Document


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q

(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended September 30, 2016
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________________ to ___________________
 
Commission file no. 001-33143
_______________________________

afsiamtrustfinancial.jpg
_______________________________
AmTrust Financial Services, Inc.
(Exact name of registrant as specified in its charter)
Delaware
 
04-3106389
(State or other jurisdiction of
 
(IRS Employer Identification No.)
incorporation or organization)
 
 
 
 
 
59 Maiden Lane, 43rd Floor, New York, New York
 
10038
(Address of principal executive offices)
 
(Zip Code)

(212) 220-7120
(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 Web site, 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       ¨
 
 
 
Non-accelerated filer         ¨
 
Smaller reporting company      ¨
(Do not check if a smaller reporting company)
 
 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Securities Exchange Act).Yes ¨ No x

As of November 1, 2016, the Registrant had one class of Common Stock ($.01 par value), of which 170,450,763 shares were issued and outstanding.





INDEX
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

2



PART 1 - FINANCIAL INFORMATION
Item 1. Financial Statements
AMTRUST FINANCIAL SERVICES, INC. AND SUBSIDIARIES
Consolidated Balance Sheet
(In Thousands, Except Par Value)
 
September 30,
2016
 
December 31,
2015
ASSETS
(Unaudited)
 
(Audited)
Investments:
 
 
 
Fixed maturities, available-for-sale, at fair value (amortized cost $6,800,294; $5,482,042)
$
7,043,815

 
$
5,433,797

Equity securities, available-for-sale, at fair value (cost $160,011; $109,346)
165,743

 
104,497

Equity securities, trading, at fair value (cost $34,091; $26,937)
34,439

 
27,271

Short-term investments
49,008

 
84,266

Equity investment in unconsolidated subsidiaries – related party
153,040

 
138,023

Other investments (related party $67,077; $64,869; recorded at fair value $40,267; $30,309)
125,201

 
99,012

Total investments
7,571,246

 
5,886,866

Cash and cash equivalents
1,092,836

 
931,970

Restricted cash and cash equivalents
557,159

 
380,699

Accrued interest and dividends
52,569

 
51,487

Premiums receivable, net
2,405,638

 
2,115,653

Reinsurance recoverable (related party $2,376,739; $1,963,140)
4,040,073

 
3,008,670

Prepaid reinsurance premium (related party $1,196,420; $1,066,961)
2,018,372

 
1,531,866

Other assets (related party $177,352; $189,223; recorded at fair value $332,085; $264,001)
1,393,379

 
1,398,064

Deferred policy acquisition costs
964,642

 
704,243

Property and equipment, net
339,063

 
281,456

Goodwill
654,861

 
432,700

Intangible assets
429,700

 
367,345

 
$
21,519,538

 
$
17,091,019

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Liabilities:
 
 
 
Loss and loss adjustment expense reserves
$
9,427,770

 
$
7,208,367

Unearned premiums
4,900,926

 
4,014,728

Ceded reinsurance premiums payable (related party $734,103; $379,988)
932,199

 
651,051

Accrued expenses and other liabilities (related party $167,975; $167,975; recorded at fair value $92,337; $132,558)
1,317,386

 
1,140,830

Debt
1,235,316

 
989,356

Total liabilities
17,813,597

 
14,004,332

Commitments and contingencies


 


Redeemable non-controlling interest
1,187

 
1,172

Stockholders’ equity:
 
 
 
Common stock, $0.01 par value; 500,000 shares authorized; 196,455 issued in 2016 and 2015, respectively; 170,427 and 175,915 outstanding in 2016 and 2015, respectively
1,965

 
1,964

Preferred stock, $0.01 par value; 10,000 shares authorized; 5,399 and 4,968 issued and outstanding; $913,750 and $482,500 aggregated liquidation preference in 2016 and 2015, respectively.
913,750

 
482,500

Additional paid-in capital
1,376,463

 
1,383,492

Treasury stock at cost; 26,028 and 20,540 shares in 2016 and 2015, respectively
(311,328
)
 
(162,867
)
Accumulated other comprehensive loss, net of tax
(51,024
)
 
(130,262
)
Retained earnings
1,591,664

 
1,334,233

Total AmTrust Financial Services, Inc. equity
3,521,490

 
2,909,060

Non-controlling interest
183,264

 
176,455

Total stockholders’ equity
3,704,754

 
3,085,515

 
$
21,519,538

 
$
17,091,019


See accompanying notes to unaudited consolidated financial statements.

3



AMTRUST FINANCIAL SERVICES, INC. AND SUBSIDIARIES
Consolidated Statements of Income
(Unaudited)
(In Thousands, Except Per Share Data)
 
 
Three Months Ended September 30,

Nine Months Ended September 30,
 
 
2016

2015

2016

2015
Revenues:
 
 

 
 

 
 

 
 

Premium income:
 
 

 
 

 
 

 
 

Net written premium
 
$
1,216,050

 
$
1,142,983

 
$
3,705,165

 
$
3,194,893

Change in unearned premium
 
(19,814
)
 
(97,575
)
 
(252,895
)
 
(231,138
)
Net earned premium
 
1,196,236

 
1,045,408

 
3,452,270

 
2,963,755

Service and fee income (related parties - three months $19,367; $19,250 and nine months $61,137; $57,935)
 
146,611

 
126,143

 
429,082

 
346,766

Net investment income
 
59,919

 
40,425

 
160,079

 
111,281

Net realized gain on investments
 
8,230

 
17,682

 
31,304

 
30,693

Total revenues
 
1,410,996

 
1,229,658

 
4,072,735

 
3,452,495

Expenses:
 
 

 
 

 
 

 
 

Loss and loss adjustment expense
 
811,048

 
709,604

 
2,310,514

 
1,961,362

Acquisition costs and other underwriting expenses (net of ceding commission - related party - three months $158,216; $138,036 and nine months $440,561; $385,945)
 
283,958

 
258,016

 
847,395

 
728,402

Other
 
137,542

 
116,900

 
398,698

 
313,487

Total expenses
 
1,232,548

 
1,084,520

 
3,556,607

 
3,003,251

Income before other income (expense), income taxes and equity in earnings of unconsolidated subsidiaries
 
178,448

 
145,138

 
516,128

 
449,244

Other income (loss):
 
 

 
 

 
 

 
 

Interest expense (net of interest income - related party - three months $2,061; $2,115 and nine months $6,436; $6,514)
 
(23,950
)
 
(12,862
)
 
(61,388
)
 
(32,763
)
Loss on extinguishment of debt
 

 
(557
)
 

 
(5,271
)
Gain on investment in life settlement contracts net of profit commission
 
5,485

 
4,616

 
28,891

 
19,085

Foreign currency (loss) gain
 
(8,320
)
 
24,721

 
(70,428
)
 
17,355

Acquisition gain on purchase
 

 
5,826

 
48,775

 
5,826

Total other income (loss)
 
(26,785
)
 
21,744

 
(54,150
)
 
4,232

Income before income taxes and equity in earnings of unconsolidated subsidiaries
 
151,663

 
166,882

 
461,978

 
453,476

Provision for income taxes
 
35,516

 
(12,649
)
 
91,160

 
38,635

Income before equity in earnings of unconsolidated subsidiaries
 
116,147

 
179,531


370,818

 
414,841

Equity in earnings of unconsolidated subsidiaries – related parties
 
1,954

 
13,477

 
12,532

 
23,048

Net income
 
$
118,101

 
$
193,008

 
$
383,350

 
$
437,889

Net income attributable to redeemable non-controlling interest and non-controlling interest of subsidiaries
 
(2,975
)
 
(1,511
)
 
(12,809
)
 
(6,940
)
Net income attributable to AmTrust Financial Services, Inc.
 
$
115,126

 
$
191,497

 
$
370,541

 
$
430,949

Dividends on preferred stock
 
(11,576
)
 
(8,789
)
 
(31,943
)
 
(22,797
)
Net income attributable to AmTrust common stockholders
 
$
103,550

 
$
182,708

 
$
338,598

 
$
408,152

Earnings per common share:
 
 

 
 

 
 

 
 

Basic earnings per share
 
$
0.61

 
$
1.10

 
$
1.96

 
$
2.48

Diluted earnings per share
 
$
0.60


$
1.09

 
$
1.93

 
$
2.43

Dividends declared per common share
 
$
0.17

 
$
0.15

 
$
0.47

 
$
0.40

Net realized loss on investments:
 
 

 
 

 
 

 
 

Total other-than-temporary impairment loss
 
$
(9,461
)
 
$
(7,636
)
 
$
(26,417
)
 
$
(10,118
)
Portion of loss recognized in other comprehensive income
 

 

 

 

Net impairment losses recognized in earnings
 
(9,461
)
 
(7,636
)
 
(26,417
)
 
(10,118
)
Net realized gain on available for sale securities
 
14,380

 
16,049

 
53,106

 
29,306

Net unrealized gain on trading securities and other investments
 
3,311

 
9,269

 
4,615

 
11,505

Net realized investment gain (loss)
 
$
8,230

 
$
17,682

 
$
31,304

 
$
30,693

See accompanying notes to unaudited consolidated financial statements.

4



AMTRUST FINANCIAL SERVICES, INC. AND SUBSIDIARIES

Consolidated Statements of Comprehensive Income
(Unaudited)
(In Thousands)
 
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
 
2016
 
2015
 
2016
 
2015
Net income
 
$
118,101

 
$
193,008

 
$
383,350

 
$
437,889

Other comprehensive (loss) income, net of tax:
 
 

 
 

 
 

 
 

Foreign currency translation adjustments
 
(89,218
)
 
2,128

 
(173,883
)
 
(49,204
)
Change in fair value of interest rate swap
 
253

 
107

 
540

 
297

Unrealized gain (loss) on securities:
 
 
 
 
 
 
 
 
Gross unrealized holding gain (loss)
 
31,529

 
(25,611
)
 
331,761

 
(106,105
)
Tax expense (benefit) arising during period
 
(41,602
)

(8,964
)

61,187


(37,137
)
Net unrealized holding gain (loss)
 
73,131

 
(16,647
)
 
270,574

 
(68,968
)
Reclassification adjustments for investment gain (loss) included in net income, net of tax:
 
 
 
 
 
 
 
 
Other-than-temporary impairment loss
 
5,989

 
1,088

 
16,526

 
1,046

Other net realized (gain) loss on investments
 
(9,388
)
 
751

 
(34,519
)
 
(412
)
Reclassification adjustments for investment gain (loss) included in net income:
 
(3,399
)
 
1,839

 
(17,993
)
 
634

Other comprehensive income (loss), net of tax
 
$
(19,233
)
 
$
(12,573
)
 
$
79,238

 
$
(117,241
)
Comprehensive income
 
98,868

 
180,435

 
462,588

 
320,648

Less: Comprehensive income attributable to redeemable non-controlling interest and non-controlling interest
 
2,975

 
1,511

 
12,809

 
6,940

Comprehensive income attributable to AmTrust Financial Services, Inc.
 
$
95,893

 
$
178,924

 
$
449,779

 
$
313,708

 
See accompanying notes to unaudited consolidated financial statements.

5



AMTRUST FINANCIAL SERVICES, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows
(Unaudited)
(In Thousands)
 
Nine Months Ended September 30,
 
2016
 
2015
Cash flows from operating activities:
 

 
 

Net income
$
383,350

 
$
437,889

Adjustments to reconcile net income to net cash provided by operating activities:
 

 
 

Depreciation and amortization
89,779

 
61,602

Net amortization of bond premium or discount
21,983

 
11,845

Equity earnings on investment in unconsolidated subsidiaries
(12,532
)
 
(23,048
)
Gain on investment in life settlement contracts, net
(28,891
)
 
(19,085
)
Realized gain on available for sale securities and unrealized gain on trading securities
(57,721
)
 
(40,811
)
Non-cash write-down of available for sale securities
26,417

 
10,118

Discount on notes payable
4,420

 
4,226

Stock based compensation
17,433

 
16,678

Loss on extinguishment of debt

 
5,271

Bad debt expense
15,199

 
13,943

Foreign currency loss (gain)
70,428

 
(17,355
)
Acquisition gain on purchase
(48,775
)
 
(5,826
)
Changes in assets - (increase) decrease:
 

 
 

Premiums and note receivables
(265,477
)
 
(492,354
)
Reinsurance recoverable
(361,794
)
 
(510,397
)
Deferred policy acquisition costs, net
(260,399
)
 
(87,597
)
Prepaid reinsurance premiums
(486,506
)
 
(304,361
)
Other assets
177,545

 
(428,504
)
Changes in liabilities - increase (decrease):
 
 
 
Reinsurance premium payable
316,497

 
138,192

Loss and loss expense reserve
1,189,411

 
999,371

Unearned premiums
513,141

 
495,499

Funds held under reinsurance treaties
(7,487
)
 
20,685

Accrued expenses and other current liabilities
(669,059
)
 
360,490

Deferred taxes
212,952

 
(178,363
)
Net cash provided by operating activities
839,914

 
468,108

Cash flows from investing activities:
 

 
 

Purchases of fixed maturities, available-for-sale
(1,839,005
)
 
(1,671,330
)
Purchases of equity securities, available-for-sale
(129,716
)
 
(32,898
)
Purchase of equity securities, trading
(150,654
)
 
(154,524
)
Purchase of other investments
(22,555
)
 
(74,562
)
Sales of fixed maturities, available-for-sale
1,537,296

 
971,448

Sales of equity securities, available-for-sale
110,895

 
18,639

Sales of equity securities, trading
155,502

 
161,723

Sales of other investments
3,371

 
2,960

Net sale of short term investments
(99,320
)
 
48,165

Net (purchase) sale of securities sold but not purchased
(14,848
)
 
75,573

Acquisition of life settlement contracts
(15,880
)
 

Receipt of life settlement contract proceeds
38,247

 
86,033

Acquisition of subsidiaries, net of cash obtained
(139,038
)
 
(219,568
)
Change in restricted cash and cash equivalents
(176,428
)
 
(70,846
)
Purchase of property and equipment
(93,787
)
 
(100,421
)
Net cash used in investing activities
(835,920
)
 
(959,608
)
 
 
 
 

6



Cash flows from financing activities:
 

 
 

Revolving credit facility borrowings

 
430,000

Revolving credit facility payments

 
(420,000
)
Secured loan proceeds
45,809

 
10,250

Secured loan agreements payments
(5,372
)
 
(5,234
)
  Convertible senior notes settlement
(10
)
 
(62,079
)
Subordinated notes due 2055 proceeds

 
285,000

Financing fees

 
(9,451
)
Common stock issuance
276

 
171,672

Common stock repurchase
(152,395
)
 

Preferred stock issuance
417,264

 
176,529

Non-controlling interest capital distributions from consolidated subsidiaries, net
(5,984
)
 
14,451

Stock option exercise and other
(6,819
)
 
(219
)
Dividends distributed on common stock
(78,501
)
 
(60,498
)
Dividends distributed on preferred stock
(31,943
)
 
(22,797
)
Net cash provided by financing activities
182,325

 
507,624

Effect of exchange rate changes on cash
(25,453
)
 
(8,221
)
Net increase in cash and cash equivalents
160,866

 
7,903

Cash and cash equivalents, beginning of the period
931,970

 
902,750

Cash and cash equivalents, end of the period
$
1,092,836

 
$
910,653

Supplemental Cash Flow Information
 

 
 

Income tax payments
$
24,565

 
$
231,684

Interest payments on debt
$
46,133

 
$
31,573

Declared dividends on common stock
$
81,167

 
$
66,121

 
See accompanying notes to unaudited consolidated financial statements.

7



Notes to Unaudited Consolidated Financial Statements
(Unaudited)
(Dollars In Thousands, Except Share and Per Share Data)
1.
 Basis of Reporting
  
The accompanying unaudited interim consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial statements and with the instructions to Form 10-Q and Article 10 of Regulation S-X and, therefore, do not include all of the information and footnotes required by GAAP for complete financial statements. These interim statements should be read in conjunction with the financial statements and notes thereto included in the AmTrust Financial Services, Inc. (“AmTrust” or the “Company”) Annual Report on Form 10-K for the year ended December 31, 2015, previously filed with the Securities and Exchange Commission (“SEC”) on February 29, 2016. The balance sheet at December 31, 2015 has been derived from the audited consolidated financial statements at that date but does not include all of the information and footnotes required by GAAP for complete financial statements.
 
These interim consolidated financial statements reflect all adjustments that are, in the opinion of management, necessary for a fair presentation of the results for the interim period and all such adjustments are of a normal recurring nature. The results of operations for the interim period are not necessarily indicative, if annualized, of those to be expected for the full year. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.

The Company implemented a two-for-one stock split on February 2, 2016. As a result, the Company retrospectively adjusted all share and per share amounts in the accompanying condensed consolidated financial statements and notes to the condensed consolidated financial statements to apply the effect of the stock split for all periods presented.
 
A detailed description of the Company’s significant accounting policies and management judgments is located in the audited consolidated financial statements for the year ended December 31, 2015, included in the Company’s Form 10-K filed with the SEC.
 
All significant inter-company transactions and accounts have been eliminated in the consolidated financial statements.
 
To facilitate period-to-period comparisons, certain reclassifications have been made to prior period consolidated financial statement amounts to conform to current period presentation.

Correction of an Immaterial Error

The Company identified an immaterial error related to its classification on the consolidated statement of cash flows for purchases and sales of securities sold but not yet purchased, at fair value. The Company determined that in prior periods reported, these amounts were improperly reflected as changes in accrued expenses and other current liabilities in cash flow from operating activities instead of securities sold but not yet purchased, at fair value, in cash flow from investing activities. The Company reviewed the impact of this error on the prior periods and determined that the error was not material to the prior period consolidated financial statements. The Company has corrected the consolidated statement of cash flows for the nine months ended September 30, 2015 by presenting this amount separately within investing activities and decreasing the changes in accrued expenses and other current liabilities within operating activities. The impact of the error decreased the Company's net cash provided by operating activities by $75,573 and increased the Company's cash flows from investing activities by an equivalent amount for the period ended September 30, 2015.
2.
Recent Accounting Pronouncements
 
With the exception of those discussed below, there have been no recent accounting pronouncements or changes in accounting pronouncements during the nine months ended September 30, 2016, as compared to those described in our Annual Report on Form 10-K for the fiscal year ended December 31, 2015, that are of significance, or potential significance, to the Company.


8



Recent Accounting Standards, Adopted

In May 2015, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2015-07, Fair Value Measurement (Topic 820): Disclosure for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent), which provides guidance that removes the requirement to categorize within the fair value hierarchy all investments for which fair value is measured using the net asset value per share practical expedient, and limits certain disclosure requirements only to investments for which the entity elects to measure the fair value using that practical expedient. The updated guidance is effective for reporting periods beginning after December 15, 2015, and should be applied retrospectively for all periods presented. The Company adopted this ASU on January 1, 2016. The adoption of this guidance did not have a material effect on the Company's results of operations, financial position or liquidity.

In April 2015, the FASB issued ASU 2015-05, Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer's Accounting for Fees Paid in a Cloud Computing Arrangement, which provides guidance to determine whether a cloud computing arrangement includes a software license. If a cloud computing arrangement includes a software license, then the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract. The updated guidance is effective for reporting periods beginning after December 15, 2015, and can be adopted either prospectively to all arrangements entered into or materially modified after the effective date, or retrospectively. The Company adopted this ASU on January 1, 2016. The adoption of this guidance did not have a material effect on the Company's results of operations, financial position or liquidity.

In April 2015, the FASB issued ASU 2015-03, Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs, which provides updated guidance to clarify the required presentation of debt issuance costs. The amended guidance requires that debt issuance costs be presented in the balance sheet as a direct reduction from the carrying amount of the recognized debt liability, consistent with the treatment of debt discounts. Amortization of debt issuance costs is to be reported as interest expense. The recognition and measurement guidance for debt issuance costs are not affected by the updated guidance. The Company adopted this ASU on January 1, 2016. The adoption of this guidance did not have a material effect on the Company's results of operations, financial position or liquidity.

In February 2015, the FASB issued ASU 2015-02, Consolidation (Topic 810): Amendments to the Consolidation Analysis, which provides amended guidance on a reporting entity's evaluation whether to consolidate certain legal entities. Specifically, the amendments will modify the evaluation of whether limited partnerships and similar legal entities are variable interest entities ("VIEs") or voting entities, eliminate the presumption that a general partner should consolidate a limited partnership, affect the consolidation analysis of reporting entities with interests in VIEs, particularly those that have fee arrangements and related party relationships, and provide a scope exception from consolidation guidance for reporting entities with interests in legal entities that are required to comply with or operate in accordance with requirements that are similar to those in Rule 2a-7 of the Investment Company Act of 1940 for registered money market funds. The Company adopted this ASU on January 1, 2016. The adoption of this guidance did not have a material effect on the Company's results of operations, financial position or liquidity.

Recent Accounting Standards, Not Yet Adopted

In August 2016, due to divergent practices for reporting certain cash receipts and cash payments on the statement of cash flows, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. The update provides guidance and clarification for eight specific cash flow issues, which include debt prepayment or debt extinguishment costs, settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing, contingent consideration payments made after a business combination, proceeds from the settlement of insurance claims, proceeds from the settlement of corporate and bank owned life insurance policies, distributions received from equity-method investees, beneficial interests in securitization transactions, and separately identifiable cash flows and application of the predominance principle. The update takes effect for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. The Company is currently evaluating the impact this guidance will have on its results of operations, financial position or liquidity.


9



In June 2016, the FASB completed its Financial Instruments—Credit Losses project by issuing ASU No. 2016-13, Financial Instruments—Credit Losses (Topic 326). The new guidance requires organizations to measure all expected credit losses for financial instruments held at the reporting date based on historical experience, current conditions and reasonable and supportable forecasts. The new guidance affects loans, debt securities, trade receivables, net investments in leases, off-balance-sheet credit exposures, reinsurance receivables, and any other financial assets not excluded from the scope that have the contractual right to receive cash. The new guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2019. The Company is currently evaluating the impact this guidance will have on its results of operations, financial position or liquidity.

In March 2016, the FASB issued ASU 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting, which simplifies several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or a liability, and classification on the statement of cash flows. The updated guidance is effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. The Company is currently evaluating the impact this guidance will have on its results of operations, financial position or liquidity.

In March 2016, the FASB issued ASU 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations, which improves the operability and understandability of the implementation guidance on principal versus agent considerations by clarifying that 1) an entity determines whether it is a principal or an agent for each specific good or service promised to the customer; 2) an entity determines the nature of each specific good or service; 3) when another party is involved in providing goods or services to a customer, an entity that is a principal obtains control of (a) a good or another asset from the other party that it then transfers to the customer, (b) a right to a service that will be performed by another party, which gives the entity the ability to direct that party to provide the service to the customer on the entity's behalf, or (c) a good or service from the other party that is combined with other goods or services to provide the specific good or service to the customer; and 4) the purpose of the indicators in paragraph 606-10-55-39 in Topic 606 is to support or assist in the assessment of control. The effective date and transition requirement for this ASU are the same as the effective date and transition requirements of ASU 2014-09, which were deferred to the quarter ending March 31, 2018 by ASU 2015-14. The Company is currently evaluating the impact this guidance will have on its results of operations, financial position or liquidity.

In March 2016, the FASB issued ASU 2016-06, Derivatives and Hedging (Topic 815): Contingent Put and Call Options in Debt Instruments, which clarifies the requirements for assessing whether contingent call (put) options that can accelerate the payment of principal on debt instruments are clearly and closely related to their debt hosts. An entity performing the assessment under the amended guidance in this ASU is required to assess the embedded call (put) options solely in accordance with the four-step decision sequence prescribed by Topic 815. The updated guidance is effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. This ASU should be applied on a modified retrospective basis. Early adoption is permitted, including adoption in an interim period. The Company is currently evaluating the impact this guidance will have on its results of operations, financial position or liquidity.

In March 2016, the FASB issued ASU 2016-05, Derivatives and Hedging (Topic 815): Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships, which clarifies that a change in the counterparty to a derivative instrument that has been designated as a hedging instrument under Topic 815 does not, in and of itself, require designation of that hedging relationship provided that all other hedge accounting criteria continue to be met. The updated guidance is effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. The adoption of this guidance is not expected to have a material effect on the Company's results of operations, financial position or liquidity.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which requires a lessee to recognize a right of use asset and a lease liability on the balance sheet for leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. The updated guidance is effective for fiscal years beginning after December 31, 2018, including interim periods within those fiscal years. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. The Company is currently evaluating the impact this guidance will have on its results of operations, financial position or liquidity.


10



In January 2016, the FASB issued ASU 2016-01, Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities, which address certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. Specifically, the guidance (a) requires equity investments to be measured at fair value with changes in fair value recognized in earnings. However, an entity may choose to measure equity investments that do not have readily determinable fair value at cost minus impairment, if any, plus or minus changes resulted from observable price changes in orderly transactions for identical or similar investments of the same issuer, (b) simplifies the impairment assessment of equity investments without readily determinable fair values by requiring a qualitative assessment to identify impairment, (c) eliminates the requirement to disclose the methods and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost, (d) requires the use of the exit price notion when measuring the fair value of financial instruments for disclosure purposes, (e) requires an entity to present separately in other comprehensive income the portion of the total change in fair value of a liability resulting from a change in  the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option, (f) requires separate presentation of financial assets and liabilities by measurement category and form on the balance sheet or the notes to the financial statements, and (g) clarifies that the need for a valuation allowance on a deferred tax asset related to an available for sale security should be evaluated with other deferred tax assets. The updated guidance is effective for reporting periods beginning after December 15, 2017. The Company is currently evaluating the impact this guidance will have on its results of operations, financial position or liquidity.

In May 2015, the FASB issued ASU 2015-09, Financial Services - Insurance (Topic 944): Disclosure about Short-Duration Contracts, which provides certain new and additional disclosure requirements about the liability for unpaid claims and claim adjustment expenses associated with short-duration contracts as defined in Topic 944. Pursuant to the updated guidance, all insurance entities that issue short-duration contracts are required to disclose, among other things, incurred and paid claims development information, a reconciliation of such information to the aggregate carrying amount of the liability for unpaid claims and claim adjustment expenses, and significant changes in methodologies and assumptions used to calculate the liability for unpaid claims and claim adjustment expenses, including the reasons for the change and the effects on the financial statements. The updated guidance was effective for reporting periods beginning after December 15, 2015, and is applied retrospectively by providing comparative disclosures for each period presented, except for those requirements that apply only to the current period. The adoption of this guidance did not have a material effect on the Company's results of operations, financial position or liquidity.

11





3.
Investments
 
(a) Available-for-Sale Securities
 
The cost or amortized cost, gross unrealized gains and losses, and estimated fair value of fixed maturities and equity securities classified as available-for-sale as of September 30, 2016 and December 31, 2015, are presented below:
(Amounts in Thousands)
As of September 30, 2016
 
Cost or amortized cost
 
Gross unrealized gains
 
Gross unrealized losses
 
Fair Value
Preferred stock
 
$
4,044

 
$

 
$
(48
)
 
$
3,996

Common stock
 
155,967

 
12,067

 
(6,287
)
 
161,747

U.S. treasury securities
 
292,558

 
3,179

 
(16
)
 
295,721

U.S. government agencies
 
7,567

 
112

 

 
7,679

Municipal bonds
 
850,475

 
26,974

 
(1,460
)
 
875,989

Foreign government
 
134,355

 
8,435

 
(528
)
 
142,262

Corporate bonds:
 
 

 
 

 
 

 
 

Finance
 
1,511,610

 
70,747

 
(12,751
)
 
1,569,606

Industrial
 
2,087,449

 
114,255

 
(18,256
)
 
2,183,448

Utilities
 
207,328

 
8,244

 
(1,869
)
 
213,703

Commercial mortgage backed securities
 
174,224

 
6,143

 
(650
)
 
179,717

Residential mortgage backed securities:
 
 

 
 

 
 

 
 

Agency backed
 
1,028,335

 
32,991

 
(81
)
 
1,061,245

Non-agency backed
 
61,910

 
1,662

 
(377
)
 
63,195

Collateralized loan / debt obligations
 
419,597

 
7,694

 
(1,622
)
 
425,669

Asset-backed securities
 
24,886

 
814

 
(119
)
 
25,581

 
 
$
6,960,305

 
$
293,317

 
$
(44,064
)
 
$
7,209,558

 
(Amounts in Thousands)
As of December 31, 2015
 
Cost or amortized cost
 
Gross unrealized gains
 
Gross unrealized losses
 
 Fair value
Preferred stock
 
$
4,869

 
$
150

 
$
(30
)
 
$
4,989

Common stock
 
104,477

 
3,816

 
(8,785
)
 
99,508

U.S. treasury securities
 
69,547

 
1,470

 
(258
)
 
70,759

U.S. government agencies
 
45,586

 
235

 
(263
)
 
45,558

Municipal bonds
 
530,004

 
11,952

 
(1,530
)
 
540,426

Foreign government
 
109,645

 
4,912

 
(812
)
 
113,745

Corporate bonds:
 
 
 
 
 
 
 
 
Finance
 
1,358,765

 
38,058

 
(34,393
)
 
1,362,430

Industrial
 
1,706,772

 
20,542

 
(80,251
)
 
1,647,063

Utilities
 
157,067

 
1,548

 
(9,115
)
 
149,500

Commercial mortgage backed securities
 
151,164

 
1,334

 
(1,180
)
 
151,318

Residential mortgage backed securities:
 
 
 
 
 
 
 
 
Agency backed
 
964,059

 
14,912

 
(4,133
)
 
974,838

Non-agency backed
 
124,046

 
322

 
(4,139
)
 
120,229

Collateralized loan / debt obligation
 
232,245

 
10

 
(6,161
)
 
226,094

Asset backed securities
 
33,142

 
4

 
(1,309
)
 
31,837

 
 
$
5,591,388

 
$
99,265

 
$
(152,359
)
 
$
5,538,294



12



Investments in foreign government securities include securities issued by national entities as well as instruments that are unconditionally guaranteed by such entities. As of September 30, 2016, the Company's foreign government securities were issued or guaranteed primarily by governments in Europe, Canada and Mexico.

Proceeds from the sale of investments in available-for-sale securities during the three months ended September 30, 2016 and 2015 were approximately $647,928 and $417,517, respectively. Proceeds from the sale of investments in available-for-sale securities during the nine months ended September 30, 2016 and 2015 were approximately $1,648,193 and $990,087, respectively.

A summary of the Company’s available-for-sale fixed maturities as of September 30, 2016 and December 31, 2015, by contractual maturity, is shown below. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
 
 
September 30, 2016
 
December 31, 2015
(Amounts in Thousands)
 
Amortized Cost
 
Fair Value
 
Amortized Cost
 
 Fair Value
Due in one year or less
 
$
257,764

 
$
258,760

 
$
125,563

 
$
124,763

Due after one through five years
 
1,487,745

 
1,523,695

 
913,365

 
909,634

Due after five through ten years
 
2,947,206

 
3,091,368

 
2,586,061

 
2,537,734

Due after ten years
 
398,638

 
414,597

 
352,397

 
357,288

Mortgage and asset backed securities
 
1,708,941

 
1,755,395

 
1,504,656

 
1,504,378

Total fixed maturities
 
$
6,800,294

 
$
7,043,815

 
$
5,482,042

 
$
5,433,797


The total other-than-temporary impairment ("OTTI") charges of our fixed maturities and equity securities classified as available-for-sale is presented below:
 
 
Three Months Ended September 30,

Nine Months Ended September 30,
(Amounts in Thousands)
 
2016

2015

2016

2015
Equity securities recognized in earnings
 
$
3,021

 
$
84

 
$
19,977

 
$
1,276

Fixed-maturity securities recognized in earnings
 

 
7,552

 

 
8,842

Other investments
 
6,440

 

 
6,440

 

 
 
$
9,461

 
$
7,636

 
$
26,417

 
$
10,118



13



The tables below summarize the gross unrealized losses of our fixed maturity and equity securities by length of time the security has continuously been in an unrealized loss position as of September 30, 2016 and December 31, 2015:
 
 
 
Less Than 12 Months

12 Months or More

Total
(Amounts in Thousands)
As of September 30, 2016
 
Fair Market Value

Unrealized Losses

No. of Positions Held

Fair Market Value

Unrealized Losses

No. of Positions Held

Fair Market Value

Unrealized Losses
Common and preferred stock
 
$
49,144


$
(6,039
)

100


$
1,279


$
(297
)

24


$
50,423


$
(6,336
)
U.S. treasury securities
 
26,829

 
(15
)
 
19

 
649

 
(1
)
 
1

 
27,478

 
(16
)
U.S. government agencies
 
178

 

 
2

 

 

 

 
178

 

Municipal bonds
 
103,790


(895
)

98


12,175


(565
)

24


115,965


(1,460
)
Foreign government
 
10,311

 
(528
)
 
12

 

 

 

 
10,311

 
(528
)
Corporate bonds:
 
 


 


 


 


 


 


 


 

Finance
 
203,687


(11,638
)

121


50,990


(1,113
)

27


254,677


(12,751
)
Industrial
 
237,197


(14,607
)

126


87,030


(3,647
)

54


324,227


(18,254
)
Utilities
 
22,028

 
(1,116
)
 
21

 
8,922

 
(754
)
 
4

 
30,950

 
(1,870
)
Commercial mortgage backed securities
 
13,077

 
(216
)
 
12

 
12,202

 
(435
)
 
38

 
25,279

 
(651
)
Residential mortgage backed securities:
 
 


 


 


 


 


 


 


 

Agency backed
 
9,265


(59
)

27


2,414


(22
)

22


11,679


(81
)
Non-agency backed
 
17,544


(376
)

18


63


(2
)

2


17,607


(378
)
Collateralized loan / debt obligations
 
47,636

 
(273
)
 
19

 
60,349

 
(1,349
)
 
23

 
107,985

 
(1,622
)
Asset-backed securities
 
9,462

 
(116
)
 
19

 
510

 
(3
)
 
6

 
9,972

 
(119
)
Total temporarily impaired securities
 
$
750,148


$
(35,878
)

594


$
236,583


$
(8,188
)

225


$
986,731


$
(44,066
)
  
 
 
Less Than 12 Months
 
12 Months or More
 
Total
(Amounts in Thousands)
As of December 31, 2015
 
Fair Market Value
 
Unrealized Losses
 
No. of Positions Held
 
Fair Market Value
 
Unrealized Losses
 
No. of Positions Held
 
Fair Market Value
 
Unrealized Losses
Common and preferred stock
 
$
59,302

 
$
(8,711
)
 
67

 
$
402

 
$
(104
)
 
2

 
$
59,704

 
$
(8,815
)
U.S. treasury securities
 
31,658

 
(232
)
 
77

 
2,586

 
(26
)
 
8

 
34,244

 
(258
)
U.S. government agencies
 
22,412

 
(262
)
 
20

 
182

 
(1
)
 
2

 
22,594

 
(263
)
Municipal bonds
 
121,550

 
(867
)
 
111

 
17,163

 
(663
)
 
30

 
138,713

 
(1,530
)
Foreign government
 
18,598

 
(688
)
 
27

 
5,977

 
(124
)
 
1

 
24,575

 
(812
)
Corporate bonds:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Finance
 
604,898

 
(33,068
)
 
349

 
59,020

 
(1,325
)
 
22

 
663,918

 
(34,393
)
Industrial
 
858,632

 
(65,887
)
 
633

 
82,495

 
(14,364
)
 
55

 
941,127

 
(80,251
)
 Utilities
 
79,358

 
(5,305
)
 
113

 
7,712

 
(3,810
)
 
5

 
87,070

 
(9,115
)
Commercial mortgage backed securities
 
35,405

 
(1,079
)
 
100

 
2,870

 
(101
)
 
6

 
38,275

 
(1,180
)
Residential mortgage backed securities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Agency backed
 
334,224

 
(2,788
)
 
163

 
35,446

 
(1,345
)
 
29

 
369,670

 
(4,133
)
Non-agency backed
 
95,001

 
(4,077
)
 
39

 
4,023

 
(62
)
 
4

 
99,024

 
(4,139
)
Collateralized loan / debt obligations
 
201,086

 
(6,161
)
 
78

 

 

 

 
201,086

 
(6,161
)
Asset-backed securities
 
30,302

 
(1,309
)
 
70

 

 

 

 
30,302

 
(1,309
)
Total temporarily impaired securities
 
$
2,492,426

 
$
(130,434
)
 
1,847

 
$
217,876

 
$
(21,925
)
 
164

 
$
2,710,302

 
$
(152,359
)


14



There are 819 and 2,011 securities at September 30, 2016 and December 31, 2015, respectively, that account for the gross unrealized loss, none of which is deemed by the Company to be OTTI. At September 30, 2016, the Company determined that the unrealized losses on fixed maturities were primarily due to market interest rate movements since their date of purchase. The Company considers an investment, primarily equity securities, to be impaired when it has been in a significant unrealized loss position (in excess of 35% of cost if the issuer has a market capitalization of under $1,000,000 and in excess of 25% of cost if the issuer has a market capitalization of $1,000,000 or more) for over 24 months. Additionally, other factors influencing the Company’s determination that unrealized losses were temporary included an evaluation of the investment’s discounted cash flows, the magnitude of the unrealized losses in relation to each security’s cost, near-term and long-term prospects of the issuer or the issuer's ability to have adequate resources to fulfill contractual obligations, the nature of the investment and management’s intent not to sell these securities, and it being not more likely than not that the Company will be required to sell these investments before anticipated recovery of fair value to the Company’s cost basis. As of September 30, 2016, for the $8,188 of unrealized losses related to securities in unrealized loss positions for a period of twelve or more consecutive months, $800 of those unrealized losses were related to securities in unrealized loss positions greater than or equal to 20% of amortized cost or cost.

(b) Trading Securities

The original or amortized cost, estimated market value and gross unrealized appreciation and depreciation of trading securities as of September 30, 2016 and December 31, 2015 are presented in the tables below:
(Amounts in Thousands)
As of September 30, 2016
 
Cost or amortized cost
 
Gross unrealized gains
 
Gross unrealized losses
 
 Market value
Common stock
 
$
34,091

 
$
788

 
$
(440
)
 
$
34,439


(Amounts in Thousands)
As of December 31, 2015
 
Cost or amortized cost
 
Gross unrealized gains
 
Gross unrealized losses
 
 Market value
Common stock
 
$
26,937

 
$
739

 
$
(405
)
 
$
27,271


Proceeds from the sale of investments in trading securities during the three months ended September 30, 2016 and 2015 were approximately $47,177 and $53,398, respectively. Proceeds from the sale of investments in trading securities during the nine months ended September 30, 2016 and 2015 were approximately $155,502 and $161,723, respectively.

(c) Investment Income
 
Net investment income for the three and nine months ended September 30, 2016 and 2015 was derived from the following sources:
 
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
(Amounts in Thousands)
 
2016
 
2015
 
2016
 
2015
Fixed maturities, available-for-sale
 
$
59,712

 
$
39,452

 
$
152,140

 
$
107,404

Equity securities, available-for-sale
 
465

 
1,183

 
6,927

 
2,253

Equity securities, trading
 
(40
)
 
(640
)
 
(318
)
 
(600
)
Cash and short term investments
 
410

 
844

 
2,182

 
3,432

 
 
60,547

 
40,839

 
160,931

 
112,489

Investment expenses
 
(628
)
 
(414
)
 
(852
)
 
(1,208
)
 
 
$
59,919

 
$
40,425

 
$
160,079

 
$
111,281


15




(d) Realized Gains and Losses
 
The tables below summarize the gross realized gains and (losses) for the three and nine months ended September 30, 2016 and 2015:

(Amounts in Thousands)
Three Months Ended September 30, 2016
 
Gross Gains
 
Gross Losses
 
Net Gains (Losses)
Fixed maturities, available-for-sale
 
$
17,535

 
$
(2,582
)
 
$
14,953

Equity securities, available-for-sale
 
553

 
(1,126
)
 
(573
)
Equity securities, trading
 
2,897

 
(1,902
)
 
995

Other investments
 
3,449

 
(1,133
)
 
2,316

Write-down of other invested assets
 

 
(6,440
)
 
(6,440
)
Write-down of equity securities, available-for-sale
 

 
(3,021
)
 
(3,021
)
 
 
$
24,434

 
$
(16,204
)
 
$
8,230

 
 
 
 
 
 
 
(Amounts in Thousands)
Three Months Ended September 30, 2015
 
Gross Gains
 
Gross Losses
 
Net Gains (Losses)
Fixed maturities, available-for-sale
 
$
21,435

 
$
(5,060
)
 
$
16,375

Equity securities, available-for-sale
 

 
(326
)
 
(326
)
Equity securities, trading
 
12,310

 
(3,041
)
 
9,269

Write-down of fixed maturities, available-for-sale
 

 
(7,552
)
 
(7,552
)
Write-down of equity securities, available-for-sale
 

 
(84
)
 
(84
)
 
 
$
33,745

 
$
(16,063
)
 
$
17,682

 
 
 
 
 
 
 
(Amounts in Thousands)
Nine Months Ended September 30, 2016
 
Gross Gains
 
Gross Losses
 
Net Gains (Losses)
Fixed maturities, available-for-sale
 
$
57,346

 
$
(4,199
)
 
$
53,147

Equity securities, available-for-sale
 
1,821

 
(1,862
)
 
(41
)
Equity securities, trading
 
17,824

 
(14,396
)
 
3,428

Other investments
 
1,189

 
(2
)
 
1,187

Write-down of equity securities, available-for-sale
 

 
(19,977
)
 
(19,977
)
Write-down of other investments
 

 
(6,440
)
 
(6,440
)
 
 
$
78,180

 
$
(46,876
)
 
$
31,304

 
 
 
 
 
 
 
(Amounts in Thousands)
Nine Months Ended September 30, 2015
 
Gross Gains
 
Gross Losses
 
Net Gains (Losses)
Fixed maturities, available-for-sale
 
$
41,979

 
$
(12,902
)
 
$
29,077

Equity securities, available-for-sale
 
2,184

 
(1,955
)
 
229

Equity securities, trading
 
19,047

 
(7,542
)
 
11,505

Write-down of fixed maturities, available-for-sale

 

 
(8,842
)
 
(8,842
)
Write-down of equity securities, available-for-sale

 

 
(1,276
)
 
(1,276
)
 
 
$
63,210

 
$
(32,517
)
 
$
30,693


(e) Derivatives
 
The Company from time to time invests in a limited number of derivatives and other financial instruments as part of its investment portfolio to manage interest rate changes or other exposures to a particular financial market. The Company records changes in valuation on its derivative positions not designated as a hedge, if any, as a component of net realized gains and losses. The Company records changes in valuation on its hedge positions as a component of other comprehensive income.


16



The Company had two interest rate swaps designated as a hedge in the total amount of $460 and $1,077 as of September 30, 2016 and December 31, 2015, respectively, that were included as a component of accrued expenses and other liabilities. The two interest rate swaps at December 31, 2015, one of which matured during the three months ended September 30, 2016, related to the Company's junior subordinated debentures.

During the nine months ended September 30, 2016, the Company entered into an interest rate swap agreement related to a five-year secured term loan agreement with Lloyd's Bank PLC to finance the purchase of a commercial office building in Nottingham, U.K. The interest rate swap covers a notional amount equal to 70% of the original outstanding balance and converts the LIBOR variable component of the Company’s interest rate to a fixed rate.
 
The following table presents the notional amounts by remaining maturity of the Company’s interest rate swaps as of September 30, 2016:
 
 
 
Remaining Life of Notional Amount (1)
 
(Amounts in Thousands)
 
One Year
 
Two Through Five Years
 
Six Through Ten Years
 
After Ten Years
 
Total
Interest rate swaps
 
$
40,000

 
$
7,591

 
$

 
$

 
$
47,591

 
(1) 
Notional amount is not representative of either market risk or credit risk and is not recorded in the consolidated balance sheet.

(f) Restricted Cash and Investments
 
The Company, in order to conduct business in certain states, is required to maintain letters of credit or assets on deposit to support state mandated regulatory requirements and certain third party agreements. The Company also utilizes trust accounts to collateralize business with its reinsurance counterparties. These assets are primarily in the form of cash and certain high grade securities. The fair values of the Company's restricted assets as of September 30, 2016 and December 31, 2015 are as follows:
 
(Amounts in Thousands)
 
September 30, 2016
 
December 31, 2015
Restricted cash and cash equivalents
 
$
557,159

 
$
380,699

Restricted investments - fixed maturities at fair value
 
1,880,536

 
1,490,547

Total restricted cash, cash equivalents, and investments
 
$
2,437,695

 
$
1,871,246

 
(g) Other

Securities sold but not yet purchased are securities that the Company has sold, but does not own, in anticipation of a decline in the market value of the security. The Company's risk is that the value of the security will increase rather than decline. Consequently, the settlement amount of the liability for securities sold, not yet purchased may exceed the amount recorded in the consolidated balance sheet as the Company is obligated to purchase the securities sold, not yet purchased in the market at prevailing prices to settle the obligations. To establish a position in security sold, not yet purchased, the Company needs to borrow the security for delivery to the buyer. When the transaction is open, the liability for the obligation to replace the borrowed security is marked to market and an unrealized gain or loss is recorded. At the time the transaction is closed, the Company realizes a gain or loss equal to the differences between the price at which the security was sold and the cost of replacing the borrowed security. While the transaction is open, the Company will also incur an expense for any dividends or interest which will be paid to the lender of the securities. The Company’s liability for securities to be delivered is measured at their fair value and was $23,770 and $38,618 as of September 30, 2016 and December 31, 2015, respectively. The securities sold but not yet purchased consisted primarily of equity and fixed maturity securities, and the liability for securities sold but not yet purchased is included in accrued expenses and other liabilities in the consolidated balance sheet.

As of September 30, 2016 and December 31, 2015, the Company had no repurchase agreements.


17




4.
Fair Value of Financial Instruments

The following tables present the level within the fair value hierarchy at which the Company’s financial assets and financial liabilities are measured on a recurring basis as of September 30, 2016 and December 31, 2015:
 
(Amounts in Thousands)
As of September 30, 2016
 
Total

Level 1

Level 2

Level 3
Assets:
 
 


 


 


 

U.S. treasury securities
 
$
295,721


$
295,721


$


$

U.S. government agencies
 
7,679




7,679



Municipal bonds
 
875,989




875,989



Foreign government
 
142,262

 

 
142,262

 

Corporate bonds and other bonds:
 
 


 


 


 

Finance
 
1,569,606




1,569,606



Industrial
 
2,183,448




2,183,448



Utilities
 
213,703




213,703



Commercial mortgage backed securities
 
179,717




171,846


7,871

Residential mortgage backed securities:
 
 


 


 


 

Agency backed
 
1,061,245




1,061,245



Non-agency backed
 
63,195




63,195



Collateralized loan / debt obligations
 
425,669

 

 
403,936

 
21,733

Asset-backed securities
 
25,581

 

 
25,581

 

Equity securities, available-for-sale
 
165,743


111,489


21,075


33,179

Equity securities, trading
 
34,439

 
34,439

 

 

Short term investments
 
49,008


49,008





Other investments
 
40,267






40,267

Life settlement contracts
 
332,085






332,085

 
 
$
7,665,357


$
490,657


$
6,739,565


$
435,135

Liabilities:
 
 


 


 


 

Equity securities sold but not yet purchased
 
$
23,770

 
$
23,770

 
$

 
$

Life settlement contract profit commission
 
4,817






4,817

Contingent consideration
 
59,267

 

 

 
59,267

Derivatives
 
460




460



 
 
$
88,314


$
23,770


$
460


$
64,084

 

18



(Amounts in Thousands)
As of December 31, 2015
 
Total
 
Level 1
 
Level 2
 
Level 3
Assets:
 
 
 
 
 
 
 
 
U.S. treasury securities
 
$
70,759

 
$
70,759

 
$

 
$
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