W.R. BERKLEY CORPORATION Overview
W. R. Berkley Corporation is an insurance holding company that is among the largest commercial lines writers inthe United States and operates worldwide in two segments of the property and casualty business: Insurance and Reinsurance & Monoline Excess. Our decentralized structure provides us with the flexibility to respond quickly and efficiently to local or specific market conditions and to pursue specialty business niches. It also allows us to be closer to our customers in order to better understand their individual needs and risk characteristics. While providing our business units with certain operating autonomy, our structure allows us to capitalize on the benefits of economies of scale through centralized capital, investment, reinsurance, enterprise risk management, and actuarial, financial and corporate legal staff support. The Company's primary sources of revenues and earnings are its insurance operations and its investments. An important part of our strategy is to form new operating units to capitalize on various business opportunities. Over the years, the Company has formed numerous operating units that are focused on important parts of the economy in theU.S. , including healthcare, cyber security, energy and agriculture, and on growing international markets, including theAsia-Pacific region ,South America andMexico . The profitability of the Company's insurance business is affected primarily by the adequacy of premium rates. The ultimate adequacy of premium rates is not known with certainty at the time an insurance policy is issued because premiums are determined before claims are reported. The ultimate adequacy of premium rates is affected mainly by the severity and frequency of claims, which are influenced by many factors, including natural and other disasters, regulatory measures and court decisions that define and change the extent of coverage and the effects of economic inflation on the amount of compensation for injuries or losses. General insurance prices are also influenced by available insurance capacity, i.e., the level of capital employed in the industry, and the industry's willingness to deploy that capital. The Company's profitability is also affected by its investment income and investment gains. The Company's invested assets are invested principally in fixed maturity securities. The return on fixed maturity securities is affected primarily by general interest rates, as well as the credit quality and duration of the securities. Returns available on fixed maturity investments have been at low levels for an extended period. The Company also invests in equity securities, merger arbitrage securities, investment funds, private equity, loans and real estate related assets. The Company's investments in investment funds and its other alternative investments have experienced, and the Company expects to continue to experience, greater fluctuations in investment income. The Company's share of the earnings or losses from investment funds is generally reported on a one-quarter lag in order to facilitate the timely completion of the Company's consolidated financial statements. The ongoing COVID-19 pandemic, including the related impact on theU.S. and global economies, has materially and adversely affected our results of operations. For the three months endedMarch 31, 2021 , the Company recorded approximately$15 million for current accident year COVID-19-related losses, net of reinsurance. At the same time, COVID-19 has led to reduced loss frequency in certain lines of business (which may increase as the economy returns to normal). The ultimate impact of COVID-19 on the economy and on the Company's results of operations, financial position and liquidity is uncertain and not within the Company's control. The scope, duration and magnitude of the direct and indirect effects of COVID-19 continue to evolve in ways that are difficult or impossible to anticipate. Its impact on the Company's first three months of 2021 is not necessarily indicative of its impact for the remainder of 2021 or beyond. Despite the effects of COVID-19 to date, the Company's financial position and liquidity continued to improve. The ultimate impact of the COVID-19 pandemic on our results of operations, financial position and liquidity remains uncertain due to, among other factors, the following: Adverse Legislative and Regulatory Action. Legislative and regulatory initiatives taken or that may be taken in response to COVID-19, such as those that seek to retroactively mandate or provide a presumption of coverage for losses which our insurance policies would not otherwise cover and were not priced to cover, may adversely affect us, particularly in our workers' compensation and property coverages businesses. Claim Losses Related to COVID-19 May Exceed Reserves. Given the great uncertainty associated with COVID-19 and its continuing impact and the limited information upon which our current assumptions and assessments have been made, our reserves and underlying estimated level of claim losses and costs arising from COVID-19 may materially change. Claim Losses and Adjustment Expenses May Increase. As the effects of COVID-19 on industry practices and economic, legal, judicial, social and other environmental conditions continue to evolve, unexpected and unintended issues 29 -------------------------------------------------------------------------------- related to claims and coverages may emerge (including in the area of property coverages where physical damage requirements and communicable disease exclusions are currently being challenged). Reinsurance. Reinsurers may dispute the applicability of reinsurance to COVID-19 related losses (including the application of reinsurance reinstatements) and, as a result, our reinsurers may refuse to pay reinsurance recoverables related thereto or they may not pay them on a timely basis. In addition, we may be unable to renew our current reinsurance coverages or purchase new coverages with respect to certain exposures under our policies, including COVID-19-related exposures. Premium Volumes May Be Negatively Impacted. Continued reduced economic activity relating to the COVID-19 pandemic will likely decrease demand for our insurance products and services. In addition, we may alter our view on the insurance coverages that are appropriate to offer in various jurisdictions, which could further negatively impact our premium volumes. Investments. Further disruptions in global financial markets due to the continuing impact of COVID-19 could cause us to incur additional unrealized and/or realized investment losses, including impairments in our fixed income portfolio and other investments. Credit Risk. As credit risk is generally a function of the economy, we face greater credit risk from our policyholders, independent agents and brokers in connection with the payment and remittance of premiums as a result of the economic impact caused by COVID-19. Similarly, our credit risk related to the reimbursement of deductibles from policyholders and in connection with reinsurance recoverables has increased. Operational Disruptions and Costs. Our operations could be disrupted if key members of our senior management or a significant percentage of our workforce or the workforce of our agents, brokers, suppliers or other third party service providers are unable to continue to work because of illness, government directives or otherwise. In response to the COVID-19 pandemic, we have implemented remote working policies which have resulted in disruptions to our business routines, heightened risk to cybersecurity attacks and data security incidents and a greater dependency on internet and telecommunication access and capabilities.
Critical Accounting Estimates
The following presents a discussion of accounting policies and estimates
relating to reserves for losses and loss expenses, assumed premiums and
allowance for expected credit losses on investments. Management believes these
policies and estimates are the most critical to its operations and require the
most difficult, subjective and complex judgments.
Reserves for Losses and Loss Expenses. To recognize liabilities for unpaid
losses, either known or unknown, insurers establish reserves, which is a balance
sheet account representing estimates of future amounts needed to pay claims and
related expenses with respect to insured events which have occurred. Estimates
and assumptions relating to reserves for losses and loss expenses are based on
complex and subjective judgments, often including the interplay of specific
uncertainties with related accounting and actuarial measurements. Such estimates
are also susceptible to change as significant periods of time may elapse between
the occurrence of an insured loss, the report of the loss to the insurer, the
ultimate determination of the cost of the loss and the insurer's payment of that
loss.
In general, when a claim is reported, claims personnel establish a "case
reserve" for the estimated amount of the ultimate payment based upon known
information about the claim at that time. The estimate represents an informed
judgment based on general reserving practices and reflects the experience and
knowledge of the claims personnel regarding the nature and value of the specific
type of claim. Reserves are also established on an aggregate basis to provide
for losses incurred but not reported ("IBNR") to the insurer, potential
inadequacy of case reserves and the estimated expenses of settling claims,
including legal and other fees and general expenses of administrating the claims
adjustment process. Reserves are established based upon the then current legal
interpretation of coverage provided.
In examining reserve adequacy, several factors are considered in estimating
the ultimate economic value of losses. These factors include, among other
things, historical data, legal developments, changes in social attitudes and
economic conditions, including the effects of inflation. The actuarial process
relies on the basic assumption that past experience, adjusted judgmentally for
the effects of current developments and anticipated trends, is an appropriate
basis for predicting future outcomes. Reserve amounts are based on management's
informed estimates and judgments using currently available data. As additional
experience and other data become available and are reviewed, these estimates and
judgments may be revised. This may result in reserve increases or decreases that
would be reflected in our results in periods in which such estimates and
assumptions are changed.
Reserves do not represent an exact calculation of liability. Rather, reserves
represent an estimate of what management expects the ultimate settlement and
claim administration will cost. While the methods for establishing reserves are
well tested
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over time, some of the major assumptions about anticipated loss emergence
patterns are subject to uncertainty. These estimates, which generally involve
actuarial projections, are based on management's assessment of facts and
circumstances then known, as well as estimates of trends in claims severity and
frequency, judicial theories of liability and other factors, including the
actions of third parties which are beyond the Company's control. These variables
are affected by external and internal events, such as inflation and economic
volatility, judicial and litigation trends, reinsurance coverage, legislative
changes and claim handling and reserving practices, which make it more difficult
to accurately predict claim costs. The inherent uncertainties of estimating
reserves are greater for certain types of liabilities where long periods of time
elapse before a definitive determination of liability is made. Because setting
reserves is inherently uncertain, the Company cannot provide assurance that its
current reserves will prove adequate in light of subsequent events.
Loss reserves included in the Company's financial statements represent
management's best estimates based upon an actuarially derived point estimate and
other considerations. The Company uses a variety of actuarial techniques and
methods to derive an actuarial point estimate for each operating unit. These
methods include paid loss development, incurred loss development, paid and
incurred Bornhuetter-Ferguson methods and frequency and severity methods. In
circumstances where one actuarial method is considered more credible than the
others, that method is used to set the point estimate. For example, the paid
loss and incurred loss development methods rely on historical paid and incurred
loss data. For new lines of business, where there is insufficient history of
paid and incurred claims data, or in circumstances where there have been
significant changes in claim practices, the paid and incurred loss development
methods would be less credible than other actuarial methods. The actuarial point
estimate may also be based on a judgmental weighting of estimates produced from
each of the methods considered. Industry loss experience is used to supplement
the Company's own data in selecting "tail factors" and in areas where the
Company's own data is limited. The actuarial data is analyzed by line of
business, coverage and accident or policy year, as appropriate, for each
operating unit.
The establishment of the actuarially derived loss reserve point estimate also
includes consideration of qualitative factors that may affect the ultimate
losses. These qualitative considerations include, among others, the impact of
re-underwriting initiatives, changes in the mix of business, changes in
distribution sources and changes in policy terms and conditions. Examples of
changes in terms and conditions that can have a significant impact on reserve
levels are the use of aggregate policy limits, the expansion of coverage
exclusions, whether or not defense costs are within policy limits, and changes
in deductibles and attachment points.
The key assumptions used to arrive at the best estimate of loss reserves are
the expected loss ratios, rate of loss cost inflation, and reported and paid
loss emergence patterns. Expected loss ratios represent management's expectation
of losses at the time the business is written, before any actual claims
experience has emerged. This expectation is a significant determinant of the
estimate of loss reserves for recently written business where there is little
paid or incurred loss data to consider. Expected loss ratios are generally
derived from historical loss ratios adjusted for the impact of rate changes,
loss cost trends and known changes in the type of risks underwritten. Expected
loss ratios are estimated for each key line of business within each operating
unit. Expected loss cost inflation is particularly important for the long-tail
lines, such as excess casualty, and claims with a high medical component, such
as workers' compensation. Reported and paid loss emergence patterns are used to
project current reported or paid loss amounts to their ultimate settlement
value. Loss development factors are based on the historical emergence patterns
of paid and incurred losses, and are derived from the Company's own experience
and industry data. The paid loss emergence pattern is also significant to excess
and assumed workers' compensation reserves because those reserves are discounted
to their estimated present value based upon such estimated payout patterns.
Management believes the estimates and assumptions it makes in the reserving
process provide the best estimate of the ultimate cost of settling claims and
related expenses with respect to insured events which have occurred; however,
different assumptions and variables could lead to significantly different
reserve estimates.
Loss frequency and severity are measures of loss activity that are considered
in determining the key assumptions described in our discussion of loss and loss
expense reserves, including expected loss ratios, rate of loss cost inflation
and reported and paid loss emergence patterns. Loss frequency is a measure of
the number of claims per unit of insured exposure, and loss severity is a
measure of the average size of claims. Factors affecting loss frequency include
the effectiveness of loss controls and safety programs and changes in economic
activity or weather patterns. Factors affecting loss severity include changes in
policy limits, retentions, rate of inflation and judicial interpretations.
Another factor affecting estimates of loss frequency and severity is the loss
reporting lag, which is the period of time between the occurrence of a loss and
the date the loss is reported to the Company. The length of the loss reporting
lag affects our ability to accurately predict loss frequency (loss frequencies
are more predictable for lines with short reporting lags) as well as the amount
of reserves needed for incurred but not reported losses (less IBNR is required
for lines with short reporting lags). As a result, loss reserves for lines with
short reporting lags are likely to have less variation from initial loss
estimates. For lines with short reporting lags, which include commercial
automobile, primary workers' compensation, other liability (claims-made) and
property business, the key assumption is the loss emergence pattern used to
project ultimate loss estimates from known
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losses paid or reported to date. For lines of business with long reporting lags,
which include other liability (occurrence), products liability, excess workers'
compensation and liability reinsurance, the key assumption is the expected loss
ratio since there is often little paid or incurred loss data to consider.
Historically, the Company has experienced less variation from its initial loss
estimates for lines of businesses with short reporting lags than for lines of
business with long reporting lags.
The key assumptions used in calculating the most recent estimate of the loss
reserves are reviewed each quarter and adjusted, to the extent necessary, to
reflect the latest reported loss data, current trends and other factors
observed. If the actual level of loss frequency and severity are higher or lower
than expected, the ultimate losses will be different than management's estimate.
The following table reflects the impact of changes (which could be favorable or
unfavorable) in frequency and severity, relative to our assumptions, on our loss
estimate for claims occurring in 2020:
(In thousands) Frequency (+/-)
Severity (+/-) 1% 5% 10%
1% $ 89,102 $ 268,193 $ 492,056
5% 268,193 454,376 687,105
10% 492,056 687,105 930,917
Our net reserves for losses and loss expenses of approximately $11.8 billion
as of March 31, 2021 relate to multiple accident years. Therefore, the impact of
changes in frequency or severity for more than one accident year could be higher
or lower than the amounts reflected above. The impact of such changes would
likely be manifested gradually over the course of many years, as the magnitude
of the changes became evident.
Approximately $2.6 billion , or 22%, of the Company's net loss reserves as of
March 31, 2021 relate to the Reinsurance & Monoline Excess segment. There is a
higher degree of uncertainty and greater variability regarding estimates of
excess workers' compensation and assumed reinsurance loss reserves. In the case
of excess workers' compensation, our policies generally attach at $1 million or
higher. The claims which reach our layer therefore tend to involve the most
serious injuries and many remain open for the lifetime of the claimant, which
extends the claim settlement tail. These claims also occur less frequently but
tend to be larger than primary claims, which increases claim variability. In the
case of assumed reinsurance our loss reserve estimates are based, in part, upon
information received from ceding companies. If information received from ceding
companies is not timely or correct, the Company's estimate of ultimate losses
may not be accurate. Furthermore, due to delayed reporting of claim information
by ceding companies, the claim settlement tail for assumed reinsurance is also
extended. Management considers the impact of delayed reporting and the extended
tail in its selection of loss development factors for these lines of business.
Information received from ceding companies is used to set initial expected
loss ratios, to establish case reserves and to estimate reserves for incurred
but not reported losses on assumed reinsurance business. This information, which
is generally provided through reinsurance intermediaries, is gathered through
the underwriting process and from periodic claim reports and other
correspondence with ceding companies. The Company performs underwriting and
claim audits of selected ceding companies to determine the accuracy and
completeness of information provided to the Company. The information received
from the ceding companies is supplemented by the Company's own loss development
experience with similar lines of business as well as industry loss trends and
loss development benchmarks.
Following is a summary of the Company's reserves for losses and loss expenses
by business segment:
March 31, December 31,
(In thousands) 2021 2020
Insurance $ 9,220,681 $ 9,034,969
Reinsurance & Monoline Excess 2,614,467 2,585,424
Net reserves for losses and loss expenses 11,835,148 11,620,393
Ceded reserves for losses and loss expenses 2,245,380 2,164,037
Gross reserves for losses and loss expenses
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--------------------------------------------------------------------------------Following is a summary of the Company's net reserves for losses and loss expenses by major line of business:
Reported Case Incurred But Total
(In thousands) Reserves Not Reported
March 31, 2021
Other liability $ 1,608,645 $ 2,920,315 $ 4,528,960
Workers' compensation (1) 984,401 883,669 1,868,070
Professional liability 412,037 927,549 1,339,586
Commercial automobile 449,342 392,003 841,345
Short-tail lines (2) 263,958 378,762 642,720
Total Insurance 3,718,383 5,502,298 9,220,681Reinsurance & Monoline Excess (1) (3) 1,451,441 1,163,026
2,614,467
Total $ 5,169,824 $ 6,665,324 $ 11,835,148
December 31, 2020
Other liability $ 1,534,514 $ 2,864,760 $ 4,399,274
Workers' compensation (1) 977,035 873,072 1,850,107
Professional liability 414,104 875,163 1,289,267
Commercial automobile 442,975 398,688 841,663
Short-tail lines (2) 295,313 359,345 654,658
Total Insurance 3,663,941 5,371,028 9,034,969Reinsurance & Monoline Excess (1) (3) 1,442,099 1,143,325
2,585,424
Total $ 5,106,040 $ 6,514,353 $ 11,620,393
___________
(1) Reserves for workers' compensation and Reinsurance & Monoline Excess are net
of an aggregate net discount of $478 million and $483 million as of March 31,
2021 and December 31, 2020 , respectively.
(2) Short-tail lines include commercial multi-peril (non-liability), inland
marine, accident and health, fidelity and surety, boiler and machinery and other
lines.
(3) Reinsurance & Monoline Excess includes property and casualty reinsurance, as
well as operations that solely retain risk on an excess basis.
The Company evaluates reserves for losses and loss adjustment expenses on a
quarterly basis. Changes in estimates of prior year losses are reported when
such changes are made. The changes in prior year loss reserve estimates are
generally the result of ongoing analysis of recent loss development trends.
Original estimates are increased or decreased as additional information becomes
known regarding individual claims and aggregate claim trends.
Certain of the Company's insurance and reinsurance contracts are
retrospectively rated, whereby the Company collects more or less premiums based
on the level of loss activity. For those contracts, changes in loss and loss
adjustment expenses for prior years may be fully or partially offset by
additional or return premiums.
Net prior year development (i.e., the sum of prior year reserve changes and
prior year earned premiums changes) for the three months ended March 31, 2021
and 2020 are as follows:
(In thousands) 2021 2020
Net decrease (increase) in prior year loss reserves
(433)
Increase in prior year earned premiums 2,595 4,448
Net favorable prior year development $ 3,454 $ 4,015
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The ongoing COVID-19 global pandemic has impacted, and will likely continue to
impact, the Company's results through its effect on claim frequency and
severity. Loss cost trends have been impacted and will likely be further
impacted by COVID-19-related claims in certain lines of business, as well as by
other effects of COVID-19 associated with economic conditions, inflation, and
social distancing and work from home rules, for example. It remains too early to
determine the ultimate net impact of COVID-19. Losses incurred from
COVID-19-related claims as well as increased severity are being offset, to a
certain extent, by lower claim frequency in certain lines of our businesses,
including commercial auto, workers' compensation, and other liability. However,
as the economy and legal systems continue to reopen, we expect the benefit of
lower claim frequency in certain lines of business will abate. Given the
continuing nature of the pandemic, the direct and indirect impacts of COVID-19
remain uncertain and ultimately could increase or decrease overall loss cost
trends and will likely continue to have differing impacts on the Company's
different lines of business.
Most of the COVID-19-related claims reported to the Company to date involve
certain short-tailed lines of business, including contingency and event
cancellation, business interruption, and film production delay. Until the
economy fully reopens, the Company expects additional claims to be reported for
these lines of business. The Company has also received COVID-19-related claims
for longer-tailed casualty lines of business such as workers' compensation and
other liability; however, the estimated incurred loss impact for these reported
claims appears to be modest at this time. Given the continuing uncertainty
regarding the pandemic's pervasiveness, the future impact that the pandemic may
have on claim frequency and severity remains uncertain at this time. In workers'
compensation, for example, currently nearly one-half of the states still have
rules, legislation or administrative orders creating a presumption that certain
"essential" workers who contract COVID-19 did so through the course of their
employment. Several other states are considering similar actions, including
varying the definition of "essential" workers. While the ultimate impact of
these presumptions remains unknown at this time, the Company believes that such
state actions will likely increase workers' compensation claims with respect to
workers deemed "essential," although this impact may be partially offset by
lower workers' compensation claim frequency with respect to non-essential
workers.
The Company has estimated the potential COVID-19 impact to its contingency and
event cancellation, workers' compensation, and other lines of business under a
number of possible scenarios; however, due to COVID-19's evolving impact and the
still limited amount of available data, there remains a high degree of
uncertainty around the Company's COVID-19 reserves. In addition, several states
(and international jurisdictions), through regulation, legislation and/or
judicial action, continue to seek to expand policy coverage terms beyond the
policy's intended coverage, including, for example, but not limited to, property
coverages, where there are attempts to extend business interruption coverage
where there is no physical damage or loss to property, and attempts to disregard
policy exclusions for communicable disease. Accordingly, losses arising from
these actions, and the other factors described above, could exceed the Company's
reserves established for those related policies.
As of March 31, 2021 , the Company had recognized losses for COVID-19-related
claims activity, net of reinsurance, of approximately $204 million , of which
$183 million relates to the Insurance segment and $21 million relates to the
Reinsurance & Monoline Excess segment. Such $204 million of COVID-19-related
losses included $120 million of reported losses and $84 million of IBNR. For the
three months ended March 31, 2021 , the Company recognized current accident year
losses for COVID-19-related claims activity, net of reinsurance, of
approximately $15 million , all of which relates to the Insurance segment.
During the three months ended March 31, 2021 , favorable prior year development
(net of additional and return premiums) of $3 million included $6 million of
favorable development for the Insurance segment, partially offset by $3 million
of adverse development for the Reinsurance & Monoline Excess segment.
The overall favorable development for the Insurance segment was primarily
attributable to favorable development on the 2020 accident year, partially
offset by adverse development on the 2016 through 2018 accident years. The
favorable development on the 2020 accident year was largely concentrated in the
commercial auto liability and other liability lines of business. During 2020,
the Company achieved larger rate increases in these lines of business than were
contemplated in its budget and initial loss ratio selections. The Company also
experienced significantly lower reported claim frequency in these lines in 2020
relative to historical averages, and lower reported incurred losses relative to
our expectations. We believe that the lower claim frequency and lower reported
incurred losses were caused by the impacts of the COVID-19 pandemic, including
for example, lockdowns, reduced driving and traffic, work from home, court
closures, etc.; however, due to the ongoing uncertainty regarding the ultimate
impacts of the pandemic on accident year 2020 incurred losses, the Company did
not adjust its reserves based on these lower trends during 2020. As the accident
year starts to mature, we began to recognize some of the favorable accident year
2020 experience in certain lines in our ultimate loss picks made as of March 31,
2021 . The adverse development on the 2016 through 2018 accident years is
concentrated in the other liability line of business, and is driven by a higher
than expected number of large losses reported. The large losses particularly
impacted directors and officers liability and excess and surplus lines casualty
classes of business.
Prior year reserve development for the Reinsurance & Monoline Excess segment was
less significant during the first quarter of 2021, and consisted of small
adverse or favorable movements across many lines of business, which largely
offset
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each other. The largest contributor to the slight overall adverse development
for the segment was non-proportional reinsurance assumed property business,
which was impacted by higher than expected reported losses on property per risk
treaties written in the U.S. and U.K. related to accident year 2020.
During the three months ended March 31, 2020 , favorable prior year development
(net of additional and return premiums) of $4 million included $7 million of
favorable development for the Insurance segment, partially offset by $3 million
of adverse development for the Reinsurance & Monoline Excess segment.
The overall favorable development for the Insurance segment was primarily
attributable to favorable development on workers' compensation business,
partially offset by adverse development on professional liability business. The
favorable workers' compensation development was spread across many accident
years, including prior to 2010, and was especially significant in accident years
2018 and 2019. The favorable workers' compensation development reflects a
continuation of the benign loss cost trends experienced during recent years,
particularly the favorable claim frequency trends (i.e., number of reported
claims per unit of exposure). In addition, ongoing workers' compensation claims
management efforts, including active medical case management and use of networks
and specialty vendors to control medical and pharmaceutical benefit costs, have
added to the Company's favorable workers' compensation prior year development.
The adverse professional liability development was mainly concentrated in
accident years 2016 and 2017, but was also spread to a lesser degree across
other accident years. The development mainly relates to directors and officers
and lawyers professional liability lines of business, and was driven by a higher
than expected number of large losses being reported in the period. The Company
also experienced a small amount of adverse prior year development during the
first quarter 2020 on general liability business stemming from large losses in
its excess and surplus lines book of business, mainly in accident years 2016 and
2017.
The adverse development for the Reinsurance & Monoline Excess segment was mainly
driven by non-proportional reinsurance assumed liability business written in the
U.K. , primarily from accident years 2015 through 2019. The development was
driven by a higher than expected number of reported large losses.
Reserve Discount. The Company discounts its liabilities for certain workers'
compensation reserves. The amount of workers' compensation reserves that were
discounted was $1,651 million and $1,655 million at March 31, 2021 and
December 31, 2020 , respectively. The aggregate net discount for those reserves,
after reflecting the effects of ceded reinsurance, was $478 million and $483
million at March 31, 2021 and December 31, 2020 , respectively. At March 31,
2021 , discount rates by year ranged from 0.7% to 6.5%, with a weighted average
discount rate of 3.5%.
Substantially all of the workers' compensation discount (97% of total
discounted reserves at March 31, 2021 ) relates to excess workers' compensation
reserves. In order to properly match loss expenses with income earned on
investment securities supporting the liabilities, reserves for excess workers'
compensation business are discounted using risk-free discount rates determined
by reference to the U.S. Treasury yield curve. These rates are determined
annually based on the weighted average rate for the period. Once established, no
adjustments are made to the discount rate for that period, and any increases or
decreases in loss reserves in subsequent years are discounted at the same rate,
without regard to when any such adjustments are recognized. The expected loss
and loss expense payout patterns subject to discounting are derived from the
Company's loss payout experience.
The Company also discounts reserves for certain other long-duration workers'
compensation reserves (representing approximately 3% of total discounted
reserves at March 31, 2021 ), including reserves for quota share reinsurance and
reserves related to losses regarding occupational lung disease. These reserves
are discounted at statutory rates permitted by the Department of Insurance of
the State of Delaware .
Assumed Reinsurance Premiums. The Company estimates the amount of assumed
reinsurance premiums that it will receive under treaty reinsurance agreements at
the inception of the contracts. These premium estimates are revised as the
actual amount of assumed premiums is reported to the Company by the ceding
companies. As estimates of assumed premiums are made or revised, the related
amount of earned premiums, commissions and incurred losses associated with those
premiums are recorded. Estimated assumed premiums receivable were approximately
$47 million at March 31, 2021 and $44 million at December 31, 2020 . The assumed
premium estimates are based upon terms set forth in reinsurance agreements,
information received from ceding companies during the underwriting and
negotiation of agreements, reports received from ceding companies and
discussions and correspondence with reinsurance intermediaries. The Company also
considers its own view of market conditions, economic trends and experience with
similar lines of business. These premium estimates represent management's best
estimate of the ultimate amount of premiums to be received under its assumed
reinsurance agreements.
Allowance for Expected Credit Losses on Investments.
Fixed Maturity Securities - For fixed maturity securities in an unrealized loss position where the Company intends to sell, or it is more likely than not that it will be required to sell the security before recovery in value, the amortized cost basis is written down to fair value through net investment gains (losses). For fixed maturity securities in an unrealized loss position 35 -------------------------------------------------------------------------------- where the Company does not intend to sell, or it is more likely than not that it will not be required to sell the security before recovery in value, the Company evaluates whether the decline in fair value has resulted from credit losses or all other factors (non-credit factors). In making this assessment, the Company considers the extent to which fair value is less than amortized cost, changes to the rating of the security by a rating agency, and adverse conditions specifically related to the security, among other factors. If this assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis, an allowance for expected credit losses is recorded for the credit loss through net investment gains (losses), limited by the amount that the fair value is less than the amortized cost basis. EffectiveJanuary 1, 2020 , the allowance is adjusted for any change in expected credit losses and subsequent recoveries through net investment gains (losses). The impairment related to non-credit factors is recognized in other comprehensive income (loss) . The Company's credit assessment of allowance for expected credit losses uses a third party model for available for sale and held to maturity securities, as well as loans receivable. The allowance for expected credit losses is generally based on the performance of the underlying collateral under various economic and default scenarios that involve subjective judgments and estimates by management. Modeling these securities involves various factors, such as projected default rates, the nature and realizable value of the collateral, if any, the ability of the issuer to make scheduled payments, historical performance and other relevant economic and performance factors. A discounted cash flow analysis is used to ascertain the amount of the allowance for expected credit losses, if any. In general, the model reverts to the rating-level long-term average marginal default rates based on 10 years of historical data, beyond the forecast period. For other inputs, the model in most cases reverts to the baseline long-term assumptions linearly over 5 years beyond the forecast period. The long-term assumptions are based on the historical averages. The Company classifies its fixed maturity securities by credit rating, primarily based on ratings assigned by credit rating agencies. For purposes of classifying securities with different ratings, the Company uses the average of the credit ratings assigned, unless in limited situations the Company's own analysis indicates an internal rating is more appropriate. Securities that are not rated by a rating agency are evaluated and classified by the Company on a case-by-case basis. A summary of the Company's non-investment grade fixed maturity securities that were in an unrealized loss position atMarch 31, 2021 is presented in the table below: Number of Aggregate ($ in thousands) Securities Fair Value Gross Unrealized Loss Foreign government 19$ 79,761 $ 39,694 Corporate 8 25,066 2,071 Mortgage-backed securities 5 540 24 Total 32$ 105,367 $ 41,789 As ofMarch 31, 2021 , the Company has recorded an allowance for expected credit losses on fixed maturity securities of$21 million . The Company has evaluated the remaining fixed maturity securities in an unrealized loss position and believes the unrealized losses are due primarily to temporary market and sector-related factors rather than to issuer-specific factors. None of these securities are delinquent or in default under financial covenants. Based on its assessment of these issuers, the Company expects them to continue to meet their contractual payment obligations as they become due. Loans Receivable - For loans receivable, the Company estimates an allowance for expected credit losses based on relevant information about past events, including historical loss experience, current conditions and forecasts that affect the expected collectability of the amortized cost of the financial asset. The allowance for expected credit losses is presented as a reduction to amortized cost of the financial asset in the consolidated balance sheet and changes to the estimate for expected credit losses are recognized through net investment gains (losses). Loans receivable are reported net of an allowance for expected credit losses of$4 million and$5 million as ofMarch 31, 2021 andDecember 31, 2020 , respectively. Fair Value Measurements. The Company's fixed maturity available for sale securities, equity securities, and its arbitrage trading account securities are carried at fair value. Fair value is defined as "the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date." The Company utilizes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date. Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for similar assets in active markets. Level 3 inputs are unobservable inputs for the asset or liability. Unobservable inputs may only be used to measure fair value to the extent that observable inputs are not available. The fair 36 --------------------------------------------------------------------------------
value of the vast majority of the Company's portfolio is based on observable data (other than quoted prices) and, accordingly, is classified as Level 2.
In classifying particular financial securities in the fair value hierarchy, the Company uses its judgment to determine whether the market for a security is active and whether significant pricing inputs are observable. The Company determines the existence of an active market by assessing whether transactions occur with sufficient frequency and volume to provide reliable pricing information. The Company determines whether inputs are observable based on the use of such information by pricing services and external investment managers, the uninterrupted availability of such inputs, the need to make significant adjustments to such inputs and the volatility of such inputs over time. If the market for a security is determined to be inactive or if significant inputs used to price a security are determined to be unobservable, the security is categorized in Level 3 of the fair value hierarchy. Because many fixed maturity securities do not trade on a daily basis, the Company utilizes pricing models and processes which may include benchmark curves, benchmarking of like securities, sector groupings and matrix pricing. Market inputs used to evaluate securities include benchmark yields, reported trades, broker/dealer quotes, issuer spreads, two-sided markets, benchmark securities, bids, offers and reference data. Quoted prices are often unavailable for recently issued securities that are infrequently traded or securities that are only traded in private transactions. For publicly traded securities for which quoted prices are unavailable, the Company determines fair value based on independent broker quotations and other observable market data. For securities traded only in private negotiations, the Company determines fair value based primarily on the cost of such securities, which is adjusted to reflect prices of recent placements of securities of the same issuer, financial data, projections and business developments of the issuer and other relevant information.
The following is a summary of pricing sources for the Company's fixed maturity
securities available for sale as of
Carrying Percent
($ in thousands) Value of Total
Pricing source:
Independent pricing services
46,393 0.3
Directly by the Company based on:
Observable data 313,115 2.0
Total $ 15,327,037 100.0 %
Independent pricing services - Substantially all of the Company's fixed
maturity securities available for sale were priced by independent pricing
services (generally one U.S. pricing service plus additional pricing services
with respect to a limited number of foreign securities held by the Company). The
prices provided by the independent pricing services are generally based on
observable market data in active markets (e.g., broker quotes and prices
observed for comparable securities). The determination of whether markets are
active or inactive is based upon the volume and level of activity for a
particular asset class. The Company reviews the prices provided by pricing
services for reasonableness based upon current trading levels for similar
securities. If the prices appear unusual to the Company, they are re-examined
and the value is either confirmed or revised. In addition, the Company
periodically performs independent price tests of a sample of securities to
ensure proper valuation and to verify our understanding of how securities are
priced. As of March 31, 2021 , the Company did not make any adjustments to the
prices provided by the pricing services. Based upon the Company's review of the
methodologies used by the independent pricing services, these securities were
classified as Level 2.
Syndicate manager - The Company has a 15% participation in a Lloyd's
syndicate, and the Company's share of the securities owned by the syndicate is
priced by the syndicate's manager. The majority of the securities are liquid,
short duration fixed maturity securities. The Company reviews the syndicate
manager's pricing methodology and audited financial statements and holds
discussions with the syndicate manager as necessary to confirm its understanding
and agreement with security prices. Based upon the Company's review of the
methodologies used by the syndicate manager, these securities were classified as
Level 2.
Observable data - If independent pricing is not available, the Company prices
the securities directly. Prices are based on observable market data where
available, including current trading levels for similar securities and
non-binding quotations from brokers. The Company generally requests two or more
quotes. If more than one quote is received, the Company sets a price within the
range of quotes received based on its assessment of the credibility of the quote
and its own evaluation of the security. The Company generally does not adjust
quotes obtained from brokers. Since these securities were priced based on
observable data, they were classified as Level 2.
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Cash flow model - If the above methodologies are not available, the Company
prices securities using a discounted cash flow model based upon assumptions as
to prevailing credit spreads, interest rates and interest rate volatility, time
to maturity and subordination levels. Discount rates are adjusted to reflect
illiquidity where appropriate. These securities were classified as Level 3.
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Results of Operations for the Three Months Ended
Following is a summary of gross and net premiums written, net premiums earned, loss ratios (losses and loss expenses incurred expressed as a percentage of premiums earned), expense ratios (underwriting expenses expressed as a percentage of premiums earned) and GAAP combined ratios (sum of loss ratio and expense ratio) for each of our business segments for the three months endedMarch 31, 2021 and 2020. The GAAP combined ratio represents a measure of underwriting profitability, excluding investment income. A GAAP combined ratio in excess of 100 indicates an underwriting loss; a number below 100 indicates an underwriting profit. ($ in thousands) 2021 2020 Insurance: Gross premiums written$ 2,140,013 $ 1,941,809 Net premiums written 1,739,824 1,583,318 Net premiums earned 1,604,979 1,484,955 Loss ratio 61.3 % 65.1 % Expense ratio 29.3 % 31.3 % GAAP combined ratio 90.6 % 96.4 % Reinsurance & Monoline Excess: Gross premiums written$ 344,699 $ 289,563 Net premiums written 310,214 262,528 Net premiums earned 244,977 206,463 Loss ratio 56.5 % 68.3 % Expense ratio 30.9 % 32.3 % GAAP combined ratio 87.4 % 100.6 % Consolidated: Gross premiums written$ 2,484,712 $ 2,231,372 Net premiums written 2,050,038 1,845,846 Net premiums earned 1,849,956 1,691,418 Loss ratio 60.6 % 65.5 % Expense ratio 29.5 % 31.4 % GAAP combined ratio 90.1 % 96.9 % Net Income (Loss) to Common Stockholders. The following table presents the Company's net income (loss) to common stockholders and net income (loss) per diluted share for the three months endedMarch 31, 2021 and 2020: (In thousands, except per share data) 2021 2020 Net income (loss) to common stockholders$ 229,525 $ (4,418) Weighted average diluted shares 186,830 190,287 Net income (loss) per diluted share$ 1.23 $ (0.02) The Company reported net income to common stockholders of$230 million in 2021 compared to net loss of$4 million in 2020. The$234 million increase in net income was primarily due to an after-tax increase in net investment gains of$166 million (primarily resulting from change in market value on equity securities and the gain from disposition of an investment fund), an after-tax increase in underwriting income of$102 million mainly due to the growth in premium rates, an after-tax increase in profits from non-insurance businesses of$2 million and an after-tax increase in profit from insurance service businesses of$1 million , partially offset by an after-tax decrease in net investment income of$13 million primarily due to reduced investment yields from fixed maturity securities, an after-tax decrease in foreign currency gains of$12 million , an after-tax increase in corporate expenses of$5 million , an after-tax debt extinguishment expense of$3 million on debt redeemed inFebruary 2021 , an increase in tax expense of$2 million due to a change in the effective tax rate, an after-tax decrease in other income of$1 million and an after-tax increase in minority interest expense of$1 million . The number of weighted average diluted shares decreased by approximately 3 million for 2021 compared to 2020 mainly reflecting shares repurchased in 2020 and 2021. 39 -------------------------------------------------------------------------------- Premiums. Gross premiums written were$2,485 million in 2021, an increase of 11% from$2,231 million in 2020. The increase was due to a$198 million increase in the Insurance segment and a$55 million increase in the Reinsurance & Monoline Excess segment. Approximately 81% of premiums expiring in 2021 were renewed, and 78% of premiums expiring in 2020 were renewed.
Average renewal premium rates for insurance and facultative reinsurance increased 11.0% in 2021 when adjusted for changes in exposures, and increased 12.8% excluding workers' compensation.
A summary of gross premiums written in 2021 compared with 2020 by line of business within each business segment follows: •Insurance - gross premiums increased 10% to$2,140 million in 2021 from$1,942 million in 2020. Gross premiums increased$92 million (36%) for professional liability,$81 million (12%) for other liability,$43 million (20%) for commercial auto and$25 million (5%) for short-tail lines, and decreased$43 million (13%) for workers' compensation. •Reinsurance & Monoline Excess - gross premiums increased 19% to$345 million in 2021 from$290 million in 2020. Gross premiums increased$33 million (22%) for casualty reinsurance,$15 million (18%) for monoline excess and$7 million (13%) for property reinsurance.
Net premiums written were
Premiums earned increased 9% to$1,850 million in 2021 from$1,691 million in 2020. Insurance premiums (including the impact of rate changes) are generally earned evenly over the policy term, and accordingly, recent rate increases will be earned over the upcoming quarters. Premiums earned in 2021 are related to business written during both 2021 and 2020. Audit premiums were$35 million in 2021 compared with$44 million in 2020.
Net Investment Income. Following is a summary of net investment income for the
three months ended
Average Annualized
Amount Yield
($ in thousands) 2021 2020 2021 2020
Fixed maturity securities, including cash and
cash equivalents and loans receivable $ 94,677 $ 128,018 2.2 % 3.4 %
Investment funds 38,935 40,577 11.6 13.4
Arbitrage trading account 19,074 1,138 16.1 0.9
Equity securities 6,180 1,563 4.7 1.7
Real estate 1,161 6,096 0.2 1.2
Gross investment income 160,027 177,392 3.0 3.7
Investment expenses (1,450) (2,629) - -
Total $ 158,577 $ 174,763 3.0 % 3.6 %
Net investment income decreased 9% to $159 million in 2021 from $175 million
in 2020 due primarily to a $33 million decrease in income from fixed maturity
securities mainly driven by lower investment yields, a $5 million decrease in
real estate and a $2 million decrease in income from investment funds, partially
offset by a $18 million increase from the arbitrage trading account, a $5
million increase from equity securities and a $1 million decrease in investment
expense. The Company shortened the duration of its fixed maturity security
portfolio, thereby reducing the potential impact of mark-to-market on the
portfolio and positioning the Company to react quickly to changes in the current
interest rate environment. Average invested assets, at cost (including cash and
cash equivalents), were $21.3 billion in 2021 and $19.4 billion in 2020.
Insurance Service Fees. The Company earns fees from an insurance distribution
business, a third-party administrator and as a servicing carrier of workers'
compensation assigned risk plans for certain states. Insurance service fees were
$26 million in both 2021 and 2020.
Net Realized and Unrealized Gains (Losses) on Investments. The Company buys
and sells securities and other investment assets on a regular basis in order to
maximize its total return on investments. Decisions to sell securities and other
investment assets are based on management's view of the underlying fundamentals
of specific investments as well as management's expectations regarding interest
rates, credit spreads, currency values and general economic conditions. Net
40
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realized and unrealized gains on investments were $52 million in 2021 compared
with net losses of $143 million in 2020. The gains of $52 million in 2021
reflect net realized gains on investments of $76 million (primarily due to the
sale of a private equity investment and real estate assets) and an increase in
unrealized losses on equity securities of $24 million . In 2020, the losses of
$143 million reflected net realized gains on investment sales of $11 million and
an increase in unrealized losses on equity securities of $154 million .
Change in Allowance for Expected Credit Losses on Investments. Based on credit
factors, the allowance for expected credit losses is increased or decreased
depending on the percentage of unrealized loss relative to amortized cost by
security, changes in rating of the security by a rating agency, and adverse
conditions specifically related to the security, among other factors. For the
three months ended March 31, 2021 , the pre-tax change in allowance for expected
credit losses on investments increased by $17 million ($13 million after-tax),
which is reflected in net investment gains (losses), primarily related to
foreign government securities which did not previously have an allowance. For
the three months ended March 31, 2020 , the pre-tax change in allowance for
expected credit losses on investments increased by $34 million ($27 million
after-tax), which is reflected in net investment gains (losses) primarily
related to market disruptions as a result of COVID-19.
Revenues from Non-Insurance Businesses. Revenues from non-insurance businesses
were derived from businesses engaged in the distribution of promotional
merchandise, world-wide textile solutions and aviation-related businesses that
provide services to aviation markets, including (i) the distribution,
manufacturing, repair and overhaul of aircraft parts and components, (ii) the
sale of new and used aircraft, and (iii) avionics, fuel, maintenance, storage
and charter services. Revenues from non-insurance businesses were $87 million in
2021 and $94 million in 2020. The decrease mainly relates to a reduction in
revenues from the aviation-related businesses impacted by COVID-19.
Losses and Loss Expenses. Losses and loss expenses increased to $1,122 million
in 2021 from $1,107 million in 2020. The consolidated loss ratio was 60.6% in
2021 and 65.5% in 2020. Catastrophe losses, net of reinsurance recoveries, were
$36 million (including current accident year losses of approximately $15 million
related to COVID-19) in 2021 and $79 million (including losses of approximately
$58 million related to COVID-19) in 2020. Favorable prior year reserve
development (net of premium offsets) was $3 million in 2021 and $4 million in
2020. The loss ratio excluding catastrophe losses and prior year reserve
development was 58.9% in 2021 and 61.0% in 2020.
A summary of loss ratios in 2021 compared with 2020 by business segment
follows:
•Insurance - The loss ratio was 61.3% in 2021 and 65.1% in 2020. Catastrophe
losses were $33 million in 2021 compared with $57 million in 2020. The Company
reflected a best estimate (net of reinsurance) based upon available information
for current accident year COVID-19-related losses of approximately $15 million ,
primarily related to contingency and event cancellation coverage. Favorable
prior year reserve development was $6 million in 2021 and $7 million in 2020.
The loss ratio excluding catastrophe losses and prior year reserve development
decreased 2.1 points to 59.7% in 2021 from 61.8% in 2020.
•Reinsurance & Monoline Excess - The loss ratio was 56.5% in 2021 and 68.3% in
2020. Catastrophe losses were $3 million in 2021 compared with $22 million in
2020. Adverse prior year reserve development was $3 million in both 2021 and
2020. The loss ratio excluding catastrophe losses and prior year reserve
development decreased 1.8 points to 54.3% in 2021 from 56.1% in 2020.
Other Operating Costs and Expenses. Following is a summary of other operating
costs and expenses:
($ in thousands) 2021 2020
Policy acquisition and insurance operating expenses
Insurance service expenses 20,786 22,573
Net foreign currency gains (5,594) (21,541)
Debt extinguishment costs 3,617 -
Other costs and expenses 51,709
45,378
Total $ 616,268 $ 578,334
Policy acquisition and insurance operating expenses are comprised of
commissions paid to agents and brokers, premium taxes and other assessments and
internal underwriting costs. Policy acquisition and insurance operating expenses
increased 3% and net premiums earned increased 9% from 2020. The expense ratio
(underwriting expenses expressed as a percentage of premiums earned) was 29.5%
in 2021 and 31.4% in 2020. The improvement is primarily attributable to higher
net premiums earned and lower travel and entertainment expenses due to the
global pandemic. However, to the extent our net premiums earned decrease, due to
the impact of the COVID-19 pandemic or otherwise, our expense ratio would be
expected to increase.
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Service expenses, which represent the costs associated with the fee-based
businesses, decreased to
Net foreign currency gains result from transactions denominated in a currency other than a company's operating functional currency. Net foreign currency gains were$6 million in 2021 compared to$22 million in 2020. Debt extinguishment costs of$4 million in 2021 related to the redemption of subordinated debentures that were due in 2056. Other costs and expenses represent general and administrative expenses of the parent company and other expenses not allocated to business segments, including the cost of certain long-term incentive plans and new business ventures. Other costs and expenses increased to$52 million in 2021 from$45 million in 2020, primarily due to the increase in non-recurring performance-based compensation costs in 2021. Expenses from Non-Insurance Businesses. Expenses from non-insurance businesses represent costs associated with businesses engaged in the distribution of promotional merchandise, world-wide textile solutions and aviation-related businesses that include (i) cost of goods sold related to aircraft and products sold and services provided, and (ii) general and administrative expenses. Expenses from non-insurance businesses were$86 million in 2021 compared to$95 million in 2020. The decrease mainly relates to a reduction of aviation-related business impacted by COVID-19. Interest Expense. Interest expense was$37 million in both 2021 and 2020. InMay 2020 , the Company issued$300 million aggregate principal amount of 4.00% senior notes due 2050. InSeptember 2020 , the Company issued an additional$170 million aggregate principal amount of 4.00% senior notes due 2050 and$250 million aggregate principal amount of 4.25% subordinated debentures due 2060 and repaid$300 million aggregate principal amount of 5.375% senior notes at maturity. InOctober 2020 , the Company redeemed$350 million aggregate principal amount of 5.625% subordinated debentures due 2053. InFebruary 2021 , the Company issued$300 million aggregate principal amount of 4.125% subordinated debenture due 2061. InMarch 2021 , the Company issued$400 million aggregate principal amount of 3.55% senior notes due 2052 and redeemed its$110 million aggregate principal amount of 5.90% subordinated debentures due 2056. Accordingly, the timing of the debt repayments and issuance in 2020 and 2021 offset the impact on interest expense from lower interest rates of new issuances for the three months endedMarch 31, 2021 compared to 2020. InApril 2021 , the Company announced it will redeem the$290 million aggregate principal amount of its 5.75% subordinated debentures due 2056 onJune 1, 2021 . This redemption will result in debt extinguishment costs of$8 million in second quarter of 2021. The redemption of debentures and issuance of additional debentures in 2021, as described below in "Liquidity and Capital Resources -- Debt," are expected to impact interest expense in 2021 and forward. Income Taxes. The effective income tax rate was 21.7% in 2021 and 45.5% in 2020. The effective income tax rate differs from the federal income tax rate of 21% principally because of state and foreign income taxes, which was partially offset by tax-exempt investment income and tax benefits related to equity-based compensation. The relative impact of these items diminished significantly in the first quarter of 2021. The Company has not providedU.S. deferred income taxes on the undistributed earnings of approximately$104 million of its non-U.S. subsidiaries since these earnings are intended to be permanently reinvested in the non-U.S. subsidiaries. In the future, if such earnings were distributed the Company projects that the incremental tax, if any, will be immaterial. 42
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Investments
As part of its investment strategy, the Company establishes a level of cash and highly liquid short-term and intermediate-term securities that, combined with expected cash flow, it believes is adequate to meet its payment obligations. Due to the low fixed maturity investment returns, the Company invests in equity securities, merger arbitrage securities, investment funds, private equity, loans and real estate related assets. The Company's investments in investment funds and its other alternative investments have experienced, and the Company expects to continue to experience, greater fluctuations in investment income. The Company also attempts to maintain an appropriate relationship between the average duration of the investment portfolio and the approximate duration of its liabilities (i.e., policy claims and debt obligations). The average duration of the fixed maturity portfolio, including cash and cash equivalents, was 2.4 years at bothMarch 31, 2021 andDecember 31, 2020 . The Company's fixed maturity investment portfolio and investment-related assets as ofMarch 31, 2021 were as follows: Carrying Percent ($ in thousands) Value of Total Fixed maturity securities: U.S. government and government agencies$ 555,714 2.5 % State and municipal: Special revenue 2,206,460 10.0 State general obligation 469,681 2.1 Local general obligation 467,053 2.1 Pre-refunded (1) 254,040 1.2 Corporate backed 172,339 0.8 Total state and municipal 3,569,573 16.2 Mortgage-backed securities: Agency 747,559 3.4 Commercial 179,286 0.8 Residential-Prime 147,220 0.7 Residential-Alt A 8,060 - Total mortgage-backed securities 1,082,125 4.9 Asset-backed securities 3,944,638 17.9 Corporate: Industrial 3,060,663 13.9 Financial 1,564,369 7.1 Utilities 439,329 2.0 Other 153,828 0.7 Total corporate 5,218,189 23.7
Foreign government and foreign government agencies 1,029,879 4.7 Total fixed maturity securities
15,400,118 69.9
Equity securities:
Common stocks 392,163 1.8
Preferred stocks 229,466 1.0
Total equity securities 621,629 2.8
Cash and cash equivalents 2,014,911 9.1
Real estate 1,961,212 8.9
Investment funds 1,358,997 6.2
Arbitrage trading account 614,721 2.8
Loans receivable 76,896 0.3
Total investments $ 22,048,484 100.0 %
_______________________
(1) Pre-refunded securities are securities for which an escrow account has been
established to fund the remaining payments of principal and interest through
maturity. Such escrow accounts are funded almost exclusively with U.S. Treasury
and U.S. government agency securities.
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Fixed Maturity Securities . The Company's investment policy with respect to fixed
maturity securities is generally to purchase instruments with the expectation of
holding them to their maturity. However, management of the available for sale
portfolio is considered necessary to maintain an approximate matching of assets
and liabilities as well as to adjust the portfolio as a result of changes in
financial market conditions and tax considerations.
The Company's philosophy related to holding or selling fixed maturity securities
is based on its objective of maximizing total return. The key factors that
management considers in its investment decisions as to whether to hold or sell
fixed maturity securities are its view of the underlying fundamentals of
specific securities as well as its expectations regarding interest rates, credit
spreads and currency values. In a period in which management expects interest
rates to rise, the Company may sell longer duration securities in order to
mitigate the impact of an interest rate rise on the fair value of the portfolio.
Similarly, in a period in which management expects credit spreads to widen, the
Company may sell lower quality securities, and in a period in which management
expects certain foreign currencies to decline in value, the Company may sell
securities denominated in those foreign currencies. The sale of fixed maturity
securities in order to achieve the objective of maximizing total return may
result in realized gains; however, there is no reason to expect these gains to
continue in future periods.
Equity Securities . Equity securities primarily represent investments in common
and preferred stocks in companies with potential growth opportunities in
different sectors, mainly in the financial institutions and energy sectors.
Investment Funds. At March 31, 2021 , the carrying value of investment funds was
$1,359 million , including investments in financial services funds of $478
million , real estate funds of $305 million , other funds of $239 million ,
transportation funds of $193 million and energy funds of $144 million .
Investment funds are generally reported on a one-quarter lag.
Real Estate. Real estate is directly owned property held for investment. At
March 31, 2021 , real estate properties in operation included a long-term ground
lease in Washington D.C. , an office complex in New York City , office buildings
in West Palm Beach and Palm Beach, Florida , an office building in London , and
the completed portion of a mixed-use project in Washington D.C. In addition,
part of the previously mentioned mixed-use project in Washington D.C. is under
development. The Company expects to fund further development costs for the
project with a combination of its own funds and external financing.
Arbitrage Trading Account. The arbitrage trading account is comprised of direct
investments in arbitrage securities. Merger arbitrage is the business of
investing in the securities of publicly held companies that are the targets in
announced tender offers and mergers.
Loans Receivable. Loans receivable, which are carried at amortized cost (net of
allowance for expected credit losses), had an amortized cost of $77 million and
an aggregate fair value of $79 million at March 31, 2021 . The amortized cost of
loans receivable is net of an allowance for expected credit losses of $4 million
as of March 31, 2021 . Loans receivable include real estate loans of $52 million
that are secured by commercial real estate located primarily in New York . Real
estate loans receivable generally earn interest at floating LIBOR-based interest
rates and have maturities (inclusive of extension options) through August 2025 .
Loans receivable include commercial loans of $25 million that are secured by
business assets and have fixed interest rates and floating LIBOR-based interest
rates with varying maturities not exceeding 10 years.
Market Risk. The fair value of the Company's investments is subject to risks of
fluctuations in credit quality and interest rates. The Company uses various
models and stress test scenarios to monitor and manage interest rate risk. The
Company attempts to manage its interest rate risk by maintaining an appropriate
relationship between the effective duration of the investment portfolio and the
approximate duration of its liabilities (i.e., policy claims and debt
obligations). The effective duration for the fixed maturity portfolio (including
cash and cash equivalents) was 2.4 years at both March 31, 2021 and December 31,
2020 .
In addition, the fair value of the Company's international investments is
subject to currency risk. The Company attempts to manage its currency risk by
matching its foreign currency assets and liabilities where considered
appropriate.
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--------------------------------------------------------------------------------Liquidity and Capital Resources
Cash Flow. Cash flow provided from operating activities increased to
The Company's insurance subsidiaries' principal sources of cash are premiums, investment income, service fees and proceeds from sales and maturities of portfolio investments. The principal uses of cash are payments for claims, taxes, operating expenses and dividends. The Company expects its insurance subsidiaries to fund the payment of losses with cash received from premiums, investment income and fees. The Company generally targets an average duration for its investment portfolio that is within 1.5 years of the average duration of its liabilities so that portions of its investment portfolio mature throughout the claim cycle and are available for the payment of claims if necessary. In the event operating cash flow and proceeds from maturities and prepayments of fixed income securities are not sufficient to fund claim payments and other cash requirements, the remainder of the Company's cash and investments is available to pay claims and other obligations as they become due. The Company's investment portfolio is highly liquid, with approximately 79% invested in cash, cash equivalents and marketable fixed maturity securities as ofMarch 31, 2021 . If the sale of fixed maturity securities were to become necessary, a realized gain or loss equal to the difference between the cost and sales price of securities sold would be recognized. Debt. AtMarch 31, 2021 , the Company had senior notes, subordinated debentures and other debt outstanding with a carrying value of$3,310 million and a face amount of$3,337 million , including$300 million aggregate principal amount of its 4.125% subordinated debentures due 2061 issued inFebruary 2021 as well as$400 million aggregate principal amount of its 3.55% senior notes due 2052 issued inMarch 2021 . The Company redeemed its$110 million aggregate principal amount of 5.90% subordinated debentures onMarch 1, 2021 . The maturities of the outstanding debt are$5 million in 2021,$426 million in 2022,$9 million in 2025,$102 million in 2028,$250 million in 2037,$350 million in 2044,$470 million in 2050,$400 million in 2052,$290 million in 2056,$185 million in 2058,$300 million in 2059,$250 million in 2060 and$300 million in 2061. InApril 2021 , the Company announced it will redeem the$290 million aggregate principal amount of its 5.75% subordinated debentures due 2056 onJune 1, 2021 . Equity. AtMarch 31, 2021 , total common stockholders' equity was$6.4 billion , common shares outstanding were 177,372,943 and stockholders' equity per outstanding share was$36.16 . During the three months endedMarch 31, 2021 , the Company repurchased 465,063 shares of its common stock for$30 million . In the first quarter of 2021, the Board declared a regular quarterly cash dividend of$0.12 per share. The number of common shares outstanding excludes shares held in a grantor trust established by the Company for delivery upon settlement of vested but mandatorily deferred RSUs. Total Capital. Total capitalization (equity, debt and subordinated debentures) was$9.7 billion atMarch 31, 2021 . The percentage of the Company's capital attributable to senior notes, subordinated debentures and other debt was 34% atMarch 31, 2021 and 30% atDecember 31, 2020 .
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