Investments

12 Months Ended

Dec. 31, 2018

Investments Debt And Equity Securities [Abstract]

NOTE 4. INVESTMENTS

The following tables set forth our Company’s available-for-sale investments and Equity Securities as of December 31, 2018 and 2017 and include OTTI securities recognized within AOCI:

	December 31, 2018
			Gross		Gross
			Unrealized		Unrealized			Amortized
amounts in thousands	Fair Value		Gains		Losses			Cost
Fixed Maturities:
U.S. Treasury Bonds, Agency Bonds and Foreign Government Bonds	$	239,776	$	901	$	(3,957	)	$	242,832
States, Municipalities and Political Subdivisions		646,551		10,734		(3,448	)		639,265
Mortgage-Backed and Asset-Backed Securities:
Agency Residential Mortgage-Backed Securities		335,542		843		(13,118	)		347,817
Residential Mortgage Obligations		138,373		604		(530	)		138,299
Asset-Backed Securities		531,991		1,018		(8,040	)		539,013
Commercial Mortgage-Backed Securities		188,201		858		(2,816	)		190,159
Subtotal	$	1,194,107	$	3,323	$	(24,504	)	$	1,215,288
Corporate Exposures⁽¹⁾		1,002,489		3,101		(28,640	)		1,028,028
Total Fixed Maturities	$	3,082,923	$	18,059	$	(60,549	)	$	3,125,413
Short-Term Investments		10,233		—		(1	)		10,234
Total Available-For-Sale Investments	$	3,093,156	$	18,059	$	(60,550	)	$	3,135,647

(1) - Corporate Exposures consist of investments in corporate bonds, hybrid bonds and redeemable preferred stocks.

	As of December 31, 2018
			Gross		Gross
	Fair		Unrealized		Unrealized
amounts in thousands	Value		Gains		(Losses)			Cost
Equity Securities:
Common Stocks	$	166,353	$	4,738	$	(15,984	)	$	177,599
Preferred Stocks		173,539		511		(10,791	)		183,819
Total Equity Securities	$	339,892	$	5,249	$	(26,775	)	$	361,418

	December 31, 2017
			Gross		Gross
			Unrealized		Unrealized			Amortized
amounts in thousands	Fair Value		Gains		Losses			Cost
Fixed Maturities:
U.S. Treasury Bonds, Agency Bonds and Foreign Government Bonds	$	393,563	$	2,081	$	(2,014	)	$	393,496
States, Municipalities and Political Subdivisions		814,632		20,136		(1,423	)		795,919
Mortgage-Backed and Asset-Backed Securities:
Agency Residential Mortgage-Backed Securities		407,619		2,352		(5,414	)		410,681
Residential Mortgage Obligations		54,104		606		(79	)		53,577
Asset-Backed Securities		328,753		2,138		(663	)		327,278
Commercial Mortgage-Backed Securities		160,904		2,354		(1,182	)		159,732
Subtotal	$	951,380	$	7,450	$	(7,338	)	$	951,268
Corporate Exposures⁽¹⁾		897,479		14,491		(3,737	)		886,725
Total Fixed Maturities	$	3,057,054	$	44,158	$	(14,512	)	$	3,027,408
Equity Securities:
Common Stocks	$	52,439	$	7,423	$	(112	)	$	45,128
Preferred Stocks		183,542		6,071		(1,560	)		179,031
Total Equity Securities	$	235,981	$	13,494	$	(1,672	)	$	224,159
Short-Term Investments ⁽²⁾		6,480		3		—			6,477
Total Available-For-Sale Investments	$	3,299,515	$	57,655	$	(16,184	)	$	3,258,044

(1) - Corporate Exposures consist of investments in corporate bonds, hybrid bonds and redeemable preferred stocks.

(2) - Cash and overseas deposits that were misclassified within Short-Term Investments prior to 2018 were reclassified, representing an immaterial correction. Refer to Note 1 Organization & Summary of Significant Accounting Policies for further information.

Our Company made strategic investments in certain companies which are reported as Other Invested Assets on the Consolidated Balance Sheet and accounted for using the equity method. In applying the equity method, these investments are initially recorded at cost and are subsequently adjusted based on our Company’s proportionate share of the net income or loss of the companies. Our initial purchase price of $2.0 million had a current carrying value of $1.9 million and $1.7 million at December 31, 2018 and 2017, respectively.

Other Invested Assets also includes overseas deposits with a fair value of $46.5 million at December 31, 2018 and $28.8 million at December 31, 2017. The overseas deposits consist of investments in private funds which are managed centrally by The Corporation of Lloyd’s in support of all Lloyd’s market participants. The funds consist of fixed income securities, bank deposits, and cash invested in local markets which are intended to fulfill regulatory deposit requirements in worldwide jurisdictions. Our Company’s ability to withdraw from the funds is restricted by an annual and quarterly funding and release process managed by Lloyd’s in conjunction with Syndicate 1221’s capital requirements in various jurisdictions.

As of December 31, 2018 and 2017, our Company did not have a concentration of greater than 5% of invested assets in a single non-U.S. government-backed issuer.

As of December 31, 2018 and 2017, Fixed Maturities for which non-credit OTTI was previously recognized and included in AOCI are now in a net unrealized net gains position of $0.3 million and $0.5 million, respectively.

The fair value of our Company’s investment portfolio may fluctuate significantly in response to various factors such as changes in interest rates, investment quality ratings, equity prices, foreign exchange rates and credit spreads. Our Company does not have the intent to sell, nor is it more likely than not that it will have to sell, Fixed Maturities in unrealized loss positions that are not other-than-temporarily impaired before recovery. For structured securities, default probability and severity assumptions differ based on property type, vintage and the stress of the collateral. Our Company does not intend to sell, and it is more likely than not that our Company will not be required to sell, these securities before the recovery of the amortized cost basis. Our Company may realize investment losses to the extent our liquidity needs require the disposition of Fixed Maturity Securities in unfavorable interest rate, liquidity or credit spread environments. Significant changes in the factors our Company considers when evaluating investments for impairment losses could result in a significant change in impairment losses reported in the Consolidated Financial Statements.

The contractual maturity dates for Fixed Maturities categorized by the number of years until maturity as of December 31, 2018 are shown in the following table:

	December 31, 2018
			Amortized
amounts in thousands	Fair Value		Cost
Due in One Year or Less	$	183,390	$	184,761
Due after One Year Through Five Years		793,254		801,841
Due After Five Years Through Ten Years		370,056		368,933
Due After Ten Years		542,116		554,592
Mortgage-Backed and Asset-Backed Securities		1,194,107		1,215,286
Total	$	3,082,923	$	3,125,413

Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties. Prepayment assumptions associated with the Mortgage-Backed and Asset-Backed Securities are reviewed on a periodic basis. When changes in prepayment assumptions are deemed necessary as the result of actual prepayments differing from anticipated prepayments, securities are revalued based upon the new prepayment assumptions utilizing the retrospective accounting method. Due to the periodic repayment of principal, the Mortgage-Backed and Asset-Backed Securities are estimated to have an effective maturity of approximately 5.2 years.

The following tables summarize all securities available-for-sale in a gross unrealized loss position as of December 31, 2018 and 2017, showing the aggregate fair value and gross unrealized loss by the length of time those securities have continuously been in a gross unrealized loss position:

	December 31, 2018
	Less than 12 months					Greater than 12 months					Total
			Gross					Gross					Gross
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
amounts in thousands	Value		(Losses)			Value		(Losses)			Value		(Losses)
Fixed Maturities:
U.S. Treasury Bonds, Agency Bonds and Foreign Government Bonds	$	101,395	$	(2,486	)	$	112,195	$	(1,471	)	$	213,590	$	(3,957	)
States, Municipalities and Political Subdivisions		123,479		(1,274	)		105,405		(2,174	)		228,884		(3,448	)
Mortgage-Backed and Asset-Backed Securities:
Agency Residential Mortgage-Backed Securities		34,819		(814	)		270,997		(12,304	)		305,816		(13,118	)
Residential Mortgage Obligations		70,965		(249	)		10,110		(281	)		81,075		(530	)
Asset-Backed Securities		345,437		(6,950	)		77,362		(1,090	)		422,799		(8,040	)
Commercial Mortgage-Backed Securities		58,877		(282	)		41,477		(2,534	)		100,354		(2,816	)
Subtotal	$	510,098	$	(8,295	)	$	399,946	$	(16,209	)	$	910,044	$	(24,504	)
Corporate Exposures ⁽¹⁾		481,057		(15,456	)		300,113		(13,184	)		781,170		(28,640	)
Total Fixed Maturities	$	1,216,029	$	(27,511	)	$	917,659	$	(33,038	)	$	2,133,688	$	(60,549	)

(1) - Corporate Exposures consist of investments in corporate bonds, hybrid bonds and redeemable preferred stocks.

	December 31, 2017
	Less than 12 months					Greater than 12 months					Total
			Gross					Gross					Gross
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
amounts in thousands	Value		(Losses)			Value		(Losses)			Value		(Losses)
Fixed Maturities:
U.S. Treasury Bonds, Agency Bonds and Foreign Government Bonds	$	273,672	$	(1,502	)	$	54,484	$	(512	)	$	328,156	$	(2,014	)
States, Municipalities and Political Subdivisions		74,097		(503	)		45,085		(920	)		119,182		(1,423	)
Mortgage-Backed and Asset-Backed Securities:
Agency Residential Mortgage-Backed Securities		87,496		(346	)		236,745		(5,068	)		324,241		(5,414	)
Residential Mortgage Obligations		12,418		(62	)		546		(17	)		12,964		(79	)
Asset-Backed Securities		85,877		(468	)		24,733		(195	)		110,610		(663	)
Commercial Mortgage-Backed Securities		20,482		(95	)		22,903		(1,087	)		43,385		(1,182	)
Subtotal	$	206,273	$	(971	)	$	284,927	$	(6,367	)	$	491,200	$	(7,338	)
Corporate Exposures ⁽¹⁾		295,433		(1,690	)		121,410		(2,047	)		416,843		(3,737	)
Total Fixed Maturities	$	849,475	$	(4,666	)	$	505,906	$	(9,846	)	$	1,355,381	$	(14,512	)
Equity Securities:
Common Stocks	$	11,245	$	(81	)	$	1,770	$	(31	)	$	13,015	$	(112	)
Preferred Stocks		50,861		(1,524	)		662		(36	)		51,523		(1,560	)
Total Equity Securities	$	62,106	$	(1,605	)	$	2,432	$	(67	)	$	64,538	$	(1,672	)
Total Fixed Maturities and Equity Securities	$	911,581	$	(6,271	)	$	508,338	$	(9,913	)	$	1,419,919	$	(16,184	)

(1) - Corporate Exposures consist of investments in corporate bonds, hybrid bonds and redeemable preferred stocks.

Our Company analyzes impaired securities quarterly to determine if any impairments are other-than-temporary. The above securities with unrealized losses have been determined to be temporarily impaired based on our evaluation.

At December 31, 2018, there were 808 Fixed Maturities in an unrealized loss position. In the above table, the gross unrealized loss for the greater than 12 months category consists primarily of Agency Residential Mortgage-Backed Securities and Hybrid bonds and Redeemable Preferred stocks, which are reported in Corporate Exposures, and is mostly due to an increase in interest rates and spread widening. The gross unrealized loss for the less than 12 months category consists primarily of Hybrid bonds and Redeemable Preferred stocks, which are reported in Corporate Exposures, and Asset Backed Securities mainly due to spread widening. At December 31, 2017, there were 454 Fixed Maturities and 22 Equity Securities in an unrealized loss position. In the above table, the gross unrealized loss for the greater than 12 months category consists primarily of Agency Residential Mortgage-backed Securities and Corporate Exposures and is mostly due to an increase in interest rates at the time of purchase. The gross unrealized loss for the less than 12 months category consists primarily of Corporate Bonds and Preferred Stocks, which are reported in Equity Securities, due to an increase in interest rates since time of purchase, as well as Foreign Government Bonds due to an unfavorable exchange rate movement in our Canadian portfolio.

As of December 31, 2018 and 2017, the largest unrealized loss by a non-government backed issuer in the investment portfolio was $3.7 million and $0.7 million, respectively.

Our Company’s ability to hold securities is supported by sufficient cash flow from our operations and from maturities within our investment portfolio in order to meet our claims payments and other disbursement obligations arising from our underwriting operations without selling such investments. With respect to securities where the decline in value is determined to be temporary and the security's value is not written down, a subsequent decision may be made to sell that security and realize a loss. Subsequent decisions on security sales are made within the context of overall risk monitoring, changing information and market conditions.

Upon adoption of ASU 2016-01 as of January 1, 2018, changes in the fair value of Equity Securities are recognized through Net Income. Our Company had no credit related OTTI losses during the year ended December 31, 2018. Our Company had four credit related OTTI losses totaling $2.1 million during the year ended December 31, 2017 from our Equity Securities portfolio. Our Company had one credit related OTTI loss totaling $0.2 million from our Fixed Maturities portfolio during the year ended December 31, 2016.

The following table summarizes the cumulative amounts related to our Company’s credit loss portion of the OTTI losses on Fixed Maturities for the years ended December 31, 2018, 2017 and 2016.

	Years Ended December 31,
amounts in thousands	2018			2017		2016
Beginning Balance	$	2,361		$	2,361	$	2,361
Additions for Credit Loss Impairments recognized in the current period on securities not previously impaired		—			—		150
Additions for Credit Loss Impairments recognized in the current period on securities previously impaired		—			—		—
Reductions for Credit Loss Impairments previously recognized on securities sold during the period		(17	)		—		(150	)
Ending Balance	$	2,344		$	2,361	$	2,361

Our Company’s Net Investment Income was derived from the following sources:

	Years Ended December 31,
amounts in thousands	2018			2017			2016
Fixed Maturities	$	90,101		$	76,784		$	67,772
Equity Securities		13,807			15,108			14,271
Short-Term Investments, Cash and Cash Equivalents ⁽¹⁾		1,676			428			317
Other Invested Assets ⁽¹⁾		666			636			410
Total Investment Income	$	106,250		$	92,956		$	82,770
Investment Expenses		(3,137	)		(3,663	)		(3,319	)
Net Investment Income	$	103,113		$	89,293		$	79,451

(1) - Cash and overseas deposits that were misclassified within Short-Term Investments prior to 2018 were reclassified, representing an immaterial correction. Refer to Note 1 Organization & Summary of Significant Accounting Policies for further information.

Realized Gains and Losses, excluding net OTTI losses recognized in earnings, for the periods indicated, were as follows:

	Years Ended December 31,
amounts in thousands	2018			2017			2016
Fixed Maturities:
Gains	$	3,775		$	4,041		$	5,681
Losses		(1,306	)		(3,249	)		(4,271	)
Fixed Maturities, Net	$	2,469		$	792		$	1,410
Short-Term Investments, Cash and Cash Equivalents:⁽¹⁾
Gains	$	208		$	1,575		$	871
Losses		(319	)		(243	)		(1,444	)
Short-Term, Net	$	(111	)	$	1,332		$	(573	)
Other Invested Assets:⁽¹⁾
Gains	$	92		$	56		$	19
Losses		(213	)		(369	)		(108	)
Other Invested Assets, Net	$	(121	)	$	(313	)	$	(89	)
Equity Securities:
Gains	$	1,102		$	44,783		$	9,096
Losses		(350	)		(1,521	)		(658	)
Equity Securities, Net	$	752		$	43,262		$	8,438
Net Realized Gains on Investments Sold	$	2,989		$	45,073		$	9,186

The following table presents the portion of Net Unrealized Losses recognized during the year that relates to Equity Securities held as of December 31, 2018:

amounts in thousands	Year Ended December 31, 2018
Equity Securities:
Total Net Realized and Unrealized Losses recognized	$	(32,585	)
Less: Net Realized Gains on Investments Sold		752
Net Unrealized Losses recognized	$	(33,337	)