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 costs is included within other underwriting expenses on the
consolidated statement of operations and comprehensive income (loss). In accordance with ASU 2017-07, other
staff compensation costs are also primarily recorded within this line item.
The Company did
no
t make any contributions to the qualified pension benefit plan for the three and nine
months ended September 30, 2020 and 2019, respectively.
18. INCOME TAXES
The Company is domiciled in Bermuda and has significant subsidiaries and/or branches in Canada, Ireland,
Singapore, Switzerland, the United Kingdom, and the United States. The Company’s Bermuda domiciled
subsidiaries are exempt from income taxation under Bermuda law until 2035. The Company’s non-Bermudian
subsidiaries and branches are subject to income taxation at varying rates in their respective domiciles.
35
The Company generally applies the estimated Annualized Effective Tax Rate (“AETR”) approach for calculating its
tax provision for interim periods as prescribed by ASC 740-270, Interim Reporting. Under the AETR approach,
the estimated annualized effective tax rate is applied to the interim year-to-date pre-tax income/loss to
determine the income tax expense or benefit for the year-to-date period. The tax expense or benefit for the
quarter represents the difference between the year-to-date tax expense or benefit for the current year-to-date
period less such amount for the immediately preceding year-to-date period. Management considers the impact
of all known events in its estimation of the Company’s annual pre -tax income/loss and annualized effective tax
rate.
19. SUBSEQUENT EVENTS
The Company has evaluated known recognized and non-recognized subsequent events. In October 2020,
Hurricanes Delta and Zeta impacted the Caribbean and southeastern United States. Due to the recentness of
these events, the Company is unable to estimate the amount of losses at this time. However, the Company
anticipates that the losses from these events will adversely impact its fourth quarter 2020 financial statements.
36
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATION
Industry Conditions.
The worldwide reinsurance and insurance businesses are highly competitive, as well as cyclical by product and
market. As such, financial results tend to fluctuate with periods of constrained availability, higher rates and
stronger profits followed by periods of abundant capacity, lower rates and constrained profitability.
Competition in the types of reinsurance and insurance business that we underwrite is based on many factors,
including the perceived overall financial strength of the reinsurer or insurer, ratings of the reinsurer or insurer by
A.M. Best and/or Standard & Poor’s, underwriting expertise, the jurisdictions where the reinsurer or insurer is
licensed or otherwise authorized, capacity and coverages offered, premiums charged, other terms and
conditions of the reinsurance and insurance business offered, services offered, speed of claims payment and
reputation and experience in lines written. Furthermore, the market impact from these competitive factors
related to reinsurance and insurance is generally not consistent across lines of business, domestic and
international geographical areas and distribution channels.
We compete in the U.S., Bermuda and international reinsurance and insurance markets with numerous global
competitors. Our competitors include independent reinsurance and insurance companies, subsidiaries or
affiliates of established worldwide insurance companies, reinsurance departments of certain insurance
companies, domestic and international underwriting operations, including underwriting syndicates at Lloyd’s of
London and certain government sponsored risk transfer vehicles. Some of these competitors have greater
financial resources than we do and have established long term and continuing business relationships, which can
be a significant competitive advantage. In addition, the lack of strong barriers to entry into the reinsurance
business and recently, the securitization of reinsurance and insurance risks through capital markets provide
additional sources of potential reinsurance and insurance capacity and competition.
Worldwide insurance and reinsurance market conditions historically have been competitive. Generally, there
was ample insurance and reinsurance capacity relative to demand, as well as, additional capital from the capital
markets through insurance linked financial instruments. These financial instruments such as side cars,
catastrophe bonds and collateralized reinsurance funds, provided capital markets with access to insurance and
reinsurance risk exposure. The capital markets demand for these products was being primarily driven by a low
interest environment and the desire to achieve greater risk diversification and potentially higher returns on their
investments. This increased competition was generally having a negative impact on rates, terms and conditions;
however, the impact varies widely by market and coverage.
The industry continues to deal with the impacts of a global pandemic, COVID-19. Globally, many countries
mandated that their citizens remain at home and many non-essential businesses have continued to be physically
closed. We closed our physical offices; however, we activated our operational resiliency plan across our global
footprint and all of our critical operations are functioning effectively from remote locations. We continue to
service and meet the needs of our clients while ensuring the safety and health of our employees and customers.
The pandemic has caused significant volatility in the global financial markets. Interest rates plummeted, credit
spreads widened and the equity markets lost value. We saw our fixed maturity and equity portfolios decline in
value resulting in realized and unrealized investment losses in our March 31, 2020 financial statements.
However, the financial markets rebounded during the second and third quarters and we recognized after -tax
realized gains of $239.4 million and unrealized gains of $596.5 million in our financial statements for these two
quarters. Nevertheless, the lack of business activity may lead to an increase in bankruptcies and corresponding
credit losses.
There will also be a negative impact on future industry underwriting results. With the closing of non-essential
businesses, there has been a significant decline in business activity. To the extent that premiums are based on
business activity, there will be a decline in premium volume. Incurred losses from the pandemic will be
impacted by the duration of the event and will vary by line of business and geographical location. For the
37
quarter ended September 30, 2020, our underwriting results include $125 million of estimated losses related to
the pandemic and $435 million for the nine months ended September 30, 2020. We anticipate this Pandemic
could have a meaningful impact on our revenue, as well as net and operating income in future quarters as a
result of reinsurance and insurance claims due to the pandemic and resulting macro -economic market
conditions.
Many regulators had issued moratoriums on the cancellation of policies for the non-payment of premiums and
also on non-renewals. We are complying with the various regulatory requests for accommodations to
policyholders during this difficult period. The moratoriums combined with the forced closure of businesses may
lead to an increase in uncollectible premium expense.
Prior to the pandemic, there was a growing industry consensus that there was some firming of (re)insurance
rates for the areas impacted by the recent catastrophes. The increased frequency of catastrophe losses in 2020
appears to be further pressuring the increase of rates. Rates also appear to be firming in some of the casualty
lines of business, particularly in the casualty lines that had seen significant losses such as excess casualty and
directors’ and officers’ liability. Other casualty lines are experiencing modest rate increase, while some lines
such as workers’ compensation were experiencing softer market conditions. It is too early to tell what will be the
impact on pricing conditions but it is likely to change depending on the line of business and geography.
While we are unable to predict the full impact the pandemic will have on the insurance industry as it continues
to have a negative impact on the global economy, we are well positioned to continue to service our clients. Our
capital position remains a source of strength, with high quality invested assets, significant liquidity and a low
operating expense ratio. Our diversified global platform with its broad mix of products, distribution and
geography is resilient.
38
Financial Summary.
We monitor and evaluate our overall performance based upon financial results. The following table displays a
summary of the consolidated net income (loss), ratios and shareholders’ equity for the periods indicated.
Three Months Ended
Percentag
e
Nine Months Ended
Percentag
e
September 30,
Increase/
September 30,
Increase/
(Dollars in millions)
2020
2019
(Decrease)
2020
2019
(Decrease)
Gross written premiums
$
2,791.6
$
2,403.3
16.2
%
$
7,731.8
$
6,697.0
15.5
%
Net written premiums
2,448.7
2,068.6
18.4
%
6,667.6
5,704.2
16.9
%
REVENUES:
Premiums earned
$
2,205.8
$
1,905.6
15.8
%
$
6,285.0
$
5,455.6
15.2
%
Net investment income
234.2
181.1
29.4
%
420.1
501.1
-16.2
%
Net realized capital gains (losses)
110.2
(12.9)
NM
%
84.3
109.6
-23.1
%
Net derivative gain (loss)
2.5
(0.2)
NM
%
(1.0)
3.4
-130.9
%
Other income (expense)
57.5
(31.0)
NM
%
48.4
(52.6)
-192.0
%
Total revenues
2,610.2
2,042.5
27.8
%
6,836.7
6,017.1
13.6
%
CLAIMS AND EXPENSES:
Incurred losses and loss adjustment expenses
1,736.2
1,371.9
26.6
%
4,574.1
3,515.1
30.1
%
Commission, brokerage, taxes and fees
445.3
443.1
0.5
%
1,360.2
1,253.5
8.5
%
Other underwriting expenses
138.9
118.2
17.5
%
385.9
322.0
19.8
%
Corporate expenses
10.6
8.4
25.9
%
29.2
22.6
29.0
%
Interest, fees and bond issue cost amortization expense
6.6
7.9
-16.0
%
21.5
24.0
-10.4
%
Total claims and expenses
2,337.7
1,949.5
19.9
%
6,370.8
5,137.2
24.0
%
INCOME (LOSS) BEFORE TAXES
272.5
93.0
193.0
%
466.0
879.9
-47.0
%
Income tax expense (benefit)
29.5
(11.4)
NM
%
15.4
88.1
-82.5
%
NET INCOME (LOSS)
$
243.1
$
104.4
132.8
%
$
450.5
$
791.8
-43.1
%
RATIOS:
Point
Change
Point
Change
Loss ratio
78.7
%
72.0
%
6.7
72.8
%
64.4
%
8.4
Commission and brokerage ratio
20.2
%
23.3
%
(3.1)
21.7
%
23.0
%
(1.3)
Other underwriting expense ratio
6.3
%
6.1
%
0.2
6.1
%
5.9
%
0.2
Combined ratio
105.2
%
101.4
%
3.8
100.6
%
93.3
%
7.3
At
At
Percentag
e
September 30,
December 31,
Increase/
(Dollars in millions, except per share amounts)
2020
2019
(Decrease)
Balance sheet data:
Total investments and cash
$
23,104.7
$
20,748.5
11.4
%
Total assets
30,153.0
27,324.1
10.4
%
Loss and loss adjustment expense reserves
15,233.1
13,611.3
11.9
%
Total debt
710.8
633.8
12.1
%
Total liabilities
20,561.7
18,191.1
13.0
%
Shareholders' equity
9,591.3
9,132.9
5.0
%
Book value per share
239.98
223.85
7.2
%
(NM, not meaningful)
(Some amounts may not reconcile due to rounding.)
Revenues.
Premiums. Gross written premiums increased by 16.2% to $2,791.6 million for the three months ended
September 30, 2020, compared to $2,403.3 million for the three months ended September 30, 2019, reflecting a
$350.3 million, or 20.2%, increase in our re insurance business and a $38.0 million, or 5.7%, increase in our
insurance business. The increase in reinsurance premiums was mainly due to increases in treaty property
business and facultative business. The rise in insurance premiums was primarily due to increases in many lines
of business, including casualty, specialty lines and business written through the Lloyd’s Syndicate. Gross written
premiums increased by 15.5% to $7,731.8 million for the nine months ended September 30, 2020, compared to
$6,697.0 million for the nine months ended September 30, 2019, reflecting a $724.8 million, or 15.5%, increase
in our re insurance business and a $310.0 million, or 15.4%, increase in our insurance business. The increase in
reinsurance premiums was mainly due to increases in treaty property business, casualty writings and facultative
39
business. The rise in insurance premiums was primarily due to increases in many lines of business, including
property, casualty, specialty lines, accident and health and business written through the Lloyd’s Syndicate.
Net written premiums increased by 18.4% to $2,448.7 million for the three months ended September 30, 2020,
compared to $2,068.6 million for the three months ended September 30, 2019. Net written premiums increased
by 16.9% to $6,667.6 million for the nine months ended September 30, 2020, compared to $5,704.2 million for
the nine months ended September 30, 2019. The differences between the changes in gross written premiums
compared to the changes in net written premiums are primarily due to varying utiliza tion of reinsurance.
Premiums earned increased by 15.8% to $2,205.8 million for the three months ended September 30, 2020,
compared to $1,905.6 million for the three months ended September 30, 2019. Premiums earned increased by
15.2% to $6,285.0 million for the nine months ended September 30, 2020, compared to $5,455.6 million for the
nine months ended September 30, 2019. The changes in premiums earned relative to net written premiums are
the result of timing; premiums are earned ratably over the coverage period whereas written premiums are
recorded at the initiation of the coverage period.
Net Investment Income. Net investment income increased by 29.4% to $234.2 million for the three months
ended September 30, 2020, compared with investment income of $181.1 million for the three months ended
September 30, 2019. This increase was primarily the result of an increase in limited partnership income, as the
improvement in the equity markets during the second quarter had a positive impact on the limited partnership
valuations, and we had higher income from our growing fixed income portfolio. Net investment income
decreased by 16.2% to $420.1 million for the nine months ended September 30, 2020, compared with
investment income of $501.1 million for the nine months ended September 30, 2019. This decrease in income
was primarily the result of losses from our limited partnerships in the second quarter, partially offset by higher
income from our growing fixed maturity portfolio. Net pre-tax investment income, as a percentage of average
invested assets, was 4.4% for the three months ended September 30, 2020, compared to 3.7% for the three
months ended September 30, 2019. Net pre-tax investment income, as a percentage of average invested assets,
was 2.7% for the nine months ended September 30, 2020, compared to 3.5% for the nine months ended
September 30, 2019.
Net Realized Capital Gains (Losses). Net realized capital gains were $110.2 million and net realized capital losses
were $12.9 million for the three months ended September 30, 2020 and 2019, respectively. As discussed earlier,
the COVID-19 pandemic caused significant volatility in the global financial markets. The net realized capital gains
of $110.2 million for the three months ended September 30, 2020 were comprised of $100.0 million of net gains
from fair value re -measurements, resulting primarily from increases in equity security valuations which further
rebounded from declines in the first quarter of 2020, $6.2 million from a decline in net allowances for credit
losses and $4.0 million of net realized capital gains from sales of investments . The net realized capital losses of
$12.9 million for the three months ended September 30, 2019 were comprised of $12.0 million of net losses
from fair value re-measurements and $7.3 million of other-than-temporary impairments, partially offset by $6.5
million of net realized capital gains from sales of investments.
Net realized capital gains were $84.3 million and $109.6 million for the nine months ended September 30, 2020
and 2019, respectively. The net realized capital gains of $84.3 million for the nine months ended September 30,
2020 were comprised of $116.3 million of net gains from fair value re-measurements, partially offset by $19.6
million of net allowances for credit losses and $12.4 million of net realized capital losses from sales of
investments. The net realized capital gains of $109.6 million for the nine months ended September 30, 2019
were comprised of $102.8 million of net gains from fair value re-measurements and $22.3 million of net realized
capital gains from sales of investments, partially offset by $15.4 million of other-than-temporary impairments.
Net Derivative Gain (Loss). In 2005 and prior, we sold seven equity index put option contracts, one of which
remained outstanding at September 30, 2020. These contracts meet the definition of a derivative in accordance
with FASB guidance and as such, are fair valued each quarter with the change recorded as net derivative gain or
loss in the consolidated statements of operations and comprehensive income (loss). As a result of these
adjustments in value, we recognized a net derivative gain of $2.5 million and a net derivative loss of $0.2 million
40
for the three months ended September 30, 2020 and 2019, respectively, and net derivative losses of $1.0 million
and net derivative gains of $3.4 million for the nine months ended September 30, 2020 and 2019, respectively.
The changes in the fair value of these equity index put option contracts is generally indicat ive of the changes in
the equity markets and interest rates over the same periods.
Other Income (Expense). We recorded other income of $57.5 million and $48.4 million for the three and nine
months ended September 30, 2020, respectively. We recorded other expense of $31.0 million and $52.6 million
for the three and nine months ended September 30, 2019, respectively. The changes were primarily the result
of fluctuations in foreign currency exchange rates, income related to Mt. Logan Re and changes in deferred gains
related to any retroactive reinsurance transactions. We recognized foreign currency exchange income of $61.4
million and $37.9 million for the three and nine months ended September 30, 2020, respectively. We recognized
foreign currency exchange expense of $26.0 million and $44.5 million for the three and nine months ended
September 30, 2019, respectively.
Claims and Expenses.
Incurred Losses and Loss Adjustment Expenses. The following tables present our incurred losses and loss
adjustment expenses (“LAE”) for the periods indicated.
Three Months Ended September 30,
Current
Ratio %/
Prior
Ratio %/
Total
Ratio %/
(Dollar in millions)
Year
Pt Change
Years
Pt Change
Incurred
Pt Change
2020
Attritional
$
1,427.5
64.8
%
$
(1.3)
-0.1
%
$
1,426.2
64.7
%
Catastrophes
310.0
14.0
%
-
-
%
310.0
14.0
%
Total
$
1,737.5
78.8
%
$
(1.3)
-0.1
%
$
1,736.2
78.7
%
2019
Attritional
$
1,128.7
59.2
%
$
(52.2)
-2.7
%
$
1,076.4
56.5
%
Catastrophes
295.5
15.5
%
-
-
%
295.5
15.5
%
Total
$
1,424.2
74.7
%
$
(52.2)
-2.7
%
$
1,371.9
72.0
%
Variance 2020/2019
Attritional
$
298.8
5.6
pts
$
50.9
2.6
pts
$
349.8
8.2
pts
Catastrophes
14.5
(1.5)
pts
-
-
pts
14.5
(1.5)
pts
Total
$
313.3
4.1
pts
$
50.9
2.6
pts
$
364.3
6.7
pts
Nine Months Ended September 30,
Current
Ratio %/
Prior
Ratio %/
Total
Ratio %/
(Dollar in millions)
Year
Pt Change
Years
Pt Change
Incurred
Pt Change
2020
Attritional
$
4,217.6
67.1
%
$
1.4
0.1
%
$
4,219.1
67.2
%
Catastrophes
355.0
5.6
%
-
-
%
355.0
5.6
%
Total
$
4,572.6
72.7
%
$
1.4
0.1
%
$
4,574.1
72.8
%
2019
Attritional
$
3,239.0
59.4
%
$
(74.4)
-1.4
%
$
3,164.6
58.0
%
Catastrophes
320.5
5.9
%
30.0
0.5
%
350.5
6.4
%
Total
$
3,559.5
65.3
%
$
(44.4)
-0.9
%
$
3,515.1
64.4
%
Variance 2020/2019
Attritional
$
978.6
7.7
pts
$
75.8
1.5
pts
$
1,054.5
9.2
pts
Catastrophes
34.5
(0.3)
pts
(30.0)
(0.5)
pts
4.5
(0.8)
pts
Total
$
1,013.1
7.4
pts
$
45.8
1.0
pts
$
1,059.0
8.4
pts
Incurred losses and LAE increased by 26.6% to $1,736.2 million for the three months ended September 30, 2020,
compared to $1,371.9 million for the three months ended September 30, 2019. The increase was primarily due
to a rise of $298.8 million in current year attritional losses, mainly due to $124.9 million of losses related to the
COVID-19 pandemic and the impact of the increase in premiums earned, as well as an increase of $14.5 million
in current year catastrophe losses. The current year catastrophe losses of $310.0 million for the three months
ended September 30, 2020 related to Hurricane Laura ($131.0 million), the Northern California wildfires ($52.0
million), the California Glass wildfire ($30.0 million), Hurricane Sally ($26.0 million), the Oregon wildfires ($21.0
million), Hurricane Isaias ($19.9 million), the Derecho storms ($15.1 million) and the Calgary storms in Canada
41
($15.0 million). The $295.5 million of current year catastrophe losses for the three months ended September 30,
2019 related to Hurricane Dorian ($164.5 million) and Typhoon Faxai ($131.0 million).
Incurred losses and LAE increased by 30.1% to $4,574.1 million for the nine months ended September 30, 2020,
compared to $3,515.1 million for the nine months ended September 30, 2019. The increase was primarily due to
a rise of $978.6 million in current year attritional losses, mainly due to $434.9 million of losses related to the
COVID-19 pandemic and the impact of the increase in premiums earned, as well as an increase of $34.5 million
in current year catastrophe losses. The current year catastrophe losses of $355.0 million fo r the nine months
ended September 30, 2020 related to Hurricane Laura ($131.0 million), the Northern California wildfires ($52.0
million), the California Glass wildfire ($30.0 million), Hurricane Sally ($26.0 million), the Oregon wildfires ($21.0
million), Hurricane Isaias ($19.9 million), the 2020 U.S. civil unrest ($17.4 million), Nashville tornadoes ($15.2
million), the Derecho storms ($15.1 million), the Calgary storms in Canada ($15.0 million), Australia East Coast
Storm ($6.8 million) and the 2020 Australia fires ($5.6 million). The $320.5 million of current year catastrophe
losses for the nine months ended September 30, 2019 related to Hurricane Dorian ($164.5 million), Typhoon
Faxai ($131.0 million) and the Townsville monsoon in Australia ($25.0 million).
Commission, Brokerage, Taxes and Fees. Commission, brokerage, taxes and fees increased by 0.5% to $445.3
million for the three months ended September 30, 2020, compared to $443.1 million for the three months
ended September 30, 2019. Commission, brokerage, taxes and fees increased by 8.5% to $1,360.2 million for
the nine months ended September 30, 2020, compared to $1,253.5 million for the nine months ended
September 30, 2019. The increases were primarily due to the impact of the increases in premiums earned and
changes in the mix of business.
Other Underwriting Expenses. Other underwriting expenses were $138.9 million and $118.2 million for the
three months ended September 30, 2020 and 2019, respectively. Other underwriting expenses were $385.9
million and $322.0 million for the nine months ended September 30, 2020 and 2019, respectively. The increases
in other underwriting expenses were mainly due to the impact of the increases in premiums earned.
Corporate Expenses. Corporate expenses, which are general operating expenses that are not allocated to
segments, were $10.6 million and $8.4 million for the three months ended September 30, 2020 and 2019,
respectively, and $29.2 million and $22.6 million for the nine months ended September 30, 2020 and 2019,
respectively. These increases were mainly due to costs associated with the relocation of our U.S. headquarters.
Interest, Fees and Bond Issue Cost Amortization Expense. Interest, fees and other bond amortization expense
was $6.6 million and $7.9 million for the three months ended September 30, 2020 and 2019, respectively.
Interest, fees and other bond amortization expense was $21.5 million and $24.0 million for the nine months
ended September 30, 2020 and 2019, respectively. Any variance in expense was primarily due to the movement
in the floating interest rate related to the long term subordinated notes, which is reset quarterly per the note
agreement. The floating rate was 2.67% as of September 30, 2020.
Income Tax Expense (Benefit). We had an income tax expense of $29.5 million and $15.4 million for the three
and nine months ended September 30, 2020, respectively. We had an income tax benefit of $11.4 million and
income tax expense of $88.1 million for the three and nine months ended September 30, 2019, respectively.
Income tax benefit or expense is primarily a function of the geographic location of the Company’s pre-tax
income and the statutory tax rates in those jurisdictions. The effective tax rate (“ETR”) is primarily affected by
tax-exempt investment income, foreign tax credits and dividends. Variations in the ETR generally result from
changes in the relative levels of pre -tax income, including the impact of catastrophe losses and net capital gains
(losses), among jurisdictions with different tax rates. The change in income tax expense (benefit) for the three
months ended September 30, 2020 as compared to the three months ended September 30, 2019 results
primarily from higher investment income and realized investment gains, partially offset by the estimated
incurred losses from the COVID-19 pandemic. The change in income tax for the nine months ended September
30, 2020 as compared to the nine months ended September 30, 2019 was primarily due to the estimated
42
incurred losses from the COVID-19 pandemic and the beneficial tax impact from the Coronavirus Aid, Relief and
Economic Securities Act (“the CARES Act”).
The CARES Act was passed by Congress and signed into law by the President on March 27, 2020 in response to
the COVID -19 pandemic. Among the provisions of the CARES Act was a special tax provision which allows
companies to elect to carryback five years net operating losses incurred in the 2018, 2019 and/or 2020 tax years.
The Tax Cuts and Jobs Act of 2017 had eliminated net operating loss carrybacks for most companies. The
Company determined that the special 5 year loss carryback tax provision provided a tax benefit of $31.0 million
which it recorded in the quarter ended March 31, 2020.
Net Income (Loss).
Our net income was $243.1 million and $104.4 million for the three months ended September 30, 2020 and
2019, respectively. Our net income was $450.5 million and $791.8 million for the nine months ended September
30, 2020 and 2019, respectively. The changes were primarily driven by the financial component fluctuations
explained above.
Ratios.
Our combined ratio increased by 3.8 points to 105.2% for the three months ended September 30, 2020,
compared to 101.4% for the three months ended September 30, 2019, and increased by 7.3 points to 100.6% for
the nine months ended September 30, 2020, compared to 93.3% for the nine months ended September 30,
2019. The loss ratio component increased 6.7 points and 8.4 points for the three and nine months ended
September 30, 2020 over the same periods last year mainly due to $124.9 million and $434.9 million of
attritional losses related to the COVID -19 pandemic for the three and nine months ended September 30, 2020,
respectively. The commission and brokerage ratio component decreased to 20.2% for the three months ended
September 30, 2020 compared to 23.3% for the three months ended September 30, 2019 and decreased to
21.7% for the nine months ended September 30, 2020 compared to 23.0% for the nine months ended
September 30, 2019. The declines were mainly due to changes in the mix of business. The other underwriting
expense ratio increased slightly to 6.3% for the three months ended September 30, 2020 from 6.1% for the three
months ended September 30, 2019 and increased slightly to 6.1% for the nine months ended September 30,
2020 from 5.9% for the nine months ended September 30, 2019. The increases for the three and nine month
periods were mainly due to employee benefit expenses.
Shareholders’ Equity.
Shareholders’ equity increased by $458.4 million to $9,591.3 million at September 30, 2020 from $9,132.9
million at December 31, 2019, principally as a result of $450.5 million of net income, $348.5 million of unrealized
appreciation on investments net of tax, $30.4 million of net foreign currency translation adjustments, $15.7
million of share -based compensation transactions and $4.5 million of net benefit plan obligation adjustments,
partially offset by the repurchase of 970,892 common shares for $200.0 million, $187.1 million of shareholder
dividends, and $4.2 million of cumulative adjustment from the adoption of ASU 2016-13.
Consolidated Investment Results
Net Investment Income.
Net investment income increased by 29.4% to $234.2 million for the three months ended September 30, 2020,
compared with investment income of $181.1 million for the three months ended September 30, 2019. This
increase was primarily the result of an increase in limited partnership income, as the improvement in the equity
markets during the second quarter had a positive impact on the limited partnership valuations, and we had
higher income from our growing fixed income portfolio. Net investment income decreased by 16.2% to $420.1
million for the nine months ended September 30, 2020, compared with investment income of $501.1 million for
the nine months ended September 30, 2019. This decrease in income was primarily the result of losses from our
limited partnerships in the second quarter, partially offset by higher income from our growing fixed maturity
portfolio.
43
The following table shows the components of net investment income for the periods indicated.
Three Months Ended
Nine Months Ended
September 30,
September 30,
(Dollars in millions)
2020
2019
2020
2019
Fixed maturities
$
136.1
$
130.1
$
407.9
$
383.4
Equity securities
4.4
4.2
11.6
12.3
Short-term investments and cash
0.5
3.9
4.4
13.5
Other invested assets
Limited partnerships
88.8
43.8
22.1
100.3
Other
14.7
7.3
(1.3)
13.6
Gross investment income before adjustments
244.5
189.3
444.7
523.1
Funds held interest income (expense)
0.7
2.3
10.9
9.7
Future policy benefit reserve income (expense)
(0.3)
(0.4)
(0.8)
(1.0)
Gross investment income
244.9
191.2
454.8
531.8
Investment expenses
(10.7)
(10.1)
(34.7)
(30.7)
Net investment income
$
234.2
$
181.1
$
420.1
$
501.1
(Some amounts may not reconcile due to rounding.)
The following tables show a comparison of various investment yields for the periods indicated.
At
At
September 30,
December 31,
2020
2019
Imbedded pre-tax yield of cash and invested assets
3.1
%
3.4
%
Imbedded after-tax yield of cash and invested assets
2.7
%
3.0
%
Three Months Ended
Nine Months Ended
September 30,
September 30,
2020
2019
2020
2019
Annualized pre-tax yield on average cash and invested assets
4.4
%
3.7
%
2.7
%
3.5
%
Annualized after-tax yield on average cash and invested assets
3.8
%
3.3
%
2.3
%
3.1
%
44
Net Realized Capital Gains (Losses).
The following table presents the composition of our net realized capital gains (losses) for the periods indicated.
Three Months Ended September 30,
Nine Months Ended September 30,
(Dollars in millions)
2020
2019
Variance
2020
2019
Variance
Gains (losses) from sales:
$
18.7
$
14.3
$
4.4
$
54.1
$
42.0
$
12.1
(13.3)
(9.0)
(4.3)
(53.1)
(25.3)
(27.8)
5.4
5.3
0.1
0.9
16.7
(15.8)
$
-
$
-
$
-
-
0.4
(0.4)
(2.0)
-
(2.0)
(2.0)
-
(2.0)
(2.0)
-
(2.0)
(2.0)
0.4
(2.4)
9.5
1.0
8.5
30.3
9.3
21.0
(10.8)
(2.2)
(8.6)
(42.9)
(6.7)
(36.2)
(1.3)
(1.1)
(0.1)
(12.6)
2.6
(15.2)
1.4
2.6
(1.2)
6.0
2.9
3.1
(0.3)
(0.5)
0.3
(5.9)
(0.6)
(5.3)
1.1
2.1
(0.9)
0.1
2.3
(2.2)
0.8
0.2
0.6
1.2
0.3
0.9
-
-
-
-
-
-
0.8
0.2
0.6
1.2
0.3
0.9
Total net realized gains (losses) from sales:
30.4
18.2
12.2
91.5
54.9
36.7
(26.4)
(11.7)
(14.7)
(103.9)
(32.6)
(71.3)
4.0
6.5
(2.4)
(12.4)
22.3
(34.6)
Allowance for credit losses
6.2
-
6.2
(19.6)
-
(19.6)
Other-than-temporary impairments:
-
(7.3)
7.3
-
(15.4)
15.4
Gains (losses) from fair value adjustments:
3.3
-
3.3
1.9
-
1.9
96.7
(12.0)
108.7
114.4
102.8
11.6
Total
100.0
(12.0)
112.0
116.3
102.8
13.5
Total net realized capital gains (losses)
$
110.2
$
(12.9)
$
123.1
84.3
109.6
(25.3)
(Some amounts may not reconcile due to rounding.)
Net realized capital gains were $110.2 million and net realized capital losses were $12.9 million for the three
months ended September 30, 2020 and 2019, respectively. As discussed earlier, the COVID-19 pandemic caused
significant volatility in the global financial markets. For the three months ended September 30, 2020, we
recorded $100.0 million of net gains from fair value re -measurements, resulting primarily from increases in
equity security valuations which further rebounded from declines in the first quarter of 2020, $6.2 million from a
decline in net allowances for credit losses and $4.0 million of net realized capital gains from sales of investments.
For the three months ended September 30, 2019, we recorded $12.0 million of net losses from fair value re-
measurements and $7.3 million of other-than-temporary impairments, partially offset by $6.5 million of net
realized capital gains from sales of investments. The fixed maturity and equity sales for the three months ended
45
September 30, 2020 and 2019 related primarily to adjusting the portfolios for overall market changes and
individual credit shifts.
Net realized capital gains were $84.3 million and $109.6 million for the nine months ended September 30, 2020
and 2019, respectively. For the nine months ended September 30, 2020, we recorded $116.3 million of net gains
from fair value re-measurements, partially offset by $19.6 million of net allowances for credit losses and $12.4
million of net realized capital losses from sales of investments . For the nine months ended September 30, 2019,
we recorded $102.8 million of net gains from fair value re-measurements and $22.3 million of net realized
capital gains from sales of investments, partially offset by $15.4 million of other-than-temporary impairments.
The fixed maturity and equity sales for the nine months ended September 30, 2020 and 2019 related primarily to
adjusting the portfolios for overall market changes and individual credit shifts.
Segment Results.
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 discusses the underwriting results for each of our segments for the periods indicated.
46
Reinsurance.
The following table presents the underwriting results and ratios for the Reinsurance segment for the periods
indicated.
Three Months Ended September 30,
Nine Months Ended September 30,
(Dollars in millions)
2020
2019
Variance
% Change
2020
2019
Variance
% Change
Gross written premiums
$
2,087.0
$
1,736.7
$
350.3
20.2
%
$
5,403.1
$
4,678.3
$
724.8
15.5
%
Net written premiums
1,936.9
1,583.7
353.1
22.3
%
4,974.0
4,213.0
761.1
18.1
%
Premiums earned
$
1,669.3
$
1,420.8
$
248.5
17.5
%
$
4,656.7
$
4,072.1
$
584.7
14.4
%
Incurred losses and LAE
1,335.0
1,050.6
284.4
27.1
%
3,361.4
2,605.9
755.5
29.0
%
Commission and brokerage
373.3
371.1
2.2
0.6
%
1,130.9
1,039.1
91.8
8.8
%
Other underwriting expenses
51.3
43.8
7.5
17.1
%
135.2
117.0
18.1
15.5
%
Underwriting gain (loss)
$
(90.4)
$
(44.8)
$
(45.6)
101.9
%
$
29.3
$
310.0
$
(280.8)
-90.6
%
Point Chg
Point Chg
Loss ratio
80.0
%
73.9
%
6.1
72.2
%
64.0
%
8.2
Commission and brokerage ratio
22.3
%
26.1
%
(3.8)
24.3
%
25.5
%
(1.2)
Other underwriting expense ratio
3.1
%
3.1
%
-
2.9
%
2.9
%
-
Combined ratio
105.4
%
103.1
%
2.3
99.4
%
92.4
%
7.0
(NM, Not Meaningful)
(Some amounts may not reconcile due to rounding.)
Premiums. Gross written premiums increased by 20.2% to $2,087.0 million for the three months ended
September 30, 2020 from $1,736.7 million for the three months ended September 30, 2019, primarily due to an
increase in treaty property writings and facultative business. Net written premiums increased by 22.3% to
$1,936.9 million for the three months ended September 30, 2020 compared to $1,583.7 million for the three
months ended September 30, 2019. The difference between the change in gross written premiums compared to
the change in net written premiums is primarily due to varying utilization of reinsurance. Premiums earned
increased by 17.5% to $1,669.3 million for the three months ended September 30, 2020, compared to $1,420.8
million for the three months ended September 30, 2019. The change in premiums earned relative to net written
premiums is primarily the result of timing; premiums are earned ratably over the coverage period whereas
written premiums are recorded at the initiation of the coverage period.
Gross written premiums increased by 15.5% to $5,403.1 million for the nine months ended September 30, 2020
from $4,678.3 million for the nine months ended September 30, 2019, primarily due to an increase in treaty
property writings, casualty business and facultative business. Net written premiums increased by 18.1% to
$4,974.0 million for the nine months ended September 30, 2020 compared to $4,213.0 million for the nine
months ended September 30, 2019. The difference between the change in gross written premiums compared to
the change in net written premiums is primarily due to varying utilization of reinsurance. Premiums earned
increased by 14.4% to $4,656.7 million for the nine months ended September 30, 2020, compared to $4,072.1
million for the nine months ended September 30, 2019. The change in premiums earned relative to net written
premiums is primarily the result of timing; premiums are earned ratably over the coverage period whereas
written premiums are recorded at the initiation of the coverage period.
47
Incurred Losses and LAE
. The following table presents the incurred losses and LAE for the Reinsurance segment
for the periods indicated.
Three Months Ended September 30,
Current
Ratio %/
Prior
Ratio %/
Total
Ratio %/
(Dollars in millions)
Year
Pt Change
Years
Pt Change
Incurred
Pt Change
2020
Attritional
$
1,063.8
63.8
%
$
(1.3)
-0.1
%
$
1,062.5
63.7
%
Catastrophes
272.5
16.3
%
-
-
%
272.5
16.3
%
Total Segment
$
1,336.3
80.1
%
$
(1.3)
-0.1
%
$
1,335.0
80.0
%
2019
Attritional
$
808.0
56.9
%
$
(52.2)
-3.7
%
755.8
53.2
%
Catastrophes
291.5
20.5
%
3.4
0.2
%
294.9
20.7
%
Total Segment
$
1,099.5
77.4
%
$
(48.8)
-3.5
%
$
1,050.6
73.9
%
Variance 2020/2019
Attritional
$
255.8
6.9
pts
$
50.9
3.6
pts
306.7
10.5
pts
Catastrophes
(19.0)
(4.2)
pts
(3.4)
(0.2)
pts
(22.4)
(4.4)
pts
Total Segment
$
236.8
2.7
pts
$
47.5
3.4
pts
$
284.4
6.1
pts
Nine Months Ended September 30,
Current
Ratio %/
Prior
Ratio %/
Total
Ratio %/
(Dollars in millions)
Year
Pt Change
Years
Pt Change
Incurred
Pt Change
2020
Attritional
$
3,067.5
65.9
%
$
(3.1)
-0.1
%
3,064.4
65.8
%
Catastrophes
297.0
6.4
%
-
-
%
297.0
6.4
%
Total Segment
$
3,364.5
72.3
%
$
(3.1)
-0.1
%
$
3,361.4
72.2
%
2019
Attritional
$
2,330.5
57.2
%
$
(74.4)
-1.8
%
2,256.0
55.4
%
Catastrophes
316.5
7.8
%
33.4
0.8
%
349.9
8.6
%
Total Segment
$
2,647.0
65.0
%
$
(41.1)
-1.0
%
$
2,605.9
64.0
%
Variance 2020/2019
Attritional
$
737.0
8.7
pts
$
71.3
1.7
pts
$
808.3
10.4
pts
Catastrophes
(19.5)
(1.4)
pts
(33.4)
(0.8)
pts
(52.9)
(2.2)
pts
Total Segment
$
717.5
7.3
pts
$
37.9
0.9
pts
$
755.5
8.2
pts
(Some amounts may not reconcile due to rounding.)
Incurred losses increased by 27.1% to $1,335.0 million for the three months ended September 30, 2020,
compared to $1,050.6 million for the three months ended September 30, 2019. The increase was primarily due
to an increase of $255.8 million in current year attritional losses, mainly related to $109.9 million of losses from
the COVID -19 pandemic and the impact of the increase in premiums earned, as well at $50.9 million less of
favorable development on prior years attritional losses in 2020 compared to 2019. The increase was partially
offset by a decline of $19.0 million in current year catastrophe losses. The current year catastrophe losses of
$272.5 million for the three months ended September 30, 2020 related primarily to Hurricane Laura ($116.0
million), the Northern California wildfires ($52.0 million), the California Glass wildfire ($30.0 million), the Oregon
wildfires ($21.0 million), Hurricane Isaias ($17.9 million), the Derecho storms ($13.1 million), the Calgary storms
in Canada ($12.5 million) and Hurricane Sally ($10.0 million). The $291.5 million of current year catastrophe
losses for the three months ended September 30, 2019 related to Hurricane Dorian ($160.5 million) and
Typhoon Faxai ($131.0 million).
Incurred losses increased by 29.0% to $3,361.4 million for the nine months ended September 30, 2020,
compared to $2,605.9 million for the nine months ended September 30, 2019. The increase was primarily due to
an increase of $737.0 million in current year attritional losses, mainly related to $351.0 million of losses from the
COVID-19 pandemic and the impact of the increase in premiums earned, as well as $71.3 million less of favorable
development on prior years attritional losses in 2020 compared to 2019. The increase was partially offset by a
decline of $19.5 million in current year catastrophe losses and $33.4 million of less favorable development on
prior year catastrophe losses. The current year catastrophe losses of $297.0 million for the nine months ended
48
September 30, 2020 related primarily to Hurricane Laura ($116.0 million), the Northern California wildfires
($52.0 million), the California Glass wildfire ($30.0 million), the Oregon wildfires ($21.0 million), Hurricane Isaias
($17.9 million), the Derecho storms ($13.1 million), the Calgary storms in Canada ($12.5 million), Hurricane Sally
($10.0 million), the Nashville tornadoes ($9.7 million), the Australia East Coast storm ($6.8 million), the Australia
fires ($5.6 million) and the 2020 U.S. Civil Unrest ($2.4 million). The $316.5 million of current year catastrophe
losses for the nine months ended September 30, 2019 were related to Hurricane Dorian ($160.5 million),
Typhoon Faxai ($131.0 million) and the Townsville monsoon in Australia ($25.0 million).
Segment Expenses. Commission and brokerage expenses increased by 0.6% to $373.3 million for the three
months ended September 30, 2020 compared to $371.1 million for the three months ended September 30,
2019. Commission and brokerage expenses increased by 8.8% to $1,130.9 million for the nine months ended
September 30, 2020 compared to $1,039.1 million for the nine months ended September 30, 2019. The
increases were mainly due to the impact of the increases in premiums earned and changes in the mix of
business.
Segment other underwriting expenses increased to $51.3 million for the three months ended September 30,
2020 from $43.8 million for the three months ended September 30, 2019. Segment other underwriting
expenses increased to $135.2 million for the nine months ended September 30, 2020 from $117.0 million for the
nine months ended September 30, 2019. These increases were mainly due to the impact of the increase in
premiums earned.
Insurance.
The following table presents the underwriting results and ratios for the Insurance segment for the periods
indicated.
Three Months Ended September 30,
Nine Months Ended September 30,
(Dollars in millions)
2020
2019
Variance
% Change
2020
2019
Variance
% Change
Gross written premiums
$
704.6
$
666.6
$
38.0
5.7
%
$
2,328.7
$
2,018.7
$
310.0
15.4
%
Net written premiums
511.8
484.8
27.0
5.6
%
1,693.6
1,491.3
202.3
13.6
%
Premiums earned
$
536.6
$
484.8
$
51.7
10.7
%
$
1,628.3
$
1,383.5
$
244.8
17.7
%
Incurred losses and LAE
401.2
321.3
79.9
24.9
%
1,212.7
909.2
303.5
33.4
%
Commission and brokerage
72.1
72.0
0.1
0.1
%
229.2
214.4
14.8
6.9
%
Other underwriting expenses
87.5
74.3
13.2
17.8
%
250.7
204.9
45.8
22.3
%
Underwriting gain (loss)
$
(24.2)
$
17.2
$
(41.4)
-240.8
%
$
(64.3)
$
55.0
$
(119.3)
-216.9
%
Point Chg
Point Chg
Loss ratio
74.8
%
66.2
%
8.6
74.6
%
65.8
%
8.8
Commission and brokerage ratio
13.4
%
14.8
%
(1.4)
14.0
%
15.5
%
(1.5)
Other underwriting expense ratio
16.3
%
15.4
%
0.9
15.4
%
14.7
%
0.7
Combined ratio
104.5
%
96.4
%
8.1
104.0
%
96.0
%
8.0
(NM not meaningful)
(Some amounts may not reconcile due to rounding.)
Premiums. Gross written premiums increased by 5.7% to $704.6 million for the three months ended September
30, 2020 compared to $666.6 million for the three months ended September 30, 2019. This increase was related
to many lines of business including casualty, specialty lines and business written through Lloyd’s syndicate. Net
written premiums increased by 5.6% to $511.8 million for the three months ended September 30, 2020
compared to $484.8 million for the three months ended September 30, 2019. The change is consistent with the
change in gross written premiums. Premiums earned increased 10.7% to $536.6 million for the three months
ended September 30, 2020 compared to $484.8 million for the three months ended September 30, 2019. The
change in premiums earned relative to net written premiums is the result of timing; premiums are earned
ratably over the coverage period whereas written premiums are recorded at the initiation of the coverage
period.
Gross written premiums increased by 15.4% to $2,328.7 million for the nine months ended September 30, 2020
compared to $2,018.7 million for the nine months ended September 30, 2019. This increase was related to most
lines of business including property, casualty, specialty lines, accident and health and business written through
49
Lloyd’s syndicate . Net written premiums increased by 13.6% to $1,693.6 million for the nine months ended
September 30, 2020 compared to $1,491.3 million for the nine months ended September 30, 2019. The
difference between the change in gross written premiums compared to the change in net written premiums is
primarily due to varying utilization of reinsurance. Premiums earned increased 17.7% to $1,628.3 million for the
nine months ended September 30, 2020 compared to $1,383.5 million for the nine months ended September 30,
2019. The change in premiums earned relative to net written premiums is the result of timing; premiums are
earned ratably over the coverage period whereas written premiums are recorded at the initiation of the
coverage period.
Incurred Losses and LAE. The following table presents the incurred losses and LAE for the Insurance segment for
the periods indicated.
Three Months Ended September 30,
Current
Ratio %/
Prior
Ratio %/
Total
Ratio %/
(Dollars in millions)
Year
Pt Change
Years
Pt Change
Incurred
Pt Change
2020
Attritional
$
363.7
67.8
%
$
-
-
%
$
363.7
67.8
%
Catastrophes
37.5
7.0
%
-
-
%
37.5
7.0
%
Total Segment
$
401.2
74.8
%
$
-
-
%
$
401.2
74.8
%
2019
Attritional
$
320.7
66.1
%
$
-
-
%
$
320.7
66.1
%
Catastrophes
4.0
0.8
%
(3.4)
-0.7
%
0.6
0.1
%
Total Segment
$
324.7
66.9
%
$
(3.4)
-0.7
%
$
321.3
66.2
%
Variance 2020/2019
Attritional
$
43.0
1.7
pts
$
-
-
pts
$
43.0
1.7
pts
Catastrophes
33.5
6.2
pts
3.4
0.7
pts
36.9
6.9
pts
Total Segment
$
76.5
7.9
pts
$
3.4
0.7
pts
$
79.9
8.6
pts
Nine Months Ended September 30,
Current
Ratio %/
Prior
Ratio %/
Total
Ratio %/
(Dollars in millions)
Year
Pt Change
Years
Pt Change
Incurred
Pt Change
2020
Attritional
$
1,150.1
70.7
%
$
4.6
0.3
%
$
1,154.7
71.0
%
Catastrophes
58.0
3.6
%
-
-
%
58.0
3.6
%
Total Segment
$
1,208.1
74.3
%
$
4.6
0.3
%
$
1,212.7
74.6
%
2019
Attritional
$
908.5
65.7
%
$
-
-
%
$
908.6
65.7
%
Catastrophes
4.0
0.3
%
(3.4)
-0.2
%
0.6
0.1
%
Total Segment
$
912.5
66.0
%
$
(3.4)
-0.2
%
$
909.2
65.8
%
Variance 2020/2019
Attritional
$
241.6
5.0
pts
$
4.5
0.3
pts
$
246.1
5.3
pts
Catastrophes
54.0
3.3
pts
3.4
0.2
pts
57.4
3.5
pts
Total Segment
$
295.6
8.3
pts
$
7.9
0.5
pts
$
303.5
8.8
pts
(Some amounts may not reconcile due to rounding.)
Incurred losses and LAE increased by 24.9% to $401.2 million for the three months ended September 30, 2020
compared to $321.3 million for the three months ended September 30, 2019. The increase was mainly due to a
rise of $43.0 million in current year attritional losses, primarily related to $15.0 million of losses from the COVID-
19 pandemic and the impact of the increase in premiums earned, as well as an increase of $33.5 million in
current year catastrophe losses. The current year catastrophe losses of $37.5 million for the three months
ended September 30, 2020 related to Hurricane Sally ($16.0 million), Hurricane Laura ($15.0 million), the Calgary
storms in Canada ($2.5 million), the Derecho storms ($2.0 million) and Hurricane Isaias ($2.0 million). The $4.0
million of current year catastrophe losses for the three months ended September 30, 2019 related to Hurricane
Dorian ($4.0 million).
50
Incurred losses and LAE increased by 33.4% to $1,212.7 million for the nine months ended September 30, 2020
compared to $909.2 million for the nine months ended September 30, 2019. The increase was mainly due to a
rise of $241.6 million in current year attritional losses, primarily related to $84.0 million of losses from the
COVID-19 pandemic and the impact of the increase in premiums earned, as well as an increase of $54.0 million
in current year catastrophe losses. The current year catastrophe losses of $58.0 million for the nine months
ended September 30, 2020 related to Hurricane Sally ($16.0 million), Hurricane Laura ($15.0 million), the 2020
U.S. Civil Unrest ($15.0 million), the Nashville tornadoes ($5.5 million), the Calgary storms in Canada ($2.5
million), the Derecho storms ($2.0 million) and Hurricane Isaias ($2.0 million). The $4.0 million of current year
catastrophe losses for the nine months ended September 30, 2019 related to Hurricane Dorian ($4.0 million).
Segment Expenses. Commission and brokerage increased by 0.1% to $72.1 million for the three months ended
September 30, 2020 compared to $72.0 million for the three months ended September 30, 2019. Commission
and brokerage increased by 6.9% to $229.2 million for the nine months ended September 30, 2020 compared to
$214.4 million for the nine months ended September 30, 2019. The increases were mainly due to the impact of
the increases in premiums earned.
Segment other underwriting expenses increased to $87.5 million for the three months ended September 30,
2020 compared to $74.3 million for the three months ended September 30, 2019. Segment other underwriting
expenses increased to $250.7 million for the nine months ended September 30, 2020 compared to $204.9
million for the nine months ended September 30, 2019. The increases were mainly due to the impact of the
increase in premiums earned and increased expenses related to the continued build out of the insurance
business.
FINANCIAL CONDITION
Cash and Invested Assets. Aggregate invested assets, including cash and short-term investments, were
$23,104.7 million at September 30, 2020, an increase of $2,356.2 million compared to $20,748.5 million at
December 31, 2019. This increase was primarily the result of $2,190.6 million of cash flows from operations,
$392.6 million of pre-tax unrealized appreciation, $89.1 million of unsettled securities, $88.0 million in fair value
re-measurements, $12.5 million in equity adjustments of our limited partnership investments, $11.8 million due
to fluctuations in foreign currencies, partially offset by repurchases of 970,892 million common shares for $200.0
million, $187.1 million paid out in dividends to shareholders, $32.6 million of amortization bond premium and
$19.6 million of allowance for credit losses.
Our principal investment objectives are to ensure funds are available to meet our insurance and reinsurance
obligations and to maximize after-tax investment income while maintaining a high quality diversified investment
portfolio. Considering these objectives, we view our investment portfolio as having two components: 1) the
investments needed to satisfy outstanding liabilities (our core fixed maturities portfolio) and 2) investments
funded by our shareholders’ equity.
For the portion needed to satisfy global outstanding liabilities, we generally invest in taxable and tax-
preferenced fixed income securities with an average credit quality of Aa3. For the U.S. portion of this portfolio,
our mix of taxable and tax -preferenced investments is adjusted periodically, consistent with our current and
projected U.S. operating results, market conditions and our tax position. This global fixed maturity securities
portfolio is externally managed by independent, professional investment managers using portfolio guidelines
approved by internal management.
Over the past several years, we have expanded the allocation of our investments funded by shareholders’ equity
to include: 1) a greater percentage of publicly traded equity securities, 2) emerging market fixed maturities
through mutual fund structures, as well as individual holdings, 3) high yield fixed maturities, 4) bank and private
loan securities and 5) private equity limited partnership investments. The objective of this portfolio
diversification is to enhance the risk-adjusted total return of the investment portfolio by allocating a prudent
portion of the portfolio to higher return asset classes, which are also less subject to changes in value with
51
movements in interest rates. We limit our allocation to these asset classes because of 1) the potential for
volatility in their values and 2) the impact of these investments on regulatory and rating agency capital adequacy
models. We use investment managers experienced in these markets and adjust our allocation to these
investments based upon market conditions. At September 30, 2020, the market value of investments in these
investment market sectors, carried at both market and fair value, approximated 58.3% of shareholders’ equity.
The Company’s limited partnership investments are comprised of limited partnerships that invest in private
equities. Generally, the limited partnerships are reported on a quarter lag. We receive annual audited financial
statements for all of the limited partnerships which are prepared using fair value accounting in accordance with
FASB guidance. For the quarterly reports, the Company’s staff performs reviews of the financial reports for any
unusual changes in carrying value. If the Company becomes aware of a significant decline in value during the lag
reporting period, the loss will be recorded in the period in which the Company identifies the decline.
The tables below summarize the composition and characteristics of our investment portfolio as of the dates
indicated.
(Dollars in millions)
At September 30, 2020
At December 31, 2019
Fixed maturities, market value
$
17,856.4
77.3
%
$
16,824.9
81.1
%
Fixed maturities, fair value
3.7
0.0
%
5.8
0.0
%
Equity securities, fair value
1,173.2
5.1
%
931.5
4.5
%
Short-term investments
1,220.8
5.2
%
414.7
2.0
%
Other invested assets
1,911.8
8.3
%
1,763.5
8.5
%
Cash
938.9
4.1
%
808.0
3.9
%
Total investmen ts and cash
$
23,104.7
100.0
%
$
20,748.5
100.0
%
(Some amounts may not reconcile due to rounding.)
At
At
September 30, 2020
December 31, 2019
Fixed income portfolio duration (years)
3.5
3.5
Fixed income composite credit quality
Aa3
A1
Imbedded end of period yield, pre-tax
3.1
%
3.4
%
Imbedded end of period yield, after-tax
2.7
%
3.0
%
The following table provides a comparison of our total return by asset class relative to broadly accepted industry
benchmarks for the periods indicated:
Nine Months Ended
Twelve Months Ended
September 30, 2020
December 31, 2019
Fixed income portfolio total return
4.4
%
6.2
%
Barclay's Capital - U.S. aggregate index
6.8
%
8.7
%
Common equity portfolio total return
11.0
%
23.8
%
S&P 500 index
5.6
%
31.5
%
Other invested asset portfolio total return
1.5
%
9.9
%
The pre-tax equivalent total return for the bond portfolio was approximately 4.5% and 6.3%, respectively, for the
nine months ended September 30, 2020 and the twelve months ended December 31, 2019. The pre-tax
equivalent return adjusts the yield on tax-exempt bonds to the fully taxable equivalent.
Our fixed income and equity portfolios have different compositions than the benchmark indexes. Our fixed
income portfolios have a shorter duration because we align our investment portfolio with our liabilities. We also
hold foreign securities to match our foreign liabilities while the index is comprised of only U.S. securities. Our
52
equity portfolios reflect an emphasis on dividend yield and growth equities, while the index is comprised of the
largest 500 equities by market capitalization.
Reinsurance Receivables.
Reinsurance receivables for both paid and recoverable on unpaid losses totaled $1,923.0 million and $1,763.5
million at September 30, 2020 and December 31, 2019, respectively. At September 30, 2020, $716.2 million, or
37.2%, was receivable from Mt. Logan Re collateralized segregated accounts and $153.1 million, or 8.0%, was
receivable from Munich Reinsurance America, Inc. (“Munich Re”). No other retrocessionaire accounted for more
than 5% of our receivables.
Loss and LAE Reserves. Gross loss and LAE reserves totaled $15,233.1 million and $13,611.3 million at
September 30, 2020 and December 31, 2019, respectively.
The following tables summarize gross outstanding loss and LAE reserves by segment, classified by case reserves
and IBNR reserves, for the periods indicated.
At September 30, 2020
Case
IBNR
Total
% of
(Dollars in millions)
Reserves
Reserves
Reserves
Total
Reinsurance
$
4,847.2
$
5,987.0
$
10,834.1
71.1
%
Insurance
1,249.4
2,924.1
4,173.5
27.4
%
Total excluding A&E
6,096.5
8,911.1
15,007.6
98.5
%
A&E
181.5
43.9
225.5
1.5
%
Total including A&E
$
6,278.1
$
8,955.0
$
15,233.1
100.0
%
(Some amounts may not reconcile due to rounding.)
At December 31, 2019
Case
IBNR
Total
% of
(Dollars in millions)
Reserves
Reserves
Reserves
Total
Reinsurance
$
5,050.5
$
4,839.4
$
9,889.9
72.7
%
Insurance
1,090.4
2,373.2
3,463.5
25.4
%
Total excluding A&E
6,140.9
7,212.5
13,353.4
98.1
%
A&E
203.4
54.5
257.9
1.9
%
Total including A&E
$
6,344.3
$
7,267.0
$
13,611.3
100.0
%
(Some amounts may not reconcile due to rounding.)
Changes in premiums earned and business mix, reserve re-estimations, catastrophe losses and changes in
catastrophe loss reserves and claim settlement activity all impact loss and LAE reserves by segment and in total.
Our loss and LAE reserves represent management’s best estimate of our ultimate liability for unpaid claims. We
continuously re-evaluate our reserves, including re-estimates of prior period reserves, taking into consideration
all available information and, in particular, newly reported loss and claim experience. Changes in reserves
resulting from such re -evaluations are reflected in incurred losses in the period when the re-evaluation is made.
Our analytical methods and processes operate at multiple levels including individual contracts, groupings of like
contracts, classes and lines of business, internal business units, segments, legal entities, and in the aggregate. In
order to set appropriate reserves, we make qualitative and quantitative analyses and judgments at these various
levels. Additionally, the attribution of reserves, changes in reserves and incurred losses among accident years
requires qualitative and quantitative adjustments and allocations at these various levels. We utilize actuarial
science, business expertise and management judgment in a manner intended to ensure the accuracy and
consistency of our reserving practices. Nevertheless, our reserves are estimates, which are subject to variation,
which may be significant.
53
There can be no assurance that reserves for, and losses from, claim obligations will not increase in the future,
possibly by a material amount. However, we believe that our existing reserves and reserving methodologies
lessen the probability that any such increase would have a material adverse effect on our financial condition,
results of operations or cash flows.
Asbestos and Environmental Exposures. A&E exposures represent a separate exposure group for monitoring and
evaluating reserve adequacy. The following table summarizes the outstanding loss reserves with respect to A&E
reserves on both a gross and net of retrocessions basis for the periods indicated.
At
At
September 30,
December 31,
(Dollars in millions)
2020
2019
Gross reserves
$
227.3
$
257.9
Reinsurance receivable
(20.0)
(29.2)
Net reserves
$
207.3
$
228.7
(Some amounts may not reconcile due to rounding.)
With respect to asbestos only, at September 30, 2020, we had net asbestos loss reserves of $203.1 million, or
97.9%, of total net A&E reserves, all of which was for assumed business.
In 2015, we sold Mt. McKinley to Clearwater Insurance Company. Concurrently with the closing, we entered into
a retrocession treaty with an affiliate of Clearwater. Per the retrocession treaty, we retroceded 100% of the
liabilities associated with certain Mt. McKinley policies, which had been reinsured by Bermuda Re. As
consideration for entering into the retrocession treaty, Bermuda Re transferred cash of $140.3 million, an
amount equal to the net loss reserves as of the closing date. Of the $140.3 million of net loss reserves
retroceded, $100.5 million were related to A&E business. The maximum liability retroceded under the
retrocession treaty will be $440.3 million, equal to the retrocession payment plus $300.0 million. We will retain
liability for any amounts exceeding the maximum liability retroceded under the retrocession treaty.
On December 20, 2019, the retrocession treaty was amended and included a partial commutation. As a result of
this amendment and partial commutation, gross A&E reserves and correspondingly reinsurance receivable were
reduced by $43.4 million. In addition, the maximum liability permitted to be retroceded increased to $450.3
million.
Ultimate loss projections for A&E liabilities cannot be accomplished using standard actuarial techniques. We
believe that our A&E reserves represent management’s best estimate of the ultimate liability; however, there
can be no assurance that ultimate loss payments will not exceed such reserves, perhaps by a significant amount.
Industry analysts use the “survival ratio” to compare the A&E reserves among companies with such liabilities.
The survival ratio is typically calculated by dividing a company’s current net reserves by the three year average of
annual paid losses. Hence, the survival ratio equals the number of years that it would take to exhaust the
current reserves if future loss payments were to continue at historical levels. Using this measurement, our net
three year asbestos survival ratio was 5.3 years at September 30, 2020. These metrics can be skewed by
individual large settlements occurring in the prior three years and therefore, may not be indicative of the timing
of future payments.
Shareholders’ Equity. Our shareholders’ equity increased to $9,591.3 million as of September 30, 2020 from
$9,132.9 million as of December 31, 2019. This increase was the result of $450.5 million of net income, $348.5
million of unrealized appreciation on investments net of tax, $30.4 million of net foreign currency translation
adjustments, $15.7 million of share-based compensation transactions and $4.5 million of net benefit plan
obligation adjustments, partially offset by the repurchase of 970,892 common shares for $200.0 million, $187.1
million of shareholder dividends, and $4.2 million of cumulative adjustment from the adoption of ASU 2016-13.
54
LIQUIDITY AND CAPITAL RESOURCES
Capital. Shareholders’ equity at September 30, 2020 and December 31, 2019 was $9,591.3 million and $9,132.9
million, respectively. Management’s objective in managing capital is to ensure its overall capital level, as well as
the capital levels of its operating subsidiaries, exceed the amounts required by regulators, the amount needed to
support our current financial strength ratings from rating agencies and our own economic capital models. The
Company’s capital has historically exceeded these benchmark levels.
Our two main operating companies Bermuda Re and Everest Re are regulated by the Bermuda Monetary
Authority (“BMA”) and the State of Delaware, Department of Insurance, respectively. Both regulatory bodies
have their own capital adequacy models based on statutory capital as opposed to GAAP basis equity. Failure to
meet the required statutory capital levels could result in various regulatory restrictions, including business
activity and the payment of dividends to their parent companies.
The regulatory targeted capital and the actual statutory capital for Bermuda Re and Everest Re were as follows:
Bermuda Re
(1)
Everest Re
(2)
At December 31,
At December 31,
(Dollars in millions)
2019
2018
2019
2018
Regulatory targeted capital
$
2,061.1
$
1,753.2
$
2,001.2
$
2,173.0
Actual capital
$
3,197.4
$
3,068.5
$
3,739.1
$
3,650.6
(1)
Regulatory targeted capital represents the target capital level from the applicable year's BSCR calculation.
(2)
Regulatory targeted capital represents 200% of the RBC authorized control level calculation for the applicable year.
Our financial strength ratings as determined by A.M. Best, Standard & Poor’s and Moody’s are important as they
provide our customers and investors with an independent assessment of our financial strength using a rating
scale that provides for relative comparisons. We continue to possess significant financial flexibility and access to
debt and equity markets as a result of our financial strength, as evidenced by the financial strength ratings as
assigned by independent rating agencies.
We maintain our own economic capital models to monitor and project our overall capital, as well as, the capital
at our operating subsidiaries. A key input to the economic models is projected income and this input is
continually compared to actual results, which may require a change in the capital strategy.
As part of our capital strategy, we model our potential exposure to catastrophe losses arising from a single
event. Projected catastrophe losses are generally summarized in term of probable maximum loss (“PML”). A full
discussion on PMLs is included in our December 31, 2019 Form 10-K filing in PART 1, Item 1. Business, Risk
Management of Underwriting and Reinsurance Arrangements. We focus on the projected net economic loss
from a catastrophe in a given zone as compared to our shareholders’ equity. Economic loss is the PML exposure,
net of third party reinsurance, reduced by estimated reinstatement premiums to renew coverage and estimated
income taxes. In our December 31, 2019 Form 10-K, we reported that our projected net economic loss from our
largest projected 100-year event represented approximately 6% of our December 31, 2019 shareholders’
equity. During the first three quarters of 2020, in response to current favorable market conditions, we increased
our net exposure to catastrophes. As a result, our projected net economic loss from our largest 100-year event
in a given zone represents approximately 7% of our June 30, 2020 shareholders’ equity.
The table below reflects the Company’s PML exposure, net of third party reinsurance at various return periods
for its top three zones/perils (as ranked by largest 1 in 100 year economic loss) based on projection data as of
July 1, 2020.
55
Return Periods (in years)
1 in 20
1 in 50
1 in 100
1 in 250
1 in 500
1 in 1,000
Exceeding Probability
5.0%
2.0%
1.0%
0.4%
0.2%
0.1%
(Dollars in millions)
Zone/ Peril
California, Earthquake
$
164
$
582
$
914
$
1,135
$
1,342
$
1,887
Southeast U.S., Wind
530
726
891
1,140
1,418
2,170
Europe Wind
147
378
632
993
1,106
1,245
The projected economic losses, defined as PML exposures, net of third party reinsurance, reinstatement
premiums and estimated income taxes, for the top three zones/perils scheduled are as follows:
Return Periods (in years)
1 in 20
1 in 50
1 in 100
1 in 250
1 in 500
1 in 1,000
Exceeding Probability
5.0%
2.0%
1.0%
0.4%
0.2%
0.1%
(Dollars in millions)
Zone/ Peril
California, Earthquake
$
130
$
443
$
689
$
853
$
1,034
$
1,648
Southeast U.S., Wind
358
495
635
840
1,068
1,705
Europe Wind
122
310
509
815
909
1,022
During the first three quarters of 2020, we repurchased 970,892 shares for $200.0 million in the open market
and paid $187.1 million in dividends to adjust our capital position and enhance long term expected returns to
our shareholders. We also repurchased $13.2 million of our long-term subordinated notes in the first three
quarters of 2020. We recognized a realized gain of $2.5 million on the repurchase.
We may continue, from time to time, to seek to retire portions of our outstanding debt securities through cash
repurchases, in open-market purchases, privately negotiated transactions or otherwise. Such repurchases, if any,
will be subject to and depend on prevailing market conditions, our liquidity requirements, contractual
restrictions and other factors. The amounts involved in any such transactions, individually or in the aggregate,
may be material.
On October 7, 2020, we issued an additional $1,000.0 million of 30 year senior notes at a rate of 3.5%. These
senior notes will mature on October 15, 2050 and will pay interest semi-annually.
In 2019, we repurchased 114,633 shares for $24.6 million in the open market and paid $234.3 million in
dividends. We may at times enter into a Rule 10b5-1 repurchase plan agreement to facilitate the repurchase of
shares. On May 22, 2020, our existing Board authorization to purchase up to 30 million of our shares was
amended to authorize the purchase of up to 32 million shares. As of September 30, 2020, we had repurchased
29.6 million shares under this authorization.
Liquidity. Our liquidity requirements are generally met from positive cash flow from operations. Positive cash
flow results from reinsurance and insurance premiums being collected prior to disbursements for claims, which
disbursements generally take place over an extended period after the collection of premiums, sometimes a
period of many years. Collected premiums are generally invested, prior to their use in such disbursements, and
investment income provides additional funding for loss payments. Our net cash flows from operating activities
were $2,190.6 million and $1,486.9 million for the nine months ended September 30, 2020 and 2019,
respectively. Additionally, these cash flows reflected net catastrophe loss payments of $505.9 million and
$678.0 million for the nine months ended September 30, 2020 and 2019, respectively and net tax recoveries of
$169.1 million and $80.5 million for the nine months ended September 30, 2020 and 2019, respectively.
If disbursements for claims and benefits, policy acquisition costs and other operating expenses were to exceed
premium inflows, cash flow from reinsurance and insurance operations would be negative. The effect on cash
flow from insurance operations would be partially offset by cash flow from investment income. Additionally,
56
cash inflows from investment maturities and dispositions, both short-term investments and longer term
maturities are available to supplement other operating cash flows.
As the timing of payments for claims and benefits cannot be predicted with certainty, we maintain portfolios of
long term invested assets with varying maturities, along with short-term investments that provide additional
liquidity for payment of claims. At September 30, 2020 and December 31, 2019, we held cash and short-term
investments of $2,159.6 million and $1,222.7 million, respectively. Our short-term investments are generally
readily marketable and can be converted to cash. In addition to these cash and short-term investments, at
September 30, 2020, we had $1,483.6 million of available for sale fixed maturity securities maturing within one
year or less, $6,624.8 million maturing within one to five years and $5,319.3 million maturing after five years.
Our $1,173.2 million of equity securities are comprised primarily of publicly traded securities that can be easily
liquidated. We believe that these fixed maturity and equity securities, in conjunction with the short-term
investments and positive cash flow from operations, provide ample sources of liquidity for the expected
payment of losses in the near future. We do not anticipate selling a significant amount of securities or using
available credit facilities to pay losses and LAE but have the ability to do so. Sales of securities might result in
realized capital gains or losses. At September 30, 2020 we had $744.6 million of net pre-tax unrealized
appreciation related to fixed maturity securities, comprised of $891.2 million of pre -tax unrealized appreciation
and $146.6 million of pre-tax unrealized depreciation.
Management generally expects annual positive cash flow from operations. Cash flow from operations may
decline and could become negative; however, as indicated above, the Company has ample liquidity to settle its
claims.
In addition to our cash flows from operations and liquid investments, we also have multiple credit facilities that
provide up to $200.0 million of unsecured revolving credit for liquidity and letters of credit but more importantly
provide for up to $600.0 million and £52.2 million of collateralized standby letters of credit to support business
written by our Bermuda operating subsidiaries.
Effective May 26, 2016, Group, Bermuda Re and Everest International entered into a five year, $800.0 million
senior credit facility with a syndicate of lenders, which amended and restated in its entirety the June 22, 2012,
four year, $800.0 million senior credit facility. Both the May 26, 2016 and June 22, 2012 senior 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 $200.0 million of unsecured revolving credit for liquidity and general corporate 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 $600.0 million for the 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 to 1 and to
maintain a minimum net worth. Minimum net worth is an amount equal to the sum of $5,371.0 million plus 25%
of consolidated net income for each of Group’s fiscal quarters, for which statements are available 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 prefe rred shares, which at September
30, 2020, was $6,372.7 million. As of September 30, 2020, the Company was in compliance with all Group Credit
Facility covenants.
At September 30, 2020 and December 31, 2019, the Company had no outstanding short -term borrowings from
the Group Credit Facility revolving credit line. At September 30, 2020, the Group Credit Facility had $99.1 million
outstanding letters of credit under tranche one and $586.2 million outstanding letters of credit under tranche
57
two. At December 31, 2019, the Group Credit Facility had $33.7 million outstanding letters of credit under
tranche one and $589.7 million outstanding letters of credit under tranche two.
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
£52.2 million for the issuance of standby letters of credit on a collateralized basis. The Company pays a
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 to 1 and to maintain a minimum net worth. Minimum net worth is an amount equal to the sum of $5,532.7
million (70% of consolidated net worth as of December 31, 2018), plus 25% of consolidated net 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 $5,910.4
million. As of September 30, 2020, the Company was in compliance with all Everest International Credit Facility
requirements.
At September 30, 2020 and December 31, 2019, Everest International Credit Facility had £52.2 million and £47.0
million, respectively, of outstanding lette rs of credit.
Costs incurred in connection with the Group Credit Facility and Everest International Credit Facility were $0.1
million for the three months ended September 30, 2020 and 2019, respectively . Costs incurred in connection
with the Group Cred it Facility and Everest International Credit Facility were $0.6 million and $0.3 million for the
nine months ended September 30, 2020 and 2019, respectively.
Effective August 15, 2019, Everest Re became a member of the Federal Home Loan Banks (“FHLB”) organization,
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 $14,667.1 million which provides borrowing capacity of up to
approximately $1,466.7 million. On August 31, 2020, Everest Re borrowed $90.0 million under its FHLB available
capacity. The $90.0 million collateralized borrowing has interest payable at a rate of 0.35% and will mature on
November 30, 2020.
Market Sensitive Instruments.
The SEC’s Financial Reporting Release #48 requires registrants to clarify and expand upon the existing financial
statement disclosure requirements for derivative financial instruments, derivative commodity instruments and
other financial instruments (collectively, “market sensitive instruments”). We do not generally enter into market
sensitive instruments for trading purposes.
Our current investment strategy seeks to maximize after -tax income through a high quality, diversified, taxable
and tax -preferenced fixed maturity portfolio, while maintaining an adequate level of liquidity. Our mix of
taxable and tax-preferenced investments is adjusted periodically, consistent with our current and projected
operating results, market conditions and our tax position. The fixed maturity securities in the investment
portfolio are comprised of non-trading available for sale securities. Additionally, we have invested in equity
securities.
The overall investment strategy considers the scope of present and anticipated Company operations. In
particular, estimates of the financial impact resulting from non-investment asset and liability transactions,
together with our capital structure and other factors, are used to develop a net liability analysis. This analysis
includes estimated payout characteristics for which our investments provide liquidity. This analysis is considered
in the development of specific investment strategies for asset allocation, duration and credit quality. The change
in overall market sensitive risk exposure principally reflects the asset changes that took place during the period.
58
Interest Rate Risk. Our $23.1 billion investment portfolio, at September 30, 2020, is principally comprised of
fixed maturity securities, which are generally subject to interest rate risk and some foreign currency exchange
rate risk, and some equity securities, which are subject to price fluctuations and some foreign exchange rate risk.
The overall economic impact of the foreign exchange risks on the investment portfolio is partially mitigated by
changes in the dollar value of foreign currency denominated liabilities and their associated income statement
impact.
Interest rate risk is the potential change in value of the fixed maturity securities portfolio, including short-term
investments, from a change in market interest rates. In a declining interest rate environment, it includes
prepayment risk on the $3,090.5 million of mortgage-backed securities in the $17,860.1 million fixed maturity
portfolio. Prepayment risk results from potential accelerated principal payments that shorten the average life
and thus the expected yield of the security.
The table below displays the potential impact of market value fluctuations and after -tax unrealized appreciation
on our fixed maturity portfolio (including $1,220.8 million of short-term investments) for the period indicated
based on upward and downward parallel and immediate 100 and 200 basis point shifts in interest rates. For
legal entities with a U.S. dollar functional currency, this modeling was performed on each security individually.
To generate appropriate price estimates on mortgage-backed securities, changes in prepayment expectations
under different interest rate environments were taken into account. For legal entities with a non-U.S. dollar
functional currency, the effective duration of the involved portfolio of securities was used as a proxy for the
market value change under the various interest rate change scenarios.
Impact of Interest Rate Shift in Basis Points
At September 30, 2020
-200
-100
0
100
200
(Dollars in millions)
Total Market/Fair Value
$
20,414.9
$
19,747.9
$
19,080.9
$
18,413.9
17,746.9
Market/Fair Value Change from Base (%)
7.0
%
3.5
%
0.0
%
(3.5)
%
(7.0)
%
Change in Unrealized Appreciation
After-tax from Base ($)
$
1,177.3
$
588.6
$
-
$
(588.6)
$
(1,177.3)
We had $15,233.1 million and $13,611.3 million of gross reserves for losses and LAE as of September 30, 2020
and December 31, 2019, respectively. These amounts are recorded at their nominal value, as opposed to
present value, which would reflect a discount adjustment to reflect the time value of money. Since losses are
paid out over a period of time, the present value of the reserves is less than the nominal value. As interest rates
rise, the present value of the reserves decreases and, conversely, as interest rates decline, the present value
increases. These movements are the opposite of the interest rate impacts on the fair value of investments.
While the difference between present value and nominal value is not reflected in our financial statements, our
financial results will include investment income over time from the investment portfolio until the claims are
paid. Our loss and loss reserve obligations have an expected duration of approximately 3.1 years, which is
reasonably consistent with our fixed income portfolio. If we were to discount our loss and LAE reserves, net of
ceded reserves, the discount would be approximately $1.4 billion resulting in a discounted reserve balance of
approximately $12.0 billion, representing approximately 63.2% of the value of the fixed maturity investment
portfolio funds.
Equity Risk. Equity risk is the potential change in fair and/or market value of the common stock, preferred stock
and mutual fund portfolios arising from changing prices. Our equity investments consist of a diversified portfolio
of individual securities and mutual funds, which invest principally in high quality common and preferred stocks
that are traded on the major exchanges, and mutual fund investments in emerging market debt. The primary
objective of the equity portfolio is to obtain greater total return relative to our core bonds over time through
market appreciation and income.
59
The table below displays the impact on fair/market value and after-tax change in fair/market value of a 10% and
20% change in equity prices up and down for the period indicated.
Impact of Percentage Change in Equity Fair/Ma rket Values
At September 30, 2020
(Dollars in millions)
-20%
-10%
0%
10%
20%
Fair/Market Value of the Equity Portfolio
$
938.5
$
1,055.8
$
1,173.2
$
1,290.5
$
1,407.8
After-tax Change in Fair/Market Value
$
(191.3)
$
(95.7)
$
-
$
95.7
$
191.3
Foreign Currency Risk. Foreign currency risk is the potential change in value, income and cash flow arising from
adverse changes in foreign currency exchange rates. Each of our non-U.S./Bermuda (“foreign”) operations
maintains capital in the currency of the country of its geographic location consistent with local regulatory
guidelines. Each foreign operation may conduct business in its local currency, as well as the currency of other
countries in which it operates. The primary foreign currency exposures for these foreign operations are the
Canadian Dollar, the Singapore Dollar, the British Pound Sterling and the Euro. We mitigate foreign exchange
exposure by generally matching the currency and duration of our assets to our corresponding operating
liabilities. In accordance with FASB guidance, the impact on the market value of available for sale fixed
maturities due to changes in foreign currency exchange rates, in relation to functional currency, is reflected as
part of other comprehensive income. Conversely, the impact of changes in foreign currency exchange rates, in
relation to functional currency, on other assets and liabilities is reflected through net income as a component of
other income (expense). In addition, we translate the assets, liabilities and income of non-U.S. dollar functional
currency legal entities to the U.S. dollar. This translation amount is reported as a component of other
comprehensive income.
In January 2020, the United Kingdom exited the European Union (commonly referred to as "Brexit"). The
Company has a Lloyd’s of London Syndicate and Bermuda Re has a branch operation in the United Kingdom. The
nature and extent of the long term impact of Brexit on regulation, interest rates, currency exchange rates and
financial markets is still uncertain and may adversely affect our operations.
Safe Harbor Disclosure.
This report contains forward -looking statements within the meaning of the U.S. federal securities laws. We
intend these forward-looking statements to be covered by the safe harbor provisions for forward-looking
statements in the federal securities laws. In some cases, these statements can be identified by the use of
forward-looking words such as “may”, “will”, “should”, “could”, “anticipate”, “estimate”, “expect”, “plan”,
“believe”, “predict”, “potential” and “intend”. Forward-looking statements contained in this report include
information regarding our reserves for losses and LAE, the CARES Act, the impact of the Tax Cut and Jobs Act, the
adequacy of capital in relation to regulatory required capital, the adequacy of our provision for uncollectible
balances, estimates of our catastrophe exposure, the effects of catastrophic and pandemic events on our
financial statements, the ability of Everest Re, Holdings, Holdings Ireland, Dublin Holdings, Bermuda Re and
Everest International to pay dividends and the settlement costs of our specialized equity index put option
contracts. Forward-looking statements only reflect our expectations and are not guarantees of performance.
These statements involve risks, uncertainties and assumptions. Actual events or results may differ materially
from our expectations. Important factors that could cause our actual events or results to be materially different
from our expectations include those discussed under the caption ITEM 1A, “Risk Factors” in the Company’s most
recent 10-K filing. We undertake no obligation to update or revise publicly any forward-looking statements,
whether as a result of new information, future events or otherwise.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market Risk Instruments.
2.
60
ITEM 4. CONTROLS AND PROCEDURES
As of the end of the period covered by this report, our management carried out an evaluation, with the
participation of the Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure
controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the “Exchange
Act”)). Based on their evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our
disclosure controls and procedures are effective to ensure that information required to be disclosed by us in the
reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within
the time periods specified in Securities and Exchange Commission’s rules and forms. Our management, with the
participation of the Chief Executive Officer and Chief Financial Officer, also conducted an evaluation of our
internal control over financial reporting to determine whether any changes occurred during the quarter covered
by this report that have materially affected, or are reasonably likely to materially affect, our internal control over
financial reporting. Based on that evaluation, there has been no such change during the quarter covered by this
report.
PART II
ITEM 1. LEGAL PROCEEDINGS
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.
ITEM 1A. RISK FACTORS
Other than as set forth below, there have been no material changes from the risk factors previously disclosed in
the Company’s annual report on Form 10-K for the fiscal year ended December 31, 2019.
The continuing COVID-19 pandemic has adversely affected, and may materially and adversely affect, our
results of operations, financial position and liquidity in the future.
The ongoing COVID -19 pandemic, including the related impact on the U.S. and global economies, has adversely
affected our results of operations. We expect the pandemic and its impact on our business to continue and
potentially even worsen, but we cannot predict the magnitude or duration of its continued impact, particularly
given the great uncertainties associated with COVID-19, including regarding the reopening of the U.S. and global
economies and the recovery from its economic and other effects. The full impact of COVID-19 on our results of
operations, financial position and liquidity is not yet known, and likely will not be known for some time, but
includes the following:
Claim Losses Related to COVID-19 May Exceed Reserves : We have established reserves for COVID -19-related
losses. Our reserves represent management’s best estimate of what the settlement and claims administration
will cost for claims that have occurred, whether reported or unreported. Given the great uncertainties
61
associated with COVID -19 and its impact and the limited information upon which our current assumptions and
assessments have been made, our preliminary reserves and the underlying estimated level of claim losses and
costs arising from COVID-19 may materially change.
Adverse Legislative and Regulatory Action:
Legislative and regulatory initiatives taken or which may be taken in
response to COVID -19 may adversely affect us. For example, our business may be subject to, certain initiatives,
including, but not limited to: legislative and regulatory action that seeks to retroactively mandate coverage for
losses which our insurance policies would not otherwise cover and which were not priced to cover; actions
prohibiting us from cancelling insurance policies in accordance with our policy terms or non-renewing policies at
their natural expiration; and/or orders to provide premium refunds, grant extended grace periods for premium
payments, and provide extended time to pay past due premiums. Any such action would likely increase both our
underwriting losses and our expenses and any legal challenges to any such action could take years to resolve.
Reduction in Premiums: The demand for insurance is significantly influenced by general economic conditions.
Consequently, reduced economic activity relating to the COVID-19 pandemic is likely to decrease demand for our
insurance products and services and negatively impact our premium volumes (and, in certain cases, may result in
return of premiums due to a decrease in exposures). This may continue for an indefinite period, with the
magnitude of the impact impossible to predict.
Investments: Further disruptions in global financial markets due to the continuing impact of COVID-19 could
cause us to incur additional unrealized and/or realized investment losses, including credit impairments in our
fixed maturity portfolio. In addition, the economic uncertainty resulting from COVID-19 may result in a decline
in interest rates, which may negatively impact our future net investment income.
Credit Risk: As credit risk is generally a function of the economy, we face greater credit risk from our
policyholders, independent agents and brokers in connection with the payment and remittance of premiums as
a result of the economic conditions caused by COVID-19. Similarly, our credit risk related to the reimbursement
of deductibles from policyholders and in connection with reinsurance recoverables has increased.
Operational Disruptions and Costs: Our operations could be disrupted if key members of our senior
management or a significant percentage of our workforce or the workforce of our agents, brokers, suppliers or
other third party service providers are unable to continue to work because of illness, government directives or
otherwise. In addition, our agents, brokers, suppliers and other third party service providers, which we rely on
for key aspects of our operations, are subject to risks and uncertainties related to the COVID-19 pandemic, which
may interfere with their ability to fulfill their respective commitments and responsibilities to us in a timely
manner and in accordance with the agreed-upon terms. In response to the COVID-19 pandemic, we have
implemented remote working policies which have resulted in disruptions to our business routines, heightened
risk to cybersecurity attacks and data security incidents and a greater dependency on internet and
telecommunication access and capabilities.
62
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Issuer Purchases of Equity Securities.
Issuer Purchases of Equity Securities
(a)
(b)
(c)
(d)
Maximum Number (or
Total Number of
Approximate Dollar
Shares (or Units)
Value) of Shares (or
Purchased as Part
Units) that May Yet
Total Number of
of Publicly
Be Purchased Under
Shares (or Units)
Average Price Paid
Announced Plans or
the Plans or
Period
Purchased
per Share (or Unit)
Programs
Programs (1)
July 1 - 31, 2020
-
$ -
-
357,803
August 1 - 31, 2020
-
$-
-
357,803
September 1 - 30, 2020
5,435
$ 205.4490
-
357,803
Total
5,435
$-
-
357,803
(1) On May 22, 2020, the Company’s executive committee of the Board of Directors approved an amendment to the share repurchase program
authorizing the Company and/or its subsidiary Holdings, to purchase up to a current aggregate of 32.0 million of the Company’s shares (recognizing that the
number of shares authorized for repurchase has been reduced by those shares that have already been purchased) in open market transactions, privately
negotiated transactions or both. Currently, the Company and/or its subsidiary Holdings have repurchased 29.6 million of the Company’s shares.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. OTHER INFORMATION
None.
63
ITEM 6. EXHIBITS
Exhibit Index
Exhibit No.
Description
64
Everest Re Group, Ltd.
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report
to be signed on its behalf by the undersigned thereunto duly authorized.
Everest Re Group, Ltd.
(Registrant)
/S/ MARK KOCIANCIC
Mark Kociancic
Executive Vice President and
(Duly Authorized Officer and Principal Financial Officer)
Dated: November 9, 2020