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 March 31, 2018
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 April 17, 2018: 13,893,078

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)
 
March 31,
2018
 
December 31,
2017
 
(unaudited)
 
 
ASSETS
 
 
 
Investments, at estimated fair value:
 
 
 
Fixed maturities, available-for-sale (amortized cost of $9,681,604 in 2018 and $9,551,153 in 2017)
$
9,904,075

 
$
9,940,670

Equity securities, available-for-sale (cost of $2,667,661 in 2017)
—

 
5,967,847

Equity securities (cost of $2,734,647 in 2018)
5,903,803

 
—

Short-term investments, available-for-sale (estimated fair value approximates cost)
2,037,238

 
2,160,974

Total Investments
17,845,116

 
18,069,491

Cash and cash equivalents
2,048,976

 
2,198,459

Restricted cash and cash equivalents
392,676

 
302,387

Receivables
1,749,025

 
1,567,453

Reinsurance recoverable on unpaid losses
4,650,860

 
4,619,336

Reinsurance recoverable on paid losses
108,658

 
126,054

Deferred policy acquisition costs
513,814

 
465,569

Prepaid reinsurance premiums
1,166,692

 
1,099,757

Goodwill
1,789,035

 
1,777,464

Intangible assets
1,317,828

 
1,355,681

Other assets
1,283,791

 
1,223,365

Total Assets
$
32,866,471

 
$
32,805,016

LIABILITIES AND EQUITY
 
 
 
Unpaid losses and loss adjustment expenses
$
13,641,937

 
$
13,584,281

Life and annuity benefits
1,093,437

 
1,072,112

Unearned premiums
3,574,496

 
3,308,779

Payables to insurance and reinsurance companies
382,263

 
324,304

Senior long-term debt and other debt (estimated fair value of $3,182,000 in 2018 and $3,351,000 in 2017)
3,048,096

 
3,099,230

Other liabilities
1,649,372

 
1,748,460

Total Liabilities
23,389,601

 
23,137,166

Redeemable noncontrolling interests
155,720

 
166,269

Commitments and contingencies

 

Shareholders' equity:
 
 
 
Common stock
3,383,668

 
3,381,834

Retained earnings
5,927,739

 
3,776,743

Accumulated other comprehensive income
12,804

 
2,345,571

Total Shareholders' Equity
9,324,211

 
9,504,148

Noncontrolling interests
(3,061
)
 
(2,567
)
Total Equity
9,321,150

 
9,501,581

Total Liabilities and Equity
$
32,866,471

 
$
32,805,016

See accompanying notes to consolidated financial statements.

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Table of Contents

MARKEL CORPORATION AND SUBSIDIARIES

Consolidated Statements of Income (Loss) and Comprehensive Income (Loss)
(Unaudited)
 
Three Months Ended March 31,
 
2018
 
2017
 
(dollars in thousands, except per share data)
OPERATING REVENUES
 
 
 
Earned premiums
$
1,151,021

 
$
982,602

Net investment income
108,016

 
100,368

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

 
(3,213
)
Net realized investment gains (losses), excluding other-than-temporary impairment losses
(946
)
 
15,183

Change in fair value of equity securities
(122,052
)
 
8,895

Net investment gains (losses)
(122,998
)
 
20,865

Other revenues
439,432

 
307,916

Total Operating Revenues
1,575,471

 
1,411,751

OPERATING EXPENSES
 
 
 
Losses and loss adjustment expenses
615,118

 
611,719

Underwriting, acquisition and insurance expenses
424,390

 
373,278

Amortization of intangible assets
28,823

 
16,770

Other expenses
402,130

 
282,633

Total Operating Expenses
1,470,461

 
1,284,400

Operating Income
105,010

 
127,351

Interest expense
40,059

 
33,402

Net foreign exchange losses (gains)
22,114

 
(95
)
Income Before Income Taxes
42,837

 
94,044

Income tax expense
108,431

 
23,004

Net Income (Loss)
(65,594
)
 
71,040

Net income (loss) attributable to noncontrolling interests
(1,288
)
 
1,171

Net Income (Loss) to Shareholders
$
(64,306
)
 
$
69,869

 
 
 
 
OTHER COMPREHENSIVE INCOME (LOSS)
 
 
 
Change in net unrealized gains on available-for-sale investments, net of taxes:
 
 
 
Net holding gains (losses) arising during the period
$
(116,922
)
 
$
160,280

Reclassification adjustments for net gains (losses) included in net income (loss)
814

 
(9,169
)
Change in net unrealized gains on available-for-sale investments, net of taxes
(116,108
)
 
151,111

Change in foreign currency translation adjustments, net of taxes
4,953

 
1,545

Change in net actuarial pension loss, net of taxes
664

 
716

Total Other Comprehensive Income (Loss)
(110,491
)
 
153,372

Comprehensive Income (Loss)
(176,085
)
 
224,412

Comprehensive income (loss) attributable to noncontrolling interests
(1,246
)
 
1,173

Comprehensive Income (Loss) to Shareholders
$
(174,839
)
 
$
223,239

 
 
 
 
NET INCOME (LOSS) PER SHARE
 
 
 
Basic
$
(4.25
)
 
$
3.91

Diluted
$
(4.25
)
 
$
3.90


See accompanying notes to consolidated financial statements.

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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, 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)
 
 
 
 
69,869

 
—

 
69,869

 
(284
)
 
69,585

 
1,455

Other comprehensive income
 
 
 
 
—

 
153,370

 
153,370

 
—

 
153,370

 
2

Comprehensive Income (Loss)
 
 
 
 
 
 
 
 
223,239

 
(284
)
 
222,955

 
1,457

Issuance of common stock
19

 
359

 
—

 
—

 
359

 
—

 
359

 
—

Repurchase of common stock
(24
)
 
—

 
(23,512
)
 
—

 
(23,512
)
 
—

 
(23,512
)
 
—

Restricted stock units expensed
—

 
7,890

 
—

 
—

 
7,890

 
—

 
7,890

 
—

Adjustment of redeemable noncontrolling interests
—

 
—

 
(15,143
)
 
—

 
(15,143
)
 
—

 
(15,143
)
 
15,143

Purchase of noncontrolling interest
—

 
(861
)
 
—

 
—

 
(861
)
 
(8,109
)
 
(8,970
)
 
—

Other
—

 
(17
)
 
318

 
—

 
301

 
(41
)
 
260

 
(2,343
)
March 31, 2017
13,950

 
$
3,376,037

 
$
3,557,927

 
$
1,719,236

 
$
8,653,200

 
$
(1,950
)
 
$
8,651,250

 
$
87,935

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2017
13,904

 
$
3,381,834

 
$
3,776,743

 
$
2,345,571

 
$
9,504,148

 
$
(2,567
)
 
$
9,501,581

 
$
166,269

Cumulative effect of adoption of ASU No. 2014-09, net of taxes
—

 
—

 
325

 
—

 
325

 
—

 
325

 
—

Cumulative effect of adoption of ASU No. 2016-01, net of taxes
—

 
—

 
2,623,773

 
(2,623,773
)
 
—

 
—

 
—

 
—

Cumulative effect of adoption of ASU No. 2018-02
—

 
—

 
(401,539
)
 
401,539

 
—

 
—

 
—

 
—

Net loss
 
 
 
 
(64,306
)
 
—

 
(64,306
)
 
(493
)
 
(64,799
)
 
(795
)
Other comprehensive income (loss)
 
 
 
 
—

 
(110,533
)
 
(110,533
)
 
—

 
(110,533
)
 
42

Comprehensive Loss
 
 
 
 
 
 
 
 
(174,514
)
 
(493
)
 
(175,007
)
 
(753
)
Issuance of common stock
2

 
2

 
—

 
—

 
2

 
—

 
2

 
—

Repurchase of common stock
(11
)
 
—

 
(12,289
)
 
—

 
(12,289
)
 
—

 
(12,289
)
 
—

Restricted stock units expensed
—

 
7,212

 
—

 
—

 
7,212

 
—

 
7,212

 
—

Adjustment of redeemable noncontrolling interests
—

 
—

 
5,051

 
—

 
5,051

 
—

 
5,051

 
(5,051
)
Purchase of noncontrolling interest
—

 
(5,391
)
 
—

 
—

 
(5,391
)
 
—

 
(5,391
)
 
(39
)
Other
—

 
11

 
(19
)
 
—

 
(8
)
 
(1
)
 
(9
)
 
(4,706
)
March 31, 2018
13,895

 
$
3,383,668

 
$
5,927,739

 
$
12,804

 
$
9,324,211

 
$
(3,061
)
 
$
9,321,150

 
$
155,720


See accompanying notes to consolidated financial statements.

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MARKEL CORPORATION AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows
(Unaudited)
 
Three Months Ended March 31,
 
2018
 
2017
 
(dollars in thousands)
OPERATING ACTIVITIES
 
 
 
Net income (loss)
$
(65,594
)
 
$
71,040

Adjustments to reconcile net income (loss) to net cash provided by operating activities
123,266

 
(59,094
)
Net Cash Provided By Operating Activities
57,672

 
11,946

INVESTING ACTIVITIES
 
 
 
Proceeds from sales of fixed maturities and equity securities
140,728

 
89,287

Proceeds from maturities, calls and prepayments of fixed maturities
191,260

 
401,875

Cost of fixed maturities and equity securities purchased
(497,377
)
 
(592,707
)
Net change in short-term investments
129,032

 
162,324

Additions to property and equipment
(23,362
)
 
(15,864
)
Acquisitions, net of cash acquired
(7,809
)
 
(3,810
)
Other
(716
)
 
(3,448
)
Net Cash Provided (Used) By Investing Activities
(68,244
)
 
37,657

FINANCING ACTIVITIES
 
 
 
Additions to senior long-term debt and other debt
52,706

 
19,302

Repayment of senior long-term debt and other debt
(102,306
)
 
(9,917
)
Repurchases of common stock
(12,289
)
 
(23,512
)
Purchase of noncontrolling interests
(6,863
)
 
(8,970
)
Distributions to noncontrolling interests
(4,706
)
 
(2,341
)
Other
(1,238
)
 
(1,104
)
Net Cash Used By Financing Activities
(74,696
)
 
(26,542
)
Effect of foreign currency rate changes on cash, cash equivalents, restricted cash and restricted cash equivalents
26,074

 
6,466

Increase (decrease) in cash, cash equivalents, restricted cash and restricted cash equivalents
(59,194
)
 
29,527

Cash, cash equivalents, restricted cash and restricted cash equivalents at beginning of period
2,500,846

 
2,085,164

CASH, CASH EQUIVALENTS, RESTRICTED CASH AND RESTRICTED CASH EQUIVALENTS AT END OF PERIOD
$
2,441,652

 
$
2,114,691


See accompanying notes to consolidated financial statements.

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Table of Contents

MARKEL CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Summary of Significant Accounting Policies

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 businesses that operate outside of the specialty insurance marketplace.

a)Basis of Presentation. The consolidated balance sheet as of March 31, 2018 and the related consolidated statements of income and comprehensive income, changes in equity and cash flows for the three months ended March 31, 2018 and 2017 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, 2017 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, with the exception of significant transactions or events that occur during the intervening period. 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 2017 Annual Report on Form 10-K for a more complete description of the Company's business and accounting policies.

b)Foreign Currency Transactions. The U.S. Dollar is the Company’s reporting currency and the primary functional currency of its foreign underwriting operations. The functional currencies of the Company's other foreign operations are the currencies of the primary economic environments in which the majority of their business is transacted.

Foreign currency transaction gains and losses are the result of exchange rate changes on transactions denominated in currencies other than the functional currency at each foreign entity. Monetary assets and liabilities are remeasured to the functional currency at current exchange rates, with resulting gains and losses included in net foreign exchange losses (gains) within net income. Non-monetary assets and liabilities are remeasured to the functional currency at historic exchange rates. Available-for-sale securities are recorded at fair value with resulting gains and losses, including the portion attributable to movements in exchange rates, included in the change in net unrealized gains on available-for-sale investments, net of taxes within other comprehensive income. While we attempt to naturally hedge our exposure to foreign currency fluctuations by matching assets and liabilities in currency, there is a financial statement mismatch between the gains or losses recorded in net income related to insurance reserves denominated in non-functional currencies and the gains or losses recorded in other comprehensive income related to the available-for-sale securities supporting the reserves.

Assets and liabilities of foreign operations denominated in a functional currency other than the U.S. Dollar are translated into the U.S. Dollar at current exchange rates, with resulting gains or losses included, net of taxes, in the change in foreign currency translation adjustments within other comprehensive income.


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Historically, the Company also designated certain additional currencies, including the British Pound Sterling, the Euro, and the Canadian Dollar, as functional currencies within its foreign underwriting operations that were deemed to contain distinct and separable operations in those foreign economic environments. However, over time the Company’s foreign underwriting operations have evolved and are now managed on a global basis. Effective January 1, 2018, management reassessed its functional currency determination as required by Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 830, Foreign Currency Matters, and concluded that its foreign underwriting operations have evolved to function as an extension, or integral component, of the Company’s global underwriting operations, and are no longer deemed to contain distinct and separable operations. As a result, more foreign currency denominated transactions are designated as non-functional, with related remeasurement gains and losses included in net income. The change in the Company’s functional currency determination has been applied on a prospective basis in accordance with ASC 830. Therefore, any translation gains and losses that were previously recorded in accumulated other comprehensive income remain unchanged through December 31, 2017.

c)Revenue Recognition. Effective January 1, 2018, the Company adopted Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers (Topic 606), and related amendments, which created a new comprehensive revenue recognition standard, ASC 606, that serves as a single source of revenue guidance for all contracts with customers to transfer goods or services or contracts for the transfer of nonfinancial assets, unless those contracts are within the scope of other standards, such as insurance contracts. ASC 606 is not applicable to the Company's insurance premium revenues or revenues from its investment portfolio but is applicable to most of the Company's other revenues, as described below. See note 2 for further discussion of the impact of adopting this standard.

Other revenues primarily relate to the Company's Markel Ventures segment and consist of revenues for the sale of products and services. Revenues are recognized when, or as, control of the promised goods or services is transferred to the Company's customers, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods or services. All contracts with customers either have an original expected length of one year or less or the Company recognizes revenue at the amount for which it has a right to invoice for the products delivered or services performed. Certain customers may receive volume rebates or credits for products and services, which are accounted for as variable consideration. The Company estimates these amounts based on the expected amount to be provided to the customer and reduces revenues recognized by a corresponding amount. The Company does not expect significant changes to its estimates of variable consideration over the term of the contracts.

Payment terms for products and services vary by the type of product or service offered and the location of the customer, and payment is typically received at or shortly after the point of sale. For certain products, the Company requires partial payment in the form of a deposit before the products are delivered to the customer, which are included in other liabilities on the Company's consolidated balance sheet.

Product revenues are primarily generated from the sale of ornamental plants, equipment used in baking systems, portable dredges, over the road transportation equipment, flooring for the trucking industry, and residential homes. Most of the Company's product revenues are recognized when the products are shipped to the customer or the products arrive at the agreed upon destination with the end customer. Some of the Company's contracts include multiple performance obligations. For such arrangements, revenues are allocated to each performance obligation based on the relative standalone selling price, which is derived from amounts stated in the contract.

Service revenues are primarily generated by delivering healthcare services, retail intelligence, consulting services and investment management services. Service revenues are generally recognized over the term of the contracts based on hours incurred or as services are provided. Investment management fee income is recognized over the period in which investment management services are provided and is calculated and recognized monthly based on the net asset value of the accounts managed. In connection with the investment management services provided, the Company is also entitled 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. Performance fee income is recognized at the conclusion of the contractual performance period, when the uncertainty related to performance has been resolved.


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2. Recent Accounting Pronouncements

Effective January 1, 2018, the Company adopted FASB ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) and several other ASU’s that were issued as amendments to ASU No. 2014-09, which apply to all contracts with customers to transfer goods or services or for the transfer of nonfinancial assets, unless those contracts are within the scope of other standards. ASU No. 2014-09's core principle is that a company recognizes 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 adopting this standard, the Company is required to use more judgment and make more estimates than under the previous guidance, including 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. The Company adopted ASU No. 2014-09 using the modified retrospective method. Prior periods were not restated and a cumulative-effect adjustment of applying the new standard to all open contracts at January 1, 2018 was $0.3 million, and is included as an adjustment to 2018 beginning retained earnings. The Company's other revenues for the quarter ended March 31, 2018 and its receivables, other assets and other liabilities as of March 31, 2018 were not materially different from the amounts that would have been recognized under the previous guidance. ASU No. 2014-09 also requires expanded revenue disclosures which are included in note 8.

Effective January 1, 2018, the Company adopted FASB ASU No. 2016-01, Financial Instruments (Topic 825): Recognition and Measurement of Financial Assets and Financial Liabilities. As a result of adoption of this ASU, equity instruments that do not result in consolidation and are not accounted for under the equity method are measured at fair value and any changes in fair value are recognized in net income. Previously, the Company’s equity securities were classified as available-for-sale and changes in fair value were recorded in other comprehensive income. Upon adoption of this ASU, cumulative net unrealized gains on equity securities of $2.6 billion, net of deferred income taxes of $673.9 million, were reclassified from accumulated other comprehensive income into retained earnings. Prior periods have not been restated to conform to the current presentation. See note 4(e) for details regarding the change in net unrealized gains on equity securities included in net loss for the quarter ended March 31, 2018 and included in other comprehensive income for the quarter ended March 31, 2017.

Effective January 1, 2018, the Company early adopted ASU No. 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. The ASU provides an option to reclassify tax effects remaining in accumulated other comprehensive income as a result of the Tax Cuts and Jobs Act (TCJA) to retained earnings. Upon enactment of the TCJA, the U.S. corporate tax rate was reduced from 35% to 21% and the Company's U.S. deferred tax balances were remeasured to the lower enacted U.S. corporate tax rate. U.S. GAAP requires the effects of changes in tax rates and laws on deferred tax balances to be recorded as a component of income tax expense in the period of enactment, even if the assets and liabilities relate to items of accumulated other comprehensive income. As a result of adopting the ASU, the Company reclassified $401.5 million of previously recognized deferred taxes from accumulated other comprehensive income into retained earnings as of January 1, 2018.

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 which will be subject to this new guidance, totaled $311.7 million at December 31, 2017. 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.

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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 its consolidated financial statements. Application of the new expected loss model for measuring impairment losses will not impact the Company's investment portfolio, none of which is measured at amortized cost, 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, 2018. These ASU's did not 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. 2017-09, Stock Compensation (Topic 718): Scope of Modification Accounting

The following ASU is relevant to the Company's operations and is not yet effective. This ASU is not expected to have a material impact on the Company's financial position, results of operations or cash flows:
•
ASU No. 2017-08, Receivables - Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities

3. Acquisitions

In November 2017, the Company completed its acquisition of 100% of the issued and outstanding common stock of State National Companies, Inc. (State National). Results attributable to State National's collateral protection insurance coverages are included in the Insurance segment, which was redefined during the first quarter of 2018. Results attributable to State National's program services (fronting) business are not included in a reportable segment. See note 6 for further discussion of the Company's reportable segments. Total consideration for this acquisition was $918.8 million, all of which was cash consideration.

As of December 31, 2017, the purchase price was preliminarily allocated to the acquired assets and liabilities of State National based on estimated fair value at the acquisition date. During the first quarter of 2018, the Company completed the process of determining the fair value of the assets and liabilities acquired with State National. The Company recognized goodwill of $379.2 million, none of which is expected to be deductible for income tax purposes. The Company also recognized indefinite lived intangible assets of $32.0 million and other intangible assets of $338.5 million, which are being amortized over a weighted average period of 13 years.

The following table summarizes the intangible assets recorded in connection with the acquisition, and as of March 31, 2018.

(dollars in thousands)
Amount
 
Economic
Useful Life
Customer relationships
$
289,000

 
13 years
Trade names
22,500

 
13 years
Technology
27,000

 
Nine years
Insurance licenses
32,000

 
Indefinite
Intangible assets, before amortization, as of the acquisition date
370,500

 
 
Amortization (from the acquisition date through March 31, 2018)
11,549

 
 
Net intangible assets as of March 31, 2018
$
358,951

 
 


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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.

 
March 31, 2018
(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
$
161,971

 
$
47

 
$
(2,644
)
 
$
—

 
$
159,374

U.S. government-sponsored enterprises
361,859

 
7,671

 
(3,510
)
 
—

 
366,020

Obligations of states, municipalities and political subdivisions
4,315,367

 
124,435

 
(27,875
)
 
—

 
4,411,927

Foreign governments
1,367,887

 
152,152

 
(4,360
)
 
—

 
1,515,679

Commercial mortgage-backed securities
1,446,454

 
887

 
(42,633
)
 
—

 
1,404,708

Residential mortgage-backed securities
868,675

 
4,614

 
(15,571
)
 
—

 
857,718

Asset-backed securities
31,735

 
1

 
(432
)
 
—

 
31,304

Corporate bonds
1,127,656

 
39,576

 
(9,887
)
 
—

 
1,157,345

Total fixed maturities
9,681,604

 
329,383

 
(106,912
)
 
—

 
9,904,075

Short-term investments
2,037,234

 
65

 
(61
)
 
—

 
2,037,238

Investments, available-for-sale
$
11,718,838

 
$
329,448

 
$
(106,973
)
 
$
—

 
$
11,941,313


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December 31, 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
$
162,378

 
$
54

 
$
(1,819
)
 
$
—

 
$
160,613

U.S. government-sponsored enterprises
352,455

 
11,883

 
(818
)
 
—

 
363,520

Obligations of states, municipalities and political subdivisions
4,381,358

 
193,120

 
(7,916
)
 
—

 
4,566,562

Foreign governments
1,341,628

 
150,010

 
(2,410
)
 
—

 
1,489,228

Commercial mortgage-backed securities
1,244,777

 
6,108

 
(16,559
)
 
—

 
1,234,326

Residential mortgage-backed securities
846,916

 
14,115

 
(4,863
)
 
—

 
856,168

Asset-backed securities
34,942

 
8

 
(222
)
 
—

 
34,728

Corporate bonds
1,186,699

 
51,563

 
(2,737
)
 
—

 
1,235,525

Total fixed maturities
9,551,153

 
426,861

 
(37,344
)
 
—

 
9,940,670

Equity securities: (1)
 
 
 
 
 
 
 
 
 
Insurance, banks and other financial institutions
899,324

 
1,209,162

 
(5,453
)
 
—

 
2,103,033

Industrial, consumer and all other
1,768,337

 
2,110,959

 
(14,482
)
 
—

 
3,864,814

Total equity securities
2,667,661

 
3,320,121

 
(19,935
)
 
—

 
5,967,847

Short-term investments
2,161,017

 
26

 
(69
)
 
—

 
2,160,974

Investments, available-for-sale
$
14,379,831

 
$
3,747,008

 
$
(57,348
)
 
$
—

 
$
18,069,491

(1) 
Effective January 1, 2018, the Company adopted ASU No. 2016-01 and equity securities are no longer classified as available-for-sale. Prior periods have not been restated to conform to the current presentation. See note 2.

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

 
March 31, 2018
 
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
$
77,443

 
$
(1,225
)
 
$
77,291

 
$
(1,419
)
 
$
154,734

 
$
(2,644
)
U.S. government-sponsored enterprises
88,345

 
(1,541
)
 
86,081

 
(1,969
)
 
174,426

 
(3,510
)
Obligations of states, municipalities and political subdivisions
684,697

 
(10,562
)
 
405,311

 
(17,313
)
 
1,090,008

 
(27,875
)
Foreign governments
139,509

 
(2,272
)
 
59,541

 
(2,088
)
 
199,050

 
(4,360
)
Commercial mortgage-backed securities
815,664

 
(15,155
)
 
489,891

 
(27,478
)
 
1,305,555

 
(42,633
)
Residential mortgage-backed securities
436,789

 
(9,478
)
 
132,324

 
(6,093
)
 
569,113

 
(15,571
)
Asset-backed securities
15,694

 
(237
)
 
14,528

 
(195
)
 
30,222

 
(432
)
Corporate bonds
374,551

 
(5,691
)
 
155,737

 
(4,196
)
 
530,288

 
(9,887
)
Total fixed maturities
2,632,692

 
(46,161
)
 
1,420,704

 
(60,751
)
 
4,053,396

 
(106,912
)
Short-term investments
138,255

 
(61
)
 
—

 
—

 
138,255

 
(61
)
Total
$
2,770,947

 
$
(46,222
)
 
$
1,420,704

 
$
(60,751
)
 
$
4,191,651

 
$
(106,973
)

At March 31, 2018, the Company held 1,052 fixed maturities with a total estimated fair value of $4.2 billion and gross unrealized losses of $107.0 million. Of these 1,052 securities, 272 securities had been in a continuous unrealized loss position for one year or longer and had a total estimated fair value of $1.4 billion and gross unrealized losses of $60.8 million. The Company does not intend to sell or believe it will be required to sell these fixed maturities before recovery of their amortized cost.

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December 31, 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
$
78,756

 
$
(659
)
 
$
78,298

 
$
(1,160
)
 
$
157,054

 
$
(1,819
)
U.S. government-sponsored enterprises
11,593

 
(79
)
 
89,194

 
(739
)
 
100,787

 
(818
)
Obligations of states, municipalities and political subdivisions
80,654

 
(789
)
 
404,814

 
(7,127
)
 
485,468

 
(7,916
)
Foreign governments
31,752

 
(452
)
 
63,406

 
(1,958
)
 
95,158

 
(2,410
)
Commercial mortgage-backed securities
253,936

 
(1,980
)
 
481,216

 
(14,579
)
 
735,152

 
(16,559
)
Residential mortgage-backed securities
157,508

 
(1,345
)
 
148,960

 
(3,518
)
 
306,468

 
(4,863
)
Asset-backed securities
14,263

 
(123
)
 
15,165

 
(99
)
 
29,428

 
(222
)
Corporate bonds
149,345

 
(863
)
 
187,754

 
(1,874
)
 
337,099

 
(2,737
)
Total fixed maturities
777,807

 
(6,290
)
 
1,468,807

 
(31,054
)
 
2,246,614

 
(37,344
)
Equity securities: (1)
 
 
 
 
 
 
 
 
 
 
 
Insurance, banks and other financial institutions
60,848

 
(4,843
)
 
1,291

 
(610
)
 
62,139

 
(5,453
)
Industrial, consumer and all other
78,552

 
(11,798
)
 
11,243

 
(2,684
)
 
89,795

 
(14,482
)
Total equity securities
139,400

 
(16,641
)
 
12,534

 
(3,294
)
 
151,934

 
(19,935
)
Short-term investments
369,104

 
(69
)
 
—

 
—

 
369,104

 
(69
)
Total
$
1,286,311

 
$
(23,000
)
 
$
1,481,341

 
$
(34,348
)
 
$
2,767,652

 
$
(57,348
)
(1) 
Effective January 1, 2018, the Company adopted ASU No. 2016-01 and equity securities are no longer classified as available-for-sale. Prior periods have not been restated to conform to the current presentation. See note 2.

At December 31, 2017, the Company held 739 securities with a total estimated fair value of $2.8 billion and gross unrealized losses of $57.3 million. Of these 739 securities, 272 securities had been in a continuous unrealized loss position for one year or longer and had a total estimated fair value of $1.5 billion and gross unrealized losses of $34.3 million. Of these securities, 258 securities were fixed maturities and 14 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 available-for-sale 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.

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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 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. 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.

Prior to the adoption of ASU No. 2016-01, equity securities were considered available-for-sale and were included in the analysis of other than temporary impairments. For equity securities, the ability and intent to hold the security for a period of time sufficient to allow for anticipated recovery was considered. A decline in fair value of equity securities that was considered to be other-than-temporary was 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.

c)The amortized cost and estimated fair value of fixed maturities at March 31, 2018 are shown below by contractual maturity.

(dollars in thousands)
Amortized
Cost
 
Estimated
Fair Value
Due in one year or less
$
238,928

 
$
239,201

Due after one year through five years
1,398,491

 
1,429,837

Due after five years through ten years
1,662,209

 
1,716,463

Due after ten years
4,035,112

 
4,224,844

 
7,334,740

 
7,610,345

Commercial mortgage-backed securities
1,446,454

 
1,404,708

Residential mortgage-backed securities
868,675

 
857,718

Asset-backed securities
31,735

 
31,304

Total fixed maturities
$
9,681,604

 
$
9,904,075


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

 
Three Months Ended March 31,
(dollars in thousands)
2018
 
2017
Interest:
 
 
 
Municipal bonds (tax-exempt)
$
20,935

 
$
22,372

Municipal bonds (taxable)
17,633

 
17,505

Other taxable bonds
37,469

 
34,888

Short-term investments, including overnight deposits
10,590

 
4,949

Dividends on equity securities
24,007

 
20,606

Income from equity method investments
1,778

 
4,593

Other
(110
)
 
(229
)
 
112,302

 
104,684

Investment expenses
(4,286
)
 
(4,316
)
Net investment income
$
108,016

 
$
100,368


e)The following table presents net investment gains (losses) and the change in net unrealized gains on available-for-sale investments. 
 
Three Months Ended March 31,
(dollars in thousands)
2018
 
2017
Realized gains on available-for-sale investments:
 
 
 
Sales of fixed maturities
$
1,522

 
$
244

Sales of equity securities (1)
—

 
15,239

Other
891

 
570

Total realized gains
2,413

 
16,053

Realized losses on available-for-sale investments:
 
 
 
Sales of fixed maturities
(491
)
 
(231
)
Sales of equity securities (1)
—

 
(431
)
Other-than-temporary impairments
—

 
(3,213
)
Other
(2,868
)
 
(208
)
Total realized losses
(3,359
)
 
(4,083
)
Net realized investment gains (losses)
(946
)
 
11,970

Change in fair value of equity securities: (1)
 
 
 
Change in fair value of equity securities sold during the period (1)
5,130

 
—

Change in fair value of equity securities held at the end of the period
(127,182
)
 
8,895

Change in fair value of equity securities (1)
(122,052
)
 
8,895

Net investment gains (losses)
$
(122,998
)
 
$
20,865

Change in net unrealized gains on available-for-sale investments included in other comprehensive income:
 
 
 
Fixed maturities
$
(144,168
)
 
$
4,647

Equity securities (1)
—

 
219,052

Short-term investments
47

 
(127
)
Net increase (decrease)
$
(144,121
)
 
$
223,572

(1) 
Effective January 1, 2018, the Company adopted ASU No. 2016-01. As a result, equity securities are no longer classified as available-for-sale with unrealized gains and losses recognized in other comprehensive income; rather, all changes in the fair value of equity securities are now recognized in net income. Prior periods have not been restated to conform to the current presentation. See note 2.

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5. Fair Value Measurements

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

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

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

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

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

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

Investments available-for-sale and equity securities. Equity securities and available-for-sale investments are recorded at fair value on a recurring basis. Available-for-sale investments include fixed maturities 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 and equity securities are 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 (ILS Funds), as further described in note 11, which are not traded on an active exchange and are valued using unobservable inputs.

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Fair value for investments available-for-sale and equity securities 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 unrealized investment 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.

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.


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

 
March 31, 2018
(dollars in thousands)
Level 1
 
Level 2
 
Level 3
 
Total
Assets:
 
 
 
 
 
 
 
Investments:
 
 
 
 
 
 
 
Fixed maturities, available-for-sale:
 
 
 
 
 
 
 
U.S. Treasury securities
$
—

 
$
159,374

 
$
—

 
$
159,374

U.S. government-sponsored enterprises
—

 
366,020

 
—

 
366,020

Obligations of states, municipalities and political subdivisions
—

 
4,411,927

 
—

 
4,411,927

Foreign governments
—

 
1,515,679

 
—

 
1,515,679

Commercial mortgage-backed securities
—

 
1,404,708

 
—

 
1,404,708

Residential mortgage-backed securities
—

 
857,718

 
—

 
857,718

Asset-backed securities
—

 
31,304

 
—

 
31,304

Corporate bonds
—

 
1,157,345

 
—

 
1,157,345

Total fixed maturities, available-for-sale
—

 
9,904,075

 
—

 
9,904,075

Equity securities:
 
 
 
 
 
 
 
Insurance, banks and other financial institutions
1,978,784

 
—

 
151,398

 
2,130,182

Industrial, consumer and all other
3,773,621

 
—

 
—

 
3,773,621

Total equity securities
5,752,405

 
—

 
151,398

 
5,903,803

Short-term investments, available-for-sale
1,940,371

 
96,867

 
—

 
2,037,238

Total investments
$
7,692,776

 
$
10,000,942

 
$
151,398

 
$
17,845,116


 
December 31, 2017
(dollars in thousands)
Level 1
 
Level 2
 
Level 3
 
Total
Assets:
 
 
 
 
 
 
 
Investments available-for-sale:
 
 
 
 
 
 
 
Fixed maturities:
 
 
 
 
 
 
 
U.S. Treasury securities
$
—

 
$
160,613

 
$
—

 
$
160,613

U.S. government-sponsored enterprises
—

 
363,520

 
—

 
363,520

Obligations of states, municipalities and political subdivisions
—

 
4,566,562

 
—

 
4,566,562

Foreign governments
—

 
1,489,228

 
—

 
1,489,228

Commercial mortgage-backed securities
—

 
1,234,326

 
—

 
1,234,326

Residential mortgage-backed securities
—

 
856,168

 
—

 
856,168

Asset-backed securities
—

 
34,728

 
—

 
34,728

Corporate bonds
—

 
1,235,525

 
—

 
1,235,525

Total fixed maturities
—

 
9,940,670

 
—

 
9,940,670

Equity securities: (1)
 
 
 
 
 
 
 
Insurance, banks and other financial institutions
1,934,224

 
—

 
168,809

 
2,103,033

Industrial, consumer and all other
3,864,814

 
—

 
—

 
3,864,814

Total equity securities
5,799,038

 
—

 
168,809

 
5,967,847

Short-term investments
2,065,749

 
95,225

 
—

 
2,160,974

Total investments available-for-sale (1)
$
7,864,787

 
$
10,035,895

 
$
168,809

 
$
18,069,491

(1) 
Effective January 1, 2018, the Company adopted ASU No. 2016-01 and equity securities are no longer classified as available-for-sale. Prior periods have not been restated to conform to the current presentation. See note 2.
 

19
Table of Contents

The following table summarizes changes in Level 3 investments measured at fair value on a recurring basis.
 
Three Months Ended March 31,
(dollars in thousands)
2018
 
2017
Equity securities, beginning of period
$
168,809

 
$
191,203

Purchases
28,900

 
6,000

Sales
(28,252
)
 
(25,371
)
Total gains (losses) included in net income (loss)
(18,059
)
 
6,211

Transfers into Level 3
—

 
—

Transfers out of Level 3
—

 
—

Equity securities, end of period
$
151,398

 
$
178,043

Change in fair value of equity securities included in net income (loss) relating to assets held at March 31, 2018 and 2017
$
(18,059
)
 
$
6,211


There were no transfers into or out of Level 1 and Level 2 during the three months ended March 31, 2018 and 2017.

The Company did not have any assets or liabilities measured at fair value on a non-recurring basis during the three months ended March 31, 2018 and 2017.

6. Segment Reporting Disclosures

In conjunction with the Company's continued growth and diversification, beginning in the first quarter of 2018 the Company's chief operating decision maker changed the way it reviews the Company's ongoing underwriting results. Effective January 1, 2018, the Company's chief operating decision maker reviews the Company's ongoing underwriting operations on a global basis in the following two segments: Insurance and Reinsurance. In determining how to allocate resources and assess the performance of its underwriting results, management considers many factors, including the nature of the insurance product sold, the type of account written and the type of customer served. The Insurance segment includes all direct business and facultative placements written across the Company. The Reinsurance segment includes all treaty reinsurance written across the Company. All investing activities related to the Company's insurance operations are included in the Investing segment.

Also during the first quarter of 2018, the Company's chief operating decision maker changed the way it assesses the performance of and allocates resources to its Markel Ventures operations. Historically, the Company’s chief operating decision maker reviewed and assessed the performance of each Markel Ventures business separately with no single business being individually significant. Following the continued growth in the Company’s Markel Ventures operations, effective in the first quarter of 2018, the chief operating decision maker reviews and assesses Markel Ventures’ performance in the aggregate, as a single operating segment. The Markel Ventures segment primarily consists of controlling interests in a diverse portfolio of businesses that operate in various industries.

The following table summarizes revenue from the Markel Ventures segment by major product grouping.
(dollars in thousands)
March 31, 2018
 
March 31, 2017
Markel Ventures:
 
 
 
Products
$
294,136

 
$
197,064

Services
97,921

 
89,871

Total Markel Ventures
$
392,057

 
$
286,935


The Company's other operations 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. Also included in the Company's other operations are results attributable to the run-off of acquired managing general agent operations and underwriting results for lines of business discontinued prior to, or in conjunction with, acquisitions, including run-off of life and annuity reinsurance business, which are monitored separately from the Company's ongoing underwriting operations. Effective November 17, 2017, the Company's other operations also include the results of the program services business acquired as part of the State National transaction. For purposes of segment reporting, none of the Company's other operations are considered to be reportable segments.

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

For management reporting purposes, the Company allocates assets to its underwriting, investing, Markel Ventures, and other operations. Underwriting assets are all assets not specifically allocated to the Investing or Markel Ventures segments, or to the Company's other operations. Underwriting and investing assets are not allocated to the Insurance and Reinsurance segments since the Company does not manage its assets by underwriting segment. The Company does not allocate capital expenditures for long-lived assets to either of its underwriting segments for management reporting purposes.


20
Table of Contents

a)The following tables summarize the Company's segment disclosures. Prior year amounts have been recast for consistency with the current year presentation.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended March 31, 2018
(dollars in thousands)
Insurance
 
Reinsurance
 
Investing
 
Markel Ventures
 
Other (1)
 
Consolidated
Gross premium volume
$
1,093,362

 
$
492,333

 
$
—

 
$
—

 
$
461,189

 
$
2,046,884

Net written premiums
912,979

 
421,058

 
—

 
—

 
765

 
1,334,802

 
 
 
 
 
 
 
 
 
 
 
 
Earned premiums
902,851

 
247,964

 
—

 
—

 
206

 
1,151,021

Losses and loss adjustment expenses:
 
 
 
 
 
 
 
 
 
 
 
Current accident year
(570,027
)
 
(153,181
)
 
—

 
—

 
—

 
(723,208
)
Prior accident years
119,173

 
(13,071
)
 
—

 
—

 
1,988

 
108,090

Amortization of policy acquisition costs
(179,485
)
 
(62,420
)
 
—

 
—

 
—

 
(241,905
)
Other operating expenses
(169,971
)
 
(12,130
)
 
—

 
—

 
(384
)
 
(182,485
)
Underwriting profit
102,541

 
7,162

 
—

 
—

 
1,810

 
111,513

Net investment income
—

 
—

 
107,894

 
122

 
—

 
108,016

Net investment losses
—

 
—

 
(122,998
)
 
—

 
—

 
(122,998
)
Other revenues
—

 
—

 
—

 
392,057

 
47,375

 
439,432

Other expenses (2)
—

 
—

 
—

 
(358,305
)
 
(43,825
)
 
(402,130
)
Amortization of intangible assets (3)
—

 
—

 
—

 
(10,097
)
 
(18,726
)
 
(28,823
)
Segment profit (loss)
$
102,541

 
$
7,162

 
$
(15,104
)
 
$
23,777

 
$
(13,366
)
 
$
105,010

Interest expense
 
 
 
 
 
 
 
 
 
 
(40,059
)
Net foreign exchange losses
 
 
 
 
 
 
 
 
 
 
(22,114
)
Income before income taxes
 
 
 
 
 
 
 
 
 
 
$
42,837

U.S. GAAP combined ratio (4)
89
%
 
97
%
 
 
 
 
 
NM

(5) 
90
%
(1) 
Other segment profit (loss) represents the total profit (loss) attributable to the Company's operations that are not included in a reportable segment as well as any amortization of intangible assets that is not allocated to a reportable segment.
(2) 
Other expenses for the Markel Ventures segment include depreciation expense of $12.7 million for the three months ended March 31, 2018.
(3) 
Segment profit for the Markel Ventures segment includes amortization of intangible assets attributable to Markel Ventures. Amortization of intangible assets is not allocated to any other reportable segments.
(4) 
The U.S. GAAP combined ratio is a measure of underwriting performance and represents the relationship of incurred losses, loss adjustment expenses and underwriting, acquisition and insurance expenses to earned premiums.
(5) 
NM - Ratio is not meaningful



21
Table of Contents

 
Three Months Ended March 31, 2017
(dollars in thousands)
Insurance
 
Reinsurance
 
Investing
 
Markel Ventures
 
Other (1)
 
Consolidated
Gross premium volume
$
912,997

 
$
547,737

 
$
—

 
$
—

 
$
17

 
$
1,460,751

Net written premiums
770,517

 
489,596

 
—

 
—

 
116

 
1,260,229

 
 
 
 
 
 
 
 
 
 
 
 
Earned premiums
756,849

 
225,637

 
—

 
—

 
116

 
982,602

Losses and loss adjustment expenses:
 
 
 
 
 
 
 
 
 
 
 
Current accident year
(492,736
)
 
(145,610
)
 
—

 
—

 
—

 
(638,346
)
Prior accident years
92,886

 
(71,563
)
 
—

 
—

 
5,304

 
26,627

Amortization of policy acquisition costs
(147,689
)
 
(56,859
)
 
—

 
—

 
—

 
(204,548
)
Other operating expenses
(146,397
)
 
(22,169
)
 
—

 
—

 
(164
)
 
(168,730
)
Underwriting profit (loss)
62,913

 
(70,564
)
 
—

 
—

 
5,256

 
(2,395
)
Net investment income
—

 
—

 
100,325

 
43

 
—

 
100,368

Net investment gains
—

 
—

 
20,865

 
—

 
—

 
20,865

Other revenues
—

 
—

 
—

 
286,935

 
20,981

 
307,916

Other expenses (2)
—

 
—

 
—

 
(251,312
)
 
(31,321
)
 
(282,633
)
Amortization of intangible assets (3)
—

 
—

 
—

 
(6,904
)
 
(9,866
)
 
(16,770
)
Segment profit (loss)
$
62,913

 
$
(70,564
)
 
$
121,190

 
$
28,762

 
$
(14,950
)
 
$
127,351

Interest expense
 
 
 
 
 
 
 
 
 
 
(33,402
)
Net foreign exchange gains
 
 
 
 
 
 
 
 
 
 
95

Income before income taxes
 
 
 
 
 
 
 
 
 
 
$
94,044

U.S. GAAP combined ratio (4)
92
%