EVEREST GROUP, LTD. - Quarter Report: 2020 September (Form 10-Q)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
10-Q
_X_
For the quarterly period ended
September 30, 2020
___
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 – 4th Floor
141 Front Street
PO Box HM 845
Hamilton
HM 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, 2020
Common Shares, $0.01 par value
RE
New York Stock Exchange
39,965,673
EVEREST RE GROUP, LTD
Table of Contents
Form 10-Q
Page
PART I
FINANCIAL INFORMATION
Item 1.
Financial Statements
1
2
3
4
5
Item 2.
36
Item 3.
59
Item 4.
60
PART II
OTHER INFORMATION
Item 1.
60
Item 1A.
60
Item 2.
62
Item 3.
62
Item 4.
62
Item 5.
62
Item 6.
63
1
EVEREST RE GROUP, LTD.
CONSOLIDATED BALANCE SHEETS
September 30,
(Dollars and share amounts in thousands, except par value per share)
2020
2019
(unaudited)
ASSETS:
Fixed maturities - available for sale, at market value
$
17,856,377
$
16,824,944
(amortized cost: 2020, $
17,131,414
; 2019, $
16,473,491
, credit allowances: 2020,
$
19,641
; 2019, $
0
)
Fixed maturities - available for sale, at fair value
3,748
5,826
Equity securities, at fair value
1,173,162
931,457
Short-term investments (cost: 2020, $
1,221,198
; 2019, $
414,639
)
1,220,753
414,706
Other invested assets (cost: 2020, $
1,911,757
; 2019, $
1,763,531
)
1,911,757
1,763,531
Cash
938,881
808,036
Total investments and cash
23,104,678
20,748,500
Accrued investment income
132,513
116,804
Premiums receivable
2,611,036
2,259,088
Reinsurance receivables
1,923,012
1,763,471
Funds held by reinsureds
548,940
489,901
Deferred acquisition costs
601,784
581,863
Prepaid reinsurance premiums
455,961
445,716
Income taxes
77,761
305,711
Other assets
697,342
612,997
TOTAL ASSETS
$
30,153,027
$
27,324,051
LIABILITIES:
Reserve for losses and loss adjustment expenses
$
15,233,125
$
13,611,313
Future policy benefit reserve
40,374
42,592
Unearned premium reserve
3,447,455
3,056,735
Funds held under reinsurance treaties
15,931
10,668
Other net payable to reinsurers
364,654
291,660
Losses in course of payment
184,894
51,950
Senior notes due
6/1/2044
397,164
397,074
Long term notes due
5/1/2067
223,649
236,758
Advances from FHLB
90,000
-
Accrued interest on debt and borrowings
7,215
2,878
Equity index put option liability
6,632
5,584
Unsettled securities payable
119,869
30,650
Other liabilities
430,773
453,264
Total liabilities
20,561,735
18,191,126
Commitments and contingencies (Note 8)
(nil)
(nil)
SHAREHOLDERS' EQUITY:
Preferred shares, par value: $
0.01
;
50,000
no
-
-
Common shares, par value: $
0.01
;
200,000
69,603
and (2019)
69,464
696
694
Additional paid-in capital
2,235,378
2,219,660
Accumulated other comprehensive income (loss), net of deferred income
tax expense (benefit) of $
74,481
30,996
411,598
28,152
Treasury shares, at cost;
29,636
28,665
(3,622,172)
(3,422,152)
Retained earnings
10,565,792
10,306,571
Total shareholders' equity
9,591,292
9,132,925
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY
$
30,153,027
$
27,324,051
The accompanying notes are an integral part of the consolidated financial statements.
2
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)
2020
2019
2020
2019
(unaudited)
(unaudited)
REVENUES:
Premiums earned
$
2,205,811
$
1,905,619
$
6,285,030
$
5,455,615
Net investment income
234,233
181,058
420,116
501,062
Net realized capital gains (losses):
Credit allowances on fixed maturity securities
6,196
-
(19,641)
-
Other-than-temporary impairments on fixed maturity securities
-
(7,314)
-
(15,404)
Other net realized capital gains (losses)
104,007
(5,629)
103,904
124,965
Total net realized capital gains (losses)
110,203
(12,943)
84,263
109,561
Net derivative gain (loss)
2,456
(189)
(1,048)
3,395
Other income (expense)
57,481
(31,025)
48,354
(52,550)
Total revenues
2,610,184
2,042,520
6,836,715
6,017,083
CLAIMS AND EXPENSES:
Incurred losses and loss adjustment expenses
1,736,210
1,371,924
4,574,066
3,515,104
Commission, brokerage, taxes and fees
445,332
443,076
1,360,170
1,253,500
Other underwriting expenses
138,875
118,158
385,865
321,976
Corporate expenses
10,618
8,435
29,184
22,622
Interest, fees and bond issue cost amortization expense
6,641
7,907
21,477
23,972
Total claims and expenses
2,337,676
1,949,500
6,370,762
5,137,174
INCOME (LOSS) BEFORE TAXES
272,508
93,020
465,953
879,909
Income tax expense (benefit)
29,451
(11,378)
15,404
88,092
NET INCOME (LOSS)
$
243,057
$
104,398
$
450,549
$
791,817
Other comprehensive income (loss), net of tax:
Unrealized appreciation (depreciation) ("URA(D)") on securities arising during
the period
63,480
93,765
335,835
524,589
Reclassification adjustment for realized losses (gains) included in net income
(loss)
(11,453)
(529)
12,689
(4,220)
Total URA(D) on securities arising during the period
52,027
93,236
348,524
520,369
Foreign currency translation adjustments
60,628
(3,426)
30,390
(15,206)
Reclassification adjustment for amortization of net (gain) loss included in net
income (loss)
1,806
1,363
4,532
3,665
Total benefit plan net gain (loss) for the period
1,806
1,363
4,532
3,665
Total other comprehensive income (loss), net of tax
114,461
91,173
383,446
508,828
COMPREHENSIVE INCOME (LOSS)
$
357,518
$
195,571
$
833,995
$
1,300,645
EARNINGS PER COMMON SHARE:
Basic
$
6.08
$
2.56
$
11.20
$
19.44
Diluted
6.07
2.56
11.18
19.38
The accompanying notes are an integral part of the consolidated financial statements.
3
EVEREST RE GROUP, LTD.
CONSOLIDATED STATEMENTS OF
CHANGES IN SHAREHOLDERS’ EQUITY
(Dollars in thousands, except share and dividends per share amounts)
2020
2019
(unaudited)
COMMON SHARES (shares outstanding):
Balance, January 1
40,798,963
40,651,148
Issued during the period, net
159,423
194,584
Treasury shares acquired
(970,892)
(75,193)
Balance, March 31
39,987,494
40,770,539
Issued during the period, net
(15,849)
9,403
Treasury shares acquired
-
(39,440)
Balance, June 30
39,971,645
40,740,502
Issued during the period, net
(5,129)
39,967
Treasury shares acquired
-
-
Balance, September 30
39,966,516
40,780,469
COMMON SHARES (par value):
Balance, January 1
$
694
$
692
Issued during the period, net
2
2
Balance, March 31
696
694
Issued during the period, net
-
-
Balance, June 30
696
694
Issued during the period, net
-
-
Balance, September 30
696
694
ADDITIONAL PAID-IN CAPITAL:
Balance, January 1
2,219,660
2,188,777
Share-based compensation plans
(3,181)
767
Balance, March 31
2,216,479
2,189,544
Share-based compensation plans
9,514
8,917
Balance, June 30
2,225,993
2,198,461
Share-based compensation plans
9,385
7,865
Balance, September 30
2,235,378
2,206,326
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS),
NET OF DEFERRED INCOME TAXES:
Balance, January 1
28,152
(462,557)
Net increase (decrease) during the period
(297,903)
246,446
Balance, March 31
(269,751)
(216,111)
Net increase (decrease) during the period
566,888
171,209
Balance, June 30
297,137
(44,902)
Net increase (decrease) during the period
114,461
91,174
Balance, September 30
411,598
46,272
RETAINED EARNINGS:
Balance, January 1
10,306,571
9,531,433
Change to beginning balance due to adoption of Accounting Standards Update 2016-13
(4,214)
-
Net income (loss)
16,612
354,551
Dividends declared ($
1.55
1.40
(63,277)
(57,137)
Balance, March 31
10,255,692
9,828,847
Net income (loss)
190,880
332,868
Dividends declared ($
1.55
1.40
(61,927)
(56,999)
Balance, June 30
10,384,645
10,104,716
Net income (loss)
243,057
104,398
Dividends declared ($
1.55
1.40
(61,910)
(56,995)
Balance, September 30
10,565,792
10,152,118
TREASURY SHARES AT COST:
Balance, January 1
(3,422,152)
(3,397,548)
Purchase of treasury shares
(200,020)
(16,153)
Balance, March 31
(3,622,172)
(3,413,701)
Purchase of treasury shares
-
(8,451)
Balance, June 30
(3,622,172)
(3,422,152)
Purchase of treasury shares
-
-
Balance, September 30
(3,622,172)
(3,422,152)
TOTAL SHAREHOLDERS' EQUITY, September 30
$
9,591,292
$
8,983,258
The accompanying notes are an integral part of the consolidated financial statements.
4
EVEREST RE GROUP, LTD.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended
September 30,
(Dollars in thousands)
2020
2019
(unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)
$
450,549
$
791,817
Adjustments to reconcile net income to net cash provided by operating activities:
Decrease (increase) in premiums receivable
(357,162)
(219,637)
Decrease (increase) in funds held by reinsureds, net
(53,878)
(17,961)
Decrease (increase) in reinsurance receivables
(172,454)
(42,891)
Decrease (increase) in income taxes
184,311
168,360
Decrease (increase) in prepaid reinsurance premiums
(7,963)
(145,846)
Increase (decrease) in reserve for losses and loss adjustment expenses
1,665,982
553,668
Increase (decrease) in future policy benefit reserve
(2,218)
(2,502)
Increase (decrease) in unearned premiums
392,904
388,597
Increase (decrease) in other net payable to reinsurers
68,784
160,306
Increase (decrease) in losses in course of payment
132,208
(6,438)
Change in equity adjustments in limited partnerships
(12,475)
(104,987)
Distribution of limited partnership income
55,576
62,359
Change in other assets and liabilities, net
(131,224)
(37,449)
Non-cash compensation expense
29,337
25,386
Amortization of bond premium (accrual of bond discount)
32,594
23,642
Net realized capital (gains) losses
(84,263)
(109,561)
Net cash provided by (used in) operating activities
2,190,608
1,486,863
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from fixed maturities matured/called - available for sale, at market value
1,781,821
1,631,298
Proceeds from fixed maturities sold - available for sale, at market value
1,390,747
2,589,232
Proceeds from fixed maturities sold - available for sale, at fair value
2,054
2,706
Proceeds from equity securities sold, at fair value
329,750
185,157
Distributions from other invested assets
210,527
215,800
Cost of fixed maturities acquired - available for sale, at market value
(3,874,890)
(5,039,728)
Cost of equity securities acquired, at fair value
(460,953)
(269,969)
Cost of other invested assets acquired
(392,650)
(299,480)
Net change in short-term investments
(804,744)
(213,048)
Net change in unsettled securities transactions
89,064
(13,770)
Net cash provided by (used in) investing activities
(1,729,274)
(1,211,802)
CASH FLOWS FROM FINANCING ACTIVITIES:
Common shares issued during the period for share-based compensation, net of expense
(13,617)
(7,836)
Purchase of treasury shares
(200,020)
(24,604)
Dividends paid to shareholders
(187,110)
(171,131)
Cost of debt repurchase
(10,647)
-
FHLB advances (repayments)
90,000
-
Cost of shares withheld on settlements of share-based compensation awards
(15,298)
(12,473)
Net cash provided by (used in) financing activities
(336,691)
(216,044)
EFFECT OF EXCHANGE RATE CHANGES ON CASH
6,203
2,060
Net increase (decrease) in cash
130,845
61,077
Cash, beginning of period
808,036
656,095
Cash, end of period
$
938,881
$
717,172
SUPPLEMENTAL CASH FLOW INFORMATION:
Income taxes paid (recovered)
$
(169,149)
$
(80,544)
Interest paid
16,731
19,078
The accompanying notes are an integral part of the consolidated financial statements.
5
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS (UNAUDITED)
For the Three and Nine Months Ended September 30, 2020 and 2019
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.
2. BASIS OF PRESENTATION
The unaudited interim consolidated financial statements of the Company as of September 30, 2020 and
December 31, 2019 and for the three and nine months ended September 30, 2020 and 2019 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, 2019 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, 2020
and 2019 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, 2019, 2018 and 2017 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 circumstance
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. This is
particularly true given the fluid and continuing nature of the COVID-19 pandemic. This is an ongoing event and
so is the Company’s evaluation and analysis. While the Company’s analysis considers all aspects of its
operations, it does not take into account legal, regulatory or legislative intervention that could retroactively
mandate or expand coverage provisions. Given the uncertainties in the current public health and economic
environment, there could be an adverse impact on results for the Property & Casualty industry and the Company
for the remainder of the year. The impact is dependent on the shape and length of the economic recovery.
With recent changes in executive management and organizational structure, the Company manages its
reinsurance and insurance operations as autonomous units and key strategic decisions are based on the
aggregate operating results and projections for these segments of business. Accordingly, effective January 1,
2020, the Company revised it reporting segments to Reinsurance Operations and Insurance Operations. This
replaces the previous reported segments of U.S. Reinsurance, International (reinsurance), Bermuda
(reinsurance) and Insurance. The prior year presented segment information has been reformatted to reflect this
change.
All intercompany accounts and transactions have been eliminated.
Certain reclassifications and format changes have been made to prior years’ amounts to conform to the 2020
presentation.
6
Application of Recently Issued Accounting Standard Changes.
Modernization of Regulation S-K Disclosures.
In August 2020, the Securities and Exchange Commission (“SEC”)
issued Final Rule Release #33-10825 which addresses the modernization of the disclosure requirements for
business, legal proceeding and risk factor disclosures in Regulation S-K filings. Rule #33-10825 will become
effective for all financial reports filed after November 9, 2020 (30 days after its publication in the Federal
Register) and will be adopted by the Company in the fourth quarter of 2020 for implementation within its 2020
10-K filings.
Accounting for Income Taxes
. In December 2019, The Financial Accounting Standards Board (“FASB”) issued ASU
2019-12, which provides simplification of existing guidance for income taxes, including the removal of certain
exceptions related to recognition of deferred tax liabilities on foreign subsidiaries. The guidance is effective for
annual reporting periods beginning after December 15, 2020 and interim periods within that annual reporting
period. The Company is currently evaluating the impact of the adoption of ASU 2019-12 on its financial
statements.
Simplification of Disclosure Requirements.
In August 2018, the SEC issued Final Rule Release #33-10532 (“the
Rule”) which addresses the simplification of the SEC’s disclosure requirements for quarterly and annual financial
reports. The main changes addressed by the Rule that are applicable to the Company are 1) elimination of the
requirement to disclose dividend per share information on the face of the Statements of Operations and
Comprehensive Income (Loss) and 2) a new requirement to disclose changes in equity by line item with subtotals
for each interim reporting period on the Statements of Changes in Shareholders’ Equity. The Rule became
effective for all financial reports filed after November 5, 2018 (30 days after its publication in the Federal
Register), except for the additional requirement for the Statements of Changes in Shareholders’ Equity which
was to be implemented for first quarter 2019 reporting. The Company has adopted the portions of the Rule that
became effective November 5, 2018. The portion of the Rule related to the new requirement for the Statements
of Changes in Shareholders’ Equity was adopted by the Company in the first quarter of 2019.
Accounting for Cloud Computing Arrangement.
In August 2018, 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 adopted the guidance
as of January 1, 2020. The adoption of ASU 2018-15 did not have a material impact on the Company’s 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 was originally effective for annual reporting periods beginning after
December 15, 2020 and interim periods within that annual reporting period. However, FASB issued ASU 2019-09
in November 2019 which defers the effective date of ASU 2018-12 until annual reporting periods beginning after
December 15, 2021. The Company is currently evaluating the impact of the adoption of ASU 2018-12 on its
financial statements.
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
7
(“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 Company adopted the guidance effective January 1, 2019. The adoption of ASU 2017-08 did not
have a material impact on the Company’s financial statements.
Valuation of Financial Instruments.
In June 2016, FASB issued ASU 2016-13 (and has subsequently issued related
guidance and amendments in ASU 2019-11 and ASU 2019-10 in November 2019) which outline guidance on the
valuation of and accounting for assets measured at amortized cost and available for sale debt securities. The
new guidance requires the carrying value of assets measured at amortized cost, including reinsurance and
premiums receivables to be presented as the net amount expected to be collected on the financial asset
(amortized cost less an allowance for credit losses valuation account). The allowance reflects expected credit
losses of the financial asset which considers available information using a combination both historical
information, current market conditions and reasonable and supportable forecasts. For available -for-sale debt
securities, the guidance modified the previous other than temporary impairment model, now requiring an
allowance for estimated credit related losses rather than a permanent impairment, 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 adopted the guidance effective January 1, 2020, on a
modified retrospective basis. The adoption resulted in a cumulative reduction of $
4,214
earnings, net of tax, which is disclosed separately within the Consolidated Statements of Shareholders’ Equity.
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
other assets
and a lease liability of $
77,270
other liabilities
of adoption, as well as de-recognizing the liability for deferred rent that was required under the 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.
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.
8
3. INVESTMENTS
Effective January 1, 2020, the Company adopted ASU 2016-13 which modified the previous other than
temporary impairment model for available for sale fixed maturity securities. The guidance requires the
Company to record allowances for credit losses for securities that are deemed to have valuation deterioration
due to credit related factors. The initial table below presents the amortized cost, allowance for credit losses,
gross unrealized appreciation/(depreciation) and market value of fixed maturity securities as of September 30,
2020 in accordance with ASU 2016-13 guidance. The second table presents the amortized cost, gross unrealized
appreciation/(depreciation), market value and other-than-temporary impairments (“OTTI”) in AOCI as of
December 31, 2019, in accordance with previously applicable guidance.
At September 30, 2020
Amortized
Allowance for
Unrealized
Unrealized
Market
(Dollars in thousands)
Cost
Credit Losses
Appreciation
Depreciation
Value
Fixed maturity securities
U.S. Treasury securities and obligations of
U.S. government agencies and corporations
$
1,387,482
$
-
$
67,544
$
(3,023)
$
1,452,003
Obligations of U.S. states and political subdivisions
514,787
-
30,939
(2,443)
543,283
Corporate securities
6,526,127
(17,474)
363,613
(66,917)
6,805,349
Asset-backed securities
1,326,918
-
23,191
(11,907)
1,338,202
Mortgage-backed securities
Commercial
892,998
-
78,298
(1,976)
969,320
Agency residential
2,044,837
-
76,284
(2,468)
2,118,653
Non-agency residential
2,559
-
-
(39)
2,520
Foreign government securities
1,476,092
(119)
86,015
(26,913)
1,535,075
Foreign corporate securities
2,959,614
(2,048)
165,297
(30,891)
3,091,972
Total fixed maturity securities
$
17,131,414
(19,641)
$
891,181
$
(146,577)
$
17,856,377
At December 31, 2019
Amortized
Unrealized
Unrealized
Market
OTTI in AOCI
(Dollars in thousands)
Cost
Appreciation
Depreciation
Value
(a)
Fixed maturity securities
U.S. Treasury securities and obligations of
U.S. government agencies and corporations
$
1,489,660
$
28,357
$
(2,214)
$
1,515,803
$
-
Obligations of U.S. states and political subdivisions
507,353
29,651
(89)
536,915
-
Corporate securities
6,227,661
185,052
(37,767)
6,374,946
469
Asset-backed securities
892,373
6,818
(1,858)
897,333
-
Mortgage-backed securities
Commercial
814,570
31,236
(1,249)
844,557
-
Agency residential
2,173,099
36,361
(10,879)
2,198,581
-
Non-agency residential
5,723
-
(20)
5,703
-
Foreign government securities
1,492,315
47,148
(33,513)
1,505,950
71
Foreign corporate securities
2,870,737
107,999
(33,580)
2,945,156
447
Total fixed maturity securities
$
16,473,491
$
472,622
$
(121,169)
$
16,824,944
$
987
(a) Represents the amount of OTTI recognized in AOCI. Amount includes unrealized gains and losses on impaired securities relating to changes in the value of
such securities subsequent to the impairment measurement date.
9
The amortized cost and market value of fixed maturity securities are shown in the following table by contractual
maturity. Mortgage-backed securities are generally more likely to be prepaid than other fixed maturity
securities. As the stated maturity of such securities may not be indicative of actual maturities, the totals for
mortgage-backed and asset-backed securities are shown separately.
At September 30, 2020
At December 31, 2019
Amortized
Market
Amortized
Market
(Dollars in thousands)
Cost
Value
Cost
Value
Fixed maturity securities – available for sale:
$
1,475,335
$
1,483,621
$
1,456,960
$
1,457,919
6,408,491
6,624,753
6,757,107
6,869,359
3,878,019
4,186,765
3,471,370
3,609,816
1,102,257
1,132,543
902,289
941,676
Asset-backed securities
1,326,918
1,338,202
892,373
897,333
Mortgage-backed securities:
Commercial
892,998
969,320
814,570
844,557
Agency residential
2,044,837
2,118,653
2,173,099
2,198,581
Non-agency residential
2,559
2,520
5,723
5,703
Total fixed maturity securities
$
17,131,414
$
17,856,377
$
16,473,491
$
16,824,944
The changes in net unrealized appreciation (depreciation) for the Company’s investments are derived from the
following sources for the periods indicated:
Three Months Ended
Nine Months Ended
September 30,
September 30,
(Dollars in thousands)
2020
2019
2020
2019
Increase (decrease) during the period between the market value and cost
of investments carried at market value, and deferred taxes thereon:
Fixed maturity securities
$
55,587
$
103,173
$
392,640
$
584,333
Fixed maturity securities, other-than-temporary impairment
-
72
-
(1,671)
Change in unrealized appreciation (depreciation), pre-tax
55,587
103,245
392,640
582,662
Deferred tax benefit (expense)
(3,560)
(9,984)
(44,116)
(62,415)
Deferred tax benefit (expense), other-than-temporary impairment
-
(25)
-
122
Change in unrealized appreciation (depreciation),
net of deferred taxes, included in shareholders’ equity
$
52,027
$
93,236
$
348,524
$
520,369
The Company reviews all of its fixed maturity, available for sale securities whose fair value has fallen below their
amortized cost at the time of review. The Company then assesses whether the decline in value is due to non-
credit related or credit related factors. In making its assessment, the Company evaluates the current market and
interest rate environment as well as specific issuer information. Generally, a change in a security’s value caused
by a change in the market, interest rate or foreign exchange environment does not constitute a credit
impairment, but rather a non-credit related decline in market value. Non-credit related declines in market value
are recorded as unrealized losses in accumulated other comprehensive income (loss). If the Company intends to
sell the security or is more likely than not to sell the security, the Company records the entire fair value
adjustment in net realized capital gains (losses) in the Company’s consolidated statements of operations and
comprehensive income (loss). If the Company determines that the decline is credit related and the Company
does not have the intent to sell the security; and it is more likely than not that the Company will not have to sell
the security before recovery of its cost basis, the Company establishes a credit allowance equal to the estimated
credit loss and is recorded in net realized capital gains (losses) in the Company’s consolidated statements of
operations and comprehensive income (loss). The amount of the allowance for a given security will generally be
the difference between a discounted cash flow model and the Company’s carrying value. The fair value
adjustment that is non-credit related is recorded as a component of other comprehensive income (loss), net of
tax, and is included in accumulated other comprehensive income (loss) in the Company’s consolidated balance
sheets. We will adjust the credit allowance account for future changes in credit loss estimates for a security and
record this adjustment through net realized capital gains (losses) in the Company’s consolidated statements of
operations and comprehensive income (loss).
10
The Company does not create an allowance for uncollectible interest. If interest is not received when due, the
interest receivable is immediately reversed and no additional interest is accrued. If future interest is received
that has not been accrued, it is recorded as income at that time.
Prior to the adoption of ASU 2016-13 effective January 1, 2020, estimated credit losses were recorded as
adjustments to the carrying value of the security and any subsequent improvement in market value were
recorded through other comprehensive income.
The Company’s assessments are based on the issuers’ current and expected future financial position, timeliness
with respect to interest and/or principal payments, speed of repayments and any applicable credit
enhancements or breakeven constant default rates on mortgage -backed and asset-backed securities, as well as
relevant information provided by rating agencies, investment advisors and analysts.
Retrospective adjustments are employed to recalculate the values of asset-backed securities. All of the
Company’s asset-backed and mortgage-backed securities have a pass-through structure. Each acquisition lot is
reviewed to recalculate the effective yield. The recalculated effective yield is used to derive a book value as if
the new yield were applied at the time of acquisition. Outstanding principal factors from the time of acquisition
to the adjustment date are used to calculate the prepayment history for all applicable securities. Conditional
prepayment rates, computed with life to date factor histories and weighted average maturities, are used in the
calculation of projected prepayments for pass-through security types.
The tables below display the aggregate market value and gross unrealized depreciation of fixed maturity
securities, by security type and contractual maturity, in each case subdivided according to length of time that
individual securities had been in a continuous unrealized loss position for the periods indicated:
Duration of Unrealized Loss at September 30, 2020 By Security Type
Less than 12 months
Greater than 12 months
Total
Gross
Gross
Gross
Unrealized
Unrealized
Unrealized
(Dollars in thousands)
Market Value
Depreciation
Market Value
Depreciation
Market Value
Depreciation
Fixed maturity securities - available for sale
U.S. Treasury securities and obligations of
U.S. government agencies and corporations
$
69,055
$
(3,023)
$
-
$
-
$
69,055
$
(3,023)
Obligations of U.S. states and political subdivisions
50,368
(2,278)
4,943
(165)
55,311
(2,443)
Corporate securities
752,828
(24,799)
196,660
(42,118)
949,488
(66,917)
Asset-backed securities
328,216
(8,346)
163,014
(3,561)
491,230
(11,907)
Mortgage-backed securities
-
-
Commercial
77,850
(1,524)
6,634
(452)
84,484
(1,976)
Agency residential
248,155
(1,256)
65,145
(1,212)
313,300
(2,468)
Non-agency residential
213
(3)
2,308
(36)
2,521
(39)
Foreign government securities
83,267
(4,352)
176,739
(22,561)
260,006
(26,913)
Foreign corporate securities
399,841
(11,117)
193,809
(19,774)
593,650
(30,891)
Total fixed maturity securities
$
2,009,793
$
(56,698)
$
809,252
$
(89,879)
$
2,819,045
$
(146,577)
11
Duration of Unrealized Loss at September 30, 2020 By Maturity
Less than 12 months
Greater than 12 months
Total
Gross
Gross
Gross
Unrealized
Unrealized
Unrealized
(Dollars in thousands)
Market Value
Depreciation
Market Value
Depreciation
Market Value
Depreciation
Fixed maturity securities
Due in one year or less
$
76,867
$
(2,652)
$
135,762
$
(21,608)
$
212,629
$
(24,260)
Due in one year through five years
675,450
(22,976)
304,410
(29,003)
979,860
(51,979)
Due in five years through ten years
377,219
(12,287)
69,424
(4,266)
446,643
(16,553)
Due after ten years
225,823
(7,654)
62,555
(29,741)
288,378
(37,395)
Asset-backed securities
328,216
(8,346)
163,014
(3,561)
491,230
(11,907)
Mortgage-backed securities
326,218
(2,783)
74,087
(1,700)
400,305
(4,483)
Total fixed maturity securities
$
2,009,793
$
(56,698)
$
809,252
$
(89,879)
$
2,819,045
$
(146,577)
The aggregate market value and gross unrealized losses related to investments in an unrealized loss position at
September 30, 2020 were $
2,819,045
146,577
securities for the single issuer whose securities comprised the largest unrealized loss position at September 30,
2020, did not exceed
0.1
% of the overall market value of the Company’s fixed maturity securities. In addition, as
indicated on the above table, there was no significant concentration of unrealized losses in any one market
sector. The $
56,698
unrealized loss position for less than one year were generally comprised of domestic and foreign corporate
securities, asset-backed securities and foreign government securities. Of these unrealized losses, $
42,015
thousand were related to securities that were rated investment grade by at least one nationally recognized
statistical rating agency. The $
89,879
unrealized loss position for more than one year related primarily to domestic and foreign corporate securities,
foreign government securities and asset-backed securities. Of these unrealized losses, $
53,247
related to securities that were rated investment grade by at least one nationally recognized statistical rating
agency. There was
no
alt-A loans. In all instances, there were no projected cash flow shortfalls to recover the full book value of the
investments and the related interest obligations. The mortgage-backed securities still have excess credit
coverage and are current on interest and principal payments.
The Company, given the size of its investment portfolio and capital position, does not have the intent to sell
these securities; and it is more likely than not that the Company will not have to sell the security before recovery
of its cost basis. In addition, all securities currently in an unrealized loss position are current with respect to
principal and interest payments.
12
The tables below display the aggregate market value and gross unrealized depreciation of fixed maturity and
equity securities, by security type and contractual maturity, in each case subdivided according to length of time
that individual securities had been in a continuous unrealized loss position for the periods indicated:
Duration of Unrealized Loss at December 31, 2019 By Security Type
Less than 12 months
Greater than 12 months
Total
Gross
Gross
Gross
Unrealized
Unrealized
Unrealized
(Dollars in thousands)
Market Value
Depreciation
Market Value
Depreciation
Market Value
Depreciation
Fixed maturity securities - available for sale
U.S. Treasury securities and obligations of
U.S. government agencies and corporations
$
85,527
$
(1,005)
$
249,371
$
(1,209)
$
334,898
$
(2,214)
Obligations of U.S. states and political subdivisions
4,600
(38)
5,522
(51)
10,122
(89)
Corporate securities
547,120
(9,877)
395,369
(27,890)
942,489
(37,767)
Asset-backed securities
176,222
(1,027)
94,190
(831)
270,412
(1,858)
Mortgage-backed securities
Commercial
83,127
(689)
23,063
(560)
106,190
(1,249)
Agency residential
344,267
(1,834)
488,680
(9,045)
832,947
(10,879)
Non-agency residential
332
-
3,976
(20)
4,308
(20)
Foreign government securities
210,766
(4,770)
283,648
(28,743)
494,414
(33,513)
Foreign corporate securities
278,403
(7,553)
365,808
(26,027)
644,211
(33,580)
Total fixed maturity securities
$
1,730,364
$
(26,793)
$
1,909,627
$
(94,376)
$
3,639,991
$
(121,169)
Duration of Unrealized Loss at December 31, 2019 By Maturity
Less than 12 months
Greater than 12 months
Total
Gross
Gross
Gross
Unrealized
Unrealized
Unrealized
(Dollars in thousands)
Market Value
Depreciation
Market Value
Depreciation
Market Value
Depreciation
Fixed maturity securities
Due in one year or less
$
67,879
$
(1,237)
$
416,583
$
(23,004)
$
484,462
$
(24,241)
Due in one year through five years
464,753
(7,960)
689,195
(38,138)
1,153,948
(46,098)
Due in five years through ten years
495,741
(12,388)
103,612
(11,100)
599,353
(23,488)
Due after ten years
98,043
(1,658)
90,328
(11,678)
188,371
(13,336)
Asset-backed securities
176,222
(1,027)
94,190
(831)
270,412
(1,858)
Mortgage-backed securities
427,726
(2,523)
515,719
(9,625)
943,445
(12,148)
Total fixed maturity securities
$
1,730,364
$
(26,793)
$
1,909,627
$
(94,376)
$
3,639,991
$
(121,169)
The aggregate market value and gross unrealized losses related to investments in an unrealized loss position at
December 31, 2019 were $
3,639,991
121,169
securities for the single issuer whose securities comprised the largest unrealized loss position at December 31,
2019, did not exceed
0.8
% of the overall market value of the Company’s fixed maturity securities. In addition, as
indicated on the above table, there was no significant concentration of unrealized losses in any one market
sector. The $
26,793
unrealized loss position for less than one year were generally comprised of domestic and foreign corporate
securities and foreign government securities. Of these unrealized losses, $
23,104
securities that were rated investment grade by at least one nationally recognized statistical rating agency. The
$
94,376
than one year related primarily to domestic and foreign corporate securities, foreign government securities and
agency residential mortgage-backed securities. Of these unrealized losses, $
73,144
securities that were rated investment grade by at least one nationally recognized statistical rating agency. There
was
no
instances, there were no projected cash flow shortfalls to recover the full book value of the investments and the
related interest obligations. The mortgage-backed securities still have excess credit coverage and are current on
interest and principal payments.
13
The components of net investment income are presented in the table below for the periods indicated:
Three Months Ended
Nine Months Ended
September 30,
September 30,
(Dollars in thousands)
2020
2019
2020
2019
Fixed maturities
$
136,104
$
130,139
$
407,946
$
383,440
Equity securities
4,402
4,147
11,585
12,250
Short-term investments and cash
494
3,899
4,356
13,497
Other invested assets
Limited partnerships
88,778
43,758
22,092
100,298
Other
14,742
7,286
(1,291)
13,565
Gross investment income before adjustments
244,520
189,229
444,688
523,050
Funds held interest income (expense)
684
2,325
10,921
9,715
Future policy benefit reserve income (expense)
(291)
(372)
(805)
(965)
Gross investment income
244,913
191,182
454,804
531,800
Investment expenses
(10,680)
(10,124)
(34,688)
(30,738)
Net investment income
$
234,233
$
181,058
$
420,116
$
501,062
The Company records results from limited partnership investments on the equity method of accounting with
changes in value reported through net investment income. Due to the timing of receiving financial information
from these partnerships, the results are generally reported on a one month or quarter lag. If the Company
determines there has been a significant decline in value of a limited partnership during this lag period, a loss will
be recorded in the period in which the Company identifies the decline.
The Company had contractual commitments to invest up to an additional $
1,464,947
partnerships and private placement loans at September 30, 2020. These commitments will be funded when
called in accordance with the partnership and loan agreements, which have investment periods that expire,
unless extended, through
2026
.
The Company participates in a private placement liquidity sweep facility (“the facility”). The primary purpose of
the facility is to enhance the Company’s return on its short-term investments and cash positions. The facility
invests in high quality, short-duration securities and permits daily liquidity. The Company consolidates its
participation in the facility. As of September 30, 2020, the market value of investments in the facility
consolidated within the Company’s balance sheets was $
1,101,256
The components of net realized capital gains (losses) are presented in the tables below for the periods indicated:
Three Months Ended
Nine Months Ended
September 30,
September 30,
(Dollars in thousands)
2020
2019
2020
2019
Fixed maturity securities, market value:
Allowance for credit losses
$
6,196
$
-
$
(19,641)
$
-
Other-than-temporary impairments
-
(7,314)
-
(15,404)
Gains (losses) from sales
5,398
5,290
941
16,660
Fixed maturity securities, fair value:
Gains (losses) from sales
(1,968)
-
(1,968)
356
Gains (losses) from fair value adjustments
3,339
-
1,944
13
Equity securities, fair value:
Gains (losses) from sales
(1,317)
(1,192)
(12,642)
2,541
Gains (losses) from fair value adjustments
96,673
(12,008)
114,364
102,795
Other invested assets
1,084
2,098
50
2,341
Short-term investments gain (loss)
798
183
1,215
259
Total net realized capital gains (losses)
$
110,203
$
(12,943)
$
84,263
$
109,561
14
Roll Forward of Allowance for Credit Losses
Three Months Ended September 30, 2020
Nine Months Ended September 30, 2020
Foreign
Foreign
Foreign
Foreign
Corporate
Government
Corporate
Corporate
Government
Corporate
Securities
Securities
Securities
Total
Securities
Securities
Securities
Total
(Dollars in thousands)
Beginning Balance
$
(22,253)
$
(92)
$
(3,492)
$
(25,837)
$
-
$
-
$
-
$
-
Credit losses on securities where credit
losses were not previously recorded
(6)
-
(144)
(150)
(27,666)
(519)
(4,699)
(32,884)
Increases in allowance on previously
impaired securities
(5,354)
(27)
(181)
(5,562)
(6,136)
(27)
(481)
(6,644)
Decreases in allowance on previously
impaired securities
159
-
151
310
3,590
212
844
4,646
Reduction in allowance due to disposals
9,980
-
1,618
11,598
12,738
215
2,288
15,241
Balance as of September 30, 2020
$
(17,474)
$
(119)
$
(2,048)
$
(19,641)
$
(17,474)
$
(119)
$
(2,048)
$
(19,641)
The Company recorded as net realized capital gains (losses) in the consolidated statements of operations and
comprehensive income (loss) fair value re-measurements, allowances for credit losses per ASU 2016-13 and
write-downs in the value of securities deemed to be impaired on an other-than-temporary basis in prior years as
displayed in the table above. The Company had no other-than-temporary impaired securities where the
impairment had both a credit and non-credit component.
The proceeds and split between gross gains and losses, from sales of fixed maturity and equity securities, are
presented in the table below for the periods indicated:
Three Months Ended
Nine Months Ended
September 30,
September 30,
(Dollars in thousands)
2020
2019
2020
2019
Proceeds from sales of fixed maturity securities
$
402,528
$
271,025
$
1,392,801
$
2,591,938
Gross gains from sales
18,721
14,270
54,077
42,316
Gross losses from sales
(15,291)
(8,980)
(55,104)
(25,300)
Proceeds from sales of equity securities
$
116,565
$
35,924
$
329,750
$
185,157
Gross gains from sales
9,512
1,035
30,268
9,286
Gross losses from sales
(10,829)
(2,227)
(42,910)
(6,745)
15
4. RESERVE FOR LOSSES, LAE AND FUTURE POLICY BENEFIT RESERVE
Activity in the reserve for losses and LAE is summarized for the periods indicated:
Nine Months Ended
September 30,
(Dollars in thousands)
2020
2019
Gross reserves beginning of period
$
13,611,313
$
13,119,090
(1,640,712)
(1,619,641)
11,970,601
11,499,449
Incurred related to:
4,572,640
3,559,505
1,426
(44,401)
4,574,066
3,515,104
Paid related to:
1,015,538
550,724
2,042,712
2,406,753
3,058,250
2,957,477
Foreign exchange/translation adjustment and cumulative adjustment due to adoption of ASU
2016-13
(28,024)
(52,125)
Net reserves end of period
13,458,393
12,004,952
1,774,732
1,632,687
$
15,233,125
$
13,637,639
(Some amounts may not reconcile due to rounding.)
Current year incurred losses were $
4,572,640
3,559,505
September 30, 2020 and 2019, respectively. The increase in current year incurred losses in 2020 compared to
2019 was primarily due to $
434,918
increase in premiums earned.
5. DERIVATIVES
The Company sold
seven
two
Company sold these equity index put options as insurance products with the intent of achieving a profit. These
equity index put option contracts meet the definition of a derivative under FASB guidance and the Company’s
position in these equity index put option contracts is unhedged. Accordingly, these equity index put option
contracts are carried at fair value in the consolidated balance sheets with changes in fair value recorded in the
consolidated statements of operations and comprehensive income (loss).
Six
prior to
September 30, 2020
, with
no
The Company had
one
Standard & Poor’s 500 (“S&P 500”) index. Based on historical index volatilities and trends and the September
30, 2020 S&P 500 index value, the Company estimates the probability that the equity index put option contract
of the S&P 500 index falling below the strike price on the exercise date to be less than
0.5
%. The theoretical
maximum payout under this equity index put option contract would occur if on the exercise date the S&P 500
index value was
zero
. At September 30, 2020, the present value of the theoretical maximum payout using a
3
%
discount factor was $
146,796
the S&P index at
3,363.00
, there would have been
no
16
At September 30, 2020 and December 31, 2019, the fair value for these equity put options was $
6,632
and $
5,584
The fair value of the equity index put options can be found in the Company’s consolidated balance sheets as
follows:
(Dollars in thousands)
Derivatives not designated as
Location of fair value
At
At
hedging instruments
in balance sheets
September 30, 2020
December 31, 2019
Equity index put option contracts
Equity index put option liability
$
6,632
$
5,584
Total
$
6,632
$
5,584
The change in fair value of the equity index put option contracts can be found in the Company’s statement of
operations and comprehensive income (loss) as follows:
(Dollars in thousands)
For the Three Months Ended
For the, Nine Months Ended
Derivatives not designated as
Location of gain (loss) in statements of
September 30,
September 30,
hedging instruments
operations and comprehensive income (loss)
2020
2019
2020
2019
Equity index put option contracts
Net derivative gain (loss)
$
2,456
$
(189)
$
(1,048)
$
3,395
Total
$
2,456
$
(189)
$
(1,048)
$
3,395
6. FAIR VALUE
GAAP guidance regarding fair value measurements address how companies should measure fair value when they
are required to use fair value measures for recognition or disclosure purposes under GAAP and provides a
common definition of fair value to be used throughout GAAP. It defines fair value as the price that would be
received to sell an asset or paid to transfer a liability in an orderly fashion between market participants at the
measurement date. In addition, it establishes a three-level valuation hierarchy for the disclosure of fair value
measurements. The valuation hierarchy is based on the transparency of inputs to the valuation of an asset or
liability. The level in the hierarchy within which a given fair value measurement falls is determined based on the
lowest level input that is significant to the measurement, with Level 1 being the highest priority and Level 3
being the lowest priority.
The levels in the hierarchy are defined as follows:
Level 1: Inputs to the valuation methodology are observable inputs that reflect unadjusted quoted prices for
identical assets or liabilities in an active market;
Level 2: Inputs to the valuation methodology include quoted prices for similar assets and liabilities in active
markets, and inputs that are observable for the asset or liability, either directly or indirectly, for
substantially the full term of the financial instrument;
Level 3: Inputs to the valuation methodology are unobservable and significant to the fair value measurement.
The Company’s fixed maturity and equity securities are primarily managed by third party investment asset
managers. The investment asset managers managing publicly traded securities obtain prices from nationally
recognized pricing services. These services seek to utilize market data and observations in their evaluation
process. They use pricing applications that vary by asset class and incorporate available market information and
when fixed maturity securities do not trade on a daily basis the services will apply available information through
processes such as benchmark curves, benchmarking of like securities, sector groupings and matrix pricing. In
addition, they use model processes, such as the Option Adjusted Spread model to develop prepayment and
interest rate scenarios for securities that have prepayment features.
In limited instances where prices are not provided by pricing services or in rare instances when a manager may
not agree with the pricing service, price quotes on a non-binding basis are obtained from investment brokers.
17
The investment asset managers do not make any changes to prices received from either the pricing services or
the investment brokers. In addition, the investment asset managers have procedures in place to review the
reasonableness of the prices from the service providers and may request verification of the prices. In addition,
the Company continually performs analytical reviews of price changes and tests the prices on a random basis to
an independent pricing source. No material variances were noted during these price validation procedures. In
limited situations, where financial markets are inactive or illiquid, the Company may use its own assumptions
about future cash flows and risk-adjusted discount rates to determine fair value. At September 30, 2020,
$
1,134,535
3,748
fair valued using unobservable inputs. The majority of the fixed maturities, market value, $
805,061
were valued by investment managers’ valuation committees and many of these fair values and all of the $
3,748
thousand of fixed maturities, fair value were substantiated by valuations from independent third parties. The
Company has procedures in place to evaluate these independent third party valuations. The remaining Level 3
fixed maturities of $
329,474
approximates fair value. At December 31, 2019, $
772,979
5,826
thousand of fixed maturities, fair value were fair valued using unobservable inputs. The majority of the fixed
maturities, market value, $
610,873
majority of these fair values and all of the $
5,826
valuations from independent third parties. The Company has procedures in place to review and evaluate these
independent third party valuations. The remaining Level 3 fixed maturities of $
162,106
either par or amortized cost, which the Company believes approximates fair value.
The Company internally manages a public equity portfolio which had a fair value at September 30, 2020 and
December 31, 2019 of $
591,681
170,888
from publicly published sources.
Equity securities denominated in U.S. currency with quoted prices in active markets for identical assets are
categorized as Level 1 since the quoted prices are directly observable. Equity securities traded on foreign
exchanges are categorized as Level 2 due to the added input of a foreign exchange conversion rate to determine
fair or market value. The Company uses foreign currency exchange rates published by nationally recognized
sources.
All categories of fixed maturity securities listed in the tables below are generally categorized as Level 2, since a
particular security may not have traded but the pricing services are able to use valuation models with observable
market inputs such as interest rate yield curves and prices for similar fixed maturity securities in terms of issuer,
maturity and seniority. For foreign government securities and foreign corporate securities, the fair values
provided by the third party pricing services in local currencies, and where applicable, are converted to U.S.
dollars using currency exchange rates from nationally recognized sources.
The fixed maturities with fair values categorized as Level 3 result when prices are not available from the
nationally recognized pricing services.
The composition and valuation inputs for the presented fixed maturities categories are as follows:
• U.S. Treasury securities and obligations of U.S. government agencies and corporations are primarily
comprised of U.S. Treasury bonds and the fair value is based on observable market inputs such as quoted
prices, reported trades, quoted prices for similar issuances or benchmark yields;
• Obligations of U.S. states and political subdivisions are comprised of state and municipal bond issuances and
the fair values are based on observable market inputs such as quoted market prices, quoted prices for
similar securities, benchmark yields and credit spreads;
18
• Corporate securities are primarily comprised of U.S. corporate and public utility bond issuances and the fair
values are based on observable market inputs such as quoted market prices, quoted prices for similar
securities, benchmark yields and credit spreads;
• Asset-backed and mortgage -backed securities fair values are based on observable inputs such as quoted
prices, reported trades, quoted prices for similar issuances or benchmark yields and cash flow models using
observable inputs such as prepayment speeds, collateral performance and default spreads;
• Foreign government securities are comprised of global non-U.S. sovereign bond issuances and the fair
values are based on observable market inputs such as quoted market prices, quoted prices for similar
securities and models with observable inputs such as benchmark yields and credit spreads and then, where
applicable, converted to U.S. dollars using an exchange rate from a nationally recognized source;
• Foreign corporate securities are comprised of global non-U.S. corporate bond issuances and the fair values
are based on observable market inputs such as quoted market prices, quoted prices for similar securities
and models with observable inputs such as benchmark yields and credit spreads and then, where applicable,
converted to U.S. dollars using an exchange rate from a nationally recognized source.
The Company’s liability for equity index put options is categorized as Level 3 since there is no active market for
these equity put options. The fair values for these options are calculated by the Company using an industry
accepted pricing model, Black-Scholes. The model inputs and assumptions are: risk free interest rates, equity
market indexes values, volatilities and dividend yields and duration. The model results are then adjusted for the
Company’s credit default swap rate. All of these inputs and assumptions are updated quarterly.
The following table presents the fair value measurement levels for all assets and liabilities, which the Company
has recorded at fair value (fair and market value) as of the periods indicated:
Fair Value Measurement Using:
Quoted Prices
in Active
Significant
Markets for
Other
Significant
Identical
Observable
Unobservable
Assets
Inputs
Inputs
(Dollars in thousands)
September 30, 2020
(Level 1)
(Level 2)
(Level 3)
Assets:
Fixed maturities, market value
U.S. Treasury securities and obligations of
U.S. government agencies and corporations
$
1,452,003
$
-
$
1,452,003
$
-
Obligations of U.S. States and political subdivisions
543,283
-
543,283
-
Corporate securities
6,805,349
-
6,081,305
724,044
Asset-backed securities
1,338,202
-
933,413
404,789
Mortgage-backed securities
Commercial
969,320
-
969,320
-
Agency residential
2,118,653
-
2,118,653
-
Non-agency residential
2,520
-
2,520
-
Foreign government securities
1,535,075
-
1,535,075
-
Foreign corporate securities
3,091,972
-
3,086,270
5,702
Total fixed maturities, market value
17,856,377
-
16,721,842
1,134,535
Fixed maturities, fair value
3,748
-
-
3,748
Equity securities, fair value
1,173,162
1,084,448
88,714
-
Liabilities:
Equity index put option contracts
$
6,632
$
-
$
-
$
6,632
There were
no
19
The following table presents the fair value measurement levels for all assets and liabilities, which the Company
has recorded at fair value (fair and market value) as of the periods indicated:
Fair Value Measurement Using:
Quoted Prices
in Active
Significant
Markets for
Other
Significant
Identical
Observable
Unobservable
Assets
Inputs
Inputs
(Dollars in thousands)
December 31, 2019
(Level 1)
(Level 2)
(Level 3)
Assets:
Fixed maturities, market value
U.S. Treasury securities and obligations of
U.S. government agencies and corporations
$
1,515,803
$
-
$
1,515,803
$
-
Obligations of U.S. States and political subdivisions
536,915
-
536,915
-
Corporate securities
6,374,946
-
5,757,358
617,588
Asset-backed securities
897,333
-
743,692
153,641
Mortgage-backed securities
Commercial
844,557
-
844,557
-
Agency residential
2,198,581
-
2,198,581
-
Non-agency residential
5,703
-
5,703
-
Foreign government securities
1,505,950
-
1,505,950
-
Foreign corporate securities
2,945,156
-
2,943,406
1,750
Total fixed maturities, market value
16,824,944
-
16,051,965
772,979
Fixed maturities, fair value
5,826
-
-
5,826
Equity securities, fair value
931,457
864,584
66,873
-
Liabilities:
Equity index put option contracts
$
5,584
$
-
$
-
$
5,584
In addition, $
218,821
209,578
consolidated balance sheets as of September 30, 2020 and December 31, 2019, respectively, are not included
within the fair value hierarchy tables as the assets are measured at NAV as a practical expedient to determine
fair value.
The following tables present the activity under Level 3, fair value measurements using significant unobservable
inputs for fixed maturities, for the periods indicated:
Total Fixed Maturities, Market Value
Three Months Ended September 30, 2020
Nine Months Ended September 30, 2020
Corporate
Asset-Backed
Foreign
Corporate
Asset-Backed
Foreign
(Dollars in thousands)
Securities
Securities
Corporate
Total
Securities
Securities
Corporate
Total
Beginning balance fixed maturities at market value
$
721,834
$
295,730
$
6,274
$
1,023,838
$
617,588
$
153,641
$
1,750
$
772,979
Total gains or (losses) (realized/unrealized)
Included in earnings
362
457
26
845
(100)
582
(71)
411
Included in other comprehensive income (loss)
(992)
5,028
126
4,162
(4,898)
7,238
86
2,426
Purchases, issuances and settlements
(1,349)
103,574
139
102,364
112,060
243,328
3,823
359,211
Transfers in and/or (out) of Level 3
4,189
-
(863)
3,326
(606)
-
114
(492)
Ending balance
$
724,044
$
404,789
$
5,702
$
1,134,535
$
724,044
$
404,789
$
5,702
$
1,134,535
The amount of total gains or losses for the period
included in earnings (or changes in net assets)
attributable to the change in unrealized gains
or losses relating to assets still held
$
-
$
-
$
-
$
-
$
(539)
$
-
$
$
-
$
(539)
(Some amounts may not reconcile due to rounding.)
20
Total Fixed Maturities, Market Value
Three Months Ended September 30, 2019
Nine Months Ended September 30, 2019
Corporate
Asset-Backed
Foreign
Corporate
Asset-Backed
Foreign
(Dollars in thousands)
Securities
Securities
Corporate
Total
Securities
Securities
Corporate
Total
Beginning balance fixed maturities at market value
$
542,878
$
-
$
2,093
$
544,971
$
428,215
$
-
$
7,744
$
435,959
Total gains or (losses) (realized/unrealized)
Included in earnings
1,018
-
-
1,018
3,348
-
(119)
3,229
Included in other comprehensive income (loss)
(1,314)
644
-
(670)
1,130
644
-
1,774
Purchases, issuances and settlements
42,289
40,000
-
82,289
150,659
40,000
(5,532)
185,127
Transfers in and/or (out) of Level 3
3,176
-
-
3,176
4,695
-
-
4,695
Ending balance
$
588,047
$
40,644
$
2,093
$
630,784
$
588,047
$
40,644
$
2,093
$
630,784
The amount of total gains or losses for the period
included in earnings (or changes in net assets)
attributable to the change in unrealized gains
or losses relating to assets still held
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
-
(Some amounts may not reconcile due to rounding.)
Total Fixed Maturities, Fair Value
Three Months Ended September 30, 2020
Nine Months Ended September 30, 2020
Foreign
Foreign
(Dollars in thousands)
Corporate
Total
Corporate
Total
Beginning balance fixed maturities at market value
$
4,431
$
4,431
$
5,826
$
5,826
Total gains or (losses) (realized/unrealized)
Included in earnings
1,371
1,371
(24)
(24)
Included in other comprehensive income (loss)
-
-
-
-
Purchases, issuances and settlements
(2,054)
(2,054)
(2,054)
(2,054)
Transfers in and/or (out) of Level 3
-
-
-
-
Ending balance
$
3,748
$
3,748
$
3,748
$
3,748
The amount of total gains or losses for the period
included in earnings (or changes in net assets)
attributable to the change in unrealized gains
or losses relating to assets still held
$
-
$
-
$
-
$
-
(Some amounts may not reconcile due to rounding.)
Total Fixed Maturities, Fair Value
Three Months Ended September 30, 2019
Nine Months Ended September 30, 2019
Foreign
Foreign
(Dollars in thousands)
Corporate
Total
Corporate
Total
Beginning balance fixed maturities at market value
$
-
$
-
$
2,337
$
2,337
Total gains or (losses) (realized/unrealized)
Included in earnings
-
-
369
369
Included in other comprehensive income (loss)
-
-
-
-
Purchases, issuances and settlements
-
-
(2,706)
(2,706)
Transfers in and/or (out) of Level 3
-
-
-
-
Ending balance
$
-
$
-
$
-
$
-
The amount of total gains or losses for the period
included in earnings (or changes in net assets)
attributable to the change in unrealized gains
or losses relating to assets still held
$
-
$
-
$
-
$
-
(Some amounts may not reconcile due to rounding.)
21
The following table presents the activity under Level 3, fair value measurements using significant unobservable
inputs for equity securities, for the periods indicated:
Three Months Ended
Nine Months Ended
September 30,
September 30,
(Dollars in thousands)
2020
2019
2020
2019
Common Stock
Balance, beginning of period
$
9,877
$
-
$
-
$
-
Total (gains) or losses (realized/unrealized)
Included in earnings
-
-
-
-
Included in other comprehensive income (loss)
-
-
-
-
Purchases, issuances and settlements
-
-
9,877
-
Transfers in and/or (out) of Level 3
(9,877)
-
(9,877)
-
Balance, end of period
$
-
$
-
$
-
$
-
The amount of total gains or losses for the period included in earnings
(or changes in net assets) attributable to the change in unrealized
gains or losses relating to liabilities still held at the reporting date
$
-
$
-
$
-
$
-
(Some amounts may not reconcile due to rounding.)
The net transfers to/(from) Level 3, fair value measurements using significant unobservable inputs for fixed
maturities, market value were $
3,326
492
) thousand for the three and nine months ended
September 30, 2020, respectively, and were $
3,176
4,695
months ended September 30, 2019, respectively. The transfers of $
3,326
ended September 30, 2020 were previously priced by a recognized pricing service and were subsequently priced
using investment managers as of September 30, 2020. The transfers of ($
492
) thousand during the nine months
ended September 30, 2020 were related to securities that were previously priced using investment managers
and were subsequently priced by a recognized pricing service as of September 30, 2020. The transfers of $
3,176
thousand and $
4,695
recognized pricing service and were subsequently priced using investment managers as of September 30, 2019.
22
The net transfers to/(from) Level 3, fair value measurements using significant unobservable inputs for equity
securities, fair value were ($
9,877
) thousand for both the three and nine months ended September 30, 2020.
The transfers of ($
9,877
) thousand during both the three and nine months ended September 30, 2020, were
related to preferred stock in a private entity purchased during the second quarter of 2020 which was priced at
cost as of June 30, 2020 and was subsequently priced based upon the book value of the underlying private entity
as of September 30, 2020.
The following table presents the activity under Level 3, fair value measurements using significant unobservable
inputs for equity index put option contracts, for the periods indicated:
Three Months Ended
Nine Months Ended
September 30,
September 30,
(Dollars in thousands)
2020
2019
2020
2019
Liabilities:
Balance, beginning of period
$
9,088
$
8,374
$
5,584
$
11,958
Total (gains) or losses (realized/unrealized)
Included in earnings
(2,456)
189
1,048
(3,395)
Included in other comprehensive income (loss)
-
-
-
-
Purchases, issuances and settlements
-
-
-
-
Transfers in and/or (out) of Level 3
-
-
-
-
Balance, end of period
$
6,632
$
8,563
$
6,632
$
8,563
The amount of total gains or losses for the period included in earnings
(or changes in net assets) attributable to the change in unrealized
gains or losses relating to liabilities still held at the reporting date
$
-
$
-
$
-
$
-
(Some amounts may not reconcile due to rounding.)
7. EARNINGS PER COMMON SHARE
Basic earnings per share are calculated by dividing net income by the weighted average number of common
shares outstanding. Diluted earnings per share reflect the potential dilution that would occur if options granted
under various share -based compensation plans were exercised resulting in the issuance of common shares that
would participate in the earnings of the entity.
23
Net income (loss) per common share has been computed as per below, based upon weighted average common
basic and dilutive shares outstanding.
Three Months Ended
Nine Months Ended
September 30,
September 30,
(Dollars in thousands, except per share amounts)
2020
2019
2020
2019
Net income (loss) per share:
Numerator
Net income (loss)
$
243,057
$
104,398
$
450,549
$
791,817
Less: dividends declared-common shares and unvested common shares
(61,910)
(56,995)
(187,115)
(171,131)
Undistributed earnings
181,148
47,403
263,435
620,687
Percentage allocated to common shareholders (1)
98.8
%
98.9
%
98.7
%
98.9
%
178,938
46,869
260,096
613,847
Add: dividends declared-common shareholders
61,199
56,403
184,836
169,329
Numerator for basic and diluted earnings per common share
$
240,138
$
103,273
$
444,931
$
783,176
Denominator
Denominator for basic earnings per weighted-average common shares
39,483
40,287
39,711
40,289
Effect of dilutive securities:
Options
74
125
79
131
Denominator for diluted earnings per adjusted weighted-average common shares
39,557
40,411
39,790
40,421
Per common share net income (loss)
Basic
$
6.08
$
2.56
$
11.20
$
19.44
Diluted
$
6.07
$
2.56
$
11.18
$
19.38
(1)
Basic weighted-average common shares outstanding
39,483
40,287
39,711
40,289
Basic weighted-average common shares outstanding and unvested common shares expected to vest
39,971
40,746
40,221
40,738
Percentage allocated to common shareholders
98.8
%
98.9
%
98.7
%
98.9
%
(Some amounts may not reconcile due to rounding.)
There were
no
2019.
All outstanding options expire on or between
February 24, 2021
September 19, 2022
.
8. COMMITMENTS AND CONTINGENCIES
In the ordinary course of business, the Company is involved in lawsuits, arbitrations and other formal and
informal dispute resolution procedures, the outcomes of which will determine the Company’s rights and
obligations under insurance and reinsurance agreements. In some disputes, the Company seeks to enforce its
rights under an agreement or to collect funds owing to it. In other matters, the Company is resisting attempts by
others to collect funds or enforce alleged rights. These disputes arise from time to time and are ultimately
resolved through both informal and formal means, including negotiated resolution, arbitration and litigation. In
all such matters, the Company believes that its positions are legally and commercially reasonable. The Company
considers the statuses of these proceedings when determining its reserves for unpaid loss and loss adjustment
expenses.
Aside from litigation and arbitrations related to these insurance and reinsurance agreements, the Company is
not a party to any other material litigation or arbitration.
The Company has entered into separate annuity agreements with The Prudential Insurance of America (“The
Prudential”) and an additional unaffiliated life insurance company in which the Company has either purchased
annuity contracts or become the assignee of annuity proceeds that are meant to settle claim payment
24
obligations in the future. In both instances, the Company would become contingently liable if either The
Prudential or the unaffiliated life insurance company were unable to make payments related to the respective
annuity contract.
The table below presents the estimated cost to replace all such annuities for which the Company was
contingently liable for the periods indicated:
At September 30,
At December 31,
(Dollars in thousands)
2020
2019
The Prudential
$
141,488
$
141,703
Unaffiliated life insurance company
34,441
35,082
9. OTHER COMPREHENSIVE INCOME (LOSS)
The following table presents the components of comprehensive income (loss) in the consolidated statements of
operations for the periods indicated:
Three Months Ended September 30, 2020
Nine Months Ended September 30, 2020
(Dollars in thousands)
Before Tax
Tax Effect
Net of Tax
Before Tax
Tax Effect
Net of Tax
Unrealized appreciation (depreciation) ("URA(D)") on securities - non-
credit related
$
68,264
$
(4,784)
$
63,480
$
373,990
$
(38,155)
$
335,835
Reclassification of net realized losses (gains) included in net income
(loss)
(12,678)
1,225
(11,453)
18,650
(5,961)
12,689
Foreign currency translation adjustments
64,453
(3,825)
60,628
28,555
1,835
30,390
Reclassification of benefit plan liability amortization included in net
income (loss)
2,285
(479)
1,806
5,736
(1,204)
4,532
Total other comprehensive income (loss)
$
122,324
$
(7,863)
$
114,461
$
426,931
$
(43,485)
$
383,446
Three Months Ended September 30, 2019
Nine Months Ended September 30, 2019
(Dollars in thousands)
Before Tax
Tax Effect
Net of Tax
Before Tax
Tax Effect
Net of Tax
Unrealized appreciation (depreciation) ("URA(D)") on securities - non-
credit related
$
103,247
$
(9,529)
$
93,718
$
587,930
$
(61,792)
$
526,138
URA(D) on securities - OTTI
72
(25)
47
(1,671)
122
(1,549)
Reclassification of net realized losses (gains) included in net income
(loss)
(74)
(455)
(529)
(3,597)
(623)
(4,220)
Foreign currency translation adjustments
(2,665)
(761)
(3,426)
(13,890)
(1,316)
(15,206)
Reclassification of benefit plan liability amortization included in net
income (loss)
1,726
(363)
1,363
4,640
(975)
3,665
Total other comprehensive income (loss)
$
102,306
$
(11,133)
$
91,173
$
573,412
$
(64,584)
$
508,828
The following table presents details of the amounts reclassified from AOCI for the periods indicated:
Three Months Ended
Nine Months Ended
September 30,
September 30,
Affected line item within the statements of
AOCI component
2020
2019
2020
2019
operations and comprehensive income (loss)
(Dollars in thousands)
URA(D) on securities
$
(12,678)
$
(74)
$
18,650
$
(3,597)
Other net realized capital gains (losses)
1,225
(455)
(5,961)
(623)
Income tax expense (benefit)
$
(11,453)
$
(529)
$
12,689
$
(4,220)
Net income (loss)
Benefit plan net gain (loss)
$
2,285
$
1,726
$
5,736
$
4,640
Other underwriting expenses
(479)
(363)
(1,204)
(975)
Income tax expense (benefit)
$
1,806
$
1,363
$
4,532
$
3,665
Net income (loss)
25
The following table presents the components of accumulated other comprehensive income (loss), net of tax, in
the consolidated balance sheets for the periods indicated:
Three Months Ended
Nine Months Ended
September 30,
September 30,
(Dollars in thousands)
2020
2019
2020
2019
Beginning balance of URA (D) on securities
$
600,922
$
247,741
$
304,425
$
(179,392)
Current period change in URA (D) of investments - non-credit related
52,027
93,190
348,524
521,919
Current period change in URA (D) of investments - non-credit OTTI
-
47
-
(1,549)
Ending balance of URA (D) on securities
652,949
340,978
652,949
340,978
Beginning balance of foreign currency translation adjustments
(231,955)
(227,527)
(201,717)
(215,747)
Current period change in foreign currency translation adjustments
60,628
(3,426)
30,390
(15,206)
Ending balance of foreign currency translation adjustments
(171,327)
(230,953)
(171,327)
(230,953)
Beginning balance of benefit plan net gain (loss)
(71,830)
(65,116)
(74,556)
(67,418)
Current period change in benefit plan net gain (loss)
1,806
1,363
4,532
3,665
Ending balance of benefit plan net gain (loss)
(70,024)
(63,753)
(70,024)
(63,753)
Ending balance of accumulated other comprehensive income (loss)
$
411,598
$
46,272
$
411,598
$
46,272
(Some amounts may not reconcile due to rounding.)
10. CREDIT FACILITIES
The Company has
two
1,000,000
additional credit facility for a total commitment of up to £
52,175
of credit and/or unsecured revolving credit lines. The following table presents the interest and fees incurred in
connection with the
two
Three Months Ended
Nine Months Ended
September 30,
September 30,
(Dollars in thousands)
2020
2019
2020
2019
Credit facility interest and fees incurred
$
105
$
105
$
560
$
315
The terms and outstanding amounts for each facility are discussed below:
Group Credit Facility
Effective May 26, 2016, Group, Everest Reinsurance (Bermuda), Ltd. (“Bermuda Re”) and Everest International
Reinsurance, Ltd. (“Everest International”), both direct subsidiaries of Group, entered into a
five year
, $
800,000
thousand senior credit facility with a syndicate of lenders, which amended and restated in its entirety the June
22, 2012,
four year
, $
800,000
credit facilities, which have similar terms, are referred to as the “Group Credit Facility”. Wells Fargo Corporation
(“Wells Fargo Bank”) is the administrative agent for the Group Credit Facility, which consists of two tranches.
Tranche one provides up to $
200,000
purposes, and for the issuance of unsecured standby letters of credit. The interest on the revolving loans shall,
at the Company’s option, be either (1) the Base Rate (as defined below) or (2) an adjusted London Interbank
Offered Rate (“LIBOR”) plus a margin. The Base Rate is the higher of (a) the prime commercial lending rate
established by Wells Fargo Bank, (b) the Federal Funds Rate plus
0.5
% per annum or (c) the one month LIBOR
Rate plus
1.0
% per annum. The amount of margin and the fees payable for the Group Credit Facility depends on
Group’s senior unsecured debt rating. Tranche two exclusively provides up to $
600,000
issuance of standby letters of credit on a collateralized basis.
The Group Credit Facility requires Group to maintain a debt to capital ratio of not greater than
0.35
maintain a minimum net worth. Minimum net worth is an amount equal to the sum of $
5,370,979
plus
25
% of consolidated net income for each of Group’s fiscal quarters, for which statements are available
26
ending on or after March 31, 2016 and for which consolidated net income is positive, plus
25
% of any increase in
consolidated net worth during such period attributable to the issuance of ordinary and preferred shares, which
at September 30, 2020, was $
6,372,662
with all Group Credit Facility covenants.
On March 25, 2020, Group borrowed $
50,000
revolving credit loan. The loan was fully paid off on June 26, 2020. There were
no
from the facility during the year ended 2019.
The following table summarizes the outstanding letters of credit and/or borrowings for the periods indicated:
(Dollars in thousands)
At September 30, 2020
At December 31, 2019
Bank
Commitment
In Use
Date of Expiry
Commitment
In Use
Date of Expiry
Wells Fargo Bank Group Credit Facility
Tranche One
$
200,000
$
99,077
12/31/2020
$
200,000
$
33,737
12/31/2020
Tranche Two
600,000
586,186
12/31/2020
600,000
2,381
7/29/2020
Tranche Two
-
1,649
9/30/2020
Tranche Two
-
573,353
12/31/2020
Tranche Two
-
12,364
1/4/2021
Total Wells Fargo Bank Group Credit Facility
$
800,000
$
685,263
$
800,000
$
623,484
Bermuda Re Letter of Credit Facility
Effective December 31, 2019, Bermuda Re renewed its letter of credit issuance facility with Citibank N.A.
referred to as the “Bermuda Re Letter of Credit Facility”, which commitment is reconfirmed annually with
updated fees. The current renewal of the Bermuda Re Letter of Credit Facility provides for the issuance of up to
$
200,000
reinsurer. The interest on drawn letters of credit shall be (A)
0.35
% per annum of the principal amount of issued
standard letters of credit (expiry of 15 months or less) and (B)
0.45
% per annum of the principal amount of
issued extended tenor letters of credit (expiry maximum of up to
60
credit shall be
0.15
% per annum.
The following table summarizes the outstanding letters of credit for the periods indicated:
(Dollars in thousands)
At September 30, 2020
At December 31, 2019
Bank
Commitment
In Use
Date of Expiry
Commitment
In Use
Date of Expiry
Citibank Bilateral Letter of Credit Agreement
$
200,000
$
3,672
11/24/2020
$
200,000
$
4,425
02/29/2020
93,846
12/31/2020
512
09/03/2020
4,425
02/28/2021
3,672
11/24/2020
183
12/16/2021
177
12/16/2020
109
12/20/2021
125
12/20/2020
5,475
12/31/2021
101,404
12/31/2020
777
08/15/2022
559
08/15/2021
37,802
09/30/2024
37,096
12/30/2023
Total Citibank Bilateral Agreement
$
200,000
$
146,289
$
200,000
$
147,970
Everest International Credit Facility
Effective May 12, 2020, Everest International amended its credit facility with Lloyds Bank plc (“Everest
International Credit Facility”). The current amendment of the Everest International Credit Facility provides up to
£
52,175
commitment fee of
0.1
% per annum on the average daily amount of the remainder of (1) the aggregate amount
available under the facility and (2) the aggregate amount of drawings outstanding under the facility. The
Company pays a credit commission fee of
0.35
% per annum on drawings outstanding under the facility.
The Everest International Credit Facility requires Group to maintain a debt to capital ratio of not greater than
0.35
$
5,532,663
70
% of consolidated net worth as of December 31, 2018), plus
25
% of consolidated net
27
income for each of Group’s fiscal quarters, for which statements are available ending on or after January 1, 2019
and for which net income is positive, plus
25
% of any increase in consolidated net worth of Group during such
period attributable to the issuance of ordinary and preferred shares, which at September 30, 2020, was
$
5,910,400
Credit Facility requirements.
The following table summarizes the outstanding letters of credit for the periods indicated:
(Dollars in thousands)
At September 30, 2020
At December 31, 2019
Bank
Commitment
In Use
Date of Expiry
Commitment
In Use
Date of Expiry
Lloyd's Bank plc
£
52,175
£
52,175
12/31/2023
£
47,000
£
47,000
12/31/2023
-
-
-
-
Total Lloyd's Bank Credit Facility
£
52,175
£
52,175
£
47,000
£
47,000
Federal Home Loan Bank Membership
Effective August 15, 2019, Everest Reinsurance Company (“Everest Re”) became a member of the Federal Home
Loan Bank of New York (“FHLBNY”), which allows Everest Re to borrow up to
10
% of its statutory admitted
assets. As of September 30, 2020, Everest Re had admitted assets of approximately $
14,667,099
which provides borrowing capacity of up to approximately $
1,466,709
On August 31, 2020, Everest Re borrowed $
90,000
90,000
thousand collateralized borrowing has interest payable at a rate of
0.35
% and will mature on
November 30,
2020
. The FHLBNY membership agreement requires that
4.5
% of borrowed funds be used to acquire additional
membership stock.
11. COLLATERALIZED REINSURANCE AND TRUST AGREEMENTS
Certain subsidiaries of Group have established trust agreements, which effectively use the Company’s
investments as collateral, as security for assumed losses payable to certain non-affiliated ceding companies. At
September 30, 2020, the total amount on deposit in trust accounts was $
1,158,783
The Company reinsures some of its catastrophe exposures with the segregated accounts of Mt. Logan Re. Mt.
Logan Re is a Class 3 insurer registered in Bermuda effective February 27, 2013 under The Segregated Accounts
Companies Act 2000 and
100
% of the voting common shares are owned by Group. Separate segregated
accounts for Mt. Logan Re began being established effective July 1, 2013 and non-voting, redeemable preferred
shares have been issued to capitalize the segregated accounts. Each segregated account invests predominantly
in a diversified set of catastrophe exposures, diversified by risk/peril and across different geographic regions
globally.
28
The following table summarizes the premiums and losses that are ceded by the Company to Mt. Logan Re
segregated accounts and assumed by the Company from Mt. Logan Re segregated accounts.
Three Months Ended
Nine Months Ended
September 30,
September 30,
Mt. Logan Re Segregated Accounts
2020
2019
2020
2019
(Dollars in thousands)
Ceded written premiums
86,712
97,391
245,422
237,841
Ceded earned premiums
71,396
79,560
233,089
220,200
Ceded losses and LAE
87,917
79,499
173,968
164,914
Assumed written premiums
8,894
9,867
14,448
14,900
Assumed earned premiums
8,894
9,867
14,448
14,900
Assumed losses and LAE
-
-
-
-
Each segregated account is permitted to assume net risk exposures equal to the amount of its available posted
collateral, which in the aggregate was $
806,564
993,036
December 31, 2019, respectively. Of this amount, Group had investments recorded at $
66,175
$
46,390
Effective April 1, 2018, the Company entered into a retroactive reinsurance transaction with one of the Mt.
Logan Re segregated accounts to retrocede $
269,198
to accident years
2002
2015
. As consideration for entering the agreement, the Company transferred
cash of $
252,000
under the agreement will be $
319,000
the maximum liability.
On April 24, 2014, the Company entered into
two
Limited (“Kilimanjaro”), a Bermuda based special purpose reinsurer, to provide the Company with catastrophe
reinsurance coverage. These agreements are multi-year reinsurance contracts which cover specified named
storm and earthquake events. The first agreement provides up to $
250,000
from named storms in specified states of the Southeastern United States. The second agreement provides up to
$
200,000
Atlantic and Northeast regions of the United States and Puerto Rico as well as reinsurance coverage from
earthquakes in specified states of the Southeast, Mid-Atlantic, Northeast and West regions of the United States,
Puerto Rico and British Columbia. These reinsurance agreements expired in
April, 2018
.
On November 18, 2014, the Company entered into a collateralized reinsurance agreement with Kilimanjaro to
provide the Company with catastrophe reinsurance coverage. This agreement is a multi-year reinsurance
contract which covers specified earthquake events. The agreement provides up to $
500,000
reinsurance coverage from earthquakes in the United States, Puerto Rico and Canada. These reinsurance
agreements expired in
November 2019
.
On December 1, 2015 the Company entered into
two
provide the Company with catastrophe reinsurance coverage. These agreements are multi-year reinsurance
contracts which cover named storm and earthquake events. The first agreement provides up to $
300,000
thousand of reinsurance coverage from named storms and earthquakes in the United States, Puerto Rico and
Canada. The second agreement provides up to $
325,000
and earthquakes in the United States, Puerto Rico and Canada.
On April 13, 2017 the Company entered into
six
provide the Company with annual aggregate catastrophe reinsurance coverage. The initial
three
four year
to $
225,000
400,000
325,000
29
reinsurance coverage from named storms and earthquakes in the United States, Puerto Rico and Canada. The
subsequent
three
five year
events. These agreements provide up to $
50,000
75,000
175,000
respectively, of annual aggregate reinsurance coverage from named storms and earthquakes in the United
States, Puerto Rico and Canada.
On April 30, 2018 the Company entered into
four
provide the Company with catastrophe reinsurance coverage. These agreements are multi-year reinsurance
contracts which cover named storm and earthquake events. The first
two
four year
contracts which provide up to $
62,500
200,000
reinsurance coverage from named storms and earthquakes in the United States, Puerto Rico, the U.S. Virgin
Islands and Canada. The remaining
two
five year
$
62,500
200,000
storms and earthquakes in the United States, Puerto Rico, the U.S. Virgin Islands and Canada.
On December 12, 2019, the Company entered into
four
to provide the Company with catastrophe reinsurance coverage. These agreements are multi-year reinsurance
contracts which cover named storm and earthquake events. The first
two
four year
contracts which provide up to $
150,000
275,000
reinsurance coverage from named storms and earthquakes in the United States, Puerto Rico, the U.S. Virgin
Islands and Canada. The remaining
two
five year
$
150,000
275,000
storms and earthquakes in the United State, Puerto Rico, the U.S. Virgin Islands and Canada.
Recoveries under these collateralized reinsurance agreements with Kilimanjaro are primarily dependent on
estimated industry level insured losses from covered events, as well as, the geographic location of the events.
The estimated industry level of insured losses is obtained from published estimates by an independent
recognized authority on insured property losses. Currently, none of the published insured loss estimates for
catastrophe events during the applicable covered periods of the various agreements have exceeded the single
event retentions or aggregate retentions under the terms of the agreements that would result in a recovery.
Kilimanjaro has financed the various property catastrophe reinsurance coverages by issuing catastrophe bonds
to unrelated, external investors. On April 24, 2014, Kilimanjaro issued $
450,000
2014-1 Notes”). The $
450,000
no longer outstanding. On November 18, 2014, Kilimanjaro issued $
500,000
Notes”). The $
500,000
longer outstanding. On December 1, 2015, Kilimanjaro issued $
625,000
Notes). On April 13, 2017, Kilimanjaro issued $
950,000
300,000
thousand of notes (“Series 2017-2 Notes). On April 30, 2018, Kilimanjaro issued $
262,500
(“Series 2018-1 Notes”) and $
262,500
Kilimanjaro issued $
425,000
425,000
Notes”). The proceeds from the issuance of the Notes listed above are held in reinsurance trust throughout the
duration of the applicable reinsurance agreements and invested solely in US government money market funds
with a rating of at least “AAAm” by Standard & Poor’s.
30
12. SENIOR NOTES
The table below displays Everest Reinsurance Holdings’ (“Holdings”) outstanding senior notes. Market value is
based on quoted market prices, but due to limited trading activity, these senior notes are considered Level 2 in
the fair value hierarchy.
September 30, 2020
December 31, 2019
Consolidated Balance
Consolidated Balance
(Dollars in thousands)
Date Issued
Date Due
Principal Amounts
Sheet Amount
Market Value
Sheet Amount
Market Value
Senior notes
06-05-2014
06-01-2044
400,000
$
397,164
$
460,252
$
397,074
$
452,848
On June 5, 2014, Holdings issued $
400,000
30
4.868
%, which will mature on
June 1, 2044
. Interest will be paid semi-annually on June 1 and December 1 of each year.
Interest expense incurred in connection with these senior notes is as follows for the periods indicated:
Three Months Ended
Nine Months Ended
September 30,
September 30,
(Dollars In thousands
2020
2019
2020
2019
Interest expense incurred
$
4,868
$
4,868
$
14,604
$
14,604
In addition to the above senior notes outstanding, Holdings issued $
1,000,000
30 year
on
October 7, 2020
3.5
%. These senior notes will mature on
October 15, 2050
interest semi-annually on April 15th and October 15th of each year.
13. LONG TERM SUBORDINATED NOTES
The table below displays Holdings’ outstanding fixed to floating rate long term subordinated notes. Market
value is based on quoted market prices, but due to limited trading activity, these subordinated notes are
considered Level 2 in the fair value hierarchy.
Maturity Date
September 30, 2020
December 31, 2019
Original
Consolidated
Balance
Consolidated
Balance
(Dollars in thousands)
Date Issued
Principal
Amount
Scheduled
Final
Sheet Amount
Market Value
Sheet Amount
Market Value
Long term subordinated notes
04-26-2007
$
400,000
05-15-2037
05-01-2067
$
223,649
$
191,301
$
236,758
$
233,191
During the fixed rate interest period from
May 3, 2007
May 14, 2017
, interest was at the annual rate of
6.6
%, payable semi-annually in arrears on November 15 and May 15 of each year, commencing on
November 15,
2007
. During the floating rate interest period from May 15, 2017 through maturity, interest will be based on the
3 month LIBOR plus
238.5
August 15 and November 15 of each year, subject to Holdings’ right to defer interest on
one
for up to
ten
quarterly for periods from and including May 15, 2017. The reset quarterly interest rate for August 17, 2020 to
November 15, 2020 is
2.67
%.
Holdings may redeem the long term subordinated notes on or after May 15, 2017, in whole or in part at
100
% of
the principal amount plus accrued and unpaid interest; however, redemption on or after the scheduled maturity
date and prior to
May 1, 2047
certain senior note holders and it mandates that Holdings receive proceeds from the sale of another
subordinated debt issue, of at least similar size, before it may redeem the subordinated notes. Effective upon
the maturity of the Company’s
5.40
% senior notes on
October 15, 2014
, the Company’s
4.868
% senior notes,
due on
June 1, 2044
, have become the Company’s long term indebtedness that ranks senior to the long term
subordinated notes.
31
The Company repurchased and retired $
0
13,183
subordinated notes during the three and nine months ended September 30, 2020, respectively. The Company
realized a gain of $
0
2,536
for the three and nine months ended September 30, 2020, respectively.
On March 19, 2009, Group announced the commencement of a cash tender offer for any and all of the
6.60
%
fixed to floating rate long term subordinated notes. Upon expiration of the tender offer, the Company had
reduced its outstanding debt by $
161,441
Interest expense incurred in connection with these long term subordinated notes is as follows for the periods
indicated:
Three Months Ended
Nine Months Ended
September 30,
September 30,
(Dollars in thousands)
2020
2019
2020
2019
Interest expense incurred
$
1,587
$
2,881
$
6,126
$
8,892
14. LEASES
Effective January 1, 2019, the Company adopted ASU 2016-02 and ASU 2018-11 which outline new guidance on
the accounting for leases. The Company enters into lease agreements for real estate that is primarily used for
office space in the ordinary course of business. These leases are accounted for as operating leases, whereby
lease expense is recognized on a straight -line basis over the term of the lease. Most leases include an option to
extend or renew the lease term. The exercise of the renewal is at the Company’s discretion. The operating lease
liability includes lease payments related to options to extend or renew the lease term if the Company is
reasonably certain of exercise those options. The Company, in determining the present value of lease payments
utilizes either the rate implicit in the lease if that rate is readily determinable or the Company’s incremental
secured borrowing rate commensurate with terms of the underlying lease.
Supplemental information related to operating leases is as follows for the periods indicated:
Three Months Ended
Nine Months Ended
September 30,
September 30,
(Dollars in thousands)
2020
2019
2020
2019
Lease expense incurred:
Operating lease cost
$
8,424
$
5,384
$
24,572
$
16,602
At September 30,
At December 31,
(Dollars in thousands)
2020
2019
Operating lease right of use assets
$
149,206
$
161,435
Operating lease liabilities
163,329
169,909
Three Months Ended
Nine Months Ended
September 30,
September 30,
(Dollars in thousands)
2020
2019
2020
2019
Operating cash flows from operating leases
$
(5,047)
$
(5,739)
$
(14,883)
$
(14,665)
At September 30,
At December 31,
2020
2019
Weighted average remaining operating lease term
12.3 years
12.6 years
Weighted average discount rate on operating leases
4.11
%
3.91
%
32
Maturities of the existing lease liabilities are expected to occur as follows:
(Dollars in thousands)
Remainder of 2020
$
5,235
2021
18,433
2022
20,882
2023
20,110
2024
19,859
2025
16,868
Thereafter
119,204
Undiscounted lease payments
220,591
Less: present value adjustment
57,262
Total operating lease liability
$
163,329
On July 2, 2019, the Company entered into a lease agreement to relocate its corporate offices from Liberty
Corner, New Jersey to a corporate complex in Warren, New Jersey. The new lease, which covers approximately
315,000
2036
. The initial base rent
payment of the lease will be approximately $
650
7,800
Company expects to relocate the existing operations and employees of the Liberty Corner, New Jersey facility to
the new corporate complex during 2021.
15. SEGMENT REPORTING
The Reinsurance operation writes worldwide property and casualty reinsurance and specialty lines of business,
on both a treaty and facultative basis, through reinsurance brokers, as well as directly with ceding companies.
Business is written in the U.S., Bermuda, and Ireland offices, as well as, through branches in Canada, Singapore
and the United Kingdom. The Insurance operation writes property and casualty insurance directly and through
brokers, surplus lines brokers and general agents within the U.S., Canada and Europe through its offices in the
U.S., Canada, Ireland and a branch located in Zurich.
These segments are managed independently, but conform with corporate guidelines with respect to pricing, risk
management, control of aggregate catastrophe exposures, capital, investments and support operations.
Management generally monitors and evaluates the financial performance of these operating segments based
upon their underwriting results.
Underwriting results include earned premium less losses and loss adjustment expenses (“LAE”) incurred,
commission and brokerage expenses and other underwriting expenses. We measure our underwriting results
using ratios, in particular loss, commission and brokerage and other underwriting expense ratios, which,
respectively, divide incurred losses, commissions and brokerage and other underwriting expenses by premiums
earned.
The Company does not maintain separate balance sheet data for its operating segments. Accordingly, the
Company does not review and evaluate the financial results of its operating segments based upon balance sheet
data.
The following tables present the underwriting results for the operating segments for the periods indicated:
33
Three Months Ended
Nine Months Ended
Reinsurance
September 30,
September 30,
(Dollars in thousands)
2020
2019
2020
2019
Gross written premiums
$
2,086,961
$
1,736,672
$
5,403,080
$
4,678,310
Net written premiums
1,936,851
1,583,713
4,974,034
4,212,952
Premiums earned
$
1,669,257
$
1,420,799
$
4,656,733
$
4,072,078
Incurred losses and LAE
1,335,048
1,050,621
3,361,367
2,605,901
Commission and brokerage
373,251
371,098
1,130,946
1,039,113
Other underwriting expenses
51,333
43,832
135,170
117,031
Underwriting gain (loss)
$
(90,375)
$
(44,752)
$
29,250
$
310,033
Three Months Ended
Nine Months Ended
Insurance
September 30,
September 30,
(Dollars in thousands)
2020
2019
2020
2019
Gross written premiums
$
704,643
$
666,602
$
2,328,733
$
2,018,727
Net written premiums
511,829
484,844
1,693,603
1,491,286
Premiums earned
$
536,554
$
484,820
$
1,628,297
$
1,383,537
Incurred losses and LAE
401,162
321,303
1,212,699
909,203
Commission and brokerage
72,081
71,978
229,224
214,387
Other underwriting expenses
87,542
74,326
250,695
204,945
Underwriting gain (loss)
$
(24,231)
$
17,213
$
(64,321)
$
55,002
The following table reconciles the underwriting results for the operating segments to income before taxes as
reported in the consolidated statements of operations and comprehensive income (loss) for the periods
indicated:
Three Months Ended
Nine Months Ended
September 30,
September 30,
(Dollars in thousands)
2020
2019
2020
2019
Underwriting gain (loss)
$
(114,606)
$
(27,539)
$
(35,071)
$
365,035
Net investment income
234,233
181,058
420,116
501,062
Net realized capital gains (losses)
110,203
(12,943)
84,263
109,561
Net derivative gain (loss)
2,456
(189)
(1,048)
3,395
Corporate expenses
(10,618)
(8,435)
(29,184)
(22,622)
Interest, fee and bond issue cost amortization expense
(6,641)
(7,907)
(21,477)
(23,972)
Other income (expense)
57,481
(31,025)
48,354
(52,550)
Income (loss) before taxes
$
272,508
$
93,020
$
465,953
$
879,909
The Company produces business in the U.S., Bermuda and internationally. The net income deriving from and
assets residing in the individual foreign countries in which the Company writes business are not identifiable in
the Company’s financial records. Based on gross written premium, the table below presents the largest country,
other than the U.S., in which the Company writes business, for the periods indicated:
Three Months Ended
Nine Months Ended
September 30,
September 30,
(Dollars in thousands)
2020
2019
2020
2019
United Kingdom gross written premium
$
314,502
$
272,297
$
857,310
$
743,294
No other country represented more than
5
% of the Company’s revenues.
34
16. SHARE-BASED COMPENSATION PLANS
For the three months ended September 30, 2020,
5,590
September 11,
2020
, with a fair value of $
207.5050
.
For the nine months ended September 30, 2020, a total of
173,419
167,829
February 26, 2020
, with a fair value of $
277.145
5,590
September 11, 2020
207.5050
. Also,
16,120
granted on
February 26, 2020
, with a fair value of $
277.145
17. RETIREMENT BENEFITS
The Company maintains both qualified and non-qualified defined benefit pension plans for its U.S. employees
employed prior to April 1, 2010. Generally, the Company computes the benefits based on average earnings over
a period prescribed by the plans and credited length of service. The Company’s non-qualified defined benefit
pension plan provided compensating pension benefits for participants whose benefits have been curtailed under
the qualified plan due to Internal Revenue Code limitations. Effective January 1, 2018, participants of the
Company’s non-qualified defined benefit pension plan may no longer accrue additional service benefits.
Net periodic benefit cost for U.S. employees included the following components for the periods indicated:
Pension Benefits
Three Months Ended
Nine Months Ended
September 30,
September 30,
(Dollars in thousands)
2020
2019
2020
2019
Service cost
$
2,040
$
2,064
$
8,092
$
6,616
Interest cost
2,562
2,928
7,608
8,788
Expected return on plan assets
(5,197)
(4,492)
(15,591)
(14,523)
Amortization of net (income) loss
2,462
1,909
6,137
5,111
FAS 88 settlement charge
871
102
871
309
Net periodic benefit cost
$
2,738
$
2,511
$
7,117
$
6,301
Other Benefits
Three Months Ended
Nine Months Ended
September 30,
September 30,
(Dollars in thousands)
2020
2019
2020
2019
Service cost
$
311
$
245
$
763
$
818
Interest cost
215
245
644
835
Amortization of prior service cost
(177)
(144)
(401)
(433)
Amortization of net (income) loss
-
(39)
-
(39)
Net periodic benefit cost
$
349
$
307
$
1,006
$
1,181
The service cost component of net periodic benefit