MKL 03.31.2015 10-Q
Table of Contents

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
___________________________________________
 FORM 10-Q
___________________________________________
x
Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended March 31, 2015
or
¨
Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from _______ to _______
Commission File Number: 001-15811
___________________________________________
MARKEL CORPORATION
(Exact name of registrant as specified in its charter)
___________________________________________
 
Virginia
 
54-1959284
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)

4521 Highwoods Parkway, Glen Allen, Virginia 23060-6148
(Address of principal executive offices)
(Zip Code)
(804) 747-0136
(Registrant's telephone number, including area code)
 ___________________________________________
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x   No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes x No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer  x
 
Accelerated filer  o
 
Non-accelerated filer  o
 
Smaller reporting company  o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x
Number of shares of the registrant's common stock outstanding at April 29, 2015: 13,945,734


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,
2015
 
December 31,
2014
 
(unaudited)
 
 
ASSETS
 
 
 
Investments, available-for-sale, at estimated fair value:
 
 
 
Fixed maturities (amortized cost of $9,371,731 in 2015 and $9,929,137 in 2014)
$
9,971,814

 
$
10,422,882

Equity securities (cost of $2,096,586 in 2015 and $1,951,658 in 2014)
4,340,849

 
4,137,576

Short-term investments (estimated fair value approximates cost)
1,731,872

 
1,594,849

Total Investments
16,044,535

 
16,155,307

Cash and cash equivalents
1,958,087

 
1,960,169

Restricted cash and cash equivalents
550,610

 
522,225

Receivables
1,193,405

 
1,135,217

Reinsurance recoverable on unpaid losses
1,949,974

 
1,868,669

Reinsurance recoverable on paid losses
113,816

 
102,206

Deferred policy acquisition costs
369,632

 
353,410

Prepaid reinsurance premiums
365,496

 
365,458

Goodwill
1,039,911

 
1,049,115

Intangible assets
680,357

 
702,747

Other assets
987,566

 
985,834

Total Assets
$
25,253,389

 
$
25,200,357

LIABILITIES AND EQUITY
 
 
 
Unpaid losses and loss adjustment expenses
$
10,280,037

 
$
10,404,152

Life and annuity benefits
1,189,140

 
1,305,818

Unearned premiums
2,316,508

 
2,245,690

Payables to insurance and reinsurance companies
286,102

 
276,122

Senior long-term debt and other debt (estimated fair value of $2,525,000 in 2015 and $2,493,000 in 2014)
2,249,554

 
2,253,594

Other liabilities
999,542

 
1,051,931

Total Liabilities
17,320,883

 
17,537,307

Redeemable noncontrolling interests
55,108

 
61,048

Commitments and contingencies

 

Shareholders' equity:
 
 
 
Common stock
3,320,323

 
3,308,395

Retained earnings
2,753,963

 
2,581,866

Accumulated other comprehensive income
1,795,372

 
1,704,557

Total Shareholders' Equity
7,869,658

 
7,594,818

Noncontrolling interests
7,740

 
7,184

Total Equity
7,877,398

 
7,602,002

Total Liabilities and Equity
$
25,253,389

 
$
25,200,357

See accompanying notes to consolidated financial statements.

3

Table of Contents

MARKEL CORPORATION AND SUBSIDIARIES

Consolidated Statements of Income and Comprehensive Income
(Unaudited)
 
Three Months Ended March 31,
 
2015
 
2014
 
(dollars in thousands,
except per share data)
OPERATING REVENUES
 
 
 
Earned premiums
$
943,650

 
$
949,375

Net investment income
92,875

 
86,715

Net realized investment gains:
 
 
 
Other-than-temporary impairment losses
(5,092
)
 

Net realized investment gains, excluding other-than-temporary impairment losses
10,663

 
17,394

Net realized investment gains
5,571

 
17,394

Other revenues
260,058

 
186,171

Total Operating Revenues
1,302,154

 
1,239,655

OPERATING EXPENSES
 
 
 
Losses and loss adjustment expenses
446,995

 
542,303

Underwriting, acquisition and insurance expenses
340,685

 
355,505

Amortization of intangible assets
14,640

 
13,999

Other expenses
231,001

 
182,168

Total Operating Expenses
1,033,321

 
1,093,975

Operating Income
268,833

 
145,680

Interest expense
29,312

 
29,699

Income Before Income Taxes
239,521

 
115,981

Income tax expense
45,515

 
28,480

Net Income
194,006

 
87,501

Net income (loss) attributable to noncontrolling interests
3,014

 
(215
)
Net Income to Shareholders
$
190,992

 
$
87,716

 
 
 
 
OTHER COMPREHENSIVE INCOME
 
 
 
Change in net unrealized gains on investments, net of taxes:
 
 
 
Net holding gains arising during the period
$
121,022

 
$
147,296

Change in unrealized other-than-temporary impairment losses on fixed maturities arising during the period
167

 
(20
)
Reclassification adjustments for net gains included in net income
(9,053
)
 
(5,944
)
Change in net unrealized gains on investments, net of taxes
112,136

 
141,332

Change in foreign currency translation adjustments, net of taxes
(21,814
)
 
913

Change in net actuarial pension loss, net of taxes
463

 
319

Total Other Comprehensive Income
90,785

 
142,564

Comprehensive Income
284,791

 
230,065

Comprehensive income (loss) attributable to noncontrolling interests
2,984

 
(208
)
Comprehensive Income to Shareholders
$
281,807

 
$
230,273

 
 
 
 
NET INCOME PER SHARE
 
 
 
Basic
$
13.57

 
$
6.28

Diluted
$
13.49

 
$
6.25


See accompanying notes to consolidated financial statements.

4

Table of Contents

MARKEL CORPORATION AND SUBSIDIARIES

Consolidated Statements of Changes in Equity
(Unaudited)
 
(in thousands)
Common Shares
 
Common
Stock
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Income
 
Total
Shareholders'
Equity
 
Noncontrolling
Interests
 
Total Equity
 
Redeemable
Noncontrolling
Interests
December 31, 2013
13,986

 
$
3,288,863

 
$
2,294,909

 
$
1,089,805

 
$
6,673,577

 
$
4,433

 
$
6,678,010

 
$
72,183

Net income (loss)
 
 
 
 
87,716

 

 
87,716

 
(324
)
 
87,392

 
109

Other comprehensive income
 
 
 
 

 
142,557

 
142,557

 

 
142,557

 
7

Comprehensive Income (Loss)
 
 
 
 
 
 
 
 
230,273

 
(324
)
 
229,949

 
116

Issuance of common stock
22

 
4,363

 

 

 
4,363

 

 
4,363

 

Repurchase of common stock
(39
)
 

 
(17,282
)
 

 
(17,282
)
 

 
(17,282
)
 

Restricted stock units expensed

 
8,421

 

 

 
8,421

 

 
8,421

 

Adjustment of redeemable noncontrolling interests

 

 
117

 

 
117

 

 
117

 
(117
)
Purchase of noncontrolling interest

 
647

 

 

 
647

 

 
647

 
(18,405
)
Other

 
7

 
9

 

 
16

 
3,945

 
3,961

 
(862
)
March 31, 2014
13,969

 
$
3,302,301

 
$
2,365,469

 
$
1,232,362

 
$
6,900,132

 
$
8,054

 
$
6,908,186

 
$
52,915

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
December 31, 2014
13,962

 
$
3,308,395

 
$
2,581,866

 
$
1,704,557

 
$
7,594,818

 
$
7,184

 
$
7,602,002

 
$
61,048

Net income
 
 
 
 
190,992

 

 
190,992

 
511

 
191,503

 
2,503

Other comprehensive income (loss)
 
 
 
 

 
90,815

 
90,815

 

 
90,815

 
(30
)
Comprehensive Income
 
 
 
 
 
 
 
 
281,807

 
511

 
282,318

 
2,473

Issuance of common stock
5

 
429

 

 

 
429

 

 
429

 

Repurchase of common stock
(21
)
 

 
(17,548
)
 

 
(17,548
)
 

 
(17,548
)
 

Restricted stock units expensed

 
10,632

 

 

 
10,632

 

 
10,632

 

Adjustment of redeemable noncontrolling interests

 

 
(1,347
)
 

 
(1,347
)
 

 
(1,347
)
 
1,347

Purchase of noncontrolling interest

 
(903
)
 

 

 
(903
)
 

 
(903
)
 
(8,609
)
Other

 
1,770

 

 

 
1,770

 
45

 
1,815

 
(1,151
)
March 31, 2015
13,946

 
$
3,320,323

 
$
2,753,963

 
$
1,795,372

 
$
7,869,658

 
$
7,740

 
$
7,877,398

 
$
55,108


See accompanying notes to consolidated financial statements.

5

Table of Contents

MARKEL CORPORATION AND SUBSIDIARIES

Condensed Consolidated Statements of Cash Flows
(Unaudited)
 
Three Months Ended March 31,
 
2015
 
2014
 
(dollars in thousands)
OPERATING ACTIVITIES
 
 
 
Net income
$
194,006

 
$
87,501

Adjustments to reconcile net income to net cash provided by operating activities
(171,174
)
 
(65,084
)
Net Cash Provided By Operating Activities
22,832

 
22,417

INVESTING ACTIVITIES
 
 
 
Proceeds from sales of fixed maturities and equity securities
71,721

 
660,447

Proceeds from maturities, calls and prepayments of fixed maturities
388,522

 
440,891

Cost of fixed maturities and equity securities purchased
(232,551
)
 
(1,114,736
)
Net change in short-term investments
(146,545
)
 
130,557

Proceeds from sales of equity method investments
15,003

 
82,518

Cost of equity method investments
(600
)
 
(8,050
)
Change in restricted cash and cash equivalents
(40,841
)
 
152,897

Additions to property and equipment
(23,606
)
 
(10,725
)
Acquisitions, net of cash acquired

 
(153,735
)
Other
(441
)
 
384

Net Cash Provided By Investing Activities
30,662

 
180,448

FINANCING ACTIVITIES
 
 
 
Additions to senior long-term debt and other debt
27,711

 
10,120

Repayment of senior long-term debt and other debt
(29,160
)
 
(8,608
)
Repurchases of common stock
(17,548
)
 
(17,282
)
Issuance of common stock
429

 
4,363

Purchase of noncontrolling interests
(10,314
)
 
(17,758
)
Distributions to noncontrolling interests
(1,159
)
 
(1,168
)
Other
(3,407
)
 
(609
)
Net Cash Used By Financing Activities
(33,448
)
 
(30,942
)
Effect of foreign currency rate changes on cash and cash equivalents
(22,128
)
 
971

Increase (decrease) in cash and cash equivalents
(2,082
)
 
172,894

Cash and cash equivalents at beginning of period
1,960,169

 
1,978,526

CASH AND CASH EQUIVALENTS AT END OF PERIOD
$
1,958,087

 
$
2,151,420


See accompanying notes to consolidated financial statements.

6

Table of Contents

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Basis of Presentation

Markel Corporation is a diverse financial holding company serving a variety of niche markets. Markel Corporation's principal business markets and underwrites specialty insurance products and programs. Through its wholly-owned subsidiary, Markel Ventures, Inc. (Markel Ventures), Markel Corporation also owns interests in various industrial and service businesses that operate outside of the specialty insurance marketplace.

The consolidated balance sheet as of March 31, 2015 and the related consolidated statements of income and comprehensive income, changes in equity and cash flows for the three months ended March 31, 2015 and 2014 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, 2014 was derived from Markel Corporation's audited annual consolidated financial statements.

The accompanying consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (U.S. GAAP) and include the accounts of Markel Corporation and its subsidiaries (the Company). All significant intercompany balances and transactions have been eliminated in consolidation. The Company consolidates the results of its 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 2014 Annual Report on Form 10-K for a more complete description of the Company's business and accounting policies.

2. Recent Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers (Topic 606), which creates a new comprehensive revenue recognition standard that will serve as a single source of revenue guidance for all companies in all industries. The guidance applies to all companies that either enter into contracts with customers to transfer goods or services or enter into contracts for the transfer of nonfinancial assets, unless those contracts are within the scope of other standards, such as insurance contracts. ASU No. 2014-09's core principle is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. In doing so, companies will need to use more judgment and make more estimates than under the current guidance. These may include identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price and allocating the transaction price to each separate performance obligation. ASU No. 2014-09 becomes effective for the Company during the first quarter of 2017 and may be applied retrospectively or under a modified retrospective method where the cumulative effect is recognized at the date of initial application. Early application is not permitted. On April 29, 2015, the FASB proposed a one-year deferral of the effective date for ASU 2014-09. Early application would be permitted for all entities, but not before the original effective date for public business entities. The Company is currently evaluating ASU No. 2014-09 to determine the potential impact that adopting this standard will have on its consolidated financial statements. Adoption of this ASU is not expected to have a significant impact on the Company's insurance operations, but will impact the Company's non-insurance operations.


7

Table of Contents

In February 2015, the FASB issued ASU No. 2015-02, Consolidation (Topic 810): Amendments to the Consolidation Analysis, which changes the way reporting enterprises evaluate whether (a) they should consolidate limited partnerships and similar entities, (b) fees paid to a decision maker or service provider are variable interests in a variable interest entity (VIE), and (c) variable interests in a VIE held by related parties of the reporting enterprise require the reporting enterprise to consolidate the VIE. It also eliminates the VIE consolidation model based on majority exposure to variability that applied to certain investment companies and similar entities. The ASU also significantly changes how to evaluate voting rights for entities that are not similar to limited partnerships when determining whether the entity is a VIE, which may affect entities for which the decision making rights are conveyed through a contractual arrangement. ASU No. 2015-02 becomes effective for the Company during the first quarter of 2016 and may be applied retrospectively or under a modified retrospective method where the cumulative-effect adjustment to retained earnings is recognized as of the beginning of the fiscal year of adoption. Reporting enterprises may also restate previously issued financial statements for one or more years with a cumulative-effect adjustment to retained earnings as of the beginning of the first year restated. Early adoption is allowed. The Company is currently evaluating ASU No. 2015-02 to determine the potential impact that adopting this standard will have on its consolidated financial statements.

3. Investments

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

 
March 31, 2015
(dollars in thousands)
Amortized
Cost
 
Gross
Unrealized
Holding
Gains
 
Gross
Unrealized
Holding
Losses
 
Unrealized
Other-Than-
Temporary
Impairment
Losses
 
Estimated
Fair
Value
Fixed maturities:
 
 
 
 
 
 
 
 
 
U.S. Treasury securities and obligations of U.S. government agencies
$
612,368

 
$
17,212

 
$
(764
)
 
$

 
$
628,816

Obligations of states, municipalities and political subdivisions
3,956,064

 
251,023

 
(2,661
)
 

 
4,204,426

Foreign governments
1,336,176

 
213,901

 
(191
)
 

 
1,549,886

Commercial mortgage-backed securities
408,016

 
8,861

 
(1,255
)
 

 
415,622

Residential mortgage-backed securities
920,185

 
44,219

 
(1,774
)
 
(2,258
)
 
960,372

Asset-backed securities
77,341

 
73

 
(295
)
 

 
77,119

Corporate bonds
2,061,581

 
78,801

 
(3,198
)
 
(1,611
)
 
2,135,573

Total fixed maturities
9,371,731

 
614,090

 
(10,138
)
 
(3,869
)
 
9,971,814

Equity securities:
 
 
 
 
 
 
 
 
 
Insurance, banks and other financial institutions
588,140

 
798,628

 
(1,740
)
 

 
1,385,028

Industrial, consumer and all other
1,508,446

 
1,458,816

 
(11,441
)
 

 
2,955,821

Total equity securities
2,096,586

 
2,257,444

 
(13,181
)
 

 
4,340,849

Short-term investments
1,731,862

 
13

 
(3
)
 

 
1,731,872

Investments, available-for-sale
$
13,200,179

 
$
2,871,547

 
$
(23,322
)
 
$
(3,869
)
 
$
16,044,535


8

Table of Contents

 
December 31, 2014
(dollars in thousands)
Amortized
Cost
 
Gross
Unrealized
Holding
Gains
 
Gross
Unrealized
Holding
Losses
 
Unrealized
Other-Than-
Temporary
Impairment
Losses
 
Estimated
Fair
Value
Fixed maturities:
 
 
 
 
 
 
 
 
 
U.S. Treasury securities and obligations of U.S. government agencies
$
662,462

 
$
12,963

 
$
(2,163
)
 
$

 
$
673,262

Obligations of states, municipalities and political subdivisions
4,075,748

 
245,158

 
(3,359
)
 

 
4,317,547

Foreign governments
1,458,255

 
154,707

 
(1,041
)
 

 
1,611,921

Commercial mortgage-backed securities
427,904

 
5,325

 
(2,602
)
 

 
430,627

Residential mortgage-backed securities
954,263

 
34,324

 
(3,482
)
 
(2,258
)
 
982,847

Asset-backed securities
100,073

 
99

 
(682
)
 

 
99,490

Corporate bonds
2,250,432

 
69,016

 
(10,441
)
 
(1,819
)
 
2,307,188

Total fixed maturities
9,929,137

 
521,592

 
(23,770
)
 
(4,077
)
 
10,422,882

Equity securities:
 
 
 
 
 
 
 
 
 
Insurance, banks and other financial institutions
523,739

 
789,717

 
(1,531
)
 

 
1,311,925

Industrial, consumer and all other
1,427,919

 
1,403,566

 
(5,834
)
 

 
2,825,651

Total equity securities
1,951,658

 
2,193,283

 
(7,365
)
 

 
4,137,576

Short-term investments
1,594,819

 
36

 
(6
)
 

 
1,594,849

Investments, available-for-sale
$
13,475,614

 
$
2,714,911

 
$
(31,141
)
 
$
(4,077
)
 
$
16,155,307


9

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.

 
March 31, 2015
 
Less than 12 months
 
12 months or longer
 
Total
(dollars in thousands)
Estimated
Fair
Value
 
Gross
Unrealized
Holding and
Other-Than-
Temporary
Impairment
Losses
 
Estimated
Fair
Value
 
Gross
Unrealized
Holding and
Other-Than-
Temporary
Impairment
Losses
 
Estimated
Fair
Value
 
Gross
Unrealized
Holding and
Other-Than-
Temporary
Impairment
Losses
Fixed maturities:
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury securities and obligations of U.S. government agencies
$
5,716

 
$
(3
)
 
$
125,651

 
$
(761
)
 
$
131,367

 
$
(764
)
Obligations of states, municipalities and political subdivisions
95,257

 
(547
)
 
61,394

 
(2,114
)
 
156,651

 
(2,661
)
Foreign governments
16,965

 
(68
)
 
44,204

 
(123
)
 
61,169

 
(191
)
Commercial mortgage-backed securities
51,673

 
(157
)
 
107,698

 
(1,098
)
 
159,371

 
(1,255
)
Residential mortgage-backed securities
3,726

 
(2,277
)
 
167,295

 
(1,755
)
 
171,021

 
(4,032
)
Asset-backed securities
10,147

 
(17
)
 
45,378

 
(278
)
 
55,525

 
(295
)
Corporate bonds
74,273

 
(1,742
)
 
373,451

 
(3,067
)
 
447,724

 
(4,809
)
Total fixed maturities
257,757

 
(4,811
)
 
925,071

 
(9,196
)
 
1,182,828

 
(14,007
)
Equity securities:
 
 
 
 
 
 
 
 
 
 
 
Insurance, banks and other financial institutions
16,810

 
(1,740
)
 

 

 
16,810

 
(1,740
)
Industrial, consumer and all other
158,284

 
(11,441
)
 

 

 
158,284

 
(11,441
)
Total equity securities
175,094

 
(13,181
)
 

 

 
175,094

 
(13,181
)
Short-term investments
440,985

 
(3
)
 

 

 
440,985

 
(3
)
Total
$
873,836

 
$
(17,995
)
 
$
925,071

 
$
(9,196
)
 
$
1,798,907

 
$
(27,191
)

At March 31, 2015, the Company held 424 securities with a total estimated fair value of $1.8 billion and gross unrealized losses of $27.2 million. Of these 424 securities, 281 securities had been in a continuous unrealized loss position for one year or longer and had a total estimated fair value of $925.1 million and gross unrealized losses of $9.2 million. All 281 securities were fixed maturities. The Company does not intend to sell or believe it will be required to sell these fixed maturities before recovery of their amortized cost.


10

Table of Contents

 
December 31, 2014
 
Less than 12 months
 
12 months or longer
 
Total
(dollars in thousands)
Estimated
Fair
Value
 
Gross
Unrealized
Holding and
Other-Than-
Temporary
Impairment
Losses
 
Estimated
Fair
Value
 
Gross
Unrealized
Holding and
Other-Than-
Temporary
Impairment
Losses
 
Estimated
Fair
Value
 
Gross
Unrealized
Holding and
Other-Than-
Temporary
Impairment
Losses
Fixed maturities:
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury securities and obligations of U.S. government agencies
$
108,250

 
$
(62
)
 
$
163,359

 
$
(2,101
)
 
$
271,609

 
$
(2,163
)
Obligations of states, municipalities and political subdivisions
58,583

 
(542
)
 
92,441

 
(2,817
)
 
151,024

 
(3,359
)
Foreign governments
18,856

 
(386
)
 
56,217

 
(655
)
 
75,073

 
(1,041
)
Commercial mortgage-backed securities
45,931

 
(210
)
 
147,558

 
(2,392
)
 
193,489

 
(2,602
)
Residential mortgage-backed securities
9,613

 
(2,285
)
 
207,374

 
(3,455
)
 
216,987

 
(5,740
)
Asset-backed securities
30,448

 
(20
)
 
45,160

 
(662
)
 
75,608

 
(682
)
Corporate bonds
141,176

 
(2,263
)
 
621,821

 
(9,997
)
 
762,997

 
(12,260
)
Total fixed maturities
412,857

 
(5,768
)
 
1,333,930

 
(22,079
)
 
1,746,787

 
(27,847
)
Equity securities:
 
 
 
 
 
 
 
 
 
 
 
Insurance, banks and other financial institutions
16,219

 
(1,531
)
 

 

 
16,219

 
(1,531
)
Industrial, consumer and all other
86,062

 
(5,834
)
 

 

 
86,062

 
(5,834
)
Total equity securities
102,281

 
(7,365
)
 

 

 
102,281

 
(7,365
)
Short-term investments
181,964

 
(6
)
 

 

 
181,964

 
(6
)
Total
$
697,102

 
$
(13,139
)
 
$
1,333,930

 
$
(22,079
)
 
$
2,031,032

 
$
(35,218
)

At December 31, 2014, the Company held 552 securities with a total estimated fair value of $2.0 billion and gross unrealized losses of $35.2 million. Of these 552 securities, 396 securities had been in a continuous unrealized loss position for one year or longer and had a total estimated fair value of $1.3 billion and gross unrealized losses of $22.1 million. All 396 securities were fixed maturities.

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.


11

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 March 31, 2015 are shown below by contractual maturity.

(dollars in thousands)
Amortized
Cost
 
Estimated
Fair Value
Due in one year or less
$
617,588

 
$
620,740

Due after one year through five years
1,904,996

 
1,962,240

Due after five years through ten years
1,925,821

 
2,054,347

Due after ten years
3,517,784

 
3,881,374

 
7,966,189

 
8,518,701

Commercial mortgage-backed securities
408,016

 
415,622

Residential mortgage-backed securities
920,185

 
960,372

Asset-backed securities
77,341

 
77,119

Total fixed maturities
$
9,371,731

 
$
9,971,814


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

 
Three Months Ended March 31,
(dollars in thousands)
2015
 
2014
Interest:
 
 
 
Municipal bonds (tax-exempt)
$
25,852

 
$
23,104

Municipal bonds (taxable)
14,100

 
8,996

Other taxable bonds
35,138

 
35,744

Short-term investments, including overnight deposits
1,251

 
1,474

Dividends on equity securities
19,024

 
16,856

Income from equity method investments
1,344

 
3,583

Other
61

 
1,179

 
96,770

 
90,936

Investment expenses
(3,895
)
 
(4,221
)
Net investment income
$
92,875

 
$
86,715



12

Table of Contents


e)Cumulative credit losses recognized in net income on fixed maturities where other-than-temporary impairment was identified and a portion of the other-than-temporary impairment was included in other comprehensive income were $10.7 million at March 31, 2015 and $12.7 million at December 31, 2014.

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

 
Three Months Ended March 31,
(dollars in thousands)
2015
 
2014
Realized gains:
 
 
 
Sales of fixed maturities
$
1,586

 
$
4,583

Sales of equity securities
15,957

 
12,145

Other
1,307

 
9,955

Total realized gains
18,850

 
26,683

Realized losses:
 
 
 
Sales of fixed maturities
(142
)
 
(8,484
)
Sales of equity securities
(160
)
 
(146
)
Other-than-temporary impairments
(5,092
)
 

Other
(7,885
)
 
(659
)
Total realized losses
(13,279
)
 
(9,289
)
Net realized investment gains
$
5,571

 
$
17,394

Change in net unrealized gains on investments:
 
 
 
Fixed maturities
$
106,338

 
$
148,811

Equity securities
58,345

 
66,453

Short-term investments
(20
)
 
1

Net increase
$
164,663

 
$
215,265


Other-than-temporary impairment losses recognized in net income and included in net realized investment gains included losses attributable to equity securities totaling $5.1 million for the three months ended March 31, 2015. There were no writedowns for other-than-temporary declines in the estimated fair value of investments for the three months ended March 31, 2014.

4. 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.

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Table of Contents


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

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

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

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.

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.


14

Table of Contents

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

 
March 31, 2015
(dollars in thousands)
Level 1
 
Level 2
 
Level 3
 
Total
Assets:
 
 
 
 
 
 
 
Investments available-for-sale:
 
 
 
 
 
 
 
Fixed maturities:
 
 
 
 
 
 
 
U.S. Treasury securities and obligations of U.S. government agencies
$

 
$
628,816

 
$

 
$
628,816

Obligations of states, municipalities and political subdivisions

 
4,204,426

 

 
4,204,426

Foreign governments

 
1,549,886

 

 
1,549,886

Commercial mortgage-backed securities

 
415,622

 

 
415,622

Residential mortgage-backed securities

 
960,372

 

 
960,372

Asset-backed securities

 
77,119

 

 
77,119

Corporate bonds

 
2,135,573

 

 
2,135,573

Total fixed maturities

 
9,971,814

 

 
9,971,814

Equity securities:
 
 
 
 
 
 
 
Insurance, banks and other financial institutions
1,385,028

 

 

 
1,385,028

Industrial, consumer and all other
2,955,821

 

 

 
2,955,821

Total equity securities
4,340,849

 

 

 
4,340,849

Short-term investments
1,618,657

 
113,215

 

 
1,731,872

Total investments available-for-sale
$
5,959,506

 
$
10,085,029

 
$

 
$
16,044,535


 
December 31, 2014
(dollars in thousands)
Level 1
 
Level 2
 
Level 3
 
Total
Assets:
 
 
 
 
 
 
 
Investments available-for-sale:
 
 
 
 
 
 
 
Fixed maturities:
 
 
 
 
 
 
 
U.S. Treasury securities and obligations of U.S. government agencies
$

 
$
673,262

 
$

 
$
673,262

Obligations of states, municipalities and political subdivisions

 
4,317,547

 

 
4,317,547

Foreign governments

 
1,611,921

 

 
1,611,921

Commercial mortgage-backed securities

 
430,627

 

 
430,627

Residential mortgage-backed securities

 
982,847

 

 
982,847

Asset-backed securities

 
99,490

 

 
99,490

Corporate bonds

 
2,307,188

 

 
2,307,188

Total fixed maturities

 
10,422,882

 

 
10,422,882

Equity securities:
 
 
 
 
 
 
 
Insurance, banks and other financial institutions
1,311,925

 

 

 
1,311,925

Industrial, consumer and all other
2,825,651

 

 

 
2,825,651

Total equity securities
4,137,576

 

 

 
4,137,576

Short-term investments
1,469,975

 
124,874

 

 
1,594,849

Total investments available-for-sale
$
5,607,551

 
$
10,547,756

 
$

 
$
16,155,307


There were no transfers into or out of Level 1 and Level 2 during the three months ended March 31, 2015 and 2014.

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, 2015 and 2014.

15

Table of Contents


5. 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. For purposes of segment reporting, the Company's non-insurance operations are not considered to be a reportable segment.

Segment profit for the Investing segment is measured by net investment income and net realized investment gains or losses. Segment profit or loss for each of the Company's underwriting segments is measured by underwriting profit or loss. The property and casualty insurance industry commonly defines underwriting profit or loss as earned premiums net of losses and loss adjustment expenses and underwriting, acquisition and insurance expenses. Underwriting profit or loss does not replace operating income or net income computed in accordance with U.S. GAAP as a measure of profitability. Underwriting profit or loss provides a basis for management to evaluate the Company's underwriting performance. Segment profit or loss for the Company's underwriting segments also includes other revenues and other expenses, primarily related to the run-off of managing general agent operations that were discontinued in conjunction with acquisitions. Other revenues and other expenses in the Other Insurance (Discontinued Lines) segment are comprised of the results attributable to the run-off of life and annuity reinsurance business.

For management reporting purposes, the Company allocates assets to its underwriting, investing and non-insurance operations. Underwriting assets are all assets not specifically allocated to the Investing segment or to the Company's non-insurance operations. Underwriting and investing assets are not allocated to the U.S. Insurance, International Insurance, Reinsurance or Other Insurance (Discontinued Lines) segments since the Company does not manage its assets by underwriting segment. The Company does not allocate capital expenditures for long-lived assets to any of its underwriting segments for management reporting purposes.


16

Table of Contents

a)The following tables summarize the Company's segment disclosures.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Three Months Ended March 31, 2015
(dollars in thousands)
U.S.
Insurance
 
International
Insurance
 
Reinsurance
 
Other
Insurance
(Discontinued
Lines)
 
Investing
 
Consolidated
Gross premium volume
$
585,365

 
$
289,227

 
$
377,837

 
$
44

 
$

 
$
1,252,473

Net written premiums
496,169

 
222,708

 
316,212

 
341

 

 
1,035,430

 
 
 
 
 
 
 
 
 
 
 
 
Earned premiums
514,554

 
205,961

 
222,754

 
381

 

 
943,650

Losses and loss adjustment expenses:
 
 
 
 
 
 
 
 
 
 
 
Current accident year
(316,757
)
 
(148,844
)
 
(148,740
)
 

 

 
(614,341
)
Prior accident years
67,581

 
76,650

 
26,387

 
(3,272
)
 

 
167,346

Underwriting, acquisition and insurance expenses
(185,260
)
 
(78,794
)
 
(76,553
)
 
(78
)
 

 
(340,685
)
Underwriting profit (loss)
80,118

 
54,973

 
23,848

 
(2,969
)
 

 
155,970

Net investment income

 

 

 

 
92,875

 
92,875

Net realized investment gains

 

 

 

 
5,571

 
5,571

Other revenues (insurance)
1,402

 
5,387

 
423

 
(23
)
 

 
7,189

Other expenses (insurance)
(905
)
 
(1,404
)
 

 
(7,349
)
 

 
(9,658
)
Segment profit (loss)
$
80,615

 
$
58,956

 
$
24,271

 
$
(10,341
)
 
$
98,446

 
$
251,947

Other revenues (non-insurance)
 
 
 
 
 
 
 
 
 
 
252,869

Other expenses (non-insurance)
 
 
 
 
 
 
 
 
 
 
(221,343
)
Amortization of intangible assets
 
 
 
 
 
 
 
 
 
 
(14,640
)
Interest expense
 
 
 
 
 
 
 
 
 
 
(29,312
)
Income before income taxes
 
 
 
 
 
 
 
 
 
 
$
239,521

U.S. GAAP combined ratio (1)
84
%
 
73
%
 
89
%
 
NM

(2) 
 
 
83
%
(1) 
The U.S. GAAP combined ratio is a measure of underwriting performance and represents the relationship of incurred losses, loss adjustment expenses and underwriting, acquisition and insurance expenses to earned premiums.
(2) 
NM – Ratio is not meaningful.

17

Table of Contents


 
Three Months Ended March 31, 2014
(dollars in thousands)
U.S.
Insurance
 
International
Insurance
 
Reinsurance
 
Other
Insurance
(Discontinued
Lines)
 
Investing
 
Consolidated
Gross premium volume
$
575,233

 
$
294,236

 
$
489,961

 
$
327

 
$

 
$
1,359,757

Net written premiums
474,054

 
229,120

 
435,997

 
140

 

 
1,139,311

 
 
 
 
 
 
 
 
 
 
 
 
Earned premiums
483,735

 
222,147

 
243,315

 
178

 

 
949,375

Losses and loss adjustment expenses:
 
 
 
 
 
 
 
 
 
 
 
Current accident year
(312,413
)
 
(163,379
)
 
(173,900
)
 

 

 
(649,692
)
Prior accident years
43,554

 
42,297

 
28,200

 
(6,662
)
 

 
107,389

Underwriting, acquisition and insurance expenses
(193,529
)
 
(80,009
)
 
(81,972
)
 
5

 

 
(355,505
)
Underwriting profit (loss)
21,347

 
21,056

 
15,643

 
(6,479
)
 

 
51,567

Net investment income

 

 

 

 
86,715

 
86,715

Net realized investment gains

 

 

 

 
17,394

 
17,394

Other revenues (insurance)
2,110

 
7,348

 
2,136

 
43

 

 
11,637

Other expenses (insurance)
(1,647
)
 
(3,595
)
 

 
(8,615
)
 

 
(13,857
)
Segment profit (loss)
$
21,810

 
$
24,809

 
$
17,779

 
$
(15,051
)
 
$
104,109

 
$
153,456

Other revenues (non-insurance)
 
 
 
 
 
 
 
 
 
 
174,534

Other expenses (non-insurance)
 
 
 
 
 
 
 
 
 
 
(168,311
)
Amortization of intangible assets
 
 
 
 
 
 
 
 
 
 
(13,999
)
Interest expense
 
 
 
 
 
 
 
 
 
 
(29,699
)
Income before income taxes
 
 
 
 
 
 
 
 
 
 
$
115,981

U.S. GAAP combined ratio (1)
96
%
 
91
%
 
94
%
 
NM

(2) 
 
 
95
%
(1) 
The U.S. GAAP combined ratio is a measure of underwriting performance and represents the relationship of incurred losses, loss adjustment expenses and underwriting, acquisition and insurance expenses to earned premiums.
(2) 
NM – Ratio is not meaningful.

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

(dollars in thousands)
March 31, 2015
 
December 31, 2014
Segment assets:
 
 
 
Investing
$
18,450,247

 
$
18,531,150

Underwriting
5,584,980

 
5,422,445

Total segment assets
24,035,227

 
23,953,595

Non-insurance operations
1,218,162

 
1,246,762

Total assets
$
25,253,389

 
$
25,200,357



18

Table of Contents

6. Other Revenues and Other Expenses

The following table summarizes the components of other revenues and other expenses.
 
 
 
 
 
 
 
 
 
Three Months Ended March 31,
 
2015
 
2014
(dollars in thousands)
Other
Revenues
 
Other
Expenses
 
Other
Revenues
 
Other
Expenses
Insurance:
 
 
 
 
 
 
 
Managing general agent operations
$
5,870

 
$
2,309

 
$
9,178

 
$
4,881

Life and annuity
(23
)
 
7,349

 
43

 
8,615

Other
1,342

 

 
2,416

 
361

 
7,189

 
9,658

 
11,637

 
13,857

Non-Insurance:
 
 
 
 
 
 
 
Markel Ventures: Manufacturing
177,762

 
151,800

 
100,611

 
95,889

Markel Ventures: Non-Manufacturing
67,681

 
63,830

 
70,595

 
65,511

Other
7,426

 
5,713

 
3,328

 
6,911

 
252,869

 
221,343

 
174,534

 
168,311

Total
$
260,058

 
$
231,001

 
$
186,171

 
$
182,168


The Company's Markel Ventures operations primarily consist of controlling interests in various industrial and service businesses and are viewed by management as separate and distinct from the Company's insurance operations. While each of the companies is operated independently from one another, management aggregates financial results into two industry groups: manufacturing and non-manufacturing.

7. Reinsurance

The following table summarizes the effect of reinsurance and retrocessional reinsurance on premiums written and earned.
 
 
 
 
 
 
 
 
 
Three Months Ended March 31,
 
2015
 
2014
(dollars in thousands)
Written
 
Earned
 
Written
 
Earned
Direct
$
801,580

 
$
844,570

 
$
795,311

 
$
828,292

Assumed
450,893

 
312,835

 
564,446

 
347,699

Ceded
(217,043
)
 
(213,755
)
 
(220,446
)
 
(226,616
)
Net premiums
$
1,035,430

 
$
943,650

 
$
1,139,311

 
$
949,375


The percentage of ceded earned premiums to gross earned premiums was 18% and 19%, respectively, for the three months ended March 31, 2015 and 2014. The percentage of assumed earned premiums to net earned premiums was 33% and 37%, respectively, for the three months ended March 31, 2015 and 2014.

Incurred losses and loss adjustment expenses were net of reinsurance recoverables (ceded incurred losses and loss adjustment expenses) of $88.8 million and $97.6 million, respectively, for the three months ended March 31, 2015 and 2014.

On March 9, 2015, the Company completed a retrospective reinsurance transaction to cede a portfolio of policies comprised of liabilities arising from asbestos and environmental exposures that originated before 1992 in exchange for payments totaling $89.0 million, which included cash paid at closing of $69.9 million. At the time of the transaction, reserves for unpaid losses and loss adjustment expenses on the policies ceded totaled $94.1 million, resulting in a deferred gain of $5.1 million which will be recognized in earnings in future periods in proportion to actual reinsurance recoveries received pursuant to the transaction. The ceded reserves represented approximately 35% of our net asbestos and environmental reserves for losses and loss adjustment expenses as of December 31, 2014.



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8. Income Taxes

The estimated annual effective tax rate was 19% and 25% for the three months ended March 31, 2015 and 2014, respectively. For the three months ended March 31, 2015, the estimated annual effective tax rate differs from the U.S. statutory tax rate of 35% primarily as a result of tax-exempt investment income and foreign tax credits for foreign taxes paid. In previous periods, foreign taxes paid were not available for use as tax credits against the Company's U.S. provision for income taxes. Based on the Company's estimated earnings from foreign operations in 2015, the Company expects that significant foreign taxes paid, both in the current period and prior periods, will be available for use as credits against its U.S. provision for income taxes in 2015. For the three months ended March 31, 2014, the estimated annual effective tax rate differs from the U.S. statutory tax rate of 35% primarily as a result of tax-exempt investment income. The decrease in the estimated annual effective tax rate in 2015 compared to 2014 was primarily due to the impact of the foreign tax credits described above.

9. Net Income per Share

Net income per share was determined by dividing adjusted net income to shareholders by the applicable weighted average shares outstanding. Diluted net income per share is computed by dividing adjusted net income to shareholders by the weighted average number of common shares and dilutive potential common shares outstanding during the period.
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