RENAISSANCERE HOLDINGS LTD. The following is a discussion and analysis of our results of operations for 2019 compared to 2018 and 2018 compared to 2017, respectively as well as our liquidity and capital resources atDecember 31, 2019 . This discussion and analysis should be read in conjunction with the audited consolidated financial statements and notes thereto included in this filing. This filing contains forward-looking statements that involve risks and uncertainties. Actual results may differ materially from the results described or implied by these forward-looking statements. See "Note on Forward-Looking Statements." OnMarch 22, 2019 , we acquired TMR, including RenaissanceRe Europe, RenaissanceReUK and their subsidiaries. As a result of the acquisition, each of the TMR entities became our wholly owned subsidiary. We accounted for the acquisition of TMR under the acquisition method of accounting in accordance with FASB Accounting Standards Codification ("ASC") Topic Business Combinations. Our results of operations and financial condition for 2019 include TMR for the period fromMarch 22, 2019 throughDecember 31, 2019 . The following discussion and analysis of our results of operations for 2019, compared to 2018, as well as our liquidity and capital resources atDecember 31, 2019 , should be read in that context. In addition, the results of operations for 2019 and financial condition atDecember 31, 2019 may not be reflective of the ultimate ongoing business of the combined entities. Refer to "Note 3. Acquisition of Tokio Millennium Re" in our "Notes to the Consolidated Financial Statements" for additional information with respect to the acquisition of TMR. INDEX TO MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Page OVERVIEW 63 SUMMARY OF CRITICAL ACCOUNTING ESTIMATES 64 Claims and Claim Expense Reserves 64 Premiums and Related Expenses 72 Reinsurance Recoverables 72 Fair Value Measurements and Impairments 73 Income Taxes 76 SUMMARY RESULTS OF OPERATIONS 77 FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES 93 Financial Condition 93 Liquidity and Cash Flows 94 Capital Resources 98 Reserve for Claims and Claim Expenses 99 Investments 100 Ratings 104 EFFECTS OF INFLATION 106 OFF-BALANCE SHEET AND SPECIAL PURPOSE ENTITY ARRANGEMENTS 106 CONTRACTUAL OBLIGATIONS 106 CURRENT OUTLOOK 107 62
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OVERVIEW
RenaissanceRe is a global provider of reinsurance and insurance. We provide property, casualty and specialty reinsurance and certain insurance solutions to customers, principally through intermediaries. Established in 1993, we have offices inBermuda ,Australia ,Ireland ,Singapore ,Switzerland , theU.K. and theU.S. Our operating subsidiaries include Renaissance Reinsurance, Renaissance ReinsuranceU.S. ,RenaissanceRe Specialty U.S. Ltd. , RenaissanceRe Europe, RenaissanceReUK , Renaissance Reinsurance ofEurope and Syndicate 1458. We also underwrite reinsurance on behalf of joint ventures, including DaVinci, Fibonacci Re, Top Layer Re, Upsilon RFO and Vermeer. In addition, through Medici, we invest in various insurance based investment instruments that have returns primarily tied to property catastrophe risk. We aspire to be the world's best underwriter by matching well-structured risks with efficient sources of capital and our mission is to produce superior returns for our shareholders over the long term. We seek to accomplish these goals by being a trusted, long-term partner to our customers for assessing and managing risk, delivering responsive and innovative solutions, leveraging our core capabilities of risk assessment and information management, investing in these core capabilities in order to serve our customers across market cycles, and keeping our promises. Our strategy focuses on superior risk selection, superior customer relationships and superior capital management. We provide value to our customers and joint venture partners in the form of financial security, innovative products, and responsive service. We are known as a leader in paying valid claims promptly. We principally measure our financial success through long-term growth in tangible book value per common share plus the change in accumulated dividends, which we believe is the most appropriate measure of our financial performance, and in respect of which we believe we have delivered superior performance over time. Our core products include property, casualty and specialty reinsurance, and certain insurance products principally distributed through intermediaries, with whom we have cultivated strong long-term relationships. We believe we have been one of the world's leading providers of catastrophe reinsurance since our founding. In recent years, through the strategic execution of several initiatives, including organic growth and acquisitions, we have expanded and diversified our casualty and specialty platform and products and believe we are a leader in certain casualty and specialty lines of business. We have determined our business consists of the following reportable segments: (1) Property, which is comprised of catastrophe and other property reinsurance and insurance written on behalf of our operating subsidiaries and certain joint ventures managed by our ventures unit, and (2) Casualty and Specialty, which is comprised of casualty and specialty reinsurance and insurance written on behalf of our operating subsidiaries and certain joint ventures managed by our ventures unit. We also pursue a number of other opportunities through our ventures unit, which has responsibility for creating and managing our joint ventures, executing customized reinsurance transactions to assume or cede risk, and managing certain strategic investments directed at classes of risk other than catastrophe reinsurance. From time to time we consider diversification into new ventures, either through organic growth, the formation of new joint ventures, or the acquisition of, or the investment in, other companies or books of business of other companies. To best serve our clients in the places they do business, we have operating subsidiaries, branches, joint ventures and underwriting platforms around the world, including DaVinci, Fibonacci Re, Renaissance Reinsurance, Top Layer Re, Upsilon RFO and Vermeer inBermuda , Renaissance ReinsuranceU.S. in theU.S. , Syndicate 1458 in theU.K. and RenaissanceRe Europe inSwitzerland , which has branches inAustralia ,Bermuda , theU.K. and theU.S. We write property and casualty and specialty reinsurance through our wholly owned operating subsidiaries, joint ventures and Syndicate 1458 and certain insurance products primarily through Syndicate 1458. Syndicate 1458 provides us with access to Lloyd's extensive distribution network and worldwide licenses and also writes business through delegated authority arrangements. The underwriting results of our operating subsidiaries and underwriting platforms are included in our Property and Casualty and Specialty segment results as appropriate. Since a meaningful portion of the reinsurance and insurance we write provides protection from damages relating to natural and man-made catastrophes, our results depend to a large extent on the frequency and severity of such catastrophic events, and the coverages we offer to customers affected by these events. We are exposed to significant losses from these catastrophic events and other exposures we cover. Accordingly, we expect a significant degree of volatility in our financial results and our financial results may vary significantly from quarter-to-quarter and from year-to-year, based on the level of insured catastrophic 63 -------------------------------------------------------------------------------- losses occurring around the world. We view our exposure to casualty and specialty lines of business as an efficient use of capital given these risks are generally less correlated with our property lines of business. This has allowed us to bring additional capacity to our clients, across a wider range of product offerings, while continuing to be good stewards of our shareholders' capital. We continually explore appropriate and efficient ways to address the risk needs of our clients and the impact of various regulatory and legislative changes on our operations. We have created and managed, and continue to manage, multiple capital vehicles across several jurisdictions and may create additional risk bearing vehicles or enter into additional jurisdictions in the future. In addition, our differentiated strategy and capabilities position us to pursue bespoke or large solutions for clients, which may be non-recurring. This, and other factors including the timing of contract inception, could result in significant volatility of premiums in both our Property and Casualty and Specialty segments. As our product and geographical diversity increases, we may be exposed to new risks, uncertainties and sources of volatility. Our revenues are principally derived from three sources: (1) net premiums earned from the reinsurance and insurance policies we sell; (2) net investment income and realized and unrealized gains from the investment of our capital funds and the investment of the cash we receive on the policies which we sell; and (3) fees and other income received from our joint ventures, advisory services and various other items. Our expenses primarily consist of: (1) net claims and claim expenses incurred on the policies of reinsurance and insurance we sell; (2) acquisition costs which typically represent a percentage of the premiums we write; (3) operating expenses which primarily consist of personnel expenses, rent and other operating expenses; (4) corporate expenses which include certain executive, legal and consulting expenses, costs for research and development, transaction and integration-related expenses, and other miscellaneous costs, including those associated with operating as a publicly traded company; (5) redeemable noncontrolling interests, which represent the interests of third parties with respect to the net income of DaVinciRe, Medici and Vermeer; and (6) interest and dividend costs related to our debt and preference shares. We are also subject to taxes in certain jurisdictions in which we operate. Since the majority of our income is currently earned inBermuda , which does not have a corporate income tax, the tax impact to our operations has historically been minimal. In the future, our net tax exposure may increase as our operations expand geographically, or as a result of adverse tax developments. The underwriting results of an insurance or reinsurance company are discussed frequently by reference to its net claims and claim expense ratio, underwriting expense ratio, and combined ratio. The net claims and claim expense ratio is calculated by dividing net claims and claim expenses incurred by net premiums earned. The underwriting expense ratio is calculated by dividing underwriting expenses (acquisition expenses and operational expenses) by net premiums earned. The combined ratio is the sum of the net claims and claim expense ratio and the underwriting expense ratio. A combined ratio below 100% indicates profitable underwriting prior to the consideration of investment income. A combined ratio over 100% indicates unprofitable underwriting prior to the consideration of investment income. We also discuss our net claims and claim expense ratio on a current accident year basis and a prior accident years basis. The current accident year net claims and claim expense ratio is calculated by taking current accident year net claims and claim expenses incurred, divided by net premiums earned. The prior accident years net claims and claim expense ratio is calculated by taking prior accident years net claims and claim expenses incurred, divided by net premiums earned. SUMMARY OF CRITICAL ACCOUNTING ESTIMATES Claims and Claim Expense Reserves General Description We believe the most significant accounting judgment made by management is our estimate of claims and claim expense reserves. Claims and claim expense reserves represent estimates, including actuarial and statistical projections at a given point in time, of the ultimate settlement and administration costs for unpaid claims and claim expenses arising from the insurance and reinsurance contracts we sell. We establish our claims and claim expense reserves by taking case reserves, adding estimates for IBNR and, if deemed necessary, adding costs for additional case reserves which represent our estimates for claims related to specific contracts which we believe may not be adequately estimated by the client as of that date, or 64 -------------------------------------------------------------------------------- adequately covered in the application of IBNR. Our reserving committee, which includes members of our senior management, reviews, discusses, and assesses the reasonableness and adequacy of the reserving estimates included in our audited financial statements. In accordance with FASB ASC Topic Business Combinations, we allocated the total consideration paid for TMR among acquired assets and assumed liabilities based on their fair values. These assets and liabilities include TMR's claims and claim expense reserves, which totaled$2.4 billion atMarch 22, 2019 , and consisted of$783.3 million and$1.6 billion included in our Property and Casualty and Specialty segments, respectively. The following table summarizes our claims and claim expense reserves by line of business, allocated between case reserves, additional case reserves and IBNR: Case Additional At December 31, 2019 Reserves Case Reserves IBNR Total (in thousands) Property$ 1,253,406 $ 1,631,223 $ 1,189,221 $ 4,073,850 Casualty and Specialty 1,596,426 129,720 3,583,913 5,310,059 Other 440 - - 440 Total$ 2,850,272 $ 1,760,943 $ 4,773,134 $ 9,384,349 AtDecember 31, 2018 (in thousands) Property$ 690,718 $ 1,308,307 $ 1,087,229 $ 3,086,254 Casualty and Specialty 771,537 116,877 2,096,979 2,985,393 Other 1,458 - 3,166 4,624 Total$ 1,463,713 $ 1,425,184 $ 3,187,374 $ 6,076,271 Activity in the liability for unpaid claims and claim expenses is summarized as follows: Year ended December 31, 2019 2018 2017 (in thousands) Net reserves as of January 1$ 3,704,050 $ 3,493,778 $ 2,568,730 Net incurred related to: Current year 2,123,876 1,390,767 1,902,424 Prior years (26,855 ) (270,749 ) (40,996 ) Total net incurred 2,097,021 1,120,018 1,861,428 Net paid related to: Current year 265,649 391,061 450,527 Prior years 832,405 503,708 524,298 Total net paid 1,098,054 894,769 974,825 Amounts acquired (1) 1,858,775 - - Foreign exchange 31,260 (14,977 ) 38,445 Net reserves as of December 31 6,593,052 3,704,050
3,493,778
Reinsurance recoverable as of
1,586,630
Gross reserves as of
(1) Represents the fair value of TMR's reserves for claims and claim expenses,
net of reinsurance recoverables, acquired at March 22, 2019 .
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The following table details our prior year development by segment of its liability for unpaid claims and claim expenses:
Year ended December 31, 2019 2018 2017
(in thousands) (Favorable)
(Favorable) adverse adverse (Favorable) adverse
development development development
Property $ (2,933 ) $ (221,290 ) $ (45,596 )
Casualty and Specialty (23,882 ) (49,262 ) 6,183
Other (40 ) (197 ) (1,583 )
Total favorable development of prior accident
years net claims and claim expenses$ (26,855 ) $
(270,749 )
Our reserving methodology for each line of business uses a loss reserving
process that calculates a point estimate for our ultimate settlement and
administration costs for claims and claim expenses. We do not calculate a range
of estimates and do not discount any of our reserves for claims and claim
expenses. We use this point estimate, along with paid claims and case reserves,
to record our best estimate of additional case reserves and IBNR in our
consolidated financial statements. Under GAAP, we are not permitted to establish
estimates for catastrophe claims and claim expense reserves until an event
occurs that gives rise to a loss.
Reserving for our reinsurance claims involves other uncertainties, such as the
dependence on information from ceding companies, the time lag inherent in
reporting information from the primary insurer to us or to our ceding companies,
and differing reserving practices among ceding companies. The information
received from ceding companies is typically in the form of bordereaux, broker
notifications of loss and/or discussions with ceding companies or their brokers.
This information may be received on a monthly, quarterly or transactional basis
and normally includes paid claims and estimates of case reserves. We sometimes
also receive an estimate or provision for IBNR. This information is often
updated and adjusted from time to time during the loss settlement period as new
data or facts in respect of initial claims, client accounts, industry or event
trends may be reported or emerge in addition to changes in applicable statutory
and case laws.
Our estimates of losses from large events are based on factors including
currently available information derived from claims information from certain
customers and brokers, industry assessments of losses from the events,
proprietary models, and the terms and conditions of our contracts. The
uncertainty of our estimates for large events is also impacted by the
preliminary nature of the information available, the magnitude and relative
infrequency of the events, the expected duration of the respective claims
development period, inadequacies in the data provided to the relevant date by
industry participants, the potential for further reporting lags or
insufficiencies and, in certain cases, the form of the claims and legal issues
under the relevant terms of insurance and reinsurance contracts. In addition, a
significant portion of the net claims and claim expenses associated with certain
large events can be concentrated with a few large clients and therefore the loss
estimates for these events may vary significantly based on the claims experience
of those clients. The contingent nature of business interruption and other
exposures will also impact losses in a meaningful way, which we believe may give
rise to significant complexity in respect of claims handling, claims adjustment
and other coverage issues, over time. Given the magnitude of certain events,
there can be meaningful uncertainty regarding total covered losses for the
insurance industry and, accordingly, several of the key assumptions underlying
our loss estimates. Loss reserve estimation in respect of our retrocessional
contracts poses further challenges compared to directly assumed reinsurance. In
addition, our actual net losses from these events may increase if our reinsurers
or other obligors fail to meet their obligations.
Because of the inherent uncertainties discussed above, we have developed a
reserving philosophy which attempts to incorporate prudent assumptions and
estimates, and we have generally experienced favorable net development on prior
accident years net claims and claim expenses in the last several years. However,
there is no assurance that this favorable development on prior accident years
net claims and claim expenses will occur in future periods.
Our reserving techniques, assumptions and processes differ among our Property
and Casualty and Specialty segments. Refer to "Note 8. Reserve for Claims and
Claim Expenses" in our "Notes to the
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Consolidated Financial Statements" for more information on the risks we insure
and reinsure, the reserving techniques, assumptions and processes we follow to
estimate our claims and claim expense reserves, prior year development of the
reserve for claims and claim expenses, analysis of our incurred and paid claims
development and claims duration information for each of our Property and
Casualty and Specialty segments.
Property Segment
Actual Results vs. Initial Estimates
As discussed above, the key assumption in estimating reserves for our Property
segment is our estimate of incurred claims and claim expenses. The table below
shows our initial estimates of incurred claims and claim expenses for each
accident year and how these initial estimates have developed over time. The
initial estimate of accident year incurred claims and claim expenses represents
our estimate of the ultimate settlement and administration costs for claims
incurred in our Property segment occurring during a particular accident year,
and as reported as of December 31 of that year. The re-estimated incurred claims
and claim expenses as of December 31 of subsequent years, represent our revised
estimates as reported as of those dates. Our most recent estimates as reported
at December 31, 2019 differ from our initial accident year estimates and
demonstrate that our initial estimate of incurred claims and claim expenses are
reasonably likely to vary from our most recent estimate, perhaps significantly.
Changes in this estimate will be recorded in the period in which they occur. In
accident years where our current estimates are lower than our initial estimates,
we have experienced favorable development while accident years where our current
estimates are higher than our original estimates indicates adverse development.
The table is presented on a net basis and, therefore, includes the benefit of
reinsurance recoverable. In addition, we have included historical incurred
claims and claim expenses development information related to Platinum and TMR in
the table below. For incurred accident year claims denominated in foreign
currency, we have used the current year-end balance sheet foreign exchange rate
for all periods provided, thereby eliminating the effects of changes in foreign
currency translation rates from the incurred accident year claims development
information included in the table below.
The following table details our Property segment incurred claims and claim
expenses, net of reinsurance, as of December 31, 2019 .
Incurred claims and claim expenses, net of reinsurance
(in thousands)
For the year ended
Accident
Year 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
2010 $ 720,159 $ 681,287 $ 636,962 $ 657,719 $ 691,473 $ 696,844 $ 706,258 $ 708,343 $ 681,435 $ 731,179
2011 - 1,559,069 1,491,770 1,422,659 1,393,110 1,369,567 1,338,187 1,333,982 1,321,137 1,302,141
2012 - - 559,946 429,425 395,203 375,098 356,310 344,535 336,719 331,865
2013 - - - 317,258 287,694 265,570 240,945 228,622 224,748 222,939
2014 - - - - 306,731 283,608 270,618 265,820 264,754 265,229
2015 - - - - - 368,766 334,572 317,865 307,088 301,733
2016 - - - - - - 445,532 458,525 443,135 432,269
2017 - - - - - - - 1,640,129 1,446,566 1,348,260
2018 - - - - - - - - 945,829 1,054,884
2019 - - - - - - - - - 1,000,190
Total $ 6,990,689
Our initial and subsequent estimates of incurred claims and claim expenses are
impacted by available information derived from claims information from certain
customers and brokers, industry assessments of losses from the events,
proprietary models, and the terms and conditions of our contracts. As described
above, given the complexity in reserving for claims and claims expenses
associated with property losses, and catastrophe excess of loss reinsurance
contracts in particular, which make up a significant proportion of our Property
segment, we have experienced development, both favorable and unfavorable, in any
given accident year. For example, net claims and claim expenses associated with
the 2017 accident year
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have experienced favorable development. This is largely driven by reductions in
estimated ultimate claims and claim expenses associated with Hurricanes Harvey,
Irma and Maria, the Mexico City Earthquake, the wildfires in California during
the fourth quarter of 2017 and certain losses associated with aggregate loss
contracts (collectively, the "2017 Large Loss Events"). In comparison, net
claims and claim expenses associated with 2018 accident year have experienced
adverse development. The adverse development was driven by a deterioration in
expected net claims and claim expenses as new and additional claims information
was received associated with Typhoons Jebi, Mangkhut and Trami, Hurricane
Florence, the wildfires in California during the third and fourth quarters of
2018, Hurricane Michael and certain losses associated with aggregate loss
contracts (the "2018 Large Loss Events").
In accident years with a low level of insured catastrophe losses, our other
property lines of business would contribute a greater proportion of our overall
incurred claims and claim expenses within our Property segment, compared to
years with a high level of insured catastrophe losses. Our other property lines
of business tend to generate less volatility in future accident years and as
such we would expect to see a slower more stable increase or decrease in
estimated incurred net claims and claim expenses over time. However, certain of
our other property contracts are exposed to catastrophe events, resulting in
increased volatility of incurred claims and claim expenses driven by the
occurrence of catastrophe events. In addition, volatility of the initial
estimate associated with large catastrophe losses and the speed at which we
settle claims can vary dramatically based on the type of event.
Sensitivity Analysis
The table below shows the impact on our gross reserve for claims and claim
expenses, net income and shareholders' equity as of and for the year ended
December 31, 2019 of a reasonable range of possible outcomes associated with our
estimates of gross ultimate losses for claims and claim expenses incurred within
our Property segment. The reasonable range of possible outcomes is based on a
distribution of outcomes of our ultimate incurred claims and claim expenses from
catastrophic events. In addition, we adjust the loss ratios and development
curves in our other property lines of business in a similar fashion to the
sensitivity analysis performed for our Casualty and Specialty segment, discussed
in greater detail below. In general, our reserve for claims and claim expenses
for more recent events are subject to greater uncertainty and, therefore,
greater variability and are likely to experience material changes from one
period to the next. This is due to the uncertainty as to the size of the
industry losses from the event, which contracts have been exposed to the
catastrophic event and the magnitude of claims incurred by our clients. As our
claims age, more information becomes available and we believe our estimates
become more certain, although there is no assurance this trend will continue in
the future. As a result, the sensitivity analysis below is based on the age of
each accident year, our current estimated incurred claims and claim expenses for
the catastrophic events occurring in each accident year, and a reasonable range
of possible outcomes of our current estimates of claims and claim expenses by
accident year. The impact on net income and shareholders' equity assumes no
increase or decrease in reinsurance recoveries, loss related premium or
redeemable noncontrolling interest.
Property Claims and Claim Expense Reserve Sensitivity Analysis
$ Impact of % Impact of
Change Reserve for Change
Reserve for Claims Claims on Reserve for % Impact of % Impact of
and Claim Expenses and Claim Claims Change on Net Change on
at Expenses andClaim Expenses Income for Shareholders'
(in thousands, except
percentages) 2019 2019 2019 December 31, 2019 December 31, 2019 Higher$ 4,598,682 $ 524,832 5.6 % (55.2 )% (8.8 )% Recorded 4,073,850 - - % - % - % Lower 3,710,019 (363,831 ) (3.9 )% 38.3 % 6.1 % 68
-------------------------------------------------------------------------------- We believe the changes we made to our estimated incurred claims and claim expenses represent a reasonable range of possible outcomes based on our experience to date and our future expectations. While we believe these are a reasonable range of possible outcomes, we do not believe the above sensitivity analysis should be considered an actuarial reserve range. Excluded from the impact on our reserves for claims and claim expenses, net income and shareholders' equity, in the table above, are reserves for claims and claim expenses associated with the TMR managed third-party capital vehicles as these reserves for claims and claim expenses are fully ceded and have no impact on our net income or shareholders' equity. In addition, the sensitivity analysis only reflects a reasonable range of possible outcomes in our underlying assumptions. It is possible that our estimated incurred claims and claim expenses could be significantly higher or lower than the sensitivity analysis described above. For example, we could be liable for events for which we have not estimated claims and claim expenses or for exposures we do not currently believe are covered under our policies. These changes could result in significantly larger changes to our estimated incurred claims and claim expenses, net income and shareholders' equity than those noted above, and could be recorded across multiple periods. We also caution that the above sensitivity analysis is not used by management in developing our reserve estimates and is also not used by management in managing the business. Casualty and Specialty Segment Actual Results vs. Initial Estimates As discussed above, the key assumption in estimating reserves for our Casualty and Specialty segment is our estimate of incurred claims and claim expenses. Standard actuarial techniques are used to calculate the ultimate claims and claim expenses and two key assumptions include the estimated incurred claims and claim expenses ratio and the estimated loss reporting patterns. The table below shows our initial estimates of incurred claims and claim expenses for each accident year and how these initial estimates have developed over time. The initial estimate of accident year incurred claims and claim expenses represents our estimate of the ultimate settlement and administration costs for claims incurred in our Casualty and Specialty segment occurring during a particular accident year, and as reported as ofDecember 31 of that year. The re-estimated incurred claims and claim expenses as ofDecember 31 of subsequent years, represent our revised estimates as reported as of those dates. Our most recent estimates as reported atDecember 31, 2019 differ from our initial accident year estimates and demonstrate that our initial estimate of incurred claims and claim expenses are reasonably likely to vary from our most recent estimate, perhaps significantly. Changes in this estimate will be recorded in the period in which they occur. In accident years where our current estimates are lower than our initial estimates, we have experienced favorable development while accident years where our current estimates are higher than our original estimates indicates adverse development. The table is presented on a net basis and, therefore, includes the benefit of reinsurance recoverable. In addition, we have included historical incurred claims and claim expenses development information related to Platinum and TMR in the table below. For incurred accident year claims denominated in foreign currency, we have used the current year-end balance sheet foreign exchange rate for all periods provided, thereby eliminating the effects of changes in foreign currency translation rates from the incurred accident year claims development information included in the table below. 69 --------------------------------------------------------------------------------
The following table details our Casualty and Specialty segment incurred claims
and claim expenses, net of reinsurance, as of
Incurred claims and claim expenses, net of reinsurance
(in thousands)
For the year ended
Accident
Year 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019
2010 $ 411,733 $ 423,754 $ 411,785 $ 375,622 $ 354,254 $ 340,881 $ 339,232 $ 335,222 $ 334,105 $ 321,752
2011 - 429,955 434,736 404,599 375,683 368,885 360,191 349,632 356,878 362,728
2012 - - 578,072 592,243 562,936 552,340 535,671 549,633 564,330 575,347
2013 - - - 595,287 573,399 545,364 520,088 508,536 493,815 476,828
2014 - - - - 718,082 714,298 719,432 700,982 683,510 688,675
2015 - - - - - 802,257 822,284 858,062 838,895 831,899
2016 - - - - - - 955,919 1,000,242 988,866 994,306
2017 - - - - - - - 1,300,584 1,278,229 1,284,136
2018 - - - - - - - - 1,253,151 1,283,407
2019 - - - - - - - - - 1,279,854
Total $ 8,098,932
As each underwriting year has developed, our estimated expected incurred claims
and claim expenses have changed. As an example, our re-estimated incurred claims
and claim expenses decreased for the
2013 accident year from the initial estimates. This decrease was principally
driven by actual reported and
paid net claims and claim expenses associated with the 2013 accident year coming
in less than expected,
which has resulted in a reduction in our expected ultimate claims and claim
expense ratio for this accident
year. In comparison, the 2018 accident year has developed adversely compared to
our initial estimates of
incurred claims and claim expenses and our current estimates are higher than our
initial estimates. The
increase in incurred claims and claim expenses for the 2018 accident year is due
to reported losses higher than expected.
The reserving methodology for our Casualty and Specialty segment is weighted
more heavily to our initial estimate in the early periods immediately following
the contracts' inception through the use of the expected loss ratio method. The
expected loss ratio method estimates the incurred losses by multiplying the
initial expected loss ratio by the earned premium. Under the expected loss ratio
method, no reliance is placed on the development of claims and claim expenses.
The determination of when reported losses are sufficient and credible to warrant
selection of an ultimate loss ratio different from the initial expected loss
ratio also requires judgment. We generally make adjustments for reported loss
experience indicating unfavorable variances from the initial expected loss ratio
sooner than reported loss experience indicating favorable variances as reporting
of losses in excess of expectations tends to have greater credibility than an
absence of or lower than expected level of reported losses. Over time, as a
greater number of claims are reported and the credibility of reported losses
improves, actuarial estimates of IBNR are typically based on the
Bornhuetter-Ferguson actuarial method. The Bornhuetter-Ferguson method places
weight on claims and claim expenses development experience. If there is adverse
development of prior accident years claims and claim expenses, we generally
select the Bornhuetter-Ferguson method to ensure the claim experience is
considered in the determination of our estimated claims and claim expenses with
the associated business. If we believe we lack the claims experience in the
early stages of development of a line of business, we may not select the
Bornhuetter-Ferguson method until such time as we believe there is greater
credibility in the level of reported losses. As prior accident years claims and
claim expenses development experience becomes credible, the Bornhuetter-Ferguson
method is generally selected which places greater weight on this experience as
it develops. The Bornhuetter-Ferguson method estimates our expected ultimate
claims and claim expenses by applying our initial estimated loss ratio to our
undeveloped premium, and adding the reported losses to the estimate. The impact
of these methodologies can be observed in the table above. For example, the 2014
accident year ultimate loss remained relatively consistent for the first two
years of development (i.e., the years ended December 31, 2015 and 2016), before
experiencing favorable development in years three and four (i.e., the years
ended December 31, 2017 and 2018). This reflects the reserving methodology where
we use the Bornhuetter-Ferguson method as the experience became more credible.
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Sensitivity Analysis
The table below quantifies the impact on our gross reserves for claims and claim
expenses, net income and shareholders' equity as of and for the year ended
December 31, 2019 of a reasonable range of possible outcomes in the actuarial
assumptions used to estimate our December 31, 2019 claims and claim expense
reserves within our Casualty and Specialty segment. The table quantifies a
reasonable range of possible outcomes in our initial estimated gross ultimate
claims and claim expense ratios and estimated loss reporting patterns. The
impact on net income and shareholders' equity assumes no increase or decrease in
reinsurance recoveries, loss related premium or redeemable noncontrolling
interest.
Casualty and Specialty Claims and Claim Expense Reserve Sensitivity Analysis
$ Impact of % Impact of % Impact of
Change Change Change on % Impact of
on Reserves for on Reserve for Net Income Change on
Estimated Claims and Claim Claims and Claim for the Year Shareholders'
Loss Expenses at Expenses at Ended Equity at
(in thousands, except Reporting December 31, December 31, December 31, December 31,
percentages) Pattern 2019 2019 2019 2019Increase expected claims
and claim expense ratio Slower
by 10% reporting$ 748,368 8.0 % (78.8 )% (12.5 )%
Increase expected claims
and claim expense ratio Expected
by 10% reporting 405,659 4.3 % (42.7 )% (6.8 )%
Increase expected claims
and claim expense ratio Faster
by 10% reporting 172,705 1.8 % (18.2 )% (2.9 )%
Expected claims and claim Slower
expense ratio reporting 306,798 3.3 % (32.3 )% (5.1 )%
Expected claims and claim Expected
expense ratio reporting - - % - % - %
Expected claims and claim Faster
expense ratio reporting (208,570 ) (2.2 )% 21.9 % 3.5 %
Decrease expected claims
and claim expense ratio Slower
by 10% reporting (139,232 ) (1.5 )% 14.7 % 2.3 %
Decrease expected claims
and claim expense ratio Expected
by 10% reporting (410,623 ) (4.4 )% 43.2 % 6.9 %
Decrease expected claims
and claim expense ratio Faster
by 10% reporting (594,629 ) (6.3 )% 62.6 % 10.0 % We believe that ultimate claims and claim expense ratios 10.0 percentage points above or below our estimated assumptions constitute a reasonable range of possible outcomes based on our experience to date and our future expectations. In addition, we believe that the adjustments we made to speed up or slow down our estimated loss reporting patterns represent a reasonable range of possible outcomes. While we believe these are a reasonable range of possible outcomes, we do not believe the above sensitivity analysis should be considered an actuarial reserve range. In addition, the sensitivity analysis only reflects a reasonable range of possible outcomes in our underlying assumptions. It is possible that our initial estimated claims and claim expense ratios and loss reporting patterns could be significantly different from the sensitivity analysis described above. For example, we could be liable for events that we have not estimated reserves for, or for exposures we do not currently believe are covered under our contracts. These changes could result in significantly larger changes to reserves for claims and claim expenses, net income and shareholders' equity than those noted above, and could be recorded across multiple periods. We also caution that the above sensitivity analysis is not used by management in developing our reserve estimates and is also not used by management in managing the business. Other Included in the Other category are the remnants of our formerBermuda -based insurance operations. These operations are in run-off and no new business is being underwritten. Our outstanding claims and claim expense reserves for these operations include insurance policies and proportional reinsurance with respect 71 -------------------------------------------------------------------------------- to risks including: (1) commercial property, which principally included catastrophe-exposed commercial property products; (2) commercial multi-line, which included commercial property and liability coverage, such as general liability, automobile liability and physical damage, building and contents, professional liability and various specialty products; and (3) personal lines property, which principally included homeowners personal lines property coverage and catastrophe exposed personal lines property coverage and totaled$0.4 million atDecember 31, 2019 (2018 -$4.6 million ). Our reserving techniques and processes for our Casualty and Specialty segment also apply to our Other category. In addition, certain of our coverages may be impacted by natural and man-made catastrophes. We estimate claim reserves for these losses after the event giving rise to these losses occurs, following a process that is similar to that used in our Property segment. Premiums and Related Expenses Premiums are recognized as income, net of any applicable reinsurance or retrocessional coverage purchased, over the terms of the related contracts and policies. Premiums written are based on contract and policy terms and include estimates based on information received from both insureds and ceding companies. Unearned premiums represents the portion of premiums written that relate to the unexpired terms of contracts and policies in force. Amounts are computed by pro rata methods based on statistical data or reports received from ceding companies. Reinstatement premiums are estimated after the occurrence of a significant loss and are recorded in accordance with the contract terms based upon paid losses and case reserves. Reinstatement premiums are earned when written. Due to the nature of reinsurance, ceding companies routinely report and remit premiums to us subsequent to the contract coverage period. Consequently, premiums written and receivable include amounts reported by the ceding companies, supplemented by our estimates of premiums that are written but not reported. The estimation of written premiums may be affected by early cancellation, election of contract provisions for cut-off and return of unearned premiums or other contract disruptions. The time lag involved in the process of reporting premiums is shorter than the lag in reporting losses. In addition to estimating premiums written, we estimate the earned portion of premiums written which is subject to judgment and uncertainty. Any adjustments to written and earned premiums, and the related losses and acquisition expenses, are accounted for as changes in estimates and are reflected in the results of operations in the period in which they are made. Lines of business that are similar in both the nature of their business and estimation process may be grouped for purposes of estimating premiums. Premiums are estimated based on ceding company estimates and our own judgment after considering factors such as: (1) the ceding company's historical premium versus projected premium, (2) the ceding company's history of providing accurate estimates, (3) anticipated changes in the marketplace and the ceding company's competitive position therein, (4) reported premiums to date and (5) the anticipated impact of proposed underwriting changes. Estimates of premiums written and earned are based on the selected ultimate premium estimate, the terms and conditions of the reinsurance contracts and the remaining exposure from the underlying policies. We evaluate the appropriateness of these estimates in light of the actual premium reported by the ceding companies, information obtained during audits and other information received from ceding companies. Reinsurance Recoverables We enter into retrocessional reinsurance agreements in order to help reduce our exposure to large losses and to help manage our risk portfolio. Amounts recoverable from reinsurers are estimated in a manner consistent with the claims and claim expense reserves associated with the related assumed reinsurance. For multi-year retrospectively rated contracts, we accrue amounts (either assets or liabilities) that are due to or from our retrocessionaires based on estimated contract experience. If we determine that adjustments to earlier estimates are appropriate, such adjustments are recorded in the period in which they are determined. The estimate of reinsurance recoverables can be more subjective than estimating the underlying claims and claim expense reserves as discussed under the heading "Claims and Claim Expense Reserves" above. In particular, reinsurance recoverables may be affected by deemed inuring reinsurance, industry losses reported by various statistical reporting services, and other factors. Reinsurance recoverables on dual trigger reinsurance contracts require us to estimate our ultimate losses applicable to these contracts as well 72 -------------------------------------------------------------------------------- as estimate the ultimate amount of insured industry losses that will be reported by the applicable statistical reporting agency, as per the contract terms. In addition, the level of our additional case reserves and IBNR reserves has a significant impact on reinsurance recoverables. These factors can impact the amount and timing of the reinsurance recoverables to be recorded. The majority of the balance we have accrued as recoverable will not be due for collection until some point in the future. The amounts recoverable ultimately collected are open to uncertainty due to the ultimate ability and willingness of reinsurers to pay our claims, for reasons including insolvency and elective run-off, contractual dispute and various other reasons. In addition, because the majority of the balances recoverable will not be collected for some time, economic conditions as well as the financial and operational performance of a particular reinsurer may change, and these changes may affect the reinsurer's willingness and ability to meet their contractual obligations to us. To reflect these uncertainties, we estimate and record a valuation allowance for potential uncollectible reinsurance recoverables which reduces reinsurance recoverables and net income. We estimate our valuation allowance by applying specific percentages against each reinsurance recoverable based on our counterparty's credit rating. The percentages applied are based on historical industry default statistics developed by major rating agencies and are then adjusted by us based on industry knowledge and our judgment and estimates. We also apply case-specific valuation allowances against certain recoveries we deem unlikely to be collected in full. We then evaluate the overall adequacy of the valuation allowance based on other qualitative and judgmental factors. AtDecember 31, 2019 , our reinsurance recoverable balance was$2.8 billion (2018 -$2.4 billion ). Of this amount, 57.5% is fully collateralized by our reinsurers, 41.0% is recoverable from reinsurers rated A- or higher by major rating agencies and 1.5% is recoverable from reinsurers rated lower than A- by major rating agencies (2018 - 60.8%, 38.0% and 1.2%, respectively). The reinsurers with the three largest balances accounted for 12.7%, 7.2% and 7.0%, respectively, of our reinsurance recoverable balance atDecember 31, 2019 (2018 - 15.5%, 6.7% and 6.5%, respectively). The valuation allowance recorded against reinsurance recoverable was$7.3 million atDecember 31, 2019 (2018 -$9.0 million ). The three largest company-specific components of the valuation allowance represented 18.1%, 7.9% and 7.2%, respectively, of our total valuation allowance atDecember 31, 2019 (2018 - 16.2%, 14.8% and 12.3%, respectively). Fair Value Measurements and Impairments Fair Value The use of fair value to measure certain assets and liabilities with resulting unrealized gains or losses is pervasive within our consolidated financial statements. Fair value is defined under accounting guidance currently applicable to us to be the price that would be received upon the sale of an asset or paid to transfer a liability in an orderly transaction between open market participants at the measurement date. We recognize the change in unrealized gains and losses arising from changes in fair value in our consolidated statements of operations. FASB ASC Topic Fair Value Measurements and Disclosures prescribes a fair value hierarchy that prioritizes the inputs to the respective valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to valuation techniques that use at least one significant input that is unobservable (Level 3). In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the level in the fair value hierarchy within which the fair value measurement in its entirety falls has been determined based on the lowest level input that is significant to the fair value measurement of the asset or liability. Our assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and we consider factors specific to the asset or liability. In order to determine if a market is active or inactive for a security, we consider a number of factors, including, but not limited to, the spread between what a seller is asking for a security and what a buyer is bidding for the same security, the volume of trading activity for the security in question, the price of the security compared to its par value (for fixed maturity investments), and other factors that may be indicative of market activity. 73 -------------------------------------------------------------------------------- In accordance with FASB ASC Topic Business Combinations, we allocated the total consideration paid for TMR among acquired assets and assumed liabilities based on their fair values. These assets included TMR's investments of$2.3 billion , including$2.2 billion of fixed maturity investments trading,$108.6 million of short term investments and$41.2 million of other investments. These assets are subject to the fair value measurement methodology outlined herein. AtDecember 31, 2019 , we classified$107.6 million and$28.2 million of our assets and liabilities, respectively, at fair value on a recurring basis using Level 3 inputs. This represented 0.4% and 0.2% of our total assets and liabilities, respectively. Level 3 fair value measurements are based on valuation techniques that use at least one significant input that is unobservable. These measurements are made under circumstances in which there is little, if any, market activity for the asset or liability. We use valuation models or other pricing techniques that require a variety of inputs including contractual terms, market prices and rates, yield curves, credit curves, measures of volatility, prepayment rates and correlations of such inputs, some of which may be unobservable, to value these Level 3 assets and liabilities. Our assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment. In making the assessment, we considered factors specific to the asset or liability. In certain cases, the inputs used to measure fair value of an asset or a liability may fall into different levels of the fair value hierarchy. In such cases, the level in the fair value hierarchy within which the fair value measurement in its entirety is classified is determined based on the lowest level input that is significant to the fair value measurement of the asset or liability. Refer to "Note 6. Fair Value Measurements" in our "Notes to the Consolidated Financial Statements" for additional information about fair value measurements. Impairments The amount and timing of asset impairment is subject to significant estimation techniques and is a critical accounting estimate for us. The significant impairment reviews we complete are for our goodwill and other intangible assets and equity method investments, as described in more detail below.Goodwill and Other Intangible AssetsGoodwill and other intangible assets acquired are initially recorded at fair value. Subsequent to initial recognition, finite lived other intangible assets are amortized over their estimated useful life, subject to impairment, and goodwill and indefinite lived other intangible assets are carried at the lower of cost or fair value, subject to impairment. If goodwill or other intangible assets are impaired, they are written down to their estimated fair values with a corresponding expense reflected in our consolidated statements of operations. In accordance with FASB ASC Topic Business Combinations, we allocated the total consideration paid for TMR among acquired assets and assumed liabilities based on their fair values. We recognized identifiable finite lived intangible assets of$11.2 million , which will be amortized over a weighted average period of 10.5 years, identifiable indefinite lived intangible assets of$6.8 million , and certain other adjustments to the fair values of the assets acquired, liabilities assumed and shareholders' equity of TMR atMarch 22, 2019 , based on foreign exchange rates onMarch 22, 2019 . In addition, we recognized goodwill of$13.1 million , based on foreign exchange rates onMarch 22, 2019 , attributable to the excess of the purchase price over the fair value of the net assets of TMR.Goodwill resulting from the acquisition of TMR will not be amortized but instead will be tested for impairment at least annually, as outlined below (more frequently if certain indicators are present).Goodwill is assigned to the applicable reporting unit of the acquired entities giving rise to the goodwill and other intangible assets. We assess goodwill and other intangible assets for impairment in the fourth quarter of each year, or more frequently if events or changes in circumstances indicate that the carrying amount may not be recoverable. For purposes of the annual impairment evaluation, we assess qualitative factors to determine if events or circumstances exist that would lead us to conclude that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If we determine that it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then we do not perform a quantitative evaluation. Should we determine that a quantitative analysis is required, we will first determine the fair value of the reporting unit and compare that with the carrying value, including goodwill. If the fair value of the reporting 74 -------------------------------------------------------------------------------- unit exceeds its carrying amount, then goodwill is not considered impaired and no further analysis is required. If the carrying amount of a reporting unit exceeds its fair value, we then proceed to determine the amount of the impairment charge, if any. There are many assumptions and estimates underlying the fair value calculation. Principally, we identify the reporting unit or business entity that the goodwill or other intangible asset is attributed to, and review historical and forecasted operating and financial performance and other underlying factors affecting such analysis, including market conditions. Other assumptions used could produce significantly different results which may result in a change in the value of goodwill or our other intangible assets and a related charge in our consolidated statements of operations. An impairment charge could be recognized in the event of a significant decline in the implied fair value of those operations where the goodwill or other intangible assets are applicable. In the event we determine that the value of goodwill has become impaired, an accounting charge will be taken in the fiscal quarter in which such determination is made, which could have a material adverse effect on our results of operations in the period in which the impairment charge is recorded. As atDecember 31, 2019 , excluding the amounts recorded in investments in other ventures, under the equity method, as noted below, our consolidated balance sheets include$210.7 million of goodwill (2018 -$197.6 million ) and$51.5 million of other intangible assets (2018 -$39.8 million ). Impairment charges related to these balances were $Nil during the year endedDecember 31, 2019 (2018 - $Nil, 2017 - $Nil). In the future, it is possible we will hold more goodwill, which would increase the degree of judgment and uncertainty embedded in our financial statements, and potentially increase the volatility of our reported results. Deferred Acquisition Costs and Value of Business Acquired ("VOBA") VOBA was initially recorded to reflect the establishment of the value of business acquired asset, which represents the estimated present value of the expected underwriting profit within the unearned premiums liability, net of reinsurance, less costs to service the related policies and a risk premium. VOBA is derived using, among other things, estimated loss ratios by line of business to calculate the underwriting profit, weighted average cost of capital, risk premium and expected payout patterns. The adjustment for VOBA will be amortized to acquisition expenses over approximately two years, as the contracts for business in-force as of the acquisition date expire. Investments inOther Ventures , Under Equity Method Investments in which we have significant influence over the operating and financial policies of the investee are classified as investments in other ventures, under equity method, and are accounted for under the equity method of accounting. Under this method, we record our proportionate share of income or loss from such investments in our results for the period. Any decline in the value of investments in other ventures, under equity method, including goodwill and other intangible assets arising upon acquisition of the investee, considered by management to be other-than-temporary, is reflected in our consolidated statements of operations in the period in which it is determined. As ofDecember 31, 2019 , we had$106.5 million (2018 -$115.2 million ) in investments in other ventures, under equity method on our consolidated balance sheets, including$10.6 million of goodwill and$14.3 million of other intangible assets (2018 -$10.6 million and$17.1 million ). The carrying value of our investments in other ventures, under equity method, individually or in the aggregate, may, and likely will, differ from the realized value we may ultimately attain, perhaps significantly so. In determining whether an equity method investment is impaired, we take into consideration a variety of factors including the operating and financial performance of the investee, the investee's future business plans and projections, recent transactions and market valuations of publicly traded companies where available, discussions with the investee's management, and our intent and ability to hold the investment until it recovers in value. Accordingly, we make assumptions and estimates in assessing whether an impairment has occurred and if, in the future, our assumptions and estimates made in assessing the fair value of these investments change, this could result in a material decrease in the carrying value of these investments. This would cause us to write-down the carrying value of these investments and could have a material adverse effect on our results of operations in the period the impairment charge is taken. We do not have any current plans to dispose of these investments, and cannot assure you we will consummate future transactions in which we realize the value at which these holdings are reflected in our financial statements. During the year endedDecember 31, 2019 , we recorded $Nil (2018 - $Nil, 2017 - $Nil) of other-than-temporary impairment charges related to goodwill and other intangible assets associated with our 75 -------------------------------------------------------------------------------- investments in other ventures, under the equity method. See "Note 4.Goodwill and Other Intangible Assets" in our "Notes to the Consolidated Financial Statements" for additional information. Income Taxes Income taxes have been provided in accordance with the provisions of FASB ASC Topic Income Taxes. Deferred tax assets and liabilities result from temporary differences between the amounts recorded in our consolidated financial statements and the tax basis of our assets and liabilities. Such temporary differences are primarily due to net operating loss carryforwards and GAAP versus tax basis accounting differences relating to unearned premiums, deferred finance charges, reserves for claims and claim expenses, accrued expenses, deferred underwriting results, premiums receivable, deferred acquisition expenses, VOBA, investments, intangible assets and amortization and depreciation. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance against deferred tax assets is recorded if it is more likely than not that all, or some portion, of the benefits related to deferred tax assets will not be realized. In accordance with FASB ASC Topic Business Combinations, we allocated the total consideration paid for TMR among acquired assets and assumed liabilities based on their fair values. This included the establishment of a net deferred tax liability of$5.7 million and the recording of a valuation allowance against TMR's deferred tax assets of$35.7 million in our consolidated financial statements. As a result of the reduction in theU.S. corporate tax rate from 35% to 21% effectiveJanuary 1, 2018 pursuant to the Tax Bill, which was enacted onDecember 22, 2017 , we recorded a$36.7 million write-down of its deferred tax asset during the fourth quarter of 2017. AtDecember 31, 2019 , our net deferred tax asset (prior to our valuation allowance) and valuation allowance were$119.6 million (2018 -$99.9 million ) and$75.7 million (2018 -$35.3 million ), respectively. See "Note 15. Taxation" in our "Notes to the Consolidated Financial Statements" for additional information. At each balance sheet date, we assess the need to establish a valuation allowance that reduces the net deferred tax asset when it is more likely than not that all, or some portion, of the deferred tax assets will not be realized. The valuation allowance assessment is performed separately in each taxable jurisdiction based on all available information including projections of future GAAP taxable income from each tax-paying component in each tax jurisdiction. The valuation allowance relates to a substantial portion of our deferred tax assets in most jurisdictions in which we do business. It excludesBermuda and ourU.S. operations that existed prior to the TMR acquisition, which only have a small valuation allowance against finite lived tax carryforwards. We have unrecognized tax benefits of $Nil as ofDecember 31, 2019 (2018 - $Nil). Interest and penalties related to unrecognized tax benefits, would be recognized in income tax expense. AtDecember 31, 2019 , interest and penalties accrued on unrecognized tax benefits were $Nil (2018 - $Nil). The following filed income tax returns are open for examination with the applicable tax authorities: tax years 2016 through 2018 with theIRS ; 2015 through 2018 withIreland ; 2018 with theU.K. ; 2015 through 2018 withSingapore ; 2018 withSwitzerland ; and 2015 through 2018 withAustralia . We do not expect the resolution of these open years to have a significant impact on our consolidated statements of operations and financial condition. 76 --------------------------------------------------------------------------------
SUMMARY OF RESULTS OF OPERATIONS
Year ended December 31, 2019 2018
2017
(in thousands, except per share amounts
and percentages)
Statements of operations highlights
Gross premiums written$ 4,807,750 $ 3,310,427 $ 2,797,540 Net premiums written$ 3,381,493 $ 2,131,902 $ 1,871,325 Net premiums earned$ 3,338,403 $ 1,976,129 $ 1,717,575
Net claims and claim expenses incurred 2,097,021 1,120,018
1,861,428
Acquisition expenses 762,232 432,989 346,892
Operational expenses 222,733 178,267 160,778
Underwriting income (loss) $ 256,417 $ 244,855 Net investment income$ 423,833 $ 261,866
Net realized and unrealized gains
(losses) on investments 414,483 (175,069 ) 135,822 Total investment result$ 838,316 $ 86,797 $ 358,031 Net income (loss)$ 950,267 $ 268,917 $ (354,671 )
Net income (loss) available
(attributable) to
shareholders$ 712,042 $ 197,276
Net income (loss) available
(attributable) to
shareholders per common share - diluted
$ (6.15 ) Dividends per common share$ 1.36 $ 1.32 $ 1.28 Key ratios
Net claims and claim expense ratio -
current accident year 63.6 % 70.4
% 110.8 %
Net claims and claim expense ratio -
prior accident years (0.8 )% (13.7 )% (2.4 )%
Net claims and claim expense ratio -
calendar year 62.8 % 56.7 % 108.4 %
Underwriting expense ratio 29.5 % 30.9 % 29.5 %
Combined ratio 92.3 % 87.6 % 137.9 %
Return on average common equity 14.1 % 4.7 % (5.7 )%
December 31, December 31, December 31,
Book value 2019 2018 2017
Book value per common share $ 120.53 $ 104.13 $ 99.72
Accumulated dividends per common share 20.68 19.32 18.00
Book value per common share plus
accumulated dividends$ 141.21 $ 123.45
Change in book value per common share
plus change in accumulated dividends 17.1 % 5.7 % (6.9 )%
December 31, December 31, December 31,
Balance sheet highlights 2019 2018 2017
Total assets $ 26,330,094 $ 18,676,196 $ 15,226,131 Total shareholders' equity attributable
to RenaissanceRe$ 5,971,367 $ 5,045,080 $ 4,391,375 77
-------------------------------------------------------------------------------- Results of operations for 2019 compared to 2018 Net income available toRenaissanceRe common shareholders was$712.0 million in 2019, compared to$197.3 million in 2018, an increase of$514.8 million . As a result of our net income available toRenaissanceRe common shareholders in 2019, we generated an annualized return on average common equity of 14.1% and our book value per common share increased from$104.13 atDecember 31, 2018 to$120.53 atDecember 31, 2019 , a 17.1% increase, after considering the change in accumulated dividends paid to our common shareholders. The most significant events affecting our financial performance during 2019, on a comparative basis to 2018, include: • TMR - the second quarter of 2019 was the first quarter that reflected the
results of TMR in our results of operations. As such, our results of
operations for 2019, compared to 2018, should be viewed in that context;
• Impact of Catastrophe Events - in 2019, we had a net negative impact on our
net income available to
from Hurricane Dorian and Typhoon Faxai (the "Q3 2019 Catastrophe Events"),
Typhoon Hagibis and losses associated with aggregate loss contracts
(collectively, the "2019 Large Loss Events"). This compares to a net negative
impact on our net income available to
changes in estimates of the 2017 Large Loss Events, in 2018;
• Underwriting Results - we generated underwriting income of
had a combined ratio of 92.3% in 2019, compared to underwriting income of
in 2019 was comprised of
Property segment and
Specialty segment. In comparison, our underwriting income in 2018 was
comprised of our Property segment, which generated underwriting income of
$262.1 million , and our Casualty and Specialty segment, which incurred an
underwriting loss of $17.0 million .
Included in our underwriting result is the net negative impact associated with
the 2019 Large Loss Events of $418.9 million and a corresponding increase of
12.9 percentage points to the combined ratio. In comparison, in 2018, the
underwriting result included the net negative impact associated with the
combined impacts of the 2018 Large Loss Events and changes in estimates of the
2017 Large Loss Events of $182.5 million and a corresponding increase in the
combined ratio of 10.0 percentage points;
• Gross Premiums Written - our gross premiums written increased by $1.5 billion, or 45.2%, to
increase of
million in the Casualty and Specialty segment. These increases were primarily
driven by expanded participation on existing transactions, certain new
transactions, rate improvements, and the impact of the acquisition of TMR;
• Investment Results - our total investment result, which includes the sum of
net investment income and net realized and unrealized gains on investments,
was a gain of
2018, an increase of
higher returns on portfolios of fixed maturity and short term investments,
equity investments trading, catastrophe bonds and investments-related
derivatives. Also driving the investment result for 2019 was higher average
invested assets, primarily resulting from the acquisition of TMR, combined
with capital raised in certain of our consolidated third-party capital
vehicles during 2019, including DaVinciRe, Upsilon RFO, Vermeer and Medici,
and the subsequent investment of those funds as part of our consolidated
investment portfolio; and
• Net Income Attributable to Redeemable Noncontrolling Interests - our net
income attributable to redeemable noncontrolling interests was
in 2019, compared to
to improved performance from DaVinciRe and the addition of net income
attributable to Vermeer in 2019, compared to 2018, which was negatively
impacted by significant losses in DaVinciRe associated with Hurricane
Michael, the wildfires in
"Q4 2018 California Wildfires") and changes in certain losses associated with
aggregate loss contracts in 2018 (the "2018 Aggregate Losses").
78-------------------------------------------------------------------------------- Results of operations for 2018 compared to 2017 Net income available toRenaissanceRe common shareholders was$197.3 million in 2018, compared to a net loss attributable toRenaissanceRe common shareholders of$244.8 million in 2017, an increase of$442.0 million . As a result of our net income available toRenaissanceRe common shareholders in 2018, we generated an annualized return on average common equity of 4.7% and our book value per common share increased from$99.72 atDecember 31, 2017 to$104.13 atDecember 31, 2018 , a 5.7% increase, after considering the change in accumulated dividends paid to our common shareholders. The most significant events affecting our financial performance during 2018, on a comparative basis to 2017, include: • Impact of Catastrophe Events - we had a net negative impact on our net income
available to
2018 Large Loss Events, partially offset by a net positive impact of
million resulting from decreases in the estimates of the net negative impact
of the 2017 Large Loss Events, compared to a net negative impact of
million associated with the 2017 Large Loss Events recorded in 2017;
• Underwriting Results - we generated underwriting income of
had a combined ratio of 87.6% in 2018, compared to an underwriting loss of
income in 2018 was comprised of
Property segment, partially offset by a
our Casualty and Specialty segment.
Included in our underwriting results for 2018 were the 2018 Large Loss Events, which had a net negative impact on our underwriting result of$340.2 million and added 18.6 percentage points to the combined ratio, partially offset by changes in the estimates of the 2017 Large Loss Events, which had a positive impact on the underwriting result of$157.8 million and reduced the combined ratio by 8.0 percentage points. In addition, as a result of the Q4 2018 California Wildfires, our underwriting result was negatively impacted by certain casualty liability exposures within the Casualty and Specialty segment. In comparison, in 2017 the underwriting result experienced a net negative impact of$989.2 million , or an increase in the combined ratio of 59.4 percentage points, associated with the 2017 Large Loss Events; • Large Reinsurance Transactions - our results for 2018 include certain large
reinsurance transactions, which are reflected in our Property segment and
increased net premiums earned by
to our net income available to
expect large transactions from time to time, we believe they reflect our
differentiated strategy, our capability to provide bespoke or large solutions
for our clients and our continued focus on serving our clients with unique
coverages;
• Gross Premiums Written - our gross premiums written increased by
million, or 18.3%, to
primarily by increases of
million in the Casualty and Specialty segment. Included in gross premiums
written in 2018 were
associated with the 2018 Large Loss Events and changes in the estimates of
the 2017 Large Loss Events, and
associated with a large reinsurance transaction, each principally within the
Property segment. Included in the gross premiums written in 2017 were
million of reinstatement premiums written associated with the 2017 Large Loss
Events;
• Investment Results - our total investment result, which includes the sum of
net investment income and net realized and unrealized gains and losses on
investments, was
decrease of
and unrealized losses on investments of
net realized and unrealized gains on investments of
The net realized and unrealized losses on investments in 2018 were driven by
net realized and unrealized losses on the fixed maturity investments
portfolio, and net realized and unrealized losses on the equity investments
trading portfolio. Partially offsetting these items was higher net investment
income from our portfolios of fixed maturity investments trading and short
term investments, primarily driven by higher average invested assets and the
impact of interest rate increases during recent periods; and
79--------------------------------------------------------------------------------
• Net Income Attributable to Redeemable Noncontrolling Interests - our net
income attributable to redeemable noncontrolling interests was
in 2018, compared to a net loss attributable to redeemable noncontrolling
interests of
DaVinciRe generating underwriting income in 2018 compared to significant
underwriting losses in 2017. Our ownership in DaVinciRe was 22.1% at both
Net Negative Impact
Net negative impact includes the sum of estimates of net claims and claim
expenses incurred, earned reinstatement premiums assumed and ceded, lost profit
commissions and redeemable noncontrolling interest. Our estimates of net
negative impact are based on a review of our potential exposures, preliminary
discussions with certain counterparties and catastrophe modeling techniques. Our
actual net negative impact, both individually and in the aggregate, may vary
from these estimates, perhaps materially. Changes in these estimates will be
recorded in the period in which they occur.
Meaningful uncertainty regarding the estimates and the nature and extent of the
losses from these events remains, driven by the magnitude and recent occurrence
of each event, the geographic areas in which the events occurred, relatively
limited claims data received to date, the contingent nature of business
interruption and other exposures, potential uncertainties relating to
reinsurance recoveries and other factors inherent in loss estimation, among
other things.
The financial data below provides additional information detailing the net
negative impact of certain events on our consolidated results of operations in
2019.
Q3 2019 2019
Catastrophe Aggregate Total 2019 Large
Year ended December 31, 2019 Typhoon Hagibis Events Losses Loss Events
(in thousands)
Net claims and claims expenses incurred
Assumed reinstatement premiums earned 28,829 24,596 183 53,608 Ceded reinstatement premiums earned (219 ) (574 ) - (793 ) Lost profit commissions 7,509 3,100 1,740 12,349
Net negative impact on underwriting
result (163,186 ) (160,066
) (95,668 ) (418,920 )
Redeemable noncontrolling interest -
DaVinciRe 35,078 22,677 12,932 70,687
Net negative impact on net income
available to
shareholders$ (128,108 ) $ (137,389 ) $ (82,736 ) $ (348,233 )
The financial data below provides additional information detailing the net negative impact of certain events on our segment underwriting results and consolidated combined ratio in 2019.
Q3 2019 2019
Catastrophe Aggregate Total 2019 Large
Year ended December 31, 2019 Typhoon Hagibis Events
Losses Loss Events
(in thousands, except percentages)
Net negative impact on Property segment
underwriting result$ (161,654 ) $ (157,064
)
Net negative impact on Casualty and
Specialty segment underwriting result (1,532 ) (3,002 ) - (4,534 )
Net negative impact on underwriting
result$ (163,186 ) $ (160,066
)
Percentage point impact on consolidated
combined ratio 5.0 4.9 2.8 12.9
80--------------------------------------------------------------------------------
The financial data below provides additional details regarding the net negative impact of certain events on our consolidated results of operations in 2018.
Q3 2018 Q4 2018 2018 Changes in Estimates
Year ended December Catastrophe Catastrophe Aggregate Total 2018 Large of the 2017 Large
31, 2018 Events (1) Events (2) Losses Loss Events Loss Events (3) Total
(in thousands)
(Increase) decrease
in net claims and
claims expenses
incurred $ (152,672 ) $ (232,702 ) $ (54,818 ) $ (440,192 ) $ 187,484 $ (252,708 )
Assumed reinstatement
premiums earned 27,165 85,663 2 112,830 (18,374 ) 94,456
Ceded reinstatement
premiums earned (209 ) (26,003 ) - (26,212 ) (2 ) (26,214 )
Lost (earned) profit
commissions 2,279 11,971 (900 ) 13,350 (11,355 ) 1,995
Net (negative)
positive impact on
underwriting result (123,437 ) (161,071 ) (55,716 ) (340,224 ) 157,753 (182,471 )
Redeemable
noncontrolling
interest - DaVinciRe 20,815 87,245 16,035 124,095 (27,983 ) 96,112
Net (negative)
positive impact on
net income available
to RenaissanceRe
common shareholders $ (102,622 ) $ (73,826 ) $ (39,681 ) $ (216,129 ) $ 129,770 $ (86,359 ) (1) Q3 2018 Catastrophe Events includes Typhoons Jebi, Mangkhut and Trami,
Hurricane Florence and the wildfires in
of 2018.
(2) Q4 2018 Catastrophe Events includes Hurricane Michael and the Q4 2018
California Wildfires.
(3) An initial estimate of the net negative impact of the 2017 Large Loss Events
was recorded in our consolidated financial statements during 2017. The
amounts noted in the table above reflect changes in the estimates of the net
negative impact of the 2017 Large Loss Events recorded in 2018.
The financial data below provides additional details regarding the net negative
impact of certain events on our segment underwriting results and consolidated
combined ratio in 2018.
Q3 2018 Q4 2018 2018 Changes in Estimates
Year ended December Catastrophe Catastrophe Aggregate
Total 2018 Large of the 2017 Large
31, 2018 Events Events Losses
Loss Events Loss Events (1) Total
(in thousands, except percentages) Net (negative) positive impact on Property segment underwriting result$ (121,875 ) $ (161,071 ) $ (55,716 ) $ (338,662 ) $ 145,724 $ (192,938 ) Net (negative) positive impact on Casualty and Specialty segment underwriting result (2) (1,562 ) - - (1,562 ) 12,029 10,467 Net (negative) positive impact on underwriting result$ (123,437 ) $ (161,071 ) $ (55,716 ) $ (340,224 ) $ 157,753 $ (182,471 ) Percentage point impact on consolidated combined ratio 6.5 8.8 2.8 18.6 (8.0 ) 10.0
(1) An initial estimate of the net negative impact of the 2017 Large Loss Events
was recorded in our consolidated financial statements during 2017. The
amounts noted in the table above reflect changes in the estimates of the net
negative impact of the 2017 Large Loss Events recorded in 2018.
(2) Impact on Casualty and Specialty segment result includes loss estimates from
catastrophe exposed contracts within certain specialty lines of business
(i.e., energy, marine, and regional multi-line business). Amounts shown for
the Q4 2018 Catastrophe Events, which includes the Q4 2018 California
Wildfires, do not reflect impacts from certain casualty liability exposures
within the Casualty and Specialty segment associated with the Q4 2018
California Wildfires, as different actuarial techniques are used to estimate
losses related to such exposures.
81-------------------------------------------------------------------------------- Underwriting Results by Segment Property Segment Below is a summary of the underwriting results and ratios for our Property segment: Year ended December 31, 2019 2018
2017
(in thousands, except percentages)
Gross premiums written$ 2,430,985 $ 1,760,926 $ 1,440,437 Net premiums written$ 1,654,259 $ 1,055,188 $ 978,014 Net premiums earned$ 1,627,494 $ 1,050,831 $ 931,070
Net claims and claim expenses incurred 965,424 497,895
1,297,985
Acquisition expenses 313,761 177,912 113,816
Operational expenses 139,015 112,954 94,194
Underwriting income (loss) $ 209,294 $ 262,070 $ (574,925 ) Net claims and claim expenses incurred -
current accident year$ 968,357 $ 719,185
Net claims and claim expenses incurred -
prior accident years (2,933 ) (221,290
) (45,596 )
Net claims and claim expenses incurred -
total$ 965,424 $ 497,895
Net claims and claim expense ratio -
current accident year 59.5 % 68.4
% 144.3 %
Net claims and claim expense ratio - prior
accident years (0.2 )% (21.0
)% (4.9 )%
Net claims and claim expense ratio -
calendar year 59.3 % 47.4 % 139.4 % Underwriting expense ratio 27.8 % 27.7 % 22.3 % Combined ratio 87.1 % 75.1 % 161.7 % Property Gross Premiums Written In 2019, our Property segment gross premiums written increased by$670.1 million , or 38.1%, to$2.4 billion , compared to$1.8 billion in 2018. Gross premiums written in the catastrophe class of business were$1.6 billion in 2019, an increase of$246.1 million , or 18.2%, compared to 2018. The increase in gross premiums written in the catastrophe class of business was primarily driven by expanded participation on existing transactions, certain new transactions, rate improvements, and the acquisition of TMR. Gross premiums written in the other property class of business were$835.5 million in 2019, an increase of$423.9 million , or 103.0%, compared to 2018. The increase in gross premiums written in the other property class of business was primarily driven by growth across our underwriting platforms, both from existing relationships and through new opportunities we believe have comparably attractive risk-return attributes, rate improvements, and business acquired in connection with the acquisition of TMR. In 2018, our Property segment gross premiums written increased by$320.5 million , or 22.2%, to$1.8 billion , compared to$1.4 billion in 2017. Gross premiums written in the catastrophe class of business were$1.3 billion in 2018, an increase of$244.9 million , or 22.2%, compared to 2017. Included in the catastrophe class of business in 2018 were$102.3 million of gross premiums written associated with large reinsurance transactions and$95.5 million of reinstatement premiums written primarily associated with the 2018 Large Loss Events and changes in the estimates of the net negative impact of the 2017 Large Loss Events. In comparison, 2017 included$172.4 million of reinstatement premiums written associated with the 2017 Large Loss Events. Excluding the reinstatement premiums written in each period associated with the respective catastrophe events, gross premiums written in the catastrophe class of business would have increased$321.8 million , or 34.5%, 82 -------------------------------------------------------------------------------- which was primarily a result of expanded participation on existing transactions and certain new transactions we believe have comparably attractive risk-return attributes, including the large reinsurance transactions noted above. Gross premiums written in the other property class of business were$411.6 million in 2018, an increase of$75.6 million , or 22.5%, compared to 2017. The increase in gross premiums written in the other property class of business was primarily driven by growth across our underwriting platforms, both from existing relationships and through new opportunities we believe have comparably attractive risk-return attributes. As the other property class of business has become a larger percentage of our Property segment gross premiums written, the amount of proportional business has increased. Proportional business typically has relatively higher premiums per unit of expected underwriting income, together with a higher acquisition expense ratio and combined ratio, than traditional excess of loss reinsurance. Our Property segment gross premiums written continue to be characterized by a large percentage ofU.S. andCaribbean premium, as we have found business derived from exposures inEurope ,Asia and the rest of the world to be, in general, less attractive on a risk-adjusted basis during recent periods. A significant amount of ourU.S. andCaribbean premium provides coverage against windstorms, notablyU.S. Atlantic windstorms, as well as earthquakes and other natural and man-made catastrophes. Property Ceded Premiums Written Year ended December 31, 2019 2018 2017 (in thousands) Ceded premiums written - Property$ 776,726 $ 705,738 $ 462,423 Ceded premiums written in our Property segment increased$71.0 million , to$776.7 million , in 2019, compared to$705.7 million in 2018. The increase in ceded premiums written was principally due to a significant portion of the increase in gross premiums written in the catastrophe class of business noted above being ceded to third-party investors in our managed vehicles, in particular Upsilon RFO, as well as an overall increase in ceded purchases. Ceded premiums written in our Property segment increased by$243.3 million , to$705.7 million , in 2018, compared to$462.4 million in 2017. The increase in ceded premiums written was principally due to a significant portion of the increase in gross premiums written in the catastrophe class of business noted above being ceded through our managed joint venture, Upsilon RFO, combined with increased purchases of retrocessional reinsurance as part of the management of our risk portfolio. Due to the potential volatility of the reinsurance contracts which we sell, we purchase reinsurance to reduce our exposure to large losses and to help manage our risk portfolio. To the extent that appropriately priced coverage is available, we anticipate continued use of retrocessional reinsurance to reduce the impact of large losses on our financial results and to manage our portfolio of risk; however, the buying of ceded reinsurance in our Property segment is based on market opportunities and is not based on placing a specific reinsurance program each year. In addition, in future periods we may utilize the growing market for insurance-linked securities to expand our purchases of retrocessional reinsurance if we find the pricing and terms of such coverages attractive. Property Underwriting Results Our Property segment generated underwriting income of$209.3 million in 2019, compared to$262.1 million in 2018, a decrease of$52.8 million . In 2019, our Property segment generated a net claims and claim expense ratio of 59.3%, an underwriting expense ratio of 27.8% and a combined ratio of 87.1%, compared to 47.4%, 27.7% and 75.1%, respectively, in 2018. 83 -------------------------------------------------------------------------------- Principally impacting the Property segment underwriting result and combined ratio in 2019 were the 2019 Large Loss Events, which resulted in a net negative impact on the Property segment underwriting result of$414.4 million and a corresponding increase in the Property segment combined ratio of 26.7 percentage points. In comparison, 2018 was impacted by the 2018 Large Loss Events, which resulted in a net negative impact on the underwriting result of$338.7 million , and a corresponding increase in the combined ratio of 37.4 percentage points. This was partially offset by a net positive impact on the underwriting result associated with changes in the estimates of the net negative impact on the underwriting result of the 2017 Large Loss Events of$145.7 million , and a corresponding decrease in the combined ratio of 14.0 percentage points. In addition, in 2019, net favorable development on prior accident years net claims and claim expenses of$2.9 million , or a decrease in the combined ratio of 0.2 percentage points, was primarily driven by favorable development on the 2017 Large Loss Events, which was mostly offset by adverse development on the 2018 Large Loss Events, compared to net favorable development of$221.3 million , or 21.0 percentage points, in 2018. The net favorable development in 2018 included the decreases in the estimates of the net negative impact of the 2017 Large Loss Events noted above. Refer to "Part II, Item 7. Summary of Critical Accounting Estimates, Claims and Claim Expense Reserves" and "Note 8. Reserve for Claims and Claim Expenses" in our "Notes to the Consolidated Financial Statements" for additional discussion of our reserving techniques and prior year development of net claims and claim expenses. Our Property segment generated underwriting income of$262.1 million in 2018, compared to an underwriting loss of$574.9 million in 2017, an improvement of$837.0 million . In 2018, our Property segment generated a net claims and claim expense ratio of 47.4%, an underwriting expense ratio of 27.7% and a combined ratio of 75.1%, compared to 139.4%, 22.3% and 161.7%, respectively, in 2017. Principally impacting the Property segment underwriting result and combined ratio in 2018 were the 2018 Large Loss Events, which resulted in a net negative impact on the underwriting result of$338.7 million , and a corresponding increase in the combined ratio of 37.4 percentage points. This was partially offset by a net positive impact on the underwriting result associated with changes in the estimates of the net negative impact on the underwriting result of the 2017 Large Loss Events of$145.7 million , and a corresponding decrease in the combined ratio of 14.0 percentage points. In comparison, 2017 was impacted by the 2017 Large Loss Events which resulted in a net negative impact on the underwriting result of$959.8 million and added 110.5 percentage points to the Property segment combined ratio. Primarily as a result of changes in the estimates of the net negative impact of the 2017 Large Loss Events noted above, the Property segment experienced net favorable development on prior accident years net claims and claim expenses of$221.3 million , or 21.0 percentage points, during 2018, compared to$45.6 million , or 4.9 percentage points, in 2017. Refer to "Part II, Item 7. Summary of Critical Accounting Estimates, Claims and Claim Expense Reserves" and "Note 8. Reserve for Claims and Claim Expenses" in our "Notes to the Consolidated Financial Statements" for additional discussion of our reserving techniques and prior year development of net claims and claim expenses. 84 -------------------------------------------------------------------------------- Casualty and Specialty Segment Below is a summary of the underwriting results and ratios for our Casualty and Specialty segment: Year ended December 31, 2019 2018 2017
(in thousands, except percentages)
Gross premiums written$ 2,376,765 $ 1,549,501 $ 1,357,110 Net premiums written$ 1,727,234 $ 1,076,714 $ 893,307 Net premiums earned$ 1,710,909 $ 925,298 $ 786,501
Net claims and claim expenses incurred 1,131,637 622,320
565,026
Acquisition expenses 448,678 255,079 233,077
Operational expenses 84,546 64,883 66,548
Underwriting income (loss) $ 46,048 $ (16,984 ) $ (78,150 ) Net claims and claim expenses incurred -
current accident year$ 1,155,519 $ 671,582
Net claims and claim expenses incurred -
prior accident years (23,882 ) (49,262
) 6,183
Net claims and claim expenses incurred -
total$ 1,131,637 $ 622,320
Net claims and claim expense ratio -
current accident year 67.5 % 72.6
% 71.1 %
Net claims and claim expense ratio - prior
accident years (1.4 )% (5.3 )% 0.7 %
Net claims and claim expense ratio -
calendar year 66.1 % 67.3
% 71.8 %
Underwriting expense ratio 31.2 % 34.5 % 38.1 % Combined ratio 97.3 % 101.8 % 109.9 % Casualty and Specialty Gross Premiums Written - In 2019, our Casualty and Specialty segment gross premiums written increased by$827.3 million , or 53.4%, to$2.4 billion , compared to$1.5 billion in 2018. The increase in gross premiums written in the Casualty and Specialty segment was primarily due to growth from new and existing business opportunities written in the current and prior periods across various classes of business within the segment, and business acquired in connection with the acquisition of TMR. In 2018, our Casualty and Specialty segment gross premiums written increased by$192.4 million , or 14.2%, to$1.5 billion , compared to$1.4 billion in 2017. The increase was principally due to selective growth from new business opportunities across various classes of business in our Casualty and Specialty segment. Much of this growth is a result of our differentiated strategy to provide bespoke customer solutions, which may be non-recurring. Our relative mix of business between proportional business and excess of loss business has fluctuated in the past and will likely continue to do so in the future. Proportional business typically has relatively higher premiums per unit of expected underwriting income, together with a higher combined ratio, than traditional excess of loss reinsurance. In addition, proportional coverage tends to be exposed to relatively more attritional, and frequent, losses, while being subject to less expected severity. Casualty and Specialty Ceded Premiums Written Year ended December 31, 2019 2018
2017
(in thousands)
Ceded premiums written - Casualty and Specialty
Ceded premiums written in our Casualty and Specialty segment increased by
85
--------------------------------------------------------------------------------
Ceded premiums written in our Casualty and Specialty segment increased by $9.0
million , to $472.8 million , in 2018, compared to $463.8 million in 2017,
primarily resulting from increases in gross premiums written subject to our
retrocessional quota share reinsurance programs utilized as part of the
management of our risk portfolio.
As in our Property segment, the buying of ceded reinsurance in our Casualty and
Specialty segment is based on market opportunities and is not based on placing a
specific reinsurance program each year.
Casualty and Specialty Underwriting Results
Our Casualty and Specialty segment generated underwriting income of $46.0
million in 2019, compared to an underwriting loss of $17.0 million in 2018. In
2019, our Casualty and Specialty segment generated a net claims and claim
expense ratio of 66.1%, an underwriting expense ratio of 31.2% and a combined
ratio of 97.3%, compared to 67.3%, 34.5% and 101.8%, respectively, in 2018.
The decrease in the Casualty and Specialty segment combined ratio in 2019 was
primarily driven by an improved underwriting expense ratio as well as an overall
decrease in the net claims and claims expense ratio. The decrease in the net
claims and claim expense ratio was principally due to lower current accident
year losses, which reduced the net claims and claim expense ratio by 5.1
percentage points in 2019, as compared to 2018 which was adversely impacted by
liability exposures associated with the wildfires in California in 2018. The
underwriting expense ratio in the Casualty and Specialty segment decreased 3.3
percentage points to 31.2% in 2019, compared to 34.5% in 2018, primarily due to
a decrease in the operating expense ratio as a result of improved operating
leverage.
Our Casualty and Specialty segment experienced net favorable development on
prior accident years net claims and claim expenses of $23.9 million , or 1.4
percentage points, during 2019, compared to $49.3 million , or 5.3 percentage
points, respectively, in 2018. The net favorable development during 2019 and
2018 was principally driven by reported losses coming in lower than expected.
Refer to "Part II, Item 7. Summary of Critical Accounting Estimates, Claims and
Claim Expense Reserves" and "Note 8. Reserve for Claims and Claim Expenses" in
our "Notes to the Consolidated Financial Statements" for additional discussion
of our reserving techniques and prior year development of net claims and claim
expenses.
Our Casualty and Specialty segment incurred an underwriting loss of $17.0
million in 2018, compared to an underwriting loss of $78.2 million in 2017. In
2018, our Casualty and Specialty segment generated a net claims and claim
expense ratio of 67.3%, an underwriting expense ratio of 34.5% and a combined
ratio of 101.8%, compared to 71.8%, 38.1% and 109.9%, respectively, in 2017.
The decrease in our Casualty and Specialty segment's combined ratio was driven
by decreases of 4.5 percentage points in the net claims and claim expense ratio
and 3.6 percentage points in the underwriting expense ratio in 2018, compared to
2017.
The decrease in our Casualty and Specialty segment net claims and claim expense
ratio was principally due to favorable development of prior accident year losses
of $49.3 million , or 5.3 percentage points during 2018, as compared to net
adverse development of $6.2 million , or 0.7 percentage points, in 2017. The net
favorable development during 2018 was principally driven by reported losses
coming in lower than expected compared to 2017, which experienced adverse
development associated with the decrease in the Ogden Rate during the period.
Refer to "Part II, Item 7. Summary of Critical Accounting Estimates, Claims and
Claim Expense Reserves" and "Note 8. Reserve for Claims and Claim Expenses" in
our "Notes to the Consolidated Financial Statements" for additional discussion
of our reserving techniques and prior year development of net claims and claim
expenses.
The underwriting expense ratio in our Casualty and Specialty segment decreased
3.6 percentage points to 34.5% in 2018, compared to 38.1% in 2017, due to
decreases in both the net acquisition ratio and the operating expense ratio,
with the latter being due to improved operating leverage.
86
--------------------------------------------------------------------------------
Fee Income
Year ended December 31, 2019 2018 2017
(in thousands)
Management fee income
Joint ventures $ 42,546 $ 26,387 $ 15,358
Managed funds 18,636 11,462 3,659
Structured reinsurance products 35,238 33,312 31,177
Total management fee income 96,420 71,161 50,194
Performance fee income
Joint ventures $ 9,660 $ 15,093 $ 9,429
Managed funds 420 62 197
Structured reinsurance products 7,693 3,580 4,719
Total performance fee income 17,773 18,735 14,345
Total fee income $ 114,193 $ 89,896 $ 64,539
The table above shows total fee income earned through third-party capital
management, as well as various joint ventures and certain structured
retrocession agreements to which we are a party. Performance fees are based on
the performance of the individual vehicles or products, and may be negative in a
particular period if, for example, large losses occur, which can potentially
result in no performance fees or the reversal of previously accrued performance
fees. Joint ventures include DaVinciRe, Top Layer Re, Vermeer and certain
entities investing in Langhorne. Managed funds include Upsilon Fund and Medici.
Structured reinsurance products and other includes Fibonacci Re, as well as
certain other vehicles and reinsurance contracts which transfer risk to capital.
The TMR third-party capital vehicles which we manage in connection with the
acquisition of TMR also generate management fee income, though this fee income
was not material to our results of operations in 2019. The fees earned through
third-party capital management are principally recorded through redeemable
noncontrolling interest, or as a reduction to operating expenses and acquisition
expenses, as applicable.
In 2019, total fee income earned through third-party capital management
increased $24.3 million , to $114.2 million , compared to $89.9 million in 2018,
primarily driven by an increase in the dollar value of capital being managed
combined with improved underlying performance.
In 2018, total fee income earned through third-party capital management
increased $25.4 million , to $89.9 million , compared to $64.5 million in 2017,
primarily driven by an increase in the dollar value of capital being managed. In
addition, certain of our joint ventures, namely DaVinciRe, were significantly
more profitable in 2018 compared to 2017.
In addition to the fee income earned through third-party capital management,
various joint ventures and certain structured retrocession agreements to which
we are a party, as detailed in the table above, we also earn fee income on
certain other underwriting-related activities. These fees, in the aggregate, are
recorded as a reduction to operating expenses or acquisition expenses, as
applicable. The total fees, as described above, earned by us in 2019 that were
recorded as a reduction to operating expenses or acquisition expenses were $92.6
million and $15.3 million , respectively, resulting in a reduction to the
combined ratio of 3.2% (2018 - $81.6 million , $15.0 million and 4.9%,
respectively, 2017 - $69.8 million , $45.4 million and 6.7%, respectively).
87
--------------------------------------------------------------------------------
Net Investment Income
Year ended December 31, 2019 2018 2017
(in thousands)
Fixed maturity investments $ 318,503 $ 211,973 $ 179,624
Short term investments 56,264 33,571 11,082
Equity investments trading 4,808 4,474 3,628
Other investments
Private equity investments 14,981 477 33,999
Other 39,246 22,475 8,067
Cash and cash equivalents 7,676 3,810 1,196
441,478 276,780 237,596
Investment expenses (17,645 ) (14,914 ) (15,387 )
Net investment income $ 423,833 $ 261,866 $ 222,209
Net investment income was $423.8 million in 2019, compared to $261.9 million in
2018, an increase of $162.0 million . Impacting our net investment income for
2019 was improved performance in our fixed maturity and short term investment
portfolios, combined with higher average invested assets, primarily resulting
from the acquisition of TMR and additional capital raised in certain of our
consolidated third-party capital vehicles.
Our private equity and other investment portfolios are accounted for at fair
value with the change in fair value recorded in net investment income, which
included net unrealized gains of $12.2 million in 2019, and net unrealized gains
of $8.3 million and $24.7 million in 2018 and 2017, respectively.
Net investment income was $261.9 million in 2018, compared to $222.2 million in
2017, an increase of $39.7 million . Impacting our net investment income for 2018
were higher average invested assets in our fixed maturity and short term
investment portfolios, combined with the impact of interest rate increases
during recent periods. In addition, our catastrophe bonds, which are included in
other investments, experienced an increase in net investment income as these
investments benefited from higher interest rates and higher invested assets, and
were less impacted by the catastrophe events in 2018, compared to 2017.
Partially offsetting these items were lower returns in our portfolio of private
equity investments in 2018 compared to 2017.
Low interest rates in 2019 have lowered the yields at which assets have been
invested relative to 2018 and longer-term historical levels. If the current
lower yield environment should persist, we would expect that the yield on our
portfolio would be adversely impacted by this low interest rate environment.
88
--------------------------------------------------------------------------------Net Realized and Unrealized Gains (Losses) on Investments
Year ended December 31, 2019 2018 2017 (in thousands) Gross realized gains$ 133,409 $ 21,284 $ 49,121 Gross realized losses (43,149 ) (91,098 ) (38,832 ) Net realized gains (losses) on fixed maturity investments 90,260 (69,814 ) 10,289 Net unrealized gains (losses) on fixed maturity investments trading 170,183 (57,310 ) 8,479 Net realized and unrealized gains (losses) on investments-related derivatives 58,891 (8,784 ) (2,490 ) Net realized gains on equity investments trading 31,062 27,739 80,027 Net unrealized gains (losses) on equity investments trading 64,087 (66,900 ) 39,517 Net realized and unrealized gains (losses) on investments$ 414,483 $ (175,069 ) $ 135,822 Our investment portfolio strategy seeks to preserve capital and provide us with a high level of liquidity. A large majority of our investments are invested in the fixed income markets and, therefore, our realized and unrealized holding gains and losses on investments are highly correlated to fluctuations in interest rates. Therefore, as interest rates decline, we will tend to have realized and unrealized gains from our investment portfolio, and as interest rates rise, we will tend to have realized and unrealized losses from our investment portfolio. Net realized and unrealized gains on investments were$414.5 million in 2019, compared to net realized and unrealized losses of$175.1 million in 2018, an increase of$589.6 million . Principally impacting our net realized and unrealized gains on investments in 2019 were: • net realized and unrealized gains on our fixed maturity investments trading
of
a downward shift in the interest rate yield curve during 2019, compared to an
upward shift in the yield curve in 2018;
• net realized and unrealized gains on our investment-related derivatives of
increase of
during 2019, in addition to the interest rate activity noted above; and
• net realized and unrealized gains on equity investments trading of
million in 2019, compared to net realized and unrealized losses of
million in 2018, an improvement of
higher returns on certain of our larger equity positions during 2019,
compared to 2018.
Net realized and unrealized losses on investments were$175.1 million in 2018, compared to net realized and unrealized gains of$135.8 million in 2017, a decrease of$310.9 million . Principally impacting our net realized and unrealized losses on investments in 2018 were: • net realized and unrealized losses on our fixed maturity investments
trading of
gains of
driven by an upward shift in the interest rate yield curve and a widening
of credit spreads during 2018, compared to a tightening of credit spreads
and a decrease in interest rates at the longer end of the yield curve in
2017; and
• net realized and unrealized losses on equity investments trading of
million in 2018, compared to net realized and unrealized gains of
million in 2017, a decrease of
returns on certain of our larger equity positions during 2018.
89--------------------------------------------------------------------------------
Net Foreign Exchange (Losses) Gains
Year ended December 31, 2019 2018 2017 (in thousands) Total foreign exchange (losses) gains$ (2,938 ) $ (12,428 ) $ 10,628 Our functional currency is theU.S. dollar. We routinely write a portion of our business in currencies other thanU.S. dollars and invest a portion of our cash and investment portfolio in those currencies. In addition, and in connection with the acquisition of TMR, we acquired certain entities with non-U.S. dollar functional currencies. As a result, we may experience foreign exchange gains and losses in our consolidated financial statements. We are primarily impacted by the foreign currency risk exposures associated with our underwriting operations, investment portfolio, and our operations with non-U.S. dollar functional currencies, and may, from time to time, enter into foreign currency forward and option contracts to minimize the effect of fluctuating foreign currencies on the value of non-U.S. dollar denominated assets and liabilities. Refer to "Part II, Item 7A. Quantitative and Qualitative Disclosures About Market Risk" for additional information related to our exposure to foreign currency risk and "Note 19. Derivative Instruments" in our "Notes to the Consolidated Financial Statements" for additional information related to foreign currency forward and option contracts we have entered into. Equity in Earnings ofOther Ventures Year ended December 31, 2019 2018 2017 (in thousands) Tower Hill Companies$ 10,337 $ 9,605 $ (1,647 ) Top Layer Re 8,801 8,852 9,851 Other 4,086 17 (174 )
Total equity in earnings of other ventures
Equity in earnings of other ventures primarily represents our pro-rata share of the net income (loss) from our investments in the Tower Hill Companies and Top Layer Re, and, except for Top Layer Re, is recorded one quarter in arrears. The carrying value of these investments on our consolidated balance sheets, individually or in the aggregate, may differ from the realized value we may ultimately attain, perhaps significantly so. The other category includes our equity investments in a select group of insurance and insurance-related companies. Equity in earnings of other ventures was$23.2 million in 2019, compared to$18.5 million in 2018, an increase of$4.8 million , principally driven by improved profitability of the Tower Hill Companies, as well as our equity investments in a select group of insurance and insurance-related companies within the other category. Equity in earnings of other ventures was$18.5 million in 2018, compared to$8.0 million in 2017, an increase of$10.4 million , principally driven by improved profitability of the Tower Hill Companies. Other Income Year ended December 31, 2019 2018 2017 (in thousands) Assumed and ceded reinsurance contracts accounted for as derivatives and deposits$ 4,473 $ 4,807 $ 8,655 Other 476 1,162 760 Total other income$ 4,949 $ 5,969 $ 9,415 In 2019, we generated other income of$4.9 million , compared to$6.0 million in 2018, a decrease of$1.0 million , driven by our assumed and ceded reinsurance contracts accounted for as derivatives and deposits. 90 -------------------------------------------------------------------------------- In 2018, we generated other income of$6.0 million , compared to$9.4 million in 2017, a decrease of$3.4 million , driven by a reduction in our assumed and ceded reinsurance contracts accounted for as derivatives and deposits. Corporate Expenses Year ended December 31, 2019 2018 2017 (in thousands) Total corporate expenses$ 94,122 $ 33,983 $ 18,572 Corporate expenses include certain executive, director, legal and consulting expenses, costs for research and development, impairment charges related to goodwill and other intangible assets, and other miscellaneous costs, including those associated with operating as a publicly traded company, as well as costs incurred in connection with the acquisition of TMR. From time to time, we may revise the allocation of certain expenses between corporate and operating expenses to better reflect the characteristic of the underlying expense. Corporate expenses increased$60.1 million to$94.1 million , in 2019, compared to$34.0 million in 2018. During 2019, we recorded$49.7 million of corporate expenses associated with the acquisition of TMR, comprised of$24.0 million of compensation-related costs,$13.8 million of transaction-related costs and$11.9 million of integration-related costs. Corporate expenses increased$15.4 million , to$34.0 million , in 2018, compared to$18.6 million in 2017, principally as a result of changes in the allocation of operating and corporate expenses to better reflect the nature of those expenses. In addition, during 2018, we incurred$3.4 million of costs in connection with the acquisition of TMR. Interest Expense and Preferred Share Dividends Year ended December 31, 2019 2018 2017 (in thousands) Interest expense$250.0 million Series B 7.50% Senior Notes due 2017 $ - $ -$ 7,813 $250.0 million 5.75% Senior Notes due 2020 14,375 14,375 14,375$300.0 million 3.700% Senior Notes due 2025 11,100 11,100 11,100$300.0 million 3.450% Senior Notes due 2027 10,350 10,350 5,482$400.0 million 3.600% Senior Notes due 2029 10,720 - -$150.0 million 4.750% Senior Notes due 2025 (DaVinciRe) 7,125 7,125 7,125 Other 4,694 4,119 (1,702 ) Total interest expense 58,364 47,069 44,193 Preferred share dividends$125.0 million 6.08% Series C Preference Shares 7,600 7,600 7,600$275.0 million 5.375% Series E Preference Shares 14,781 14,781 14,781$250.0 million 5.750% Series F Preference Shares 14,375 7,707 - Total preferred share dividends 36,756 30,088 22,381 Total interest expense and preferred share dividends$ 95,120 $ 77,157 $ 66,574 Interest expense increased$11.3 million to$58.4 million in 2019, compared to$47.1 million in 2018, primarily driven by additional interest expense due to theApril 2019 issuance of$400.0 million principal amount of 3.600% Senior Notes due 2029, resulting in nearly nine months of interest expense in 2019, compared to no interest on these notes in 2018. Interest expense increased$2.9 million to$47.1 million in 2018, compared to$44.2 million in 2017, primarily driven by additional interest expense due to twelve months of interest expense in 2018 on the 91 --------------------------------------------------------------------------------$300.0 million principal amount of 3.450% Senior Notes due 2027 issued inJune 2017 , compared to seven months of interest expense on these notes in 2017. Preferred share dividends increased by$6.7 million to$36.8 million in 2019, compared to$30.1 million in 2018, primarily driven by dividends on the$250.0 million principal amount of 5.750% Series F Preference Shares issued inJune 2018 resulting in twelve months of dividends in 2019 compared to six months of dividends on these preference shares in 2018. Preferred share dividends increased by$7.7 million to$30.1 million in 2018, compared to$22.4 million in 2017, primarily driven by dividends on the$250.0 million of 5.750% Series F Preference Shares issued inJune 2018 . Income Tax (Expense) Benefit Year ended December 31, 2019 2018 2017 (in thousands) Income tax (expense) benefit$ (17,215 ) $ 6,302 $ (26,487 ) We are subject to income taxes in certain jurisdictions in which we operate; however, since the majority of our income is currently earned inBermuda , which does not have a corporate income tax, the tax impact to our operations has historically been minimal. In 2019, we recognized an income tax expense of$17.2 million , compared to an income tax benefit of$6.3 million in 2018. The income tax expense in 2019 was principally driven by investment gains in ourU.S. operations and income in the taxable jurisdictions of the newly acquired TMR entities. In 2018, we recognized an income tax benefit of$6.3 million , compared to an income tax expense of$26.5 million in 2017. The income tax benefit in 2018 was principally driven by pre-tax GAAP losses in ourU.S. -based operations associated with the 2018 Large Loss Events and unrealized losses on our investment portfolio, compared to pre-tax GAAP losses in ourU.S. -based operations, offset by the impact of a$36.7 million increase in income tax expense due to the write-down of a portion of our deferred tax asset during 2017, as a result of the reduction in theU.S. corporate tax rate pursuant to the Tax Bill, which was enacted onDecember 22, 2017 . AtDecember 31, 2019 , ourU.S. tax-paying subsidiaries had a net deferred tax asset (after valuation allowance) of$48.2 million . Our operations inIreland , theU.K. ,Singapore and theU.S. operations of TMR have historically produced GAAP taxable losses and we currently do not believe it is more likely than not that we will be able to recover the predominant amount of our net deferred tax assets in these jurisdictions. Our valuation allowance totaled$75.7 million and$35.3 million atDecember 31, 2019 and 2018, respectively. Our effective income tax rate, which we calculate as income tax benefit (expense) divided by income or loss before taxes, may fluctuate significantly from period to period depending on the geographic distribution of pre-tax income or loss in any given period between different jurisdictions with comparatively higher tax rates and those with comparatively lower tax rates. The geographic distribution of pre-tax income or loss can vary significantly between periods due to, but not limited to, the following factors: the business mix of net premiums written and earned; the size and nature of net claims and claim expenses incurred; the amount and geographic location of operating expenses, net investment income, net realized and unrealized gains (losses) on investments; outstanding debt and related interest expense; and the amount of specific adjustments to determine the income tax basis in each of our operating jurisdictions. In addition, a significant portion of our gross and net premiums are currently written and earned inBermuda , which does not have a corporate income tax, including the majority of our catastrophe business, which can result in significant volatility to our pre-tax income or loss in any given period. We expect our consolidated effective tax rate to increase in the future, as our global operations outside ofBermuda expand, including in connection with the acquisition of TMR. In addition, it is possible we could be adversely affected by changes in tax laws, regulation, or enforcement, any of which could increase our effective tax rate more rapidly or steeply than we currently anticipate. Generally, the preponderance of our revenue and pre-tax income or loss is generated by our domestic (i.e.,Bermuda ) operations, in the form of underwriting income or loss and net investment income or loss, rather 92 -------------------------------------------------------------------------------- than our foreign operations. However, the geographic distribution of pre-tax income or loss can vary significantly between periods for a variety of reasons, including the business mix of net premiums written and earned, the size and nature of net claims and claim expenses incurred, the amount and geographic location of operating expenses, net investment income and net realized and unrealized gains (losses) on investments and the amount of specific adjustments to determine the income tax basis in each of our operating jurisdictions. Pre-tax income for our domestic operations was higher compared to our foreign operations for the years endedDecember 31, 2019 and 2018 primarily as a result of the more volatile catastrophe business underwritten in ourBermuda operations during these periods incurring a comparatively lower level of catastrophe losses and thus generating higher levels of net underwriting income than our foreign operations, which underwrite primarily less volatile business with higher attritional net claims and claim expenses and as a result produce lower levels of net underwriting income in benign loss years. For 2017, our domestic operations generated an underwriting loss due to the significant catastrophe loss activity during the year and the underwriting loss in our domestic operations was significantly greater than the underwriting loss that was generated by our foreign operations. Net (Income) Loss Attributable to Redeemable Noncontrolling Interests Year ended December 31, 2019 2018 2017 (in thousands) Net (income) loss attributable to redeemable noncontrolling interests$ (201,469 ) $ (41,553 ) $ 132,282 Our net income attributable to redeemable noncontrolling interests was$201.5 million in 2019, compared to$41.6 million in 2018, a change of$159.9 million . The increase was primarily driven by the results of operations of Vermeer being included in net income attributable to redeemable noncontrolling interests in 2019, combined with DaVinciRe generating higher net income. Our net income attributable to redeemable noncontrolling interests was$41.6 million in 2018, compared to a net loss attributable to redeemable noncontrolling interests of$132.3 million in 2017, a change of$173.8 million , principally due to DaVinciRe generating underwriting income in 2018, compared to significant underwriting losses in 2017 driven by the 2017 Large Loss Events. Refer to "Note 10. Noncontrolling Interests" in our "Notes to Consolidated Financial Statements" for additional information regarding our redeemable noncontrolling interests. FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES Financial Condition As aBermuda -domiciled holding company,RenaissanceRe has limited operations of its own. Its assets consist primarily of investments in subsidiaries, and, to a degree, cash and securities in amounts which fluctuate over time. We therefore rely on dividends, distributions and other statutorily permissible payments from our subsidiaries, investment income and fee income to meet our liquidity requirements, which primarily include making principal and interest payments on our debt and dividend payments to our preference and common shareholders. The payment of dividends by our subsidiaries is, under certain circumstances, limited by the applicable laws and regulations in the various jurisdictions in which our subsidiaries operate, includingBermuda , theU.S. , theU.K. ,Switzerland ,Australia andIreland . In addition, insurance laws require our insurance subsidiaries to maintain certain measures of solvency and liquidity. We believe that each of our insurance subsidiaries and branches exceeded the minimum solvency, capital and surplus requirements in their applicable jurisdictions atDecember 31, 2019 . Certain of our subsidiaries and branches are required to file financial condition reports, or FCRs, with their regulators, which provide details on solvency and financial performance. Where required, these FCRs will be posted on our website. The regulations governing our and our principal operating subsidiaries' ability to pay dividends and to maintain certain measures of solvency and liquidity, requirements to file FCRs and are discussed in detail in "Part I, Item 1. Regulation" and "Note 18. Statutory Requirements" in our "Notes to the Consolidated Financial Statements." 93 -------------------------------------------------------------------------------- Liquidity and Cash Flows Holding Company LiquidityRenaissanceRe's principal uses of liquidity are: (1) common share related transactions including dividend payments to our common shareholders and common share repurchases, (2) preference share related transactions including dividend payments to our preference shareholders and preference share redemptions, (3) interest and principal payments on debt, (4) capital investments in our subsidiaries, (5) acquisition of new or existing companies or businesses, such as our acquisition of TMR and (6) certain corporate and operating expenses. We attempt to structure our organization in a way that facilitates efficient capital movements betweenRenaissanceRe and our operating subsidiaries and to ensure that adequate liquidity is available when required, giving consideration to applicable laws and regulations, and the domiciliary location of sources of liquidity and related obligations. In the aggregate, our principal operating subsidiaries have historically produced sufficient cash flows to meet their expected claims payments and operational expenses and to provide dividend payments to us. In addition, our subsidiaries maintain a concentration of investments in high quality liquid securities, which management believes will provide additional liquidity for extraordinary claims payments should the need arise. However, in some circumstances,RenaissanceRe may contribute capital to its subsidiaries. For example, during 2018 and 2017 we experienced significant losses from large catastrophe events, and as we would expect following events of this magnitude, it was necessary forRenaissanceRe to contribute capital to certain of our principal operating subsidiaries to ensure they were able to maintain levels of capital adequacy and liquidity in compliance with various laws and regulations, support rating agency capital requirements, pay valid claims quickly and be adequately capitalized to pursue business opportunities as they arise. During 2019,RenaissanceRe contributed capital toRenaissanceRe Specialty Holdings to fund the acquisition of TMR and made a capital contribution to Renaissance Reinsurance to increase its shareholders' equity, consistent with past practice following a significant acquisition and to support growth in premiums. In addition, from time to time we invest in new managed joint ventures, increase our investments in certain of our managed joint ventures and contribute cash to investment subsidiaries. In certain instances, we are required to make capital contributions to our subsidiaries, for example, Renaissance Reinsurance is obligated to make a mandatory capital contribution of up to$50.0 million in the event that a loss reduces Top Layer Re's capital below a specified level. Sources of Liquidity Historically, cash receipts from operations, consisting primarily of premiums, investment income and fee income, have provided sufficient funds to pay losses and operating expenses of our subsidiaries and to fund dividends and distributions toRenaissanceRe . Other potential sources of liquidity include borrowings under our credit facilities and issuances of securities. The premiums received by our operating subsidiaries are generally received months or even years before losses are paid under the policies related to such premiums. Premiums and acquisition expenses generally are received within the first two years of inception of a contract while operating expenses are generally paid within a year of being incurred. It generally takes much longer for claims and claims expenses to be reported and ultimately settled, requiring the establishment of reserves for claims and claim expenses. Therefore, the amount of claims paid in any one year is not necessarily related to the amount of net claims incurred in that year, as reported in the consolidated statement of operations. While we expect that our liquidity needs will continue to be met by our cash receipts from operations, as a result of the combination of current market conditions, lower than usual investment yields, and the nature of our business where a large portion of the coverages we provide can produce losses of high severity and low frequency, future cash flows from operating activities cannot be accurately predicted and may fluctuate significantly between individual quarters and years. In addition, due to the magnitude and complexity of certain large loss events, meaningful uncertainty remains regarding losses from these events and our actual ultimate net losses from these events may vary materially from preliminary estimates, which would impact our cash flows from operations. 94 -------------------------------------------------------------------------------- Our "shelf" registration statement on Form S-3 under the Securities Act allows for the public offering of various types of securities, including common shares, preference shares and debt securities, and thus provides a source of liquidity. Because we are a "well-known seasoned issuer" as defined by the rules promulgated under the Securities Act, we are also eligible to file additional automatically effective registration statements on Form S-3 in the future for the potential offering and sale of an unlimited amount of debt and equity securities. Credit Facilities In addition, we maintain letter of credit facilities which provide liquidity and allow us to satisfy certain collateral requirements. The outstanding amounts drawn under each of our significant credit facilities are set forth below: At December 31, 2019 Issued or Drawn (in thousands) Revolving Credit Facility (1) $ - Bilateral Letter of Credit Facilities Secured 298,063 Unsecured 381,770 Funds at Lloyd's Letter of Credit Facility 290,000 TMR Letters of Credit (2) 140,923$ 1,110,756
(1) At
(2) These letters of credit were transferred to us in connection with the
acquisition of TMR. Refer to "Note 3. Acquisition of Tokio Millennium Re" in
our "Notes to the Consolidated Financial Statements" for additional
information related to the acquisition of TMR.
Refer to "Note 9. Debt and Credit Facilities" in our "Notes to the Consolidated Financial Statements" for additional information related to our debt and credit facilities and "Note 12. Shareholders' Equity" in our "Notes to the Consolidated Financial Statements" for additional information related to our common and preference shares. Funds at Lloyd's As a member of Lloyd's, the underwriting capacity, or stamp capacity, of Syndicate 1458 must be supported by providing a deposit in the form of cash, securities or letters of credit, which are referred to as Funds at Lloyd's. AtDecember 31, 2019 , the FAL required to support the underwriting activities at Lloyd's through Syndicate 1458 was £524.3 million (2018 - £427.5 million). Actual FAL posted for Syndicate 1458 atDecember 31, 2019 by RenaissanceRe CCL was £522.5 million (2018 - £481.0 million), supported by a$290.0 million letter of credit and a$385.9 million deposit of cash and fixed maturity securities (2018 -$180.0 million and$390.8 million , respectively). OnNovember 7, 2019 , Renaissance Reinsurance amended and restated a letter of credit reimbursement agreement supporting business written by Syndicate 1458 to increase the size of the facility from$255.0 million to$290.0 million and to reduce certain collateral pledge requirements. Refer to "Note 9. Debt and Credit Facilities" in our "Notes to the Consolidated Financial Statements" for additional information related to this letter of credit facility. Multi-Beneficiary Reinsurance Trusts and Multi-Beneficiary Reduced Collateral Reinsurance Trusts Refer to "Note 18. Statutory Requirements" in our "Notes to the Consolidated Financial Statements" for additional information related to our multi-beneficiary reinsurance trusts and multi-beneficiary reduced collateral reinsurance trust, which certain of our insurance subsidiaries use to collateralize reinsurance liabilities. 95 -------------------------------------------------------------------------------- Cash Flows Year ended December 31, 2019 2018 2017 (in thousands) Net cash provided by operating activities$ 2,137,195 $ 1,221,701 $ 1,025,787 Net cash used in investing activities (2,988,644 ) (2,536,613 ) (122,434 ) Net cash provided by financing activities 1,120,117 1,066,340 28,860 Effect of exchange rate changes on foreign currency cash 2,478 (5,098 ) 8,222 Net increase (decrease) in cash and cash equivalents 271,146 (253,670 ) 940,435 Cash and cash equivalents, beginning of period 1,107,922 1,361,592 421,157 Cash and cash equivalents, end of period$ 1,379,068 $ 1,107,922 $ 1,361,592
2019
During 2019, our cash and cash equivalents increased by$271.1 million , to$1.4 billion atDecember 31, 2019 , compared to$1.1 billion atDecember 31, 2018 . Cash flows provided by operating activities. Cash flows provided by operating activities during 2019 were$2.1 billion , compared to$1.2 billion during 2018. Cash flows provided by operating activities during 2019 were primarily the result of certain adjustments to reconcile our net income of$950.3 million to net cash provided by operating activities, including: • an increase in reserve for claims and claim expenses of$900.6 million as
a result of claims and claims expenses incurred of
2019 principally driven by current accident year losses, partially offset
by claims payments of $2.3 billion primarily associated with prior
accident years losses;
• an increase in reinsurance balances payable of
driven by the issuance of non-voting preference shares to investors in
Upsilon RFO, which are accounted for as prospective reinsurance and
included in reinsurance balances payable on our consolidated balancesheet. Refer to "Note 11. Variable Interest Entities" in our "Notes to the
Consolidated Financial Statements" for additional information related to
Upsilon RFO's non-voting preference shares;
• an increase in other operating cash flows of
reflecting the movement in subscriptions received in advance of the
issuance of Upsilon RFO's non-voting preference shares effective January
1, 2020 and 2019, which were recorded in other liabilities at
2019 and 2018, respectively. Refer to "Note 11. Variable Interest
Entities" in our "Notes to the Consolidated Financial Statements" for
additional information related to Upsilon RFO's non-voting preference
shares;
• a net decrease in reinsurance recoverable of
resulting from the collection of $1.2 billion during 2019, partially
offset by increases to reinsurance recoverable principally driven by
increases in net claims and claim expenses associated with current
accident year losses, combined with the continued execution of our
gross-to-net strategy; partially offset by
• an increase in premiums receivable of
in gross premiums written combined with the timing of receipts of those
premiums; and
• net realized and unrealized gains on investments of $414.5 million principally due to improved performances from our fixed maturity, public
equity and investments-related derivative portfolios.
Cash flows used in investing activities. During 2019, our cash flows used in investing activities were$3.0 billion , principally reflecting net purchases of short term investments, fixed maturity investments and other investments of$1.9 billion ,$605.4 million and$202.9 million , respectively. The net purchase of short term investments was funded in part by the capital received from investors in DaVinciRe, Medici, Upsilon RFO and Vermeer, and other net cash flows provided by operating activities. The net purchase of other investments during 2019, was primarily driven by an increased allocation to catastrophe bonds. In addition, we completed our acquisition of TMR onMarch 22, 2019 , resulting in a net cash outflow of$276.2 million , comprised of cash consideration paid byRenaissanceRe as acquisition consideration of$813.6 million , net 96 -------------------------------------------------------------------------------- of cash acquired from TMR of$537.4 million . Refer to "Note 3. Acquisition of Tokio Millennium Re" in our "Notes to the Consolidated Financial Statements" for additional information related to the acquisition of TMR. Cash flows provided by financing activities. Our cash flows provided by financing activities in 2019 were$1.1 billion , and were principally the result of: • net inflows of$827.1 million related to net third-party redeemable noncontrolling interest share transactions in DaVinciRe, Medici and Vermeer;
• net inflows of
of $400.0 million principal amount of our 3.600% Senior Notes due
April 15, 2029 ; partially offset by
• dividends paid on our common and preference shares of
2018
During 2018, our cash and cash equivalents decreased by$253.7 million , to$1.1 billion atDecember 31, 2018 , compared to$1.4 billion atDecember 31, 2017 . Cash flows provided by operating activities. Cash flows provided by operating activities during 2018 were$1.2 billion , compared to$1.0 billion during 2017. Cash flows provided by operating activities during 2018 were primarily the result of certain adjustments to reconcile our net income of$268.9 million to net cash provided by operating activities, including: • an increase in reserve for claims and claim expenses of$995.9 million as
a result of claims and claims expenses incurred of
2018 principally driven by the 2018 Large Loss Events, partially offset by
claims payments of
Loss Events;
• an increase in reinsurance balances payable of
driven by the issuance of non-voting preference shares to investors in
Upsilon RFO, following capital being deployed in the vehicle, which are
accounted for as prospective reinsurance and included in reinsurance
balances payable on our consolidated balance sheet. Refer to "Note 11.Variable Interest Entities" in our "Notes to the Consolidated Financial
Statements" for additional information related to Upsilon RFO's non-voting
preference shares;
• an increase in unearned premiums of
renewals and the increase in gross premiums written in 2018, compared to
2017; partially offset by
• an increase in reinsurance recoverable of $785.6 million primarilyresulting from the increase in net claims and claim expenses principally
driven by the 2018 Large Loss Events, noted above, as we continue to
execute our gross-to-net strategy;
• a decrease in other operating cash flows of
associated with movements in subscriptions received in advance associated
with the issuance of Upsilon RFO's non-voting preference shares effective
and "Note. 23 Subsequent Events" in our "Notes to the Consolidated
Financial Statements" for additional information related to Upsilon RFO's
non-voting preference shares;
• increases in premiums receivable and deferred acquisition costs of
million and
our gross premiums written and amortization of deferred acquisition costs,
respectively;
• net realized and unrealized losses on investments of
principally related to our fixed maturity investments portfolio which
experienced an upward shift in the interest rate yield curve and a
widening of credit spreads during 2018, and our equity investments trading
portfolio which was impacted by lower returns on certain of our larger
equity positions during 2018; and
• an increase of
ceded premiums written associated renewals in 2018.
97-------------------------------------------------------------------------------- Cash flows used in investing activities. During 2018, our cash flows used in investing activities were$2.5 billion , principally reflecting net purchases of short term, fixed maturity and other investments of$1.4 billion ,$904.4 million and$199.5 million , respectively. The net purchase of short term and fixed maturity investments was funded in part by the capital received from investors in Upsilon RFO and Vermeer, and the proceeds from the issuance of our 5.750% Series F Preference Shares and the issuance of$250.0 million of our common shares toState Farm , each as discussed below. In addition, we increased our allocation to other investments during 2018. Cash flows provided by financing activities. Our cash flows provided by financing activities in 2018 were$1.1 billion , and were principally the result of: • net inflows of$665.7 million related to a net contribution of capital from third-party shareholders, primarily related to the creation of Vermeer, which was initially capitalized with$600.0 million of participating, non-voting common shares;
• net inflows of
million of Depositary Shares (each representing a 1/1000th interest in a
share of our 5.750% Series F Preference Shares), net of expenses;
• net inflows of
our common shares to
• dividends paid on our common and preference shares of
Capital Resources We monitor our capital adequacy on a regular basis and seek to adjust our capital according to the needs of our business. In particular, we require capital sufficient to meet or exceed the capital adequacy ratios established by rating agencies for maintenance of appropriate financial strength ratings, the capital adequacy tests performed by regulatory authorities and the capital requirements under our credit facilities. We may seek to raise additional capital or return capital to our shareholders through common share repurchases and cash dividends (or a combination of such methods). In the normal course of our operations, we may from time to time evaluate additional share or debt issuances given prevailing market conditions and capital management strategies, including for our operating subsidiaries and joint ventures. In addition, as noted above, we enter into agreements with financial institutions to obtain letter of credit facilities for the benefit of our operating subsidiaries in their reinsurance and insurance business. Our total shareholders' equity attributable toRenaissanceRe and debt as ofDecember 31, 2019 andDecember 31, 2018 was as follows: At December At December 31, 2019 31, 2018 Change (in thousands) Common shareholders' equity$ 5,321,367 $
4,395,080
Preference shares 650,000 650,000 -
Total shareholders' equity attributable to
RenaissanceRe 5,971,367
5,045,080 926,287
3.600% Senior Notes due 2029 391,475
- 391,475
3.450% Senior Notes due 2027 296,292 295,797 495 3.700% Senior Notes due 2025 298,057 297,688 369 5.750% Senior Notes due 2020 249,931 249,602 329
4.750% Senior Notes due 2025 (DaVinciRe) (1) 148,350 148,040
310
Total debt 1,384,105 991,127 392,978
Total shareholders' equity attributable to
RenaissanceRe and debt$ 7,355,472 $ 6,036,207 $ 1,319,265
(1)
DaVinciRe. Because
outstanding voting rights, the consolidated financial statements of DaVinciRe
are included in the consolidated financial statements of RenaissanceRe .
However, RenaissanceRe does not guarantee or provide credit support for
98-------------------------------------------------------------------------------- DaVinciRe andRenaissanceRe's financial exposure to DaVinciRe is limited to its investment in DaVinciRe's shares and counterparty credit risk arising from reinsurance transactions. During 2019, our total shareholders' equity attributable toRenaissanceRe and debt increased by$1.3 billion , to$7.4 billion . Our shareholders' equity attributable toRenaissanceRe increased$926.3 million during 2019 principally as a result of: • our comprehensive income attributable toRenaissanceRe of$748.3 million ;
• the issuance of 1,739,071 of our common shares to
the acquisition of TMR; and partially offset by
•
shares, respectively.
Our debt increased$393.0 million during the year endedDecember 31, 2019 principally as a result of theApril 2, 2019 issuance of$400.0 million principal amount of 3.600% Senior Notes dueApril 15, 2029 . The net proceeds from this offering were used to repay, in full, the$200.0 million that was outstanding under our revolving credit agreement atMarch 31, 2019 , and the remainder of the net proceeds will be used for general corporate purposes. Refer to "Note 3. Acquisition of Tokio Millennium Re" in our "Notes to the Consolidated Financial Statements" for additional information regarding the acquisition of TMR and "Note 9. Debt and Credit Facilities" in our "Notes to the Consolidated Financial Statements" for additional information regarding the issuance of our 3.600% Senior Notes due 2029. Reserve for Claims and Claim Expenses We believe the most significant accounting judgment made by management is our estimate of claims and claim expense reserves. Claims and claim expense reserves represent estimates, including actuarial and statistical projections at a given point in time, of the ultimate settlement and administration costs for unpaid claims and claim expenses arising from the insurance and reinsurance contracts we sell. Our actual net claims and claim expenses paid will differ, perhaps materially, from the estimates reflected in our financial statements, which may adversely impact our financial condition, liquidity and capital resources. Refer to "Note 8. Reserve for Claims and Claim Expenses" in our "Notes to the Consolidated Financial Statements" for more information on the risks we insure and reinsure, the reserving techniques, assumptions and processes we follow to estimate our claims and claim expense reserves, prior year development of the reserve for claims and claim expenses, analysis of our incurred and paid claims development and claims duration information for each of our Property and Casualty and Specialty segments. In addition, refer to "Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations, Summary of Critical Accounting Estimates, Claims and Claim Expense Reserves" for more information on the reserving techniques, assumptions and processes we follow to estimate our claims and claim expense reserves, our current estimates versus our initial estimates of our claims reserves, and sensitivity analysis for each of our Property and Casualty and Specialty segments. 99 --------------------------------------------------------------------------------
Investments
The table below shows our invested assets:
At December 31, 2019 2018 Change (in thousands, except percentages) U.S. treasuries$ 4,467,345 25.7 %$ 3,331,411 28.0 %$ 1,135,934 Agencies 343,031 1.9 % 174,883 1.5 % 168,148 Municipal - - % 6,854 0.1 % (6,854 ) Non-U.S. government 497,392 2.9 % 279,818 2.4 % 217,574 Non-U.S. government-backed corporate 321,356 1.9 % 160,063 1.3 % 161,293 Corporate 3,075,660 17.7 % 2,450,244 20.6 % 625,416 Agency mortgage-backed 1,148,499 6.6 % 817,880 6.8 % 330,619 Non-agency mortgage-backed 294,604 1.7 % 278,680 2.4 % 15,924 Commercial mortgage-backed 468,698 2.7 % 282,294 2.4 % 186,404 Asset-backed 555,070 3.2 % 306,743 2.6 % 248,327 Total fixed maturity investments, at fair value 11,171,655 64.3 % 8,088,870 68.1 % 3,082,785 Short term investments, at fair value 4,566,277 26.3 % 2,586,520 21.8 % 1,979,757 Equity investments trading, at fair value 436,931 2.5 % 310,252 2.6 % 126,679 Other investments, at fair value 1,087,377 6.3 % 784,933 6.5 % 302,444 Total managed investment portfolio 17,262,240 99.4 % 11,770,575 99.0 % 5,491,665 Investments in other ventures, under equity method 106,549 0.6 % 115,172 1.0 % (8,623 ) Total investments$ 17,368,789 100.0 %$ 11,885,747 100.0 %$ 5,483,042 AtDecember 31, 2019 , we held investments totaling$17.4 billion , compared to$11.9 billion atDecember 31, 2018 . In connection with the acquisition of TMR, we acquired total investments with a fair market value of$2.3 billion onMarch 22, 2019 , the date of acquisition. Our investment guidelines stress preservation of capital, market liquidity, and diversification of risk. Notwithstanding the foregoing, our investments are subject to market-wide risks and fluctuations, as well as to risks inherent in particular securities. In addition to the information presented above and below, refer to "Note 5. Investments" and "Note 6. Fair Value Measurements" in our "Notes to the Consolidated Financial Statements" for additional information regarding our investments and the fair value measurement of our investments, respectively. As the reinsurance coverages we sell include substantial protection for damages resulting from natural and man-made catastrophes, as well as for potentially large casualty and specialty exposures, we expect from time to time to become liable for substantial claim payments on short notice. Accordingly, our investment portfolio as a whole is structured to seek to preserve capital and provide a high level of liquidity, which means that the large majority of our investment portfolio consists of highly rated fixed income securities, includingU.S. treasuries, agencies, highly rated sovereign and supranational securities, high-grade corporate securities and mortgage-backed and asset-backed securities. We also have an allocation to publicly traded equities reflected on our consolidated balance sheet as equity investments trading and an allocation to other investments (including catastrophe bonds, private equity investments, senior secured bank loan funds and hedge funds). AtDecember 31, 2019 , our portfolio of equity investments trading totaled$436.9 million or 2.5%, of our total investments (2018 -$310.3 million or 2.6%). Our portfolio of other investments totaled$1.1 billion , or 6.3%, of our total investments (2018 -$784.9 million or 6.5%). 100 -------------------------------------------------------------------------------- The following table summarizes the composition of our investment portfolio, including the amortized cost and fair value of our investment portfolio and the ratings as assigned by S&P and/or other rating agencies when S&P ratings were not available, and the respective effective yield. Credit Rating (1) Weighted % of Total Average Non- Amortized Investment Yield to Investment December 31, 2019 Cost Fair Value Portfolio Maturity AAA AA A BBB Grade Not Rated (in thousands, except percentages)
Short term
investments$ 4,566,277 $ 4,566,277 26.3 % 1.6 %$ 4,293,369 $ 258,477 $ 12,480 $ 1,376 $ 545 $ 30 100.0 % 94.0 % 5.7 % 0.3 % - % - % - % Fixed maturity investments U.S. treasuries 4,439,533 4,467,345 25.7 % 1.7 % - 4,467,345 - - - - Agencies 342,162 343,031 1.9 % 2.1 % - 343,031 - - - - Non-U.S. government 495,465 497,392 2.9 % 1.6 % 262,457 204,036 11,292 18,259 1,348 - Non-U.S. government-backed corporate 321,303 321,356 1.9 % 2.0 % 169,357 113,459 37,300 550 690 - Corporate 3,010,615 3,075,660 17.7 % 3.0
% 47,337 221,494 1,395,626 802,372 593,371 15,460
Agency
mortgage-backed 1,130,746 1,148,499 6.6 % 2.5 % - 1,148,499 - - - -
Non-agency
securities - Alt
A 218,846 229,055 1.3 % 3.8 % 32,026 6,671 2,227 8,000 146,434 33,697
Non-agency
securities -
Prime 63,421 65,549 0.4 % 3.3 % 23,535 3,142 2,657 582 20,814 14,819
Commercial
mortgage-backed 489,352 468,698 2.7 % 2.6 % 365,272 84,859 2,701 14,270 1,596 -
Asset-backed 555,971 555,070 3.2 % 3.3 % 438,281 84,683 1,409 30,697 - -
Total fixed
maturity
investments 11,067,414 11,171,655 64.3 % 2.3 % 1,338,265 6,677,219 1,453,212 874,730 764,253 63,976
100.0 % 12.0 % 59.8 % 13.0 % 7.8 % 6.8 % 0.6 %
Equity
investments
trading 436,931 2.5 % - - - - - 436,931
100.0 % - % - % - % - % - % 100.0 %
Other investments
Catastrophe bonds 781,641 4.5 % - - - - 781,641 -
Private equity
investments 271,047 1.6 % - - - - - 271,047
Senior secured
bank loan funds 22,598 0.1 % - - - - - 22,598
Hedge funds 12,091 0.1 % - - - - - 12,091
Total other
investments 1,087,377 6.3 % - - - - 781,641 305,736
100.0 % - % - % - % - % 71.9 % 28.1 %
Investments in
other ventures 106,549 0.6 % - - - - - 106,549
100.0 % - % - % - % - % - % 100.0 %
Total investment
portfolio $ 17,368,789 100.0 % $ 5,631,634 $ 6,935,696 $ 1,465,692 $ 876,106 $ 1,546,439 $ 913,222
100.0 % 32.4 % 40.0 % 8.4 % 5.0 % 8.9 % 5.3 %
(1) The credit ratings included in this table are those assigned by S&P. When
ratings provided by S&P were not available, ratings from other nationally
recognized rating agencies were used. We have grouped short term investments
with an A-1+ and A-1 short term issue credit rating as
investments with an A-2 short term issue credit rating as AA and short term
investments with an A-3 short term issue credit rating as A.
Fixed Maturity Investments and Short Term Investments AtDecember 31, 2019 , our fixed maturity investments and short term investment portfolio had a dollar-weighted average credit quality rating of AA (2018 - AA) and a weighted average effective yield of 2.1% (2018 - 3.2%). AtDecember 31, 2019 , our non-investment grade and not rated fixed maturity investments totaled$828.2 million or 7.4% of our fixed maturity investments (2018 -$1.0 billion or 12.2%, respectively). 101 -------------------------------------------------------------------------------- In addition, within our other investments category we have funds that invest in non-investment grade and not rated fixed income securities and non-investment grade cat-linked securities. AtDecember 31, 2019 , the funds that invest in non-investment grade and not rated fixed income securities and non-investment grade cat-linked securities totaled$816.3 million (2018 -$531.1 million ). AtDecember 31, 2019 , we had$4.6 billion of short term investments (2018 -$2.6 billion ). Short term investments are managed as part of our investment portfolio and have a maturity of one year or less when purchased. Short term investments are carried at fair value. The increase in our allocation to short term investments atDecember 31, 2019 , compared toDecember 31, 2018 , is principally driven by the additional invested assets in certain of our managed joint ventures and third-party capital vehicles that limit investment allocation to shorter term securities. The duration of our fixed maturity investments and short term investments atDecember 31, 2019 was 2.9 years (2018 - 2.1 years). From time to time, we may reevaluate the duration of our portfolio in light of the duration of our liabilities and market conditions. The longer duration of our fixed maturity investments and short term investments atDecember 31, 2019 , compared toDecember 31, 2018 , is principally the result of a strategic evaluation of the interest rate sensitivity across our consolidated balance sheet and the duration contribution from our investments portfolio. The value of our fixed maturity investments will fluctuate with changes in the interest rate environment and when changes occur in economic conditions or the investment markets. Additionally, our differing asset classes expose us to other risks which could cause a reduction in the value of our investments. Examples of some of these risks include: • Changes in the overall interest rate environment can expose us to "prepayment risk" on our mortgage-backed investments. When interest rates decline, consumers will generally make prepayments on their mortgages and, as a result, our investments in mortgage-backed securities will be repaid to us
more quickly than we might have originally anticipated. When we receive these
prepayments, our opportunities to reinvest these proceeds back into the
investment markets will likely be at reduced interest rates. Conversely, when
interest rates increase, consumers will generally make fewer prepayments on
their mortgages and, as a result, our investments in mortgage-backed
securities will be repaid to us less quickly than we might have originally
anticipated. This will increase the duration of our portfolio, which is
disadvantageous to us in a rising interest rate environment.
• Our investments in mortgage-backed securities are also subject to default
risk. This risk is due in part to defaults on the underlying securitized
mortgages, which would decrease the fair value of the investment and be
disadvantageous to us. Similar risks apply to other asset-backed securities
in which we may invest from time to time.
• Our investments in debt securities of other corporations are exposed to
losses from insolvencies of these corporations, and our investment portfolio
can also deteriorate based on reduced credit quality of these corporations.
We are also exposed to the impact of widening credit spreads even if specific
securities are not downgraded.
• Our investments in asset-backed securities are subject to prepayment risks,
as noted above, and to the structural risks of these securities. The
structural risks primarily emanate from the priority of each security in the
issuer's overall capital structure. We are also exposed to the impact of
widening credit spreads.
• Within our other investments category, we have funds that invest in
non-investment grade fixed income securities as well as securities
denominated in foreign currencies. These investments expose us to losses from
insolvencies and other credit-related issues and also to widening of credit
spreads. We are also exposed to fluctuations in foreign exchange rates that
may result in realized losses to us if our exposures are not hedged or if our
hedging strategies are not effective.
102-------------------------------------------------------------------------------- Equity Investments Trading The following table summarizes the fair value of equity investments trading: At December 31, 2019 2018 Change (in thousands) Financials$ 248,189 $ 200,357 $ 47,832 Communications and technology 79,206 42,333 36,873 Industrial, utilities and energy 38,583 24,520 14,063 Consumer 35,987 20,639 15,348 Healthcare 29,510 18,925 10,585 Basic materials 5,456 3,478 1,978 Total$ 436,931 $ 310,252 $ 126,679 We have a diversified public equity securities mandate with a third-party investment manager which currently comprises a portion of our investments included in equity investments trading. In addition, we can also strategically invest in certain more concentrated public equity positions internally, primarily through our ventures business unit. It is possible our equity allocation will increase in the future, and it could, from time to time, have a material effect on our financial results for the reasonably foreseeable future. Other Investments The table below shows our portfolio of other investments: At December 31, 2019 2018 Change (in thousands) Catastrophe bonds$ 781,641 $ 516,571 $ 265,070 Private equity investments 271,047 242,647 28,400 Senior secured bank loan funds 22,598 14,482 8,116 Hedge funds 12,091 11,233 858 Total other investments$ 1,087,377 $ 784,933 $ 302,444 We account for our other investments at fair value in accordance with FASB ASC Topic Financial Instruments. The fair value of certain of our fund investments, which principally include private equity funds, senior secured bank loan funds and hedge funds, is recorded on our consolidated balance sheet in other investments, and is generally established on the basis of the net valuation criteria established by the managers of such investments, if applicable. The net valuation criteria established by the managers of such investments is established in accordance with the governing documents of such investments. Many of our fund investments are subject to restrictions on redemptions and sales which are determined by the governing documents and limit our ability to liquidate these investments in the short term. Some of our fund managers and fund administrators are unable to provide final fund valuations as of our current reporting date. We typically experience a reporting lag to receive a final net asset value report of one month for our hedge funds and senior secured bank loan funds and three months for private equity funds, although we have occasionally experienced delays of up to six months at year end, as the private equity funds typically complete their year-end audits before releasing their final net asset value statements. In circumstances where there is a reporting lag between the current period end reporting date and the reporting date of the latest fund valuation, we estimate the fair value of these funds by starting with the prior month or quarter-end fund valuations, adjusting these valuations for actual capital calls, redemptions or distributions, and the impact of changes in foreign currency exchange rates, and then estimating the return for the current period. In circumstances in which we estimate the return for the current period, all information available to us is utilized. This principally includes using preliminary estimates reported to us by our fund managers, obtaining the valuation of underlying portfolio investments where such underlying investments are publicly traded and therefore have a readily observable price, using information that is available to us with respect to the underlying investments, reviewing various indices for similar investments 103 -------------------------------------------------------------------------------- or asset classes, and estimating returns based on the results of similar types of investments for which we have obtained reported results, or other valuation methods, where possible. Actual final fund valuations may differ, perhaps materially so, from our estimates and these differences are recorded in our consolidated statement of operations in the period in which they are reported to us, as a change in estimate. Included in net investment income for 2019 is a loss of$5.5 million (2018 - income of$0.3 million ) representing the change in estimate during the period related to the difference between our estimated net investment income due to the lag in reporting discussed above and the actual amount as reported in the final net asset values provided by our fund managers. Our estimate of the fair value of catastrophe bonds is based on quoted market prices, or when such prices are not available, by reference to broker or underwriter bid indications. Refer to "Note 6. Fair Value Measurements" in our "Notes to the Consolidated Financial Statements" for additional information regarding the fair value measurement of our investments. We have committed capital to private equity investments, other investments and investments in other ventures of$1.1 billion , of which$708.4 million has been contributed atDecember 31, 2019 . Our remaining commitments to these investments atDecember 31, 2019 totaled$411.3 million . In the future, we may enter into additional commitments in respect of private equity investments or individual portfolio company investment opportunities. Investments inOther Ventures , under Equity Method The table below shows our investments in other ventures, under equity method: At December 31, 2019 2018 (in thousands, except percentages) Investment Ownership %
Carrying Value Investment Ownership % Carrying Value
Total Tower Hill Companies 64,750 24.9 % 36,779 64,750 24.9 % 38,241 Top Layer Re 65,375 50.0 % 35,363 65,375 50.0 % 46,562 Other 38,964 26.6 % 34,407 35,862 30.6 % 30,369 Total investments in other ventures, under equity method$ 169,089 $ 106,549$ 165,987 $ 115,172 Except for Top Layer Re, the equity in earnings of the Tower Hill Companies and our other category of investments in other ventures are reported one quarter in arrears. The carrying value of our investments in other ventures, under equity method, individually or in the aggregate may, and likely will, differ from the realized value we may ultimately attain, perhaps significantly so. Ratings Financial strength ratings are important to the competitive position of reinsurance and insurance companies. We have received high long-term issuer credit and financial strength ratings fromA.M. Best , S&P, Moody's and Fitch, as applicable. These ratings represent independent opinions of an insurer's financial strength, operating performance and ability to meet policyholder obligations, and are not an evaluation directed toward the protection of investors or a recommendation to buy, sell or hold any of our securities. Rating organizations continually review the financial positions of our principal operating subsidiaries and joint ventures and ratings may be revised or revoked by the agencies which issue them. 104 --------------------------------------------------------------------------------
The ratings of our principal operating subsidiaries and joint ventures and the
ERM ratings of
A.M. Best (1) S&P (2) Moody's (3) Fitch (4)
Renaissance Reinsurance Ltd. A+ A+ A1 A+ DaVinci Reinsurance Ltd. A A+ A3 - Renaissance Reinsurance of Europe Unlimited Company A+ A+ - - Renaissance ReinsuranceU.S. Inc. A+ A+ - - RenaissanceRe Europe AG A+ A+ - - RenaissanceRe Specialty U.S. A+ A+ - - Top Layer Reinsurance Ltd. A+ AA - - Vermeer Reinsurance Ltd. A - - - RenaissanceRe Syndicate 1458 - - - - Lloyd's Overall Market Rating A A+ - AA- RenaissanceRe Very Strong Very Strong - - (1) TheA.M. Best ratings for our principal operating subsidiaries and joint ventures represent the insurer's financial strength rating. The Lloyd's Overall Market Rating represents RenaissanceRe Syndicate 1458's financial strength rating. TheA.M. Best rating forRenaissanceRe represents its Enterprise Risk Management ("ERM") score. (2) The S&P ratings for our principal operating subsidiaries and joint ventures represent the insurer's financial strength rating and the issuer's long-term issuer credit rating. The Lloyd's Overall Market Rating representsRenaissanceRe Syndicate 1458's financial strength rating. The S&P rating forRenaissanceRe represents the rating on its ERM practices. (3) The Moody's ratings represent the insurer's financial strength rating. (4) The Fitch rating for Renaissance Reinsurance represents the insurer's financial strength rating. The Lloyd's Overall Market Rating represents RenaissanceRe Syndicate 1458's financial strength rating.A.M. Best The outlook for all of ourA.M. Best ratings is stable. "A+" is the second highest designation ofA.M. Best's rating levels. "A+" rated insurance companies are defined as "Superior" companies and are considered byA.M. Best to have a very strong ability to meet their obligations to policyholders. "A" is the third highest designation assigned byA.M. Best , representingA.M. Best's opinion that the insurer has an "Excellent" ability to meet its ongoing obligations to policyholders. S&P The outlook for all of our S&P ratings is stable. The "A" range ("A+","A", "A-"), which is the third highest rating assigned by S&P, indicates that S&P believes the insurers have strong capacity to meet their respective financial commitments but they are somewhat more susceptible to adverse effects or changes in circumstances and economic conditions than insurers rated higher. Moody's The outlook for all of our Moody's ratings is stable.Moody's Insurance Financial Strength Ratings represent its opinions of the ability of insurance companies to pay punctually policyholder claims and obligations and senior unsecured debt instruments. Moody's believes that insurance companies rated "A1" and "A3" offer good financial security. Fitch The outlook for all of our Fitch ratings is stable. Fitch believes that insurance companies rated "A+" have "Strong" capacity to meet policyholders and contract obligations on a timely basis with a low expectation of ceased or interrupted payments. Insurers rated "AA-" by Fitch are believed to have a very low expectation of ceased or interrupted payments and very strong capital to meet policyholder obligations. 105 -------------------------------------------------------------------------------- Lloyd's Overall Market RatingA.M. Best , S&P and Fitch have each assigned a financial strength rating to the Lloyd's overall market. The financial risks to policy holders of syndicates within the Lloyd's market are partially mutualized through the Lloyd'sCentral Fund , to which all underwriting members contribute. Because of the presence of the Lloyd'sCentral Fund , and the current legal and regulatory structure of the Lloyd's market, financial strength ratings on individual syndicates would not be particularly meaningful and in any event would not be lower than the financial strength rating of the Lloyd's overall market. EFFECTS OF INFLATION The potential exists, after a catastrophe loss, for the development of inflationary pressures in a local economy. We consider the anticipated effects on us in our catastrophe loss models. Our estimates of the potential effects of inflation are also considered in pricing and in estimating reserves for unpaid claims and claim expenses. In addition, it is possible that the risk of general economic inflation has increased which could, among other things, cause claims and claim expenses to increase and also impact the performance of our investment portfolio. The actual effects of this potential increase in inflation on our results cannot be accurately known until, among other items, claims are ultimately settled. The onset, duration and severity of an inflationary period cannot be estimated with precision. OFF-BALANCE SHEET AND SPECIAL PURPOSE ENTITY ARRANGEMENTS AtDecember 31, 2019 , we had not entered into any off-balance sheet arrangements, as defined in Item 303(a)(4) of Regulation S-K. CONTRACTUAL OBLIGATIONS In the normal course of business, we are party to a variety of contractual obligations and these are considered by us when assessing our liquidity requirements. In certain circumstances, our contractual obligations may be accelerated due to defaults under the agreements governing those obligations (including pursuant to cross-default provisions in such agreements) or in connection with certain changes in control of the Company, for example. In addition, in certain circumstances, in the event of a default these obligations may bear an increased interest rate or be subject to penalties. OnMarch 22, 2019 we acquired TMR and the transaction was accounted under the acquisition method of accounting in accordance with FASB ASC Topic Business Combinations. Total consideration paid was allocated among acquired assets and assumed liabilities based on their fair values. Refer to "Note 3. Acquisition of Tokio Millennium Re" in our "Notes to the Consolidated Financial Statements" for additional information related to the acquisition of TMR. 106 --------------------------------------------------------------------------------
The table below shows our contractual obligations:
Less than 1 More than 5
At December 31, 2019 Total year 1-3 years 3-5 years years
(in thousands)
Long term debt
obligations (1)
3.600% Senior Notes due
2029 $ 533,747 $ 14,400 $ 28,800 $ 28,800 $ 461,747
3.450% Senior Notes due
2027 $ 377,615 $ 10,350 $ 20,700 $ 20,700 $ 325,865
3.700% Senior Notes due
2025 358,264 11,100 22,200 22,200 302,764
5.750% Senior Notes due
2020 252,918 252,918 - - -
4.750% Senior Notes due
2025 (DaVinciRe) (1) 187,991 7,125 14,250 14,250 152,366
Total long term debt
obligations 1,710,535 295,893 85,950 85,950 1,242,742
Private equity and
investment commitments
(2) 411,262 411,262 - - -
Operating lease
obligations 40,657 7,912 14,651 6,809 11,285
Capital lease obligations 25,628 3,336 6,672 5,491 10,129
Payable for investments
purchased 225,275 225,275 - - -
Reserve for claims and
claim expenses (3) 9,384,349 2,627,618 4,410,643 3,002,993 (656,905 )
Total contractual
obligations $ 11,797,706 $ 3,571,296 $ 4,517,916 $ 3,101,243 $ 607,251 (1) Includes contractual interest payments.
(2) The private equity and investment commitments do not have a defined
contractual commitment date and we have therefore included them in the less
than one year category.
(3) Because of the nature of the coverages we provide, the amount and timing of
the cash flows associated with our policy liabilities will fluctuate, perhaps
significantly, and therefore are highly uncertain. We have based our
estimates of future claim payments on available relevant sources of loss and
allocated loss adjustment expense development data and benchmark industry
payment patterns. These benchmarks are revised periodically as new trends
emerge. We believe that it is likely that this benchmark data will not be
predictive of our future claim payments and that material fluctuations can
occur due to the nature of the losses which we insure and the coverages which
we provide.
CURRENT OUTLOOK
Property Exposed Market Developments
We estimate that the insurance and reinsurance markets experienced approximately
$75 billion of insured catastrophe loss in 2019 from events including Hurricane
Dorian, Typhoons Faxai and Hagibis, and the significant wildfires in California .
These events follow a number of significant large loss events in 2018, including
Typhoons Jebi, Mangkhut and Trami, Hurricanes Florence and Michael, and
wildfires across the state of California , as well as the significant natural
disasters in 2017, including Hurricanes Harvey, Irma and Maria, the Mexico City
Earthquake, and wildfires in many areas of California . In addition, the market
has been impacted by continuing, significant adverse developments from these
events, particularly Typhoon Jebi and Hurricanes Irma and Michael. In sum, we
estimate that 2017 and 2018 represent the largest back-to-back years for insured
natural disaster losses in history, and view the incidents experienced in 2019
as consistent with this trend.
Given the nature and breadth of these events, the associated losses over this
period affected an unusually large number of regions, and, accordingly,
insureds, reinsurance lines and reinsurers. In addition, the ultimate scale of
the losses, difficulty of loss estimation, length of payout periods, social
inflation risk and other factors have contributed to uncertainty around these
loss events, both individually and in the aggregate. Moreover, we believe a
large number of our clients and competitors have been impacted by significant
ongoing adverse developments on these large events; in particular, we estimate
that the industry's reported adverse developments on Typhoon Jebi and on
Hurricane Irma would each represent, by themselves, historically large insured
loss events. We believe that the adverse development in respect of these various
disasters arises from factors including: underestimations of exposure and
incurred loss; loss
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reporting delays in the regions impacted by Typhoon Jebi; aggressive litigation
and adjustment practices, particularly, but not limited to, in the state of
Florida ; other elevated loss adjustment expenses; and other factors. We continue
to estimate that Typhoon Faxai will approach a $10 billion industry event and
currently estimate likely industry-wide insured losses arising from Typhoon
Hagibis at approximately $15 billion , subject in each case to significant
uncertainty.
We believe that revised views of risk as a result of these experiences, both in
respect of the Japanese and U.S. markets and perils, and the potential
diminishment of capacity or risk appetite from the insurance-linked securities
market, may contribute favorably to market conditions in future periods,
although there can be no assurance that these developments will occur or be
sustained.
Based on our experience, intermediary reports and other industry commentary, in
respect of the January 2020 renewal, rates for retrocessional reinsurance and
some lines of primary insurance were up substantially, while rates on other
layers of reinsurance, if loss free in expiring periods, were up less markedly.
Loss affected reinsurance programs and lines, such as treaties exposed to the
California wildfires, did manifest more substantially improved terms. These
developments facilitated our growth in gross premiums written, both in our
existing operations and more particularly by presenting opportunities to deploy
additional third-party capital. Nonetheless, in respect of certain regions and
perils we continue to assess that prevailing rate increases were not sufficient
to offset increases in exposure, continuing risks from social inflation and the
potential for sustained elevation in exposure due to changes in climate
conditions and demographics. Moreover, we believe that the adverse impact of
years of sustained reinsurance rate decreases have not yet been offset by the
recent positive rate environment. Accordingly, we sought to re-balance our
portfolio, and to access forms of portfolio protection to further our capacity
to support our clients while maximizing the estimated efficiency of our retained
risk portfolio.
We believe it is possible that these large loss events, the scale and pace of
adverse developments and other market dynamics may contribute to sustained
general market dynamics that could continue to support improving market
conditions in lines and regions we target, and in which we have differentiating
expertise. In addition, public rate filings, reports from intermediaries and
public reports from primary insurance companies reflect rate increases in the
U.S. in respect of property-exposed direct insurance coverages, as well as
complex commercial lines. We also expect that the broader market will reflect
rate increases in respect of retrocessional coverages. Accordingly, we currently
intend to allocate relatively more capital in coming periods to our assumed
retrocessional portfolio, target products in the U.S. excess and surplus lines
direct insurance market, and our other property business. We also anticipate
continuing improvements in the reinsurance sector overall, in particular, with
respect to the complex, holistic and bespoke product coverages for which we
believe we have competitive advantages. However, at this time we cannot know
with certainty whether any such positive developments will transpire or be
sustained, or the degree to which we will continue to benefit from them.
Moreover, we are carefully monitoring ongoing, adverse trends in the Florida
market with respect to claims practices, litigation risks, and exposure growth,
and are prepared to continue to reduce our exposure to risks and accounts
exposed to these trends.
We expect that over time reinsurance demand for many coverages and solutions
will continue to lag the pace of growth in available capital. We believe we are
well positioned to benefit from these developments as shown, for example, in our
efforts to optimize our gross-to-net portfolio. However, we estimate that in
2019, and in respect of the January 2020 renewal season, capital supply from
alternative capital providers was more constrained than in past periods. It is
possible that the recent large loss events, and the uncertainty relating to the
ultimate insured losses arising from these events, may contribute to a
continuation of this trend for the capital raising cycle in respect of the April
and June 1, 2020 market renewals. Nonetheless, over the medium and longer term,
we anticipate the market will continue to be characterized by an ample supply of
capital, including third-party capital, notwithstanding the significant impacts
of the large loss events of 2017, 2018 and 2019, and the continuing adverse
developments therefrom.
Furthermore, cedants in many of the key markets we serve are large and
increasingly sophisticated. They may be able to manage large and growing
retentions, access risk transfer capital in expanding forms, and may seek to
focus their reinsurance relationships on a core group of well-capitalized,
highly-rated reinsurers who can provide a complete product suite as well as
value-added service. While we believe we are well positioned to compete for
business we find attractive, these dynamics may limit the degree to which the
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market sustains favorable improvements in the near-term or continue to introduce
or exacerbate long-term challenges in our markets.
Casualty and Specialty Exposed Market Developments
Certain of the markets in which our Casualty and Specialty segment operate
generally experienced favorable rate trends in respect of the January 2020
renewals. Moreover, we also saw meaningful improvements in terms and conditions,
including broad-based reductions in ceding commissions. Concurrently, however,
the casualty and specialty markets have continued to broadly exhibit adverse
loss development and negative exposure trends, including a meaningful increase
in both the incidence and severity of civil jury awards. In 2019, we observed
favorable conditions for accounts that exhibited elevated loss emergence or
underlying rate deterioration, but we also estimate that the favorable market
trends have extended more broadly. In the near term, we expect that current
pricing trends exhibited during the year are likely to continue, with terms and
conditions for loss-affected lines of business continuing to show moderate
improvement and certain other areas of the casualty and specialty market
potentially maintaining less pronounced but positive adjustments. As a whole, we
continue to believe that pockets of casualty and specialty lines may provide
attractive opportunities for stronger or well-positioned reinsurers, and that,
given our strong ratings, expanded product offerings, and increased U.S. market
presence, we are well positioned to compete for business that we find
attractive. At the same time, we also estimate that underlying loss costs for
many casualty and specialty lines of business will continue to rise. We plan to
continue to seek unique or differentiated opportunities to provide coverage on
large programs open to us on a differentiated basis or to select markets.
However, we cannot assure you that positive market trends will continue, that we
will succeed in identifying and expanding on attractive programs or obtain
potentially attractive new programs, or that future, currently unforeseen,
developments will not adversely impact the casualty and specialty markets.
Relatedly, specific renewal terms vary widely by insured account and our ability
to shape our portfolio to improve its estimated risk and return characteristics
is subject to a range of competitive and commercial factors. We cannot assure
you that these positive dynamics will be sustained, or that we will participate
fully in improving terms. We intend to seek to maintain strong underwriting
discipline and, in light of prevailing market conditions, cannot provide
assurance that we will succeed in growing or maintaining our current combined
in-force book of business.
General Economic Conditions
Underlying economic conditions in several of the key markets we serve remained
generally stable in 2019, with certain of our core markets, including the U.S. ,
experiencing economic growth supported by decreases in some prevailing interest
rates, and continued quantitative easing policies by some major central banks,
partly offset by reporting declines in manufacturing activity in certain key
markets and a reduction in trade flows. Economic growth contributes positively
to demand for our coverages and services, particularly in jurisdictions with
high insurance penetration and the potential for risk concentration. We also
continue to seek and participate in efforts to enhance insurance penetration in
respect of select perils and regions, although such efforts are complex and
frequently long-term and uncertain in nature.
We continue to believe that meaningful risk remains related to political and
economic uncertainty, economic weakness, or adverse disruptions in general
economic and financial market conditions. Moreover, any future economic growth
may be at a comparatively suppressed rate for a relatively extended period of
time, particularly given the length of the U.S. economic cycle. Declining or
weak economic conditions could reduce demand for the products sold by us or our
customers, impact the risk-adjusted attractiveness and absolute returns and
yields of our investment portfolio, or weaken our overall ability to write
business at risk-adequate rates. Persistent low levels of economic activity
could also adversely impact other areas of our financial performance, by
contributing to unforeseen premium adjustments, mid-term policy cancellations,
commutations or asset devaluations, among other things. In addition, it is
possible that increasing uncertainties related to cross-border trade may reduce
economic growth for specific sectors which drive the insurance market
disproportionately. In particular, our specialty and casualty reinsurance and
Lloyd's portfolios could be exposed to risks arising from economic weakness or
dislocations, including with respect to a potential increase of claims in
directors and officers, errors and omissions, surety, casualty clash and other
lines of business. In addition, we believe our consolidated credit risk,
reflecting our counterparty dealings with customers, agents, brokers,
retrocessionaires, capital providers and parties associated with
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our investment portfolio, among others, is likely to be higher during a period
of economic weakness. Any of the foregoing or other outcomes of a period of
economic weakness could adversely impact our financial position or results of
operations.
The sustained environment of low interest rates in recent years lowered the
yields at which we invest our assets relative to longer-term historical levels.
In 2019, decreases in prevailing interest rates contributed significantly to
comparably high net realized and unrealized gains from our invested assets.
However, as we invest cash from new premiums written or reinvest the proceeds of
invested assets that mature or that we choose to sell, we expect the yield on
our portfolio to be adversely impacted by a declining interest rate environment.
While it is possible that yields will improve in future periods, we currently
anticipate a period of declining interest rates and broader uncertainty. We are
unable to predict with certainty when conditions will substantially and
sustainably improve, or the pace of any such improvement.
We continue to monitor the risk that our principal markets will experience
increased inflationary conditions, potentially exacerbated by interest rate
cuts. Inflationary conditions would cause costs related to our claims and claim
expenses to increase and impact the performance of our investment portfolio,
among other things. The onset, duration and severity of an inflationary period
cannot be estimated with precision.
Legislative and Regulatory Update
In prior Congressional sessions, Congress has considered a range of potential
legislation which would, if enacted, provide for matters such as the creation of
(i) a federal reinsurance catastrophe fund; (ii) a federal consortium to
facilitate qualifying state residual markets and catastrophe funds in securing
reinsurance; and (iii) a federal bond guarantee program for state catastrophe
funds in qualifying state residual markets. In April 2016 , H.R.4947, the Natural
Disaster Reinsurance Act of 2016, which would create a federal reinsurance
program to cover any losses insured or reinsured by eligible state programs
arising from natural catastrophes, including losses from floods, earthquakes,
tropical storms, tornadoes, volcanic eruption and winter storms, was introduced.
If enacted, this bill, or legislation, similar to any of these proposals, would,
we believe, likely contribute to the growth of state entities offering
below-market priced insurance and reinsurance in a manner adverse to us and
market participants more generally. Such legislation could also encourage
cessation, or even reversal, of reforms and stabilization initiatives that have
been enacted in the state of Florida and other catastrophe-exposed states in
recent years. While we believe such legislation will continue to be vigorously
opposed, if adopted these bills would likely diminish the role of private market
catastrophe reinsurers and could adversely impact our financial results, perhaps
materially.
In June 2012 , Congress passed the Biggert-Waters Bill, which provided for a
five-year renewal of the National Flood Insurance Program (the "NFIP") and,
among other things, authorized the Federal Emergency Management Agency ("FEMA")
to carry out initiatives to determine the capacity of private insurers,
reinsurers, and financial markets to assume a greater portion of the flood risk
exposure in the U.S. , and to assess the capacity of the private reinsurance
market to assume some of the program's risk. Commencing in January 2017 , FEMA
has, acting under authority contemplated by the Biggert-Waters Bill, secured
annual reinsurance protection for the NFIP. Most recently, in January 2020 , FEMA
announced that it had renewed its reinsurance program to provide for $1.33
billion of protection in respect of 2020, covering 10.25% of NFIP's losses
between $4 billion and $6 billion , 34.7% of its losses between $6 billion and $8
billion , and 21.8% of its losses between $8 billion and $10 billion . In
addition, NFIP has procured an additional $500 million of private market
protection via the FloodSmart Re $500 million Series 2018-1 Notes. It is
possible this program will continue and potentially expand in future periods and
may encourage other U.S. federal programs to explore private market risk
transfer initiatives; however, we cannot assure you that any such developments
will in fact occur, or that if they do transpire we will succeed in
participating.
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The statutory authorization for the operation and continuation of the NFIP has
expired and received a series of short-term extensions. The NFIP's current
authorization has been extended to September 30, 2020 . In January 2019 , the
Federal Deposit Insurance Corp. and Office of the Comptroller of the Currency
issued rules requiring lenders to accept private flood insurance policies that
have coverage at least as comprehensive as that offered by NFIP, and providing a
framework to evaluate alternative flood coverage; these rules went into effect
on July 1, 2019 . Congress is also considering legislative language that would
direct FEMA to consider policyholders who discontinue an NFIP policy and then
later return to the NFIP as having continuous coverage if they can demonstrate
that a flood insurance policy from a private firm was maintained throughout the
interim period. To the extent these laws, rules and regulations are adopted and
enforced, they could incrementally contribute to the growth of private
residential flood opportunities and the financial stabilization of the NFIP.
However, reauthorization of the NFIP remains subject to meaningful uncertainty;
and whether a successful reauthorization would continue market-enhancing reforms
is significantly uncertain. Accordingly, we cannot assure you that legislation
to reform the NFIP will indeed be enacted or that the private market for
residential flood protection will be enhanced if it is.
In recent years, market conditions for insurance in the state of Florida have
been significantly impacted by the increasingly prevalent utilization of a
practice referred to as "assignment of benefits," or "AOB." We currently
estimate that the impacts of AOB have contributed adversely and significantly to
the ultimate economic losses borne by the insurance market in light of recent
large Florida loss events, including Hurricanes Irma and Michael. An AOB is an
instrument executed by a primary policyholder that is deemed to permit certain
third parties, such as water extraction companies, roofers or plumbers, to
"stand in the shoes" of the insured and seek direct payments from the
policyholder's insurance company.
In April 2019 , SB 122: The Insurance Assignment Agreements Act (the "AOB Reform
Bill") became law in Florida , effective July 1, 2019 . Among other things, the
AOB Reform Bill is intended to change the way attorneys' fees are calculated to
provide less incentive for plaintiff attorneys to file frivolous suits; requires
written notice to the insurer of a filing; more clearly informs insureds of
their rights; allows Florida domestic insurers the option of offering policies
with and without AOB language included; and requires service providers in
Florida to give an insurer and the consumer prior written notice of at least 10
business days before filing suit on a claim. While we are cautiously optimistic
that this law could somewhat mitigate, in respect of losses subsequent to July
2019 , some of the more egregious practices that have contributed to adverse
industry results in Florida , we continue believe that the likely estimated
impact to exposed loss in reinsurance treaties and programs will not be
material. In addition, the AOB Reform Bill is not intended to remediate the
adverse impacts of earlier events, such as the large losses in 2017 and 2018,
which continue to exhibit loss development well beyond modeled expectations.
Moreover, industry organizations have reported that there was a measurable spike
in AOB filings before the bill's effective date of July 1, 2019 and that
plaintiff firms have announced identified "workarounds" to the AOB Reform Bill
provisions. In general, we continue to estimate that the dynamics and practices
we refer to as "social inflation" will continue to adversely impact loss trends
in Florida . Moreover, reforms of social inflation trends in Florida or other
jurisdictions do not impact the increased risks attributable to changes in
climate, demographics and other factors which we estimate are increasing the
probability and severity of meteorologically-driven hazards.
In January 2020 media reports announced that the rating agency responsible for
assigning financial stability ratings ("FSR") to more than 40 Florida domestic
insurers had warned that several carriers would be expected to receive
downgrades due to deteriorating conditions in the state's property insurance
market, and that more than a dozen of such carriers could be downgraded in the
next few months. Factors cited by this agency included what the firm deemed to
be the cumulative impact of prolonged periods of inadequate rate revisions by
these carriers, as well as state judicial rulings adversely impacting claims
awards, including in respect of the natural disasters of recent years.
Further, in February 2020 , legislation was introduced in the Florida Senate ,
Bill No. SB 1334, which would, if ultimately adopted, significantly expand the
Florida Hurricane Catastrophe Fund for a statutory period of several years. This
bill was just introduced, and we cannot assess yet its likelihood of passage or
the impact it would have on the market or us if adopted. However, in general,
expansion of state programs such as that contemplated by the bill reduce private
market opportunities. In sum, taken together, these ongoing challenges have
impacted our own risk selection criteria with respect to Florida exposures, and
our estimation of the number of programs we believe are likely to be submitted
at attractive risk-adjusted terms in respect of the June 2020 renewal.
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