AND ANALYSIS
OF FINANCIAL CONDITION
AND RESULTS
OF
OPERATION
Industry Conditions.
The worldwide reinsurance
and insurance businesses
are highly competitive,
as well as
cyclical by product
and
market.
As such,
financial results
tend to
fluctuate with
periods of
constrained availability,
higher rates
and
stronger profits
followed by
periods of abundant capacity,
lower rates and constrained
profitability.
Competition in the
types of reinsurance
and insurance business
that we
underwrite is based
on many
factors,
including the perceived overall financial strength
of the reinsurer or insurer,
ratings of the reinsurer or insurer by
A.M. Best and/or
Standard &
Poor's, underwriting expertise,
the jurisdictions where
the reinsurer
or insurer is
licensed or
otherwise authorized,
capacity and
coverages offered,
premiums charged,
other terms
and
conditions of
the reinsurance
and insurance
business offered,
services offered,
speed of
claims payment
and
reputation and
experience in
lines written.
Furthermore, the
market impact
from these
competitive factors
related to
reinsurance and
insurance is
generally not
consistent across
lines of business,
domestic and
international geographical areas and distribution channels.
We compete
in the U.S.,
Bermuda and international
reinsurance and
insurance markets
with numerous
global
competitors. Our
competitors include
independent reinsurance
and insurance
companies, subsidiaries or
affiliates of
established worldwide
insurance companies,
reinsurance departments
of certain
insurance
companies, domestic and
international underwriting operations,
including underwriting syndicates
at Lloyd's
of
London and
certain government
sponsored risk
transfer vehicles.
Some of
these competitors
have greater
financial resources than we
do and have established
long term and continuing
business relationships, which can
be a
significant competitive
advantage.
In addition,
the lack
of strong
barriers to
entry into
the reinsurance
business and
recently, the
securitization of
reinsurance and
insurance risks
through capital
markets provide
additional sources of potential reinsurance and insurance capacity and
competition.
Worldwide insurance
and reinsurance
market conditions
historically have
been competitive.
Generally, there
was ample insurance and
reinsurance capacity relative
to demand, as well
as, additional capital from
the capital
markets through
insurance linked
financial instruments.
These financial
instruments such
as side
cars,
catastrophe bonds
and collateralized
reinsurance funds, provided
capital markets
with access to
insurance and
reinsurance risk exposure.
The capital markets
demand for these
products was being
primarily driven by
a low
interest environment and
the desire to achieve greater
risk diversification and potentially higher returns
on their
investments.
This increased competition was generally
having a negative impact on
rates, terms and conditions;
however,
the impact varies widely by market and coverage.
The industry
continues to
deal with
the impacts
of a
global pandemic,
COVID-19.
Globally, many
countries
mandated that their citizens remain at
home and many non-essential businesses have continued
to be physically
closed.
We closed our
physical offices; however,
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.
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 resulting in
realized and unrealized
investment losses in
our March 31,
2020 financial statements.
However,
the financial
markets rebounded
during the
second and
third quarters
and we
recognized after
-tax
realized gains of
$239.4 million and
unrealized gains of
$596.5 million in
our financial statements
for these two
quarters.
Nevertheless, the lack of business
activity may lead to
an increase in bankruptcies
and corresponding
credit losses.
There will also
be a negative
impact on future
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
37
quarter ended September 30,
2020, our underwriting results
include $125 million of
estimated losses related
to
the pandemic and
$435 million for
the nine months
ended September 30,
2020.
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
had 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.
The increased frequency of
catastrophe losses in
2020
appears to be
further pressuring the
increase of rates.
Rates also appear
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 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.
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.
38
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
Percentag
e
Nine Months Ended
Percentag
e
September 30,
Increase/
September 30,
Increase/
(Dollars in millions)
2020
2019
(Decrease)
2020
2019
(Decrease)
Gross written premiums
$
2,791.6$
2,403.3
16.2
%
$
7,731.8$
6,697.0
15.5
%
Net written premiums
2,448.7
2,068.6
18.4
%
6,667.6
5,704.2
16.9
%
REVENUES:
Premiums earned
$
2,205.8$
1,905.6
15.8
%
$
6,285.0$
5,455.6
15.2
%
Net investment income
234.2
181.1
29.4
%
420.1
501.1
-16.2
%
Net realized capital gains (losses)
110.2
(12.9)
NM
%
84.3
109.6
-23.1
%
Net derivative gain (loss)
2.5
(0.2)
NM
%
(1.0)
3.4
-130.9
%
Other income (expense)
57.5
(31.0)
NM
%
48.4
(52.6)
-192.0
%
Total revenues
2,610.2
2,042.5
27.8
%
6,836.7
6,017.1
13.6
%
CLAIMS AND EXPENSES:
Incurred losses and loss adjustment expenses
1,736.2
1,371.9
26.6
%
4,574.1
3,515.1
30.1
%
Commission, brokerage, taxes and fees
445.3
443.1
0.5
%
1,360.2
1,253.5
8.5
%
Other underwriting expenses
138.9
118.2
17.5
%
385.9
322.0
19.8
%
Corporate expenses
10.6
8.4
25.9
%
29.2
22.6
29.0
%
Interest, fees and bond issue cost amortization expense
6.6
7.9
-16.0
%
21.5
24.0
-10.4
%
Total claims and expenses
2,337.7
1,949.5
19.9
%
6,370.8
5,137.2
24.0
%
INCOME (LOSS) BEFORE TAXES
272.5
93.0
193.0
%
466.0
879.9
-47.0
%
Income tax expense (benefit)
29.5
(11.4)
NM
%
15.4
88.1
-82.5
%
NET INCOME (LOSS)
$
243.1$
104.4
132.8
%
$
450.5$
791.8
-43.1
%
RATIOS:
Point
Change
Point
Change
Loss ratio
78.7
%
72.0
%
6.7
72.8
%
64.4
%
8.4
Commission and brokerage ratio
20.2
%
23.3
%
(3.1)
21.7
%
23.0
%
(1.3)
Other underwriting expense ratio
6.3
%
6.1
%
0.2
6.1
%
5.9
%
0.2
Combined ratio
105.2
%
101.4
%
3.8
100.6
%
93.3
%
7.3
At
At
Percentag
e
September 30,
December 31,
Increase/
(Dollars in millions, except per share amounts)
2020
2019
(Decrease)
Balance sheet data:
Total investments and cash
$
23,104.7$
20,748.5
11.4
%
Total assets
30,153.0
27,324.1
10.4
%
Loss and loss adjustment expense reserves
15,233.1
13,611.3
11.9
%
Total debt
710.8
633.8
12.1
%
Total liabilities
20,561.7
18,191.1
13.0
%
Shareholders' equity
9,591.3
9,132.9
5.0
%
Book value per share
239.98
223.85
7.2
%
(NM, not meaningful)
(Some amounts may not reconcile due to rounding.)
Revenues.
Premiums.
Gross written premiums increased
by 16.2% to $2,791.6 million
for the three months
ended
September 30, 2020, compared to $2,403.3 million for
the three months ended September 30, 2019, reflecting
a
$350.3 million,
or 20.2%,
increase in
our re
insurance business
and a
$38.0 million,
or 5.7%,
increase in
our
insurance business.
The increase
in reinsurance
premiums was
mainly due
to increases
in treaty
property
business and facultative
business.
The rise in
insurance premiums was
primarily due to
increases in many
lines
of business, including casualty,
specialty lines and business written
through the Lloyd's
Syndicate.
Gross written
premiums increased by 15.5%
to $7,731.8 million for
the nine months ended
September 30, 2020, compared
to
$6,697.0 million for
the nine months
ended September 30, 2019,
reflecting a $724.8
million, or 15.5%, increase
in our re
insurance business and
a $310.0 million,
or 15.4%, increase
in our insurance
business.
The increase in
reinsurance premiums was
mainly due to increases
in treaty property
business, casualty writings and facultative
39
business.
The rise
in insurance
premiums was
primarily due
to increases
in many
lines of
business, including
property, casualty,
specialty lines, accident and health and business written through the Lloyd's
Syndicate.
Net written premiums
increased by 18.4%
to $2,448.7 million for
the three months
ended September 30, 2020,
compared to $2,068.6 million for the three months ended September 30, 2019.
Net written premiums increased
by 16.9% to
$6,667.6 million for
the nine months
ended September 30,
2020, compared to
$5,704.2 million for
the nine months
ended September 30,
2019.
The differences
between the changes
in gross written
premiums
compared to the
changes in net written premiums are primarily due to varying utiliza
tion of reinsurance.
Premiums earned
increased by
15.8% to
$2,205.8 million
for the
three months
ended September
30, 2020,
compared to $1,905.6
million for the three
months ended September 30,
2019.
Premiums earned increased by
15.2% to $6,285.0 million for
the nine months ended September
30, 2020, compared to
$5,455.6 million for the
nine months ended September 30, 2019.
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
by 29.4%
to $234.2
million for
the three
months
ended September
30, 2020,
compared with
investment income
of $181.1
million for
the three
months ended
September 30, 2019.
This increase was
primarily the result of
an increase in limited
partnership income, as
the
improvement in the
equity markets during
the second quarter
had a positive
impact on the
limited partnership
valuations, and we had higher income
from our growing fixed
income portfolio.
Net investment income
decreased by 16.2%
to $420.1 million
for the nine
months ended September
30, 2020, compared
with
investment income
of $501.1 million
for the nine
months ended September
30, 2019.
This decrease in
income
was primarily the
result of losses
from our limited
partnerships in the
second quarter,
partially offset by
higher
income from our
growing fixed
maturity portfolio.
Net pre-tax
investment income,
as a percentage
of average
invested assets,
was 4.4%
for the
three months
ended September
30, 2020,
compared to
3.7% for
the three
months ended September 30, 2019.
Net pre-tax investment income, as
a percentage of average
invested assets,
was 2.7%
for the
nine months
ended September
30, 2020,
compared to
3.5% for
the nine
months ended
September 30, 2019.
Net Realized Capital Gains
(Losses).
Net realized capital gains
were $110.2 million and net realized
capital losses
were $12.9 million for the three months ended September 30, 2020 and
2019, respectively.
As discussed earlier,
the COVID-19 pandemic caused significant volatility in the global financial
markets.
The net realized capital gains
of $110.2 million for the three months
ended September 30, 2020 were comprised of
$100.0 million of net gains
from fair
value re
-measurements,
resulting primarily from
increases in equity
security valuations which
further
rebounded from
declines in
the first
quarter of
2020, $6.2
million from
a decline
in net
allowances for
credit
losses and $4.0 million
of net realized
capital gains from
sales of investments
.
The net realized
capital losses of
$12.9 million
for the
three months
ended September
30, 2019
were comprised
of $12.0
million of
net losses
from fair value
re-measurements and $7.3 million
of other-than-temporary impairments,
partially offset by $6.5
million of net realized capital gains from sales of investments.
Net realized capital
gains were $84.3
million and $109.6 million for
the nine months ended
September 30, 2020
and 2019, respectively.
The net realized capital
gains of $84.3 million for
the nine months ended September
30,
2020 were
comprised of $116.3
million of net
gains from
fair value
re-measurements, partially offset
by $19.6
million of net
allowances for credit
losses and $12.4 million
of net realized
capital losses from
sales of
investments.
The net
realized capital
gains
of $109.6
million for
the nine
months ended
September 30,
2019
were comprised of $102.8 million of
net gains from fair
value re-measurements and $22.3 million
of net realized
capital gains from sales of investments, partially offset by $15.4 million of
other-than-temporary
impairments.
Net Derivative
Gain (Loss).
In 2005
and prior,
we sold
seven equity
index put
option contracts,
one of which
remained outstanding at September 30,
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 a net derivative
gain of $2.5 million and
a net derivative loss of
$0.2 million
40
for the three months ended September 30,
2020 and 2019, respectively,
and net derivative losses of $1.0 million
and net derivative
gains of $3.4
million for the
nine months ended
September 30, 2020
and 2019, respectively.
The changes in the
fair value of
these equity index
put option contracts
is generally indicat
ive of the changes
in
the equity markets and interest rates over
the same periods.
Other Income (Expense).
We recorded
other income of
$57.5 million and
$48.4 million for
the three and
nine
months ended September 30, 2020, respectively.
We recorded other
expense of $31.0 million and $52.6 million
for the three
and nine months
ended September 30,
2019, respectively.
The changes were
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 $61.4
million and $37.9 million for the three and nine months ended September 30,
2020, respectively.
We recognized
foreign currency
exchange expense
of $26.0
million and
$44.5 million
for the
three and
nine months
ended
September 30, 2019, respectively.
Claims and Expenses.
Incurred Losses
and Loss
Adjustment Expenses.
The following
tables present
our incurred
losses and
loss
adjustment expenses ("LAE") for the periods indicated.
Three Months Ended September 30,
Current
Ratio %/
Prior
Ratio %/
Total
Ratio %/
(Dollar in millions)
Year
Pt Change
Years
Pt Change
Incurred
Pt Change
2020
Attritional
$
1,427.5
64.8
%
$
(1.3)
-0.1
%
$
1,426.2
64.7
%
Catastrophes
310.0
14.0
%
-
-
%
310.0
14.0
%
Total
$
1,737.5
78.8
%
$
(1.3)
-0.1
%
$
1,736.2
78.7
%
2019
Attritional
$
1,128.7
59.2
%
$
(52.2)
-2.7
%
$
1,076.4
56.5
%
Catastrophes
295.5
15.5
%
-
-
%
295.5
15.5
%
Total
$
1,424.2
74.7
%
$
(52.2)
-2.7
%
$
1,371.9
72.0
%
Variance 2020/2019
Attritional
$
298.8
5.6
pts
$
50.9
2.6
pts
$
349.8
8.2
pts
Catastrophes
14.5
(1.5)
pts
-
-
pts
14.5
(1.5)
pts
Total
$
313.3
4.1
pts
$
50.9
2.6
pts
$
364.3
6.7
pts
Nine Months Ended September 30,
Current
Ratio %/
Prior
Ratio %/
Total
Ratio %/
(Dollar in millions)
Year
Pt Change
Years
Pt Change
Incurred
Pt Change
2020
Attritional
$
4,217.6
67.1
%
$
1.4
0.1
%
$
4,219.1
67.2
%
Catastrophes
355.0
5.6
%
-
-
%
355.0
5.6
%
Total
$
4,572.6
72.7
%
$
1.4
0.1
%
$
4,574.1
72.8
%
2019
Attritional
$
3,239.0
59.4
%
$
(74.4)
-1.4
%
$
3,164.6
58.0
%
Catastrophes
320.5
5.9
%
30.0
0.5
%
350.5
6.4
%
Total
$
3,559.5
65.3
%
$
(44.4)
-0.9
%
$
3,515.1
64.4
%
Variance 2020/2019
Attritional
$
978.6
7.7
pts
$
75.8
1.5
pts
$
1,054.5
9.2
pts
Catastrophes
34.5
(0.3)
pts
(30.0)
(0.5)
pts
4.5
(0.8)
pts
Total
$
1,013.1
7.4
pts
$
45.8
1.0
pts
$
1,059.0
8.4
pts
Incurred losses and LAE increased by 26.6% to $1,736.2
million for the three months ended September 30, 2020,
compared to $1,371.9
million for the
three months ended
September 30, 2019.
The increase was
primarily due
to a rise of
$298.8 million in current
year attritional losses,
mainly due to $124.9
million of losses related
to the
COVID-19 pandemic and
the impact of the
increase in premiums
earned, as well
as an increase
of $14.5 million
in current year
catastrophe losses.
The current year
catastrophe losses
of $310.0 million
for the three
months
ended September 30,
2020 related to
Hurricane Laura ($131.0
million), the Northern
California wildfires ($52.0
million), the California
Glass wildfire ($30.0
million), Hurricane Sally
($26.0 million), the
Oregon wildfires ($21.0
million), Hurricane Isaias
($19.9 million), the
Derecho storms
($15.1 million) and
the Calgary storms
in Canada
41
($15.0 million).
The $295.5 million of current year catastrophe losses for the three
months ended September 30,
2019 related to Hurricane Dorian ($164.5 million) and Typhoon Faxai ($131.0
million).
Incurred losses and LAE
increased by 30.1% to
$4,574.1 million for the
nine months ended September
30, 2020,
compared to $3,515.1 million for the nine months ended September 30, 2019.
The increase was primarily due to
a rise of
$978.6 million in
current year
attritional losses,
mainly due to
$434.9 million of
losses related
to the
COVID-19 pandemic and
the impact of the
increase in premiums
earned, as well
as an increase
of $34.5 million
in current
year catastrophe
losses.
The current
year catastrophe
losses of $355.0
million fo
r
the nine months
ended September 30,
2020 related to
Hurricane Laura ($131.0
million), the Northern
California wildfires ($52.0
million), the California
Glass wildfire ($30.0
million), Hurricane Sally
($26.0 million), the
Oregon wildfires ($21.0
million), Hurricane
Isaias ($19.9
million), the
2020 U.S.
civil unrest
($17.4 million),
Nashville tornadoes
($15.2
million), the Derecho
storms ($15.1 million),
the Calgary storms
in Canada ($15.0
million), AustraliaEast Coast
Storm ($6.8 million)
and the 2020
Australia fires
($5.6 million).
The $320.5 million
of current year
catastrophe
losses for
the nine
months ended
September 30,
2019 related
to Hurricane
Dorian ($164.5
million), Typhoon
Faxai ($131.0 million) and the Townsville
monsoon in Australia ($25.0 million).
Commission, Brokerage,
Taxes
and Fees.
Commission, brokerage,
taxes and
fees increased
by 0.5% to
$445.3
million for
the three
months ended
September 30,
2020, compared
to $443.1
million for
the three
months
ended September 30,
2019.
Commission, brokerage,
taxes and
fees increased
by 8.5% to
$1,360.2 million for
the nine months
ended September 30,
2020, compared to
$1,253.5 million for
the nine months
ended
September 30, 2019.
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
$138.9 million
and $118.2
million for
the
three months
ended September
30, 2020
and 2019,
respectively.
Other underwriting
expenses were
$385.9
million and $322.0 million for the nine months ended
September 30, 2020 and 2019, respectively.
The increases
in other underwriting expenses were mainly due to the impact of the increases in
premiums earned.
Corporate Expenses.
Corporate expenses,
which are
general operating
expenses that
are not
allocated to
segments, were
$10.6 million
and $8.4
million for
the three
months ended
September 30,
2020 and
2019,
respectively,
and $29.2
million and
$22.6 million
for the
nine months
ended September
30, 2020
and 2019,
respectively.
These increases were mainly due to costs associated with the relocation of our
U.S. headquarters.
Interest, Fees
and Bond
Issue Cost
Amortization Expense.
Interest, fees
and other
bond amortization
expense
was $6.6
million and
$7.9 million
for the
three months
ended September
30, 2020
and 2019,
respectively.
Interest, fees
and other
bond amortization
expense was
$21.5 million
and $24.0
million for
the nine
months
ended September 30, 2020 and 2019, respectively.
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 2.67% as of September 30, 2020.
Income Tax
Expense (Benefit).
We had an
income tax expense
of $29.5 million
and $15.4 million
for the three
and nine months
ended September 30,
2020, respectively.
We had
an income tax
benefit of $11.4
million and
income tax
expense of
$88.1 million
for the
three and
nine months
ended September
30, 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 ended September 30, 2020 as compared to the three months ended
September 30, 2019 results
primarily from higher investment
income and realized
investment gains, partially
offset by the estimated
incurred losses from
the COVID-19 pandemic.
The change in income
tax for the
nine months ended September
30, 2020
as compared
to the
nine months
ended September
30, 2019
was primarily
due to
the estimated
42
incurred losses from the
COVID-19 pandemic and the
beneficial tax impact
from the Coronavirus
Aid, Relief and
Economic Securities Act ("the CARES Act").
The CARES Act
was passed by
Congress and signed
into law by
the President on
March 27, 2020
in response to
the COVID
-19 pandemic.
Among the
provisions of
the CARES
Act was
a special
tax provision
which 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 ended March 31, 2020.
Net Income (Loss).
Our net
income was
$243.1 million
and $104.4
million for
the three
months ended
September 30,
2020 and
2019, respectively.
Our net income was $450.5 million and $791.8 million for the nine months ended
September
30, 2020
and 2019,
respectively.
The changes
were primarily
driven by
the financial
component fluctuations
explained above.
Ratios.
Our combined ratio increased by 3.8 points
to 105.2% for the three months ended September
30, 2020,
compared to 101.4% for the three months
ended September 30, 2019, and increased by 7.3 points to 100.6% for
the nine
months ended
September 30,
2020, compared
to 93.3%
for the
nine months
ended September
30,
2019.
The loss
ratio component
increased 6.7
points and
8.4 points
for the
three and
nine months
ended
September 30, 2020 over the same periods last
year mainly due to $124.9 million and $434.9 million of
attritional losses related
to the COVID
-19 pandemic for
the three and
nine months ended
September 30, 2020,
respectively.
The commission and
brokerage ratio
component decreased to
20.2% for the
three months ended
September 30,
2020 compared
to 23.3%
for the
three months
ended September
30, 2019
and decreased
to
21.7% for the
nine months ended
September 30, 2020
compared to 23.0%
for the nine
months ended
September 30, 2019.
The declines were
mainly due to
changes in the
mix of business.
The other underwriting
expense ratio increased slightly to 6.3% for the three months
ended September 30, 2020 from 6.1% for the three
months ended
September 30,
2019 and
increased slightly
to 6.1%
for the
nine months
ended September
30,
2020 from
5.9% for
the nine months
ended September 30,
2019.
The increases for
the three and
nine month
periods were mainly due to employee benefit expenses.
Shareholders' Equity.
Shareholders' equity
increased by
$458.4 million
to $9,591.3
million at
September 30,
2020 from
$9,132.9
million at December 31, 2019, principally as a result of $450.5 million of
net income, $348.5 million of unrealized
appreciation on
investments net
of tax,
$30.4 million
of net
foreign currency
translation adjustments,
$15.7
million of share
-based compensation
transactions and
$4.5 million of
net benefit
plan obligation
adjustments,
partially offset
by the repurchase
of 970,892 common
shares for
$200.0 million, $187.1
million of shareholder
dividends, and $4.2 million of cumulative adjustment from the adoption of ASU
2016-13.
Consolidated Investment Results
Net Investment Income.
Net investment
income increased by
29.4% to $234.2
million for the
three months ended
September 30, 2020,
compared with
investment income
of $181.1
million for
the three
months ended
September 30,
2019.
This
increase was primarily the
result of an increase
in limited partnership income,
as the improvement in
the equity
markets during
the second
quarter had
a positive
impact on
the limited
partnership valuations,
and we
had
higher income from
our growing fixed
income portfolio.
Net investment income
decreased by 16.2%
to $420.1
million for the nine months
ended September 30, 2020, compared
with investment income of
$501.1 million for
the nine months ended September 30, 2019.
This decrease in income was primarily the result of losses from
our
limited partnerships
in the
second quarter,
partially offset
by higher
income from
our growing
fixed maturity
portfolio.
43
The following table shows the components of net investment income for the
periods indicated.
Three Months Ended
Nine Months Ended
September 30,
September 30,
(Dollars in millions)
2020
2019
2020
2019
Fixed maturities
$
136.1$
130.1$
407.9$
383.4
Equity securities
4.4
4.2
11.6
12.3
Short-term investments and cash
0.5
3.9
4.4
13.5
Other invested assets
Limited partnerships
88.8
43.8
22.1
100.3
Other
14.7
7.3
(1.3)
13.6
Gross investment income before
adjustments
244.5
189.3
444.7
523.1
Funds held interest income (expense)
0.7
2.3
10.9
9.7
Future policy benefit reserve income (expense)
(0.3)
(0.4)
(0.8)
(1.0)
Gross investment income
244.9
191.2
454.8
531.8
Investment expenses
(10.7)
(10.1)
(34.7)
(30.7)
Net investment income
$
234.2$
181.1$
420.1$
501.1
(Some amounts may not reconcile due to rounding.)
The following tables show a comparison of various investment yields for the
periods indicated.
At
At
September 30,
December 31,
2020
2019
Imbedded pre-tax yield of cash and invested
assets
3.1
%
3.4
%
Imbedded after-tax yield of cash and invested
assets
2.7
%
3.0
%
Three Months Ended
Nine Months Ended
September 30,
September 30,
2020
2019
2020
2019
Annualized pre-tax yield on average
cash and invested assets
4.4
%
3.7
%
2.7
%
3.5
%
Annualized after-tax yield on average
cash and invested assets
3.8
%
3.3
%
2.3
%
3.1
%
44
Net Realized Capital Gains (Losses).
The following table presents the composition of our net realized capital gains
(losses) for the periods indicated.
Three Months Ended September 30,
Nine Months Ended September 30,
(Dollars in millions)
2020
2019
Variance
2020
2019
Variance
Gains (losses) from sales:
Fixed maturity securities, market value:
Gains
$
18.7$
14.3$
4.4$
54.1$
42.0$
12.1
Losses
(13.3)
(9.0)
(4.3)
(53.1)
(25.3)
(27.8)
Total
5.4
5.3
0.1
0.9
16.7
(15.8)
Fixed maturity securities, fair value:
Gains
$
-
$
-
$
-
-
0.4
(0.4)
Losses
(2.0)
-
(2.0)
(2.0)
-
(2.0)
Total
(2.0)
-
(2.0)
(2.0)
0.4
(2.4)
Equity securities, fair value:
Gains
9.5
1.0
8.5
30.3
9.3
21.0
Losses
(10.8)
(2.2)
(8.6)
(42.9)
(6.7)
(36.2)
Total
(1.3)
(1.1)
(0.1)
(12.6)
2.6
(15.2)
Other Invested Assets:
Gains
1.4
2.6
(1.2)
6.0
2.9
3.1
Losses
(0.3)
(0.5)
0.3
(5.9)
(0.6)
(5.3)
Total
1.1
2.1
(0.9)
0.1
2.3
(2.2)
Short Term Investments:
Gains
0.8
0.2
0.6
1.2
0.3
0.9
Losses
-
-
-
-
-
-
Total
0.8
0.2
0.6
1.2
0.3
0.9
Total net realized
gains (losses) from sales:
Gains
30.4
18.2
12.2
91.5
54.9
36.7
Losses
(26.4)
(11.7)
(14.7)
(103.9)
(32.6)
(71.3)
Total
4.0
6.5
(2.4)
(12.4)
22.3
(34.6)
Allowance for credit losses
6.2
-
6.2
(19.6)
-
(19.6)
Other-than-temporary impairments:
-
(7.3)
7.3
-
(15.4)
15.4
Gains (losses) from fair value adjustments:
Fixed maturities, fair value
3.3
-
3.3
1.9
-
1.9
Equity securities, fair value
96.7
(12.0)
108.7
114.4
102.8
11.6
Total
100.0
(12.0)
112.0
116.3
102.8
13.5
Total net realized
capital gains (losses)
$
110.2$
(12.9)$
123.1
84.3
109.6
(25.3)
(Some amounts may not reconcile due to rounding.)
Net realized
capital gains
were $110.2
million and net
realized capital
losses were
$12.9 million
for the
three
months ended September 30, 2020 and 2019, respectively.
As discussed earlier,
the COVID-19 pandemic caused
significant volatility
in the
global financial
markets.
For the
three months
ended September
30, 2020,
we
recorded $100.0
million of
net gains
from fair
value re
-measurements,
resulting primarily
from increases
in
equity security valuations which further rebounded from declines in the first
quarter of 2020, $6.2 million from a
decline in net allowances for credit losses and $4.0 million of net realized
capital
gains from sales of investments.
For the
three months
ended September
30, 2019,
we recorded
$12.0 million of
net losses
from fair
value re-
measurements and
$7.3 million
of other-than-temporary
impairments, partially
offset by
$6.5 million
of net
realized capital gains from
sales of investments.
The fixed maturity and equity sales for
the three months ended
45
September 30,
2020 and
2019 related
primarily to
adjusting the
portfolios for
overall market
changes and
individual credit shifts.
Net realized capital
gains were $84.3
million and $109.6 million for
the nine months ended
September 30, 2020
and 2019, respectively.
For the nine months ended September 30, 2020, we recorded $116.3 million of net
gains
from fair
value re-measurements,
partially offset by
$19.6 million of
net allowances for
credit losses and
$12.4
million of net realized capital
losses from sales of investments
.
For the nine months ended September
30, 2019,
we recorded
$102.8 million
of net
gains from
fair value
re-measurements and
$22.3 million
of net
realized
capital gains
from sales of
investments, partially
offset by
$15.4 million of
other-than-temporary impairments.
The fixed maturity and equity sales for the nine months ended September 30, 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 the U.S.,
Bermuda, and Ireland
offices, as well
as, through branches
in Canada, Singapore
and the United
Kingdom.
The Insurance operation
writes property and
casualty insurance directly
and through
brokers, surplus
lines brokers
and general agents
within the U.S.,
Canada and Europe
through its offices
in the
U.S., Canada, Ireland and a branch located in Zurich.
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.
46
Reinsurance.
The following
table presents
the underwriting
results and
ratios for
the Reinsurance
segment for
the periods
indicated.
Three Months Ended September 30,
Nine Months Ended September 30,
(Dollars in millions)
2020
2019
Variance
% Change
2020
2019
Variance
% Change
Gross written premiums
$
2,087.0$
1,736.7$
350.3
20.2
%
$
5,403.1$
4,678.3$
724.8
15.5
%
Net written premiums
1,936.9
1,583.7
353.1
22.3
%
4,974.0
4,213.0
761.1
18.1
%
Premiums earned
$
1,669.3$
1,420.8$
248.5
17.5
%
$
4,656.7$
4,072.1$
584.7
14.4
%
Incurred losses and LAE
1,335.0
1,050.6
284.4
27.1
%
3,361.4
2,605.9
755.5
29.0
%
Commission and brokerage
373.3
371.1
2.2
0.6
%
1,130.9
1,039.1
91.8
8.8
%
Other underwriting expenses
51.3
43.8
7.5
17.1
%
135.2
117.0
18.1
15.5
%
Underwriting gain (loss)
$
(90.4)$
(44.8)$
(45.6)
101.9
%
$
29.3$
310.0$
(280.8)
-90.6
%
Point Chg
Point Chg
Loss ratio
80.0
%
73.9
%
6.1
72.2
%
64.0
%
8.2
Commission and brokerage ratio
22.3
%
26.1
%
(3.8)
24.3
%
25.5
%
(1.2)
Other underwriting expense ratio
3.1
%
3.1
%
-
2.9
%
2.9
%
-
Combined ratio
105.4
%
103.1
%
2.3
99.4
%
92.4
%
7.0
(NM, Not Meaningful)
(Some amounts may not reconcile due to rounding.)
Premiums.
Gross written premiums increased
by 20.2% to $2,087.0 million
for the three months
ended
September 30, 2020 from
$1,736.7 million for the three
months ended September 30, 2019,
primarily due to an
increase in
treaty property
writings and
facultative business.
Net written
premiums increased
by 22.3%
to
$1,936.9 million
for the
three months
ended September
30, 2020
compared to
$1,583.7 million for
the three
months ended September 30, 2019.
The difference between the change in gross written
premiums compared to
the change
in net
written premiums
is primarily
due to
varying utilization
of reinsurance.
Premiums earned
increased by 17.5%
to $1,669.3 million for
the three months
ended September 30,
2020, compared to
$1,420.8
million for the three months ended September 30, 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.
Gross written premiums
increased by 15.5% to
$5,403.1 million for the
nine months ended September
30, 2020
from $4,678.3
million for
the nine
months ended
September 30,
2019, primarily
due to
an increase
in treaty
property
writings, casualty
business and
facultative business.
Net written
premiums increased
by 18.1%
to
$4,974.0 million
for the
nine months
ended September
30, 2020
compared to
$4,213.0 million
for the
nine
months ended September 30, 2019.
The difference between the change in gross written
premiums compared to
the change
in net
written premiums
is primarily
due to
varying utilization
of reinsurance.
Premiums earned
increased by 14.4%
to $4,656.7 million
for the nine
months ended September
30, 2020, compared
to $4,072.1
million for the nine
months ended September 30,
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.
47
Incurred Losses and LAE
.
The following table
presents the incurred
losses and LAE for
the Reinsurance segment
for the periods indicated.
Three Months Ended September 30,
Current
Ratio %/
Prior
Ratio %/
Total
Ratio %/
(Dollars in millions)
Year
Pt Change
Years
Pt Change
Incurred
Pt Change
2020
Attritional
$
1,063.8
63.8
%
$
(1.3)
-0.1
%
$
1,062.5
63.7
%
Catastrophes
272.5
16.3
%
-
-
%
272.5
16.3
%
Total Segment
$
1,336.3
80.1
%
$
(1.3)
-0.1
%
$
1,335.0
80.0
%
2019
Attritional
$
808.0
56.9
%
$
(52.2)
-3.7
%
755.8
53.2
%
Catastrophes
291.5
20.5
%
3.4
0.2
%
294.9
20.7
%
Total Segment
$
1,099.5
77.4
%
$
(48.8)
-3.5
%
$
1,050.6
73.9
%
Variance 2020/2019
Attritional
$
255.8
6.9
pts
$
50.9
3.6
pts
306.7
10.5
pts
Catastrophes
(19.0)
(4.2)
pts
(3.4)
(0.2)
pts
(22.4)
(4.4)
pts
Total Segment
$
236.8
2.7
pts
$
47.5
3.4
pts
$
284.4
6.1
pts
Nine Months Ended September 30,
Current
Ratio %/
Prior
Ratio %/
Total
Ratio %/
(Dollars in millions)
Year
Pt Change
Years
Pt Change
Incurred
Pt Change
2020
Attritional
$
3,067.5
65.9
%
$
(3.1)
-0.1
%
3,064.4
65.8
%
Catastrophes
297.0
6.4
%
-
-
%
297.0
6.4
%
Total Segment
$
3,364.5
72.3
%
$
(3.1)
-0.1
%
$
3,361.4
72.2
%
2019
Attritional
$
2,330.5
57.2
%
$
(74.4)
-1.8
%
2,256.0
55.4
%
Catastrophes
316.5
7.8
%
33.4
0.8
%
349.9
8.6
%
Total Segment
$
2,647.0
65.0
%
$
(41.1)
-1.0
%
$
2,605.9
64.0
%
Variance 2020/2019
Attritional
$
737.0
8.7
pts
$
71.3
1.7
pts
$
808.3
10.4
pts
Catastrophes
(19.5)
(1.4)
pts
(33.4)
(0.8)
pts
(52.9)
(2.2)
pts
Total Segment
$
717.5
7.3
pts
$
37.9
0.9
pts
$
755.5
8.2
pts
(Some amounts may not reconcile due to rounding.)
Incurred losses increased by 27.1% to
$1,335.0 million for the three months
ended September 30, 2020,
compared to $1,050.6 million
for the three
months ended September 30,
2019.
The increase was primarily
due
to an increase of
$255.8 million in current
year attritional losses,
mainly related to
$109.9 million of losses from
the COVID
-19 pandemic
and the
impact of
the increase
in premiums
earned, as
well at
$50.9 million
less of
favorable development
on prior years
attritional losses
in 2020 compared
to 2019.
The increase
was partially
offset by
a decline of
$19.0 million in
current year
catastrophe losses.
The current
year catastrophe
losses of
$272.5 million
for the
three months
ended September
30, 2020
related primarily
to Hurricane
Laura ($116.0
million), the Northern California wildfires ($52.0
million), the California Glass wildfire ($30.0
million), the Oregon
wildfires ($21.0 million), Hurricane
Isaias ($17.9 million), the
Derecho storms ($13.1
million), the Calgary storms
in Canada
($12.5 million)
and Hurricane
Sally ($10.0
million).
The $291.5
million of
current year
catastrophe
losses for the three months
ended September 30, 2019 related
to Hurricane Dorian ($160.5 million) and
Typhoon Faxai ($131.0 million).
Incurred losses increased
by 29.0% to $3,361.4
million for the nine
months ended September 30,
2020,
compared to $2,605.9 million for the nine months ended September 30, 2019.
The increase was primarily due to
an increase of $737.0 million in current year attritional
losses, mainly related to $351.0 million of losses from the
COVID-19 pandemic and the impact of the increase in premiums earned, as well as
$71.3 million less of favorable
development on prior
years attritional
losses in 2020
compared to 2019.
The increase was
partially offset by
a
decline of $19.5
million in current
year catastrophe
losses and $33.4
million of less
favorable development
on
prior year catastrophe
losses.
The current year
catastrophe losses of
$297.0 million for
the nine months ended
48
September 30,
2020 related
primarily to
Hurricane Laura
($116.0 million),
the Northern
California wildfires
($52.0 million), the California
Glass wildfire ($30.0 million),
the Oregon wildfires ($21.0
million), Hurricane Isaias
($17.9 million), the Derecho storms
($13.1 million), the Calgary storms
in Canada ($12.5 million), Hurricane
Sally
($10.0 million), the Nashville tornadoes
($9.7 million), the Australia East
Coast storm ($6.8 million), the
Australia
fires ($5.6 million)
and the 2020
U.S. Civil Unrest
($2.4 million).
The $316.5 million of
current year catastrophe
losses for the nine months ended September 30,
2019 were related to Hurricane Dorian ($160.5
million),
Typhoon Faxai ($131.0 million) and the Townsville
monsoon in Australia ($25.0 million).
Segment Expenses.
Commission and
brokerage expenses
increased by
0.6% to
$373.3 million
for the
three
months ended
September 30,
2020 compared
to $371.1
million for
the three
months ended
September 30,
2019.
Commission and brokerage
expenses increased
by 8.8%
to $1,130.9 million
for the
nine months
ended
September 30, 2020 compared to $1,039.1 million for the nine months ended
September
30, 2019.
The
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
$51.3 million
for the
three months
ended September
30,
2020 from $43.8 million
for the three months
ended September 30, 2019.
Segment other underwriting
expenses increased to $135.2 million for the nine months ended
September 30, 2020 from $117.0 million for the
nine months
ended September
30, 2019.
These increases
were mainly
due to
the impact
of the
increase in
premiums earned.
Insurance.
The following
table presents
the underwriting
results and
ratios for
the Insurance
segment for
the periods
indicated.
Three Months Ended September 30,
Nine Months Ended September 30,
(Dollars in millions)
2020
2019
Variance
% Change
2020
2019
Variance
% Change
Gross written premiums
$
704.6$
666.6$
38.0
5.7
%
$
2,328.7$
2,018.7$
310.0
15.4
%
Net written premiums
511.8
484.8
27.0
5.6
%
1,693.6
1,491.3
202.3
13.6
%
Premiums earned
$
536.6$
484.8$
51.7
10.7
%
$
1,628.3$
1,383.5$
244.8
17.7
%
Incurred losses and LAE
401.2
321.3
79.9
24.9
%
1,212.7
909.2
303.5
33.4
%
Commission and brokerage
72.1
72.0
0.1
0.1
%
229.2
214.4
14.8
6.9
%
Other underwriting expenses
87.5
74.3
13.2
17.8
%
250.7
204.9
45.8
22.3
%
Underwriting gain (loss)
$
(24.2)$
17.2$
(41.4)
-240.8
%
$
(64.3)$
55.0$
(119.3)
-216.9
%
Point Chg
Point Chg
Loss ratio
74.8
%
66.2
%
8.6
74.6
%
65.8
%
8.8
Commission and brokerage ratio
13.4
%
14.8
%
(1.4)
14.0
%
15.5
%
(1.5)
Other underwriting expense ratio
16.3
%
15.4
%
0.9
15.4
%
14.7
%
0.7
Combined ratio
104.5
%
96.4
%
8.1
104.0
%
96.0
%
8.0
(NM not meaningful)
(Some amounts may not reconcile due to rounding.)
Premiums.
Gross written premiums increased
by 5.7% to $704.6 million for
the three months ended September
30, 2020 compared to $666.6 million for the three months ended September 30,
2019.
This increase was related
to many lines
of business including casualty,
specialty lines and business
written through Lloyd's
syndicate.
Net
written premiums increased
by 5.6% to $511.8
million for the three
months ended September 30,
2020
compared to $484.8 million for
the three months ended September
30, 2019.
The change is consistent
with the
change in
gross written
premiums.
Premiums earned increased
10.7% to $536.6
million for the
three months
ended September 30,
2020 compared to
$484.8 million for
the three months
ended September 30,
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.
Gross written premiums
increased by 15.4% to
$2,328.7 million for the
nine months ended September
30, 2020
compared to $2,018.7 million for the nine months ended September 30, 2019.
This increase was related to most
lines of business
including property,
casualty, specialty
lines, accident and
health and business
written through
49
Lloyd's syndicate
.
Net written
premiums increased
by 13.6%
to $1,693.6
million for
the nine
months ended
September 30, 2020 compared to $1,491.3 million for the nine months ended
September 30, 2019.
The
difference between
the change in
gross written
premiums compared to
the change in
net written premiums
is
primarily due to varying utilization of
reinsurance.
Premiums earned increased 17.7% to $1,628.3 million for
the
nine months ended September 30, 2020 compared to $1,383.5 million for the nine
months ended September 30,
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 September 30,
Current
Ratio %/
Prior
Ratio %/
Total
Ratio %/
(Dollars in millions)
Year
Pt Change
Years
Pt Change
Incurred
Pt Change
2020
Attritional
$
363.7
67.8
%
$
-
-
%
$
363.7
67.8
%
Catastrophes
37.5
7.0
%
-
-
%
37.5
7.0
%
Total Segment
$
401.2
74.8
%
$
-
-
%
$
401.2
74.8
%
2019
Attritional
$
320.7
66.1
%
$
-
-
%
$
320.7
66.1
%
Catastrophes
4.0
0.8
%
(3.4)
-0.7
%
0.6
0.1
%
Total Segment
$
324.7
66.9
%
$
(3.4)
-0.7
%
$
321.3
66.2
%
Variance 2020/2019
Attritional
$
43.0
1.7
pts
$
-
-
pts
$
43.0
1.7
pts
Catastrophes
33.5
6.2
pts
3.4
0.7
pts
36.9
6.9
pts
Total Segment
$
76.5
7.9
pts
$
3.4
0.7
pts
$
79.9
8.6
pts
Nine Months Ended September 30,
Current
Ratio %/
Prior
Ratio %/
Total
Ratio %/
(Dollars in millions)
Year
Pt Change
Years
Pt Change
Incurred
Pt Change
2020
Attritional
$
1,150.1
70.7
%
$
4.6
0.3
%
$
1,154.7
71.0
%
Catastrophes
58.0
3.6
%
-
-
%
58.0
3.6
%
Total Segment
$
1,208.1
74.3
%
$
4.6
0.3
%
$
1,212.7
74.6
%
2019
Attritional
$
908.5
65.7
%
$
-
-
%
$
908.6
65.7
%
Catastrophes
4.0
0.3
%
(3.4)
-0.2
%
0.6
0.1
%
Total Segment
$
912.5
66.0
%
$
(3.4)
-0.2
%
$
909.2
65.8
%
Variance 2020/2019
Attritional
$
241.6
5.0
pts
$
4.5
0.3
pts
$
246.1
5.3
pts
Catastrophes
54.0
3.3
pts
3.4
0.2
pts
57.4
3.5
pts
Total Segment
$
295.6
8.3
pts
$
7.9
0.5
pts
$
303.5
8.8
pts
(Some amounts may not reconcile due to rounding.)
Incurred losses and
LAE increased by
24.9% to $401.2
million for the
three months ended
September 30, 2020
compared to $321.3 million
for the three months
ended September 30, 2019.
The increase was mainly due
to a
rise of $43.0 million in current year attritional
losses, primarily related to $15.0 million of losses
from the COVID-
19 pandemic
and the
impact of
the increase
in premiums
earned, as
well as
an increase
of $33.5
million in
current year
catastrophe losses.
The current
year catastrophe
losses of
$37.5 million
for the
three months
ended September 30, 2020 related to Hurricane Sally
($16.0 million), Hurricane Laura ($15.0 million), the Calgary
storms in Canada
($2.5 million), the
Derecho storms ($2.0
million) and Hurricane
Isaias ($2.0 million).
The $4.0
million of current year
catastrophe losses for
the three months ended
September 30, 2019 related
to Hurricane
Dorian ($4.0 million).
50
Incurred losses and
LAE increased by
33.4% to $1,212.7 million
for the nine
months ended September
30, 2020
compared to $909.2
million for the
nine months ended September
30, 2019.
The increase was
mainly due to a
rise of
$241.6 million
in current
year attritional
losses, primarily
related to
$84.0 million
of losses
from the
COVID-19 pandemic and
the impact of the
increase in premiums
earned, as well
as an increase
of $54.0 million
in current
year catastrophe
losses.
The current
year catastrophe
losses of
$58.0 million
for the
nine months
ended September 30,
2020 related
to Hurricane Sally
($16.0 million), Hurricane
Laura ($15.0 million),
the 2020
U.S. Civil
Unrest ($15.0
million), the
Nashville tornadoes
($5.5 million),
the Calgary
storms in
Canada ($2.5
million), the Derecho
storms ($2.0 million)
and Hurricane Isaias
($2.0 million).
The $4.0 million
of current year
catastrophe losses for the nine months ended September 30, 2019 related to
Hurricane Dorian ($4.0 million).
Segment Expenses.
Commission and brokerage
increased by 0.1%
to $72.1 million
for the three
months ended
September 30, 2020
compared to $72.0
million for the
three months ended
September 30, 2019.
Commission
and brokerage increased
by 6.9% to $229.2 million for
the nine months ended September 30, 2020
compared to
$214.4 million for the
nine months ended September 30,
2019.
The increases were mainly
due to the impact of
the increases in premiums earned.
Segment other
underwriting expenses
increased to
$87.5 million
for the
three months
ended September
30,
2020 compared to
$74.3 million for
the three months
ended September 30, 2019.
Segment other underwriting
expenses increased
to $250.7
million for
the nine
months ended
September 30,
2020 compared
to $204.9
million for
the nine
months ended
September 30,
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
$23,104.7 million
at September
30, 2020,
an increase
of $2,356.2
million compared
to $20,748.5
million at
December 31, 2019.
This increase
was primarily
the result
of $2,190.6 million
of cash
flows from
operations,
$392.6 million of pre-tax unrealized
appreciation, $89.1 million of unsettled
securities, $88.0 million in fair
value
re-measurements, $12.5 million in
equity adjustments of our
limited partnership investments,
$11.8 million due
to fluctuations in foreign currencies, partially offset by repurchases
of 970,892 million common shares for $200.0
million, $187.1 million
paid out in
dividends to shareholders,
$32.6 million of
amortization bond premium
and
$19.6 million of allowance for credit losses.
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 the U.S.
portion of this portfolio,
our mix
of taxable
and tax
-preferenced investments
is adjusted
periodically, consistent
with our
current and
projected U.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
51
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.
At September
30, 2020, the
market value
of investments
in these
investment market sectors, carried at
both market and fair value, approximated 58.3% 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 September 30, 2020
At December 31, 2019
Fixed maturities, market value
$
17,856.4
77.3
%
$
16,824.9
81.1
%
Fixed maturities, fair value
3.7
0.0
%
5.8
0.0
%
Equity securities, fair value
1,173.2
5.1
%
931.5
4.5
%
Short-term investments
1,220.8
5.2
%
414.7
2.0
%
Other invested assets
1,911.8
8.3
%
1,763.5
8.5
%
Cash
938.9
4.1
%
808.0
3.9
%
Total investmen
ts and cash
$
23,104.7
100.0
%
$
20,748.5
100.0
%
(Some amounts may not reconcile due to rounding.)
At
At
September 30, 2020December 31, 2019
Fixed income portfolio duration (years)
3.5
3.5
Fixed income composite credit quality
Aa3
A1
Imbedded end of period yield, pre-tax
3.1
%
3.4
%
Imbedded end of period yield, after-tax
2.7
%
3.0
%
The following table provides a comparison
of our total return by asset
class relative to broadly accepted
industry
benchmarks for the periods indicated:
Nine Months Ended
Twelve Months Ended
September 30, 2020December 31, 2019
Fixed income portfolio total return
4.4
%
6.2
%
Barclay's Capital - U.S. aggregate
index
6.8
%
8.7
%
Common equity portfolio total return
11.0
%
23.8
%
S&P 500 index
5.6
%
31.5
%
Other invested asset portfolio total
return
1.5
%
9.9
%
The pre-tax equivalent total return for
the bond portfolio was approximately 4.5% and 6.3%, respectively,
for the
nine months ended
September 30,
2020 and
the twelve months ended December
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 only U.S.
securities.
Our
52
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 $1,923.0
million and $1,763.5
million at September 30,
2020 and December 31,
2019, respectively.
At September 30,
2020, $716.2 million, or
37.2%, was
receivable from
Mt. Logan
Re collateralized
segregated accounts
and $153.1 million,
or 8.0%,
was
receivable from Munich 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 $15,233.1 million and $13,611.3 million
at
September 30, 2020 and December 31, 2019, respectively.
The following tables
summarize gross outstanding
loss and LAE reserves
by segment, classified by
case reserves
and IBNR reserves, for the periods indicated.
At September 30, 2020
Case
IBNR
Total
% of
(Dollars in millions)
Reserves
Reserves
Reserves
Total
Reinsurance
$
4,847.2$
5,987.0$
10,834.1
71.1
%
Insurance
1,249.4
2,924.1
4,173.5
27.4
%
Total excluding
A&E
6,096.5
8,911.1
15,007.6
98.5
%
A&E
181.5
43.9
225.5
1.5
%
Total including
A&E
$
6,278.1$
8,955.0$
15,233.1
100.0
%
(Some amounts may not reconcile due to rounding.)
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.
53
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
September 30,
December 31,
(Dollars in millions)
2020
2019
Gross reserves
$
227.3$
257.9
Reinsurance receivable
(20.0)
(29.2)
Net reserves
$
207.3$
228.7
(Some amounts may not reconcile due to rounding.)
With respect to
asbestos only,
at September 30,
2020, we had
net asbestos loss
reserves of $203.1
million, or
97.9%, of total net A&E reserves, all of which was for assumed business.
In 2015, we sold Mt. McKinley to Clearwater 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
retrocession treaty will
be $440.3 million, equal to
the retrocession payment plus
$300.0 million.
We will retain
liability for any amounts exceeding the maximum liability retroceded under the
retrocession treaty.
On December 20, 2019, the retrocession treaty was amended and included a
partial commutation.
As a result of
this amendment and partial
commutation, gross A&E
reserves and correspondingly reinsurance
receivable were
reduced by
$43.4 million.
In addition,
the maximum
liability permitted
to be
retroceded increased
to $450.3
million.
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
at September
30, 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 increased
to $9,591.3
million as
of September
30, 2020
from
$9,132.9 million as of
December 31, 2019.
This increase was
the result of
$450.5 million of net
income, $348.5
million of
unrealized appreciation
on investments
net of
tax, $30.4
million of
net foreign
currency translation
adjustments, $15.7 million of share-based compensation transactions
and $4.5 million of net benefit plan
obligation adjustments, partially
offset by the
repurchase of 970,892
common shares for
$200.0 million, $187.1
million of shareholder dividends, and $4.2 million of cumulative adjustment from
the adoption of ASU 2016-13.
54
LIQUIDITY AND CAPITAL RESOURCES
Capital.
Shareholders' equity at September
30, 2020 and December 31,
2019 was $9,591.3 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
and Everest Re are regulated
by the Bermuda
Monetary
Authority ("BMA")
and the
State of
Delaware, Department
of Insurance,
respectively.
Both regulatory
bodies
have their own
capital adequacy models based
on statutory capital
as opposed to GAAP
basis equity.
Failure to
meet the
required statutory
capital levels
could result
in various
regulatory restrictions,
including business
activity and the payment of dividends to their parent companies.
The regulatory targeted capital and the actual statutory capital
for Bermuda Re and Everest Re were
as follows:
Bermuda Re
(1)
Everest Re
(2)
At December 31,
At December 31,
(Dollars in millions)
2019
2018
2019
2018
Regulatory targeted capital
$
2,061.1$
1,753.2$
2,001.2$
2,173.0
Actual 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.
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.
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
our December
31, 2019
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 our December 31, 2019 Form 10-K, we
reported that our projected net economic
loss from our
largest projected 100-year
event represented
approximately 6% of
our December 31, 2019
shareholders'
equity.
During the first three quarters of 2020, in response
to current favorable market
conditions, we increased
our net exposure
to catastrophes.
As a result, our
projected net economic
loss from our largest
100-year event
in a given zone represents approximately 7% of our June 30, 2020 shareholders'
equity.
The table below
reflects the Company's
PML exposure, net
of third party
reinsurance at various
return periods
for its top
three zones/perils (as
ranked by
largest 1
in 100 year
economic loss) based
on projection data
as of
July 1, 2020.
55
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
California, Earthquake
$
164$
582$
914$
1,135$
1,342$
1,887Southeast U.S., Wind
530
726
891
1,140
1,418
2,170
Europe Wind
147
378
632
993
1,106
1,245
The projected economic
losses, defined as PML
exposures, net of
third party reinsurance,
reinstatement
premiums and estimated income taxes, for the top three 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
California, Earthquake
$
130$
443$
689$
853$
1,034$
1,648Southeast U.S., Wind
358
495
635
840
1,068
1,705
Europe Wind
122
310
509
815
909
1,022
During the first
three quarters
of 2020, we
repurchased 970,892
shares for
$200.0 million in
the open market
and paid $187.1
million in dividends
to adjust
our capital
position and enhance
long term expected
returns to
our shareholders.
We also
repurchased $13.2
million of
our long-term
subordinated notes
in the
first three
quarters of 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.
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.
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 May
22, 2020,
our existing
Board authorization
to purchase
up to
30 million
of our
shares was
amended to authorize
the purchase of up
to 32 million shares.
As of September
30, 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 $2,190.6
million and $1,486.9
million for
the nine months
ended September 30,
2020 and 2019,
respectively.
Additionally, these
cash flows
reflected net
catastrophe loss
payments of
$505.9 million
and
$678.0 million for
the nine months
ended September 30, 2020
and 2019, respectively
and net tax
recoveries of
$169.1 million and $80.5 million for the nine months ended September 30, 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,
56
cash inflows
from investment
maturities and dispositions,
both short-term
investments and
longer term
maturities are available to supplement other operating cash flows.
As the timing of
payments for claims
and benefits cannot be
predicted with certainty,
we maintain portfolios
of
long term
invested assets
with varying
maturities, along
with short-term
investments that
provide additional
liquidity for payment
of claims.
At September
30, 2020 and
December 31, 2019,
we held cash
and short-term
investments of
$2,159.6 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
September 30, 2020,
we had $1,483.6 million
of available for
sale fixed maturity
securities maturing within one
year or
less, $6,624.8 million
maturing within one
to five
years and
$5,319.3 million maturing
after five
years.
Our $1,173.2 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 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 September 30, 2020 we
had $744.6 million of net pre-tax
unrealized
appreciation related to
fixed maturity securities,
comprised of $891.2
million of pre
-tax unrealized appreciation
and $146.6 million of pre-tax unrealized depreciation.
Management generally
expects annual
positive cash
flow from
operations.
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 £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
"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 prefe
rred shares, which at
September
30, 2020, was $6,372.7 million.
As of September 30, 2020, the Company was in compliance with all Group
Credit
Facility covenants.
At September
30, 2020 and
December 31, 2019,
the Company had
no outstanding short
-term borrowings from
the Group Credit Facility revolving credit line.
At September 30, 2020, the Group Credit Facility had $99.1 million
outstanding letters
of credit under
tranche one and
$586.2 million outstanding
letters of
credit under tranche
57
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 May
12 2020,
Everest International
amended its credit
facility with
Lloyds Bank
plc ("Everest
International Credit Facility").
The current amendment of the Everest
International Credit Facility provides
up to
£52.2 million
for the
issuance of
standby letters
of credit
on a
collateralized basis.
The 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.
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 September
30, 2020,
was $5,910.4
million.
As of September 30,
2020, the Company was
in compliance with all
Everest International
Credit Facility
requirements.
At September 30, 2020 and
December 31, 2019, Everest
International Credit Facility had
£52.2 million and £47.0
million, respectively, of outstanding lette
rs of credit.
Costs incurred
in connection
with the
Group Credit
Facility and
Everest International
Credit Facility
were $0.1
million for
the three
months ended September
30, 2020 and
2019, respectively
.
Costs incurred
in connection
with the Group Cred
it Facility and Everest
International Credit Facility
were $0.6 million and
$0.3 million for the
nine months ended September 30, 2020 and 2019, respectively.
Effective August 15,
2019, Everest Re
became a member of the Federal
Home Loan Banks ("FHLB") organization,
which allows Everest Re to borrow
up to 10% of its statutory admitted assets.
As of September 30, 2020, Everest
Re had admitted
assets of approximately
$14,667.1 million which
provides borrowing
capacity of up
to
approximately $1,466.7 million. On
August 31, 2020, Everest
Re borrowed $90.0 million
under its FHLB available
capacity.
The $90.0 million
collateralized borrowing
has interest payable
at a rate
of 0.35% and
will mature on
November 30, 2020.
Market Sensitive Instruments.
The SEC's Financial
Reporting Release #48
requires registrants
to clarify and
expand upon the
existing financial
statement disclosure
requirements for
derivative financial
instruments, derivative
commodity instruments
and
other financial instruments (collectively,
"market sensitive instruments").
We do not generally enter into
market
sensitive instruments for trading purposes.
Our current investment
strategy seeks
to maximize after
-tax income through
a high quality,
diversified, 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.
58
Interest Rate
Risk.
Our $23.1
billion investment
portfolio, at
September 30,
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
$3,090.5 million of
mortgage-backed securities
in the $17,860.1
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
$1,220.8 million of
short-term investments)
for the
period indicated
based on
upward and
downward parallel
and immediate
100 and
200 basis point
shifts in interest
rates.
For
legal entities
with a U.S.
dollar functional currency,
this modeling was
performed on each
security individually.
To generate
appropriate price
estimates on
mortgage-backed securities,
changes in
prepayment expectations
under different
interest rate
environments were
taken into
account.
For legal
entities with
a non-U.S.
dollar
functional currency,
the effective
duration of
the involved
portfolio of
securities was
used as
a proxy
for the
market value change under the various interest rate
change scenarios.
Impact of Interest Rate Shift in Basis Points
At September 30, 2020
-200
-100
0
100
200
(Dollars in millions)
Total Market/Fair
Value
$
20,414.9$
19,747.9$
19,080.9$
18,413.9
17,746.9
Market/Fair Value
Change from Base (%)
7.0
%
3.5
%
0.0
%
(3.5)
%
(7.0)
%
Change in Unrealized Appreciation
After-tax from Base ($)
$
1,177.3$
588.6
$
-
$
(588.6)$
(1,177.3)
We had
$15,233.1 million and
$13,611.3 million of
gross reserves for
losses and LAE
as of September
30, 2020
and December
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
3.1 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 $1.4
billion resulting
in a discounted
reserve balance of
approximately $12.0
billion, representing
approximately 63.2%
of the
value of
the fixed
maturity investment
portfolio funds.
Equity Risk.
Equity risk is the potential
change in fair and/or market
value of the common stock,
preferred stock
and mutual fund portfolios arising from changing prices.
Our equity investments consist of a diversified portfolio
of individual securities
and mutual funds,
which invest
principally in high
quality common and
preferred stocks
that are
traded on the
major exchanges,
and mutual fund
investments in
emerging market
debt.
The primary
objective of the
equity portfolio is
to obtain
greater total
return relative
to our core
bonds over
time through
market appreciation and income.
59
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/Ma
rket Values
At September 30, 2020
(Dollars in millions)
-20%
-10%
0%
10%
20%
Fair/Market Value
of the Equity Portfolio
$
938.5$
1,055.8$
1,173.2$
1,290.5$
1,407.8
After-tax Change in Fair/Market
Value
$
(191.3)$
(95.7)
$
-
$
95.7$
191.3
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
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.
In January
2020, the
United Kingdom
exited the
European Union
(commonly referred
to as
"Brexit").
The
Company has a Lloyd's of London Syndicate
and Bermuda Re has a branch operation in the United 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
the U.S.
federal securities
laws.
We
intend these forward-looking statements
to be covered by
the safe harbor provisions for
forward-looking
statements in
the federal
securities laws.
In some
cases, these
statements can
be identified
by the
use of
forward-looking words such
as "may",
"will", "should",
"could",
"anticipate",
"estimate",
"expect",
"plan",
"believe",
"predict", "potential"
and "intend".
Forward-looking statements
contained in
this report
include
information regarding our reserves for losses and LAE, the CARES
Act, the impact of the Tax Cut and Jobs Act, the
adequacy of
capital in
relation to
regulatory required
capital, the
adequacy of
our provision
for uncollectible
balances, estimates of our catastrophe exposure,
the effects of catastrophic
and pandemic events on our
financial statements,
the ability
of Everest
Re, Holdings,
Holdings Ireland,
Dublin Holdings,
Bermuda Re
and
Everest International
to pay
dividends and
the settlement
costs of
our specialized
equity index
put option
contracts.
Forward-looking statements
only reflect
our expectations
and are
not guarantees
of performance.
These statements
involve risks,
uncertainties and
assumptions.
Actual events
or results
may differ
materially
from our expectations.
Important factors that
could cause our actual events
or results to be materially
different
from our expectations include those
discussed under the caption ITEM 1A, "Risk Factors"
in the Company's most
recent 10-K
filing.
We undertake
no obligation
to update
or revise
publicly any
forward-looking statements,
whether as a result of new information, future events or otherwise.
ITEM 3. QUANTITATIVE
AND QUALITATIVE
DISCLOSURES ABOUT MARKET RISK
Market Risk Instruments.
See "Liquidity and Capital Resources - Market Sensitive Instruments" in PART
I - ITEM
2.
60
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