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EVEREST GROUP, LTD. - Quarter Report: 2021 September (Form 10-Q)

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

 

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

For the quarterly period ended September 30, 2021

 

___ 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 November 1, 2021

 

Common Shares, $0.01 par value

 

RE

 

New York Stock Exchange

 

39,369,026

 

 


 

EVEREST RE GROUP, LTD

 

Table of Contents

Form 10-Q

 

 

Page

PART I

 

FINANCIAL INFORMATION

 

Item 1.

Financial Statements

 

 

 

 

 

Consolidated Balance Sheets as of September 30, 2021 (unaudited)

 

 

and December 31, 2020

1

 

 

 

 

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

 

 

three and nine months ended September 30, 2021 and 2020 (unaudited)

2

 

 

 

 

Consolidated Statements of Changes in Shareholders’ Equity for the nine

 

 

months ended September 30, 2021 and 2020 (unaudited)

3

 

 

 

 

Consolidated Statements of Cash Flows for the nine months ended

 

 

September 30, 2021 and 2020 (unaudited)

4

 

 

 

 

Notes to Consolidated Interim Financial Statements (unaudited)

5

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and

 

 

Results of Operation

31

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

53

 

 

 

Item 4.

Controls and Procedures

53

 

 

 

 

PART II

 

OTHER INFORMATION

 

Item 1.

Legal Proceedings

54

 

 

 

Item 1A.

Risk Factors

54

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

54

 

 

 

Item 3.

Defaults Upon Senior Securities

54

 

 

 

Item 4.

Mine Safety Disclosures

54

 

 

 

Item 5.

Other Information

55

 

 

 

Item 6.

Exhibits

55

 

 

 

 

 


 

EVEREST RE GROUP, LTD.

CONSOLIDATED BALANCE SHEETS

 

 

 

September 30,

 

December 31,

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

2021

 

2020

 

(unaudited)

 

 

 

ASSETS:

 

 

 

 

 

Fixed maturities - available for sale, at market value

$

21,623,119

 

$

20,040,173

(amortized cost: 2021, $21,182,756; 2020, $19,225,067, credit allowances: 2021, $(31,980); 2020, $(1,745))

 

 

 

 

 

Equity securities, at fair value

 

1,523,595

 

 

1,472,236

Short-term investments (cost: 2021, $713,144; 2020, $1,135,088)

 

713,144

 

 

1,134,950

Other invested assets

 

2,855,372

 

 

2,012,581

Cash

 

1,068,441

 

 

801,651

Total investments and cash

 

27,783,671

 

 

25,461,591

Accrued investment income

 

170,364

 

 

141,304

Premiums receivable

 

3,408,338

 

 

2,680,562

Reinsurance recoverables

 

2,215,380

 

 

1,994,555

Funds held by reinsureds

 

811,269

 

 

716,655

Deferred acquisition costs

 

797,735

 

 

622,053

Prepaid reinsurance premiums

 

552,468

 

 

412,015

Income taxes net recoverable

 

-

 

 

17,253

Other assets

 

866,872

 

 

742,369

TOTAL ASSETS

$

36,606,097

 

$

32,788,357

 

 

 

 

 

 

LIABILITIES:

 

 

 

 

 

Reserve for losses and loss adjustment expenses

$

18,956,953

 

$

16,398,997

Future policy benefit reserve

 

36,533

 

 

37,723

Unearned premium reserve

 

4,421,098

 

 

3,501,359

Funds held under reinsurance treaties

 

18,279

 

 

15,807

Other net payable to reinsurers

 

485,682

 

 

294,347

Losses in course of payment

 

150,784

 

 

127,971

Senior notes due 6/1/2044

 

397,284

 

 

397,194

Senior notes due 10/15/2050

 

979,915

 

 

979,524

Long term notes due 5/1/2067

 

223,749

 

 

223,674

Borrowings from FHLB

 

310,000

 

 

310,000

Accrued interest on debt and borrowings

 

23,267

 

 

10,460

Unsettled securities payable

 

83,626

 

 

206,693

Income taxes net payable

 

4,074

 

 

-

Other liabilities

 

536,218

 

 

558,432

Total liabilities

 

26,627,462

 

 

23,062,181

 

 

 

 

 

 

Commitments and contingencies (Note 7)

 

(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; (2021) 69,806

 

 

 

 

 

and (2020) 69,620 outstanding before treasury shares

 

698

 

 

696

Additional paid-in capital

 

2,266,342

 

 

2,245,301

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

 

 

 

 

 

tax expense (benefit) of $44,338 at 2021 and $80,451 at 2020

 

203,733

 

 

534,899

Treasury shares, at cost; 30,427 shares (2021) and 29,636 shares (2020)

 

(3,822,235)

 

 

(3,622,172)

Retained earnings

 

11,330,097

 

 

10,567,452

Total shareholders' equity

 

9,978,635

 

 

9,726,176

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY

$

36,606,097

 

$

32,788,357

 

 

 

 

 

 

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

1


 

EVEREST RE GROUP, LTD.

CONSOLIDATED STATEMENTS OF OPERATIONS

AND COMPREHENSIVE INCOME (LOSS)

 

 

 

Three Months Ended

 

Nine Months Ended

 

September 30,

 

September 30,

(Dollars in thousands, except per share amounts)

2021

 

2020

 

2021

 

2020

 

(unaudited)

 

(unaudited)

REVENUES:

 

 

 

 

 

 

 

 

 

 

 

Premiums earned

$

2,656,403

 

$

2,205,811

 

$

7,602,640

 

$

6,285,030

Net investment income

 

292,759

 

 

234,233

 

 

960,267

 

 

420,116

Net realized capital gains (losses):

 

 

 

 

 

 

 

 

 

 

 

Credit allowances on fixed maturity securities

 

(7,329)

 

 

6,196

 

 

(30,234)

 

 

(19,641)

Other net realized capital gains (losses)

 

3,107

 

 

104,007

 

 

169,023

 

 

103,904

Total net realized capital gains (losses)

 

(4,222)

 

 

110,203

 

 

138,789

 

 

84,263

Other income (expense)

 

(19,517)

 

 

59,937

 

 

44,190

 

 

47,306

Total revenues

 

2,925,423

 

 

2,610,184

 

 

8,745,886

 

 

6,836,715

 

 

 

 

 

 

 

 

 

 

 

 

CLAIMS AND EXPENSES:

 

 

 

 

 

 

 

 

 

 

 

Incurred losses and loss adjustment expenses

 

2,274,301

 

 

1,736,210

 

 

5,571,861

 

 

4,574,066

Commission, brokerage, taxes and fees

 

564,335

 

 

445,332

 

 

1,611,095

 

 

1,360,170

Other underwriting expenses

 

141,150

 

 

138,875

 

 

424,225

 

 

385,865

Corporate expenses

 

17,817

 

 

10,618

 

 

46,363

 

 

29,184

Interest, fees and bond issue cost amortization expense

 

15,539

 

 

6,641

 

 

46,785

 

 

21,477

Total claims and expenses

 

3,013,142

 

 

2,337,676

 

 

7,700,329

 

 

6,370,762

 

 

 

 

 

 

 

 

 

 

 

 

INCOME (LOSS) BEFORE TAXES

 

(87,719)

 

 

272,508

 

 

1,045,557

 

 

465,953

Income tax expense (benefit)

 

(14,251)

 

 

29,451

 

 

97,181

 

 

15,404

 

 

 

 

 

 

 

 

 

 

 

 

NET INCOME (LOSS)

$

(73,468)

 

$

243,057

 

$

948,376

 

$

450,549

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss), net of tax:

 

 

 

 

 

 

 

 

 

 

 

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

 

(100,021)

 

 

63,480

 

 

(304,465)

 

 

335,835

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

 

(1,388)

 

 

(11,453)

 

 

(3,464)

 

 

12,689

Total URA(D) on securities arising during the period

 

(101,409)

 

 

52,027

 

 

(307,929)

 

 

348,524

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

(53,599)

 

 

60,628

 

 

(28,886)

 

 

30,390

 

 

 

 

 

 

 

 

 

 

 

 

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

 

1,563

 

 

1,806

 

 

5,649

 

 

4,532

Total benefit plan net gain (loss) for the period

 

1,563

 

 

1,806

 

 

5,649

 

 

4,532

Total other comprehensive income (loss), net of tax

 

(153,445)

 

 

114,461

 

 

(331,166)

 

 

383,446

 

 

 

 

 

 

 

 

 

 

 

 

COMPREHENSIVE INCOME (LOSS)

$

(226,913)

 

$

357,518

 

$

617,210

 

$

833,995

 

 

 

 

 

 

 

 

 

 

 

 

EARNINGS PER COMMON SHARE:

 

 

 

 

 

 

 

 

 

 

 

Basic

$

(1.88)

 

$

6.08

 

$

23.74

 

$

11.20

Diluted

 

(1.88)

 

 

6.07

 

 

23.72

 

 

11.18

 

 

 

 

 

 

 

 

 

 

 

 

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)

2021

 

2020

 

(unaudited)

COMMON SHARES (shares outstanding):

 

 

 

 

 

Balance, January 1

 

39,983,481

 

 

40,798,963

Issued during the period, net

 

196,481

 

 

159,423

Treasury shares acquired

 

(97,462)

 

 

(970,892)

Balance, March 31

 

40,082,500

 

 

39,987,494

Issued during the period, net

 

940

 

 

(15,849)

Treasury shares acquired

 

(68,100)

 

 

-

Balance, June 30

 

40,015,340

 

 

39,971,645

Issued during the period, net

 

(10,721)

 

 

(5,129)

Treasury shares acquired

 

(625,358)

 

 

-

Balance, September 30

 

39,379,261

 

 

39,966,516

 

 

 

 

 

 

COMMON SHARES (par value):

 

 

 

 

 

Balance, January 1

$

696

 

$

694

Issued during the period, net

 

2

 

 

2

Balance, March 31

 

698

 

 

696

Issued during the period, net

 

-

 

 

-

Balance, June 30

 

698

 

 

696

Issued during the period, net

 

-

 

 

-

Balance, September 30

 

698

 

 

696

 

 

 

 

 

 

ADDITIONAL PAID-IN CAPITAL:

 

 

 

 

 

Balance, January 1

 

2,245,301

 

 

2,219,660

Share-based compensation plans

 

436

 

 

(3,181)

Balance, March 31

 

2,245,737

 

 

2,216,479

Share-based compensation plans

 

10,653

 

 

9,514

Balance, June 30

 

2,256,390

 

 

2,225,993

Share-based compensation plans

 

9,952

 

 

9,385

Balance, September 30

 

2,266,342

 

 

2,235,378

 

 

 

 

 

 

ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS),

 

 

 

 

 

NET OF DEFERRED INCOME TAXES:

 

 

 

 

 

Balance, January 1

 

534,899

 

 

28,152

Net increase (decrease) during the period

 

(299,820)

 

 

(297,903)

Balance, March 31

 

235,079

 

 

(269,751)

Net increase (decrease) during the period

 

122,099

 

 

566,888

Balance, June 30

 

357,178

 

 

297,137

Net increase (decrease) during the period

 

(153,445)

 

 

114,461

Balance, September 30

 

203,733

 

 

411,598

 

 

 

 

 

 

RETAINED EARNINGS:

 

 

 

 

 

Balance, January 1

 

10,567,452

 

 

10,306,571

Change to beginning balance due to adoption of Accounting Standards Update 2016-13

 

-

 

 

(4,214)

Net income (loss)

 

341,862

 

 

16,612

Dividends declared ($1.55 per share 2021 and $1.55 per share 2020)

 

(62,228)

 

 

(63,277)

Balance, March 31

 

10,847,086

 

 

10,255,692

Net income (loss)

 

679,982

 

 

190,880

Dividends declared ($1.55 per share 2021 and $1.55 per share 2020)

 

(62,046)

 

 

(61,927)

Balance, June 30

 

11,465,022

 

 

10,384,645

Net income (loss)

 

(73,468)

 

 

243,057

Dividends declared ($1.55 per share 2021 and $1.55 per share 2020)

 

(61,457)

 

 

(61,910)

Balance, September 30

 

11,330,097

 

 

10,565,792

 

 

 

 

 

 

TREASURY SHARES AT COST:

 

 

 

 

 

Balance, January 1

 

(3,622,172)

 

 

(3,422,152)

Purchase of treasury shares

 

(23,545)

 

 

(200,020)

Balance, March 31

 

(3,645,717)

 

 

(3,622,172)

Purchase of treasury shares

 

(16,782)

 

 

-

Balance, June 30

 

(3,662,499)

 

 

(3,622,172)

Purchase of treasury shares

 

(159,736)

 

 

-

Balance, September 30

 

(3,822,235)

 

 

(3,622,172)

 

 

 

 

 

 

TOTAL SHAREHOLDERS' EQUITY, September 30

$

9,978,635

 

$

9,591,292

 

 

 

 

 

 

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

 

 

 

 

 

 

3


 

EVEREST RE GROUP, LTD.

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

 

 

Nine Months Ended

 

September 30,

(Dollars in thousands)

2021

 

2020

 

(unaudited)

CASH FLOWS FROM OPERATING ACTIVITIES:

 

 

 

 

 

Net income (loss)

$

948,376

 

$

450,549

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

 

 

 

 

 

Decrease (increase) in premiums receivable

 

(736,614)

 

 

(357,162)

Decrease (increase) in funds held by reinsureds, net

 

(92,512)

 

 

(53,878)

Decrease (increase) in reinsurance recoverables

 

(230,593)

 

 

(172,454)

Decrease (increase) in income taxes

 

57,270

 

 

184,311

Decrease (increase) in prepaid reinsurance premiums

 

(146,639)

 

 

(7,963)

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

 

2,576,049

 

 

1,665,982

Increase (decrease) in future policy benefit reserve

 

(1,189)

 

 

(2,218)

Increase (decrease) in unearned premiums

 

927,524

 

 

392,904

Increase (decrease) in other net payable to reinsurers

 

198,954

 

 

68,784

Increase (decrease) in losses in course of payment

 

23,661

 

 

132,208

Change in equity adjustments in limited partnerships

 

(543,401)

 

 

(12,475)

Distribution of limited partnership income

 

105,571

 

 

55,576

Change in other assets and liabilities, net

 

(247,615)

 

 

(131,224)

Non-cash compensation expense

 

33,199

 

 

29,337

Amortization of bond premium (accrual of bond discount)

 

57,289

 

 

32,594

Net realized capital (gains) losses

 

(138,789)

 

 

(84,263)

Net cash provided by (used in) operating activities

 

2,790,541

 

 

2,190,608

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

 

 

 

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

 

2,756,963

 

 

1,781,821

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

 

883,149

 

 

1,390,747

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

 

-

 

 

2,054

Proceeds from equity securities sold, at fair value

 

578,894

 

 

329,750

Distributions from other invested assets

 

216,573

 

 

210,527

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

 

(5,670,636)

 

 

(3,874,890)

Cost of equity securities acquired, at fair value

 

(507,862)

 

 

(460,953)

Cost of other invested assets acquired

 

(604,180)

 

 

(392,650)

Net change in short-term investments

 

422,643

 

 

(804,744)

Net change in unsettled securities transactions

 

(177,259)

 

 

89,064

Net cash provided by (used in) investing activities

 

(2,101,715)

 

 

(1,729,274)

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

 

 

 

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

 

(12,156)

 

 

(13,617)

Purchase of treasury shares

 

(200,064)

 

 

(200,020)

Dividends paid to shareholders

 

(185,731)

 

 

(187,110)

Cost of debt repurchase

 

-

 

 

(10,647)

FHLB borrowings (repayments)

 

-

 

 

90,000

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

 

(15,133)

 

 

(15,298)

Net cash provided by (used in) financing activities

 

(413,084)

 

 

(336,691)

 

 

 

 

 

 

EFFECT OF EXCHANGE RATE CHANGES ON CASH

 

(8,952)

 

 

6,203

 

 

 

 

 

 

Net increase (decrease) in cash

 

266,790

 

 

130,845

Cash, beginning of period

 

801,651

 

 

808,036

Cash, end of period

$

1,068,441

 

$

938,881

 

 

 

 

 

 

SUPPLEMENTAL CASH FLOW INFORMATION:

 

 

 

 

 

Income taxes paid (recovered)

$

39,767

 

$

(169,149)

Interest paid

 

33,422

 

 

16,731

 

 

 

 

 

 

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

 

 

 

 

 

4


 

NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS (UNAUDITED)

 

For the Three and Nine Months Ended September 30, 2021 and 2020

 

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 consolidated financial statements of the Company as of September 30, 2021 and December 31, 2020 and for the three and nine months ended September 30, 2021 and 2020 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, 2020 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, 2021 and 2020 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, 2020, 2019 and 2018, included in the Company’s most recent Form 10-K filing.

 

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

 

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

 

All intercompany accounts and transactions have been eliminated.

 

Certain reclassifications and format changes have been made to prior years’ amounts to conform to the 2021 presentation.

 

Application of Recently Issued Accounting Standard Changes.

 

Reference Rate Reform - LIBOR. In March 2020, the Financial Accounting Standards Board (“FASB”) issued ASU 2020-04 (and subsequently issued ASU 2021-01 in January 2021), which outlines the issues surrounding the cessation of LIBOR as a reference rate for contractual debt agreements. The guidance also details the potential alternative expedients and sources available for use in determination of rates and terms for such debt agreements in order to apply appropriate accounting policy. The guidance is effective for annual reporting

5


 

periods beginning after December 15, 2021. The Company is currently evaluating the impact of the adoption of ASU 2020-04 and 2021-01 on its financial statements.

 

Accounting for Income Taxes. In December 2019, The 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 adopted the guidance as of January 1, 2021. The adoption of ASU 2019-12 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 and then ASU 2020-11 in November 2021, which ultimately defers the effective date of ASU 2018-12 until annual reporting periods beginning after December 15, 2022. The Company is currently evaluating the impact of the adoption of ASU 2018-12 on its financial statements.

 

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

 

3. INVESTMENTS

 

The following tables show amortized cost, allowance for credit losses, gross unrealized appreciation, gross unrealized depreciation and market value of available for sale, fixed maturity securities as of the dates indicated:

 

 

 

At September 30, 2021

 

 

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

$

1,344,813

 

$

-

 

$

28,332

 

$

(10,323)

 

$

1,362,822

 

Obligations of U.S. states and political subdivisions

 

578,289

 

 

(151)

 

 

31,295

 

 

(1,058)

 

 

608,375

 

Corporate securities

 

7,315,144

 

 

(22,890)

 

 

254,723

 

 

(52,736)

 

 

7,494,241

 

Asset-backed securities

 

3,284,025

 

 

(7,679)

 

 

32,405

 

 

(3,499)

 

 

3,305,252

 

Mortgage-backed securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

1,042,504

 

 

-

 

 

49,729

 

 

(4,363)

 

 

1,087,870

 

Agency residential

 

2,208,540

 

 

-

 

 

45,876

 

 

(8,415)

 

 

2,246,001

 

Non-agency residential

 

7,316

 

 

-

 

 

11

 

 

(21)

 

 

7,306

 

Foreign government securities

 

1,428,105

 

 

-

 

 

54,778

 

 

(27,738)

 

 

1,455,145

 

Foreign corporate securities

 

3,974,020

 

 

(1,260)

 

 

129,296

 

 

(45,949)

 

 

4,056,107

Total fixed maturity securities

$

21,182,756

 

$

(31,980)

 

$

626,445

 

$

(154,102)

 

$

21,623,119

 

6


 

 

 

At December 31, 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

$

1,325,156

 

$

-

 

$

49,084

 

$

(7,134)

 

$

1,367,106

 

Obligations of U.S. states and political subdivisions

 

543,895

 

 

-

 

 

34,654

 

 

(1,254)

 

 

577,295

 

Corporate securities

 

6,824,800

 

 

(1,220)

 

 

380,677

 

 

(55,231)

 

 

7,149,026

 

Asset-backed securities

 

2,540,809

 

 

-

 

 

30,691

 

 

(5,698)

 

 

2,565,802

 

Mortgage-backed securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

915,923

 

 

-

 

 

75,275

 

 

(895)

 

 

990,303

 

Agency residential

 

2,206,139

 

 

-

 

 

64,663

 

 

(3,063)

 

 

2,267,739

 

Non-agency residential

 

5,187

 

 

-

 

 

9

 

 

(2)

 

 

5,194

 

Foreign government securities

 

1,565,260

 

 

(22)

 

 

102,587

 

 

(22,450)

 

 

1,645,375

 

Foreign corporate securities

 

3,297,898

 

 

(503)

 

 

204,023

 

 

(29,085)

 

 

3,472,333

Total fixed maturity securities

$

19,225,067

 

$

(1,745)

 

$

941,663

 

$

(124,812)

 

$

20,040,173

 

 

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, 2021

 

At December 31, 2020

 

Amortized

 

Market

 

Amortized

 

Market

(Dollars in thousands)

Cost

 

Value

 

Cost

 

Value

Fixed maturity securities – available for sale:

 

 

 

 

 

 

 

 

 

 

 

Due in one year or less

$

1,621,263

 

$

1,621,541

 

$

1,365,793

 

$

1,374,674

Due after one year through five years

 

6,675,763

 

 

6,826,936

 

 

6,529,189

 

 

6,774,785

Due after five years through ten years

 

4,918,975

 

 

5,069,884

 

 

4,414,211

 

 

4,751,903

Due after ten years

 

1,424,370

 

 

1,458,329

 

 

1,247,816

 

 

1,309,773

Asset-backed securities

 

3,284,025

 

 

3,305,252

 

 

2,540,809

 

 

2,565,802

Mortgage-backed securities:

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

1,042,504

 

 

1,087,870

 

 

915,923

 

 

990,303

Agency residential

 

2,208,540

 

 

2,246,001

 

 

2,206,139

 

 

2,267,739

Non-agency residential

 

7,316

 

 

7,306

 

 

5,187

 

 

5,194

Total fixed maturity securities

$

21,182,756

 

$

21,623,119

 

$

19,225,067

 

$

20,040,173

 

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)

2021

 

2020

 

2021

 

2020

Increase (decrease) during the period between the market value and cost

 

 

 

 

 

 

 

 

 

 

 

of investments carried at market value, and deferred taxes thereon:

 

 

 

 

 

 

 

 

 

 

 

Fixed maturity securities and short-term investments

$

(108,789)

 

$

55,587

 

$

(344,370)

 

$

392,640

Change in unrealized appreciation (depreciation), pre-tax

 

(108,789)

 

 

55,587

 

 

(344,370)

 

 

392,640

Deferred tax benefit (expense)

 

7,380

 

 

(3,560)

 

 

36,441

 

 

(44,116)

Change in unrealized appreciation (depreciation),

 

 

 

 

 

 

 

 

 

 

 

net of deferred taxes, included in shareholders’ equity

$

(101,409)

 

$

52,027

 

$

(307,929)

 

$

348,524

 

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

7


 

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. The Company 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).

 

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.

 

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, 2021 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

$

381,357

 

$

(6,369)

 

$

57,084

 

$

(3,954)

 

$

438,441

 

$

(10,323)

Obligations of U.S. states and political subdivisions

 

61,687

 

 

(937)

 

 

3,569

 

 

(121)

 

 

65,256

 

 

(1,058)

Corporate securities

 

1,559,623

 

 

(32,541)

 

 

399,617

 

 

(20,195)

 

 

1,959,240

 

 

(52,736)

Asset-backed securities

 

610,425

 

 

(3,131)

 

 

23,396

 

 

(368)

 

 

633,821

 

 

(3,499)

Mortgage-backed securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

108,367

 

 

(3,138)

 

 

26,144

 

 

(1,225)

 

 

134,511

 

 

(4,363)

Agency residential

 

814,318

 

 

(5,631)

 

 

134,746

 

 

(2,784)

 

 

949,064

 

 

(8,415)

Non-agency residential

 

2,742

 

 

(19)

 

 

156

 

 

(2)

 

 

2,898

 

 

(21)

Foreign government securities

 

382,570

 

 

(22,491)

 

 

58,238

 

 

(5,247)

 

 

440,808

 

 

(27,738)

Foreign corporate securities

 

1,221,503

 

 

(34,080)

 

 

183,579

 

 

(11,869)

 

 

1,405,082

 

 

(45,949)

Total fixed maturity securities

$

5,142,592

 

$

(108,337)

 

$

886,529

 

$

(45,765)

 

$

6,029,121

 

$

(154,102)

 

8


 

 

 

Duration of Unrealized Loss at September 30, 2021 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

$

178,193

 

$

(6,982)

 

$

150,934

 

$

(11,210)

 

$

329,127

 

$

(18,192)

Due in one year through five years

 

1,494,463

 

 

(33,475)

 

 

381,773

 

 

(17,997)

 

 

1,876,236

 

 

(51,472)

Due in five years through ten years

 

1,466,402

 

 

(45,526)

 

 

123,239

 

 

(9,696)

 

 

1,589,641

 

 

(55,222)

Due after ten years

 

467,682

 

 

(10,435)

 

 

46,141

 

 

(2,483)

 

 

513,823

 

 

(12,918)

Asset-backed securities

 

610,425

 

 

(3,131)

 

 

23,396

 

 

(368)

 

 

633,821

 

 

(3,499)

Mortgage-backed securities

 

925,427

 

 

(8,788)

 

 

161,046

 

 

(4,011)

 

 

1,086,473

 

 

(12,799)

Total fixed maturity securities

$

5,142,592

 

$

(108,337)

 

$

886,529

 

$

(45,765)

 

$

6,029,121

 

$

(154,102)

 

The aggregate market value and gross unrealized losses related to investments in an unrealized loss position at September 30, 2021 were $6,029.1 million and $154.1 million, respectively. The market value of securities for the single issuer (the United States government) whose securities comprised the largest unrealized loss position at September 30, 2021, did not exceed 1.7% of the overall market value of the Company’s fixed maturity securities. The market value of the securities for the issuer with the second largest unrealized loss position at September 30, 2021, comprised less than 0.6% 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 $108.3 million 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, foreign government securities, U.S. Treasury and government securities and agency residential mortgage-backed securities. Of these unrealized losses, $101.6 million were related to securities that were rated investment grade by at least one nationally recognized rating agency. The $45.8 million of unrealized losses related to fixed maturity securities in an unrealized loss position for more than one year related primarily to foreign and domestic corporate securities and foreign government securities. Of these unrealized losses, $43.4 million were related to securities that were rated investment grade by at least one nationally recognized 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.

 

 

 

Duration of Unrealized Loss at December 31, 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

$

135,190

 

$

(7,134)

 

$

-

 

$

-

 

$

135,190

 

$

(7,134)

Obligations of U.S. states and political subdivisions

 

19,524

 

 

(999)

 

 

4,059

 

 

(255)

 

 

23,583

 

 

(1,254)

Corporate securities

 

669,755

 

 

(26,159)

 

 

247,962

 

 

(29,072)

 

 

917,717

 

 

(55,231)

Asset-backed securities

 

235,566

 

 

(4,768)

 

 

85,595

 

 

(930)

 

 

321,161

 

 

(5,698)

Mortgage-backed securities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

53,511

 

 

(578)

 

 

6,592

 

 

(317)

 

 

60,103

 

 

(895)

Agency residential

 

434,447

 

 

(2,016)

 

 

50,353

 

 

(1,047)

 

 

484,800

 

 

(3,063)

Non-agency residential

 

185

 

 

(2)

 

 

-

 

 

-

 

 

185

 

 

(2)

Foreign government securities

 

114,755

 

 

(8,813)

 

 

150,812

 

 

(13,637)

 

 

265,567

 

 

(22,450)

Foreign corporate securities

 

354,548

 

 

(17,489)

 

 

115,595

 

 

(11,596)

 

 

470,143

 

 

(29,085)

Total fixed maturity securities

$

2,017,481

 

$

(67,958)

 

$

660,968

 

$

(56,854)

 

$

2,678,449

 

$

(124,812)

 

9


 

 

 

Duration of Unrealized Loss at December 31, 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

$

96,144

 

$

(4,942)

 

$

112,419

 

$

(12,071)

 

$

208,563

 

$

(17,013)

Due in one year through five years

 

653,816

 

 

(32,469)

 

 

283,866

 

 

(21,319)

 

 

937,682

 

 

(53,788)

Due in five years through ten years

 

422,517

 

 

(19,392)

 

 

49,749

 

 

(2,034)

 

 

472,266

 

 

(21,426)

Due after ten years

 

121,295

 

 

(3,791)

 

 

72,394

 

 

(19,136)

 

 

193,689

 

 

(22,927)

Asset-backed securities

 

235,566

 

 

(4,768)

 

 

85,595

 

 

(930)

 

 

321,161

 

 

(5,698)

Mortgage-backed securities

 

488,143

 

 

(2,596)

 

 

56,945

 

 

(1,364)

 

 

545,088

 

 

(3,960)

Total fixed maturity securities

$

2,017,481

 

$

(67,958)

 

$

660,968

 

$

(56,854)

 

$

2,678,449

 

$

(124,812)

 

The aggregate market value and gross unrealized losses related to investments in an unrealized loss position at December 31, 2020 were $2,678.4 million and $124.8 million, respectively. The market value of securities for the single issuer whose securities comprised the largest unrealized loss position at December 31, 2020, did not exceed 0.7% of the overall market value of the Company’s fixed maturity securities. The market value of the securities for the issuer with the second largest unrealized loss comprised less than 0.1% 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 $68.0 million 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, $63.4 million were related to securities that were rated investment grade by at least one nationally recognized rating agency. The $56.9 million 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, $33.5 million were related to securities that were rated investment grade by at least one nationally recognized 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 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)

2021

 

2020

 

2021

 

2020

Fixed maturities

$

134,157

 

$

136,104

 

$

423,335

 

$

407,946

Equity securities

 

3,774

 

 

4,402

 

 

12,105

 

 

11,585

Short-term investments and cash

 

82

 

 

494

 

 

1,035

 

 

4,356

Other invested assets:

 

 

 

 

 

 

 

 

 

 

 

Limited partnerships

 

138,718

 

 

88,778

 

 

493,017

 

 

22,092

Other

 

30,954

 

 

14,742

 

 

62,828

 

 

(1,291)

Gross investment income before adjustments

 

307,685

 

 

244,520

 

 

992,320

 

 

444,688

Funds held interest income (expense)

 

1,196

 

 

684

 

 

12,449

 

 

10,921

Future policy benefit reserve income (expense)

 

(272)

 

 

(291)

 

 

(733)

 

 

(805)

Gross investment income

 

308,609

 

 

244,913

 

 

1,004,036

 

 

454,804

Investment expenses

 

(15,850)

 

 

(10,680)

 

 

(43,769)

 

 

(34,688)

Net investment income

$

292,759

 

$

234,233

 

$

960,267

 

$

420,116

 

The Company records results from limited partnership investments on the equity method of accounting with changes in value reported through net investment income. The net investment income from limited partnerships is dependent upon the Company’s share of the net asset values of interests underlying each limited partnership. 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

10


 

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 $2,648.1 million in limited partnerships and private placement loan securities at September 30, 2021. 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, 2021, the market value of investments in the facility consolidated within the Company’s balance sheets was $429.7 million.

 

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)

2021

 

 

2020

 

2021

 

 

2020

Fixed maturity securities, market value:

 

 

 

 

 

 

 

 

 

 

 

Allowance for credit losses

$

(7,329)

 

$

6,196

 

$

(30,234)

 

$

(19,641)

Gains (losses) from sales

 

6,219

 

 

5,398

 

 

25,453

 

 

941

Fixed maturity securities, fair value:

 

 

 

 

 

 

 

 

 

 

 

Gains (losses) from sales

 

-

 

 

(1,968)

 

 

-

 

 

(1,968)

Gains (losses) from fair value adjustments

 

-

 

 

3,339

 

 

-

 

 

1,944

Equity securities, fair value:

 

 

 

 

 

 

 

 

 

 

 

Gains (losses) from sales

 

(489)

 

 

(1,317)

 

 

9,504

 

 

(12,642)

Gains (losses) from fair value adjustments

 

(4,542)

 

 

96,673

 

 

128,039

 

 

114,364

Other invested assets

 

1,920

 

 

1,084

 

 

6,014

 

 

50

Short-term investments gain (loss)

 

-

 

 

798

 

 

13

 

 

1,215

Total net realized capital gains (losses)

$

(4,222)

 

$

110,203

 

$

138,789

 

$

84,263

 

 

 

 

 

 

 

 

 

 

 

 

(Some amounts may not reconcile due to rounding.)

 

 

 

 

 

 

 

 

 

 

 

 

 

Roll Forward of Allowance for Credit Losses

 

 

Three Months Ended September 30, 2021

 

Nine Months Ended September 30, 2021

 

 

 

 

 

 

Obligations of

 

 

 

 

 

 

 

 

 

 

 

Obligations of

 

 

 

 

 

 

 

 

 

 

 

 

U.S. States

 

Foreign

 

Foreign

 

 

 

 

 

 

 

U.S. States

 

Foreign

 

Foreign

 

 

 

 

Corporate

 

Asset-Backed

 

and Political

 

Government

 

Corporate

 

 

 

Corporate

 

Asset-Backed

 

and Political

 

Government

 

Corporate

 

 

 

 

Securities

 

Securities

 

Subdivisions

 

Securities

 

Securities

 

Total

 

Securities

 

Securities

 

Subdivisions

 

Securities

 

Securities

 

Total

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning Balance

 

$

(18,475)

 

$

(4,915)

 

$

-

 

$

-

 

$

(1,260)

 

$

(24,650)

 

$

(1,220)

 

$

-

 

$

-

 

$

(22)

 

$

(503)

 

$

(1,745)

Credit losses on securities where credit

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

losses were not previously recorded

 

 

(5,257)

 

 

 

 

 

(151)

 

 

-

 

 

-

 

 

(5,408)

 

 

(21,177)

 

 

(4,915)

 

 

(151)

 

 

-

 

 

(1,055)

 

 

(27,298)

Increases in allowance on previously

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

impaired securities

 

 

(620)

 

 

(2,764)

 

 

-

 

 

-

 

 

-

 

 

(3,384)

 

 

(2,088)

 

 

(2,764)

 

 

-

 

 

-

 

 

-

 

 

(4,852)

Decreases in allowance on previously

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

impaired securities

 

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

 

-

Reduction in allowance due to disposals

 

 

1,462

 

 

-

 

 

-

 

 

-

 

 

-

 

 

1,462

 

 

1,595

 

 

-

 

 

-

 

 

22

 

 

298

 

 

1,915

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance as of September 30, 2021

 

$

(22,890)

 

$

(7,679)

 

$

(151)

 

$

-

 

$

(1,260)

 

$

(31,980)

 

$

(22,890)

 

$

(7,679)

 

$

(151)

 

$

-

 

$

(1,260)

 

$

(31,980)

 

11


 

 

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 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)

2021

 

2020

 

2021

 

2020

Proceeds from sales of fixed maturity securities

$

283,412

 

$

402,528

 

$

883,149

 

$

1,392,801

Gross gains from sales

 

17,004

 

 

18,721

 

 

51,738

 

 

54,077

Gross losses from sales

 

(10,785)

 

 

(15,291)

 

 

(26,285)

 

 

(55,104)

 

 

 

 

 

 

 

 

 

 

 

 

Proceeds from sales of equity securities

$

104,231

 

$

116,565

 

$

578,894

 

$

329,750

Gross gains from sales

 

2,768

 

 

9,512

 

 

20,875

 

 

30,268

Gross losses from sales

 

(3,257)

 

 

(10,829)

 

 

(11,371)

 

 

(42,910)

 

12


 

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)

2021

 

2020

Gross reserves beginning of period

$

16,398,997

 

$

13,611,313

Less reinsurance recoverables on unpaid losses

 

(1,843,691)

 

 

(1,640,712)

Net reserves beginning of period

 

14,555,306

 

 

11,970,601

 

 

 

 

 

 

Incurred related to:

 

 

 

 

 

Current year

 

5,577,911

 

 

4,572,640

Prior years

 

(6,050)

 

 

1,426

Total incurred losses and LAE

 

5,571,861

 

 

4,574,066

 

 

 

 

 

 

Paid related to:

 

 

 

 

 

Current year

 

1,375,665

 

 

1,015,538

Prior years

 

1,786,393

 

 

2,042,712

Total paid losses and LAE

 

3,162,058

 

 

3,058,250

 

 

 

 

 

 

Foreign exchange/translation adjustment

 

(41,000)

 

 

(28,024)

 

 

 

 

 

 

Net reserves end of period

 

16,924,109

 

 

13,458,393

Plus reinsurance recoverables on unpaid losses

 

2,032,844

 

 

1,774,732

Gross reserves end of period

$

18,956,953

 

$

15,233,125

 

 

 

 

 

 

(Some amounts may not reconcile due to rounding.)

 

Current year incurred losses were $5,577.9 million and $4,572.6 million for the nine months ended September 30, 2021 and 2020, respectively. Gross and net reserves increased for the nine months ended September 30, 2021, reflecting an increase in underlying exposure due to premium growth and catastrophe losses of $1,010.0 million and $355.0 million for the nine months ended September 30, 2021 and 2020, respectively. In addition, current year incurred losses for the nine months ended September 30, 2020 included $434.9 million of losses associated with the COVID-19 Pandemic which did not recur in 2021.

 

5. 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.

 

13


 

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.

 

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, 2021, $1,803.0 million of fixed maturities, market value were fair valued using unobservable inputs. The majority of these fixed maturities were valued by investment managers’ valuation committees and many of these fair values were substantiated by valuations from independent third parties. The Company has procedures in place to evaluate these independent third party valuations. At December 31, 2020, $1,330.2 million of fixed maturities, market value were fair valued using unobservable inputs.

 

The Company internally manages a public equity portfolio which had a fair value at September 30, 2021 and December 31, 2020 of $1,253.9 million and $784.7 million, 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.

 

In addition to the valuations from investment managers, some of the fixed maturities with fair values categorized as Level 3 result when prices are not available from the nationally recognized pricing services. The asset managers may obtain non-binding price quotes for the securities from brokers. The single broker quotes

14


 

are provided by market makers or broker-dealers who are recognized as market participants in the markets in which they are providing the quotes. The prices received from brokers are reviewed for reasonableness by the third party asset managers and the Company. If the broker quotes are for foreign denominated securities, the quotes are converted to U.S. dollars using currency exchange rates from nationally recognized sources. In limited circumstances when broker prices are not available for private placements, the Company will value the securities using comparable market information or receive fair values from investment managers.

 

The composition and valuation inputs for the presented fixed maturities categories Level 1 and Level 2 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;

 

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.

 

15


 

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, 2021

 

(Level 1)

 

(Level 2)

 

(Level 3)

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

Fixed maturities, market value

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury securities and obligations of

 

 

 

 

 

 

 

 

 

 

 

 

U.S. government agencies and corporations

 

$

1,362,822

 

$

-

 

$

1,362,822

 

$

-

Obligations of U.S. States and political subdivisions

 

 

608,375

 

 

-

 

 

608,375

 

 

-

Corporate securities

 

 

7,494,241

 

 

-

 

 

6,700,200

 

 

794,041

Asset-backed securities

 

 

3,305,252

 

 

-

 

 

2,301,183

 

 

1,004,069

Mortgage-backed securities

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

 

1,087,870

 

 

-

 

 

1,087,870

 

 

-

Agency residential

 

 

2,246,001

 

 

-

 

 

2,246,001

 

 

-

Non-agency residential

 

 

7,306

 

 

-

 

 

7,306

 

 

-

Foreign government securities

 

 

1,455,145

 

 

-

 

 

1,455,145

 

 

-

Foreign corporate securities

 

 

4,056,107

 

 

-

 

 

4,051,232

 

 

4,875

Total fixed maturities, market value

 

 

21,623,119

 

 

-

 

 

19,820,134

 

 

1,802,985

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity securities, fair value

 

 

1,523,595

 

 

1,451,271

 

 

72,324

 

 

-

 

 

 

 

 

 

 

 

Fair Value Measurement Using:

 

 

 

 

 

Quoted Prices

 

 

 

 

 

 

 

 

 

 

 

in Active

 

Significant

 

 

 

 

 

 

 

 

Markets for

 

Other

 

Significant

 

 

 

 

 

Identical

 

Observable

 

Unobservable

 

 

 

 

 

Assets

 

Inputs

 

Inputs

(Dollars in thousands)

 

December 31, 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

 

$

1,367,106

 

$

-

 

$

1,367,106

 

$

-

Obligations of U.S. States and political subdivisions

 

 

577,295

 

 

-

 

 

577,295

 

 

-

Corporate securities

 

 

7,149,026

 

 

-

 

 

6,447,534

 

 

701,492

Asset-backed securities

 

 

2,565,802

 

 

-

 

 

1,942,769

 

 

623,033

Mortgage-backed securities

 

 

 

 

 

 

 

 

 

 

 

 

Commercial

 

 

990,303

 

 

-

 

 

990,303

 

 

-

Agency residential

 

 

2,267,739

 

 

-

 

 

2,267,739

 

 

-

Non-agency residential

 

 

5,194

 

 

-

 

 

5,194

 

 

-

Foreign government securities

 

 

1,645,375

 

 

-

 

 

1,645,375

 

 

-

Foreign corporate securities

 

 

3,472,333

 

 

-

 

 

3,466,634

 

 

5,699

Total fixed maturities, market value

 

 

20,040,173

 

 

-

 

 

18,709,949

 

 

1,330,224

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity securities, fair value

 

 

1,472,236

 

 

1,368,704

 

 

103,532

 

 

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

In addition, $266.3 million and $224.7 million of investments within other invested assets on the consolidated balance sheets as of September 30, 2021 and December 31, 2020, 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.

 

16


 

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, 2021

 

Nine Months Ended September 30, 2021

 

 

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

 

$

705,571

 

$

815,276

 

$

4,887

 

$

1,525,734

 

$

701,492

 

$

623,033

 

$

5,699

 

$

1,330,224

Total gains or (losses) (realized/unrealized)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Included in earnings

 

 

3,184

 

 

(3,292)

 

 

33

 

 

(75)

 

 

(12,366)

 

 

(7,254)

 

 

173

 

 

(19,447)

Included in other comprehensive income (loss)

 

 

(1,311)

 

 

(381)

 

 

(34)

 

 

(1,726)

 

 

6,107

 

 

4,094

 

 

(70)

 

 

10,131

Purchases, issuances and settlements

 

 

86,597

 

 

192,466

 

 

(12)

 

 

279,051

 

 

98,808

 

 

384,196

 

 

(928)

 

 

482,076

Transfers in and/or (out) of Level 3

 

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

 

-

Ending balance

 

$

794,041

 

$

1,004,069

 

$

4,875

 

$

1,802,984

 

$

794,041

 

$

1,004,069

 

$

4,875

 

$

1,802,984

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

$

761

 

$

(2,764)

 

$

-

 

$

(2,003)

 

$

(16,518)

 

$

(7,679)

 

$

-

 

$

(24,197)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Some amounts may not reconcile due to rounding.)

 

 

 

 

 

 

 

 

 

 

 

 

 

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.)

 

17


 

 

 

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.)

 

 There were no net transfers to/(from) level 3, fair value measurements using significant unobservable inputs for fixed maturities, market value for the three and nine months ended September 30, 2021, respectively. The net transfers to/(from) level 3, fair value measurements using significant unobservable inputs for fixed maturities, market value were $3.3 million and ($0.5) million for the three and nine months ended September 30, 2020, respectively. The net transfers of $3.3 million 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 net transfers of ($0.5) million 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 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)

2021

 

2020

 

2021

 

2020

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 equity securities, fair value were ($9.9) million for both the three and nine months ended September 30, 2020. The transfers of ($9.9) million 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.

 

18


 

 

6. 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.

 

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)

2021

 

2020

 

2021

 

2020

Net income (loss) per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Numerator

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

$

(73,468)

 

 

$

243,057

 

 

$

948,376

 

 

$

450,549

 

 

Less: dividends declared-common shares and unvested common shares

 

(61,457)

 

 

 

(61,910)

 

 

 

(185,731)

 

 

 

(187,115)

 

 

Undistributed earnings

 

(134,925)

 

 

 

181,148

 

 

 

762,646

 

 

 

263,435

 

 

Percentage allocated to common shareholders (1)

 

100.0

%

 

 

98.8

%

 

 

98.7

%

 

 

98.7

%

 

 

 

(134,925)

 

 

 

178,938

 

 

 

752,414

 

 

 

260,096

 

 

Add: dividends declared-common shareholders

 

61,457

 

 

 

61,199

 

 

 

183,333

 

 

 

184,836

 

 

Numerator for basic and diluted earnings per common share

$

(73,468)

 

 

$

240,138

 

 

$

935,748

 

 

$

444,931

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Denominator

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Denominator for basic earnings per weighted-average common shares

 

39,161

 

 

 

39,483

 

 

 

39,409

 

 

 

39,711

 

 

Effect of dilutive securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Options

 

36

 

 

 

74

 

 

 

44

 

 

 

79

 

 

Denominator for diluted earnings per adjusted weighted-average common shares

 

39,197

 

 

 

39,557

 

 

 

39,452

 

 

 

39,790

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Per common share net income (loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

$

(1.88)

 

 

$

6.08

 

 

$

23.74

 

 

$

11.20

 

 

Diluted

$

(1.88)

 

 

$

6.07

 

 

$

23.72

 

 

$

11.18

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1)

Basic weighted-average common shares outstanding

 

39,161

 

 

 

39,483

 

 

 

39,409

 

 

 

39,711

 

 

Basic weighted-average common shares outstanding and unvested common shares expected to vest

 

39,161

 

 

 

39,971

 

 

 

39,945

 

 

 

40,221

 

 

Percentage allocated to common shareholders

 

100.0

%

 

 

98.8

%

 

 

98.7

%

 

 

98.7

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Some amounts may not reconcile due to rounding.)

 

 

 

 

 

 

 

 

 

There were no anti-diluted options outstanding for the three and nine months ended September 30, 2021 and 2020.

 

All outstanding options granted under share-based compensation plans expire on or between February 22, 2022 and September 19, 2022.

 

7. 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.

19


 

 

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 had one equity index put option contract at September 30, 2021, based on the Standard & Poor’s 500 (“S&P 500”) index. Based on historical index volatilities and trends and the September 30, 2021 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 0.1%. 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, 2021, the present value of the theoretical maximum payout using a 3% discount factor was $151.2 million. Conversely, if the contract had expired on September 30, 2021, with the S&P index at 4,307.54, there would have been no settlement amount.

 

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 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)

2021

 

2020

The Prudential

$

138,869

 

$

140,773

Unaffiliated life insurance company

 

34,163

 

 

35,128

 

8. 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, 2021

 

Nine Months Ended September 30, 2021

(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

$

(107,980)

 

$

7,959

 

$

(100,021)

 

$

(343,137)

 

$

38,672

 

$

(304,465)

Reclassification of net realized losses (gains) included in net income (loss)

 

(809)

 

 

(579)

 

 

(1,388)

 

 

(1,233)

 

 

(2,231)

 

 

(3,464)

Foreign currency translation adjustments

 

(59,094)

 

 

5,495

 

 

(53,599)

 

 

(30,060)

 

 

1,174

 

 

(28,886)

Reclassification of benefit plan liability amortization included in net income (loss)

 

1,979

 

 

(416)

 

 

1,563

 

 

7,151

 

 

(1,502)

 

 

5,649

Total other comprehensive income (loss)

$

(165,904)

 

$

12,459

 

$

(153,445)

 

$

(367,279)

 

$

36,113

 

$

(331,166)

 

 

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

 

20


 

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

 

2021

 

2020

 

2021

 

2020

 

operations and comprehensive income (loss)

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

URA(D) on securities

 

$

(809)

 

$

(12,678)

 

$

(1,233)

 

$

18,650

 

Other net realized capital gains (losses)

 

 

 

(579)

 

 

1,225

 

 

(2,231)

 

 

(5,961)

 

Income tax expense (benefit)

 

 

$

(1,388)

 

$

(11,453)

 

$

(3,464)

 

$

12,689

 

Net income (loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Benefit plan net gain (loss)

 

$

1,979

 

$

2,285

 

$

7,151

 

$

5,736

 

Other underwriting expenses

 

 

 

(416)

 

 

(479)

 

 

(1,502)

 

 

(1,204)

 

Income tax expense (benefit)

 

 

$

1,563

 

$

1,806

 

$

5,649

 

$

4,532

 

Net income (loss)

 

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)

2021

 

2020

 

2021

 

2020

Beginning balance of URA (D) on securities

$

517,639

 

$

600,922

 

$

724,159

 

$

304,425

Current period change in URA (D) of investments - non-credit related

 

(101,409)

 

 

52,027

 

 

(307,929)

 

 

348,524

Ending balance of URA (D) on securities

 

416,230

 

 

652,949

 

 

416,230

 

 

652,949

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance of foreign currency translation adjustments

 

(90,677)

 

 

(231,955)

 

 

(115,390)

 

 

(201,717)

Current period change in foreign currency translation adjustments

 

(53,599)

 

 

60,628

 

 

(28,886)

 

 

30,390

Ending balance of foreign currency translation adjustments

 

(144,276)

 

 

(171,327)

 

 

(144,276)

 

 

(171,327)

 

 

 

 

 

 

 

 

 

 

 

 

Beginning balance of benefit plan net gain (loss)

 

(69,784)

 

 

(71,830)

 

 

(73,870)

 

 

(74,556)

Current period change in benefit plan net gain (loss)

 

1,563

 

 

1,806

 

 

5,649

 

 

4,532

Ending balance of benefit plan net gain (loss)

 

(68,221)

 

 

(70,024)

 

 

(68,221)

 

 

(70,024)

 

 

 

 

 

 

 

 

 

 

 

 

Ending balance of accumulated other comprehensive income (loss)

$

203,733

 

$

411,598

 

$

203,733

 

$

411,598

 

 

 

 

 

 

 

 

 

 

 

 

(Some amounts may not reconcile due to rounding.)

 

 

 

 

 

 

 

9. CREDIT FACILITIES

 

The Company has multiple active credit facilities for a total commitment of up to $1,530.0 million and an additional credit facility for a total commitment of up to £52.2 million, providing for the issuance of letters of credit and/or unsecured revolving credit lines. The Company also has additional uncommitted credit facilities of up to $140.0 million which may be accessible via written request and corresponding authorization from the applicable lender. The following table presents the interest and fees incurred in connection with these committed credit facilities for the periods indicated:

 

 

Three Months Ended

 

Nine Months Ended

 

September 30,

 

September 30,

(Dollars in thousands)

2021

 

2020

 

2021

 

2020

Credit facility interest and fees incurred

$

-

 

$

105

 

$

175

 

$

560

Loan interest and fees incurred - Federal Home Loan Bank

 

281

 

 

27

 

 

827

 

 

27

Total interest and fees incurred

$

281

 

$

132

 

$

1,002

 

$

587

 

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, $800.0 million senior credit facility with a syndicate of lenders, which amended and restated in its entirety the June 22,

21


 

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 “2016 Group Credit Facility”. Wells Fargo Corporation (“Wells Fargo Bank”) is the administrative agent for the 2016 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. Tranche two exclusively provides up to $600.0 million for the issuance of standby letters of credit on a collateralized basis.

 

Effective May 26, 2021, the term of the 2016 Group Credit Facility expired. The Company elected not to renew this facility to allow for the replacement by new credit facilities, including the 2021 Bermuda Re Wells Fargo Letter of Credit Facility, detailed below. As a result, Tranche One of the Group Credit Facility (unsecured revolving credit in the amount of $200.0 million) is no longer effective or available for use. The $600.0 million of credit availability in Tranche two will be in run-off and able to support standby letters of credit currently in force through December 31, 2021. As of December 31, 2021, the entirety of the 2016 Group Credit Facility will have expired and will no longer be effective. This collateralized letter of credit capacity will be replaced with additional bilateral collateralized letters of credit.

 

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 preferred shares, which at September 30, 2021, was $6,651.8 million. As of September 30, 2021, the Company was in compliance with all Group Credit Facility covenants.

 

The following table summarizes the outstanding letters of credit and/or borrowings for the periods indicated:

 

(Dollars in thousands)

 

 

 

 

At September 30, 2021

 

 

At December 31, 2020

Bank

 

 

 

Commitment

 

In Use

 

Date of Expiry

 

Commitment

 

In Use

 

Date of Expiry

Wells Fargo Bank Group Credit Facility

 

Tranche One

 

$

-

 

$

-

 

 

 

$

200,000

 

$

164,242

 

12/31/2021

 

 

Tranche Two

 

 

600,000

 

 

402,284

 

12/31/2021

 

 

600,000

 

 

589,690

 

12/31/2021

Total Wells Fargo Bank Group Credit Facility

 

 

 

$

600,000

 

$

402,284

 

 

 

$

800,000

 

$

753,932

 

 

 

 

Bermuda Re Wells Fargo Letter of Credit Facility

 

Effective February 23, 2021, Bermuda Re entered into a letter of credit issuance facility with Wells Fargo referred to as the “2021 Bermuda Re Wells Fargo Letter of Credit Facility.” The Bermuda Re Wells Fargo Letter of Credit Facility originally provided for the issuance of up to $50.0 million of secured letters of credit. Effective May 5, 2021, the agreement was amended to provide for the issuance of up to $500.0 million of secured letters of credit.

 

The following table summarizes the outstanding letters of credit for the periods indicated:

 

(Dollars in thousands)

 

At September 30, 2021

Bank

 

Commitment

 

In Use

 

Date of Expiry

Wells Fargo Bank Bilateral LOC Agreement

 

$

500,000

 

$

404,157

 

12/31/2021

 

 

$

500,000

 

$

404,157

 

 

 

Bermuda Re Citibank Letter of Credit Facility

 

Effective August 9, 2021, Bermuda Re entered into a new letter of credit issuance facility with Citibank N.A. which superseded the previous letter of credit issuance facility with Citibank N.A. that was effective December 31, 2020. Both of these agreements are referred to as the “Bermuda Re Citibank Letter of Credit Facility”. The current Bermuda Re Citibank Letter of Credit Facility provides for the committed issuance of up to $230.0 million of secured letters of credit. In addition, the facility provided for the uncommitted issuance of up the $140.0

22


 

million, which may be accessible via written request by the Company and corresponding authorization from Citibank N.A.

 

The following table summarizes the outstanding letters of credit for the periods indicated:

 

(Dollars in thousands)

 

At September 30, 2021

 

At December 31, 2020

Bank

 

Commitment

 

In Use

 

Date of Expiry

 

Commitment

 

In Use

 

Date of Expiry

Citibank Bilateral Letter of Credit Agreement

 

$

230,000

 

$

1,264

 

11/24/2021

 

$

200,000

 

$

4,425

 

02/28/2021

 

 

 

 

 

 

429

 

12/16/2021

 

 

 

 

 

3,672

 

11/24/2021

 

 

 

 

 

 

139,887

 

12/31/2021

 

 

 

 

 

448

 

12/16/2021

 

 

 

 

 

 

4,425

 

02/28/2022

 

 

 

 

 

115

 

12/20/2021

 

 

 

 

 

 

838

 

03/01/2022

 

 

 

 

 

136,383

 

12/31/2021

 

 

 

 

 

 

148

 

12/20/2022

 

 

 

 

 

39,619

 

12/30/2024

 

 

 

 

 

 

28,498

 

12/31/2022

 

 

 

 

 

821

 

08/15/2022

 

 

 

 

 

 

999

 

08/15/2023

 

 

 

 

 

-

 

 

 

 

 

 

 

 

1,252

 

09/23/2023

 

 

 

 

 

-

 

 

 

 

 

 

 

 

22,964

 

09/30/2025

 

 

 

 

 

-

 

 

Total Citibank Bilateral Agreement

 

$

230,000

 

$

200,704

 

 

 

$

200,000

 

$

185,483

 

 

 

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 £52.2 million for the issuance of standby letters of credit on a collateralized basis.

 

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 $6,393.0 million (70% of consolidated net worth as of December 31, 2019), plus 25% of consolidated net income for each of Group’s fiscal quarters, for which statements are available ending on or after January 1, 2020 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, 2021, was $6,788.7 million. As of September 30, 2021, 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, 2021

 

At December 31, 2020

Bank

 

Commitment

 

In Use

 

Date of Expiry

 

Commitment

 

In Use

 

Date of Expiry

Lloyd's Bank plc

 

£

52,175

 

£

52,175

 

12/31/2024

 

£

52,175

 

£

52,175

 

12/31/2023

Total Lloyd's Bank Credit Facility

 

£

52,175

 

£

52,175

 

 

 

£

52,175

 

£

52,175

 

 

 

 

 

 

 

Bermuda Re Bayerische Landesbank Credit Facility

 

Effective August 9, 2021 Bermuda Re entered into a letter of credit issuance facility with Bayerische Landesbank, an agreement referred to as the “Bermuda Re Bayerische Landesbank Credit Facility”. The Bermuda Re Bayerische Landesbank Credit Facility provides for the committed issuance of up to $200.0 million of secured letters of credit.

 

23


 

(Dollars in thousands)

 

At September 30, 2021

Bank

 

Commitment

 

In Use

 

Date of Expiry

Bayerische Landesbank Bilateral Letter of Credit Agreement

 

$

200,000

 

$

-

 

 

Total Bayerische Landesbank Bilateral Agreement

 

$

200,000

 

$

-

 

 

 

 

Federal Home Loan Bank Membership

 

Everest Reinsurance Company (“Everest Re”) is 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, 2021, Everest Re had admitted assets of approximately $18,874.0 million which provides borrowing capacity of up to approximately $1,887.4 million. During 2020, Everest Re borrowed $400.0 million under its FHLBNY capacity. The borrowings have interest payable at an interest rate of 0.35%. As of September 30, 2021, $310.0 million of these borrowings remain outstanding, with maturities in November and December 2021. The FHLBNY membership agreement requires that 4.5% of borrowed funds be used to acquire additional membership stock.

 

10. 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, 2021, the total amount on deposit in trust accounts was $1,526.1 million.

 

The Company reinsures some of its catastrophe exposures with the segregated accounts of Mt. Logan Re. Mt. Logan Re is a Collateralized insurer registered in Bermuda and 100% of the voting common shares are owned by Group. Each segregated account invests predominantly in a diversified set of catastrophe exposures, diversified by risk/peril and across different geographic regions globally.

 

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

 

 

2021

 

 

2020

 

 

2021

 

 

2020

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

Ceded written premiums

 

$

114,694

 

$

86,712

 

$

269,987

 

$

245,422

Ceded earned premiums

 

 

100,133

 

 

71,396

 

 

249,662

 

 

233,089

Ceded losses and LAE

 

 

169,998

 

 

87,917

 

 

281,893

 

 

173,968

 

 

 

 

 

 

 

 

 

 

 

 

 

Assumed written premiums

 

 

4,273

 

 

8,894

 

 

9,490

 

 

14,448

Assumed earned premiums

 

 

4,273

 

 

8,894

 

 

9,490

 

 

14,448

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 $847.3 million and $806.6 million at September 30, 2021 and December 31, 2020, respectively. Of this amount, Group had investments recorded at $61.6 million and $67.6 million at September 30, 2021 and December 31, 2020, 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 $269.2 million 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 $252.0 million to the Mt. Logan Re segregated account. The maximum liability to be retroceded under the agreement will be $319.0 million. The Company will retain liability for any amounts exceeding the maximum liability. As of September 30, 2021 and December 31, 2020, the Company has a reinsurance recoverable of $217.5 million and $254.9 million, respectively. In addition, the Company has a deferred gain liability of $34.4

24


 

million and $38.8 million as of September 30, 2021 and December 31, 2020, respectively, reported in other liabilities.

 

The Company entered into various 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 named storm and earthquake events. The table below summarizes the various agreements.

 

(Dollars in thousands)

 

 

 

 

 

 

 

 

 

 

 

Class

 

Description

 

Effective Date

 

Expiration Date

 

Limit

 

Coverage Basis

Series 2017-1 Class A-2

 

US, Canada, Puerto Rico – Named Storm and Earthquake Events

 

4/13/2017

 

4/13/2022

 

 

50,000

 

Aggregate

Series 2017-1 Class B-2

 

US, Canada, Puerto Rico – Named Storm and Earthquake Events

 

4/13/2017

 

4/13/2022

 

 

75,000

 

Aggregate

Series 2017-1 Class C-2

 

US, Canada, Puerto Rico – Named Storm and Earthquake Events

 

4/13/2017

 

4/13/2022

 

 

175,000

 

Aggregate

Series 2018-1 Class A-1

 

US, Canada, Puerto Rico – Named Storm and Earthquake Events

 

4/30/2018

 

5/6/2022

 

 

62,500

 

Aggregate

Series 2018-1 Class B-1

 

US, Canada, Puerto Rico – Named Storm and Earthquake Events

 

4/30/2018

 

5/6/2022

 

 

200,000

 

Aggregate

Series 2018-1 Class A-2

 

US, Canada, Puerto Rico – Named Storm and Earthquake Events

 

4/30/2018

 

5/5/2023

 

 

62,500

 

Aggregate

Series 2018-1 Class B-2

 

US, Canada, Puerto Rico – Named Storm and Earthquake Events

 

4/30/2018

 

5/5/2023

 

 

200,000

 

Aggregate

Series 2019-1 Class A-1

 

US, Canada, Puerto Rico – Named Storm and Earthquake Events

 

12/12/2019

 

12/19/2023

 

 

150,000

 

Occurrence

Series 2019-1 Class B-1

 

US, Canada, Puerto Rico – Named Storm and Earthquake Events

 

12/12/2019

 

12/19/2023

 

 

275,000

 

Aggregate

Series 2019-1 Class A-2

 

US, Canada, Puerto Rico – Named Storm and Earthquake Events

 

12/12/2019

 

12/19/2024

 

 

150,000

 

Occurrence

Series 2019-1 Class B-2

 

US, Canada, Puerto Rico – Named Storm and Earthquake Events

 

12/12/2019

 

12/19/2024

 

 

275,000

 

Aggregate

Series 2021-1 Class A-1

 

US, Canada, Puerto Rico – Named Storm and Earthquake Events

 

4/8/2021

 

4/21/2025

 

 

150,000

 

Occurrence

Series 2021-1 Class B-1

 

US, Canada, Puerto Rico – Named Storm and Earthquake Events

 

4/8/2021

 

4/21/2025

 

 

85,000

 

Aggregate

Series 2021-1 Class C-1

 

US, Canada, Puerto Rico – Named Storm and Earthquake Events

 

4/8/2021

 

4/21/2025

 

 

85,000

 

Aggregate

Series 2021-1 Class A-2

 

US, Canada, Puerto Rico – Named Storm and Earthquake Events

 

4/8/2021

 

4/20/2026

 

 

150,000

 

Occurrence

Series 2021-1 Class B-2

 

US, Canada, Puerto Rico – Named Storm and Earthquake Events

 

4/8/2021

 

4/20/2026

 

 

90,000

 

Aggregate

Series 2021-1 Class C-2

 

US, Canada, Puerto Rico – Named Storm and Earthquake Events

 

4/8/2021

 

4/20/2026

 

 

90,000

 

Aggregate

 

 

Total available limit as of September 30, 2021

 

 

 

 

 

$

2,325,000

 

 

 

 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.

 

25


 

Kilimanjaro has financed the various property catastrophe reinsurance coverages by issuing catastrophe bonds to unrelated, external investors. The proceeds from the issuance of the Notes listed below are held in reinsurance trusts throughout the duration of the applicable reinsurance agreements and invested solely in U.S. government money market funds with a rating of at least “AAAm” by Standard & Poor’s.

 

(Dollars in thousands)

 

 

 

 

 

 

 

Note Series

 

Issue Date

 

Maturity Date

 

Amount

Series 2017-1 Class A-2

 

4/13/2017

 

4/13/2022

 

$

50,000

Series 2017-1 Class B-2

 

4/13/2017

 

4/13/2022

 

 

75,000

Series 2017-1 Class C-2

 

4/13/2017

 

4/13/2022

 

 

175,000

Series 2018-1 Class A-1

 

4/30/2018

 

5/6/2022

 

 

62,500

Series 2018-1 Class B-1

 

4/30/2018

 

5/6/2022

 

 

200,000

Series 2018-1 Class A-2

 

4/30/2018

 

5/5/2023

 

 

62,500

Series 2018-1 Class B-2

 

4/30/2018

 

5/5/2023

 

 

200,000

Series 2019-1 Class A-1

 

12/12/2019

 

12/19/2023

 

 

150,000

Series 2019-1 Class B-1

 

12/12/2019

 

12/19/2023

 

 

275,000

Series 2019-1 Class A-2

 

12/12/2019

 

12/19/2024

 

 

150,000

Series 2019-1 Class B-2

 

12/12/2019

 

12/19/2024

 

 

275,000

Series 2021-1 Class A-1

 

4/8/2021

 

4/21/2025

 

 

150,000

Series 2021-1 Class B-1

 

4/8/2021

 

4/21/2025

 

 

85,000

Series 2021-1 Class C-1

 

4/8/2021

 

4/21/2025

 

 

85,000

Series 2021-1 Class A-2

 

4/8/2021

 

4/20/2026

 

 

150,000

Series 2021-1 Class B-2

 

4/8/2021

 

4/20/2026

 

 

90,000

Series 2021-1 Class C-2

 

4/8/2021

 

4/20/2026

 

 

90,000

 

11. 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, 2021

 

December 31, 2020

 

 

 

 

 

 

 

Consolidated Balance

 

 

 

 

Consolidated Balance

 

 

 

(Dollars in thousands)

Date Issued

 

Date Due

 

Principal Amounts

 

Sheet Amount

 

Market Value

 

Sheet Amount

 

Market Value

4.868% Senior notes

6/5/2014

 

6/1/2044

 

400,000

 

$

397,284

 

$

506,828

 

$

397,194

 

$

528,000

3.5% Senior notes

10/07/2020

 

10/15/2050

 

1,000,000

 

 

979,915

 

 

1,065,400

 

 

979,524

 

 

1,138,100

 

On June 5, 2014, Holdings issued $400.0 million of 30 year senior notes with an interest coupon rate of 4.868%, which will mature on June 1, 2044. Interest is paid semi-annually on June 1 and December 1 of each year.

 

On October 7, 2020, Holdings issued $1,000.0 million of 30 year senior notes with an interest coupon rate of 3.50%, which will mature on October 15, 2050. Interest is paid semi-annually on April 15 and October 15 of each year.

 

On October 4, 2021, Holdings issued $1,000.0 million of 31 year senior notes with an interest coupon rate of 3.125%, which will mature on October 15, 2052. Interest is paid semi-annually on April 15 and October 15 of each year.

 

26


 

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

2021

 

2020

 

2021

 

2020

Interest expense incurred 4.868% Senior notes

$

4,868

 

$

4,868

 

$

14,604

 

$

14,604

Interest expense incurred 3.5% Senior notes

 

8,805

 

 

-

 

 

26,415

 

 

-

 

12. 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, 2021

 

December 31, 2020

 

 

 

Original

 

 

 

 

 

Consolidated Balance

 

Market

 

Consolidated Balance

 

Market

(Dollars in thousands)

Date Issued

 

Principal Amount

 

Scheduled

 

Final

 

Sheet Amount

 

Value

 

Sheet Amount

 

Value

Long term subordinated notes

4/26/2007

 

$

400,000

 

5/15/2037

 

5/1/2067

 

$

223,749

 

$

216,043

 

$

223,674

 

$

206,447

 

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 16, 2021 to November 14, 2021 is 2.51%.

 

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.

 

The Company repurchased and retired $0 million and $13.2 million 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 million and $2.5 million from the repurchase of the long term subordinated notes for the three and nine months ended September 30, 2020, respectively. No repurchases of debt were made during the three and nine months ended September 30, 2021.

 

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 $161.4 million. In addition, during 2020, the Company repurchased and retired $13.2 million of the notes.

 

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)

2021

 

2020

 

2021

 

2020

Interest expense incurred

$

1,456

 

$

1,587

 

$

4,378

 

$

6,126

 

27


 

13. 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, the United Kingdom and Switzerland. The Insurance operation writes property and casualty insurance directly and through brokers, surplus lines brokers and general agents within the U.S., Bermuda, Canada and Europe through its offices in the U.S., Canada, United Kingdom, Ireland and a branch in the Netherlands.

 

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. The Company measures its 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:

 

 

Three Months Ended

 

Nine Months Ended

Reinsurance

September 30,

 

September 30,

(Dollars in thousands)

2021

 

2020

 

2021

 

2020

Gross written premiums

$

2,488,344

 

$

2,086,961

 

$

6,695,594

 

$

5,403,080

Net written premiums

 

2,292,957

 

 

1,936,851

 

 

6,265,825

 

 

4,974,034

 

 

 

 

 

 

 

 

 

 

 

 

Premiums earned

$

1,976,454

 

$

1,669,257

 

$

5,674,707

 

$

4,656,733

Incurred losses and LAE

 

1,766,197

 

 

1,335,048

 

 

4,206,243

 

 

3,361,367

Commission and brokerage

 

471,079

 

 

373,251

 

 

1,353,062

 

 

1,130,946

Other underwriting expenses

 

45,347

 

 

51,333

 

 

144,408

 

 

135,170

Underwriting gain (loss)

$

(306,170)

 

$

(90,375)

 

$

(29,006)

 

$

29,250

 

 

Three Months Ended

 

Nine Months Ended

Insurance

September 30,

 

September 30,

(Dollars in thousands)

2021

 

2020

 

2021

 

2020

Gross written premiums

$

1,009,264

 

$

704,643

 

$

2,923,587

 

$

2,328,733

Net written premiums

 

732,832

 

 

511,829

 

 

2,123,311

 

 

1,693,603

 

 

 

 

 

 

 

 

 

 

 

 

Premiums earned

$

679,949

 

$

536,554

 

$

1,927,933

 

$

1,628,297

Incurred losses and LAE

 

508,103

 

 

401,162

 

 

1,365,619

 

 

1,212,699

Commission and brokerage

 

93,256

 

 

72,081

 

 

258,033

 

 

229,224

Other underwriting expenses

 

95,802

 

 

87,542

 

 

279,817

 

 

250,695

Underwriting gain (loss)

$

(17,213)

 

$

(24,231)

 

$

24,465

 

$

(64,321)

 

28


 

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)

2021

 

2020

 

2021

 

2020

Underwriting gain (loss)

$

(323,383)

 

$

(114,606)

 

$

(4,541)

 

$

(35,071)

Net investment income

 

292,759

 

 

234,233

 

 

960,267

 

 

420,116

Net realized capital gains (losses)

 

(4,222)

 

 

110,203

 

 

138,789

 

 

84,263

Corporate expenses

 

(17,817)

 

 

(10,618)

 

 

(46,363)

 

 

(29,184)

Interest, fee and bond issue cost amortization expense

 

(15,539)

 

 

(6,641)

 

 

(46,785)

 

 

(21,477)

Other income (expense)

 

(19,517)

 

 

59,937

 

 

44,190

 

 

47,306

Income (loss) before taxes

$

(87,719)

 

$

272,508

 

$

1,045,557

 

$

465,953

 

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)

2021

 

2020

 

2021

 

2020

United Kingdom gross written premium

$

281,645

 

$

314,502

 

$

897,107

 

$

857,310

 

No other country represented more than 5% of the Company’s revenues.

 

14. SHARE-BASED COMPENSATION PLANS

 

For the three months ended September 30, 2021, a total of 2,090 restricted stock awards were granted: 2,090 restricted share awards were granted on September 9, 2021 with a fair value of $263.63 per share.

 

For the nine months ended September 30, 2021, a total of 209,631 restricted stock awards were granted: 194,610, 10,656, 2,275 and 2,090 restricted share awards were granted on February 23, 2021, February 24, 2021, May 12, 2021 and September 9, 2021, with a fair value of $242.24 per share, $244.445 per share, $264.845 per share and $263.63 per share, respectively. Additionally, 22,205 performance share unit awards were granted on February 23, 2021, with a fair value of $242.24 per unit.

 

15. INCOME TAXES

 

The Company is domiciled in Bermuda and has significant subsidiaries and/or branches in Canada, Ireland, the Netherlands, 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.

 

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.

 

29


 

16. SUBSEQUENT EVENTS

 

The Company has evaluated known recognized and non-recognized subsequent events. Other than the debt issuance on October 4, 2021 described in Note 11, the Company does not have any subsequent events to report.

 

30


 

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 and its subsequent variants. Globally, many countries mandated that their citizens remain at home and many non-essential businesses have continued to be physically closed. 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.

 

There continues to be a negative impact on industry underwriting results from the pandemic. These impacts vary significantly from country to country depending on the rate of infections and the corresponding mandated business restrictions.

 

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 and 2021 appears to be further pressuring the increase of rates. As business activity continues to regain strength, rates also appear to be firming in most 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.

31


 

 

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.

 

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

 

Percentage

 

Nine Months Ended

 

Percentage

 

September 30,

 

Increase/

 

September 30,

 

Increase/

(Dollars in millions)

2021

 

2020

 

(Decrease)

 

2021

 

2020

 

(Decrease)

Gross written premiums

$

3,497.6

 

 

$

2,791.6

 

 

25.3

%

 

$

9,619.2

 

 

$

7,731.8

 

 

24.4

%

Net written premiums

 

3,025.8

 

 

 

2,448.7

 

 

23.6

%

 

 

8,389.1

 

 

 

6,667.6

 

 

25.8

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

REVENUES:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Premiums earned

$

2,656.4

 

 

$

2,205.8

 

 

20.4

%

 

$

7,602.6

 

 

$

6,285.0

 

 

21.0

%

Net investment income

 

292.8

 

 

 

234.2

 

 

25.0

 

 

 

960.3

 

 

 

420.1

 

 

128.6

 

Net realized capital gains (losses)

 

(4.2)

 

 

 

110.2

 

 

-103.8

%

 

 

138.8

 

 

 

84.3

 

 

64.7

 

Other income (expense)

 

(19.5)

 

 

 

59.9

 

 

-132.6

%

 

 

44.2

 

 

 

47.3

 

 

-6.5

 

Total revenues

 

2,925.4

 

 

 

2,610.2

 

 

12.1

%

 

 

8,745.9

 

 

 

6,836.7

 

 

27.4

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CLAIMS AND EXPENSES:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Incurred losses and loss adjustment expenses

 

2,274.3

 

 

 

1,736.2

 

 

31.0

%

 

 

5,571.9

 

 

 

4,574.1

 

 

21.8

%

Commission, brokerage, taxes and fees

 

564.3

 

 

 

445.3

 

 

26.7

%

 

 

1,611.1

 

 

 

1,360.2

 

 

18.4

%

Other underwriting expenses

 

141.2

 

 

 

138.9

 

 

1.6

%

 

 

424.2

 

 

 

385.9

 

 

9.9

%

Corporate expenses

 

17.8

 

 

 

10.6

 

 

67.8

%

 

 

46.4

 

 

 

29.2

 

 

58.9

%

Interest, fees and bond issue cost amortization expense

 

15.5

 

 

 

6.6

 

 

134.0

%

 

 

46.8

 

 

 

21.5

 

 

117.8

%

Total claims and expenses

 

3,013.1

 

 

 

2,337.7

 

 

28.9

%

 

 

7,700.3

 

 

 

6,370.8

 

 

20.9

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

INCOME (LOSS) BEFORE TAXES

 

(87.7)

 

 

 

272.5

 

 

-132.2

%

 

 

1,045.6

 

 

 

466.0

 

 

124.4

 

Income tax expense (benefit)

 

(14.3)

 

 

 

29.5

 

 

-148.4

%

 

 

97.2

 

 

 

15.4

 

 

NM

%

NET INCOME (LOSS)

$

(73.5)

 

 

$

243.1

 

 

-130.2

 

 

$

948.4

 

 

$

450.5

 

 

110.5

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

RATIOS:

 

 

 

 

 

 

 

 

Point Change

 

 

 

 

 

 

 

 

 

Point Change

Loss ratio

 

85.6

%

 

 

78.7

%

 

6.9

 

 

 

73.3

%

 

 

72.8

%

 

0.5

 

Commission and brokerage ratio

 

21.2

%

 

 

20.2

%

 

1.0

 

 

 

21.2

%

 

 

21.7

%

 

(0.5)

 

Other underwriting expense ratio

 

5.3

%

 

 

6.3

%

 

(1.0)

 

 

 

5.6

%

 

 

6.1

%

 

(0.5)

 

Combined ratio

 

112.2

%

 

 

105.2

%

 

7.0

 

 

 

100.1

%

 

 

100.6

%

 

(0.5)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

At

 

At

 

Percentage

 

 

 

 

 

 

 

 

 

 

 

 

September 30,

 

December 31,

 

Increase/

(Dollars in millions, except per share amounts)

 

 

 

 

 

 

 

 

 

 

 

2021

 

2020

 

(Decrease)

Balance sheet data:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total investments and cash

 

 

 

 

 

 

 

 

 

 

 

$

27,783.7

 

 

$

25,461.6

 

 

9.1

%

Total assets

 

 

 

 

 

 

 

 

 

 

 

 

36,606.1

 

 

 

32,788.4

 

 

11.6

%

Loss and loss adjustment expense reserves

 

 

 

 

 

 

 

 

 

 

 

 

18,957.0

 

 

 

16,399.0

 

 

15.6

%

Total debt

 

 

 

 

 

 

 

 

 

 

 

 

1,910.9

 

 

 

1,910.4

 

 

-

%

Total liabilities

 

 

 

 

 

 

 

 

 

 

 

 

26,627.5

 

 

 

23,062.2

 

 

15.5

%

Shareholders' equity

 

 

 

 

 

 

 

 

 

 

 

 

9,978.6

 

 

 

9,726.2

 

 

2.6

%

Book value per share

 

 

 

 

 

 

 

 

 

 

 

 

253.40

 

 

 

243.25

 

 

4.2

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(NM, not meaningful)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Some amounts may not reconcile due to rounding.)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

32


 

Revenues.

Premiums. Gross written premiums increased by 25.3% to $3,497.6 million for the three months ended September 30, 2021, compared to $2,791.6 million for the three months ended September 30, 2020, reflecting a $401.3 million, or 19.2%, increase in our reinsurance business and a $304.6 million, or 43.2%, increase in our insurance business. The increase in reinsurance premiums was due to increases in most lines of business, notably casualty pro rata business, casualty excess of loss and property catastrophe excess of loss business, as well as $24.0 million positive impact from the movement of foreign exchange rates. The rise in insurance premiums was primarily due to increases in specialty casualty business, professional liability business and short-tail business, including property. Gross written premiums increased by 24.4% to $9,619.2 million for the nine months ended September 30, 2021, compared to $7,731.8 million for the nine months ended September 30, 2020, reflecting a $1,292.5 million, or 23.9%, increase in our reinsurance business and a $594.9 million, or 25.5%, increase in our insurance business. The increase in reinsurance premiums was due to increases in most lines of business, notably property pro rata business, casualty pro rata business and casualty excess of loss, as well as $94.2 million positive impact from the movement of foreign exchange rates. The rise in insurance premiums was primarily due to increases in specialty casualty business, professional liability business and short-tail business, including property, partially offset by a decline in workers’ compensation business.

 

Net written premiums increased by 23.6% to $3,025.8 million for the three months ended September 30, 2021, compared to $2,448.7 million for the three months ended September 30, 2020. Net written premiums increased by 25.8% to $8,389.1 million for the nine months ended September 30, 2021, compared to $6,667.6 million for the nine months ended September 30, 2020. These increases are consistent with the changes in gross written premiums. Premiums earned increased by 20.4% to $2,656.4 million for the three months ended September 30, 2021, compared to $2,205.8 million for the three months ended September 30, 2020. Premiums earned increased by 21.0% to $7,602.6 million for the nine months ended September 30, 2021, compared to $6,285.0 million for the nine months ended September 30, 2020. 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 to $292.8 million for the three months ended September 30, 2021, compared with investment income of $234.2 million for the three months ended September 30, 2020 and increased to $960.3 million for the nine months ended September 30, 2021, compared to $420.1 million for the nine months ended September 30, 2020. Net pre-tax investment income, as a percentage of average invested assets, was 4.4% for the three months ended September 30, 2021 and 2020. Net pre-tax investment income, as a percentage of average invested assets, was 5.0% for the nine months ended September 30, 2021 compared to 2.7% for the nine months ended September 30, 2020. The increases in both income and yield were primarily the result of a significant increase in limited partnership income and higher income from other alternative investments. The limited partnership income primarily reflects increases in their reported net asset values. As such, until these asset values are monetized and the resultant income is distributed, they are subject to future increases or decreases in the asset value, and the results may be volatile.

 

Net Realized Capital Gains (Losses). Net realized capital losses were $4.2 million and net realized capital gains were $110.2 million for the three months ended September 30, 2021 and 2020, respectively. The net realized capital losses of $4.2 million for the three months ended September 30, 2021 were comprised of $4.6 million of net losses from fair value re-measurements and $7.3 million of allowances for credit losses, partially offset by $7.7 million of net realized capital gains from sales of investments. 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 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.

 

Net realized capital gains were $138.8 million and $84.3 million for the nine months ended September 30, 2021 and 2020, respectively. The net realized capital gains of $138.8 million for the nine months ended September 30, 2021 were comprised of $128.0 million of net gains from fair value re-measurements and $41.0 million of net

33


 

realized capital gains from sales of investments, partially offset by $30.2 million of allowances for credit losses. 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.

 

Other Income (Expense). We recorded other expense of $19.5 million and other income of $59.9 million for the three months ended September 30, 2021 and 2020, respectively. We recorded other income of $44.2 million and $47.3 million for the nine months ended September 30, 2021 and 2020, respectively. The changes were primarily the result of fluctuations in foreign currency exchange rates. We recognized foreign currency exchange expense of $16.6 million and foreign currency exchange income of $61.4 million for the three months ended September 30, 2021 and 2020, respectively. We recognized foreign currency exchange income of $44.0 million and $37.9 million for the nine months ended September 30, 2021 and 2020, 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

2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Attritional

$

1,580.9

 

59.5

%

 

$

(1.6)

 

-0.1

%

 

$

1,579.3

 

59.4

%

Catastrophes

 

695.0

 

26.2

%

 

 

-

 

-

%

 

 

695.0

 

26.2

%

Total

$

2,275.9

 

85.7

%

 

$

(1.6)

 

-0.1

%

 

$

2,274.3

 

85.6

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Variance 2021/2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Attritional

$

153.4

 

(5.3)

pts

 

$

(0.3)

 

-

pts

 

$

153.1

 

(5.3)

pts

Catastrophes

 

385.0

 

12.2

pts

 

 

-

 

-

pts

 

 

385.0

 

12.2

pts

Total

$

538.4

 

6.9

pts

 

$

(0.3)

 

-

pts

 

$

538.1

 

6.9

pts

 

 

Nine Months Ended September 30,

 

Current

 

Ratio %/

 

Prior

 

Ratio %/

 

Total

 

Ratio %/

(Dollar in millions)

Year

 

Pt Change

 

Years

 

Pt Change

 

Incurred

 

Pt Change

2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Attritional

$

4,567.9

 

60.1

%

 

$

(6.1)

 

-0.1

%

 

 

4,561.9

 

60.0

%

Catastrophes

 

1,010.0

 

13.3

%

 

 

-

 

-

%

 

 

1,010.0

 

13.3

%

Total

$

5,577.9

 

73.4

%

 

$

(6.1)

 

-0.1

%

 

$

5,571.9

 

73.3

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Variance 2021/2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Attritional

$

350.3

 

(7.0)

pts

 

$

(7.5)

 

(0.2)

pts

 

$

342.8

 

(7.2)

pts

Catastrophes

 

655.0

 

7.7

pts

 

 

-

 

-

pts

 

 

655.0

 

7.7

pts

Total

$

1,005.3

 

0.7

pts

 

$

(7.5)

 

(0.2)

pts

 

$

997.8

 

0.5

pts

 

Incurred losses and LAE increased by 31.0% to $2,274.3 million for the three months ended September 30, 2021, compared to $1,736.2 million for the three months ended September 30, 2020, primarily due to an increase of $385.0 million in current year catastrophe losses and a rise of $153.4 million in current year attritional losses, mainly due to the impact of the increase in premiums earned. The increase in attritional losses was partially offset by $124.9 million of COVID-19 Pandemic losses incurred in 2020 which did not recur in 2021. The current year catastrophe losses of $695.0 million for the three months ended September 30, 2021 mainly related to Hurricane Ida ($463.0 million) and the European floods ($232.0 million). The $310.0 million of current year catastrophe losses 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

34


 

($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 ($15.0 million).

 

Incurred losses and LAE increased by 21.8% to $5,571.9 million for the nine months ended September 30, 2021, compared to $4,574.1 million for the nine months ended September 30, 2020, primarily due to an increase of $655.0 million in current year catastrophe losses and a rise of $350.3 million in current year attritional losses, mainly due to the impact of the increase in premiums earned. The increase in attritional losses was partially offset by $434.9 million of COVID-19 Pandemic losses incurred in 2020 which did not recur in 2021. The current year catastrophe losses of $1,010.0 million for the nine months ended September 30, 2021 related primarily to Hurricane Ida ($463.0 million), the Texas winter storms ($285.0 million) and the European floods ($242.0 million) with the rest of the losses emanating from the 2021 Australia floods and Victoria Australia flooding. The $355.0 million of current year catastrophe losses for 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).

 

Commission, Brokerage, Taxes and Fees. Commission, brokerage, taxes and fees increased by 26.7% to $564.3 million for the three months ended September 30, 2021, compared to $445.3 million for the three months ended September 30, 2020. Commission, brokerage, taxes and fees increased by 18.4% to $1,611.1 million for the nine months ended September 30, 2021, compared to $1,360.2 million for the nine months ended September 30, 2020. 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 $141.2 million and $138.9 million for the three months ended September 30, 2021 and 2020, respectively. Other underwriting expenses were $424.2 million and $385.9 million for the nine months ended September 30, 2021 and 2020, respectively. The increases in other underwriting expenses were mainly due to the continued build out of our insurance operations and the impact of the increases in premiums earned.

 

Corporate Expenses. Corporate expenses, which are general operating expenses that are not allocated to segments, were $17.8 million and $10.6 million for the three months ended September 30, 2021 and 2020, respectively, and $46.4 million and $29.2 million for the nine months ended September 30, 2021 and 2020, respectively. These increases were mainly due to higher compensation expenses from an increased staff count.

 

Interest, Fees and Bond Issue Cost Amortization Expense. Interest, fees and other bond amortization expense was $15.5 million and $6.6 million for the three months ended September 30, 2021 and 2020, respectively. Interest, fees and other bond amortization expense was $46.8 million and $21.5 million for the nine months ended September 30, 2021 and 2020, respectively. These increases were primarily due to interest expense on the $1,000.0 million senior note issuance in October 2020, partially offset by a decrease 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 2.51% as of September 30, 2021.

 

Income Tax Expense (Benefit). We had an income tax benefit of $14.3 million and an income tax expense of $29.5 million for the three months ended September 30, 2021 and 2020, respectively. We had an income tax expense of $97.2 million and $15.4 million for the nine months ended September 30, 2021 and 2020, 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 annualized effective tax rate (“AETR”) is primarily affected by tax-exempt investment income, qualifying dividends and foreign tax credits. Variations in the AETR 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 changes in income tax expense (benefit) for the three and nine months ended September 30, 2021 as compared to the

35


 

three and nine months ended September 30, 2020 results primarily from higher investment income from limited partnerships and higher realized investment capital, partially offset by an increase in catastrophe losses.

 

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 allowed 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 five 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 loss was $73.5 million and our net income was $243.1 million for the three months ended September 30, 2021 and 2020, respectively. Our net income was $948.4 million and $450.5 million for the nine months ended September 30, 2021 and 2020, respectively. These changes were primarily driven by the financial component fluctuations explained above.

 

Ratios.

Our combined ratio increased by 7.0 points to 112.2% for the three months ended September 30, 2021, compared to 105.2% for the three months ended September 30, 2020, and decreased by 0.5 points to 100.1% for the nine months ended September 30, 2021, compared to 100.6% for the nine months ended September 30, 2020. The loss ratio component increased 6.9 points and 0.5 points for the three and nine months ended September 30, 2021 over the same period last year mainly due to increase catastrophe losses, partially offset by COVID-19 Pandemic attritional losses incurred in the three and nine months ended September 30, 2020 which did not re-cur in 2021. The commission and brokerage ratio components increased to 21.2% for the three months ended September 30, 2021 compared to 20.2% for the three months ended September 30, 2020 and decreased to 21.2% for the nine months ended September 30, 2021 compared to 21.7% for the nine months ended September 30, 2020. These changes were mainly due to changes in the mix of business. The other underwriting expense ratios decreased to 5.3% for the three months ended September 30, 2021 compared to 6.3% for the three months ended September 30, 2020 and decreased to 5.6% for the nine months ended September 30, 2021 compared to 6.1% for the nine months ended September 30, 2020. These decreases were mainly due to changes in the mix of business.

 

Shareholders’ Equity.

Shareholders’ equity increased by $252.5 million to $9,978.6 million at September 30, 2021 from $9,726.2 million at December 31, 2020, principally as a result of $948.4 million of net income, $21.0 million of share-based compensation transactions and $5.6 million of net benefit plan obligation adjustments, net of tax, partially offset by $307.9 million of unrealized depreciation on investments net of tax, the repurchase of 790,920 common shares for $200.1 million, $185.7 million of shareholder dividends and $28.9 million of net foreign currency translation adjustments.

 

Consolidated Investment Results

 

Net Investment Income.

Net investment income increased to $292.8 million for the three months ended September 30, 2021, compared with investment income of $234.2 million for the three months ended September 30, 2020. Net investment income increased to $960.3 million for the nine months ended September 30, 2021, compared with investment income of $420.1 million for the nine months ended September 30, 2020. These increases were primarily the result of a significant increase in limited partnership income and higher income from other alternative investments. The limited partnership income primarily reflects increases in their reported net asset values. As such, until these asset values are monetized and the resultant income is distributed, they are subject to future increases or decreases in the asset value, and the results may be volatile.

 

36


 

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)

2021

 

2020

 

2021

 

2020

Fixed maturities

$

134.2

 

$

136.1

 

$

423.3

 

$

407.9

Equity securities

 

3.8

 

 

4.4

 

 

12.1

 

 

11.6

Short-term investments and cash

 

-

 

 

0.5

 

 

1.0

 

 

4.4

Other invested assets

 

 

 

 

 

 

 

 

 

 

 

Limited partnerships

 

138.8

 

 

88.8

 

 

493.1

 

 

22.1

Other

 

30.9

 

 

14.7

 

 

62.8

 

 

(1.3)

Gross investment income before adjustments

 

307.6

 

 

244.5

 

 

992.3

 

 

444.7

Funds held interest income (expense)

 

1.2

 

 

0.7

 

 

12.5

 

 

10.9

Future policy benefit reserve income (expense)

 

(0.2)

 

 

(0.3)

 

 

(0.7)

 

 

(0.8)

Gross investment income

 

308.6

 

 

244.9

 

 

1,004.0

 

 

454.8

Investment expenses

 

(15.9)

 

 

(10.7)

 

 

(43.8)

 

 

(34.7)

Net investment income

$

292.8

 

$

234.2

 

$

960.3

 

$

420.1

 

 

 

 

 

 

 

 

 

 

 

 

(Some amounts may not reconcile due to rounding.)

 

 

Three Months Ended

 

Nine Months Ended

 

September 30,

 

September 30,

 

2021

 

2020

 

2021

 

2020

Annualized pre-tax yield on average cash and invested assets

4.4

%

 

4.4

%

 

5.0

%

 

2.7

%

Annualized after-tax yield on average cash and invested assets

3.8

%

 

3.8

%

 

4.4

%

 

2.3

%

 

37


 

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)

2021

 

2020

 

Variance

 

 

2021

 

 

2020

 

Variance

Gains (losses) from sales:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fixed maturity securities, market value:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gains

$

17.0

 

$

18.7

 

$

(1.7)

 

$

51.7

 

$

54.1

 

$

(2.4)

Losses

 

(10.8)

 

 

(13.3)

 

 

2.5

 

 

(26.3)

 

 

(53.1)

 

 

26.8

Total

 

6.3

 

 

5.4

 

 

0.9

 

 

25.5

 

 

0.9

 

 

24.5

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fixed maturity securities, fair value:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gains

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

 

-

Losses

 

-

 

 

(2.0)

 

 

2.0

 

 

-

 

 

(2.0)

 

 

2.0

Total

 

-

 

 

(2.0)

 

 

2.0

 

 

-

 

 

(2.0)

 

 

2.0

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Equity securities, fair value:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gains

 

2.8

 

 

9.5

 

 

(6.7)

 

 

20.9

 

 

30.3

 

 

(9.4)

Losses

 

(3.3)

 

 

(10.8)

 

 

7.5

 

 

(11.4)

 

 

(42.9)

 

 

31.5

Total

 

(0.5)

 

 

(1.3)

 

 

0.8

 

 

9.5

 

 

(12.6)

 

 

22.1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other Invested Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gains

 

2.4

 

 

1.4

 

 

1.0

 

 

8.0

 

 

6.0

 

 

2.0

Losses

 

(0.5)

 

 

(0.3)

 

 

(0.2)

 

 

(2.0)

 

 

(5.9)

 

 

3.9

Total

 

1.9

 

 

1.1

 

 

0.8

 

 

6.0

 

 

0.1

 

 

5.9

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Short Term Investments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gains

 

-

 

 

0.8

 

 

(0.8)

 

 

-

 

 

1.2

 

 

(1.2)

Losses

 

-

 

 

-

 

 

-

 

 

-

 

 

-

 

 

-

Total

 

-

 

 

0.8

 

 

(0.8)

 

 

-

 

 

1.2

 

 

(1.2)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total net realized gains (losses) from sales:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gains

 

22.2

 

 

30.4

 

 

(8.2)

 

 

80.6

 

 

91.5

 

 

(10.9)

Losses

 

(14.6)

 

 

(26.4)

 

 

11.8

 

 

(39.7)

 

 

(103.9)

 

 

64.2

Total

 

7.7

 

 

4.0

 

 

3.7

 

 

41.0

 

 

(12.4)

 

 

53.4

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for credit losses:

 

(7.3)

 

 

6.2

 

 

(13.5)

 

 

(30.2)

 

 

(19.6)

 

 

(10.6)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gains (losses) from fair value adjustments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fixed maturities, fair value

 

-

 

 

3.3

 

 

(3.3)

 

 

-

 

 

1.9

 

 

(1.9)

Equity securities, fair value

 

(4.6)

 

 

96.7

 

 

(101.3)

 

 

128.0

 

 

114.4

 

 

13.6

Total

 

(4.6)

 

 

100.0

 

 

(104.6)

 

 

128.0

 

 

116.3

 

 

11.7

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total net realized capital gains (losses)

$

(4.2)

 

$

110.2

 

$

(114.4)

 

$

138.8

 

$

84.3

 

$

54.5

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Some amounts may not reconcile due to rounding.)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net realized capital losses were $4.2 million and net realized capital gains were $110.2 million for the three months ended September 30, 2021 and 2020, respectively. For the three months ended September 30, 2021, we recorded $4.6 million of net losses from fair value re-measurements and $7.3 million of allowances for credit losses, partially offset by $7.7 million of net realized capital gains from sales of investments. 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 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 fixed maturity and equity sales for the three months ended September 30, 2021 and 2020 related primarily to adjusting the portfolios for overall market changes and individual credit shifts.

 

38


 

Net realized capital gains were $138.8 million and $84.3 million for the nine months ended September 30, 2021 and 2020, respectively. For the nine months ended September 30, 2021 we recorded $128.0 million of net gains from fair value re-measurements and $41.0 million of net realized capital gains from sales of investments, partially offset by $30.2 million of allowances for credit losses. 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.

 

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, the United Kingdom and Switzerland. The Insurance operation writes property and casualty insurance directly and through brokers, surplus lines brokers and general agents within the U.S., Bermuda, Canada and Europe through its offices in the U.S., Canada, United Kingdom, Ireland and a branch in the Netherlands.

 

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.

 

Our loss and LAE reserves are management’s best estimate of our ultimate liability for unpaid claims. We re-evaluate our estimates on an ongoing basis, including all prior period reserves, taking into consideration all available information, and in particular, recently reported loss claim experience and trends related to prior periods. Such re-evaluations are recorded in incurred losses in the period in which re-evaluation is made.

 

The following discusses the underwriting results for each of our segments for the periods indicated.

 

39


 

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)

2021

 

2020

 

Variance

 

% Change

 

2021

 

2020

 

Variance

 

% Change

Gross written premiums

$

2,488.3

 

 

$

2,087.0

 

 

$

401.3

 

19.2

%

 

$

6,695.6

 

 

$

5,403.1

 

 

$

1,292.5

 

23.9

%

Net written premiums

 

2,293.0

 

 

 

1,936.9

 

 

 

356.1

 

18.4

%

 

 

6,265.8

 

 

 

4,974.0

 

 

 

1,291.8

 

26.0

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Premiums earned

$

1,976.5

 

 

$

1,669.3

 

 

$

307.2

 

18.4

%

 

$

5,674.7

 

 

$

4,656.7

 

 

$

1,018.0

 

21.9

%

Incurred losses and LAE

 

1,766.2

 

 

 

1,335.0

 

 

 

431.2

 

32.3

%

 

 

4,206.2

 

 

 

3,361.4

 

 

 

844.8

 

25.1

%

Commission and brokerage

 

471.1

 

 

 

373.3

 

 

 

97.8

 

26.2

%

 

 

1,353.1

 

 

 

1,130.9

 

 

 

222.2

 

19.6

%

Other underwriting expenses

 

45.3

 

 

 

51.3

 

 

 

(6.0)

 

-11.7

%

 

 

144.4

 

 

 

135.2

 

 

 

9.2

 

6.8

%

Underwriting gain (loss)

$

(306.2)

 

 

$

(90.4)

 

 

$

(215.8)

 

-238.8

%

 

$

(29.0)

 

 

$

29.3

 

 

$

(58.3)

 

-199.2

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Point Chg

 

 

 

 

 

 

 

 

 

 

 

 

Point Chg

Loss ratio

 

89.4

%

 

 

80.0

%

 

 

 

 

9.4

 

 

 

74.1

%

 

 

72.2

%

 

 

 

 

1.9

 

Commission and brokerage ratio

 

23.8

%

 

 

22.3

%

 

 

 

 

1.5

 

 

 

23.8

%

 

 

24.3

%

 

 

 

 

(0.4)

 

Other underwriting expense ratio

 

2.3

%

 

 

3.1

%

 

 

 

 

(0.8)

 

 

 

2.5

%

 

 

2.9

%

 

 

 

 

(0.4)

 

Combined ratio

 

115.5

%

 

 

105.4

%

 

 

 

 

10.1

 

 

 

100.5

%

 

 

99.4

%

 

 

 

 

1.1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(NM, Not Meaningful)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Some amounts may not reconcile due to rounding.)

 

Premiums. Gross written premiums increased by 19.2% to $2,488.3 million for the three months ended September 30, 2021 from $2,087.0 million for the three months ended September 30, 2020, due to increases in most lines of business, notably casualty pro rata business, casualty excess of loss business and property catastrophe excess of loss business, as well as a $24.0 million positive impact from the movement of foreign exchange rates. Net written premiums increased by 18.4% to $2,293.0 million for the three months ended September 30, 2021 compared to $1,936.9 million for the three months ended September 30, 2020, which is consistent with the change in gross written premiums. Premiums earned increased by 18.4% to $1,976.5 million for the three months ended September 30, 2021, compared to $1,669.3 million for the three months ended September 30, 2020. 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 23.9% to $6,695.6 million for the nine months ended September 30, 2021 from $5,403.1 million for the nine months ended September 30, 2020, due to increases in most lines of business, notably property pro rata business, casualty pro rata business and casualty excess of loss, as well as a $94.2 million positive impact from the movement of foreign exchange rates. Net written premiums increased by 26.0% to $6,265.8 million for the nine months ended September 30, 2021 compared to $4,974.0 million for the nine months ended September 30, 2020. The difference between the change in gross written premiums compared to the change in net written premiums was primarily due to varying utilization of reinsurance. Premiums earned increased by 21.9% to $5,674.7 million for the nine months ended September 30, 2021, compared to $4,656.7 million for the nine months ended September 30, 2020. 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.

 

40


 

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

2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Attritional

$

1,152.8

 

58.3

%

 

$

(1.6)

 

-0.1

%

 

 

1,151.2

 

58.2

%

Catastrophes

 

615.0

 

31.1

%

 

 

-

 

-

%

 

 

615.0

 

31.1

%

Total Segment

$

1,767.8

 

89.4

%

 

$

(1.6)

 

-0.1

%

 

$

1,766.2

 

89.4

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Variance 2021/2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Attritional

$

89.0

 

(5.5)

pts

 

$

(0.3)

 

-

pts

 

$

88.7

 

(5.5)

pts

Catastrophes

 

342.5

 

14.8

pts

 

 

-

 

-

pts

 

 

342.5

 

14.8

pts

Total Segment

$

431.5

 

9.3

pts

 

$

(0.3)

 

-

pts

 

$

431.2

 

9.4

pts

 

 

Nine Months Ended September 30,

 

Current

 

Ratio %/

 

Prior

 

Ratio %/

 

Total

 

Ratio %/

(Dollars in millions)

Year

 

Pt Change

 

Years

 

Pt Change

 

Incurred

 

Pt Change

2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Attritional

$

3,338.6

 

58.8

%

 

$

(4.9)

 

-0.1

%

 

 

3,333.7

 

58.7

%

Catastrophes

 

872.5

 

15.4

%

 

 

-

 

-

%

 

 

872.5

 

15.4

%

Total Segment

$

4,211.1

 

74.2

%

 

$

(4.9)

 

-0.1

%

 

$

4,206.2

 

74.1

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Variance 2021/2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Attritional

$

271.1

 

(7.1)

pts

 

$

(1.8)

 

-

pts

 

$

269.3

 

(7.1)

pts

Catastrophes

 

575.5

 

9.0

pts

 

 

-

 

-

pts

 

 

575.5

 

9.0

pts

Total Segment

$

846.6

 

1.9

pts

 

$

(1.8)

 

-

pts

 

$

844.8

 

1.9

pts

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Incurred losses increased by 32.3% to $1,766.2 million for the three months ended September 30, 2021, compared to $1,335.0 million for the three months ended September 30, 2020. The increase was primarily due to an increase of $342.5 million in current year catastrophe losses, as well as an increase of $89.0 million in current year attritional losses, mainly related to the impact of the increase in premiums earned, and partially offset by $109.9 million of COVID-19 Pandemic losses incurred in 2020 which did not recur in 2021. The current year catastrophe losses of $615.0 million for the three months ended September 30, 2021 related primarily to Hurricane Ida ($383.0 million) and the European floods ($232.0 million). The $272.5 million of current year catastrophe losses 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).

 

Incurred losses increased by 25.1% to $4,206.2 million for the nine months ended September 30, 2021, compared to $3,361.4 million for the nine months ended September 30, 2020. The increase was primarily due to an increase of $575.5 million in current year catastrophe losses and an increase of $271.1 million in current year attritional losses, mainly related to the impact of the increase in premiums earned. The increase in attritional losses was partially offset by $351.0 million of COVID-19 Pandemic losses incurred in 2020 which did not re-cur in 2021. The current year catastrophe losses of $872.5 million for the nine months ended September 30, 2021 related primarily to Hurricane Ida ($383.0 million), the European floods ($242.0 million) and the Texas winter storms ($227.5 million) with the rest of the losses emanating from the 2021 Australia floods and the Victoria Australia flooding. The $297.0 million of current year catastrophe losses for the nine months ended September

41


 

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).

 

Segment Expenses. Commission and brokerage expenses increased by 26.2% to $471.1 million for the three months ended September 30, 2021 compared to $373.3 million for the three months ended September 30, 2020. Commission and brokerage expenses increased by 19.6% to $1,353.1 million for the nine months ended September 30, 2021 compared to $1,130.9 million for the nine months ended September 30, 2020. These increases were mainly due to the impact of the increases in premiums earned and changes in the mix of business.

 

Segment other underwriting expenses decreased to $45.3 million for the three months ended September 30, 2021 from $51.3 million for the three months ended September 30, 2020. The quarter over quarter decline was mainly due to changes in the mix of business. Segment other underwriting expenses increased to $144.4 million for the nine months ended September 30, 2021 from $135.2 million for the nine months ended September 30, 2020. The year over year increase was mainly due to the impact of the changes 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)

2021

 

2020

 

Variance

 

% Change

 

2021

 

2020

 

Variance

 

% Change

Gross written premiums

$

1,009.3

 

 

$

704.6

 

 

$

304.7

 

43.2

%

 

$

2,923.6

 

 

$

2,328.7

 

 

$

594.9

 

25.5

%

Net written premiums

 

732.8

 

 

 

511.8

 

 

 

221.0

 

43.2

%

 

 

2,123.3

 

 

 

1,693.6

 

 

 

429.7

 

25.4

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Premiums earned

$

679.9

 

 

$

536.6

 

 

$

143.3

 

26.7

%

 

$

1,927.9

 

 

$

1,628.3

 

 

$

299.6

 

18.4

%

Incurred losses and LAE

 

508.1

 

 

 

401.2

 

 

 

106.9

 

26.7

%

 

 

1,365.6

 

 

 

1,212.7

 

 

 

152.9

 

12.6

%

Commission and brokerage

 

93.3

 

 

 

72.1

 

 

 

21.2

 

29.4

%

 

 

258.0

 

 

 

229.2

 

 

 

28.8

 

12.6

%

Other underwriting expenses

 

95.8

 

 

 

87.5

 

 

 

8.3

 

9.4

%

 

 

279.8

 

 

 

250.7

 

 

 

29.1

 

11.6

%

Underwriting gain (loss)

$

(17.2)

 

 

$

(24.2)

 

 

$

6.9

 

29.0

%

 

$

24.5

 

 

$

(64.3)

 

 

$

88.8

 

138.0

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Point Chg

 

 

 

 

 

 

 

 

 

 

 

 

Point Chg

Loss ratio

 

74.7

%

 

 

74.8

%

 

 

 

 

-

 

 

 

70.8

%

 

 

74.6

%

 

 

 

 

-3.8

 

Commission and brokerage ratio

 

13.7

%

 

 

13.4

%

 

 

 

 

0.3

 

 

 

13.4

%

 

 

14.0

%

 

 

 

 

-0.6

 

Other underwriting expense ratio

 

14.1

%

 

 

16.3

%

 

 

 

 

-2.2

 

 

 

14.5

%

 

 

15.4

%

 

 

 

 

-0.9

 

Combined ratio

 

102.5

%

 

 

104.5

%

 

 

 

 

-2.0

 

 

 

98.7

%

 

 

104.0

%

 

 

 

 

-5.3

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(NM not meaningful)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Some amounts may not reconcile due to rounding.)

 

Premiums. Gross written premiums increased by 43.2% to $1,009.3 million for the three months ended September 30, 2021 compared to $704.6 million for the three months ended September 30, 2020. This rise was primarily related to increases in specialty casualty business, professional liability business and short-tail business, including property. Net written premiums increased by 43.2% to $732.8 million for the three months ended September 30, 2021 compared to $511.8 million for the three months ended September 30, 2020, which is consistent with the change in gross written premiums. Premiums earned increased 26.7% to $679.9 million for the three months ended September 30, 2021 compared to $536.6 million for the three months ended September 30, 2020. 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.

 

42


 

Gross written premiums increased by 25.5% to $2,923.6 million for the nine months ended September 30, 2021 compared to $2,328.7 million for the nine months ended September 30, 2020. This rise was related to increases in specialty casualty business, professional liability business and short-tail business, including property, partially offset by a decline in workers’ compensation business. Net written premiums increased by 25.4% to $2,123.3 million for the nine months ended September 30, 2021 compared to $1,693.6 million for the nine months ended September 30, 2020, which is consistent with the change in gross written premiums. Premiums earned increased by 18.4% to $1,927.9 million for the nine months ended September 30, 2021 compared to $1,628.3 million for the nine months ended September 30, 2020. 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

2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Attritional

$

428.1

 

63.0

%

 

$

-

 

-

%

 

 

428.1

 

63.0

%

Catastrophes

 

80.0

 

11.8

%

 

 

-

 

-

%

 

 

80.0

 

11.8

%

Total Segment

$

508.1

 

74.7

%

 

$

-

 

-

%

 

$

508.1

 

74.7

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Variance 2021/2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Attritional

$

64.4

 

(4.8)

pts

 

$

-

 

-

pts

 

$

64.4

 

(4.8)

pts

Catastrophes

 

42.5

 

4.8

pts

 

 

-

 

-

pts

 

 

42.5

 

4.8

pts

Total Segment

$

106.9

 

-

pts

 

$

-

 

-

pts

 

$

106.9

 

-

pts

 

 

Nine Months Ended September 30,

 

Current

 

Ratio %/

 

Prior

 

Ratio %/

 

Total

 

Ratio %/

(Dollars in millions)

Year

 

Pt Change

 

Years

 

Pt Change

 

Incurred

 

Pt Change

2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Attritional

$

1,229.3

 

63.8

%

 

$

(1.2)

 

-0.1

%

 

 

1,228.1

 

63.7

%

Catastrophes

 

137.5

 

7.1

%

 

 

-

 

-

%

 

 

137.5

 

7.1

%

Total Segment

$

1,366.8

 

70.9

%

 

$

(1.2)

 

-0.1

%

 

$

1,365.6

 

70.8

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Variance 2021/2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Attritional

$

79.2

 

(6.9)

pts

 

$

(5.8)

 

(0.4)

pts

 

$

73.4

 

(7.3)

pts

Catastrophes

 

79.5

 

3.5

pts

 

 

-

 

-

pts

 

 

79.5

 

3.5

pts

Total Segment

$

158.7

 

(3.4)

pts

 

$

(5.8)

 

(0.4)

pts

 

$

152.9

 

(3.8)

pts

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(Some amounts may not reconcile due to rounding.)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Incurred losses and LAE increased by 26.7% to $508.1 million for the three months ended September 30, 2021 compared to $401.2 million for the three months ended September 30, 2020. The increase was mainly due to an increase in current year attritional losses of $64.4 million primarily related to the impact of the increase in premiums earned, as well as an increase of $42.5 million in current year catastrophe losses. The increase in attritional losses was partially offset by $15.0 million of COVID-19 Pandemic losses incurred in 2020 which did not recur in 2021. The current year catastrophe losses of $80.0 million for the three months ended September 30, 2021 related to Hurricane Ida. The $37.5 million of current year catastrophe losses 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).

43


 

 

Incurred losses and LAE increased by 12.6% to $1,365.6 million for the nine months ended September 30, 2021 compared to $1,212.7 million for the nine months ended September 30, 2020. The increase was mainly due to an increase in current year catastrophe losses of $79.5 million and an increase of $79.2 million in current year attritional losses primarily related to the impact of the increase in premiums earned. The increase in attritional losses was partially offset by $84.0 million of COVID-19 Pandemic losses incurred in 2020 which did not recur in 2021. The current year catastrophe losses of $137.5 million for the nine months ended September 30, 2021 related to Hurricane Ida ($80.0 million) and the Texas winter storms ($57.5 million). The $58.0 million of current year catastrophe losses 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).

 

Segment Expenses. Commission and brokerage increased by 29.4% to $93.3 million for the three months ended September 30, 2021 compared to $72.1 million for the three months ended September 30, 2020. Commission and brokerage increased by 12.6% to $258.0 million for the nine months ended September 30, 2021 compared to $229.2 million for the nine months ended September 30, 2020. The increases were mainly due to the impact of the increases in premiums earned.

 

Segment other underwriting expenses increased to $95.8 million for the three months ended September 30, 2021 compared to $87.5 million for the three months ended September 30, 2020. Segment other underwriting expenses increased to $279.8 million for the nine months ended September 30, 2021 compared to $250.7 million for the nine months ended September 30, 2020. The increases were mainly due to the impact of the increases 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 $27,783.7 million at September 30, 2021, an increase of $2,322.1 million compared to $25,461.6 million at December 31, 2020. This increase was primarily the result of $2,790.5 million of cash flows from operations, $543.4 million in equity adjustments of our limited partnership investments, and $13.7 million in fair value re-measurements, partially offset by $344.5 million of pre-tax unrealized depreciation, the repurchases of 790,920 common shares for $200.1 million, $185.7 million paid out in dividends to shareholders, $177.3 million decrease in unsettled securities, $57.1 million of amortization bond premium and $53.3 million due to fluctuations in foreign currencies.

 

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 fixed maturities with an average credit quality of A1. 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. We limit our allocation to these asset classes because of

44


 

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, 2021, the market value of investments in these investment market sectors, carried at both market and fair value, approximated 95.6% 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 reviews 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, 2021

 

At December 31, 2020

Fixed maturities, market value

$

21,623.1

 

77.8

%

 

$

20,040.2

 

78.7

%

Equity securities, fair value

 

1,523.6

 

5.5

%

 

 

1,472.2

 

5.8

%

Short-term investments

 

713.1

 

2.6

%

 

 

1,135.0

 

4.5

%

Other invested assets

 

2,855.4

 

10.3

%

 

 

2,012.6

 

7.9

%

Cash

 

1,068.4

 

3.8

%

 

 

801.7

 

3.1

%

Total investments and cash

$

27,783.7

 

100.0

%

 

$

25,461.6

 

100.0

%

 

 

 

 

 

 

 

 

 

 

 

 

(Some amounts may not reconcile due to rounding.)

 

 

 

 

 

 

 

 

 

 

 

 

 

At

 

At

 

September 30, 2021

 

December 31, 2020

Fixed income portfolio duration (years)

3.3

 

 

3.6

 

Fixed income composite credit quality

A1

 

 

Aa3

 

 

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, 2021

 

December 31, 2020

Fixed income portfolio total return

0.5

%

 

6.3

%

Barclay's Capital - U.S. aggregate index

(1.6)

%

 

7.5

%

 

 

 

 

 

 

Common equity portfolio total return

11.6

%

 

26.7

%

S&P 500 index

15.9

%

 

18.4

%

 

 

 

 

 

 

Other invested asset portfolio total return

33.8

%

 

8.3

%

 

The pre-tax equivalent total return for the bond portfolio was approximately (0.5)% and 5.3%, respectively, for the nine months ended September 30, 2021 and the twelve months ended December 31, 2020. 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 equity portfolios reflect an emphasis on dividend yield and growth equities, while the index is comprised of the largest 500 equities by market capitalization.

 

45


 

Reinsurance Recoverables.  

Reinsurance recoverables for both paid and unpaid losses totaled $2,215.4 million and $1,994.6 million at September 30, 2021 and December 31, 2020, respectively. At September 30, 2021, $778.7 million, or 35.1%, was receivable from Mt. Logan Re collateralized segregated accounts; $205.6 million, or 9.3%, was receivable from Munich Reinsurance America, Inc. (“Munich Re”) and $110.9 million or 5.0% was receivable from Endurance Specialty Holdings, Ltd. (“Endurance”). No other retrocessionaire accounted for more than 5% of our recoverables.

 

Loss and LAE Reserves. Gross loss and LAE reserves totaled $18,957.0 million and $16,399.0 million at September 30, 2021 and December 31, 2020, 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, 2021

 

Case

 

IBNR

 

Total

 

% of

(Dollars in millions)

Reserves

 

Reserves

 

Reserves

 

Total

Reinsurance

$

5,497.6

 

$

8,304.1

 

$

13,801.7

 

72.8

%

Insurance

 

1,354.5

 

 

3,619.8

 

 

4,974.3

 

26.2

%

Total excluding A&E

 

6,852.1

 

 

11,923.9

 

 

18,776.0

 

99.0

%

A&E

 

167.8

 

 

13.1

 

 

180.9

 

1.0

%

Total including A&E

$

7,019.9

 

$

11,937.0

 

$

18,957.0

 

100.0

%

 

 

 

 

 

 

 

 

 

 

 

 

(Some amounts may not reconcile due to rounding.)

 

 

 

 

 

 

 

 

 

 

 

 

 

At December 31, 2020

 

Case

 

IBNR

 

Total

 

% of

(Dollars in millions)

Reserves

 

Reserves

 

Reserves

 

Total

Reinsurance

$

5,092.7

 

$

6,723.8

 

$

11,816.5

 

72.1

%

Insurance

 

1,282.1

 

 

3,082.6

 

 

4,364.8

 

26.6

%

Total excluding A&E

 

6,374.8

 

 

9,806.4

 

 

16,181.3

 

98.7

%

A&E

 

184.0

 

 

33.8

 

 

217.7

 

1.3

%

Total including A&E

$

6,558.8

 

$

9,840.2

 

$

16,399.0

 

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.

 

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.

46


 

 

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)

2021

 

2020

Gross reserves

$

182.5

 

$

219.3

Ceded reserves

 

(13.7)

 

 

(21.1)

Net reserves

$

168.8

 

$

198.3

 

 

 

 

 

 

(Some amounts may not reconcile due to rounding.)

 

 

 

 

 

 

With respect to asbestos only, at September 30, 2021, we had net asbestos loss reserves of $167.7 million, or 99.3%, of total net A&E reserves, all of which was for assumed business.

 

In 2015, we sold Mt. McKinley Insurance Company (“Mt. McKinley”) to Clearwater Insurance Company (“Clearwater”). 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.

 

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 ceded reserves were reduced by $43.4 million. In addition, the maximum liability permitted to be retroceded increased to $450.3 million. We will retain liability for any amounts exceeding the maximum liability retroceded under the retrocession treaty.

 

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 5.5 years at September 30, 2021. 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 $9,978.6 million as of September 30, 2021 from $9,726.2 million as of December 31, 2020. This increase was the result of $948.4 million of net income, $21.0 million of share-based compensation transactions and $5.6 million of net benefit plan obligation adjustments, net of tax, partially offset by $307.9 million of unrealized depreciation on investments net of tax, the repurchase of 790,920 common shares for $200.1 million, $185.7 million of shareholder dividends and $28.9 million of net foreign currency translation adjustments.

 

LIQUIDITY AND CAPITAL RESOURCES

 

Capital. Shareholders’ equity at September 30, 2021 and December 31, 2020 was $9,978.6 million and $9,726.2 million, respectively. Management’s objective in managing capital is to ensure its overall capital level, as well as

47


 

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)

2020

 

2019

 

2020

 

2019

Regulatory targeted capital

$

1,923.2

 

$

2,061.1

 

$

2,489.8

 

$

2,001.2

Actual capital

$

2,930.3

 

$

3,197.4

 

$

5,276.0

 

$

3,739.1

 

(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.

 

On October 7, 2020, we issued $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.

 

On October 4, 2021, we issued an additional $1,000.0 million of 31 year senior notes at a rate of 3.125%. These senior notes will mature on October 15, 2052 and will pay interest semi-annually.

 

During the first three quarters of 2021, we repurchased 790,920 shares for $200.1 million in the open market and paid $185.7 million in dividends to adjust our capital position and enhance long term expected returns to our shareholders. In 2020, we repurchased 970,892 shares for $200.0 million in the open market and paid $249.1 million in dividends to adjust our capital position and enhance long term expected returns to our shareholders. 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, 2021, we had repurchased 30.4 million shares under this authorization.

 

We also repurchased $13.2 million of our long-term subordinated notes in 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.

 

48


 

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 $2,790.5 million and $2,190.6 million for the nine months ended September 30, 2021 and 2020, respectively. Additionally, these cash flows reflected net catastrophe loss payments of $525.9 million and $505.9 million for the nine months ended September 30, 2021 and 2020, respectively and net tax payments of $39.8 million and net tax recoveries of $169.1 million for the nine months ended September 30, 2021 and 2020, 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, 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, 2021 and December 31, 2020, we held cash and short-term investments of $1,781.6 million and $1,936.6 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, 2021, we had $1,621.5 million of available for sale fixed maturity securities maturing within one year or less, $6,826.9 million maturing within one to five years and $6, 528.2 million maturing after five years. Our $1,523.6 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 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, 2021 we had $472.3 million of net pre-tax unrealized appreciation related to fixed maturity securities, comprised of $626.4 million of pre-tax unrealized appreciation and $154.1 million of pre-tax unrealized depreciation.

 

Management generally expects annual positive cash flow from operations, which reflects the strength of overall pricing. However, given the recent set of catastrophic events, cash flow from operations may decline and could become negative in the near term as significant claim payments are made related to the catastrophes. However, as indicated above, the Company has ample liquidity to settle its catastrophe claims.

 

In addition to our cash flows from operations and liquid investments, we also have multiple credit facilities that provide commitment of up to $1,530.0 million and £52.2 million of collateralized standby letters of credit to support business written by our Bermuda operating subsidiaries. In addition, the Company has the ability to request access to an additional $140.0 million of uncommitted credit facilities, which would require approval from the applicable lender.

 

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 “2016 Group Credit Facility”. Wells Fargo Corporation (“Wells Fargo Bank”) is the administrative agent for the 2016 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. Tranche two exclusively provides up to $600.0 million for the issuance of standby letters of credit on a collateralized basis.

 

49


 

Effective May 26, 2021, the term of the 2016 Group Credit Facility expired. The Company elected not to renew this facility to allow for the replacement by new credit facilities, including the 2021 Bermuda Re Wells Fargo Letter of Credit Facility. As a result, Tranche One of the Group Credit Facility (unsecured revolving credit in the amount of $200.0 million) is no longer effective or available for use. The $600 million of credit availability in Tranche two will be in run-off and able to support standby letters of credit currently in force through December 31, 2021. As of December 31, 2021, the entirety of the 2016 Group Credit Facility will have expired and will no longer be effective.

 

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 preferred shares, which at September 30, 2021, was $6,651.8 million. As of September 30, 2021, the Company was in compliance with all Group Credit Facility covenants.

 

At September 30, 2021 and December 31, 2020, the Company had no outstanding short-term borrowings from the Group Credit Facility revolving credit line. At September 30, 2021, the Group Credit Facility had $402.3 million outstanding letters of credit under tranche two. At December 31, 2020, the Group Credit Facility had $164.2 million outstanding letters of credit under tranche one and $589.7 million outstanding letters of credit under tranche two.

 

Effective August 9, 2021 Bermuda Re entered into a new letter of credit issuance facility with Citibank N.A. which superseded the previous letter of credit issuance facility with Citibank N.A. that was effective December 31, 2020. Both of these agreements are referred to as the “Bermuda Re Citibank Letter of Credit Facility”. The current Bermuda Re Letter of Credit Facility provides for the committed issuance of up to $230.0 million of secured letters of credit. In addition, the facility provides for the uncommitted issuance of up to $140.0 million, which may be accessible via written request by the Company and corresponding authorization from Citibank N.A.

 

At September 30, 2021 and December 31, 2020, the Bermuda Re Citibank Letter of Credit Facility had $200.7 million and $185.5 million of outstanding letters of credit, respectively.

 

Effective February 23, 2021, Bermuda Re entered into a letter of credit issuance facility with Wells Fargo referred to as the “Bermuda Re Wells Fargo Letter of Credit Facility.” The Bermuda Re Wells Fargo Letter of Credit Facility originally provided for the issuance of up to $50.0 million of secured letters of credit. Effective May 5, 2021, the agreement was amended to provide for the issuance of up to $500.0 million of secured letters of credit.

 

At September 30, 2021, the Bermuda Re Wells Fargo Letter of Credit Facility had $404.2 million of outstanding letters of credit.

 

Effective August 9, 2021 Bermuda Re entered into a letter of credit issuance facility with Bayerische Landesbank, an agreement referred to as the “Bermuda Re Bayerische Landesbank Credit Facility”. The Bermuda Re Bayerische Landesbank Credit Facility provides for the committed issuance of up to $200.0 million of secured letters of credit.

 

At September 30, 2021, the Bermuda Re Bayerische Landesbank Credit Facility had no outstanding letters of credit.

 

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.

 

50


 

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 $6,393.0, million (70% of consolidated net worth as of December 31, 2019), 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, 2021, was $6,788.7 million. As of September 30, 2021, the Company was in compliance with all Everest International Credit Facility requirements.

 

At September 30, 2021 and December 31, 2020, Everest International Credit Facility had £52.2 million of outstanding letters of credit.

 

Costs incurred in connection with the Group Credit Facility and Everest International Credit Facility were $0 million and $0.1 million for the three months ended September 30, 2021 and 2020, respectively. Costs incurred in connection with the Group Credit Facility and Everest International Credit Facility were $0.2 million and $0.6 million for the nine months ended September 30, 2021 and 2020, respectively.

 

Everest Re is 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, 2021, Everest Re had admitted assets of approximately $18,874.0 million which provides borrowing capacity of up to approximately $1,887.4 million. As of September 30, 2021, Everest Re had $310.0 million of outstanding borrowings through its FHLB borrowing capacity. The $310.0 million of collateralized borrowings have interest payable at a rate of 0.35%.

 

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, fixed maturity portfolio, while maintaining an adequate level of liquidity. Our mix of investments is adjusted periodically, consistent with our current and projected operating results and market conditions. 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.

 

Interest Rate Risk. Our $27.8 billion investment portfolio, at September 30, 2021, 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 $3,341.2 million of mortgage-backed securities in the $21,623.1 million fixed maturity

51


 

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 $713.1 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, 2021

 

-200

 

 

-100

 

0

 

 

100

 

200

(Dollars in millions)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Market/Fair Value

$

23,888.3

 

 

$

23,112.3

 

 

$

22,336.3

 

 

$

21,560.2

 

 

$

20,784.2

 

Market/Fair Value Change from Base (%)

 

6.9

%

 

 

3.5

%

 

 

0.0

%

 

 

(3.5)

%

 

 

(6.9)

%

Change in Unrealized Appreciation

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

After-tax from Base ($)

$

1,339.0

 

 

$

669.5

 

 

$

-

 

 

$

(669.5)

 

 

$

(1,339.0)

 

 

We had $18,957.0 million and $16,399.0 million of gross reserves for losses and LAE as of September 30, 2021 and December 31, 2020, 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 3.8 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 $0.8 billion resulting in a discounted reserve balance of approximately $16.1 billion, representing approximately 72.0% 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.

 

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/Market Values

 

At September 30, 2021

(Dollars in millions)

-20%

 

-10%

 

0%

 

10%

 

20%

Fair/Market Value of the Equity Portfolio

$

1,218.9

 

$

1,371.2

 

$

1,523.6

 

$

1,676.0

 

$

1,828.3

After-tax Change in Fair/Market Value

$

(241.2)

 

$

(120.6)

 

$

-

 

$

120.6

 

$

241.2

 

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

52


 

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.

 

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.



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.

 

53


 

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

 

No material changes.



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, 2021

133,949

$

248.8612

133,949

2,058,292

August 1 - 31, 2021

191,560

$

257.2113

191,560

1,866,732

September 1 - 30, 2021

305,222

$

257.1626

299,849

1,566,883

Total

630,731

$

-

625,358

1,566,883

 

(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 30.4 million of the Company’s shares.



ITEM 3.DEFAULTS UPON SENIOR SECURITIES

 

None.



ITEM 4.MINE SAFETY DISCLOSURES

 

Not applicable.

54


 



ITEM 5.OTHER INFORMATION

 

None.



ITEM 6.EXHIBITS

 

Exhibit Index

 

 

Exhibit No.

Description

 

 

10.1

Credit Facility Agreement, dated August 9, 2021, between Everest Reinsurance (Bermuda), Ltd. and Citibank Europe plc providing a $230.0 million committed credit facility, filed herewith

 

 

10.2

Credit Facility Agreement, dated August 27, 2021, between Everest Reinsurance (Bermuda), Ltd. and Bayerische Landesbank providing a $200.0 million committed credit facility, filed herewith

 

 

31.1

Section 302 Certification of Juan C. Andrade

 

 

31.2

Section 302 Certification of Mark Kociancic

 

 

32.1

Section 906 Certification of Juan C. Andrade and Mark Kociancic

 

 

101.INS

XBRL Instance Document

 

 

101.SCH

XBRL Taxonomy Extension Schema

 

 

101.CAL

XBRL Taxonomy Extension Calculation Linkbase

 

 

101.DEF

XBRL Taxonomy Extension Definition Linkbase

 

 

101.LAB

XBRL Taxonomy Extension Labels Linkbase

 

 

101.PRE

XBRL Taxonomy Extension Presentation Linkbase

 

 

104

Cover Page Interactive Data File (embedded within the Inline XBRL document)

 

 

 

 

 

 

 

55


 

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 4, 2021

 

 

 

 

 

 

 

 

 

 

 

 

56