EVEREST GROUP, LTD. The following is a discussion and analysis of our results of operations and financial condition for the years endedDecember 31, 2021 and 2020. This discussion should be read in conjunction with the Consolidated Financial Statements and related Notes, under ITEM 8 of this Form 10-K. Pursuant to the FAST Act Modernization and Simplification of Regulation S-K, comparisons between 2020 and 2019 have been omitted from this Form 10-K but can be found in "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Part II, Item 7 of our Form 10-K for the year endedDecember 31, 2020 .
All comparisons in this discussion are to the corresponding prior year unless otherwise indicated.
Industry Conditions. The worldwide reinsurance and insurance businesses are highly competitive, as well as cyclical by product and market. As such, financial results tend to fluctuate with periods of constrained availability, higher rates and stronger profits followed by periods of abundant capacity, lower rates and constrained profitability. Competition in the types of reinsurance and insurance business that we underwrite is based on many factors, including the perceived overall financial strength of the reinsurer or insurer, ratings of the reinsurer or insurer byA.M. Best and/orStandard & Poor's , underwriting expertise, the jurisdictions where the reinsurer or insurer is licensed or otherwise authorized, capacity and coverages offered, premiums charged, other terms and conditions of the reinsurance and insurance business offered, services offered, speed of claims payment and reputation and experience in lines written. Furthermore, the market impact from these competitive factors related to reinsurance and insurance is generally not consistent across lines of business, domestic and international geographical areas and distribution channels. We compete in theU.S. ,Bermuda and international reinsurance and insurance markets with numerous global competitors. Our competitors include independent reinsurance and insurance companies, subsidiaries or affiliates of established worldwide insurance companies, reinsurance departments of certain insurance companies, domestic and international underwriting operations, including underwriting syndicates atLloyd's of London and certain government sponsored risk transfer vehicles. Some of these competitors have greater financial resources than we do and have established long term and continuing business relationships, which can be a significant competitive advantage. In addition, the lack of strong barriers to entry into the reinsurance business and recently, the securitization of reinsurance and insurance risks through capital markets provide additional sources of potential reinsurance and insurance capacity and competition. Worldwide insurance and reinsurance market conditions historically have been competitive. Generally, there was ample insurance and reinsurance capacity relative to demand, as well as additional capital from the capital markets through insurance linked financial instruments. These financial instruments such as side cars, catastrophe bonds and collateralized reinsurance funds, provided capital markets with access to insurance and reinsurance risk exposure. The capital markets demand for these products was being primarily driven by a low interest environment and the desire to achieve greater risk diversification and potentially higher returns on their investments. This increased competition was generally having a negative impact on rates, terms and conditions; however, the impact varies widely by market and coverage. The industry continues to deal with the impacts of a global pandemic, COVID-19 and its subsequent variants. We activated our operational resiliency plan across our global footprint and all of our critical operations are functioning effectively from remote locations. We continue to service and meet the needs of our clients while ensuring the safety and health of our employees and customers. Prior to the pandemic, there was a growing industry consensus that there was some firming of (re)insurance rates for the areas impacted by the recent catastrophes. The increased frequency of catastrophe losses in 2020 and 2021 appears to be further pressuring the increase of rates. As business activity continues to regain strength, rates also appear to be firming in most lines of business, particularly in the casualty lines that had seen 42 -------------------------------------------------------------------------------- significant losses such as excess casualty and directors' and officers' liability. Other casualty lines are experiencing modest rate increase, while some lines such as workers' compensation were experiencing softer market conditions. It is too early to tell what the impact on pricing conditions will be, but it is likely to change depending on the line of business and geography. While we are unable to predict the full impact the pandemic will have on the insurance industry as it continues to have a negative impact on the global economy, we are well positioned to continue to service our clients. Our capital position remains a source of strength, with high quality invested assets, significant liquidity and a low operating expense ratio. Our diversified global platform with its broad mix of products, distribution and geography is resilient. 43 --------------------------------------------------------------------------------
Financial Summary.
We monitor and evaluate our overall performance based upon financial results.
The following table displays a summary of the consolidated net income (loss),
ratios and shareholders' equity for the periods indicated.
Percentage
Years Ended December 31, Increase/(Decrease)
(Dollars in millions) 2021 2020 2019 2021/2020 2020/2019
Gross written premiums $ 13,049.8 $ 10,482.4 $ 9,133.4 24.5% 14.8%
Net written premiums 11,445.5 9,117.0 7,824.4 25.5% 16.5%
REVENUES:
Premiums earned $ 10,406.4 $ 8,681.5 $ 7,403.7 19.9% 17.3%
Net investment income 1,164.9 642.5 647.1 81.3% (0.7)%
Net realized capital gains 44.7%
(losses) 257.9 267.6 185.0 (3.6)%
Other income (expense) 37.0 6.5 (4.6) NM (39.2)%
Total revenues 11,866.3 9,598.1 8,231.2 23.6% 16.6%
CLAIMS AND EXPENSES:
Incurred losses and loss
adjustment expenses 7,391.3 6,550.8 4,922.9 12.8% 33.1%
Commission, brokerage, taxes and
fees 2,208.8 1,873.3 1,703.7 17.9% 10.0%
Other underwriting expenses 582.6 511.2 440.9 14.0% 16.0%
Corporate expenses 67.8 41.1 33.0 65.0% 24.7%
Interest, fees and bond issue cost
amortization expense 70.1 36.3 31.7 93.1% 14.6%
Total claims and expenses 10,320.6 9,012.8 7,132.2 14.5% 26.4%
INCOME (LOSS) BEFORE TAXES 1,545.6 585.3 1,099.0 164.1% (46.7)%
Income tax expense (benefit) 166.5 71.2 89.5 133.9% (20.5)%
NET INCOME (LOSS) $ 1,379.1 $ 514.2 $ 1,009.5 168.2% (49.1)%
RATIOS: Point Change
Loss ratio 71.0% 75.5% 66.5% (4.5) 9.0
Commission and brokerage ratio 21.2% 21.6% 23.0% (0.4) (1.4)
Other underwriting expense ratio 5.6% 5.8% 6.0% (0.2) (0.2)
Combined ratio 97.8% 102.9% 95.5% (5.1) 7.4
Percentage
At December 31, Increase/(Decrease)
(Dollars in millions, except per
share amounts) 2021 2020 2019 2021/2020 2020/2019
Balance sheet data:
Total investments and cash $ 29,673.3 $ 25,461.6 $ 20,748.5 16.5% 22.7%
Total assets 38,185.3 32,711.5 27,244.0 16.7% 20.1%
Loss and loss adjustment expense
reserves 19,009.5 16,322.1 13,531.3 16.5% 20.6%
Total debt 3,088.6 1,910.4 633.8 61.7% 201.4%
Total liabilities 28,046.1 22,985.3 18,111.1 22.0% 26.9%
Shareholders' equity 10,139.2 9,726.2 9,132.9 4.2% 6.5%
Book value per share 258.21 243.25 223.85 6.2% 8.7%
(NM, not meaningful)
(Some amounts may not reconcile due to rounding.)
44
--------------------------------------------------------------------------------Revenues.
Premiums. Gross written premiums increased by 24.5% to$13.0 billion in 2021, compared to$10.5 billion in 2020, reflecting a$1.8 billion , or 24.5%, increase in our reinsurance business and a$0.8 billion , or 24.4%, increase in our insurance business. The increase in reinsurance premiums was due to increases in most lines of business, notably casualty pro rata business, casualty excess of loss business, property pro-rata business and property catastrophe excess of loss business, as well as$90.5 million positive impact from the movement of foreign exchange rates. The rise in insurance premiums was primarily due to increases in specialty casualty business, professional liability business and short-tail business, including property. Net written premiums increased by 25.5% to$11.4 billion in 2021, compared to$9.1 billion in 2020. This change is consistent with the change in gross written premiums. Premiums earned increased by 19.9% to$10.4 billion in 2020, compared to$8.7 billion in 2020. The change in premiums earned relative to net written premiums is the result of timing; premiums are earned ratably over the coverage period whereas written premiums are recorded at the initiation of the coverage period. Other Income (Expense). We recorded other income of$37.0 million and$6.5 million in 2021 and 2020, respectively. The changes were primarily the result of fluctuations in foreign currency exchange rates. We recognized foreign currency exchange income of$28.1 million in 2021 and foreign currency exchange expense of$7.3 million in 2020. Claims and Expenses.
Incurred Losses and Loss Adjustment Expenses. The following table presents our incurred losses and loss adjustment expenses ("LAE") for the periods indicated.
Years Ended December 31,
Current Ratio %/ Prior Ratio %/ Total Ratio %/
(Dollars in millions) Year Pt Change Years Pt Change Incurred Pt Change
2021
Attritional $ 6,265.3 60.2% $ (9.1) (0.1)% $ 6,256.2 60.1%
Catastrophes 1,135.0 10.9% - -% 1,135.0 10.9%
Total segment $ 7,400.3 71.1% $ (9.1) (0.1)% $ 7,391.3 71.0%
2020
Attritional $ 5,724.4 66.0% $ 401.4 4.7% $ 6,125.8 70.7%
Catastrophes 425.0 4.9% - -% 425.0 4.9%
Total segment $ 6,149.4 70.9% $ 401.4 4.7% $ 6,550.8 75.5%
2019
Attritional $ 4,441.0 60.0% $ (93.6) (1.3)% $ 4,347.4 58.7%
Catastrophes 545.5 7.4% 30.0 0.4% 575.5 7.8%
Total segment $ 4,986.5 67.4% $ (63.6) (0.9)% $ 4,922.9 66.5%
Variance 2021/2020
Attritional $ 540.9 (5.8) pts $ (410.5) (4.8) pts $ 130.4 (10.6) pts
Catastrophes 710.0 6.0 pts - - pts 710.0 6.0 pts
Total segment $ 1,250.9 0.2 pts $ (410.5) (4.8) pts $ 840.4 (4.6) pts
Variance 2020/2019
Attritional $ 1,283.4 6.0 pts $ 495.0 6.0 pts $ 1,778.4 12.0 pts
Catastrophes (120.5) (2.5) pts (30.0) (0.4) pts
(150.5) (2.9) pts
Total segment
(Some amounts may not reconcile due to rounding.)
Incurred losses and LAE increased by 12.8% to$7.4 billion in 2021, compared to$6.6 billion in 2020, primarily due to an increase of$710.0 million in current year catastrophe losses and a rise of$540.9 million in current year 45 -------------------------------------------------------------------------------- attritional losses, partially offset by more favorable development on prior years attritional losses mainly related to$400.0 million of reserve strengthening in the 4th quarter of 2020 which did not recur in 2021. The increase in current year attritional losses was mainly due to the impact of the increase in premiums earned, partially mitigated by$511.1 million of COVID-19 Pandemic losses incurred in 2020. The current year catastrophe losses of$1.1 billion in 2021 related primarily to Hurricane Ida ($460.0 million ), theTexas winter storms ($294.4 million ) the European floods ($242.1 million ) , theCanada drought loss ($80.0 million ) and the Quad state tornadoes ($45.0 million ) with the rest of the losses emanating from theSouth Africa riots and the 2021Australia floods. The$425.0 million of current year catastrophe losses in 2020 related to Hurricane Laura ($124.0 million ), theNorthern California wildfires ($44.1 million ), Hurricane Zeta ($40.0 million ), Hurricane Sally ($32.8 million ), the California Glass wildfire ($29.5 million ),Nashville tornadoes ($22.9 million ), the Derecho storms ($20.5 million ), Hurricane Isaias ($20.0 million ),Hurricane Delta ($20.0 million ), theOregon wildfires ($17.0 million ), the Calgary storms inCanada ($14.7 million ), the 2020 U.S. civil unrest ($14.5 million ), the Queensland Hailstorm ($10.0 million ), the 2020 Australia fires ($8.2 million ) and the Australia East Coast Storm ($6.8 million ). Commission, Brokerage, Taxes and Fees. Commission, brokerage, taxes and fees increased by 17.9% to$2.2 billion for the year endedDecember 31, 2021 compared to$1.9 billion for the year endedDecember 31, 2020 . The increase was primarily due to the impact of the increases in premiums earned and changes in the mix of business. Other Underwriting Expenses. Other underwriting expenses were$582.6 million and$511.2 million in 2021 and 2020, respectively. The increase in other underwriting expenses in 2021 was mainly due to the continued build out of our insurance operations and the growth of the Group overall; broadly in line with the year over year increase in premiums earned. Corporate Expenses. Corporate expenses, which are general operating expenses that are not allocated to segments, were$67.8 million and$41.1 million for the years endedDecember 31, 2021 and 2020, respectively. The increase from 2020 to 2021 was mainly due to costs associated with the relocation of ourU.S. corporate offices and higher compensation expenses from an increased staff count. Interest, Fees and Bond Issue Cost Amortization Expense. Interest, fees and other bond amortization expense was$70.1 million and$36.3 million in 2021 and 2020, respectively. The increase in interest expense was primarily due to the issuance of$1.0 billion of senior notes inOctober 2020 and the issuance of$1.0 billion of senior notes inOctober 2021 . Interest expense was also impacted by the movements in the floating interest rate related to the long term subordinated notes, which is reset quarterly per the note agreement. The floating rate was 2.54% as ofDecember 31, 2021 . Income Tax Expense (Benefit). We had income tax expense of$166.5 million and$71.2 million in 2021 and 2020, respectively. Income tax expense is primarily a function of the geographic location of the Company's pre-tax income and the statutory tax rates in those jurisdictions. The effective tax rate ("ETR") is primarily affected by tax-exempt investment income, foreign tax credits and dividends. Variations in the ETR generally result from changes in the relative levels of pre-tax income, including the impact of catastrophe losses and net capital gains (losses), among jurisdictions with different tax rates. The Coronavirus Aid, Relief, and Economic Security ("CARES") Act, enacted onMarch 27, 2020 , provided thatU.S. companies could carryback for five years net operating losses incurred in 2018, 2019 and/or 2020. This beneficial tax provision in the CARES Act enabled the Company to carryback its significant 2018 net operating losses to prior tax years with higher effective tax rates of 35% versus 21% in 2018 and later years. As a result, the Company was able to record a net income tax benefit from the five-year carryback of$32.5 million and obtain federal income tax cash refunds of$182.5 million including interest in 2020. 46
--------------------------------------------------------------------------------
Net Income (Loss).
Our net income was
Ratios. Our combined ratio decreased by 5.1 points to 97.8% in 2021, compared to 102.9% in 2020. The loss ratio component decreased 4.5 points in 2021 over the same period last year mainly due to$400.0 million of reserve strengthening in the fourth quarter of 2020 and COVID-19 Pandemic attritional losses incurred in 2020, neither of which recurred in 2021. These impacts to the loss ratio were partially offset by$710.0 million of additional current year catastrophe losses in 2021 compared to 2020. The commission and brokerage ratio components decreased to 21.2% in 2021 compared to 21.6% in 2020 mainly due to changes in the mix of business. The other underwriting expense ratios decreased slightly to 5.6% in 2021 compared to 5.8% in 2020.
Shareholders' Equity.
Shareholders' equity increased by$0.4 billion to$10.1 billion atDecember 31, 2021 from$9.7 billion atDecember 31, 2020 , principally as a result of$1.4 billion of net income,$29.1 million of share-based compensation transactions and$23.5 million of net benefit plan obligation adjustments, net of tax, partially offset by$484.8 million of unrealized depreciation on investments net of tax,$246.7 million of shareholder dividends, the repurchase of 887,622 common shares for$225.1 million and$62.1 million of net foreign currency translation adjustments.
Consolidated Investment Results
Net Investment Income.
Net investment income increased by 81.3% to$1.2 billion in 2021 compared with investment income of$642.5 million in 2020. The increase was primarily the result of a significant increase in limited partnership income and higher income from other alternative investments. The limited partnership income primarily reflects increases in their reported net asset values. As such, until these asset values are monetized and the resultant income is distributed, they are subject to future increases or decreases in the asset value, and the results may be volatile. The following table shows the components of net investment income for the periods indicated. Years Ended December 31, (Dollars in millions) 2021 2020 2019 Fixed maturities$ 561.1 $ 542.4 $ 520.3 Equity securities 17.3 18.8 19.5 Short-term investments and cash 1.3 5.0 17.6 Other invested assets Limited partnerships 565.3 112.9 105.8 Other 62.9 1.7 14.1
Gross investment income before adjustments 1,207.9 680.7 677.3 Funds held interest income (expense)
12.3 12.8 13.3
Future policy benefit reserve income (expense) (1.1) (1.2) (1.4) Gross investment income 1,219.1 692.2 689.2 Investment expenses (54.2) (49.8) (42.1) Net investment income$ 1,164.9 $ 642.5 $ 647.1
(Some amounts may not reconcile due to rounding.)
47
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The following tables show a comparison of various investment yields for the
periods indicated.
2021 2020 2019Annualized pre-tax yield on average cash and invested assets 4.4 % 2.9 % 3.3 % Annualized after-tax yield on average cash and invested assets 3.8 % 2.5 % 2.9 %
Annualized return on invested assets 5.3 % 4.0 % 4.3 %
2021 2020 2019
Fixed income portfolio total return 0.5 % 6.3 % 6.2 %
Barclay's Capital -
Common equity portfolio total return 19.0 % 26.7 % 23.8 % S&P 500 index
28.7 % 18.4 % 31.5 %
Other invested asset portfolio total return 36.5 % 8.3 % 9.9 %
The pre-tax equivalent total return for the bond portfolio was approximately 0.5% and 5.3%, respectively, in 2021 and 2020. The pre-tax equivalent return adjusts the yield on tax-exempt bonds to the fully taxable equivalent. Our fixed income and equity portfolios have different compositions than the benchmark indexes. Our fixed income portfolios have a shorter duration because we align our investment portfolio with our liabilities. We also hold foreign securities to match our foreign liabilities while the index is comprised of onlyU.S. securities. Our equity portfolios reflect an emphasis on dividend yield and growth equities, while the index is comprised of the largest 500 equities by market capitalization. 48
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Net Realized Capital Gains (Losses).
The following table presents the composition of our net realized capital gains (losses) for the periods indicated.
Years Ended December 31, 2021/2020 2020/2019
(Dollars in millions) 2021 2020 2019 Variance Variance
Gains (losses) from sales:
Fixed maturity securities, market
value:
Gains $ 71.7 $ 79.6 $ 63.4 $ (7.9) $ 16.2
Losses (55.2) (81.8) (35.3) 26.6 (46.5)
Total 16.5 (2.2) 28.1 18.7 (30.3)
Fixed maturity securities, fair
value:
Gains - - 0.4 - (0.4)
Losses - (2.9) - 2.9 (2.9)
Total - (2.9) 0.4 2.9 (3.3)
Equity securities, fair value:
Gains 42.2 37.4 14.3 4.8 23.1
Losses (14.6) (46.4) (10.1) 31.8 (36.3)
Total 27.6 (9.0) 4.1 36.6 (13.1)
Other Invested Assets
Gains 10.0 7.7 6.8 2.3 0.9
Losses (3.8) (6.0) (0.8) 2.2 (5.3)
Total 6.1 1.7 6.0 4.4 (4.4)
Short Term Investments
Gains - 1.3 - (1.3) 1.3
Losses - - - - -
Total - 1.3 - (1.3) 1.3
Total net realized capital gains
(losses) from sales:
Gains 123.9 126.1 84.9 (2.1) 41.2
Losses (73.7) (137.1) (46.1) 63.4 (91.0)
Total 50.2 (11.1) 38.9 61.3 (49.9)
Allowance for credit losses: (28.0) (1.7) - (26.3) (1.7)
Other-than-temporary impairments: - - (20.9) - 20.9
Gains (losses) from fair value adjustments: Fixed maturities, fair value - 1.9 1.8 (1.9) 0.1 Equity securities, fair value 235.7 278.5 165.2 (42.8) 113.3 Total 235.7 280.4 167.0
(44.7) 113.4
Total net realized capital gains (losses)$ 257.9 $ 267.6 $ 185.0 $
(9.8)
(Some amounts may not reconcile due to rounding.)
Segment Results.
The Company's operations are comprised of its Reinsurance segment and its
Insurance segment. These segments are managed independently, but conform with
corporate guidelines with respect to pricing, risk management, control of
aggregate catastrophe exposures, capital, investments and support operations.
Management generally monitors and evaluates the financial performance of these
operating segments based upon their underwriting results.
49
--------------------------------------------------------------------------------The following discusses the underwriting results for each of our segments for the periods indicated.
Reinsurance.
The following table presents the underwriting results and ratios for the Reinsurance segment for the periods indicated.
Years Ended December 31, 2021/2020 2020/2019
(Dollars in millions) 2021 2020 2019 Variance % Change Variance % Change
Gross written
premiums $ 9,067.3 $ 7,281.7 $ 6,355.9 $ 1,785.6 24.5%
Premiums earned$ 7,757.5 $ 6,466.1 $ 5,491.3 $ 1,291.4 20.0%$ 974.8 17.8% Incurred losses and LAE 5,556.4 4,933.4 3,675.2 623.0 12.6% 1,258.2 34.2% Commission and brokerage 1,854.5 1,552.4 1,400.2 302.1 19.5% 152.1 10.9% Other underwriting expenses 199.1 175.7 160.8 23.4 13.3% 14.9 9.3% Underwriting gain (loss)$ 147.4 $ (195.4) $ 255.0 $ 342.9
175.4%
Point Chg Point Chg
Loss ratio 71.6% 76.3% 67.0% (4.7) 9.3
Commission and
brokerage ratio 23.9% 24.0% 25.5% (0.1) (1.5)
Other underwriting
expense ratio 2.6% 2.7% 2.9% (0.1) (0.2)
Combined ratio 98.1% 103.0% 95.4% (4.9) 7.6
(NM, not meaningful)
(Some amounts may not reconcile due to rounding.)
Premiums. Gross written premiums increased by 24.5% to $9.1 billion in 2021 from
$7.3 billion in 2020, primarily due to increases in most lines of business,
notably casualty pro rata business, casualty excess of loss, property pro rata
business and property catastrophe excess of loss business as well as a $90.5
million positive impact from the movement of foreign exchange rates. Net written
premiums increased by 26.1% to $8.5 billion in 2021 compared to $6.8 billion in
2020, which is consistent with the change in gross written premiums. Premiums
earned increased by 20.0% to $7.8 billion in 2021, compared to $6.5 billion in
2020. The change in premiums earned relative to net written premiums is
primarily the result of timing; premiums are earned ratably over the coverage
period whereas written premiums are recorded at the initiation of the coverage
period.
50--------------------------------------------------------------------------------
Incurred Losses and LAE. The following table presents the incurred losses and LAE for the Reinsurance segment for the periods indicated.
Years Ended December 31,
Current Ratio %/ Prior Ratio %/ Total Ratio %/
(Dollars in millions) Year Pt Change Years Pt Change Incurred Pt Change
2021
Attritional $ 4,581.8 59.1% $ (7.9) (0.1)% $ 4,573.9 59.0%
Catastrophes 982.5 12.7% - -% 982.5 12.7%
Total segment $ 5,564.3 71.8% $ (7.9) (0.1)% $ 5,556.4 71.6%
2020
Attritional $ 4,179.5 64.6% $ 396.9 6.1% $ 4,576.4 70.7%
Catastrophes 357.0 5.5% - -% 357.0 5.5%
Total segment $ 4,536.5 70.1% $ 396.9 6.1% $ 4,933.4 76.3%
2019
Attritional $ 3,177.5 57.9% $ (77.2) (1.4)% $ 3,100.4 56.5%
Catastrophes 541.5 9.9% 33.4 0.6% 574.8 10.5%
Total segment $ 3,719.0 67.8% $ (43.8) (0.8)% $ 3,675.2 67.0%
Variance 2021/2020
Attritional $ 402.3 (5.5) pts $ (404.8) (6.2) pts $ (2.5) (11.7) pts
Catastrophes 625.5 7.2 pts - - pts 625.5 7.2 pts
Total segment $ 1,027.8 1.7 pts $ (404.8) (6.2) pts $ 623.0 (4.5) pts
Variance 2020/2019
Attritional $ 1,002.0 6.7 pts $ 474.1 7.5 pts $ 1,476.0 14.2 pts
Catastrophes (184.5) (4.4) pts (33.4) (0.6) pts
(217.8) (5.0) pts
Total segment
(Some amounts may not reconcile due to rounding.)
Incurred losses increased by 12.6% to$5.6 billion in 2021, compared to$4.9 billion in 2020. The increase was primarily due to an increase of$625.5 million in current year catastrophe losses and an increase of$402.3 million in current year attritional losses, partially offset by more favorable development on prior years attritional losses mainly related to$400.0 million of reserve strengthening in the 4th quarter of 2020 which did not recur in 2021. The increase in current year attritional losses was mainly related to the impact of the increase in premiums earned, partially mitigated by$407.1 million of COVID-19 Pandemic losses incurred in 2020 which did not re-cur in 2021. The current year catastrophe losses of$982.5 million in 2021 related primarily to Hurricane Ida ($380.0 million ), theTexas winter storms ($236.9 million ), the European floods ($242.1 million ), theCanada drought loss ($80.0 million and the Quad state tornadoes ($30.0 million , with the rest of the losses emanating from the 2021 South Africa riots and the 2021 Australia floods. The$357.0 million of current year catastrophe losses in 2020 related primarily to Hurricane Laura ($105.5 million ), theNorthern California wildfires ($44.1 million ), Hurricane Zeta ($32.0 million ), the California Glass wildfire ($29.5 million ),Hurricane Delta ($18.0 million ), Hurricane Isaias ($17.8 million ), theNashville tornadoes ($17.5 million ), the Derecho storms ($17.5 million ), theOregon wildfires ($17.0 million ), Hurricane Sally ($16.9 million ), the Calgary storms inCanada ($12.2 million ), theQueensland hailstorm ($10.0 million ), theAustralia fires ($8.2 million ), theAustralia East Coast storm ($6.8 million ), and the 2020 U.S. Civil Unrest ($4.1 million ). Segment Expenses. Commission and brokerage expense increased by 19.5% to$1.9 billion in 2021 compared to$1.6 billion in 2020. The increase was mainly due to the impact of the increase in premiums earned and changes in the mix of business. Segment other underwriting expenses increased to$199.1 million in 2021 from$175.7 million in 2020. The increases were mainly due to the impact of the increase in premiums earned. 51 --------------------------------------------------------------------------------
Insurance.
The following table presents the underwriting results and ratios for the Insurance segment for the periods indicated.
Years Ended December 31, 2021/2020 2020/2019
(Dollars in millions) 2021 2020 2019 Variance % Change Variance % Change
Gross written
premiums $ 3,982.5 $ 3,200.6 $ 2,777.5 $ 781.8 24.4%
Premiums earned$ 2,649.0 $ 2,215.4 $ 1,912.4 $ 433.6 19.6%$ 303.0 15.8% Incurred losses and LAE 1,834.8 1,617.4 1,247.7 217.4 13.4% 369.7 29.6% Commission and brokerage 354.3 320.9 303.5 33.4 10.4% 17.4 5.7% Other underwriting expenses 383.5 335.5 280.1 48.0 14.3% 55.4 19.8% Underwriting gain (loss)$ 76.3 $ (58.4) $ 81.1 $ 134.8
230.7%
Point Chg Point Chg
Loss ratio 69.3% 73.0% 65.2% (3.7) 7.8
Commission and
brokerage ratio 13.4% 14.5% 15.9% (1.1) (1.4)
Other underwriting
expense ratio 14.5% 15.1% 14.7% (0.6) 0.4
Combined ratio 97.1% 102.6% 95.8% (5.5) 6.8
(Some amounts may not reconcile due to rounding.)
Premiums. Gross written premiums increased by 24.4% to$4.0 billion in 2021 compared to$3.2 billion in 2020. This rise was primarily related to increases in specialty casualty business, professional liability business and short-tail business, including property. Net written premiums increased by 23.9% to$2.9 billion in 2021 compared to$2.3 billion in 2020, which is consistent with the change in gross written premiums. Premiums earned increased 19.6% to$2.6 billion in 2021 compared to$2.2 billion in 2020. The change in premiums earned relative to net written premiums is the result of timing; premiums are earned ratably over the coverage period whereas written premiums are recorded at the initiation of the coverage period. 52 --------------------------------------------------------------------------------
Incurred Losses and LAE. The following table presents the incurred losses and LAE for the Insurance segment for the periods indicated.
Years Ended December 31,
Current Ratio %/ Prior Ratio %/ Total Ratio %/
(Dollars in millions) Year Pt Change Years Pt Change Incurred Pt Change
2021
Attritional $ 1,683.5 63.6% $ (1.2) -% $ 1,682.3 63.6%
Catastrophes 152.5 5.8% - -% 152.5 5.8%
Total segment $ 1,836.0 69.4% $ (1.2) -% $ 1,834.8 69.3%
2020
Attritional $ 1,544.9 69.7% $ 4.5 0.2% $ 1,549.4 69.9%
Catastrophes 68.0 3.1% - -% 68.0 3.1%
Total segment $ 1,612.9 72.8% $ 4.5 0.2% $ 1,617.4 73.0%
2019
Attritional $ 1,263.4 66.1% $ (16.4) (0.9)% $ 1,247.0 65.2%
Catastrophes 4.0 0.2% (3.4) (0.2)% 0.7 0.0%
Total segment $ 1,267.5 66.3% $ (19.8) (1.1)% $ 1,247.7 65.2%
Variance 2021/2020
Attritional $ 138.6 (6.1) pts $ (5.7) (0.2) pts $ 132.9 (6.3) pts
Catastrophes 84.5 2.7 pts - - pts 84.5 2.7 pts
Total segment $ 223.1 (3.4) pts $ (5.7) (0.2) pts $ 217.4 (3.7) pts
Variance 2020/2019
Attritional $ 281.5 3.6 pts $ 20.9 1.1 pts $ 302.4 4.7 pts
Catastrophes 64.0 2.9 pts 3.4 0.2 pts 67.3 3.1 pts
Total segment $ 345.4 6.5 pts $ 24.3 1.3 pts $ 369.7 7.8 pts
(Some amounts may not reconcile due to rounding.)
Incurred losses and LAE increased by 13.4% to$1.8 billion in 2021 compared to$1.6 billion in 2020. The increase was mainly due to an increase of$138.6 million in current year attritional losses and an increase in current year catastrophe losses of$84.5 million . The increase in current year attritional losses was primarily due to the impact of the increase in premiums earned, partially mitigated by$104.0 million of COVID-19 Pandemic losses incurred in 2020 which did not recur in 2021. The current year catastrophe losses of$152.5 million related to Hurricane Ida ($80.0 million ), theTexas winter storms ($57.5 million ) and the Quad State tornadoes ($15.0 million ). The$68.0 million of current year catastrophe losses in 2020 related to Hurricane Laura ($18.5 million ), Hurricane Sally ($15.9 million ), the 2020 U.S. Civil Unrest ($10.4 million ), Hurricane Zeta ($8.0 million ), theNashville tornadoes ($5.5 million ), the Derecho storms ($3.0 million ), the Calgary storms inCanada ($2.5 million ), Hurricane Isaias ($2.2 million ) andHurricane Delta ($2.0 million ). Segment Expenses. Commission and brokerage increased by 10.4% to$354.3 million in 2021 compared to$320.9 million in 2020. The increase in 2021 was mainly due to the impact of the increase in premiums earned. Segment other underwriting expenses increased to$383.5 million in 2021 compared to$335.5 million in 2020. The increases were mainly due to the impact of the increases in premiums earned and increased expenses related to the continued build out of the insurance business.
Critical Accounting Estimates
The following is a summary of the critical accounting estimates related to accounting estimates that (1) require management to make assumptions about highly uncertain matters and (2) could materially impact the consolidated financial statements if management made different assumptions.
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Loss and LAE Reserves. Our most critical accounting estimate is the
determination of our loss and LAE reserves. We maintain reserves equal to our
estimated ultimate liability for losses and LAE for reported and unreported
claims for our insurance and reinsurance businesses. Because reserves are based
on estimates of ultimate losses and LAE by underwriting or accident year, we use
a variety of statistical and actuarial techniques to monitor reserve adequacy
over time, evaluate new information as it becomes known and adjust reserves
whenever an adjustment appears warranted. We consider many factors when setting
reserves including: (1) our exposure base and projected ultimate premiums
earned; (2) our expected loss ratios by product and class of business, which are
developed collaboratively by underwriters and actuaries; (3) actuarial
methodologies and assumptions which analyze our loss reporting and payment
experience, reports from ceding companies and historical trends, such as
reserving patterns, loss payments and product mix; (4) current legal
interpretations of coverage and liability; and (5) economic conditions. Our
insurance and reinsurance loss and LAE reserves represent management's best
estimate of our ultimate liability. Actual losses and LAE ultimately paid may
deviate, perhaps substantially, from such reserves. Our net income (loss) will
be impacted in a period in which the change in estimated ultimate losses and LAE
is recorded. See also ITEM 8, "Financial Statements and Supplementary Data" -
Note 1 of Notes to the Consolidated Financial Statements.
It is more difficult to accurately estimate loss reserves for reinsurance
liabilities than for insurance liabilities. At
The detailed data required to evaluate ultimate losses for our insurance business is accumulated from our underwriting and claim systems. Reserving for reinsurance requires evaluation of loss information received from ceding companies. Ceding companies report losses to us in many forms dependent on the type of contract and the agreed or contractual reporting requirements. Generally, proportional/quota share contracts require the submission of a monthly/quarterly account, which includes premium and loss activity for the period with corresponding reserves as established by the ceding company. This information is recorded into our records. For certain proportional contracts, we may require a detailed loss report for claims that exceed a certain dollar threshold or relate to a particular type of loss. Excess of loss and facultative contracts generally require individual loss reporting with precautionary notices provided when a loss reaches a significant percentage of the attachment point of the contract or when certain causes of loss or types of injury occur. Our experienced claims staff handles individual loss reports and supporting claim information. Based on our evaluation of a claim, we may establish additional case reserves (ACRs) in addition to the case reserves reported by the ceding company. To ensure ceding companies are submitting required and accurate data, the Underwriting, Claim, Reinsurance Accounting and Internal Audit departments of the Company perform various reviews of our ceding companies, particularly larger ceding companies, including on-site audits of domestic ceding companies. We sort both our reinsurance and insurance reserves into exposure groupings for actuarial analysis. We assign our business to exposure groupings so that the underlying exposures have reasonably homogeneous loss development characteristics and are large enough to facilitate credible estimation of ultimate losses. We periodically review our exposure groupings and we may change our groupings over time as our business changes. We currently use over 200 exposure groupings to develop our reserve estimates. One of the key selection characteristics for the exposure groupings is the historical duration of the claims settlement process. Business in which claims are reported and settled relatively quickly are commonly referred to as short tail lines, principally property lines. On the other hand, casualty claims tend to take longer to be reported and settled and casualty lines are generally referred to as long tail lines. Our estimates of ultimate losses for shorter tail lines, with the exception of loss estimates for large catastrophic events, generally exhibit less volatility than those for the longer tail lines.
We use similar actuarial methodologies, such as expected loss ratio, chain ladder reserving methods and Borhuetter Ferguson, supplemented by judgment where appropriate, to estimate our ultimate losses and LAE
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for each exposure group. Although we use similar actuarial methodologies for
both short tail and long tail lines, the faster reporting of experience for the
short tail lines allows us to have greater confidence in our estimates of
ultimate losses for short tail lines at an earlier stage than for long tail
lines. As a result, we utilize, as well, exposure-based methods to estimate our
ultimate losses for longer tail lines, especially for immature accident years.
For both short and long tail lines, we supplement these general approaches with
analytically based judgments. We cannot estimate losses from widespread
catastrophic events, such as hurricanes and earthquakes, using traditional
actuarial methods. We estimate losses for these types of events based on
information derived from catastrophe models, quantitative and qualitative
exposure analyses, reports and communications from ceding companies and
development patterns for historically similar events. Due to the inherent
uncertainty in estimating such losses, these estimates are subject to
variability, which increases with the severity and complexity of the underlying
event.
Our key actuarial assumptions contain no explicit provisions for reserve uncertainty nor do we supplement the actuarially determined reserves for uncertainty.
Our carried reserves at each reporting date are management's best estimate of
ultimate unpaid losses and LAE at that date. We complete detailed reserve
studies for each exposure group annually for our reinsurance and insurance
operations. The completed annual reinsurance reserve studies are "rolled
forward" for each accounting period until the subsequent reserve study is
completed. Analyzing the roll-forward process involves comparing actual reported
losses to expected losses based on the most recent reserve study. We analyze
significant variances between actual and expected losses and also consider
recent market, underwriting and management criteria to determine management's
best estimate of ultimate unpaid losses and LAE. As a result of these additional
factors, in some instances the selected reserve level may be higher or lower
than the actuarial indicated estimate.
Given the inherent variability in our loss reserves, we have developed an
estimated range of possible gross reserve levels. A table of ranges by segment,
accompanied by commentary on potential and historical variability, is included
in "Financial Condition - Loss and LAE Reserves". The ranges are statistically
developed using the exposure groups used in the reserve estimation process and
aggregated to the segment level. For each exposure group, our actuaries
calculate a range for each accident year based principally on two variables. The
first is the historical changes in losses and LAE incurred but not reported
("IBNR") for each accident year over time; the second is volatility of each
accident year's held reserves related to estimated ultimate losses, also over
time. Both are measured at various ages from the end of the accident year
through the final payout of the year's losses. Ranges are developed for the
exposure groups using statistical methods to adjust for diversification; the
ranges for the exposure groups are aggregated to the segment level, likewise,
with an adjustment for diversification. Our estimates of our reserve variability
may not be comparable to those of other companies because there are no
consistently applied actuarial or accounting standards governing such
presentations. Our recorded reserves reflect our best point estimate of our
liabilities and our actuarial methodologies focus on developing such point
estimates. We calculate the ranges subsequently, based on the historical
variability of such reserves.
Asbestos and Environmental Exposures. We continue to receive claims under
expired insurance and reinsurance contracts asserting injuries and/or damages
relating to or resulting from environmental pollution and hazardous substances,
including asbestos. Environmental claims typically assert liability for (a) the
mitigation or remediation of environmental contamination or (b) bodily injury or
property damage caused by the release of hazardous substances into the land, air
or water. Asbestos claims typically assert liability for bodily injury from
exposure to asbestos or for property damage resulting from asbestos or products
containing asbestos.
Our reserves include an estimate of our ultimate liability for A&E claims. Our
A&E liabilities emanate from Everest Re's assumed reinsurance business.
Liabilities related to Mt. McKinley's direct business, which had been ceded to
Bermuda Re previously, were retroceded to an affiliate of Clearwater Insurance
Company in 2015, concurrent with the sale of Mt. McKinley to Clearwater
Insurance Company . There are significant
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uncertainties surrounding our estimates of our potential losses from A&E claims.
Among the uncertainties are: (a) potentially long waiting periods between
exposure and manifestation of any bodily injury or property damage; (b)
difficulty in identifying sources of asbestos or environmental contamination;
(c) difficulty in properly allocating responsibility and/or liability for
asbestos or environmental damage; (d) changes in underlying laws and judicial
interpretation of those laws; (e) the potential for an asbestos or environmental
claim to involve many insurance providers over many policy periods; (f)
questions concerning interpretation and application of insurance and reinsurance
coverage; and (g) uncertainty regarding the number and identity of insureds with
potential asbestos or environmental exposure.
Due to the uncertainties discussed above, the ultimate losses attributable to
A&E, and particularly asbestos, may be subject to more variability than are
non-A&E reserves and such variation could have a material adverse effect on our
financial condition, results of operations and/or cash flows. See also ITEM 8,
"Financial Statements and Supplementary Data" - Notes 1 and 3 of Notes to the
Consolidated Financial Statements.
Reinsurance Recoverables. We have purchased reinsurance to reduce our exposure
to adverse claim experience, large claims and catastrophic loss occurrences. Our
ceded reinsurance provides for recovery from reinsurers of a portion of losses
and loss expenses under certain circumstances. Such reinsurance does not relieve
us of our obligation to our policyholders. In the event our reinsurers are
unable to meet their obligations under these agreements or are able to
successfully challenge losses ceded by us under the contracts, we will not be
able to realize the full value of the reinsurance recoverable balance. In some
cases, we may hold full or partial collateral for the receivable, including
letters of credit, trust assets and cash. Additionally, creditworthy foreign
reinsurers of business written in the U.S. , as well as capital markets'
reinsurance mechanisms, are generally required to secure their obligations. We
have established reserves for uncollectible balances based on our assessment of
the collectability of the outstanding balances. The allowance for uncollectible
reinsurance reflects management's best estimate of reinsurance cessions that may
be uncollectible in the future due to reinsurers' unwillingness or inability to
pay. The allowance for uncollectible reinsurance comprises an allowance and an
allowance for disputed balances. Based on this analysis, the Company may adjust
the allowance for uncollectible reinsurance or charge off reinsurer balances
that are determined to be uncollectible.
Premiums Written and Earned. Premiums written by us are earned ratably over the
coverage periods of the related insurance and reinsurance contracts. We
establish unearned premium reserves to cover the unexpired portion of each
contract. Such reserves, for assumed reinsurance, are computed using pro rata
methods based on statistical data received from ceding companies. Premiums
earned, and the related costs, which have not yet been reported to us, are
estimated and accrued. Because of the inherent lag in the reporting of written
and earned premiums by our ceding companies, we use standard accepted actuarial
methodologies to estimate earned but not reported premium at each financial
reporting date. These earned but not reported premiums are combined with
reported earned premiums to comprise our total premiums earned for determination
of our incurred losses and loss and LAE reserves. Commission expense and
incurred losses related to the change in earned but not reported premium are
included in current period company and segment financial results. See also ITEM
8, "Financial Statements and Supplementary Data" - Note 1 of Notes to the
Consolidated Financial Statements.
The following table displays the estimated components of net earned but not reported premiums by segment for the periods indicated.
At December 31,
(Dollars in millions) 2021 2020 2019
Reinsurance $ 2,054.7 $ 1,774.4 $ 1,424.5
Insurance - - -
Total $ 2,054.7 $ 1,774.4 $ 1,424.5 (Some amounts may not reconcile due to rounding.)
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Investment Valuation. Our fixed income investments are classified for accounting
purposes as available for sale and are carried at market value or fair value in
our consolidated balance sheets. Our equity securities are all carried at fair
value. Most securities we own are traded on national exchanges where market
values are readily available. Some of our commercial mortgage-backed securities
("CMBS") are valued using cash flow models and risk-adjusted discount rates. We
hold some privately placed securities, less than 10% of the portfolio, that are
either valued by investment advisors or the Company. In some instances, values
provided by an investment advisor are supported with opinions from qualified
independent third parties. The Company has procedures in place to review the
values received from its investment advisors. At December 31, 2021 and 2020, our
investment portfolio included $2.6 billion and $1.8 billion , respectively, of
limited partnership investments whose values are reported pursuant to the equity
method of accounting. We carry these investments at values provided by the
managements of the limited partnerships and due to inherent reporting lags, the
carrying values are based on values with "as of" dates from one month to one
quarter prior to our financial statement date.
At December 31, 2021 , we had unrealized gains, net of tax, of $239.4 million
compared to unrealized gains, net of tax, of $724.2 million at December 31,
2020 . Gains and losses from market fluctuations for investments held at market
value are reflected as comprehensive income (loss) in the consolidated balance
sheets. Gains and losses from market fluctuations for investments held at fair
value are reflected as net realized capital gains and losses in the consolidated
statements of operations and comprehensive income (loss). Market value declines
for the fixed income portfolio, which are considered credit related, are
reflected in our consolidated statements of operations and comprehensive income
(loss), as realized capital losses. We consider many factors when determining
whether a market value decline is credit related, including: (1) we have no
intent to sell and, more likely than not, will not be required to sell prior to
recovery, (2) the length of time the market value has been below book value, (3)
the credit strength of the issuer, (4) the issuer's market sector, (5) the
length of time to maturity and (6) for asset-backed securities, changes in
prepayments, credit enhancements and underlying default rates. If management's
assessments change in the future, we may ultimately record a realized loss after
management originally concluded that the decline in value was temporary. See
also ITEM 8, "Financial Statements and Supplementary Data" - Note 1 of Notes to
the Consolidated Financial Statements.
Financial Condition
Cash and Invested Assets. Aggregate invested assets, including cash and
short-term investments, were $29.7 billion at December 31, 2021 , an increase of
$4.2 billion compared to $25.5 billion at December 31, 2020 . This increase was
primarily the result of $3.8 billion of cash flows from operations, $968.4
million of proceeds from the issuance of senior notes, $612.6 million in equity
adjustments of our limited partnership investments, $209.0 million of proceeds
from Federal Home Loan Bank ("FHLB") borrowings and $101.5 million in fair value
re-measurements, partially offset by $542.3 million of pre-tax unrealized
depreciation, $246.7 million paid out in dividends to shareholders, repurchases
of 887,622 common shares for $225.1 million , $203.0 million of unsettled
securities and $134.1 million due to fluctuations in foreign currencies.
The Company's limited partnership investments are comprised of limited
partnerships that invest in private equities. Generally, the limited
partnerships are reported on a quarter lag. We receive annual audited financial
statements for all of the limited partnerships which are prepared using fair
value accounting in accordance with FASB guidance. For the quarterly reports,
the Company staff performs reviews of the financial reports for any unusual
changes in carrying value. If the Company becomes aware of a significant decline
in value during the lag reporting period, the loss will be recorded in the
period in which the Company identifies the decline.
57
--------------------------------------------------------------------------------The table below summarizes the composition and characteristics of our investment portfolio as of the dates indicated.
At December 31,
2021 2020
Fixed income portfolio duration (years) 3.2 3.6 Fixed income composite credit quality A+ AA-
Reinsurance Recoverables. Reinsurance recoverables for both paid and unpaid losses totaled$2.1 billion atDecember 31, 2021 and$2.0 billion atDecember 31, 2020 . AtDecember 31, 2021 ,$691.4 million , or 33.7%, was recoverable fromMt. Logan Re collateralized segregated accounts;$221.9 million , or 10.8%, was recoverable from Munich Re and$115.1 million , or 5.6%, was recoverable from Endurance Re. No other retrocessionaire accounted for more than 5% of our recoverables.
Loss and LAE Reserves. Gross loss and LAE reserves totaled
The following tables summarize gross outstanding loss and LAE reserves by segment, classified by case reserves and IBNR reserves, for the periods indicated.
At December 31, 2021
Case IBNR Total % of
(Dollars in millions) Reserves Reserves Reserves Total
Reinsurance $ 5,415.0 $ 8,312.3 $ 13,727.3 72.2%
Insurance 1,546.2 3,562.4 5,108.6 26.9%
Total excluding A&E 6,961.2 11,874.7 18,835.9 99.1%
A&E 163.7 9.9 173.6 0.9%
Total including A&E $ 7,124.8 $ 11,884.7 $ 19,009.5 100.0%
(Some amounts may not reconcile due to rounding.)
At December 31, 2020
Case IBNR Total % of
(Dollars in millions) Reserves Reserves Reserves Total
Reinsurance $ 5,092.7 $ 6,723.8 $ 11,816.5 72.4%
Insurance 1,282.1 3,005.7 4,287.9 26.3%
Total excluding A&E 6,374.8 9,729.5 16,104.4 98.7%
A&E 184.0 33.8 217.7 1.3%
Total including A&E $ 6,558.8 $ 9,763.3 $ 16,322.1 100.0%
(Some amounts may not reconcile due to rounding.)
Changes in premiums earned and business mix, reserve re-estimations, catastrophe
losses and changes in catastrophe loss reserves and claim settlement activity
all impact loss and LAE reserves by segment and in total.
Our loss and LAE reserves represent management's best estimate of our ultimate
liability for unpaid claims. We continuously re-evaluate our reserves, including
re-estimates of prior period reserves, taking into consideration all available
information and, in particular, newly reported loss and claim experience.
Changes in reserves resulting from such re-evaluations are reflected in incurred
losses in the period when the re-evaluation is made. Our analytical methods and
processes operate at multiple levels including individual contracts, groupings
of like contracts, classes and lines of business, internal business units,
segments, legal entities, and in the aggregate.
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In order to set appropriate reserves, we make qualitative and quantitative
analyses and judgments at these various levels. Additionally, the attribution of
reserves, changes in reserves and incurred losses among accident years requires
qualitative and quantitative adjustments and allocations at these various
levels. We utilize actuarial science, business expertise and management judgment
in a manner intended to ensure the accuracy and consistency of our reserving
practices. Nevertheless, our reserves are estimates, which are subject to
variation, which may be significant.
There can be no assurance that reserves for, and losses from, claim obligations
will not increase in the future, possibly by a material amount. However, we
believe that our existing reserves and reserving methodologies lessen the
probability that any such increase would have a material adverse effect on our
financial condition, results of operations or cash flows.
We have included ranges for loss reserve estimates determined by our actuaries,
which have been developed through a combination of objective and subjective
criteria. Our presentation of this information may not be directly comparable to
similar presentations of other companies as there are no consistently applied
actuarial or accounting standards governing such presentations. Our recorded
reserves are an aggregation of our best point estimates for approximately 200
reserve groups and reflect our best point estimate of our liabilities. Our
actuarial methodologies develop point estimates rather than ranges and the
ranges are developed subsequently based upon historical and prospective
variability measures.
The following table below represents the reserve levels and ranges for each of our business segments for the period indicated.
Outstanding Reserves and Ranges By Segment (1)
At December 31, 2021
As Low Low High High
(Dollars in millions) Reported Range % Range Range % Range
Gross Reserves By Segment
Reinsurance $ 13,727.3 -8.1% $ 12,610.3 8.5% $ 14,899.2
Insurance 5,108.6 -8.2% 4,692.2 8.8% 5,557.6
Total Gross Reserves
(excluding A&E) 18,835.9 -8.1% 17,302.4 8.6% 20,456.7
A&E (All Segments) 173.6 -13.7% 149.8 13.7% 197.4
Total Gross Reserves $ 19,009.5 -8.2% 17,452.2 8.7% 20,654.1
(Some amounts may not reconcile due to rounding.)
______________________________________________________
(1)There can be no assurance that reserves will not ultimately exceed the indicated ranges requiring additional income (loss) statement expense.
Depending on the specific segment, the range derived for the loss reserves,
excluding reserves for A&E exposures, ranges from minus 8.1% to minus 8.2% for
the low range and from plus 8.5% to plus 8.8% for the high range. Both the
higher and lower ranges are associated with the Insurance segment. The size of
the range is dependent upon the level of confidence associated with the reserve
estimates. Within each range, management's best estimate of loss reserves is
based upon the point estimate derived by our actuaries in detailed reserve
studies. Such ranges are necessarily subjective due to the lack of generally
accepted actuarial standards with respect to their development. For the above
presentation, we have assumed what we believe is a reasonable confidence level
but note that there can be no assurance that our claim obligations will not vary
outside of these ranges
Additional losses, including those relating to latent injuries, and other
exposures, which are as yet unrecognized, the type or magnitude of which cannot
be foreseen by us or the reinsurance and insurance industry generally, may
emerge in the future. Such future emergence, to the extent not covered by
existing retrocessional contracts, could have material adverse effects on our
future financial condition, results of operations and cash flows.
59
--------------------------------------------------------------------------------Asbestos and Environmental Exposures. A&E exposures represent a separate exposure group for monitoring and evaluating reserve adequacy.
With respect to asbestos only, atDecember 31, 2021 , we had net asbestos loss reserves of$155.9 million , or 99.9%, of total net A&E reserves, all of which was for assumed business.
See Note 3 of Notes to Consolidated Financial Statements for a summary of Asbestos and Environmental Exposures.
Ultimate loss projections for A&E liabilities cannot be accomplished using standard actuarial techniques. We believe that our A&E reserves represent management's best estimate of the ultimate liability; however, there can be no assurance that ultimate loss payments will not exceed such reserves, perhaps by a significant amount. Industry analysts use the "survival ratio" to compare the A&E reserves among companies with such liabilities. The survival ratio is typically calculated by dividing a company's current net reserves by the three year average of annual paid losses. Hence, the survival ratio equals the number of years that it would take to exhaust the current reserves if future loss payments were to continue at historical levels. Using this measurement, our net three year asbestos survival ratio was 4.9 years atDecember 31, 2021 . These metrics can be skewed by individual large settlements occurring in the prior three years and therefore, may not be indicative of the timing of future payments.
Liquidity and Capital Resources
Capital. Shareholders' equity atDecember 31, 2021 andDecember 31, 2020 was$10.1 billion and$9.7 billion , respectively. Management's objective in managing capital is to ensure its overall capital level, as well as the capital levels of its operating subsidiaries, exceed the amounts required by regulators, the amount needed to support our current financial strength ratings from rating agencies and our own economic capital models. The Company's capital has historically exceeded these benchmark levels. Our two main operating companies Bermuda Re andEverest Re are regulated by theBermuda Monetary Authority ("BMA") and theState of Delaware ,Department of Insurance , respectively. Both regulatory bodies have their own capital adequacy models based on statutory capital as opposed to GAAP basis equity. Failure to meet the required statutory capital levels could result in various regulatory restrictions, including business activity and the payment of dividends to their parent companies.
The regulatory targeted capital and the actual statutory capital for Bermuda Re
and
Bermuda Re (1) Everest Re (2)
At December 31, At December 31,
(Dollars in millions) 2021 (3) 2020 (3) 2021 2020
Regulatory targeted capital $ - $ 1,923.2 $ 2,940.9 $ 2,489.8
Actual capital $ 3,092.3 $ 2,930.3 $ 5,789.5 $ 5,276.0 (1) Regulatory targeted capital represents the target capital level from the applicable year's BSCR calculation.
(2) Regulatory targeted capital represents 200% of the RBC authorized control level calculation for the applicable year.
(3) The 2021 BSCR calculation is not yet due to be completed; however, the
Company anticipates that Bermuda Re's
Our financial strength ratings as determined byA.M. Best ,Standard & Poor's and Moody's are important as they provide our customers and investors with an independent assessment of our financial strength using a rating scale that provides for relative comparisons. We continue to possess significant financial flexibility and access to debt and equity markets as a result of our financial strength, as evidenced by the financial strength ratings as assigned by independent rating agencies. See also ITEM 1, Business - "Financial Strength Ratings". 60 -------------------------------------------------------------------------------- We maintain our own economic capital models to monitor and project our overall capital, as well as, the capital at our operating subsidiaries. A key input to the economic models is projected income and this input is continually compared to actual results, which may require a change in the capital strategy. In 2021, we repurchased 887,622 shares for$225.1 million in the open market and paid$246.7 million in dividends to adjust our capital position and enhance long term expected returns to our shareholders. During 2020, we repurchased 970,892 shares for$200.0 million in the open market and paid$249.1 million in dividends. We may at times enter into a Rule 10b5-1 repurchase plan agreement to facilitate the repurchase of shares. OnMay 22, 2020 , our existing Board authorization to purchase up to 30 million of our shares was amended to authorize the purchase of up to 32 million shares. As ofDecember 31, 2021 , we had repurchased 30.5 million shares under this authorization. We also repurchased$13.2 million of our long-term subordinated notes in 2020. We recognized a realized gain of$2.5 million on the repurchase. We may continue, from time to time, to seek to retire portions of our outstanding debt securities through cash repurchases, in open-market purchases, privately negotiated transactions or otherwise. Such repurchases, if any, will be subject to and depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors. The amounts involved in any such transactions, individually or in the aggregate, may be material. OnOctober 7, 2020 , we issued an additional$1.0 billion of 30 year senior notes with an interest coupon rate of 3.5%. These senior notes will mature onOctober 15, 2050 and will pay interest semi-annually.
On
Liquidity. Our liquidity requirements are generally met from positive cash flow from operations. Positive cash flow results from reinsurance and insurance premiums being collected prior to disbursements for claims, which disbursements generally take place over an extended period after the collection of premiums, sometimes a period of many years. Collected premiums are generally invested, prior to their use in such disbursements, and investment income provides additional funding for loss payments. Our net cash flows from operating activities were$3.8 billion and$2.9 billion for the years endedDecember 31, 2021 and 2020, respectively. Additionally, these cash flows reflected net tax payments of$98.0 million and net tax recoveries of$169.7 million for the years endedDecember 31, 2021 and 2020, respectively, as well as net catastrophe loss payments of$834.1 million and$661.5 million for the years endedDecember 31, 2021 and 2020, respectively. If disbursements for claims and benefits, policy acquisition costs and other operating expenses were to exceed premium inflows, cash flow from reinsurance and insurance operations would be negative. The effect on cash flow from insurance operations would be partially offset by cash flow from investment income. Additionally, cash inflows from investment maturities and dispositions, both short-term investments and longer term maturities are available to supplement other operating cash flows. As the timing of payments for claims and benefits cannot be predicted with certainty, we maintain portfolios of long term invested assets with varying maturities, along with short-term investments that provide additional liquidity for payment of claims. AtDecember 31, 2021 andDecember 31, 2020 , we held cash and short-term investments of$2.6 billion and$1.9 billion , respectively. Our short-term investments are generally readily marketable and can be converted to cash. In addition to these cash and short-term investments, atDecember 31, 2021 , we had$1.4 billion of available for sale fixed maturity securities maturing within one year or less,$7.2 billion maturing within one to five years and$6.7 billion maturing after five years. Our$1.8 billion of equity securities are comprised primarily of publicly traded securities that can be easily liquidated. We believe that these fixed maturity and equity securities, in conjunction with the short-term investments and positive cash flow from operations, provide ample sources of liquidity for the expected payment of losses in the near future. We do not anticipate selling a significant amount of securities or using available credit facilities to pay losses 61 --------------------------------------------------------------------------------
and LAE but have the ability to do so. Sales of securities might result in
realized capital gains or losses. At
Management generally expects annual positive cash flow from operations, which reflects the strength of overall pricing. However, given the recent set of catastrophic events, cash flow from operations may decline and could become negative in the near term as significant claim payments are made related to the catastrophes. However, as indicated above, the Company has ample liquidity to settle its catastrophe claims. In addition to our cash flows from operations and liquid investments, we also have multiple active credit facilities that provide commitments of up to$1.2 billion of collateralized standby letters of credit to support business written by ourBermuda operating subsidiaries. In addition, the Company has the ability to request access to an additional$340.0 million of uncommitted credit facilities, which would require approval from the applicable lender. There is no guarantee the uncommitted capacity will be available to us on a future date. EffectiveMay 26, 2016 , Group,Bermuda Re and Everest International entered into a five year,$800.0 million senior credit facility with a syndicate of lenders. TheMay 26, 2016 senior credit facility is referred to as the "2016 Group Credit Facility".Wells Fargo Corporation ("Wells Fargo Bank ") is the administrative agent for the 2016 Group Credit Facility. EffectiveMay 26, 2021 , the term of the 2016 Group Credit Facility expired. The Company elected not to renew this facility to allow for the replacement by other collateralized letter of credit facilities such as those described below. As a result of the non-renewal inMay 2021 , letter of credit commitment/availability in the 2016 Group Credit Facility as ofDecember 21, 2021 is limited only to the remaining$39.2 million of letters of credit currently in force and scheduled to expire in 2022. No additional letters of credit will be issued under the 2016 Group Credit Facility, and the facility will be dormant once the remaining letters of credit have expired. As ofDecember 31, 2021 , the Company was in compliance with all Group Credit Facility covenants. AtDecember 31, 2020 , the Company had no outstanding short-term borrowings from the Group Credit Facility revolving credit line. AtDecember 31, 2020 , the Group Credit Facility had$164.2 million outstanding letters of credit under tranche one and$589.7 million outstanding letters of credit under tranche two. EffectiveAugust 9, 2021 Bermuda Re entered into a new letter of credit issuance facility withCitibank N.A . which superseded the previous letter of credit issuance facility withCitibank N.A . that was effectiveDecember 31, 2020 . Both of these agreements are referred to as the "Bermuda Re Citibank Letter of Credit Facility". The current Bermuda Re Letter of Credit Facility provides for the committed issuance of up to$230.0 million of secured letters of credit. In addition, the facility provides for the uncommitted issuance of up to$140.0 million , which may be accessible via written request by the Company and corresponding authorization fromCitibank N.A . AtDecember 31, 2021 the Bermuda Re Citibank Letter of Credit Facility had$333.4 million of outstanding letters of credit -$226.5 million outstanding from the committed portion of the credit facility and$106.9 million outstanding from the uncommitted portion of the credit facility. AtDecember 31, 2020 , the Bermuda Re Citibank Letter of Credit Facility had$185.5 million of outstanding letters of credit. EffectiveFebruary 23, 2021 , Bermuda Re entered into a letter of credit issuance facility with Wells Fargo referred to as the "Bermuda Re Wells Fargo Bilateral Letter of Credit Facility." The Bermuda Re Wells Fargo Bilateral Letter of Credit Facility originally provided for the issuance of up to$50.0 million of secured letters of credit. EffectiveMay 5, 2021 , the agreement was amended to provide for the issuance of up to$500.0 million of secured letters of credit. 62 --------------------------------------------------------------------------------
At
EffectiveAugust 27, 2021 Bermuda Re entered into a letter of credit issuance facility withBayerische Landesbank , an agreement referred to as the "Bermuda Re Bayerische Landesbank Credit Facility". The Bermuda Re Bayerische Landesbank Credit Facility provides for the committed issuance of up to$200.0 million of secured letters of credit.
At
EffectiveOctober 8, 2021 Bermuda Re entered into a letter of credit issuance facility with Lloyd'sBank Corporate Markets PLC , an agreement referred to as the "Bermuda Re Lloyd's Bank Credit Facility". The Bermuda Re Lloyd's Bank Credit Facility provides for the committed issuance of up to$50.0 million of secured letters of credit, and subject to credit approval a maximum total facility amount of$250.0 million .
At
EffectiveNovember 3, 2021 Bermuda Re entered into a letter of credit issuance facility with Barclays Bank PLC, an agreement referred to as the "Bermuda Re Barclays Credit Facility". The Bermuda Re Barclays Credit Facility provides for the committed issuance of up to$200.0 million of secured letters of credit.
At
EffectiveMay 12, 2020 ,Everest International amended its credit facility with Lloyds Bank plc ("Everest International Credit Facility"). The current amendment of the Everest International Credit Facility provided up to £52.2 million for the issuance of standby letters of credit on a collateralized basis. However, the Everest International Credit Facility was subsequently cancelled effectiveDecember 20, 2021 and was no longer available for use.
At
Costs incurred in connection with the various credit facilities were
Everest Re is a member of the Federal Home Loan Banks ("FHLB") organization, which allowsEverest Re to borrow up to 10% of its statutory admitted assets. As ofDecember 31, 2021 ,Everest Re had admitted assets of approximately$20.3 billion which provides borrowing capacity of up to approximately$2.0 billion . As ofDecember 31, 2021 ,Everest Re had$519.0 million of outstanding borrowings are scheduled to mature in the fourth quarter of 2022 and have interest rates payable between 0.53% and 0.65%. Exposure to Catastrophes. Like other insurance and reinsurance companies, we are exposed to multiple insured losses arising out of a single occurrence, whether a natural event, such as a hurricane or an earthquake, or other catastrophe, such as an explosion at a major factory. A large catastrophic event can be expected to generate insured losses to multiple reinsurance treaties, facultative certificates and direct insurance policies across various lines of business. We focus on potential losses that could result from any single event, or series of events as part of our evaluation and monitoring of our aggregate exposures to catastrophic events. Accordingly, we employ various techniques to estimate the amount of loss we could sustain from any single catastrophic event or series of events in various 63 -------------------------------------------------------------------------------- geographic areas. These techniques range from deterministic approaches, such as tracking aggregate limits exposed in catastrophe-prone zones and applying reasonable damage factors, to modeled approaches that attempt to scientifically measure catastrophe loss exposure using sophisticated Monte Carlo simulation techniques that forecast frequency and severity of potential losses on a probabilistic basis. No single computer model or group of models is currently capable of projecting the amount and probability of loss in all global geographic regions in which we conduct business. In addition, the form, quality and granularity of underwriting exposure data furnished by (re)insureds is not uniformly compatible with the data requirements for our licensed models, which adds to the inherent imprecision in the potential loss projections. Further, the results from multiple models and analytical methods must be combined to estimate potential losses by and across business units. Also, while most models have been updated to incorporate claims information from recent catastrophic events, catastrophe model projections are still inherently imprecise. In addition, uncertainties with respect to future climatic patterns and cycles could add further uncertainty to loss projections from models based on historical data. Nevertheless, when combined with traditional risk management techniques and sound underwriting judgment, catastrophe models are a useful tool for underwriters to price catastrophe exposed risks and for providing management with quantitative analyses with which to monitor and manage catastrophic risk exposures by zone and across zones for individual and multiple events. Projected catastrophe losses are generally summarized in terms of the PML. We define PML as our anticipated loss, taking into account contract terms and limits, caused by a single catastrophe affecting a broad contiguous geographic area, such as that caused by a hurricane or earthquake. The PML will vary depending upon the modeled simulated losses and the make-up of the in force book of business. The projected severity levels are described in terms of "return periods", such as "100-year events" and "250-year events". For example, a 100-year PML is the estimated loss to the current in-force portfolio from a single event which has a 1% probability of being exceeded in a twelve month period. In other words, it corresponds to a 99% probability that the loss from a single event will fall below the indicated PML. It is important to note that PMLs are estimates. Modeled events are hypothetical events produced by a stochastic model. As a result, there can be no assurance that any actual event will align with the modeled event or that actual losses from events similar to the modeled events will not vary materially from the modeled event PML. From an enterprise risk management perspective, management sets limits on the levels of catastrophe loss exposure we may underwrite. The limits are revised periodically based on a variety of factors, including but not limited to our financial resources and expected earnings and risk/reward analyses of the business being underwritten. Management estimates that the projected net economic loss from its largest 100-year event in a given zone represents approximately 4.8% of itsDecember 31, 2021 shareholders' equity. Economic loss is the PML exposure, net of third party reinsurance, reduced by estimated reinstatement premiums to renew coverage and estimated income taxes. The impact of income taxes on the PML depends on the distribution of the losses by corporate entity, which is also affected by inter-affiliate reinsurance. Management also monitors and controls its largest PMLs at multiple points along the loss distribution curve, such as loss amounts at the 20, 50, 100, 250, 500 and 1,000 year return periods. This process enables management to identify and control exposure accumulations and to integrate such exposures into enterprise risk, underwriting and capital management decisions.
Our catastrophe loss projections, segmented by risk zones, are updated quarterly and reviewed as part of a formal risk management review process.
We believe that our greatest worldwide 1 in 100 year exposure to a single
catastrophic event is to an earthquake event affecting
64
--------------------------------------------------------------------------------million. See also table under ITEM 1, "Business - Risk Management of Underwriting and Retrocession Arrangements".
If such a single catastrophe loss were to occur, management estimates that the economic loss to us would be approximately$483 million . The estimate involves multiple variables, including which Everest entity would experience the loss, and as a result there can be no assurance that this amount would not be exceeded. We may purchase reinsurance to cover specific business written or the potential accumulation or aggregation of exposures across some or all of our operations. Reinsurance purchasing decisions consider both the potential coverage and market conditions including the pricing, terms, conditions, availability and collectability of coverage, with the aim of securing cost effective protection from financially secure counterparts. The amount of reinsurance purchased has varied over time, reflecting our view of our exposures and the cost of reinsurance. Information Technology. Everest's information technology is a key component of its business operations. Information technology systems and services are hosted at public and private cloud service providers across multiple datacenters with processing performed at the office locations of our operating subsidiaries and branches. We have implemented security procedures, and regularly assess and enhance our security protocols, to ensure that our key business systems are protected, secured and backed up at off-site locations so that they can be restored promptly if necessary. We have business continuity plans and disaster recovery plans along with periodic testing of those plans to ensure we are capable of providing uninterrupted technology services in the event of major systems outages with alternative secure datacenters available in case of broader outages. Our business operations depend on the proper functioning and availability of our information technology platform, which includes data processing and related electronic communications. We communicate electronically internally and externally with our brokers, program managers, clients, third-party vendors, regulators, and others. These communications and the data we handle may include personal, confidential or proprietary information. We ensure that all our systems, data and electronic transmissions are appropriately protected with the latest technology safeguards and meet regulatory standards. Despite these safeguards, a significant cyber incident, including system failure, security breach and disruption by malware or other damage could interrupt or delay our operations and possibly our results. This type of incident may result in a violation of applicable data security, privacy, or other laws, damage our reputation, cause a loss of customers or give rise to regulatory scrutiny as well as monetary fines and other penalties. Management is not aware of a cybersecurity incident that has had a material impact on our operations.
Expected Cash Outflows. The following table shows our significant expected cash outflows for the period indicated.
Payments due by period
Less than More than
(Dollars in millions) Total 1 year 1-3 years 3-5 years 5 years
Senior notes $ 2,400.0 $ - $ - $ - $ 2,400.0
Long term notes 225.4 - - - 225.4
Interest expense (1) 2,697.6 91.8 183.6 183.6 2,238.6
Operating lease agreements 204.1 21.1 40.9 33.3 108.8
Gross reserve for losses
and LAE (2) 19,009.5 2,083.9 7,454.0 4,053.1 5,418.5
Total $ 24,536.6 $ 2,196.8 $ 7,678.5 $ 4,270.0 $ 10,391.3 (Some amounts may not reconcile due to rounding.)
(1)Interest expense on long term notes is calculated at the variable floating
rate of 2.54% as of
(2)Loss and LAE reserves represent management's best estimate of losses from
claim and related settlement costs. Both the amounts and timing of such payments
are estimates, and the inherent variability of resolving claims as well as
changes in market conditions make the timing of cash flows uncertain. Therefore,
the ultimate amount and timing of loss and LAE payments could differ from our
estimates.
65-------------------------------------------------------------------------------- The cash outflows for senior notes and long term notes are the responsibility of Holdings. We strive to ensure that we have sufficient cash flow, liquidity, investments and access to capital markets to satisfy these obligations. Holdings generally depends upon dividends fromEverest Re , its operating insurance subsidiary for its funding, capital contributions from Group or access to the capital markets. Our various operating insurance and reinsurance subsidiaries have sufficient cash flow, liquidity and investments to settle outstanding reserves for losses and LAE. Management believes that we, and each of our entities, have sufficient financial resources or ready access thereto, to meet all obligations. Dividends. During 2021 and 2020, we declared and paid common shareholder dividends of$246.7 million and$249.1 million , respectively. As an insurance holding company, we are partially dependent on dividends and other permitted payments from our subsidiaries to pay cash dividends to our shareholders. The payment of dividends to Group byHoldings Ireland and Everest Dublin Holdings is subject to Irish corporate and regulatory restrictions; the payment of dividends to Holdings Ireland by Holdings and to Holdings byEverest Re is subject toDelaware regulatory restrictions; and the payment of dividends to Group by Bermuda Re,Everest International orMt. Logan Re is subject toBermuda insurance regulatory restrictions. Management expects that, absent extraordinary catastrophe losses, such restrictions should not affectEverest Re's ability to declare and pay dividends sufficient to support Holdings' general corporate needs and that Holdings Ireland,Everest Dublin Holdings ,Bermuda Re and Everest International will have the ability to declare and pay dividends sufficient to support Group's general corporate needs. For the years endedDecember 31, 2021 and 2020,Everest Re paid no dividends to Holdings, and EGS paid no dividends to Holdings. For the years endedDecember 31, 2021 and 2020, Bermuda Re paid dividends to Group of$300.0 million and$650.0 million , respectively;Everest International paid dividends to Group of$274.3 million and$0.0 million , respectively; andMt. Logan Re paid no dividends to Group. See ITEM 1, "Business - Regulatory Matters - Dividends" and ITEM 8, "Financial Statements and Supplementary Data" - Note 14 of Notes to Consolidated Financial Statements.
Market Sensitive Instruments.
TheSEC's Financial Reporting Release #48 requires registrants to clarify and expand upon the existing financial statement disclosure requirements for derivative financial instruments, derivative commodity instruments and other financial instruments (collectively, "market sensitive instruments"). We do not generally enter into market sensitive instruments for trading purposes. Our current investment strategy seeks to maximize after-tax income through a high quality, diversified, fixed maturity portfolio, while maintaining an adequate level of liquidity. Our mix of investments is adjusted periodically, consistent with our current and projected operating results and market conditions. The fixed maturity securities in the investment portfolio are comprised of non-trading available for sale securities. Additionally, we have invested in equity securities. The overall investment strategy considers the scope of present and anticipated Company operations. In particular, estimates of the financial impact resulting from non-investment asset and liability transactions, together with our capital structure and other factors, are used to develop a net liability analysis. This analysis includes estimated payout characteristics for which our investments provide liquidity. This analysis is considered in the development of specific investment strategies for asset allocation, duration and credit quality. The change in overall market sensitive risk exposure principally reflects the asset changes that took place during the period. Interest Rate Risk. Our$29.7 billion investment portfolio atDecember 31, 2021 , is principally comprised of fixed maturity securities, which are generally subject to interest rate risk and some foreign currency exchange rate risk, and some equity securities, which are subject to price fluctuations and some foreign exchange rate risk. The overall economic impact of the foreign exchange risks on the investment portfolio is partially mitigated by changes in the dollar value of foreign currency denominated liabilities and their associated income statement impact. 66 -------------------------------------------------------------------------------- Interest rate risk is the potential change in value of the fixed maturity securities portfolio, including short-term investments, from a change in market interest rates. In a declining interest rate environment, it includes prepayment risk on the$3.4 billion of mortgage-backed securities in the$22.3 billion fixed maturity portfolio. Prepayment risk results from potential accelerated principal payments that shorten the average life and thus the expected yield of the security. The tables below display the potential impact of market value fluctuations and after-tax unrealized appreciation on our fixed maturity portfolio (including$1.2 billion of short-term investments) for the period indicated based on upward and downward parallel and immediate 100 and 200 basis point shifts in interest rates. For legal entities with aU.S. dollar functional currency, this modeling was performed on each security individually. To generate appropriate price estimates on mortgage-backed securities, changes in prepayment expectations under different interest rate environments were taken into account. For legal entities with a non-U.S. dollar functional currency, the effective duration of the involved portfolio of securities was used as a proxy for the market value change under the various interest rate change scenarios. Impact of Interest Rate Shift in Basis Points At December 31, 2021 -200 -100 - 100 200 (Dollars in millions) Total Market/Fair Value$ 24,972.8 $ 24,229.7 $ 23,486.6 $ 22,743.5 $ 22,000.5 Market/Fair Value Change from Base (%) 6.3% 3.2% -% (3.2)% (6.3)% Change in Unrealized Appreciation After-tax from Base ($)$ 1,293.7 $ 646.8 $ -$ (646.8) $ (1,293.7) Impact of Interest Rate Shift in Basis Points At December 31, 2020 -200 -100 - 100 200 (Dollars in millions) Total Market/Fair Value$ 22,618.8 $ 21,897.0 $ 21,175.1 $ 20,453.3 $ 19,731.4 Market/Fair Value Change from Base (%) 6.8% 3.4% -% (3.4)% (6.8)% Change in Unrealized Appreciation After-tax from Base ($)$ 1,264.4 $ 632.2 $ -$ (632.2) $ (1,264.4) We had$19.0 billion and$16.3 billion of gross reserves for losses and LAE as ofDecember 31, 2021 and 2020, respectively. These amounts are recorded at their nominal value, as opposed to present value, which would reflect a discount adjustment to reflect the time value of money. Since losses are paid out over a period of time, the present value of the reserves is less than the nominal value. As interest rates rise, the present value of the reserves decreases and, conversely, as interest rates decline, the present value increases. These movements are the opposite of the interest rate impacts on the fair value of investments. While the difference between present value and nominal value is not reflected in our financial statements, our financial results will include investment income over time from the investment portfolio until the claims are paid. Our loss and loss reserve obligations have an expected duration of approximately 4.0 years, which is reasonably consistent with our fixed income portfolio. If we were to discount our loss and LAE reserves, net of ceded reserves, the discount would be approximately$1.0 billion resulting in a discounted reserve balance of approximately$16.0 billion , representing approximately 68.2% of the value of the fixed maturity investment portfolio funds. Equity Risk. Equity risk is the potential change in fair and/or market value of the common stock, preferred stock and mutual fund portfolios arising from changing prices. Our equity investments consist of a diversified portfolio of individual securities and mutual funds, which invest principally in high quality common and preferred stocks that are traded on the major exchanges, and mutual fund investments in emerging market debt. The primary objective of the equity portfolio is to obtain greater total return relative to our core bonds over time through market appreciation and income. 67 -------------------------------------------------------------------------------- The tables below display the impact on fair/market value and after-tax change in fair/market value of a 10% and 20% change in equity prices up and down for the period indicated. Impact of Percentage Change in Equity Fair/Market Values At December 31, 2021 (Dollars in millions) -20% -10% 0% 10% 20% Fair/Market Value of the Equity Portfolio$ 1,460.7 $ 1,643.3 $ 1,825.9 $ 2,008.5 $ 2,191.1 After-tax Change in Fair/Market Value$ (290.1) $ (145.0) $ -$ 145.0 $ 290.1 Impact of Percentage Change in Equity Fair/Market Values At December 31, 2020 (Dollars in millions) -20% -10% 0% 10% 20% Fair/Market Value of the Equity Portfolio$ 1,177.8 $ 1,325.0 $ 1,472.2 $ 1,619.5 $ 1,766.7 After-tax Change in Fair/Market Value$ (234.0) $ (117.0) $ -$ 117.0 $ 234.0 Foreign Currency Risk. Foreign currency risk is the potential change in value, income and cash flow arising from adverse changes in foreign currency exchange rates. Each of our non-U.S. /Bermuda ("foreign") operations maintains capital in the currency of the country of its geographic location consistent with local regulatory guidelines. Each foreign operation may conduct business in its local currency, as well as the currency of other countries in which it operates. The primary foreign currency exposures for these foreign operations are the Canadian Dollar, the Singapore Dollar, the British Pound Sterling and the Euro. We mitigate foreign exchange exposure by generally matching the currency and duration of our assets to our corresponding operating liabilities. In accordance with FASB guidance, the impact on the market value of available for sale fixed maturities due to changes in foreign currency exchange rates, in relation to functional currency, is reflected as part of other comprehensive income. Conversely, the impact of changes in foreign currency exchange rates, in relation to functional currency, on other assets and liabilities is reflected through net income as a component of other income (expense). In addition, we translate the assets, liabilities and income of non-U.S. dollar functional currency legal entities to theU.S. dollar. This translation amount is reported as a component of other comprehensive income. InJanuary 2020 , theUnited Kingdom exited theEuropean Union (commonly referred to as "Brexit"). The Company has a Lloyd's of London Syndicate and Bermuda Re has a branch operation in theUnited Kingdom . The nature and extent of the impact of Brexit on regulation, interest rates, currency exchange rates and financial markets is still uncertain and may adversely affect our operations. The tables below display the potential impact of a parallel and immediate 10% and 20% increase and decrease in foreign exchange rates on the valuation of invested assets subject to foreign currency exposure for the periods indicated. This analysis includes the after-tax impact of translation from transactional currency to functional currency as well as the after-tax impact of translation from functional currency to theU.S. dollar reporting currency. Change in Foreign Exchange Rates in Percent At December 31, 2021 (Dollars in millions) -20% -10% 0% 10% 20% Total After-tax Foreign Exchange Exposure$ (688.1) $ (344.1) $ -$ 344.1 $ 688.1 Change in Foreign Exchange Rates in Percent At December 31, 2020 (Dollars in millions) -20% -10% 0% 10% 20% Total After-tax Foreign Exchange Exposure$ (605.8) $ (302.9) $ -$ 302.9 $ 605.8 68
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Safe Harbor Disclosure.
This report contains forward-looking statements within the meaning of theU.S. federal securities laws. We intend these forward-looking statements to be covered by the safe harbor provisions for forward-looking statements in the federal securities laws. In some cases, these statements can be identified by the use of forward-looking words such as "may", "will", "should", "could", "anticipate", "estimate", "expect", "plan", "believe", "predict", "potential" and "intend". Forward-looking statements contained in this report include information regarding our reserves for losses and LAE, the impact of the Tax Cut and Jobs Act, the adequacy of capital in relation to regulatory required capital, the adequacy of our provision for uncollectible balances, estimates of our catastrophe exposure, the effects of catastrophic and pandemic events on our financial statements, the ability ofEverest Re , Holdings, Holdings Ireland,Dublin Holdings ,Bermuda Re and Everest International to pay dividends and the settlement costs of our specialized equity index put option contracts. Forward-looking statements only reflect our expectations and are not guarantees of performance. These statements involve risks, uncertainties and assumptions. Actual events or results may differ materially from our expectations. Important factors that could cause our actual events or results to be materially different from our expectations include those discussed under the caption ITEM 1A, "Risk Factors". We undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise.
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