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

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

 

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

For the quarterly period ended June 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

HamiltonHM 19, Bermuda

441-295-0006

 

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

of registrant’s principal executive office)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

 

Yes

X

 

No

 

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

 

Yes

X

 

No

 

 

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

 

Large Accelerated Filer

X

 

Accelerated filer

 

 

Non-accelerated filer

 

 

 

Smaller reporting company

 

 

 

 

Emerging growth company

 

 

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

 

YES

 

 

NO

X

 

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

 

YES

 

 

NO

X

 

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

 

 

Class

 

Trading Symbol

Name of Exchange where Registered

Number of Shares Outstanding

At August 1, 2020

 

Common Shares, $0.01 par value

 

RE

 

New York Stock Exchange

 

39,971,796

 

 


 

EVEREST RE GROUP, LTD

 

Table of Contents

Form 10-Q

 

 

Page

PART I

 

FINANCIAL INFORMATION

 

Item 1.

Financial Statements

 

 

 

 

 

Consolidated Balance Sheets June 30, 2020 (unaudited)

 

 

and December 31, 2019

1

 

 

 

 

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

 

 

three and six months ended June 30, 2020 and 2019 (unaudited)

2

 

 

 

 

Consolidated Statements of Changes in Shareholders’ Equity for the six

 

 

months ended June 30, 2020 and 2019 (unaudited)

3

 

 

 

 

Consolidated Statements of Cash Flows for the six months ended

 

 

June 30, 2020 and 2019 (unaudited)

4

 

 

 

 

Notes to Consolidated Interim Financial Statements (unaudited)

5

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and

 

 

Results of Operation

34

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

56

 

 

 

Item 4.

Controls and Procedures

56

 

 

 

 

PART II

 

OTHER INFORMATION

 

Item 1.

Legal Proceedings

56

 

 

 

Item 1A.

Risk Factors

57

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

58

 

 

 

Item 3.

Defaults Upon Senior Securities

58

 

 

 

Item 4.

Mine Safety Disclosures

58

 

 

 

Item 5.

Other Information

58

 

 

 

Item 6.

Exhibits

59

 

 

 

 

 


 

EVEREST RE GROUP, LTD.

CONSOLIDATED BALANCE SHEETS

 

 

 

June 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

$

17,055,259

 

$

16,824,944

(amortized cost: 2020, $16,392,238; 2019, $16,473,491, credit allowances: 2020, $25,837; 2019, $0)

 

 

 

 

 

Fixed maturities - available for sale, at fair value

 

4,431

 

 

5,826

Equity securities, at fair value

 

949,170

 

 

931,457

Short-term investments (cost: 2020, $854,248; 2019, $414,639)

 

853,964

 

 

414,706

Other invested assets (cost: 2020, $1,816,373; 2019, $1,763,531)

 

1,816,373

 

 

1,763,531

Cash

 

922,479

 

 

808,036

Total investments and cash

 

21,601,676

 

 

20,748,500

Accrued investment income

 

120,387

 

 

116,804

Premiums receivable

 

2,484,271

 

 

2,259,088

Reinsurance receivables

 

1,852,887

 

 

1,763,471

Funds held by reinsureds

 

513,123

 

 

489,901

Deferred acquisition costs

 

578,210

 

 

581,863

Prepaid reinsurance premiums

 

464,206

 

 

445,716

Income taxes

 

294,333

 

 

305,711

Other assets

 

675,700

 

 

612,997

TOTAL ASSETS

$

28,584,793

 

$

27,324,051

 

 

 

 

 

 

LIABILITIES:

 

 

 

 

 

Reserve for losses and loss adjustment expenses

$

14,276,641

 

$

13,611,313

Future policy benefit reserve

 

40,659

 

 

42,592

Unearned premium reserve

 

3,190,174

 

 

3,056,735

Funds held under reinsurance treaties

 

11,876

 

 

10,668

Other net payable to reinsurers

 

369,761

 

 

291,660

Losses in course of payment

 

199,157

 

 

51,950

Senior notes due 06/01/2044

 

397,134

 

 

397,074

Long term notes due 05/01/2067

 

223,625

 

 

236,758

Accrued interest on debt and borrowings

 

2,368

 

 

2,878

Equity index put option liability

 

9,088

 

 

5,584

Unsettled securities payable

 

89,749

 

 

30,650

Other liabilities

 

488,262

 

 

453,264

Total liabilities

 

19,298,494

 

 

18,191,126

 

 

 

 

 

 

Commitments and contingencies (Note 9)

 

-

 

 

-

 

 

 

 

 

 

SHAREHOLDERS' EQUITY:

 

 

 

 

 

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

 

 

 

 

 

no shares issued and outstanding

 

-

 

 

-

Common shares, par value: $0.01; 200,000 shares authorized; (2020) 69,608

 

 

 

 

 

and (2019) 69,464 outstanding before treasury shares

 

696

 

 

694

Additional paid-in capital

 

2,225,993

 

 

2,219,660

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

 

 

 

 

 

tax expense (benefit) of $66,616 at 2020 and $30,996 at 2019

 

297,137

 

 

28,152

Treasury shares, at cost; 29,636 shares (2020) and 28,665 shares (2019)

 

(3,622,172)

 

 

(3,422,152)

Retained earnings

 

10,384,645

 

 

10,306,571

Total shareholders' equity

 

9,286,299

 

 

9,132,925

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY

$

28,584,793

 

$

27,324,051

 

 

 

 

 

 

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

1


 

EVEREST RE GROUP, LTD.

CONSOLIDATED STATEMENTS OF OPERATIONS

AND COMPREHENSIVE INCOME (LOSS)

 

 

 

Three Months Ended

 

Six Months Ended

 

June 30,

 

June 30,

(Dollars in thousands, except per share amounts)

2020

 

2019

 

2020

 

2019

 

(unaudited)

 

(unaudited)

REVENUES:

 

 

 

 

 

 

 

 

 

 

 

Premiums earned

$

2,042,405

 

$

1,817,299

 

$

4,079,219

 

$

3,549,996

Net investment income

 

38,083

 

 

179,028

 

 

185,883

 

 

320,004

Net realized capital gains (losses):

 

 

 

 

 

 

 

 

 

 

 

Credit allowances on fixed maturity securities

 

(4,063)

 

 

-

 

 

(25,837)

 

 

-

Other-than-temporary impairments on fixed maturity securities

 

-

 

 

(5,157)

 

 

-

 

 

(8,090)

Other net realized capital gains (losses)

 

188,711

 

 

35,429

 

 

(103)

 

 

130,594

Total net realized capital gains (losses)

 

184,648

 

 

30,272

 

 

(25,940)

 

 

122,504

Net derivative gain (loss)

 

11,869

 

 

353

 

 

(3,504)

 

 

3,584

Other income (expense)

 

(32,490)

 

 

(18,225)

 

 

(9,127)

 

 

(21,525)

Total revenues

 

2,244,515

 

 

2,008,727

 

 

4,226,531

 

 

3,974,563

 

 

 

 

 

 

 

 

 

 

 

 

CLAIMS AND EXPENSES:

 

 

 

 

 

 

 

 

 

 

 

Incurred losses and loss adjustment expenses

 

1,407,016

 

 

1,094,630

 

 

2,837,856

 

 

2,143,180

Commission, brokerage, taxes and fees

 

466,316

 

 

420,950

 

 

914,838

 

 

810,424

Other underwriting expenses

 

118,130

 

 

104,833

 

 

246,990

 

 

203,818

Corporate expenses

 

8,733

 

 

7,535

 

 

18,566

 

 

14,187

Interest, fees and bond issue cost amortization expense

 

7,253

 

 

8,434

 

 

14,836

 

 

16,065

Total claims and expenses

 

2,007,448

 

 

1,636,382

 

 

4,033,086

 

 

3,187,674

 

 

 

 

 

 

 

 

 

 

 

 

INCOME (LOSS) BEFORE TAXES

 

237,067

 

 

372,345

 

 

193,445

 

 

786,889

Income tax expense (benefit)

 

46,187

 

 

39,477

 

 

(14,047)

 

 

99,470

 

 

 

 

 

 

 

 

 

 

 

 

NET INCOME (LOSS)

$

190,880

 

$

332,868

 

$

207,492

 

$

687,419

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss), net of tax:

 

 

 

 

 

 

 

 

 

 

 

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

 

551,753

 

 

197,759

 

 

272,354

 

 

430,824

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

 

(7,257)

 

 

(1,869)

 

 

24,142

 

 

(3,691)

Total URA(D) on securities arising during the period

 

544,496

 

 

195,890

 

 

296,496

 

 

427,133

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

20,586

 

 

(25,832)

 

 

(30,238)

 

 

(11,780)

 

 

 

 

 

 

 

 

 

 

 

 

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

 

1,806

 

 

1,151

 

 

2,726

 

 

2,302

Total benefit plan net gain (loss) for the period

 

1,806

 

 

1,151

 

 

2,726

 

 

2,302

Total other comprehensive income (loss), net of tax

 

566,888

 

 

171,209

 

 

268,984

 

 

417,655

 

 

 

 

 

 

 

 

 

 

 

 

COMPREHENSIVE INCOME (LOSS)

$

757,768

 

$

504,077

 

$

476,476

 

$

1,105,074

 

 

 

 

 

 

 

 

 

 

 

 

EARNINGS PER COMMON SHARE:

 

 

 

 

 

 

 

 

 

 

 

Basic

$

4.78

 

$

8.17

 

$

5.14

 

$

16.88

Diluted

 

4.77

 

 

8.15

 

 

5.13

 

 

16.82

 

 

 

 

 

 

 

 

 

 

 

 

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

2


 

EVEREST RE GROUP, LTD.

CONSOLIDATED STATEMENTS OF

CHANGES IN SHAREHOLDERS’ EQUITY

 

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

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

 

 

 

 

 

 

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

 

 

 

 

 

 

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

 

 

 

 

 

 

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)

 

 

 

 

 

 

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 in 2020 and $1.40 per share in 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

 

 

 

 

 

 

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)

 

 

 

 

 

 

TOTAL SHAREHOLDERS' EQUITY, June 30

$

9,286,299

 

$

8,836,817

 

 

 

 

 

 

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

 

 

 

 

 

 

3


 

EVEREST RE GROUP, LTD.

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

 

 

Six Months Ended

 

June 30,

(Dollars in thousands)

2020

 

2019

 

(unaudited)

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

Net income (loss)

$

207,492

 

$

687,419

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

 

 

 

 

 

Decrease (increase) in premiums receivable

 

(252,609)

 

 

(174,583)

Decrease (increase) in funds held by reinsureds, net

 

(23,498)

 

 

(55,421)

Decrease (increase) in reinsurance receivables

 

(147,515)

 

 

(19,319)

Decrease (increase) in income taxes

 

(25,000)

 

 

180,126

Decrease (increase) in prepaid reinsurance premiums

 

(29,699)

 

 

(137,092)

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

 

800,816

 

 

155,096

Increase (decrease) in future policy benefit reserve

 

(1,933)

 

 

(1,648)

Increase (decrease) in unearned premiums

 

159,744

 

 

219,263

Increase (decrease) in other net payable to reinsurers

 

89,499

 

 

132,474

Increase (decrease) in losses in course of payment

 

147,427

 

 

35,738

Change in equity adjustments in limited partnerships

 

84,066

 

 

(57,031)

Distribution of limited partnership income

 

40,447

 

 

41,321

Change in other assets and liabilities, net

 

(10,313)

 

 

(60,820)

Non-cash compensation expense

 

19,175

 

 

17,171

Amortization of bond premium (accrual of bond discount)

 

20,547

 

 

13,321

Net realized capital (gains) losses

 

25,940

 

 

(122,504)

Net cash provided by (used in) operating activities

 

1,104,586

 

 

853,511

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

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

 

1,261,650

 

 

1,009,921

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

 

990,273

 

 

2,318,207

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

 

-

 

 

2,706

Proceeds from equity securities sold, at fair value

 

213,185

 

 

149,233

Distributions from other invested assets

 

164,975

 

 

143,752

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

 

(2,301,701)

 

 

(3,466,331)

Cost of equity securities acquired, at fair value

 

(224,086)

 

 

(229,070)

Cost of other invested assets acquired

 

(343,332)

 

 

(207,323)

Net change in short-term investments

 

(439,457)

 

 

(499,983)

Net change in unsettled securities transactions

 

49,504

 

 

88,531

Net cash provided by (used in) investing activities

 

(628,989)

 

 

(690,357)

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

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

 

(12,841)

 

 

(7,485)

Purchase of treasury shares

 

(200,019)

 

 

(24,604)

Dividends paid to shareholders

 

(125,205)

 

 

(114,136)

Cost of debt repurchase

 

(10,647)

 

 

-

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

 

(14,141)

 

 

(11,748)

Net cash provided by (used in) financing activities

 

(362,853)

 

 

(157,973)

 

 

 

 

 

 

EFFECT OF EXCHANGE RATE CHANGES ON CASH

 

1,699

 

 

91

 

 

 

 

 

 

Net increase (decrease) in cash

 

114,443

 

 

5,272

Cash, beginning of period

 

808,036

 

 

656,095

Cash, end of period

 

922,479

 

 

661,367

 

 

 

 

 

 

SUPPLEMENTAL CASH FLOW INFORMATION:

 

 

 

 

 

Income taxes paid (recovered)

$

10,895

 

$

(83,995)

Interest paid

 

14,992

 

 

15,984

 

 

 

 

 

 

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

4


 

NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS (UNAUDITED)

 

For the Three and Six Months Ended June 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 June 30, 2020 and December 31, 2019 and for the three and six months ended June 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 six months ended June 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.

 

5


 

Certain reclassifications and format changes have been made to prior years’ amounts to conform to the 2020 presentation.

 

Application of Recently Issued Accounting Standard Changes.

 

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 Securities and Exchange Commission (“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 (“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

6


 

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 carrying value of assets measured at amortized cost will now be presented as the amount expected to be collected on the financial asset (amortized cost less an allowance for credit losses valuation account). Available for sale debt securities will now record credit losses through an allowance for credit losses, which will be limited to the amount by which fair value is below amortized cost. The guidance is effective for annual and interim reporting periods beginning after December 15, 2019. The Company adopted the guidance effective January 1, 2020. The adoption resulted in a cumulative reduction of $4,214 thousand in retained earnings, 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.

 

 

3. REVISIONS TO FINANCIAL STATEMENTS

 

In preparing third quarter 2019 financial statements, the Company identified errors in the handling of foreign exchange related to premium funds held from reinsureds. Although management determined that the impact of the foreign exchange differences were not material to prior period financial statements, the impact of recording the cumulative difference would have significantly impacted results within the third quarter 2019. As a result, prior period balances have been revised in the applicable financial statements and corresponding footnotes to correct the foreign exchange adjustments.

 

7


 

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

 

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

 

 

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE

 

 

Three Months Ended June 30, 2019

 

 

Six Months Ended June 30, 2019

INCOME (LOSS):

 

 

As Previously

 

 

Impact of

 

 

 

 

 

As Previously

 

 

Impact of

 

 

 

 

 

 

Reported

 

 

Revisions

 

 

As Revised

 

 

Reported

 

 

Revisions

 

 

As Revised

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other income (expense)

 

$

(7,977)

 

$

(10,248)

 

$

(18,225)

 

$

(17,030)

 

$

(4,495)

 

$

(21,525)

Total revenues

 

$

2,018,975

 

$

(10,248)

 

$

2,008,727

 

$

3,979,058

 

$

(4,495)

 

$

3,974,563

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

INCOME (LOSS) BEFORE TAXES

 

$

382,593

 

$

(10,248)

 

$

372,345

 

$

791,384

 

$

(4,495)

 

$

786,889

Income tax expense (benefit)

 

 

39,738

 

 

(261)

 

 

39,477

 

 

99,629

 

 

(159)

 

 

99,470

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

NET INCOME (LOSS)

 

$

342,855

 

$

(9,987)

 

$

332,868

 

$

691,755

 

$

(4,336)

 

$

687,419

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

COMPREHENSIVE INCOME (LOSS)

 

$

514,064

 

$

(9,987)

 

$

504,077

 

$

1,109,410

 

$

(4,336)

 

$

1,105,074

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

EARNINGS PER COMMON SHARE:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

8.42

 

$

(0.25)

 

$

8.17

 

$

16.98

 

$

(0.10)

 

$

16.88

Diluted

 

$

8.39

 

$

(0.24)

 

$

8.15

 

$

16.93

 

$

(0.11)

 

$

16.82

 

CONSOLIDATED STATEMENTS OF

 

Six Months Ended June 30, 2019

CHANGES IN STOCKHOLDER'S EQUITY

 

As Previously

 

Impact of

 

 

 

 

 

Reported

 

Revisions

 

As Revised

 

 

 

 

 

 

 

 

 

 

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

RETAINED EARNINGS:

 

 

 

 

 

 

 

 

 

Balance, January 1

 

$

9,574,440

 

$

(43,007)

 

$

9,531,433

Net income (loss)

 

 

348,900

 

 

5,651

 

 

354,551

Balance, March 31

 

 

9,866,203

 

 

(37,356)

 

 

9,828,847

Net income (loss)

 

 

342,855

 

 

(9,987)

 

 

332,868

Balance, June 30,

 

 

10,152,059

 

 

(47,343)

 

 

10,104,716

TOTAL STOCKHOLDER'S EQUITY, June 30

 

$

8,884,160

 

$

(47,343)

 

$

8,836,817

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

Six Months Ended June 30, 2019

 

 

As Previously

 

Impact of

 

 

 

 

 

Reported

 

Revisions

 

As Revised

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$

691,755

 

$

(4,336)

 

$

687,419

Decrease (increase) in premiums receivable

 

 

(178,319)

 

 

3,736

 

 

(174,583)

Decrease (increase) in funds held by reinsureds, net

 

 

(56,180)

 

 

759

 

 

(55,421)

Decrease (increase) in income taxes

 

 

180,285

 

 

(159)

 

 

180,126

 

4. INVESTMENTS

 

Effective January 1, 2020, the Company adopted ASU 2016-13 which provides guidance on the accounting for fixed maturity securities. The guidance requires the Company to record allowances for credit losses for

8


 

securities that are deemed to have valuation deterioration due to credit risk issues. 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 June 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 June 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

$

1,355,970

 

$

-

 

$

79,243

 

$

(282)

 

$

1,434,931

 

Obligations of U.S. states and political subdivisions

 

508,478

 

 

-

 

 

27,597

 

 

(3,794)

 

 

532,281

 

Corporate securities

 

6,349,631

 

 

(22,253)

 

 

356,702

 

 

(66,292)

 

 

6,617,788

 

Asset-backed securities

 

1,076,648

 

 

-

 

 

16,728

 

 

(23,818)

 

 

1,069,558

 

Mortgage-backed securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

850,616

 

 

-

 

 

71,017

 

 

(1,837)

 

 

919,796

 

Agency residential

 

2,016,481

 

 

-

 

 

74,813

 

 

(2,043)

 

 

2,089,251

 

Non-agency residential

 

3,153

 

 

-

 

 

-

 

 

(42)

 

 

3,111

 

Foreign government securities

 

1,461,380

 

 

(92)

 

 

73,849

 

 

(33,937)

 

 

1,501,200

 

Foreign corporate securities

 

2,769,881

 

 

(3,492)

 

 

158,296

 

 

(37,342)

 

 

2,887,343

Total fixed maturity securities

$

16,392,238

 

 

(25,837)

 

$

858,245

 

$

(169,387)

 

$

17,055,259

 

 

 

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 June 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

$

1,401,446

 

$

1,413,299

 

$

1,456,960

 

$

1,457,919

Due after one year through five years

 

6,415,691

 

 

6,636,170

 

 

6,757,107

 

 

6,869,359

Due after five years through ten years

 

3,712,330

 

 

3,987,207

 

 

3,471,370

 

 

3,609,816

Due after ten years

 

915,873

 

 

936,867

 

 

902,289

 

 

941,676

Asset-backed securities

 

1,076,648

 

 

1,069,558

 

 

892,373

 

 

897,333

Mortgage-backed securities:

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

850,616

 

 

919,796

 

 

814,570

 

 

844,557

Agency residential

 

2,016,481

 

 

2,089,251

 

 

2,173,099

 

 

2,198,581

Non-agency residential

 

3,153

 

 

3,111

 

 

5,723

 

 

5,703

Total fixed maturity securities

$

16,392,238

 

$

17,055,259

 

$

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

 

Six Months Ended

 

June 30,

 

June 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

$

614,077

 

$

227,266

 

$

337,053

 

$

481,160

Fixed maturity securities, other-than-temporary impairment

 

-

 

 

(1,499)

 

 

-

 

 

(1,743)

Change in unrealized appreciation (depreciation), pre-tax

 

614,077

 

 

225,767

 

 

337,053

 

 

479,417

Deferred tax benefit (expense)

 

(69,581)

 

 

(29,954)

 

 

(40,557)

 

 

(52,431)

Deferred tax benefit (expense), other-than-temporary impairment

 

-

 

 

77

 

 

-

 

 

147

Change in unrealized appreciation (depreciation),

 

 

 

 

 

 

 

 

 

 

 

net of deferred taxes, included in shareholders’ equity

$

544,496

 

$

195,890

 

$

296,496

 

$

427,133

 

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 temporary or credit related. 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 temporary decline in market value. Temporary 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 June 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

$

28,192

 

$

(282)

 

$

-

 

$

-

 

$

28,192

 

$

(282)

Obligations of U.S. states and political subdivisions

 

71,054

 

 

(3,569)

 

 

3,331

 

 

(225)

 

 

74,385

 

 

(3,794)

Corporate securities

 

712,066

 

 

(28,954)

 

 

170,908

 

 

(37,338)

 

 

882,974

 

 

(66,292)

Asset-backed securities

 

457,430

 

 

(16,504)

 

 

138,272

 

 

(7,314)

 

 

595,702

 

 

(23,818)

Mortgage-backed securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

47,046

 

 

(1,196)

 

 

6,017

 

 

(641)

 

 

53,063

 

 

(1,837)

Agency residential

 

137,030

 

 

(1,067)

 

 

90,425

 

 

(976)

 

 

227,455

 

 

(2,043)

Non-agency residential

 

213

 

 

(3)

 

 

2,898

 

 

(39)

 

 

3,111

 

 

(42)

Foreign government securities

 

112,183

 

 

(6,363)

 

 

201,603

 

 

(27,574)

 

 

313,786

 

 

(33,937)

Foreign corporate securities

 

401,754

 

 

(10,593)

 

 

217,672

 

 

(26,749)

 

 

619,426

 

 

(37,342)

Total fixed maturity securities

$

1,966,968

 

$

(68,531)

 

$

831,126

 

$

(100,856)

 

$

2,798,094

 

$

(169,387)

 

11


 

 

 

Duration of Unrealized Loss at June 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

$

74,911

 

$

(897)

 

$

154,772

 

$

(24,782)

 

$

229,683

 

$

(25,679)

Due in one year through five years

 

738,690

 

 

(23,176)

 

 

325,533

 

 

(32,475)

 

 

1,064,223

 

 

(55,651)

Due in five years through ten years

 

368,721

 

 

(16,989)

 

 

51,998

 

 

(8,556)

 

 

420,719

 

 

(25,545)

Due after ten years

 

142,927

 

 

(8,699)

 

 

61,211

 

 

(26,073)

 

 

204,138

 

 

(34,772)

Asset-backed securities

 

457,430

 

 

(16,504)

 

 

138,272

 

 

(7,314)

 

 

595,702

 

 

(23,818)

Mortgage-backed securities

 

184,289

 

 

(2,266)

 

 

99,340

 

 

(1,656)

 

 

283,629

 

 

(3,922)

Total fixed maturity securities

$

1,966,968

 

$

(68,531)

 

$