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EVEREST GROUP, LTD. - Quarter Report: 2019 September (Form 10-Q)

 

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 September 30, 2019

 

___ Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

Commission file number 1-15731

 

 

EVEREST RE GROUP, LTD.

(Exact name of registrant as specified in its charter)

Bermuda

 

98-0365432

(State or other jurisdiction of

incorporation or organization)

 

 

(I.R.S. Employer

Identification No.)

Seon Place – 4 Floor

141 Front Street

PO Box HM 845

HamiltonHM 19, Bermuda

441-295-0006

 

(Address, including zip code, and telephone number, including area code,

of registrant’s principal executive office)

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 every Interactive Data File required to be submitted 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 such files).

 

Yes

X

 

No

 

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large Accelerated Filer

X

 

Accelerated filer

 

 

Non-accelerated filer

 

 

 

Smaller reporting company

 

 

 

 

Emerging growth company

 

 

Indicate by check mark if the registrant is an emerging growth company and has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange act.

 

YES

 

 

NO

X

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

 

YES

 

 

NO

X

 

Securities registered pursuant to Section 12(b) of the Act:

 

 

Class

 

Trading Symbol

Name of Exchange where Registered

Number of Shares Outstanding

At November 1, 2019

 

Common Shares, $0.01 par value

 

RE

 

New York Stock Exchange

 

40,782,128

 

 


 

EVEREST RE GROUP, LTD

 

Table of Contents

Form 10-Q

 

 

Page

PART I

 

FINANCIAL INFORMATION

 

Item 1.

Financial Statements

 

 

 

 

 

Consolidated Balance Sheets September 30, 2019 (unaudited)

 

 

and December 31, 2018

1

 

 

 

 

Consolidated Statements of Operations and Comprehensive Income (Loss) for the

 

 

three and nine months ended September 30, 2019 and 2018 (unaudited)

2

 

 

 

 

Consolidated Statements of Changes in Shareholders’ Equity for the three and nine

 

 

months ended September 30, 2019 and 2018 (unaudited)

3

 

 

 

 

Consolidated Statements of Cash Flows for the Nine months ended

 

 

September 30, 2019 and 2018 (unaudited)

4

 

 

 

 

Notes to Consolidated Interim Financial Statements (unaudited)

5

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and

 

 

Results of Operation

42

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

68

 

 

 

Item 4.

Controls and Procedures

68

 

 

 

 

PART II

 

OTHER INFORMATION

 

Item 1.

Legal Proceedings

69

 

 

 

Item 1A.

Risk Factors

69

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

69

 

 

 

Item 3.

Defaults Upon Senior Securities

69

 

 

 

Item 4.

Mine Safety Disclosures

70

 

 

 

Item 5.

Other Information

70

 

 

 

Item 6.

Exhibits

70

 

 

 

 

 


 

EVEREST RE GROUP, LTD.

CONSOLIDATED BALANCE SHEETS

 

 

 

September 30,

 

December 31,

(Dollars and share amounts in thousands, except par value per share)

2019

 

2018

 

(unaudited)

 

 

 

ASSETS:

 

 

 

 

 

Fixed maturities - available for sale, at market value

$

16,566,133

 

$

15,225,263

(amortized cost: 2019, $16,164,841; 2018, $15,406,572)

 

 

 

 

 

Fixed maturities - available for sale, at fair value

 

-

 

 

2,337

Equity securities, at fair value

 

906,230

 

 

716,639

Short-term investments (cost: 2019, $458,915; 2018, $241,010)

 

458,954

 

 

240,987

Other invested assets (cost: 2019, $1,716,104; 2018, $1,591,745)

 

1,716,104

 

 

1,591,745

Cash

 

717,172

 

 

656,095

Total investments and cash

 

20,364,593

 

 

18,433,066

Accrued investment income

 

116,123

 

 

104,619

Premiums receivable

 

2,393,769

 

 

2,183,183

Reinsurance receivables

 

1,817,857

 

 

1,787,648

Funds held by reinsureds

 

450,539

 

 

435,031

Deferred acquisition costs

 

526,514

 

 

511,573

Prepaid reinsurance premiums

 

484,268

 

 

343,343

Income taxes

 

361,243

 

 

594,487

Other assets

 

508,835

 

 

358,042

TOTAL ASSETS

$

27,023,741

 

$

24,750,992

 

 

 

 

 

 

LIABILITIES:

 

 

 

 

 

Reserve for losses and loss adjustment expenses

$

13,637,639

 

$

13,119,090

Future policy benefit reserve

 

44,276

 

 

46,778

Unearned premium reserve

 

2,896,161

 

 

2,517,612

Funds held under reinsurance treaties

 

11,634

 

 

13,099

Other net payable to reinsurers

 

371,807

 

 

218,439

Senior notes due 06/01/2044

 

397,044

 

 

396,954

Long term notes due 05/01/2067

 

236,733

 

 

236,659

Accrued interest on debt and borrowings

 

7,821

 

 

3,093

Equity index put option liability

 

8,563

 

 

11,958

Unsettled securities payable

 

53,524

 

 

51,112

Other liabilities

 

375,281

 

 

275,401

Total liabilities

 

18,040,483

 

 

16,890,195

 

 

 

 

 

 

Commitments and contingencies (Note 9)

 

-

 

 

-

 

 

 

 

 

 

SHAREHOLDERS' EQUITY:

 

 

 

 

 

Preferred shares, par value: $0.01; 50,000 shares authorized;

 

 

 

 

 

no shares issued and outstanding

 

-

 

 

-

Common shares, par value: $0.01; 200,000 shares authorized; (2019) 69,406

 

 

 

 

 

and (2018) 69,202 outstanding before treasury shares

 

694

 

 

692

Additional paid-in capital

 

2,206,326

 

 

2,188,777

Accumulated other comprehensive income (loss), net of deferred income

 

 

 

 

 

tax expense (benefit) of $43,886 at 2019 and $(20,697) at 2018

 

46,272

 

 

(462,557)

Treasury shares, at cost; 28,665 shares (2019) and 28,551 shares (2018)

 

(3,422,152)

 

 

(3,397,548)

Retained earnings

 

10,152,118

 

 

9,531,433

Total shareholders' equity

 

8,983,258

 

 

7,860,797

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY

$

27,023,741

 

$

24,750,992

 

 

 

 

 

 

The accompanying notes are an integral part of the consolidated financial statements.

1


 

EVEREST RE GROUP, LTD.

CONSOLIDATED STATEMENTS OF OPERATIONS

AND COMPREHENSIVE INCOME (LOSS)

 

 

 

Three Months Ended

 

Nine Months Ended

 

September 30,

 

September 30,

(Dollars in thousands, except per share amounts)

2019

 

2018

 

2019

 

2018

 

(unaudited)

 

(unaudited)

REVENUES:

 

 

 

 

 

 

 

 

 

 

 

Premiums earned

$

1,905,619

 

$

1,731,479

 

$

5,455,615

 

$

5,080,724

Net investment income

 

181,058

 

 

161,363

 

 

501,062

 

 

440,979

Net realized capital gains (losses):

 

 

 

 

 

 

 

 

 

 

 

Other-than-temporary impairments on fixed maturity securities

 

(7,314)

 

 

(3,825)

 

 

(15,404)

 

 

(4,783)

Other-than-temporary impairments on fixed maturity securities

 

 

 

 

 

 

 

 

 

 

 

transferred to other comprehensive income (loss)

 

-

 

 

-

 

 

-

 

 

-

Other net realized capital gains (losses)

 

(5,629)

 

 

58,629

 

 

124,965

 

 

50,462

Total net realized capital gains (losses)

 

(12,943)

 

 

54,804

 

 

109,561

 

 

45,679

Net derivative gain (loss)

 

(189)

 

 

2,225

 

 

3,395

 

 

5,485

Other income (expense)

 

(31,025)

 

 

(13,408)

 

 

(52,550)

 

 

(2,948)

Total revenues

 

2,042,520

 

 

1,936,463

 

 

6,017,083

 

 

5,569,919

 

 

 

 

 

 

 

 

 

 

 

 

CLAIMS AND EXPENSES:

 

 

 

 

 

 

 

 

 

 

 

Incurred losses and loss adjustment expenses

 

1,371,924

 

 

1,251,858

 

 

3,515,104

 

 

3,650,349

Commission, brokerage, taxes and fees

 

443,076

 

 

381,401

 

 

1,253,500

 

 

1,122,442

Other underwriting expenses

 

118,158

 

 

97,942

 

 

321,976

 

 

287,325

Corporate expenses

 

8,435

 

 

7,890

 

 

22,622

 

 

23,519

Interest, fees and bond issue cost amortization expense

 

7,907

 

 

7,901

 

 

23,972

 

 

23,047

Total claims and expenses

 

1,949,500

 

 

1,746,992

 

 

5,137,174

 

 

5,106,682

 

 

 

 

 

 

 

 

 

 

 

 

INCOME (LOSS) BEFORE TAXES

 

93,020

 

 

189,471

 

 

879,909

 

 

463,237

Income tax expense (benefit)

 

(11,378)

 

 

(8,910)

 

 

88,092

 

 

(11,117)

 

 

 

 

 

 

 

 

 

 

 

 

NET INCOME (LOSS)

$

104,398

 

$

198,381

 

$

791,817

 

$

474,354

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss), net of tax:

 

 

 

 

 

 

 

 

 

 

 

Unrealized appreciation (depreciation) ("URA(D)") on securities arising during the period

 

93,765

 

 

(22,282)

 

 

524,589

 

 

(254,682)

Reclassification adjustment for realized losses (gains) included in net income (loss)

 

(529)

 

 

1,417

 

 

(4,220)

 

 

(7,106)

Total URA(D) on securities arising during the period

 

93,236

 

 

(20,865)

 

 

520,369

 

 

(261,788)

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

(3,426)

 

 

(5,930)

 

 

(15,206)

 

 

(51,883)

 

 

 

 

 

 

 

 

 

 

 

 

Reclassification adjustment for amortization of net (gain) loss included in net income (loss)

 

1,363

 

 

1,816

 

 

3,665

 

 

5,446

Total benefit plan net gain (loss) for the period

 

1,363

 

 

1,816

 

 

3,665

 

 

5,446

Total other comprehensive income (loss), net of tax

 

91,173

 

 

(24,979)

 

 

508,828

 

 

(308,225)

 

 

 

 

 

 

 

 

 

 

 

 

COMPREHENSIVE INCOME (LOSS)

$

195,571

 

$

173,402

 

$

1,300,645

 

$

166,129

 

 

 

 

 

 

 

 

 

 

 

 

EARNINGS PER COMMON SHARE:

 

 

 

 

 

 

 

 

 

 

 

Basic

$

2.56

 

$

4.87

 

$

19.44

 

$

11.61

Diluted

 

2.56

 

 

4.84

 

 

19.38

 

 

11.55

 

 

 

 

 

 

 

 

 

 

 

 

The accompanying notes are an integral part of the consolidated financial statements.

2


 

EVEREST RE GROUP, LTD.

CONSOLIDATED STATEMENTS OF

CHANGES IN SHAREHOLDERS’ EQUITY

 

(Dollars in thousands, except share and dividends per share amounts)

2019

 

2018

 

(unaudited)

COMMON SHARES (shares outstanding):

 

 

 

 

 

Balance, January 1

 

40,651,148

 

 

40,835,272

Issued during the period, net

 

194,584

 

 

143,362

Treasury shares acquired

 

(75,193)

 

 

-

Balance, March 31

 

40,770,539

 

 

40,978,634

Issued during the period, net

 

9,403

 

 

(5,718)

Treasury shares acquired

 

(39,440)

 

 

(112,747)

Balance, June 30

 

40,740,502

 

 

40,860,169

Issued during the period, net

 

39,967

 

 

16,388

Treasury shares acquired

 

-

 

 

(229,432)

Balance, September 30

 

40,780,469

 

 

40,647,125

 

 

 

 

 

 

COMMON SHARES (par value):

 

 

 

 

 

Balance, January 1

$

692

 

$

691

Issued during the period, net

 

2

 

 

1

Balance, March 31

 

694

 

 

692

Issued during the period, net

 

-

 

 

-

Balance, June 30

 

694

 

 

692

Issued during the period, net

 

-

 

 

-

Balance, September 30

 

694

 

 

692

 

 

 

 

 

 

ADDITIONAL PAID-IN CAPITAL:

 

 

 

 

 

Balance, January 1

 

2,188,777

 

 

2,165,768

Share-based compensation plans

 

767

 

 

(2,249)

Balance, March 31

 

2,189,544

 

 

2,163,519

Share-based compensation plans

 

8,917

 

 

9,182

Balance, June 30

 

2,198,461

 

 

2,172,701

Share-based compensation plans

 

7,865

 

 

9,893

Balance, September 30

 

2,206,326

 

 

2,182,594

 

 

 

 

 

 

ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS),

 

 

 

 

 

NET OF DEFERRED INCOME TAXES:

 

 

 

 

 

Balance, January 1

 

(462,557)

 

 

(160,891)

Change to beginning balance due to adoption of Accounting Standards Update 2016-01

 

-

 

 

(1,201)

Net increase (decrease) during the period

 

246,446

 

 

(179,882)

Balance, March 31

 

(216,111)

 

 

(341,974)

Net increase (decrease) during the period

 

171,209

 

 

(103,364)

Balance, June 30

 

(44,902)

 

 

(445,338)

Net increase (decrease) during the period

 

91,174

 

 

(24,979)

Balance, September 30

 

46,272

 

 

(470,317)

 

 

 

 

 

 

RETAINED EARNINGS:

 

 

 

 

 

Balance, January 1

 

9,531,433

 

 

9,657,412

Change to beginning balance due to adoption of Accounting Standards Update 2016-01

 

-

 

 

1,201

Net income (loss)

 

354,551

 

 

215,186

Dividends declared ($1.40 per share 2019 and $1.30 per share 2018)

 

(57,137)

 

 

(53,240)

Balance, March 31

 

9,828,847

 

 

9,820,559

Net income (loss)

 

332,868

 

 

60,787

Dividends declared ($1.40 per share 2019 and $1.30 per share 2018)

 

(56,999)

 

 

(53,240)

Balance, June 30

 

10,104,716

 

 

9,828,106

Net income (loss)

 

104,398

 

 

198,381

Dividends declared ($1.40 per share 2019 and $1.30 per share 2018)

 

(56,995)

 

 

(52,863)

Balance, September 30

 

10,152,118

 

 

9,973,624

 

 

 

 

 

 

TREASURY SHARES AT COST:

 

 

 

 

 

Balance, January 1

 

(3,397,548)

 

 

(3,322,244)

Purchase of treasury shares

 

(16,153)

 

 

-

Balance, March 31

 

(3,413,701)

 

 

(3,322,244)

Purchase of treasury shares

 

(8,451)

 

 

(25,304)

Balance, June 30

 

(3,422,152)

 

 

(3,347,548)

Purchase of treasury shares

 

-

 

 

(50,000)

Balance, September 30

 

(3,422,152)

 

 

(3,397,548)

 

 

 

 

 

 

TOTAL SHAREHOLDERS' EQUITY, September 30

$

8,983,258

 

$

8,289,045

 

 

 

 

 

 

The accompanying notes are an integral part of the consolidated financial statements.

 

 

 

 

 

 

3


 

EVEREST RE GROUP, LTD.

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

 

 

Nine Months Ended

 

September 30,

(Dollars in thousands)

2019

 

2018

 

(unaudited)

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

Net income (loss)

$

791,817

 

$

474,354

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

 

 

 

 

 

Decrease (increase) in premiums receivable

 

(219,637)

 

 

(257,291)

Decrease (increase) in funds held by reinsureds, net

 

(17,961)

 

 

(73,189)

Decrease (increase) in reinsurance receivables

 

(42,891)

 

 

(430,839)

Decrease (increase) in income taxes

 

168,360

 

 

57,916

Decrease (increase) in prepaid reinsurance premiums

 

(145,846)

 

 

(92,174)

Increase (decrease) in reserve for losses and loss adjustment expenses

 

553,668

 

 

591,385

Increase (decrease) in future policy benefit reserve

 

(2,502)

 

 

(3,143)

Increase (decrease) in unearned premiums

 

388,597

 

 

364,299

Increase (decrease) in other net payable to reinsurers

 

160,306

 

 

79,219

Increase (decrease) in losses in course of payment

 

(6,438)

 

 

98,947

Change in equity adjustments in limited partnerships

 

(104,987)

 

 

(88,377)

Distribution of limited partnership income

 

62,359

 

 

69,078

Change in other assets and liabilities, net

 

(37,449)

 

 

(251,472)

Non-cash compensation expense

 

25,386

 

 

25,791

Amortization of bond premium (accrual of bond discount)

 

23,642

 

 

24,804

Net realized capital (gains) losses

 

(109,561)

 

 

(45,679)

Net cash provided by (used in) operating activities

 

1,486,863

 

 

543,629

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

Proceeds from fixed maturities matured/called - available for sale, at market value

 

1,631,298

 

 

1,444,452

Proceeds from fixed maturities sold - available for sale, at market value

 

2,589,232

 

 

1,756,139

Proceeds from fixed maturities sold - available for sale, at fair value

 

2,706

 

 

1,751

Proceeds from equity securities sold, at fair value

 

185,157

 

 

785,819

Distributions from other invested assets

 

215,800

 

 

3,061,938

Cost of fixed maturities acquired - available for sale, at market value

 

(5,039,728)

 

 

(3,358,333)

Cost of fixed maturities acquired - available for sale, at fair value

 

-

 

 

(4,381)

Cost of equity securities acquired, at fair value

 

(269,969)

 

 

(820,924)

Cost of other invested assets acquired

 

(299,480)

 

 

(3,244,817)

Net change in short-term investments

 

(213,048)

 

 

535

Net change in unsettled securities transactions

 

(13,770)

 

 

100,647

Net cash provided by (used in) investing activities

 

(1,211,802)

 

 

(277,174)

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

Common shares issued during the period for share-based compensation, net of expense

 

(7,836)

 

 

(7,763)

Purchase of treasury shares

 

(24,604)

 

 

(75,304)

Dividends paid to shareholders

 

(171,131)

 

 

(159,343)

Cost of shares withheld on settlements of share-based compensation awards

 

(12,473)

 

 

(15,259)

Net cash provided by (used in) financing activities

 

(216,044)

 

 

(257,669)

 

 

 

 

 

 

EFFECT OF EXCHANGE RATE CHANGES ON CASH

 

2,060

 

 

(4,092)

 

 

 

 

 

 

Net increase (decrease) in cash

 

61,077

 

 

4,694

Cash, beginning of period

 

656,095

 

 

635,067

Cash, end of period

 

717,172

 

 

639,761

 

 

 

 

 

 

SUPPLEMENTAL CASH FLOW INFORMATION:

 

 

 

 

 

Income taxes paid (recovered)

$

(80,544)

 

$

(67,941)

Interest paid

 

19,078

 

 

17,741

 

 

 

 

 

 

NON-CASH TRANSACTIONS:

 

 

 

 

 

Reclassification of investment balances due to prospective consolidation of private placement

 

 

 

 

 

liquidity sweep facility effective July 1, 2018

 

 

 

 

 

 

 

 

 

 

 

Fixed maturities - available for sale, at market value

$

-

 

$

143,656

Short-term investments

 

-

 

 

243,864

Other invested assets

 

-

 

 

(387,520)

 

 

 

 

 

 

The accompanying notes are an integral part of the consolidated financial statements.

4


 

NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS (UNAUDITED)

 

For the Three and Nine Months Ended September 30, 2019 and 2018

 

1. GENERAL

 

Everest Re Group, Ltd. (“Group”), a Bermuda company, through its subsidiaries, principally provides reinsurance and insurance in the U.S., Bermuda and international markets. As used in this document, “Company” means Group and its subsidiaries.

 

During the fourth quarter of 2017, the Company established a new Irish insurance subsidiary, Everest Insurance (Ireland), designated activity company (“Ireland Insurance”), which writes insurance business mainly in the European markets.

 

2. BASIS OF PRESENTATION

 

The unaudited consolidated financial statements of the Company as of September 30, 2019 and December 31, 2018 and for the three and nine months ended September 30, 2019 and 2018 include all adjustments, consisting of normal recurring accruals, which, in the opinion of management, are necessary for a fair statement of the results on an interim basis. Certain financial information, which is normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”), has been omitted since it is not required for interim reporting purposes. The December 31, 2018 consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by GAAP. The results for the three and nine months ended September 30, 2019 and 2018 are not necessarily indicative of the results for a full year. These financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto for the years ended December 31, 2018, 2017 and 2016 included in the Company’s most recent Form 10-K filing.

 

The Company consolidates the results of operations and financial position of all voting interest entities ("VOE") in which the Company has a controlling financial interest and all variable interest entities ("VIE") in which the Company is considered to be the primary beneficiary. The consolidation assessment, including the determination as to whether an entity qualifies as a VIE or VOE, depends on the facts and circumstances surrounding each entity.

 

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities (and disclosure of contingent assets and liabilities) at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Ultimate actual results could differ, possibly materially, from those estimates.

 

All intercompany accounts and transactions have been eliminated.

 

Certain reclassifications and format changes have been made to prior years’ amounts to conform to the 2019 presentation.

 

Application of Recently Issued Accounting Standard Changes.

 

5


 

Accounting for Cloud Computing Arrangement. In August 2018, The Financial Accounting Standards Board (“FASB”) issued ASU 2018-15, which outlines accounting for implementation costs of a cloud computing arrangement that is a service contract. This guidance requires that implementation costs of a cloud computing arrangement that is a service contract must be capitalized and expensed in accordance with the existing provisions provided in Subtopic 350-40 regarding development of internal use software. In addition, any capitalized implementation costs should be amortized over the term of the hosting arrangement. The guidance is effective for annual reporting periods beginning after December 15, 2019 and interim periods within that annual reporting period. The Company is currently evaluating the impact of the adoption of ASU 2018-15 on its financial statements.

 

Accounting for Long Duration Contracts. In August 2018, FASB issued ASU 2018-12, which discusses changes to the recognition, measurement and presentation of long duration contracts. The main provisions of this guidance address the following: 1) In determining liability for future policy benefits, companies must review cash flow assumptions at least annually and the discount rate assumption at each reporting period date 2) Amortization of deferred acquisition costs has been simplified to be in constant level proportion to either premiums, gross profits or gross margins 3) Disaggregated roll forwards of beginning and ending liabilities for future policy benefits are required. The guidance is effective for annual reporting periods beginning after December 15, 2021 and interim periods within that annual reporting period. The Company is currently evaluating the impact of the adoption of ASU 2018-12 on its financial statements.

 

Accounting for Deferred Taxes in Accumulated Other Comprehensive Income (AOCI). In February 2018, FASB issued ASU 2018-02 which outlines guidance on the treatment of trapped deferred taxes contained within AOCI on the consolidated balance sheets. The new guidance allows the amount of trapped deferred taxes in AOCI, resulting from the change in the U.S. tax rate from 35% to 21% upon enactment of the Tax Cuts and Jobs Act (“TCJA”), to be reclassified as part of retained earnings in the consolidated balance sheets. The guidance is effective for annual and interim reporting periods beginning after December 15, 2018, but early adoption is allowed. The Company decided to early adopt the guidance as of December 31, 2017. The adoption resulted in a reclass of $1,250 thousand between AOCI and retained earnings during the fourth quarter of 2017. As an accounting policy, the Company has adopted the aggregate portfolio approach for releasing disproportionate income tax effects from AOCI.

 

Accounting for Impact on Income Taxes due to Tax Reform. In December 2017, the SEC issued Staff Accounting Bulletin (“SAB”) 118 which provides guidance on the application of FASB Accounting Standards Codification (“ASC”) Topic 740, Income Taxes, due to the enactment of TCJA. SAB 118 became effective upon release. The Company has adopted the provisions of SAB 118 with respect to measuring the tax effects for the modifications to the determination of tax basis loss reserves. In 2018, the Company recorded adjustments to the amount of tax expense it recorded in 2017 with respect to the TCJA as estimated amounts were finalized, which did not have a material impact on the Company’s financial statements.

 

Amortization of Bond Premium. In March 2017, FASB issued ASU 2017-08 which outlines guidance on the amortization period for premium on callable debt securities. The new guidance requires that the premium on callable debt securities be amortized through the earliest call date rather than through the maturity date of the callable security. The guidance is effective for annual and interim reporting periods beginning after December 15, 2018. The adoption of ASU 2017-08 did not have a material impact on the Company’s financial statements.

 

Presentation and Disclosure of Net Periodic Benefit Costs. In March 2017, FASB issued ASU 2017-07 which outlines guidance on the presentation of net periodic costs of benefit plans. The new guidance requires that the service cost component of net periodic benefit costs be reported within the same line item of the statements of operations as other compensation costs are reported. Other components of net periodic benefit costs should be reported separately. Footnote disclosure is required to state within which line items of the statements of operations the components are reported. The guidance is effective for annual and interim reporting periods beginning after December 15, 2017. The Company adopted the guidance effective January 1, 2018. The adoption of ASU 2017-07 did not have a material impact on the Company’s financial statements.

6


 

 

Disclosure of Restricted Cash. In November 2016, FASB issued ASU 2016-18 and in August 2016, FASB issued ASU 2016-15 which outline guidance on the presentation in the statements of cash flows of changes in restricted cash. The new guidance requires that the statements of cash flows should reflect all changes in cash, cash equivalents and restricted cash in total and not segregated individually. The guidance is effective for annual and interim reporting periods beginning after December 15, 2017. The Company adopted the guidance effective January 1, 2018. The adoption of ASU 2016-18 and ASU 2016-15 did not have a material impact on the Company’s financial statements.

 

Intra-Entity Asset Transfers. In October 2016, FASB issued ASU 2016-16 which outlines guidance on the tax accounting for intra-entity asset sales and transfers, other than inventory. The new guidance requires that reporting entities recognize tax expense from the intra-entity transfer of an asset in the seller’s tax jurisdiction at the time of transfer and recognize any deferred tax asset in the buyer’s tax jurisdiction at the time of transfer. The guidance is effective for annual and interim reporting periods beginning after December 15, 2017. The Company adopted the guidance effective January 1, 2018. The adoption of ASU 2016-16 did not have a material impact on the Company’s financial statements.

 

Valuation of Financial Instruments. In June 2016, FASB issued ASU 2016-13 which outlines guidance on the valuation of and accounting for assets measured at amortized cost and available for sale debt securities. The carrying value of assets measured at amortized cost will now be presented as the amount expected to be collected on the financial asset (amortized cost less an allowance for credit losses valuation account). Available for sale debt securities will now record credit losses through an allowance for credit losses, which will be limited to the amount by which fair value is below amortized cost. The guidance is effective for annual and interim reporting periods beginning after December 15, 2019. The Company is currently evaluating the impact of the adoption of ASU 2016-13 on its financial statements.

 

Accounting for Share-Based Compensation. In March 2016, the FASB issued ASU 2016-09, authoritative guidance regarding the accounting for share-based compensation. This guidance requires that the income tax effects resulting from the change in the value of share-based compensation awards between grant and settlement will be recorded as part of the consolidated statements of operations and comprehensive income/(loss). Previously, excess tax benefits have been recorded as part of the additional paid in capital within the consolidated balance sheets. The guidance is effective for annual reporting periods beginning after December 15, 2016 and interim periods within that annual reporting period. The Company has implemented this guidance prospectively as of January 1, 2017. The guidance also requires that the cost of employee taxes paid via shares withheld upon settlement of share-based compensation awards must be shown as a financing activity within the Statements of Cash Flows. The Company has implemented this guidance retrospectively as of January 1, 2017.

 

Leases. In February 2016, FASB issued ASU 2016-02 (and subsequently issued ASU 2018-11 in July, 2018) which outline new guidance on the accounting for leases. The new guidance requires the recognition of lease assets and lease liabilities on the balance sheets for most leases that were previously deemed operating leases and required only lease expense presentation in the statements of operations. The guidance is effective for annual and interim reporting periods beginning after December 15, 2018. The Company adopted ASU 2016-02 effective January 1, 2019 and elected to utilize a cumulative-effect adjustment to the opening balance of retained earnings for the year of adoption. Accordingly, the Company’s reporting for the comparative periods prior to adoption continue to be presented in the financial statements in accordance with previous lease accounting guidance. The Company also elected to apply the package of practical expedients applicable to the Company in the updated guidance for transition for leases in effect at adoption. The Company did not elect the hindsight practical expedient to determine the lease term of existing leases (e.g. The Company did not re-assess lease renewals, termination options nor purchase options in determining lease terms). The adoption of the updated guidance resulted in the Company recognizing a right-of-use asset of $69,869 thousand as part of other assets and a lease liability of $77,270 thousand as part of other liabilities in the consolidated balance sheet at the time of adoption, as well as de-recognizing the liability for deferred rent that was required under the

7


 

previous guidance. The cumulative effect adjustment to the opening balance of retained earnings was zero. The adoption of the updated guidance did not have a material effect on the Company’s results of operations or liquidity.

 

Recognition and Measurement of Financial Instruments. In January 2016, the FASB issued ASU 2016-01 which outlines revised guidance on the accounting for equity investments. The new guidance states that all equity investments in unconsolidated entities will be measured at fair value, with the change in value being recorded through the income statement rather than being recorded within other comprehensive income. The updated guidance is effective for annual and interim reporting periods beginning after December 15, 2017. The Company adopted the guidance effective January 1, 2018. The adoption of ASU 2016-01 resulted in a cumulative change adjustment of $1,201 thousand between AOCI and retained earnings, which is disclosed separately within the consolidated statement of changes in shareholders’ equity.

 

Revenue Recognition. In May 2014, the FASB issued ASU 2014-09 and in August 2015, FASB issued ASU 2015-14 which outline revised guidance on the recognition of revenue arising from contracts with customers. The new guidance states that reporting entities should apply certain steps to determine when revenue should be recognized, based upon fulfillment of performance obligations to complete contracts. The updated guidance is effective for annual and interim reporting periods beginning after December 15, 2017. The Company adopted the guidance effective January 1, 2018. The adoption of ASU 2014-09 and ASU 2015-14 did not have a material impact on the Company’s financial statements.

 

Any issued guidance and pronouncements, other than those directly referenced above, are deemed by the Company to be either not applicable or immaterial to its financial statements.

 

3. REVISIONS TO FINANCIAL STATEMENTS

 

In preparing its current period financial statements, the Company identified errors in the handling of foreign exchange related to premium funds held from reinsureds. Although management determined that the impact of the foreign exchange differences were not material to prior period financial statements, the impact of recording the cumulative difference would have significantly impacted results within the current period. As a result, prior period balances have been revised in the applicable financial statements and corresponding footnotes to correct the foreign exchange adjustments.

 

Management assessed the materiality of this change within prior period financial statements based upon SEC Staff Accounting Bulletin Number 99, Materiality, which is since codified in Accounting Standards Codification ("ASC") 250, Accounting Changes and Error Corrections. The prior period comparative financial statements that are presented herein have been revised.

 

8


 

The following tables present line items for prior period financial statements that have been affected by the revision. For these line items, the tables detail the amounts as previously reported, the impact upon those line items due to the revision, and the amounts as currently revised within the financial statements.

 

CONSOLIDATED BALANCE SHEETS

 

December 31, 2018

 

December 31, 2017

 

 

As Previously

 

Impact of

 

 

 

 

As Previously

 

Impact of

 

 

 

 

 

Reported

 

Revisions

 

As Revised

 

Reported

 

Revisions

 

As Revised

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

ASSETS:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Premiums Receivable

 

$

2,218,283

 

$

(35,100)

 

$

2,183,183

 

$

1,844,881

 

$

(25,106)

 

$

1,819,775

Funds held by reinsureds

 

 

445,040

 

 

(10,009)

 

 

435,031

 

 

292,927

 

 

(4,292)

 

 

288,635

Income taxes

 

 

592,385

 

 

2,102

 

 

594,487

 

 

299,438

 

 

902

 

 

300,340

TOTAL ASSETS

 

$

24,793,999

 

$

(43,007)

 

$

24,750,992

 

$

23,591,792

 

$

(28,496)

 

$

23,563,296

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

SHAREHOLDERS' EQUITY:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Retained earnings

 

 

9,574,440

 

 

(43,007)

 

 

9,531,433

 

 

9,685,908

 

 

(28,496)

 

 

9,657,412

Total shareholders' equity

 

 

7,903,804

 

 

(43,007)

 

 

7,860,797

 

 

8,369,232

 

 

(28,496)

 

 

8,340,736

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY

 

$

24,793,999

 

$

(43,007)

 

$

24,750,992

 

$

23,591,792

 

$

(28,496)

 

$

23,563,296

 

CONSOLIDATED BALANCE SHEETS

 

June 30, 2019

 

March 31, 2019

 

 

As Previously

 

Impact of

 

 

 

 

As Previously

 

Impact of

 

 

 

 

 

Reported

 

Revisions

 

As Revised

 

Reported

 

Revisions

 

As Revised

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

ASSETS:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Premiums Receivable

 

$

2,389,943

 

$

(38,836)

 

$

2,351,107

 

$

2,392,094

 

$

(29,831)

 

$

2,362,263

Funds held by reinsureds

 

 

498,043

 

 

(10,768)

 

 

487,275

 

 

432,736

 

 

(9,525)

 

 

423,211

Income taxes

 

 

358,457

 

 

2,261

 

 

360,718

 

 

475,851

 

 

2,000

 

 

477,851

TOTAL ASSETS

 

$

26,387,791

 

$

(47,343)

 

$

26,340,448

 

$

25,630,507

 

$

(37,356)

 

$

25,593,151

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

SHAREHOLDERS' EQUITY:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Retained earnings

 

 

10,152,059

 

 

(47,343)

 

 

10,104,716

 

 

9,866,203

 

 

(37,356)

 

 

9,828,847

Total stockholder's equity

 

 

8,884,160

 

 

(47,343)

 

 

8,836,817

 

 

8,426,629

 

 

(37,356)

 

 

8,389,273

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY

 

$

26,387,791

 

$

(47,343)

 

$

26,340,448

 

$

25,630,507

 

$

(37,356)

 

$

25,593,151

 

9


 

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE

 

Year Ended December 31, 2018

 

Year Ended December 31, 2017

INCOME (LOSS):

 

As Previously

 

Impact of

 

 

 

 

As Previously

 

Impact of

 

 

 

 

 

Reported

 

Revisions

 

As Revised

 

Reported

 

Revisions

 

As Revised

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other income (expense)

 

$

(9,060)

 

$

(15,711)

 

$

(24,771)

 

$

(35,442)

 

$

14,227

 

$

(21,215)

Total revenues

 

$

7,377,206

 

$

(15,711)

 

$

7,361,495

 

$

6,608,071

 

$

14,227

 

$

6,622,298

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

INCOME (LOSS) BEFORE TAXES

 

$

(226,471)

 

$

(15,711)

 

$

(242,182)

 

$

405,184

 

$

14,227

 

$

419,411

Income tax expense (benefit)

 

 

(330,023)

 

 

(1,200)

 

 

(331,223)

 

 

(63,784)

 

 

444

 

 

(63,340)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NET INCOME (LOSS)

 

$

103,552

 

$

(14,511)

 

$

89,041

 

$

468,968

 

$

13,783

 

$

482,751

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

COMPREHENSIVE INCOME (LOSS)

 

$

(196,913)

 

$

(14,511)

 

$

(211,424)

 

$

526,091

 

$

13,783

 

$

539,874

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

EARNINGS PER COMMON SHARE:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

2.54

 

$

(0.36)

 

$

2.18

 

$

11.43

 

$

0.34

 

$

11.77

Diluted

 

$

2.53

 

$

(0.36)

 

$

2.17

 

$

11.36

 

$

0.34

 

$

11.70

 

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE

 

 

Three Months Ended June 30, 2019

 

 

Six Months Ended June 30, 2019

INCOME (LOSS):

 

 

As Previously

 

 

Impact of

 

 

 

 

 

As Previously

 

 

Impact of

 

 

 

 

 

 

Reported

 

 

Revisions

 

 

As Revised

 

 

Reported

 

 

Revisions

 

 

As Revised

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other income (expense)

 

$

(7,977)

 

$

(10,248)

 

$

(18,225)

 

$

(17,030)

 

$

(4,495)

 

$

(21,525)

Total revenues

 

$

2,018,975

 

$

(10,248)

 

$

2,008,727

 

$

3,979,058

 

$

(4,495)

 

$

3,974,563

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

INCOME (LOSS) BEFORE TAXES

 

$

382,593

 

$

(10,248)

 

$

372,345

 

$

791,384

 

$

(4,495)

 

$

786,889

Income tax expense (benefit)

 

 

39,738

 

 

(261)

 

 

39,477

 

 

99,629

 

 

(159)

 

 

99,470

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NET INCOME (LOSS)

 

$

342,855

 

$

(9,987)

 

$

332,868

 

$

691,755

 

$

(4,336)

 

$

687,419

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

COMPREHENSIVE INCOME (LOSS)

 

$

514,064

 

$

(9,987)

 

$

504,077

 

$

1,109,410

 

$

(4,336)

 

$

1,105,074

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

EARNINGS PER COMMON SHARE:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

8.42

 

$

(0.25)

 

$

8.17

 

$

16.98

 

$

(0.10)

 

$

16.88

Diluted

 

$

8.39

 

$

(0.24)

 

$

8.15

 

$

16.93

 

$

(0.11)

 

$

16.82

 

10


 

CONSOLIDATED STATEMENTS OF OPERATIONS

 

Three Months Ended March 31, 2019

AND COMPREHENSIVE INCOME (LOSS):

 

As Previously

 

Impact of

 

 

 

 

 

Reported

 

Revisions

 

As Revised

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

Revenues:

 

 

 

 

 

 

 

 

 

Other income (expense)

 

$

(9,053)

 

$

5,753

 

$

(3,300)

Total revenues

 

$

1,960,083

 

$

5,753

 

$

1,965,836

 

 

 

 

 

 

 

 

 

 

INCOME (LOSS) BEFORE TAXES

 

$

408,791

 

$

5,753

 

$

414,544

Income tax expense (benefit)

 

 

59,891

 

 

102

 

 

59,993

 

 

 

 

 

 

 

 

 

 

NET INCOME (LOSS)

 

$

348,900

 

$

5,651

 

$

354,551

 

 

 

 

 

 

 

 

 

 

COMPREHENSIVE INCOME (LOSS)

 

$

595,346

 

$

5,651

 

$

600,997

 

 

 

 

 

 

 

 

 

 

EARNINGS PER COMMON SHARE:

 

 

 

 

 

 

 

 

 

Basic

 

$

8.57

 

$

0.13

 

$

8.70

Diluted

 

$

8.54

 

$

0.13

 

$

8.67

 

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE

 

Three Months Ended September 30, 2018

 

Nine Months Ended September 30, 2018

INCOME (LOSS):

 

As Previously

 

Impact of

 

 

 

As Previously

 

Impact of

 

 

 

 

 

Reported

 

Revisions

 

As Revised

 

Reported

 

Revisions

 

As Revised

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other income (expense)

 

$

(5,458)

 

$

(7,950)

 

$

(13,408)

 

$

9,642

 

$

(12,590)

 

$

(2,948)

Total revenues

 

$

1,944,413

 

$

(7,950)

 

$

1,936,463

 

$

5,582,509

 

$

(12,590)

 

$

5,569,919

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

INCOME (LOSS) BEFORE TAXES

 

$

197,421

 

$

(7,950)

 

$

189,471

 

$

475,827

 

$

(12,590)

 

$

463,237

Income tax expense (benefit)

 

 

(8,192)

 

 

(718)

 

 

(8,910)

 

 

(9,999)

 

 

(1,118)

 

 

(11,117)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NET INCOME (LOSS)

 

$

205,613

 

$

(7,232)

 

$

198,381

 

$

485,826

 

$

(11,472)

 

$

474,354

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

COMPREHENSIVE INCOME (LOSS)

 

$

180,634

 

$

(7,232)

 

$

173,402

 

$

177,601

 

$

(11,472)

 

$

166,129

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

EARNINGS PER COMMON SHARE:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

5.04

 

$

(0.17)

 

$

4.87

 

$

11.89

 

$

(0.28)

 

$

11.61

Diluted

 

$

5.02

 

$

(0.18)

 

$

4.84

 

$

11.83

 

$

(0.28)

 

$

11.55

 

11


 

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE

 

Three Months Ended June 30, 2018

 

Six Months Ended June 30, 2018

INCOME (LOSS):

 

As Previously

 

Impact of

 

 

 

 

As Previously

 

Impact of