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 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. Globally, many countries mandated that their citizens remain at home and many non-essential businesses have continued to be physically closed. We activated our operational resiliency plan across our global footprint and all of our critical operations are functioning effectively from remote locations. We continue to service and meet the needs of our clients while ensuring the safety and health of our employees and customers. There continues to be a negative impact on industry underwriting results from the pandemic. These impacts vary significantly from country to country depending on the rate of infections and the corresponding mandated business restrictions. Prior to the pandemic, there was a growing industry consensus that there was some firming of (re)insurance rates for the areas impacted by the recent catastrophes. The increased frequency of catastrophe losses in 2020 and 2021 appears to be further pressuring the increase of rates. As business activity continues to regain strength, rates also appear to be firming in most lines of business, particularly in the casualty lines that had seen significant losses such as excess casualty and directors' and officers' liability. Other casualty lines are experiencing modest rate increase, while some lines such as workers' compensation were experiencing softer market conditions. It is too early to tell what will be the impact on pricing conditions but it is likely to change depending on the line of business and geography. 31 -------------------------------------------------------------------------------- While we are unable to predict the full impact the pandemic will have on the insurance industry as it continues to have a negative impact on the global economy, we are well positioned to continue to service our clients. Our capital position remains a source of strength, with high quality invested assets, significant liquidity and a low operating expense ratio. Our diversified global platform with its broad mix of products, distribution and geography is resilient. Financial Summary. We monitor and evaluate our overall performance based upon financial results. The following table displays a summary of the consolidated net income (loss), ratios and shareholders' equity for the periods indicated. Three Months Ended Percentage Six Months Ended Percentage June 30, Increase/ June 30, Increase/ (Dollars in millions) 2021 2020 (Decrease) 2021 2020 (Decrease) Gross written premiums$ 3,190.1 $ 2,369.3 34.6 %$ 6,121.6 $ 4,940.2 23.9 % Net written premiums 2,809.4 2,017.5 39.3 % 5,363.3 4,219.0 27.1 % REVENUES: Premiums earned$ 2,558.4 $ 2,042.4 25.3 %$ 4,946.2 $ 4,079.2 21.3 % Net investment income 407.1 38.1 NM 667.5 185.9 NM Net realized capital gains 104.1 184.6 -43.6 % 143.0 (25.9) NM
(losses)
Other income (expense) 7.1 (20.6) -134.5 % 63.7 (12.6) NM Total revenues 3,076.7 2,244.5 37.1 % 5,820.5 4,226.5 37.7 % CLAIMS AND EXPENSES: Incurred losses and loss 1,586.1 1,407.0 12.7 % 3,297.6 2,837.9 16.2 % adjustment expenses Commission, brokerage, taxes 557.7 466.3 19.6 % 1,046.8 914.8 14.4 % and fees Other underwriting expenses 140.8 118.1 19.2 % 283.1 247.0 14.6 % Corporate expenses 16.2 8.7 85.1 % 28.5 18.6 53.8 % Interest, fees and bond issue 15.6 7.3 115.2 % 31.2 14.8 110.6 % cost amortization expense Total claims and expenses 2,316.5 2,007.4 15.4 % 4,687.2 4,033.1 16.2 % INCOME (LOSS) BEFORE TAXES 760.2 237.1 220.7 % 1,133.3 193.4 NM Income tax expense (benefit) 80.2 46.2 73.6 % 111.4 (14.0) NM % NET INCOME (LOSS)$ 680.0 $ 190.9 256.2$ 1,021.8 $ 207.5 NM RATIOS: Point Change Point Change Loss ratio 62.0 % 68.9 % (6.9) 66.7 % 69.6 % (2.9)
Commission and brokerage ratio 21.8 % 22.8 % (1.0)
21.2 % 22.4 % (1.2)
Other underwriting expense 5.8 6.1 (0.4)
ratio 5.5 % % (0.3) 5.7 % %
Combined ratio 89.3 % 97.5 % (8.2) 93.6 % 98.1 % (4.5)
At At Percentage
June 30, December 31, Increase/
(Dollars in millions, except 2021 2020 (Decrease)
per share amounts)
Balance sheet data:
Total investments and cash $ 27,056.0 $ 25,461.6 6.3 %
Total assets 35,370.1 32,788.4 7.9 %
Loss and loss adjustment 17,645.7 16,399.0 7.6 %
expense reserves
Total debt 1,910.8 1,910.4 - %
Total liabilities 24,953.3 23,062.2 8.2 %
Shareholders' equity 10,416.8 9,726.2 7.1 %
Book value per share 260.32 243.25 7.0 %
(NM, not meaningful)
(Some amounts may not
reconcile due to rounding.)
32
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Revenues.
Premiums. Gross written premiums increased by 34.6% to$3,190.1 million for the three months endedJune 30, 2021 , compared to$2,369.3 million for the three months endedJune 30, 2020 , reflecting a$609.9 million , or 39.6%, increase in our reinsurance business and a$210.9 million , or 25.4%, increase in our insurance business. The increase in reinsurance premiums was due to increases in most lines of business, notably property pro rata business, casualty pro rata business and casualty excess of loss, as well as$43.3 million positive impact from the movement of foreign exchange rates. The rise in insurance premiums was primarily due to increases in specialty casualty business, property business and professional liability business, Gross written premiums increased by 23.9% to$6,121.6 million for the six months endedJune 30, 2021 , compared to$4,940.2 million for the six months endedJune 30, 2020 , reflecting a$891.1 million , or 26.9%, increase in our reinsurance business and a$290.2 million , or 17.9%, increase in our insurance business. The increase in reinsurance premiums was due to increases in most lines of business, notably property pro rata business, casualty pro rata business and casualty excess of loss, as well as$70.3 million positive impact from the movement of foreign exchange rates. The rise in insurance premiums was primarily due to increases in specialty casualty business, property business and professional liability business, partially offset by a decline in workers' compensation business. Net written premiums increased by 39.3% to$2,809.4 million for the three months endedJune 30, 2021 , compared to$2,017.5 million for the three months endedJune 30, 2020 . Net written premiums increased by 27.1% to$5,363.3 million for the six months endedJune 30, 2021 , compared to$4,219.0 million for the six months endedJune 30, 2020 . The difference between the change in gross written premiums compared to the change in net written premiums was primarily due to varying utilization of reinsurance. Premiums earned increased by 25.3% to$2,558.4 million for the three months endedJune 30, 2021 , compared to$2,042.4 million for the three months endedJune 30, 2020 . Premiums earned increased by 21.3% to$4,946.2 million for the six months endedJune 30, 2021 , compared to$4,079.2 million for the six months endedJune 30, 2020 . The changes in premiums earned relative to net written premiums are the result of timing; premiums are earned ratably over the coverage period whereas written premiums are recorded at the initiation of the coverage period. Net Investment Income. Net investment income increased to$407.1 million for the three months endedJune 30, 2021 , compared with investment income of$38.1 million for the three months endedJune 30, 2020 and increased to$667.5 million for the six months endedJune 30, 2021 , compared to$185.9 million for the six months endedJune 30, 2020 . Net pre-tax investment income, as a percentage of average invested assets, was 6.3% for the three months endedJune 30, 2021 compared to 0.7% for the three months endedJune 30, 2020 . Net pre-tax investment income, as a percentage of average invested assets, was 5.3% for the six months endedJune 30, 2021 compared to 1.8% for the six months endedJune 30, 2020 . The increases in both income and yield were primarily the result of a significant increase in limited partnership income and higher income from our fixed income portfolio. The limited partnership income primarily reflects increases in their reported net asset values. As such, until these asset values are monetized and the resultant income is distributed, they are subject to future increases or decreases in the asset value, and the results may be volatile. Net Realized Capital Gains (Losses). Net realized capital gains were$104.1 million and$184.6 million for the three months endedJune 30, 2021 and 2020, respectively. The net realized capital gains of$104.1 million for the three months endedJune 30, 2021 were comprised of$103.5 million of net gains from fair value re-measurements and$16.5 million of net realized capital gains from sales of investments, partially offset by$15.9 million of allowances for credit losses. The net realized capital gains of$184.6 million for the three months endedJune 30, 2020 were comprised of$161.4 million of net gains from fair value re-measurements, resulting primarily from increases in equity security valuations which rebounded from declines in the first quarter of 2020, and$27.3 million of net realized capital gains from sales of investments, partially offset by$4.1 million of net allowances for credit losses. Net realized capital gains were$143.0 million and net realized capital losses were$25.9 million for the six months endedJune 30, 2021 and 2020, respectively. The net realized capital gains of$143.0 million for the six months endedJune 30, 2021 were comprised of$132.6 million of net gains from fair value re-measurements 33
-------------------------------------------------------------------------------- and$33.3 million of net realized capital gains from sales of investments, partially offset by$22.9 million of allowances for credit losses. The net realized capital losses of$25.9 million for the six months endedJune 30, 2020 were comprised of$25.8 million of net allowances for credit losses and$16.4 million of net realized capital losses from sales of investments, partially offset by$16.3 million of net gains from fair value re-measurements. Other Income (Expense). We recorded other income of$7.1 million and other expense of$20.6 million for the three months endedJune 30, 2021 and 2020, respectively. We recorded other income of$63.7 million and other expense of$12.6 million for the six months endedJune 30, 2021 and 2020, respectively. The changes were primarily the result of fluctuations in foreign currency exchange rates. We recognized foreign currency exchange income of$8.8 million and foreign currency exchange expense of$44.2 million for the three months endedJune 30, 2021 and 2020, respectively. We recognized foreign currency exchange income of$60.6 million and foreign currency exchange expense of$23.6 million for the six months endedJune 30, 2021 and 2020, respectively.
Claims and Expenses.
Incurred Losses and Loss Adjustment Expenses. The following tables present our incurred losses and loss adjustment expenses ("LAE") for the periods indicated.
Three Months Ended June 30,
Current Ratio %/ Prior Ratio %/ Total Ratio %/
(Dollar in millions) Year Pt Change Years Pt Change Incurred Pt Change
2021
Attritional $ 1,543.8 60.3 % $ (2.6) -0.1 % $ 1,541.1 60.2 %
Catastrophes 45.0 1.8 % - - % 45.0 1.8 %
Total $ 1,588.8 62.1 % $ (2.6) -0.1 % $ 1,586.1 62.0 %
2020
Attritional
15.0 0.7 % - - % 15.0 0.7 %
Total $ 1,401.7 68.6 % $ 5.3 0.3 % $ 1,407.0 68.9 %
Variance 2021/2020
Attritional $ 157.1 (7.6) pts $ (7.9) (0.4) pts $ 149.1 (8.0) pts
Catastrophes 30.0 1.1 pts - - pts 30.0 1.1 pts
Total $ 187.1 (6.5) pts $ (7.9) (0.4) pts $ 179.1 (6.9) pts
Six Months Ended June 30,
Current Ratio %/ Prior Ratio %/ Total Ratio %/
(Dollar in millions) Year Pt Change Years Pt Change Incurred Pt Change
2021
Attritional $ 2,987.0 60.4 % $ (4.5) -0.1 % 2,982.6 60.3 %
Catastrophes 315.0 6.4 % - - % 315.0 6.4 %
Total $ 3,302.0 66.8 % $ (4.5) -0.1 % $ 3,297.6 66.7 %
2020
Attritional
45.0 1.1 % - - % 45.0 1.1 %
Total $ 2,835.1 69.5 % $ 2.7 0.1 % $ 2,837.9 69.6 %
Variance 2021/2020 Attritional$ 196.9 (8.0) pts$ (7.2) (0.2) pts$ 189.7 (8.2) pts Catastrophes 270.0 5.3 pts - - pts 270.0 5.3 pts Total$ 466.9 (2.7) pts$ (7.2) (0.2) pts$ 459.7 (2.9) pts Incurred losses and LAE increased by 12.7% to$1,586.1 million for the three months endedJune 30, 2021 , compared to$1,407.0 million for the three months endedJune 30, 2020 , primarily due to a rise of$157.1 million in current year attritional losses, mainly due to the impact of the increase in premiums earned, and partially offset by$160.0 million of COVID-19 Pandemic losses incurred in 2020 which did not recur in 2021. The losses were also impacted by an increase of$30.0 million in current year catastrophe losses. The current year catastrophe losses of$45.0 million for the three months endedJune 30, 2021 related to Tropical Storm Claudette, theTexas winter storms, the 2021 Australia floods and the Europe Convective storms. The$15.0 34 --------------------------------------------------------------------------------
million of current year catastrophe losses for the three months ended
Incurred losses and LAE increased by 16.2% to$3,297.6 million for the six months endedJune 30, 2021 , compared to$2,837.9 million for the six months endedJune 30, 2020 , primarily due to an increase of$270.0 million in current year catastrophe losses and a rise of$196.9 million in current year attritional losses, mainly due to the impact of the increase in premiums earned, and partially offset by$310.0 million of COVID-19 Pandemic losses incurred in 2020 which did not recur in 2021. The current year catastrophe losses of$315.0 million for the six months endedJune 30, 2021 related primarily to theTexas winter storms ($270.0 million ) with the rest of the losses emanating from Tropical Storm Claudette, the 2021 Australia floods,Victoria Australia flooding and the Europe Convective storms. The$45.0 million of current year catastrophe losses for the six months endedJune 30, 2020 related to the 2020 U.S. civil unrest ($15.0 million ),Nashville tornadoes ($13.1 million ),Australia East Coast storm ($10.0 million ) and the 2020 Australia fires ($6.9 million ). Commission, Brokerage, Taxes and Fees. Commission, brokerage, taxes and fees increased by 19.6% to$557.7 million for the three months endedJune 30, 2021 , compared to$466.3 million for the three months endedJune 30, 2020 . Commission, brokerage, taxes and fees increased by 14.4% to$1,046.8 million for the six months endedJune 30, 2021 , compared to$914.8 million for the six months endedJune 30, 2020 . The increases were primarily due to the impact of the increases in premiums earned and changes in the mix of business. Other Underwriting Expenses. Other underwriting expenses were$140.8 million and$118.1 million for the three months endedJune 30, 2021 and 2020, respectively. Other underwriting expenses were$283.1 million and$247.0 million for the six months endedJune 30, 2021 and 2020, respectively. The increases in other underwriting expenses were mainly due to the continued build out of our insurance operations and the impact of the increases in premiums earned. Corporate Expenses. Corporate expenses, which are general operating expenses that are not allocated to segments, were$16.2 million and$8.7 million for the three months endedJune 30, 2021 and 2020, respectively, and$28.5 million and$18.6 million for the six months endedJune 30, 2021 and 2020, respectively. These increases were mainly due to higher compensation expenses from an increased staff count. Interest, Fees and Bond Issue Cost Amortization Expense. Interest, fees and other bond amortization expense was$15.6 million and$7.3 million for the three months endedJune 30, 2021 and 2020, respectively. Interest, fees and other bond amortization expense was$31.2 million and$14.8 million for the six months endedJune 30, 2021 and 2020, respectively. These increases were primarily due to interest expense on the$1,000.0 million senior note issuance inOctober 2020 and the movement in the floating interest rate related to the long term subordinated notes, which is reset quarterly per the note agreement. The floating rate was 2.54% as ofJune 30, 2021 . Income Tax Expense (Benefit). We had an income tax expense of$80.2 million and$46.2 million for the three months endedJune 30, 2021 and 2020, respectively. We had an income tax expense of$111.4 million and an income tax benefit of$14.0 million for the six months endedJune 30, 2021 and 2020, respectively. Income tax benefit or expense is primarily a function of the geographic location of the Company's pre-tax income and the statutory tax rates in those jurisdictions. The annualized effective tax rate ("AETR") is primarily affected by tax-exempt investment income, qualifying dividends and foreign tax credits. Variations in the AETR generally result from changes in the relative levels of pre-tax income, including the impact of catastrophe losses and net capital gains (losses), among jurisdictions with different tax rates. The changes in income tax expense (benefit) for the three and six months endedJune 30, 2021 as compared to the three and six months endedJune 30, 2020 results primarily from higher investment income from limited partnerships, higher realized investment gains and improved underwriting results. 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 allowed 35 -------------------------------------------------------------------------------- companies to elect to carryback five years net operating losses incurred in the 2018, 2019 and/or 2020 tax years. The Tax Cuts and Jobs Act of 2017 had eliminated net operating loss carrybacks for most companies. The Company determined that the special five year loss carryback tax provision provided a tax benefit of$31.0 million which it recorded in the quarter endedMarch 31, 2020 . Net Income (Loss). Our net income was$680.0 million and$190.9 million for the three months endedJune 30, 2021 and 2020, respectively. Our net income was$1,021.8 million and$207.5 million for the six months endedJune 30, 2021 and 2020, respectively. These changes were primarily driven by the financial component fluctuations explained above. Ratios. Our combined ratio decreased by 8.2 points to 89.3% for the three months endedJune 30, 2021 , compared to 97.5% for the three months endedJune 30, 2020 , and decreased by 4.5 points to 93.6% for the six months endedJune 30, 2021 , compared to 98.1% for the six months endedJune 30, 2020 . The loss ratio component decreased 6.9 points and 2.9 points for the three and six months endedJune 30, 2021 over the same period last year mainly due to COVID-19 Pandemic attritional losses incurred in the three and six months endedJune 30, 2020 which did not re-cur in 2021, partially offset by higher catastrophe losses in the three and six months endedJune 30, 2021 . The commission and brokerage ratio components decreased to 21.8% for the three months endedJune 30, 2021 compared to 22.8% for the three months endedJune 30, 2020 and decreased to 21.2% for the six months endedJune 30, 2021 compared to 22.4% for the six months endedJune 30, 2020 . These changes were mainly due to changes in the mix of business. The other underwriting expense ratios decreased slightly to 5.5% for the three months endedJune 30, 2021 compared to 5.8% for the three months endedJune 30, 2020 and decreased slightly to 5.7% for the six months endedJune 30, 2021 compared to 6.1% for the six months endedJune 30, 2020 .
Shareholders' Equity.
Shareholders' equity increased by$690.6 million to$10,416.8 million atJune 30, 2021 from$9,726.2 million atDecember 31, 2020 , principally as a result of$1,021.8 million of net income,$24.7 million of net foreign currency translation adjustments,$11.1 million of share-based compensation transactions and$4.1 million of net benefit plan obligation adjustments, net of tax partially offset by$206.5 million of unrealized depreciation on investments net of tax,$124.3 million of shareholder dividends and the repurchase of 165,562 common shares for$40.3 million .
Consolidated Investment Results
Net Investment Income.
Net investment income increased to$407.1 million for the three months endedJune 30, 2021 , compared with investment income of$38.1 million for the three months endedJune 30, 2020 . Net investment income increased to$667.5 million for the six months endedJune 30, 2021 , compared with investment income of$185.9 million for the six months endedJune 30, 2020 . These increases were primarily the result of a significant increase in limited partnership income and higher income from our growing fixed income portfolio. The limited partnership income primarily reflects increases in their reported net asset values. As such, until these asset values are monetized and the resultant income is distributed, they are subject to future increases or decreases in the asset value, and the results may be volatile. 36
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The following table shows the components of net investment income for the
periods indicated.
Three Months Ended Six Months Ended
June 30, June 30,
(Dollars in millions) 2021 2020 2021 2020
Fixed maturities $ 148.3 $ 133.9 $ 289.2 $ 271.8
Equity securities 3.5 3.7 8.3 7.2
Short-term investments and cash 0.7 1.7 1.0 3.9
Other invested assets
Limited partnerships 240.0 (88.3) 354.3 (66.7)
Other 25.9 (2.9) 31.9 (16.0)
Gross investment income before
adjustments 418.3 48.1 684.6 200.2
Funds held interest income (expense) 3.3 2.0 11.3 10.2
Future policy benefit reserve income
(expense) (0.2) (0.3) (0.5) (0.5)
Gross investment income 421.5 49.8 695.4 209.9
Investment expenses (14.4) (11.7) (27.9) (24.0)
Net investment income $ 407.1 $ 38.1 $ 667.5 $ 185.9 (Some amounts may not reconcile due to rounding.)
Three Months Ended Six Months Ended
June 30, June 30,
2021 2020 2021 2020
Annualized pre-tax yield on average cash and 6.3 % 0.7 % 5.3 % 1.8 %
invested assets
Annualized after-tax yield on average cash 5.5 % 0.6 % 4.6 % 1.6 %
and invested assets
37
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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 June 30, Six Months Ended June 30,
(Dollars in millions) 2021 2020 Variance 2021 2020 Variance
Gains (losses) from sales:
Fixed maturity securities,
market value:
Gains $ 19.8 $ 21.4 $ (1.6) $ 34.7 $ 35.4 $ (0.7)
Losses (9.8) (11.7) 1.9 (15.5) (39.8) 24.3
Total 10.0 9.6 0.3 19.2 (4.5) 23.6
Equity securities, fair value:
Gains 5.8 18.2 (12.4) 18.1 20.8 (2.7)
Losses (2.0) (1.9) (0.1) (8.1) (32.1) 24.0
Total 3.8 16.3 (12.5) 10.0 (11.3) 21.3
Other Invested Assets:
Gains 4.1 1.6 2.5 5.6 4.6 1.0
Losses (1.4) (0.3) (1.1) (1.5) (5.6) 4.1
Total 2.7 1.3 1.4 4.1 (1.0) 5.1
Short Term Investments:
Gains - 0.1 (0.1) - 0.4 (0.4)
Losses - - - - - -
Total - 0.1 (0.1) - 0.4 (0.4)
Total net realized gains
(losses) from sales:
Gains 29.7 41.2 (11.6) 58.4 61.1 (2.8)
Losses (13.2) (13.9) 0.7 (25.1) (77.5) 52.4
Total 16.5 27.3 (10.8) 33.3 (16.4) 49.6
Allowance for credit losses: (15.9) (4.1) (11.8) (22.9) (25.8) 2.9
Gains (losses) from fair value adjustments: Fixed maturities, fair value - (0.3) 0.3 - (1.4) 1.4 Equity securities, fair value 103.5 161.7 (58.2) 132.6 17.7 114.9 Total 103.5 161.4 (57.9)
132.6 16.3 116.3
Total net realized capital gains (losses)$ 104.1 $ 184.6 $ (80.5) $
143.0
(Some amounts may not reconcile due to rounding.) Net realized capital gains were$104.1 million and$184.6 million for the three months endedJune 30, 2021 and 2020, respectively. For the three months endedJune 30, 2021 , we recorded$103.5 million of net gains from fair value re-measurements and$16.5 million of net realized capital gains from sales of investments, partially offset by$15.9 million of allowances for credit losses. For the three months endedJune 30, 2020 , we recorded$161.4 million of net gains from fair value re-measurements, resulting primarily from increases in equity security valuations which rebounded from declines in the first quarter of 2020, and$27.3 million of net realized capital gains from sales of investments, partially offset by$4.1 million of net allowances for credit losses. The fixed maturity and equity sales for the three months endedJune 30, 2021 and 2020 related primarily to adjusting the portfolios for overall market changes and individual credit shifts. Net realized capital gains were$143.0 million and net realized capital losses were$25.9 million for the six months endedJune 30, 2021 and 2020, respectively. For the six months endedJune 30, 2021 we recorded$132.6 million of net gains from fair value re-measurements and$33.3 million of net realized capital gains from sales of investments, partially offset by$22.9 million of allowances for credit losses. For the six months endedJune 30, 2020 we recorded$25.8 million of net allowances for credit losses and$16.4 million of net realized capital losses from sales of investments, partially offset by$16.3 million of net gains from fair value re-measurements. 38 --------------------------------------------------------------------------------
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 , theUnited Kingdom andSwitzerland . The Insurance operation writes property and casualty insurance directly and through brokers, surplus lines brokers and general agents within theU.S. ,Canada andEurope through its offices in theU.S. ,Canada ,Ireland and branches inSwitzerland andthe Netherlands . These segments are managed independently, but conform with corporate guidelines with respect to pricing, risk management, control of aggregate catastrophe exposures, capital, investments and support operations. Management generally monitors and evaluates the financial performance of these operating segments based upon their underwriting results. Underwriting results include earned premium less losses and loss adjustment expenses ("LAE") incurred, commission and brokerage expenses and other underwriting expenses. We measure our underwriting results using ratios, in particular loss, commission and brokerage and other underwriting expense ratios, which, respectively, divide incurred losses, commissions and brokerage and other underwriting expenses by premiums earned.
The Company does not maintain separate balance sheet data for its operating segments. Accordingly, the Company does not review and evaluate the financial results of its operating segments based upon balance sheet data.
Our loss and LAE reserves are management's best estimate of our ultimate liability for unpaid claims. We re-evaluate our estimates on an ongoing basis, including all prior period reserves, taking into consideration all available information, and in particular, recently reported loss claim experience and trends related to prior periods. Such re-evaluations are recorded in incurred losses in the period in which re-evaluation is made.
The following discusses the underwriting results for each of our segments for the periods indicated.
Reinsurance.
The following table presents the underwriting results and ratios for the Reinsurance segment for the periods indicated.
Three Months Ended June 30, Six Months Ended June 30,
(Dollars in millions) 2021 2020 Variance %
Change 2021 2020 Variance % Change
Gross written premiums
Premiums earned$ 1,920.8 $ 1,502.3 $ 418.5 27.9 %$ 3,698.3 $ 2,987.5 $ 710.8 23.8 % Incurred losses and LAE 1,168.1 1,005.7 162.4 16.1 % 2,440.0 2,026.3 413.7 20.4 % Commission and brokerage 473.3 387.3 86.0 22.2 % 882.0 757.7 124.3 16.4 % Other underwriting expenses 47.1 39.7 7.4 18.6 % 99.1 83.8 15.1 18.1 % Underwriting gain (loss)$ 232.3 $ 69.5 $ 162.7 234.1 %$ 277.2 $ 119.6 $ 157.5 131.7 % Point Chg Point Chg Loss ratio 60.8 % 67.0 % (6.2) 66.0 % 67.8 % (1.8) Commission and brokerage ratio 24.6 % 25.8 % (1.2) 23.8 % 25.4 % (1.6) Other underwriting expense ratio 2.5 % 2.6 % (0.1) 2.7 % 2.8 % (0.1) Combined ratio 87.9 % 95.4 % (7.5) 92.5 % 96.0 % (3.5) (NM, Not Meaningful) (Some amounts may not reconcile due to rounding.) 39
-------------------------------------------------------------------------------- Premiums. Gross written premiums increased by 39.6% to$2,148.2 million for the three months endedJune 30, 2021 from$1,538.3 million for the three months endedJune 30, 2020 , due to increases in most lines of business, notably property pro rata business, casualty pro rata business and casualty excess of loss, as well as a$43.3 million positive impact from the movement of foreign exchange rates. Net written premiums increased by 44.6% to$2,059.9 million for the three months endedJune 30, 2021 compared to$1,424.1 million for the three months endedJune 30, 2020 . The difference between the change in gross written premiums compared to the change in net written premiums was primarily due to varying utilization of reinsurance. Premiums earned increased by 27.9% to$1,920.8 million for the three months endedJune 30, 2021 , compared to$1,502.3 million for the three months endedJune 30, 2020 . The change in premiums earned relative to net written premiums is primarily the result of timing; premiums are earned ratably over the coverage period whereas written premiums are recorded at the initiation of the coverage period. Gross written premiums increased by 26.9% to$4,207.3 million for the six months endedJune 30, 2021 from$3,316.1 million for the six months endedJune 30, 2020 , due to increases in most lines of business, notably property pro rata business, casualty pro rata business and casualty excess of loss, as well as a$70.3 million positive impact from the movement of foreign exchange rates. Net written premiums increased by 30.8% to$3,972.9 million for the six months endedJune 30, 2021 compared to$3,037.2 million for the six months endedJune 30, 2020 . The difference between the change in gross written premiums compared to the change in net written premiums was primarily due to varying utilization of reinsurance. Premiums earned increased by 23.8% to$3,698.3 million for the six months endedJune 30, 2021 , compared to$2,987.5 million for the six months endedJune 30, 2020 . The change in premiums earned relative to net written premiums is primarily the result of timing; premiums are earned ratably over the coverage period whereas written premiums are recorded at the initiation of the coverage period.
Incurred Losses and LAE. The following table presents the incurred losses and LAE for the Reinsurance segment for the periods indicated.
Three Months Ended June 30,
Current Ratio %/ Prior Ratio %/ Total Ratio %/
(Dollars in millions) Year Pt Change Years Pt Change Incurred Pt Change
2021
Attritional $ 1,134.6 59.1 % $ (1.4) -0.1 % 1,133.1 59.0 %
Catastrophes 35.0 1.8 % - - % 35.0 1.8 %
Total Segment $ 1,169.6 60.9 % $ (1.4) -0.1 % $ 1,168.1 60.8 %
2020
Attritional $ 1,004.9 66.9 % $ 0.8 0.1 % $ 1,005.7 67.0 %
Catastrophes - - % - - % - - %
Total Segment $ 1,004.9 66.9 % $ 0.8 0.1 % $ 1,005.7 67.0 %
Variance 2021/2020
Attritional $ 129.7 (7.8) pts $ (2.2) (0.2) pts $ 127.4 (8.0) pts
Catastrophes 35.0 1.8 pts - - pts 35.0 1.8 pts
Total Segment $ 164.7 (6.0) pts $ (2.2) (0.2) pts $ 162.4 (6.2) pts
40
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Six Months Ended June 30,
Current Ratio %/ Prior Ratio %/ Total Ratio %/
(Dollars in millions) Year Pt Change Years Pt Change Incurred Pt Change
2021
Attritional $ 2,185.8 59.1 % $ (3.3) -0.1 % 2,182.5 59.0 %
Catastrophes 257.5 7.0 % - - % 257.5 7.0 %
Total Segment $ 2,443.3 66.1 % $ (3.3) -0.1 % $ 2,440.0 66.0 %
2020
Attritional $ 2,003.6 67.1 % $ (1.8) -0.1 % $ 2,001.8 67.0 %
Catastrophes 24.5 0.8 % - - % 24.5 0.8 %
Total Segment $ 2,028.1 67.9 % $ (1.8) -0.1 % $ 2,026.3 67.8 %
Variance 2021/2020
Attritional $ 182.2 (8.0) pts $ (1.5) - pts $ 180.7 (8.0) pts
Catastrophes 233.0 6.2 pts - - pts 233.0 6.2 pts
Total Segment $ 415.2 (1.8) pts $ (1.5) - pts $ 413.7 (1.8) pts
Incurred losses increased by 16.1% to $1,168.1 million for the three months
ended June 30, 2021 , compared to $1,005.7 million for the three months ended
June 30, 2020 . The increase was primarily due to an increase of $129.7 million
in current year attritional losses, mainly related to the impact of the increase
in premiums earned, and partially offset by $131.0 million of COVID-19 Pandemic
losses incurred in 2020 which did not recur in 2021, as well as an increase of
$35.0 million in current year catastrophe losses. The current year catastrophe
losses of $35.0 million for the three months ended June 30, 2021 related
primarily to Tropical Storm Claudette, the Victoria Australia flooding and the
Europe Convective storms. There were no current year catastrophe losses for the
three months ended June 30, 2020 .
Incurred losses increased by 20.4% to $2,440.0 million for the six months ended
June 30, 2021 , compared to $2,026.3 million for the six months ended June 30,
2020 . The increase was primarily due to an increase of $233.0 million in current
year catastrophe losses and an increase of $182.2 million in current year
attritional losses, mainly related to the impact of the increase in premiums
earned and partially offset by $241.0 million of COVID-19 Pandemic losses
incurred in 2020 which did not re-cur in 2021. The current year catastrophe
losses of $257.5 million for the six months ended June 30, 2021 related
primarily to the Texas winter storms ($212.5 million ) with the rest of the
losses emanating from Tropical Storm Claudette, the 2021 Australia floods, the
Victoria Australia flooding and the Europe Convective storms. The $24.5 million
of current year catastrophe losses for the six months ended June 30, 2020
related to the Australian East Coast storm ($10.0 million ), the Nashville
tornadoes ($7.6 million ) and the Australia fires ($6.9 million ).
Segment Expenses. Commission and brokerage expenses increased by 22.2% to $473.3
million for the three months ended June 30, 2021 compared to $387.3 million for
the three months ended June 30, 2020 . Commission and brokerage expenses
increased by 16.4% to $882.0 million for the six months ended June 30, 2021
compared to $757.7 million for the six months ended June 30, 2020 . These
increases were mainly due to the impact of the increases in premiums earned and
changes in the mix of business.
Segment other underwriting expenses increased to $47.1 million for the three
months ended June 30, 2021 from $39.7 million for the three months ended June
30, 2020 . Segment other underwriting expenses increased to $99.1 million for the
six months ended June 30, 2021 from $83.8 million for the six months ended June
30, 2020 . These increases were mainly due to the impact of the increase in
premiums earned.
41
--------------------------------------------------------------------------------
Insurance.
The following table presents the underwriting results and ratios for the Insurance segment for the periods indicated.
Three Months Ended June 30, Six Months Ended June 30,
(Dollars in millions) 2021 2020 Variance % Change
2021 2020 Variance % Change
Gross written premiums
1,390.5 1,181.8 208.7 17.7 %
Premiums earned
$ 1,248.0 $ 1,091.7 $ 156.2 14.3 % Incurred losses and LAE 418.0 401.3 16.7 4.2 % 857.5 811.5 46.0 5.7 % Commission and brokerage 84.5 79.0 5.5 7.0 % 164.8 157.1 7.6 4.8 % Other underwriting expenses 93.8 78.4 15.3 19.5 % 184.0 163.2 20.9 12.8 % Underwriting gain (loss)$ 41.3 $ (18.6) $ 59.9 NM
Point Chg Point Chg
Loss ratio 65.6 % 74.3 % -8.7 68.7 % 74.3 % -5.6
Commission and
brokerage ratio 13.3 % 14.6 % -1.3 13.2 % 14.4 % -1.2
Other underwriting
expense ratio 14.6 % 14.5 % 0.1 14.8 % 15.0 % -0.2
Combined ratio 93.5 % 103.4 % -9.9 96.7 % 103.7 % -7.0
(NM not meaningful)
(Some amounts may not reconcile due to rounding.)
Premiums. Gross written premiums increased by 25.4% to $1,041.9 million for the
three months ended June 30, 2021 compared to $831.0 million for the three months
ended June 30, 2020 . This rise was related to increases in specialty casualty
business, property business and professional liability business. Net written
premiums increased by 26.3% to $749.5 million for the three months ended June
30, 2021 compared to $593.4 million for the three months ended June 30, 2020 ,
which is consistent with the change in gross written premiums. Premiums earned
increased 18.0% to $637.6 million for the three months ended June 30, 2021
compared to $540.1 million for the three months ended June 30, 2020 . The change
in premiums earned relative to net written premiums is the result of timing;
premiums are earned ratably over the coverage period whereas written premiums
are recorded at the initiation of the coverage period.
Gross written premiums increased by 17.9% to $1,914.3 million for the six months
ended June 30, 2021 compared to $1,624.1 million for the six months ended June
30, 2020 . This rise was related to increases in specialty casualty business,
property business and professional liability business, partially offset by a
decline in workers' compensation business. Net written premiums increased by
17.7% to $1,390.5 million for the six months ended June 30, 2021 compared to
$1,181.8 million for the six months ended June 30, 2020 , which is consistent
with the change in gross written premiums. Premiums earned increased 14.3% to
$1,248.0 million for the six months ended June 30, 2021 compared to $1,091.7
million for the six months ended June 30, 2020 . The change in premiums earned
relative to net written premiums is the result of timing; premiums are earned
ratably over the coverage period whereas written premiums are recorded at the
initiation of the coverage period.
42
--------------------------------------------------------------------------------Incurred Losses and LAE. The following table presents the incurred losses and LAE for the Insurance segment for the periods indicated.
Three Months Ended June 30,
Current Ratio %/ Prior Ratio %/ Total Ratio %/
(Dollars in millions) Year Pt Change Years Pt Change Incurred Pt Change
2021
Attritional $ 409.2 64.2 % $ (1.2) -0.2 % 408.0 64.0 %
Catastrophes 10.0 1.6 % - - % 10.0 1.6 %
Total Segment $ 419.2 65.8 % $ (1.2) -0.2 % $ 418.0 65.6 %
2020
Attritional $ 381.8 70.7 % $ 4.5 0.8 % $ 386.3 71.5 %
Catastrophes 15.0 2.8 % - - % 15.0 2.8 %
Total Segment $ 396.8 73.5 % $ 4.5 0.8 % $ 401.3 74.3 %
Variance 2021/2020
Attritional $ 27.4 (6.5) pts $ (5.7) (1.0) pts $ 21.7 (7.5) pts
Catastrophes (5.0) (1.2) pts - - pts (5.0) (1.2) pts
Total Segment $ 22.4 (7.7) pts $ (5.7) (1.0) pts $ 16.7 (8.7) pts
Six Months Ended June 30,
Current Ratio %/ Prior Ratio %/ Total Ratio %/
(Dollars in millions) Year Pt Change Years Pt Change Incurred Pt Change
2021
Attritional $ 801.2 64.2 % $ (1.2) -0.1 % 800.0 64.1 %
Catastrophes 57.5 4.6 % - - % 57.5 4.6 %
Total Segment $ 858.7 68.8 % $ (1.2) -0.1 % $ 857.5 68.7 %
2020
Attritional $ 786.5 72.0 % $ 4.6 0.4 % $ 791.0 72.4 %
Catastrophes 20.5 1.9 % - - % 20.5 1.9 %
Total Segment $ 807.0 73.9 % $ 4.6 0.4 % $ 811.5 74.3 %
Variance 2021/2020
Attritional $ 14.7 (7.8) pts $ (5.8) (0.5) pts $ 9.0 (8.3) pts
Catastrophes 37.0 2.7 pts - - pts 37.0 2.7 pts
Total Segment $ 51.7 (5.1) pts $ (5.8) (0.5) pts $ 46.0 (5.6) pts
(Some amounts may not reconcile due to
rounding.)
Incurred losses and LAE increased by 4.2% to $418.0 million for the three months
ended June 30, 2021 compared to $401.3 million for the three months ended June
30, 2020 . The increase was mainly due to an increase in current year attritional
losses of $27.4 million primarily related to the impact of the increase in
premiums earned, and partially offset by $29.0 million of COVID-19 Pandemic
losses incurred in 2020 which did not recur in 2021. The current year
catastrophe losses of $10.0 million for the three months ended June 30, 2021
related to the Texas winter storms ($10.0 million ). The $15.0 million of current
year catastrophe losses for the three months ended June 30, 2020 related
primarily to the U.S. civil unrest ($15.0 million ).
Incurred losses and LAE increased by 5.7% to $857.5 million for the six months
ended June 30, 2021 compared to $811.5 million for the six months ended June 30,
2020 . The increase was mainly due to an increase in current year catastrophe
losses of $37.0 million and an increase of $14.7 million in current year
attritional losses primarily related to the impact of the increase in premiums
earned, and partially offset by $69.0 million of COVID-19 Pandemic losses
incurred in 2020 which did not recur in 2021. The current year catastrophe
losses of $57.5 million for the six months ended June 30, 2021 related to the
Texas winter storms ($57.5 million ). The $20.5 million of current year
catastrophe losses for the six months ended June 30, 2020 related primarily to
the U.S. civil unrest ($15.0 million ) and the Nashville tornadoes ($5.5
million ).
Segment Expenses. Commission and brokerage increased by 7.0% to $84.5 million
for the three months ended June 30, 2021 compared to $79.0 million for the three
months ended June 30, 2020 . Commission and brokerage increased by 4.8% to $164.8
million for the six months ended June 30, 2021 compared to $157.1 million for
the
43
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six months ended
Segment other underwriting expenses increased to$93.8 million for the three months endedJune 30, 2021 compared to$78.4 million for the three months endedJune 30, 2020 . Segment other underwriting expenses increased to$184.0 million for the six months endedJune 30, 2021 compared to$163.2 million for the six months endedJune 30, 2020 . The increases were mainly due to the impact of the increases in premiums earned and increased expenses related to the continued build out of the insurance business. FINANCIAL CONDITION Cash and Invested Assets. Aggregate invested assets, including cash and short-term investments, were$27,056.0 million atJune 30, 2021 , an increase of$1,594.4 million compared to$25,461.6 million atDecember 31, 2020 . This increase was primarily the result of 1,628.0 million of cash flows from operations,$377.1 million in equity adjustments of our limited partnership investments,$61.9 million due to fluctuations in foreign currencies and$43.4 million in fair value re-measurements, partially offset by$235.6 million of pre-tax unrealized depreciation,$124.3 million paid out in dividends to shareholders,$103.5 million decrease in unsettled securities, the repurchases of 165,562 common shares for$40.3 million , and$37.8 million of amortization bond premium. Our principal investment objectives are to ensure funds are available to meet our insurance and reinsurance obligations and to maximize after-tax investment income while maintaining a high quality diversified investment portfolio. Considering these objectives, we view our investment portfolio as having two components: 1) the investments needed to satisfy outstanding liabilities (our core fixed maturities portfolio) and 2) investments funded by our shareholders' equity. For the portion needed to satisfy global outstanding liabilities, we generally invest in fixed maturities with an average credit quality of A1. This global fixed maturity securities portfolio is externally managed by independent, professional investment managers using portfolio guidelines approved by internal management. Over the past several years, we have expanded the allocation of our investments funded by shareholders' equity to include: 1) a greater percentage of publicly traded equity securities, 2) emerging market fixed maturities through mutual fund structures, as well as individual holdings, 3) high yield fixed maturities, 4) bank and private loan securities and 5) private equity limited partnership investments. The objective of this portfolio diversification is to enhance the risk-adjusted total return of the investment portfolio by allocating a prudent portion of the portfolio to higher return asset classes. We limit our allocation to these asset classes because of 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. AtJune 30, 2021 , the market value of investments in these investment market sectors, carried at both market and fair value, approximated 85.1% of shareholders' equity. The Company's limited partnership investments are comprised of limited partnerships that invest in private equities. Generally, the limited partnerships are reported on a quarter lag. We receive annual audited financial statements for all of the limited partnerships which are prepared using fair value accounting in accordance with FASB guidance. For the quarterly reports, the Company reviews the financial reports for any unusual changes in carrying value. If the Company becomes aware of a significant decline in value during the lag reporting period, the loss will be recorded in the period in which the Company identifies the decline. 44 --------------------------------------------------------------------------------
The tables below summarize the composition and characteristics of our investment portfolio as of the dates indicated.
(Dollars in millions) At June 30, 2021 At December 31,
2020
Fixed maturities, market value$ 21,275.2 78.6 %$ 20,040.2 78.7 % Equity securities, fair value 1,485.8 5.5 % 1,472.2 5.8 % Short-term investments 629.9 2.3 % 1,135.0 4.5 % Other invested assets 2,558.6 9.5 % 2,012.6 7.9 % Cash 1,106.3 4.1 % 801.7 3.1 % Total investments and cash$ 27,056.0 100.0 %$ 25,461.6 100.0 %
(Some amounts may not reconcile due to rounding.)
At At
June 30, 2021 December 31, 2020
Fixed income portfolio duration (years) 3.6 3.6
Fixed income composite credit quality A1 Aa3
The following table provides a comparison of our total return by asset class relative to broadly accepted industry benchmarks for the periods indicated:
Twelve Months
Six Months Ended Ended
June 30, 2021 December 31,
2020
Fixed income portfolio total return 0.5 % 6.3 %
Barclay's Capital - U.S. aggregate index (1.6) % 7.5 %
Common equity portfolio total return 11.1 % 26.7 % S&P 500 index 15.3 %
18.4 %
Other invested asset portfolio total return 25.1 % 8.3 % The pre-tax equivalent total return for the bond portfolio was approximately 0.6% and 5.3%, respectively, for the six months endedJune 30, 2021 and the twelve months endedDecember 31, 2020 . The pre-tax equivalent return adjusts the yield on tax-exempt bonds to the fully taxable equivalent. Our fixed income and equity portfolios have different compositions than the benchmark indexes. Our fixed income portfolios have a shorter duration because we align our investment portfolio with our liabilities. We also hold foreign securities to match our foreign liabilities while the index is comprised of 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$2,032.4 million and$1,994.6 million atJune 30, 2021 andDecember 31, 2020 , respectively. AtJune 30, 2021 ,$668.2 million , or 32.9%, was receivable fromMt. Logan Re collateralized segregated accounts;$195.7 million , or 9.6%, was receivable fromMunich Reinsurance America, Inc. ("Munich Re") and$113.9 million or 5.6% was receivable fromEndurance Specialty Holdings, Ltd. ("Endurance"). No other retrocessionaire accounted for more than 5% of our receivables.
Loss and LAE Reserves. Gross loss and LAE reserves totaled
45
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The following tables summarize gross outstanding loss and LAE reserves by
segment, classified by case reserves and IBNR reserves, for the periods
indicated.
At June 30, 2021
Case IBNR Total % of
(Dollars in millions) Reserves Reserves Reserves Total
Reinsurance $ 5,341.3 $ 7,381.5 $ 12,722.7 72.1 %
Insurance 1,292.5 3,437.6 4,730.1 26.8 %
Total excluding A&E 6,633.8 10,819.1 17,452.9 98.9 %
A&E 173.9 18.9 192.9 1.1 %
Total including A&E $ 6,807.7 $ 10,838.1 $ 17,645.8 100.0 %
(Some amounts may not reconcile
due to rounding.)
At December 31, 2020
Case IBNR Total % of
(Dollars in millions) Reserves Reserves Reserves Total
Reinsurance $ 5,092.7 $ 6,723.8 $ 11,816.5 72.1 %
Insurance 1,282.1 3,082.6 4,364.8 26.6 %
Total excluding A&E 6,374.8 9,806.4 16,181.3 98.7 %
A&E 184.0 33.8 217.7 1.3 %
Total including A&E $ 6,558.8 $ 9,840.2 $ 16,399.0 100.0 %
(Some amounts may not reconcile
due to rounding.)
Changes in premiums earned and business mix, reserve re-estimations, catastrophe
losses and changes in catastrophe loss reserves and claim settlement activity
all impact loss and LAE reserves by segment and in total.
Our loss and LAE reserves represent management's best estimate of our ultimate
liability for unpaid claims. We continuously re-evaluate our reserves, including
re-estimates of prior period reserves, taking into consideration all available
information and, in particular, newly reported loss and claim experience.
Changes in reserves resulting from such re-evaluations are reflected in incurred
losses in the period when the re-evaluation is made. Our analytical methods and
processes operate at multiple levels including individual contracts, groupings
of like contracts, classes and lines of business, internal business units,
segments, legal entities, and in the aggregate. In order to set appropriate
reserves, we make qualitative and quantitative analyses and judgments at these
various levels. Additionally, the attribution of reserves, changes in reserves
and incurred losses among accident years requires qualitative and quantitative
adjustments and allocations at these various levels. We utilize actuarial
science, business expertise and management judgment in a manner intended to
ensure the accuracy and consistency of our reserving practices. Nevertheless,
our reserves are estimates, which are subject to variation, which may be
significant.
There can be no assurance that reserves for, and losses from, claim obligations
will not increase in the future, possibly by a material amount. However, we
believe that our existing reserves and reserving methodologies lessen the
probability that any such increase would have a material adverse effect on our
financial condition, results of operations or cash flows.
46
--------------------------------------------------------------------------------
Asbestos and Environmental Exposures. A&E exposures represent a separate
exposure group for monitoring and evaluating reserve adequacy. The following
table summarizes the outstanding loss reserves with respect to A&E reserves on
both a gross and net of retrocessions basis for the periods indicated.
At At
June 30, December 31,
(Dollars in millions) 2021 2020
Gross reserves $ 194.2 $ 219.3
Reinsurance receivable (18.2) (21.1)
Net reserves $ 176.0 $ 198.3 (Some amounts may not reconcile due to rounding.)
With respect to asbestos only, at
In 2015, we soldMt. McKinley Insurance Company ("Mt. McKinley") toClearwater Insurance Company ("Clearwater"). Concurrently with the closing, we entered into a retrocession treaty with an affiliate of Clearwater. Per the retrocession treaty, we retroceded 100% of the liabilities associated with certain Mt. McKinley policies, which had been reinsured by Bermuda Re. As consideration for entering into the retrocession treaty, Bermuda Re transferred cash of$140.3 million , an amount equal to the net loss reserves as of the closing date. Of the$140.3 million of net loss reserves retroceded,$100.5 million were related to A&E business. The maximum liability retroceded under the retrocession treaty will be$440.3 million , equal to the retrocession payment plus$300.0 million . 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$43.4 million . In addition, the maximum liability permitted to be retroceded increased to$450.3 million . We will retain liability for any amounts exceeding the maximum liability retroceded under the retrocession treaty. Ultimate loss projections for A&E liabilities cannot be accomplished using standard actuarial techniques. We believe that our A&E reserves represent management's best estimate of the ultimate liability; however, there can be no assurance that ultimate loss payments will not exceed such reserves, perhaps by a significant amount. Industry analysts use the "survival ratio" to compare the A&E reserves among companies with such liabilities. The survival ratio is typically calculated by dividing a company's current net reserves by the three year average of annual paid losses. Hence, the survival ratio equals the number of years that it would take to exhaust the current reserves if future loss payments were to continue at historical levels. Using this measurement, our net three year asbestos survival ratio was 5.3 years atJune 30, 2021 . These metrics can be skewed by individual large settlements occurring in the prior three years and therefore, may not be indicative of the timing of future payments. Shareholders' Equity. Our shareholders' equity increased to$10,416.8 million as ofJune 30, 2021 from$9,726.2 million as ofDecember 31, 2020 . This increase was the result of$1,021.8 million of net income,$24.7 million of net foreign currency translation adjustments,$11.1 million of share-based compensation transactions and$4.1 million of net benefit plan obligation adjustments, net of tax partially offset by$206.5 million of unrealized depreciation on investments net of tax,$124.3 million of shareholder dividends, the repurchase of 165,562 common shares for$40.3 million .
LIQUIDITY AND CAPITAL RESOURCES
Capital. Shareholders' equity atJune 30, 2021 andDecember 31, 2020 was$10,416.8 million and$9,726.2 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 47
-------------------------------------------------------------------------------- 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) 2020 2019 2020 2019
Regulatory targeted capital
$ 2,930.3 $ 3,197.4 $ 5,276.0 $ 3,739.1
(1) Regulatory targeted capital represents the target capital level from the applicable year's BSCR calculation.
(2) Regulatory targeted capital represents 200% of the RBC authorized control level calculation for the applicable year.
Our financial strength ratings as determined 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. 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. As part of our capital strategy, we model our potential exposure to catastrophe losses arising from a single event. Projected catastrophe losses are generally summarized in term of probable maximum loss ("PML"). A full discussion on PMLs is included in ourDecember 31, 2020 Form 10-K filing in PART 1, Item 1. Business, Risk Management of Underwriting and Reinsurance Arrangements. We focus on the projected net economic loss from a catastrophe in a given zone as compared to our 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. In ourDecember 31, 2020 Form 10-K, we reported that our projected net economic loss from our largest projected 100-year event represented approximately 6.7% of ourDecember 31, 2020 shareholders' equity. During the first half of 2021, our net exposure to catastrophes has changed due to the market conditions and business decisions. As a result, our projected net economic loss from our largest 100-year event in a given zone represents approximately 6% of ourJune 30, 2021 shareholders' equity.
The table below reflects the Company's PML exposure, net of third party
reinsurance at various return periods for its top zones/perils (as ranked by
largest 1 in 100 year economic loss) based on projection data as of
Return Periods (in years) 1 in 20 1 in 50 1 in 100 1 in 250
1 in 500 1 in 1,000
Exceeding Probability 5.0% 2.0% 1.0% 0.4% 0.2% 0.1%
(Dollars in millions)
Zone/ Peril
Southeast U.S., Wind $ 544 $ 710 $ 847 $ 1,035 $ 1,291 $ 1,799
California, Earthquake 172 504 660 802 962 1,968
Texas Wind 159 346 482 643 694 816
Europe Wind 158 395 590 913 1,066 1,198
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The projected economic losses, defined as PML exposures, net of third party reinsurance, reinstatement premiums and estimated income taxes, for the top zones/perils scheduled are as follows:
Return Periods (in years) 1 in 20 1 in 50 1 in 100 1 in 250
1 in 500 1 in 1,000
Exceeding Probability 5.0% 2.0% 1.0% 0.4% 0.2% 0.1%
(Dollars in millions)
Zone/ Peril
Southeast U.S., Wind $ 355 $ 477 $ 574 $ 724 $ 946 $ 1,285
California, Earthquake 137 365 483 593 706 1,470
Texas Wind 119 254 353 441 494 551
Europe Wind 136 317 465 727 823 943
On October 7, 2020 , we issued an additional $1,000.0 million of 30 year senior
notes at a rate of 3.5%. These senior notes will mature on October 15, 2050 and
will pay interest semi-annually.
During the first two quarters of 2021, we repurchased 165,562 shares for $40.3
million in the open market and paid $124.3 million in dividends to adjust our
capital position and enhance long term expected returns to our shareholders. In
2020, we repurchased 970,892 shares for $200.0 million in the open market and
paid $249.1 million in dividends to adjust our capital position and enhance long
term expected returns to our shareholders. We may at times enter into a Rule
10b5-1 repurchase plan agreement to facilitate the repurchase of shares. On May
22, 2020 , our existing Board authorization to purchase up to 30 million of our
shares was amended to authorize the purchase of up to 32 million shares. As of
June 30, 2021 , we had repurchased 29.8 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.
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 $1,628.0 million and $1,104.6 million for the six months ended
June 30, 2021 and 2020, respectively. Additionally, these cash flows reflected
net catastrophe loss payments of $334.7 million and $355.6 million for the six
months ended June 30, 2021 and 2020, respectively and net tax payments of $34.8
million and $10.9 million for the six months ended June 30, 2021 and 2020,
respectively.
If disbursements for claims and benefits, policy acquisition costs and other
operating expenses were to exceed premium inflows, cash flow from reinsurance
and insurance operations would be negative. The effect on cash flow from
insurance operations would be partially offset by cash flow from investment
income. Additionally, cash inflows from investment maturities and dispositions,
both short-term investments and longer term maturities are available to
supplement other operating cash flows.
As the timing of payments for claims and benefits cannot be predicted with
certainty, we maintain portfolios of long term invested assets with varying
maturities, along with short-term investments that provide additional liquidity
for payment of claims. At June 30, 2021 and December 31, 2020 , we held cash and
short-term investments of $1,736.3 million and $1,936.6 million , respectively.
Our short-term investments are generally readily marketable and can be converted
to cash. In addition to these cash and short-term investments, at June 30, 2021 ,
we had $1,638.8 million of available for sale fixed maturity securities maturing
within one year or less, $6,618.4 million maturing within one to five years and
$6,471.7 million maturing after five years. Our $1,485.8
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million of equity securities are comprised primarily of publicly traded
securities that can be easily liquidated. We believe that these fixed maturity
and equity securities, in conjunction with the short-term investments and
positive cash flow from operations, provide ample sources of liquidity for the
expected payment of losses in the near future. We do not anticipate selling a
significant amount of securities to pay losses and LAE but have the ability to
do so. Sales of securities might result in realized capital gains or losses. At
June 30, 2021 we had $581.2 million of net pre-tax unrealized appreciation
related to fixed maturity securities, comprised of $735.7 million of pre-tax
unrealized appreciation and $154.5 million of pre-tax unrealized depreciation.
Management generally expects annual positive cash flow from operations, which
reflects the strength of overall pricing. However, given the recent set of
catastrophic events, cash flow from operations may decline and could become
negative in the near term as significant claim payments are made related to the
catastrophes. However, as indicated above, the Company has ample liquidity to
settle its catastrophe claims.
In addition to our cash flows from operations and liquid investments, we also
have multiple credit facilities that provide up to $1,300.0 million and £52.2
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 "2016 Group
Credit Facility". Wells Fargo Corporation ("Wells Fargo Bank ") is the
administrative agent for the 2016 Group Credit Facility, which consists of two
tranches. Tranche one provides up to $200.0 million of unsecured revolving
credit for liquidity and general corporate purposes, and for the issuance of
unsecured standby letters of credit. Tranche two exclusively provides up to
$600.0 million for the issuance of standby letters of credit on a collateralized
basis.
Effective May 26, 2021 , the term of the 2016 Group Credit Facility expired. The
Company elected not to renew this facility to allow for the replacement by new
credit facilities, including the 2021 Bermuda Re Wells Fargo Letter of Credit
Facility. As a result, Tranche One of the Group Credit Facility (unsecured
revolving credit in the amount of $200.0 million ) is no longer effective or
available for use. The $600 million of credit availability in Tranche two will
be in run-off and able to support standby letters of credit currently in force
through December 31, 2021 . As of December 31, 2021 , the entirety of the 2016
Group Credit Facility will have expired and will no longer be effective.
The Group Credit Facility requires Group to maintain a debt to capital ratio of
not greater than 0.35 to 1 and to maintain a minimum net worth. Minimum net
worth is an amount equal to the sum of $5,371.0 million plus 25% of consolidated
net income for each of Group's fiscal quarters, for which statements are
available ending on or after March 31, 2016 and for which consolidated net
income is positive, plus 25% of any increase in consolidated net worth during
such period attributable to the issuance of ordinary and preferred shares, which
at June 30, 2021 , was $6,649.3 million . As of June 30, 2021 , the Company was in
compliance with all Group Credit Facility covenants.
At June 30, 2021 and December 31, 2020 , the Company had no outstanding
short-term borrowings from the Group Credit Facility revolving credit line. At
June 30, 2021 , the Group Credit Facility had $402.3 million outstanding letters
of credit under tranche two. At December 31, 2020 , the Group Credit Facility had
$164.2 million outstanding letters of credit under tranche one and $589.7
million outstanding letters of credit under tranche two.
Effective May 12, 2020 , Everest International amended its credit facility with
Lloyds Bank plc ("Everest International Credit Facility"). The current amendment
of the Everest International Credit Facility provides up to £52.2 million for
the issuance of standby letters of credit on a collateralized basis.
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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 $6,393.0 , million (70% of
consolidated net worth as of December 31, 2019 ), plus 25% of consolidated net
income for each of Group's fiscal quarters, for which statements are available
ending on or after January 1, 2019 and for which net income is positive, plus
25% of any increase in consolidated net worth of Group during such period
attributable to the issuance of ordinary and preferred shares, which at June 30,
2021 , was $6,786.2 million . As of June 30, 2021 , the Company was in compliance
with all Everest International Credit Facility requirements.
At
Costs incurred in connection with theGroup Credit Facility and Everest International Credit Facility were$0.3 million for the three months endedJune 30, 2021 and 2020. Costs incurred in connection with theGroup Credit Facility and Everest International Credit Facility were$0.7 million and$0.5 million for the six months endedJune 30, 2021 and 2020, respectively.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 ofJune 30, 2021 ,Everest Re had admitted assets of approximately$18,197.2 million which provides borrowing capacity of up to approximately$1,819.7 million . As ofJune 30, 2021 ,Everest Re had$310.0 million of outstanding borrowings through its FHLB borrowing capacity. The$310.0 million of collateralized borrowings have interest payable at a rate of 0.35%.
Market Sensitive Instruments.
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$27.1 billion investment portfolio, atJune 30, 2021 , is principally comprised of fixed maturity securities, which are generally subject to interest rate risk and some foreign currency exchange rate risk, and some equity securities, which are subject to price fluctuations and some foreign exchange rate risk. The overall economic impact of the foreign exchange risks on the investment portfolio is partially mitigated by changes in the dollar value of foreign currency denominated liabilities and their associated income statement impact. Interest rate risk is the potential change in value of the fixed maturity securities portfolio, including short-term investments, from a change in market interest rates. In a declining interest rate environment, it includes prepayment risk on the$3,376.9 million of mortgage-backed securities in the$21,275.2 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. 51 -------------------------------------------------------------------------------- The table below displays the potential impact of market value fluctuations and after-tax unrealized appreciation on our fixed maturity portfolio (including$629.9 million of short-term investments) for the period indicated based on upward and downward parallel and immediate 100 and 200 basis point shifts in interest rates. For legal entities with aU.S. dollar functional currency, this modeling was performed on each security individually. To generate appropriate price estimates on mortgage-backed securities, changes in prepayment expectations under different interest rate environments were taken into account. For legal entities with a non-U.S. dollar functional currency, the effective duration of the involved portfolio of securities was used as a proxy for the market value change under the various interest rate change scenarios. Impact of Interest Rate Shift in Basis Points At June 30, 2021 -200 -100 0 100 200 (Dollars in millions) Total Market/Fair Value$ 23,462.3 $ 22,683.7 $ 21,905.1 $ 21,126.6 $ 20,348.0 Market/Fair Value Change 7.1 % 3.6 % 0.0 % (3.6) % (7.1) % from Base (%) Change in Unrealized Appreciation After-tax from Base ($)$ 1,361.4 $ 680.7 $ -$ (680.7) $ (1,361.4) We had$17,645.8 million and$16,399.0 million of gross reserves for losses and LAE as ofJune 30, 2021 andDecember 31, 2020 , respectively. These amounts are recorded at their nominal value, as opposed to present value, which would reflect a discount adjustment to reflect the time value of money. Since losses are paid out over a period of time, the present value of the reserves is less than the nominal value. As interest rates rise, the present value of the reserves decreases and, conversely, as interest rates decline, the present value increases. These movements are the opposite of the interest rate impacts on the fair value of investments. While the difference between present value and nominal value is not reflected in our financial statements, our financial results will include investment income over time from the investment portfolio until the claims are paid. Our loss and loss reserve obligations have an expected duration of approximately 3.7 years, which is reasonably consistent with our fixed income portfolio. If we were to discount our loss and LAE reserves, net of ceded reserves, the discount would be approximately$0.8 billion resulting in a discounted reserve balance of approximately$15.0 billion , representing approximately 68.3% 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 June 30, 2021
(Dollars in millions) -20% -10% 0% 10% 20%
Fair/Market Value of the Equity Portfolio
1,485.8 $ 1,634.4 $ 1,783.0
After-tax Change in Fair/Market Value $ (235.3) $ (117.6) $ - $ 117.6 $ 235.3
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
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Canadian Dollar, the Singapore Dollar, the British Pound Sterling and the Euro.
We mitigate foreign exchange exposure by generally matching the currency and
duration of our assets to our corresponding operating liabilities. In accordance
with FASB guidance, the impact on the market value of available for sale fixed
maturities due to changes in foreign currency exchange rates, in relation to
functional currency, is reflected as part of other comprehensive income.
Conversely, the impact of changes in foreign currency exchange rates, in
relation to functional currency, on other assets and liabilities is reflected
through net income as a component of other income (expense). In addition, we
translate the assets, liabilities and income of non-U.S. dollar functional
currency legal entities to the U.S. dollar. This translation amount is reported
as a component of other comprehensive income.
Safe Harbor Disclosure.
This report contains forward-looking statements within the meaning of 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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