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EVEREST GROUP, LTD. - Quarter Report: 2020 September (Form 10-Q)

re-20200930
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
10-Q
 
_X_
 
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 
For the quarterly period ended
September 30, 2020
 
___
 
Transition Report Pursuant to
 
Section 13 or 15(d) of the Securities Exchange Act of 1934
 
 
Commission file number
1-15731
 
 
EVEREST RE GROUP, LTD.
 
(Exact name of registrant as specified in its charter)
Bermuda
98-0365432
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
Seon Place – 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
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
1
EVEREST RE GROUP,
 
LTD.
CONSOLIDATED BALANCE SHEETS
 
 
September 30,
 
December 31,
 
(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
 
shares authorized;
 
no
 
shares issued and outstanding
-
-
Common shares, par value: $
0.01
;
200,000
 
shares authorized; (2020)
69,603
and (2019)
69,464
 
outstanding before treasury shares
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
 
at 2020 and $
30,996
 
at 2019
411,598
28,152
Treasury shares, at cost;
29,636
 
shares (2020) and
28,665
 
shares (2019)
(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
 
per share 2020 and
 
$
1.40
 
per share 2019)
(63,277)
(57,137)
Balance, March 31
10,255,692
9,828,847
Net income (loss)
 
190,880
332,868
Dividends declared ($
1.55
 
per share 2020 and
 
$
1.40
 
per share 2019)
(61,927)
(56,999)
Balance, June 30
10,384,645
10,104,716
Net income (loss)
 
243,057
104,398
Dividends declared ($
1.55
 
per share 2020 and
 
$
1.40
 
per share 2019)
(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
 
thousand in retained
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
 
thousand as part
 
of
other assets
and a lease liability of
 
$
77,270
 
thousand as part of
other liabilities
 
in the consolidated balance
 
sheet at the time
of adoption,
 
as well
 
as de-recognizing
 
the liability
 
for deferred
 
rent that
 
was required
 
under the
 
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:
 
Due in one year or less
$
1,475,335
$
1,483,621
$
1,456,960
$
1,457,919
 
Due after one year through five years
6,408,491
6,624,753
6,757,107
6,869,359
 
Due after five years through ten years
3,878,019
4,186,765
3,471,370
3,609,816
 
Due after ten years
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
 
thousand and
 
$
146,577
 
thousand, respectively.
 
The market
 
value of
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
 
thousand of
 
unrealized losses
 
related to
 
fixed maturity
 
securities that
 
have been
 
in an
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
 
thousand of
 
unrealized losses
 
related to
 
fixed maturity
 
securities in
 
an
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
 
thousand were
related to
 
securities that
 
were rated
 
investment grade
 
by at
 
least one
 
nationally recognized
 
statistical rating
agency.
 
There was
no
 
gross unrealized
 
depreciation for
 
mortgage-backed securities
 
related to
 
sub-prime and
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
 
thousand and
 
$
121,169
 
thousand, respectively.
 
The market
 
value of
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
 
thousand of
 
unrealized losses
 
related to
 
fixed maturity
 
securities that
 
have been
 
in an
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
 
thousand were
 
related to
securities that were
 
rated investment
 
grade by at
 
least one nationally
 
recognized statistical
 
rating agency.
 
The
$
94,376
 
thousand of unrealized losses related
 
to fixed maturity securities in
 
an unrealized loss position for
 
more
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
 
thousand were
 
related to
securities that were rated investment
 
grade by at least one nationally recognized
 
statistical rating agency.
 
There
was
no
 
gross unrealized depreciation
 
for mortgage-backed securities
 
related to sub-prime and
 
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.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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
 
thousand in limited
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
 
thousand.
 
 
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
 
Less reinsurance recoverables
(1,640,712)
(1,619,641)
 
Net reserves beginning of period
11,970,601
11,499,449
Incurred related to:
 
Current year
4,572,640
3,559,505
 
Prior years
1,426
(44,401)
 
Total incurred
 
losses and LAE
4,574,066
3,515,104
Paid related to:
 
Current year
 
1,015,538
550,724
 
Prior years
2,042,712
2,406,753
 
Total paid losses and LAE
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
 
Plus reinsurance recoverables
1,774,732
1,632,687
 
Gross reserves end of period
$
15,233,125
$
13,637,639
(Some amounts may not reconcile due to rounding.)
 
Current year
 
incurred losses
 
were $
4,572,640
 
thousand and
 
$
3,559,505
 
thousand for
 
the nine
 
months ended
September 30,
 
2020 and 2019,
 
respectively. The
 
increase in current
 
year incurred
 
losses in 2020
 
compared to
2019 was primarily
 
due to $
434,918
 
thousand of incurred
 
losses due to
 
COVID-19 as well
 
as the impact
 
of the
increase in premiums earned.
 
 
5.
 
DERIVATIVES
 
 
The Company
 
sold
seven
 
equity index
 
put option
 
contracts, based
 
on
two
 
indices, in
 
2001 and
 
2005.
 
The
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
 
of these
 
contracts had
 
expired
prior to
September 30, 2020
, with
no
 
liabilities due under the terms of the expired contracts.
 
 
The Company had
one
 
remaining equity index put option contract
 
at September 30, 2020, based on the
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
 
thousand.
 
Conversely, if
 
the contract
 
had expired
 
on September 30,
 
2020, with
the S&P index at
3,363.00
, there would have been
no
 
settlement amount.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
16
At September 30, 2020 and
 
December 31, 2019, the fair value
 
for these equity put options was
 
$
6,632
 
thousand
and $
5,584
 
thousand, respectively.
 
 
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
 
thousand of fixed
 
maturities, market value
 
and $
3,748
 
thousand of fixed
 
maturities, fair value
 
were
fair valued
 
using unobservable inputs.
 
The majority of
 
the fixed maturities,
 
market value,
 
$
805,061
 
thousand,
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
 
thousand were valued at
 
either par or amortized cost,
 
which the Company believes
approximates fair value.
 
At December 31, 2019, $
772,979
 
thousand of fixed maturities, market value and $
5,826
thousand of fixed
 
maturities, fair
 
value were
 
fair valued
 
using unobservable
 
inputs.
 
The majority of
 
the fixed
maturities, market value, $
610,873
 
thousand, were valued by investment
 
managers’ valuation committees and a
majority of these fair
 
values and all of
 
the $
5,826
 
thousand of fixed
 
maturities, fair value
 
were substantiated
 
by
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
 
thousand were valued at
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
 
thousand and
 
$
170,888
 
thousand, respectively,
 
and all
 
prices were
 
obtained
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
 
transfers between Level 1 and Level 2 for
 
the nine months ended September 30, 2020.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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
 
thousand and
 
$
209,578
 
thousand of
 
investments within
 
other invested
 
assets on
 
the
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
 
at the reporting date
$
-
$
-
$
-
$
-
$
(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
 
at the reporting date
$
-
$
-
$
-
$
-
$
-
$
-
$
-
$
-
(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
 
at the reporting date
$
-
$
-
$
-
$
-
(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
 
at the reporting date
$
-
$
-
$
-
$
-
(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
 
thousand and
 
($
492
) thousand
 
for the
 
three and
 
nine months
 
ended
September 30,
 
2020, respectively,
 
and were
 
$
3,176
 
thousand and
 
$
4,695
 
thousand for
 
the three
 
and nine
months ended
 
September 30,
 
2019, respectively.
 
The transfers
 
of $
3,326
 
thousand during
 
the three
 
months
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
 
thousand during 2019
 
were related
 
to securities that
 
were previously priced
 
by a
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
 
anti-diluted options outstanding
 
for the three
 
and nine months
 
ended September 30,
 
2020 and
2019.
 
 
All outstanding options expire on or between
February 24, 2021
 
and
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
 
active credit
 
facilities for
 
a total
 
commitment of
 
up to
 
$
1,000,000
 
thousand and
 
an
additional credit facility
 
for a total
 
commitment of up to
 
£
52,175
 
thousand, providing for
 
the issuance of letters
of credit and/or
 
unsecured revolving credit
 
lines.
 
The following table
 
presents the interest
 
and fees incurred
 
in
connection with the
two
 
credit facilities for the periods indicated:
 
 
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
 
thousand 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 $
200,000
 
thousand 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
 
$
600,000
 
thousand 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
 
$
5,370,979
 
thousand
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
 
thousand.
 
As of September
 
30, 2020, the
 
Company was in
 
compliance
with all Group Credit Facility covenants.
 
 
On March 25, 2020, Group
 
borrowed $
50,000
 
thousand under Tranche
 
one of the credit facility
 
as an unsecured
revolving credit loan.
 
The loan was
 
fully paid off
 
on June 26,
 
2020.
 
There were
no
 
revolving credit borrowings
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
 
thousand of secured letters
 
of credit to
 
collateralize reinsurance
 
obligations as a
 
non-admitted
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
 
months).
 
The commitment fee on undrawn
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
 
thousand 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
$
5,532,663
 
thousand (
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
 
thousand.
 
As of September 30,
 
2020, the Company was
 
in compliance with all
 
Everest International
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
 
thousand
which provides borrowing capacity of up to approximately $
1,466,709
 
thousand.
 
 
On August 31,
 
2020, Everest
 
Re borrowed
 
$
90,000
 
thousand under its
 
FHLBNY available capacity.
 
The $
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
 
thousand.
 
 
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
 
thousand and $
993,036
 
thousand at September
 
30, 2020 and
December 31, 2019,
 
respectively.
 
Of this
 
amount, Group
 
had investments
 
recorded at
 
$
66,175
 
thousand and
$
46,390
 
thousand at September 30, 2020 and December 31, 2019, respectively, in the segregated accounts.
 
 
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
 
thousand of casualty reserves held
 
by Bermuda Re related
to accident
 
years
2002
 
through
2015
.
 
As consideration
 
for entering
 
the agreement,
 
the Company
 
transferred
cash of
 
$
252,000
 
thousand to the
 
Mt. Logan
 
Re segregated
 
account.
 
The maximum
 
liability to
 
be retroceded
under the agreement
 
will be $
319,000
 
thousand.
 
The Company will
 
retain liability
 
for any
 
amounts exceeding
the maximum liability.
 
On April
 
24, 2014,
 
the Company
 
entered into
two
 
collateralized reinsurance
 
agreements with
 
Kilimanjaro Re
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
 
thousand of reinsurance
 
coverage
from named storms in specified states
 
of the Southeastern United States.
 
The second agreement provides up to
$
200,000
 
thousand of
 
reinsurance coverage
 
from named
 
storms in
 
specified states
 
of the
 
Southeast, Mid-
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
 
thousand of
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
 
collateralized reinsurance
 
agreements with Kilimanjaro
 
to
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
 
thousand of reinsurance coverage
 
from named storms
and earthquakes in the United States, Puerto Rico and Canada.
 
 
On April
 
13, 2017
 
the Company
 
entered into
six
 
collateralized reinsurance
 
agreements with
 
Kilimanjaro to
provide the Company with annual aggregate catastrophe
 
reinsurance coverage.
 
The initial
three
 
agreements are
four year
 
reinsurance contracts which cover named storm and earthquake
 
events.
 
These agreements provide up
to $
225,000
 
thousand, $
400,000
 
thousand and
 
$
325,000
 
thousand, respectively,
 
of annual
 
aggregate
 
29
reinsurance coverage
 
from named storms
 
and earthquakes in
 
the United States,
 
Puerto Rico and
 
Canada.
 
The
subsequent
three
 
agreements are
five year
 
reinsurance contracts
 
which cover
 
named storm
 
and earthquake
events.
 
These agreements provide
 
up to $
50,000
 
thousand, $
75,000
 
thousand and $
175,000
 
thousand,
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
 
collateralized reinsurance
 
agreements with
 
Kilimanjaro 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
 
agreements are
four year
 
reinsurance
contracts which
 
provide up
 
to $
62,500
 
thousand and
 
$
200,000
 
thousand, respectively,
 
of annual
 
aggregate
reinsurance coverage
 
from named
 
storms and
 
earthquakes in
 
the United
 
States, Puerto
 
Rico, the
 
U.S. Virgin
Islands and
 
Canada.
 
The remaining
two
 
agreements are
five year
 
reinsurance contracts
 
which provide
 
up to
$
62,500
 
thousand and $
200,000
 
thousand, respectively,
 
of annual aggregate
 
reinsurance coverage
 
from named
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
 
collateralized reinsurance
 
agreements with Kilimanjaro
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
 
agreements are
four year
 
reinsurance
contracts which
 
provide up
 
to $
150,000
 
thousand and
 
$
275,000
 
thousand, respectively,
 
of annual
 
aggregate
reinsurance coverage
 
from named
 
storms and
 
earthquakes in
 
the United
 
States, Puerto
 
Rico, the
 
U.S. Virgin
Islands and
 
Canada.
 
The remaining
two
 
agreements are
five year
 
reinsurance contracts
 
which provide
 
up to
$
150,000
 
thousand and $
275,000
 
thousand, respectively, of annual aggregate
 
reinsurance coverage from named
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
 
thousand of
 
notes (“Series
2014-1 Notes”).
 
The $
450,000
 
thousand of Series 2014-1
 
Notes were fully
 
redeemed on April 30,
 
2018 and are
no longer outstanding.
 
On November 18,
 
2014, Kilimanjaro issued
 
$
500,000
 
thousand of notes
 
(“Series 2014-2
Notes”).
 
The $
500,000
 
thousand of
 
Series 2014-2
 
Notes were
 
fully redeemed
 
in November
 
2019 and
 
are no
longer outstanding.
 
On December
 
1, 2015,
 
Kilimanjaro issued
 
$
625,000
 
thousand of
 
notes (“Series
 
2015-1
Notes).
 
On April 13, 2017,
 
Kilimanjaro issued $
950,000
 
thousand of notes (“Series
 
2017-1 Notes) and $
300,000
thousand of
 
notes (“Series
 
2017-2 Notes).
 
On April
 
30, 2018,
 
Kilimanjaro issued
 
$
262,500
 
thousand of
 
notes
(“Series 2018-1
 
Notes”) and
 
$
262,500
 
thousand of
 
notes (“Series
 
2018-2 Notes”).
 
On December
 
12, 2019
Kilimanjaro issued
 
$
425,000
 
thousand of notes
 
(“Series 2019-1 Notes”)
 
and $
425,000
 
of notes
 
(“Series 2019-2
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
 
thousand of
30
 
year senior notes
 
at
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
 
thousand of
30 year
 
senior notes
on
October 7, 2020
 
at an interest rate of
3.5
%.
 
These senior notes will mature on
October 15, 2050
 
and will pay
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
 
through
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
 
basis points,
 
reset quarterly,
 
payable quarterly
 
in arrears
 
on February
 
15, May
 
15,
August 15 and November
 
15 of each year,
 
subject to Holdings’ right
 
to defer interest
 
on
one
 
or more occasions
for up to
ten
 
consecutive years.
 
Deferred interest
 
will accumulate interest
 
at the applicable
 
rate compounded
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
 
is subject to
 
a replacement capital
 
covenant.
 
This covenant is
 
for the benefit
 
of
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
 
thousand and $
13,183
 
thousand of its
 
outstanding long term
subordinated notes
 
during the three
 
and nine months
 
ended September 30,
 
2020, respectively.
 
The Company
realized a
 
gain of $
0
 
thousand and $
2,536
 
thousand from the
 
repurchase of the
 
long term subordinated
 
notes
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
 
thousand.
 
 
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
 
square feet of
 
office space, was effective
 
October 1, 2019 and
 
runs through
2036
.
 
The initial base rent
payment of
 
the lease
 
will be
 
approximately $
650
 
thousand per
 
month or
 
$
7,800
 
thousand per
 
year.
 
The
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
 
restricted stock awards
 
were granted on
September 11,
2020
, with a fair value of $
207.5050
.
 
 
For the
 
nine months
 
ended September
 
30, 2020,
 
a total
 
of
173,419
 
restricted stock
 
awards were
 
granted:
 
167,829
 
restricted share awards were
 
granted on
February 26, 2020
, with a fair value
 
of $
277.145
 
per share and
5,590
 
on
September 11, 2020
 
with a fair value
 
of $
207.5050
.
 
Also,
16,120
 
performance share unit awards
 
were
granted on
February 26, 2020
, with a fair value of $
277.145
 
per unit.
 
 
 
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:
 
Fixed maturity securities, market value:
 
Gains
$
18.7
$
14.3
$
4.4
$
54.1
$
42.0
$
12.1
 
Losses
(13.3)
 
(9.0)
 
(4.3)
(53.1)
(25.3)
(27.8)
 
Total
5.4
5.3
0.1
0.9
16.7
(15.8)
 
 
 
 
 
 
Fixed maturity securities, fair value:
 
Gains
$
-
 
$
-
 
$
-
-
0.4
(0.4)
 
Losses
(2.0)
-
(2.0)
(2.0)
-
(2.0)
 
Total
(2.0)
 
-
 
(2.0)
(2.0)
0.4
(2.4)
 
Equity securities, fair value:
 
Gains
9.5
 
1.0
 
8.5
30.3
9.3
21.0
 
Losses
(10.8)
(2.2)
(8.6)
(42.9)
(6.7)
(36.2)
 
Total
(1.3)
 
(1.1)
 
(0.1)
(12.6)
2.6
(15.2)
 
Other Invested Assets:
 
 
 
 
 
 
Gains
1.4
2.6
(1.2)
6.0
2.9
3.1
 
Losses
(0.3)
 
(0.5)
 
0.3
(5.9)
(0.6)
(5.3)
 
Total
1.1
2.1
(0.9)
0.1
2.3
(2.2)
 
 
 
 
 
 
Short Term Investments:
 
Gains
0.8
 
0.2
 
0.6
1.2
0.3
0.9
 
Losses
-
-
-
-
-
-
 
Total
0.8
 
0.2
 
0.6
1.2
0.3
0.9
Total net realized
 
gains (losses) from sales:
 
 
 
 
 
 
Gains
30.4
18.2
12.2
91.5
54.9
36.7
 
Losses
(26.4)
(11.7)
(14.7)
(103.9)
(32.6)
(71.3)
 
Total
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:
 
Fixed maturities, fair value
3.3
-
3.3
1.9
-
1.9
 
Equity securities, fair value
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.
 
See “Liquidity and Capital Resources - Market Sensitive Instruments” in PART
 
I – ITEM
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.
 
 
 
 
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
 
Chief Financial Officer
(Duly Authorized Officer and Principal Financial Officer)
 
 
Dated:
 
November 9, 2020