8,121
)
 
3,507

 
2,208

Change in net actuarial pension loss, net of taxes
902

 
394

 
1,618

 
857

Total Other Comprehensive Income
192,711

 
131,156

 
346,083

 
367,788

Comprehensive Income
344,138

 
211,829

 
568,550

 
612,107

Comprehensive income attributable to noncontrolling interests
1,781

 
1,887

 
2,954

 
5,171

Comprehensive Income to Shareholders
$
342,357

 
$
209,942

 
$
565,596

 
$
606,936

 
 
 
 
 
 
 
 
NET INCOME PER SHARE
 
 
 
 
 
 
 
Basic
$
10.34

 
$
5.44

 
$
14.25

 
$
16.65

Diluted
$
10.31

 
$
5.41

 
$
14.20

 
$
16.55


See accompanying notes to consolidated financial statements.

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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, 2015
13,959

 
$
3,342,357

 
$
3,137,285

 
$
1,354,508

 
$
7,834,150

 
$
6,459

 
$
7,840,609

 
$
62,958

Net income
 
 
 
 
239,167

 
—

 
239,167

 
790

 
239,957

 
4,362

Other comprehensive income
 
 
 
 
—

 
367,769

 
367,769

 
—

 
367,769

 
19

Comprehensive Income
 
 
 
 
 
 
 
 
606,936

 
790

 
607,726

 
4,381

Issuance of common stock
48

 
4,101

 
—

 
—

 
4,101

 
—

 
4,101

 
—

Repurchase of common stock
(16
)
 
—

 
(15,206
)
 
—

 
(15,206
)
 
—

 
(15,206
)
 
—

Restricted stock units expensed
—

 
13,473

 
—

 
—

 
13,473

 
—

 
13,473

 
—

Adjustment of redeemable noncontrolling interests
—

 
—

 
(5,981
)
 
—

 
(5,981
)
 
—

 
(5,981
)
 
5,981

Purchase of noncontrolling interest
—

 
899

 
—

 
—

 
899

 
—

 
899

 
(3,977
)
Other
—

 
—

 
(3
)
 
—

 
(3
)
 
(45
)
 
(48
)
 
(3,142
)
June 30, 2016
13,991

 
$
3,360,830

 
$
3,355,262

 
$
1,722,277

 
$
8,438,369

 
$
7,204

 
$
8,445,573

 
$
66,201

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2016
13,955

 
$
3,368,666

 
$
3,526,395

 
$
1,565,866

 
$
8,460,927

 
$
6,484

 
$
8,467,411

 
$
73,678

Net income (loss)
 
 
 
 
219,529

 
—

 
219,529

 
(307
)
 
219,222

 
3,245

Other comprehensive income
 
 
 
 
—

 
346,067

 
346,067

 
—

 
346,067

 
16

Comprehensive Income (Loss)
 
 
 
 
 
 
 
 
565,596

 
(307
)
 
565,289

 
3,261

Issuance of common stock
24

 
359

 
—

 
—

 
359

 
—

 
359

 
—

Repurchase of common stock
(61
)
 
—

 
(59,194
)
 
—

 
(59,194
)
 
—

 
(59,194
)
 
—

Restricted stock units expensed
—

 
10,568

 
—

 
—

 
10,568

 
—

 
10,568

 
—

Adjustment of redeemable noncontrolling interests
—

 
—

 
(20,284
)
 
—

 
(20,284
)
 
—

 
(20,284
)
 
20,284

Purchase of noncontrolling interest
—

 
(2,910
)
 
—

 
—

 
(2,910
)
 
(8,109
)
 
(11,019
)
 
(6,179
)
Other
—

 
(453
)
 
(200
)
 
—

 
(653
)
 
39

 
(614
)
 
(4,353
)
June 30, 2017
13,918

 
$
3,376,230

 
$
3,666,246

 
$
1,911,933

 
$
8,954,409

 
$
(1,893
)
 
$
8,952,516

 
$
86,691


See accompanying notes to consolidated financial statements.

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Table of Contents

MARKEL CORPORATION AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows
(Unaudited)
 
Six Months Ended June 30,
 
2017
 
2016
 
(dollars in thousands)
OPERATING ACTIVITIES
 
 
 
Net income
$
222,467

 
$
244,319

Adjustments to reconcile net income to net cash provided by operating activities
15,478

 
(174,105
)
Net Cash Provided By Operating Activities
237,945

 
70,214

INVESTING ACTIVITIES
 
 
 
Proceeds from sales of fixed maturities and equity securities
262,518

 
226,492

Proceeds from maturities, calls and prepayments of fixed maturities
676,023

 
471,907

Cost of fixed maturities and equity securities purchased
(939,314
)
 
(1,324,755
)
Net change in short-term investments
677,968

 
(348,335
)
Proceeds from sales of equity method investments
2,881

 
6,479

Additions to property and equipment
(35,578
)
 
(34,634
)
Acquisitions, net of cash acquired
(202,033
)
 
(5,762
)
Other
(5,689
)
 
(1,731
)
Net Cash Provided (Used) By Investing Activities
436,776

 
(1,010,339
)
FINANCING ACTIVITIES
 
 
 
Additions to senior long-term debt and other debt
29,898

 
533,235

Repayment of senior long-term debt and other debt
(139,564
)
 
(228,836
)
Premiums and fees related to early extinguishment of debt
—

 
(43,691
)
Repurchases of common stock
(59,194
)
 
(15,206
)
Issuance of common stock
359

 
4,101

Purchase of noncontrolling interests
(18,068
)
 
(3,078
)
Distributions to noncontrolling interests
(4,345
)
 
(3,187
)
Other
(7,705
)
 
(13,428
)
Net Cash Provided (Used) By Financing Activities
(198,619
)
 
229,910

Effect of foreign currency rate changes on cash, cash equivalents, restricted cash and restricted cash equivalents
24,977

 
1,912

Increase (decrease) in cash, cash equivalents, restricted cash and restricted cash equivalents
501,079

 
(708,303
)
Cash, cash equivalents, restricted cash and restricted cash equivalents at beginning of period
2,085,164

 
3,070,141

CASH, CASH EQUIVALENTS, RESTRICTED CASH AND RESTRICTED CASH EQUIVALENTS AT END OF PERIOD
$
2,586,243

 
$
2,361,838


See accompanying notes to consolidated financial statements.

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Table of Contents

MARKEL CORPORATION AND SUBSIDIARIES

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.

The consolidated balance sheet as of June 30, 2017, the related consolidated statements of income and comprehensive income for the quarters and six months ended June 30, 2017 and 2016, and the consolidated statements of changes in equity and cash flows for the six months ended June 30, 2017 and 2016 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, 2016 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. Readers are urged to review the Company's 2016 Annual Report on Form 10-K for a more complete description of the Company's business and accounting policies.

2. Recent Accounting Pronouncements

Effective for the year ended December 31, 2016, the Company adopted Financial Accounting Standards Board (FASB) Accounting Standards Update (ASU) No. 2015-09, Financial Services-Insurance (Topic 944): Disclosures about Short-Duration Contracts, which 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 on both an annual and interim basis. Interim period disclosures required by ASU No. 2015-09 include a tabular rollforward and related qualitative information for the liability for unpaid losses and loss adjustment expenses. The interim disclosures were required beginning in the first quarter of 2017 and have been included in note 7.

Effective January 1, 2017, the Company early adopted 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. Upon adoption of this ASU, the Company made an accounting policy election to use the cumulative earnings approach for presenting distributions received from equity method investees, which is consistent with its existing approach. Under this approach, distributions up to the amount of cumulative equity in earnings recognized will be treated as returns on investment and presented in operating activities and those in excess of that amount will be treated as returns of investment and presented in financing activities. The provisions of ASU No. 2016-15 were adopted on a retrospective basis and did not impact the Company's financial position, results of operations or cash flows.

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Table of Contents


Effective January 1, 2017, the Company early adopted ASU No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash. The ASU requires that amounts generally described as restricted cash and restricted cash equivalents be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. The Company previously presented changes in restricted cash and restricted cash equivalents on the statements of cash flows as an investing activity. The Company generally describes amounts held in trust or on deposit to support underwriting activities as well as amounts pledged as security for letters of credit as restricted cash or restricted cash equivalents. The provisions of ASU No. 2016-18 were adopted on a retrospective basis and did not impact the Company's financial position, results of operations or total comprehensive income. As a result of adoption of this ASU, investing cash inflows of $90.0 million attributed to the change in restricted cash for the six months ended June 30, 2016 were reclassified out of investing activities. The Company's statements of cash flows now include restricted cash and restricted cash equivalents in the beginning-of-period and end-of-period total amounts for cash, cash equivalents, restricted cash and restricted cash equivalents.

Effective January 1, 2017, the Company early adopted ASU No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business. The ASU changes the definition of a business to assist entities with evaluating when a set of transferred assets and activities is a business. The guidance provides a screen to determine when a set of assets and activities is not a business. The provisions of ASU No. 2017-01 were adopted on a prospective basis and did not have an impact on the Company's financial position, results of operations or cash flows.

Effective January 1, 2017, the Company early adopted ASU No. 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. The ASU eliminates Step 2 of the goodwill impairment test, which is performed by estimating the fair value of individual assets and liabilities of the reporting unit to calculate the implied fair value of goodwill. Instead, an entity will record a goodwill impairment charge based on the excess of a reporting unit's carrying value over its estimated fair value, not to exceed the carrying amount of goodwill. The provisions of ASU No. 2017-04 were adopted on a prospective basis and did not have an impact on the Company's financial position, results of operations or cash flows.

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. 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, ASU No. 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients and ASU No. 2016-20, Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers were all issued in 2016 as amendments to ASU No. 2014-09. These amendments will be evaluated and adopted in conjunction with ASU No. 2014-09. ASU No. 2014-09 becomes effective for the Company during the first quarter of 2018 and will be applied using the modified retrospective method, whereby the cumulative effect of adoption will be recognized as an adjustment to retained earnings at the date of initial application. The adoption of this ASU will not impact the Company's insurance premium revenues or revenues from its investment portfolio, which totaled 77% of consolidated revenues for the year ended December 31, 2016, but may have an impact the Company's other revenues, which are primarily attributable to its non-insurance operations. The Company has completed an inventory of these revenue streams, which are comprised of a diverse portfolio of contracts across various industries, and has preliminarily concluded that over 80% of the Company's other revenues for the year ended December 31, 2016 will not be impacted by adoption of this ASU. The Company is still evaluating the impact, if any, on the remaining 20% of its other revenues for the year ended December 31, 2016. The Company also expects to provide additional disclosures in the notes to financial statements as required under the new guidance and is still assessing the full impact that adopting the new accounting guidance will have on its consolidated financial statements.

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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. 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. The Company is currently evaluating ASU No. 2016-01 to determine the 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, but will have a material impact on the Company's results of operations as changes in fair value of equity instruments will be presented in net income rather than other comprehensive income. As of June 30, 2017, accumulated other comprehensive income included $1.8 billion of net unrealized gains on equity securities, net of taxes. See note 4(e) for details regarding the change in net unrealized gains on equity securities included in other comprehensive income (loss) for the quarters and six months ended June 30, 2017 and 2016.

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). The ASU requires lessees to record 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. ASU No. 2016-02 becomes effective for the Company during the first quarter of 2019 and will be applied using a modified retrospective approach for leases that exist or are entered into after the beginning of the earliest comparative period in the financial statements. The Company's future minimum lease payments, which represent minimum annual rental commitments excluding taxes, insurance and other operating costs for noncancelable operating leases, and will be subject to this new guidance, totaled $234.3 million at December 31, 2016. The calculation of the lease liability and right-of-use asset requires further analysis of the underlying leases to determine which portions of the underlying lease payments are required to be included in the calculation. Adoption of this standard will impact the Company’s consolidated balance sheets but is not expected to have a material impact on the Company’s results of operations or cash flows. The Company is currently evaluating ASU No. 2016-02 to determine the magnitude of the impact that adopting this standard will have on its consolidated financial statements.

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, which are measured at fair value, 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. Application of the new expected loss model for measuring impairment losses will not impact the Company's investment portfolio, all of which is considered available-for sale, but will impact the Company's other financial assets, including its reinsurance recoverables. Upon adoption of this ASU, any impairment losses on the Company's available-for-sale debt securities will be recorded as an allowance, subject to reversal, rather than as a reduction in amortized cost.

The following ASU's relate to topics relevant to the Company's operations and were adopted effective January 1, 2017. These ASU's did not have a material impact on the Company’s financial position, results of operations or cash flows:
•
ASU No. 2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory
•
ASU No. 2016-07, Investments - Equity Method and Joint Ventures (Topic 323): Simplifying the Transition to the Equity Method of Accounting
•
ASU No. 2016-17, Consolidation (Topic 810): Interests Held through Related Parties That Are under Common Control
•
ASU No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business

9
Table of Contents


The following ASU’s relate to topics relevant to the Company's operations and are not yet effective. These ASU's are not expected to have a material impact on the Company's financial position, results of operations or cash flows:
•
ASU No. 2016-16, Income Taxes (Topic 740): Intra-entity Transfers of Assets Other Than Inventory
•
ASU No. 2017-07, Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost
•
ASU No. 2017-08, Receivables - Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities
•
ASU No. 2017-09, Stock Compensation (Topic 718): Scope of Modification Accounting

3. Acquisitions

SureTec Acquisition

On April 28, 2017, the Company completed the acquisition of SureTec Financial Corp. (SureTec), a Texas-based privately held surety company primarily offering contract, commercial and court bonds. Results attributable to this acquisition are included in the U.S. Insurance segment.

Total consideration for this acquisition was $246.9 million, which included cash consideration of $225.6 million. Total consideration includes the estimated fair value of contingent consideration we expect to pay based on SureTec's earnings, as defined in the merger agreement, for the years 2017 through 2020. The purchase price was allocated to the acquired assets and liabilities of SureTec based on estimated fair values on April 28, 2017. The Company recognized goodwill of $70.4 million, which is primarily attributable to synergies that are expected to result upon integration of SureTec into the Company's insurance operations. None of the goodwill recognized is expected to be deductible for income tax purposes. The Company also recognized other intangible assets of $103.0 million, which includes $92.0 million of agent relationships to be amortized over a weighted average period of 15 years.

Subsequent Events

On July 19, 2017, the Company entered into a definitive agreement to acquire 81% of Costa Farms, a Florida-based privately held grower of house and garden plants. Cash consideration for the purchase is currently estimated to be approximately $255 million; however, total consideration will include contingent consideration and additional cash consideration, which are expected to fluctuate based on actual conditions to be determined upon closing. The transaction is subject to customary closing conditions, and is expected to close in the third quarter of 2017. Upon completion of the acquisition, Costa Farm’s operating results will be included with the Company’s non-insurance operations, which are not included in a reportable segment.

On July 26, 2017, the Company entered into a definitive merger agreement to acquire State National Companies, Inc. (State National). State National is a leading specialty provider of property and casualty insurance services that includes both fronting services and collateral protection insurance coverage. Under the merger agreement, State National stockholders will receive cash for each outstanding share of State National common stock (other than restricted shares that do not vest in connection with the transaction). The aggregate merger consideration, which includes net cash payments for State National stock options and restricted stock, is expected to be approximately $919 million. The transaction is subject to customary closing conditions, including regulatory approvals and the approval of State National’s stockholders, and is expected to close in the fourth quarter of 2017.


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Table of Contents

4. Investments

a)The following tables summarize the Company's available-for-sale investments. Commercial and residential mortgage-backed securities include securities issued by U.S. government-sponsored enterprises and U.S. government agencies.

 
June 30, 2017
(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
$
138,404

 
$
81

 
$
(844
)
 
$
—

 
$
137,641

U.S. government-sponsored enterprises
372,560

 
10,745

 
(1,426
)
 
—

 
381,879

Obligations of states, municipalities and political subdivisions
4,477,463

 
196,535

 
(20,632
)
 
—

 
4,653,366

Foreign governments
1,310,376

 
143,572

 
(2,231
)
 
—

 
1,451,717

Commercial mortgage-backed securities
1,188,439

 
8,014

 
(13,054
)
 
—

 
1,183,399

Residential mortgage-backed securities
830,679

 
21,786

 
(3,690
)
 
—

 
848,775

Asset-backed securities
37,856

 
25

 
(84
)
 
—

 
37,797

Corporate bonds
1,313,879

 
48,340

 
(3,301
)
 
—

 
1,358,918

Total fixed maturities
9,669,656

 
429,098

 
(45,262
)
 
—

 
10,053,492

Equity securities:
 
 
 
 
 
 
 
 
 
Insurance, banks and other financial institutions
888,805

 
976,110

 
(586
)
 
—

 
1,864,329

Industrial, consumer and all other
1,764,205

 
1,721,110

 
(8,817
)
 
—

 
3,476,498

Total equity securities
2,653,010

 
2,697,220

 
(9,403
)
 
—

 
5,340,827

Short-term investments
1,704,359

 
67

 
(10
)
 
—

 
1,704,416

Investments, available-for-sale
$
14,027,025

 
$
3,126,385

 
$
(54,675
)
 
$
—

 
$
17,098,735


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Table of Contents

 
December 31, 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
$
259,379

 
$
99

 
$
(894
)
 
$
—

 
$
258,584

U.S. government-sponsored enterprises
418,457

 
9,083

 
(4,328
)
 
—

 
423,212

Obligations of states, municipalities and political subdivisions
4,324,332

 
145,678

 
(41,805
)
 
—

 
4,428,205

Foreign governments
1,306,324

 
159,291

 
(2,153
)
 
—

 
1,463,462

Commercial mortgage-backed securities
1,055,947

 
3,953

 
(19,544
)
 
—

 
1,040,356

Residential mortgage-backed securities
779,503

 
18,749

 
(5,048
)
 
(2,258
)
 
790,946

Asset-backed securities
27,494

 
2

 
(158
)
 
—

 
27,338

Corporate bonds
1,420,298

 
49,146

 
(9,364
)
 
(673
)
 
1,459,407

Total fixed maturities
9,591,734

 
386,001

 
(83,294
)
 
(2,931
)
 
9,891,510

Equity securities:
 
 
 
 
 
 
 
 
 
Insurance, banks and other financial institutions
846,343

 
857,063

 
(5,596
)
 
—

 
1,697,810

Industrial, consumer and all other
1,635,105

 
1,421,080

 
(8,154
)
 
—

 
3,048,031

Total equity securities
2,481,448

 
2,278,143

 
(13,750
)
 
—

 
4,745,841

Short-term investments
2,336,100

 
57

 
(6
)
 
—

 
2,336,151

Investments, available-for-sale
$
14,409,282

 
$
2,664,201

 
$
(97,050
)
 
$
(2,931
)
 
$
16,973,502


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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.

 
June 30, 2017
 
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
$
95,984

 
$
(741
)
 
$
7,427

 
$
(103
)
 
$
103,411

 
$
(844
)
U.S. government-sponsored enterprises
137,702

 
(1,426
)
 
—

 
—

 
137,702

 
(1,426
)
Obligations of states, municipalities and political subdivisions
706,155

 
(17,574
)
 
31,626

 
(3,058
)
 
737,781

 
(20,632
)
Foreign governments
122,855

 
(2,231
)
 
—

 
—

 
122,855

 
(2,231
)
Commercial mortgage-backed securities
536,397

 
(12,801
)
 
14,693

 
(253
)
 
551,090

 
(13,054
)
Residential mortgage-backed securities
123,791

 
(1,806
)
 
74,672

 
(1,884
)
 
198,463

 
(3,690
)
Asset-backed securities
22,992

 
(51
)
 
5,106

 
(33
)
 
28,098

 
(84
)
Corporate bonds
378,552

 
(2,351
)
 
74,071

 
(950
)
 
452,623

 
(3,301
)
Total fixed maturities
2,124,428

 
(38,981
)
 
207,595

 
(6,281
)
 
2,332,023

 
(45,262
)
Equity securities:
 
 
 
 
 
 
 
 
 
 
 
Insurance, banks and other financial institutions
955

 
(60
)
 
1,375

 
(526
)
 
2,330

 
(586
)
Industrial, consumer and all other
88,643

 
(5,877
)
 
9,288

 
(2,940
)
 
97,931

 
(8,817
)
Total equity securities
89,598

 
(5,937
)
 
10,663

 
(3,466
)
 
100,261

 
(9,403
)
Short-term investments
56,385

 
(10
)
 
—

 
—

 
56,385

 
(10
)
Total
$
2,270,411

 
$
(44,928
)
 
$
218,258

 
$
(9,747
)
 
$
2,488,669

 
$
(54,675
)

At June 30, 2017, the Company held 572 securities with a total estimated fair value of $2.5 billion and gross unrealized losses of $54.7 million. Of these 572 securities, 89 securities had been in a continuous unrealized loss position for one year or longer and had a total estimated fair value of $218.3 million and gross unrealized losses of $9.7 million. Of these securities, 73 securities were fixed maturities and 16 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, 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
$
122,950

 
$
(894
)
 
$
—

 
$
—

 
$
122,950

 
$
(894
)
U.S. government-sponsored enterprises
220,333

 
(4,324
)
 
7,618

 
(4
)
 
227,951

 
(4,328
)
Obligations of states, municipalities and political subdivisions
1,004,947

 
(37,685
)
 
31,723

 
(4,120
)
 
1,036,670

 
(41,805
)
Foreign governments
68,887

 
(2,145
)
 
5,005

 
(8
)
 
73,892

 
(2,153
)
Commercial mortgage-backed securities
749,889

 
(19,091
)
 
29,988

 
(453
)
 
779,877

 
(19,544
)
Residential mortgage-backed securities
181,557

 
(4,987
)
 
79,936

 
(2,319
)
 
261,493

 
(7,306
)
Asset-backed securities
14,501

 
(106
)
 
5,869

 
(52
)
 
20,370

 
(158
)
Corporate bonds
494,573

 
(8,357
)
 
93,790

 
(1,680
)
 
588,363

 
(10,037
)
Total fixed maturities
2,857,637

 
(77,589
)
 
253,929

 
(8,636
)
 
3,111,566

 
(86,225
)
Equity securities:
 
 
 
 
 
 
 
 
 
 
 
Insurance, banks and other financial institutions
8,808

 
(410
)
 
37,973

 
(5,186
)
 
46,781

 
(5,596
)
Industrial, consumer and all other
98,406

 
(4,772
)
 
29,650

 
(3,382
)
 
128,056

 
(8,154
)
Total equity securities
107,214

 
(5,182
)
 
67,623

 
(8,568
)
 
174,837

 
(13,750
)
Short-term investments
504,211

 
(6
)
 
—

 
—

 
504,211

 
(6
)
Total
$
3,469,062

 
$
(82,777
)
 
$
321,552

 
$
(17,204
)
 
$
3,790,614

 
$
(99,981
)

At December 31, 2016, the Company held 654 securities with a total estimated fair value of $3.8 billion and gross unrealized losses of $100.0 million. Of these 654 securities, 109 securities had been in a continuous unrealized loss position for one year or longer and had a total estimated fair value of $321.6 million and gross unrealized losses of $17.2 million. Of these securities, 93 securities were fixed maturities and 16 were equity securities.

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

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


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 June 30, 2017 are shown below by contractual maturity.

(dollars in thousands)
Amortized
Cost
 
Estimated
Fair Value
Due in one year or less
$
455,586

 
$
457,635

Due after one year through five years
1,224,123

 
1,267,114

Due after five years through ten years
1,568,950

 
1,645,516

Due after ten years
4,364,023

 
4,613,256

 
7,612,682

 
7,983,521

Commercial mortgage-backed securities
1,188,439

 
1,183,399

Residential mortgage-backed securities
830,679

 
848,775

Asset-backed securities
37,856

 
37,797

Total fixed maturities
$
9,669,656

 
$
10,053,492


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

 
Quarter Ended June 30,
 
Six Months Ended June 30,
(dollars in thousands)
2017
 
2016
 
2017
 
2016
Interest:
 
 
 
 
 
 
 
Municipal bonds (tax-exempt)
$
22,758

 
$
22,563

 
$
45,130

 
$
44,485

Municipal bonds (taxable)
17,793

 
16,222

 
35,298

 
32,110

Other taxable bonds
36,296

 
36,959

 
71,184

 
72,278

Short-term investments, including overnight deposits
5,834

 
2,654

 
10,783

 
4,945

Dividends on equity securities
19,017

 
16,758

 
39,623

 
34,410

Income from equity method investments
1,802

 
3,921

 
6,395

 
3,668

Other
24

 
190

 
(205
)
 
2,674

 
103,524

 
99,267

 
208,208

 
194,570

Investment expenses
(4,225
)
 
(4,271
)
 
(8,541
)
 
(8,280
)
Net investment income
$
99,299

 
$
94,996

 
$
199,667

 
$
186,290



15
Table of Contents

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

 
Quarter Ended June 30,
 
Six Months Ended June 30,
(dollars in thousands)
2017
 
2016
 
2017
 
2016
Realized gains:
 
 
 
 
 
 
 
Sales of fixed maturities
$
554

 
$
699

 
$
757

 
$
967

Sales of equity securities
1,295

 
17,798

 
16,533

 
45,526

Other
4,259

 
353

 
4,826

 
773

Total realized gains
6,108

 
18,850

 
22,116

 
47,266

Realized losses:
 
 
 
 
 
 
 
Sales of fixed maturities
(412
)
 
(142
)
 
(602
)
 
(555
)
Sales of equity securities
(786
)
 
(1,780
)
 
(1,216
)
 
(2,498
)
Other-than-temporary impairments
(604
)
 
(3,675
)
 
(3,817
)
 
(12,080
)
Other
(81
)
 
(718
)
 
(286
)
 
(2,996
)
Total realized losses
(1,883
)
 
(6,315
)
 
(5,921
)
 
(18,129
)
Gains on securities measured at fair value through net income
13,402

 
4,706

 
22,297

 
9,283

Net realized investment gains
$
17,627

 
$
17,241

 
$
38,492

 
$
38,420

Change in net unrealized gains on investments included in other comprehensive income:
 
 
 
 
 
 
 
Fixed maturities
$
79,413

 
$
213,026

 
$
84,060

 
$
452,982

Equity securities
204,372

 
42,786

 
423,424

 
139,744

Short-term investments
133

 
32

 
6

 
(35
)
Net increase
$
283,918

 
$
255,844

 
$
507,490

 
$
592,691


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.


16
Table of Contents

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, U.S. government-sponsored enterprises, 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 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.

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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.

 
June 30, 2017
(dollars in thousands)
Level 1
 
Level 2
 
Level 3
 
Total
Assets:
 
 
 
 
 
 
 
Investments available-for-sale:
 
 
 
 
 
 
 
Fixed maturities:
 
 
 
 
 
 
 
U.S. Treasury securities
$
—

 
$
137,641

 
$
—

 
$
137,641

U.S. government-sponsored enterprises
—

 
381,879

 
—

 
381,879

Obligations of states, municipalities and political subdivisions
—

 
4,653,366

 
—

 
4,653,366

Foreign governments
—

 
1,451,717

 
—

 
1,451,717

Commercial mortgage-backed securities
—

 
1,183,399

 
—

 
1,183,399

Residential mortgage-backed securities
—

 
848,775

 
—

 
848,775

Asset-backed securities
—

 
37,797

 
—

 
37,797

Corporate bonds
—

 
1,358,918

 
—

 
1,358,918

Total fixed maturities
—

 
10,053,492

 
—

 
10,053,492

Equity securities:
 
 
 
 
 
 
 
Insurance, banks and other financial institutions
1,680,416

 
—

 
183,913

 
1,864,329

Industrial, consumer and all other
3,476,498

 
—

 
—

 
3,476,498

Total equity securities
5,156,914

 
—

 
183,913

 
5,340,827

Short-term investments
1,614,064

 
90,352

 
—

 
1,704,416

Total investments available-for-sale
$
6,770,978

 
$
10,143,844

 
$
183,913

 
$
17,098,735



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December 31, 2016
(dollars in thousands)
Level 1
 
Level 2
 
Level 3
 
Total
Assets:
 
 
 
 
 
 
 
Investments available-for-sale:
 
 
 
 
 
 
 
Fixed maturities:
 
 
 
 
 
 
 
U.S. Treasury securities
$
—

 
$
258,584

 
$
—

 
$
258,584

U.S. government-sponsored enterprises
—

 
423,212

 
—

 
423,212

Obligations of states, municipalities and political subdivisions
—

 
4,428,205

 
—

 
4,428,205

Foreign governments
—

 
1,463,462

 
—

 
1,463,462

Commercial mortgage-backed securities
—

 
1,040,356

 
—

 
1,040,356

Residential mortgage-backed securities
—

 
790,946

 
—

 
790,946

Asset-backed securities
—

 
27,338

 
—

 
27,338

Corporate bonds
—

 
1,459,407

 
—

 
1,459,407

Total fixed maturities
—

 
9,891,510

 
—

 
9,891,510

Equity securities:
 
 
 
 
 
 
 
Insurance, banks and other financial institutions
1,506,607

 
—

 
191,203

 
1,697,810

Industrial, consumer and all other
3,048,031

 
—

 
—

 
3,048,031

Total equity securities
4,554,638

 
—

 
191,203

 
4,745,841

Short-term investments
2,255,898

 
80,253

 
—

 
2,336,151

Total investments available-for-sale
$
6,810,536

 
$
9,971,763

 
$
191,203

 
$
16,973,502


The following table summarizes changes in Level 3 investments measured at fair value on a recurring basis.
 
Quarter Ended June 30,
 
Six Months Ended June 30,
(dollars in thousands)
2017
 
2016
 
2017
 
2016
Equity securities, beginning of period
$
178,043

 
$
176,942

 
$
191,203

 
$
—

Purchases
1,250

 
25,000

 
7,250

 
195,250

Sales
(1,303
)
 
(25,000
)
 
(26,674
)
 
(25,000
)
Total gains included in:
 
 
 
 
 
 
 
Net income
5,923

 
6,581

 
12,134

 
13,273

Other comprehensive income
—

 
—

 
—

 
—

Transfers into Level 3
—

 
—

 
—

 
—

Transfers out of Level 3
—

 
—

 
—

 
—

Equity securities, end of period
$
183,913

 
$
183,523

 
$
183,913

 
$
183,523

Net unrealized gains included in net income relating to assets held at June 30, 2017 and 2016 (1)
$
5,923

 
$
6,581

 
$
12,134

 
$
13,273

(1) Included in net realized investment gains 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 six months ended June 30, 2017 and 2016.

Except as disclosed in note 3, the Company did not have any assets or liabilities measured at fair value on a non-recurring basis during the six months ended June 30, 2017 and 2016.


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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 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. 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.


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a)The following tables summarize the Company's segment disclosures.
 
Quarter Ended June 30, 2017
(dollars in thousands)
U.S.
Insurance
 
International
Insurance
 
Reinsurance
 
Other
Insurance
(Discontinued
Lines)
 
Investing
 
Consolidated
Gross premium volume
$
753,329

 
$
355,949

 
$
247,902

 
$
(16
)
 
$
—

 
$
1,357,164

Net written premiums
630,453

 
286,833

 
220,466

 
(95
)
 
—

 
1,137,657

 
 
 
 
 
 
 
 
 
 
 
 
Earned premiums
578,241

 
225,948

 
229,480

 
(95
)
 
—

 
1,033,574

Losses and loss adjustment expenses:
 
 
 
 
 
 
 
 
 
 
 
Current accident year
(379,809
)
 
(158,590
)
 
(146,186
)
 
—

 
—

 
(684,585
)
Prior accident years
77,266

 
55,262

 
28,151

 
928

 
—

 
161,607

Amortization of policy acquisition costs
(124,032
)
 
(36,356
)
 
(53,086
)
 
—

 
—

 
(213,474
)
Other operating expenses
(108,684
)
 
(54,203
)
 
(23,539
)
 
(135
)
 
—

 
(186,561
)
Underwriting profit
42,982

 
32,061

 
34,820

 
698

 
—

 
110,561

Net investment income
—

 
—

 
—

 
—

 
99,299

 
99,299

Net realized investment gains
—

 
—

 
—

 
—

 
17,627

 
17,627

Other revenues (insurance)
1,043

 
574

 
—

 
771

 
—

 
2,388

Other expenses (insurance)
(85
)
 
(2,728
)
 
—

 
(7,169
)
 
—

 
(9,982
)
Segment profit (loss)
$
43,940

 
$
29,907

 
$
34,820

 
$
(5,700
)
 
$
116,926