EVEREST GROUP, LTD. 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 the global 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 continued to be very competitive, particularly in the property catastrophe and casualty reinsurance lines of business. 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, provide capital markets with access to insurance and reinsurance risk exposure. The capital markets demand for these products is being primarily driven by the current low interest environment and the desire to achieve greater risk diversification and potentially higher returns on their investments. This increased competition is generally having a negative impact on rates, terms and conditions; however, the impact varies widely by market and coverage. The industry is currently dealing with the impacts of a global pandemic, COVID-19. Globally, many countries have mandated that their citizens remain at home and non-essential businesses have been physically closed. We have closed our physical offices; however, we have activated our operational resiliency plan across our global footprint and all of our critical operations are functioning effectively from remote locations. We continue to service and meet the needs of our clients while ensuring the safety and health of our employees and customers. The pandemic has caused significant volatility in the global financial markets. Interest rates plummeted, credit spreads widened and the equity markets lost value. We saw our fixed maturity and equity portfolios decline in value; however, some of the declines reflected in ourMarch 31, 2020 financial statements have already recovered in April. Nevertheless, the lack of business activity may lead to an increase in bankruptcies and corresponding credit losses. Our other invested assets are comprised primarily of limited partnership investments. The change in limited partnership values are generally recorded on a quarter lag, As a result, the impact on the limited partnership values during the first quarter volatility will not be reflected in our results until the second quarter of 2020. 35
-------------------------------------------------------------------------------- There will also be a negative impact on the industry underwriting results. With the closing of non-essential businesses, there has been a significant decline in business activity. To the extent that premiums are based on business activity, there will be a decline in premium volume. Incurred losses from the pandemic will be impacted by the duration of the event and will vary by line of business and geographical location. For the quarter endedMarch 31, 2020 , our underwriting results include$150 million of estimated losses related to the pandemic. We anticipate this pandemic could have a meaningful impact on our revenue, as well as net and operating income in future quarters as a result of reinsurance and insurance claims due to the pandemic and resulting macro-economic market conditions. Many regulators have issued moratoriums on the cancellation of policies for the non-payment of premiums and also on non-renewals. We are complying with the various regulatory requests for accommodations to policyholders during this difficult period. The moratoriums combined with the forced closure of businesses may lead to an increase in uncollectible premium expense. Prior to the pandemic, there was a growing industry consensus that there was some firming of (re)insurance rates for the areas impacted by the recent catastrophes. Rates also appeared to be firming in some of the casualty lines of business, particularly in the casualty lines that had seen significant losses such as excess casualty and directors' and officers' liability. Other casualty lines were experiencing modest rate increase, while some lines such as workers' compensation were experiencing softer market conditions. It is too early to tell what will be the impact on pricing conditions but it is likely to change depending on the line of business and geography. While we are unable to predict the full impact the pandemic will have on the insurance industry as it continues to have a negative impact on the global economy, we are well positioned to continue to service our clients. Our capital position remains a source of strength, with high quality invested assets, significant liquidity, low financial leverage, and a low operating expense ratio. Our diversified global platform with its broad mix of products, distribution and geography is resilient. 36 --------------------------------------------------------------------------------
Financial Summary.
We monitor and evaluate our overall performance based upon financial results.
The following table displays a summary of the consolidated net income (loss),
ratios and shareholders' equity for the periods indicated.
Three Months Ended Percentage
March 31, Increase/
(Dollars in millions) 2020 2019 (Decrease)
Gross written premiums $ 2,570.9 $ 2,127.1 20.9 %
Net written premiums 2,201.5 1,851.7 18.9 %
REVENUES:
Premiums earned $ 2,036.8 $ 1,732.7 17.6 %
Net investment income 147.8 141.0 4.8 %
Net realized capital gains (losses) (210.6) 92.2 NM %
Net derivative gain (loss) (15.4) 3.2 NM %
Other income (expense) 23.4 (3.3) NM %
Total revenues 1,982.0 1,965.8 0.8 %
CLAIMS AND EXPENSES:
Incurred losses and loss adjustment 1,430.8 1,048.6 36.5 %
expenses
Commission, brokerage, taxes and fees 448.5 389.5 15.2 %
Other underwriting expenses 128.9 99.0 30.2 %
Corporate expenses 9.8 6.7 47.8 %
Interest, fees and bond issue cost 7.6 7.6 (0.6) %
amortization expense
Total claims and expenses 2,025.6 1,551.3 30.6 %
INCOME (LOSS) BEFORE TAXES (43.6) 414.5 (110.5) %
Income tax expense (benefit) (60.2) 60.0 (200.4) %
NET INCOME (LOSS) $ 16.6 $ 354.6 (95.3) %
RATIOS: Point Change
Loss ratio 70.3 % 60.5 % 9.8
Commission and brokerage ratio 22.0 % 22.5 % (0.5)
Other underwriting expense ratio 6.3 % 5.7 % 0.6
Combined ratio 98.6 % 88.7 % 9.9
At At Percentage
March 31, December 31, Increase/
(Dollars in millions, except per share 2020 2019 (Decrease)
amounts)
Balance sheet data:
Total investments and cash $ 20,336.6 $ 20,748.5 (2.0) %
Total assets 27,222.6 27,324.1 (0.4) %
Loss and loss adjustment expense reserves 13,820.5 13,611.3 1.5 %
Total debt 682.2 633.8 7.7 %
Total liabilities 18,641.7 18,191.1 2.5 %
Shareholders' equity 8,580.9 9,132.9 (6.0) %
Book value per share 214.59 223.85 (4.1) %
(NM, not meaningful)
(Some amounts may not reconcile due to
rounding.)
Revenues.
Premiums. Gross written premiums increased by 20.9% to $2,570.9 million for the
three months ended March 31, 2020 , compared to $2,127.1 million for the three
months ended March 31, 2019 , reflecting a $245.7 million , or 16.0%, increase in
our reinsurance business and a $198.0 million , or 33.3%, increase in our
insurance business. The increase in reinsurance premiums was mainly due to
increases in treaty casualty writings, treaty property business, facultative
business and financial lines. The rise in insurance premiums was primarily due
to increases in many lines of business, including property, casualty, energy,
specialty lines, accident and health and business written through the Lloyd's
Syndicate.
Net written premiums increased by 18.9% to $2,201.5 million for the three months
ended March 31, 2020 , compared to $1,851.7 million for the three months ended
March 31, 2019 . The changes are consistent with the change in gross written
premiums. Premiums earned increased by 17.6% to $2,036.8 million for the three
37
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months ended March 31, 2020 , compared to $1,732.7 million for the three months
ended March 31, 2019 . The change in premiums earned relative to net written
premiums is the result of timing; premiums are earned ratably over the coverage
period whereas written premiums are recorded at the initiation of the coverage
period.
Net Investment Income. Net investment income increased by 4.8% to $147.8 million
for the three months ended March 31, 2020 compared with investment income of
$141.0 million for the three months ended March 31, 2019 . Net pre-tax investment
income, as a percentage of average invested assets, was 2.9% for the three
months ended March 31, 2020 compared to 3.0% for the three months ended March
31, 2019 . The increase in income was primarily the result of higher income from
our growing fixed maturity portfolio and from our limited partnerships,
partially offset by lower income from other invested assets.
Net Realized Capital Gains (Losses). Net realized capital losses were $210.6
million and net realized capital gains were $92.2 million for the three months
ended March 31, 2020 and 2019, respectively. The net realized capital losses of
$210.6 million for the three months ended March 31, 2020 were comprised of
$145.1 million of net losses from fair value re-measurements, $43.7 million of
net realized capital losses from sales of investments and $21.8 million of
allowances for credit losses. The net realized capital gains of $92.2 million
for the three months ended March 31, 2019 were comprised of $84.4 million of net
gains from fair value re-measurements and $10.7 million of net realized capital
gains from sales of investments, partially offset by $2.9 million of
other-than-temporary impairments.
Net Derivative Gain (Loss). In 2005 and prior, we sold seven equity index put
option contracts, two of which remained outstanding at March 31, 2020 . These
contracts meet the definition of a derivative in accordance with FASB guidance
and as such, are fair valued each quarter with the change recorded as net
derivative gain or loss in the consolidated statements of operations and
comprehensive income (loss). As a result of these adjustments in value, we
recognized net derivative losses of $15.4 million and net derivative gains of
$3.2 million for the three months ended March 31, 2020 and 2019, respectively.
The change in the fair value of these equity index put option contracts is
generally indicative of the change in the equity markets and interest rates over
the same periods.
Other Income (Expense). We recorded other income of $23.4 million and other
expense of $3.3 million for the three months ended March 31, 2020 and 2019,
respectively. The change was primarily the result of fluctuations in foreign
currency exchange rates, income related to Mt. Logan Re and changes in deferred
gains related to any retroactive reinsurance transactions. We recognized foreign
currency exchange income of $20.6 million and foreign currency exchange expense
of $0.3 million for the three months ended March 31, 2020 and 2019,
respectively.
38
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Claims and Expenses.
Incurred Losses and Loss Adjustment Expenses. The following tables present our incurred losses and loss adjustment expenses ("LAE") for the periods indicated.
Three Months Ended March 31,
Current Ratio %/ Prior Ratio %/ Total Ratio %/
(Dollar in millions) Year Pt Change Years Pt Change Incurred Pt Change
2020
Attritional $ 1,403.4 68.9 % $ (2.6) -0.1 % $ 1,400.8 68.8 %
Catastrophes 30.0 1.5 % - - % 30.0 1.5 %
Total $ 1,433.4 70.4 % $ (2.6) -0.1 % $ 1,430.8 70.3 %
2019
Attritional
25.0 1.4 % - - % 25.0 1.4 %
Total $ 1,050.1 60.6 % $ (1.6) -0.1 % $ 1,048.6 60.5 %
Variance 2020/2019 Attritional$ 378.3 9.7 pts$ (1.0) - pts$ 377.2 9.7 pts Catastrophes 5.0 0.1 pts - - pts 5.0 0.1 pts Total$ 383.3 9.8 pts$ (1.0) - pts$ 382.2 9.8 pts Incurred losses and LAE increased by 36.5% to$1,430.8 million for the three months endedMarch 31, 2020 , compared to$1,048.6 million for the three months endedMarch 31, 2019 , primarily due to an Increase of$378.3 million in current year attritional losses, mainly due to$150.0 million of losses related to the COVID-19 pandemic, the impact of the increase in premiums earned and an increase of$5.0 million in current year catastrophe losses. The current year catastrophe losses of$30.0 million for the three months endedMarch 31, 2020 related to theNashville tornadoes ($10.0 million ), Australia East Coast Storm ($10.0 million ) and the 2020 Australia fires ($10.0 million ). The$25.0 million of current year catastrophe losses for the three months endedMarch 31, 2019 related to the Townsville monsoon inAustralia ($25.0 million ). Commission, Brokerage, Taxes and Fees. Commission, brokerage, taxes and fees increased by 15.2% to$448.5 million for the three months endedMarch 31, 2020 , compared to$389.5 million for the three months endedMarch 31, 2019 . 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$128.9 million and$99.0 million for the three months endedMarch 31, 2020 and 2019, respectively. The increase in other underwriting expenses was mainly due to the impact of the increase in premiums earned. Corporate Expenses. Corporate expenses, which are general operating expenses that are not allocated to segments, were$9.8 million and$6.7 million for the three months endedMarch 31, 2020 and 2019, respectively. The increase was mainly due to higher incentive compensation expenses. Interest, Fees and Bond Issue Cost Amortization Expense. Interest, fees and other bond amortization expense was$7.6 million for the three months endedMarch 31, 2020 and 2019. Any variance in expense was primarily due to the movement in the floating interest rate related to the long term subordinated notes, which is reset quarterly per the note agreement. The floating rate was 4.08% as ofMarch 31, 2020 . Income Tax Expense (Benefit). We had an income tax benefit of$60.2 million and an income tax expense of$60.0 million for the three months endedMarch 31, 2020 and 2019, respectively. Income tax benefit or expense is primarily a function of the geographic location of the Company's pre-tax income and the statutory tax rates in those jurisdictions. The effective tax rate ("ETR") is primarily affected by tax-exempt investment income, foreign tax credits and dividends. Variations in the ETR generally result from changes in the relative levels of pre-tax income, including the impact of catastrophe losses and net capital gains (losses), among jurisdictions with different tax rates. The change in income tax expense (benefit) for the three months endedMarch 31, 2020 compared to the three months endedMarch 31, 2019 was primarily due to estimated incurred losses from the 39
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COVID-19 pandemic and the impact from the Coronavirus Aid, Relief and Economic Securities Act ("the CARES Act").
The CARES Act was passed byCongress and signed into law by the President onMarch 27, 2020 in response to the COVID-19 pandemic. Among the provisions of the CARES Act was a special tax provision which allows companies to elect to carryback five years net operating losses incurred in the 2018, 2019 and/or 2020 tax years. The Tax Cuts and Jobs Act of 2017 had eliminated net operating loss carrybacks for most companies. The Company determined that the special 5 year loss carryback tax provision provided a tax benefit of$31.0 million which it recorded in the quarter endedMarch 31, 2020 .
Net Income (Loss).
Our net income was$16.6 million and$354.6 million for the three months endedMarch 31, 2020 and 2019, respectively. The change was primarily driven by the financial component fluctuations explained above.
Ratios.
Our combined ratio increased by 9.9 points to 98.6% for the three months endedMarch 31, 2020 , compared to 88.7% for the three months endedMarch 31, 2019 . The loss ratio component increased 9.8 points for the three months endedMarch 31, 2020 over the same period last year mainly due to 7.4 points related to the$150.0 million of attritional losses related to the COVID-19 pandemic. The commission and brokerage ratio component decreased slightly to 22.0% for the three months endedMarch 31, 2020 compared to 22.5% for the three months endedMarch 31, 2019 . The decrease was mainly due to changes in the mix of business. The other underwriting expense ratio increased to 6.3% for the three months endedMarch 31, 2020 from 5.7% for the three months endedMarch 31, 2019 . The increase was mainly due to higher incentive compensation expenses.
Shareholders' Equity.
Shareholders' equity decreased by$552.0 million to$8,580.9 million atMarch 31, 2020 from$9,132.9 million atDecember 31, 2019 , principally as a result of$248.0 million of unrealized depreciation on investments net of tax, the repurchase of 970,892 common shares for$200.0 million ,$63.3 million of shareholder dividends,$50.8 million of net foreign currency translation adjustments,$4.2 million of cumulative adjustment from the adoption of ASU 2016-13 and$3.2 million of share-based compensation transactions, partially offset by$16.6 million of net income, and$0.9 million of net benefit plan obligation adjustments.
Consolidated Investment Results
Net Investment Income.
Net investment income increased by 4.8% to$147.8 million for the three months endedMarch 31, 2020 , compared with investment income of$141.0 million for the three months endedMarch 31, 2019 . The increase was primarily the result of higher income from our growing fixed maturity portfolio and from our limited partnerships, partially offset by lower income from other invested assets. 40 -------------------------------------------------------------------------------- The following table shows the components of net investment income for the periods indicated. Three Months Ended March 31, (Dollars in millions) 2020 2019 Fixed maturities$ 137.9 $ 126.7 Equity securities 3.5 3.5 Short-term investments and cash 2.2 4.2 Other invested assets Limited partnerships 21.6 8.3 Other (13.1) 3.0 Gross investment income before adjustments 152.1 145.7 Funds held interest income (expense) 8.2 6.0
Future policy benefit reserve income (expense) (0.2) (0.2) Gross investment income
160.1 151.4
Investment expenses (12.3) (10.5)
Net investment income $ 147.8 $ 141.0 (Some amounts may not reconcile due to rounding.)
The following tables show a comparison of various investment yields for the
periods indicated.
At At
March 31, December 31,
2020 2019
Imbedded pre-tax yield of cash and invested assets 3.4 % 3.4 %
Imbedded after-tax yield of cash and invested assets 3.0 % 3.0 %
Three Months Ended
March 31,
2020 2019Annualized pre-tax yield on average cash and invested 2.9 %
3.0 %
assets
Annualized after-tax yield on average cash and invested 2.6 % 2.6 %
assets
41
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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.
Three Months Ended March 31,
(Dollars in millions) 2020 2019 Variance
Gains (losses) from sales:
Fixed maturity securities, market value:
Gains $ 14.0 $ 16.1 $ (2.1)
Losses (28.1) (10.9) (17.2)
Total (14.1) 5.3 (19.3)
Equity securities, fair value:
Gains 2.6 5.7 (3.1)
Losses (30.2) (0.6) (29.6)
Total (27.6) 5.0 (32.6)
Other Invested Assets:
Gains 3.0 0.4 2.6
Losses (5.4) - (5.4)
Total (2.3) 0.4 (2.7)
Short Term Investments:
Gains 0.3 - 0.3
Total 0.3 - 0.3
Total net realized gains (losses) from sales:
Gains 19.9 22.2 (2.3)
Losses (63.6) (11.5) (52.1)
Total (43.7) 10.7 (54.4)
Allowance for credit losses (21.8) - (21.8)
Other-than-temporary impairments: - (2.9) 2.9
Gains (losses) from fair value adjustments: Fixed maturities, fair value (1.1) -
(1.1)
Equity securities, fair value (144.0) 84.4
(228.4)
Total (145.1) 84.4
(229.5)
Total net realized capital gains (losses)
(Some amounts may not reconcile due to rounding.)
Net realized capital losses were$210.6 million and net realized capital gains were$92.2 million for the three months endedMarch 31, 2020 and 2019, respectively. For the three months endedMarch 31, 2020 , we recorded$145.1 million of net losses from fair value re-measurements,$43.7 million of net realized capital losses from sales of investments and$21.8 million of allowances for credit losses. For the three months endedMarch 31, 2019 , we recorded$84.4 million of net gains from fair value re-measurements and$10.7 million of net realized capital gains from sales of investments, partially offset by$2.9 million of other-than-temporary impairments. The fixed maturity and equity sales for the three months endedMarch 31, 2020 and 2019 related primarily to adjusting the portfolios for overall market changes and individual credit shifts. Segment Results. The Reinsurance operation writes worldwide property and casualty reinsurance and specialty lines of business, on both a treaty and facultative basis, through reinsurance brokers, as well as directly with ceding companies. Business is written in theU.S. ,Bermuda , andIreland offices, as well as, through branches inCanada ,Singapore and theUnited Kingdom . The Insurance operation writes property and casualty insurance directly and through 42 -------------------------------------------------------------------------------- brokers, surplus lines brokers and general agents within theU.S. ,Canada andEurope through its offices in theU.S. ,Canada ,Ireland and a branch located inZurich . These segments are managed independently, but conform with corporate guidelines with respect to pricing, risk management, control of aggregate catastrophe exposures, capital, investments and support operations. Management generally monitors and evaluates the financial performance of these operating segments based upon their underwriting results. Underwriting results include earned premium less losses and loss adjustment expenses ("LAE") incurred, commission and brokerage expenses and other underwriting expenses. We measure our underwriting results using ratios, in particular loss, commission and brokerage and other underwriting expense ratios, which, respectively, divide incurred losses, commissions and brokerage and other underwriting expenses by premiums earned.
The Company does not maintain separate balance sheet data for its operating segments. Accordingly, the Company does not review and evaluate the financial results of its operating segments based upon balance sheet data.
The following discusses the underwriting results for each of our segments for the periods indicated.
Reinsurance.
The following table presents the underwriting results and ratios for the Reinsurance segment for the periods indicated.
Three Months Ended March 31,
(Dollars in millions) 2020 2019 Variance % Change
Gross written premiums $ 1,777.8 $ 1,532.1 $ 245.7 16.0 %
Net written premiums 1,613.1 1,394.6 218.5 15.7 %
Premiums earned $ 1,485.2 $ 1,307.5 $ 177.7 13.6 %
Incurred losses and LAE 1,020.6 772.2 248.4 32.2 %
Commission and brokerage 370.4 322.6 47.7 14.8 %
Other underwriting expenses 44.1 35.8 8.4 23.5 %
Underwriting gain (loss) $ 50.1 $ 176.9 $ (126.8) -71.7 %
Point Chg
Loss ratio 68.7 % 59.1 % 9.6
Commission and brokerage ratio 24.9 % 24.7 % 0.2
Other underwriting expense ratio 3.0 % 2.7 % 0.3 Combined ratio 96.6 % 86.5 % 10.1 (NM, Not Meaningful) (Some amounts may not reconcile due to rounding.) Premiums. Gross written premiums increased by 16.0% to$1,777.8 million for the three months endedMarch 31, 2020 from$1,532.1 million for the three months endedMarch 31, 2019 , primarily due to an increase in treaty casualty business, treaty property writings, facultative business and business written through ourBermuda andIreland offices. Net written premiums increased by 15.7% to$1,613.1 million for the three months endedMarch 31, 2020 compared to$1,394.6 million for the three months endedMarch 31, 2019 , which is consistent with the change in gross written premiums. Premiums earned increased by 13.6% to$1,485.2 million for the three months endedMarch 31, 2020 , compared to$1,307.5 million for the three months endedMarch 31, 2019 . The change in premiums earned relative to net written premiums is primarily the result of timing; premiums are earned ratably over the coverage period whereas written premiums are recorded at the initiation of the coverage period. 43 --------------------------------------------------------------------------------
Incurred Losses and LAE. The following table presents the incurred losses and LAE for the Reinsurance segment for the periods indicated.
Three Months Ended March 31,
Current Ratio %/ Prior Ratio %/ Total Ratio %/
(Dollars in millions) Year Pt Change Years Pt Change Incurred Pt Change
2020
Attritional $ 998.8 67.2 % $ (2.6) -0.2 % $ 996.1 67.0 %
Catastrophes 24.5 1.7 % - - % 24.5 1.7 %
Total Segment $ 1,023.3 68.9 % $ (2.6) -0.2 % $ 1,020.6 68.7 %
2019
Attritional $ 748.8 57.3 % $ (1.6) -0.1 % 747.2 57.2 %
Catastrophes 25.0 1.9 % - - % 25.0 1.9 %
Total Segment $ 773.8 59.2 % $ (1.6) -0.1 % $ 772.2 59.1 %
Variance 2020/2019
Attritional $ 250.0 9.9 pts $ (1.1) (0.1) pts 248.9 9.8 pts
Catastrophes (0.5) (0.2) pts - - pts (0.5) (0.2) pts
Total Segment $ 249.5 9.7 pts $ (1.1) (0.1) pts $ 248.4 9.6 pts
Incurred losses increased by 32.2% to $1,020.6 million for the three months
ended March 31, 2020 , compared to $772.2 million for the three months ended
March 31, 2019 . The increase was primarily due to an increase of $250.0 million
in current year attritional losses, mainly related to $110.0 million of losses
from the COVID-19 pandemic and the impact of the increase in premiums earned.
The current year catastrophe losses of $24.5 million for the three months ended
March 31, 2020 related primarily to the Australia East Coast storm ($10.0
million ), Australia fires ($10.0 million ) and the Nashville tornadoes ($4.5
million ). The current year catastrophe losses of $25.0 million for the three
months ended March 31, 2019 related to the Townsville monsoon in Australia
($25.0 million ).
Segment Expenses. Commission and brokerage expenses increased by 14.8% to $370.4
million for the three months ended March 31, 2020 compared to $322.6 million for
the three months ended March 31, 2019 . 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 $44.1 million for the three months
ended March 31, 2020 from $35.8 million for the three months ended March 31,
2019 . The increase was mainly due to the impact of the increases in premiums
earned and changes in the mix of business.
Insurance.
The following table presents the underwriting results and ratios for the Insurance segment for the periods indicated.
Three Months Ended March 31,
(Dollars in millions) 2020 2019 Variance % Change
Gross written premiums $ 793.1 $ 595.1 $ 198.0 33.3 %
Net written premiums 588.4 457.1 131.3 28.7 %
Premiums earned $ 551.6 $ 425.2 $ 126.4 29.7 %
Incurred losses and LAE 410.2 276.4 133.8 48.4 %
Commission and brokerage 78.2 66.8 11.4 17.1 %
Other underwriting expenses 84.7 63.2 21.5 34.0 %
Underwriting gain (loss) $ (21.5) $ 18.8 $ (40.3) -214.4 %
Point Chg
Loss ratio 74.4 % 65.0 % 9.4
Commission and brokerage ratio 14.2 % 15.7 % (1.5)
Other underwriting expense ratio 15.3 % 14.9 % 0.4
Combined ratio 103.9 % 95.6 % 8.3
(NM not meaningful)
(Some amounts may not reconcile due to rounding.)
44
-------------------------------------------------------------------------------- Premiums. Gross written premiums increased by 33.3% to$793.1 million for the three months endedMarch 31, 2020 compared to$595.1 million for the three months endedMarch 31, 2019 . This increase was related to most lines of business including property, casualty, energy, specialty lines, accident and health and business written through Lloyd's syndicate. Net written premiums increased by 28.7% to$588.4 million for the three months endedMarch 31, 2020 compared to$457.1 million for the three months endedMarch 31, 2019 . The change is consistent with the change in gross written premiums. Premiums earned increased 29.7% to$551.6 million for the three months endedMarch 31, 2020 compared to$425.2 million for the three months endedMarch 31, 2019 . The change in premiums earned relative to net written premiums is the result of timing; premiums are earned ratably over the coverage period whereas written premiums are recorded at the initiation of the coverage period.
Incurred Losses and LAE. The following table presents the incurred losses and LAE for the Insurance segment for the periods indicated.
Three Months Ended March 31,
Current Ratio %/ Prior Ratio %/ Total Ratio %/
(Dollars in millions) Year Pt Change Years Pt Change Incurred Pt Change
2020
Attritional $ 404.7 73.4 % $ - - % $ 404.7 73.4 %
Catastrophes 5.5 1.0 % - - % 5.5 1.0 %
Total Segment $ 410.2 74.4 % $ - - % $ 410.2 74.4 %
2019
Attritional $ 276.4 65.0 % $ - - % $ 276.4 65.0 %
Catastrophes - - % - - % - - %
Total Segment $ 276.4 65.0 % $ - - % $ 276.4 65.0 %
Variance 2020/2019
Attritional $ 128.3 8.4 pts $ - - pts $ 128.3 8.4 pts
Catastrophes 5.5 1.0 pts - - pts 5.5 1.0 pts
Total Segment $ 133.8 9.4 pts $ - - pts $ 133.8 9.4 pts
Incurred losses and LAE increased by 48.4% to $410.2 million for the three
months ended March 31, 2020 compared to $276.4 million for the three months
ended March 31, 2019 , mainly due to an increase of $128.3 million in current
year attritional losses, primarily related to $40.0 million of losses from the
COVID-19 pandemic, the impact of the increase in premiums earned and an increase
of $5.5 million in current year catastrophe losses. The current year catastrophe
losses of $5.5 million for the three months ended March 31, 2020 related to the
Nashville tornadoes ($5.5 million ). There were no current year catastrophe
losses for the three months ended March 31, 2019
Segment Expenses. Commission and brokerage increased by 17.1% to $78.2 million
for the three months ended March 31, 2020 compared to $66.8 million for the
three months ended March 31, 2019 . The increase was mainly due to the impact of
the increase in premiums earned. Segment other underwriting expenses increased
to $84.7 million for the three months ended March 31, 2020 compared to $63.2
million for the three months ended March 31, 2019 . The increases were mainly due
to the impact of the increase in premiums earned and increased expenses related
to the continued build out of the insurance business.
FINANCIAL CONDITION
Cash and Invested Assets. Aggregate invested assets, including cash and
short-term investments, were $20,336.6 million at March 31, 2020 , a decrease of
$411.9 million compared to $20,748.5 million at December 31, 2019 . This decrease
was primarily the result of $277.1 million of pre-tax unrealized depreciation,
repurchases of 970,892 million common shares for $200.0 million , $160.8 million
due to fluctuations in foreign currencies, $157.7 million in fair value
re-measurements, $63.3 million paid out in dividends to shareholders, $21.8
million of allowance for credit losses, $17.2 million of unsettled securities
and $8.6 million of amortization bond premium, partially offset by $506.0
million of cash flows from operations, $50.0 million from revolving credit
borrowings and $8.5 million in equity adjustments of our limited partnership
investments.
45
-------------------------------------------------------------------------------- Our principal investment objectives are to ensure funds are available to meet our insurance and reinsurance obligations and to maximize after-tax investment income while maintaining a high quality diversified investment portfolio. Considering these objectives, we view our investment portfolio as having two components: 1) the investments needed to satisfy outstanding liabilities (our core fixed maturities portfolio) and 2) investments funded by our shareholders' equity. For the portion needed to satisfy global outstanding liabilities, we generally invest in taxable and tax-preferenced fixed income securities with an average credit quality of Aa3. For theU.S. portion of this portfolio, our mix of taxable and tax-preferenced investments is adjusted periodically, consistent with our current and projectedU.S. operating results, market conditions and our tax position. This global fixed maturity securities portfolio is externally managed by independent, professional investment managers using portfolio guidelines approved by internal management. Over the past several years, we have expanded the allocation of our investments funded by shareholders' equity to include: 1) a greater percentage of publicly traded equity securities, 2) emerging market fixed maturities through mutual fund structures, as well as individual holdings, 3) high yield fixed maturities, 4) bank and private loan securities and 5) private equity limited partnership investments. The objective of this portfolio diversification is to enhance the risk-adjusted total return of the investment portfolio by allocating a prudent portion of the portfolio to higher return asset classes, which are also less subject to changes in value with movements in interest rates. We limit our allocation to these asset classes because of 1) the potential for volatility in their values and 2) the impact of these investments on regulatory and rating agency capital adequacy models. We use investment managers experienced in these markets and adjust our allocation to these investments based upon market conditions. AtMarch 31, 2020 , the market value of investments in these investment market sectors, carried at both market and fair value, approximated 55.0% of shareholders' equity. The Company's limited partnership investments are comprised of limited partnerships that invest in private equities. Generally, the limited partnerships are reported on a quarter lag. We receive annual audited financial statements for all of the limited partnerships which are prepared using fair value accounting in accordance with FASB guidance. For the quarterly reports, the Company's staff performs reviews of the financial reports for any unusual changes in carrying value. If the Company becomes aware of a significant decline in value during the lag reporting period, the loss will be recorded in the period in which the Company identifies the decline.
The tables below summarize the composition and characteristics of our investment portfolio as of the dates indicated.
(Dollars in millions) At March 31, 2020 At December 31,
2019
Fixed maturities, market value
4.7 0.0 % 5.8 0.0 %
Equity securities, fair value 722.9 3.6 % 931.5 4.5 %
Short-term investments 441.7 2.2 % 414.7 2.0 %
Other invested assets 1,803.8 8.8 % 1,763.5 8.5 %
Cash 817.6 4.0 % 808.0 3.9 %
Total investments and cash $ 20,336.6 100.0 % $ 20,748.5 100.0 %
(Some amounts may not reconcile due to rounding.)
At At
March 31, 2020 December 31, 2019
Fixed income portfolio duration (years) 3.6 3.5
Fixed income composite credit quality Aa3 A1
Imbedded end of period yield, pre-tax 3.4 % 3.4 %
Imbedded end of period yield, after-tax 3.0 % 3.0 %
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The following table provides a comparison of our total return by asset class relative to broadly accepted industry benchmarks for the periods indicated:
Three Months Ended Twelve Months Ended
March 31, 2020 December 31, 2019
Fixed income portfolio total return (0.8) % 6.2 %
Barclay's Capital - U.S. aggregate index 3.2 % 8.7 %
Common equity portfolio total return (17.6) % 23.8 % S&P 500 index (19.6) %
31.5 %
Other invested asset portfolio total return 0.7 % 9.9 % The pre-tax equivalent total return for the bond portfolio was approximately (0.8)% and 6.3%, respectively, for the three months endedMarch 31, 2020 and the twelve months endedDecember 31, 2019 . The pre-tax equivalent return adjusts the yield on tax-exempt bonds to the fully taxable equivalent. Our fixed income and equity portfolios have different compositions than the benchmark indexes. Our fixed income portfolios have a shorter duration because we align our investment portfolio with our liabilities. We also hold foreign securities to match our foreign liabilities while the index is comprised of 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. Reinsurance Receivables. Reinsurance receivables for both paid and recoverable on unpaid losses totaled$1,808.6 million and$1,763.5 million atMarch 31, 2020 andDecember 31, 2019 , respectively. AtMarch 31, 2020 ,$686.9 million , or 38.0%, was receivable fromMt. Logan Re collateralized segregated accounts and$155.5 million , or 8.6%, was receivable fromMunich Reinsurance America, Inc. ("Munich Re"). No other retrocessionaire accounted for more than 5% of our receivables.
Loss and LAE Reserves. Gross loss and LAE reserves totaled
The following tables summarize gross outstanding loss and LAE reserves by
segment, classified by case reserves and IBNR reserves, for the periods
indicated.
At March 31, 2020
Case IBNR Total % of
(Dollars in millions) Reserves Reserves Reserves Total
Reinsurance $ 4,853.5 $ 5,080.3 $ 9,933.8 71.9 %
Insurance 1,092.9 2,546.1 3,639.0 26.3 %
Total excluding A&E 5,946.4 7,626.4 13,572.8 98.2 %
A&E 196.8 50.9 247.7 1.8 %
Total including A&E $ 6,143.2 $ 7,677.3 $ 13,820.5 100.0 %
(Some amounts may not
reconcile due to rounding.)
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At December 31, 2019
Case IBNR Total % of
(Dollars in millions) Reserves Reserves Reserves Total
Reinsurance $ 5,050.5 $ 4,839.4 $ 9,889.9 72.7 %
Insurance 1,090.4 2,373.2 3,463.5 25.4 %
Total excluding A&E 6,140.9 7,212.5 13,353.4 98.1 %
A&E 203.4 54.5 257.9 1.9 %
Total including A&E $ 6,344.3 $ 7,267.0 $ 13,611.3 100.0 %
(Some amounts may not
reconcile due to rounding.)
Changes in premiums earned and business mix, reserve re-estimations, catastrophe
losses and changes in catastrophe loss reserves and claim settlement activity
all impact loss and LAE reserves by segment and in total.
Our loss and LAE reserves represent management's best estimate of our ultimate
liability for unpaid claims. We continuously re-evaluate our reserves, including
re-estimates of prior period reserves, taking into consideration all available
information and, in particular, newly reported loss and claim experience.
Changes in reserves resulting from such re-evaluations are reflected in incurred
losses in the period when the re-evaluation is made. Our analytical methods and
processes operate at multiple levels including individual contracts, groupings
of like contracts, classes and lines of business, internal business units,
segments, legal entities, and in the aggregate. In order to set appropriate
reserves, we make qualitative and quantitative analyses and judgments at these
various levels. Additionally, the attribution of reserves, changes in reserves
and incurred losses among accident years requires qualitative and quantitative
adjustments and allocations at these various levels. We utilize actuarial
science, business expertise and management judgment in a manner intended to
ensure the accuracy and consistency of our reserving practices. Nevertheless,
our reserves are estimates, which are subject to variation, which may be
significant.
There can be no assurance that reserves for, and losses from, claim obligations
will not increase in the future, possibly by a material amount. However, we
believe that our existing reserves and reserving methodologies lessen the
probability that any such increase would have a material adverse effect on our
financial condition, results of operations or cash flows.
Asbestos and Environmental Exposures. A&E exposures represent a separate
exposure group for monitoring and evaluating reserve adequacy. The following
table summarizes the outstanding loss reserves with respect to A&E reserves on
both a gross and net of retrocessions basis for the periods indicated.
At At
March 31, December 31,
(Dollars in millions) 2020 2019
Gross reserves $ 249.8 $ 257.9
Reinsurance receivable (28.4) (29.2)
Net reserves $ 221.4 $ 228.7 (Some amounts may not reconcile due to rounding.)
With respect to asbestos only, at
In 2015, we sold Mt. McKinley toClearwater Insurance Company . Concurrently with the closing, we entered into a retrocession treaty with an affiliate of Clearwater. Per the retrocession treaty, we retroceded 100% of the liabilities associated with certain Mt. McKinley policies, which had been reinsured by Bermuda Re. As consideration for entering into the retrocession treaty,Bermuda Re transferred cash of$140.3 million , an amount equal to the net loss reserves as of the closing date. Of the$140.3 million of net loss reserves retroceded,$100.5 million were related to A&E business. The maximum liability retroceded under the 48
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retrocession treaty will be
OnDecember 20, 2019 , the retrocession treaty was amended and included a partial commutation. As a result of this amendment and partial commutation, gross A&E reserves and correspondingly reinsurance receivable were reduced by$43,362 thousand . In addition, the maximum liability permitted to be retroceded increased to$450,298 thousand . Ultimate loss projections for A&E liabilities cannot be accomplished using standard actuarial techniques. We believe that our A&E reserves represent management's best estimate of the ultimate liability; however, there can be no assurance that ultimate loss payments will not exceed such reserves, perhaps by a significant amount. Industry analysts use the "survival ratio" to compare the A&E reserves among companies with such liabilities. The survival ratio is typically calculated by dividing a company's current net reserves by the three year average of annual paid losses. Hence, the survival ratio equals the number of years that it would take to exhaust the current reserves if future loss payments were to continue at historical levels. Using this measurement, our net three year asbestos survival ratio was 5.6 years atMarch 31, 2020 . These metrics can be skewed by individual large settlements occurring in the prior three years and therefore, may not be indicative of the timing of future payments. Shareholders' Equity. Our shareholders' equity decreased to$8,580.9 million as ofMarch 31, 2020 from$9,132.9 million as ofDecember 31, 2019 . This decrease was the result of$248.0 million of unrealized depreciation on investments net of tax, the repurchase of 970,892 common shares for$200.0 million ,$63.3 million of shareholder dividends,$50.8 million of net foreign currency translation adjustments,$4.2 million of cumulative adjustment from the adoption of ASU 2016-13 and$3.2 million of share-based compensation transactions, partially offset by$16.6 million of net income, and$0.9 million of net benefit plan obligation adjustments
LIQUIDITY AND CAPITAL RESOURCES
Capital. Shareholders' equity atMarch 31, 2020 andDecember 31, 2019 was$8,580.9 million and$9,132.9 million , respectively. Management's objective in managing capital is to ensure its overall capital level, as well as the capital levels of its operating subsidiaries, exceed the amounts required by regulators, the amount needed to support our current financial strength ratings from rating agencies and our own economic capital models. The Company's capital has historically exceeded these benchmark levels. Our two main operating companies Bermuda Re 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) 2019 2018 2019 2018
Regulatory targeted capital
$ 3,197.4 $ 3,068.5 $ 3,739.1 $ 3,650.6
(1) Regulatory targeted capital represents the target capital level from the applicable year's BSCR calculation.
(2) Regulatory targeted capital represents 200% of the RBC authorized control level calculation for the applicable year.
49
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Our financial strength ratings as determined by A.M. Best , Standard & Poor's and
Moody's are important as they provide our customers and investors with an
independent assessment of our financial strength using a rating scale that
provides for relative comparisons. We continue to possess significant financial
flexibility and access to debt and equity markets as a result of our financial
strength, as evidenced by the financial strength ratings as assigned by
independent rating agencies.
We maintain our own economic capital models to monitor and project our overall
capital, as well as, the capital at our operating subsidiaries. A key input to
the economic models is projected income and this input is continually compared
to actual results, which may require a change in the capital strategy.
During the first quarter of 2020, we repurchased 970,892 shares for $200.0
million in the open market and paid $63.3 million in dividends to adjust our
capital position and enhance long term expected returns to our shareholders. We
also repurchased $1.7 million of our long-term subordinated notes in the first
quarter of 2020. We recognized a realized gain of $0.5 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.
In 2019, we repurchased 114,633 shares for $24.6 million in the open market and
paid $234.3 million in dividends. We may at times enter into a Rule 10b5-1
repurchase plan agreement to facilitate the repurchase of shares. On November
19, 2014 , our existing Board authorization to purchase up to 25 million of our
shares was amended to authorize the purchase of up to 30 million shares. As of
March 31, 2020 , we had repurchased 29.6 million shares under this authorization.
Liquidity. Our liquidity requirements are generally met from positive cash flow
from operations. Positive cash flow results from reinsurance and insurance
premiums being collected prior to disbursements for claims, which disbursements
generally take place over an extended period after the collection of premiums,
sometimes a period of many years. Collected premiums are generally invested,
prior to their use in such disbursements, and investment income provides
additional funding for loss payments. Our net cash flows from operating
activities were $506.0 million and $459.8 million for the three months ended
March 31, 2020 and 2019, respectively. Additionally, these cash flows reflected
net tax payments of $4.9 million and net tax recoveries of $90.8 million for the
three months ended March 31, 2020 and 2019, respectively, and net catastrophe
loss payments of $229.3 million and $249.2 million for the three months ended
March 31, 2020 and 2019, respectively.
If disbursements for claims and benefits, policy acquisition costs and other
operating expenses were to exceed premium inflows, cash flow from reinsurance
and insurance operations would be negative. The effect on cash flow from
insurance operations would be partially offset by cash flow from investment
income. Additionally, cash inflows from investment maturities and dispositions,
both short-term investments and longer term maturities are available to
supplement other operating cash flows.
As the timing of payments for claims and benefits cannot be predicted with
certainty, we maintain portfolios of long term invested assets with varying
maturities, along with short-term investments that provide additional liquidity
for payment of claims. At March 31, 2020 and December 31, 2019 , we held cash and
short-term investments of $1,259.3 million and $1,222.7 million , respectively.
Our short-term investments are generally readily marketable and can be converted
to cash. In addition to these cash and short-term investments, at March 31,
2020 , we had $1,344.3 million of available for sale fixed maturity securities
maturing within one year or less, $6,631.5 million maturing within one to five
years and $4,600.7 million maturing after five years. Our $722.9 million of
equity securities are comprised primarily of publicly traded securities that can
be easily liquidated. We believe that these fixed maturity and equity
securities, in conjunction with the short-term investments and positive cash
flow from operations, provide ample sources of liquidity for the expected
50
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payment of losses in the near future. We do not anticipate selling a significant
amount of securities or using available credit facilities to pay losses and LAE
but have the ability to do so. Sales of securities might result in realized
capital gains or losses. At March 31, 2020 we had $74.5 million of net pre-tax
unrealized appreciation related to fixed maturity securities, comprised of
$515.3 million of pre-tax unrealized appreciation and $440.8 million of pre-tax
unrealized depreciation.
Management generally expects annual positive cash flow from operations, which
reflects the strength of overall pricing. Cash flow from operations may decline
and could become negative; however, as indicated above, the Company has ample
liquidity to settle its claims.
In addition to our cash flows from operations and liquid investments, we also
have multiple credit facilities that provide up to $200.0 million of unsecured
revolving credit for liquidity and letters of credit but more importantly
provide for up to $600.0 million and £47.0 million of collateralized standby
letters of credit to support business written by our Bermuda operating
subsidiaries.
Effective May 26, 2016 , Group, Bermuda Re and Everest International entered into
a five year, $800.0 million senior credit facility with a syndicate of lenders,
which amended and restated in its entirety the June 22, 2012 , four year, $800.0
million senior credit facility. Both the May 26, 2016 and June 22, 2012 senior
credit facilities, which have similar terms, are referred to as the "Group
Credit Facility". Wells Fargo Corporation ("Wells Fargo Bank ") is the
administrative agent for the Group Credit Facility, which consists of two
tranches. Tranche one provides up to $200.0 million of unsecured revolving
credit for liquidity and general corporate purposes, and for the issuance of
unsecured standby letters of credit. The interest on the revolving loans shall,
at the Company's option, be either (1) the Base Rate (as defined below) or (2)
an adjusted London Interbank Offered Rate ("LIBOR") plus a margin. The Base Rate
is the higher of (a) the prime commercial lending rate established by Wells
Fargo Bank , (b) the Federal Funds Rate plus 0.5% per annum or (c) the one month
LIBOR Rate plus 1.0% per annum. The amount of margin and the fees payable for
the Group Credit Facility depends on Group's senior unsecured debt rating.
Tranche two exclusively provides up to $600.0 million for the issuance of
standby letters of credit on a collateralized basis.
The Group Credit Facility requires Group to maintain a debt to capital ratio of
not greater than 0.35 to 1 and to maintain a minimum net worth. Minimum net
worth is an amount equal to the sum of $5,371.0 million plus 25% of consolidated
net income for each of Group's fiscal quarters, for which statements are
available ending on or after March 31, 2016 and for which consolidated net
income is positive, plus 25% of any increase in consolidated net worth during
such period attributable to the issuance of ordinary and preferred shares, which
at March 31, 2020 , was $6,259.5 million . As of March 31, 2020 , the Company was
in compliance with all Group Credit Facility covenants.
At March 31, 2020 and December 31, 2019 , the Company had $50.0 million and $0.0
million of outstanding short-term borrowings from the Group Credit Facility
revolving credit line, respectively. At March 31, 2020 , the Group Credit
Facility had $91.8 million outstanding letters of credit under tranche one and
$589.2 million outstanding letters of credit under tranche two. At December 31,
2019 , the Group Credit Facility had $33.7 million outstanding letters of credit
under tranche one and $589.7 million outstanding letters of credit under tranche
two.
Effective November 7, 2019 , Everest International renewed its credit facility
with Lloyds Bank plc ("Everest International Credit Facility"). The current
renewal of the Everest International Credit Facility has a four year term and
provides up to £47,000 thousand for the issuance of standby letters of credit on
a collateralized basis. The Company pays a commitment fee of 0.1% per annum on
the average daily amount of the remainder of (1) the aggregate amount available
under the facility and (2) the aggregate amount of drawings outstanding under
the facility. The Company pays a credit commission fee of 0.35% per annum on
drawings outstanding under the facility.
51
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The Everest International Credit Facility requires Group to maintain a debt to
capital ratio of not greater than 0.35 to 1 and to maintain a minimum net worth.
Minimum net worth is an amount equal to the sum of $5,532.7 million (70% of
consolidated net worth as of December 31, 2018 ), plus 25% of consolidated net
income for each of Group's fiscal quarters, for which statements are available
ending on or after January 1, 2019 and for which net income is positive, plus
25% of any increase in consolidated net worth of Group during such period
attributable to the issuance of ordinary and preferred shares, which at March
31, 2020 , was $5,797.2 million . As of March 31, 2020 , the Company was in
compliance with all Everest International Credit Facility requirements.
At
Costs incurred in connection with the
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, taxable and tax-preferenced fixed maturity portfolio, while maintaining an adequate level of liquidity. Our mix of taxable and tax-preferenced investments is adjusted periodically, consistent with our current and projected operating results, market conditions and our tax position. The fixed maturity securities in the investment portfolio are comprised of non-trading available for sale securities. Additionally, we have invested in equity securities. The overall investment strategy considers the scope of present and anticipated Company operations. In particular, estimates of the financial impact resulting from non-investment asset and liability transactions, together with our capital structure and other factors, are used to develop a net liability analysis. This analysis includes estimated payout characteristics for which our investments provide liquidity. This analysis is considered in the development of specific investment strategies for asset allocation, duration and credit quality. The change in overall market sensitive risk exposure principally reflects the asset changes that took place during the period. Interest Rate Risk. Our$20.3 billion investment portfolio, atMarch 31, 2020 , is principally comprised of fixed maturity securities, which are generally subject to interest rate risk and some foreign currency exchange rate risk, and some equity securities, which are subject to price fluctuations and some foreign exchange rate risk. The overall economic impact of the foreign exchange risks on the investment portfolio is partially mitigated by changes in the dollar value of foreign currency denominated liabilities and their associated income statement impact. Interest rate risk is the potential change in value of the fixed maturity securities portfolio, including short-term investments, from a change in market interest rates. In a declining interest rate environment, it includes prepayment risk on the$3,065.3 million of mortgage-backed securities in the$16,550.6 million fixed maturity portfolio. Prepayment risk results from potential accelerated principal payments that shorten the average life and thus the expected yield of the security. The table below displays the potential impact of market value fluctuations and after-tax unrealized appreciation on our fixed maturity portfolio (including$441.7 million of short-term investments) for the period indicated based on upward and downward parallel and immediate 100 and 200 basis point shifts in interest rates. For legal entities with aU.S. dollar functional currency, this modeling was performed on each security individually. To generate appropriate price estimates on mortgage-backed securities, changes in prepayment expectations 52 -------------------------------------------------------------------------------- under different interest rate environments were taken into account. For legal entities with a non-U.S. dollar functional currency, the effective duration of the involved portfolio of securities was used as a proxy for the market value change under the various interest rate change scenarios. Impact of Interest Rate Shift in Basis Points At March 31, 2020 -200 -100 0 100 200 (Dollars in millions) Total Market/Fair Value$ 18,222.2 $ 17,607.2 $ 16,992.3 $ 16,377.4 15,762.5 Market/Fair Value Change 7.2 % 3.6 % 0.0 % (3.6) % (7.2) % from Base (%) Change in Unrealized Appreciation After-tax from Base ($)$ 1,088.7 $ 544.3 $ -$ (544.3) $ (1,088.7) We had$13,820.5 million and$13,611.3 million of gross reserves for losses and LAE as ofMarch 31, 2020 andDecember 31, 2019 , respectively. These amounts are recorded at their nominal value, as opposed to present value, which would reflect a discount adjustment to reflect the time value of money. Since losses are paid out over a period of time, the present value of the reserves is less than the nominal value. As interest rates rise, the present value of the reserves decreases and, conversely, as interest rates decline, the present value increases. These movements are the opposite of the interest rate impacts on the fair value of investments. While the difference between present value and nominal value is not reflected in our financial statements, our financial results will include investment income over time from the investment portfolio until the claims are paid. Our loss and loss reserve obligations have an expected duration of approximately 3.0 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$1.3 billion resulting in a discounted reserve balance of approximately$10.8 billion , representing approximately 63.8% of the value of the fixed maturity investment portfolio funds. Equity Risk. Equity risk is the potential change in fair and/or market value of the common stock, preferred stock and mutual fund portfolios arising from changing prices. Our equity investments consist of a diversified portfolio of individual securities and mutual funds, which invest principally in high quality common and preferred stocks that are traded on the major exchanges, and mutual fund investments in emerging market debt. The primary objective of the equity portfolio is to obtain greater total return relative to our core bonds over time through market appreciation and income. The table below displays the impact on fair/market value and after-tax change in fair/market value of a 10% and 20% change in equity prices up and down for the period indicated. Impact of Percentage Change in Equity Fair/Market Values At March 31, 2020 (Dollars in millions) -20% -10% 0% 10% 20% Fair/Market Value of the$ 578.3 $ 650.6 $ 722.9 $ 795.1 $ 867.4 Equity Portfolio After-tax Change in$ (119.6) $ (59.8) $ -$ 59.8 $ 119.6 Fair/Market Value 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 53 -------------------------------------------------------------------------------- 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 long term impact of Brexit on regulation, interest rates, currency exchange rates and financial markets is still uncertain and may adversely affect our operations. Safe Harbor Disclosure. This report contains forward-looking statements within the meaning of 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 CARES Act, the impact of the Tax Cut and Jobs Act, the adequacy of capital in relation to regulatory required capital, the adequacy of our provision for uncollectible balances, estimates of our catastrophe exposure, the effects of catastrophic and pandemic events on our financial statements, the ability 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" in the Company's most recent 10-K filing. We undertake no obligation to update or revise publicly any forward-looking statements, whether as a result of new information, future events or otherwise.
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